________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003
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
OPPENHEIMER HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Ontario, Canada 98-0080034
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 2015, Suite 1110
20 Eglinton Avenue West
Toronto, Ontario, Canada M4R 1K8
(Address of principal executive offices) (Zip Code)
Registrants Telephone number, including area code: (416) 322-1515
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Class A non-voting shares New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Not Applicable
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants 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. [ X ]
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 [ X ] No [ ]
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, 2003 was $355,695,000 based on the closing price of the Class A non-voting shares on the New York Stock Exchange as at June 30, 2003 of $27.96.
The number of shares of the Companys Class A non-voting shares and Class B voting shares (being the only classes of common stock of the Company), outstanding on March 9, 2004 was 13,322,416 and 99,680 shares, respectively.
_______________________________________________________________________
TABLE OF CONTENTS
Item Number |
Page |
|
PART 1 | ||
1. | Business |
2 |
2. | Properties |
16 |
3. | Legal Proceedings |
16 |
4. | Submission of Matters to a Vote of Security Holders |
17 |
PART II | ||
5. | Market for the Registrants Common Equity and Related Stockholder Matters |
18 |
6. | Selected Financial Data |
20 |
7. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
22 |
7a. | Quantitative and Qualitative Disclosures About Market Risk |
32 |
8. | Financial Statements and Supplementary Data |
34 |
9. | Changes in and Disagreements with Accountants and Financial Disclosure |
34 |
9a. | Controls and Procedures |
34 |
PART III | ||
10. | Directors and Executive Officers of the Registrant |
36 |
11. | Executive Compensation |
41 |
12. | Security Ownership of Certain Beneficial Owners and Management |
47 |
13. | Certain Relationships and Related Transactions |
49 |
14. | Principal Accounting Fees and Services |
50 |
PART IV | ||
15. | Exhibits, Financial Statement Schedules, and Reports on Form 8-K |
51 |
Signatures |
52 |
|
Certifications |
53 |
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 is being conducted by Oppenheimer. The asset management business acquired from CIBC World Markets in June 2003 is being conducted by OAM. The Company operates a discount brokerage business through Freedom.
In September 2001, through a wholly-owned subsidiary, Oppenheimer acquired 91.6% of the outstanding common stock of Josephthal Group, Inc. ("Josephthal Group"). In October 2001 substantially all of the remaining outstanding stock of Josephthal Group was acquired. The purchase price was $1 plus the assumption of liabilities of $23,885,000. Josephthal Group indirectly owns 100% of Josephthal, formerly a private New York-based broker-dealer founded in 1910 with approximately 265 financial consultants in 25 offices across the United States at the time of closing. The acquisition was accounted for by the purchase method. The accounts of Josephthal were converted to Oppenheimers system in November 2001. Oppenheimer acted as a clearing agent for Josephthal until December 31, 2001 when the accounts of Josephthal became accounts of Oppenheimer. Josephthal made application to withdraw as a broker dealer and such application was approved. Since January 1, 2002, its business has been conducted by Oppenheimer.
In November 2001, through a wholly-owned subsidiary, Oppenheimer acquired 100% of the outstanding common stock of Grand Charter Group Incorporated ("Grand Charter") for a cash consideration of $2,892,000. Grand Charter owns 100% of Prime, formerly a twelve-year-old full service securities firm with approximately 110 financial consultants operating from offices in New York, New York and Boca Raton, Florida. The acquisition was accounted for by the purchase method. Effective January 1, 2002, Primes accounts became Oppenheimer accounts. Prime ceased to be a broker-dealer effective January 22, 2002 and since January 1, 2002 its business has been conducted by Oppenheimer. The business generated by the two branches associated with the Prime acquisition was cleared pursuant to an agreement with Bank of New York until November 2002 when its client accounts were converted to Oppenheimers clearing platform.
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.
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 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. The asset management business is being operated by OAM. The acquisition is being accounted for by the purchase method. This transaction more than doubles the Companys retail exposure and asset base.
In January 2003, the Company received monetary damages plus interest in the amount of $21,750,000, pursuant to an award by a National Association of Securities Dealers Dispute Resolution panel against another broker-dealer in a raiding case involving the sales force of First of Michigan Corporation, a company acquired by Oppenheimer in July 1997. During the fourth quarter of 1997, approximately 20% of the "pre-raid" staff of financial consultants were hired away in a raid. These proceeds, which were received in January 2003, were included in the Companys results for the first quarter of 2003.
In January 2004, the Company received monetary damages plus interest in the amount of approximately $2.7 million, pursuant to an award by a National Association of Securities Dealers Dispute Resolution Panel against another broker dealer in a raiding case involving financial consultants of Josephthal & Co. Inc., a company acquired by Oppenheimer in September 2001. These proceeds, which were received in January 2004, will be included in the Companys results for the first quarter of 2004.
At December 31, 2003, Oppenheimer employed 1,704 full-time registered representatives and approximately 1,309 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 3,013 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 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 2003, 2002 and 2001. In addition, Oppenheimer has purchased protection from Lloyds of London of an additional $49,500,000 per customer. In February 2004, the protection purchased from Lloyds of London was increased to $74,500,000 per customer.
The Companys 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 as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.
The following table sets forth the amount and percentage of the Company's revenues from each principal source for each of the following years ended December 31.
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, 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, 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 Oppenhimer 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. 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. Trading profits (or losses) depend primarily upon the skills of the employees engaged in market making and position taking, the amount of capital allocated to positions in securities and the general trend of prices in the securities markets.
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 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 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 include those of issuers which are followed by Oppenheimer's research department. Oppenheimer makes markets in approximately over 650 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 Stock Market, 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 Companys 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 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, a department that underwrites and trades U.S. government agency issues, taxable corporate bonds, and UITs. 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 partnerships ("hedge funds"), which are offered to its qualified clients as well as qualified clients of other broker-dealers.
Investment Income
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.
Principal transactions with customers as well as market-making and other trading and investment activities accounted for approximately 20%, 21% and 22%, respectively, of the Companys total revenues for the fiscal years ended December 31, 2003, 2002 and 2001, respectively.
Risk Management
Credit Risk. Credit risk represents the loss that the Company would incur if a client, counterparty or issuer of securities or other instruments held by the Company fails to perform its contractual obligations. The Company follows industry practice to reduce credit risk related to various investing and financing activities by obtaining and maintaining collateral. The Company adjusts margin requirements if it believes the risk exposure is not appropriate based on market conditions. When Oppenheimer advances funds or securities to a counterparty in a principal transaction or to a customer in a brokered transaction, it is subject to the risk that the counterparty or customer will not repay such advances. If the market price of the securities purchased or loaned has declined or increased, respectively, Oppenheimer may be unable to recover some or all of the value of the amount advanced. A similar risk is also present where a customer is unable to respond to a margin call and the market price of the collateral has dropped. In addition, Oppenheimer's securities positions are subject to fluctuations in market value and liquidity.
Oppenheimer monitors market risks through daily profit and loss statements and position reports. Each trading department adheres to internal position limits determined by senior management and regularly reviews the age and composition of its proprietary accounts. Positions and profits and losses for each trading department are reported to senior management on a daily basis. Oppenheimer may from time to time attempt to reduce market risk through the utilization of various derivative securities as a hedge to market exposure.
In its market-making activities, Oppenheimer must provide liquidity in the equities for which it makes markets. As a result of this event, Oppenheimer has risk containment policies in place, which limit position size and monitor transactions on a minute-to-minute basis.
In addition to monitoring the credit-worthiness of its customers, Oppenheimer imposes more conservative margin requirements than those of the NYSE. Generally, Oppenheimer limits customer loans to an amount not greater than 65% of the value of the securities (or 50% if the securities in the account are concentrated in a limited number of issues). Particular attention and more restrictive requirements are placed on more highly volatile securities traded in the NASDAQ market. In comparison, the NYSE permits loans of up to 75% of the value of the equity securities in a customer's account.
Operational Risk. Operational risk generally refers to the risk of loss resulting from the Companys operations, including, but not limited to, improper or unauthorized execution and processing of transactions, deficiencies in its operating systems, business disruptions and inadequacies or breaches in its internal control processes. The Company operates in diverse markets and it is reliant on the ability of its employees and systems to process high numbers of transactions often within short time frames. In the event of a breakdown or improper operation of systems, human error or improper action by employees, the Company could suffer financial loss, regulatory sanctions or damage to its reputation. In order to mitigate and control operational risk, the Company has developed and continues to enhance policies and procedures that are designed to identify and manage operational risk at appropriate levels.
Legal Risk. Legal risk includes the risk of non-compliance with applicable legal and regulatory requirements. The Company is subject to extensive regulation in the different jurisdictions in which it conducts its business. The Company has various procedures addressing issues such as regulatory capital requirements, sales and trading practices, use of and safekeeping of customer funds, credit granting, collection activities, money-laundering and record keeping.
For further discussion of risk management, see Item 7A, Quantitative and Qualitative Disclosures about Market Risk.
DISASTER RECOVERY
The events of September 11, 2001 heightened the need for comprehensive disaster recovery plans. Disaster recovery plans exist for the Companys 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 Companys 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 in Edison New Jersey 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.
INTEREST
Oppenheimer derives a substantial portion of its interest revenues, and incurs a substantial portion of its interest expenses, 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 Companys 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 Companys 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 customers 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 Oppenheimers internal policies.
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 Oppenheimers 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 companys "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 customers 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 Oppenheimers 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 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 Oppenheimers 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 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 O 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.
The Company derived 7%, 8% and 4% of its revenues from underwriting in 2003, 2002 and 2001, respectively. See "Net Capital Requirements" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."
INVESTMENT ADVISORY BUSINESS
Oppenheimer (through its Fahnestock Asset Management division) 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, 2003, Oppenheimer and OAM had approximately $9.59 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; OMEGA, financial advisor discretionary fee-based advisory accounts; and Alternative Investments Group, non-traditional investment strategies within SEC-registered funds.
Fahnestock Asset Management and the OMEGA Group 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 its clients particular needs and objectives.
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 Companys asset management business because existing clients might withdraw funds and the Companys 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.
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 380 persons in its administration and operations departments at its head office, approximately 60 persons in its administration and operations departments in Detroit and over 100 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 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 a broker's blanket insurance bond covering loss or theft of securities, forgery of checks and drafts, embezzlement, fraud and misplacement of securities. This bond provides coverage of up to an aggregate of $25,000,000 with a self-insurance retention of $250,000.
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 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.
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 ("SRO") 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 Oppenheimers primary regulator with respect to options trading activities. The NASD has been designated Freedoms 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 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 Broker-Dealer in Canada.
The regulations to which broker-dealers are subject cover all aspects of the securities business, including sales methods, trade practices among broker-dealers, the use and safekeeping of customers' funds and securities, capital structure of securities firms, record keeping and the conduct of directors, officers and employees. The SEC has adopted rules requiring underwriters to ensure that municipal securities issuers provide current financial information and imposing limitations on political contributions to municipal issuers by brokers, dealers and other municipal finance professionals. Additional legislation, changes in rules promulgated by the SEC, the CFTC and by self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules may directly affect the method of operation and profitability of broker-dealers. The SEC, self-regulatory organizations (including the NYSE) and state securities commissions may conduct administrative proceedings which can result in censure, fine, issuance of cease and desist orders or suspension or expulsion of a broker-dealer, its officers, or employees. The principal purpose of regulating and disciplining broker-dealers is to protect customers and the securities markets rather than to protect creditors and shareholders of broker-dealers.
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."
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 Securities Exchange Act of 1934, as amended (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 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 Companys 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 Companys 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, 2003, occupied office space totalling approximately 984,000 square feet in 98 locations under standard commercial terms expiring between 2004 and 2014. If any leases are not renewed, the Company believes it could obtain comparable space elsewhere on commercially reasonable rental terms.
Item 3. LEGAL PROCEEDINGS
The Operating Subsidiaries are involved in certain litigation arising in the ordinary course of business. Management believes, based upon discussion with legal counsel, that the outcome of this litigation will not have a material effect on the Companys financial position. The materiality of legal matters to the Companys 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 2003 fiscal year.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Class A Shares are listed and traded on The New York Stock Exchange (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 Toronto Stock Exchange and on The New York Stock Exchange. Prices provided are in Canadian dollars or U.S. dollars as indicated and are based on data provided by The Toronto Stock Exchange and The New York Stock Exchange.
The following table sets forth information about the shareholders of the Company as at December 31, 2003 as set forth in the records of the Company's transfer agent and registrar:
Class A Shares:
Class B Shares
Shareholders of record having addresses in: |
Number of shares |
Percentage |
Number of shareholders |
Canada (1) |
97,813 |
98% |
116 |
United States |
1,739 |
2% |
67 |
Other |
128 |
- |
3 |
Total issued and outstanding |
99,680 |
100% |
186 |
(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 Companys Class A and Class B Shares for the fiscal years ended December 31, 2003 and 2002.
Type | Declaration date | Record date | Payment date | Amount per share |
Quarterly | January 24, 2002 | February 8, 2002 | February 22, 2002 |
$0.09 |
Quarterly | April 19, 2002 | May 3, 2002 | May 17, 2002 |
$0.09 |
Quarterly | July 18, 2002 | August 2, 2002 | August 16, 2002 |
$0.09 |
Quarterly | October 18, 2002 | November 8, 2002 | November 22, 2002 |
$0.09 |
Quarterly | January 24, 2003 | February 14, 2003 | February 28, 2003 |
$0.09 |
Quarterly | April 24, 2003 | May 9, 2003 | May 23, 2003 |
$0.09 |
Quarterly | July 24, 2003 | August 8, 2003 | August 22, 2003 |
$0.09 |
Quarterly | October 24, 2003 | November 7, 2003 | November 21, 2003 |
$0.09 |
Quarterly | January 27, 2004 | February 13, 2004 | February 27, 2004 |
$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 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 Companys 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 8, 2003, the Company announced that during the year commencing July 10, 2003 it intended to purchase up to 636,000 Class A Shares by way of a Normal Course Issuer Bid through the facilities of The Toronto Stock Exchange and/or The New York Stock Exchange, representing approximately 5% of the outstanding Class A Shares. In fiscal 2003, through a Normal Course Issuer Bid, which expired July 8, 2003, the Company purchased 25,700 Class A Shares at an average cost of $22.76 per share. The Company did not purchase any Class A Shares in 2003 under the current Normal Course Issuer Bid, which expires July 9, 2004. Any shares purchased by the Company pursuant to the Normal Course Issuer Bid will be cancelled. The Company may, at its option, apply to extend the program for an additional year.
Item 6. SELECTED FINANCIAL DATA
The following table presents selected financial information derived from the audited consolidated financial statements of the Company for the five years ended December 31, 2003. 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, "Managements Discussion and Analysis of Financial Condition and Results of Operations".
2003 |
2002 |
2001 |
2000 |
1999 |
||||
(In thousands of U.S. dollars except per share and share amounts) |
||||||||
Revenue |
$689,993 |
$283,333 |
$261,261 |
$316,499 |
$279,111 |
|||
Net profit |
$29,791 |
$9,321 |
$19,150 |
$40,901 |
$27,390 |
|||
Net profit per share (1) | ||||||||
- basic |
$2.35 |
$0.75 |
$1.55 |
$3.38 |
$2.19 |
|||
- diluted |
$1.63 |
$0.73 |
$1.50 |
$3.29 |
$2.17 |
|||
Total assets |
$1,709,117 |
$1,031,226 |
$710,275 |
$697,482 |
$766,528 |
|||
Total current liabilities |
$1,193,401 |
$783,590 |
$468,580 |
$475,682 |
$579,141 |
|||
Subordinated indebtedness, | ||||||||
including current portion |
- |
- |
- |
- |
$30 |
|||
Total long term liabilities |
$234,785 |
- |
- |
- |
- |
|||
Cash dividends per Class A | ||||||||
Share and Class B share |
$0.36 |
$0.36 |
$0.36 |
$0.31 |
$0.28 |
|||
Shareholders' equity |
$280,931 |
$247,636 |
$241,695 |
$221,800 |
$187,388 |
|||
Book value per share (1) |
$21.75 |
$19.82 |
$19.43 |
$18.34 |
$15.30 |
|||
Number of shares of capital stock outstanding |
12,919,200 |
12,496,687 |
12,436,765 |
12,090,649 |
12,247,249 |
|||
The Class A Shares and Class B Shares are combined because they are of equal rank for purposes of dividends and in the event of a distribution of assets upon liquidation, dissolution or winding up.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Companys 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.
Critical Accounting Policies
The Companys 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 Companys
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 Companys
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 size of positions in securities that the Company
holds would not be large
enough to affect the quoted price of the
securities if the Company were to sell them, and that any
such sale would happen in an orderly manner. However, these
assumptions may be incorrect and the actual value realized upon
disposition could be different from the current carrying value.
Intangible Assets and Goodwill
Goodwill represents the excess cost
of a business acquisition over the fair value of
the net assets acquired. SFAS No. 142,
"Goodwill and Other Intangible Assets," provides
that goodwill is no longer amortized and the value of
identifiable intangible assets must be amortized over their
useful lives, unless the asset is determined to have an
indefinite useful life. Goodwill relates to the
acquisitions of Oppenheimer, First of Michigan Capital
Corporation, Grand Charter Group Incorporated, Josephthal &
Co. Inc. and the Oppenheimer division and has been allocated to
the private client reporting unit pursuant to SFAS No. 142.
The Company obtained an independent valuation of assets acquired
and liabilities assumed with respect to the acquisition of the
Oppenheimer division in 2003. This valuation involved significant
estimates, which were based on historical data, revenue
projections and industry experience. The Company has identified
intangible assets relating to customer relationships, which it is
amortizing over their useful lives, and trademarks and trade
names, which are being evaluated for impairment on at least an
annual basis. The excess cost of the Oppenheimer division is
being allocated to goodwill.
The Company reviews its goodwill on at least an annual basis in order to determine whether its value is impaired. Goodwill is impaired when the carrying amount of the reporting unit exceeds the implied fair value of the reporting unit. In estimating the fair value of the reporting unit, the Company uses valuation techniques based on multiples of revenues, earnings, book value and discounted cash flows similar to models employed in analyzing the purchase price of an acquisition target. If the value of the goodwill is impaired, the difference between the value of the goodwill reflected on the financial statements and its current fair value is recognized as an expense in the period in which the impairment occurs.
Reserves
The Company records reserves related to
legal proceedings in "other payables and
accrued expenses". The determination of the amounts
of these reserves requires significant judgment on the
part of management. Management considers many
factors including, but not limited to: the amount of the
claim; the amount of the loss in the client's account;
the basis and validity of the claim; the possibility of
wrong doing on the part of an employee of the Company;
previous results in similar cases; and legal precedents and
case law as well as the timing of the resolution of such matters.
Each legal proceeding is reviewed with counsel in each accounting
period and the reserve is adjusted as deemed appropriate by
management. Any change in the reserve amount is recorded
as a charge to results in that period. The assumptions
of management in determining the estimates of reserves may be
incorrect and the actual disposition of a legal proceeding could
be greater or less than the reserve amount.
The Company also records reserves or
allowances for doubtful accounts related to
receivables from clients and financial consultants.
Client loans are collateralized by securities;
however, if there is a decline in the value of the
collateral and the Company cannot obtain additional collateral or
collect on the loan, a reserve is established. The Company
also makes loans or pays advances to financial
consultants. Reserves are established on these
receivables if the financial consultant is no longer
associated with the Company and the receivable has not been
promptly repaid or if it is determined that it is probable
the amount will not be collected.
The Company also estimates taxes payable and records income tax reserves. These reserves are based on historic experience and may not reflect the ultimate liability. The Company monitors and adjusts these reserves as necessary.
Asset management operations
Asset management fees are generally recognized over the period the related service is provided based on the account value at the valuation date per the respective asset management agreements. In certain circumstances, the firm is entitled to receive incentive fees when the return on assets under management exceeds certain benchmark returns or other performance targets. Incentive fees are generally based on investment performance over a 12-month period and are not subject to adjustment once the measurement period ends. Accordingly, incentive fees are recognized in the consolidated statements of earnings when the measurement period ends. Asset management fees and incentive fees are included in "Advisory fees" in the consolidated statements of earnings. Assets under management are not included as assets of the Company.
Business Environment
The Company is a holding company whose principal subsidiaries are Oppenheimer and OAM. Oppenheimer provides securities brokerage, investment banking, trust and asset management services to its clients from 98 offices across the U.S.A. and associated offices in Caracas, Venezuela and Buenos Aires, Argentina. Oppenheimer is licensed to offer brokerage and other financial services in all 50 States. Client assets entrusted to the Company as at December 31, 2003 totalled approximately $46 billion. The Company provides investment advisory services through OAM and Fahnestock Asset Management, operating as a division of Oppenheimer . The Company provides trust services and products through Oppenheimer Trust Company. At December 31, 2003, client assets under management by the asset management groups totaled $9.59 billion. Oppenheimer also engages in proprietary trading of securities. In addition, the Company operates a discount brokerage business based in Edison, NJ, through Freedom. At December 31, 2003, the Company employed approximately 3,013 people, of whom 1,704 were financial consultants.
The securities industry is highly competitive and sensitive to many factors and is directly affected by general economic and market conditions, including the volatility and price level of securities markets; the volume, size, and timing of securities transactions; the demand for investment banking services and changes in interest rates, all of which have an impact on commissions, trading and investment income as well as on liquidity. In addition, a significant portion of the Company's expenses are relatively fixed and do not vary with market activity. Consequently, substantial fluctuations can occur in the Company's revenues and net income from period to period due to these and other factors.
In addition, the Company faces competition from commercial banks and other sources as these institutions offer more investment banking and financial services traditionally only provided by securities firms. The effect of the consolidation of the securities industry of recent years means that a variety of financial services companies have merged to offer a broader spectrum of investment products and such competitors have substantially greater financial resources than the Company. The Company is also experiencing increasing regulation in the securities industry, particularly affecting the over-the-counter markets, making compliance with regulations more difficult and costly. At present, the Company is unable to predict the extent of changes, or the effect on the Company's business.
Outlook
The Company's long-term plan is to continue to expand existing offices by hiring experienced professionals as well as through the purchase of operating branch offices from other broker dealers, thus maximizing the potential of each office and the development of existing trading, investment banking, investment advisory and other activities. Equally important is the search for viable acquisition candidates. As opportunities are presented, it is the long term intention of the Company to pursue growth by acquisition where a comfortable match can be found in terms of corporate goals and personnel and at a price that would provide the Company's shareholders with incremental value. In the near term, the Company will not be seeking additional significant acquisitions, but will focus its attention on the integration of recent acquisitions, including the significant acquisition in 2003 of the U.S. private client and asset management businesses of CIBC World Markets.
Results of Operations
The results of the year ended December 31, 2003, compared to the same period of 2002, reflect the changed face of the Company after the acquisition by the Company on January 3, 2003 of the U.S. private client business of CIBC World Markets and the subsequent acquisition on June 4, 2003 of the U.S. asset management business of CIBC World Markets (together, the Oppenheimer divisions). This acquisition more than doubled the Companys private client presence, adding approximately 620 financial consultants in 18 offices, at the date of closing. The aggregate purchase price was approximately U.S. $242 million. The Company began self-clearing substantially all of the private client business at the end of May 2003. Until that time, CIBC provided operational and administrative services to the Company on a transition basis. That arrangement precluded the attainment of certain operating efficiencies and cost savings that became available to the Company post- conversion of the client accounts to the Companys clearing platform.
The Company closed on its purchase of OAM on June 4, 2003. OAM currently manages client assets totaling over U.S. $8.65 billion. The business includes internally managed funds, alternative investments (including hedge funds) and third party managed high net worth accounts.
The Companys results were significantly impacted by the recent integration of its acquisition of the Oppenheimer private client division and the closing of the purchase of OAM. In 2003, expenses were impacted by payments to CIBC through May 2003 for various transition services, which the Company utilized during the period. The costs of integration and retention also significantly impacted the 2003 results. On May 27, 2003, Oppenheimer assumed clearing and execution of the business of the Oppenheimer divisions. There were client service issues and internal operational difficulties encountered as a result of the largest conversion of client accounts in the Companys history, which were largely rectified by the end of the second quarter. The Company continues to monitor its systems requirements and remains committed to make improvements in service and technology.
The assumption of the clearing functions substantially changed the Companys balance sheet through increased client receivables and payables, related broker-dealer stock loans and borrows and bank loans, as well as some increase in inventories carried by the Company to accommodate the increased size of the business. The Company continues to believe that this recent acquisition will transform the Company and the Company remains confident that operating margins will improve over coming quarters as overlapping services are eliminated, and integration is completed.
The U.S. economy has continued to pick up momentum as reflected in growth in fourth quarter GNP. New job creation continues to lag and remains an issue for consumer confidence. Low interest rates, a record trade deficit and a record federal budget deficit have been reflected in a weak U.S. dollar, which is trading at record lows compared to other major currencies. These factors are likely to continue to lead to favorable U.S. corporate earnings comparisons and continuing strength in the stock market. Savings rates and favorable demographics in the United States also provide for strong investment flows and favorable conditions for the securities industry.
The following table and discussion summarizes the changes in the major revenue and expense categories for the past two years (in thousands of dollars).
Period to Period Change |
||||
Increase (Decrease) |
||||
2003 versus 2002 |
2002 versus 2001 |
|||
Amount |
Percentage |
Amount |
Percentage |
|
Revenues - | ||||
Commissions |
189,324 |
+139% |
$13,475 |
+11% |
Principal transactions, net |
78,445 |
+135% |
1,853 |
+3% |
Interest |
14,978 |
+54% |
(6,687) |
-19% |
Underwriting fees |
27,863 |
+122% |
11,805 |
+108% |
Advisory fees |
54,185 |
+206% |
1,861 |
+8% |
Other |
41,865 |
+332% |
(235) |
-2% |
Total revenues |
406,660 |
+144% |
22,072 |
+8% |
Expenses - | ||||
Compensation |
265,250 |
+156% |
20,972 |
+14% |
Clearing and exchanges fees |
11,127 |
+116% |
3,595 |
+60% |
Communications |
22,460 |
+70% |
8,446 |
+36% |
Occupancy costs |
25,832 |
+93% |
8,539 |
+44% |
Interest |
5,943 |
+71% |
(5,692) |
-40% |
Other |
38,362 |
+168% |
4,907 |
+27% |
Total expenses |
368,974 |
+136% |
40,767 |
+18% |
Profit before taxes |
37,686 |
+292% |
(18,695) |
-59% |
Income taxes |
15,442 |
+288% |
(7,092) |
-57% |
Net profit |
22,244 |
+295% |
(11,603) |
-61% |
Fiscal 2003 compared to Fiscal 2002
Results for 2003 reflected both the changed face of the Company following its acquisition activity in 2003 and improving economic growth in the U.S., which led to a resurgence of investor participation in the markets. Following its acquisition on January 3, 2003 of the U.S. Private Client business of CIBC World Markets, the Company significantly increased its private client business in terms of financial consultants and client assets. The number of financial consultants increased to 1,704 at December 31, 2003 compared to 1,102 at December 31, 2002. Client assets entrusted to the Company were approximately $46 billion at December 31, 2003 compared to approximately $17.8 billion at December 31, 2002. The acquisition on June 4, 2003 of the U.S. Asset Management business of CIBC World Markets added new business lines and increased managed assets from approximately $869 million at December 31, 2002 to approximately $9.59 billion at December 31, 2003.
Total revenues for 2003 were $689,993,000 an increase of 144% over $283,333,000 in 2002. Commission income (income realized in securities transactions for which Oppenheimer acts as agent) increased 139% to $325,071,000 from $135,747,000 in 2002. This increase was primarily the result of the additional business generated by the acquired Oppenheimer branches, as well as improved market conditions. Revenues from principal transactions (revenues from transactions in which Oppenheimer acts as principal in the secondary market trading of over-the-counter equities and municipal, corporate and government bonds) increased by 135% to $136,672,000 from $58,227,000 in 2002 due to the business generated by the acquired divisions and stronger activity in the trading of fixed income securities as a result of lower interest rates and higher bond prices in 2003 compared to 2002. Investment banking revenues increased by 122% to $50,623,000 from $22,760,000 in 2002, related to increased participation in the issuance of closed-end funds and debt securities, particularly as a result of the impact of the acquired Oppenheimer divisions. Advisory fees increased by 206% to $80,550,000 from $26,365,000 in 2002 primarily as a result of the acquisition of the U.S. Asset Management business of CIBC World Markets in June 2003. In January 2003, the Company was awarded $21,750,000 in an arbitration award in connection with a raiding case involving the sales force of First of Michigan Corporation, a company acquired by the Company in 1997.
Interest income in 2003 was $42,600,000, an increase of 54% from $27,622,000 in 2002. Interest expense was $14,322,000, an increase of 71% from $8,379,000 in 2002. This represents an increase of 47% in net interest revenue (interest revenue less interest expense) in 2003 compared to 2002, which can be attributed to an increase in average customer margin balances due to the conversion of the customer accounts of the acquired Oppenheimer branches in May 2003 and lower interest rates in 2003 compared to 2002.
Expenses in 2003 totalled $639,390,000, an increase of 136% compared to $270,416,000 in 2002. The increase in expenses can be attributed to the acquisitions of the Oppenheimer divisions in 2003 as well as continuing unfavorable legal settlement costs associated with Josephthal & Co. Inc. client accounts, which were acquired in 2001. Compensation and related expenses in 2003 were $435,160,000, an increase of 156% from $169,810,000 in 2002. Compensation expense has volume-related components and increases with increases in commission business conducted in 2003 compared to 2002, as well as increased retention and severance costs and a general increase in staff levels in both acquired branch offices and in head office departments which were required to handle the business volume of the larger entity. Clearing and exchange fees in 2003 were $20,734,000, an increase of 116% from $9,607,000 in 2002. These expenses increased in 2003 compared with 2002 with increased volume and with the increased size of the sales force. In addition, until May, 2003, the business generated from the acquired Oppenheimer branches was being cleared by a third party. The cost of third party clearing is higher than the cost of clearing trades in-house. Communications expenses in 2003 were $54,526,000, an increase of 70% over $32,066,000 in 2002 reflecting additional costs of a larger branch system, after the acquisition of the Oppenheimer divisions. Occupancy costs in 2003 were $53,604,000, an increase of 93% compared to $27,772,000 in 2002 as a result of the increased size of the organization with the acquisition of the Oppenheimer divisions. The increase in communications, technology and occupancy expenses reflects the additional costs associated with connecting and housing approximately 55% more financial consultants in 16 more branch offices in 2003 compared to December 31, 2002, before the acquisitions of the Oppenheimer divisions. During 2003, the Company was able to utilize previously underutilized space and was able to reassign employees to maximize the usage of space. Other expenses were $61,144,000, an increase of 168% over $22,782,000 in 2002. The increase relates primarily to increased levels of general and administrative expense due to the larger organization size, as well as increased bad debt expense and costs of litigation. The Company may face additional unfavorable judgments in future periods. The Company has used its best estimate to provide adequate reserves to cover litigation losses.
Fiscal 2002 compared to Fiscal 2001
Results for fiscal 2002 reflected continued difficult conditions in the investment environment. The combined impact of rising unemployment levels, adverse import/export flows and slowing business conditions has overcome the normal impact of record low interest rates and the prospect of lower tax rates to produce low market volumes and overall declining prices.
Revenues in fiscal 2002 increased compared to fiscal 2001 by 8% as a result of the acquisitions of Josephthal and Prime Charter in the latter part of 2001 and BUYandHOLD in March 2002. Net profit declined by 61% in fiscal 2002 compared to fiscal 2001 as a result of poor market conditions and substantial expenses associated with these recent acquisitions, including integration costs of combining facilities, severance payments associated with combining personnel and most significantly, costs of litigation for claims which preceded the Companys acquisitions of these entities.
Total revenues for 2002 were $283,333,000 an increase of 8% over $261,261,000 in 2001. Commission income (income realized in securities transactions for which the Company acts as agent) increased 11% to $135,747,000 in 2002 from $122,272,000 in 2001. This increase was the result of the additional business generated by Josephthal, Prime Charter and BUYandHOLD, which more than offset generally lower commission levels in the weaker markets of 2002 compared to 2001. Revenues from principal transactions (revenues from transactions in which the Company acts as principal in the secondary market trading of over-the-counter equities and municipal, corporate and government bonds) increased by 3% to $58,227,000 in 2002 from $56,374,000 in 2001 due to stronger activity in the trading of fixed income securities as a result of lower interest rates and higher bond prices in 2002 compared to 2001. The Company has reduced the number of securities in which it makes markets. It may increase or decrease this number as conditions warrant. Underwriting fees increased by 108% to $22,760,000 in 2002 from $10,955,000 in 2001 related to increased participation in the issuance of closed-end funds and debt securities. Demand for these products increased in 2002 as investors sought new investment vehicles. Advisory fees increased by 8% to $26,365,000 in 2002 from $24,504,000 in 2001 primarily as a result of the acquisition of the business of BUYandHOLD in March 2002. BUYandHOLD provides a fee-based investing approach to retail investors.
Interest income in 2002 was $27,622,000, a decrease of 19% from $34,309,000 in 2001. Interest expense was $8,379,000, a decrease of 40% from $14,071,000 in 2001. This represents a decrease of 5% in net interest revenue (interest revenue less interest expense) in 2002 compared to 2001, which can be attributed to a decrease in average customer margin balances and lower interest rates in 2002 compared to 2001.
Expenses in 2002 totalled $270,416,000, an increase of 18% compared to $229,649,000 in 2001. The increase in expenses can be attributed to the acquisitions of Josephthal and Prime Charter in the latter part of 2001 and the business of BUYandHOLD in March 2002. Compensation and related expenses in 2002 were $169,810,000, an increase of 14% from $148,838,000 in 2001. Compensation expense has volume-related components and increases with increases in commission business conducted in 2002 compared to 2001, as well as increased retention and severance costs and a general increase in staff levels in both acquired branch offices and in head office departments which were required to handle the business volume of the larger entity. Clearing and exchange fees in 2002 were $9,607,000, an increase of 60% from $6,012,000 in 2001. These expenses increased in 2002 compared with 2001 with increased volume and with the increased size of the sales force. In addition, until November, 2002, the business generated from the former Prime Charter branches was being cleared by a third party as was the business of BUYandHOLD until June, 2002. The cost of third party clearing is higher than the cost of clearing trades in-house. Communications expenses in 2002 were $32,066,000, an increase of 36% over $23,620,000 in 2001 reflecting additional costs of a larger branch system, after the acquisition of Josephthal and Prime Charter. Occupancy costs in 2002 were $27,772,000, an increase of 44% compared to $19,233,000 in 2001 as a result of increasing the size of the organization with the acquisition of Josephthal and Prime Charter in 2001. The increase in communications, technology and occupancy expenses reflects the additional costs associated with connecting and housing 51% more financial consultants in 15 more branch offices in 2002 compared to September 16, 2001, before the acquisitions of Josephthal and Prime Charter. Occupancy costs were also significantly impacted by costs associated with underutilized space that will be utilized in 2003 and future years by post year-end acquisitions. Other expenses were $22,782,000, an increase of 27% over $17,875,000 in 2001. The increase relates primarily to increased bad debt expense and costs of litigation.
Liquidity and Capital Resources
Total assets at December 31, 2003 increased by approximately 66% from December 31, 2002 due primarily to the acquisition of the Oppenheimer divisions and the conversion of the Oppenheimer private client division client accounts to the Oppenheimer clearing platform on May 27, 2003. Liquid assets at December 31, 2003 accounted for 88% of total assets, compared to 98% at December 31, 2002. The acquisitions of the Oppenheimer divisions resulted in the addition of fixed assets, intangibles and goodwill, all considered long-term in nature. Current assets at December 31, 2003 increased by 50% compared to the previous year-end because of increases in all aspects of the Companys business with the self-clearing of the Oppenheimer divisions business. The new business impacted broker and customer receivables, stock borrow/stock loan balances, deposits with clearing organizations, restricted cash and notes receivable. The Company satisfies its need for funds from its own cash resources, internally generated funds, collateralized and uncollateralized borrowings, consisting primarily of bank loans, and uncommitted lines of credit. The amount of Oppenheimer 's bank borrowings fluctuates in response to changes in the level of the Company's securities inventories and customer margin debt, changes in stock loan balances and changes in notes receivable from employees. Oppenheimer has arrangements with banks for borrowings on an unsecured and on a fully collateralized basis. At December 31, 2003, $101,619,000 of such borrowings were outstanding, an increase of over 527% compared to outstanding borrowings at December 31, 2002. At December 31, 2003, the Company had available collateralized and uncollateralized letters of credit of $143,934,000.
In connection with the acquisition of the Oppenheimer divisions, the Company issued debentures in the amount of approximately $161 million and a zero coupon promissory note in the amount of approximately $66 million. The notes to the financial statements contain a description of these instruments. The interest due on the debentures is payable semi-annually and is being financed from internally-generated funds. The principal payments on the zero coupon promissory note is also being financed from internally-generated funds. The Company believes that the necessary internally-generated funds will be available to service these obligations from funds generated by normal operations, including funds generated by the acquired business.
In connection with the acquisition of the Oppenheimer divisions, the Company has arranged a credit facility in the amount of $50 million with CIBC. In January 2003, the Company borrowed $25 million under this facility and borrowed the balance in July 2003. The borrowings were used to finance broker notes and are repayable, together with interest at the CIBC U.S. base rate plus 2%, over five years or earlier if any broker notes become due earlier. The interest and principal repayments are being made out of internally-generated funds and the Company believes that the cash flow from funds generated by normal operations, including funds generated by the acquired business, will be adequate to enable the Company to meet its obligations. In accordance with the credit arrangement, the Company has provided certain covenants to CIBC with respect to the maintenance of minimum debt/equity ratios and net capital of Oppenheimer. In the Companys view, the most restrictive of the covenants requires that Oppenheimer maintain minimum excess net capital of $100 million. As at December 31, 2003, the Company was in compliance with the covenants. The Company does not foresee any difficulties in complying with the covenants.
Management believes that funds from operations, combined with the Company's capital base and available credit facilities, are sufficient for the Company's liquidity needs in the foreseeable future.
The Company paid cash dividends to its shareholders totalling $4,616,000, during 2003, from internally-generated cash.
During 2003, the Company purchased a total of 25,700 of its Class A non-voting shares at an average cost of $22.76 per share through the facilities of the New York Stock Exchange by way of a Normal Course Issuer Bid, using internally generated cash. The Company has expressed an intention to purchase up to an additional 636,000 of its shares from time to time until July 9, 2004 from internally generated funds.
Because of the Company's strong financial condition, size and earnings history, management believes adequate sources of credit would be available to finance higher trading volumes, branch expansion, and major capital expenditures, as needed. See factors affecting "forward-looking statements".
The book value of the Companys Class A and Class B Shares was $21.75 at December 31, 2003, an increase of approximately 10% compared to $19.82 at December 31, 2002, based on total outstanding shares of 12,919,200 and 12,496,687, respectively.
Contractual and Contingent Obligations
The Company has contractual obligations to make future payments in connection with non-cancelable lease obligations, certain retirement plans and debt assumed upon the acquisition of Josephthal. Additional disclosure relating the Companys commitments appears in note 12 to the consolidated financial statements.
The following table sets forth these contractual and contingent commitments as at December 31, 2003.
Contractual Obligations
(In millions of dollars)
2004 |
2005 |
2006 |
2007 |
Thereafter |
Total |
|
Minimum rentals |
$23 |
$21 |
$19 |
$17 |
$68 |
$148 |
Supplemental Executive Retirement Plan |
1 |
- |
- |
- |
- |
1 |
Assumed Josephthal notes |
4 |
1 |
- |
- |
- |
5 |
Bank loans |
10 |
10 |
10 |
10 |
- |
40 |
Debentures |
- |
- |
- |
- |
161 |
161 |
Zero coupon notes |
15 |
15 |
15 |
6 |
- |
51 |
Total |
$53 |
$47 |
$44 |
$33 |
$229 |
$406 |
Inflation
Because the assets of the Company's brokerage subsidiaries are highly liquid, and because securities inventories are carried at current market values, the impact of inflation generally is reflected in the financial statements. However, the rate of inflation affects the Company's costs relating to employee compensation, rent, communications and certain other operating costs, and such costs may not be recoverable in the level of commissions charged. To the extent inflation results in rising interest rates and has other adverse effects upon the securities markets, it may adversely affect the Company's financial position and results of operations.
Newly Issued Accounting Standards
The Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", FIN No. 45, "Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", FIN No. 46, "Consolidation of Variable Interest Entities",SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities", and SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". The Company has adopted these statements and interpretations and their adoption has not had a material impact on its financial results.
The Company has reviewed SFAS No. 148, "Accounting for Stock-Based Compensation Transition and Disclosure" and has adopted the disclosure provisions, but does not intend to adopt other provisions of this standard at this time.
Factors Affecting "Forward-Looking Statements"
From time to time, the Company may publish "Forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended ( the "Act"), and Section 21E of the Exchange Act or make oral statements that constitute forward-looking statements. These forward-looking statements may relate to such matters as anticipated financial performance, future revenues or earnings, business prospects, projected ventures, new products, anticipated market performance, and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company cautions readers that a variety of factors could cause the Companys actual results to differ materially from the anticipated results or other expectations expressed in the Companys forward-looking statements. These risks and uncertainties, many of which are beyond the Companys control, include, but are not limited to: (i) transaction volume in the securities markets, (ii) the volatility of the securities markets, (iii) fluctuations in interest rates, (iv) changes in regulatory requirements which could affect the cost of doing business, (v) fluctuations in currency rates, (vi) general economic conditions, both domestic and international, (vii) changes in the rate of inflation and the related impact on the securities markets, (viii) competition from existing financial institutions and other new participants in the securities markets, (ix) legal developments affecting the litigation experience of the securities industry, (x) changes in federal and state tax laws which could affect the popularity of products sold by the Company, and (xi) domestic and world events. The Company does not undertake any obligation to publicly update or revise any forward-looking statements.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Management
The Companys principal business activities by their nature involve significant market, credit and other risks. The Companys effectiveness in managing these risks is critical to its success and stability.
As part of its normal business operations, the Company engages in the trading of both fixed income and equity securities in both a proprietary and market-making capacity. The Company makes markets in over-the-counter equities in order to facilitate order flow and accommodate its institutional and retail customers. The Company also makes markets in municipal bonds, mortgage-backed securities, government bonds and high yield bonds.
Market Risk
Market risk generally means the risk of loss that may result from the potential change in the value of a financial instrument as a result of fluctuations in interest and currency exchange rates and in equity and commodity prices. Market risk is inherent in all types of financial instruments, including both derivatives and non-derivatives. The Companys exposure to market risk arises from its role as a financial intermediary for its customers transactions and from its proprietary trading and arbitrage activities. (See additional discussion under Risk Management in Item 1).
Operational Risk
Operational risk generally means the risk of loss resulting from improper processing of transactions or deficiencies in the Companys 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 Companys 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. The Company has procedures designed to assess and monitor counterparty risk. For a discussion of funding risk, see Liquidity and Capital Resources, above.
Credit Risk
Credit risk arises from non-performance by trading counterparties, customers and issuers of debt securities held in the Companys inventory. The Company manages this risk by imposing and monitoring position limits, regularly reviewing trading counterparties, monitoring and limiting securities concentrations, marking positions to market on a daily basis to evaluate and establish the adequacy of collateral, and, with respect to trading counterparties, conducting business through clearing corporations which guarantee performance. Further discussion of credit risk appears in the Notes to the Consolidated Financial Statements, in Item 8.
Legal and Regulatory Risk
Legal and regulatory risk includes the risk of non-compliance with applicable legal and regulatory requirements. The Company is subject to extensive regulation in the different jurisdictions in which it conducts its activities. The Company has comprehensive procedures for addressing issues such as regulatory capital requirements, sales and trading practices, use of and safekeeping of customer funds and securities, granting of credit, collection activities, money laundering, and record keeping.
Value-at-Risk
Value-at-risk is a statistical measure of the potential loss in the fair value of a portfolio due to adverse movements in underlying risk factors. In response to the Securities and Exchange Commissions market risk disclosure requirements, the Company has performed a value-at-risk analysis of its trading financial instruments and derivatives. The value-at-risk calculation uses standard statistical techniques to measure the potential loss in fair value based upon a one-day holding period and a 95% confidence level. The calculation is based upon a variance-covariance methodology, which assumes a normal distribution of changes in portfolio value. The forecasts of variances and co-variances used to construct the model, for the market factors relevant to the portfolio, were generated from historical data. Although value-at-risk models are sophisticated tools, their use can be limited as historical data is not always an accurate predictor of future conditions. The Company attempts to manage its market exposure using other methods, including trading authorization limits and concentration limits.
At December 31, 2003 and 2002, the Companys value-at-risk for each component of market risk was as follows (in thousands of U.S. dollars):
Fiscal 2003 |
As at December 31, |
||||
High |
Low |
Average |
2003 |
2002 |
|
Interest rate risk |
$174 |
132 |
$150 |
168 |
$150 |
Equity price risk |
387 |
369 |
369 |
412 |
336 |
Diversification benefit |
(86) |
(133) |
(110) |
(169) |
(18) |
Total |
$475 |
$368 |
$409 |
$411 |
$468 |
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 Companys results of operations, financial condition or cash flows. The changes in the value-at-risk amounts reported in 2003 from those reported in 2002 reflect changes in the size and composition of the Companys trading portfolio at December 31, 2003 compared to December 31, 2002, which include a larger position in equities. The Companys portfolio as at December 31, 2003 includes approximately $15,781,000 in corporate equities, which are co-related to deferred compensation liabilities and which do not bear any value-at-risk to the Company. Further discussion of risk management appears in Item 7, Managements Discussion and Analysis of the Results of Operations and Item 1, Risk Management.
The value-at-risk estimate has limitations that should be considered in evaluating the Companys potential future losses based on the year-end portfolio positions. Recent market conditions including increased volatility, may result in statistical relationships that result in higher value-at-risk than would be estimated from the same portfolio under different market conditions. Likewise, the converse may be true. Critical risk management strategy involves the active management of portfolio levels to reduce market risk. The Companys market risk exposure is continuously monitored as the portfolio risks and market conditions change.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required to be furnished in response to this Item is submitted hereinafter following the signature pages hereto.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
As of the end of the reporting period, an evaluation was carried out under the supervision and with the participation of the Companys management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of the Companys disclosure controls and procedures were effective. No significant changes were made in the Companys internal over financial reporting during the quarter ended December 31, 2003 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
General
Directors of the Company are elected annually by the holders of the Class B Shares to serve until the next annual meeting of shareholders or until their successors are appointed. Executive officers are appointed annually by the directors or until their successors are appointed. Certain information concerning the executive officers and directors of the Company as at March 8, 2004 is set forth below.
Name | Age |
Positions held |
John L. Bitove | 76 |
A
Director of the Company since February 1980; Retired
executive.
- Member of the Audit, Compensation and Stock Option and Nominating/Corporate Governance Committees |
Richard Crystal | 63 | A Director of the Company since 1992; Partner Brown Raysman Millstein Felder & Steiner LLP (law firm) since July 2002, U.S. counsel to the Company; Partner, Winston & Strawn (law firm) and predecessor firms from 1985 to July 2002. |
Albert G. Lowenthal | 58 | Chairman of the Board, Chief Executive Officer and Director of the Company since 1985; Chairman of the Board, Chief Executive Officer and Director of Oppenheimer since 1985; prior to 1985, Mr. Lowenthal was President of Cowen Securities Inc., a New York stock brokerage firm and a general partner of Cowen & Co., a New York stock brokerage firm. |
Kenneth W. McArthur | 68 |
A
Director of the Company since 1996; President and C.E.O.
of Shurway Capital Corporation ( a private corporation),
since July1993; Senior Vice-President of Bank of Montreal
Investment Counsel between January 1992 and July 1993;
Senior Vice-President of Nesbitt Thomson Inc. between
July 1989 and January 1993.
- Member of the Audit and Nominating/Corporate Governance Committees |
Antonio Molestina | 40 | A Director of the Company since 2003; Deputy General Counsel, Canadian Imperial Bank of Commerce (chartered bank) |
A. Winn Oughtred | 61 | A Director of the Company since 1979; a Director of Oppenheimer since 1983; Secretary of the Company since June, 1992 and prior to June, 1991; Partner, Borden Ladner Gervais LLP (law firm), Canadian counsel to the Company since 1979. |
Elaine K. Roberts | 52 | President, Treasurer and a Director of the Company since 1977; Treasurer and a Director of Oppenheimer since 1983. |
Richard Venn | 52 |
A
Director of the Company since 2003; Senior Executive
Vice-President, Corporate Development, Canadian Imperial
Bank of Commerce (chartered bank)
-Member of the Nominating/Corporate Governance Committee |
Burton Winberg | 79 |
A
Director of the Company since 1979; President of Rockport
Holdings Limited (a real estate development company)
since 1959.
- Member of the Audit, Compensation and Stock Option and Nominating/Corporate Governance Committees. |
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file by specific dates with the SEC initial reports of ownership and reports of changes in ownership of equity securities of the Company. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms that they file. The Company is required to report in this annual report on Form 10-K any failure of its directors and executive officers and greater than ten percent stockholders to file by the relevant due date any of these reports during the preceding fiscal year (or, to the extent not previously disclosed, any prior fiscal year).
To the Company's knowledge, based solely on review of copies of such reports furnished to the Company during the fiscal year ended December 31, 2003 and representations made to the Company by such persons, all Section 16(a) filing requirements applicable to the Company's officers, directors and greater than ten percent stockholders were complied with.
DIRECTORS COMPENSATION
From January 1, 2003 to June 30, 2003, the Company paid its directors an annual retainer fee of $10,000, plus $1,000 for each board or committee meeting attended in person and $500 for each board or committee meeting attended by telephone. Commencing July 1, 2003, directors fees were increased as follows:
Fees: |
Effective July 1, 2003 |
Annual retainer for directors |
$15,000 |
Fee per meeting attended in person |
$1,500 |
Fee per meeting attended by telephone |
$500 |
Annual retainer for committee chairmen |
$5,000 |
Annual retainer for lead director |
$5,000 |
Annual retainer for members of the Audit Committee, other than the chairman |
$2,500 |
In 2003 the Directors were paid fees for both board and committee attendance of $195,500 in aggregate. Directors are reimbursed for travel and related expenses incurred in attending board and committee meetings. Directors who are not employees of the Company and its subsidiaries are also entitled to the automatic grant of stock options under the Companys 1996 Equity Incentive Plan, as amended (the "Plan"), pursuant to a formula set out in the Plan.
DIRECTORS AND OFFICERS INSURANCE
The Company carries liability insurance for its directors and officers. On November 30, 2003, the Company renewed its directors and officers liability insurance for one year ending November 30, 2004 at an annual premium rate of $325,750. No part of the insurance premiums were or are to be paid by the officers and directors. The aggregate insurance coverage under both policies is limited to $10 million with retention of $2.5 million for the policy years ended November 30, 2003 and 2004.
Under the by-laws of the Company, the Company is obligated to indemnify the directors and officers of the Company and its subsidiaries to the maximum extent permitted by the Business Corporations Act (Ontario). The Company has entered into indemnity agreements with each of its directors providing for such indemnities.
RESOURCES FOR THE BOARD COMMITTEES
The Board and each of its committees have, under the Companys Corporate Governance Guidelines, the authority to retain independent legal, financial or other advisors at the expense of the Company.
BOARD COMPOSITION
Pursuant to a Stakeholders Agreement dated December 9, 2002 between the Company, CIBC and others, CIBC has the right to have two of its designees nominated for election to the Companys board. CIBC exercised this right in 2003 and its designees, Mr. A. Molestina and Mr. R. Venn, were elected as directors of the Company at the May 12, 2003 annual and special meeting of shareholders and will serve as directors of the Company until the termination of the May 17, 2004 annual and special meeting of shareholders. CIBC has informed the Company that it does not wish to exercise this right for the May 17, 2004 annual and special meeting of shareholders.
BOARD COMMITTEES
The Board has an Audit Committee, a Compensation and Stock Option Committee and a Nominating/Corporate Governance Committee. The following is a brief summary of the responsibilities of these Committees,
Audit Committee
(Messrs. Bitove, McArthur and Winberg (Chair))
The Board has adopted a written charter for the Audit Committee, a copy of which is attached to this Management Information Circular as Schedule C. The Audit Committee:
reviews annual, quarterly and all legally required public disclosure documents containing financial information that are submitted to the Board;
reviews the nature, scope and timing of the annual audit carried out by the external auditors and reports to the Board;
evaluates the external auditors' performance for the preceding fiscal year; reviews their fees and makes recommendations to the Board;
reviews internal financial control policies, procedures and risk management and reports to the Board;
meets with the external auditors quarterly to review quarterly and annual financial statements and reports and to consider material matters which, in the opinion of the external auditors, should be brought to the attention of the Board and the shareholders;
reviews internal audit activities, meets regularly with internal audit personnel and reports to the Board;
reviews accounting principles and practices;
reviews management reports with respect to litigation, capital expenditures, tax matters and corporate administration charges and reports to the Board;
reviews related party transactions;
reviews and approves changes or waivers to the Company's Code of Conduct and Business Ethics for Directors, Officers and Employees; and
annually reviews this Charter and recommends and make changes thereto as required.
All members of the Audit Committee are independent.
During 2003, the Audit Committee met 5 times.
Compensation and Stock Option Committee
(Messrs. Bitove and Winberg (Chair))
The Board has adopted a Compensation and Stock Option Committee Charter. The Compensation and Stock Option Committee:
makes recommendations to the Board with respect to compensation policy for the Company and its subsidiaries;
makes recommendations to the Board with respect to salary, bonus and benefits paid and provided to senior management of the Company;
in accordance with the provisions of the Company's 1996 Equity Incentive Plan, authorizes grants of stock options and recommends modifications to the Plan;
grants certain compensation awards to senior management of the Company based on criteria linked to the performance of the individual and/or the Company;
administers the Performance-Based Compensation Agreement between the Company and Mr. A.G. Lowenthal;
certifies compliance with the criteria performance-based awards or grants and
administers and makes awards under the Company's Stock Appreciation Rights Plan.
During 2003 the Committee met 4 times.
(see also "Report of the Compensation and Stock Option Committee")
Nominating/Corporate Governance Committee
(Messrs. Bitove, McArthur (Chair), Venn and Winberg)
The Board has adopted a Nominating/Corporate Governance Committee Charter.
The Nominating/Corporate Governance Committee:
makes recommendations to the Board with respect to corporate governance;
when necessary, oversees the recruitment of new Directors for the Company;
recommends nominees for election or appointment to the Board;
maintains an orientation program for new directors and oversees the continuing education needs of Directors;
evaluates Director performance;
reviews and makes recommendations with respect to the Company's Corporate Governance Guidelines;
reviews and approves governance reports for publication in the Company's Management Information Circular and Annual Report on Form 10-K.
Although the Committee was formed in 2003, it did not have any formal meetings in 2003. The members of the Committee, as members of the Board, participated during the year in discussions and decisions on corporate governance, the effectiveness of the Board and related matters. The Committee did meet on February 25, 2004 and has established a schedule for regular meetings for the balance of 2004.
CODE OF ETHICS
The Company has adopted a Code of Conduct and Business Ethics for Directors, Officers and Employees, which can be found on its website at www.opco.com . A paper copy of the Code of Conduct and Business Ethics for Directors, Officers and Employees can be requested by writing to the Company at its head office or by making an email request to investorelations@opy.ca .
Item 11. EXECUTIVE COMPENSATION
With respect to the year ended December 31, 2003, the Compensation and Stock Option Committee of the Board of Directors (the "Committee") was responsible for making recommendations for approval by the Board of Directors with respect to the compensation of the Companys executive officers. The members of this Committee are John L. Bitove and Burton Winberg, each of whom are outside directors of the Company and have no interlocking relationship with the Company or its subsidiaries.
Summary Compensation Table
The following table sets forth total annual compensation paid or accrued by the Company to or for the account of the Company's chief executive officer and each of the four most highly paid executive officers of the Company and Oppenheimer , the Companys principal operating subsidiary, other than the chief executive officer, whose total cash compensation for the fiscal year ended December 31, 2003 exceeded $100,000 (the "Named Executives").
(1) Includes Directors Fees. See the table in Item 10, above, for the applicable rates.
(2) This amount represents Company contributions to the Oppenheimer 401(k) Plan.
(3) Mr. Okin joined Oppenheimer on January 3, 2003. In addition to the above compensation, on March 17, 2003 Mr. Okin was awarded 22,222 Class A Shares, which will be issued on January 3, 2006 and priced at $22.50, provided that Mr. Okin remains continuously employed by the Company. The issuance of these conditionally-issued Class A Shares was confirmed by shareholders on May 12, 2003.
(4) Mr. Robinson joined the OAM on June 4, 2003.
OPTION GRANTS FOR THE YEAR ENDED DECEMBER 31, 2003
The following table sets forth details of options granted to the Named Executives during the year ended December 31, 2003.
AGGREGATED OPTION EXERCISES AND YEAR-END VALUE TABLE
The following table sets forth information with respect to options exercised during the year ended December 31, 2003 by the Named Executives and as to unexercised options held by them at December 31, 2003:
Shares |
Number of securities Underlying unexercised Options/SARs at fiscal year end |
Value of unexercised in-the-money Options/ SARs at fiscal year end |
|||||
Acquired |
Value |
exercisable/ |
exercisable/ |
||||
Name |
on exercise |
Realized |
unexercisable |
unexercisable |
|||
A.G. Lowenthal |
150,000 |
$978,750 |
150,000/150,000 |
$3,000,750/$1,435,500 |
|||
T. Robinson |
0 |
0 |
0/10,000 |
$0/75,400 |
|||
E. J. Shames |
15,000 |
$95,475 |
15,000/7,500 |
$300,075/$71,775 |
|||
E.K. Roberts |
0 |
0 |
75,000/10,000 |
$1,500,375/$95,700 |
|||
R. Okin |
0 |
0 |
0/50,000 |
$0/$466,750 |
REPORT OF THE COMPENSATION AND STOCK OPTION COMMITTEE
The following report of the Committee discusses generally the Committee's executive compensation objectives and policies and their relationship to corporate performance in 2003. In addition, the report specifically discusses the Committee's bases for compensation in 2003 of the Company's Chief Executive Officer, as well as the other senior executive officers of the Company and Oppenheimer .
Objectives and Policies
The Committee's objective is to provide a competitive compensation program with appropriate incentives for superior performance, thereby providing a strong and direct link between corporate performance and compensation. Performance is defined in several ways, as more fully discussed below, each of which has relevance to the Company's success in the short-term, long-term or both.
The Company's compensation program for senior executive officers consists of the following key elements: a base salary, an annual bonus, grants of stock options and, in the case of the Chief Executive Officer, the Performance-Based Compensation Agreement referred to below.
In arriving at its recommendations concerning the specific components of the Company's compensation program, the Committee considers certain public information about the compensation paid by a group of comparable public Canadian and U.S. broker-dealers and the relative performance of the Company as measured by net income levels and earnings per share, among other factors.
The Committee believes that this approach best serves the interests of shareholders by enabling the Company to structure compensation in a way that meets the requirements of the highly competitive environment in which the Company operates, while ensuring that senior executive officers are compensated in a manner that advances both the short and long-term interests of shareholders.
Compensation for the Company's senior executive officers involves a significant component of remuneration which is contingent on the performance of both the Company and the senior executive officer: the variable annual bonus (which permits individual performance to be recognized on an annual basis, and which is based, in significant part, on an evaluation of the contribution made by the officer to corporate performance) and stock options (which directly relate a portion of compensation to stock price appreciation realized by the Companys shareholders).
Base Salary. Salaries paid to senior executive officers (other than the Chief Executive Officer) are reviewed annually by the Committee considering recommendations made by the Chief Executive Officer to the Committee, based upon the Chief Executive Officer's assessment of the nature of the position, and the skills, experience and performance of each senior executive officer, as well as salaries paid by comparable companies in the Companys industry. The Committee then makes recommendations to the Board with respect to base salaries.
Annual Bonus. Bonuses paid to senior executive officers (other than the Chief Executive Officer) are reviewed annually by the Committee considering recommendations made by the Chief Executive Officer to the Committee, based upon the Chief Executive Officer's assessment of the performance of the Company and his assessment of the contribution of each senior executive to that performance. The Committee then makes recommendations to the Board with respect to bonuses.
Senior executive officers, including the Chief Executive Officer, of Oppenheimer have the right to elect to defer a portion of their annual bonus and performance-based compensation under Oppenheimer's Executive Deferred Compensation Plan, a non-qualified unfunded plan.
Stock Option Grants. Under the Plan, as amended, senior executive officers and employees of the Company and its subsidiaries (other than the Chief Executive Officer) are granted stock options by the Committee based upon the recommendations of the Chief Executive Officer and based upon a variety of considerations, including the date of the last grant made to the officer or employee, as well as considerations relating to the contribution and performance of the specific optionee.
Chief Executive Officer Compensation
Mr. A.G. Lowenthal, the Chairman of the Board and the Chief Executive Officer of the Company and Oppenheimer, is paid a base salary set by the Committee, plus performance-based compensation under the Performance-Based Compensation Agreement referred to below and, at the discretion of the Committee, is eligible for bonuses and grants of stock options.
On January 1, 2001, the Company entered into a Performance-Based Compensation Agreement (the "2001 Comp Agreement") with Mr. Lowenthal, which expires on December 31, 2005. The 2001 Comp Agreement was approved by the Class B Shareholders in 2001. The purpose of the 2001 Comp Agreement is to set the terms under which Mr. Lowenthal's performance-based compensation is to be calculated during the term thereof.
In March of 2003, the Committee established performance goals under the 2001 Comp Agreement entitling Mr. Lowenthal to a Performance Award under the 2001 Comp Agreement for the year 2003 of an aggregate of $3,360,323 determined by the application of a formula based on the following components: the amount by which the closing price of one Class A Share at January 1, 2003, exceeded the closing price of one Class A Share as at December 31, 2003 multiplied by 200,000 shares; 3% of the amount by which the Company's consolidated profit before income taxes for the year ended December 31, 2003 exceeded 15% of and is less than 25% of the Company's consolidated shareholders' equity as at December 31, 2002; 3.0% percent of the amount by which the Companys consolidated net profit for the year ended December 31, 2003 was greater than $0 and less than $11,500,000; 4.0% of the amount by which the Companys consolidated net profit for the year ended December 31, 2003 was greater than $11,500,000 and less than $23,000,000; and 4.5% of the amount by which the Companys consolidated net profit for the year ended December 31, 2003 was greater than U.S.$23,000,000 and less than $34,000,000. In March of 2003, the Committee set Mr. Lowenthals base salary for 2003 at $500,000.
U.S. Internal Revenue Code Section 162(m)
The Company is a Canadian taxpayer. However, because Oppenheimer is a U.S. taxpayer, most compensation issues are affected by the U.S. Internal Revenue Code of 1986, as amended (the "U.S. Tax Code").
Section 162(m) of the U.S. Tax Code generally disallows a tax deduction to public Companys for annual compensation of over $1,000,000 paid to any of the company's chief executive officer and four other most highly paid executive officers (determined as of the end of each fiscal year) unless such compensation constitutes qualified performance-based compensation or otherwise qualifies for an exception.
In order to qualify for exemptions under Section 162(m) in 2001, the 2001 Comp Agreement was adopted and approved by the Class B Shareholders.
To the extent consistent with the Company's general compensation objectives, the Committee considers the potential effect of Section 162(m) on compensation paid to the executive officers of the Company and its subsidiaries. However, the Committee reserves the right to award and recommend the awarding of nondeductible compensation in any circumstances it deems appropriate. Further, because of ambiguities and uncertainties as to the application and interpretation of Section 162(m) and the regulations issued thereunder, no assurance can be given, notwithstanding the Company's efforts to qualify, that the compensation paid by the Company to its executive officers will in fact satisfy the requirements for the exemption from the Section 162(m) deduction limit.
Members of the Compensation and Stock Option Committee
Burton Winberg Chairman
John L. Bitove
SHARE PERFORMANCE GRAPH
The following graph shows changes over the past five year period of U.S.$100 invested in (1) the Companys Class A Shares, (2) the Standard & Poors 500 Index, and (3) the Standard & Poors / Toronto Stock Exchange Composite Index.
[PERFORMANCE GRAPH]
1998 |
1999 |
2000 |
2001 |
2002 |
2003 |
|
Oppenheimer |
100 |
87 |
163 |
119 |
90 |
136 |
S&P 500 |
100 |
118 |
90 |
87 |
77 |
126 |
S&P / TSX Composite |
100 |
130 |
106 |
86 |
86 |
124 |
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As at December 31, 2003, the authorized capital of the Company includes an unlimited number of Class A Shares of which 12,819,520 Class A Shares were issued and outstanding and 99,680 Class B Shares, all of which were issued and outstanding.
The following table sets forth certain information regarding the beneficial ownership of, or the exercise of control or discretion over, each class of shares of the Company as at March 9, 2004, with respect to (i) each person known by the Company to beneficially own or exercise control or discretion over more than 5% of any class of the Companys shares, (ii) each of the Companys directors, (iii) each of the Companys executive officers named in the Summary Compensation Table and (iv) the directors and officers as a group.
For purposes of the table, beneficial ownership is determined pursuant to Rule 13d-3 of the U.S. Securities Exchange Act of 1934, as amended, pursuant to which a person or group of persons is deemed to have "beneficial ownership" of a class of outstanding shares which such person or group has the right to acquire within 60 days after March 9, 2004. The percentage of shares deemed outstanding is based on 13,322,416 Class A Shares and 99,680 Class B Shares outstanding as of March 9, 2004. In addition, for purposes of computing the percentage of Class A Shares owned by each person, the percentage includes all Class A Shares issuable upon exercise of outstanding options held by such persons within 60 days after March 9, 2004.
There are no outstanding rights to acquire beneficial ownership of any Class B Shares.
Class A Shares |
Class B Shares |
||||
Name and Address of Beneficial Owner |
Shares |
% |
Shares |
% |
|
Private
Capital Management, L.P.
8889 Pelican Bay Boulevard Suite 500 Naples, FL 34108 |
4,132,534 |
31.0% |
- |
- |
|
AIC
Limited
1375 Kerns Road Burlington, Canada L7R 4X8 |
1,837,800 |
13.8% |
- |
- |
|
Olga
Roberts (2)
20 Eglinton Ave. W. Suite 1110 Toronto, Canada M4R 1K8 |
324,955 |
2.4% |
44,309 |
44.4% |
|
Albert G. Lowenthal (1)
125 Broad St New York, NY 10004 |
2,751,143 |
20.6% |
50,975 |
51% |
|
J.L. Bitove |
56,830 |
* |
20 |
* |
|
R. Crystal (7) |
13,950 |
* |
- |
- |
|
K.W. McArthur (4) |
56,250 |
* |
- |
- |
|
A. Molestina |
- |
- |
- |
- |
|
R. Okin (9) |
103 |
* |
- |
- |
|
A.W. Oughtred |
9,750 |
* |
- |
- |
|
E.K. Roberts (3) |
178,594 |
1.3% |
116 |
* |
|
E.J. Shames (6) |
47,450 |
* |
- |
- |
|
R. Venn |
- |
- |
- |
- |
|
B. Winberg (8) |
10,650 |
* |
- |
- |
|
Executive Officers and Directors as a group (10 persons) |
3,134,779 |
23.5% |
51,011 |
51% |
________________________________________
* less than 1%
(1) With respect to the Class A Shares, Mr. Lowenthal is the sole general partner of Phase II Financial L. P., a New York limited partnership ("Phase II L.P."), which is the record holder of 2,738,430 Class A Shares. Mr. Lowenthal holds 11,347 Class A Shares through the Company's 401(k) plan, and 1,366 Class A Shares directly. With respect to the Class B Shares, Phase II, an Ontario Company wholly-owned by Mr. Lowenthal, is the holder of record of all such shares.
(2) With respect to the Class B Shares, Mrs. Roberts, who is the mother of Elaine Roberts, President of the Company, owns 100 Class B Shares directly and 44,209 Class B Shares indirectly through Elka Estates Limited, an Ontario Company ("Elka"), which is wholly-owned by Mrs. Roberts. With respect to the Class A Shares, Mrs. Roberts owns 41,900 Class A Shares directly and 283,055 Class A Shares through Elka Estates Limited.
(3) 182,294 Class A Shares are held directly.
(4) 50,000 Class A Shares are held directly and 6,250 Class A Shares are beneficially owned in respect of Class A Shares issuable upon exercise of options issued under the Plan.
(6) 45,000 Class A Shares are held directly, 2,450 Class A Shares are held through the Companys 401(k) Plan.
(7) 2,700 Class A Shares are held directly and 11,250 Class A Shares are beneficially owned in respect of Class A Shares issuable upon exercise of options issued under the Plan.
(8) Includes 6,250 Class A Shares which are beneficially owned in respect of Class A Shares issuable upon exercise of options issued under the Plan.
(9) 103 Class A Shares are held through the Companys 401(k) Plan.
(c) There are no arrangements, known to the Company, the operation of which may at a subsequent date result in a change of control of the Company.
(d) Class A Shares authorized for issuance under the Companys 1996 Equity Incentive Plan (the "Plan"), as amended as at December 31, 2003 are as follows: All Class A Shares authorized under the Plan have been approved by shareholders of the Company.
A description of the Plan appears in Note 8 of the Companys financial statements for the year ended December 31, 2003. The Company does not have any warrants or rights outstanding as at December 31, 2003.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year 2003 certain of the directors, executive officers and senior officers of the Company and Oppenheimer maintained margin accounts with Oppenheimer in connection with the purchase of securities (including securities of the Company) which margin accounts are substantially on the same terms, including interest rates and collateral, as those prevailing from time to time for comparable transactions with non-affiliated persons and do not involve more than the normal risk of collectability. The details of their indebtedness to Oppenheimer on their margin accounts is as follows:
Item 14. Principal Accounting Fees and Services
The Companys principal accountant is PricewaterhouseCoopers LLP. Audit fees include fees for the audit of the Companys annual consolidated financial statements and the review of its quarterly financial statements. Audit fees also include fees for the audits of the Companys broker dealer subsidiaries in compliance with statutory and regulatory filings. Other audit-related fees include fees for the audit of the Companys 401(k) plan. In 2002, the Company engaged Ernst & Young to provide tax related services.
Year ended December 31, |
||
2003 |
2002 |
|
Audit fees |
$827,500 |
$546,000 |
Audit-related fees |
50,000 |
34,000 |
Tax fees |
nil |
Nil |
All other fees |
nil |
nil |
$877,500 |
$580,000 |
The Audit Committee has the sole authority and responsibility to nominate independent auditors for election by shareholders, and to recommend to shareholders that independent auditors be removed. The Audit Committee approves all audit engagement fees and terms as well as approves all non-audit engagements and engagement fees provided by independent auditors. The process begins prior to the commencement of the audit. The fees described above were 100% pre-approved.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 9th day of March, 2004.
OPPENHEIMER HOLDINGS INC.
BY: "E.K. Roberts"
E.K. Roberts, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
Signature | Title | Date |
"J.L. Bitove" | Director | March 9, 2004 |
J.L. Bitove | ||
"R. Crystal" | Director | March 9, 2004 |
R. Crystal | ||
"A.G. Lowenthal" | Chairman, Chief Executive | March 9, 2004 |
A.G. Lowenthal | Officer, Director | |
"K.W. McArthur" | Director | March 9, 2004 |
K.W. McArthur | ||
"A. Molestina" | Director | March 9, 2004 |
A. Molestina | ||
"A.W. Oughtred" | Secretary, Director | March 9, 2004 |
A.W. Oughtred | ||
"E.K. Roberts" | President & Treasurer, | March 9, 2004 |
E.K. Roberts | (Principal Financial and Accounting Officer), Director | |
"R. Venn" | Director | March 9, 2004 |
R. Venn | ||
"B. Winberg" | Director | March 9, 2004 |
B. Winberg |
OPPENHEIMER HOLDINGS INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2003
FOR INCLUSION IN THE COMPANYS FORM 10-K
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OPPENHEIMER HOLDINGS INC.
Managements Responsibility for Consolidated Financial Statements |
55 |
Report of Independent Auditors |
56 |
Consolidated Balance Sheets as at December 31, 2003 and 2002 |
57 |
Consolidated
Statements of Operations for the three years ended
December 31, 2003, 2002 and 2001 |
59 |
Consolidated Statements of Changes in Shareholders Equity for the three years ended December 31, 2003, 2002 and 2001 |
60 |
Consolidated
Statements of Cash Flows for the three years ended
December 31, 2003, 2002 and 2001 |
61 |
Notes to Consolidated Financial Statements |
63 |
MANAGEMENT'S RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements of Oppenheimer Holdings Inc. were prepared by management in accordance with accounting principles generally accepted in the United States of America, which conform in all material respects with accounting principles generally accepted in Canada. The significant accounting policies of the Company are described in Note 1 to the consolidated financial statements.
Management is responsible for the integrity and objectivity of the information contained in the consolidated financial statements. In order to present fairly the financial position of the Company and the results of its operations and its cash flows, estimates which are necessary are based on careful judgments and have been properly reflected in the consolidated financial statements. Management has established systems of internal control which are designed to provide reasonable assurance that assets are safeguarded from loss or unauthorized use and to produce reliable accounting records for the preparation of financial information.
PricewaterhouseCoopers LLP, the Company's independent accountants, conduct an audit of the consolidated financial statements in accordance with auditing standards generally accepted in the United States of America. Their audit includes a review and evaluation of the Company's systems of internal control, and such tests and procedures as they consider necessary in order to form an opinion as to whether the consolidated financial statements are presented fairly in accordance with accounting principles generally accepted in the United States of America.
The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and internal control. The Board of Directors is assisted in this responsibility by its Audit Committee, whose members are not officers of the Company. The Audit Committee meets with management as well as with the independent auditors to review the internal controls, consolidated financial statements, and the auditors report. The Audit Committee reports its findings to the Board of Directors for its consideration in approving the consolidated financial statements for issuance to the shareholders.
Management recognizes its responsibility for conducting the Company's affairs in compliance with established financial standards, and applicable laws and regulations, and for maintaining proper standards of conduct for its activities.
A.G. Lowenthal, E.K. Roberts,
Chairman of the Board President and Treasurer
and Chief Executive Officer
February 25, 2004
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF OPPENHEIMER HOLDINGS INC.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in shareholders equity and cash flows present fairly, in all material respects, the financial position of Oppenheimer Holdings Inc. (the "Company") and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Companys management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in note 2, in 2002 the Company adopted the goodwill provisions of Statement of Accounting Standards No. 142, "Goodwill and Other Intangibles".
"PricewaterhouseCoopers LLP"
New York, New York
February 25, 2004
OPPENHEIMER HOLDINGS INC. |
||||||
CONSOLIDATED BALANCE SHEETS |
||||||
AS AT DECEMBER 31, |
||||||
2003 |
2002 |
|||||
(Expressed in thousands of U.S. dollars) |
||||||
ASSETS | ||||||
Current assets | ||||||
Cash and cash equivalents |
$34,478 |
$16,115 |
||||
Restricted deposits (note 3) |
14,466 |
7,440 |
||||
Deposits with clearing organizations |
17,858 |
3,606 |
||||
Receivable from brokers and clearing organizations |
278,521 |
492,094 |
||||
Receivable from customers |
906,487 |
392,929 |
||||
Securities owned, including amounts pledged, at market value (note 4) |
95,223 |
50,173 |
||||
Notes receivable (note 15) |
97,919 |
17,012 |
||||
Other |
63,610 |
28,418 |
||||
1,508,562 |
1,007,787 |
|||||
Other assets | ||||||
Stock exchange seats (approximate market value | ||||||
$4,968; $6,716 in 2002) |
2,994 |
2,994 |
||||
Property, plant and equipment (note 5) |
23,807 |
8,488 |
||||
Intangible assets, net of amortization |
35,865 |
- |
||||
Goodwill |
137,889 |
11,957 |
||||
200,555 |
23,439 |
|||||
$1,709,117 |
$1,031,226 |
OPPENHEIMER HOLDINGS INC. |
|||||
CONSOLIDATED BALANCE SHEETS |
|||||
AS AT DECEMBER 31, |
|||||
2003 |
2002 |
||||
(Expressed in thousands of U.S. dollars) |
OPPENHEIMER HOLDINGS INC. |
||||||
CONSOLIDATED STATEMENTS OF OPERATIONS |
||||||
FOR THE YEAR ENDED DECEMBER 31, |
||||||
2003 |
2002 |
2001 |
||||
(Expressed in thousands of U.S. dollars, except per share amounts) |
||||||
REVENUE: | ||||||
Commissions |
$325,071 |
$135,747 |
$122,272 |
|||
Principal transactions, net |
136,672 |
58,227 |
56,374 |
|||
Interest |
42,600 |
27,622 |
34,309 |
|||
Underwriting fees |
50,623 |
22,760 |
10,955 |
|||
Advisory fees |
80,550 |
26,365 |
24,504 |
|||
Arbitration award |
21,750 |
- |
- |
|||
Other |
32,727 |
12,612 |
12,847 |
|||
689,993 |
283,333 |
261,261 |
||||
EXPENSES: | ||||||
Compensation and related expenses |
435,160 |
169,810 |
148,838 |
|||
Clearing and exchange fees |
20,734 |
9,607 |
6,012 |
|||
Communications |
54,526 |
32,066 |
23,620 |
|||
Occupancy and equipment costs |
53,604 |
27,772 |
19,233 |
|||
Interest |
14,322 |
8,379 |
14,071 |
|||
Other |
61,044 |
22,782 |
17,875 |
|||
639,390 |
270,416 |
229,649 |
||||
Profit before income taxes |
50,603 |
12,917 |
31,612 |
|||
Income tax provision (note 10) |
20,812 |
5,370 |
12,462 |
|||
Profit before cumulative effect of a change in accounting principle |
29,791 |
7,547 |
19,150 |
|||
Cumulative effect of a change in accounting principle (note 2) |
- |
1,774 |
- |
|||
NET PROFIT FOR YEAR |
$29,791 |
$9,321 |
$19,150 |
|||
Earnings per share (notes 2 and 11) | ||||||
Basic earnings per share |
$2.35 |
$0.75 |
$1.55 |
|||
- Before the effect of a change in accounting | ||||||
principle |
$2.35 |
$0.61 |
$1.55 |
|||
- Cumulative effect of a change in accounting | ||||||
principle |
- |
$0.14 |
- |
|||
Diluted earnings per share |
$1.63 |
$0.73 |
$1.50 |
|||
The accompanying notes are an integral part of these consolidated financial statements. |
||||||
The accompanying notes are an integral part of these consolidated financial statements. |
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
December 31, 2003
GENERAL
Oppenheimer Holdings Inc. (formerly Fahnestock Viner Holdings Inc.) ("OPY") is incorporated under the laws of Ontario. On September 2, 2003 the names of OPY and certain of its subsidiaries were changed. The consolidated financial statements include the accounts of OPY and its subsidiaries (together, the "Company"). The principal subsidiaries of OPY are Oppenheimer & Co. Inc. (formerly Fahnestock & Co. Inc.) ("Oppenheimer"), a registered broker dealer in securities, and Oppenheimer Asset Management Inc.(formerly Hudson Capital Advisors, Inc.) ("OAM"), a registered investment advisor under the Investment Advisors Act of 1940. Oppenheimer operates as Fahnestock & Co. Inc. in South America. Oppenheimer owns Freedom Investments, Inc. ("Freedom"), a registered broker dealer in securities, which also operates as the BUYandHOLD division of Freedom, offering on-line discount brokerage and dollar-based investing services. Oppenheimer is a member of the New York Stock Exchange, the American Stock Exchange and several other regional exchanges in the United States. 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, trust services, and investment advisory and asset management services.
1. Summary of significant accounting policies
These consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America for purpose of inclusion in the Companys annual report on Form 10-K. In all material respects, they conform with accounting principles generally accepted in Canada, which have been used to prepare the consolidated financial statements for purposes of inclusion in the Companys annual report to shareholders.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates are related to income taxes and contingencies. Actual results could be materially different from these estimates.
Since operations are predominantly based in the United States of America, these consolidated financial statements are presented in U.S. dollars.
Certain prior period amounts have been reclassified to conform to the current presentation.
The following is a summary of significant accounting policies followed in the preparation of these consolidated financial statements:
(a) Basis of consolidation
The consolidated financial statements include the accounts of the Company and all subsidiaries. The major subsidiaries, wholly-owned and operated in the United States of America, are as follows:
Oppenheimer & Co. Inc. -broker/dealer in securities
Oppenheimer Asset Management Inc. -investment advisory services
Freedom Investments, Inc. -discount broker in securities
Significant intercompany balances and transactions have been eliminated in the preparation of the consolidated financial statements.
(b) Brokerage operations
Transactions in proprietary securities and related revenues and expenses are recorded on a trade date basis. Customers securities and commodities transactions are reported on a settlement date basis, which is generally three business days after trade date. Related commission income and expense is recorded on a trade date basis. Securities owned and securities sold, but not yet purchased, are reported at market value generally based upon quoted prices. Realized and unrealized changes in market value are recognized in net trading revenues in the period in which the change occurs. Other financial instruments are carried at fair value or amounts that approximate fair value.
(c) Asset management operations
Asset management fees are generally recognized over the period the related service is provided based on the account value at the valuation date per the respective asset management agreements. In certain circumstances, OAM is entitled to receive incentive fees when the return on assets under management exceeds certain benchmark returns or other performance targets. Incentive fees are generally based on investment performance over a 12-month period and are not subject to adjustment once the measurement period ends. Accordingly, incentive fees are recognized in the consolidated statements of operations when the measurement period ends. Asset management fees and incentive fees are included in "Advisory fees" in the consolidated statements of earnings. Assets under management are not included as assets of the Company.
(d) Cash and cash equivalents
The Company defines cash equivalents as highly liquid investments with original maturities of less than 90 days that are not held for sale in the ordinary course of business.
(e) Drafts payable
Drafts payable represent amounts drawn by the Company against a bank.
(f) Goodwill
Goodwill arose upon the acquisitions of Oppenheimer, First of Michigan Capital Corporation, Josephthal & Co. Inc., Grand Charter Group Incorporated and the Oppenheimer divisions. Goodwill is subject to an annual test for impairment to determine if the fair value of goodwill of a reporting unit is less than its carrying amount. Goodwill recorded as at December 31, 2003 has been tested for impairment and no such impairment was recorded.
(g) Intangible Assets
Intangible assets arose upon the acquisition of the Oppenheimer divisions and are comprised of customer relationships and trademarks and trade names . Customer relationships, carried at $4,165,000 net of accumulated amortization of $735,000, are being amortized on a straight-line basis over 80 months commencing in January 2003. Trademarks and trade names, carried at $31,700,000, which are not amortized, are subject to an annual test for impairment to determine if the fair value is less than its carrying amount.
(h) Property, plant and equipment
Furniture, fixtures, equipment and leasehold improvements and stock exchange seats are stated at cost. Depreciation of furniture,fixtures and equipment is provided on a straight-line basis generally over three to seven years. Leasehold improvements are amortized on a straight-line basis over the shorter of the life of the improvement or the remaining term of the lease.
(i) Foreign currency translations
Canadian currency balances have been translated into U.S. dollars as follows: monetary assets and liabilities at exchange rates prevailing at period end; revenue and expenses at average rates for the period; and non-monetary assets and share capital at historical rates.
(j) Income taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Deferred income tax assets and liabilities arise from "temporary differences" between the tax basis of an asset or liability and its reported amount in the consolidated financial statements. Deferred tax balances are determined by applying the enacted tax rates.
(k)Securities lending activities
Securities borrowed and securities loaned are carried at the amounts of cash collateral advanced or received.
Securities borrowed transactions require the Company to deposit cash or other collateral with the lender. The Company receives cash or collateral in an amount generally in excess of the market value of securities loaned.
The Company monitors the market value of securities borrowed and loaned on a daily basis and may require counterparties to deposit additional collateral or return collateral pledged, when appropriate.
Included in receivable from brokers and clearing organizations are deposits paid for securities borrowed of $237,329,000 (as at December 31, 2002 - $480,938,000). Included in payable to brokers and clearing organizations are deposits received for securities loaned of $444,977,000 (as at December 31, 2002 - $514,213,000).
(l) Resale and repurchase agreements
Transactions involving purchases of securities under agreements to resell ("reverse repurchase agreements") or sales of securities under agreements to repurchase ("repurchase agreements") are treated as collateralized financing transactions and recorded at their contractual resale or repurchase amounts plus accrued interest.
The Company obtains possession of collateral with a market value equal to or in excess of the principal amount loaned under reverse repurchase agreements. Collateral is valued daily and adjusted when appropriate.
(m) Investment banking revenues
Investment banking fees are recorded on offering date, sales concessions on settlement date and underwriting fees at the time the transaction is substantially completed and income is reasonably determinable.
(n) Interest expense
Included in interest expense is interest on bank loans, debt, payments in lieu of interest on securities loaned and interest paid with respect to repurchase agreements.
(o) Stock-based compensation plans
The Company has a stock-based compensation plan. The Company accounts for stock based compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" . No compensation expense is recognized for this plan when stock options are issued to employees as the options are exercisable at the fair value at the date of grant. Any consideration paid by employees on the exercise of stock options or purchase of stock is credited to share capital.
2. Recently Issued Accounting Standards
Goodwill and other intangible assets
The Company adopted Financial Accounting Standards Board issued Statement of Accounting Standards No.142, "Goodwill and Other Intangibles " effective January 1, 2002 without restatement of prior periods. In connection with the adoption of the standard, the Companys recorded amount of goodwill is no longer subject to amortization but is being periodically measured for impairment. Such impairment test was performed as at December 31, 2003 and no impairment was recorded.
In addition, on January 1, 2002, the Company wrote off unamortized "negative goodwill" in the amount of $1,774,000, as required by the standard. Negative goodwill represents the excess fair value of net assets acquired above the cost of acquisition. The write-off was recognized in the statement of operations for the year ended December 31, 2002 as a gain from the cumulative effect of a change in accounting principle.
The following table reflects the effect of the amortization of goodwill on the results of operations as though FAS 142 had been adopted on January 1, 2001.
December 31, |
|||
2003 |
2002 |
2001 |
|
Profit before cumulative effect of a change in accounting principle as reported |
$29,791 |
$7,547 |
$19,150 |
Amortization of goodwill as reported |
- |
- |
432 |
Profit before cumulative effect of a change in accounting principle as adjusted |
29,791 |
7,547 |
19,582 |
Cumulative effect of a change in accounting principle as reported |
- |
1,774 |
- |
Net profit as adjusted |
$29,791 |
$9,321 |
$19,582 |
Basic earnings per share as reported |
$2.35 |
$0.75 |
$1.55 |
- Before cumulative effect of a change in accounting principle |
$2.35 |
$0.61 |
$1.55 |
-Cumulative effect of a change in accounting principle |
- |
$0.14 |
- |
Diluted earnings per share as reported |
$1.63 |
$0.73 |
$1.50 |
Basic earnings per share as adjusted |
$2.35 |
$0.75 |
$1.59 |
Diluted earnings per share as adjusted |
$1.63 |
$0.73 |
$1.53 |
Other recently issued accounting standards
The Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", FIN No. 45, "Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", FIN No. 46, "Consolidation of Variable Interest Entities", SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities", and SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". The Company has adopted these statements and interpretations and their adoption did not have a material impact on its financial results.
The Company has reviewed SFAS No. 148, "Accounting for Stock-Based Compensation Transition and Disclosure" and has adopted the disclosure provisions, but does not intend to adopt the other provisions of this standard at this time.
3. Restricted deposits
Deposits of $14,466,000 (2002 - $7,440,000) were held at year-end in a special reserve bank accounts for the exclusive benefit of customers in accordance with regulatory requirements. To the extent permitted, these deposits are invested in interest bearing accounts collateralized by qualified securities.
4. Securities owned and Securities sold, but not yet purchased (at fair market value)
2003 |
2002 |
||
Securities owned consist of: | |||
Corporate equities |
$34,877,000 |
$11,467,000 |
|
Corporate and sovereign debt |
24,962,000 |
16,522,000 |
|
U.S. government and agency and state and municipal government obligations |
32,070,000 |
22,103,000 |
|
Money market funds |
3,288,000 |
- |
|
Options and other |
26,000 |
81,000 |
|
$95,223,000 |
$50,173,000 |
||
Securities sold, but not yet purchased consist of: | |||
Corporate equities |
$3,128,000 |
$5,049,000 |
|
Corporate debt |
5,115,000 |
3,935,000 |
|
U.S. government and agency and state and municipal government obligations and other |
2,444,000 |
622,000 |
|
$10,687,000 |
$9,606,000 |
Securities owned and Securities sold, but not yet purchased, consist of trading and investment securities at fair market values. Included in securities owned at December 31, 2003 are corporate equities with fair market values of approximately $15,781,000, which are correlated to deferred compensation liabilities to certain employees. At December 31, 2003, the Company has pledged securities owned of approximately $1,427,000 ($1,078,000 in 2002) as collateral to counterparties for securities loan transactions, which can be sold or repledged.
5. Property, plant and equipment
2003 |
2002 |
|||
(Expressed in thousands of U.S. dollars) |
||||
Cost |
Accumulated depreciation/ amortization |
Net book value |
Net book value |
|
Furniture, fixtures and equipment |
$40,415 |
$25,744 |
$14,671 |
$7,395 |
Leasehold improvements |
15,542 |
6,406 |
9,136 |
1,093 |
$55,957 |
$32,150 |
$23,807 |
$8,488 |
Depreciation and amortization expense, included in occupancy and equipment costs, was $8,783,000, $4,864,000 and $3,542,000 in the years ended December 31, 2003, 2002 and 2001, respectively.
6. Bank call loans
Bank call loans, primarily payable on demand, bear interest at various rates but not exceeding the broker call rate, which was 2.75% at December 31, 2003. These loans, collateralized by firm and customer securities with market values of approximately $35,674,000 and $139,478,000, respectively, at December 31, 2003 are primarily with two U.S. money center banks. Details of the bank call loans are as follows:
(1) The average amount outstanding during the year was computed by adding amounts outstanding at the end of each month and dividing by twelve.
(2) The weighted average interest rate during the year was
computed by dividing the actual interest expense by the average
bank call loans outstanding at the end of each month.
Aggregate interest paid on bank call loans by the Company on a cash basis during the years ended December 31, 2003, 2002, and 2001 was $6,523,000, $6,473,000 and $9,709,000, respectively.
7. Long term liabilities
Issued |
Maturity Date |
Interest Rate |
December 31, 2003 |
|
Bank loans (a) |
1/2/2008 |
6.5% |
$39,655,000 |
|
Less current portion |
10,119,000 |
|||
Long term portion of bank loans |
$29,536,000 |
|||
Zero Coupon Promissory Note, | ||||
issued January 2, 2003 (b) |
- |
0% |
$50,875,000 |
|
Less current portion |
15,921,000 |
|||
Long term portion of long-term debt |
$34,954,000 |
|||
First and Second Variable Rate
Exchangeable
Debentures , issued January 6, 2003 and May 12, 2003, respectively (c) |
1/2/2013 |
3% |
$160,822,000 |
|
(a) Bank loans are subject to a credit arrangement with Canadian Imperial Bank of Commerce ("CIBC") dated January 2, 2003 in the aggregate amount of $50 million dollars, and bear interest at the U.S. base rate plus 2% per annum. The minimum annual principle repayment under the agreement is approximately $10,119,000. The principle repayments are tied to certain employee notes receivable issued during 2003 and repayments above the minimum level are triggered by the termination of employment of these employees. In accordance with the credit arrangement, the Company has provided certain covenants to CIBC with respect to the maintenance of minimum debt/equity ratios and net capital of Oppenheimer. In the Companys view, the most restrictive of the covenants requires that Oppenheimer maintain minimum excess net capital of $100 million. As at December 31, 2003, the Company was in compliance with the covenants. Interest expense on bank loans was $2,021,000 in 2003, of which $1,802,000 was paid on a cash basis.
(b)The Zero Coupon Promissory Note is repayable as related employee notes receivable, which are assigned to Oppenheimer, become due and are forgiven. Such payments are to be made notwithstanding whether any of the employees loans default.
(c)The First and Second Variable Rate Exchangeable Debentures are exchangeable for approximately 6.9 million Class A Shares of the Company at the rate of $23.20 per share. The annual interest rate is 3% in 2003, 4% in 2004 - 2006, and 5% in 2007 through maturity. The First and Second Variable Rate Exchangeable Debentures, which mature on January 2, 2013, contain a retraction clause, which may be activated by the holder for a period of 120 days at the end of year seven. Interest is payable semi-annually in June and December. Interest expense on the First and Second Variable Rate Exchangeable Debentures was $4,811,000 in 2003.
8. Share capital
The Company's authorized share capital, all of which is without par value, consists of (a) an unlimited number of first preference shares issuable in series; (b) an unlimited number of Class A non-voting shares ("Class A Shares"); and (c) 99,680 Class B voting shares ("Class B Shares").
The Class A and the Class B Shares are equal in all respects except that the Class A Shares are non-voting.
The Company's issued and outstanding share capital is as follows (no first preference shares have been issued):
2003 |
2002 |
2001 |
|||
12,819,520 (12,397,007 in 2002 and 12,337,085 in 2001) Class A Shares |
$41,520,000 |
$34,338,000 |
$34,124,000 |
||
99,680 Class B Shares |
133,000 |
133,000 |
133,000 |
||
$41,653,000 |
$34,471,000 |
$34,257,000 |
Equity Incentive Plan
Under the Companys 1996 Equity Incentive Plan as amended February 28, 2002 ("EIP"), the compensation and stock option committee of the board of directors of the Company may grant options to purchase Class A Shares to officers and key employees of the Company and its subsidiaries. Grants of options are made to the Companys independent directors on a formula basis. Options are generally granted for a five-year term and generally vest at the rate of 25% of the amount granted for each year held. The aggregate number of Class A Shares that are available under the EIP is 3,815,000.
The following table summarizes stock options outstanding and exercisable as at December 31, 2003.
Range of exercise prices |
Number outstanding |
Weighted average remaining contractual life |
Weighted average exercise price of outstanding options |
Number exercisable (vested) |
Weighted average exercise price of vested options |
$13.875-$22.00 |
633,178 |
0.75 years |
$15.35 |
463,723 |
$14.63 |
$22.00-$34.51 |
1,251,805 |
2.97 years |
$25.08 |
118,000 |
$24.49 |
$13.875-$34.51 |
1,884,983 |
2.22 years |
$21.81 |
581,723 |
$16.63 |
The Company issued 23,042 Class A Shares from Treasury for a total consideration of $613,000 to the Company's 401(k) plan in the year ended December 31, 2003 (nil in 2002 and 2001).
Dividends
In 2003, the Company paid cash dividends to holders of Class A and Class B Shares as follows ($0.36 in 2002 and 2001):
Dividend per share Record Date Payment Date
$0.09 February 14, 2003 February 28, 2003
$0.09 May 9, 2003 May 23, 2003
$0.09 August 8, 2003 August 22, 2003
$0.09 November 7, 2003 November 21, 2003
Issuer Bid
The Company may purchase up to 636,000 Class A Shares by way of a Normal Course Issuer Bid through the facilities of The Toronto Stock Exchange and/or the New York Stock Exchange until July 9, 2004. During the year ended December 31, 2003, the Company purchased 25,700 Class A Shares for a total consideration of $585,000, pursuant to a Normal Course Issuer Bid which expired on July 8, 2003 (151,400 shares for $3,289,000 in 2002 and 6,100 shares for $149,000 in 2001).
9. Contributed capital
Contributed capital represents the tax benefit on the difference between market price and exercise price on employee stock options exercised.
10. Income taxes
The income tax provision shown in the consolidated statement of operations is reconciled to amounts of tax that would have been payable (recoverable) from the application of combined federal, state, provincial and local tax rates to pre-tax profit as follows:
Income taxes included in the consolidated statements of operations represent the following:
2003 |
2002 |
2001 |
|
Current: | |||
Canadian tax |
- |
$74,000 |
- |
U.S. federal tax |
$18,959,000 |
5,176,000 |
$9,878,000 |
State and local tax |
3,530,000 |
1,226,000 |
3,157,000 |
$22,489,000 |
6,476,000 |
13,035,000 |
|
Deferred: | |||
U.S. federal tax |
$(1,342,000) |
$(885,000) |
$(458,000) |
State and local tax |
(335,000) |
(221,000) |
(115,000) |
(1,677,000) |
(1,106,000) |
(573,000) |
|
$20,812,000 |
$5,370,000 |
$12,462,000 |
Goodwill arising from the acquisitions of Josephthal Group Inc. and the Oppenheimer divisions is being amortized for tax purposes on a straight-line basis over 15 years. The difference between book and tax is recorded as a deferred tax liability.
Aggregate deferred income tax assets, which relate primarily to fixed assets and currently non-deductible expenses, are included in other assets and amounted to approximately $7,257,000 ($5,966,000 in 2002).
On a cash basis, the Company paid income taxes for the years ended December 31, 2003, 2002 and 2001 in the amounts of $13,342,000, $8,411,000 and $14,918,000, respectively.
11. Earnings per share
Basic earnings per share was computed by dividing net profit by the weighted average number of Class A and Class B Shares outstanding. Diluted earnings per share includes the weighted average Class A and Class B Shares outstanding and the effects of exchangeable debentures using the if converted method and Class A Share options using the treasury stock method.
Earnings per share has been calculated as follows:
2003 |
2002 |
2001 |
|||
Basic weighted average number of shares outstanding |
12,692,634 |
12,429,264 |
12,348,051 |
||
Net effect, if converted method |
6,932,000 |
- |
- |
||
Net effect, treasury method |
317,850 |
280,278 |
421,783 |
||
Diluted common shares (1) |
19,942,484 |
12,709,542 |
12,769,834 |
||
Net profit, as reported |
$29,791,000 |
$9,321,000 |
$19,150,000 |
||
Effect of dilutive exchangeable debentures |
2,791,000 |
- |
- |
||
Net profit available to shareholders and assumed conversions |
$32,582,000 |
$9,321,000 |
$19,150,000 |
||
Basic earnings per share |
$2.35 |
$0.75 |
$1.55 |
||
-Before cumulative effect of a change in accounting principle |
$2.35 |
$0.61 |
$1.55 |
||
-Cumulative effect of a change in accounting principle |
- |
$0.14 |
- |
||
Diluted earnings per share |
$1.63 |
$0.73 |
$1.50 |
||
(1) The diluted earnings per share computations do not include the antidilutive effect of the following options: | |||||
Number of antidilutive options, end of period |
291,995 |
509,630 |
124,000 |
Stock-based compensation
Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) was issued in 1995 and changed the method of accounting for stock compensation plans similar to those of the Company. Adoption of SFAS 123s fair value recognition method is optional. The Company has chosen to continue to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations in accounting for its stock compensation plans. The Company has reviewed SFAS No. 148, "Accounting for Stock-Based Compensation Transition and Disclosure", which was issued in 2002, and has adopted the disclosure provisions but does not intend to adopt other provisions of this standard at this time.
In accordance with SFAS 123, the following presents the pro forma income and earnings per share impact, using a fair value calculation, of the Companys stock-based compensation. Amounts are expressed in thousands of U.S. dollars, except per share amounts.
Year ended December 31, |
|||
2003 |
2002 |
2001 |
|
Net profit as reported |
$29,791 |
$9,321 |
$19,150 |
Stock based employee compensation expense included in reported net income |
- |
- |
- |
Additional compensation expense |
1,840 |
1,906 |
1,843 |
Pro forma net profit |
$27,951 |
$7,415 |
$17,307 |
Basic profit per share as reported |
$2.35 |
$0.75 |
$1.55 |
Diluted profit per share as reported |
$1.63 |
$0.73 |
$1.50 |
Pro forma basic profit per share |
$2.20 |
$0.60 |
$1.40 |
Pro forma diluted profit per share |
$1.40 |
$0.58 |
$1.36 |
For purposes of the pro forma presentation, the Company determined fair value using the Black-Scholes option pricing model with the following weighted average assumptions for grants in fiscal 2003, 2002 and 2001, respectively: expected dividend yields of 1.3%, 1.4% and 1.4%; risk-free interest rates ranging from 2.87% to 3.4%, 3.75% to 4.55%, and 3.76% to 5.07%; expected volatility ranging from 21% to 23%, 27% to 28%, and 27% to 29%; and expected life of 5 years. The weighted average fair value of options granted during 2003, 2002 and 2001, respectively was $1,697,000, $1,946,000 and $3,741,000. The fair value is being amortized over five years on an after-tax basis, where applicable for purposes of pro forma presentation. Stock options generally expire five years after the date of grant or three months after the date of retirement, if earlier. Stock options generally vest over a five year period with 0% in year one, 25% of the shares becoming exercisable on each of the next three anniversaries of the grant date and the balance vesting in the last six months of the option life. The vesting period is at the discretion of the Compensation and Stock Option Committee and is determined at the time of grant.
The calculation of fair value in this pro forma presentation are not indicative of future amounts because it does not take into consideration future grants, any difference between actual and assumed forfeitures.
12. Commitments and contingencies
The Company and its subsidiaries have operating leases for office space and capital leases for equipment expiring at various dates through 2013. Future minimum rental commitments under such office and equipment leases as at December 31, 2003 are as follows:
2004 |
$23,019,000 |
2005 |
20,787,000 |
2006 |
19,193,000 |
2007 |
17,483,000 |
2008 and thereafter |
68,086,000 |
Total |
$148,568,000 |
Certain of the leases contain provisions for rent escalation based on increases in costs incurred by the lessor.
(b) The Company's rent expense for the years ended December 31, 2003, 2002 and 2001 was $31,028,000, $14,108,000 and $10,909,000, respectively.
(c) The Company, through its subsidiaries, maintains a defined contribution plan covering substantially all full-time U.S. employees. The Oppenheimer plan provides that Oppenheimer may make discretionary contributions. For certain employees who were formerly employed by First of Michigan Corporation ("FOM"), contributions are made in accordance with the terms of the plan document.
FOM sponsors an unfunded Supplemental Executive Retirement Program ("SERP"), which is a non-qualified plan that provides certain former officers additional retirement benefits. Benefits payable under the SERP were approximately $970,000 at December 31,2003.
The Company made contributions to the plans of $3,491,000, $1,398,000 and $1,525,000 in 2003, 2002 and 2001, respectively.
(d) On November 30, 2000 the Company established an Executive Deferred Compensation Plan ("EDCP") in order to offer to certain qualified high-performing financial consultants, a bonus based upon a formula reflecting years of service, gross commissions and a valuation of their clients assets. The bonus amounts calculated with respect to fiscal 2003 total approximately $1,254,000 ($966,000 in 2002, $1,270,000 in 2001) and will normally vest five years from the end of the related fiscal year. The liability is being recognized on a straight-line basis over the vesting period. The total amount expensed in 2003 for deferred compensation was $4,186,000.
The Company is maintaining a Deferred Compensation Plan on behalf of certain employees who were formerly employed by CIBC World Markets. The liability is being tracked against the value of an investment portfolio held by the Company for this purpose.
The Company has granted Stock Appreciation Rights to certain employees as part of their compensation package based on a formula reflecting gross commission and length of service. The value of Stock Appreciation Rights granted in 2003 total approximately $635,000 and will normally vest five years from the end of the related fiscal year. The liability is being recognized over the vesting period.
In 2003, the Company awarded up to 45,000 Class A Shares to certain employees, which will vest if the employees are continuously employed by the Company until January 3, 2006. The value of this award has been estimated at $211,000. The liability is being recognized over the vesting period.
The amount expensed in 2003 for stock-related awards was $468,000 (nil in 2002 and 2001).
(e) At December 31, 2003, the Company has collateralized and uncollateralized letters of credit for $143,900,000. Collateral for these letters of credit include marketable customer securities of approximately $181,914,000, pledged to two financial institutions.
(f) The Company is involved in certain litigation arising in the ordinary course of business. Management believes, based upon discussions with legal counsel, that the outcome of this litigation will not have a material effect on the Company's financial position. The materiality of legal matters to the Company's future operating results depends on the level of future results of operations as well as the timing and ultimate outcome of such legal matters.
(g) The Company's major subsidiaries, Oppenheimer and Freedom, are subject to the uniform net capital requirements of the Securities and Exchange Commission ("SEC") under Rule 15c3-1 (the "Rule"). Oppenheimer computes its net capital requirements under the alternative method provided for in the Rule which requires that Fahnestock maintain net capital equal to two percent of aggregate customer related debit items, as defined in SEC Rule 15c3-3. At December 31, 2003, Oppenheimer had net capital of $150,709,000, which was $128,243,000 in excess of the $22,466,000 required to be maintained at that date. Freedom computes its net capital requirement under the basic method provided for in the Rule, which requires that Freedom maintain net capital equal to the greater of $250,000 or 6 2/3% of aggregate indebtedness, as defined. At December 31, 2003, Freedom had net capital of $5,056,000, which was $4,806,000 in excess of the $250,000 required to be maintained at that date.
At December 31, 2003, Oppenheimer and Freedom had $5,396,000 and $9,070,000, respectively, in cash and securities segregated under Federal and other regulations.
Oppenheimer Trust Company is subject to regulation by the New Jersey Department of Banking.
(h) In accordance with the Securities and Exchange Commissions No Action Letter dated November 3, 1998, the Company has computed a reserve requirement for the proprietary accounts of introducing firms as of December 31, 2003. The Company had no deposit requirements as of December 31, 2003.
13. Financial instruments with off-balance sheet risk and concentration of credit risk
In the normal course of business, the Company's securities activities involve execution, settlement and financing of various securities transactions for customers. These activities may expose the Company to risk in the event customers, other brokers and dealers, banks, depositories or clearing organizations are unable to fulfill their contractual obligations.
The Company is exposed to off-balance sheet risk of loss on unsettled transactions in the event customers and other counterparties are unable to fulfill their contractual obligations. It is the Company's policy to periodically review, as necessary, the credit standing of each counterparty with which it conducts business.
Securities sold, but not yet purchased represent obligations of the Company to deliver the specified security at the contracted price and thereby create a liability to repurchase the security in the market at prevailing prices. Accordingly, these transactions result in off-balance-sheet risk, as the Company's ultimate obligation to satisfy the sale of securities sold, but not yet purchased may exceed the amount recognized on the balance sheet. Securities positions are monitored on a daily basis.
The Company's customer financing and securities lending activities require the Company to pledge customer securities as collateral for various financing sources such as bank loans and securities lending. At December 31, 2003, the Company had approximately $1.3 billion of customer securities under customer margin loans that are available to be pledged of which the Company has repledged approximately $297,600,000 under securities loan agreements. In addition, the Company has received collateral of approximately $229,264,000 under securities borrow agreements of which the Company has repledged approximately $145,949,000 as collateral under securities loans agreements. Included in receivable from brokers and clearing organizations are receivables from three major U.S. broker-dealers totaling $108,870,000.
The Company monitors the market value of collateral held and the market value of securities receivable from others. It is the Company's policy to request and obtain additional collateral when exposure to loss exists. In the event the counterparty is unable to meet its contractual obligation to return the securities, the Company may be exposed to off-balance sheet risk of acquiring securities at prevailing market prices.
At December 31, 2003 the Company had outstanding commitments to buy and sell of $980,000 and $508,000, respectively, primarily of mortgage-backed securities on a when issued basis. These commitments have off-balance sheet risks similar to those described above.
The Company has a clearing arrangement with Pershing LLC to clear certain transactions in foreign securities. Accordingly, the Company has credit exposures with this clearing broker. The clearing broker can rehypothecate the securities held on behalf of the Company. The clearing broker has the right to charge the Company for losses that result from a client's failure to fulfill its contractual obligations. As the right to charge the Company has no maximum amount and applies to all trades executed through the clearing broker, the Company believes there is no maximum amount assignable to this right. At December 31, 2003, the Company has recorded no liabilities with regard to this right. The Company's policy is to monitor the credit standing of this clearing broker, all counterparties and all clients with which it conducts business.
14. Acquisitions
On January 3, 2003, the Company acquired the U.S. Private Client Division of CIBC World Markets Corp. ("World Markets"), a wholly-owned subsidiary of CIBC, and agreed to complete the acquisition of the U.S. Asset Management Division of World Markets. The U.S. Private Client Division, also referred to as the Oppenheimer division, is part of Oppenheimer and employed approximately 620 brokers in 18 branch offices located across the United States at the time of acquisition. Client assets at the date of acquisition were approximately $30 billion. The acquisition more than doubled the Companys private client presence in terms of client assets and provided managerial expertise to the organization. On June 4, 2003, the Company completed the acquisition of the U.S. Asset Management Division of World Markets, now operating as OAM. OAM includes Oppenheimer Investment Advisers, three investment management consulting programs (Investment Advisory Service, Strategic Asset Review and Portfolio Advisory Service), a broker-managed wrap program (OMEGA) and Advantage Advisors (which includes publicly listed closed end funds and alternative investment offerings). The acquisition was accounted for by the purchase method. The Company engaged an independent evaluator to identify and value intangible assets acquired. The fair value of assets acquired, included in the table below, is based on the report of the independent evaluator.
The following table summarizes the estimated fair value of assets acquired, in thousands of dollars:
The aggregate purchase price of approximately $241,947,000 was paid as follows:
$15,611,000 |
was paid by the Company in cash from cash on hand |
$65,514,000 |
was paid with the proceeds of the issuance by Viner Finance Inc., a wholly-owned subsidiary of the Company, to World Markets, of a zero coupon promissory note (i) |
$160,822,000 |
was paid with the proceeds of debentures issued by E.A. Viner International Co., a wholly-owned subsidiary of the Company, to CIBC (ii) |
( i) The Zero Coupon Promissory Note is repayable as related employee notes receivable, which are assigned to Oppenheimer, become due and are forgiven. Such payments are to be made notwithstanding whether any of the employees loans default.
( ii) Two debentures were issued. The first and second variable rate exchangeable debentures, in the aggregate principal amount of $160,822,000, are exchangeable for 6,932,000 Class A Shares of the Company at the rate of $23.20 per share (approximately 35% of the Class A Shares on a diluted basis). The first and second variable rate exchangeable debentures mature on January 2, 2013, and bear interest at an annual rate of interest of 3% in the first year, 4% in years two through four, and 5% in years five through maturity. A potential additional issuance of up to approximately 208,000 Class A Shares may be required if the debentures are exchanged, the holders exercise their rights to have the resulting Class A Shares sold and the holders realize a price of less than $23.20 per share.
In addition, the Company has arranged a credit facility in the amount of $50 million with CIBC. In January 2003, the Company borrowed $25 million under this facility and borrowed the balance in July 2003. The borrowings are being used to finance broker notes and are repayable, together with interest at the CIBC U.S. base rate plus 2%, over five years or earlier if any broker notes become due earlier.
Presented below are pro forma consolidated results of operations. Amounts presented give effect to the acquisitions of the U.S. Private Client and Asset Management Divisions of World Markets as if the transactions were consummated as at January 1, 2002. The Companys actual results for the year ended December 31, 2003 include the results of the Oppenheimer private client division and OAM from January 3, 2003 and June 4, 2003, respectively.
The pro forma information is for comparative purposes only and is not indicative either of the actual results that would have occurred if the acquisition had been consummated at the beginning of the periods presented, or of future operations of the combined companies. CIBC has an October 31 st year end and, therefore, the 2002 financial information for the acquired divisions relates to the year ended October 31, 2002. Revenue and expenses included in the pro forma presentation for the year ended December 31, 2002 include certain CIBC corporate allocations, reflecting the manner in which this division was managed within CIBC. Such allocations may distort the comparability of the years presented below. In the period ended July 31, 2003, the Company incurred certain transition costs relating to continued management and clerical support and clearing services provided by World Markets. The Company realized cost savings after the conversion of the client accounts of the acquired division to the Companys clearing platform. The conversion took place on May 27, 2003.
15. Related Party Transactions
The Company has notes and accounts receivable from employees, net, of approximately $97,919,000 at December 31, 2003, which are recorded at face value net of accumulated amortization. These amounts will be forgiven over a service period from the initial date of the loan or based on productivity levels of employees with respect to certain of these notes receivable and are contingent on their continued employment with the Company. The unforgiven portion of the notes become due on demand in the event the employee departs during the service period.
At December 31, 2003, Oppenheimer had an outstanding guarantee of debt of approximately $3,163,000 that arose as a result of the acquisition of Josephthal Group, Inc.
16. Segment Information
The Company has determined its reportable segments based on the Companys method of internal reporting, which disaggregates its retail business by branch and its proprietary and investment banking businesses by product. The Companys segments are: Private Client which includes all business generated by the Companys 89 branches, including commission and fee income earned on client transactions, net interest earnings on client margin loans and cash balances, stock loan activities and financing activities; Capital Markets which includes market-making activities in over-the-counter equities, institutional trading in both fixed income and equities, structured assets transactions, bond trading, trading in mortgage-backed securities, corporate underwriting activities, public finance activities, and syndicate participation; and Asset Management which includes fees from money market funds and the investment management services of Oppenheimer Asset Management Inc and Oppenheimers asset management divisions employing various programs to professionally manage client assets either in individual accounts or in funds. The Company evaluates the performance of its segments and allocates resources to them based upon profitability.
In connection with the analysis done in conjunction with the adoption of SFAS No. 142, the Company has made changes to its reportable segments. Prior year results have been restated based on the composition of the new segments.
The table below presents information about the reported revenue and operating income (profit before income taxes) of the Company for the years ended December 31, 2003, 2002 and 2001. The Companys business is predominantly in the U.S. Asset information by reportable segment is not reported, since the Company does not produce such information for internal use.
* Losses in the Private Client segment in 2002 were the result of unfavorable market conditions as well as operating losses and acquisition costs relating to Josephthal, Prime Charter and BUYandHOLD and included litigation, settlement costs, retention and severance costs and the costs of under-utilized facilities.
17. Subsequent events
(a) On January 27, 2004, a cash dividend of U.S.$0.09 per share (totalling $1,200,000) was declared payable on February 20, 2004 to Class A non-voting and Class B shareholders of record on February 6, 2004.
(b) In January 2004, the Company received monetary damages plus interest in the amount of approximately $2.7 million, pursuant to an award by a National Association of Securities Dealers Dispute Resolution Panel against another broker dealer in a raiding case involving financial consultants of Josephthal & Co. Inc, a company acquired by Oppenheimer in September 2001. These proceeds, which were received in January 2004, will be included in the Companys results for the first quarter of 2004.
18. Quarterly Information (unaudited)
(Expressed in thousands of dollars, except per share amounts)
EXHIBIT INDEX
Unless designated by an asterisk indicating that such document has been filed herewith, the Exhibits listed below have been heretofore filed by the Company pursuant to Section 13 or 15(d) of the Exchange Act and are hereby incorporated herein by reference to the pertinent prior filing.
Number | Description |
Page |
2.1 | Asset Purchase Agreement dated as of December 9, 2002 and Amendment No. 1 to the Asset Purchase Agreement dated as of January 2, 2003, by and among Fahnestock Viner Holdings Inc., Viner Finance Inc., Canadian Imperial Bank of Commerce and CIBC World Markets Corp. (previously filed as an exhibit to Form 8-K dated January 17, 2003). | |
2.2 | Asset Management Acquisition Agreement dated as of January 2, 2003, by and among Fahnestock Viner Holdings Inc., Fahnestock & Co. Inc., Canadian Imperial Bank of Commerce and CIBC World Markets Corp. (previously filed as an exhibit to Form 8-K dated January 17, 2003). | |
3 (a) | Articles of Incorporation, as amended, of Fahnestock Viner Holdings Inc. (previously filed as exhibits to Form 20-F for the fiscal year ended December 31, 1986 and 1988). | |
3(b) | By-Laws, as amended, of Fahnestock Viner Holdings Inc. (previously filed as an exhibit to Form 20-F for the fiscal year ended December 31, 1987). | |
4.1 | Stakeholders Agreement dated December 9, 2002, by and among Fahnestock Viner Holdings Inc., Canadian Imperial Bank of Commerce, Albert G. Lowenthal, Phase II Financial L.P., Phase II Financial Limited, The Albert G. Lowenthal Foundation, Olga Roberts and Elka Estates Limited (previously filed as an exhibit to Form 8-K dated January 17, 2003). | |
4.2 | Registration Rights Agreement dated January 2, 2003, issued by Fahnestock Viner Holdings Inc. to Canadian Imperial Bank of Commerce (previously filed as an exhibit to Form 8-K dated January 17, 2003). | |
4.3 | Exchangeable Debenture dated January 6, 2003, issued by E. A. Viner International Co. to Canadian Imperial Bank of Commerce (previously filed as an exhibit to Form 8-K dated January 17, 2003). | |
4.4 | Interim Exchangeable Debenture dated January 6, 2003, issued by E. A. Viner International Co. to Canadian Imperial Bank of Commerce (previously filed as an exhibit to Form 8-K dated January 17, 2003). | |
4.5 | Exchangeable Debenture dated May 17, 2003, issued by E. A. Viner International Co. to Canadian Imperial Bank of Commerce (filed herewith). * | |
10(f) | Fahnestock Viner Holdings Inc. 1996 Equity Incentive Plan, Amended and Restated as at May 17, 1999 (previously filed as an exhibit to Form S-8 dated May 15, 2000) | |
E-1
10(k) | Performance-Based Compensation Agreement between Fahnestock Viner Holdings Inc. and Albert G. Lowenthal dated March 25, 1997 (previously filed as an exhibit filed to Form 10-K for the year ended December 31, 1997) | |
10(l) | Securities Purchase Agreement dated June 11, 1997, between 1888 Limited Partnership and DST Systems Inc. and Purchaser (previously filed as an exhibit to Schedule 14D-1 and Schedule 13D for First of Michigan Capital Corporation dated June 18, 1997) | |
10(m) | Fahnestock Viner Holdings Inc. 1996 Equity Incentive Plan Amendment No. 1 dated February 29, 2000 (previously filed as an exhibit to Form 10-K for the year ended December 31, 1999) | |
10(n) | Fahnestock Viner Holdings Inc. 1996 Equity Incentive Plan Amendment No. 2 dated May 19, 2001 (previously filed as an exhibit to Form 10-K for the year ended December 31, 2001) | |
10(o) | Performance-Based Compensation Agreement between Fahnestock Viner Holdings Inc. and Albert G. Lowenthal dated January 1, 2001 (previously filed as an exhibit to Form 10-K for the year ended December 31, 2001) | |
10(p) | Credit Agreement dated January 2, 2003, by and between Fahnestock Viner Holdings Inc. and Canadian Imperial Bank of Commerce (previously filed as an exhibit to Form 8-K dated January 17, 2003). | |
10(q) | Amended and Restated Promissory Note dated January 15, 2003, made by Viner Finance Inc. for the benefit of CIBC World Markets Corp (previously filed as an exhibit to Form 8-K dated January 17, 2003). | |
10(r) | Non-Competition Agreement dated January 2, 2003, by and among Canadian Imperial Bank of Commerce and CIBC World Markets Corp., Fahnestock & Co. Inc. and Viner Finance Inc. (previously filed as an exhibit to Form 8-K dated January 17, 2003). | |
10(s) | Non-Solicitation Agreement dated January 2, 2003 by and among Fahnestock Viner Holdings Inc., Fahnestock & Co. Inc., Canadian Imperial Bank of Commerce and CIBC World Markets Corp. (previously filed as an exhibit to Form 8-K dated January 17, 2003). | |
10(t) | Clearing Agreement dated January 2, 2003 between Fahnestock & Co. Inc. and CIBC World Markets Corp. (previously filed as an exhibit to Form 8-K dated January 17, 2003). |
E-2
10(u) | Shareholders Agreement dated December 9, 2002, by and among Fahnestock Viner Holdings Inc., Albert G. Lowenthal, Phase II Financial L.P., Phase II Financial Limited, The Albert G. Lowenthal Foundation, Olga Roberts and Elka Estates Limited (previously filed as an exhibit to Form 8-K dated January 17, 2003). | |
14 | Code of Conduct and Business Ethics for Directors, Officers and Employees (filed herewith) * | |
21 | Subsidiaries of the registrant (filed herewith) * | |
31.1 | Rule 13a 14(a) 15d 14(a) Certification signed by A.G. Lowenthal (filed herewith) * | |
31.2 | Rule 13a 14(a) 15d 14(a) Certification signed by E.K. Roberts (filed herewith) * | |
32.1 | Certification pursuant to 18 U.S.C. Section 1350 signed by A.G. Lowenthal (filed herewith) * | |
32.2 | Certification pursuant to 18 U.S.C. Section 1350 signed by E.K. Roberts (filed herewith) * |
E-3
EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 The undersigned, Elaine K. Roberts, President and Chief Financial Officer of Oppenheimer Holdings Inc. (the "Company"),hereby certifies that to her knowledge the Annual Report on Form 10-K for the period ended December 31, 2002 of the Company filed with the Securities and Exchange Commission on the date hereof (the "Report") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the period specified. Signed at the City of Toronto, Ontario, Canada, this 9 day of March, 2004. "E.K. Roberts" Elaine K. Roberts President and Chief Financial Officer
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT AS AT DECEMBER 31, 2003 (100% owned)
OPPENHEIMER HOLDINGS INC. (Ontario)
E.A. VINER HOLDINGS CO. (Delaware)
NEWSON INC. (Pennsylvania)
OPPENHEIMER ASSET MANAGEMENTINC. (New York)
EVANSTON FINANCIAL INC. (New York)
OPPENHEIMER TRUST COMPANY (New Jersey)
VINER FINANCE INC. (Delaware)
OPPENHEIMER & CO. INC. (New York)
FIRST OF MICHIGAN CAPITAL CORPORATION (Delaware)
-OLD MICHIGAN CORPORATION (Delaware)
-CRANBROOK CAPITAL MANAGEMENT, INC. (Michigan)
-FIRST OF MICHIGAN VENTURE CAPITAL ASSOCIATES, INC. (Michigan)
PACE SECURITIES INC. (New York)
FREEDOM INVESTMENTS, INC. (Delaware)
REICH & CO.INC. (Alabama)
GRAND CHARTER GROUP, INCORPORATED (Delaware)
PRIME CHARTER LTD. (Delaware)
JOSEPHTHAL & CO. INC. (New York)
CERTIFICATION EXHIBIT 31.1
I, Albert G. Lowenthal, certify that:
1. I have reviewed this annual report on Form 10-K of Oppenheimer Holdings Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; | ||
b) evaluated the effectiveness of the registrants disclosure controls and procedures; and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by the annual report based on such evaluation | ||
c) disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial data; and | ||
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
"A.G. Lowenthal" | |||
Name: Albert G. Lowenthal | |||
Title: Chief Executive Officer |
March 9, 2004
CERTIFICATION EXHIBIT 31.2
I, Elaine K. Roberts, certify that:
1.I have reviewed this annual report on Form 10-K of Oppenheimer Holdings Inc.;
2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) and 15d-15(e)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; | ||
b) evaluated the effectiveness of the registrants disclosure controls and procedures; and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by the annual report based on such evaluation | ||
c) disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5.The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial data; and | ||
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
"E.K. Roberts" | |||
Name: Elaine K. Roberts | |||
Title: Chief Financial Officer |
March 9, 2004
EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 The undersigned, Albert G. Lowenthal, Chairman and Chief Executive Officer of Oppenheimer Holdings Inc. (the "Company"), hereby certifies that to his knowledge the Annual Report on Form 10-K for the period ended December 31, 2002 of the Company filed with the Securities and Exchange Commission on the date hereof (the "Report") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the period specified. Signed at the New York, New York, this 9 day of March, 2004 "A.G. Lowenthal" Albert G. Lowenthal Chairman and Chief Executive Officer
THIS SECOND EXCHANGEABLE DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE TRANSFERRED WITHOUT REGISTRATION UNDER THE SECURITIES ACT OR STATE SECURITIES LAWS OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED AND OTHERWISE SUBJECT TO THE RESTRICTIONS CONTAINED HEREIN.
THIS SECOND EXCHANGEABLE DEBENTURE IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND RIGHTS OF REPURCHASE WHICH ARE SET FORTH IN A STAKEHOLDERS AGREEMENT. A COPY OF SUCH AGREEMENT WILL BE PROVIDED WITHOUT COST BY THE COMPANY UPON REQUEST TO THE HOLDER OF THIS SECOND EXCHANGEABLE DEBENTURE.
E. A. VINER INTERNATIONAL CO.
SECOND VARIABLE RATE EXCHANGEABLE DEBENTURE DUE 2013
$90,841,572
May 12, 2003
E. A. Viner International Co., a Delaware corporation (the "Company," which term includes any successor corporation or other business entity), for value received, hereby promises to pay to Canadian Imperial Bank of Commerce (including its permitted designees or assignees, "Holder"), the principal sum of NINETY MILLION, EIGHT HUNDRED FORTY ONE THOUSAND, FIVE HUNDRED SEVENTY TWO U.S. DOLLARS ($90,841,572) on January 2, 2013 (the "Maturity Date"), together with interest on the unpaid balance of the principal amount of this Second Variable Rate Exchangeable Debenture (the "Second Exchangeable Debenture") at a variable rate calculated in accordance with the formula set forth in Section 1 below, interest to be payable in the manner and at times provided herein. Certain defined terms are set forth in Section 4 hereof and elsewhere herein.
1. Interest . The interest rate for the period (i) commencing on the date of original issuance of this Second Exchangeable Debenture (the "Issue Date") and ending on the one year anniversary of the Issue Date, shall be 3% per annum; (ii) commencing on the day immediately following the one year anniversary of the Issue Date and ending on the four year anniversary of the Issue Date, shall be 4% per annum; and (iii) commencing on the day immediately following the four year anniversary of the Issue Date until the Maturity Date, shall be 5% per annum. Accrued but unpaid interest on this Second Exchangeable Debenture will be payable on the last Business Day of June 2003 and on the last Business Day of each December and June thereafter (each an "Interest Payment Date"). Interest on this Second Exchangeable Debenture will accrue from the most recent date to which interest has been paid or accrued as provided in the preceding sentence or, if no interest has been paid, from the Issue Date. Interest will be computed on the basis of a 360-day year for the actual days elapsed. In the event that the Company fails to timely pay interest on an Interest Payment Date or otherwise during the occurrence and continuance of an Event of Default, such unpaid interest shall compound semi-annually until paid by the Company at a rate equal to 2% above the then applicable interest rate. Nothing herein shall preclude the Company from withholding any tax amounts imposed on or with respect to Holder from any payments made hereunder, which tax amounts are required to be withheld by any law or regulation.
2. Repayment . Unless earlier exchanged, the outstanding principal of this Second Exchangeable Debenture, together with accrued but unpaid interest thereon, shall be immediately due and payable and shall be repaid on the Put Date in whole, or in part, to the extent this Second Exchangeable Debenture is retracted pursuant to Section 8(b), or in whole on the Retraction Date, to the extent this second Exchangeable Debenture is retracted pursuant to Section 8 (c), or in whole on the Maturity Date.
3. Method of Cash Payment .
The Company will make cash payments of principal and interest in currency of the United States that at the time of payment is legal tender for payment of public and private debts. Cash payments shall be made to Holder by wire transfer of immediately available funds to an account designated in writing by Holder and provided to the Company at least ten (10) Business Days before any Payment Date.
4. Certain Defined Terms .
The following terms shall have the following meanings:
" Affiliate " means, with respect to a specified Person, a Person that directly or indirectly, through one or more intermediaries, controls, or is controlled by or is under common control with, the Person specified.
" Asset Purchase Agreement " means the Asset Purchase Agreement, dated as of December 9, 2002, as amended by and among the Parent, Canadian Imperial Bank of Commerce and certain of their Affiliates.
" Average Market Value " means, with respect to Class A Shares, the average of the last reported sale price for the Class A Shares on the NYSE for the 20 consecutive Business Days ending five Business Days prior to the Put Date or Maturity Date, as applicable.
" Bankruptcy Law " means, with respect to the Company, Title 11, United States Bankruptcy Code, or with respect to the Parent, the Bankruptcy and Insolvency Act (Canada) and the Companies Creditors Arrangement Act (Canada), and in each case any similar law relating to reorganization or for the appointment of a receiver, liquidator or trustee in respect of all or a material portion of the Companys or Parents property or an assignment for the benefit of creditors, or any similar law for the relief of debtors.
" Board of Directors " means the Board of Directors of the Company or Parent, as the case may be, or any committee thereof duly authorized to act on behalf of such Board.
" Business Day " means any day other than a Saturday, Sunday or other day on which the NYSE is not open for trading.
" Class A Shares " means the Class A non-voting shares of the Parent and any capital stock or other securities that are issued in respect of, in exchange for, or in substitution of, any Class A Shares by reason of any reorganization, recapitalization, reclassification, merger, consolidation, spin-off, partial or complete liquidation, stock dividend, split-up, sale of assets, distribution to stockholders or combination of the Class A Shares or any other change in the capital structure of the Company.
" Current Market Price Per Share " has the meaning set forth in Section 5(h) hereof.
" Custodian " means any receiver, trustee, assignee, liquidator, custodian or similar official under any Bankruptcy Law.
" Determination Date " has the meaning set forth in Section 5(h) hereof.
" GAAP " means generally accepted accounting principles in the United States.
" Exchange Date " has the meaning set forth in Section 5(d) hereof.
" Exchange Effective Date " has the meaning set forth in Section 5(c) hereof.
" Exchange Price " has the meaning set forth in Section 5(h) hereof.
" Exchangeable Debenture " means the Variable Rate Exchangeable Debenture Due 2013 issued by the Company in the initial principal amount of $69,980,828 and any Exchangeable Debenture issued in replacement thereof, as such Exchangeable Debenture may be amended from time to time.
" Expiration Time " has the meaning set forth in Section 5(h) hereof.
" Governmental Entity " means any national, federal, state, provincial, municipal, local, territorial, foreign or other governmental entity or any department, commission, board, bureau, agency, regulatory authority or instrumentality thereof, or any court, judicial, administrative or arbitral body or public or private tribunal.
" Guarantee " means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any indebtedness of any other Person and any obligation, direct or indirect, contingent or otherwise, of such Person (1) to purchase or pay (or advance or supply funds for the purchase or payment of) such indebtedness or other obligation of such Person (whether arising by virtue of partnership arrangements, or by agreements to keepwell, to purchase assets, goods, securities or services, to take-or-pay or to maintain financial statement conditions or otherwise) or (2) entered into for the purpose of assuring in any other manner the obligee of such indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided, however, that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning.
" HSR Act " means the United States Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended.
" Indebtedness " means of any Person at any date, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds (other than performance bonds), debentures, notes or other similar instruments, (c) all obligations of such Person to pay the deferred purchase price of property or services (other than trade payables incurred in the ordinary course of business), (d) all obligations of such Person under capital leases, (e) all contingent or non-contingent obligations of such Person to reimburse any Person in respect of amounts paid or payable (currently or in the future, on a contingent or non-contingent basis) under a letter of credit or similar instrument, (f) all Indebtedness of any other Person secured by a lien on any asset of such Person, and (g) all Indebtedness of others Guaranteed by such Person; provided that Indebtedness shall not include intercompany Indebtedness, which is expressly subordinate and junior in right of payment to the Second Exchangeable Debenture.
" Interest Payment Date " has the meaning set forth in Section 1 hereof.
" Issue Date " has the meaning set forth in Section 1 hereof.
" NYSE " The New York Stock Exchange, Inc.
" Parent " means Fahnestock Viner Holdings Inc., an Ontario corporation and its successors.
" Payment Date " means any Interest Payment Date or Maturity Date, provided that if any Payment Date is not a Business Day, such Payment Date shall, for all purposes hereunder, be deemed to be the next succeeding Business Day.
" Person " means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity.
" Purchased Shares " has the meaning set forth in Section 5(h) hereof.
" Put Date " means any date from and after the seven year anniversary of the Issue Date (the "Seven Year Anniversary Date") to 120 days after the Seven Year Anniversary Date.
" Put Event " means the date of death of the Significant Shareholder I Individual (as defined in the Stakeholders Agreement).
" Responsible Officer " means any senior financial officer and any other officer of the Company with responsibility for the administration of this Second Exchangeable Debenture.
" Retraction Consideration " means the aggregate principal amount of the Second Exchangeable Debenture outstanding plus any accrued but unpaid interest through the Retraction Date, 25% of which shall be paid in cash, and 75% of which shall be paid through the issuance of the Second Retraction Debenture.
"Second Exchangeable Debenture " means this Second Variable Rate Exchangeable Debenture Due 2013 issued by the Company in the initial principal amount of $90,841,572 and any Second Exchangeable Debenture issued in replacement thereof, as such Second Exchangeable Debenture may be amended from time to time.
" Second Retraction Debenture " means the 9.75% Debenture of the Company which may become issuable upon payment of the Retraction Consideration, the form of which is set forth as Exhibit B hereto.
" Significant Subsidiary " means any Subsidiary that would be a "Significant Subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S-X promulgated by the SEC.
" Stakeholders Agreement " means the agreement dated as of December 9, 2002, by and among Parent, Canadian Imperial Bank of Commerce and certain other parties named therein.
" Subsidiary " means, in respect of any Person, any corporation, association, partnership or other business entity of which more than 50% of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by (1) such Person, (2) such Person and one or more Subsidiaries of such Person or (3) one or more Subsidiaries of such Person.
" TSX " means The Toronto Stock Exchange.
" Triggering Distribution " has the meaning set forth in Section 5(h) hereof.
" Variable Rate Convertible Debentures " means the Convertible Debentures Due 2006 issued by the Company in the initial principal amount of $90,841,572 and any Convertible Debentures issued in replacement thereof, as such Convertible Debentures may be amended from time to time.
5. Exchange .
(a) Conditions and Number of Class A Shares . At any time prior to (i) the close of business on July 2, 2012 (ii) the delivery to the Company of a Retraction Notice, or (iii) the delivery to the Holder of a Regulatory Call Notice (as defined in the Stakeholders Agreement), the Holder may, at the Holder's option, exchange the principal amount of this Second Exchangeable Debenture (or any portion thereof equal to $1,000 or any integral multiple of $1,000 in excess thereof) for Class A Shares at the Exchange Price then in effect. The number of Class A Shares issuable upon exchange of the Second Exchangeable Debenture shall be determined by dividing the principal amount of the Second Exchangeable Debenture or portion thereof, including any accrued but unpaid interest thereon, surrendered for exchange by the Exchange Price in effect on the Exchange Date. The initial Exchange Price is $23.20 per Class A Share subject to adjustment as provided in this Section 5.
(b) Additional Class A Shares . If, on either the Put Date or the Maturity Date, the Holder has surrendered all or any portion of his Second Exchangeable Debenture for exchange and has sold the Class A Shares received upon exchange pursuant to an underwritten public offering within 120 days of such surrender ("Secondary Sale") and receives aggregate gross proceeds (after giving effect to underwriting discounts and commissions which shall be paid by the Company and shall not reduce the number of Class A Shares to be received by the Holder) less than the amount determined by multiplying the number of shares sold by the Average Market Value of the shares, then Parent shall, as soon as reasonably practicable following receipt of a notice (the "Additional Share Notice") stating the exercise of the Holder's rights pursuant to this Section 5(b), issue an additional number of Class A Shares to the Holder. The payment of the fees and expenses associated with such Secondary Sale (other than with respect to underwriting discounts and commissions) shall be as set forth in the Registration Rights Agreement. It shall be a condition of such issuance that the Additional Share Notice shall include a representation and warranty of the Holder that it is an accredited investor within the meaning of the Securities Act (Ontario) and is acquiring such additional Class A Shares as principal. The number of such shares to be issued shall equal the amount of such difference divided by the last reported sales price of the of the Class A Shares on the NYSE on the closing date of the Secondary Sale, provided, however, that the number of shares to be so issued pursuant to this Section 5(b) shall not exceed an amount equal to 3% of the number of Class A Shares issuable upon exchange of all Exchangeable Debentures and Second Exchangeable Debentures then outstanding times a fraction, the numerator of which is the number of Class A Shares sold in the underwritten offering and the denominator of which is the number of Class A Shares issuable upon exchange of the entire principal amount of all Exchangeable Debentures and Second Exchangeable Debentures. The Company acknowledges that the Holder may surrender the Second Exchangeable Debenture at the closing of the Secondary Sale and may withdraw its obligation to surrender the Second Exchangeable Debenture in the event that the Secondary Sale does not close. In the event that the Holder surrenders the Second Exchangeable Debenture, interest will no longer accrue on such Second Exchangeable Debenture from and after the date of surrender, unless the Holder subsequently withdraws such surrender if the Secondary Sale does not close, in which case interest will be reinstated for the period of such surrender. In no event will interest accrue after the Maturity Date.
(c) 45 Day Waiting Period . The Holder is not entitled to any rights of a holder of Class A Shares until 45 days after the Holder has exchanged its Second Exchangeable Debentures for Class A Shares (the "Exchange Effective Date"), and only to the extent the Second Exchangeable Debenture has been deemed to have been exchanged for Class A Shares pursuant to this Section 5. The person in whose name the Class A Share certificate is registered following exchange shall be deemed to be a stockholder of record on the Exchange Effective Date.
(d) Exchange Procedure . To exchange the Second Exchangeable Debenture, the Holder must (i) complete and manually sign the exchange notice on the back of this Second Exchangeable Debenture and deliver such notice to the Company, with a copy to Parent, and (ii) surrender the Second Exchangeable Debenture to the Company. The date on which the Holder satisfies all those requirements is the "Exchange Date." As soon as practicable after the Exchange Effective Date, Parent shall deliver to the Holder, either directly or through the Company, a certificate for the number of whole Class A Shares issuable upon the exchange and cash in lieu of any fractional shares. Any cash paid in lieu of fractional shares shall be based upon the Closing Price of the Class A Shares on the Business Day immediately prior to the Exchange Date. If this Debenture is exchanged in part only, the Company shall execute and deliver to the Holder, a new Second Exchangeable Debenture equal in principal amount to the unconverted portion of the Second Exchangeable Debenture surrendered.
(e) Taxes on Exchange . If the Holder exchanges this Second Exchangeable Debenture, the Company shall pay any documentary, stamp or similar issue or transfer tax due on the issue of Class A Shares upon such exchange. However, the Holder shall pay any such tax which is due because the Holder requests the shares to be issued in a name other than the Holder's name. Nothing herein shall preclude any tax withholding imposed on or with respect to Holder required by law or regulation.
(f) Parent To Provide Stock . Parent shall, prior to issuance of any Class A Shares hereunder, and from time to time as may be necessary, reserve, out of its authorized but unissued Class A Shares, a sufficient number of Class A Shares to permit the exchange of the Second Exchangeable Debenture into Class A Shares. All Class A Shares delivered upon exchange of the Exchangeable Debenture shall be newly issued shares, shall be duly authorized, validly issued, fully paid and nonassessable and shall be free from preemptive rights and free of any lien or adverse claim.
(g) Compliance With Securities Laws; Listing . Parent will endeavor promptly to comply with all applicable federal, state and provincial securities laws regulating the offer and delivery of Class A Shares upon exchange of Second Exchangeable Debenture, if any, and will list or cause to have quoted such Class A Shares on each national securities exchange, the TSX or on The Nasdaq National Market or other over-the-counter market or such other market on which the Class A Shares are then listed or quoted; provided, however, that if rules of such automated quotation system or exchange permit the Company to defer the listing of such Class A Shares until the first exchange of the Second Exchangeable Debenture into Class A Shares in accordance with the provisions hereof, Parent covenants to list such Class A Shares issuable upon exchange of the Second Exchangeable Debenture in accordance with the requirements of such automated quotation system or exchange on or prior to the first Exchange Effective Date.
(h) Adjustment of Exchange Price . The initial exchange price as stated in Section 5(a) hereof shall be adjusted from time to time (as so adjusted, the "Exchange Price") as follows:
(i) In case Parent shall (1) pay a dividend on its Class A Shares in Class A Shares, (2) make a distribution on its Class A Shares in Class A Shares, (3) subdivide its outstanding Class A Shares into a greater number of shares, or (4) combine its outstanding Class A Shares into a smaller number of shares, the Exchange Price in effect immediately prior thereto shall be adjusted so that the Holder upon exchange of the Second Exchangeable Debenture shall thereafter be entitled to receive that number of Class A Shares which it would have owned had the Second Exchangeable Debenture been exchanged immediately prior to the happening of such event. An adjustment made pursuant to this subsection (i) shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of subdivision or combination.
(ii) In case Parent shall, by dividend or otherwise, at any time distribute (a "Triggering Distribution") to all or substantially all holders of its Class A Shares, cash in an aggregate amount that, together with the aggregate amount of (A) any cash and the fair market value (as reasonably determined in good faith by the Board of Directors of Parent, whose determination shall be conclusive evidence thereof) of any other consideration payable to holders of Class A Shares in respect of any offer by Parent or a Subsidiary of Parent to purchase Class A Shares from Parent's Class A stockholders on a pro rata basis and such offer is consummated within the 12 months preceding the date of payment of the Triggering Distribution and in respect of which no Exchange Price adjustment pursuant to this Section 5 has been made and (B) all other cash distributions to all or substantially all holders of its Class A Shares made within the 12 months preceding the date of payment of the Triggering Distribution and in respect of which no Exchange Price adjustment pursuant to this Section 5 has been made, exceeds an amount equal to 5% of the product of the Current Market Price Per Class A Share on the Business Day (the "Determination Date") immediately preceding the day on which such Triggering Distribution is declared by Parent multiplied by the number of Class A Shares outstanding on the Determination Date (excluding shares held in the treasury of Parent), the Exchange Price shall be reduced so that the same shall equal the price determined by multiplying such Exchange Price in effect immediately prior to the Determination Date by a fraction of which the numerator shall be the Current Market Price Per Class A Share on the Determination Date less the sum of the aggregate amount of cash and the aggregate fair market value (as reasonably determined in good faith by the Board of Directors of Parent, whose determination shall be conclusive evidence of such fair market value) of any such other consideration so distributed, paid or payable within such 12 months (including, without limitation, the Triggering Distribution) applicable to one Class A Share (determined on the basis of the number of Class A Shares outstanding on the Determination Date) and the denominator shall be such Current Market Price Per Class A Share on the Determination Date, such reduction to become effective immediately prior to the opening of business on the day following the date on which the Triggering Distribution is paid.
(1) In case any offer, by Parent or any of its Subsidiaries to purchase Class A Shares from Parent's Class A stockholders on a pro rata basis shall expire and such offer (as amended upon the expiration thereof) shall involve the payment of aggregate consideration in an amount (determined as the sum of the aggregate amount of cash consideration and the aggregate fair market value (as reasonably determined in good faith by the Board of Directors of Parent), whose determination shall be conclusive evidence thereof of any other consideration) that, together with the aggregate amount of (A) any cash and the fair market value (as reasonably determined in good faith by the Board of Directors of Parent, whose determination shall be conclusive evidence thereof) of any other consideration payable in respect of any other offers by Parent or any Subsidiary of Parent to purchase Class A Shares from Parent's Class A stockholders on a pro rata basis consummated within the 12 months preceding the date of the Expiration Date (as defined below) and in respect of which no Exchange Price adjustment pursuant to this Section 5 has been made and (B) all cash distributions to all or substantially all holders of its Class A Shares made within the 12 months preceding the Expiration Date and in respect of which no Exchange Price adjustment pursuant to this Section 5 has been made, exceeds an amount equal to 5% of the product of the Current Market Price Per Class A Share as of the last date (the "Expiration Date") tenders, repurchases or redemptions could have been made pursuant to such offer (as it may be amended) (the last time at which such purchases could have been made on the Expiration Date is hereinafter sometimes called the "Expiration Time") multiplied by the number of Class A Shares outstanding (including tendered shares but excluding any shares held in the treasury of Parent) at the Expiration Time, then, immediately prior to the opening of business on the day after the Expiration Date, the Exchange Price shall be reduced so that the same shall equal the price determined by multiplying the Exchange Price in effect immediately prior to the close of business on the Expiration Date by a fraction of which the numerator shall be the product of the number of Class A Shares outstanding (including tendered, repurchased or redeemed shares but excluding any shares held in the treasury of Parent) at the Expiration Time multiplied by the Current Market Price Per Class A Share on the Trading Day next succeeding the Expiration Date and the denominator shall be the sum of (x) the aggregate consideration (determined as aforesaid) payable to Class A stockholders based on the acceptance (up to any maximum specified in the terms of the offer) of all shares validly tendered and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "Purchased Shares") and (y) the product of the number of Class A Shares outstanding (less any Purchased Shares and excluding any shares held in the treasury of Parent) at the Expiration Time and the Current Market Price Per Class A Share on the Trading Day next succeeding the Expiration Date, such reduction to become effective immediately prior to the opening of business on the day following the Expiration Date. In the event that Parent or its Subsidiary, as the case may be, is obligated to purchase shares pursuant to any offer to purchase Class A Shares from Parent's Class A stockholders on a pro rata basis, but Parent or its Subsidiary, as the case may be, is permanently prevented by applicable law from effecting any or all such purchases or any or all such purchases are rescinded, the Exchange Price shall again be adjusted to be the Exchange Price which would have been in effect based upon the number of shares actually purchased. If the application of this Section 5(h) would result in an increase in the Exchange Price, no adjustment shall be made under this Section 5(h).
(2) For the purpose of any computation under subsections (i) and (ii) of this Section 5(h), the current market price per Class A Share (the "Current Market Price Per Share") on any date shall be deemed to be the average of the daily Closing Prices for the 30 consecutive Trading Days commencing 45 Business Days before (i) the Determination Date or the Expiration Date, as the case may be, with respect to distributions or offers under subsection (ii) of this Section 5(h) or (ii) the record date with respect to distributions, issuances or other events requiring such computation under subsection (i) of this Section 5(h). The Closing Price for each day (the "Closing Price") shall be the last reported sales price or, in case no such reported sale takes place on such date, the average of the reported closing bid and asked prices in case on the NYSE. If the Class A Shares are not then quoted or listed or admitted to trading on the NYSE, the last reported sale price referenced above shall be determined based on the last reported sale price on the TSX (and converted to U.S. dollars at the exchange rate quoted by the Bank of Canada at such time) or, if the Class A Shares are not then quoted or listed or admitted to trading on the NYSE or TSX, any national securities exchange or quotation system on which sales of Class A Shares takes place, or, in case no reported sale takes place, the Market Price shall be the fair value of a Class A Shares as reasonably determined in good faith by the Board of Directors of the Company.
(3) In any case in which this Section 5(h) shall require that an adjustment be made following a record date or a Determination Date or Expiration Date, as the case may be, established for purposes of this Section 5(h), Parent may elect to defer issuing to the Holder until after such record date or Determination Date or Expiration Date the Class A Shares and other capital stock of Parent issuable upon such exchange over and above the Class A Shares and other capital stock of Parent issuable upon such exchange only on the basis of the Exchange Price prior to adjustment; and, in lieu of the shares the issuance of which is so deferred, Parent shall issue or cause its transfer agent to issue due bills or other appropriate evidence prepared by Parent of the right to receive such shares. If any distribution in respect of which an adjustment to the Exchange Price is required to be made as of the record date or Determination Date or Expiration Date therefor is not thereafter made or paid by the Company for any reason, the Exchange Price shall be readjusted to the Exchange Price which would then be in effect if such record date had not been fixed or such effective date or Determination Date or Expiration Date had not occurred.
(iii) If any event occurs as to which the foregoing provisions of this Section 5(h) are not strictly applicable or, if strictly applicable, would not, in the good faith judgment of the Company, fairly and adequately protect the rights of the Holder in accordance with the essential intent and principles of such provisions, then the Company shall make such adjustments in the application of such provisions, in accordance with such essential intent and principles, as shall be reasonably necessary, in the good faith opinion of the Company, to protect such rights as aforesaid, but in no event shall any such adjustment have the effect of increasing the Exchange Price or decreasing the number of Class A Shares issuable upon exchange of this Second Exchangeable Debenture.
(iv) Adjustment for Tax Purposes . Parent shall be entitled to make such reductions in the Exchange Price, in addition to those required by this Section 5(h), as it in its discretion shall determine to be advisable in order that any stock dividends, subdivisions of shares, distributions of rights to purchase stock or Second Exchangeable Debenture or distributions of Second Exchangeable Debenture convertible into or exchangeable for stock hereafter made by Parent to its stockholders shall not be taxable.
(v) Notice of Adjustment . Whenever the Exchange Price or exchange privilege is adjusted, Parent or Company shall promptly mail to the Holder a notice of the adjustment.
(vi) Notice of Certain Transactions . In the event that:
(1) Parent or the Company consolidates or merges with or into, or transfers all or substantially all of its property and assets to, another corporation or another corporation merges into Parent or the Company and;
(2) a record date has been established by Parent for any distributions to holders of Class A Shares, other than a distribution comprised solely of ordinary dividends; or
(3) there is a dissolution or liquidation of Parent or the Company,
Parent shall mail to Holders a notice stating the proposed record or effective date, as the case may be. Parent shall mail the notice at least twenty days in advance of the applicable record date for such action. Failure to mail such notice or any defect therein shall not affect the validity of any transaction referred to in clause (1), (2), or (3) of this Section 5(h)(vi).
In the event that a Put Event has occurred, the Company shall give notice to Holders as soon as practicable thereafter, but in any event, not more than 30 days after the occurrence thereof.
6. Representations and Warranties of the Company .
The Company represents and warrants to the Holder as follows:
(a) Organization; Authority . The Company is a corporation duly organized and validly subsisting under the laws of the State of Delaware, and has all requisite corporate power and authority to enter into this Second Exchangeable Debenture and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Second Exchangeable Debenture and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company. This Second Exchangeable Debenture has been duly executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms except that (i) such enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights, and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought.
(b) No Violation; Consents and Approvals . The execution and delivery of this Second Exchangeable Debenture do not, and the consummation of the transactions contemplated hereby and compliance with the terms hereof will not, conflict with, or result in any violation of or default under, (i) any provision of the articles or by-laws of the Company, (ii) any judgment, order or decree, or material statute, law, ordinance, rule or regulation applicable to the Company or the property or assets of the Company or (iii) any note, bond, mortgage, indenture, license, agreement, lease or other instrument or obligation to which the Company is a party or by which the Company may be bound or affected or to which any of its respective assets may be subject. Except for the requirements of the HSR Act, no consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity or any third party is required to be obtained or made by or with respect to the Company in connection with the execution and delivery of this Second Exchangeable Debenture or the consummation by the Company of the transactions contemplated hereby.
(c) Capitalization . As of the date of this Second Exchangeable Debenture, Parents authorized capital stock consists of (i) an unlimited number of authorized Class A Non-Voting Shares, no par value, of which 12,691,643 shares are issued and outstanding, (ii) 99,680 authorized Class B Voting Shares, no par value, all of which are issued and outstanding and (iii) an unlimited number of First Preference Shares issuable in series, of which no shares are issued or outstanding. All such issued and outstanding shares are duly authorized and validly issued, fully paid and nonassessable. The Class A Shares initially issuable upon exchange of this Second Exchangeable Debenture and pursuant to Section 5(b) represent in aggregate 32.24% of the total issued and outstanding Class A and Class B Shares as of the date hereof.
7. Effect of Reclassification, Consolidation, Merger Amalgamation or Sale on Exchange Privilege .
If any of the following shall occur, namely: (a) any reclassification or change of Class A Shares issuable upon exchange of the Second Exchangeable Debenture (other than as a result of a subdivision or combination, or any other change for which an adjustment is provided in Section 5; (b) any consolidation or merger or amalgamation or combination to which Parent or the Company is a party other than a merger or amalgamation in which Parent or the Company is the continuing corporation and which does not result in any reclassification of, or change (other than as a result of a subdivision or combination) in, outstanding Class A Shares; or (c) any sale or conveyance as an entirety or substantially as an entirety of the property and assets of Parent or the Company, directly or indirectly, to any person, then Company and Parent shall take all actions necessary to ensure that, as a condition precedent to such reclassification, change, combination, consolidation, merger, sale or conveyance, the Holder shall have the right to either (i) convert the Second Exchangeable Debenture into the kind and amount of shares of stock and other securities and property (including cash) receivable upon such reclassification, change, combination, consolidation, merger, amalgamation, sale or conveyance by a holder of the number of Class A Shares deliverable upon exchange of the Second Exchangeable Debenture immediately prior to such reclassification, change, combination, consolidation, merger, sale or conveyance or (ii) continue to hold debentures of such successor purchasing or transferee corporation, as the case may be, which shall be as nearly equivalent as may be practicable to the Second Exchangeable Debentures. If, in the case of any such consolidation, merger, amalgamation, combination, sale or conveyance, the stock or other securities and property (including cash) receivable thereupon by a holder of Class A Shares include shares of stock or other securities and property of a person other than the successor, purchasing or transferee corporation, as the case may be, in such consolidation, merger, amalgamation, combination, sale or conveyance, then such replacement debentures shall also be executed by such other person and shall contain such additional provisions to protect the interests of the Holder as the Board of Directors of the Company shall reasonably consider necessary by reason of the foregoing. The provisions of this Section 7 shall similarly apply to successive reclassifications, changes, combinations, consolidations, mergers, amalgamation, sales or conveyances.
8. Regulatory Call; Retraction .
(a) Regulatory Call . In the event of a Regulatory Event (as defined in the Stakeholders Agreement), but only to the extent necessary to cure such Regulatory Event, this Second Exchangeable Debenture may be purchased by Parent (or its designee, which may include the Company, in which case the Company shall be entitled to purchase this Second Exchangeable Debenture for cancellation) in the manner and subject to the terms and conditions set forth in Section 4.6 of the Stakeholders Agreement. The Company is hereby authorized by the Holder to take all actions reasonably necessary to ensure that Section 4.6 of the Stakeholders Agreement is complied with and, for purposes of a purchase for cancellation of this Second Exchangeable Debenture, the terms of Section 4.6 of the Stakeholders Agreement are hereby incorporated herein by reference.
(b) Retraction at Year Seven . Not less than 30 nor more than 90 days prior to a Put Date, the Holder may, at its election, notify the Company and the Parent in writing (a "Retraction Notice") of its intention to require the Company to redeem the Second Exchangeable Debenture in whole or in part, on the Put Date set forth in the Retraction Notice, without premium or penalty at a retraction price (the "Retraction Payment") equal to the then outstanding principal amount, plus any accrued but unpaid interest up to, but not including the Put Date. On the Put Date, the Holder shall deliver the certificate evidencing this Second Exchangeable Debenture to the Company for redemption and upon payment of the Retraction Payment in cash by or on behalf of the Company, all rights of the Holder hereunder shall cease.
(c) Retraction on Put Event . Not more than 120 days after a Put Event, the Holder may, at its election, notify the Company and the Parent in writing (a "Retraction Notice") of its irrevocable intention to require the Company to redeem the Exchangeable Debenture in whole on the retraction date set forth in the Retraction Notice (the "Retraction Date"), which may not be less than 180 days from the Put Event nor more than 210 days from the Put Event. Retraction will be effected without premium or penalty at a redemption price equal to the Retraction Consideration. On the Retraction Date, the Holder shall deliver the certificate evidencing this Second Exchangeable Debenture to the Company for redemption and a certificate containing a representation and warranty of the Holder that it is an accredited investor within the meaning of the Securities Act (Ontario) and is acquiring the Second Retraction Debenture as principal. Upon payment of the Retraction Consideration by or on behalf of the Company, all rights of the Holder hereunder shall cease. Notwithstanding the foregoing, no retraction hereunder shall be effective unless any outstanding Variable Rate Convertible Debentures and Second Exchangeable Debentures, if any, shall also be retracted concurrently.
9. Events of Default .
(a) An "Event of Default" occurs if:
(2) the Company defaults in the payment of a principal payment when the same becomes due and payable;
(3) the Company fails to comply with any of its agreements under this Second Exchangeable Debenture (other than those referred to in clauses (1) and (2) above) and such failure continues for 30 days;
(4) A default occurs under any mortgage, indenture or agreement or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Company or any of its Significant Subsidiaries (or payment of which is Guaranteed by the Company or any of its Significant Subsidiaries), whether such indebtedness for money borrowed or Guarantee now exists, or is created after the Issue Date (which default, (i) constitutes a failure to pay at final maturity (after giving effect to any applicable grace periods and any extensions thereof) the principal amount of such indebtedness for money borrowed or (ii) shall have resulted in such indebtedness for money borrowed being accelerated or otherwise become or being declared due and payable prior to its stated maturity), and the principal amount of all such indebtedness for money borrowed as to which a default described in this clause (4) has occurred aggregates $5,000,000 or more;
(5) A final judgment or judgments for the payment of money aggregating in excess of $5,000,000 are rendered against one or more of the Company and its Significant Subsidiaries and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay;
(6) the Company or any Significant Subsidiary pursuant to or within the meaning of any Bankruptcy Law:
(A) commences a voluntary case;
(B) consents to the entry of an order for relief against it in an involuntary case;
(C) consents to the appointment of a Custodian of it or for any substantial part of its property; or
(D) makes a general assignment for the benefit of its creditors; or
(7) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that:
(A) is for relief against the Company or any Significant Subsidiary in an involuntary case;
(B) appoints a Custodian of the Company or any Significant Subsidiary or for any substantial part of its property; or
(C) orders the winding up or liquidation of the Company or any Significant Subsidiary; or any similar relief is granted under any foreign laws and the order or decree remains unstayed and in effect for 60 days.
The foregoing will constitute Events of Default whatever the reason for any such Event of Default and whether it is voluntary or involuntary or is effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body.
(b) Acceleration . If an Event of Default (other than an Event of Default specified in clauses (a)(6) or (a)(7) of Section 9) occurs and is continuing, the Holder by written notice to the Company (an "Acceleration Notice"), may declare the unpaid principal of and accrued interest on this Second Exchangeable Debenture to be immediately due and payable. Upon such a declaration, the unpaid principal of and accrued interest on this Second Exchangeable Debenture shall be due and payable immediately without presentment, demand or notice of any kind, which are hereby expressly waived by the Company. If an Event of Default specified in clauses (a)(6) or (a) (7) of Section 9 occurs, all principal of and interest on the Second Exchangeable Debenture shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Holder. The Holder by written notice to the Company may rescind an acceleration and its consequences if (i) all existing Events of Default, other than the nonpayment of principal of or interest on this Second Exchangeable Debenture which has become due solely because of the acceleration, have been cured or waived and (ii) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction.
(c) Remedies Cumulative . A delay or omission by the Holder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All remedies are cumulative to the extent permitted by law.
10. Covenants .
(a) Corporate Existence, Etc . The Company will at all times preserve and keep in full force and effect its corporate existence and that of its Significant Subsidiaries and all rights and franchises of the Company and its Significant Subsidiaries unless, in the good faith judgment of the Company, the termination of or failure to preserve and keep in full force and effect such corporate existence, right or franchise would not, individually or in the aggregate, have a materially adverse effect on the business, operations, affairs, financial condition, properties or assets of the Company and its Subsidiaries taken as a whole.
(b) Payment of Taxes . The Company will file all income tax or similar tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies payable by any of them, to the extent such taxes and assessments have become due and payable and before they have become delinquent, provided that the Company need not pay any such tax or assessment if (i) the amount, applicability or validity thereof is contested by the Company on a timely basis in good faith and in appropriate proceedings, and the Company has established adequate reserves therefor in accordance with GAAP on the books of the Company or (ii) the nonpayment of all such taxes and assessments in the aggregate would not reasonably be expected to have a materially adverse effect on the business, operations, affairs, financial condition, properties or assets of the Company and its Subsidiaries taken as a whole.
(c) Maintenance of Properties . The Company and its Significant Subsidiaries will maintain and keep, or cause to be maintained and kept, their respective properties in good repair, working order and condition (other than ordinary wear and tear), so that the business carried on in connection therewith may be properly conducted at all times, provided that this Section 10(c) shall not prevent the Company from discontinuing the operation and the maintenance of any of its properties if such discontinuance is desirable in the conduct of its business and the Company has concluded that such discontinuance would not, individually or in the aggregate, have a materially adverse effect on the business, operations, affairs, financial condition, properties or assets of the Company and its Subsidiaries taken as a whole.
(d) Insurance . The Company and its Significant Subsidiaries will maintain, with financially sound and reputable insurers, insurance with respect their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated.
(e) Compliance with Law . The Company and its Significant Subsidiaries will comply with all laws, ordinances or governmental rules or regulations to which each of them is subject, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of their respective properties or to the conduct of its business, in each case to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations would not reasonably be expected, individually or in the aggregate, to have a materially adverse effect on the business, operations, affairs, financial condition, properties or assets of the Company and its Subsidiaries taken as a whole.
(f) Company Financial Statements . The Company shall deliver to the Holder:
(i) Quarterly Statements -- within 45 days after the end of each quarterly fiscal period in each fiscal year of the Company (other than the last quarterly fiscal period of each such fiscal year), copies of,
(1) a consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarter, and
(2) consolidated statements of income, changes in shareholders' equity and cash flows of the Company and its Subsidiaries, for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter, setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a senior financial officer as fairly presenting, in all material respects, the financial position of the companies being reported on and their results of operations and cash flows, subject to changes resulting from year-end adjustments;
(ii) Annual Statements -- within 90 days after the end of each fiscal year of the Company, copies of,
(1) an audited consolidated balance sheet of the Company and its Subsidiaries, as at the end of such year, and
(2) an audited consolidated statements of income, changes in shareholders' equity and cash flows of the Company and its Subsidiaries, for such year,
setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP.
(g) Notice of Default or Event of Default . Promptly, and in any event within five days after a Responsible Officer becoming aware of the existence of any Default or Event of Default, a written notice specifying the nature and period of existence thereof and what action the Company is taking or proposes to take with respect thereto.
(h) Further Instruments and Acts . Upon request of a Holder, the Company shall execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purpose of this Second Exchangeable Debenture. In addition, the Company is expressly authorized to take such actions as are reasonably necessary to effectuate the respective rights and obligations of the parties under the Stakeholders Agreement, to the extent such rights and obligations relate to this Second Exchangeable Debenture.
(i) Indebtedness . The Company shall not create, incur, assume or permit to be outstanding any Indebtedness other than Indebtedness incurred pursuant to this Second Exchangeable Debenture and the transactions contemplated by the Asset Purchase Agreement, unless the proceeds of such Indebtedness are used to pay all or a portion of the Indebtedness represented by the Convertible Debenture.
11. Amendment and Waiver .
(a) Consent Required . Any term, covenant, agreement or condition of this Second Exchangeable Debenture may, with the consent of the Company, be amended or compliance therewith may be waived (either generally or in a particular instance and either retroactively or prospectively), if the Company shall have obtained the consent in writing of the Holder, provided, however, that any term covenant agreement or condition which relates to the obligations of Parent pursuant to Sections 5, 6, 7 and 8(a) hereof will also require the consent of Parent.
(b) Effect of Amendment or Waiver . Any amendment or waiver shall be binding upon each future holder of this Second Exchangeable Debenture and upon the Company (and Parent, as applicable), whether or not such Second Exchangeable Debenture shall have been marked to indicate such amendment or waiver. No such amendment or waiver shall extend to or affect any obligation not expressly amended or waived or impair any right consequent thereon.
12. Replacement Second Exchangeable Debenture .
If this Second Exchangeable Debenture becomes mutilated and is surrendered to the Company or if the Holder of this Second Exchangeable Debenture presents evidence to the reasonable satisfaction of the Company that this Second Exchangeable Debenture has been lost, destroyed or wrongfully taken, the Company shall issue a replacement Second Exchangeable Debenture of like tenor if the requirements of the Company for such transactions are met. An indemnity agreement may be required that is sufficient in the reasonable judgment of the Company to protect the Company from any loss which it may suffer. The Company may charge for its out-of-pocket expenses incurred in replacing this Second Exchangeable Debenture.
13. No Recourse Against Others .
No director, officer, employee or stockholder, as such, of the Company shall have any liability for any obligations of the Company under this Second Exchangeable Debenture or for any claim based on, in respect or by reason of, such obligations or their creation. The Holder by accepting this Second Exchangeable Debenture waives and releases all such liability. This waiver and release are part of the consideration for the issue of this Second Exchangeable Debenture.
14. Notices .
All notices, requests, demands, waivers and other communications required or permitted to be given under this Second Exchangeable Debenture shall be in writing and shall be deemed to have been duly given if delivered personally, by mail (certified or registered mail, return receipt requested), by recognized overnight courier or by facsimile transmission (receipt of which is confirmed):
(i) if to the Company, to:
E.A. Viner International Co.
125 Broad Street
New York, NY 10004
Fax: (212) 943-8728
Attention: A.G. Lowenthal
with a copy to:
Borden Ladner Gervais LLP
Scotia Plaza, Suite 4400
40 King Street West
Toronto, Ontario M5H 3Y4
CANADA
Attention: A. Winn Oughtred, Esq.
Telephone: (416) 367-6247
Facsimile: (416) 361-7076
Email: woughtred@blgcanada.comand
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, NY 10036
Attention: Vincent J. Pisano, Esq.
Telephone: (212) 735-2718
Facsimile: (917) 777-2718
Email: vpisano@skadden.com
(ii) if to the Holder, to:
Canadian Imperial Bank of Commerce
Commerce Court West
Toronto, Ontario M5L 1A2
CANADA
Attention: Gerry McCaughey
Telephone: (416) 980-2211
Facsimile: (416) 332-4316
Email: gerry.mccaughey@cibc.comwith a copy to:
Mayer, Brown, Rowe & Maw
1675 Broadway
New York, NY 10019-5820
Attention: James B. Carlson, Esq.
Telephone: (212) 506-2515
Facsimile: (212) 849-5515
Email: jcarlson@mayerbrownrowe.comand
Canadian Imperial Bank of Commerce
Legal and Compliance
245 Park Avenue
42nd Floor
New York, NY 10167
Attention: Michael Capatides, Esq.
Telephone: (917) 332-4108
Facsimile: (917) 332-4320
Email: michael.capatides@us.cibc.com
or to such other person or address as any party shall specify by notice in writing to the other party. All such notices, requests, demands, waivers and communications shall be deemed to have been received on the date on which so hand-delivered, on the third Business Day following the date on which so mailed, on the Business Day following the date on which delivered to the overnight courier service and on the date on which faxed and confirmed, except for a notice of change of address, which shall be effective only upon receipt thereof.
15. Waiver of Stay, Usury or Extension Laws .
The Company (to the extent it may lawfully do so) shall not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, usury or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Exchangeable Debenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law.
16. Governing Law; Jurisdiction .
This Second Exchangeable Debenture shall be construed, performed and enforced in accordance with, and governed by, the laws of the State of New York, without giving effect to the principles of conflicts of laws thereof. Each party irrevocably submits to the exclusive jurisdiction of (i) the Supreme Court of the State of New York, New York County, and (ii) the United States District Court for the Southern District of New York, for the purposes of any suit, action or other proceeding arising out of this Second Exchangeable Debenture. Each party agrees to commence any action, suit or proceeding relating hereto either in the United States District Court for the Southern District of New York or if such suit, action or other proceeding may not be brought in such court for reasons of subject matter jurisdiction, in the Supreme Court of the State of New York, New York County. Each party irrevocably and unconditionally waives any objection to the laying of venue of any action, suit or proceeding arising out of this Second Exchangeable Debenture in (A) the Supreme Court of the State of New York, New York County, or (B) the United Sates District Court for the Southern District of New York, and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. Each party irrevocably and unconditionally waives the right to trial by jury in any legal or equitable action, suit or proceeding arising out of or relating to this Second Exchangeable Debenture, the notes or any other operative agreement or any transaction contemplated hereby or thereby or the subject matter of any of the foregoing.
17. Successors, etc.; Entire Agreement; Assignment .
This Second Exchangeable Debenture shall be binding upon and shall inure to the benefit of the Holder and the Company (and Parent with respect to its rights and obligations pursuant to Sections 5, 6, 7 and 8(a) hereof) and their respective successors and permitted assigns. This Second Exchangeable Debenture constitutes the entire agreement between the parties, superseding all prior understandings and writings, with respect to the indebtedness represented hereby. Provided, however, that in the event any provision of the Second Exchangeable Debenture is in conflict with any provision of the Stakeholders Agreement, the provisions of the Stakeholders Agreement shall control and take precedence over any provision herein. Holder may not assign or transfer this Second Exchangeable Debenture without complying with the terms and conditions of the Stakeholders Agreement applicable to the transfer of the Second Exchangeable Debenture, and such transfer shall be subject to regulatory approval, including but not limited to, the rules and regulations of NYSE. In the event that the Holder wishes to assign or transfer this Second Exchangeable Debenture, the Holder shall deliver written notice of such intention to the Company specifying the name and address for notices of the transferee and the proposed date of transfer (which date shall be not fewer than ten (10) Business Days following the Holders delivery to the Company of such notice). In the event that the Company objects to such proposed date of transfer, the Company and the Holder shall work together in good faith to determine a mutually agreeable date of transfer, provided, however, that such date shall not be later than 30 days following the Holders delivery to the Company of written notice of its intention to assign or transfer this Second Exchangeable Debenture. On the date of transfer, the Holder shall surrender this Second Exchangeable Debenture to the Company for cancellation, and the Company shall issue a Second Exchangeable Debenture to such transferee, which Second Exchangeable Debenture is identical in all respects to this Second Exchangeable Debenture except for the name of the Holder and the name and address of the Holder specified in Section 14. The Holder may not assign or transfer this Second Exchangeable Debenture except pursuant to the foregoing procedure.
18. Headings .
The section headings of this Second Exchangeable Debenture are for convenience only and shall not affect the meaning or interpretation of this Second Exchangeable Debenture or any provision hereof.
IN WITNESS WHEREOF, the Company has caused this Second Exchangeable Debenture to be executed by its duly authorized officer.
Dated: May 12, 2003
E.A. VINER INTERNATIONAL CO.
By:
Name:
Title:
IN WITNESS WHEREOF, solely with respect to the rights and obligations of Parent pursuant to Sections 5, 6, 7 and 8(a) hereof, Parent has caused this Second Exchangeable Debenture to be executed by its duly authorized officer.
Dated: May 12, 2003
FAHNESTOCK VINER HOLDINGS INC.
By:
Name:
Title:
Exhibit A
EXCHANGE NOTICE
By execution and delivery to the Company of this Exchange Notice, the undersigned represents and warrants that it is an accredited investor within the meaning of the Securities Act (Ontario) and is acquiring the Class A Shares as principal.
To exchange this Second Exchangeable Debenture for Class A Shares of Fahnestock Viner Holdings Inc.
check the box: [ ]
To exchange only part of this Second Exchangeable Debenture, state the principal amount to be exchanged (must be $1,000 or a multiple of $1,000): $______________.
If you want the stock certificate made out in another person's name, fill in the form below:
_________________________________________________________________
(Insert assignee's soc. sec. or tax I.D. no.)
_________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
(Print or type assignee's name, address and zip code)
Your Signature:
Date: ______________ ______________________________________
(Sign exactly as your name appears on the other side of this Second Exchangeable Debenture)
EXHIBIT 14
March 2004
Oppenheimer Holdings Inc.
Oppenheimer & Co. Inc.
Code of Conduct and Business Ethics for Directors, Officers and
Employees
1. Introduction
This Code of Conduct and Business Ethics (the "Code") applies to all directors, officers and employees of Oppenheimer Holdings Inc., Oppenheimer & Co. Inc. and all other subsidiaries of Oppenheimer Holdings Inc. (collectively "Oppenheimer"). Some subsidiaries, departments and specialized areas have specific codes of conduct or ethics or the like in place that cover conduct or regulatory issues that only apply to that area or field. If you work for one of these subsidiaries or specialized areas such specific codes of conduct of ethics apply to you in addition to the Code.
2. Purpose of the Code
The purpose of the Code is to promote and foster the honest and ethical conduct of the directors, officers and employees of Oppenheimer.
Our Basic Principles are:
adhere to the law wherever Oppenheimer does business;
avoid putting yourself or Oppenheimer in a conflict of interest;
conduct yourself honestly and with integrity;
keep Oppenheimer transactions, communications and information, accurate, confidential and secure, and Oppenheimer assets safe; and
treat everyone fairly and equitably whether customers, suppliers, employees or others who deal with Oppenheimer.
3. Compliance with Law
You must know, respect and comply with all laws, rules, and regulations applicable to the conduct of Oppenheimer's businesses in the areas in which you work. Oppenheimer actively promotes compliance with the laws, rules, and regulations that govern Oppenheimer's business. Obeying both the letter and spirit of the law is one of the foundations of Oppenheimers ethical standards. You must follow and obey the laws of all the states and countries where we operate. While you are not expected to be an expert on every detail of all the laws that govern our business in every jurisdiction, you are expected to understand the laws and regulations applicable to your duties at Oppenheimer and to understand the regulatory environment within which the firm operates well enough to know when to seek advice from your Manager, a Senior Officer or from the Senior Vice President and Corporate Counsel.
A. Brokerage Accounts
In accordance with industry regulations, Oppenheimer employees and officers and their immediate families must maintain their brokerage accounts at Oppenheimer. Exceptions to this policy are rarely granted and must be approved by your Manager, the Director of Compliance or the Senior Vice President and Corporate Counsel.
B. Insider Trading
Securities laws and Oppenheimer policy prohibit you from acting upon material non-public information to benefit yourself or others. Information is "material" if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision, or it could reasonably be expected to affect the price of an issuer's securities. At times, our policies may limit the ability of some employees to enter into transactions. Anyone with ongoing possession of non-public information may be unable to trade personally in the securities of the companies about which he or she has information. Those having access to confidential or non-public information must not use or share that information except in connection with the legitimate conduct of Oppenheimer business. Oppenheimer strives to prevent the misuse of material non-public information by, among other things, limiting access to confidential information and limiting and monitoring communications between various Oppenheimer departments including, without limitation, the investment banking, asset management, sales, research, and trading departments. In addition to civil and criminal proceedings and penalties, misuse of confidential information or engaging in insider trading will result in disciplinary action, up to and including termination.
C. Money Laundering and Antiterrorism Laws
Oppenheimer complies with federal, state,. and international laws prohibiting money laundering and with the safeguards against terrorist activity contained in the USA Patriot Act. Under no circumstances should you participate in any money laundering activity. In addition to severe criminal penalties, money laundering by Oppenheimer employees and violations of the USA Patriot Act will result in disciplinary action, up to and including termination. Any suspicious deposits, or any other client activity that raises questions about the source of the client's funds, should be reported immediately to your Manager, the firms Anti-Money Laundering Officer (currently Mr. James Gianni at (212) 668-5024, or the Office of the General Counsel.
D. Proper Record-Keeping and Disclosure Requirements
Oppenheimer requires honest and accurate accounting and recording of financial and other information in order to make responsible business decisions and provide an accurate account of Oppenheimer's performance to stakeholders and regulators. It is a violation of law and Oppenheimer policy for any employee to attempt to improperly influence or mislead any person engaged in auditing or reviewing our financial accounts and statements. Oppenheimer is committed to full compliance with all requirements applicable to its regulatory and public disclosures. Oppenheimer requires that its financial and other reporting fairly present the financial condition, results of operations, and cash flow of Oppenheimer and that it comply in all respects with applicable law, governmental rules, and regulations, including generally accepted accounting principles (GAAP) in the United States and Canada and applicable rules of the U.S. Securities and Exchange Commission, the New York Stock Exchange, Canadian securities regulators, the Toronto Stock Exchange and other securities regulators. Oppenheimer has implemented disclosure controls and procedures to ensure that its public disclosures are timely, compliant, and otherwise full, fair, accurate, and understandable. All employees and officers responsible for the preparation of Oppenheimer's public disclosures, or who provide information as part of that process, have a responsibility to ensure that such disclosures and information are complete, accurate, and in compliance with Oppenheimer's disclosure controls and procedures.
E. Document Retention and Destruction
Without exception, all officers and employees must fully comply with Oppenheimer's document retention and destruction policy. It is a criminal offense to destroy documents that are subject to a subpoena or other legal process. Once a legal proceeding has begun, or even when one is threatened or reasonably likely, federal and state obstruction-of-justice statutes require Oppenheimer to preserve documents relevant to the issues in that proceeding even before specific documents are requested. Any Oppenheimer employee who fails to comply with this policy, as well as industry regulations and state and federal laws, is subject to termination and may also face criminal or civil prosecution, with possible fines and prison terms.
F. Cooperation with Investigations and Law Enforcement
It is Oppenheimer's policy to cooperate with government investigators and law enforcement officials. Every Oppenheimer employee must also cooperate with investigations by non-governmental regulators with oversight of our business, such as securities exchanges, as well as with internal Oppenheimer investigations. All inquiries or requests or demands for information from external investigators must be immediately referred to the Office of the General Counsel. The Office of the General Counsel must coordinate all responses to external investigators' questions. Failure to cooperate with legitimate investigations will result in disciplinary action, up to and including termination.
G. Privacy
All Oppenheimer personnel must comply with all applicable privacy laws in their handling of client matters and client and Oppenheimer records. Any questions about the applicability of privacy laws should be referred to the Office of the General Counsel.
4. Conflicts of Interest
A conflict of interest occurs when your private interests interfere, or appear to interfere, in any way, with the interests of Oppenheimer. Conflicts of interest can arise when you take action or have interests that may make it difficult for you to perform your duties to Oppenheimer effectively. Conflicts of interest also arise when you, or a member of your family, receives improper personal benefits as a result of your position with Oppenheimer. Loans to, or guarantees of obligations of, any employees, officers, directors or any of their family members are likely to pose conflicts of interest, as are transactions of any kind between Oppenheimer and any other organization in which you or any member of your family have an interest.
Engaging in any conduct that represents a conflict of interest is prohibited. If you have any doubt whether or not conduct would be considered a conflict of interest, please consult your Manager, a Senior Officer or the Senior Vice President and Corporate Counsel. You must also disclose any material transaction or relationship that could reasonably be expected to give rise to such a conflict to the Senior Vice President and Corporate Counsel. If a conflict of interest cannot be avoided, it must be managed in an ethical, responsible manner, so as not to create the perception of impropriety.
As a Director, Senior Executive, or Financial Officer or employee of Oppenheimer, it is imperative that you avoid any investment, interest or association that interferes, might interfere, or might be perceived to interfere, with your independent exercise of judgment in Oppenheimer's best interest.
A. Ownership of Securities and Outside Business Activities
As a Senior Executive or employee of Oppenheimer, you must report all outside business activities, including ownership of privately held stock and limited partnership interests, to your Manager and to the appropriate Oppenheimer Compliance Officer so that a review for potential conflicts of interest can be conducted. Outside business activities and interests include serving as a partner or a stockholder in another business, as an officer in a family-owned corporation, or as an outside director of another company. The appropriateness of you engaging in these and other types of outside business activities, interest, or investment opportunities depends on many factors, including the nature and extent of the outside interest, the potential for conflicts of interest, the relationship between Oppenheimer and the outside entities, and the duties involved. You must receive prior written approval for any outside business activity and private investment from the Director of Compliance. You have an obligation to keep Oppenheimer apprised of these activities and provide updated information about the outside interests. Service by you as a director, officer, or employee of any other corporation or business must be authorized in writing by the Director of Compliance. Unless approved in writing by the Director of Compliance or the Senior Vice President and Corporate Counsel, you may not serve as a director of a publicly traded company.
Directors of Oppenheimer should inform the Chairman and Chief Executive Officer of Oppenheimer Holdings Inc. prior to accepting appointments to the boards of directors or advisory boards of any public or privately held company. The disclosure requirements and other possible conflict-of-interest issues involved must be analyzed and discussed.
B. Public Office
You are required to notify and receive the approval of the Director of Compliance or the Senior Vice President and Corporate Counsel before committing to a candidacy for elective office or a formal position on a company committee and before accepting an appointment to a public or civic office. Oppenheimer must take steps to ensure that conflicts of interest are not raised by such campaign or public service. In general, you may run for and serve in local, elective, or appointed civic offices, provided the activity, including campaigning:
occurs outside work hours;
involves no use of Oppenheimer's name, facilities, client lists, other corporate assets, or corporate funding;
is confined solely to you in your capacity as a private citizen and not as a representative of Oppenheimer; and
does not present an actual or perceived conflict of interest for Oppenheimer, as determined in the sole judgment of Oppenheimer.
5. Corporate Opportunities
You may not advance your personal interests at the expense of Oppenheimer. You owe a duty to Oppenheimer to advance Oppenheimer's legitimate interests to the best of your abilities whenever the opportunity arises. You must not take for yourself personally opportunities you discover through your employment with Oppenheimer or the use of Oppenheimer property, information, or position, which is in violation of Oppenheimer's policies. In addition, Oppenheimer property, information, or position must not be used for personal gain. You may not compete with Oppenheimer while employed by Oppenheimer.
6. Confidentiality Obligations
A. Non-Public Information
You must maintain the confidentiality of information entrusted to you by Oppenheimer and provided by our clients, suppliers and service providers. In the conduct of its business, Oppenheimer receives a great deal of non-public information. Much of this information may be sensitive, with the potential to affect market conditions, negotiations, strategic positioning, and relationships with clients, competitors, suppliers or service providers. You must exercise care not to misuse non-public information obtained during your employment, including client lists, information about Oppenheimer personnel and clients, and business plans and ideas. The obligation to maintain the confidentiality of information may be subject to legal or regulatory requirements to disclose that information. In such cases, the Office of the General Counsel will help determine what disclosure is required and how it is to be made.
B. Media, Publishing, and Public Appearances
You may not provide non-public corporate information to persons outside Oppenheimer, including the media. Any inquiries or questions relative to the media should be referred to the Chief Executive Officer or the President of Oppenheimer Holdings Inc.
C. Client Information Privacy
Oppenheimer protects the confidentiality and security of client information [Oppenheimer's Privacy Policy for client information provides that:
Oppenheimer does not sell or rent clients' personal information;
you may not discuss the business affairs of any client with any other person, except on a strict need-to-know basis;
Oppenheimer does not release client information to third parties, except upon a client's authorization or when permitted or required by law; and
third-party service providers and suppliers with access to client information are required to keep client information confidential and use it only to provide services to or for Oppenheimer.
7. Fair Dealing
You must deal fairly with Oppenheimer's clients, suppliers, service providers, competitors, and employees. Competitive advantage must result from superior performance, not unethical or illegal business dealings. While Oppenheimer seeks to outperform our competitors, it must be done honestly and fairly.
A. Unethical Behavior, Relationships with Competitors
You may not take unfair advantage of anyone through unethical or illegal measures, such as manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other unfair dealing practices. It is improper, and may be illegal, to hire competitors' employees for the purpose of obtaining clients or trade secrets or other proprietary information. It is also against Oppenheimer's policy to seek increased revenues by disparaging our competitors. Our goal is to increase business by offering superior and innovative financial products and services. Oppenheimer advertising must be truthful, not deceptive, and in compliance with applicable laws, regulations, and corporate policies. All advertising and marketing materials must be approved using the established approval procedures. You must guard against unfair competitive practices and exercise extreme caution to avoid conduct that might violate antitrust laws or other rules prohibiting anti-competitive activities. Violations may result in criminal or civil proceedings and penalties. If a competitor or third-party proposes to discuss unfair collusion, price-fixing, or other anti-competitive activities, your responsibility is to object, terminate the conversation, or leave the meeting and report the incident promptly to your manager, a Senior Officer or the Senior Vice President and Corporate Counsel. You must avoid any discussion with competitors of proprietary or confidential information, business plans, or topics such as pricing or sales policies the discussion of which could be viewed as an attempt to make joint rather than independent business decisions.
B. Gifts, Gratuities, Political Contributions, and Other Payments Related to Oppenheimer Business
You, your associates or members of your family may not, directly or indirectly, accept or receive bonuses, fees, gifts, frequent or excessive entertainment, or any similar form of consideration that is of more than nominal value from any person or entity with which Oppenheimer does, or seeks to do, business. It also is generally against corporate policy to give gifts or gratuities, other than within accepted guidelines, without receiving specific approval by the Director of Compliance or the Senior Vice President and Corporate Counsel. You may not give gifts of any value to government officials without specific approval by the Director of Compliance or the Senior Vice President and Corporate Counsel. Oppenheimer policy forbids bribes, payoffs, contributions, or payments of any kind by any Oppenheimer employee, officer or director to any person, government official, or entity for the purpose of improperly obtaining or retaining business or influencing consideration of any business activity. This policy covers all types of payments that may or may not be considered legal under the circumstances. Special rules may apply to payments or gifts (including entertainment) to officers, directors, employees, or other affiliates of government owned or controlled entities and certain highly regulated entities (such as banks or insurance companies), as well as entities located in certain jurisdictions.
8. Respect for the Individual
A. Conduct Business Activities in an Atmosphere of Good Faith and Respect
It is Oppenheimer's policy, to treat each individual with dignity, consideration, and respect. All Oppenheimer employees should be honest and fair with others, share the credit when credit is due, avoid public criticism of one another, and encourage an atmosphere in which openness, cooperation, and consultation are the norms. Internal relationships with fellow employees should be based on the same high standards of integrity and ethical responsibility that are observed with Oppenheimer clients, shareholders, and the public.
Oppenheimer is committed to promoting diversity within its workforce; achieving it is an important competitive advantage in the global marketplace. Oppenheimer has a strict policy of equal opportunity in hiring, developing, promoting, and compensating employees. We seek to attract, retain, and reward employees who perform their work to the highest standards, basing promotions on qualification and merit. Discrimination is not tolerated on the grounds of race, national origin, religion, gender, age, disability, sexual orientation, or veteran status. Just as we do not tolerate illegal discrimination in any form, we also do not tolerate illegal sexual or any other form of harassment at any level of Oppenheimer. Employees who experience or observe work-related discrimination, harassment, or similar problems have an obligation to report it to their Manager, the Director of Human Resources, or the Senior Vice President and Corporate Counsel.
Indebtedness between employees is best avoided and must not reach a level that may compromise the objectivity essential in manager employee relationships or in the discharge of job-related responsibilities. Any indebtedness between employees and their direct or indirect supervisors (regardless of which one is borrower or lender) must be limited to nominal amounts.
9. Protecting Oppenheimer Information, Assets, and Property
A. Business Use
You must protect Oppenheimer's assets and ensure their efficient use. You may only use Oppenheimer property for legitimate business purposes. Any suspected fraud or theft of Oppenheimer property must be reported for investigation immediately. Oppenheimer's assets include our capital, facilities, equipment, proprietary information, technology, business plans, ideas for new products and services, trade secrets, inventions, copyrightable materials, and client lists. Information owned by Oppenheimer must be treated with the same care as any other asset, and every Oppenheimer employee has a role in protecting its confidentiality and integrity.
B. Proprietary Information and Intellectual Property
Your obligation to protect Oppenheimer's assets applies to our proprietary information. Proprietary information includes business, marketing, and service plans; unpublished financial data and reports; databases; customer information; and salary and bonus information, as well as intellectual property such as trade secrets, patents, trademarks, and copyrights. Unauthorized use or distribution of this material is a violation of Oppenheimer's policy, and it may also be illegal and result in civil and criminal proceedings and penalties. Intellectual property refers to a company's intangible assets, such as the company's business methods, inventions, trademarks, and publications. All inventions and copyrightable material conceived by an employee within the scope of his or her employment are the exclusive property of Oppenheimer, and as a condition of continued employment, the employee must do whatever is necessary to transfer to Oppenheimer the technical ownership of such inventions or materials. It is the responsibility of every employee to protect Oppenheimer's intellectual property. In addition, Oppenheimer also respects the intellectual property of other parities. The unauthorized use of another party's patented, trademarked, or copyrighted (electronic, audio, video, text) materials is strictly prohibited, regardless of their source. In addition, Oppenheimer does not permit the use of software or other devices whose primary purpose is the circumvention or violation of another's intellectual property rights. Please contact the Senior Vice President and Corporate Counsel with questions about the proposed use of another party's intellectual property and for appropriate contracts.
C. Compliance with Internal Controls
Oppenheimer maintains and enforces a strong, effective system of internal controls to safeguard and preserve its information and assets, its clients, and its shareholders. These controls are designed to ensure that business transactions are properly authorized and carried out, and that all reporting is truthful and accurate. These administrative and accounting control systems are the responsibility of each group in the Oppenheimer organization. All business transactions require authorization at an appropriate management level. Any employee who is responsible for the acquisition or disposition of assets for Oppenheimer, or who is authorized to incur liabilities on Oppenheimer's behalf, must act prudently in exercising this authority and must be careful not to exceed his or her authority. Equally important, every employee must help ensure that all business transactions are executed as authorized. Transactions must be properly reflected on Oppenheimer's books and records. Every employee is involved, if not in the authorization or execution of business transactions, in some level of reporting. This may include reporting travel and entertainment expenses or recording work hours on a timecard. It is important that all reporting be done honestly and accurately and that employees cooperate fully with both internal and independent audits.
10. OPPENHEIMER WRITTEN AND ELECTRONIC COMMUNICATIONS
You must use Oppenheimer's information and communication systems properly and judiciously. Oppenheimer has strict policies on use of the Internet and on written and electronic communications which you must comply with.
A. Access to the Internet
Oppenheimer has strict policies on Internet access. Only authorized connections are permitted, and access to the Internet must be accomplished via an approved security gateway. Furthermore, you are not permitted to link to the Internet from Oppenheimer offices via modem dial-up services or other external service providers without the express approval of the Director of Compliance. Additionally, you should exercise good judgment when using the Internet during business hours for personal and non-business purposes. You may not do any of the following:
transmit, copy, or download any material, including sexually explicit images or messages and materials containing racial, ethnic, or other slurs, that may defame, embarrass, threaten, offend, or harm an Oppenheimer employee or client or the general public;
transmit or post non-public corporate information about Oppenheimer or any company to any organization or individual not authorized to receive or possess it;
attempt to gain access to any computer, database, or network without authorization or wilfully propagate computer viruses or other disruptive or destructive programs;
distribute unsolicited e-mail messages, advertisements, or postings to multiple newsgroups, individuals, or organizations (e.g., "spamming"); and
use electronic means for the purpose of gambling or to send or forward chain letters.
You may not establish e-mail addresses or domain names that attempt to trade on, or are derived from, the Oppenheimer name or any corporate, brand names or domain names used within the Oppenheimer Group; if such use is identified, immediate relinquishment will be requested. You should not register domain names on behalf of Oppenheimer and may not establish Internet websites related to Oppenheimer business without approval from your Manager and the Director of Compliance and Director of Information Technology. You are reminded to be sure that your system passwords are secure. Inappropriate conduct in respect of the usage of Oppenheimer's communications systems will lead to disciplinary action, including revocation of privileges, immediate termination, and referral to regulatory authorities.
B. Written and E-Mail Communications
Electronic communications should be treated with the same care as any other business communication. Any communication relating to Oppenheimer business must be of an appropriate nature, must not violate the legal rights of Oppenheimer, any Oppenheimer employee, or third party, and must be transmitted, stored, and accessed in the manner that safeguards confidentiality and complies with applicable law. All written communications, including those electronically delivered, should be clear, concise, and professional in tone and content. Communications for personal, non-business purposes should be kept to a minimum.
C. Communications Monitoring
All electronic communications relating to Oppenheimer business must be made through the Oppenheimer network unless the Director of Compliance and Director of Information Technology has expressly authorized another means. Electronic communications, including connections to Internet and Intranet websites using Oppenheimer computing or network resources, as the property of Oppenheimer and are subject to monitoring and surveillance. Communications by certain Oppenheimer personnel are subject to detailed supervisory requirements.
11. Report Problems or Irregularities
If you believe that you may have breached the Code or a supplemental code or guideline that applies to you, or have observed:
a breach of the Code or a supplemental code or guideline by another Oppenheimer employee; or
a serious weakness or deficiency in Oppenheimer's policies, procedures or controls which might enable breaches to occur or go undetected;
you have a responsibility to Oppenheimer, your fellow Oppenheimer employees and yourself to report it to your Manager, that employee's Manager or the Senior Vice President and Corporate Counsel.
Failure to report a known breach of the Code may result in serious consequences. If a problem or irregularity has been referred to you, you must resolve the issue or refer it appropriately using the chain of communication referred to below.
Oppenheimer recognizes that, from time to time, you may be uncertain about an appropriate course of action. In all such cases, immediately seek the advice of your Manager, a more senior officer or the Senior Vice President and Corporate Counsel. Consult a still more senior officer or one of the persons referred to below if you do not receive what you consider to be a reasonable response from any such person.
If you are not satisfied with the resulting response or action, you should contact or write without fear of reprisal to the Chief Executive Officer of Oppenheimer or the Senior Vice President and Corporate Counsel. You will be protected by Oppenheimer from retaliation or reprisal if you, in good faith, report actual, suspected or perceived breaches of the Code, or supplemental codes or guidelines or problems with Oppenheimer policies, procedures or controls.
12. BREACHES OF THE CODE
Breaches of the Code (and supplemental codes or guidelines) or reported problems with Oppenheimer policies, procedures or controls will be dealt with promptly and fairly. Any breach of the Code (and supplemental codes or guidelines) is a serious matter, and can result in action up to and including termination of employment. Oppenheimer may be required to report certain types of breaches to regulatory authorities, in which case the director, officer or employee may be subject to civil or criminal proceedings and penalties.
13. Sources of Assistance
You are expected to know and understand this Code. If you have questions or concerns consult your supervisor or your Manager. If this is not appropriate or if you need further guidance, you may consult any of the following as you believe appropriate:
Ms. Lenore Denys
Director of Human Resources
Oppenheimer & Co. Inc.
300 River Place, Suite 4000
Detroit, MI 48207
Tel: (313) 566-2309
Fax: (313) 259-7853
Email: Lenore.denys@opco.comMr. Allen Holeman
Director of Compliance
Oppenheimer & Co. Inc.
125 Broad Street, 16 th Floor
New York, NY 10004
Tel: (212) 668-8944
Fax: (212) 668-5896
Email: Allen.Holeman@opco.comDennis P. McNamara, Esq.
Senior Vice President and Corporate Counsel,
Oppenheimer & Co. Inc.
125 Broad Street, 16th Floor
New York, NY 10004 U.S.A.
Tel: (212) 668-5771
Fax: (212) 425-8627
E-mail: dennis.mcnamara@opco.com
Eric Shames, Esq.
Office of the General Counsel
Oppenheimer & Co. Inc.
125 Broad Street, 16 th Floor
New York, NY 10004 U.S.A.
Tel: (212) 668-8073
Fax: (212) 785-1918
Email: eric.shames@opco.com
Ms. Elaine K. Roberts,
President and Treasurer
Oppenheimer Holdings Inc.
20 Eglinton Avenue West
Suite 1110, P.O. Box 2015
Toronto, Ontario M4R 1K8
Tel: (416) 322-1515
Fax: (416) 322-7007
E-mail: eroberts@opy.ca
Mr. Albert G. Lowenthal
Chairman and CEO
Oppenheimer Holdings Inc. and Oppenheimer & Co. Inc.
125 Broad Street
16th Floor
New York, N.Y. 10004 U.S.A.
Tel: (212) 668-5782
Fax: (212) 943-8728
E-mail: albert.lowenthal@opco.comMr. Kenneth W. McArthur
Lead Director
Oppenheimer Holdings Inc.
93 Riverwood Parkway
Toronto, Ontario M8Y 4E4
Tel: (416) 233-0218
Fax: (416) 233-7870or
Gulf Harbor Golf and Country Club
14335 Harbor Links Ct., Unit 20B
Fort Meyers Florida 33908 USA
Tel: (239) 481-0249
Fax: (239) 481-0249
C:\DOCUME~1\nhaile\LOCALS~1\Temp\MetaSave\Oppenheimer Code of Conduct.doc