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 September 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 October 19, 2000 was 11,982,469 and 99,680
shares, respectively.
FAHNESTOCK VINER HOLDINGS INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheet
as of September 30, 2000
and December 31, 1999
Condensed Consolidated Statement of Operations
for the three and nine months ended
September 30, 2000 and 1999
Condensed Consolidated Statement of Cash Flows
for the nine months ended
September 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)
SEPTEMBER 30, DECEMBER 31,
2000 1999
Expressed in thousands of U.S. dollars
ASSETS
Current assets
Cash and short-term deposits $12,039 $10,838
Restricted deposits 2,367 2,392
Securities purchased under agreement to resell 26,580 74,560
Deposits with clearing organizations 4,835 5,955
Receivable from brokers and clearing organizations 167,158 136,767
Receivable from customers 511,173 436,320
Securities owned, at market value 48,338 63,244
Other 17,925 19,018
790,415 749,094
Other assets
Stock exchange seats (approximate market
value$7,451; $6,148 in 1999) 3,018 1,318
Fixed assets, net of accumulated depreciation of
$14,160; $11,956 in 1999 10,165 10,872
Goodwill, at amortized cost 3,589 5,244
16,772 17,434
$807,187 $766,528
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Drafts payable $33,508 $24,765
Bank call loans 33,283 66,322
Securities sold under agreement to repurchase 23,512 69,031
Payable to brokers and clearing organizations 325,303 209,151
Payable to customers 106,899 125,207
Securities sold, but not yet purchased,
at market value 12,686 18,661
Accounts payable and other liabilities 44,338 45,331
Income taxes payable 12,874 20,672
592,403 579,140
Shareholders' equity
Share capital
11,982,469 Class A non-voting shares
(1999 - 12,147,569 shares) 29,457 32,518
99,680 Class B voting shares 133 133
29,590 32,651
Contributed capital 3,262 3,262
Retained earnings 181,932 151,475
214,784 187,388
$807,187 $766,528
The accompanying notes are an integral part of these condensed
financial statements.
FAHNESTOCK VINER HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
Expressed in thousands of U.S. dollars, except per share amounts
REVENUE:
Commissions $30,099 $25,855 $98,147 $86,668
Principal transactions, net 15,046 16,834 72,168 51,772
Interest 15,151 11,483 42,533 31,671
Underwriting fees 2,366 3,836 7,479 9,442
Advisory fees 5,275 4,882 16,068 16,900
Other 1,528 2,058 5,886 5,394
69,465 64,948 242,281 201,847
EXPENSES:
Compensation and related expenses 36,558 32,129 118,451 103,312
Clearing and exchange fees 1,184 2,042 5,091 6,674
Communications 5,593 5,298 17,506 16,003
Occupancy costs 2,889 3,190 9,371 9,550
Interest 7,349 5,719 19,904 15,933
Other 4,028 5,134 11,364 15,192
57,601 53,512 181,687 166,664
Profit before income taxes 11,864 11,436 60,594 35,183
Income tax provision 5,489 5,183 27,347 15,978
NET PROFIT FOR PERIOD $6,375 $6,253 $33,247 $19,205
Profit per share
- basic $0.53 $0.50 $2.74 $1.54
- diluted $0.51 $0.50 $2.69 $1.52
The accompanying notes are an integral part of these condensed
financial statements.
FAHNESTOCK VINER HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
2000 1999
Expressed in thousands of U.S. dollars
Cash flows from operating activities:
Net profit for the period $33,247 $19,205
Adjustments to reconcile net profit to net cash provided
by (used in) operating activities:
Non-cash items included in net profit:
Depreciation and amortization 2,541 2,564
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 25 (517)
Securities purchased under agreement to resell 47,980 (38,713)
Deposits with clearing organizations 1,120 (1,941)
Receivable from brokers and clearing organizations (30,391) (31,749)
Receivable from customers (74,853) (48,068)
Securities owned 14,906 9,405
Tax benefit from employee stock options exercised - 1,066
Other assets 1,880 14,375
Increase (decrease) in operating liabilities, net of
the effect of the acquisition of Propp & Company Inc.
Drafts payable 8,743 (8,416)
Securities sold under agreement to repurchase (45,519) 43,482
Payable to brokers and clearing organizations 116,152 64,684
Payable to customers (18,308) 1,966
Securities sold, but not yet purchased (5,975) (9,330)
Accounts payable and other liabilities (992) (1,496)
Income taxes payable (8,089) 9,002
Cash provided by operating activities 42,467 25,027
Cash flows from investing activities:
Purchase of Propp & Company Inc., net of cash acquired (883) -
Proceeds from sale of exchange seat - 655
Purchase of fixed assets (1,493) (2,862)
Cash used in investing activities (2,376) (2,207)
Cash flows from financing activities:
Cash dividends paid on Class A non-voting and
Class B shares (2,790) (2,642)
Issuance of Class A non-voting shares 855 4,111
Repurchase of Class A non-voting shares for
cancellation (3,916) (4,479)
Decrease in bank call loans (33,039) (21,752)
Cash used in financing activities (38,890) (24,762)
Net increase (decrease) in cash and short-term deposits 1,201 (1,942)
Cash and short-term deposits, beginning of period 10,838 11,501
Cash and short-term deposits, end of period $12,039 $9,559
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 1,300 people, of whom 551 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 of
America 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 Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
Basic weighted average number
of shares outstanding 12,067,763 12,501,571 12,116,620 12,501,571
Net effect, treasury method 410,142 175,648 242,721 182,797
Diluted common shares 12,477,905 12,677,219 12,359,341 12,684,368
Net profit for the period $6,375,000 $6,253,000 $33,247,000 $19,205,000
Basic profit per share $0.53 $0.50 $2.74 $1.54
Diluted profit per share $0.51 $0.50 $2.69 $1.52
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 September 30, 2000, the net capital of Fahnestock as
calculated under the Rule was $150,235,000 or 26% of Fahnestock's
aggregate debit items. This was $121,743,000 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.
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
Expressed in thousands of U.S. dollars
Revenue:
Retail Branches $34,965 $33,077 $120,429 $108,290
Capital Markets 15,843 16,976 68,039 51,574
Asset Management 3,281 3,146 9,818 9,143
Interest 14,369 10,540 40,449 28,614
Other 1,007 1,209 3,546 4,226
Total $69,465 $64,948 $242,281 $201,847
Operating Income:
Retail Branches $751 $792 $6,524 $4,314
Capital Markets 2,748 1,577 25,110 10,252
Asset Management 1,987 2,020 6,053 5,824
Interest 6,149 5,075 18,876 13,087
Other (166) 1,972 4,031 1,706
Total $11,864 $11,436 $60,594 $35,183
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 third quarter ended September 30, 2000 was
U.S.$6,375,000 or $0.53 per share compared to U.S.$6,253,000 or
$0.50 per share for the third quarter of 1999, an increase of 2% in net
profit. Revenue for the third quarter of 2000 was U.S.$69,465,000, an
increase of 7% compared to revenue of U.S.$64,948,000 in the third
quarter of 1999, as commissions, net interest revenue and advisory fees
increased during the quarter compared to prior year levels.
Net profit for the nine months ended September 30, 2000 was
U.S.$33,247,000 or $2.74 per share compared to U.S.$19,205,000 or
$1.54 per share for the comparable period of 1999, an increase of 73%
in net profit. Revenue for the first nine months of 2000 was
U.S.$242,281,000, compared to revenue of U.S. $201,847,000 in the
first nine months of 1999, an increase of 20%.
During the third quarter of 2000, stock markets rallied off the
lows set in May and by the end of the quarter were relatively
unchanged. Impacting the markets during the quarter were changes in
earnings expectations, disappointing earnings by key sector leaders,
and, of course, volatility in the oil market due to concerns about
supplies. However, inflationary pressures appeared to be contained,
and the Federal Reserve chose not to raise interest rates at their
September meeting. While Fahnestock revenue and earnings remained
high, they were impacted by the aforementioned factors, as well as
seasonal weakness in volumes during the summer months. Interest
income reached a record due to higher customer balances combined
with higher interest rates.
Commission income and to a large extent, income from
principal transactions, depend on market volume levels. Commission
revenue increased by 16% in the third quarter of 2000 compared to the
third quarter of 1999 as markets became more volatile over the
summer period. Net revenue from principal transactions decreased by
11% compared to the third quarter of 1999 due to reduced activity in
the NASDAQ markets. 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 38%
compared to the third quarter of 1999 as volatility dampened the
market for new issues. Advisory fees increased by 8% due to increased
assets under management. Net interest revenue (interest revenue less
interest expense) increased by 35% in the third 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 increased in the third quarter of 2000 compared to the same
period in 1999. Compensation expense has volume-related components
and , therefore, increased with the increased level of business
conducted in 2000 compared to 1999. The cost of communications and
technology increased 6% in the third quarter of 2000 compared to
1999 due to the implementation of a much improved technology
platform Company-wide in the summer of 2000.
Liquidity and Capital Resources
Total assets at September 30, 2000 of $807,187,000
increased by approximately 5% 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 September 30,
2000, $33,283,000 of such borrowings were outstanding, a decrease of
50% compared to 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 September 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 February 29, 2000, May 19, 2000 and August 18, 2000,
the Company paid cash dividends of $0.07, $0.08 and $0.08,
respectively, per Class A non-voting and Class B share totaling
$2,790,000 from available cash on hand.
On October 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 November 17, 2000 to shareholders of record on
November 3, 2000.
The book value of the Company's Class A non-voting and
Class B shares is U.S.$17.78 at September 30, 2000 (U.S.$14.70 at
September 30, 1999), based on total outstanding shares of 12,082,149
and 12,486,949, 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 September 30, 2000 and 1999, the Company's value-at-
risk for each component of market risk was as follows:
September 30,
2000 1999
Expressed in thousands of U.S. dollars
Interest rate risk $105 $137
Equity price risk 492 518
Diversification benefit (310) (472)
Total $287 $183
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 Company
decreased its exposure in both its equities and debt trading portfolios.
This decrease in exposure was further reduced by a diversification
benefit arising out of a market hedge. However, despite increased
market volatility in 2000, the diversification benefit in the third quarter
of 2000 was less than in the same period of 1999 primarily due to the
use of hedging instruments that are less volatile but more liquid than
the securities traded by the Company in the ordinary course of
business.
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 October, 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)
