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 June 30, 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 July 19, 2000 was 11,964,759 and 99,680
shares, respectively.
FAHNESTOCK VINER HOLDINGS INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet
as of June 30, 2000 and December 31, 1999
Consolidated Statement of Operations
for the three and six months ended June 30, 2000 and 1999
Consolidated Statement of Cash Flows
for the six months ended June 30, 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)
Expressed in thousands of U.S. dollars
JUNE 30, DECEMBER 31,
2000 1999
ASSETS
Current assets
Cash and short-term deposits $10,567 $10,838
Restricted deposits 2,630 2,392
Securities purchased under agreement to resell 29,353 74,560
Deposits with clearing organizations 5,459 5,955
Receivable from brokers and clearing organizations 149,930 136,767
Receivable from customers 501,700 436,320
Securities owned, at market value 56,232 63,244
Other 15,424 19,018
771,295 749,094
Other assets
Stock exchange seats (approximate market value
$7,676; $6,148 in 1999) 3,018 1,318
Fixed assets, net of accumulated depreciation of
$13,275; $11,956 in 1999 10,232 10,872
Goodwill, at amortized cost 3,634 5,244
16,884 17,434
$788,179 $766,528
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Drafts payable $21,325 $24,765
Bank call loans 84,765 66,322
Securities sold under agreement to repurchase 24,000 69,031
Payable to brokers and clearing organizations 232,172 209,151
Payable to customers 146,470 125,207
Securities sold, but not yet purchased,
at market value 13,768 18,661
Accounts payable and other liabilities 43,912 45,331
Income taxes payable 12,955 20,672
579,367 579,140
Shareholders' equity
Share capital
11,933,759 Class A non-voting shares
(1999 - 12,147,569 shares) 28,895 32,518
99,680 Class B voting shares 133 133
29,028 32,651
Contributed capital 3,262 3,262
Retained earnings 176,522 151,475
208,812 187,388
$788,179 $766,528
The accompanying notes are an integral part of these condensed
financial statements.
FAHNESTOCK VINER HOLDINGS INC.
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
Expressed in thousands of U.S.
dollars, except per share amounts
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
REVENUE:
Commissions $29,816 $31,540 $68,048 $60,813
Principal transactions, net 16,178 20,135 57,122 34,938
Interest 13,708 10,992 27,382 20,188
Underwriting fees 2,132 2,690 5,113 5,606
Advisory fees 5,025 5,519 10,793 12,018
Other 2,565 2,072 4,358 3,336
69,424 72,948 172,816 136,899
EXPENSES:
Compensation and related
expenses 34,857 37,189 81,893 71,183
Clearing and exchange fees 1,618 2,452 3,907 4,632
Communications 5,893 5,377 11,913 10,705
Occupancy costs 3,217 3,353 6,482 6,360
Interest 5,905 5,579 12,555 10,214
Other 3,529 5,243 7,336 10,058
55,019 59,193 124,086 113,152
Profit before income taxes 14,405 13,755 48,730 23,747
Income tax provision 6,113 6,148 21,858 10,795
NET PROFIT FOR PERIOD $8,292 $7,607 $26,872 $12,952
Profit per share
- basic $0.68 $0.61 $2.21 $1.04
- diluted $0.67 $0.60 $2.18 $1.02
The accompanying notes are an integral part of these condensed
financial statements.
FAHNESTOCK VINER HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
Expressed in thousands of U.S. dollars
FOR THE SIX MONTHS ENDED JUNE 30,
2000 1999
Cash flows from operating activities:
Net profit for the period $26,872 $12,952
Adjustments to reconcile net profit to net cash
provided by (used in) operating activities:
Non-cash items included in net profit:
Depreciation and amortization 1,535 1,686
Gain on sale of exchange seat - (492)
Decrease (increase) in operating assets, net
of the effect of the acquisition of
Propp & Company Inc.
Restricted deposits (238) (439)
Securities purchased under agreement to resell 45,207 (25,893)
Deposits with clearing organizations 496 (5,255)
Receivable from brokers and clearing organizations (13,163) (30,906)
Receivable from customers (65,380) (131,944)
Securities owned 7,012 9,831
Other assets 4,382 9,302
Increase (decrease) in operating liabilities,
net of the effect of the acquisition of
Propp & Company Inc.
Drafts payable (3,439) (6,710)
Securities sold under agreement to repurchase (45,031) 27,761
Payable to brokers and clearing organizations 23,022 149,437
Payable to customers 21,263 780
Securities sold, but not yet purchased (4,893) 4,154
Accounts payable and other liabilities (1,489) (2,180)
Income taxes payable (8,008) 5,567
Cash (used in) provided by operating activities (11,852) 17,651
Cash flows from investing activities:
Purchase of Propp & Company Inc.,
net of cash acquired (740) -
Proceeds from sale of exchange seat - 655
Purchase of fixed assets (675) (1,453)
Cash used in investing activities (1,415) (798)
Cash flows from financing activities:
Cash dividends paid on Class A non-voting
and Class B shares (1,824) (1,768)
Issuance of Class A non-voting shares 293 3,771
Repurchase of Class A non-voting shares
for cancellation (3,916) (3,853)
Tax benefit from employee stock options exercised - 909
Increase (decrease) in bank call loans 18,443 (12,438)
Cash provided by (used in) financing activities 12,996 (13,379)
Net (decrease) increase in cash and short-term deposits (271) 3,474
Cash and short-term deposits, beginning of period 10,838 11,501
Cash and short-term deposits, end of period $10,567 $14,975
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 1,290 people, of whom 753 are
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 Six Months ended
June 30, June 30
2000 1999 2000 1999
Basic weighted average number
of shares outstanding 12,141,317 12,511,060 12,141,317 12,511,060
Net effect, treasury method 150,703 161,412 183,173 133,962
Diluted common shares 12,292,020 12,672,472 12,324,490 12,645,022
Net profit for the period $8,292,000 $7,607,000 $26,872,000 $12,952,000
Basic profit per share $0.68 $0.61 $2.21 $1.04
Diluted profit per share $0.67 $0.60 $2.18 $1.02
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 June 30, 2000, the net capital of Fahnestock as calculated
under the Rule was $144,252,000 or 26% of Fahnestock's aggregate
debit items. This was $133,158,000 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 conducted primarily in the U.S. Asset
information by reportable segment is not reported, since the
Company does not produce such information for internal use.
Expressed in thousands of U.S. dollars
Three Months ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
Revenue:
Retail Branches $35,591 $39,655 $85,464 $75,079
Capital Markets 16,310 18,592 52,195 34,663
Asset Management 3,177 3,045 6,537 5,998
Interest 13,226 9,799 26,080 18,225
Other 1,120 1,857 2,540 2,934
Total $69,424 $72,948 $172,816 $136,899
Operating Income:
Retail Branches $871 $1,764 $5,772 $3,621
Capital Markets 2,787 5,426 15,378 8,902
Asset Management 1,954 1,865 4,066 3,700
Interest 6,825 4,378 12,727 7,997
Other 1,968 322 10,787 (473)
Total $14,405 $13,755 $48,730 $23,747
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 quarter ended June 30, 2000 was
$8,292,000 or $0.68 per share compared to $7,607,000 or $0.61
per share for the first quarter of 1999, an increase of 9% in net profit,
reflecting higher net interest revenue and a reduction in expenses.
Revenue for the second quarter of 2000 was $69,424,000, a
decrease of 5% compared to revenue of $72,948,000 in the second
quarter of 1999 reflecting lower levels of commission income and
income from principal transactions due to lower overall stock market
volumes, partially offset by higher interest income, compared to the
same period in 1999.
Results for the second quarter of 2000 reflected substantially
increased market volatility as technology stocks declined
precipitously and then partially recovered during the quarter. This
was more fully reflected in the movement of the NASDAQ
composite average which declined from a high of 5132 in March
2000 to a low of 3165 during the quarter and ended at 3966. As a
result, investors reduced their activity levels and instead, focussed on
interest rate increases by the Federal Reserve Board and fears of
emerging inflationary conditions as energy prices and wage rates
posted significant increases.
Commission income and to a large extent, income from
principal transactions, depend on market volume levels. Commission
revenue decreased by 5% in the second quarter of 2000 compared to
the second quarter of 1999 due to investor concern about market
volatility and economic factors. Net revenue from principal
transactions decreased by 20% compared to the second quarter of
1999. Due to high market volatility, the Company reduced the
number of securities in which it makes markets. It may increase or
decrease this number from time to time as market conditions
warrant. Investment banking revenues declined by 21% compared to
the second quarter of 1999 as investor concerns about the economy
dampened the market for new issues. Advisory fees decreased by 9%
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 44% in the second 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 decreased
in the second quarter of 2000 compared to the same period in 1999.
Compensation expense and clearing and exchange fees have
volume-related components and , therefore, decreased with the
decreased level of business conducted in 2000 compared to 1999.
The cost of communications and technology increased 10% in the
second quarter of 2000 compared to 1999 due to the implementation
of a much improved technology platform Company-wide in the
summer of 1999.
Other Business
The Company purchased the outstanding shares of Propp &
Company Inc. on May 15, 2000 for $7,006,000. The purchase price
was less than the fair value of Propp & Company Inc.'s net assets at
the acquisition date by $1,391,000. This difference will be amortized
on a straight line basis over 20 years.
Liquidity and Capital Resources
Total assets at June 30, 2000 of $788,179,000 increased by
approximately 3% 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 June 30,
2000, $84,765,000 of such borrowings were outstanding, an increase
of 28% over outstanding borrowings at December 31, 1999.
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.
Through June 30, 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
532,100 Class A non-voting shares at an average cost of $15.225.
Of these purchases, a total of 244,600 Class A non-voting shares
with an average cost of $16.01, were purchased and cancelled during
2000.
On June 29, 2000 the Company announced its intention to
purchase for cancellation up to 596,537 of its Class A non-voting
shares (approximately 5% of outstanding Class A shares) by way of
a normal course issuer bid through the facilities of the New York and
Toronto Stock Exchanges during the period commencing July 5,
2000 and terminating July 4, 2001. 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.
On February 29, 2000 and May 19, 2000, the Company paid
cash dividends of $0.07 and $0.08, respectively, per Class A non-
voting and Class B share totaling $1,824,000 from available cash on
hand.
On July 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 August 18, 2000 to shareholders of record
on August 4, 2000.
The book value of the Company's Class A non-voting and
Class B shares is U.S.$17.35 at June 30, 2000 (U.S.$14.29 at June
30, 1999), based on total outstanding shares of 12,033,439 and
12,475,499, 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 June 30, 2000 and 1999, the Company's value-at-risk for
each component of market risk was as follows:
Expressed in thousands of U.S. dollars
June 30,
2000 1999
Interest rate risk $116 $166
Equity price risk 978 498
Diversification benefit (543) (265)
Total $551 $399
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.
The increase in the Company's exposure from the shifting of the
weighting of the portfolio towards equities and away from debt was partially
offset by an increase in the 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 July, 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)
