UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934For the
fiscal year ended December 31, 2004
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934For
the transition period from _________ to _________.
Commission file number 1-12043
OPPENHEIMER HOLDINGS INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
98-0080034
(I.R.S. Employer
Identification No.)
20 Eglinton Avenue West
Toronto, Ontario, Canada
(Address of principal executive offices)
M4R 1K8
(Zip Code)
Registrant’s Telephone number, including area code: (416) 322-1515
Class A non-voting shares
Name of each exchange
on which registered
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 þ No o
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. þ
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Securities Exchange Act of 1934). Yes þ No o
The aggregate market value of the voting stock of the Company held by non-affiliates of the Company
cannot be calculated in a meaningful way because there is only limited trading in the class of
voting stock of the Company. The aggregate market value of the Class A non-voting shares held by
non-affiliates of the Company at June 30, 2004 was $371,701,000 based on the closing price of the
Class A non-voting shares on the New York Stock Exchange as at June 30, 2004 of $27.78.
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 March 10, 2005 was 13,297,671 and
99,680 shares, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
The Company’s definitive proxy statement to be filed by the Company pursuant to Regulation 14A is
incorporated into Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K.
TABLE OF CONTENTS
Item Number
Page
PART 1
1.
2
2.
15
3.
15
4.
16
PART II
5.
17
6.
20
7.
21
7a.
34
8.
37
9.
65
9a.
65
9b.
65
PART III
10.
66
11.
66
12.
66
13.
66
14.
67
PART IV
15.
68
69
73
PART I
Item 1. BUSINESS
Oppenheimer Holdings Inc., formerly called Fahnestock Viner Holdings Inc., prior to that 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 Canada M4R 1K8 and its telephone number is (416) 322-1515.
The Company was originally incorporated under the laws of British Columbia. Pursuant to its
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, Oppenheimer & Co. Inc. (formerly called Fahnestock & Co. Inc. and prior
to that called Edward A. Viner & Co., Inc.), a New York corporation (“Oppenheimer”); Freedom
Investments, Inc., a Delaware corporation (“Freedom”); Oppenheimer Asset Management Inc. (formerly
called Hudson Capital Advisors Inc.), a New York corporation (“OAM”); Evanston Financial, Inc., a
New York corporation (“Evanston”); since September 17, 2001, Josephthal & Co. Inc., a New York
corporation (“Josephthal”); and since November 9, 2001, Prime Charter, Ltd., a Delaware corporation
(“Prime”). Oppenheimer, OAM and Freedom 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.
Oppenheimer and OAM are the principal Operating Subsidiaries. Oppenheimer is engaged in the
securities brokerage business in the United States, operates in Toronto, Canada as an International
Dealer and, through the agency of local licensed broker-dealers, operates offices in Buenos Aires,
Argentina and Caracas, Venezuela. OAM is engaged in the investment advisory business in the United
States. In addition, Oppenheimer conducts investment advisory business under the name Fahnestock
Asset Management, a division of Oppenheimer. The business formerly conducted by Josephthal and
Prime is now conducted by Oppenheimer. The private client business acquired from CIBC World Markets
Inc. in January 2003 discussed below is being conducted by Oppenheimer. The asset management
business acquired from CIBC World Markets in June 2003 discussed below is being conducted by OAM.
The Company operates a discount brokerage business through Freedom.
In March 2002, through Freedom, the Company purchased the business of BUYandHOLD Securities
Corporation and affiliates for cash consideration of $2,297,000. BUYandHOLD is an on-line brokerage
business headquartered in Edison, NJ. The combination of the Freedom and BUYandHOLD technology
platforms provides clients with a comprehensive and diversified suite of online financial services.
BUYandHOLD operates as a division of Freedom. The acquisition was accounted for by the purchase
method.
In May 2002, Oppenheimer Trust Company received a charter as a limited purpose bank domiciled in
New Jersey. Oppenheimer Trust Company offers trust services to the clients of Oppenheimer and OAM.
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On January 3, 2003, the Company acquired the U.S. Private Client Division of CIBC World Markets and
on June 4, 2003 acquired the U.S. Asset Management Division of CIBC World Markets (the “Oppenheimer
divisions”) for a total consideration of approximately $242 million, of which approximately $16
million was paid in cash at closing from cash on hand and the balance was paid from the proceeds of
the issuance of debt instruments. The private client business is being operated by Oppenheimer and
added approximately 620 account executives in 18 branches located in the major financial centers of
the United States to its business at the closing date. Client assets of the Private Client Division
were approximately $30 billion at the closing date. Assets under management in the Asset Management
Division were approximately $8.5 billion at the acquisition date. The asset management business is
being operated by OAM. The acquisition was accounted for by the purchase method. This transaction
more than doubled the Company’s retail exposure and asset base.
At December 31, 2004,
Oppenheimer employed approximately 1,667 full-time registered representatives
and approximately 1,187 other employees in trading, research, investment banking, investment
advisory services, public finance and support positions in the United States for Oppenheimer, OAM
and Freedom, for a total of approximately 2,854 full-time employees.
Oppenheimer and Freedom are broker-dealers registered with the Securities and Exchange Commission
(the “SEC”) and in all other jurisdictions where their respective businesses require registration.
Oppenheimer, in addition to its United States operations, has two additional offices: it 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.
Oppenheimer is a member of the New York Stock Exchange, Inc. (“NYSE”), the National Association of
Securities Dealers, Inc. (“NASD”), the American Stock Exchange, Inc. (“AMEX”), the Chicago Stock
Exchange Incorporated (“CSE”), the Chicago Board Options Exchange, Inc. (“CBOE”), the New York
Futures Exchange, Inc. (“NYFE”), the National Futures Association (“NFA”) and the Securities
Industry Association (“SIA”). In addition, Oppenheimer has satisfied the requirements of the
Municipal Securities Rulemaking Board (“MSRB”) for effecting customer transactions in municipal
securities. Freedom is a member of the NASD.
Oppenheimer, which acts as a clearing broker for Freedom and carries an omnibus account for the
BUYandHOLD Division of Freedom, which is itself a self-clearing firm, 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
3
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 2004, 2003 and 2002. In addition, Oppenheimer
has purchased an additional “excess SIPC” policy protection from
Lloyds of London of an additional $74,500,000 (and $900,000 for claims for cash balances) per
customer. The “excess SIPC” policy has an aggregate limit of liability of $400,000,000. The
Company has entered into an indemnity agreement with Lloyds of London pursuant to which the Company
has agreed to indemnify Lloyd’s of London for losses incurred by Lloyd’s under the policy.
The Company’s internet address is www.opco.com. The Company makes available free of charge through
its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and other SEC filings and all amendments to those reports within 24 hours of such material
being electronically filed with or furnished to the SEC.
SOURCES OF REVENUE:
The Company derives most of its revenues from the operations of its principal subsidiaries,
Oppenheimer and OAM. Although maintained as separate entities, the operations of the Company’s
brokerage subsidiaries are closely related because Oppenheimer acts as clearing broker and omnibus
in transactions initiated by Freedom. Except as expressly otherwise stated, the discussion below
pertains to the operations of Oppenheimer.
COMMISSIONS
A significant portion of Oppenheimer’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 Oppenheimer has
formulated. Often, discounts are granted to customers, generally on large trades or to active
customers. Oppenheimer also provides a range of services in other financial products to retail and
institutional customers, including the purchase and sale of options on the CBOE, the AMEX and other
stock exchanges as well as futures on indexes listed on various exchanges.
Commission business relies heavily on the services of financial consultants with good sales
production records and good reputations. Competition among securities firms for such personnel is
intense. Retail clients’ accounts are serviced by retail financial advisors (excluding the
institutional financial consultants referred to below) in Oppenheimer’s offices. Oppenheimer’s
institutional clients, which include mutual funds, banks, insurance companies, hedge funds, and
pension and profit-sharing funds, are serviced by institutional financial advisors. (For a
discussion of regulatory matters, see “Regulation”.) The institutional department is supported by
the equity research department which provides coverage of a number of commercial and industrial as
well as emerging growth companies and special situation investments.
Securities Clearance Activities
Oppenheimer provides a full range of securities clearance services to two non-affiliated securities
firms on a fully-disclosed basis. In addition to commissions and service charges,
4
Oppenheimer derives substantial interest revenue from its securities clearing activities. See
“Interest — Securities Borrowed And Loaned.” Oppenheimer provides margin financing for the clients
of the securities firms for which it clears, with the securities firms guaranteeing the accounts of
their clients. Oppenheimer also extends margin credit directly to its correspondent firms to the
extent that such firms hold securities positions for their own account. Because Oppenheimer must
rely on the guarantees and general credit of its
correspondent firms, Oppenheimer 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.”
Commodities
Oppenheimer is a futures commission merchant and clears commodities transactions on a number of
commodities exchanges for its clients that trade commodities through a correspondent firm on an
omnibus basis. Such client commodity accounts contain significant leverage and thus have a greater
than average likelihood of becoming unsecured or for clients incurring substantial losses, that
ultimately could result in a loss to the Company.
PRINCIPAL TRANSACTIONS
In the regular course of its business, Oppenheimer takes securities positions as a market maker to
facilitate customer transactions and for investment purposes. In making markets and when trading
for its own account, Oppenheimer exposes its own capital to the risk of fluctuations in market
value.
Oppenheimer monitors its risk by maintaining its securities positions at or below certain
pre-established levels. These levels reduce certain opportunities to realize profits in the event
that the values of such securities increase. However, they also reduce the risk of loss in the
event of decreases in such values and result in controlled interest costs incurred on funds
provided to maintain such positions. Oppenheimer also attempts to minimize risk with respect to its
principal transactions by re-selling (or buying) to offset its positions quickly after establishing
positions, thereby reducing the need to hold securities inventory positions for even short periods
of time.
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.
Oppenheimer takes both long and short positions in those securities in which it makes a market.
Equities. Oppenheimer acts as both principal and agent in the execution of its customers’ orders
in the over-the-counter market. Oppenheimer 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.) In executing customer orders for over-the-counter securities in which it does not make
a market, Oppenheimer generally charges a commission and acts as agent, or will act as principal by
marking the security up or down in
5
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 Oppenheimer makes a market,
Oppenheimer 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 Oppenheimer makes a market also may include those of issuers which
are followed by Oppenheimer’s research department. Oppenheimer makes markets in over 800
over-the-counter equity securities, and trades securities for its own account, as well as to
facilitate customer transactions. As a result of the move to decimal trading in the NASDAQ, which began for all stocks in April 2001,
narrowing bid-ask spreads and smaller price increments are being experienced and are resulting in a
decrease in trading revenue earned from the Company’s market making operations. Oppenheimer also
trades in OTC Bulletin Board and pink sheet securities. These securities are typically more
illiquid, have smaller capitalizations and may involve more risk than NASDAQ-traded securities.
High Yield. Oppenheimer also trades and positions non-investment grade public and private debt
securities, as well as distressed securities. Risk of loss upon default by the borrower is
significantly greater with respect to unrated or less than investment grade corporate debt
securities than with other corporate debt securities. These securities are generally unsecured and
are often subordinated to other creditors of the issuer. These issuers usually have high levels of
indebtedness and are more sensitive to adverse economic conditions, such as recession or increasing
interest rates, than are investment grade issuers. There is a limited market for some of these
securities and market quotes are available only from a small number of dealers.
Other Trading and Investment Activities
Oppenheimer holds positions in its trading accounts in over-the-counter securities and in
exchange-listed securities in which it does not make a market and may engage from time to time in
other types of principal transactions in securities. Oppenheimer 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, and a
department that underwrites and trades U.S. government agency issues, taxable corporate bonds, and
UIT’s. These departments continually purchase and sell securities and make markets in order to
make a profit on the inter-dealer spread. Although Oppenheimer from time to time holds an inventory
of securities, more typically, it seeks to match customer buy and sell orders. In addition,
Oppenheimer or OAM hold proprietary positions in equity or fixed income securities in which it may
not act as a dealer.
The size of its securities positions on any one day may not be representative of Oppenheimer’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 Oppenheimer 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.”
In the case of OAM, it holds investments as general partner in a range of investment
6
partnerships (“hedge funds”), which are offered to Oppenheimer hedge fund qualified clients as well
as qualified clients of other broker-dealers.
Investment Income
Principal transactions with customers as well as market-making and other trading and investment
activities, dividends and interest earned on securities held in inventory, cash and cash
equivalents and cash and securities held in segregated accounts are treated as investment income.
The Company’s investment activities primarily include investing in equity and equity-related
securities and limited partnerships as well as general partnership interests in connection with
private investment transactions, either for the accounts of Company-sponsored private equity
partnerships, real estate partnerships or special purpose partnerships or for its own account.
These activities include mutual fund investments, insurance vehicles with investment options,
including those made in connection with its deferred compensation plans, venture capital
investments, and investments in portfolio and operating companies. The fair value of these
investments is subject to a higher degree of volatility and may include significant risks of loss
while attempting to obtain higher returns than those available from
publicly-traded securities.
INTEREST
Oppenheimer derives a substantial portion of its interest revenue, and incurs a substantial portion
of its interest expense, in connection with its securities borrowed/ securities loaned activity.
Oppenheimer also earns interest on its securities portfolio, on its operating and segregated
balances, on its margin lending activity and on certain of its investments. Oppenheimer also incurs
interest expense on its long-term debt, bank loans and free credit balances in the accounts of
customers.
Securities Borrowed/ Securities Loaned. In connection with both its trading and brokerage
activities, Oppenheimer 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. Oppenheimer has an active securities
borrowed and lending matched book business (“Matched Book”), in which Oppenheimer borrows
securities from one party and lends them to another party. When Oppenheimer borrows securities,
Oppenheimer provides cash to the lender as collateral, which is reflected in the Company’s
financial statements as receivable from brokers and dealers. OPCO earns interest revenues on this
cash collateral. Similarly, when Oppenheimer lends securities to another party, that party provides
cash to Oppenheimer as collateral, which is reflected in the Company’s financial statements as
payable to brokers and dealers. Oppenheimer pays interest expense on the cash collateral received
from the party borrowing the securities.
Margin Lending. Customers’ transactions are executed on either a cash or margin basis. In a
margin transaction, Oppenheimer extends credit to the customer, collateralized by securities and
cash in the customer’s account, for a portion of the purchase price, and receives income from
interest charged on such extensions of credit. Margin lending by Oppenheimer is subject to the
margin rules of the Board of Governors of the Federal Reserve System, NYSE margin requirements and
Oppenheimer’s internal policies.
7
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 Oppenheimer’s business, including the extension of margin credit. Subject to applicable
regulations, interest is paid by Oppenheimer on most, but not all, of such free credit balances
awaiting reinvestment by customers. The customer is charged for such margin financing at interest
rates derived from the company’s “base” rate as defined, as well as the
brokers’ loan rate, and LIBOR, to which is added an additional amount of up to 2%. To the extent
that the use of free credit balances reduces borrowings, interest expense is reduced.
In permitting a customer to purchase securities on margin, Oppenheimer is subject to the risk that
a market decline could reduce the value of its collateral below the amount of the customer’s
indebtedness and that the customer might otherwise be unable to repay the indebtedness.
In addition to monitoring the creditworthiness of its customers, Oppenheimer also considers the
trading liquidity and volatility of the securities it accepts as collateral for its margin loans.
Trading liquidity and volatility may be dependent, in part, upon the market in which the security
is traded, the number of outstanding shares of the issuer, events affecting the issuer and/or
securities markets in general, and whether or not there are any legal restrictions on the sale of
the securities. Oppenheimer considers all of these factors at the time it agrees to extend credit
to customers and continues to review its extensions of credit on an ongoing basis.
The majority of Oppenheimer’s margin loans are made to United States citizens or to corporations
which are domiciled in the United States. Oppenheimer may extend credit to investors or
corporations who are citizens of foreign countries or who may reside outside the United States.
Oppenheimer believes that should such foreign investors default upon their loans and should the
collateral for those loans be insufficient to satisfy the investors’ obligations, it may be more
difficult to collect such investors’ outstanding indebtedness than would be the case if investors
were citizens or residents of the United States.
Although Oppenheimer attempts to minimize the risk associated with the extension of credit in
margin accounts, there is no assurance that the assumptions on which Oppenheimer bases its
decisions will be correct or that it is in a position to predict factors or events which will have
an adverse impact on any individual customer or issuer, or the securities markets in general.
INVESTMENT BANKING BUSINESS
Oppenheimer offers corporations (primarily middle-market growth companies) a full range of
financial advisory services as well as debt, equity, and convertible financing
8
services. Products include acquisition financing, private placements and public offerings of debt
and equity securities, debt refinancings, restructuring, merger and acquisition and exclusive sales
advice, structured financings and securitizations. Investment banking activity involves both
economic and regulatory risks. An underwriter may incur losses if it is unable to sell the
securities it is committed to purchase or if it is forced to liquidate its commitments at less than
the agreed upon purchase price. In addition, under the Securities Act and other laws and court
decisions with respect to underwriters’ liability and limitations on indemnification of
underwriters by issuers, an underwriter is subject to substantial potential liability for material
misstatements or omissions in prospectuses and other communications with respect to underwritten
offerings. Further, underwriting commitments constitute a charge against net capital and
Oppenheimer’s underwriting commitments may be limited by the requirement that it must, at all
times, be in compliance with the Uniform Net Capital Rule 15c3-1 of the SEC.
Oppenheimer intends to continue to pursue opportunities to provide services for its corporate
customers, which may require it to finance and/or underwrite the issuance of securities. Under
circumstances where Oppenheimer is required to act as an underwriter or to take a position in the
securities of its customers, Oppenheimer may assume greater risk than would normally be assumed in
its normal trading activity. Oppenheimer also participates as an underwriter in the syndication of
issues managed by other securities firms.
INVESTMENT ADVISORY BUSINESS
Oppenheimer (through its Fahnestock Asset Management and OMEGA Group divisions) and OAM provide
investment advisory services for a fee to its 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 Oppenheimer ‘s customary commission schedule.
At December 31, 2004, Oppenheimer and OAM had approximately $10.3 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.
OAM is a broad-based advisory platform that includes: Investment Advisory Services (IAS), Strategic
Asset Review (STAR), and Portfolio Advisory Services (PAS), collectively the consulting services;
Oppenheimer Investment Advisors (OIA), core internally managed client accounts; and Alternative
Investments Group, non-traditional investment strategies within SEC-registered funds.
Fahnestock Asset Management and OMEGA Group (financial advisor discretionary fee-based advisory
accounts) provide customized discretionary investment management services and products to high net
worth individuals and families, endowments and foundations and institutions. They seek to provide
portfolio management, client service and other financial services in a disciplined manner that is
tailored to meet their clients’ particular needs and objectives.
9
Oppenheimer Institutional Management is a newly formed division to offer investment management
services to a class of clients that includes corporate pension plans, Taft-Hartley Plans,
endowments, and the pension plans of municipal and governmental units. The division is still in
formation and has not yet begun offering services. (See “Importance of Investment Performance”).
Importance of Investment Performance.
The Company believes that investment performance is one of the most important factors for the
growth of assets under management for a company in the asset management business. Poor investment
performance could impair growth of the management business because existing clients might withdraw funds
and the Company’s ability to attract funds from existing and new clients might diminish.
Investment advisory and administrative contracts are generally terminable at will or upon
relatively short notice. Institutional and individual clients can terminate their relationships
with an asset manager, reduce the aggregate amount of assets under
management, or shift their funds to other types of accounts with different rate structures for any
number of reasons, including investment performance, changes in prevailing interest rates, loss of
key investment management personnel and financial market performance. In a declining stock market,
the withdrawal of assets from accounts could accelerate.
Other Business
The Company operates a mortgage banking business through Evanston Financial Corporation.
Evanston is an approved MAP/FHA lender and also a Ginnie Mae approved Multifamily Issuer.
Evanston directly provides all aspects of mortgage banking: origination, processing, underwriting,
closing, securitizing and servicing of FHA mortgage loans.
RISK MANAGEMENT
For a discussion of risk management, see Item 7A, “Quantitative and Qualitative Disclosures about
Market Risk”.
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 Oppenheimer and its correspondents; and general office services. Oppenheimer
employs approximately 395 persons in its administration and operations departments at its head
office, approximately 65 persons in its administration and operations departments in Detroit and
over 200 administrative and operations persons located in its branch offices.
There is considerable fluctuation during any year and from year to year in the volume of
transactions Oppenheimer must process. Oppenheimer records transactions and posts its
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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 Oppenheimer liable for disciplinary action by governmental and self-regulatory
organizations.
Oppenheimer 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. Oppenheimer
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.
Oppenheimer 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, Oppenheimer
carries an insurance policy (a broker’s blanket 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 $1,000,000. Our
businesses entail the inherent risk of liability related to litigation from clients or third party vendors and actions
taken by regulatory agencies. To help protect against these potential liabilities, we purchase
insurance in amounts, and against risks, that we consider appropriate. There can be no assurance,
however, that a claim or claims will be covered by insurance or, if covered, will not exceed the
limits of available insurance coverage, that any insurer will remain solvent and will meet its
obligations to provide us with coverage or that insurance coverage will continue to be available
with sufficient limits at a reasonable cost. Over the last several years, insurance expenses have
increased and we expect further increases to be significant going forward. In addition, certain
insurance coverage may not be available or may only be available at prohibitive costs. Renewals of
insurance policies may expose Oppenheimer to additional costs through higher premiums or the
assumption of higher deductibles or co-insurance liability.
COMPETITION
Oppenheimer 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 that 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 Oppenheimer for investment funds by offering a greater range of financial services.
Oppenheimer 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. Oppenheimer and its competitors employ advertising and direct
11
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 Oppenheimer’s
competitors engage in these programs more extensively than does Oppenheimer.
There is substantial commission discounting by broker-dealers competing for institutional and
retail brokerage business. Recently, full service firms have begun offering on-line trading
services to their clients at substantial discounts to their regular pricing. Oppenheimer intends to
compete in this area, but it is likely to reduce profitability per transaction, unless offset by
higher transaction volume. The continuation of such discounting and an increase in the incidence
thereof could adversely affect Oppenheimer. However, an increase in the use of discount brokerages
could be beneficial to Freedom.
DISASTER RECOVERY
The events of September 11, 2001 heightened the need for comprehensive disaster recovery plans.
Disaster recovery plans exist for the Company’s critical systems, and redundancies are built into
the systems as deemed appropriate. The Company believes
that its disaster recovery program, including off-site back-up technology and operational
facilities, is adequate to handle a reasonable business disruption. However, there can be no
assurances that a disaster directly affecting the Company’s headquarters or its operations center
would not have a material adverse impact on the Company. Insurance and other safeguards might only
partially reimburse the Company for its losses. The Company also uses periodic self-assessments,
internal audit reviews and independent consultants as a further check on operational risk and
exposure.
The Company maintains disaster recovery procedures and a site remote from its main operations at
which it houses back-up facilities to its main operations in New York City. Subsequent to 9/11/01,
the Company has substantially upgraded its investment in such procedures and facilities, but there
remains substantial risk and uncertainty with respect to the efficacy of such planning due to the
complications of moving its personnel and business to any such facility.
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
(“SROs”) such as the NASD and national securities exchanges such as the NYSE and the National Futures
Association. The NYSE has been designated Oppenheimer’s primary regulator with respect to
securities activities and the National Futures Association has been designated Oppenheimer’s
primary regulator with respect to commodities activities. The CBOE has been designated
Oppenheimer’s primary regulator with respect to options trading activities. The NASD has been
designated Freedom’s primary regulator with respect to securities 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 Oppenheimer’s and Freedom’s operations. Securities firms are also subject to regulation by state
securities commissions in the states in which they do
12
business. Oppenheimer and Freedom are each registered as a broker-dealer in the 50 states and
Puerto Rico. Oppenheimer is also registered as an International Dealer in Canada.
The regulations to which broker-dealers are subject cover all aspects of the securities business,
including sales methods, trade practices among broker-dealers, the use and safekeeping of
customers’ funds and securities, capital structure of securities firms, record keeping and the
conduct of directors, officers and employees. The SEC has adopted rules requiring underwriters to
ensure that municipal securities issuers provide current financial information and imposing
limitations on political contributions to municipal issuers by brokers, dealers and other municipal
finance professionals. Additional legislation, changes in rules promulgated by the SEC, the CFTC
and by self-regulatory organizations, or changes in the interpretation or enforcement of existing
laws and rules may directly affect the method of operation and profitability of broker-dealers. The
SEC, self-regulatory organizations (including the NYSE) and state securities commissions may
conduct administrative proceedings which can result in censure, fine, issuance of cease and desist
orders or suspension or expulsion of a broker-dealer, its officers, or employees. These
administrative proceedings, whether or not resulting in adverse
findings, can require substantial expenditures and can have an adverse impact on the reputation of a broker-dealer.
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.
During the last year, abuses by certain participants in the mutual fund industry, including
activities relating to market timing, late trading and selective disclosure of portfolio holdings,
prompted legislative and regulatory scrutiny of a wide range of fund-related activities. This
scrutiny resulted in the adoption of new rules and a number of legislative and regulatory proposals
relating to fund practices. In this regard, the SEC proposed rules designed to strengthen existing
prohibitions relating to late trading and adopted rules to enhance required disclosure of market
timing and pricing policies. The SEC also adopted and proposed additional rules requiring corporate
governance changes including the adoption of compliance policies and the requirement that funds and investment advisors designate a chief
compliance officer.
Oppenheimer is also subject to regulation by the SEC and under certain state laws in connection
with its business as an investment advisor and in connection with its research department
activities.
Margin lending by Oppenheimer is subject to the margin rules of the Board of Governors of the
Federal Reserve System and the NYSE. Under such rules, Oppenheimer 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,
Oppenheimer may (and currently does) impose more restrictive margin requirements than required by
such rules. See “Customer Lending.”
Financial scandals have led to insecurity and uncertainty in the financial markets. In response to
these scandals, the Sarbanes-Oxley Act of 2002 effected significant changes to corporate
governance, accounting requirements and corporate reporting.
13
This law generally applies to all companies, including us, with equity or debt securities
registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We have
taken numerous actions, and incurred substantial expenses, over the last year and a half to comply
with the Sarbanes-Oxley Act, related regulations promulgated by the SEC and other corporate
governance requirements of the NYSE.
NET CAPITAL REQUIREMENTS
As registered broker-dealers and member firms of the NYSE (Oppenheimer) or the NASD (Freedom), the
Operating Subsidiaries are subject to certain net capital requirements pursuant to Rule 15c3-1 (the
“Net Capital Rule”) promulgated under 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.
Oppenheimer elects to compute net capital under an alternative method of calculation permitted by
the Net Capital Rule. (Freedom computes net capital under the basic formula as provided by the Net
Capital Rule.) Under this alternative method, Oppenheimer 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 in the Net Capital Rule as net worth (assets minus liabilities),
plus qualifying subordinated borrowings minus certain mandatory deductions that result from
excluding assets that are not readily convertible into cash and deductions for certain operating
charges. The Net Capital Rule values certain other assets, such as a firm’s positions in
securities, conservatively. Among these deductions are adjustments (called “haircuts”) in the
market value of securities to reflect the possibility of a market decline prior to disposition.
Compliance with the Net Capital Rule could limit those operations of the brokerage subsidiaries of
the Company that require the intensive use of capital, such as underwriting
14
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
and/or the SROs 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 or to expand the Company’s business.
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 Oppenheimer at 125 Broad Street, New York, New
York. This office also serves as the base for most of Oppenheimer ‘s research, operations and
trading and investment banking activities, though other offices also have employees who work in
these areas. Investment advisory services are offered from the Company’s office at 200 Park Avenue,
New York, New York, although other offices also have employees who work
in this area. 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
Oppenheimer ‘s New York office using the data processing facilities located there. Freedom conducts
its business from its offices located in Edison, N.J., where the Company also maintains its
disaster recovery site. 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 at December 31, 2004, occupied office
space totaling approximately 930,000 square feet in 84 locations under standard commercial terms
expiring between 2005 and 2015. If any leases are not renewed, the Company believes it could obtain
comparable space elsewhere on commercially reasonable rental terms.
Item 3. LEGAL PROCEEDINGS
Many aspects of the Company’s business involve substantial risks of liability. In the normal course
of business, the Company has been named as defendant or co-defendant in lawsuits creating
substantial exposure. The Company is also involved from time to time in governmental and
self-regulatory agency investigations and proceedings. There has been an increased incidence of
litigation and regulatory investigations in the financial services industry in recent years,
including customer claims seeking, in total, substantial damages.
The Company is the subject of customer complaints, has been named as defendant or codefendant in
various lawsuits seeking, in total, substantial damages and is involved in certain governmental and
self-regulatory agency investigations and proceedings. These
15
proceedings arise primarily from securities brokerage, asset management and investment banking
activities. While the ultimate resolution of pending litigation and other matters cannot be
currently determined, in the opinion of management, after consultation with legal counsel, the
Company has no reason to believe that the resolution of these matters will have a material adverse
effect on its financial condition. However, the Company’s results of operations could be materially
affected during any period if liabilities in that period differ from prior estimates. 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
are owned by 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 information 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
2004 fiscal year.
16
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 (the “NYSE”) and
The Toronto Stock Exchange (the “TSX”) (trading symbol “OPY”). 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 TSX and
on the NYSE. Prices provided are in Canadian dollars or U.S. dollars as indicated and are based on
data provided by the TSX and the NYSE.
Class A Shares:
TSX
NYSE
HIGH
LOW
HIGH
LOW
(Cdn. Dollars)
(U.S. dollars)
2004
$
45.10
$
40.90
$
34.40
$
30.96
$
42.75
$
35.80
$
32.22
$
26.23
$
36.75
$
30.15
$
27.80
$
22.70
$
30.00
$
27.00
$
27.00
$
21.25
2003
$
39.20
$
33.64
$
25.24
$
22.06
$
39.75
$
32.90
$
29.85
$
22.25
$
40.35
$
35.65
$
29.30
$
25.50
$
46.11
$
39.00
$
35.10
$
29.15
The following table sets forth information about the shareholders of the Company as at December 31,
2004 as set forth in the records of the Company’s transfer agent and registrar:
Class A Shares:
Number of
Number of
Shareholders of record having addresses in:
shares
Percentage
shareholders
5,115,458
38%
157
8,180,804
62%
170
614
—
6
13,296,876
100%
333
17
Class B Shares
Number of
Number of
Shareholders of record having addresses in:
shares
Percentage
shareholders
97,813
98%
112
1,739
2%
67
128
—
3
99,680
100%
182
(1) The Company has been informed that 50,975 Class B shares held by Phase II Financial
Limited, an Ontario corporation, are beneficially owned by A.G. Lowenthal, Chairman, CEO and a
Director of the Company, a U.S. citizen and resident. See Item 12, “Security Ownership of Certain
Beneficial Owners and Management”.
Dividends
The following table sets forth the frequency and amount of any cash dividends declared on the
Company’s Class A and Class B Shares for the fiscal years ended December 31, 2004 and 2003 and the
first quarter of 2005.
Amount
Type
Declaration date
Record date
Payment date
per share
January 24, 2003
February 14, 2003
February 28, 2003
$
0.09
April 24, 2003
May 9, 2003
May 23, 2003
$
0.09
July 24, 2003
August 8, 2003
August 22, 2003
$
0.09
October 24, 2003
November 7, 2003
November 21, 2003
$
0.09
January 27, 2004
February 6, 2004
February 20, 2004
$
0.09
April 26, 2004
May 7, 2004
May 21, 2004
$
0.09
July 27, 2004
August 6, 2004
August 20, 2004
$
0.09
October 25, 2004
November 5, 2004
November 19, 2004
$
0.09
January 28, 2005
February 11, 2005
February 25, 2005
$
0.09
Future dividend policy will depend upon the earnings and financial condition of the Operating
Subsidiaries, the Company’s need for funds and other factors. 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
18
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 subject to U.S. federal
income taxation as qualified dividends to the extent paid out of the Company’s earnings and
profits, determined under U.S. tax principles, subject to tax at 15%. 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.
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 July 16, 2004, the Company announced that during the year commencing July 22, 2004 it intended
to purchase up to 669,000 Class A Shares by way of a Normal Course Issuer Bid through the
facilities of the TSX and/or the NYSE, representing approximately 5% of the outstanding Class A
Shares. During the fourth quarter of 2004, the Company purchased 1,300 Class A Shares for $22.50
per share in the month of November. The Company purchased 132,100 Class A Shares in 2004 at an
average price of $23.62 per share under the current Normal Course
Issuer Bid. Any shares purchased by the Company pursuant to the Normal Course Issuer Bid are cancelled. The
Company may, at its option, apply to extend the program for an additional year.
19
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, 2004. 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 2003, the Company purchased the U.S. private client and asset management divisions of
CIBC World Markets. The 2003 amounts include the assets and liabilities and operating results of
the private client division for the entire year and the assets and liabilities and operating
results of the asset management division as of and subsequent to June 4, 2003. In 2002, the Company
purchased the business of BUYandHOLD Securities Corporation. The 2002 amounts include the assets
and liabilities and operating results of BUYandHOLD as of and subsequent to the period after March
12, 2002. In 2001, the Company purchased Josephthal and Prime. The 2001 amounts include the assets
and liabilities and operating results of Josephthal and Prime as of and subsequent to the period
after September 17, 2001 and November 9, 2001, respectively. See also Item 1, “Business” and Item
7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
2004
2003
2002
2001
2000
(In thousands of U.S. dollars except per share and share amounts)
$
655,140
$
689,993
$
283,333
$
261,261
$
316,499
$
22,501
$
28,696
$
9,321
$
19,150
$
40,901
$
1.68
$
2.26
$
0.75
$
1.55
$
3.38
$
1.31
$
1.65
$
0.73
$
1.50
$
3.29
$
1,802,473
$
1,701,213
$
1,031,226
$
710,275
$
697,482
$
1,286,902
$
1,194,859
$
783,590
$
468,580
$
475,682
including current portion
—
—
—
—
$
207,264
$
226,518
—
—
—
Share and Class B share
$
0.36
$
0.36
$
0.36
$
0.36
$
0.31
$
308,307
$
279,836
$
247,636
$
241,695
$
221,800
$
22.96
$
21.66
$
19.82
$
19.43
$
18.34
stock outstanding
13,396,556
12,919,200
12,496,687
12,436,765
12,090,649
(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.
20
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company’s financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America. The following discussion should be read in
conjunction with the consolidated financial statements and notes thereto which appear elsewhere in
this annual report.
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), research, market-making, and investment advisory and asset management
services. The Company provides its services from 81 offices in 21 states located throughout the
United States. The Company conducts business in 2 offices in Latin America through local
broker-dealers. Client assets entrusted to the Company as at December 31, 2004 totaled
approximately $48 billion. The Company provides investment advisory services through Oppenheimer
Asset Management Inc. and Fahnestock Asset Management and OMEGA Group, each of which operates as a
division of Oppenheimer. The Company provides trust services and products through Oppenheimer Trust
Company. The Company provides discount brokerage services through Freedom Investments Inc. and
through BUYandHOLD, a division of Freedom. At December 31, 2004, client assets under management by
the asset management groups totaled $10.3 billion. At December 31, 2004, the Company employed
approximately 2,854 people full time, of whom 1,667 were financial advisors.
Critical Accounting Policies
The Company’s accounting policies are essential to understanding and interpreting the financial
results reported in the consolidated financial statements. The significant accounting policies used
in the preparation of the Company’s consolidated financial statements are summarized in note 1 to
those statements. Certain of those policies are considered to be particularly important to the
presentation of the Company’s financial results because they require management to make difficult,
complex or subjective judgments, often as a result of matters that are inherently uncertain. The
following is a discussion of these policies.
Valuation of Securities and Other Assets
Substantially all financial instruments are reflected in the consolidated financial statements at
fair value or amounts that approximate fair value. These include cash equivalents; deposits with
clearing organizations; securities owned; and securities sold but not yet purchased. Where
available, the Company uses prices from independent sources such as listed market prices, or broker
or dealer price quotations. In addition, even where the value of a security is derived from an
independent market price or broker or dealer quote, certain assumptions may be required to
determine the fair value. For instance, the Company generally assumes that the s