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 June 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 June 30, 1997 was 12,435,760 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 June 30, 1997 and December 31, 1996
Consolidated Statement of Operations 3
for the six months ended June 30, 1997 and 1996
Consolidated Statement of Cash Flows 4
for the six months ended June 30, 1997 and 1996
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 6
PART II OTHER INFORMATION
Item 1. Legal Proceedings 8
Item 2. Changes in Securities 8
Item 3. Defaults Upon Senior Securities 8
Item 4. Submission of Matters to a Vote of Security-Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
FAHNESTOCK VINER HOLDINGS INC.
CONSOLIDATED BALANCE SHEET
AS AT JUNE 30, 1997
unaudited
June 30, December 31,
Expressed in thousands of U.S. dollars 1997 1996 *
ASSETS
Current assets
Cash $9,565 $9,363
Restricted deposits 2,396 1,902
Escrow deposit for stock of First
of Michigan Capital Corporation 38,000 -
Receivable from brokers and
clearing oganizations 326,120 186,543
Receivable from customers 263,407 266,142
Securities purchased under
agreement to resell 2,025 2,005
Securities owned, at market value 44,057 39,591
Demand notes receivable 30 30
Other 9,237 10,143
694,837 515,719
Other assets
Stock exchange seats (approximate
market value $3,950; $3,503 in 1996) 1,394 1,411
Fixed assets, net of accumulated
depreciation of $4,419; $3,853 in 1996) 1,919 1,856
Goodwill, at amortized cost 836 930
4,149 4,197
$698,986 $519,916
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Drafts payable $10,585 $12,439
Bank call loans 17,300 11,800
Payable to brokers and
clearing organizations 356,769 193,965
Payable to customers 96,563 91,880
Securities sold, but not yet
purchased, at market value 38,559 32,756
Accounts payable and other liabilities 25,633 29,366
Income taxes payable 6,016 11,803
551,425 384,009
Subordinated loans payable 30 30
Shareholders' equity
Share capital
12,435,760 Class A non-voting shares
(1996 - 12,265,760 shares) 41,265 40,024
99,680 Class B voting shares 133 133
41,398 40,157
Contributed capital 1,099 1,099
Retained earnings 105,034 94,621
147,531 135,877
$698,986 $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 SIX MONTHS ENDED JUNE 30, 1997
Second quarter ended Six months ended
unaudited June 30, June 30,
1997 1996* 1997 1996*
Expressed in thousands of U.S. dollars
REVENUE:
Commissions $18,941 $19,507 $37,794 $38,896
Principal transactions 11,984 31,128 29,521 52,884
Interest 8,573 8,665 15,979 17,252
Underwriting fees 1,422 2,710 4,582 4,702
Advisory fees 2,585 4,649 5,450 7,939
Other 913 792 1,580 1,528
44,418 67,451 94,906 123,201
EXPENSES:
Compensation and related expenses 22,112 31,189 46,565 57,559
Clearing and exchange fees 1,822 1,876 3,575 3,805
Communications 3,658 4,047 7,222 7,924
Occupancy costs 2,255 2,372 4,549 4,718
Interest 4,261 4,502 7,339 9,297
Other 2,201 2,558 4,813 4,814
36,309 46,544 74,063 88,117
Profit before income taxes 8,109 20,907 20,843 35,084
Income tax provision 3,603 9,250 9,268 15,536
NET PROFIT FOR PERIOD $4,506 $11,657 $11,575 $19,548
Profit per share
- - basic $0.36 $0.94 $0.91 $1.57
- - fully diluted $0.34 $0.91 $0.88 $1.54
*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 SIX MONTHS ENDED JUNE 30, 1997
unaudited
1997 1996
Expressed in thousands of U.S. dollars
Cash flows from operating activities:
Net profit for the period $11,575 $19,548
Adjustments to reconcile net profit to net cash
provided by operating activities:
Non-cash items included in net profit:
Depreciation and amortization 566 343
Decrease (increase) in operating assets:
Restricted deposits (494) 149
Receivable from brokers and clearing organizations (139,577) 19,211
Receivable from customers 2,735 (16,955)
Securities purchased under agreement to resell (20) (793)
Securities owned (4,466) (1,919)
Other assets 905 7,609
Increase (decrease) in operating liabilities:
Drafts payable (1,854) (5,450)
Payable to brokers and clearing organizations 162,804 (230)
Payable to customers 4,683 (4,267)
Securities sold, but not yet purchased 5,803 (10,744)
Accounts payable and other liabilities (3,733) 7,232
Income taxes payable (5,787) 4,946
33,140 18,680
Cash flows from investing and other activities:
Escrow deposit for stock of First of Michigan
Capital Corporation (38,000) -
Purchase of fixed assets (517) (234)
(38,517) (234)
Cash flows from financing activities:
Cash dividends paid on Class A non-voting and
Class B shares (1,498) (3,061)
Issuance of Class A non-voting shares 1,577 2,010
Increase (decrease) in bank call loans 5,500 (18,050)
5,579 (19,101)
Increase (decrease) in cash 202 (655)
Cash, beginning of period 9,363 9,707
Cash, end of period $9,565 $9,052
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 12,727,526 in 1997,
12,429,534 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
June 30, 1997, basic earnings per share would be $0.93 and $1.60,
respectively, for the six months ended June 30, 1997 and 1996 and diluted
earnings per share would be $0.88 and $1.53, respectively, for the six
months ended June 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 June 30, 1997, the net capital of Fahnestock as calculated under
the Rule was $91,979,000 or 29% of Fahnestock's aggregate debit items.
This is $85,579,000 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 are being 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
5
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. Subsequent Event
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. It is the Company's intention to
acquire the balance of the outstanding shares in a back-end merger.
The Company will account for this acquisition by the purchase method of
accounting.
The purchase was funded with available cash of which $38,000,000 was held in
an escrow deposit account with The Bank of New York as at June 30, 1997 in
connection with the acquisition.
At June 30, 1997 First of Michigan Capital Corporation had total assets of
$115,198,300 and total liabilities of $84,381,500. For the nine months
ended June 30, 1997, First of Michigan Capital Corporation reported the
following unaudited results of operations:
Revenue $53,676,900
Income before income taxes $ 3,189,400
Net income $ 2,041,400
Earnings per share $0.80
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 $4,506,000 or $0.36 per
share compared to $11,657,000 or $0.94 per share for the second quarter of
1996. Revenue for the second quarter of 1997 was $44,418,000 compared to
revenue of $67,451,000 in the second quarter of 1996.
Net profit for the six months ended June 30, 1997 was $11,575,000 or $0.91
per share compared to $19,548,000 or $1.57 per share for the comparable
period of 1996, a decrease of 41% in net profit. Revenue for the first six
months of 1997 was $94,906,000, a decrease of 23% compared to revenue of
$123,201,000 in the first six months of 1996.
The largest impact on both revenue and earnings in 1997 is the significant
reduction in gross trading profits from principal transactions in the
over-the-counter equity markets compared to 1996. Revenue from principal
6
transactions was $11,984,000 in the second quarter of 1997, a decrease
of 62% from $31,128,000 in 1996. Market volatility and an uninterrupted and
dramatic increase in equity prices, has created a more difficult trading
environment. Commission revenue depends on market volume levels. Commission
revenue in the second quarter of 1997 reached its highest level since the
quarter ended June 30, 1996. However, compared to the second quarter of
1996 which was the Company's record quarter, commission income declined
by 3% to $18,941,000 from $19,507,000 in 1996. Underwriting fees were
$1,422,000, a decline of 48% from $2,710,000 in 1996. The year to date
revenue from underwriting fees show a decline of 3% compared to 1996.
Advisory fees in the second quarter of 1997 were $2,585,000, a decline of
44% from $4,649,000 in 1996, due to the retirement of a key employee in
September 1996 and the consequent decline in assets under management. No
significant impact on net earnings has resulted. Total expenses in the
second quarter of 1997 were $36,309,000, a decrease of 22% compared to
$46,544,000 in the comparable period of 1996. A reduction in compensation
expense accounted for substantially all of the decrease due to the
aforementioned reduction in revenues. Other expenses remained relatively
stable from period to period.
On July 17, 1997 the Company announced that it had acquired 99.7% of the
outstanding common shares of First of Michigan Capital Corporation by way
of a tender offer for cash consideration of U.S.$15.00 per share for a
total cost of $37,366,000. First of Michigan is engaged in securities
brokerage and trading and investment banking. First of Michigan is a
member of the New York Stock Exchange and employs approximately 280 investment
executives from 34 retail branches, 33 of which are located in Michigan.
The addition of First of Michigan will increase the Company's sales force by
51% and total branch offices by 71%. It is anticipated that the costs
associated with the integration of First of Michigan will postpone
its contribution to future profitability until 1998.
Liquidity and Capital Resources
Total assets at June 30, 1997 were $698,986,000, an increase of 34% from
$519,916,000 at December 31, 1996. This net increase is attributable mainly
to an increase in receivables from brokers and clearing organizations.
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 June 30, 1997 $17,300,000 of such borrowings were
outstanding.
At June 30, 1997 the Company had $38,000,000 cash in an escrow deposit with
The Bank of New York pursuant to the terms of an outstanding tender offer
for all of the outstanding common shares of First of Michigan Capital
Corporation. This deposit was funded from available cash. This escrow
deposit was treated as a "non-allowable" asset for purposes of the
Fahnestock & Co. Inc. net capital calculation and therefor had the effect
of reducing net regulatory capital and excess net capital as calculated
under the Rule by $38,000,000. On July 17, 1997 at the expiration of the
tender offer, FMCC Acquisition Corp., a wholly-owned subsidiary of the
Company, acquired 99.7% of the outstanding common stock of First of
Michigan Capital Corporation. It is the intention of the Company to
acquire the balance of the stock in a back-end merger.
7
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, 1997 and May 23, 1997 , the Company paid cash dividends of
U.S.$0.06 per Class A non-voting and Class B shares totaling $1,498,000
from available cash on hand.
On July 21, 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
August 22, 1997 to shareholders of record on August 8, 1997.
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 projected ventures, new products, 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. 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
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
8
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,
resulting in an aggregate tender offer price of $37,366,185. 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.
It is the intention of the Company that any Shares not acquired in the
Offer will be acquired in a back-end merger of FMCC with and into First
of Michigan for an equivalent per Share consideration.
The Company obtained the cash necessary to consummate the Offer and will
obtain the cash necessary in connection with the back-end merger from
general corporate funds. Typically, the Company, through Fahnestock, will
utilize excess corporate funds to finance customer debit balances. (The
purchase of customer securities on margin requires the advance of part of
the purchase price by Fahnestock to commercial banks. The amount borrowed for
this purpose is called a "customer debit balance"). Fahnestock has bank lines
of credit that are available through commercial banks in the ordinary
course of business for financing customer balances. Customer debit balances
are financed through commercial bank lines utilizing customers' securities
as collateral.
In connection with the Offer, $38,000,000 was held in escrow with The Bank
of New York as at June 30, 1997. The balance of the escrow deposit not used
to purchase Shares under the Offer was returned to the Company.
First of Michigan, through its subsidiaries, is engaged in securities
brokerage and trading and investment banking and is a member firm of the
New York Stock Exchange. First of Michigan employs approximately 280
investment executives and operates 34 retail branch offices, of which 33
are located in Michigan.
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 21st day of July, 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)
11
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<LEGEND> Financial Data Schedule for the second quarterly period ended
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