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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission file number 1-12043
FAHNESTOCK VINER HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Ontario, Canada 98-0080034
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 2015, Suite 1110
20 Eglinton Avenue West
Toronto, Ontario, Canada M4R 1K8
(Address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code:
(416) 322-1515
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Class A non-voting shares New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Not Applicable
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock of the Company held
by non-affiliates of the Company cannot be calculated because no
class of voting stock of the Company is publicly traded. The
aggregate market value of the Class A non-voting shares held by
non-affiliates of the Company at December 31, 1998 was
$214,222,000.
The number of shares of the Company's Class A non-voting shares
and Class B voting shares (being the only classes of common stock
of the Company), outstanding on February 28, 1999 was 12,489,819
and 99,680 shares, respectively.
TABLE OF CONTENTS
Item Number Page
PART 1
1.Business 1
2.Properties 12
3.Legal Proceedings 12
4.Submission of Matters to a Vote of Security Holders 13
PART II
5.Market for the Registrant's Common Equity and Related
Stockholder Matters 13
6.Selected Financial Data 16
7.Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
7a.Quantitative and Qualitative Disclosures
About Market Risk 23
8.Financial Statements and Supplementary Data 25
9.Changes in and Disagreements with Accountants
and Financial Disclosure 25
PART III
10.Directors and Executive Officers of the Registrant 25
11.Executive Compensation 27
12.Security Ownership of Certain Beneficial Owners and
Management 31
13.Certain Relationships and Related Transactions 32
PART IV
14.Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 33
Signatures 34
PART I
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 will operate 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 and, through the agency of local
licensed broker-dealers, Fahnestock 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. formed Evanston
Financial Corporation, Inc. 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, 1998, Fahnestock and FOM together employed
694 full-time registered representatives and 607 employees in
trading, research, investment banking, investment advisory services,
public finance and support positions for Fahnestock's 45 offices in
the United States, FOM's 25 offices (all of which are located in
Michigan) and for Freedom in its offices in Omaha, Nebraska.
Fahnestock, FOM 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,
conducts business 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, FOM and Freedom are members of the New York Stock
Exchange, Inc. ("NYSE") and the National Association of Securities
Dealers, Inc. ("NASD"); and Fahnestock and FOM are members 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 FOM and 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
1997 and in 1996 and 1995 was 0.095% of the adjusted combined
gross revenues of Fahnestock and Freedom (and until July, 1995,
Pace Securities Inc.). In addition, Fahnestock has purchased
protection from Aetna Casualty and Surety Company of an
additional $9,500,000 per customer. Upon request, Fahnestock, at
the customer's expense, will obtain additional protection for a
customer whose securities account is in excess of $10,000,000.
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,
1998 % 1997 % 1996 %
(Dollars in thousands, except percentages)
Commissions $114,889 49% $103,323 43% $73,992 35%
Principal
transactions, net 32,727 14% 65,972 27% 80,508 38%
Interest 42,028 18% 40,123 17% 32,981 15%
Underwriting fees 12,655 6% 11,042 4% 8,672 4%
Advisory fees 21,742 9% 15,808 7% 14,189 6%
Other 8,740 4% 5,890 2% 3,646 2%
Total revenues $232,781 100% $242,158 100% $213,988 100%
The Company derives most of its revenues from the operations of its
principal subsidiaries, Fahnestock and FOM. Although maintained
as separate entities, because Fahnestock acts as clearing broker in
transactions initiated by FOM and 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 and FOM'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. In
certain cases, discounts are granted to customers, generally on large
trades or to active customers. Fahnestock and FOM also provide 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 account
executives with good sales production records. Competition among
securities firms for such personnel is intense. Retail clients' accounts
are serviced by retail account executives (excluding the institutional
account executives referred to below) in Fahnestock's and FOM's
offices. Fahnestock's and FOM'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 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
five 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." In most cases,
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.
In addition to executing trades, Fahnestock also provides other
services to its correspondents, including performance of accounting
functions, provision of office services, custody of securities and
compliance with regulatory requirements. The responsibilities
arising out of Fahnestock's clearing relationships are allocated
pursuant to agreements with its correspondents. To the extent that
the correspondent broker has financial resources available, this
allocation of responsibilities protects Fahnestock against claims by
customers of correspondent brokers where the responsibility for the
function giving rise to a claim has been allocated to the
correspondent broker. If the correspondent is unable to meet its
obligations to its customers, however, dissatisfied customers may
attempt to obtain recovery from Fahnestock.
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, 1998, Fahnestock made
approximately 1,500 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.
The U.S. Justice Department and the SEC have completed an
investigation of industry over-the-counter trading practices. As a
result of the investigation, the SEC issued "The 21a Report"
detailing industry practices, some of which were deemed anti-
competitive. The SEC has effected a "Firm Quote Rule", an "Order
Exposure Rule" and a "Best Execution Interpretation" (the "Rules"),
all of which are intended to correct the aforementioned practices and
offer public customers better executions. The Rules became effective
on January 10, 1997 and have negatively impacted the day to day
profitability of Fahnestock's OTC trading department. The impact of
the Rules has been to narrow the spread (the difference between the
bid and ask prices) on virtually all of the securities in which
Fahnestock makes markets, thus reducing potential profitability in
day to day transactions.
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 and FOM hold positions in their trading accounts in
over-the-counter securities and in exchange-listed securities in which
they do 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 and a department that trades
high yield securities (commonly referred to as "junk bonds"). FOM
has several trading departments including: over-the-counter equities,
taxable corporate bonds, municipal bonds, UITs and US government
bonds. These departments continually purchase and sell securities
and make markets in order to make a profit on the inter-dealer
spread. Although Fahnestock and FOM from time to time holds an
inventory of securities, more typically, they seek to match customer
buy and sell orders. Fahnestock and FOM do 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.
Investment Income
Dividends and interest earned on securities held in inventory are
treated as investment income.
Principal transactions, including market-making and other trading
and investment activities, accounted for approximately 14%, 27%
and 38%, respectively, of the Company's total revenues for the fiscal
years ended December 31, 1998, 1997 and 1996, respectively.
Risk Management
Fahnestock's and FOM's principal transactions and brokerage
activities expose them to credit and market risks. When Fahnestock
or FOM 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 or FOM 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 and FOM's securities positions are subject to
fluctuations in market value and liquidity.
Fahnestock and FOM monitor 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 or
FOM 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. This may require
Fahnestock to position itself for the inevitable reversal in the market,
however temporary that reversal may be. In the fourth quarter of
1998, the recovery of the Internet sector from the October lows was
unprecedented with some stocks tripling in value over a few weeks.
Fahnestock misjudged the momentum of this rally and was slow to
take losses, waiting for the reversal that historically should have
occurred. In a few trading days, the firm's positions became
outsized, causing the firm to sustain significant and unrecoverable
losses over a few days. As a result of this event, Fahnestock has re-
evaluated its risk management policies and has put into place risk
containment policies to limit position size and to monitor
transactions on a minute-to-minute basis. The newly strengthened
risk management policies also limit market-making activities
entirely in securities that are the focus of day traders acting through
on-line brokers and those where valuations and price volatility
exceed certain predetermined boundaries.
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). 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 and FOM manage 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% of its revenues from
underwriting in 1998, 4% in both 1997 and 1996. 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 divisions Fahnestock
Asset Management and Newbold Investment Advisory) provide
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, 1998 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 180
persons in its administration and operations departments at its head
office and approximately 110 people in its administration and
operations departments in FOM's Detroit headquarters.
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. 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. FOM is registered as a
broker-dealer in all 50 states except Nebraska. FOM's primary
regulator with respect to securities activities has been designated as
the NYSE.
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. (FOM and
Freedom compute 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 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. 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. FOM conducts its business
from its offices located at 300 River Place, Detroit, Michigan.
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 totaling approximately 363,000 square feet in 73
locations under standard commercial terms expiring between 1999
and 2013. If any leases are not renewed, the Company believes it
could obtain comparable space elsewhere on commercially
reasonable rental terms.
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. 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. 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)
1998
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
1997
1st Quarter $25.25 $19.25 $18.375 $14.00
2nd Quarter 28.60 20.75 20.875 14.75
3rd Quarter 28.75 24.00 21.00 17.625
4th Quarter 29.55 25.00 21.50 17.0625
The following table sets forth information about the Company's
shareholders as at December 31, 1998 as set forth in the records of
the Company's transfer agent and registrar:
Class A Shares:
Shareholders of record
having addresses in: Number of shares Percentage Number of shareholders
Canada 5,593,387 45.7% 197
United States 6,647,850 54.3% 187
Other 32 - 2
Total issued and
outstanding 12,241,269 100% 386
Class B shares
Shareholders of record
having addresses in: Number of shares Percentage Number of shareholders
Canada (1) 98,135 98.5% 125
United States 1,537 1.5% 70
Other 8 - 2
Total issued and
outstanding 99,680 100% 197
(1) The Company has been informed that 50,098 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
Type Declaration dateRecord datePayment dateAmount per share
Annual January 25,1996 February 9,1996 February 23,1996 $0.20
Quarterly April 19,1996 May 9,1996 May 23,1996 $0.05
Quarterly July 16,1996 August 9,1996 August 23,1996 $0.05
Quarterly October 17,1996 November 8,1996 November 22,1996 $0.05
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
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, 1999. 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, 1998 the Company announced that commencing July 3,
1998 it intended to purchase up to 790,000 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, 1998, through the currently outstanding
Normal Course Issuer Bid the Company purchased 398,500 Class A
Shares. In addition, in fiscal 1998, through a Normal Course Issuer
Bid which expired July 1, 1998, the Company purchased 17,000
Class A Shares. The average cost for all shares repurchased in fiscal
1998 was U.S. $15.14. 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 2, 1999. The Company may, at its option, apply to
extend the program for an additional year.
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, 1998. 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,
1998 1997 1996 1995 1994
(In thousands of US dollars except share amounts)
Revenue $232,781 $242,158 $213,988 $184,433 $157,253
Profit before
extraordinary
item $ 12,447 $ 26,731 $ 30,279 $ 20,899 $ 11,780
Net profit $ 12,447 $ 26,731 $ 30,279 $ 20,899 $ 11,780
Profit before
extraordinary
item per share(1) $0.99 $2.14 $2.46 $1.69 $0.96
Net profit per
share(1)
- -basic $0.99 $2.14 $2.46 $1.69 $0.96
- -diluted $0.96 $2.08 $2.41 $1.68 $0.95
Total assets $666,763 $835,146 $519,916 $623,466 $510,636
Total current
liabilities $500,410 $674,181 $384,009 $516,031 $421,818
Subordinated
indebtedness,
including
current portion $30 $30 $30 $30 $30
Cash dividends
per Class A
Share and
Class B share $0.28 $0.24 $0.35 $0.15 $0.15
Shareholders'
equity $166,323 $160,935 $135,877 $107,405 $88,788
Book value per
share (1) $13.48 $12.87 $10.99 $8.92 $7.34
Number of shares
of capital stock
outstanding 12,340,949 12,508,440 12,365,440 12,040,090 12,094,680
(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. 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 46 offices in the North Eastern United
States, the Midwest, Florida and California, and from two associated
offices in Caracas, Venezuela and Buenos Aires, Argentina. In
addition, the Company operates in Michigan from 24 retail branch
offices as First of Michigan, a division of Fahnestock. First of
Michigan Capital Corporation was acquired on July 17, 1997. FOM
is engaged in securities brokerage and trading and investment
banking. Client assets entrusted to the Company as at December 31,
1998 totalled approximately $15 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, 1998. 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 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 that may be enacted, 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 candidates 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 investment environment in 1998 was marked by extreme
volatility. Despite a world-wide economic crisis, U.S. markets
continued upward, fueled by large cash inflows. This strong market
resulted in the fourth successive year of popular stock averages
rising over 20% per annum while interest rates remained at low
levels. The outlook for 1999 indicates slower growth in corporate
earnings and in the U.S. economy generally. However, the impact of
cash flow from the savings of the baby-boom generation continues
to substantially impact equity markets. The impact of the internet
through the ability to access instantaneous information and as a tool
for trading has added investor interest and volatility to the market.
The Company's revenues in fiscal 1998 decreased by 4% compared
to fiscal 1997. This was the result of trading losses in NASDAQ
equities in the fourth quarter of 1998. Except for these losses, the
revenues of the Company would have been higher in 1998 compared
to 1997. The increases in other revenue categories can be attributed
to both the acquisition of FOM in July 1997 and to generally
favorable business conditions. Expenses increased by approximately
8% in 1998 compared to 1997. The increase can be attributed to the
fact the operations of the Company included FOM for the full year in
1998 and only part of the year in 1997. Net profit was approximately
53% lower in 1998 compared to 1997. This can be attributed to the
trading losses in NASDAQ equities in the fourth quarter of 1998.
The Company has taken steps to limit its financial exposure in
NASDAQ market-making activities. (See Item 1 - Risk
Management)
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, 1998,
1997 and 1996.
Period to Period Change Increase (Decrease)
1998 versus 1997 1997 versus 1996
Amount Percentage Amount Percentage
Revenues -
Commissions $11,566,000 11.2% $29,331,000 39.6%
Principal transactions, net (33,245,000) (50.4) (14,536,000) (18.1)
Interest 1,905,000 4.7 7,142,000 21.7
Underwriting fees 1,613,000 14.6 2,370,000 27.3
Advisory fees 5,934,000 37.5 1,619,000 11.4
Other 2,850,000 48.3 2,244,000 61.5
Total revenues (9,377,000) (3.8) 28,170,000 13.2
Expenses -
Compensation 10,279,000 8.6 17,726,000 17.4
Clearing and exchanges fees (484,000) (5.3) 1,856,000 25.6
Communications 3,051,000 17.1 2,877,000 19.2
Occupancy costs 2,221,000 20.1 849,000 8.3
Interest 1,670,000 8.3 3,850,000 23.6
Other (1,353,000) (7.7) 8,430,000 90.9
Total expenses 15,384,000 7.9 35,588,000 22.2
Profit before taxes (24,761,000) (53.3) (7,418,000) (13.8)
Income taxes (10,477,000) (53.0) (3,870,000) (16.4)
Net profit (14,284,000) (53.4) (3,548,000) (11.7)%
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 totaled $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 $16,343,000
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.
Fiscal 1997 compared to Fiscal 1996
In fiscal 1997, the U.S. economy remained strong with stable interest
rates and record low unemployment levels. Investors continued their
commitment to the equity market, sending popular market averages
upward by over 20% per annum for the third successive year. In July
1997, the Company purchased FOM, and at year end had
approximately 215 registered representatives in 26 branch offices to
bring the total for the Company to 724 investment executives in 75
offices. Total revenues for 1997 were $242,158,000, an increase of
13% over $213,988,000 in 1996. Commission in 1997 was
$103,323,000, an increase of 40% over $73,992,000 in 1996. Of this
increase, 77% can be attributed to the addition of FOM's business.
Principal transactions generated net revenue of $65,972,000 in
1997, a decrease of 18% compared to $80,508,000 in 1996. Market
volatility and an uninterrupted and dramatic increase in equity prices
created a difficult trading environment. Underwriting fees in 1997
were $11,042,000, an increase of 27% over $8,672,000 in 1996. The
Company was able to increase its underwriting business in both the
public finance area and the structured asset area. Advisory fees in
1997 were $15,808,000, an increase of 11% over $14,189,000 in
1996 as a result of the addition of assets under management in 1997.
Interest income was $40,123,000 in 1997, an increase of 22% over
$32,981,000 in 1996. Interest expense was $20,161,000 in 1997, an
increase of 24% over $16,311,000 in 1996. The increase is
attributable to the higher stock loan/stock borrow balances in 1997
compared to 1996 and higher customer debit balances as a result of
the acquisition of FOM. Net interest revenue (interest revenue less
interest expense) increased 20% in 1997 compared to 1996.
Expenses totaled $195,674,000 in 1997, an increase of 22% over
$160,086,000 in 1996. Approximately 90% of the increase in 1997
can be attributed to the addition of the FOM operations effective
July 17, 1997 and related acquisition costs. Compensation and
related expenses were $119,785,000 in 1997, an increase of 17%
over $102,059,000 in 1996. Communications expenses were
$17,879,000, an increase of 19% over $15,002,000 in 1996.
Occupancy costs were $11,025,000 in 1997, an increase of 8% over
$10,176,000 in 1996. These increases can primarily be attributed to
the increased size of the organization after the acquisition of FOM.
Clearing and exchange fees were $9,118,000, an increase of 26%
over $7,262,000 in 1996 and includes a variable component which
rises as commission income rises. Other expenses were $17,706,000,
an increase of 91% over $9,276,000 in 1996. This increase is due to
several factors including: professional fees incurred as a result of the
acquisition of FOM and other matters, depreciation and amortization
on a much larger fixed asset base after the acquisition, licensing and
filing fees as a result of the acquisition, and other acquisition-related
costs.
Liquidity and Capital Resources
The decrease in the Company's assets in 1998 compared to 1997 has
been primarily the result of the loss of FOM investment executives
following the acquisition of FOM in July 1997. As a result of
corporate raids, a significant number of FOM investment executives
and their clients left the FOM organization. The level of the
Company's assets at the end of 1997 represented a significant
increase over the 1996 level because of the FOM acquisition.
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 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, 1998, Fahnestock had bank lines of credit and call
loan arrangements with outstanding borrowings thereunder of
$42,217,000.
The Company paid cash dividends to its shareholders totaling
$3,531,000, during 1998, from internally-generated cash.
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 Year 2000 problem arises as the result of computer systems
having been written using two digits, rather than four, to define the
year during a period when data processing media put a high value on
brevity of expression. Any computer, computer program, equipment
or product that has date-sensitive software or embedded chips, if not
corrected, could produce inaccurate or unpredictable results
commencing on January 1, 2000.
The Company is a broker/dealer in securities and as such relies
heavily on computer technology to conduct its operations. The
Company relies on both internal systems and on third party vendors.
As at the date hereof, all vendors of software and hardware and all
vendors of non-critical systems (elevators, vault, building security,
etc.) have been contacted and inquiries about their Y2K readiness
have been made. Certain non-critical systems have been determined
to be non-Y2K compliant and have been or are being replaced with
available Y2K-compliant systems. Approximately 95% of all
vendors (100% of mission-critical vendors) have responded and have
indicated that they already are or will be compliant. In terms of the
Company's internal systems, all programs have been assessed for
Year 2000 compliance. The majority of the compilation work has
been completed and substantially all remediated systems have been
internally tested on a parallel basis with current production, using
live files. The remaining programs upon which modification work
has not yet begun, represent less than 1% of the total number of
programs running at the Company. Full testing and full Year 2000
compliance is expected to be completed by June 30, 1999. The
Company is actively participating in a number of industry
committees including the Security Industry Association Year 2000
Committee. The Company validated its connections to various test
sites in July 1998 and will participate in various industry-wide Year
2000 tests that are scheduled to run on Saturdays beginning on
March 6, 1999 (to simulate December 29, 1999) through April 17,
1999 (to simulate January 4, 2000). Files interfacing with SIAC and
DTC have already been adapted and are compliant. To date there
have been no material exceptions in tests that have been completed.
The cost of program remediation and testing, readying the Company
for Year 2000 has been estimated to be approximately $200,000 -
$250,000 for fiscal 1998. This includes the costs associated with the
personnel dedicated to the project. The cost of new hardware has not
been included as substantially all purchases are included in the
general technology upgrade being made in connection with the roll-
out of new desk-top systems company-wide. It is expected that
similar costs would be required in fiscal 1999. This range of costs
does not include normal ongoing costs for computer hardware or
software revisions that would be required in the normal course of
business. All funding for the Y2K compliance effort is from
available cash on hand.
The Company has begun work on a comprehensive contingency plan
with respect to the Y2K problem, and intends to complete this plan
by April 30, 1999 as part of its ongoing Y2K compliance effort.
Despite the Company's planning and preparation for Year 2000,
there can be no assurance that partial or total systems interruptions
will not occur and that the costs necessary to update hardware and
software would not have a material adverse impact of the Company's
business, financial condition, statement of operations and business
prospects, although the Company believes that such results are
unlikely.
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. 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.
Value-at-Risk
Value-at-risk is a statistical measure of the potential loss in the fair
value of a portfolio due to adverse movements in underlying risk
factors. In response to the Securities and Exchange Commission's
market risk disclosure requirements, the Company has performed a
value-at-risk analysis of its trading financial instruments and
derivatives. The value -at-risk calculation uses standard statistical
techniques to measure the potential loss in fair value based upon a
one-day holding period and a 95% confidence level. The calculation
is based upon a variance-covariance methodology, which assumes a
normal distribution of changes in portfolio value. The forecasts of
variances and co-variances used to construct the model, for the
market factors relevant to the portfolio, were generated from
historical data. Although value-at-risk models are sophisticated
tools, their use can be limited as historical data is not always an
accurate predictor of future conditions. The Company attempts to
manage its market exposure using other methods, including trading
authorization limits and concentration limits.
At December 31, 1998 and 1997, the Company's value-at-risk for
each component of market risk was as follows:
(000's omitted) 1998 1997
Interest rate risk $298 $120
Equity price risk 759 680
Diversification benefit (575) (313)
Total $482 $487
The potential future loss presented by the total value-at-risk
generally falls within predetermined levels of loss that should not be
material to the Company's results of operations, financial condition
or cash flows. The changes in the value-at-risk amounts reported in
1998 from those reported in 1997 reflect changes in the size and
composition of the Company's trading portfolio; more particularly an
increase in the size of the Company's debt portfolio and a decrease in
the Company's equity portfolio at December 31, 1998 compared to
December 31, 1997. Further discussion of risk management appears
in Item 7, Management's Discussion and Analysis of the Results of
Operations and Item 1, Risk Management.
The value-at-risk estimate has limitations that should be considered
in evaluating the Company's potential future losses based on the
year-end portfolio positions. Recent market conditions including
increased volatility, may result in statistical relationships that result
in higher value-at-risk than would be estimated from the same
portfolio under different market conditions, or the converse may be
true. Critical risk management strategy involves the active
management of portfolio levels to reduce market risk. The
Company's market risk exposure is continuously monitored as the
portfolio risks and market conditions change.
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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
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, 1998 is set forth
below.
Name Age Positions held
John L. Bitove 70 A Director of the Company since
February 1980; Retired executive.
- Member of the Audit and Compensation and
Stock Option Committees
Richard Crystal 58 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 53 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 63 A Director of the Company since 1996;
President and C.E.O. of Shurway Capital
Corporation (a private corporation), since
July 1993; 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 56 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 & Elliot (Law firm), Canadian counsel
to the Company since 1979.
Elaine K. Roberts 47 President, Treasurer and a Director of the
Company since 1977; Treasurer and a Director
of Fahnestock since 1983.
Burton Winberg 74 A Director of the Company since 1979;
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. 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, 1998 exceeded $100,000.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-term Compensation
# Securities
Name and Principal Other under All
Occupation and Annual options/ Other
Year Salary Bonus Comp RSA SARS LTIP Comp
A.G. Lowenthal,
Chairman,CEO,
and Director of
the Company,
Chairman, CEO,
and Director
of Fahnestock
1998 300,000 350,000 9,950 0 150,000 0 5,265
1997 300,000 - 11,990 0 0 908,000 6,050
1996 300,000 400,000 10,400 0 0 386,694 6,730
Robert Neuhoff,
Executive Vice
President of
Fahnestock
1998 230,000 87,500 0 0 0 0 5,265
1997 230,000 175,000 0 0 0 0 6,050
1996 230,000 175,000 0 0 0 0 6,730
Robert Sablowsky, (1)
Executive Vice
President of
Fahnestock
1998 200,000 210,000 200,710 0 0 0 5,265
1997 200,000 10,000 193,173 0 20,000 0 6,050
1996 41,025 2,061 8,785 0 20,000 0 0
Eric Shames
Secretary of
Fahnestock
1998 187,500 50,000 0 0 15,000 0 5,265
1997 150,000 75,000 0 0 0 0 6,050
1996 150,000 75,000 0 0 15,000 0 6,595
Robert Maimone
Senior Vice
President of
Fahnestock
1998 135,000 50,000 0 0 0 0 5,265
1997 135,000 75,000 0 0 0 0 6,050
1996 135,000 75,000 0 0 25,000 0 6,730
(1) Mr. Sablowsky joined Fahnestock on October 18, 1996.
OTHER ANNUAL COMPENSATION - For Mr. Lowenthal,
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.
RSA - RESTRICTED STOCK AWARDS - 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
# of shares $ Year end value
underlying of unexercised
unexercised in-the-money
Shares options/SARs options
acquired on Value exercisable/ exercisable/
Name exercise realized unexercisable unexercisable
A.G. Lowenthal 150,000 $1,852,000 150,000/150,000 $1,426,500/0
R. Neuhoff 0 0 25,000/0 $237,750/0
R. Sablowsky 0 0 0/40,000 0/$62,500
E. Shames 0 0 3,750/26,250 $26,062/78,188
R. Maimone 0 0 6,250/18,750 $43,438/130,312
Details of number of shares and value of exercisable and
unexercisable options are as follows:
These options are exercisable in $CDN and have been converted at
the exchange rate as at December 31, 1998.
# of Option Price at Value Total
Name shares price Dec.31/98 per share value
A.G. Lowenthal
- -exercisable 150,000 $7.99 $17.50 $9.51 $1,426,500
- -unexercisable 150,000 $17.875 $17.50 n/a n/a
R. Neuhoff
- -exercisable 25,000 $7.99 $17.50 $9.51 $237,750
- -unexercisable 0 n/a
R. Sablowsky
- -exercisable 0 n/a
- -unexercisable 20,000 $14.375 $17.50 $3.125 $62,500
- -unexercisable 20,000 $20.875 $17.50 n/a n/a
E. Shames
- -exercisable 3,750 $10.55 $17.50 $6.95 $26,062
- -unexercisable 11,250 $10.55 $17.50 $6.95 $78,188
- -unexercisable 15,000 $17.875 $17.50 n/a n/a
R. Maimone
- -exercisable 6,250 $10.55 $17.50 $6.95 $43,438
- -unexercisable 18,750 $10.55 $17.50 $6.95 $130,312
OPTION/SAR GRANTS FOR THE YEAR ENDED DECEMBER 31, 1998.
Date of Grant Name # shares Price of Option Expiration date
January 29, 1998 A.G. Lowenthal 150,000 $17.875 January 28, 2003
January 29, 1998 Eric Shames 15,000 $17.875 January 28, 2003
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. On January 10, 1996, with
respect to the 1995 fiscal year, the Company issued 113,000 Class A
Shares from Treasury at Cdn.$12.24 (US$8.85) per share to the
Company's 401(k) plan. On January 14, 1997, with respect to the
1996 fiscal year, the Company issued 70,000 Class A Shares from
Treasury at U.S.$14.375 per share to the Company's 401(k) plan. On
January 14, 1998, with respect to the 1997 fiscal year, the Company
issued 42,000 Class A Shares from Treasury at U.S.$17.6875 per
share to the Company's 401(k) plan. On January 14, 1999, with
respect to the 1998 fiscal year, the Company issued 56,000 Class A
Shares from Treasury at U.S. $15.875 per shares to the Company's
401(k) plan.
FOM has a savings plan qualified under Section 401(k) of the
Internal Revenue Code pursuant to which FOM makes regular
defined cash contributions based on the Plan document. In addition,
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.
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 1997
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. The
Performance Goal established in March 1998 resulted in nil being
payable to Mr. Lowenthal for fiscal 1998.
Stock Appreciation Agreement
In February, 1995 Fahnestock entered into a Stock Appreciation
Agreement (the "Stock Appreciation Agreement") with Albert G.
Lowenthal, the Chairman and Chief Executive Officer of the
Company and of Fahnestock, pursuant to the recommendation of the
Company's Compensation Committee and the approval of the Board
of Directors. The purpose of the Stock Appreciation Agreement is to
provide additional compensation to Mr. Lowenthal for his past
services (so as to bring Mr. Lowenthal's compensation more into line
with the compensation paid to chief executive officers of comparable
companies in the financial services industry) linked to the future
market price of the Company's stock.
Under the terms of the Stock Appreciation Agreement, Mr.
Lowenthal was entitled to receive a cash award in January 1996 of
U.S.$238,306, being the greater of (x) U.S.$150,000 or (y) the
difference between Cdn.$9.00 and the Market Value (as defined in
the Stock Appreciation Agreement) for the Company's Class A
Shares on The Toronto Stock Exchange as of December 31, 1995,
multiplied by 100,000. Mr. Lowenthal was entitled to additional
payment of U.S.$386,694 in January 1997 based upon this formula
and restricted by the proviso that the aggregate paid with respect to
1995 and 1996 not exceed U.S.$625,000.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) The following table sets forth information as of December 31,
1998 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 Identity of Person or Group
Mailing Address Amount Owned Percent of Class
Class B A.G. Lowenthal
c/o Fahnestock & Co. Inc.
125 Broad St
New York, NY 10004 50,484 (1) 50.6%
O. Roberts
c/o Fahnestock Viner Holdings Inc.
Suite 1110, Box 2015
20 Eglinton Ave. W.
Toronto, Canada M4R 1K8 44,309 (2) 44.4%
________________________________________
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,
1998 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 Identity of Person
or Group Amount Owned Percent of Class
Class A Shares A.G. Lowenthal 2,462,500 (1), (2) 20.2%
E.K. Roberts 149,494 (4) 1.2%
A.W. Oughtred 500 *
J.L. Bitove 25,580 0.2%
R. Crystal 16,750 (5) 0.1%
K.W. McArthur 35,000 0.3%
B. Winberg 700 *
Officers and Directors
as a group
(7 members) 2,690,524 (1),(2),(4),(5) 21.9%
Class B Shares A.G. Lowenthal 50,484 (3) 50.6%
E.K. Roberts 108 0.1%
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 50.8%
_____________________________________
(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 2,150,900 Class A Shares. Mr. Lowenthal holds
10,250 Class A Shares through the Company's 401(k) plan and
151,350 Class A Shares directly.
(2) 150,000 Class A Shares are beneficially owned in respect of
Class A Shares currently issuable upon exercise of options issued
under the Company's ISO and ESO.
(3) Phase II, an Ontario corporation wholly-owned by Mr.
Lowenthal, is the holder of record of all such shares.
(4) 75,000 Class A Shares are beneficially owned in respect of Class
A Shares currently issuable upon exercise of options issued under
the Company's ESO.
(5) 16,250 Class A Shares are beneficially owned in respect of Class
A Shares currently issuable upon exercise of options issued under
the Company's ESO.
* 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. 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 1998 was $266,000 (nil and
$178,000 in 1997 and 1996, respectively). Mr. Robert Neuhoff also
maintains a margin account with Fahnestock. The maximum
borrowings outstanding during 1998 was $984,000 ($876,000 and
$427,000 in 1997 and 1996, respectively).
PART IV
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 F-1 to F-15
(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
The Company filed a Form 8-K on December 11, 1998. The
Company issued an earnings alert as a result of trading losses
sustained in October and November 1998.
(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 ?
day of March, 1999.
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 26, 1999
J.L. Bitove
/s/R. Crystal Director March 26, 1999
R. Crystal
/s/A.G. Lowenthal Chairman, Chief Executive March 26, 1999
A.G. Lowenthal Officer, Director
/s/K.W. McArthur Director March 26, 1999
K.W. McArthur
/s/A.W. Oughtred Secretary, Director March 26, 1999
A.W. Oughtred
/s/E.K. Roberts President, Treasurer, March 26, 1999
E.K. Roberts Chief Financial Officer,
Director
/s/ B. Winberg Director March 26, 1999
B. Winberg
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FAHNESTOCK VINER HOLDINGS INC.
Management's Responsibility for Consolidated Financial Statements F-1
Report of Independent Accountants F-2
Consolidated Balance Sheet as of December 31, 1998 and 1997 F-3
Consolidated Statement of Operations for the three years ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Statement of Retained Earnings for the three years
ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statement of Cash Flows for the three years ended
December 31, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
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
auditors, conduct an audit of the consolidated financial statements in
accordance with generally accepted auditing standards. 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 auditors 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 26, 1999
F-1
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, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years ended December 31, 1998 in
conformity with generally accepted accounting principles. 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 audit. We conducted our audit of
these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free
from 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 audit provides a
reasonable basis for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
New York, New York
February 26, 1999.
F-2
FAHNESTOCK VINER HOLDINGS INC.
CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31,
1998 1997
Expressed in thousands of U.S. dollars
ASSETS
Current assets
Cash and short-term deposits $11,501 $10,784
Restricted deposits (note 2) 2,312 1,537
Securities purchased under agreement to resell 12,174 -
Deposits with clearing organizations 7,072 4,734
Receivable from brokers and clearing
organizations (note 1) 167,018 359,205
Receivable from customers 334,664 350,807
Securities owned, at market value (notes 3 and 5) 88,579 63,262
Demand notes receivable 30 30
Other 26,912 27,945
650,262 818,304
Other assets
Stock exchange seats (approximate market value
$4798; $5,592 in 1997) 1,507 1,542
Fixed assets, net of accumulated depreciation of
$8,896; $6,490 in 1997 9,286 9,128
Goodwill, at amortized cost 5,708 6,172
16,500 16,842
$666,763 $835,146
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Drafts payable $22,734 $18,507
Bank call loans (note 5) 42,217 23,755
Securities sold under agreement to repurchase 664 -
Payable to brokers and clearing
organizations (note 1) 235,029 422,173
Payable to customers 115,878 117,033
Securities sold, but not yet purchased,
at market value (note 3) 41,104 31,090
Accounts payable and other liabilities 40,119 45,571
Income taxes payable 2,665 16,052
Subordinated loans payable (note 4) 30 30
500,440 674,211
Commitments and contingencies (note 10)
Shareholders' equity
Share capital (note 6)
12,241,269 Class A non-voting shares
(1997 - 12,408,760 shares) 36,392 40,783
99,680 Class B voting shares 133 133
36,525 40,916
Contributed capital (note 7) 2,196 1,333
Retained earnings 127,602 118,686
166,323 160,935
$666,763 $835,146
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
FAHNESTOCK VINER HOLDINGS INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
1998 1997 1996
Expressed in thousands of U.S. dollars, except per share amounts
REVENUE:
Commissions $114,889 $103,323 $73,992
Principal transactions, net 32,727 65,972 80,508
Interest 42,028 40,123 32,981
Underwriting fees 12,655 11,042 8,672
Advisory fees 21,742 15,808 14,189
Other 8,740 5,890 3,646
232,781 242,158 213,988
EXPENSES:
Compensation and related expenses 130,064 119,785 102,059
Clearing and exchange fees 8,634 9,118 7,262
Communications 20,930 17,879 15,002
Occupancy costs 13,246 11,025 10,176
Interest 21,831 20,161 16,311
Other 16,353 17,706 9,276
211,058 195,674 160,086
Profit before income taxes 21,723 46,484 53,902
Income tax provision (note 8) 9,276 19,753 23,623
NET PROFIT FOR YEAR $12,447 $26,731 $30,279
Profit per share (note 9)
- basic $0.99 $2.14 $2.46
- diluted $0.96 $2.08 $2.41
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
FAHNESTOCK VINER HOLDINGS INC.
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31,
1998 1997 1996
Expressed in thousands of U.S. dollars
Retained earnings, beginning of the year $118,686 $94,957 $68,974
Net profit for the year 12,447 26,731 30,279
Dividends (3,531) (3,002) (4,296)
Retained earnings, end of the year $127,602 $118,686 $94,957
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
FAHNESTOCK VINER HOLDINGS INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
1998 1997 1996
Expressed in thousands of U.S. dollars
Cash flows from operating activities:
Net profit for the year $12,447 $26,731 $30,279
Adjustments to reconcile net profit to
net cash provided
by (used in) operating activities:
Non-cash items included in net profit:
Depreciation and amortization 2,905 1,357 955
Decrease (increase) in operating assets,
net of effects of acquisition of First
of Michigan Capital Corporation:
Restricted deposits (775) 365 (660)
Securities purchased under agreement
to resell (12,174) - -
Deposits with clearing organizations (2,338) (1,033) (35)
Receivable from brokers and clearing
organizations 192,187 (165,787) 117,067
Receivable from customers 16,143 556 (12,958)
Securities owned (25,317) (17,693) (4,742)
Other assets 1,033 (13,919) 4,574
Increase (decrease) in operating
liabilities net of effects of
acquisition of First of Michigan
Capital Corporation:
Drafts payable 4,227 6,069 (4,382)
Securities sold under agreement
to repurchase 664 - -
Payable to brokers and clearing
organizations (187,144) 226,095 (125,878
Payable to customers (1,155) 5,055 12,386
Securities sold, but not
yet purchased 10,014 (2,024) 6,816
Accounts payable and other
liabilities (5,452) 3,010 5,739
Income taxes payable (13,387) 3,708 2,697
Cash (used in) provided by
operating activities (8,122) 72,490 31,858
Cash flows from investing activities:
Purchase of First of Michigan Capital
Corporation, net
of cash acquired (note 12) - (34,340) -
Proceeds from sale of exchange seat - 1,358 -
Purchase of fixed assets (2,564) (5,152) (995)
Cash (used in) investing activities (2,564) (38,134) (995)
Cash flows from financing activities:
Cash dividends paid on Class A
non-voting and Class B shares (3,531) (3,002) (4,296)
Issuance of Class A non-voting shares 1,899 1,577 2,175
Repurchase of Class A non-voting
shares for cancellation (6,290) (482) -
Tax benefit from employee options
exercised 863 234 314
Increase (decrease) in bank
call loans 18,462 (31,262) (29,400)
Cash provided by (used in)
financing activities 11,403 (32,935) (31,207)
Net increase (decrease) in cash
and short-term deposits 717 1,421 (344)
Cash and short-term deposits,
beginning of year 10,784 9,363 9,707
Cash and short-term deposits,
end of year $11,501 $10,784 $9,363
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
FAHNESTOCK VINER HOLDINGS INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
December 31, 1998
GENERAL
Fahnestock Viner Holdings Inc. (the "Company") is incorporated
under the laws of Ontario. The Company's principal subsidiaries,
Fahnestock & Co. Inc. ("Fahnestock") and First of Michigan
Corporation ("FOM"), are members 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
accordance 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 date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. 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)
Significant inter-company balances and transactions have been
eliminated upon consolidation.
(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.
F-7
(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 $138,279,000 (1997-
$299,938,000). Included in payable to brokers and clearing
organizations are deposits received for securities loaned of
$226,763,000 (1997-$411,089,000).
F-8
(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 supercedes FAS 14, Financial
Reporting for Segments of a Business Enterprise, replacing the
"industry segment" approach with the "management approach". The
management approach designates 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 16).
2. Restricted deposits
Deposits of $2,312,000 (1997-$1,537,000) 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)
1998 1997
Securities owned consist of:
Corporate equities $26,580,000 $28,309,000
Corporate debt 18,905,000 13,264,000
U.S. government and agency and state
and municipal government obligations 26,098,000 10,029,000
Options 138,000 -
Money market funds 16,858,000 11,660,000
$88,579,000 $63,262,000
Securities sold, but not yet purchased consist of:
Corporate equities $21,129,000 $26,706,000
Corporate debt 4,376,000 3,266,000
U.S. government and agency and state
and municipal government obligations 15,599,000 1,118,000
$41,104,000 $31,090,000
F-9
4. Subordinated loans payable
1998 1997
Due in 1999 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
6.375% at December 31, 1998. These loans, collateralized by firm
and customer securities with market values of approximately
$63,916,000 and $40,935,000, respectively, are primarily with one
money center bank. Details of the bank call loans are as follows:
December 31, 1998 1997 1996
Year-end balance $42,217,000 $23,755,000 $11,800,000
Weighted interest rate
(at end of year) 6.03% 6.31% 6.34%
Maximum balance
(at any month end) $56,432,000 $45,650,000 $23,150,000
Average amount outstanding
(during the year) (1) $27,246,000 $23,779,000 $10,867,000
Weighted average interest rate
(during the year) (2) 4.30% 4.16% 5.97%
(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, 1998, 1997, and 1996 was $16,643,000,
$21,449,000 and $17,721,000, respectively.
6. Share capital
The Company's authorized share capital 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.
All of the above-referenced classes of shares are without par value.
The Company's issued and outstanding share capital is as follows
(no first preference shares have been issued):
1998 1997 1996
12,241,269 (12,408,760 in 1997 and
12,265,760 in 1996) Class A
non-voting shares $36,392,000 $40,783,000 $39,688,000
99,680 Class B voting shares 133,000 133,000 133,000
$36,525,000 $40,916,000 $39,821,000
F-10
The Company has outstanding options with certain employees to
purchase a total of 1,266,110 Class A non-voting shares as follows:
Date of GrantNumber of SharesOption PriceExpiration Date
January 28, 1994 100,000 Cdn. $12.50 February 28, 1999
March 1, 1994 250,000 Cdn. $12.25 February 28, 1999
June 6, 1994 55,000 Cdn. $9.00 June 5, 1999
January 2, 1996 20,000 Cdn. $12.625 January 1, 2001
May 29, 1996 137,750 Cdn. $15.70 May 28, 2001
July 16, 1996 112,500 Cdn. $15.75 July 15, 2001
December 16, 1996 1,000 U.S. $14.375 December 15, 2001
December 31, 1996 5,000 Cdn. $19.80 December 31, 2001
January 7, 1997 78,820 U.S. $14.50 January 6, 2002
February 26, 1997 75,000 Cdn. $23.90 February 26, 2002
October 20, 1997 20,000 U.S. $20.875 October 19, 2002
December 23, 1997 5,000 U.S. $17.75 December 22, 2002
January 8, 1998 144,540 U.S. $18.00 January 7, 2003
January 29, 1998 185,000 U.S. $17.875 January 28, 2003
April 21, 1998 45,500 U.S. $21.50 April 20, 2003
October 20, 1998 11,000 U.S. $14.25 October 19, 2003
During 1998, options to purchase 206,000 Class A non-voting shares
(100,000 in 1997 and 212,350 in 1996) were exercised for cash
totaling $1,156,000 ($571,000 in 1997 and $1,175,000 in 1996). The
number of options vested at December 31, 1998 was 376,500
(335,000 in 1997 and 223,750 in 1996). The authorized number of
Class A non-voting shares that may be made subject to options under
the Company's employee stock option plans is 2,100,000.
The Company issued Class A non-voting shares from Treasury to
the Company's 401(k) plan as follows:
Issue price Total
Year Number of shares Date of issue per share consideration paid
1996 70,000 January 14, 1997 $14.375 $1,006,000
1997 42,000 January 14, 1998 $17.6875 $743,000
1998 56,000 January 12, 1999 $17.875 $889,000
In 1998, the Company paid cash dividends to holders of Class A
non-voting and Class B shares as follows (U.S. $0.24 in 1997):
Dividend
per share Record Date Payment Date
US$0.07 February 6, 1998 February 20, 1998
US$0.07 May 8, 1998 May 22, 1998
US$0.07 August 7, 1998 August 21, 1998
US$0.07 November 6, 1998 November 20, 1998
F-11
The Company may purchase up to 790,000 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, 1998, the Company
purchased 17,000 Class A non-voting shares for a total consideration
of $299,000 under a Normal Course Issuer Bid which expired on
July 1, 1998 and 398,500 Class A non-voting shares for a total
consideration of $5,991,000 under the currently effective Normal
Course Issuer Bid (27,000 shares for $482,000 in 1997 and nil in
1996). Unless terminated earlier by the Company, it may continue to
purchase shares up to July 2, 1999.
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:
1998 1997 1996
Profit before income tax $21,723,000 $46,484,000 $53,902,000
U.S. federal tax at 35% $ 7,589,000 $16,289,000 $18,876,000
Canadian tax at 44% 17,000 (25,000) (13,000)
Combined state and local tax 2,877,000 6,558,000 7,378,000
Income taxes before under-noted 10,483,000 22,822,000 26,241,000
Tax effect of non-taxable interest
and dividends (244,000) (88,000) (271,000)
Tax effect of deductible state and
local taxes and other differences
between accounting and
taxable income (963,000) (2,981,000) (2,347,000)
Income taxes $9,276,000 $19,753,000 $23,623,000
Profit before income tax provision
Canadian operations $ 39,000 $ (56,000) $ (29,000)
U.S. operations $21,684,000 $46,540,000 $53,931,000
The current U.S. income tax provision in 1998 is $9,276,000
($19,753,000 in 1997 and $23,623,000 in 1996). The current
Canadian income tax provision in 1998 is $39,000 (nil in 1997 and
1996).
Aggregate deferred tax assets, which relate primarily to fixed assets and
non-deductible expenses, are included in other assets and
amounted to approximately $1,445,000.
On a cash basis, the Company paid income taxes for the years ended
December 31, 1998, 1997 and 1996 in the amounts of $21,170,000,
$15,588,000 and $19,467,000, respectively.
F-12
9. Profit per share
1998 1997 1996
Basic weighted average number of
shares outstanding 12,575,905 12,494,054 12,296,197
Net effect, treasury stock method 365,412 383,887 287,039
Diluted common shares 12,941,317 12,877,941 12,583,236
Net profit $12,447,000 $26,731,000 $30,279,000
Basic profit per share $0.99 $2.14 $2.46
Diluted profit per share $0.96 $2.08 $2.41
Statement of Financial Accounting Standards No.128 - Earnings Per
Share ("FAS 128") requires a change in the method of calculation for
both primary and fully-diluted earnings per share for periods ended
after December 15, 1997. Earnings per share for the years ended
December 31, 1997 and 1996 have been restated to comply with
FAS 128.
FASB Statement No.123 "Accounting for Stock-Based
Compensation" ("SFAS 123") was issued in 1995, and if fully
adopted, changes the method for recognition of cost on 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 1998 grants for stock compensation had been determined
in accordance with SFAS 123 are as follows:
December 31, 1998 December 31, 1997 December 31, 1996
As As As
Reported Proforma Reported Proforma Reported Proforma
(000s omitted)
Net profit $12,447 $11,857 $26,731 $26,406 $30,279 $30,117
Basic profit
per share $0.99 $0.94 $2.14 $2.11 $2.46 $2.45
Diluted profit
per share $0.96 $0.92 $2.08 $2.05 $2.41 $2.39
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 1998: risk-free interest rates
ranging from 4.02% to 5.63% (5.68% to 6.37% in 1997 and 5.41%
to 6.66% in 1996), expected dividend yield of 1.4%, expected life of
5 years and expected volatility ranging from 24% to 30% (28% to
33% in 1997 and 25% in 1996). The weighted average fair value of
options granted during 1998 was $1,747,000 ($1,054,000 in 1997
and $958,000 in 1996). 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.
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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:
1999 $6,386,000
2000 5,727,000
2001 4,998,000
2002 4,068,000
2003 and thereafter 25,016,000
Total $46,195,000
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,
1998, 1997 and 1996 was $8,226,000, $6,689,000 and $5,566,000,
respectively.
(c) The Company, through its subsidiaries, maintains contribution
based retirement plans covering substantially all full-time U.S.
employees. The Fahnestock plan provides that the Company may
make discretionary contributions.
The FOM plan contributions are made in accordance with the terms of the
Plan document. FOM also 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 $2,450,000 at December 31, 1998.
The Company made contributions to the plans of $2,344,000,
$2,207,000 and $1,922,000 in 1998, 1997 and 1996, respectively.
(d) At December 31, 1998, the Company has collateralized and
uncollateralized letters of credit for $47,000,000. Collateral for these
letters of credit include marketable securities of approximately
$53,000,000, pledged to two financial institutions. No amounts have
been drawn on the letters of credit at December 31, 1998.
(e) 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.
(f) The Company's principal subsidiaries, Fahnestock and FOM , are
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, 1998, Fahnestock had net capital of $97,958,000
which was $89,925,000 in excess of the $8,033,000 required to be
maintained at that date. FOM computes its net capital under the basic
formula as provided by the Rule. At December 31, 1998, FOM had
net capital of $9,969,000 which was $9,719,000 in excess of the
$250,000 required to be maintained at that date.
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11. Comparative figures
Certain 1996 figures have been reclassified in order to conform with
the financial statement presentation adopted for 1997.
12. Acquisitions
On July 17, 1997, a subsidiary of the Company acquired
approximately 99.4% of the outstanding common stock of First of
Michigan Capital Corporation by way of a tender offer for cash
consideration. On July 31, 1997, the Company acquired the
remaining outstanding shares. The total purchase price was
$37,609,000. The acquisition was accounted for by the purchase
method as follows:
Cash $3,269,000
Receivable from brokers and others, net 69,885,000
Fixed assets 3,140,000
Assets subsequently sold 264,000
Other assets 11,713,000
88,271,000
Deduct:
Loans and notes payable (43,217,000)
Other liabilities (12,990,000)
Fair value of assets acquired 32,064,000
Purchase price paid 37,609,000
Excess of cost over fair value allocated
to goodwill $5,545,000
13. 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 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 to minimize the risk of loss.
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, 1998, approximately $104,211,000 of customer
securities are pledged as collateral for securities lending activities.
Included in receivable from brokers and clearing organizations are
receivables from five major broker-dealers totaling $70,171,000.
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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, 1998 included revenue from
trading equities of $14,617,000 ($53,828,000 in 1997) and revenue
from trading fixed income securities of $18,110,000 ($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, 1998, the Company had open contracts to sell stock
index futures contracts with notional values of approximately
$18,682,000 ($19,582,000 in 1997). The fair value of these
derivative financial instruments included in brokers and clearing
organizations at December 31, 1998 was approximately $1,012,000
($71,125 in 1997), and the monthly average fair values of the
instruments during the year were assets of $738,000 and liabilities of
$265,000 (assets of $133,000 and liabilities of $379,000 in 1997).
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, 1998 the Company had outstanding commitments
to buy and sell of $2,280,000 and $5,000,000, respectively, of
mortgage-backed securities on a when issued basis. These
commitments have off-balance sheet risks similar to those described
above.
14. 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".
New accounting standards issued but not effective would not have a
material impact on the Company's financial statements.
15. Related Party Transactions
The Company has retention notes and accounts receivable for
employees, net, of approximately $3,447,000 at December 31, 1998.
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.
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16. 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, 1998. The
Company's business is predominantly in the U.S. Asset information
by reportable segment is not reported, since the Company does not
produce such information for internal use.
Year ended December 31,199819971996
Revenue:
Retail Branches $138,862,000 $116,173,000 $96,199,000
Capital Markets 38,153,000 74,728,000 73,765,000
Asset Management 11,740,000 10,031,000 11,535,000
Interest 38,810,000 38,917,000 31,414,000
Other 5,216,000 2,309,000 1,075,000
Total $232,781,000 $242,158,000 $213,988,000
Operating Income:
Retail Branches $3,579,000 $1,712,000 $972,000
Capital Markets (5,530,000) 19,425,000 27,734,000
Asset Management 7,361,000 6,282,000 4,971,000
Interest 17,078,000 16,552,000 13,942,000
Other (765,000) 2,513,000 6,283,000
Total $21,723,000 $46,484,000 $53,902,000
16. Subsequent event
On January 1, 1999, Fahnestock purchased the operating assets of
FOM at carrying value and hired all of its personnel. FOM is now
operating as a division of Fahnestock.
On January 28, 1999, a cash dividend of U.S.$0.07 per share
(totaling $893,000) was declared payable on February 26, 1999 to
holders of Class A non-voting and Class B shares of record on
February 12, 1999.
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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/
Page
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)
21
Subsidiaries of the registrant (filed herewith) *
27
Financial Data Schedules, as required by Item 601(c)(2)(1) of
Regulations S-K and S-B (filed herewith) *
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