| OPPENHEIMER HOLDINGS INC Item 1A RISK FACTORS The Company’s business and operations are subject to numerous risks |
| The material risks and uncertainties that management believes affect the Company are described below |
| The risks and uncertainties described below are not the only ones facing the Company |
| Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Company’s business operations |
| If any of the following risks actually occur, the Company’s financial condition and results of operations could be materially and adversely affected |
| If the Company is unable to repay its outstanding indebtedness obligations when due, its operations may be materially adversely affected |
| At December 31, 2005, the Company had an aggregate of approximately dlra1dtta9 billion of indebtedness |
| The Company cannot assure that its operations will generate funds sufficient to repay its existing debt obligations as they come due |
| The Company’s failure to repay its indebtedness and make interest payments as required by its debt obligations could have a material adverse affect on its operations |
| 15 The Company is subject to extensive securities regulation and the failure to comply with these regulations could subject it to penalties or sanctions |
| The securities industry and the Company’s business is subject to extensive regulation by the SEC, state securities regulators and other governmental regulatory authorities |
| The Company is also regulated by industry self-regulatory organizations, including the NYSE, the NASD and the MSRB The regulatory environment is also subject to change and the Company may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other federal or state governmental regulatory authorities, or self-regulatory organizations |
| The Company also may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations |
| Oppenheimer is a registered broker-dealer with the SEC and a member firm of the NYSE Broker-dealers are subject to regulations which cover all aspects of the securities business, including: · sales methods and supervision; · trading practices among broker-dealers; · use and safekeeping of customers’ funds and securities; · anti-money laundering and Patriot Act compliance; · capital structure of securities firms; · compliance with lending practices (Regulation T); · record keeping; and · the conduct of directors, officers and employees |
| Compliance with many of the regulations applicable to the Company involves a number of risks, particularly in areas where applicable regulations may be subject to varying interpretation |
| The requirements imposed by these regulators are designed to ensure the integrity of the financial markets and to protect customers and other third parties who deal with the Company |
| Consequently, these regulations often serve to limit the Company’s activities, including through net capital, customer protection and market conduct requirements |
| Much of the regulation of broker-dealers has been delegated to self-regulatory organizations, principally the NASD Regulation, Inc, the regulatory arm of the NASD, and the NYSE, which are the Company’s primary regulatory agencies |
| NASD Regulation, Inc |
| and the NYSE adopt rules, subject to approval by the SEC, which govern its members and conducts periodic examinations of member firms 6; operations |
| If the Company is found to have violated any applicable regulation, formal administrative or judicial proceedings may be initiated against it that may result in: · censure; · fine; · civil penalties, including treble damages in the case of insider trading violations; · the issuance of cease-and-desist orders; · the deregistration or suspension of our broker-dealer activities; · the suspension or disqualification of our officers or employees; or · other adverse consequences |
| 16 The imposition of any of these or other penalties could have a material adverse effect on our operating results and financial condition |
| See Item 1, under the caption “REGULATION” and Item 7, “Managements’ Discussion and Analysis of Financial Condition and Results of Operations” - Regulation |
| The Company may incur significant losses from trading and investment activities due to market fluctuations and volatility |
| The Company generally maintains trading and investment positions in the equity markets |
| To the extent that the Company owns assets, ie, has long positions, in those markets, a downturn in those markets could result in losses from a decline in the value of those long positions |
| Conversely, to the extent that the Company has sold assets that it does not own, ie, has short positions, in any of those markets, an upturn in those markets could expose the Company to potentially unlimited losses as it attempts to cover its short positions by acquiring assets in a rising market |
| In addition, the Company maintains trading positions that can be adversely affected by the level of volatility in the financial markets, ie, the degree to which trading prices fluctuate over a particular period, in a particular market, regardless of market levels |
| The value of the Company’s goodwill and intangible assets may become impaired A substantial portion of the Company’s assets arise from goodwill and intangibles recorded as a result of business acquisitions it has made |
| The Company is required to perform a test for impairment of such goodwill and intangible assets, at least annually |
| If the test resulted in a write-down of goodwill and/or intangible assets, the Company would incur a significant loss |
| Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact the Company’s business Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on the Company’s ability to conduct business |
| Although management has established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations |
| The Company maintains a disaster recovery site to aid it in reacting to circumstances such as those described above |
| The plans and preparations for such eventualities including the site itself may not be adequate or effective for their intended purpose |
| The Company’s revenue may decline in adverse market or economic conditions |
| During periods of unfavorable financial and economic conditions the number and size of the transactions in which the Company provides underwriting services, merger and acquisition consulting and other services are reduced |
| The Company’s investment banking revenues, in the form of financial advisory and underwriting fees, are directly related to the number and size of the transactions in which it participates and therefore 17 may be adversely affected by a sustained downturn in the securities markets |
| Additionally, a downturn in market conditions may lead to a decline in the volume of transactions that the Company executes for its customers and, therefore, to a decline in the revenue the Company receives from commissions and principal transactions |
| If these adverse financial and economic conditions were to persist, the Companye would incur a further decline in transactions and revenue that it receives from commissions and principal transactions |
| Management fees associated with the Company’s advisory business will decline with a decline in security prices |
| The Company depends on its senior employees and the loss of their services could harm its business |
| The Company’s success is dependent in large part upon the services of several of its senior executives and employees |
| Any loss of service by the CEO may adversely affect the business and operations of the Company |
| The Company maintains key man insurance on the life of its CEO If the Company’s senior executives or employees terminate their employment with it and the Company is unable to find suitable replacements in relatively short periods of time, itsr operations may be materially and adversely affected |
| The Company does not currently have employment agreements or non-competition agreements with any of its senior officers |
| The Company faces significant competition for professional employees |
| From time to time, individuals the Company employs may choose to leave to pursue other opportunities |
| The Company has experienced losses of financial advisors, trading and investment banking professionals in the past, and the level of competition for key personnel remains intense |
| The Company can not give assurances that the loss of key personnel will not occur again in the future |
| The loss of a financial adviser or a trading or investment banking professional, particularly a senior professional with a broad range of contacts in an industry, could materially and adversely affect the Company’s operating results |
| The Company is subject to various risks associated with the securities industry |
| As a securities broker-dealer, Oppenheimer is subject to uncertainties that are common in the securities industry |
| These uncertainties include: · the volatility of domestic and international financial, bond and stock markets, as demonstrated by recent disruptions in the financial markets; · extensive governmental regulation; · litigation; · intense competition; · substantial fluctuations in the volume and price level of securities; and · dependence on the solvency of various third parties |
| As a result, revenue and earnings may vary significantly from quarter to quarter and from year to year |
| In periods of low volume, profitability is impaired because certain expenses remain relatively fixed |
| Oppenheimer is smaller and has less capital than many of its competitors in the securities industry |
| In the event of a market downturn, the Company’s business could be adversely affected in many ways |
| The Company’s revenue is likely to decline in such circumstances and, if the Company is unable to reduce expenses at the same pace, its profit margins would erode |
| 18 The Company’s risk management policies and procedures may leave it exposed to unidentified risks or an unanticipated level of risk |
| The policies and procedures the Company employs to identify, monitor and manage risks may not be fully effective |
| Some methods of risk management are based on the use of observed historical market behavior |
| As a result, these methods may not predict future risk exposures, which could be significantly greater than the historical measures indicate |
| Other risk management methods depend on evaluation of information regarding markets, clients or other matters that are publicly available or otherwise accessible by the Company |
| Management of operational, legal and regulatory risk requires, among other things, policies and procedures to properly record and verify a large number of transactions and events |
| The Company can not give assurances that its policies and procedures will effectively and accurately record and verify this information |
| The Company seeks to monitor and control its risk exposure through a variety of separate but complementary financial, credit, operational and legal reporting systems |
| The Company believes that it effectively evaluates and manages the market, credit and other risks to which it is exposed |
| Nonetheless, the effectiveness of the Company’s ability to manage risk exposure can never be completely or accurately predicted or fully assured |
| For example, unexpectedly large or rapid movements or disruptions in one or more markets or other unforeseen developments can have a material adverse effect on the Company’s financial statements |
| The consequences of these developments can include losses due to adverse changes in securities values, decreases in the liquidity of trading positions, higher volatility in earnings, increases in the Company’s credit risk to customers as well as to third parties and increases in general systemic risk |
| Credit risk exposes the Company to losses caused by financial or other problems experienced by third parties |
| The Company is exposed to the risk that third parties that owe it money, securities or other assets will not perform their obligations |
| These parties include: · trading counterparties; · customers; · clearing agents; · exchanges; · clearing houses; and · other financial intermediaries as well as issuers whose securities we hold |
| These parties may default on their obligations owed to the Company due to bankruptcy, lack of liquidity, operational failure or other reasons |
| This risk may arise, for example, from: · holding securities of third parties; · executing securities trades that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, exchanges, clearing houses or other financial intermediaries; and · extending credit to clients through bridge or margin loans or other arrangements |
| Significant failures by third parties to perform their obligations owed to the Company could adversely affect its revenue and perhaps its ability to borrow in the credit markets |
| 19 Intense competition from existing and new entities may adversely affect the Company’s revenue and profitability |
| The securities industry is rapidly evolving, intensely competitive and has few barriers to entry |
| The Company expects competition to continue and intensify in the future |
| Many of the Company’s competitors have significantly greater financial, technical, marketing and other resources than the Company does |
| Some of the Company’s competitors also offer a wider range of services and financial products than the Company does and have greater name recognition and a larger client base |
| These competitors may be able to respond more quickly to new or changing opportunities, technologies and client requirements |
| They may also be able to undertake more extensive promotional activities, offer more attractive terms to clients, and adopt more aggressive pricing policies |
| The Company may not be able to compete effectively with current or future competitors and competitive pressures faced by it may harm its business |
| The precautions the Company takes to prevent and detect employee misconduct may not be effective and it could be exposed to unknown and unmanaged risks or losses |
| The Company runs the risk that employee misconduct could occur |
| Misconduct by employees could include: · employees binding us to transactions that exceed authorized limits or present unacceptable risks to the Company; · employees hiding unauthorized or unsuccessful activities from the Company; or · the improper use of confidential information |
| These types of misconduct could result in unknown and unmanaged risks or losses to the Company including regulatory sanctions and serious harm to its reputation |
| The precautions the Company takes to prevent and detect these activities may not be effective |
| If employee misconduct does occur, the Company’s business operations could be materially adversely affected |
| Failure to comply with net capital requirements could subject the Company to suspension or revocation by the SEC or suspension or expulsion by the NASD and the NYSE Oppenheimer and Freedom are subject to the SEC’s net capital rule which requires the maintenance of minimum net capital |
| Oppenheimer computes its net capital requirements under the alternative method provided for in the Rule which requires that Oppenheimer maintain net capital equal to two percent of aggregate customer related debit items, as defined in SEC Rule 15c3-1 |
| At December 31, 2005, Oppenheimer had net capital of dlra172cmam780cmam000, which was dlra144cmam904cmam000 in excess of the dlra27cmam876cmam000 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 dlra250cmam000 or 6 2/3prca of aggregate indebtedness, as defined |
| At December 31, 2005, Freedom had net capital of dlra7cmam005cmam000, which was dlra6cmam755cmam000 in excess of the dlra250cmam000 required to be maintained at that date |
| The net capital rule is designed to measure the general financial integrity and liquidity of a 20 broker-dealer |
| In computing net capital, various adjustments are made to net worth which exclude assets not readily convertible into cash |
| Additionally, the regulations require that certain assets, such as a broker-dealer’s position in securities, be valued in a conservative manner so as to avoid over-inflation of the broker-dealer’s net capital |
| The net capital rule requires that a broker-dealer maintain a certain minimum level of net capital |
| The particular levels vary in application depending upon the nature of the activity undertaken by a firm |
| Compliance with the net capital rule limits those operations of broker-dealers which require the intensive use of their capital, such as underwriting commitments and principal trading activities |
| The rule also limits the ability of securities firms to pay dividends or make payments on certain indebtedness such as subordinated debt as it matures |
| A significant operati ng loss or any charge against net capital could adversely affect the ability of a broker-dealer to expand or, depending on the magnitude of the loss or charge, maintain its then present level of business |
| The NASD and the NYSE may enter the offices of a broker-dealer at any time, without notice, and calculate the firm’s net capital |
| If the calculation reveals a deficiency in net capital, the NYSE or NASD may immediately restrict or suspend certain or all of the activities of a broker-dealer, including its ability to make markets |
| Risk of losses associated with securities laws violations and litigation |
| Many aspects of the Company’s business involve substantial risks of liability |
| An underwriter is exposed to substantial liability under federal and state securities laws, other federal and state laws, and court decisions, including decisions with respect to underwriters’ liability and limitations on indemnification of underwriters by issuers |
| For example, a firm that acts as an underwriter may be held liable for material misstatements or omissions of fact in a prospectus used in connection with the securities being offered or for statements made by its securities analysts or other personnel |
| In recent years, there has been an increasing incidence of litigation involving the securities industry, including class actions that seek substantial damages |
| The Company’s underwriting activities will usually involve offerings of the securities of smaller companies, which often involve a higher degree of risk and are more volatile than the securities of more established companies |
| In comparison with more established companies, smaller companies are also more likely to be the subject of securities class actions, to carry directors and officers liability insurance policies with lower limits or not at all, and to become insolvent |
| Each of these factors increases the likelihood that an underwriter may be required to contribute to an adverse judgment or settlement of a securities lawsuit |
| In the normal course of business, the Operating Subsidiaries have been and continue to be the subject of numerous civil actions and arbitrations arising out of customer complaints relating to our activities as a broker-dealer, as an employer and as a result of other business activities |
| In general, cases may involve various allegations that employees mishandled customer accounts |
| The Company believes that, based on our historical experience and the reserves established by the Company, the resolution of the claims presently pending will not have a material adverse effect on the Company’s financial condition |
| However, although the Company typically reserves an amount it believes will be sufficient to cover any damages assessed against it, the Company has in the past been assessed damages that exceeded its reserves |
| If the Company misjudged the amount of damages that may be assessed against it from pending or 21 threatened claims, or if the Company is unable to adequately estimate the amount of damages that will be assessed against it from claims that arise in the future and reserve accordingly, its financial statements may be materially adversely affected |
| The Company’s information systems may experience an interruption or breach in security The Company relies heavily on communications and information systems to conduct its business |
| Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company’s customer relationship management, general ledger, and other systems |
| While the Company has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed |
| The occurrence of any failures, interruptions or security breaches of the Company’s information systems could damage the Company’s reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose the Company to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company’s financial condition and results of operations |
| The Company continually encounters technological change The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services |
| The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs |
| The Company’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Company’s operations |
| Many of the Company’s competitors have substantially greater resources to invest in technological improvements |
| The Company may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers |
| Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on the Company’s business and, in turn, the Company’s financial condition and results of operations |
| Risks associated with the Company’s stock The Company’s stock price can be volatile Stock price volatility may make it difficult for an investor to resell the Company’s Class A non-voting shares (the “Class A Shares”) when wanted and at prices deemed attractive |
| The Company’s stock price can fluctuate significantly in response to a variety of factors including, among other things: 22 · Actual or anticipated variations in quarterly results of operations; · Recommendations by securities analysts; · Operating and stock price performance of other companies that investors deem comparable to the Company; · News reports relating to trends, concerns and other issues in the financial services industry; · Perceptions in the marketplace regarding the Company and/or its competitors; · New technology used, or services offered, by competitors; · Significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Company or its competitors; · Failure to integrate acquisitions or realize anticipated benefits from acquisitions; and · The occurrence of any of the other events described in these Risk Factors |
| General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause the Company’s stock price to decrease regardless of operating results |
| The Trading Volume In The Company’s Class A Shares Is Less Than That of Larger Financial Services Companies Although the Company’s Class A Shares are listed for trading on the NYSE and the Toronto Stock Exchange (the “TSX”), the trading volume in its Class A Shares is less than that of larger financial services companies |
| A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of the Company’s Class A Shares at any given time |
| This presence depends on the individual decisions of investors and general economic and market conditions over which the Company has no control |
| Given the lower trading volume of the Company’s Class A Shares, significant sales of the Company’s Class A Shares, or the expectation of these sales, could cause the Company’s stock price to fall |
| The Company issues two classes of stock The Company issues two classes of stock, Class A Shares and Class B voting shares |
| At December 31, 2005, there were 99cmam680 Class B voting shares outstanding compared to 12cmam496cmam141 Class A Shares |
| The voting power associated with the Class B voting shares will be effectively able to exercise control over all matters requiring stockholder approval, including the election of all directors and approval of significant corporate transactions, and other matters affecting the Company |
| This voting power may have the effect of delaying or preventing a change in control of the Company |
| The controlling shareholder(s) may have potential conflicts of interest with other shareholders |
| See Item 4, “Submission of Matters to a Vote of Security Holders” |
| 23 Possible additional issuances will cause dilution At December 31, 2005, the Company had 12cmam496cmam141 Class A Shares outstanding and options to purchase a total of 1cmam775cmam641 Class A Shares |
| The Company is further authorized to issue up to 8cmam694cmam711 Class A Shares under compensation plans and pursuant to the exchange terms of outstanding debentures, for which shareholder approval has already been obtained |
| If the Company issues additional shares, its other shareholders may find their holdings drastically diluted, which if it occurs, means that they will own a smaller percentage of the Company |