OPPENHEIMER HOLDINGS INC - Quarter Report: 2001 September (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended September 30, 2001

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
(State or other jurisdiction of
incorporation or organization)

98-0080034
(I.R.S. Employer Identification No.)

P.O. Box 2015, Suite 1110
20 Eglinton Avenue West
Toronto, Ontario, Canada M4R 1K8
(Address of principal executive offices) (Zip Code)

416-322-1515
(Registrant's telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]

The number of shares of the Company's Class A non-voting shares and Class B voting shares (being the only classes of common stock of the Company), outstanding on October 18, 2001 was 12,303,670 and 99,680 shares, respectively.

FAHNESTOCK VINER HOLDINGS INC.

INDEX

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PART I FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

Condensed Consolidated Balance Sheets as of September 30, 2001and December 31, 2000 2

Condensed Consolidated Statements of Operations for the three and nine months periods ended September 30, 2001 and 2000 4

Condensed Consolidated Statements of Cash Flows for the nine month period ended September 30, 2001 and 2000 5

Notes to Condensed Consolidated Financial Statements 6

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10

Item 3. Quantitative and Qualitative Disclosures About Market Risk 12

PART II OTHER INFORMATION

Item 1. Legal Proceedings 14

Item 2. Changes in Securities and Use of Proceeds 14

Item 3. Defaults Upon Senior Securities 14

Item 4. Submission of Matters to a Vote of Security-Holders 14

Item 5. Other Information 14

Item 6. Exhibits and Reports on Form 8-K 14

SIGNATURES 15

The accompanying notes are an integral part of these condensed consolidated financial statements.

The accompanying notes are an integral part of these condensed consolidated financial statements.

The accompanying notes are an integral part of these condensed consolidated financial statements.

The accompanying notes are an integral part of these condensed consolidated financial statements.

FAHNESTOCK VINER HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Basis of Presentation

The condensed consolidated financial statements include the accounts of Fahnestock Viner Holdings Inc. ("FVH") and its subsidiaries (together, the "Company"). The principal subsidiaries of FVH are Fahnestock & Co. Inc. ("Fahnestock") and since September 17, 2001, Josephthal & Co. Inc. ("Josephthal"), registered broker-dealers in securities. The Company engages in a broad range of activities in the securities industry, including retail securities brokerage, institutional sales and trading, investment banking (both corporate and public finance), underwritings, research, market-making, and investment advisory and asset management services. The Company provides its services from 100 offices in 19 states located primarily in the Northeastern United States, Michigan, the Midwest and Florida. Fahnestock also conducts business in Toronto, Canada and in South America through local broker-dealers. The Company employs approximately 1,850 people, of whom over 1,000 are financial consultants.

All material intercompany accounts have been eliminated in consolidation.

The Company’s condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC") with respect to Form 10-Q and do not include all of the information and footnotes required under accounting principles generally accepted in the United States of America for complete financial statements. These financial statements should be read in conjunction with the Company’s most recent annual report on Form 10-K for the year ended December 31, 2000 including the summary of significant accounting policies utilized by the Company.

The financial statements include all adjustments which, in the opinion of management, are normal and recurring and necessary for a fair presentation of the results of operations, financial position and cash flows for the interim periods presented. The nature of the Company’s business is such that the results of operations for the interim periods are not necessarily indicative of the results to be expected for a full year.

These condensed consolidated financial statements are presented in U.S. dollars.

2. Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets". SFAS 141 mandates the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and establishes specific criteria for the recognition of intangible assets separately from goodwill. SFAS 142 addresses the accounting for goodwill and other intangible assets subsequent to their acquisition. Under the new rules, goodwill and other intangible assets deemed to have indefinite lives will no longer be amortized but, instead, will be tested at least annually for impairment. All other intangible assets will continue to be amortized over their estimated useful lives. The Company intends to fully adopt the new rules on January 1, 2002, the beginning of fiscal 2002. The Company has not yet determined the impact that these standards could have on its consolidated financial position or results of operations.

3. Earnings per share

Basic earnings per share was computed by dividing net profit by the weighted average number of Class A non-voting and Class B shares outstanding. Diluted earnings per share includes the weighted average Class A non-voting and Class B shares outstanding and the effects of Class A non-voting share options using the treasury stock method.

Earnings per share has been calculated as follows:

4. Net Capital Requirements

The Company's principal broker-dealer subsidiaries, Fahnestock and Josephthal, are subject to the Uniform Net Capital Rule (the "Rule") of the SEC and the net capital rule of the New York Stock Exchange (the "NYSE"). Fahnestock and Josephthal have elected to use the alternative method permitted by the Rule, which requires that they maintain minimum net capital equal to 2% of aggregate debit items arising from customer transactions, as defined. The NYSE may prohibit a member firm from expanding its business or paying dividends if resulting net capital would be less than 5% of aggregate debit items.

At September 30, 2001, the net capital of Fahnestock as calculated under the Rule was $173,242,000 or 50% of Fahnestock's aggregate debit items. This was $166,337,000 in excess of the minimum required net capital. At September 30, 2001, the net capital of Josephthal & Co. Inc. as calculated under the Rule was $1,727,000. This was $1,477,000 in excess of the minimum required net capital.

5. Segment Information

The table below presents information about the reported operating income of the Company for the periods noted, in accordance with the method described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2000. The Company’s business is conducted primarily in the U.S. Asset information by reportable segment is not reported, since the Company does not produce such information for internal use.

6. Acquisitions

On September 17, 2001, the Company, through an indirect wholly-owned subsidiary, acquired substantially all of the outstanding common shares of Josephthal Group, Inc., which indirectly owns 100% of Josephthal & Co., Inc, a private New York-based, full service broker-dealer with approximately 265 financial consultants in 25 offices across the United States. The results of Josephthal’s operations have been included in the consolidated financial statements since that date. Josephthal was founded in 1910 and is a member of the New York Stock Exchange and other principal exchanges. With this acquisition, the Company has in its employ over 1,000 financial consultants in 100 offices, and has combined client assets under administration in excess of $20 billion.

The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of acquisition. The Company is currently assessing the valuation of potential intangible assets, other than goodwill and of certain liabilities and thus, the summary of fair values is subject to change.

Josephthal Group, Inc.
Balance Sheet
As at September 17, 2001

Presented below are the unaudited proforma consolidated results of operations which give effect to the acquisition of Josephthal as if the transaction was consummated at the beginning of each of the periods presented. The proforma information is for comparative purposes only and is not necessarily indicative either of the actual results that would have occurred if the acquisition had been consummated at the beginning of the period presented, or of future operations of the combined companies. The Company has not yet determined the amount, if any, to be allocated to intangible assets other than goodwill and thus, the results do not include any amortization of such intangible assets, if any.

7. Subsequent Events

In October, 2001, the Company agreed to acquire Grand Charter Group, Incorporated, which owns 100% of Prime Charter Ltd., a twelve year old full service securities firm with approximately 100 financial consultants headquartered in New York City. Prime Charter is a member firm of the NASD and operates from two offices in New York City and Boca Raton, Florida.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The securities industry is directly affected by general economic and market conditions, including fluctuations in volume and price levels of securities and changes in interest rates, all of which have an impact on commissions and firm trading and investment income as well as on liquidity. Substantial fluctuations can occur in revenues and net income due to these and other factors.

Results of Operations

Net profit was U.S.$3,334,000 or $0.27 per share for the third quarter ended September 30, 2001 compared to U.S.$6,375,000 or $0.53 per share for the third quarter of 2000, a decrease of 48% in net profit. Revenue for the third quarter of 2001 was U.S.$53,748,000, a decrease of 23% compared to revenue of U.S.$69,465,000 in the third quarter of 2000.

On September 11, 2001, attacks by terrorists on the World Trade Center and the Pentagon irretrievably damaged North America’s sense of invulnerability at home. The repercussions have had and will have far reaching consequences going beyond the personal losses experienced by many Americans and their families. An already fragile economic environment probably has tipped into recession. Despite continuing interest rate reductions and calls to resume normal behavior, investors remain skittish and markets are extremely volatile. Only time will tell what the long-term impact of these events will be on investors, the economy, and North American society.

Weak and uncertain markets, together with the fact that markets in the United States were closed for four days in September 2001 following the terrorist bombings, had a drastic effect on the Company’s revenues from commissions and principal transactions in the third quarter of 2001 compared to the third quarter of 2000. Declining interest rates throughout 2001 and lower customer margin balances reduced net interest income in the third quarter of 2001 compared to the same period in 2000.

On September 17, 2001 the Company purchased substantially all of the outstanding shares of Josephthal Group, Inc., the parent of Josephthal & Co. Inc., a full service securities firm headquartered in New York City with approximately 265 financial consultants in 25 offices across the United States. Josephthal was founded in 1910 and is a member of the New York Stock Exchange and other principal exchanges. The consolidated results of operations for the third quarter 2001 include the operations of Josephthal Group from the date of acquisition. Josephthal is currently operating at a loss. The pretax impact of the Josephthal acquisition in the Company’s consolidated results for the third quarter 2001 is a loss of approximately $1,140,000. The Company has plans to assume the clearing of the Josephthal client accounts in early November and every effort is being made to streamline the combined operations and effect cost savings as quickly and efficiently as possible.

Commission income and to a large extent, income from principal transactions, depend on market volume levels. Commission revenue decreased by 15% in the third quarter of 2001 compared to the third quarter of 2000 with markets generating lower volumes in 2001 compared to 2000 as a result both of reduced investor activity during the summer of 2001 and a complete halt in all activity for four days in September following the terrorist attacks on September 11^th partially offset by commission income contributed by Josephthal in the post-acquisition period. Net revenue from principal transactions decreased by 25% compared to the third quarter of 2000 due to market volatility, significantly reduced activity, and reduced spreads (the difference between bid and ask) in the NASDAQ markets resulting from the decimalization of NASDAQ markets which became effective in the third quarter of 2001. For these reasons, the Company reduced the number of securities in which it makes markets. It may increase or decrease this number from time to time as market conditions warrant. Investment banking revenues increased by 17% in the third quarter of 2001 compared with the third quarter of 2000 as a result of several merger and acquisition assignments that closed during the 2001 quarter. Advisory fees increased by 4% in the third quarter of 2001 compared to the third quarter of 2000 as a result of increased fees from increased balances in money market funds. Net interest revenue (interest revenue less interest expense) decreased by 37% in the third quarter of 2001 compared to the third quarter of 2000 as a result of significantly lower U.S. interest rates and lower customer margin balances.

Expenses decreased by 17% in the third quarter of 2001 compared to the third quarter of 2000. Compensation expense has volume-related components and, therefore, with the decreased level of business conducted in the third quarter of 2001 compared to the third quarter of 2000, decreased by 11%, partially offset by the increased compensation costs resulting from the post-acquisition operations of Josephthal. The cost of communications and technology decreased 8% in the third quarter of 2001 compared to the third quarter of 2000 due to benefits derived from reductions in telecommunications costs from vendors, which more than offset the effect of the acquisition of Josephthal on September 17, 2001. Occupancy costs increased by 10% in the third quarter of 2001 compared to the third quarter of 2000 reflecting the addition of 25 locations with the acquisition of Josephthal in September 2001.

Liquidity and Capital Resources

Total assets at September 30, 2001 were $627,269,000, a decrease of approximately 10% from $697,482,000 at December 31, 2000 due primarily to lower customer balances, as well as the discontinuation of the Company’s matched book business and reduced stock borrow/stock loan activity. Liquid assets accounted for 97% of total assets, consistent with year-end levels. The Company satisfies its need for funds from its own cash resources, internally-generated funds, subordinated borrowings, collateralized borrowings consisting primarily of bank loans, and uncommitted lines of credit. The amount of Fahnestock's bank borrowings fluctuates in response to changes in the level of the Company's securities inventories and customer margin debt as well as changes in stock loan balances. Fahnestock has arrangements with banks for borrowings on a fully collateralized as well as unsecured basis. At September 30, 2001, $5,383,000 of such borrowings were outstanding, a decrease of 79% compared to outstanding borrowings at December 31, 2000. At September 30, 2001 the Company had available collateralized and uncollateralized letters of credit of $26,500,000.

Management believes that funds from operations, combined with Fahnestock's capital base and available credit facilities, are sufficient for the Company's liquidity needs in the foreseeable future.

On February 23, 2001, May 18, 2001 and August 17, 2001, the Company paid cash dividends of $0.09 per Class A non-voting and Class B share totaling $3,327,000 from available cash on hand.

On October 18, 2001, the Board of Directors declared a regular quarterly cash dividend of U.S.$0.09 per Class A non-voting and Class B share payable on November 16, 2001 to shareholders of record on November 2, 2001.

The book value of the Company’s Class A non-voting and Class B shares was $19.31 at September 30, 2001 compared to $17.78 at September 30, 2000, based on total outstanding shares of 12,403,350 and 12,082,149, respectively.

Factors Affecting "Forward-Looking Statements"

This report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended ( the "Act"), and Section 21E of the Exchange Act. These forward-looking statements relate to anticipated financial performance, future revenues or earnings, business prospects and anticipated market performance of the Company. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company cautions readers that a variety of factors could cause the Company’s actual results to differ materially from the anticipated results or other expectations expressed in the Company’s forward-looking statements. These risks and uncertainties, many of which are beyond the Company’s control, include, but are not limited to: (i) transaction volume in the securities markets, (ii) the volatility of the securities markets, (iii) fluctuations in interest rates, (iv) changes in regulatory requirements which could affect the cost and manner of doing business, (v) fluctuations in currency rates, (vi) general economic conditions, both domestic and international, (vii) changes in the rate of inflation and the related impact on the securities markets, (viii) competition from existing financial institutions and other new participants in the securities markets, (ix) legal developments affecting the litigation experience of the securities industry, and (x) changes in federal and state tax laws which could affect the popularity of products sold by the Company. There can be no assurance that the Company has correctly or completely identified and assessed all of the factors affecting the Company’s business. The Company does not undertake any obligation to publicly update or revise any forward-looking statements.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Risk Management

The Company’s principal business activities by their nature involve significant market and credit risks. The Company’s effectiveness in managing these risks is critical to its success and stability.

As part of its normal business operations, the Company engages in the trading of both fixed income and equity securities in both a proprietary and market-making capacity. The Company makes markets in over-the-counter equities in order to facilitate order flow and accommodate its institutional and retail customers. The Company also makes markets in municipal bonds, mortgage-backed securities, government bonds and high yield bonds.

Market risk generally means the risk of loss that may result from the potential change in the value of a financial instrument as a result of fluctuations in interest and currency exchange rates and in equity and commodity prices. Market risk is inherent in all types of financial instruments, including both derivatives and non-derivatives. The Company’s exposure to market risk arises from its role as a financial intermediary for its customers’ transactions and from its proprietary trading and arbitrage activities.

In addition, the Company’s activities expose it to operational risk, legal risk and funding risk. Operational risk generally means the risk of loss resulting from improper processing of transactions or deficiencies in the Company’s operating systems or internal controls. With respect to its trading activities, the Company has procedures designed to ensure that all transactions are accurately recorded and properly reflected on the Company’s books on a timely basis. With respect to client activities, the Company operates a system of internal controls designed to ensure that transactions and other account activity (new account solicitation, transaction authorization, transaction processing, billing and collection) are properly approved, processed, recorded and reconciled. Legal risk generally includes the risk of non-compliance with legal and regulatory requirements and the risk that a counterparty’s obligations are unenforceable. The Company is subject to extensive regulation in the various jurisdictions in which it conducts its business. Through its legal advisors and its compliance department, the Company has established routines to ensure compliance with regulatory capital requirements, sales and trading practices, new products, use and safekeeping of customer securities and funds, granting of credit, collection activities, and record keeping. The Company has procedures designed to assess and monitor counterparty credit risk.

Value-at-Risk

Value-at-risk is a statistical measure of the potential loss in the fair value of a portfolio due to adverse movements in underlying risk factors. In response to the SEC’s market risk disclosure requirements, the Company has performed a value-at-risk analysis of its trading financial instruments and derivatives. The value -at-risk calculation uses standard statistical techniques to measure the potential loss in fair value based upon a one-day holding period and a 95% confidence level. The calculation is based upon a variance-covariance methodology, which assumes a normal distribution of changes in portfolio value. The forecasts of variances and co-variances used to construct the model for the market factors relevant to the portfolio were generated from historical data. Although value-at-risk models are sophisticated tools, their use can be limited as historical data is not always an accurate predictor of future conditions. The Company attempts to manage its market exposure using other methods, including trading authorization and concentration limits.

At September 30, 2001 and 2000, the Company’s value-at-risk for each component of market risk was as follows:

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 as at September 30, 2001 compared to those reported as at September 30, 2000 reflect reductions in the size and changes in the composition of the Company’s trading portfolio. The weighting of the portfolio at September 30, 2001 shifted towards debt and away from equities compared to the relative portfolio composition for the comparable period in 2000. From time to time the Company modifies its risk exposure with hedging positions and this affects the diversification benefit in the value-at-risk calculation.

The value-at-risk estimate has limitations that should be considered in evaluating the Company’s potential future losses based on the period-end portfolio positions. Recent market conditions, including increased volatility, may result in statistical relationships that result in higher value-at-risk than would be estimated from the same portfolio under different market conditions, or the converse may be true. Critical risk management strategy involves the active management of portfolio levels to reduce market risk. The Company’s market risk exposure is continuously monitored as the portfolio risks and market conditions change.

PART II OTHER INFORMATION

ITEM 1. Legal Proceedings

The Company's subsidiaries are parties to legal proceedings incidental to
their respective businesses. In management's opinion, there are no legal
proceedings to which the Company or its subsidiaries are parties or to
which any of their respective properties are subject which are material to
the Company's financial position. The potential significance of legal
matters on the Company's future operating results depends on the level of
future results of operations as well as the timing and ultimate outcome of
such legal matters.

ITEM 2. Changes in Securities and Use of Proceeds

Not applicable

ITEM 3. Defaults Upon Senior Securities

Not applicable

ITEM 4. Submission of Matters to a Vote of Security-Holders

None

ITEM 5. Other Information

None

ITEM 6. Exhibits and Reports on Form 8-K

(a) Exhibits - None

(b) Reports on Form 8-K - None

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized, in the City of Toronto, Ontario, Canada on the 30th day of October, 2001.

FAHNESTOCK VINER HOLDINGS INC.

By: "A.G. Lowenthal"
A.G.Lowenthal, Chairman
(Principal Financial Officer)

By: "E.K. Roberts"
E.K.Roberts, President
(Duly Authorized Officer)