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 March 31, 1999 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 April 21, 1999 was 12,241,269 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 March 31, 1999 and December 31, 1998 Consolidated Statement of Operations 4 for the three months ended March 31, 1999 and 1998 Consolidated Statement of Cash Flows 5 for the three months ended March 31, 1999 and 1998 Notes to Consolidated Financial 6 Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3. Quantitative and Qualitative Disclosures About Market Risk 10 PART II OTHER INFORMATION Item 1. Legal Proceedings 12 Item 2. Changes in Securities and Use of Proceeds 12 Item 3. Defaults Upon Senior Securities 12 Item 4. Submission of Matters to a Vote of Security-Holders 12 Item 5. Other Information 12 Item 6. Exhibits and Reports on Form 8-K 12 SIGNATURES 13 FAHNESTOCK VINER HOLDINGS INC. CONSOLIDATED BALANCE SHEET unaudited March 31, December 31, 1999 1998 Expressed in thousands of U.S. dollars ASSETS Current assets Cash and short-term deposits $10,270 $11,501 Restricted deposits 2,302 2,312 Securities purchased under agreement to resell 6,191 12,174 Deposits with clearing organizations 4,950 7,072 Receivable from brokers and clearing organizations 227,868 167,018 Receivable from customers 397,781 334,664 Securities owned, at market value 110,549 88,579 Demand notes receivable 30 30 Other 18,716 26,912 778,657 650,262 Other assets Stock exchange seats (approximate market value $7,096; $4,798 in 1998) 1,498 1,507 Fixed assets, net of accumulated depreciation of $9,580; $8,896 in 1998 9,041 9,286 Goodwill, at amortized cost 5,592 5,708 16,131 16,501 $794,788 $666,763 The accompanying notes are an integral part of these condensed financial statements. FAHNESTOCK VINER HOLDINGS INC. CONSOLIDATED BALANCE SHEET unaudited March 31, December 31, 1999 1998 Expressed in thousands of U.S. dollars LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Drafts payable $11,824 $22,734 Bank call loans 21,515 42,217 Securities sold under agreement to repurchase 22,400 664 Payable to brokers and clearing organizations 375,987 235,029 Payable to customers 107,154 115,878 Securities sold, but not yet purchased, at market value 39,526 41,104 Accounts payable and other liabilities 39,802 40,119 Income taxes payable 4,620 2,665 Subordinated loans payable 30 30 622,858 500,440 Shareholders' equity Share capital 12,398,319 Class A non-voting shares (1998 - 12,241,269 shares) 36,637 36,392 99,680 Class B voting shares 133 133 36,770 36,525 Contributed capital 3,105 2,196 Retained earnings 132,055 127,602 171,930 166,323 $794,788 $666,763 The accompanying notes are an integral part of these condensed financial statements. FAHNESTOCK VINER HOLDINGS INC. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, unaudited 1999 1998 Expressed in thousands of U.S. dollars, except per share amounts REVENUE: Commissions $29,273 $29,401 Principal transactions, net 14,803 19,229 Interest 9,196 10,983 Underwriting fees 2,916 2,317 Advisory fees 6,499 5,762 Other 1,264 1,507 63,951 69,199 EXPENSES: Compensation and related expenses 33,994 36,393 Clearing and exchange fees 2,180 2,118 Communications 5,328 5,264 Occupancy costs 3,007 3,040 Interest 4,635 6,217 Other 4,815 3,978 53,959 57,010 Profit before income taxes 9,992 12,189 Income tax provision 4,647 5,156 NET PROFIT FOR PERIOD $5,345 $7,033 Profit per share (Note 2) - basic $0.43 $0.56 - diluted $0.42 $0.54 The accompanying notes are an integral part of these condensed financial statements. FAHNESTOCK VINER HOLDINGS CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, unaudited 1999 1998 Expressed in thousands of U.S. dollars Cash flows from operating activities: Net profit for the period $5,345 $7,033 Adjustments to reconcile net profit to net cash provided by (used in) operating activities: Non-cash items included in net profit: Depreciation and amortization 809 658 Decrease (increase) in operating assets, Restricted deposits 10 (182) Securities purchased under agreements to resell 5,983 - Deposits with clearing organizations 2,122 1,431 Receivable from brokers and clearing organizations (60,850) 10,285 Receivable from customers (63,117) (1,747) Securities owned (21,970) (18,977) Other assets 8,196 12,150 Increase (decrease) in operating liabilities, Drafts payable (10,910) 1,428 Securities sold under agreement to repurchase 21,736 - Payable to brokers and clearing organizations 140,958 (19,225) Payable to customers (8,724) (3,733) Securities sold, but not yet purchased (1,578) 18,976 Accounts payable and other liabilities (317) (872) Income taxes payable 1,955 (10,661) Cash provided by (used in) operating activities 19,648 (3,436) Cash flows from investing activities: Purchase of fixed assets (439) (629) Cash (used in) investing activities (439) (629) Cash flows from financing activities: Cash dividends paid on Class A non-voting and Class B shares (892) (889) Issuance of Class A non-voting shares 3,771 1,516 Repurchase of Class A non-voting shares for cancellation (3,526) (35) Tax benefit from employee stock options exercised 909 - Increase (decrease) in bank call loans (20,702) 8,011 Cash (used in) provided by financing activities (20,440) 8,603 Net (decrease) increase in cash and short-term deposits (1,231) 4,538 Cash and short-term deposits, beginning of period 11,501 10,784 Cash and short-term deposits, end of period $10,270 $15,322 The accompanying notes are an integral part of these condensed financial statements. 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 (together, the "Company"). The principal subsidiary of FVH is Fahnestock & Co. Inc. ("Fahnestock"), a registered broker-dealer 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, 1998 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. Profit per share has been calculated as follows: Three months ended March 31, 1999 1998 Basic weighted average number of shares outstanding 12,511,282 12,670,362 Net effect, treasury stock method 140,134 377,068 Diluted common shares 12,651,416 13,047,430 Net profit for the period $5,345,000 $7,033,000 Basic profit per share $0.43 $0.56 Diluted profit per share $0.42 $0.54 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 March 31, 1999, the net capital of Fahnestock as calculated under the Rule was $110,479,000 or 23% of Fahnestock's aggregate debit items. This was $101,007,000 in excess of the minimum required net capital. 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 Unaudited net profit of U.S.$5,345,000 or $0.43 per share for the first quarter of 1999 compared to U.S.$7,033,000 or $0.56 per share for the first quarter of 1998, a decrease of 24% in net profit. Revenue for the first quarter of 1999 was U.S.$63,951,000 compared to U.S.$69,199,000 in the first quarter of 1998, a decrease of 8%. Market conditions remained strong in the first quarter of 1999 with the Dow Jones industrial average reaching the 10,000 mark for the first time due to low interest rates, expectations of a strong economy, and substantial cash inflows. Revenue for the first quarter of 1999 trailed the previous year due to reduced revenue from trading activities. Revenue from retail activities remained strong and revenue from investment banking and advisory fees grew by 17% due to increased activity in the quarter, however, this was not sufficient to offset the reduced trading revenue. Over-the-counter trading was profitable for the first quarter of 1999, but at a significantly reduced level compared to the same quarter of 1998. As the quarter progressed, trading revenues strengthened as the Company adjusted to the more volatile markets. Reduced inventories were carried throughout the quarter. Commission income and to a large extent, income from principal transactions, depend on market volume levels. Commission revenue remained stable compared to the first quarter of 1998. Net revenue from principal transactions declined 23% compared to the first quarter of 1998. Investment banking revenues and advisory fees both showed significant improvement in the first quarter of 1999 compared to the same quarter of 1998 due to increased underwriting and private placement activity and an increase in assets under management. Net interest revenue (interest revenue less interest expense) decreased slightly in the first quarter of 1999 compared to the same period in 1998 as a result of lower customer balances. Expenses, other than interest, decreased by 3% in the first quarter of 1999 compared to the same quarter of 1998. First of Michigan Corporation ("First of Michigan"), which was acquired in July 1997, has been operated as a division of Fahnestock since the beginning of 1999. Expenses in the first quarter of 1999 were lower than in the comparable quarter of 1998 because the first two quarters of 1998 included unexpected costs relating to the First of Michigan operations. During the first quarter of 1999, the Company purchased six branch offices from Fifth Third/ The Ohio Company. All of these branches are located in the State of Michigan and will operate as part of the First of Michigan division. The First of Michigan division continues to regain market share as it continues to add to its sales force. As previously reported, the operations of First of Michigan Corporation were reorganized as the First of Michigan division of Fahnestock & Co. Inc. in the beginning of 1999. Liquidity and Capital Resources Total assets at March 31, 1999 of $794,788,000 increased by approximately 19% from $666,763,000 at December 31, 1998 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 March 31, 1999, $21,515,000 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 liquidity needs in the foreseeable future. Through March 31, 1999, the Company has purchased and cancelled a total of 651,200 Class A non-voting shares at an average cost of $14.61 (252,700 shares at an average price of $13.95 per share were purchased during the first quarter of 1999) through the facilities of the New York and the Toronto Stock Exchanges pursuant to a Normal Course Issuer Bid that is open from July 3, 1998 to July 2, 1999. Under the outstanding Normal Course Issuer Bid, the Company may purchase up to 790,000 Class A non-voting shares. The Company believes that the 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 26, 1999, the Company paid cash dividends of U.S.$0.07 per Class A non-voting and Class B share totaling $892,000 from available cash on hand. On April 21, 1999, the board of directors declared a regular quarterly cash dividend of $0.07 per Class A non-voting and Class B share payable on May 21, 1999 to shareholders of record on May 7, 1999. Year 2000 Disclosure The Year 2000 problem ("Year 2000" or "Y2K") is the result of computer systems having been written using two digits, rather than four, to define the year. Any computer, computer program, equipment or product that has date-sensitive software or embedded chips, not corrected, could produce inaccurate or unpredictable results commencing on January 1, 2000. The Company is a broker/dealer in securities and as such relies heavily on computer technology to conduct its operations. The Company relies on both internal systems and on third party vendors. As at the date hereof, all vendors of software and hardware and all vendors of non-critical systems (elevators, vault, building security, etc.) have been contacted and inquiries about their Y2K readiness have been made. Certain non-critical systems have been determined to be non-Y2K compliant and have been or are being replaced with available Y2K-compliant systems. Approximately 99% of all vendors (100% of mission-critical vendors) have responded and have indicated that they already are or will be compliant. In terms of the Company's internal systems, all programs have been assessed for Year 2000 compliance. Substantially all of the compilation work has been completed and a portion has been internally tested on a parallel basis with current production, using live files. Full testing and Year 2000 compliance is expected to be completed by June 30, 1999. The Company is actively participating in a number of industry committees including the Security Industry Association Year 2000 Committee. The Company validated its connections to various test sites in July 1998 and has successfully participated in various industry-wide Year 2000 tests which have taken place in March and April 1999. Files interfacing with SIAC and DTC have already been adapted and are compliant. To date there have been no material exceptions in tests that have been completed. The cost of readying the Company for Year 2000 has been estimated to be approximately $200,000 - $250,000 for fiscal 1999. This includes the costs associated with the personnel dedicated to the project and the cost of new hardware. A budget of $50,000 has been approved for fiscal 2000 to cover contingencies. This range of costs does not include normal ongoing costs for computer hardware or software revisions that would be required in the normal course of business. All funding for the Y2K compliance effort is from available cash on hand. The Company has adopted a comprehensive contingency plan with respect to the Y2K problem, and is reviewing this plan on an ongoing basis to assess its continued applicability. Despite the Company's planning and preparation for Year 2000, there can be no assurance that partial or total systems interruptions will not occur and that the costs necessary to update hardware and software would not have a material adverse impact on the Company's business, financial condition, statement of operations and business prospects. 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 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 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. 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 March 31, 1999 and December 31, 1998, the Company's value-at-risk for each component of market risk was as follows: (000's omitted) 1999 1998 Interest rate risk $423 $298 Equity price risk 254 759 Diversification benefit (395) (575) Total $282 $482 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 1999 from those reported in 1998 reflect changes in the size and composition of the Company's trading portfolio; more particularly an increase in the size of the Company's debt portfolio and a decrease in the Company's equity portfolio at March 31, 1999 compared to December 31, 1998. The value-at-risk estimate has limitations that should be considered in evaluating the Company's potential future losses based on the year-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 21st day of April, 1999. 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)