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