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, 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 October 20, 1999 was 12,389,769 and 99,680 shares, respectively. FAHNESTOCK VINER HOLDINGS INC. INDEX Page No PART I FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Consolidated Balance Sheet as of September 30, 1999 and December 31, 1998 Consolidated Statement of Operations for the nine months ended September 30, 1999 and 1998 Consolidated Statement of Cash Flows for the nine months ended September 30, 1999 and 1998 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. CONSOLIDATED BALANCE SHEET (unaudited) September 30, December 31, 1999 1998 Expressed in thousands of U.S. dollars ASSETS Current assets Cash and short-term deposits $9,559 $11,501 Restricted deposits 2,829 2,312 Securities purchased under agreement to resell 50,887 12,174 Deposits with clearing organizations 9,013 7,072 Receivable from brokers and clearing organizations 198,767 167,018 Receivable from customers 382,732 334,664 Securities owned, at market value 79,174 88,579 Demand notes receivable 30 30 Other 12,537 26,912 745,528 650,262 Other assets Stock exchange seats (approximate market value $7,499; $4,798 in 1998) 1,326 1,507 Fixed assets, net of accumulated depreciation of $11,140; $8,896 in 1998 9,904 9,286 Goodwill, at amortized cost 5,407 5,708 16,637 16,501 $762,165 $666,763 The accompanying notes are an integral part of these condensed financial statements. FAHNESTOCK VINER HOLDINGS INC. CONSOLIDATED BALANCE SHEET (unaudited) September 30, December 31, 1999 1998 Expressed in thousands of U.S. dollars LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Drafts payable $14,318 $22,734 Bank call loans 20,465 42,217 Securities sold under agreement to repurchase 44,146 664 Payable to brokers and clearing organizations 299,713 235,029 Payable to customers 117,844 115,878 Securities sold, but not yet purchased, at market value 31,774 41,104 Accounts payable and other liabilities 38,623 40,119 Income taxes payable 11,667 2,665 Subordinated loans payable 30 30 578,580 500,440 Shareholders' equity Share capital 12,387,269 Class A non-voting shares (1998 - 12,241,269 shares) 36,024 36,392 99,680 Class B voting shares 133 133 36,157 36,525 Contributed capital 3,262 2,196 Retained earnings 144,166 127,602 183,585 166,323 $762,165 $666,763 The accompanying notes are an integral part of these condensed financial statements. FAHNESTOCK VINER HOLDINGS INC. CONSOLIDATED STATEMENT OF OPERATIONS (unaudited) Third Quarter ended Nine months ended September 30, September 30, 1999 1998 1999 1998 Expressed in thousands of U.S. dollars, except per share amounts REVENUE: Commissions $25,855 $27,799 $86,668 $86,580 Principal transactions, net 16,834 17,075 51,772 50,703 Interest 11,483 10,780 31,671 33,167 Underwriting fees 3,836 3,824 9,442 10,176 Advisory fees 4,882 6,262 16,900 16,800 Other 2,058 1,538 5,394 6,954 64,948 67,278 201,847 204,380 EXPENSES: Compensation and related expenses 32,129 33,254 103,312 105,964 Clearing and exchange fees 2,042 2,100 6,674 6,296 Communications 5,298 5,158 16,003 16,052 Occupancy costs 3,190 3,446 9,550 9,901 Interest 5,719 5,360 15,933 17,516 Other 5,134 4,265 15,192 11,601 53,512 53,583 166,664 167,330 Profit before income taxes 11,436 13,695 35,183 37,050 Income tax provision 5,183 6,106 15,978 16,223 NET PROFIT FOR PERIOD $6,253 $7,589 $19,205 $20,827 Profit per share - basic $0.50 $0.60 $1.54 $1.65 - diluted $0.50 $0.59 $1.52 $1.60 The accompanying notes are an integral part of these condensed financial statements. FAHNESTOCK VINER HOLDINGS INC. CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 Expressed in thousands of U.S. dollars Cash flows from operating activities: Net profit for the period $19,205 $20,827 Adjustments to reconcile net profit to net cash provided by (used in) operating activities: Non-cash items included in net profit: Depreciation and amortization 2,564 2,156 Gain on sale of exchange seat (492) - Decrease (increase) in operating assets, Restricted deposits (517) (423) Securities purchased under agreements to resell (38,713) - Deposits with clearing organizations (1,941) (3,838) Receivable from brokers and clearing organizations (31,749) 178,700 Receivable from customers (48,068) 14,719 Securities owned 9,405 (5,566) Other assets 14,375 4,174 Increase (decrease) in operating liabilities, Drafts payable (8,416) (9,744) Securities sold under agreement to repurchase 43,482 - Payable to brokers and clearing organizations 64,684 (187,290) Payable to customers 1,966 (7,024) Securities sold, but not yet purchased (9,330) 4,689 Accounts payable and other liabilities (1,496) (5,159) Income taxes payable 9,002 (5,279) Cash provided by operating activities 23,961 942 Cash flows from investing activities: Proceeds from sale of exchange seat 655 - Purchase of fixed assets (2,862) (2,015) Cash (used in) investing activities (2,207) (2,015) Cash flows from financing activities: Cash dividends paid on Class A non-voting and Class B shares (2,642) (2,668) Issuance of Class A non-voting shares 4,111 1,851 Repurchase of Class A non-voting shares for cancellation (4,479) (4,881) Tax benefit from employee stock options exercised 1,066 863 (Decrease) increase in bank call loans (21,752) 3,978 Cash (used in) financing activities (23,696) (857) Net (decrease) in cash and short-term deposits (1,942) (1,930) Cash and short-term deposits, beginning of period 11,501 10,784 Cash and short-term deposits, end of period $9,559 $8,854 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 80 offices in 15 states located primarily in the Northeastern United States, Michigan, the Midwest and Florida. In addition, Fahnestock conducts business in South America through local broker-dealers. The Company employs approximately 755 financial consultants. All material intercompany accounts have been eliminated in consolidation. The Company's condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC") with respect to Form 10-Q and do not include all of the information and footnotes required under accounting principles generally accepted in the United States for complete financial statements. These financial statements should be read in conjunction with the Company's most recent annual report on Form 10-K for the year ended December 31, 1998 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, 1999 1998 1999 1998 Basic weighted average number of shares outstanding 12,501,571 12,654,045 12,501,571 12,654,045 Net effect, treasury stock method 175,648 128,423 182,797 374,267 Diluted common shares 12,677,219 12,782,468 12,684,368 13,028,312 Net profit for the period $6,253,000 $7,589,000 $19,205,000 $20,827,000 Basic profit per share $0.50 $0.60 $1.54 $1.65 Diluted profit per share $0.50 $0.59 $1.52 $1.60 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, 1999, the net capital of Fahnestock as calculated under the Rule was $126,409,000 or 28% of Fahnestock's aggregate debit items. This was $117,345,000 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 described, in accordance with the method described in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. The Company's business is predominantly 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, 000's omitted 1999 1998 1999 1998 Revenue: Retail Branches $33,077 $32,376 $108,290 $105,136 Capital Markets 16,976 20,587 51,574 55,902 Asset Management 3,146 3,242 9,143 8,827 Interest 10,540 9,761 28,614 30,720 Other 1,209 1,312 4,226 3,795 Total $64,948 $67,278 $201,847 $204,380 Operating Income: Retail Branches $792 $175 $4,314 $3,183 Capital Markets 1,577 4,835 10,252 14,774 Asset Management 2,020 2,153 5,824 5,577 Interest 5,075 4,555 13,057 13,291 Other 1,972 1,977 1,706 225 Total $11,436 $13,695 $35,183 $37,050 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, 1999 was $6,253,000 or $0.50 per share compared to $7,589,000 or $0.60 per share for the third quarter of 1998, a decrease of 18% in net profit. Revenue for the third quarter of 1999 was $64,948,000, a decrease of 3% compared to revenue of $67,278,000 in the third quarter of 1998, as commissions, trading activities, and advisory fees declined during the quarter compared to prior year levels. Net profit for the nine months ended September 30, 1999 was $19,205,000 or $1.54 per share compared to $20,827,000 or $1.65 per share for the comparable period of 1998, a decrease of 8% in net profit. Revenue for the first nine months of 1999 was $201,847,000, compared to revenue of $204,380,000 in the first nine months of 1998, a decrease of 1%. During the third quarter of 1999, while the senior market averages touched new highs, the stock market became much more selective - with most companies, both large and small, well off their highs. The increase in interest rates also contributed to the dampening of market activity. As a result, the retail market softened and turnover slowed. This is reflected in lower revenues and earnings compared to the prior year. Commission income and to a large extent, income from principal transactions, depend on market volume levels. Commission revenue decreased by 7% in the third quarter of 1999 compared to the third quarter of 1998 due to a softening in market conditions, but remained level on a year-to-date basis. Net revenue from principal transactions decreased by 1% compared to the third quarter of 1998, but increased by 2% on a year-to-date basis. Market volatility has reduced the quarter to quarter predictability of these revenues. Investment banking revenues achieved the same levels in the third quarter 1999 as was achieved in the comparable quarter of 1998. Advisory fees decreased by 22% due to a lower level of participation in corporate syndicates this year compared to the prior year. Net interest revenue (interest revenue less interest expense) increased slightly in the third quarter of 1999 compared to the same period in 1998 as a result of higher stock borrow/stock loan activity and higher levels of interest-earning assets. Expenses, other than interest, were at the same levels in the third quarter of 1999 as in the third quarter of 1998. Liquidity and Capital Resources Total assets at September 30, 1999 of $762,165,000 increased by approximately 14% from $666,763,000 at December 31, 1998 due primarily to higher customer and broker/dealer balances and higher positions in securities purchased under agreement to resell. 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, 1999, $20,465,000 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 September 30, 1999, the Company has purchased through the facilities of the New York and the Toronto Stock Exchanges pursuant to Normal Course Issuer Bids and cancelled a total of 318,000 Class A non-voting shares at an average cost of $14.0831 (42,800 shares at an average price of $14.6082 per share were purchased pursuant to the currently outstanding Normal Course Issuer Bid which commenced on July 5, 1999). The Company announced that it intends to purchase up to 758,000 of its Class A non-voting shares (approximately 10% of the public float) by way of a Normal Course Issuer Bid through the facilities of the Toronto and New York Stock Exchanges during the period July 5, 1999 through July 4, 2000. The Company believes that its Class A non-voting shares may be undervalued from time to time and that the repurchase of such shares is an appropriate use of corporate funds. On February 26, 1999, May 21, 1999 and August 20, 1999, the Company paid cash dividends of $0.07 per Class A non-voting and Class B share totaling $2,642,000 from available cash on hand. On October 20, 1999, the board of directors declared a regular quarterly cash dividend of U.S.$0.07 per Class A non-voting and Class B share payable on November 19, 1999 to shareholders of record on November 5, 1999. The book value of the Company's Class A non-voting and Class B shares is U.S.$14.70 at September 30, 1999 (U.S.$14.22 at September 30, 1998), based on total outstanding shares of 12,486,949 and 12,438,299, respectively. 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. The Company's remediation efforts have proceeded according to plan. The modification and testing of the Company's internal systems for Year 2000 compliance is complete and Y2K compliant versions are currently in service. Non-information systems have also been assessed, modified and tested. In March, April and May 1999, the Company participated in an industry-wide testing program. The Securities Industry Association reported that these tests were successful. The Company continues to perform internal and point- to-point tests with significant counterparties and will do so throughout the balance of 1999. The Company has contacted the third parties on whom it relies, regarding their Year 2000 status, and has received assurances that the third party systems are compliant. However, there can be no guarantee that these parties have provided accurate and complete information concerning their Year 2000 efforts. The cost of readying the Company for Year 2000 has been estimated to be approximately $500,000 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, is reviewing this plan on an ongoing basis to assess its continued applicability, and is making adjustments as required. 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. 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, 1999 and December 31, 1998, the Company's value-at-risk for each component of market risk was as follows: September 30, December 31, 000's omitted 1999 1998 Interest rate risk $137 $298 Equity price risk 518 759 Diversification benefit (472) (575) Total $183 $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 and weighting of the Company's portfolio of government debt and a reduction in the Company's exposure to NASDAQ markets at September 30, 1999 compared to December 31, 1998 reduced the Company's overall exposure through the diversification benefit arising out of a market hedge. The value-at-risk estimate has limitations that should be considered in evaluating the Company's potential future losses based on the period-end portfolio positions. Recent market conditions, including increased volatility, may result in statistical relationships that result in higher value-at-risk than would be estimated from the same portfolio under different market conditions, or the converse may be true. Critical risk management strategy involves the active management of portfolio levels to reduce market risk. The Company's market risk exposure is continuously monitored as the portfolio risks and market conditions change. PART II ITEM 1. Legal Proceedings There are no material legal proceedings to which the Company or its subsidiaries are parties or to which any of their respective properties are subject. The Company's subsidiaries are parties to legal proceedings incidental to their respective businesses. The materiality of legal matters on the Company's future operating results depends on the level of future results of operations as well as the timing and ultimate outcome of such legal matters. ITEM 2. Changes in Securities and Use of Proceeds Not applicable ITEM 3. Defaults Upon Senior Securities Not applicable ITEM 4. Submission of Matters to a Vote of Security-Holders None ITEM 5. Other Information None ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits - Financial Data Schedule included as Exhibit 27 (b) Reports on Form 8-K - None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized, in the City of Toronto, Ontario, Canada on the 20th day of October, 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)