UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the transition period from ___to___
Commission File Number: 1-12043
FAHNESTOCK VINER HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Ontario, Canada 98-0080034
State or jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
P.O. Box 2015, Suite 1110
20 Eglinton Avenue West
Toronto, Ontario, Canada M4R 1K8
(Address of principal executive offices) (Zip Code)
416-322-1515
(Registrant's telephone number, including area code)
Not applicable
(Former name, address and former fiscal year, if changed since last report)
Indicate by check mark whether registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months ( or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [x] No [ ]
The number of shares of the Company's Class A non-voting shares and
Class B voting shares (being the only classes of common stock of the Company),
outstanding on April 19, 2000 was 12,006,619 and 99,680 shares, respectively.
FAHNESTOCK VINER HOLDINGS INC.
INDEX
Page No.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet
as of March 31, 2000
and December 31, 1999
Consolidated Statement of Operations
for the three months ended
March 31, 2000 and 1999
Consolidated Statement of Cash Flows
for the three months ended
March 31, 2000 and 1999
Notes to Consolidated Financial
Statements
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security-Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
FAHNESTOCK VINER HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEET
unaudited
March 31, December 31,
2000 1999
Expressed in thousands of U.S. dollars
ASSETS
Current assets
Cash and short-term deposits $11,659 $10,838
Restricted deposits 2,681 2,392
Securities purchased under agreement to resell 51,034 74,560
Deposits with clearing organizations 11,075 5,955
Receivable from brokers and clearing organizations 163,693 136,767
Receivable from customers 560,455 436,320
Securities owned, at market value 59,544 63,244
Demand notes receivable - 30
Other 19,323 18,988
879,464 749,094
Other assets
Stock exchange seats (approximate market value
$5,910; $6,148 in 1999) 1,318 1,318
Fixed assets, net of accumulated depreciation of
$12,703; $11,956 in 1999 10,369 10,872
Goodwill, at amortized cost 5,128 5,244
16,815 17,434
$896,279 $766,528
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Drafts payable $27,851 $24,765
Bank call loans 155,281 66,322
Securities sold under agreement to repurchase 44,031 69,031
Payable to brokers and clearing organizations 229,366 209,151
Payable to customers 159,261 125,207
Securities sold, but not yet purchased,
at market value 20,175 18,661
Accounts payable and other liabilities 44,033 45,301
Income taxes payable 13,362 20,672
Subordinated loans payable - 30
693,360 579,140
Shareholders' equity
Share capital
12,006,619 Class A non-voting shares
(1999 - 12,147,569 shares) 30,324 32,518
99,680 Class B voting shares 133 133
30,457 32,651
Contributed capital 3,262 3,262
Retained earnings 169,200 151,475
202,919 187,388
$896,279 $766,528
The accompanying notes are an integral part of these condensed financial
statements.
FAHNESTOCK VINER HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(unaudited)
2000 1999
Expressed in thousands of U.S. dollars, except per share amounts
REVENUE:
Commissions $38,232 $29,273
Principal transactions, net 40,944 14,803
Interest 13,674 9,196
Underwriting fees 2,981 2,916
Advisory fees 5,768 6,499
Other 1,793 1,264
103,392 63,951
EXPENSES:
Compensation and related expenses 47,036 33,994
Clearing and exchange fee 2,289 2,180
Communications 6,020 5,328
Occupancy costs 3,265 3,007
Interest 6,650 4,635
Other 3,807 4,815
69,067 53,959
Profit before income taxes 34,325 9,992
Income tax provision 15,745 4,647
NET PROFIT FOR PERIOD $18,580 $5,345
Profit per share
- basic $1.53 $0.43
- diluted $1.51 $0.42
The accompanying notes are an integral part of these condensed financial
statements.
FAHNESTOCK VINER HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
unaudited
2000 1999
Expressed in thousands of U.S. dollars
Cash flows from operating activities:
Net profit for the period $18,580 $5,345
Adjustments to reconcile net profit to net cash
provided by (used in) operating activities:
Non-cash items included in net profit:
Depreciation and amortization 863 809
Decrease (increase) in operating assets,
Restricted deposits (289) 10
Securities purchased under agreements to resell 23,526 5,983
Deposits with clearing organizations (5,120) 2,122
Receivable from brokers and clearing organizations (26,926) (60,850)
Receivable from customers (124,135) (63,117)
Securities owned 3,700 (21,970)
Demand noted receivable 30 -
Other assets (335) 8,196
Increase (decrease) in operating liabilities,
Drafts payable 3,086 (10,910)
Securities sold under agreement to repurchase (25,000) 21,736
Payable to brokers and clearing organizations 20,215 140,958
Payable to customers 34,054 (8,724)
Securities sold, but not yet purchased 1,514 (1,578)
Accounts payable and other liabilities (1,268) (317)
Income taxes payable (7,310) 1,955
Cash (used in) provided by operating activities (84,815) 19,648
Cash flows from investing activities:
Purchase of fixed assets (244) (439)
Cash used in investing activities (244) (439)
Cash flows from financing activities:
Cash dividends paid on Class A non-voting and
Class B shares (855) (892)
Issuance of Class A non-voting shares 14 3,771
Repurchase of Class A non-voting shares
for cancellation (2,208) (3,526)
Decrease in subordinated loans payable (30) -
Tax benefit from employee stock options exercised - 909
Increase (decrease) in bank call loans 88,959 (20,702)
Cash provided by (used in) financing activities 85,880 (20,440)
Net increase (decrease) in cash and
short-term deposits 821 (1,231)
Cash and short-term deposits, beginning of period 10,838 11,501
Cash and short-term deposits, end of period $11,659 $10,270
The accompanying notes are an integral part of these condensed financial
statements
FAHNESTOCK VINER HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
1. Basis of Presentation
The condensed consolidated financial statements include the
accounts of Fahnestock Viner Holdings Inc. ("FVH") and its subsidiaries
(together, the "Company"). The principal subsidiary of FVH is Fahnestock &
Co. Inc. ("Fahnestock"), a registered broker-dealer in securities. The
Company engages in a broad range of activities in the securities industry,
including retail securities brokerage, institutional sales and trading,
investment banking (both corporate and public finance), underwritings,
research, market-making, and investment advisory and asset management
services. The Company provides its services from 76 offices in 15 states
located primarily in the Northeastern United States, Michigan, the Midwest
and Florida. Fahnestock conducts business in Toronto, Canada and in South
America through local broker-dealers. The Company employs
approximately 748 financial consultants.
All material intercompany accounts have been eliminated in
consolidation.
The Company's condensed consolidated financial statements have
been prepared in accordance with the rules and regulations of the Securities
and Exchange Commission ("SEC") with respect to Form 10-Q and do not
include all of the information and footnotes required under accounting
principles generally accepted in the United States for complete financial
statements. These financial statements should be read in conjunction with
the Company's most recent annual report on Form 10-K for the year ended
December 31, 1999 including the summary of the significant accounting
policies utilized by the Company.
All adjustments which, in the opinion of management, are normal
and recurring and necessary for a fair presentation of the results of
operations, financial position and cash flows for the interim periods
presented have been made. The nature of the Company's business is such
that the results of operations for the interim periods are not necessarily
indicative of the results to be expected for a full year.
These condensed consolidated financial statements are presented in
U.S. dollars.
2. Profit per share
Profit per share was computed by dividing net profit by the weighted
average number of Class A non-voting and Class B shares outstanding.
Diluted profit per share includes the weighted average Class A non-voting
and Class B shares outstanding and the effects of Class A non-voting share
options using the treasury stock method.
Profit per share has been calculated as follows:
Three months ended March 31,
2000 1999
Basic weighted average number of
shares outstanding 12,182,624 12,511,282
Net effect, treasury stock method 143,563 140,134
Diluted common shares 12,326,187 12,651,416
Net profit for the period $18,580,000 $5,345,000
Basic profit per share $1.53 $0.43
Diluted profit per share $1.51 $0.42
3. Net Capital Requirements
The Company's principal broker-dealer subsidiary, Fahnestock, is
subject to the Uniform Net Capital Rule (the "Rule") of the SEC and the net
capital rule of the New York Stock Exchange (the "NYSE"). Fahnestock
has elected to use the alternative method permitted by the Rule which
requires that it maintains minimum net capital equal to 2% of aggregate
debit items arising from customer transactions, as defined. The NYSE may
prohibit a member firm from expanding its business or paying dividends if
resulting net capital would be less than 5% of aggregate debit items.
At March 31, 2000, the net capital of Fahnestock as calculated under
the Rule was $139,002,000 or 21% of Fahnestock's aggregate debit items.
This was $125,701,000 in excess of the minimum required net capital.
4. Segment Information
The table below presents information about the reported operating
income of the Company for the periods noted, in accordance with the
method described in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999. The Company's business is predominantly
in the U.S. Asset information by reportable segment is not reported, since
the Company does not produce such information for internal use.
000's omitted Three Months Ended March 31,
2000 1999
Revenue:
Retail Branches $49,873 $35,424
Capital Markets 35,885 16,071
Asset Management 3,360 2,952
Interest 12,854 8,426
Other 1,420 1,078
Total $103,392 $63,951
Operating Income:
Retail Branches $4,731 $1,756
Capital Markets 12,591 3,476
Asset Management 2,112 1,835
Interest 5,902 3,619
Other 8,989 (694)
Total $34,325 $9,992
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The securities industry is directly affected by general economic and
market conditions, including fluctuations in volume and price levels of
securities and changes in interest rates, all of which have an impact on
commissions and firm trading and investment income as well as on
liquidity. Substantial fluctuations can occur in revenues and net income due
to these and other factors.
Results of Operations
Net profit for the first quarter ended March 31, 2000 was
$18,580,000 or $1.53 per share compared to $5,345,000 or $0.43 per share
for the first quarter of 1999, an increase of 248% in net profit. Revenue for
the first quarter of 2000 was $103,392,000, an increase of 62% compared to
revenue of $63,951,000 in the first quarter of 1999 as commissions, trading
activities, and interest income all increased to record levels during the
quarter, and significantly surpassed prior year levels.
During the first quarter of 2000, results were driven by record market
trading volume, record share prices in both the NASDAQ and listed
markets, as well as greatly increased market volatility. The Company
realized record levels of commissions, revenue from principal transactions
and interest income derived primarily from higher customer debit balances.
Investors continued to favor the securities of technology and biotechnology
companies, sending an unprecedented inflow of funds into specialty mutual
funds in these two sectors.
Results for the quarter reflected the Company's determination to
continue to expand in all of its business segments. While the Company
clearly benefited from strong market conditions, its long-term success will
continue to be based on its commitment to client service and investment in
new technology.
Commission income and to a large extent, income from principal
transactions, depend on market volume levels. Commission revenue
increased by 31% in the first quarter of 2000 compared to the first quarter of
1999 due to booming market conditions, spurred by insatiable investor
interest in the new economy issues. Net revenue from principal transactions
increased by 177% compared to the first quarter of 1999. Market trading
volumes were huge and the trading departments were on the right side of a
steeply rising market. Investment banking revenues achieved the same
levels in the first quarter 2000 as was achieved in the comparable quarter of
1999. Advisory fees decreased by 11% due to reduced placement fees as a
result of a lower level of participation in corporate syndicates this year
compared to the prior year. Net interest revenue (interest revenue less
interest expense) increased by 54% in the first quarter of 2000 compared to
the same period in 1999 as a result of higher stock borrow/stock loan activity
and higher levels of interest-earning assets, high customer debit balances
carried and higher interest rates. Expenses, other than compensation and
interest, were at roughly the same levels in the first quarter of 2000 as in
the first quarter of 1999. Compensation expense and interest expense have
volume-related components and , therefore, increased with the increase in
the level of business conducted in 2000 compared to 1999.
Liquidity and Capital Resources
Total assets at March 31, 2000 of $896,279,000 increased by
approximately 17% from $766,528,000 at December 31, 1999 due primarily
to higher customer and broker/dealer balances. Liquid assets accounted for
98% of total assets, consistent with year end levels. The Company satisfies
its need for funds from its own cash resources, internally-generated funds,
subordinated borrowings, collateralized borrowings consisting primarily of
bank loans, and uncommitted lines of credit. The amount of Fahnestock's
bank borrowings fluctuates in response to changes in the level of the
Company's securities inventories and customer margin debt as well as
changes in stock loan balances. Fahnestock has arrangements with banks for
borrowings on a fully collateralized basis. At March 31, 2000, $155,281,000
of such borrowings were outstanding.
Management believes that funds from operations, combined with
Fahnestock's capital base and available credit facilities, are sufficient for
the Company's liquidity needs in the foreseeable future.
The Company previously announced that it intends to purchase up to
758,000 of its Class A non-voting shares (approximately 10% of the public
float) by way of a Normal Course Issuer Bid through the facilities of the
Toronto and New York Stock Exchanges during the period July 5, 1999
through July 4, 2000. The Company believes that its Class A non-voting
shares may be undervalued from time to time and that the repurchase of such
shares is an appropriate use of corporate funds.
Through March 31, 2000, the Company has purchased through the
facilities of the New York and the Toronto Stock Exchanges pursuant to the
Normal Course Issuer Bid and cancelled a total of 429,600 Class A non-
voting shares at an average cost of $14.8823. Of these purchases, a total of
142,100 Class A non-voting shares with an average cost of $15.5414, were
purchased and cancelled during the first quarter of 2000.
On February 29, 2000, the Company paid cash dividends of $0.07
per Class A non-voting and Class B share totalling $855,000 from available
cash on hand.
On April 19, 2000, the board of directors declared a regular
quarterly cash dividend of U.S.$0.08 per Class A non-voting and Class B
share payable on May 19, 2000 to shareholders of record on May 5, 2000.
The book value of the Company's Class A non-voting and Class B
shares is U.S.$16.76 at March 31, 2000 (U.S.$13.76 at March 31, 1999),
based on total outstanding shares of 12,106,299 and 12,497,999,
respectively.
Year 2000 Disclosure
The Company has not encountered any material problems with either
its internal systems or with vendor systems associated with the transition to
Year 2000. The Company continues to monitor its risk relating to the Year
2000 problem. The Company has in place a comprehensive contingency
plan which addresses disruptions due to disaster or the inability to use its
principal technology platform.
Factors Affecting "Forward-Looking Statements"
This report on Form 10-Q contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Act"), and Section 21E of the Exchange Act. These forward-looking statements
relate to anticipated financial performance, future revenues or earnings,
business prospects and anticipated market performance of the Company. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, the Company cautions readers that a variety of factors could cause the
Company's actual results to differ materially from the anticipated results or
other expectations expressed in the Company's forward-looking statements.
These risks and uncertainties, many of which are beyond the Company's
control, include, but are not limited to: (i) transaction volume in the
securities markets, (ii) the volatility of the securities markets, (iii)
fluctuations in interest rates, (iv) changes in regulatory requirements which
could affect the cost and manner of doing business, (v) fluctuations in
currency rates, (vi) general economic conditions, both domestic and
international, (vii) changes in the rate of inflation and the related impact
on the securities markets, (viii) competition from existing financial
institutions and other new participants in the securities markets, (ix) legal
developments affecting the litigation experience of the securities industry,
and (x) changes in federal and state tax laws which could affect the
popularity of products sold by the Company. There can be no assurance that the
Company has correctly or completely identified and assessed all of the factors
affecting the Company's business. The Company does not undertake any
obligation to publicly update or revise any forward-looking statements.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Risk Management
The Company's principal business activities by their nature involve
significant market and credit risks. The Company's effectiveness in
managing these risks is critical to its success and stability.
As part of its normal business operations, the Company engages in
the trading of both fixed income and equity securities in both a proprietary
and market-making capacity. The Company makes markets in over-the-
counter equities in order to facilitate order flow and accommodate its
institutional and retail customers. The Company also makes markets in
municipal bonds, mortgage-backed securities, government bonds and high
yield bonds.
Market risk generally means the risk of loss that may result from the
potential change in the value of a financial instrument as a result of
fluctuations in interest and currency exchange rates and in equity and
commodity prices. Market risk is inherent in all types of financial
instruments, including both derivatives and non-derivatives. The Company's
exposure to market risk arises from its role as a financial intermediary for
its customers' transactions and from its proprietary trading and arbitrage
activities.
In addition, the Company's activities expose it to operational risk,
legal risk and funding risk. Operational risk generally means the risk of loss
resulting from improper processing of transactions or deficiencies in the
Company's operating systems or internal controls. With respect to its trading
activities, the Company has procedures designed to ensure that all
transactions are accurately recorded and properly reflected on the
Company's books on a timely basis. With respect to client activities, the
Company operates a system of internal controls designed to ensure that
transactions and other account activity (new account solicitation, transaction
authorization, transaction processing, billing and collection) are properly
approved, processed, recorded and reconciled. Legal risk generally includes
the risk of non-compliance with legal and regulatory requirements and the
risk that a counterparty's obligations are unenforceable. The Company is
subject to extensive regulation in the various jurisdictions in which it
conducts its business. Through its legal advisors and its compliance
department, the Company has established routines to ensure compliance
with regulatory capital requirements, sales and trading practices, new
products, use and safekeeping of customer securities and funds, granting of
credit, collection activities, and record keeping. The Company has
procedures designed to assess and monitor counterparty risk. For a
discussion of funding risk, see "Liquidity and Capital Resources", above.
Value-at-Risk
Value-at-risk is a statistical measure of the potential loss in the fair
value of a portfolio due to adverse movements in underlying risk factors. In
response to the SEC's market risk disclosure requirements, the Company has
performed a value-at-risk analysis of its trading financial instruments and
derivatives. The value -at-risk calculation uses standard statistical
techniques to measure the potential loss in fair value based upon a one-day
holding period and a 95% confidence level. The calculation is based upon a
variance-covariance methodology, which assumes a normal distribution of
changes in portfolio value. The forecasts of variances and co-variances used
to construct the model, for the market factors relevant to the portfolio, were
generated from historical data. Although value-at-risk models are
sophisticated tools, their use can be limited as historical data is not always
an accurate predictor of future conditions. The Company attempts to manage
its market exposure using other methods, including trading authorization
limits and concentration limits.
At March 31, 2000 and 1999, the Company's value-at-risk for each
component of market risk was as follows:
000's omitted March 31,
2000 1999
Interest rate risk $71 $254
Equity price risk 796 518
Diversification benefit (417) (345)
Total $450 $427
The potential future loss presented by the total value-at-risk
generally falls within predetermined levels of loss that should not be
material to the Company's results of operations, financial condition or cash
flows. The changes in the value-at-risk amounts reported in 2000 from those
reported in 1999 reflect reductions in the size and changes in the
composition of the Company's trading portfolio. The Company's overall
exposure in 2000 compared to 1999 increased modestly. The weighting of
the portfolio shifted toward equities and away from debt, with a reduction in
overall exposure provided through a diversification benefit arising out of a
market hedge.
The value-at-risk estimate has limitations that should be considered
in evaluating the Company's potential future losses based on the period-end
portfolio positions. Recent market conditions, including increased volatility,
may result in statistical relationships that result in higher value-at-risk
than would be estimated from the same portfolio under different market
conditions, or the converse may be true. Critical risk management strategy
involves the active management of portfolio levels to reduce market risk.
The Company's market risk exposure is continuously monitored as the
portfolio risks and market conditions change.
PART II
ITEM 1. Legal Proceedings
There are no material legal proceedings to which the
Company or its subsidiaries are parties or to which any of their
respective properties are subject. The Company's subsidiaries are
parties to legal proceedings incidental to their respective businesses.
The materiality of legal matters on the Company's future operating
results depends on the level of future results of operations as well as
the timing and ultimate outcome of such legal matters.
ITEM 2. Changes in Securities and Use of Proceeds
Not applicable
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security-Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Financial Data Schedule included as Exhibit 27
(b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized, in the City of Toronto, Ontario,
Canada on the 19th day of April, 2000.
FAHNESTOCK VINER HOLDINGS INC.
By: /s/ A.G. Lowenthal
A.G.Lowenthal, Chairman
(Principal Financial Officer)
By: /s/ E.K. Roberts
E.K.Roberts, President
(Duly Authorized Officer)