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, 1997
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: 1-14416
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 September 30, 1997 was 12,435,760 and 99,680 shares,
respectively.
FAHNESTOCK VINER HOLDINGS INC. - INDEX -
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet
as of September 30, 1997 and December 31, 1996
Consolidated Statement of Operations
for the nine months ended September 30, 1997 and 1996
Consolidated Statement of Cash Flows
for the nine months ended September 30, 1997 and 1996
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
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.
CONSOLIDATED BALANCE SHEET
AS AT SEPTEMBER 30, 1997 (unaudited)
December
1997 31, 1996*
Expressed in thousands of U.S. dollars
ASSETS
Current assets
Cash and short-term deposits $42,977 $9,363
Restricted deposits 1,449 1,902
Securities purchased under agreement to resell 4,315 2,005
Receivable from brokers and clearing organizations 394,162 186,543
Receivable from customers 341,902 266,142
Securities owned, at market value 55,650 39,591
Demand notes receivable 30 30
Other 27,383 10,143
867,868 515,719
Other assets
Stock exchange seats (approximate market value
$4,715; $3,503 in 1996) 1,540 1,411
Fixed assets, net of accumulated depreciation of
$7,350; $3,853 in 1996) 5,320 1,856
Goodwill, at amortized cost 5,795 930
12,655 4,197
$880,523 $519,916
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Drafts payable $15,650 $12,439
Bank call loans 22,680 11,800
Payable to brokers and clearing organizations 447,138 193,965
Payable to customers 128,408 91,880
Securities sold, but not yet purchased,
at market value 52,807 32,756
Accounts payable and other liabilities 49,227 29,366
Income taxes payable 10,386 11,803
726,296 384,009
Subordinated loans payable 30 30
Shareholders' equity
Share capital
12,435,760 Class A non-voting shares
(1996 - 12,265,760 shares) 41,265 39,688
99,680 Class B voting shares 133 133
41,398 39,821
Contributed capital 1,099 1,099
Retained earnings 111,700 94,957
154,197 135,877
$880,523 $519,916
* Condensed from audited financial statements
The accompanying notes are an integral part of these condensed
financial statements. 2
FAHNESTOCK VINER HOLDINGS INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (unaudited)
Third quarter ended Nine months ended
September 30, September 30,
1997 1996* 1997 1996*
Expressed in thousands of U.S. dollars, except per share amounts
REVENUE:
Commissions $34,624 $16,811 $72,418 $55,707
Principal transactions 17,061 13,905 46,582 66,789
Interest 11,681 8,073 27,660 25,325
Underwriting fees 1,240 2,138 5,822 6,840
Advisory fees 5,104 3,574 10,554 11,513
Other 3,010 1,262 4,590 2,790
72,720 45,763 167,626 168,964
EXPENSES:
Compensation and related expenses 37,630 22,223 84,195 79,782
Clearing and exchange fees 3,023 1,760 6,598 5,565
Communications 4,164 4,544 11,386 12,468
Occupancy costs 3,368 2,416 7,917 7,134
Interest 5,865 3,924 13,204 13,221
Other 5,999 1,284 10,812 6,098
60,049 36,151 134,112 124,268
Profit before income taxes 12,671 9,612 33,514 44,696
Income tax provision 5,254 4,058 14,522 19,594
NET PROFIT FOR PERIOD $7,417 $5,554 $18,992 $25,102
Profit per share
- - primary $0.58 $0.45 $1.50 $2.02
- - fully diluted $0.56 $0.44 $1.44 $1.91
* restated to conform with presentation adopted at December 31, 1996.
The accompanying notes are an integral part of these condensed financial
statements. 3
FAHNESTOCK VINER HOLDINGS INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (unaudited)
1997 1996
Expressed in thousands of U.S. dollars
Cash flows from operating activities:
Net profit for the period $18,992 $25,102
Adjustments to reconcile net profit to net cash
provided by operating activities:
Non-cash items included in net profit:
Depreciation and amortization 932 520
Decrease (increase) in operating assets, net of
effects of acquisition of First of Michigan
Capital Corporation:
Restricted deposits 453 59
Receivable from brokers and clearing organizations (200,744) 63,772
Receivable from customers 9,461 (10,305)
Securities purchased under agreement to resell (2,310) 127
Securities owned (11,487) 1,078
Other assets (10,255) 5,313
Increase (decrease) in operating liabilities net
of effects of acquisition of First of Michigan
Capital Corporation:
Drafts payable 3,211 (6,983)
Payable to brokers and clearing organizations 251,060 (60,241)
Payable to customers 16,430 9,184
Securities sold, but not yet purchased 19,693 (2,493)
Accounts payable and other liabilities 6,667 8,166
Income taxes payable (1,428) 3,475
Cash provided from operating activities 100,675 36,774
Cash flows from investing and other activities:
Purchase of First of Michigan Capital Corporation,
net of cash acquired (34,374) -
Proceeds from sale of exchange seat 1,360 -
Purchase of fixed assets (1,037) (379)
Cash used in investing and other activities (34,051) (379)
Cash flows from financing activities:
Cash dividends paid on Class A non-voting
and Class B shares (2,250) (3,678)
Issuance of Class A non-voting shares 1,577 2,134
Decrease in bank call loans (32,337) (26,700)
Cash used in financing activities (33,010) (28,244)
Net increase in cash and short-term deposits 33,614 8,151
Cash and short-term deposits, beginning of period 9,363 9,707
Cash and short-term deposits, end of period $42,977 $17,858
Supplemental schedule of non-cash investing activity:
The Company purchased the shares of First of Michigan
Capital Corporation as follows:
Fair value of assets acquired, excluding cash $108,309
Liabilities assumed (78,993)
Goodwill 5,058
Cash paid, net of cash acquired $34,374
The accompanying notes are an integral part of these condensed financial
statements. 4
FAHNESTOCK VINER HOLDINGS INC.
Notes to Consolidated Financial Statements
(unaudited)
1. Financial Statements
The consolidated financial statements have been prepared in accordance
with the instructions to Form 10-Q and do not include all of the information
and notes generally required by accounting principles generally accepted in
the United States for complete financial statements. The financial statements
should be read in conjunction with the registrant's annual report for the
year ended December 31, 1996 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 necessary for a fair presentation of
the results of operations for the interim periods presented have been made.
All adjustments made are of a recurring nature. The results of operations for
the interim periods are not necessarily indicative of the results for a full
year.
These consolidated financial statements are reported in U.S. dollars.
2. Earnings per share
Primary earnings per share are based on the weighted average number of
Class A non-voting and Class B shares outstanding of 12,729,350 in 1997,
12,449,093 in 1996. Fully diluted earnings per share reflects the effect of
outstanding employee stock options.
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. The Company plans to adopt FAS 128 in the fourth quarter of 1997
for the year ended December 31, 1997. If FAS 128 had been adopted at
September 30, 1997, basic earnings per share would be $1.53 and $1.60,
respectively, for the nine months ended September 30, 1997 and 1996 and
diluted earnings per share would be $1.45 and $1.53, respectively, for the
nine months ended September 30, 1997 and 1996.
3. Net Capital Requirements
The Company's principal broker-dealer subsidiary, Fahnestock & Co. Inc.
("Fahnestock"), is subject to the Uniform Net Capital Rule (the "Rule") of
the Securities and Exchange Commission 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 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, 1997, the net capital of Fahnestock as calculated under
the Rule was $94,127,000 or 22% of Fahnestock's aggregate debit items. This
is $85,982,000 in excess of the minimum required net capital.
4. Commitments and Contingencies
In May 1997, Fahnestock entered into a new office space lease, which
expires on September 30, 2013, and will relocate its head office to 125 Broad
Street, New York, NY. in the fourth quarter of 1997. Base rent payments
commence on October 1, 1998, but will be expensed for accounting purposes
evenly over the life of the lease. Rental payments for the currently occupied
space at 110 Wall Street, New York NY are being expensed over the period
of the lease which expires on January 31, 1998. Minimum rental payments on
operating leases for office space and furniture and fixtures expiring at
various dates through 2013 are as follows: 1998 - $3,786,700;
1999 - $2,360,200; 2000 - $1,735,900; 2001 - $1,631,400; and for the period
2002 through 2013 - an aggregate of $20,142,700.
5. Acquisition
On July 17, 1997 FMCC Acquisition Corp., a wholly-owned subsidiary of
the Company, accepted for payment 2,491,079 common shares of First of
Michigan Capital Corporation pursuant to a tender offer which expired at
Midnight, New York City time on July 16, 1997. This represents approximately
99.7% of the outstanding common stock. On July 31, 1997, the balance of the
outstanding shares were acquired in a back-end merger. The total purchase
price was $37,609,000.
The Company is accounting for this acquisition by the purchase method of
accounting. Goodwill acquired is being amortized on a straight-line basis
over twenty years. The results of operations for the period ended September
30, 1997 include the consolidated operations of First of Michigan Capital
Corporation from July 17, 1997 forward.
The purchase was funded with available cash.
ITEM 2.
Managements' 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
Fahnestock Viner Holdings Inc. reported earnings of $7,417,000 or $0.58 per
share compared to $5,554,000 or $0.45 per share for the third quarter of
1996, an increase of 34%. Revenue for the third quarter of 1997 was
$72,720,000 compared to revenue of $45,763,000 in the third quarter of 1996,
an increase of 59%. The increase in revenue is primarily attributable to
the acquisition of First of Michigan Capital Corporation on July 17, 1997
as well as generally excellent business conditions. The third quarter of
1997 includes the operations of First of Michigan Capital Corporation since
July 17, 1997. First of Michigan operates 33 retail branches in Michigan
and employs approximately 255 investment executives. First of Michigan
is also engaged in investment banking and principal trading activities.
Commission revenue in the third quarter of 1997 was significantly improved
from the third quarter of 1996, up 106% both as a result of the addition of
the retail operations of the 33 First of Michigan branches acquired in
mid-July and also to generally heavier volumes in the equity markets in the
third quarter of 1997 compared to the same period in 1996. Principal
transactions, up 23%, also showed significant gains from levels reported in
the same period of 1996. Advisory fees increased 43% from levels reported in
1996 due both to the addition of assets under management and to increases in
the market values of existing accounts. Net interest revenue (interest
revenue less interest expense) increased by 40% in the third quarter of
1997 compared to 1996 due the addition of significant customer debit balances
with the acquisition of First of Michigan and higher stock loan/borrow
activities in 1997. All expense categories were affected by the acquisition
of First of Michigan. It is anticipated that the costs associated with
integrating First of Michigan, including incentives, will preclude a profit
contribution from that segment until 1998. Variable expenses such as
compensation increased with commission and trading volume increases in the
third quarter of 1997.
Net profit for the nine months ended September 30, 1997 was $18,992,000 or
$1.50 per share compared to $25,102,000 or $2.02 per share for the comparable
period of 1996, a decrease of 24% in net profit. Revenue for the first nine
months of 1997 was $167,626,000 compared to revenue of $168,964,000 in the
first nine months of 1996.
The consolidation of First of Michigan was substantially completed during the
third quarter with the absorption of the accounts and business of First of
Michigan's "back office operations". Full integration of the business
continues. As mentioned above, the costs associated with this process are
expected to postpone a contribution to overall profitablity until 1998. The
addition of First of Michigan increased the Company's sales force by 51% and
added 33 branch offices bringing the total to 81. The Company today employs
approximately 800 investment executives.
Liquidity and Capital Resources
Total assets at September 30, 1997 were $880,523,000, an increase of 69%
from $519,916,000 at December 31, 1996. This net increase is attributable
mainly to an increase in receivables from brokers and clearing organizations
as well as receivables from customers primarily due to the acquisition of
First of Michigan Capital Corporation. Liquid assets accounted for 99% of
total assets, consistent with year end levels. The Company satisfies its
need for funds from its own cash resources, internally-generated funds, term
and 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-related borrowings as well as
changes in stock loan balances. Fahnestock has arrangements with banks for
borrowings on a fully collateralized basis. At September 30, 1997 $22,680,000
of such borrowings were outstanding.
Management believes that funds from operations, combined with Fahnestock's
capital base and available credit facilities, will be sufficient to satisfy
the Company's cash requirements in the foreseeable future.
On February 21, May 23, and August 22, 1997, the Company paid cash dividends
of $0.06 per Class A non-voting and Class B shares totaling $2,250,000 from
available cash on hand.
On October 20, 1997, the board of directors declared a regular quarterly cash
dividend of $0.06 per Class A non-voting and Class B share payable on
November 21, 1997 to shareholders of record on November 7, 1997.
7
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,
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. In addition, the results or
expectations of the Company will be impacted by factors associated
with the acquisition of First of Michigan and its integration with the
Company's existing business. 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.
8
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
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
On June 18, 1997, the Company, through its indirect, wholly-owned
subsidiary, FMCC Acquisition Corp. ("FMCC"), commenced a tender offer
(the "Offer") for all the outstanding shares (the "Shares") of common stock
of First of Michigan Capital Corporation ("First of Michigan") at a price of
$15.00 per Share net to the seller in cash. On July 17, 1997, following
the expiration of the Offer at 12:00 Midnight, New York City time on July 16,
1997, the aggregate 2,491,079 Shares (or approximately 99.7% of the total
number of Shares outstanding) were accepted for payment. Included in this
number are the aggregate 1,418,351 Shares subject to the Securities Purchase
Agreement dated as of June 11, 1997 between FMCC and 1888 Limited Partnership
("1888") and DST Systems Inc. ("DST"), which were tendered into the Offer
pursuant to certain letter agreements between FMCC and 1888 and DST,
respectively.
On July 31, 1997 the Company acquired the remaining Shares in the
Offer in a back-end merger of FMCC with and into First of Michigan for an
equivalent per Share consideration. The total purchase price for the Shares
of First of Michigan was $37,609,000.
The Company obtained the cash necessary to consummate the Offer and
in connection with the back-end merger from general corporate funds.
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
9
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, 1997.
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)
10
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<ARTICLE> BD
<LEGEND> EXHIBIT 27 - Financial Data Schedule for the third quarterly period
ended September 30, 1997 required pursuant to Item 601(c) of Regulation S-K
and Regulation S-B and Rule 401 of Regulation S-T.
</LEGEND>
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<NAME> FAHNESTOCK VINER HOLDINGS INC.
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 42,977,000
<RECEIVABLES> 409,631,000
<SECURITIES-RESALE> 4,315,000
<SECURITIES-BORROWED> 326,466,000
<INSTRUMENTS-OWNED> 55,650,000
<PP&E> 5,320,000
<TOTAL-ASSETS> 880,523,000
<SHORT-TERM> 22,680,000
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<SECURITIES-LOANED> 433,265,000
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