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, 1998 or ___ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ___to___ Commission File Number: 1-12043 FAHNESTOCK VINER HOLDINGS INC. (Exact name of registrant as specified in its charter) Ontario, Canada 98-0080034 State or jurisdiction of (I.R.S. Employer incorporation or organization Identification number) P.O. Box 2015, Suite 1110 20 Eglinton Avenue West Toronto, Ontario, Canada M4R 1K8 (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: 416-322-1515 Former name, address and former fiscal year, if changed since last report. Not applicable Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months ( or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] The number of shares of the Company's Class A non-voting shares and Class B voting shares (being the only classes of common stock of the Company), outstanding on July 22, 1998 was 12,592,260 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, 1998 and December 31, 1997 Consolidated Statement of Operations 4 for the six months ended June 30, 1998 and 1997 Consolidated Statement of Cash Flows 5 for the six months ended June 30, 1998 and 1997 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II OTHER INFORMATION Item 1. Legal Proceedings 9 Item 2. Changes in Securities and Use of Proceeds 9 Item 3. Defaults Upon Senior Securities 9 Item 4. Submission of Matters to a Vote of Security-Holders 9 Item 5. Other Information 10 Item 6. Exhibits and Reports on Form 8-K 10 SIGNATURES 11 FAHNESTOCK VINER HOLDINGS INC. CONSOLIDATED BALANCE SHEET (unaudited) June 30, December 31, 1998 1997 * Expressed in thousands of U.S. dollars ASSETS Current assets Cash and short-term deposits $9,643 $10,784 Restricted deposits 1,923 1,537 Deposits with clearing organizations 7,048 4,734 Receivable from brokers and clearing organizations 262,479 359,205 Receivable from customers 372,632 350,807 Securities owned, at market value 80,516 63,262 Demand notes receivable 30 30 Other 16,128 27,945 750,399 818,304 Other assets Stock exchange seats (approximate market value $4,755; $5,592 in 1997) 1,525 1,542 Fixed assets, net of accumulated depreciation of$8,579; $7,458 in 1997 9,719 9,128 Goodwill, at amortized cost 5,940 6,172 17,184 16,842 $767,583 $835,146 * Condensed from audited financial statements The accompanying notes are an integral part of these condensed financial statements. 2 FAHNESTOCK VINER HOLDINGS INC. CONSOLIDATED BALANCE SHEET (unaudited) June 30, December 31, 1998 1997 * Expressed in thousands of U.S. dollars LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Drafts payable $14,214 $18,507 Bank call loans 56,432 23,755 Securities sold under agreements to repurchase 880 - Payable to brokers and clearing organizations 324,514 422,173 Payable to customers 110,515 117,033 Securities sold, but not yet purchased, at market value 40,197 31,090 Accounts payable and other liabilities 39,405 45,571 Income taxes payable 7,771 16,052 593,928 674,181 Subordinated loans payable 30 30 Shareholders' equity Share capital 12,585,010 Class A non-voting shares (1997 - 12,408,760 shares) 42,013 40,783 99,680 Class B voting shares 133 133 42,146 40,916 Contributed capital 1,333 1,333 Retained earnings 130,146 118,686 173,625 160,935 $767,583 $835,146 * Condensed from audited financial statements The accompanying notes are an integral part of these condensed financial statements. 3 FAHNESTOCK VINER HOLDINGS INC. CONSOLIDATED STATEMENT OF OPERATIONS (unaudited) FOR THE PERIOD ENDED JUNE 30, Second Quarter ended Six months ended June 30, June 30, 1998 1997 1998 1997 Expressed in thousands of U.S. dollars, except per share amounts REVENUE: Commissions $29,380 $18,941 $58,781 $37,794 Principal transactions, net 14,399 11,984 33,628 29,521 Interest 11,404 8,573 22,387 15,979 Underwriting fees 4,035 1,422 6,352 4,582 Advisory fees 4,776 2,585 10,538 5,450 Other 3,909 913 5,416 1,580 67,903 44,418 137,102 94,906 EXPENSES: Compensation and related expenses 36,317 22,112 72,710 46,565 Clearing and exchange fees 2,078 1,822 4,196 3,575 Communications 5,630 3,658 10,894 7,222 Occupancy costs 3,415 2,255 6,455 4,549 Interest 5,939 4,261 12,156 7,339 Other 3,358 2,201 7,336 4,813 56,737 36,309 113,747 74,063 Profit before income taxes 11,166 8,109 23,355 20,843 Income tax provision 4,961 3,603 10,117 9,268 NET PROFIT FOR PERIOD $6,205 $4,506 $13,238 $11,575 Profit per share - - basic $0.49 $0.37 $1.04 $0.94 - - diluted $0.47 $0.35 $1.01 $0.91 The accompanying notes are an integral part of these condensed financial statements. 4 FAHNESTOCK VINER HOLDINGS INC. CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) FOR THE SIX MONTHS ENDED JUNE 30, 19981997 Expressed in thousands of U.S. dollars Cash flows from operating activities: Net profit for the year $13,238 $11,575 Adjustments to reconcile net profit to net cash provided by (used in) operating activities: Non-cash items included in net profit: Depreciation and amortization 1,369 566 Decrease (increase) in operating assets, Restricted deposits (386) (494) Deposits with clearing organizations (2,314) (30) Receivable from brokers and clearing organizations 96,726 (139,577) Receivable from customers (21,825) 2,735 Securities owned (17,254) (4,436) Other assets 11,818 885 Increase (decrease) in operating liabilities, Drafts payable (4,293) (1,854) Securities sold under agreements to repurchase 880 - Payable to brokers and clearing organizations (97,659) 162,804 Payable to customers (6,518) 4,683 Securities sold, but not yet purchased 9,107 5,803 Accounts payable and other liabilities (6,166) (3,733) Income taxes payable (8,281) (5,787) Cash (used in) provided by operating activities (31,558) 33,140 Cash flows from investing and other activities: Escrow deposit for stock of First of Michigan Capital Corporation - (38,000) Purchase of fixed assets (1,712) (517) Cash used in investing and other activities (1,712) (38,517) Cash flows from financing activities: Cash dividends paid on Class A non-voting and Class B shares (1,778) (1,498) Issuance of Class A non-voting shares 1,529 1,577 Repurchase of Class A non-voting shares for cancellation (299) - Increase in bank call loans 32,677 5,500 Cash provided by financing activities 32,129 5,579 Net (decrease) increase in cash and short-term deposits (1,141) 202 Cash and short-term deposits, beginning of period 10,784 9,363 Cash and short-term deposits, end of period $9,643 $9,565 The accompanying notes are an integral part of these condensed financial statements. 5 FAHNESTOCK VINER HOLDINGS INC. Notes to Consolidated Financial Statements (unaudited) 1. Basis of Presentation The consolidated financial statements include the accounts of Fahnestock Viner Holdings Inc. ("FVH") and its subsidiaries (the "Company"). The principal subsidiaries of FVH are Fahnestock & Co. Inc. ("Fahnestock") and First of Michigan Corporation ("FOM"), registered broker-dealers in securities. All material intercompany accounts have been eliminated in consolidation. The Company's financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC") with respect to Form 10-Q and do not include all of the information and footnotes required under accounting principles generally accepted in the United States for complete financial statements. These financial statements should be read in conjunction with the Company's most recent annual report on Form 10-K for the year ended December 31, 1997 which should be consulted for a summary of the significant accounting policies utilized by the Company. All adjustments which, in the opinion of management, are normal and recurring and necessary for a fair presentation of the results of operations, financial position and cash flows for the interim periods presented have been made. The nature of the Company's business is such that the results of operations for the interim periods are not necessarily indicative of the results to be expected for a full year. These consolidated financial statements are presented in U.S. dollars. 2. Profit per share Profit per share was computed by dividing net profit by the weighted average number of Class A non-voting and Class B shares outstanding. Diluted profit per share includes the weighted average Class A non-voting and Class B shares outstanding and the effects of Class A non-voting share options using the treasury stock method. Statement of Financial Accounting Standards No. 128 - Earnings Per Share ("FAS 128") requires a change in the method of calculation for both primary and fully-diluted earnings per share for periods ended after December 15, 1997. Profit per share for the six months ended June 30, 1997 has been restated to comply with FAS 128. Profit per share has been calculated as follows: Three months ended Six months ended June 30, June 30, 1998 1997 1998 1997 Basic weighted average number of shares outstanding 12,684,423 12,265,760 12,684,423 12,265,760 Net effect, treasury stock method 462,222 427,325 423,418 427,325 Diluted common shares 13,146,645 12,693,085 13,107,841 12,693,085 Net profit for the period $6,205,000 $4,506,000 $13,238,000 $11,575,000 Basic profit per share $0.49 $0.37 $1.04 $0.94 Diluted profit per share $0.47 $0.35 $1.01 $0.91 6 3. Net Capital Requirements The Company's principal broker-dealer subsidiaries, Fahnestock and FOM, are subject to the Uniform Net Capital Rule (the "Rule") of the SEC and the net capital rule of the New York Stock Exchange (the "NYSE"). Both Fahnestock and FOM have elected to use the alternative method permitted by the Rule which requires that they maintain minimum net capital equal to 2% of aggregate debit items arising from customer transactions, as defined. The NYSE may prohibit a member firm from expanding its business or paying dividends if resulting net capital would be less than 5% of aggregate debit items. At June 30, 1998, the net capital of Fahnestock as calculated under the Rule was $97,345,000 or 23% of Fahnestock's aggregate debit items. This was $86,695,000 in excess of the minimum required net capital. At June 30, 1998, FOM's net capital as calculated under the Rule was $8,730,000. This was $8,480,000 in excess of the minimum required net capital. 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 Unaudited net profit in the second quarter of 1998 were $6,205,000 or $0.49 per share compared to $4,506,000 or $0.37 per share for the second quarter of 1997, an increase of 38% in net profit. Revenue for the second quarter of 1998 rose to a record $67,903,000, an increase of 53% over revenue of $44,418,000 in the second quarter of 1997, as commissions, investment banking income, and asset management fees reached new highs, all significantly affected by the acquisition of First of Michigan Corporation ("FOM") in July 1997. FOM operates 25 retail branches located in Michigan and employs approximately 170 investment executives. Fahnestock and FOM together operate from 75 branches located in fifteen states and employ approximately 715 investment executives. Net profit for the six months ended June 30, 1998 was $13,238,000 or $1.04 per share compared to $11,575,000 or $0.94 per share for the comparable period of 1997, an increase of 14% in net profit. Revenue for the first six months of 1998 was $137,102,000, an increase of 44% compared to revenue of $94,906,000 in the first six months of 1997. There was a continuation of strong markets in the second quarter of 1998 with stock indexes reaching new highs and with long bond yields at secular lows, making for a positive investment environment. Commission income and to a large extent, income from principal transactions, depend on market volume levels. Commission revenue increased 55% compared to the second quarter 1997 due to strong mutual fund activity and increases in listed securities volume. Net revenue from principal transactions increased by 20% in the second quarter 1998 from the comparable period of 1997. Investment banking revenues and advisory fees both showed significant improvement in the second quarter of 1998 compared to 1997 due to increased underwriting and private placement activity. Net interest revenue (interest revenue less interest expense) increased by 27% in the second quarter of 7 1998 compared to the second quarter of 1997 as a result of higher client balances brought about both by the addition of the FOM business and a generally more active client business in 1998 compared to 1997. Expenses, other than interest, increased by 59% in the second quarter of 1998 compared to 1997, with FOM accounting for a substantial portion of the increase. Operations at FOM improved in the second quarter, as the population of investment executives stabilized. The contribution of FOM continued to fall short of expectations, however, the process of rebuilding has begun. Higher than normal costs associated with terminations, transferring client accounts, repopulating branches and other attendant costs reduced profit margins in the second quarter of 1998, but are expected to reach more normal levels during the second half of 1998. Liquidity and Capital Resources Total assets at June 30, 1998 of $767,583,000 decreased by approximately 8% from $835,146,000 at December 31, 1997 due to a decline in the level of receivables from brokers and clearing organizations. 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, 1998 $56,432,000 of such borrowings were outstanding. Management believes that funds from operations, combined with Fahnestock's capital base and available credit facilities, are sufficient for the Company's needs in the foreseeable future. On February 20, 1998 and May 22, 1998, the Company paid cash dividends of U.S.$0.07, quarterly per Class A non-voting and Class B shares totaling $1,778,000 from available cash on hand. On July 22, 1998, the board of directors declared a regular quarterly cash dividend of $0.07 per Class A non-voting and Class B share payable on August 21, 1998 to shareholders of record on August 7, 1998. 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 8 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. 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 On May 11, 1998, the Company held an annual and special meeting of shareholders with the following results: The following people were elected as directors of the Company: J.L. Bitove, R. Crystal, A.G. Lowenthal, K.W. McArthur, A.W. Oughtred, E.K. Roberts and B. Winberg for the ensuing year or until their successors be elected. [Voted: For 95,179; Against -0-; Withheld -0-] Coopers & Lybrand, Chartered Accountants, were appointed auditors of the Company until termination of the next Annual Meeting of the Company at a remuneration to be fixed by the directors. [Voted: For 95,179; Against -0-; Withheld -0-] The amendment to the Company's 1996 Equity Incentive Plan (the "Plan") increasing the number of Class A non- voting shares that may be issued under the Plan and other plans of the Company from 1,850,000 Class A non-voting shares to 2,100,000 Class A non-voting shares was confirmed. [Voted: For 95,179; Against -0-; Withheld -0-] 9 ITEM 5. Other Information Fahnestock & Co. Inc. was the subject of disciplinary actions by the New York Stock Exchange pursuant to four examinations conducted by the Exchange's Member Firm Regulation Division for the years 1993 through 1996. Without admitting or denying findings of deficiencies in various areas of the business, Fahnestock agreed to pay a $100,000 fine and to retain an independent consultant to review its systems and procedures and to make recommendations that would prevent a recurrence of such deficiencies. Fahnestock agreed to advise the Exchange of the steps to be taken to implement the recommendations contained in the report. The Company does not believe that implementation of such recommendations will have a material adverse impact on Fahnestock's operations. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits - Financial Data Schedule included as Exhibit 27 (b) Reports on Form 8-K - None 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized, in the City of Toronto, Ontario, Canada on the 22nd day of July, 1998. FAHNESTOCK VINER HOLDINGS INC. By:__/S/ A.G.Lowenthal____ A.G.Lowenthal,Chairman (Principal Financial Officer) By:__/S/ E.K.Roberts____ E.K.Roberts, President (Duly Authorized Officer) 11