Item 1. BUSINESS
Fahnestock Viner Holdings Inc., formerly called E.A. Viner Holdings Limited and immediately prior to that called Goldale Investments Limited (the "Company"), maintains its registered office and principal place of business at 20 Eglinton Avenue West, Suite 1110, Toronto, Ontario M4R 1K8 and its telephone number is (416) 322-1515.
The Company was originally incorporated under the laws of British Columbia. Pursuant to Certificate and Articles of Continuation effective October 12, 1977, the Company's legal existence was continued under the Business Corporation Act (Ontario) as if it had been incorporated as an Ontario corporation.
The Company is a holding company and carries on no active business. It owns, directly or through intermediate subsidiaries, Fahnestock & Co. Inc. (formerly Edward A. Viner & Co., Inc.), a New York corporation ("Fahnestock"), Freedom Investments, Inc., a Delaware corporation ("Freedom"), Hudson Capital Advisors Inc., a New York corporation ("Hudson Capital") and, since July 1997, First of Michigan Corporation, a Michigan corporation ("FOM") and since October 1998, Evanston Financial Corporation, Inc.. Pursuant to a purchase agreement dated December 1, 1998, all of FOM's registered personnel and customer accounts were transferred to Fahnestock on January 1, 1999 and certain assets and liabilities were transferred to Fahnestock on December 31, 1998. FOM filed to withdraw their registration as a broker-dealer with the New York Stock Exchange on January 6, 1999. FOM operates as a division of Fahnestock. Fahnestock, Freedom, FOM, Evanston and Hudson Capital are sometimes collectively referred to as the "Operating Subsidiaries". Through the Operating Subsidiaries, the Company is engaged in the securities brokerage and trading business and offers investment advisory and other related financial services. Fahnestock (and FOM until January 2, 1999) are the principal Operating Subsidiaries. Fahnestock is engaged in the securities brokerage business in the United States, operates in Toronto, Canada as an International Broker-Dealer and, through the agency of local licensed broker-dealers, operates offices in Buenos Aires, Argentina and Caracas, Venezuela. Hudson Capital is engaged in the investment advisory business in the United States.
In October 1998, E.A. Viner International Co., a wholly owned subsidiary of the Company, formed Evanston Financial Corporation, Inc. ("Evanston") as a mortgage banker specializing in refinancing and re-marketing of mortgages on subsidized health-care and nursing home facilities. Evanston is readying its application to the Federal Home Administration to acquire a federal home loan license.
On July 17, 1997, a subsidiary of Fahnestock acquired approximately 99.4% of the outstanding common stock of First of Michigan Capital Corporation ("FOMCC") by way of a US$15.00 per share cash tender offer. On July 31, 1997, the Company acquired the remaining outstanding shares pursuant to a back-end "short-form" merger of the Company's subsidiary with and into FOMCC. The total purchase price was $37,609,000. The acquisition was accounted for by the purchase method.
At December 31, 1999, Fahnestock employed 755 full-time registered representatives and 550 non-income producing employees in trading, research, investment banking, investment advisory services, public finance and support positions in the United States for Fahnestock and Freedom. Fahnestock and Freedom are broker-dealers registered with the Securities and Exchange Commission (the "SEC") and in all other jurisdictions where their respective businesses requires registration. Fahnestock, in addition to its United States operations, has three additional offices: it conducts business in Toronto, Ontario as an International Broker- Dealer and in Caracas and Buenos Aires through local broker-dealers who are licensed under the laws of Venezuela and Argentina, respectively.
The Operating Subsidiaries are collectively engaged in a broad range of activities in the securities brokerage business, including retail securities brokerage, institutional sales, bond trading and investment banking - offering both corporate and public finance services, underwriting, research, market making and investment advisory and asset management services. No material part of the Company's revenues, taken as a whole, are derived from a single customer or group of customers.
Fahnestock and Freedom are members of the New York Stock Exchange, Inc. ("NYSE") and the National Association of Securities Dealers, Inc. ("NASD"); and Fahnestock is a member of the American Stock Exchange, Inc. ("AMEX"), the Chicago Stock Exchange Incorporated ("CSE"), the Chicago Board Options Exchange, Inc. ("CBOE"), the Philadelphia Stock Exchange, Inc. ("PHLX"), the New York Futures Exchange, Inc. ("NYFE"), the National Futures Association ("NFA") and the Securities Industry Association ("SIA"). In addition, Fahnestock has satisfied the requirements of the Municipal Securities Rulemaking Board ("MSRB") for effecting customer transactions in municipal securities.
Fahnestock, which acts as a clearing broker for Freedom, is also a member of the Securities Investor Protection Corporation ("SIPC"), which provides, in the event of the liquidation of a broker-dealer, protection for customers' accounts (including the customer accounts of other securities firms when it acts on their behalf as a clearing broker) held by the firm of up to $500,000 for each customer, subject to a limitation of $100,000 for claims for cash balances. SIPC is funded through assessments on registered broker-dealers which may not exceed 1% of a broker-dealer's gross revenues (as defined); SIPC assessments were a flat fee of $150 in 1998, 1997 and 1996. In addition, Fahnestock has purchased protection from Aetna Casualty and Surety Company of an additional $24,500,000 per customer.
The following table sets forth the amount and percentage of the Company's revenues from each principal source for the periods indicated and includes the consolidated revenues of FOMCC from July 17, 1997, the date of its acquisition.
Year ended December 31, 1999 % 1998 % 1997 % (Dollars in thousands, except percentages)
Commissions $118,747 43% $114,889 49% $103,323 43% Principal transactions, net 71,014 25% 32,727 14% 65,972 27% Interest 43,835 16% 42,028 18% 40,123 17% Underwriting fees 15,550 5% 12,655 6% 11,042 4% Advisory fees 22,440 8% 21,742 9% 15,808 7% Other 7,525 3% 8,740 4% 5,890 2%
Total revenues $279,111 100% $232,781 100% $242,158 100%
The Company derives most of its revenues from the operations of its principal subsidiary, Fahnestock. Although maintained as separate entities, because Fahnestock acts as clearing broker in transactions initiated by Freedom, the operations of the Company's brokerage subsidiaries are closely related. Except as expressly otherwise stated, the discussion below pertains to the operations of Fahnestock.
COMMISSIONS
A significant portion of Fahnestock's revenues is derived from commissions from retail and, to a lesser extent, institutional customers on brokerage transactions in exchange-listed and over-the-counter corporate equity and debt securities. Brokerage commissions are charged on both exchange and over-the-counter transactions in accordance with a schedule which Fahnestock has formulated. Often, discounts are granted to customers, generally on large trades or to active customers. Fahnestock also provides a range of services in other financial products to retail and institutional customers, including the purchase and sale of options on the CBOE, the AMEX and other stock exchanges as well as futures on indexes listed on various exchanges.
Commission business relies heavily on the services of financial consultants with good sales production records. Competition among securities firms for such personnel is intense. Retail clients' accounts are serviced by retail financial consultants (excluding the institutional financial consultants referred to below) in Fahnestock's offices. Fahnestock's institutional clients, which include mutual funds, banks, insurance companies, and pension and profit-sharing funds, are serviced by institutional brokers. (For a discussion of regulatory matters, see "Regulation".) The institutional department is supported by the equity research department which provides coverage of a number of commercial and industrial as well as emerging growth companies and special situation investments.
Securities Clearance Activities
Fahnestock provides a full range of securities clearance services to three non-affiliated securities firms on a fully-disclosed basis. In addition to commissions and service charges, Fahnestock derives substantial interest revenue from its securities clearing activities. See "Interest" and "Securities Borrowed And Loaned." Fahnestock provides margin financing for the clients of the securities firms for which it clears, with the securities firms guaranteeing the accounts of their clients. Fahnestock also extends margin credit directly to its correspondent firms to the extent that such firms hold securities positions for their own account. Because Fahnestock must rely on the guarantees and general credit of its correspondent firms, Fahnestock may be exposed to significant risks of loss if any of its correspondents or its correspondents' customers are unable to meet their respective financial commitments. See "Risk Management."
The correspondent clearing procedure for fully-disclosed accounts involves a series of steps: The correspondent broker opens an account for its customer and takes the customer's order for the purchase and sale of securities. The order is then executed by the correspondent firm or Fahnestock. Fahnestock completes the transaction by taking possession of the customer's cash, if securities are being purchased, or certificates, if securities are being sold, lending the customer any amounts required if the purchase is being made on margin, and making delivery to the broker for the other party to the transaction. Fahnestock or the correspondent sends the customer a written confirmation containing the details of each transaction the day after it is executed, and Fahnestock sends each customer a monthly statement for the entire account. The execution, clearance, settlement, receipt, delivery and record-keeping functions involved in the clearing process require the performance of a series of complex steps, many of which are accomplished with data processing equipment.
Floor Brokerage
In addition to transactions in which Fahnestock executes transactions for itself or its own customers, Fahnestock acts as agent for the accounts of other brokers. With its memberships on the various exchanges, Fahnestock attempts to utilize excess execution capacity by executing orders for other brokerage firms. Fahnestock bills such other firms at prevailing rates which are set on a basis competitive with rates charged by other brokerage firms performing similar functions.
PRINCIPAL TRANASACTIONS
Market-Making
Fahnestock acts as both principal and as agent in the execution of its customers' orders in the over-the-counter market. Fahnestock buys, sells and maintains an inventory of a security in order to "make a market" in that security. (To "make a market" in a security is to maintain firm bid and offer prices by standing ready to buy or sell round lots at publicly quoted prices. In order to make a market it is necessary to commit capital to buy, sell and maintain an inventory of a security.) As of December 31, 1999, Fahnestock made approximately 850 dealer markets in the common stock or other equity securities of corporate issuers. In executing customer orders for over-the-counter securities in which it does not make a market, Fahnestock generally charges a commission and acts as agent or will act as principal by marking the security up or down in a riskless transaction, working with another firm which is a market-maker acting as principal. However, when the buy or sell order is in a security in which Fahnestock makes a market, Fahnestock normally acts as principal and purchases from or sells to its customers at a price which is approximately equal to the current inter-dealer market price plus or minus a mark-up or mark-down. The stocks in which Fahnestock makes a market also include those of issuers which are followed by Fahnestock's research department.
Trading profits or losses depend on (i) the skills of those employees engaged in market-making activities, (ii) the capital allocated to holding positions in securities and (iii) the general trend of prices in the securities markets. Trading as principal requires the commitment of capital and creates an opportunity for profits or an exposure to risk of loss due to market fluctuations. Fahnestock takes both long and short positions in those securities in which it makes a market.
The size of its securities positions on any one day may not be representative of Fahnestock's exposure on any other day because securities positions vary substantially based upon economic and market conditions, allocations of capital, underwriting commitments and trading volume. Also, the aggregate value of inventories of stocks which Fahnestock may carry is limited by the Net Capital Rule. See "Net Capital Requirements" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."
To a lesser extent, Fahnestock also buys and sells municipal bonds, Ginnie Maes, Unit Investment Trusts and U.S. Treasury Securities as well as other fixed income securities for its own account in the secondary market and maintains an inventory of municipal bonds and other securities and resells bonds from its inventory to dealers as well as to institutional and retail customers.
Other Trading Activities
Fahnestock holds positions in its trading accounts in over-the-counter securities and in exchange-listed securities in which it does not make a market, and may engage from time to time in other types of principal transactions in securities. Fahnestock has several trading departments including: a convertible bond department, a risk arbitrage department, a corporate bond dealer department, a municipal bond department, a government/mortgage backed securities department, a department that underwrites and trades U.S. government agency issues, taxable corporate bonds, UITs and a department that trades high yield securities (commonly referred to as "junk bonds"). These departments continually purchase and sell securities and make markets in order to make a profit on the inter-dealer spread. Although Fahnestock from time to time holds an inventory of securities, more typically, it seeks to match customer buy and sell orders. Fahnestock does not carry "bridge loans" (i.e., short-term loans made in anticipation of intermediate-term or long-term financing). No substantial losses relating to Fahnestock's risk arbitrage activities have been incurred.
Through its Winstar Securities division, the Company offers a fixed income dealer system available over the internet providing real-time markets, automated execution and straight-through processing. The Winstar system covers markets in Treasuries, Agencies and Municipal Bonds.
Investment Income
Dividends and interest earned on securities held in inventory are treated as investment income.
Principal transactions with customers as well as market-making and other trading and investment activities, accounted for approximately 25%, 14% and 27%, respectively, of the Company's total revenues for the fiscal years ended December 31, 1999, 1998 and 1997, respectively.
Risk Management
Fahnestock's principal transactions and brokerage activities expose it to credit and market risks. When Fahnestock advances funds or securities to a counterparty in a principal transaction or to a customer in a brokered transaction, it is subject to the risk that the counterparty or customer will not repay such advances. If the market price of the securities purchased or loaned has declined or increased, respectively, Fahnestock may be unable to recover some or all of the value of the amount advanced. A similar risk is also present where a customer is unable to respond to a margin call and the market price of the collateral has dropped. In addition, Fahnestock's securities positions are subject to fluctuations in market value and liquidity.
Fahnestock monitors market risks through daily profit and loss statements and position reports. Each trading department adheres to internal position limits determined by senior management and regularly reviews the age and composition of its proprietary accounts. Positions and profits and losses of each trading department are reported to senior management on a daily basis. Fahnestock may from time to time attempt to reduce market risk through the utilization of various derivative securities as a hedge to market exposure.
In its market-making activities, Fahnestock must provide liquidity in the equities for which it makes markets. As a result of this event, Fahnestock has risk containment policies in place which limit position size and monitor transactions on a minute-to-minute basis.
In addition to monitoring the credit worthiness of its customers, Fahnestock imposes more conservative margin requirements than those of the NYSE. Generally, Fahnestock limits customer loans to an amount not greater than 65% of the value of the securities (or 50% if the securities in the account are concentrated in a limited number of issues). Particular attention and more restrictive requirements are placed on more highly volatile securities traded in the NASDAQ market. In comparison, the NYSE permits loans of up to 75% of the value of the securities in a customer's account.
For further discussion of risk management, see Item 7a, Quantitative and Qualitative Disclosures about Market Risk.
INTEREST
Fahnestock derives net interest income from the financing of customer margin loans and its securities lending activities. See "Customer Financing" and "Securities Borrowed and Loaned."
Customer Financing
Customers' securities transactions are effected on either a cash or margin basis. In margin transactions, Fahnestock extends credit to the customer, collateralized by securities and/or cash in the customer's account, for a portion of the purchase price, and receives income from interest charged on such extensions of credit. The customer is charged for such margin financing at interest rates based upon the brokers call rate (the prevailing interest rate charged by banks on collateralized loans to broker-dealers), to which is added an additional amount of up to 2%.
In each of the last five years, financing activities conducted on behalf of its customers have provided Fahnestock with a substantial source of revenue. A substantial portion of these financing activities are undertaken in connection with Fahnestock's securities clearance business and its own retail business. See "Commissions." The amount of Fahnestock's interest revenue is affected by the volume of customer borrowing and by prevailing interest rates.
The primary source of funds to finance customers' margin account borrowings are collateralized and uncollateralized bank borrowings, funds generated by lending securities on a cash collateral basis in excess of the amount of securities borrowed and free credit balances in customers' accounts. Free credit balances in customers' accounts, to the extent not required to be segregated pursuant to SEC rules, may be used in the conduct of Fahnestock's business, including the extension of margin credit. Subject to applicable regulations, interest is paid by Fahnestock on most, but not all, of such free credit balances awaiting reinvestment by customers. To the extent that the use of free credit balances reduces borrowings, interest expense is reduced.
Margin lending by Fahnestock is subject to the margin rules of the Board of Governors of the Federal Reserve System, NYSE margin requirements and Fahnestock's internal policies. By permitting customers to purchase on margin, Fahnestock takes the risk of a market decline that would reduce the value of its collateral below the customer's indebtedness before the collateral could be sold. Under applicable NYSE rules, in the event of a decline in the market value of the securities in a margin account, Fahnestock is obligated to require the customer to deposit additional securities or cash in the account so that at all times the loan to the customer for the purchase of marginable securities is no greater than 75% of the market value of such securities or cash in the account.
Securities Borrowed and Loaned
In connection with both its trading and brokerage activities, Fahnestock borrows securities to cover short sales and to complete transactions in which customers have failed to deliver securities by the required settlement date, and lends securities to other brokers and dealers for similar purposes. When borrowing securities, Fahnestock is required to deposit cash or other collateral, or to post a letter of credit with the lender and receives a rebate (based on the amount of cash deposited) or pays a fee calculated to yield a negotiated rate of return.
When lending securities, Fahnestock receives cash or similar collateral and generally pays a rebate (based on the amount of cash deposited) to the other party to the transaction. Transactions in which stocks are borrowed or loaned are generally executed pursuant to written agreements with counterparties which require that the securities borrowed be marked to market on a daily basis and that excess collateral be refunded or that additional collateral be furnished in the event of changes in the market value of the securities. Margin adjustments are usually made on a daily basis through the facilities of various clearing houses.
UNDERWRITING BUSINESS
Fahnestock manages the underwriting of both corporate and municipal securities including the securitization of corporate and other obligations, and participates as an underwriter in the syndicates of issues managed by other securities firms. The corporate finance department is responsible for originating and developing transactions which include underwriting, mergers and acquisitions, private placements, valuations, financial advisory work and other investment banking matters.
The management of and participation in public offerings involve significant risks. An underwriter may incur losses if it is unable to resell at a profit the securities it has purchased. Under federal and state securities and other laws, an underwriter is subject to substantial liability for misstatements or omissions that are judged to be material in prospectuses and other communications related to underwriting.
Underwriting commitments cause a charge against net capital. Consequently, the aggregate amount of underwriting commitments at any one time may be limited by the amount of net capital available. The Company derived 5%, 6% and 4% of its revenues from underwriting in 1999, 1998 and 1997, respectively. See "Net Capital Requirements" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."
INVESTMENT ADVISORY BUSINESS
Hudson Capital and Fahnestock (through its Fahnestock Asset Management division) provides investment advisory services for a fee to their respective clients. These equity and debt management service fees are based on the value of the portfolio under management. In addition to the management fee, transactions executed for such accounts may be effected at standard rates of commission or at discounts from Fahnestock's customary commission schedule.
At December 31, 1999 Fahnestock and Hudson Capital together had approximately $1.2 billion under management. The agreements under which the portfolios are managed on behalf of institutions and other investors generally provide for termination by either party at any time.
ADMINISTRATION AND OPERATIONS
Administration and operations personnel are responsible for the processing of securities transactions; the receipt, identification and delivery of funds and securities; the maintenance of internal financial controls; accounting functions; custody of customers' securities; the handling of margin accounts for Fahnestock and its correspondents; and general office services. Fahnestock employs approximately 220 persons in its administration and operations departments at its head office and approximately 64 people in its administration and operations departments in Detroit.
There is considerable fluctuation during any year and from year to year in the volume of transactions Fahnestock must process. Fahnestock records transactions and posts its books on a daily basis. Operations personnel monitor day-to-day operations to assure compliance with applicable laws, rules and regulations. Failure to keep current and accurate books and records can render Fahnestock liable for disciplinary action by governmental and self-regulatory organizations.
Fahnestock executes its own and certain of its correspondents' securities transactions on all United States exchanges of which it is a member and in the over-the-counter market. Fahnestock clears all of its securities transactions (i.e., it delivers securities that it has sold, receives securities that it has purchased and transfers related funds) through its own facilities and through memberships in various clearing corporations and custodian banks.
Fahnestock believes that its internal controls and safeguards are adequate, although fraud and misconduct by customers and employees and the possibility of theft of securities are risks inherent in the securities industry. As required by the NYSE and certain other authorities, Fahnestock carries a broker's blanket insurance bond covering loss or theft of securities, forgery of checks and drafts, embezzlement, fraud and misplacement of securities. This bond provides coverage of up to an aggregate of $15,000,000 with a self-insurance retention of $100,000.
COMPETITION
Fahnestock encounters intense competition in all aspects of the securities business and competes directly with other securities firms, a significant number of which have substantially greater resources and offer a wider range of financial services. In addition, there has recently been increasing competition from other sources, such as commercial banks, insurance companies and certain major corporations which have entered the securities industry through acquisition, and from other entities. Additionally, foreign-based securities firms and commercial banks regularly offer their services in performing a variety of investment banking functions including: merger and acquisition advice, leveraged buy-out financing, merchant banking, and bridge financing, all in direct competition with U.S. broker-dealers. These developments have led to the creation of a greater number of integrated financial services firms that may be able to compete more effectively than Fahnestock for investment funds by offering a greater range of financial services.
Fahnestock believes that the principal factors affecting competition in the securities industry are the quality and ability of professional personnel and relative prices of services and products offered. Fahnestock and its competitors employ advertising and direct solicitation of potential customers in order to increase business and furnish investment research publications in an effort to retain existing and attract potential clients. Many of Fahnestock's competitors engage in these programs more extensively than does Fahnestock.
There is substantial commission discounting by broker-dealers competing for institutional and retail brokerage business. Recently, full service firms have begun offering on- line trading services to their clients at substantial discounts to their regular pricing. Fahnestock intends to compete in this area, but it is likely to reduce profitability per transaction, unless offset by higher transaction volume. The continuation of such discounting and an increase in the incidence thereof could adversely affect Fahnestock. However, an increase in the use of discount brokerages could be beneficial to Freedom.
REGULATION
The securities industry in the United States is subject to extensive regulation under both federal and state laws. The SEC is the federal agency charged with administration of the federal securities laws. Much of the regulation of broker-dealers has been delegated to self-regulatory organizations, principally the NASD and the national securities exchanges such as the NYSE, which has been designated as Fahnestock's primary regulator with respect to securities activities and the National Futures Association which has been designated as Fahnestock's primary regulator with respect to commodities activities. The CBOE has been designated Fahnestock's primary regulator with respect to options trading activities. These self-regulatory organizations adopt rules (subject to approval by the SEC or the Commodities Futures Trading Commission ("CFTC"), as the case may be) governing the industry and conduct periodic examinations of Fahnestock's and Freedom's operations. Securities firms are also subject to regulation by state securities commissions in the states in which they do business. Fahnestock is registered as a broker-dealer in 50 states and Puerto Rico. Fahnestock is also registered as an International Broker-Dealer in Canada.
The regulations to which broker-dealers are subject cover all aspects of the securities business, including sales methods, trade practices among broker-dealers, the use and safekeeping of customers' funds and securities, capital structure of securities firms, record keeping and the conduct of directors, officers and employees. The SEC has adopted rules requiring underwriters to ensure that municipal securities issuers provide current financial information and imposing limitations on political contributions to municipal issuers by brokers, dealers and other municipal finance professionals. Additional legislation, changes in rules promulgated by the SEC, the CFTC and by self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules may directly affect the method of operation and profitability of broker-dealers. The SEC, self-regulatory organizations (including the NYSE), and state securities commissions may conduct administrative proceedings which can result in censure, fine, issuance of cease and desist orders or suspension or expulsion of a broker-dealer, its officers, or employees. The principal purpose of regulating and disciplining broker-dealers is to protect customers and the securities markets, rather than to protect creditors and shareholders of broker-dealers.
Fahnestock and Hudson Capital are also subject to regulation by the SEC and under certain state laws in connection with their businesses as investment advisors.
Margin lending by Fahnestock is subject to the margin rules of the Board of Governors of the Federal Reserve System and the NYSE. Under such rules, Fahnestock is limited in the amount it may lend in connection with certain purchases of securities and is also required to impose certain maintenance requirements on the amount of securities and cash held in margin accounts. In addition, Fahnestock may (and currently does) impose more restrictive margin requirements than required by such rules. See "Customer Financing."
NET CAPITAL REQUIREMENTS
As a registered broker-dealer and a member firm of the NYSE, Fahnestock is subject to certain net capital requirements pursuant to Rule 15c3-1 (the "Net Capital Rule") promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"). The Net Capital Rule, which specifies minimum net capital requirements for registered brokers and dealers, is designed to measure the general financial integrity and liquidity of a broker-dealer and requires that at least a minimum part of its assets be kept in relatively liquid form.
Fahnestock elects to compute net capital under an alternative method of calculation permitted by the Net Capital Rule. (Freedom computes net capital under the basic formula as provided by the Net Capital Rule.) Under this alternative method, Fahnestock is required to maintain a minimum "net capital", as defined in the Net Capital Rule, at least equal to 2% of the amount of its "aggregate debit items" computed in accordance with the Formula for Determination of Reserve Requirements for Brokers and Dealers (Exhibit A to Rule 15c3-3 under the Exchange Act) or $250,000, whichever is greater. "Aggregate debit items" are assets that have as their source transactions with customers, primarily margin loans. Failure to maintain the required net capital may subject a firm to suspension or expulsion by the NYSE, the SEC and other regulatory bodies and ultimately may require its liquidation. The Net Capital Rule also prohibits payments of dividends, redemption of stock and the prepayment of subordinated indebtedness if net capital thereafter would be less than 5% of aggregate debit items (or 7% of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, if greater) and payments in respect of principal of subordinated indebtedness if net capital thereafter would be less than 5% of aggregate debit items (or 6% of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, if greater). The Net Capital Rule also provides that the total outstanding principal amounts of a broker-dealer's indebtedness under certain subordination agreements (the proceeds of which are included in its net capital) may not exceed 70% of the sum of the outstanding principal amounts of all subordinated indebtedness included in net capital, par or stated value of capital stock, paid in capital in excess of par, retained earnings and other capital accounts for a period in excess of 90 days.
Net capital is essentially defined as net worth (assets minus liabilities), plus qualifying subordinated borrowings minus certain mandatory deductions that result from excluding assets that are not readily convertible into cash and deductions for certain operating charges. The Net Capital Rule values certain other assets, such as a firm's positions in securities, conservatively. Among these deductions are adjustments (called "haircuts") in the market value of securities to reflect the possibility of a market decline prior to disposition.
Compliance with the Net Capital Rule could limit those operations of the brokerage subsidiaries of the Company that require the intensive use of capital, such as underwriting and trading activities and the financing of customer account balances, and also could restrict the Company's ability to withdraw capital from its brokerage subsidiaries, which in turn could limit the Company's ability to pay dividends, repay debt and redeem or purchase shares of its outstanding capital stock. Under the Net Capital Rule broker-dealers are required to maintain certain records and provide the SEC with quarterly reports with respect to, among other things, significant movements of capital, including transfers to a holding company parent or other affiliate. The SEC may in certain circumstances restrict the Company's brokerage subsidiaries' ability to withdraw excess net capital and transfer it to the Company or to other of the Operating Subsidiaries.
Item 2.
Item 2. PROPERTIES
The Company maintains offices at 20 Eglinton Avenue West, Toronto, Ontario, Canada for general administrative activities. Most day-to-day management functions are conducted at the executive offices of Fahnestock at 125 Broad Street, New York, New York. This office also serves as the base for most of Fahnestock's research, operations and trading, investment banking and investment advisory services, though other offices also have employees who work in these areas. Generally, the offices outside of 125 Broad Street, New York serve as bases for sales representatives who process trades and provide other brokerage services in co-operation with Fahnestock's New York office using the data processing facilities located there. Freedom conducts its business from its offices located at 11422 Miracle Hills Dr., Omaha, Nebraska. Management believes that its present facilities are adequate for the purposes for which they are used and have adequate capacity to provide for presently contemplated future uses.
The Company and its subsidiaries own no real property, but occupy office space totalling approximately 366,000 square feet in 76 locations under standard commercial terms expiring between 2000 and 2013. If any leases are not renewed, the Company believes it could obtain comparable space elsewhere on commercially reasonable rental terms.
Item 3.
Item 3. LEGAL PROCEEDINGS
The Company is involved in certain litigation arising in the ordinary course of business. Management believes, based upon discussion with legal counsel, that the outcome of this litigation will not have a material effect on the Company's financial position. The materiality of legal matters to 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 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Class B voting shares (the "Class B Shares"), the Company's only class of voting securities, are not registered under the Exchange Act and are not required to be registered. The Class B Shares have fewer than 500 shareholders of record. Consequently, the Company is not required under Section 14 of the Exchange Act to furnish proxy soliciting material or an information statement to holders of the Class B Shares. However, the Company is required under applicable Canadian securities laws to provide proxy soliciting material, including a management proxy circular, to the holders of its Class B Shares.
Pursuant to the Company's Articles of Incorporation, holders of Class A non-voting shares (the "Class A Shares"), although not entitled to vote thereat, are entitled to receive notices of shareholders' meetings and to receive all informational documents required by law or otherwise to be provided to holders of Class B Shares. In addition, holders of Class A Shares are entitled to attend and speak at all meetings of shareholders, except class meetings not including the Class A Shares.
In the event of either a "take-over bid" or an "issuer bid", (as those terms are defined in the Securities Act, (Ontario)) being made for the Class B Shares and no corresponding offer being made to purchase Class A Shares, the holders of Class A Shares would have no right under the Articles of Incorporation of the Company or under any applicable statute to require that a similar offer be made to them to purchase their Class A Shares.
No matters were submitted to the Company's shareholders during the fourth quarter of the Company's fiscal year.
PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Shares are listed and traded on The New York Stock Exchange (trading symbol "FVH") and on The Toronto Stock Exchange (trading symbol "FHV.A"). The Class B Shares are not traded on any stock exchange in Canada or the United States and, as a consequence, there is only limited trading in the Class B shares. The Company does not presently contemplate listing the Class B Shares in the United States on any national or regional stock exchange or on NASDAQ.
The following tables set forth the high and low sales prices of the Class A Shares on The Toronto Stock Exchange and on The New York Stock Exchange. Prices provided are in Canadian dollars or U.S. dollars as indicated and are based on data provided by The Toronto Stock Exchange and The New York Stock Exchange.
Class A Shares: TSE NYSE HIGH LOW HIGH LOW (Cdn. Dollars) (U.S. dollars) 1st Quarter $28.25 $20.25 $19.9375 $13.25 2nd Quarter $26.50 $21.00 $18.00 $14.3125 3rd Quarter $24.20 $21.25 $16.25 $14.375 4th Quarter $23.70 $21.05 $16.125 $14.3125
1st Quarter $26.75 $23.00 $18.50 $16.6875 2nd Quarter 31.75 25.00 22.1875 17.625 3rd Quarter 29.50 20.75 19.875 13.5625 4th Quarter 27.00 20.45 17.875 13.3125
The following table sets forth information about the Company's shareholders as at December 31, 1999 as set forth in the records of the Company's transfer agent and registrar:
Class A Shares:
Shareholders of record Number of Number of having addresses in: shares Percentage shareholders Canada 5,301,429 44% 192 United States 6,846,008 56% 167 Other 132 - 3 Total issued and outstanding 12,147,569 100% 362
Class B shares Shareholders of record Number of Number of having addresses in: shares Percentage shareholders Canada (1) 98,135 98% 126 United States 1,537 2% 68 Other 8 - 2 Total issued and outstanding 99,680 100% 196
(1) The Company has been informed that 50,484 Class B shares held by Phase II Financial Limited, an Ontario corporation, are beneficially owned by A.G. Lowenthal, a U.S. citizen and resident. See Item 12, "Security Ownership of Certain Beneficial Owners and Management".
Dividends Amount per Type Declaration date Record date Payment date share
Quarterly January 29, 1997 February 10, 1997 February 21, 1997 $0.06 Quarterly April 21, 1997 May 9, 1997 May 23, 1997 $0.06 Quarterly July 21, 1997 August 8, 1997 August 22, 1997 $0.06 Quarterly October 20, 1997 November 7, 1997 November 21, 1997 $0.06 Quarterly January 29, 1998 February 6, 1998 February 20, 1998 $0.07 Quarterly April 20,1998 May 8, 1998 May 22, 1998 $0.07 Quarterly July 21, 1998 August 7, 1998 August 21, 1998 $0.07 Quarterly October 20, 1998 November 6, 1998 November 20, 1998 $0.07 Quarterly January 28, 1999 February 12, 1999 February 26, 1999 $0.07 Quarterly April 21, 1999 May 7, 1999 May 21, 1999 $0.07 Quarterly July 21, 1999 August 6, 1999 August 20, 1999 $0.07 Quarterly October 20, 1999 November 5, 1999 November 19, 1999 $0.07 Quarterly January 27, 2000 February 11, 2000 February 25, 2000 $0.07
Future dividend policy will depend upon the earnings and financial condition of the Operating Subsidiaries, the Company's need for funds and other factors. However, it is the present intention of the Company's management to pay a quarterly dividend in the amount of U.S. $0.07 per Class A Share and Class B Share in May, August and November, 2000. Dividends may be paid to holders of Class A Shares and Class B Shares (pari passu), as and when declared by the Company's Board of Directors, from funds legally available therefor.
Certain Tax Matters
The following paragraphs summarize certain United States and Canadian federal income tax considerations in connection with the receipt of dividends paid on the Class A and Class B Shares of the Company. These tax considerations are stated in brief and general terms and are based on United States and Canadian law currently in effect. There are other potentially significant United States and Canadian federal income tax considerations and state, provincial or local income tax considerations with respect to ownership and disposition of the Class A and Class B Shares which are not discussed herein. The tax considerations relative to ownership and disposition of the Class A and Class B Shares may vary from taxpayer to taxpayer depending on the taxpayer's particular status. Accordingly, prospective purchasers should consult with their tax advisors regarding tax considerations which may apply to the particular situation.
United States Federal Income Tax Considerations
Dividends on Class A and Class B Shares paid to citizens or residents of the U.S. or to U.S. corporations (including any Canadian federal income tax withheld) will be generally subject to U.S. federal ordinary income taxation. Such dividends will not be eligible for the deduction for dividends received by corporations (unless such corporation owns by vote and value at least 10% of the stock of the Company, in which case a portion of such dividend may be eligible for such exclusion).
U.S. corporations, U.S. citizens and U.S. residents will generally be entitled, subject to certain limitations, to a credit against their U.S. federal income tax for Canadian federal income taxes withheld from such dividends. Taxpayers may claim a deduction for such taxes if they do not elect to claim such tax credit. No deduction for foreign taxes may be claimed by an individual taxpayer who does not itemize deductions. Because the application of the foreign tax credit depends upon the particular circumstances of each shareholder, shareholders are urged to consult their own tax advisors in this regard. Under certain limited circumstances, non-resident alien and foreign corporations will be subject to U.S. federal income taxation at graduated rates from dividends or gains with respect to their Class A and Class B Shares, if such income or gain is treated as effectively connected with the conduct of the recipient's trade or business within the United States, and may be entitled to such tax credit or such deduction.
Canadian Federal Income Tax Considerations
Dividends paid on Class A and Class B Shares held by non-residents of Canada will generally be subject to Canadian withholding tax. This withholding tax is levied at the basic rate of 25%, although this rate may be reduced by the terms of any applicable tax treaty. The Canada - U.S. tax treaty provides that the withholding rate on dividends paid to U.S. residents on Class A and Class B Shares is generally 15%.
Normal Course Issuer Bid
On June 30, 1999 the Company announced that commencing July 5, 1999 it intended to purchase up to 758,000 Class A Shares by way of a Normal Course Issuer Bid through the facilities of The Toronto Stock Exchange and/or The New York Stock Exchange, representing approximately 10% of the public float of Class A Shares. For the year ended December 31, 1999, through the currently outstanding Normal Course Issuer Bid the Company purchased 287,500 Class A Shares. In addition, in fiscal 1999, through a Normal Course Issuer Bid which expired July 2, 1999, the Company purchased 275,200 Class A Shares. The average cost for all shares repurchased in fiscal 1999 was U.S. $14.29. Any shares purchased by the Company pursuant to the Normal Course Issuer Bid will be cancelled. Unless terminated earlier by the Company, it may continue to purchase shares up to July 4, 2000. The Company may, at its option, apply to extend the program for an additional year.
Item 6.
Item 6. SELECTED FINANCIAL DATA
The following table presents selected financial information derived from the audited consolidated financial statements of the Company for the five years ended December 31, 1999. The selected financial information should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements and notes thereto included elsewhere in this report. In 1997, the Company purchased FOM. The 1997 amounts include the assets and liabilities and the operating results of FOM as of and subsequent to the period after July 17, 1997. See also Item 1, "Business" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations".
Year ended December 31, 1999 1998 1997 1996 1995 (In thousands of U.S. dollars except per share and share amounts) Revenue $279,111 $232,781 $242,158 $213,988 $184,433 Profit before extraordinary item $27,390 $12,447 $26,731 $30,279 $20,899 Net profit $27,390 $12,447 $26,731 $30,279 $20,899 Profit before extraordinary item per share (1) $2.19 $0.99 $2.14 $2.46 $1.69 Net profit per share (1) - - basic $2.19 $0.99 $2.14 $2.46 $1.69 - - diluted $2.17 $0.96 $2.08 $2.41 $1.68 Total assets $766,528 $666,763 $835,146 $519,916 $623,466 Total current liabilities $579,141 $500,410 $674,181 $384,009 $516,031 Subordinated indebtedness, including current portion $30 $30 $30 $30 $30 Cash dividends per Class A Share and Class B share $0.28 $0.28 $0.24 $0.35 $0.15 Shareholders' equity $187,388 $166,323 $160,935 $135,877 $107,405 Book value per share (1) $15.30 $13.48 $12.87 $10.99 $8.92 Number of shares of capital stock outstanding 12,247,249 12,340,949 12,508,440 12,365,440 12,040,090
(1) The Class A Shares and Class B Shares are combined because they are of equal rank for purposes of dividends and in the event of a distribution of assets upon liquidation, dissolution or winding up.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business Environment
Fahnestock, the Company's principal operating subsidiary, provides brokerage and related investment services. Fahnestock is engaged in proprietary trading and offers other related financial services to investors in fifteen states from 76 offices in the North Eastern United States, the Midwest, Florida and California, including an office in Toronto, Canada and associated offices in Caracas, Venezuela and Buenos Aires, Argentina. Client assets entrusted to the Company as at December 31, 1999 totalled approximately $16.5 billion. Fahnestock is licensed to offer brokerage and other financial services in all 50 States. The Company provides investment advisory services through Hudson Capital and through Fahnestock Asset Management and Newbold Investment Advisors, operating as divisions of Fahnestock. Funds under management by the asset management groups totalled $1.2 billion at December 31, 1999. The Company also operates a discount brokerage business based in Omaha, Nebraska, through Freedom.
The securities industry is highly competitive and sensitive to many factors and is directly affected by general economic and market conditions, including the volatility and price level of securities markets; the volume, size, and timing of securities transactions; the demand for investment banking services and changes in interest rates, all of which have an impact on commissions, trading and investment income as well as on liquidity. In addition, a significant portion of the Company's expenses are relatively fixed and do not vary with market activity. Consequently, substantial fluctuations can occur in the Company's revenues and net income from period to period due to these and other factors.
The Company anticipates increasing competition from commercial banks and thrift institutions as these institutions begin to offer more investment banking and financial services traditionally only provided by securities firms. The growing use of discount brokerage firms by investors has impacted traditional retail commission business and the presence of on- line trading over the internet, including such services presently being offered by full service securities firms, has begun to significantly impact the means by which retail clients place their orders. The Company is also experiencing increasing regulation in the securities industry, particularly affecting the over-the-counter markets, making compliance with regulations more difficult and costly. At present, the Company is unable to predict the extent of changes, or the effect on the Company's business.
The Company's long-term plan is to continue to expand existing offices by hiring experienced professionals, thus maximixing the potential of each office and development of existing trading, investment banking, investment advisory and other activities. Equally important is the search for viable corporations for acquisition. As opportunities are presented, it is the intention of the Company to pursue growth by acquisition where a comfortable match can be found in terms of corporate goals and personnel and at a price that would provide the Company's shareholders with value.
Results of Operations
The financial markets ended the year at all time highs. Overcoming mid-year concerns regarding interest rate increases and possible Year 2000 computer disruptions, the NASDAQ market closed at 4,069, an 86% increase during 1999. The U.S. economy gathered strength, with low inflation, increased productivity and low unemployment. Consumer spending levels were higher than they have been in a generation.
Investor focus was on the internet economy and technology and telecommunications sectors. The impact of day trading and market momentum pushed stock valuations and volumes higher throughout the course of the year.
The Company's revenues in fiscal 1999 increased by 20% compared to fiscal 1998. This was a result of favorable market conditions which generated strong revenues from all sources: commissions, investment banking, trading revenues and financial service fees, compared to 1998 revenues which included significant fourth quarter trading losses arising from market-making activities.
The following table summarizes the changes in the major revenue and expense categories from the consolidated statement of operations for the past three fiscal years ended December 31, 1999, 1998 and 1997.
Period to Period Change Increase (Decrease) 1999 versus 1998 1998 versus 1997 Amount Percentage Amount Percentage Revenues - Commissions $3,858,000 3% $11,566,000 11% Principal transactions, net 38,287,000 117% (33,245,000) -50% Interest 1,807,000 4% 1,905,000 5% Underwriting fees 2,895,000 23% 1,613,000 15% Advisory fees 698,000 3% 5,934,000 38% Other (1,215,000) -14% 2,850,000 48% Total revenues 46,330,000 20% (9,377,000) -4%
Expenses - Compensation 13,493,000 10% 10,279,000 9% Clearing and exchanges fees 236,000 3% (484,000) -5% Communications 491,000 2% 3,051,000 17% Occupancy costs (524,000) -4% 2,221,000 20% Interest (505,000) -2% 1,670,000 8% Other 4,396,000 27% (1,353,000) -8% Total expenses 17,587,000 8% 15,384,000 8%
Profit before taxes 28,743,000 132% (24,761,000) -53% Income taxes 13,800,000 149% (10,477,000) -53% Net profit 14,943,000 120% (14,284,000) -53%
Fiscal 1999 compared to Fiscal 1998
In fiscal 1999, the U.S. economy displayed growing strength throughout the year, with growth of 4.9%, low inflation, low unemployment and a strong dollar. Despite increases in interest rates designed to slow the U.S. economy, the market finished the year closing at record highs and posting high volumes. The internet economy, technology issues and the telecommunication sector were the market favorites, with day traders propelling market valuations and volumes to unprecedented levels. The wide public use and acceptance of the internet as an information resource and trading tool has changed the nature of market trading, with 29% of total volume for the year attributed to on-line trading. The Company, through its subsidiary, Freedom, has derived increased business from this increased volume. In addition, the Company provides all of its clients with on-line access to their account information.
Total revenues for 1999 were $279,111,000, an increase of 20% over $232,781,000 in 1998. Commission income (income realized in securities transactions for which the Company acts as agent) increased 3% to $118,747,000 from $114,889,000 in 1998. This increase is attributable to the active trading environment encountered most particularly in the fourth quarter of 1999, when strong investor interest propelled valuations and volumes in the favored technology equities to historically high levels. Included in the increase in commission revenue was a 31% increase in commission earned by the Company's internet subsidiary, Freedom. Principal transactions (revenues from transactions in which the Company acts as principal in the secondary market trading of over-the-counter equities and municipal, corporate and government bonds) increased by 117% to $71,014,000 in 1999 from $32,727,000 in 1998. The increase was due, in part, to the Company's significant trading losses arising from market-making activities in the fourth quarter of 1998. Risk containment policies were implemented immediately thereafter which are designed to limit future exposure to the type and size of loss experienced in 1998. Underwriting fees in 1999 were $15,550,000, an increase of 23% compared to $12,655,000 in 1998. In 1999, the Company expanded a strategy of regionalizing its investment banking and public finance departments, and realized greater participation in both IPO and M&A business. Advisory fees in 1999 were $22,440,000, an increase of 3% compared to $21,742,000 in 1998. The management of client assets was consolidated within the Fahnestock Asset Management division in late 1999. The overall level of assets under management remained static from 1998 to 1999.
Interest income was $43,835,000 in 1999, an increase of 4% over $42,028,000 in 1998. Interest expense was $21,326,000 in 1999, a decrease of 2% from $21,831,000 in 1998. This represents an increase of 11% in net interest revenue (interest revenue less interest expense) in 1999 compared to 1998 which can be attributed to an increase in customer debit balances and higher stock borrow/stock loan balances in 1999 compared to 1998.
Expenses totalled $228,645,000 in 1999, an increase of 8% compared to $211,058,000 in 1998. The increase is due, in part, to higher variable expenses which increase as volume of business increases, such as Compensation and related expenses and, to some degree, Clearing and exchange fees. Compensation and related costs were $143,557,000, an increase of 10% over $130,064,000 in 1998. Clearing and exchange fees were $8,870,000, an increase of 3% over $8,634,000 in 1998. Communications expenses were $21,421,000, an increase of 2% over $20,930,000 in 1998 reflecting additional costs in 1999, after the summer introduction of a firm-wide proprietary communication platform providing a wide area network supporting investment quotes and news distribution, internet access, internal and external e- mail capability, order entry, and data base management. Occupancy costs were $12,722,000, a decrease of 4% compared to $13,246,000 as a result of branch consolidation and renegotiation of leases. Other expenses were $20,749,000, an increase of 27% over $16,353,000 in 1998 due to an increased provision for bad debts, higher levels of professional fees and a higher charge to the error account in 1999 compared to 1998.
Fiscal 1998 compared to Fiscal 1997
In fiscal 1998, there was one economic crisis after another; including the collapse of Asian markets, the meltdown in Russia, currency devaluations in Brazil and weakness in the U.S. dollar. Yet, despite the bad news, the U.S. equity markets continued to be supported by unprecedented inflows of cash and a strong U.S. economy, sending popular market averages upward by over 20% for the fourth consecutive year.
Total revenues for 1998 were $232,781,000, a decrease of 4% from $242,158,000 in 1997. Commission income (income realized in securities transactions for which the Company acts as agent) increased 11% to $114,889,000 compared to $103,323,000. This increase is attributable both to the business added by the FOM acquisition in July 1997 and to favorable business conditions. Principal transactions (revenues from transactions in which the Company acts as principal in the secondary market trading of over-the-counter equities and municipal, corporate and government bonds) decreased 50% to $32,727,000 compared to $65,972,000. In the fourth quarter of 1998, the Company suffered unprecedented trading losses arising from its market-making activities in NASDAQ issues. A sharp upward surge in the internet sector after the October lows left the Company with outsized positions from which the Company sustained significant and unrecoverable losses. Risk containment policies have been put into effect which will limit the Company's future exposure to such events. Underwriting fees in 1998 were $12,655,000, an increase of 15% over $11,042,000 in 1997. The Company increased its investment banking revenues in 1998. Advisory fees were $21,742,000 in 1998, an increase of 38% over $15,808,000 in 1997. The addition of new client accounts as well as the growth in value of existing client accounts contributed to the increase.
Interest income was $42,028,000 in 1998, an increase of 5% over $40,123,000 in 1997. Interest expense was $21,831,000 in 1998, an increase of 8% over $20,161,000 in 1997. The increase is attributable to higher customer debit balances with the inclusion of FOM customers for the full year in 1998 compared to approximately half of a year in 1997.Net interest income (interest revenue less interest expense) increased by 1% in 1998 compared to 1997.
Expenses totalled $211,058,000 in 1998, an increase of 8% compared to $195,674,000 in 1997. A large part of the increase can be attributed to the inclusion of a full year of FOM operations in 1998 compared to approximately half of a year in 1997. The acquisition of FOM added 26 branch offices to the Fahnestock system. Compensation and related expenses were $130,064,000 in 1998, an increase of 9% over $119,785,000 in 1997. The expected increase in compensation and related expenses was partially mitigated by reduced compensation to traders as a result of the trading losses incurred in the fourth quarter of 1998. Communications expenses were $20,930,000, an increase of 17% over $17,879,000 in 1997. Occupancy costs were $13,246,000, an increase of 20% over $11,025,000 in 1997. The increases in communications and occupancy costs can primarily be attributed to the increased size of the organization after the acquisition of FOM. Clearing and exchange fees were $8,634,000, a decrease of 5% compared to $9,118,000 in 1997. Other expenses of $16,353,000 also decreased in 1998 (by 8%) compared to $17,706,000 in 1997. Certain economies of scale were introduced as the FOM and Fahnestock operations were consolidated.
Liquidity and Capital Resources
The increase in the Company's assets in 1999 compared to 1998 is primarily the result of increased client balances, reflecting a strong retail environment in 1999. Customer-related receivables and securities inventory are highly liquid and represent a substantial percentage of total assets. The principal sources of financing for the Company's assets are stockholders' equity, customer free credit balances, proceeds from securities lending, bank loans and other payables. The Company historically has not utilized long-term financing. Cash generated from operations, increased earnings, proceeds from stock purchased by employee stock plans, and cash proceeds upon the exercise of employee stock options supplemented bank borrowings during the past three years. At December 31, 1999, Fahnestock had bank lines of credit and call loan arrangements with outstanding borrowings thereunder of $66,322,000.
The Company paid cash dividends to its shareholders totalling $3,517,000, during 1999, from internally-generated cash.
During 1999, the Company has purchased a total of 562,700 of its Class A non-voting shares at an average cost of $14.29 per share through the facilities of the Toronto and New York Stock Exchanges by way of a Normal Course Issuer Bid, using internally generated cash. The Company has expressed an intention to purchase up to an additional 331,000 of its shares from time to time until July 4, 2000 from internally generated funds.
Because of the Company's strong financial condition, size and earnings history, management believes adequate sources of credit would be available to finance higher trading volumes, branch expansion, and major capital expenditures, as needed.
Inflation
Because the assets of the Company's brokerage subsidiaries are highly liquid, and because securities inventories are carried at current market values, the impact of inflation generally is reflected in the financial statements. However, the rate of inflation affects the Company's costs relating to employee compensation, rent, communications and certain other operating costs, and such costs may not be recoverable in the level of commissions charged. To the extent inflation results in rising interest rates and has other adverse effects upon the securities markets, it may adversely affect the Company's financial position and results of operations.
Year 2000 Disclosure
The Company has not encountered any material problems with either its internal systems or with vendor systems associated with the transition to Year 2000. The cost of remediating the Company's systems for Year 2000 compliance, from June 1998 through January 2000, was approximately $800,000, and was expensed in the year incurred. This amount does not include normal ongoing costs for computer hardware or software revisions which would be required in the normal course of business and does not include the cost of the Company's new wide-area-network which was installed in 1999. The Company continues to monitor its risk relating to the Year 2000 problem which would have a material adverse impact on the Company's business, financial condition, statement of operations and business prospects. The Company has in place a comprehensive contingency plan which addresses disruptions due to a disaster or the inability to use its principal information technology platform.
Factors Affecting "Forward-Looking Statements"
From time to time, the Company may publish "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 or make oral statements that constitute forward-looking statements. These forward-looking statements may relate to such matters as anticipated financial performance, future revenues or earnings, business prospects, projected ventures, new products, anticipated market performance, and similar matters. 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 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. The Company does not undertake any obligation to publicly update or revise any forward-looking statements.
Item 7A.
Item 7A. 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. (See additional discussion of Risk Management in Item 1).
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.
Credit Risk Credit risk arises from non-performance by trading counterparties, customers and issuers of debt securities held in the Company's inventory. The Company manages this risk by imposing and monitoring position limits, regularly reviewing trading counterparties, monitoring and limiting securities concentrations, marking positions to market on a daily basis to evaluate and establish the adequacy of collateral, and with respect to trading counterparties, conducting business through clearing corporations which guarantee performance. Further discussion of credit risk appears in the Notes to the Consolidated Financial Statements, see Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required to be furnished in response to this Item is submitted hereinafter following the signature pages hereto.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
General
Directors of the Company are elected annually by the holders of the Class B Shares to serve until the next annual meeting of shareholders or until their successors are appointed. Executive officers are appointed annually by the directors or until their successors are appointed. Certain information concerning the executive officers and directors of the Company as at December 31, 1999 is set forth below.
Name/ Age/ Positions held
John L. Bitove A Director of the Company since February 1980; Retired executive. - - Member of the Audit and Compensation and Stock Option Committees
Richard Crystal A Director of the Company since 1992; Partner, Whitman Breed Abbott & Morgan LLP (Attorneys- at-Law), US counsel to the Company since 1985.
Albert G. Lowenthal Chairman of the Board, Chief Executive Officer and a Director of the Company since 1985; Chairman of the Board and Chief Executive Officer of Fahnestock since 1985; prior to 1985, Mr. Lowenthal was President of Cowen Securities Inc., a New York stock brokerage firm and a general partner of Cowen & Co., a New York brokerage firm.
Kenneth W. McArthur A Director of the Company since 1996; President and C.E.O. of Shurway Capital Corporation ( a private corporation), since July1993; Senior Vice- President Bank of Montreal Investment Counsel between January 1992 and July 1993; Senior Vice-President Nesbitt Thomson Inc. between July 1989 and January 1993. - - Member of the Audit Committee
A. Winn Oughtred A Director of the Company since 1979; a Director of Fahnestock since 1983; Secretary of the Company since June, 1992 and prior to June, 1991; Partner, Borden Ladner Gervais LLP. (Law firm), Canadian counsel to the Company since 1979.
Elaine K. Roberts President, Treasurer and a Director of the Company since 1977; Treasurer and a Director of Fahnestock since 1983.
Burton Winberg A Director of the Company since1979; President of Rockport Holdings Limited (a real estate development company) since 1959. - - Member of the Audit and Compensation and Stock Option Committees.
Compliance with Section 16(a) of the Securities Exchange Act of 1934.
Section 16(a) of the Exchange Act requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file by specific dates with the SEC initial reports of ownership and reports of changes in ownership of equity securities of the Company. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms that they file. The Company is required to report in this annual report on Form 10-K any failure of its directors and executive officers and greater than ten percent stockholders to file by the relevant due date any of these reports during the two preceding fiscal years.
To the Company's knowledge, based solely on review of copies of such reports furnished to the Company during the two fiscal years ended December 31, 1998, all Section 16(a) filing requirements applicable to the Company's officers, directors and greater than ten percent stockholders were complied with.
Item 11.
Item 11. EXECUTIVE COMPENSATION
General The following table sets forth total annual compensation paid or accrued by the Company to or for the account of the Company's chief executive officer and each of the four most highly paid executive officers of the Company whose total cash compensation for the fiscal year ended December 31, 1999 exceeded $100,000.
Annual Compensation Long-term Compensation #Securities Under Name and $Other Options/ $All Principal Annual SARs $LTIP Other Occupation Year $Salary $Bonus Comp. RSA Granted Payouts Comp.
A.G. Lowenthal, 1999 300,000 0 11,170 0 150,000 981,510 6,270 Chairman, CEO, 1998 300,000 350,000 9,950 0 150,000 0 5,265 and Director of 1997 300,000 0 11,990 0 0 908,000 6,050 the Company; Chairman and CEO of Fahnestock
Robert Neuhoff, 1999 230,000 185,000 0 0 50,000 0 6,270 Executive Vice 1998 230,000 87,500 0 0 0 0 5,265 President of 1997 230,000 175,000 0 0 0 0 6,050 Fahnestock
Eric Shames 1999 210,000 110,000 0 0 15,000 0 6,270 Secretary of 1998 187,500 50,000 0 0 15,000 0 5,265 Fahnestock 1997 150,000 75,000 0 0 0 0 6,050
Robert Sablowsky, 1999 200,000 40,000 235,154 0 20,000 0 6,270 Executive Vice 1998 200,000 210,000 200,710 0 0 0 5,265 President of 1997 200,000 10,000 193,173 0 20,000 0 6,050 Fahnestock
Elaine Roberts 1999 133,750 100,000 10,000 0 75,000 0 0 President and 1998 120,000 35,000 9,950 0 0 0 0 Treasurer of the 1997 120,000 70,000 11,990 0 0 0 0 Company
OTHER ANNUAL COMPENSATION - For Mr. Lowenthal and Ms. Roberts, includes Directors Fees of Cdn$10,000 per year plus Cdn$600 per meeting attended and which were converted to $US at the average rate prevailing during the year and for Mr. Sablowsky, includes commissions earned on his retail business. RESTRICTED STOCK AWARDS("RSA") - The Company does not have a plan for granting restricted stock awards. LTIP PAYOUTS - See discussion under "Performance-Based Compensation Agreement" and "Stock Appreciation Agreement", described herein. LTIP payouts are paid in January following the year for which they were accrued. ALL OTHER COMPENSATION - This represents Company contributions to the 401(k) Plan.
OPTION EXERCISES AND YEAR-END VALUE TABLE December 31, 1999 $Year-end # of shares value of Underlying unexercised unexercised in-the-money Shares options/SARs options acquired $Value exercisable/ exercisable/ Name on exercise Realized unexercisable unexercisable
A.G. Lowenthal 150,000 $919,500 0/300,000 0/$159,375 R. Neuhoff 25,000 $95,015 0/50,000 $13,281/$13,281 E. Shames 0 0 7,500/37,500 $30,451/$46,369 R. Sablowsky 0 0 15,000/45,000 $5,625/$26,875 E.Roberts 75,000 $459,750 0/75,000 0/$79,688
Details of number of shares and value of exercisable and unexercisable options are as follows: Those options exercisable in $CDN have been converted at the exchange rate as at December 31, 1999.
# of Option Price at Value Total shares Price Dec.31/99 Per Share Value A.G. Lowenthal - unexercisable 150,000 $17.875 $14.9375 0 0 unexercisable 150,000 $13.875 $14.9375 $1.0625 $159,375
R. Neuhoff - exercisable 12,500 $13.875 $14.9375 $1.0625 $13,281 unexercisable 12,500 $13.875 $14.9375 $1.0625 $13,281
E. Shames - exercisable 7,500 Cdn$15.70 $14.9375 $4.0575 $30,431 unexercisable 7,500 Cdn$15.70 $14.9375 $4.0575 $30,431 unexercisable 15,000 $17.875 $14.9375 0 0 unexercisable 15,000 $13.875 $14.9375 $1.0625 $15,938
R. Sablowsky - exercisable 10,000 $14.375 $14.9375 $0.5625 $5,625 unexercisable 10,000 $14.375 $14.9375 $0.5625 $5,625 exercisable 5,000 $20.875 $14.9375 0 0 unexercisable 15,000 $20.875 $14.9375 0 0 unexercisable 20,000 $13.875 $14.9375 $1.0625 $21,250
E. Roberts - exercisable 0 0 0 0 0 unexercisable 75,000 $13.875 $14.9375 $1.0625 $79,688
OPTION/SAR GRANTS FOR THE YEAR ENDED DECEMBER 31, 1999. Price of Date of Grant Name # of shares Option Expiration date
February 24, 1999 A.G. Lowenthal 150,000 $13.875 February 23, 2004 February 24, 1999 E.K. Roberts 75,000 $13.875 February 23, 2004 February 24, 1999 R. Neuhoff 50,000 $13.875 February 23, 2004 February 24, 1999 R. Sablowsky 20,000 $13.875 February 23, 2004 February 24, 1999 E. Shames 15,000 $13.875 February 23, 2004
Pension Plan
Fahnestock has no pension plans for its officers and employees other than a savings plan qualified under Section 401(k) of the Internal Revenue Code, pursuant to which the Company may make an annual cash contribution based on compensation for each employee. Should participants in the plan elect to receive their employer contribution in the form of Class A Shares, the Company may make an additional contribution of Class A Shares equal in market value to 15% of the purchase price of the Class A Shares. Class A Shares were issued as follows from Treasury to the Company's 401(K) Plan.
Number of Fiscal Class A Year Date of issue Shares issued Price per share 1996 January 14, 1997 70,000 $14.375 1997 January 14, 1998 42,000 $17.6875 1998 January 14, 1999 56,000 $15.875 1999 NIL
For former FOM employees, who not converted to the Plan option described above, there is another option under the Plan pursuant to which the Company makes regular defined cash contributions based on the Plan document. FOM sponsors an unfunded Supplemental Executive Retirement Program ("SERP"), which is a non-qualified plan that provides certain former officers additional retirement benefits.
In addition, U.S. employees of the Company and its subsidiaries are entitled to group health benefits and group life insurance coverage pursuant to plans which do not discriminate in scope, terms, or operation in favor of officers or directors of the Company, and which are generally available to all salaried U.S. employees.
Employee Stock Option Plans
In 1996, the Company established its 1996 Equity Incentive Plan (the "EIP"). The 1986 Incentive Stock Option Plan (the "ISO") and the 1986 Employee Stock Option Plan (the "ESO") which were established in 1986 expired in April 1996. (The EIP, the ISO and the ESO are sometimes hereinafter collectively referred to as the "Plans".) The Plans permit the compensation and stock option committee of the board of directors of the Company to grant options to purchase Class A Shares of the Company to officers and key employees of the Company and its subsidiaries. Under an amendment to the ESO in June 1992 grants of options are made to the Company's independent directors on a formula basis. Options generally vest at the rate of 25% of the amount granted for each year held. Under the provisions of the Internal Revenue Code, options granted under the ISO qualify as "incentive stock options" and options granted under the ESO do not qualify. The EIP was amended in January 1997 to increase the authorized number of Class A Shares that may be subject to options to 1,850,000. The EIP was further amended on March 25, 1997 to limit the number of options granted to any senior officer of the Company in any 60 month period to 500,000 Class A Shares. On May 17, 1999, the EIP was amended to provide for an increase in the authorized number of Class A Shares that may be subject to options to 2,850,000.
The Compensation and Stock Option Committee of the board of directors of the Company administers and interprets the provisions of the Plans, except as the Plans relate to grants to independent directors which are made pursuant to a formula. The committee's responsibilities include determining (i) which employees are eligible for participation in the Plans, (ii) when to grant options under the Plans, (iii) the number of shares that may be subject to options, and (iv) the times at which options may be exercised.
Performance-Based Compensation Agreement
In March 1997, the Company entered into a Performance- Based Compensation Agreement (the "Comp Agreement") effective January 1, 1997 and expiring December 31, 2001 with Albert G. Lowenthal, the Chairman and Chief Executive Officer of the Company and Fahnestock, pursuant to the recommendation of the Company's Compensation and Stock Option Committee and the approval of the Board of Directors. The purpose of the Comp Agreement was to set the terms under which Mr. Lowenthal's non-salary compensation was to be calculated. The Comp Agreement provides for (1) a written Performance Goal, the formula for which must be established by the Committee within the first 90 days of the year and (2) a Stock Appreciation Amount equal to the amount by which the market value of the Company's Class A Shares at December 31 exceeds the base price as at December 31 of the prior year multiplied by a number of shares to be set each year by the Committee with in the first 90 days of the year. The sum of all performance awards paid under the Comp Agreement shall not exceed $5,000,000.
The Performance Goal established in March 1997 resulted in $908,000 payable to Mr. Lowenthal for fiscal 1997 based on the following formula: (a) 3% of the excess of the Company's actual Return on Equity over a Base Return on Equity of 15% (based on Shareholders' Equity as at December 31, 1996), up to a 25% Return on Equity; (b) plus 4% of the excess of the Company's actual Return on Equity over a 25% Return on Equity (based on Shareholders' Equity as at December 31, 1996). The Stock Appreciation Amount was set in March 1997 at 150,000 shares and resulted in $456,000 payable to Mr. Lowenthal for fiscal 1997. Mr. Lowenthal and the Company agreed to accept the amount payable under the Performance Goal, which was less than the formula required, as the full performance-based compensation for fiscal 1997. Both the Performance Goal and the Stock Appreciation Amount established in March 1998 resulted in nil being payable to Mr. Lowenthal for fiscal 1998. The Performance Goal established in March 1999 resulted in $981,510 payable to Mr. Lowenthal for fiscal 1999 based on the following formula: (a) 3% of the excess of the Company's actual Return on Equity over a Base Return on Equity of 15% (based on Shareholders' Equity as at December 31, 1998), up to a 25% Return on Equity; (b) plus 4% of the excess of the Company's actual Return on Equity over a 25% Return on Equity (based on Shareholders' Equity as at December 31, 1998); ( c) plus 3% of the amount by which the Company's consolidated net profit for the year ended December 31, 1999 exceeds the average of the Company's consolidated net profit for the three years ended December 31, 1998, 1997 and 1996. The Stock Appreciation Amount resulted in nil being payable to Mr. Lowenthal for fiscal 1999.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) The following table sets forth information as of December 31, 1999 as to the only persons known to the Company which own beneficially more than 5% of the Class B Shares (the only class of voting stock of the Company). There are no outstanding rights to acquire beneficial ownership of any Class B Shares.
Title of Class Class B
Identity of Person or Group/ Mailing Address Amount owned Percent of class
A.G. Lowenthal 50,484 (1) 50.6% c/o Fahnestock & Co. Inc. 125 Broad St New York, NY 10004
O. Roberts 44,309 (2) 44.4% c/o Fahnestock Viner Holdings Inc. Suite 1110, Box 2015 20 Eglinton Ave. W. Toronto, Canada M4R 1K8 ____________________________________________________________________ 1. All shares are held of record by Phase II Financial Limited, an Ontario corporation ("Phase II") wholly-owned by Mr. Lowenthal who is Chairman of the Company. 2. Mrs. Roberts, who is the mother of Elaine Roberts, President of the Company, owns 100 shares directly and 44,209 shares indirectly through Elka Estates Limited, an Ontario corporation ("Elka") which is wholly-owned by Mrs. Roberts.
(b) The following table sets forth information as of December 31, 1999 as to the ownership of Class A Shares and Class B Shares, the only classes of equity securities of the Company, by persons who are directors of the Company, naming them, and as to directors and officers of the Company as a group, without naming them.
Title of Class Class A Shares
Name of Person or Group Amount Owned Percentage of Class
A.G. Lowenthal 2,462,981 (1) 20% E.K. Roberts 120,994 1% A.W. Oughtred 6,750 (4) * J.L. Bitove 31,730 (4) * R. Crystal 12,500 (3) * K.W. McArthur 35,000 * B. Winberg 6,950 (4) * Officers and Directors as a group (7 members) 2,676,905 (1),(3),(4) 22%
Title of Class Class B Shares
Name of Person or Group Amount Owned Percentage of Class
A.G. Lowenthal 50,484 (2) 51% E.K. Roberts 108 * A.W. Oughtred 0 * J.L. Bitove 20 * R. Crystal 0 * K.W. McArthur 0 * B. Winberg 0 * Officers and Directors as a group (7 members) 50,612 51% _______________________________________________________________________ (1) Mr. Lowenthal is the sole general partner of Phase II Financial L. P., a New York limited partnership, ("Phase II L.P.") which is the record holder of 2,450,900 Class A Shares. Mr. Lowenthal holds 10,731 Class A Shares through the Company's 401(k) plan and 151,350 Class A Shares directly. (2) Phase II, an Ontario corporation wholly-owned by Mr. Lowenthal, is the holder of record of all such shares. (3) 12,500 Class A Shares are beneficially owned in respect of Class A Shares currently issuable upon exercise of options issued under the Company's ESO. (4) 6,250 Class A Shares are beneficially owned in respect of Class A Shares currently issuable upon exercise of options issued under the Company `s EIP. * less than 1%
(c) There are no arrangements, known to the Company, the operation of which may at a subsequent date result in a change of control of the Company.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None of the directors or officers of the Company or any associate of any such director or officer was indebted to the Company or its subsidiaries at any time during the last three years except as follows:
During the last three years Albert G. Lowenthal and Phase II L.P. have maintained margin accounts with Fahnestock. Such margin accounts are substantially on the same terms, including interest rates and collateral, as those prevailing from time to time for comparable transactions with non-affiliated persons and do not involve more than the normal risk of collectability. The maximum amount of borrowings outstanding during 1999 was nil ($266,000 and nil in 1998 and 1997, respectively). Mr. Robert Neuhoff also maintains a margin account with Fahnestock. The maximum borrowings outstanding during 1999 was $996,000 ($984,000 and $876,000 in 1998 and 1997, respectively).
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (i)Financial Statements The response to this portion of Item 14 is submitted as a separate section of this report. See pages to
(ii)Financial Statement Schedules Not Applicable
(iii)Listing of Exhibits The exhibits which are filed with this Form 10-K or are incorporated herein by reference are set forth in the Exhibit Index which immediately precedes the exhibits to this report.
(b) Reports on Form 8-K None
(c) Exhibits See the Exhibit Index included hereinafter.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 20th day of March, 2000.
FAHNESTOCK VINER HOLDINGS INC.
BY:/s/E.K. Roberts E.K. Roberts, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date
/s/J.L. Bitove Director March 20, 2000 J.L. Bitove
/s/ R. Crystal Director March 20, 2000 R. Crystal
/s/ A.G. Lowenthal Chairman, Chief March 20, 2000 A.G. Lowenthal Executive Officer, Director
/s/ K.W. McArthur Director March 20, 2000 K.W. McArthur
/s/ A.W. Oughtred Secretary, Director March 20, 2000 A.W. Oughtred
/s/ E.K. Roberts President, Treasurer, March 20, 2000 E.K. Roberts Chief Financial Officer, Director
/s/ B.Winberg Director March 20, 2000 B. Winberg
__________________________________________________________________________ 	INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 	FAHNESTOCK VINER HOLDINGS INC.
Management's Responsibility for Consolidated Financial Statements
Report of Independent Accountants
Consolidated Balance Sheet as of December 31, 1999 and 1998
Consolidated Statement of Operations for the three years ended December 31, 1999, 1998 and 1997
Consolidated Statement of Retained Earnings for the three years ended December 31, 1999, 1998 and 1997
Consolidated Statement of Cash Flows for the three years ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements ________________________________________________________________________ MANAGEMENT'S RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements of Fahnestock Viner Holdings Inc. were prepared by management in accordance with generally accepted accounting principles in the United States, which conform in all material respects with accounting principles generally accepted in Canada. The significant accounting policies of the Company are described in Note 1 to the consolidated financial statements.
Management is responsible for the integrity and objectivity of the information contained in the consolidated financial statements. In order to present fairly the financial position of the Company and the results of its operations and the changes in its financial position, estimates which are necessary are based on careful judgements and have been properly reflected in the consolidated financial statements. Management has established systems of internal control which are designed to provide reasonable assurance that assets are safeguarded from loss or unauthorized use and to produce reliable accounting records for the preparation of financial information.
PricewaterhouseCoopers LLP, the Company's independent accountants, conduct an audit of the consolidated financial statements in accordance with generally accepted auditing standards in the United States. Their audit includes a review and evaluation of the Company's systems of internal control, and such tests and procedures as they consider necessary in order to form an opinion as to whether the consolidated financial statements are presented fairly in accordance with accounting principles generally accepted in the United States.
The Board of Directors is responsible for ensuring that management fulfils its responsibilities for financial reporting and internal control. The Board of Directors is assisted in this responsibility by its Audit Committee, a majority of whose members are not officers of the Company. The Audit Committee meets with management as well as with the independent accountants to review the internal controls, consolidated financial statements, and the auditors' report. The Audit Committee reports its findings to the Board of Directors for its consideration in approving the consolidated financial statements for issuance to the shareholders.
Management recognizes its responsibility for conducting the Company's affairs in compliance with established financial standards, and applicable laws and regulations, and for maintaining proper standards of conduct for its activities.
/s/A.G. Lowenthal /s/E.K. Roberts A.G. Lowenthal, E.K. Roberts, Chairman of the Board President and Treasurer and Chief Executive Officer
February 29, 2000 _________________________________________________________________________ REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS OF FAHNESTOCK VINER HOLDINGS INC.
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, retained earnings, and cash flows present fairly, in all material respects, the financial position of Fahnestock Viner Holdings Inc. and its subsidiaries at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
New York, New York February 29, 2000.
________________________________________________________________________ FAHNESTOCK VINER HOLDINGS INC. CONSOLIDATED BALANCE SHEET AS AT DECEMBER 31, 1999 1998 Expressed in thousands of U.S. dollars
ASSETS Current assets Cash and short-term deposits $10,838 $11,501 Restricted deposits (note 2) 2,392 2,312 Securities purchased under agreement to resell 74,560 12,174 Deposits with clearing organizations 5,955 7,072 Receivable from brokers and clearing organizations (note 1) 136,767 167,018 Receivable from customers 436,320 334,664 Securities owned, at market value (notes 3 and 5) 63,244 88,579 Demand notes receivable 30 30 Other 18,988 26,912
749,094 650,262 Other assets Stock exchange seats (approximate market value $6,148; $4,798 in 1998) 1,318 1,507 Fixed assets, net of accumulated depreciation of $11,956; $8,896 in 1998 10,872 9,286 Goodwill, at amortized cost 5,244 5,708
17,434 16,501
$766,528 $666,763
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Drafts payable $24,765 $22,734 Bank call loans (note 5) 66,322 42,217 Securities sold under agreement to repurchase 69,031 664 Payable to brokers and clearing organizations (note 1) 209,151 235,029 Payable to customers 125,207 115,878 Securities sold, but not yet purchased, at market value (note 3) 18,661 41,104 Accounts payable and other liabilities 45,301 40,119 Income taxes payable 20,672 2,665 Subordinated loans payable (note 4) 30 30
579,140 500,440
Commitments and contingencies (note 10)
Shareholders' equity Share capital (note 6) 12,147,569 Class A non-voting shares (1998 - 12,241,269 shares) 32,518 36,392 99,680 Class B voting shares 133 133
32,651 36,525 Contributed capital (note 7) 3,262 2,196 Retained earnings 151,475 127,602
187,388 166,323
$766,528 $666,763
The accompanying notes are an integral part of these consolidated financial statements.
FAHNESTOCK VINER HOLDINGS INC. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,
1999 1998 1997 Expressed in thousands of U.S. dollars, except per share amounts
REVENUE: Commissions $118,747 $114,889 $103,323 Principal transactions, net 71,014 32,727 65,972 Interest 43,835 42,028 40,123 Underwriting fees 15,550 12,655 11,042 Advisory fees 22,440 21,742 15,808 Other 7,525 8,740 5,890
279,111 232,781 242,158 EXPENSES: Compensation and related expenses 143,557 130,064 119,785 Clearing and exchange fee 8,870 8,634 9,118 Communications 21,421 20,930 17,879 Occupancy costs 12,722 13,246 11,025 Interest 21,326 21,831 20,161 Other 20,749 16,353 17,706
228,645 211,058 195,674
Profit before income taxes 50,466 21,723 46,484 Income tax provision (note 8) 23,076 9,276 19,753 NET PROFIT FOR YEAR $27,390 $12,447 $26,731 Profit per share (note 9) - basic $2.19 $0.99 $2.14 - diluted $2.17 $0.96 $2.08
The accompanying notes are an integral part of these consolidated financial statements.
FAHNESTOCK VINER HOLDINGS INC. CONSOLIDATED STATEMENT OF RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31,
1999 1998 1997 Expressed in thousands of U.S. dollars
Retained earnings, beginning of the year $127,602 $118,686 $94,957 Net profit for the year 27,390 12,447 26,731 Dividends (3,517) (3,531) (3,002)
Retained earnings, end of the year $151,475 $127,602 $118,686
The accompanying notes are an integral part of these consolidated financial statements.
FAHNESTOCK VINER HOLDINGS INC. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31,
1999 1998 1997 Expressed in thousands of U.S. dollars
Cash flows from operating activities: Net profit for the year $27,390 $12,447 $26,731 Adjustments to reconcile net profit to net cash provided by (used in) operating activities: Non-cash items included in net profit: Depreciation and amortization 3,527 2,905 1,357 Gain on sale of exchange seat (492) - - Decrease (increase) in operating assets: Restricted deposits (80) (775) 365 Securities purchased under agreement to resell (62,386) (12,174) - Deposits with clearing organizations 1,117 (2,338) (1,033) Receivable from brokers and clearing organizations 30,251 192,187 (165,787) Receivable from customers (101,656) 16,143 556 Securities owned 25,335 (25,317) (17,693) Other assets 7,924 1,033 (13,919) Increase (decrease) in operating liabilities: Drafts payable 2,031 4,227 6,069 Securities sold under agreement to repurchase 68,367 664 - Payable to brokers and clearing organizations (25,878) (187,144) 226,095 Payable to customers 9,329 (1,155) 5,055 Securities sold, but not yet purchased (22,443) 10,014 (2,024) Accounts payable and other liabilities 5,181 (5,452) 3,010 Income taxes payable 18,007 (13,387) 3,708 Cash (used in) provided by operating activities (14,476) (8,122) 72,490
Cash flows from investing activities: Purchase of First of Michigan Capital Corporation, net of cash acquired - - (34,340) Proceeds from sale of exchange seat 655 - 1,358 Purchase of fixed assets (4,622) (2,564) (5,152) Cash (used in) investing activities (3,967) (2,564) (38,134)
Cash flows from financing activities: Cash dividends paid on Class A non-voting and Class B shares (3,517) (3,531) (3,002) Issuance of Class A non-voting shares 4,164 1,899 1,577 Repurchase of Class A non-voting shares for cancellation (8,038) (6,290) (482) Tax benefit from employee options exercised 1,066 863 234 Increase (decrease) in bank call loans 24,105 18,462 (31,262) Cash provided by (used in) financing activities 17,780 11,403 (32,935)
Net (decrease) increase in cash and short-term deposits (663) 717 1,421 Cash and short-term deposits, beginning of year 11,501 10,784 9,363 Cash and short-term deposits, end of year $10,838 $11,501 $10,784
The accompanying notes are an integral part of these consolidated financial statements.
FAHNESTOCK VINER HOLDINGS INC. Notes to Consolidated Financial Statements (Expressed in U.S. dollars) December 31, 1999
GENERAL Fahnestock Viner Holdings Inc. (the "Company") is incorporated under the laws of Ontario. The Company's principal subsidiary, Fahnestock & Co. Inc. ("Fahnestock") is a member of the New York Stock Exchange, the American Stock Exchange and several other regional exchanges in the United States.
1. Summary of significant accounting policies These consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States for the purpose of inclusion in the annual report on Form 10-K. In all material respects, they conform with accounting principles generally accepted in Canada which have been used to prepare the consolidated financial statements for purposes of inclusion in the annual report to shareholders, except the calculation of earnings per share.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates are related to income taxes and contingencies. Actual results could be materially different from these estimates.
Since operations are predominantly based in the United States, these consolidated financial statements are presented in U.S. dollars.
The following is a summary of significant accounting policies followed in the preparation of these consolidated financial statements:
(a) Basis of consolidation The consolidated financial statements include the accounts of the Company and all subsidiaries. The major subsidiaries, wholly- owned and operated in the U.S., are as follows:
	Fahnestock & Co. Inc.		-broker/dealer in securities 	Freedom Investments, Inc.	-discount broker in securities 	Hudson Capital Advisors, Inc.	-investment advisory services 	First of Michigan Corporation 	-broker/dealer in securities (until December 31,1998)
All significant intercompany balances and transactions have been eliminated in the preparation of the consolidated financial statements.
(b) Brokerage operations Transactions in proprietary securities and related revenues and expenses are recorded on a trade date basis.
Customers' securities and commodities transactions are reported on a settlement date basis which is generally three business days. Related commission income and expense is recorded on a trade date basis.
Securities owned and securities sold but not yet purchased are reported at market value generally based upon quoted prices. Realized and unrealized changes in market value are recognized in net trading revenues in the year in which the change occurs.
Other financial instruments are carried at fair value or amounts that approximate fair value.
(c) Cash and cash equivalents The Company defines cash equivalents as highly liquid investments with original maturities of less than 90 days that are not held for sale in the ordinary course of business.
(d) Drafts payable Drafts payable represent amounts drawn by the Company against a bank.
(e) Goodwill Goodwill, acquired upon the acquisition of Fahnestock, Fahnestock International Inc. and First of Michigan Capital Corporation, is being amortized to operations on a straight-line basis over twenty years. Negative goodwill arising as a result of the acquisition of Hopper Soliday Corporation and subsidiaries and Reich & Co., Inc. is being amortized to operations on a straight-line basis over twenty years.
(f) Fixed assets Fixed assets and stock exchange seats are stated at cost. Depreciation of furniture and fixtures is provided on the straight-line method generally over five to seven years. Leasehold improvements are amortized on a straight-line basis over the shorter of the life of the asset or the life of the lease.
(g) Foreign currency translations Canadian currency balances have been translated into U.S. dollars as follows: monetary assets and liabilities at exchange rates prevailing at year end; revenue and expenses at average rates for the year; and non-monetary assets and share capital at historic rates.
(h) Income taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes". Deferred income tax assets and liabilities arise from "temporary differences" between the tax basis of an asset or liability and its reported amount in the consolidated financial statements. Deferred tax balances are determined by applying the enacted tax rates.
(i)Securities lending activities Securities borrowed and securities loaned are carried at the amounts of cash collateral advanced or received.
Securities borrowed transactions require the Company to deposit cash, letters of credit, or other collateral with the lender. The Company receives cash or collateral in an amount generally in excess of the market value of securities loaned.
The Company monitors the market value of securities borrowed and loaned on a daily basis and may require counterparties to deposit additional collateral or return collateral pledged when appropriate.
Included in receivable from brokers and clearing organizations are deposits paid for securities borrowed of $113,147,000 (1998- $138,279,000). Included in payable to brokers and clearing organizations are deposits received for securities loaned of $199,132,000 (1998-$226,763,000).
(j) Resale and repurchase agreements Transactions involving purchases of securities under agreements to resell ("reverse repurchase agreements") or sales of securities under agreements to repurchase ("repurchase agreements") are treated as collateralized financing transactions and recorded at their contractual resale or repurchase amounts plus accrued interest.
The Company obtains possession of collateral with a market value equal to or in excess of the principal amount loaned under reverse repurchase agreements. Collateral is valued daily, and adjusted when appropriate.
(k) Segment Reporting In 1998 the Company adopted Statement of Financial Accounting Standards (FAS) 131, Disclosures about Segments of an Enterprise and Related Information. FAS 131 determines segments based upon the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. FAS 131 also requires disclosures about products and services, geographic areas, and major customers. The adoption of FAS 131 did not affect results of operations or financial position but did affect the disclosure of segment information. (See Note 14).
2. Restricted deposits Deposits of $2,392,000 (1998-$2,312,000) were held at year end in a special reserve bank account for the exclusive benefit of customers in accordance with regulatory requirements. To the extent permitted, these deposits are invested in interest bearing accounts collateralized by qualified securities.
3. Securities owned and sold, but not yet purchased (at market value) 1999 1998 Securities owned consist of: Corporate equities $25,387,000 $26,580,000 Corporate debt 14,380,000 18,905,000 U.S. government and agency and state and municipal government obligations 19,564,000 26,098,000 Options 3,000 138,000 Money market funds 3,910,000 16,858,000
$63,244,000 $88,579,000
Securities sold, but not yet purchased consist of: Corporate equities $4,454,000 $21,129,000 Corporate debt 3,372,000 4,376,000 U.S. government and agency and state and municipal government obligations 10,835,000 15,599,000
$18,661,000 $41,104,000
4. Subordinated loans payable 							 1999		 1998 Due October 31, 2000, at 5.5% $30,000 $30,000
5. Bank call loans Bank call loans, primarily payable on demand, bear interest at various rates but not exceeding the broker call rate, which was 7.25% at December 31, 1999. These loans, collateralized by firm and customer securities with market values of approximately $35,408,000 and $148,436,000, respectively, are primarily with two money center banks. Details of the bank call loans are as follows:
December 31, 1999 1998 1997
Year-end balance $66,322,000 $42,217,000 $23,755,000 Weighted interest rate (at end of year) 4.82% 6.03% 6.31% Maximum balance (at any month end) $66,322,000 $56,432,000 $45,650,000 Average amount outstanding (during the year) (1) $39,505,000 $27,246,000 $23,779,000 Weighted average interest rate (during the year) (2) 3.29% 4.30% 4.16%
(1) The average amount outstanding during the year was computed by adding amounts outstanding at the end of each month and dividing by twelve.
(2) The weighted average interest rate during the year was computed by dividing the actual interest expense by the average bank call loans outstanding at the end of each month.
Aggregate interest paid by the Company on a cash basis during the years ended December 31, 1999, 1998, and 1997 was $19,378,000, $16,643,000, and $21,449,000, respectively.
6. Share capital The Company's authorized share capital, all of which is without par value, consists of (a) an unlimited number of first preference shares issuable in series; (b) an unlimited number of Class A non- voting shares; and (c) 99,680 Class B voting shares.
The Class A non-voting and the Class B voting shares are equal in all respects except that the Class A non-voting shares are non- voting.
The Company's issued and outstanding share capital is as follows (no first preference shares have been issued):
1999 1998 1997 12,147,569 (12,241,269 in 1998 and 12,408,760 in 1997) Class A non-voting shares $32,518,000 $36,392,000 $40,783,000 99,680 Class B voting shares 133,000 133,000 133,000
$32,651,000 $36,525,000 $40,916,000
Under the Company's 1996 Equity Incentive Plan as amended May 17, 1999 ("EIP"), the compensation and stock option committee of the board of directors of the Company may grant options to purchase Class A Shares to officers and key employees of the Company and its subsidiaries. Grants of options are made to the Company's independent directors on a formula basis. Options are generally granted for a five year term and generally vest at the rate of 25% of the amount granted for each year held. The authorized number of Class A non-voting shares that may be made subject to options under the EIP is 2,850,000.
1999 1998
Number of Weighted Number of Weighted Shares Average Shares Average Exercise Exercise Price Price Options outstanding, beginning of year 1,226,110 $12.71 1,120,030 $10.47 Options granted 755,909 $14.96 392,860 $18.24 Options exercised (413,000) $7.93 (206,000) $5.61 Options forfeited (51,350) $15.16 (40,780) $18.40 Options outstanding, end of year 1,557,669 $15.18 1,226,110 $12.71 Options vested, end of year 152,750 $9.04 376,500 $7.85
The following table summarizes stock options outstanding and exercisable as at December 31, 1999.
Range of Number Weighted Weighted Number Weighted Exercise Outstanding Average Average Exercisable Average Price Remaining Exercise Exercise In U.S. $ Contractual Price Price Life
$5.46 - $14.38 268,250 1.4 years $11.06 127,750 $11.07 $14.50 - $21.50 1,289,419 3.9 years $16.04 25,000 $17.48
$5.46 - $21.50 1,557,669 3.4 years $15.18 152,750 $12.12
The Company issued Class A non-voting shares from Treasury to the Company's 401(k) plan as follows:
Year Number of Date Issue price Total consideration shares of issue per share paid
1997 42,000 January 14, 1998 $17.6875 $743,000 1998 56,000 January 12, 1999 $15.875 $889,000 1999 nil
In 1999, the Company paid cash dividends to holders of Class A non-voting and Class B shares as follows (U.S. $0.28 in 1998):
Dividend per share Record Date Payment Date
US$0.07 February 12, 1999 February 26, 1999 US$0.07 May 7, 1999 May 21, 1999 US$0.07 August 6, 1999 August 20, 1999 US$0.07 November 5, 1999 November 19, 1999
The Company may purchase up to 758,000 Class A non-voting shares by way of a Normal Course Issuer Bid through the facilities of The Toronto Stock Exchange and/or the New York Stock Exchange. During the year ended December 31, 1999, the Company purchased 275,200 Class A non-voting shares for a total consideration of $3,853,000 under a Normal Course Issuer Bid which expired on July 2, 1999 and 287,500 Class A non-voting shares for a total consideration of $4,185,000 under the currently effective Normal Course Issuer Bid (415,500 shares for $6,290,000 in 1998 and 27,000 shares for $482,000 in 1997). Unless terminated earlier by the Company, it may continue to purchase shares up to July 4, 2000.
7. Contributed capital Contributed capital represents the tax benefit on the difference between market price and exercise price on employee stock options exercised.
8. Income taxes The income tax provision shown in the consolidated statement of operations is reconciled to amounts of tax that would have been payable (recoverable) from the application of combined federal, state, provincial and local tax rates to pre-tax profit as follows:
1999 1998 1997
Profit before income tax $50,466,000 $21,723,000 $46,484,000
U.S. federal tax at 35% $17,663,000 $7,589,000 $16,289,000 Canadian tax at 44% - 17,000 (25,000) Combined state and local tax 4,444,000 1,870,000 4,263,000
Income taxes before under-noted 22,107,000 9,476,000 20,527,000 Tax effect of non-taxable interest and dividends (177,000) (244,000) (88,000) Tax effect of differences between accounting and taxable income 1,146,000 44,000 (686,000)
Income taxes $23,076,000 $9,276,000 $19,753,000
Profit before income tax provision Canadian operations - $39,000 $( 56,000) U.S. operations $50,466,000 $21,684,000 $46,540,000
The current U.S. income tax provision in 1999 is $23,076,000 ($9,276,000 in 1998 and $19,753 in 1997). The current Canadian income tax provision in 1999 is nil (nil in 1998 and 1997).
Income taxes included in the consolidated statements of income represent the following: Year ended December 31, 1999 1998 1997
U.S. Federal tax $16,239,000 $6,399,000 $13,218,000 State and local tax 6,837,000 2,877,000 6,535,000 Canadian tax - - -
$23,076,000 $9,276,000 $19,753,000
Aggregate deferred tax assets, which relate primarily to fixed assets and non-deductible expenses, are included in other assets and amounted to approximately $3,100,000.
On a cash basis, the Company paid income taxes for the years ended December 31, 1999, 1998 and 1997 in the amounts of $4,700,000, $21,170,000 and $15,588,000, respectively.
9. Earnings per share 1999 1998 1997 Basic weighted average number of shares outstanding 12,479,550 12,575,905 12,494,054 Stock options 114,902 365,412 383,887 Diluted common shares 12,594,452 12,941,317 12,877,941
Net profit $27,390,000 $12,447,000 $26,731,000
Basic profit per share $2.19 $0.99 $2.14 Diluted profit per share $2.17 $0.96 $2.08
Statement of Financial Accounting Standards No.128 - Earnings Per Share ("FAS 128") required a change in the method of calculation for both basic and diluted earnings per share for periods ended after December 15, 1997. Earnings per share for the year ended December 31, 1997 have been restated to comply with FAS 128. The dilutive impact of stock options has been determined by application of the treasury stock method.
FASB Statement No.123 "Accounting for Stock-Based Compensation" ("SFAS 123") was issued in 1995, and changed the method for accounting for stock compensation plans similar to those of the Company.
Adoption of SFAS 123's fair value recognition method is optional. The Company has chosen to continue to apply Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock compensation plans.
The unaudited proforma results if compensation expense for the Company's 1999 grants for stock compensation had been determined in accordance with SFAS 123 are as follows:
December 31, 1999 December 31, 1998 December 31, 1997 As As As Reported Proforma Reported Proforma Reported Proforma
Net profit (000's omitted) $27,390 $26,215 $12,447 $11,857 $26,731 $26,406 Basic profit per share $2.19 $2.10 $0.99 $0.94 $2.14 $2.11 Diluted profit per share $2.17 $2.08 $0.96 $0.92 $2.08 $2.05
For purposes of the proforma presentation, the Company determined fair value using an option pricing model with the following weighted average assumptions for grants in 1999: risk- free interest rates ranging from 4.78% to 6.34% (4.02% to 5.63% in 1998 and 5.68% to 6.37% in 1997), expected dividend yield of 1.8%, expected life of 5 years and expected volatility ranging from 24% to 48% (24% to 30% in 1998 and 28% to 33% in 1997). The weighted average fair value of options granted during 1998 was $3,889,000 ($1,747,000 in 1998 and $1,054,000 in 1997). The fair value is being amortized over five years on an after-tax basis, where applicable for purposes of proforma presentation. Stock options generally expire five years after the date of grant or three months after the date of retirement, if earlier. Stock options generally vest over a five year period with 0% in year one, 25% of the shares becoming exercisable on each of the next three anniversaries of the grant date and the balance vesting in the last six months of the option life. The vesting period is at the discretion of the Compensation and Stock Option Committee and is determined at the time of grant.
The effects of applying SFAS 123 in this proforma presentation are not indicative of future amounts because it does not take into consideration future grants, any difference between actual and assumed forfeitures, and only reflects grants subsequent to December 15, 1994.
10. Commitments and contingencies (a) The Company and its subsidiaries are obligated under lease agreements expiring at various dates through 2013 to pay the following future minimum rentals:
2000 $7,056,000 2001 6,198,000 2002 5,129,000 2003 4,518,000 2004 and thereafter 24,491,000 Total $47,392,000
Certain of the leases contain provisions for rent escalation based on increases in costs incurred by the lessor.
(b) The Company's rent expense for the years ended December 31, 1999, 1998 and 1997 was $8,182,000, $8,226,000 and $6,689,000, respectively.
(c) The Company, through its subsidiaries, maintains a defined contribution plan covering substantially all full-time U.S. employees. The Fahnestock plan provides that the Company may make discretionary contributions. For certain employees who were formerly employed by FOM, contributions are made in accordance with the terms of the plan document.
FOM sponsors an unfunded Supplemental Executive Retirement Program ("SERP"), which is a non-qualified plan that provides certain former officers additional retirement benefits. Benefits payable under the SERP were approximately $2,208,000 at December 31, 1999.
The Company made contributions to the plans of $2,692,000, $2,344,000 and $2,207,000 in 1999, 1998 and 1997, respectively.
(d) At December 31, 1999, the Company has collateralized and uncollateralized letters of credit for $23,500,000. Collateral for these letters of credit include marketable securities of approximately $19,639,000, pledged to two financial institutions. No amounts have been drawn on the letters of credit at December 31, 1999.
(e) The Company is involved in certain litigation arising in the ordinary course of business. Management believes, based upon discussions with legal counsel, that the outcome of this litigation will not have a material effect on the Company's financial position. The materiality of legal matters to 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.
(f) The Company's principal subsidiary, Fahnestock, is subject to the uniform net capital requirements of the Securities and Exchange Commission ("SEC") under Rule 15c3-1 (the "Rule"). Fahnestock computes its net capital requirements under the alternative method provided for in the Rule which requires that Fahnestock maintain net capital equal to two percent of aggregate customer related debit items, as defined in SEC Rule 15c3-3. At December 31, 1999, Fahnestock had net capital of $130,166,000 which was $119,888,000 in excess of the $10,278,000 required to be maintained at that date.
(g) In accordance with the Securities and Exchange Commission's No Action Letter dated November 3, 1998, the Company has computed a reserve requirement for the proprietary accounts of introducing firms as of December 31, 1999. The Company had no deposit requirements as of December 31, 1999.
11. Financial instruments with off-balance sheet risk and concentration of credit risk In the normal course of business, the Company's securities activities involve execution, settlement and financing of various securities transactions for customers. These activities may expose the Company to risk in the event customers, other brokers and dealers, banks, depositories or clearing organizations are unable to fulfill their contractual obligations.
The Company is exposed to off-balance sheet risk of loss on unsettled transactions in the event customers and other counterparties are unable to fulfill their contractual obligations. It is the Company's policy to periodically review, as necessary, the credit standing of each counterparty with which it conducts business.
Securities sold, but not yet purchased represent obligations of the Company to deliver the specified security at the contracted price and thereby create a liability to repurchase the security in the market at prevailing prices. Accordingly, these transactions result in off-balance-sheet risk, as the Company's ultimate obligation to satisfy the sale of securities sold, but not yet purchased may exceed the amount recognized on the balance sheet. Securities positions are monitored on a daily basis.
The Company's customer financing and securities lending activities require the Company to pledge customer securities as collateral for various financing sources such as bank loans and securities lending. At December 31, 1999, approximately $118,858,000 of customer securities are pledged as collateral for securities lending activity. Included in receivable from brokers and clearing organizations are receivables from five major broker-dealers totalling $67,672,000.
The Company monitors the market value of collateral held and the market value of securities receivable from others. It is the Company's policy to request and obtain additional collateral when exposure to loss exists. In the event the counterparty is unable to meet its contractual obligation to return the securities, the Company may be exposed to off-balance sheet risk of acquiring securities at prevailing market prices.
As part of its trading strategy, the Company uses derivative financial instruments. Principal transactions revenue, including derivatives, for the year ended December 31, 1999 included revenue from trading equities of $57,078,000 ($14,617,000 in 1998 and $53,828,000 in 1997) and revenue from trading fixed income securities of $13,936,000 ($18,110,000 in 1998 and $12,144,000 in 1997).
Futures contracts, comprised mainly of stock index futures, represent commitments to purchase or sell securities at a future date and at a specified price. Credit risk and market risk exist with respect to these instruments. Credit risk associated with the contracts is limited to amounts recorded in the balance sheet. Notional or contractual amounts are used to express the volume of these transactions, and do not represent the amounts potentially subject to market risk. At December 31, 1999, the Company had open contracts to sell stock index futures contracts with notional values of approximately $22,263,000 ($18,682,000 in 1998). The fair value of these derivative financial instruments included in brokers and clearing organizations at December 31, 1999 was approximately $974,000 ($1,012,000 in 1998), and the monthly average fair values of the instruments during the year were assets of $267,000 and liabilities of $335,000 (assets of $738,000 and liabilities of $265,000 in 1998).
Cash is deposited to satisfy initial margin requirements for open futures contracts and is included in receivable from brokers and clearing organizations with any gain or loss from the unsettled futures transactions.
At December 31, 1999 the Company had outstanding commitments to buy and sell of $1,466,000 and $188,000, respectively, of mortgage-backed securities on a when issued basis. These commitments have off-balance sheet risks similar to those described above.
12. Impact of Recently Issued Accounting Standards The Company has adopted Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" and No. 131, "Disclosures about Segments of an Enterprise and Related Information" in 1998.
New accounting standards issued but not effective would not have a material impact on the Company's financial statements.
13. Related Party Transactions The Company has notes and accounts receivable for employees, net, of approximately $3,212,000 at December 31, 1999. These amounts will be forgiven over a three year period from the initial date of the loan and are contingent on their continued employment with the Company. The unamortized potion of the notes become due on demand in the event the employee departs during the three year period.
14. Segment Information The Company has determined that its reportable segments are those that are based on the Company's method of internal reporting, which disaggregates its retail business by branch and its proprietary and investment banking businesses by product. The Company's segments are: Retail Branches which includes all business generated by the Company's 73 branches, including commission and fee income earned on client transactions; Capital Markets which includes market-making activities in over-the- counter equities, institutional trading in both fixed income and equities, structured assets transactions, bond trading, trading in mortgage-backed securities, corporate underwriting activities, public finance activities, and syndicate participation; Interest which is derived from client margin accounts, stock loan activities and financing activities; and Asset Management which includes fees from money market funds and the investment management services of Hudson Capital and Fahnestock's asset management divisions employing various programs to professionally manage client assets either in individual accounts or in funds. The Company evaluates the performance of its segments and allocates resources to them based upon profitability.
The table below presents information about the reported operating income of the Company for the year ended December 31, 1999. 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.
Year ended December 31, 1999 1998 1997
Revenue: Retail Branches $148,584,000 $138,862,000 $116,173,000 Capital Markets 74,027,000 38,153,000 74,728,000 Asset Management 12,177,000 11,740,000 10,031,000 Interest 39,753,000 38,810,000 38,917,000 Other 4,570,000 5,216,000 2,309,000 Total $279,111,000 $232,781,000 $242,158,000
Operating Income: Retail Branches $5,220,000 $3,579,000 $1,712,000 Capital Markets 16,307,000 (5,530,000) 19,425,000 Asset Management 7,760,000 7,361,000 6,282,000 Interest 18,382,000 17,078,000 16,552,000 Other 2,797,000 (765,000) 2,513,000 Total $50,466,000 $21,723,000 $46,484,000
15. Subsequent event On January 29, 2000, a cash dividend of U.S.$0.07 per share (totalling $855,000) was declared payable on February 25, 2000 to holders of Class A non-voting and Class B shares of record on February 11, 2000.
EXHIBIT INDEX Unless designated by an asterisk indicating that such document has been filed herewith, the Exhibits listed below have been heretofore filed by the Company pursuant to Section 13 or 15(d) of the Exchange Act and are hereby incorporated herein by reference to the pertinent prior filing. Number/ Description
3(a) Articles of Incorporation, as amended, of Fahnestock Viner Holdings Inc. (previously filed as exhibits to Form 20-F for the fiscal year ended December 31, 1986 and 1988).
3(b) By-Laws, as amended, of Fahnestock Viner Holdings Inc. (previously filed as an exhibit to Form 20-F for the fiscal year ended December 31, 1987).
10(b) Supplemental Legend to 1986 Incentive Stock Option Plan (previously filed as an exhibit to the registrant's registration statement on Form S-8 (file no. 33-38134)
10(c) Supplemental Legend to 1986 Employee Stock Option Plan (previously filed as an exhibit to the registrant's registration statement on Form S-8 (file no. 33-38134)
10(d) Fahnestock Viner Holdings Inc. 1986 Incentive Stock Option Plan , Amended and Restated as at April 26, 1991 (previously filed as an exhibit to Form 10-K for the year ended December 31, 1992)
10(e) Fahnestock Viner Holdings Inc. 1986 Employee Stock Option Plan, Amended and Restated as at April 26, 1991 (previously filed as an exhibit to Form 10-K for the year ended December 31, 1992)
10(f) Fahnestock Viner Holdings Inc. 1996 Equity Incentive Plan, Amended and Restated as at January 7, 1997 (previously filed as an exhibit to Form 10-K for the year ended December 31, 1996)
10(g) Fahnestock Viner Holdings Inc. 1996 Equity Incentive Plan Amendment No. 1 dated March 25, 1997 (previously filed as an exhibit filed to Form 10-K for the year ended December 31, 1997)
10(h) Lease document for the premises at 125 Broad Street, New York, NY dated May 27, 1997 between NY Broad Holdings, Inc. and Fahnestock & Co. Inc. (previously filed as an exhibit filed to Form 10-K for the year ended December 31, 1997)
10(i) Lease document for the premises at 300 River Place, Detroit, MI dated February 28, 1997 between The Stroh Companies, Inc. and First of Michigan Corporation (previously filed as an exhibit filed to Form 10-K for the year ended December 31, 1997)
10(j) Stock Appreciation Agreement between Fahnestock & Co. Inc. and Albert G. Lowenthal dated February 15, 1995 (previously filed as an exhibit filed to Form 10-K for the year ended December 31, 1997)
10(k) Performance-Based Compensation Agreement between Fahnestock Viner Holdings Inc. and Albert G. Lowenthal dated March 25, 1997 (previously filed as an exhibit filed to Form 10-K for the year ended December 31, 1997)
10(l) Securities Purchase Agreement dated June 11, 1997, between 1888 Limited Partnership and DST Systems Inc. and Purchaser (previously filed as an exhibit to Schedule 14D-1 and Schedule 13D for First of Michigan Capital Corporation dated June 18, 1997)
Subsidiaries of the registrant (filed herewith) *
Financial Data Schedules, as required by Item 601(c)(2)(1) of Regulations S-K and S-B (filed herewith) *
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