OPPENHEIMER HOLDINGS INC - Quarter Report: 2001 June (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 June 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 98-0080034

State or jurisdiction of (I.R.S. Employer

incorporation or organization Identification No.)

P.O. Box 2015, Suite 1110

20 Eglinton Avenue West

Toronto, Ontario, Canada M4R 1K8

(Address of principal executive offices)

(Zip Code)

416-322-1515

(Registrant's telephone number, including area code)

Not applicable

(Former name, address and former fiscal year, if changed since last report)

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

The number of shares of the Company's Class A non-voting shares and Class B voting shares (being the only classes of common stock of the Company), outstanding on July 19, 2001 was 12,292,450 and 99,680 shares, respectively.

FAHNESTOCK VINER HOLDINGS INC.

INDEX

PART I FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

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

Condensed Consolidated Statements of Operations for the three and six months periods ended June 30, 2001 and 2000

Condensed Consolidated Statements of Cash Flows for the six month period ended June 30, 2001 and 2000

Notes to Condensed Consolidated Financial Statements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

PART II OTHER INFORMATION

Item 1. Legal Proceedings

Item 2. Changes in Securities and Use of Proceeds

Item 3. Defaults Upon Senior Securities

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

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

SIGNATURES

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 subsidiary of FVH is Fahnestock & Co. Inc. ("Fahnestock"), a registered broker-dealer in securities. The Company engages in a broad range of activities in the securities industry, including retail securities brokerage, institutional sales and trading, investment banking (both corporate and public finance), underwritings, research, market-making, and investment advisory and asset management services. The Company provides its services from 75 offices in 15 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 1,260 people, of whom 740 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. 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:

3. Net Capital Requirements

The Company's principal broker-dealer subsidiary, Fahnestock, is subject to the Uniform Net Capital Rule (the "Rule") of the SEC and the net capital rule of the New York Stock Exchange (the "NYSE"). Fahnestock has elected to use the alternative method permitted by the Rule which requires that it 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 June 30, 2001, the net capital of Fahnestock as calculated under the Rule was $168,244,000 or 44% of Fahnestock's aggregate debit items. This was $160,652,000 in excess of the minimum required net capital.

4. Segment Information

The table below presents information about the reported operating income of the Company for the periods 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.

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

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

Results of Operations

Net profit for the second quarter ended June 30, 2001 was $3,919,000 or $0.32 per share compared to $8,292,000 or $0.68 per share for the second quarter of 2000, a decrease of 53% in net profit. Revenue for the second quarter of 2001 was $56,876,000 compared to $69,424,000 in the second quarter of 2000, a decrease of 18%.

Results for the second quarter of 2001 reflected substantially lower individual investor participation in the equity markets, the impact of reduced economic activity, and the substantial reduction in the value of securities held by investors in technology and telecommunications sectors. Market volume reflected reduced activity levels by both institutional and individual investors. Results were also impacted by lower interest rates and lower client debit balances, as well as the effect of decimalization on trading spreads in the NASDAQ market.

As a result of highly volatile market conditions in 2001 and investor uncertainty, the Company’s commission business and revenues from principal trading activities declined compared to the previous year. A less than robust economic environment for the remainder of this year when compared to the previous year is likely to affect securities markets for the balance of the fiscal year. Controllable expenses are being reduced to more closely reflect anticipated revenues over the next several quarters.

Commission income and to a large extent, income from principal transactions, depend on market volume levels. Commission revenue decreased by 11% in the second quarter of 2001 compared to the second quarter of 2000 with markets generating lower volumes in 2001 compared to 2000. Net revenue from principal transactions decreased by 28% compared to the second quarter of 2000 due to significantly reduced activity and reduced trading opportunities in the NASDAQ markets. Due to these reduced opportunities, 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 and advisory fees increased by 17% and 16%, respectively, compared with the second quarter of 2000. Net interest revenue (interest revenue less interest expense) decreased by 37% in the second quarter of 2001 compared to the second quarter of 2000 as a result of lower U.S. interest rates and lower customer debit balances.

Expenses decreased by 9% in the second quarter of 2001 compared to the second quarter of 2000. Compensation expense has volume-related components and, therefore, decreased (by 8%) with the decreased level of business conducted in the second quarter of 2001 compared to the second quarter of 2000. The cost of communications and technology decreased 3% in the second quarter of 2001 compared to the second quarter of 2000 due to benefits derived from reductions in telecommunications costs from vendors. Occupancy costs decreased by 15% in the second quarter of 2001 compared to the second quarter of 2000 due to the consolidation of several branch locations.

Liquidity and Capital Resources

Total assets at June 30, 2001 were $567,100,000, a decrease of approximately 19% from $697,482,000 at December 31, 2000 due primarily to lower customer and broker/dealer balances, as well as transactions in the Company’s matched book. 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 basis. At June 30, 2001, $24,466,000 of such borrowings were outstanding, a decrease of 6% compared to outstanding borrowings at December 31, 2000. At June 30, 2001 the Company had available collateralized and uncollateralized letters of credit of $35,500,000.

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.

Both on February 23, 2001 and May 18, 2001, the Company paid cash dividends of $0.09 per Class A non-voting and Class B share totaling $2,212,000 from available cash on hand.

On July 19, 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 August 17, 2001 to shareholders of record on August 3, 2001.

The book value of the Company’s Class A non-voting and Class B shares was $19.13 at June 30, 2001 compared to $17.35 at June 30, 2000, based on total outstanding shares of 12,389,930 and 12,033,439, 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 June 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 June 30, 2001 compared to those reported as at June 30, 2000 reflect reductions in the size and changes in the composition of the Company’s trading portfolio. The weighting of the portfolio at June 30, 2001 shifted towards debt and away from equities compared to the relative portfolio composition for the comparable period in 2000.

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

PART II

ITEM 1. Legal Proceedings

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

At the Annual and Special Meeting of Shareholders of the Company held on May 14, 2001, the holders of Class B voting shares (i) elected seven directors, (ii) appointed PricewaterhouseCoopers LLP as auditors of the Company and authorized the directors to fix the remuneration of the auditors, (iii) confirmed an amendment to the Company’s 1996 Equity Incentive Plan increasing the number of Class A non-voting shares that may be issued pursuant to options granted under the Plan by 175,000 shares and (iv) approved the Performance-Based Compensation Agreement dated as of January 1, 2001 between the Company and A.G. Lowenthal.

 

The number of votes cast for or against or withheld as to each matter voted upon, as applicable, is set forth below:

ITEM 5. Other Information

None

ITEM 6. Exhibits and Reports on Form 8-K

Exhibits -

(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 19th day of July 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)

EXHIBIT INDEX