As filed with the Securities and Exchange Commission on November 3, 1998
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
September 30, 1998
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 number)
P.O. Box 2015, Suite 1110
20 Eglinton Avenue West
Toronto, Ontario, Canada M4R 1K8
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: 416-322-1515
Former name, address and former fiscal year, if changed since last report.
Not applicable
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 October 20, 1998 was 12,236,319 and 99,680
shares, respectively
FAHNESTOCK VINER HOLDINGS INC.
INDEX
Page No.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet 2
as of September 30, 1998
and December 31, 1997
Consolidated Statement of Operations 4
for the nine months ended
September 30, 1998 and 1997
Consolidated Statement of Cash Flows 5
for the nine months ended
September 30, 1998 and 1997
Notes to Consolidated Financial 6
Statements
Item 2. Management's Discussion and Analysis 7
of Financial Condition and Results
of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities and Use of Proceeds10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of
Security-Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
FAHNESTOCK VINER HOLDINGS INC.
CONSOLIDATED BALANCE SHEET
unaudited
September 30, December 31,
1998 1997*
Expressed in thousands of U.S. dollars
ASSETS
Current assets
Cash and short-term deposits $8,854 $10,784
Restricted deposits 1,960 1,537
Deposits with clearing organizations 8,572 4,734
Receivable from brokers and clearing organizations 180,505 359,205
Receivable from customers 341,368 356,087
Securities owned, at market value 68,828 63,262
Demand notes receivable 30 30
Other 18,491 22,665
628,608 818,304
Other assets
Stock exchange seats (approximate market value
$4,662; $5,592 in 1997) 1,516 1,542
Fixed assets, net of accumulated depreciation of
$9,421; $7,458 in 1997 9,360 9,128
Goodwill, at amortized cost 5,824 6,172
16,700 16,842
$645,308 $835,146
* Condensed from audited financial statements
The accompanying notes are an integral part of these condensed
financial statements.
2
FAHNESTOCK VINER HOLDINGS INC.
CONSOLIDATED BALANCE SHEET
unaudited
September 30, December 31,
1998 1997*
Expressed in thousands of U.S. dollars
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Drafts payable $8,763 $18,507
Bank call loans 27,733 23,755
Payable to brokers and clearing organizations 234,883 422,173
Payable to customers 110,009 117,033
Securities sold, but not yet purchased,
at market value 35,779 31,090
Accounts payable and other liabilities 40,412 45,571
Income taxes payable 10,773 16,052
468,352 674,181
Subordinated loans payable 30 30
Shareholders' equity
Share capital
12,338,619 Class A non-voting shares
(1997 - 12,408,760 shares) 37,753 40,783
99,680 Class B voting shares 133 133
37,886 40,916
Contributed capital 2,196 1,333
Retained earnings 136,844 118,686
176,926 160,935
$645,308 $835,146
* Condensed from audited financial statements
The accompanying notes are an integral part of these condensed
financial statements.
3
FAHNESTOCK VINER HOLDINGS INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED SEPTEMBER 30,
unaudited
3rd Quarter ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
Expressed in thousands of U.S. dollars, except per share amounts
REVENUE:
Commissions $27,799 $34,624 $86,580 $72,418
Principal transactions, net 17,075 17,061 50,703 46,582
Interest 10,780 11,681 33,167 27,660
Underwriting fees 3,824 1,240 10,176 5,822
Advisory fees 6,262 5,104 16,800 10,554
Other 1,538 3,010 6,954 4,590
67,278 72,720 204,380 167,626
EXPENSES:
Compensation and related expenses 33,254 37,630 105,964 84,195
Clearing and exchange fees 2,100 3,023 6,296 6,598
Communications 5,158 4,164 16,052 11,386
Occupancy costs 3,446 3,368 9,901 7,917
Interest 5,360 5,865 17,516 13,204
Other 4,265 5,999 11,601 10,812
53,583 60,049 167,330 134,112
Profit before income taxes 13,695 12,671 37,050 33,514
Income tax provision 6,106 5,254 16,223 14,522
NET PROFIT FOR PERIOD $7,589 $7,417 $20,827 $18,992
Profit per share (Note 2)
- - basic $0.60 $0.60 $1.65 $1.53
- - diluted $0.59 $0.57 $1.60 $1.47
The accompanying notes are an integral part of these condensed
financial statements.
4
FAHNESTOCK VINER HOLDINGS INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
unaudited
1998 1997
Expressed in thousands of U.S. dollars
Cash flows from operating activities:
Net profit for the year $20,827 $18,992
Adjustments to reconcile net profit to net cash
provided by (used in) operating activities:
Non-cash items included in net profit:
Depreciation and amortization 2,156 932
Decrease (increase) in operating assets,
Restricted deposits (423) 453
Deposits with clearing organizations (3,838) (578)
Receivable from brokers and clearing organizations 178,700 (207,619)
Receivable from customers 14,719 (75,760)
Securities purchased under agreements to resell - (2,310)
Securities owned (5,566) (15,481)
Other assets 4,174 (17,240)
Increase (decrease) in operating liabilities,
Drafts payable (9,744) 3,211
Payable to brokers and clearing organizations (187,290) 253,173
Payable to customers (7,024) 36,528
Securities sold, but not yet purchased 4,689 20,051
Accounts payable and other liabilities (5,159) 19,860
Income taxes payable (5,279) (1,417)
Cash provided by operating activities 942 32,795
Cash flows from investing and other activities:
Purchase of First of Michigan Capital Corporation,
net of cash acquired - (9,711)
Proceeds from sale of exchange seat - 1,360
Purchase of fixed assets (2,015) (1,037)
Cash (used in) investing and other activities (2,015) (9,388)
Cash flows from financing activities:
Cash dividends paid on Class A non-voting and
Class B shares (2,668) (2,250)
Issuance of Class A non-voting shares 1,851 1,577
Repurchase of Class A non-voting shares for
cancellation (4,881) -
Tax benefit from employee stock options exercised 863 -
Increase in bank call loans 3,978 10,880
Cash (used in) provided by financing activities (857) 10,207
Net (decrease) increase in cash and short-term deposits (1,930) 33,614
Cash and short-term deposits, beginning of period 10,784 9,363
Cash and short-term deposits, end of period $8,854 $42,977
The accompanying notes are an integral part of these condensed
financial statements.
5
FAHNESTOCK VINER HOLDINGS INC.
Notes to Consolidated Financial Statements (unaudited)
1. Basis of Presentation
The consolidated financial statements include the accounts of
Fahnestock Viner Holdings Inc. ("FVH") and its subsidiaries
(together, the "Company"). The principal subsidiaries of FVH are
Fahnestock & Co. Inc. ("Fahnestock") and First of Michigan
Corporation ("FOM"), registered broker-dealers in securities. All
material intercompany accounts have been eliminated in
consolidation.
The Company's 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, 1997 which should
be consulted for a 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.
Certain figures have been restated to conform with the
financial statement presentation adopted for 1998.
These 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.
Statement of Financial Accounting Standards No. 128 -
Earnings Per Share ("FAS 128") requires a change in the method of
calculation for both primary and fully-diluted earnings per share for
periods ended after December 15, 1997. Profit per share for the nine
months ended September 30, 1997 has been restated to comply with
FAS 128. Profit per share has been calculated as follows:
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
Basic weighted average
number of shares
outstanding 12,654,045 12,431,850 12,654,045 12,431,850
Net effect, treasury
stock method 128,423 457,293 374,267 511,604
Diluted common shares 12,782,468 12,889,143 13,028,312 12,943,454
Net profit for the period $7,589,000 $7,417,000 $20,827,000 $18,992,000
Basic profit per share $0.60 $0.60 $1.65 $1.53
Diluted profit per share $0.59 $0.57 $1.60 $1.47
6
3. Net Capital Requirements
The Company's principal broker-dealer subsidiaries,
Fahnestock and FOM, are 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"). Both Fahnestock and FOM have
elected to use the alternative method permitted by the Rule which
requires that they maintain 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 September 30, 1998, the net capital of Fahnestock as
calculated under the Rule was $113,114,000 or 29% of Fahnestock's
aggregate debit items. This was $105,425,000 in excess of the
minimum required net capital. At September 30, 1998, FOM's net
capital as calculated under the Rule was $7,105,000. This was
$6,855,000 in excess of the minimum required net capital.
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
Unaudited net profit in the third quarter of 1998 were
$7,589,000 or $0.60 per share compared to $7,417,000 or $0.60 per
share for the third quarter of 1997. Revenue for the third quarter of
1998 was $67,278,000, a decrease of 7% from revenue of
$72,720,000 in the third quarter of 1997, reflecting weaker markets
as well as reduced revenues from First of Michigan Corporation
("FOM") compared to the same period in 1997. FOM was acquired
in July 1997. At the present time, FOM operates 25 retail branches
located in Michigan and employs approximately 170 investment
executives, a decline of approximately 25% from the level at the
acquisition date. Fahnestock and FOM together operate from 75
branches located in fifteen states and employ approximately 690
investment executives.
Net profit for the nine months ended September 30, 1998
was $20,827,000 or $1.65 per share compared to $18,992,000 or
$1.53 per share for the comparable period of 1997, an increase of
10% in net profit. Revenue for the first nine months of 1998 was
$204,380,000, an increase of 22% compared to revenue of
$167,626,000 in the first nine months of 1997. The results in 1997
did not include FOM prior to July 17, 1997.
Markets were extremely volatile in the third quarter of 1998.
The stock market has entered a correction that began in July 1998.
The world financial situation, particularly as the collapse of the
Asian economies affects the rest of the world, will continue to be a
key determinant of the securities market's direction and volatility.
Earnings of domestic companies will be selectively impacted by
world events, and this may lead to a weaker economy in 1999. Low
interest rates and low inflation are expected to counteract these
external forces.
7
Commission income and to a large extent, income from
principal transactions, depend on market volume levels. Commission
revenue decreased 20% compared to the third quarter 1997 due both
to weaker markets as well as reduced revenues from FOM compared
to the same period in 1997. The loss of part of the sales force
through mass defections commencing in November 1997
contributed to this reduction in revenue. Net revenue from principal
transactions remained at the same level as in the comparable period
of 1997. Investment banking revenues and advisory fees both
showed significant improvement in the third quarter of 1998
compared to 1997 due to increased underwriting and private
placement activity. Net interest revenue (interest revenue less
interest expense) decreased slightly in the third quarter of 1998
compared to the same period in 1997 as a result of lower customer
balances. Expenses, other than interest, decreased by 11% in the
third quarter of 1998 compared to 1997. The third quarter of 1998 is
the first quarter since the acquisition of FOM, in July 1997, that has
not been impacted by costs resulting from the acquisition.
Considerable uncertainty has been created in the valuation of
banks and securities firms, based on recent press accounts of losses
at hedge funds, as well as counterparty risk in derivative instruments
and defaults on emerging market debt. The Company is not exposed
to losses from these sources except as they may impact market
performance and activity generally.
Liquidity and Capital Resources
Total assets at September 30, 1998 of $645,308,000
decreased by approximately 23% from $835,146,000 at December
31, 1997 due to a decline in the level of receivables from brokers
and clearing organizations, a result both of weaker markets as well
as the loss of FOM accounts discussed above. Liquid assets
accounted for 97% 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 September
30, 1998 $27,733,000 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 needs in the foreseeable future.
Through September 30, 1998, the Company has purchased a
total of 294,900 Class A non-voting shares at an average cost of
$15.53 through the facilities of the New York and the Toronto Stock
Exchanges pursuant to a Normal Course Issuer Bid that is open from
July 3, 1998 to July 2, 1999. Under the outstanding Normal Course
Issuer Bid, the Company may purchase up to 790,000 Class A non-
voting shares. The Company believes that the 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. Also in fiscal
1998, the Company purchased a total of 17,000 Class A non-voting
shares at an average cost of $17.58 pursuant to a Normal Course
Issuer Bid which terminated on July 1, 1998.
On February 20, 1998, May 22, 1998 and August 21, 1998,
the Company paid cash dividends of U.S.$0.07, quarterly per Class
A non-voting and Class B share totaling $2,668,000 from available
cash on hand.
8
On October 20, 1998, the board of directors declared a
regular quarterly cash dividend of $0.07 per Class A non-voting and
Class B share payable on November 20, 1998 to shareholders of
record on November 6, 1998.
Year 2000 Disclosure
The Year 2000 problem is the result of computer systems having been
written using two digits, rather than four, to define the year. Any
computer, computer program, equipment or product that has date-sensitive
software or embedded chips, not corrected, could produce inaccurate
or unpredictable results commencing on January 1, 2000.
The Company is a broker/dealer in securities and as such
relies heavily on computer technology to conduct its operations. The
Company relies on both internal systems and on third party vendors.
As at the date hereof, all vendors of software and hardware and all
vendors of non-critical systems (elevators, vault, building security,
etc.) have been contacted and inquiries about their Y2K readiness
and been made. Certain non-critical systems have been determined
to be non-Y2K compliant and have been or are being replaced with
available Y2K-compliant systems. Approximately 95% of all
vendors (100% of mission-critical vendors) have responded and have
indicated that they already are or will be compliant. In terms of the
Company's internal systems, all programs have been assessed for
Year 2000 compliance. The majority of the compilation work has
been completed and a portion has been internally tested on a parallel
basis with current production, using live files. The remaining
programs upon which modification work has not yet begun,
represent less than 1% of the total number of programs running at
the Company. This work is expected to be complete by the end of
January 1999. Full testing and full Year 2000 compliance is
expected to be completed by June 30, 1999. The Company is
actively participating in a number of industry committees including
the Security Industry Association Year 2000 Committee. The
Company validated its connections to various test sites in July 1998
and will participate in various industry-wide Year 2000 tests that are
scheduled in 1999. Files interfacing with SIAC and DTC have already been
adapted and are compliant. To date there have been no material
exceptions in tests that have been completed.
The cost of readying the Company for Year 2000 has been
estimated to be approximately $200,000 - $250,000 for fiscal 1998.
This includes the costs associated with the personnel dedicated to the
project and the cost of new hardware. It is expected that similar costs
would be required in fiscal 1999. This range of costs does not
include normal ongoing costs for computer hardware or software revisions
that would be required in the normal course of business. All funding for
the Y2K compliance effort is from available cash on hand.
The Company does not have a comprehensive contingency plan with
respect to the Y2K problem, but intends to estoblish such a plan
in 1999 as part of its ongoing Y2K compliance effort.
Despite the Company's planning and preparation for Year
2000, there can be no assurance that partial or total systems
interruptions will not occur and that the costs necessary to update
hardware and software would not have a material adverse impact of
the Company's business, financial condition, statement of operations
and business prospects.
Factors Affecting "Forward-Looking Statements"
This report on Form 10-Q contains "forward-looking statements"
9
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, including
statements related to its acquisition of First of Michigan. 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.
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
10
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 20th day of October, 1998.
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)
11