Oppenheimer Holdings Inc. Annual Report 2008
Oppenheimer Holdings Inc. Annual Report 2008 Company Overview
Oppenheimer, through its principal subsidiaries,
Oppenheimer & Co. Inc. (a U.S. broker-dealer)
and Oppenheimer Asset Management Inc., offers
a wide range of investment banking, securities,
investment management and wealth management
services from 86 offices in 21 states and through local
broker-dealers in four foreign jurisdictions. OPY Credit
Corp. offers syndication as well as trading of issued corporate
loans. Oppenheimer employs over 3,300 people. Oppenheimer offers
trust and estate services through Oppenheimer Trust Company. Evanston
Financial Corporation is engaged in mortgage brokerage and servicing.
In addition, through its subsidiary, Freedom Investments, Inc. and the
BUYandHOLD division of Freedom, Oppenheimer offers online discount
brokerage and dollar-based investing services. Financial Highlights
(In thousands of U.S. dollars except per share amounts)
2008 2007 2006 2005 2004
Gross Revenue $920,070 $914,397 $800,823 $679,746 $655,140
Profit Before Income Taxes $(36,043) $127,394 $80,450 $41,689 $35,908
Net Profit $(20,770) $75,367 $44,577 $22,916 $21,077
Basic Earnings Per Share $(1.57) $5.70 $3.50 $1.76 $1.58
Total Assets $1,529,584 $2,138,241 $2,160,090 $2,184,467 $1,806,199
Shareholders’ Equity $425,726 $443,980 $359,041 $308,123 $306,883
Book Value Per Share $32.75 $33.22 $27.76 $24.46 $22.91
Total Shares Outstanding 12,999 13,366 12,934 12,596 13,397
Number of Employees 3,399 2,928 2,993 2,969 2,854
Gross Revenue Net Profit Shareholders’ Equity Book Value Per Share (US$ thousands) (US$ thousands) (US$ thousands) (US$) 950,000 80,000 450,000 35 850,000 70,000 400,000 30 750,000 60,000 350,000 650,000 50,000 300,000 25 550,000 40,000 250,000 20 450,000 30,000 200,000 350,000 20,000 15 150,000 250,000 10,000 10 100,000 150,000 0 5 50,000 -10,000 50,000 0 -20,000 0 0 9900 01 02 03 04 05 06 07 08 990700 01 02 03 04 05 06 08 9900 01 02 03 04 05 06 07 08 99 00 01 02 03 04 05 06 07 08
Assets Under Client Assets Financial Advisors Branch Offices Management (US$ billions) (US$ billions) 18 70 2400 100 16 90 60 2000 14 80 50 70 12 1600 60 10 40 1200 50 8 30 40 6 800 20 30 4 20 10 400 2 10 0 0 0 0 99 00 01 02 03 04 05 06 07 08 9900 01 02 03 04 05 06 07 08 990700010203040506 08 9900 01 02 03 04 05 06 07 08
1 Dear Fellow Shareholders
In last year’s report, I said, “It seems clear that 2008 will be extremely challenging… and the costs associated with integration and the current capital markets environment will lead to significant earnings challenges in the months ahead.” That was clearly an understatement.
It has been a very long time since our country worth noting that our balance sheet did not has faced the kind of economic turmoil that and does not contain toxic assets that may re- we have recently witnessed. It is difficult to quire write-downs. We have never used lever- predict how long or severe the slowdown in age to increase shareholder returns. Equally the global economy will be. The financial important, our cost structure in 2009 will be crisis as yet shows no signs of abating, significantly improved, permitting us to reach although there are glimmers of hope in the profitability in the challenging times ahead. markets as I write this letter. During 2008, the Company produced In the year just ended, we saw stock market revenues of $920 million, an increase of averages decline 45 percent, even though 1 percent from $914.4 million in the prior equities did relatively better than the credit year. Our net loss was $20.8 million, as com- markets. The mere suggestion that in a single pared to a profit of $75.4 million earned in year the securities industry could witness the 2007. The loss per share was $1.57 compared failure of Bear Stearns and Lehman, Merrill to net profit of $5.70 per share ($5.57 fully Lynch and Wachovia forced to merge, and diluted) in the prior year. At December 31, Morgan Stanley and Goldman Sachs convert- 2008, the Company had a total of 12,999,145 ing to commercial banks in order to fund their shares outstanding. businesses would have been considered Results for the year reflect both market con- impossible. ditions and the acquisition of certain Capital Financial dislocation is likely to persist for Markets Businesses from Canadian Imperial some time to come. The bear market has Bank of Commerce (CIBC) on January 14, taught the financial community some expen- 2008. The addition of the acquired businesses sive but valuable lessons about leverage and led to increased commission revenue but risk that will not be soon forgotten. Current investment banking revenues were extremely market conditions are having considerable disappointing. Market conditions led to lower impact on the minds of investors and con- levels of fee-based revenues and to no signif- sumers, resulting in significant levels of risk icant performance fees from hedge funds. aversion, and a desire to “stay close to shore” Compensation costs to employees grew in everything they do. This will lead to a significantly both as related to revenue as particularly slow recovery, but a recovery will well as on an absolute basis as a result of begin as a result of massive infusions of commitments made in connection with our liquidity by governments around the world. acquisition of the CIBC Capital Markets Businesses. Other acquisition-related costs Our firm has certainly not been immune to were paid to CIBC and other vendors includ- these conditions. However, in this challenging ing transition support payments and increased environment, I am confident that Oppen- expenditures for technology. heimer’s fundamental strengths will provide the foundation we need to weather the We repaid $35.7 million on our senior financial storm and improve our market secured credit note, bringing the balance to position. We are a sound company with a $47.7 million at year-end. However, as a part strong balance sheet and a solid business. It is of the Capital Markets Businesses acquisition,
2 Oppenheimer borrowed $100 million through • Our investment banking business declined Capital Purchase Program, and Oppenheimer a subordinated loan from CIBC to support the substantially for the year, despite its increased Holdings is exploring becoming a U.S. acquired businesses. Both of these loans were size and scope. The revenues for investment Corporation and a U.S. Bank Holding Com- renegotiated prior to year-end due to the banking increased 2 percent year to year pany in order to help resolve the ARS disappointing financial results posted by the but on a pro forma basis they declined problem for our clients. Company resulting in increased interest rates 68 percent. We firmly believe that our financial and being paid on each of these facilities going Moving forward, we will take a pragmatic operational strength gives us the ability to forward, as well as other financial conditions. approach to new investments across our make the investments required to grow our We believe, however, that issues surrounding company, pressing ahead in those areas business and gain market share while main- our debt have now been put to rest. offering the most promise for long-term taining a strong balance sheet. In this As discussed above, the acquisition of growth. Given the environment, we will likely challenging financial environment, we are the Capital Markets Businesses, although see some interesting opportunities for maintaining financial discipline and remain presenting unique opportunities for investment and expansion. Rest assured that focused on our core franchises and longer Oppenheimer over the longer term, posed we will investigate them carefully and no term growth opportunities as we deal with significant financial and operating issues for matter how inexpensive, attractive or com- the demands of the present. Powerful the year just ended. We reduced headcount pelling they may seem, we will move demographic trends should benefit capital in the Capital Markets business by 140 and forward only with great care. Some of our markets and capital flows over time. addressed costs throughout this business to greatest opportunities are in the possibilities However, the financial markets must begin to better position the Company going forward. thrown open by the turmoil in our industry. repair themselves for growth to take hold in We believe that as a result of these changes, We are in a unique position to attract the economy. as well as reduced contractual commitments, experienced professionals across the entire A key factor to our success will be the the Capital Markets business will spend $80 spectrum of our business during this period. commitment, passion and integrity of our million less in 2009 compared to 2008. Amidst the turmoil of the past year, the most employees. We provide our employees with Our traditional businesses performed well in significant problem that emerged for us was the opportunity to pursue their careers in an 2008, although at a reduced level compared in the area of auction rate securities (ARS). entrepreneurial environment with significant to the prior year: This firm and the entire securities industry resources at hand. By staying close to our participated in the auction rate market for clients and providing them with guidance, • Our firm added 165 experienced Financial decades. The failure of the ARS market in service and solutions, we continue to Advisors and two new branch offices. February 2008 wasn’t anticipated as it was strengthen our franchise for the future while • Client assets in products that generate fee caused by the extraordinary market disloca- building a strong base for the present. While income ended the year at $12.5 billion, down tion of this period. We have worked with the way ahead may be difficult, we are 28 percent from 2007 as a result of the gen- regulators and financing sources to try to confident in our ability to succeed now and in eral market decline. We were pleased that we find a means for our clients to find liquidity the future. We thank you, our shareholders, opened over 6,500 new accounts with sig- from their ARS holdings, so far without suc- for your continued support. nificant new assets in 2008. Client assets un- cess. We are also taking extraordinary der administration were $48.1 billion, down actions to facilitate a process that would pro- 23 percent largely due to market erosion. vide liquidity to ARS including having Oppenheimer Trust Company file an amend- • Oppenheimer Trust Company’s account ment to its charter to become a commercial base continued to grow, although the value bank and an application to the FDIC for of assets held declined as a result of market deposit insurance. Oppenheimer Trust and conditions leaving assets at $900 million Albert G. Lowenthal Oppenheimer Holdings have filed applica- Chairman of the Board at year-end. tions to participate in the U.S. Treasury Oppenheimer Holdings Inc.
3 Private Client Services Objective Advice, Comprehensive Solutions
Oppenheimer’s Private Client Group provides personalized service and comprehensive solutions designed to help our clients manage their financial lives. Given the unprecedented market volatility in 2008, and possibly more than at any other time in our history, our clients expected and received extensive support and careful attention to their needs.
By reaching out and communicating frequently, our Financial Advisors were able to reassure our clients that a long-term view of their financial strategy, one that includes professional advice on asset allocation and diversification, is a sound approach to the current and future environment. It is this day-to-day ability of our Financial Advisors to connect with clients that continues to strengthen our business.
With market turbulence comes change in the securities industry. 2008 saw significant move- ment of financial advisors as both clients and advisors sought stable firms with strong balance sheets. Oppenheimer continued its disciplined approach to growth and was able to attract 165 high-quality Financial Advisors to the firm. While new to Oppenheimer, these Financial Advisors have a track record of impressive production levels and solid industry experience. Their move to Oppenheimer is supported not only by our open architecture platform, flexibility in approach and access to quick decisions, but by working relationships with our Capital Markets professionals to deliver even greater client value.
Oppenheimer Trust Company continued to see a significant volume of new client opportuni- ties from an expanding number of Financial Advisors. In 2008, client accounts grew 22 percent. Assets from new accounts totaled over $162,200,000, while assets overall declined due to the broad market declines and liquidity use by a number of balance sheet cash management clients.
Oppenheimer Financial Advisors
worked closely with clients to provide
insight and information they required
to guide them through the difficult
market environment.
4 We expanded our planning services with the Oppenheimer Personal
Financial Plan. This tool allows our Financial Advisors to conduct
an in-depth assessment of a client’s financial picture, which is key
to positioning client assets appropriately for the future.
The market environment shift to a safe harbor approach ment plans. 2008 was a challenging year across most retire- allows the Trust Company to provide the comfort and secu- ment products. Custodial account assets declined due to rity many clients are seeking, especially with regard to wealth market action but the number of client accounts custodied transfer and estate planning. at Oppenheimer increased. We are maintaining our focus on the institutional consulting business, while continuing to Oppenheimer Life Agency, Ltd. continued to focus on our work on rolling out products and services designed to clients’ long-term financial goals, which include asset pro- increase our IRA Rollover market share. tection and preservation as well as efficient wealth transfer. While the difficult market conditions of 2008 affected almost Oppenheimer’s Executive Services Group provides advice every investment vehicle, the guaranteed income feature of to clients seeking sophisticated solutions to the challenges annuity products and the death benefit protection provided that come from participation in corporate equity compensa- to heirs were stabilizing factors for investors. tion programs and to maximize the after-tax impact on family and business wealth. While last year was a difficult We are continuing to expand and enhance our product one for these strategies, as the downturn in the stock market offerings to address the three primary risks retirees face: the dampened investors’ appetites for liquidations and hedging, market, inflation and outliving their savings. Our consulta- we did see a significant increase in activity assisting publicly tive approach to working with clients includes sophisticated traded companies with stock buy-back plans. In many planning techniques and coordination among our annuity instances this was done by incorporating a 10b5-1 trading team, strategic partners and Financial Advisors. In addition, plan. While the adoption of new 10b5-1 sales plans we are strengthening our programs for corporate and small remained flat for 2008, purchase plans for both corporations business clients, such as corporate- and bank-owned life and individuals increased. We continue to focus on develop- insurance and group employee benefit planning. ing partnerships with our Financial Advisors as they realize a Retirement Services continues to focus on consulting with greater need for executive services with their clients. individuals and employers to establish and enhance retire-
5 Asset Management Focused on Long-Term Needs and Goals
Oppenheimer Asset Management (OAM) continues to show solid performance supporting the demand for long-term investment advice and strategies. In 2008, OAM saw assets under advisement decrease from $17.5 billion in 2007 to $12.5 billion, primarily attributable to a year of declining markets. However, new account openings and the positive impact of asset allocation on client financial strategies helped ameliorate the decrease in client assets and make them less severe than the market’s overall decline.
The Consulting Group continued to attract new client assets to its advisory programs through- out the year. The Group’s commitment to rigorous manager research, an intense due diligence process and constant oversight provided the catalyst for active rebalancing and other manager changes. These capabilities are vital to advising Financial Advisors and clients on long- term investment strategies, especially during periods of significant market volatility.
In 2008, we expanded our Unified Managed Account (UMA) pro- gram to include a broad universe of more than 1,500 mutual funds and we increased the number of separate account strategies and exchange-traded funds available in the program. Adding new asset allocation choices that include non-traditional mutual funds further diversified the UMA discretionary portfolio offerings.
We also enhanced the Portfolio Advisory Service (PAS) with the addition of two “absolute return” portfolios. These non-traditional mutual funds contribute to diversification, which can help reduce downside market risk. Our investment in technology for the PAS platform increased our operational and trading capacity and also provided more robust quarterly reporting to our foreign clients through offshore PAS.
The Alternative Investments Group (AIG) raised almost $400 million in 2008, aided by the addition of new funds to both the private equity and hedge fund platforms. Early in 2008, AIG launched its third private equity fund of the past three years, which is focused on the global market for natural resource and energy-related assets.
6 Our research team provides perspective and opinion on trends,
capital flows and sector- and company-specific insights to help our
businesses and clients make informed investment decisions.
AIG added further flexibility and options to the Hedge Fund tional emphasis on finding compelling investment opportuni- Consulting platform with the addition of two funds. Addi- ties resulting from the current dislocation in financial markets. tionally, our global macro and trend-following funds finished Discretionary Portfolio Management, through the OMEGA the year with positive returns in excess of 20 percent due to investment advisory program and Fahnestock Asset Manage- the unpredictability of the markets. Offerings from AIG con- ment, added significant, experienced investment professionals tinue to show the diversification benefits of alternative to our eligible advisors. These new Financial Advisors — investments in client portfolios. attracted to Oppenheimer’s history of investment advisory We are mindful of the need for full transparency in all that we expertise and diversity of programs and services — have intro- do, and we are beginning a process of periodic notifications duced a substantial number of client relationships to the firm. to advise clients about the professional organizations that Oppenheimer Investment Advisors’ (OIA) fixed income monitor custody and performance of all funds permitted on strategies continued to attract client assets during the volatile our platform. markets of 2008. The conservative nature of the Taxable and The Private Equity and Special Investments Group contin- Tax-Exempt portfolios provided clients with much needed ued to provide a high level of financial advisory services and downside protection, along with transparency of holdings private equity market advice to our Financial Advisors and that clients seek. Asset growth in OIA’s Core, Core Plus and their wealth management clients. Notably, in 2008, we led a High Yield portfolios was positively impacted as clients sought group of Oppenheimer clients in the formation of Aquus fixed income investments to increase portfolio exposure to Energy. Aquus has already acquired two solar energy inte- credit investments in the wake of credit easing, and in antic- gration businesses and is positioned to become the leading ipation of credit market recovery. Our OIA portfolio managers solar energy integrator through a combination of organic continue to work closely with Oppenheimer’s Financial growth and acquisitions. Despite turmoil in the real estate Advisors to recommend portfolio solutions for our clients’ markets, our commercial real estate funds, primarily office asset allocation strategies. buildings managed by Meritage Properties, have maintained Oppenheimer Investment Management (OIM) reached its a disciplined approach to property acquisitions and we an- three-year milestone in 2008, an important measure for insti- ticipate launching a third Meritage fund in 2009. Oppen- tutional investors and their consultants. OIM continued to heimer Activist Partners, our unique vehicle to invest in the expand institutional consulting firm relationships and advance activist asset class, saw its performance suffer during the business development opportunities. With a coordinated mar- second half of 2008 as overall financial market disruptions keting plan in the institutional marketplace and expanded part- reduced the value of most equities and limited the tools nering with Oppenheimer Financial Advisors, OIM’s assets under available for activists to achieve gains. In 2009, we will management reached nearly $1 billion at the end of the year. continue to expand our product offerings and will place addi-
7 Capital Markets Comprehensive Support During Complex Times
Early in 2008, Oppenheimer closed on the acquisition of a major portion of CIBC’s U.S. Capital Markets business. Having effectively integrated our investment banking, research and trading capabilities, the resulting Oppenheimer Capital Markets Group is uniquely positioned to serve the increasingly complex needs of our clients.
Equity Capital Markets Delivering Unique Insight and Advice
Oppenheimer’s Equity Research Department provided continuous coverage and valuable insights to individual and institutional clients with 40 senior research analysts covering over 700 companies in eight sectors: Healthcare, Technology, Media & Telecom, Consumer & Business Services, Energy, Financial Services, Industrial Growth and China. During the year, Oppenheimer’s research product, among the largest and broadest of its peers, had the highest percentage of correct stock picks by its analysts as measured by Bloomberg. Our analysts were recognized as key thought leaders, in particular in our coverage and anticipation of the meltdown in financial stocks and for insight into the energy markets.
Equity Sales and Trading generated higher commission revenues reflecting significant growth in market share. We were able to quickly consolidate coverage teams in research sales and sales trading following the close of the CIBC Capital Markets transaction and were well positioned to take advantage of the opportunity created by the departure of several competitor firms. Extreme volatility provided opportunity for our sales team to leverage the stock-picking success of our research staff and for our trading desk to provide a high level of execution service and liquidity to clients. We added an experienced Options team and focused on coordinating our Equity, ETF, and Convertible Bond Sales and Trading teams to provide exceptional service. A well- coordinated approach to information flow between Sales, Trading and Research continues to add value and we will be working closely with our UK office to grow our market share in Europe.
The number of companies covered
by our analysts has grown to over
700 since the acquisition of CIBC
World Markets Corp.’s U.S. Equity
Capital Markets business, helping
deliver broader insight to clients.
8 Key transactions completed by
the Investment Banking Group.
Investment Banking Helping Middle-Market Companies Grow
2008 was a historically challenging year across all of Investment Banking. During the year, the firm completed 31 public offerings and five private placements, raising approximately $4.1 billion in capital. Oppenheimer acted as bookrunner for six public offerings and lead agent on three private placements, including an $83.5 million follow-on equity offering for Constant Contact, Neutral Tandem Inc.’s $81 million follow-on offering, and ShengdaTech Inc.’s $115 million convertible offering. The firm also acted as a strategic financial advisor in 31 mergers and acquisitions and other advisory engagements with a transaction value of $6.5 billion in 2008.
We are focused on being a leading middle-market investment bank with dedicated industry practice groups in Consumer & Business Services, Energy, Financial Institutions, Health- care, Industrial Growth & Services, Shipping, Technology, Telecom and Media. During the year, we were able to take advantage of the market turmoil by enhancing our capabilities. The firm added an experienced Restructuring Group to provide advice to companies with challenges in a declining economy and over-leveraged financial structures. Several seasoned banking profes- sionals also joined the firm. Our industry groups, together with our award-winning Mergers & Acquisitions Group and dedicated Financial Sponsors Calling Group, worked closely with clients throughout the year to provide greater value and insight. Looking ahead, we remain focused on staying in front of our clients and believe that we are extremely well positioned to gain market share when the capital markets begin to normalize and transaction activity resumes.
9 Debt Capital Markets Providing Value in a Difficult Environment
2008 was a record year for the Oppenheimer taxable fixed income sales and trading business. Total revenues for the year were over $90 million, an increase of over 50 percent from the prior year. The growth was primarily attributed to increased transaction activity with institutional accounts throughout the United States, Europe and Latin America. The current market environment has made available an unprecedented number of skilled traders and salespeople who have strong relationships with clients. In addition to these exceptional new hires, we rolled out new technolo- gies and new products and opened in new markets. We introduced enhanced risk management systems, real-time order entry systems, and comprehensive multicurrency capabilities.
High yield and leveraged loan sales and trading capabilities were added as a result of the CIBC acquisition and turned out to be timely additions to the firm. The rapid de-levering and increased liquidity needs of the buy side created significant trading opportunities, despite the lack of primary issuance. The Loan Sales and Trading Desk traded approximately $1.3 billion of bank loans with over 135 counterparties, generating profitability for the firm without taking any meaningful financial risk. Our presence in London now includes a high grade fixed income sales and trading business that is well positioned to expand Oppenheimer’s presence in Europe.
The Leveraged Finance Group completed its first underwritten trans- action under the Oppenheimer name when it acted as Syndication Agent for a $400 million credit facility for Amedisys, Inc., the proceeds of which were used to fund an acquisition. Acting as financial advisor on behalf of our clients also has been a primary focus of the Leveraged Finance Group. Assignments have included advising on loan amendments and modifications, recapitalizations ahead of impending debt maturities, Throughout the year, debt repurchases and tender offers for our clients’ loans and debt securities, and clients’ accumu-
Oppenheimer was uniquely lation of distressed loans and debt securities of non-affiliated companies. By providing these services, we play an integral part in the financing and capital structure decisions our clients make. positioned to hire exceptional
talent and assist clients We have been able to seize a unique growth opportunity amidst the turmoil facing our largest
as they navigated the world’s competitors without increasing the amount of risk capital used in the business and we remain optimistic that Oppenheimer can continue to expand its market presence. most severe financial crisis
in a generation.
10 Significant financings by the Municipal Capital Markets Public Finance Providing Market Access and Expertise Group in 2008
The Oppenheimer Municipal Capital Markets Group continued to offer client-oriented $205,000,000 City of Kansas City, Missouri solutions to the capital funding needs of municipalities and tax-exempt issuers throughout the Special Obligation Refunding Bonds United States. Our experienced professionals assisted public sector clients with the means to (Sprint Arena Project) access markets during one of the most tumultuous periods in the last fifty years for financial $60,050,000 services. With the demise of the bond insurers and the deterioration of the commercial Massachusetts Health and Education Facilities Authority Hospital Revenue banking sector, Oppenheimer’s ability to distribute bonds through its substantial retail sales Bonds (Quincy Medical Center) network provided ready access to capital for our issuer clients. $162,500,000 Missouri Health and Education As participants in more than $3 billion in managed and co-managed municipal underwritings, Facilities Authority Health Facilities Oppenheimer continued to grow its municipal finance business at a time when many other Revenue Bonds (Cox Health System) firms were reducing their participation in the sector. The firm offers a full complement of $19,895,000 services, including underwriting, financial advisory, derivative advisory and arbitrage rebate City of Galveston, Texas Tax and Revenue Certificates services for finance projects that include schools, colleges, healthcare systems, water and sewer of Obligation systems, highways, arenas, solid waste disposal facilities and economic development projects. $79,780,000 Michigan Strategic Fund Projects of particular note in 2008 included a $60 million financing for Quincy Medical Limited Obligation Revenue Bonds Center in Quincy, Massachusetts; a $30 million financing for the Ohio Air Quality Development $39,370,000 Authority; $50 million in various Bank Qualified Kansas School Bonds; and $205 million Kansas City of North Kansas City, Missouri City, Missouri Special Obligation Refunding Bonds. The transition from bonds underwritten Variable Rate Demand Hospital Revenue Bonds with municipal bond insurance and credit enhancement to self-supported bonds will provide a great opportunity for Oppenheimer’s experienced public finance and skilled bond $65,085,000 Rhode Island Housing & Mortgage distribution professionals. Finance Corporation Homeownership Opportunity Bonds Serving public finance clients from six regional offices located throughout the country, and providing bond distribution from its large national branch office system, Oppenheimer is well $30,000,000 State of Ohio Air Quality Development positioned to expand its presence in the municipal market. The need for funding of infrastruc- Authority Solid Waste Disposal Facility Revenue Bonds ture and capital expansion is greater than ever, and with the capacity to serve a wide range of borrowers, Oppenheimer is committed to making the necessary resources available to our long- term and new clients.
11 Management’s Discussion and Analysis of Financial Condition and Results of Operations All dollar amounts expressed herein are in U.S. dollars.
Oppenheimer Holdings Inc. Oppenheimer Holdings Inc. and subsidiaries’ (the “Company”) consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of 2008 Financial Review America. The following discussion should be read in conjunction with the consolidated financial state - ments and notes thereto which appear elsewhere in this annual report. The Company engages in a broad range of activities in the securities industry, including retail securi - ties brokerage, institutional sales and trading, investment banking (both corporate and public), research, market-making, securities lending activities, trust services and investment advisory and asset management services. Its principal subsidiaries are Oppenheimer & Co. Inc. (“Oppenheimer”) and Oppenheimer Asset Management (“OAM”). As at December 31, 2008, the Company provided its services from 86 offices in 21 states located throughout the United States, offices in Tel Aviv, Israel, 12 Management’s Discussion and Hong Kong, China, and London, England and in two offices in Latin America through local broker- Analysis of Financial Condition dealers. Client assets entrusted to the Company as at December 31, 2008 totaled approximately and Results of Operations $48.1 billion. The Company provides investment advisory services through OAM and Oppenheimer Investment Management (“OIM”) and Oppenheimer’s Fahnestock Asset Management and OMEGA Group divisions. The Company provides trust services and products through Oppenheimer Trust 21 Quantitative and Qualitative Company. The Company provides discount brokerage services through Freedom Investments, Inc. Disclosures about Market Risk (“Freedom”) and through BUYandHOLD, a division of Freedom. Through OPY Credit Corp., the Com - pany offers syndication as well as trading of issued corporate loans. Evanston Financial Inc. 23 Management’s Report on Internal (“Evanston”) is engaged in mortgage brokerage and servicing. At December 31, 2008, client assets Control over Financial Reporting under management by the asset management groups totaled $12.5 billion, which includes approxi - mately $9.8 billion under the Company’s fee-based programs. At December 31, 2008, the Company employed 3,399 employees (3,332 full time and 67 part time), of whom approximately 2,390 were Report of Independent Registered registered personnel, including approximately 1,333 financial advisors. Public Accounting Firm Critical Accounting Estimates The Company’s accounting policies are essential to understanding and interpreting the financial results 24 Consolidated Balance Sheets as at reported in the consolidated financial statements. The significant accounting policies used in the December 31, 2008 and 2007 preparation of the Company’s consolidated financial statements are summarized in note 1 to those statements. Certain of those policies are considered to be particularly important to the presentation of 25 Consolidated Statements of the Company’s financial results because they require management to make difficult, complex or Operations for the three years subjective judgments, often as a result of matters that are inherently uncertain. The following is a ended December 31, 2008, discussion of these policies. 2007 and 2006 Financial Instruments and Fair Value
Consolidated Statements of Financial Instruments Securities owned and securities sold but not yet purchased, investments and derivative contracts are Comprehensive Income (Loss) for carried at fair value with changes in fair value recognized in earnings each period. The Company’s the three years ended December other financial instruments are generally short-term in nature or have variable interest rates and as 31, 2008, 2007 and 2006 such their carrying values approximate fair value, with the exception of notes receivable from employ - ees which are carried at cost . 26 Consolidated Statements of Financial Instruments Used for Asset and Liability Management Changes in Shareholders’ Equity for The Company utilizes interest rate swap agreements to manage interest rate risk of its variable rate Senior the three years ended December Secured Credit Note. These swaps have been designated as cash flow hedges under Statement of Finan - 31, 2008, 2007 and 2006 cial Accounting Standards No. 133, “ Accounting for Derivative Instruments and Hedging Activities ”. Changes in the fair value of the swap hedges are expected to be highly effective in offsetting changes in 27 Consolidated Statements of the interest payments due to changes in the 3-Month London Interbank Offering Rate (“LIBOR”). Cash Flows for the three years Fair Value Measurements ended December 31, 2008, 2007 Effective January 1, 2008, the Company adopted the provisions of Statement of Financial Accounting and 2006 Standards No. 157 (“SFAS 157”), “ Fair Value Measurements ”, which defines fair value, establishes a framework for measuring fair value, establishes a fair value measurement hierarchy, and expands fair 28 Notes to Consolidated Financial value measurement disclosures. Fair value, as defined by SFAS 157, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the Statements measurement date. The fair value hierarchy established by SFAS 157 prioritizes the inputs used in valua - tion techniques into the following three categories (highest to lowest priority): Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets; Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly; and Level 3: Unobservable inputs
12 | Oppenheimer Holdings Inc. The Company’s financial instruments are recorded at fair value and gener - on the part of an employee of the Company; the basis and validity of the ally are classified within level 1 or level 2 within the fair value hierarchy claim; previous results in similar cases; and legal precedents and case law as using quoted market prices or quotes from market makers or broker-deal - well as the timing of the resolution of such matters. Each legal and regula - ers. Financial instruments classified within level 1 are valued based on tory proceeding is reviewed with counsel in each accounting period and the quoted market prices in active markets and consist of U.S. government, reserve is adjusted as deemed appropriate by management. Any change in federal agency, and sovereign government obligations, corporate equities, the reserve amount is recorded in the results of that period. The assump - and certain money market instruments. Level 2 financial instruments prima - tions of management in determining the estimates of reserves may be rily consist of investment grade and high-yield corporate debt, convertible incorrect and the actual disposition of a legal or regulatory proceeding bonds, mortgage and asset-backed securities, municipal obligations, and could be greater or less than the reserve amount. certain money market instruments. Financial instruments classified as Level 2 are valued based on quoted prices for similar assets and liabilities in active Goodwill markets and quoted prices for identical or similar assets and liabilities in The Company determines the fair value of each of its reporting units and markets that are not active. Some financial instruments are classified within the fair value of the reporting unit’s goodwill under the provisions of SFAS Level 3 within the fair value hierarchy as observable pricing inputs are not No. 142, “ Goodwill and Other Intangible Assets ” (“SFAS 142”). Goodwill available due to limited market activity for the asset or liability. Such finan - arose upon the acquisitions of Oppenheimer, Old Michigan Corp., cial instruments include investments in hedge funds and private equity Josephthal & Co. Inc., Grand Charter Group Incorporated and the Oppen - funds where the Company is general partner, less-liquid private label mort - heimer Divisions (as defined below). The Company defines a reporting gage and asset-backed securities, and auction rate securities. A description unit as an operating segment. The Company’s goodwill resides in its Pri - of the valuation techniques applied and inputs used in measuring the fair vate Client Division (“PCD”). Goodwill of a reporting unit is subject to at value of the Company’s financial instruments is located in note 4 to the least an annual test for impairment to determine if the fair value of good - consolidated financial statements. will of a reporting unit is less than its estimated carrying amount. The Company derives the estimated carrying amount of its operating seg - Fair Value Option ments by estimating the amount of shareholders’ equity required to sup - The Company adopted the provisions of Statement of Financial Accounting port the activities of each operating segment. Standards No. 159 (“SFAS 159”), “ The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB State - SFAS 142 requires goodwill of a reporting unit to be tested for impair - ment No. 115 ”, effective January 1, 2008. SFAS 159 provides entities the ment between annual tests if an event occurs or circumstances change option to measure certain financial assets and financial liabilities at fair that would more likely than not reduce the fair value of a reporting unit value with changes in fair value recognized in earnings each period. SFAS below its carrying amount. In 2008, the financial services industry and the 159 permits the fair value option election on an instrument-by-instrument securities markets generally were materially and adversely affected by sig - basis at initial recognition of an asset or liability or upon an event that gives nificant declines in the values of nearly all financial asset classes and by a rise to a new basis of accounting for that instrument. The Company has significant lack of liquidity. The Company’s stock price, consistent with elected to apply the fair value option to its loan trading portfolio which stock prices in the broader financial services sector, declined significantly resides in the newly formed entity, OPY Credit Corp. Management has during this period of time. Beginning in June 2008, the Company’s mar - elected this treatment as it is consistent with the manner in which the busi - ket capitalization fell below recorded book value on a consistent basis ness is managed as well as the way that financial instruments in other parts which continued through the end of the year. Due to the significant dis - of the business are recorded. There were no loan positions held in the sec - count between the market capitalization and book value, the Company ondary loan trading portfolio during the year ended December 31, 2008. viewed this discount as a triggering event to performing an interim good - will impairment test under SFAS 142. As a result, the Company per - Loans and Allowances for Doubtful Accounts formed an impairment analysis between annual tests as of September 30, Customer receivables, primarily consisting of margin loans collateralized 2008 and also performed its annual test for goodwill impairment as of by customer-owned securities, are charged interest at rates similar to December 31, 2008. See note 15 to the consolidated financial statements other such loans made throughout the industry. Customer receivables are for the year ended December 31, 2008. stated net of allowance for doubtful accounts from customers. The Com - pany reviews large customer accounts that do not comply with the Com - Excess of fair value of assets acquired over cost arose from the acquisition pany’s margin requirements on a case-by-case basis to determine the of the New Capital Markets Business. If the earn-out from the acquisition likelihood of collection and records an allowance for doubtful accounts of the New Capital Markets Business (see note 18 to the consolidated following that process. For small customer accounts that do not comply financial statements for the year ended December 31, 2008 appearing in with the Company’s margin requirements, the allowance for doubtful Item 8.) exceeds $5.0 million in any of the five years from 2008 through accounts is generally recorded as the amount of unsecured or partially 2012, the excess will first reduce the excess of fair value of acquired assets secured receivables. over cost and second will create goodwill, as applicable.
The Company also makes loans or pays advances to financial advisors as Intangible Assets part of its hiring process. Reserves are established on these receivables if Intangible assets arose upon the acquisition, in January 2003, of the U.S. the financial advisor is no longer associated with the Company and the Private Client and Asset Management Divisions of CIBC World Markets Inc. receivable has not been promptly repaid or if it is determined that it is (the “Oppenheimer Divisions”) and are comprised of customer relation - probable the amount will not be collected. ships and trademarks and trade names. Customer relationships are carried Legal and Regulatory Reserves at $490,000 (which is net of accumulated amortization of $4.4 million) and are being amortized on a straight-line basis over 80 months com - The Company records reserves related to legal and regulatory proceedings mencing in January 2003. Trademarks and trade names, carried at $31.7 in accounts payable and other liabilities. The determination of the amounts million, which are not amortized, are subject to at least an annual test for of these reserves requires significant judgment on the part of management. impairment to determine if the fair value is less than their carrying amount. Management considers many factors including, but not limited to: the amount of the claim; specifically in the case of client litigation, the amount Intangible assets also arose from the acquisition of the New Capital Mar - of the loss in the client’s account and the possibility of wrongdoing, if any, kets Business in January 2008 and are comprised of customer relation -
Oppenheimer Holdings Inc . | 13 ships and a below market lease. Customer relationships are carried at and liabilities except for items that are recognized or disclosed at fair value $880,600 (which is net of accumulated amortization of $60,500) and are in the consolidated financial statements on a recurring basis (at least annu - being amortized on a straight-line basis over 180 months commencing in ally). As a result, the Company only partially adopted the provisions of SFAS January 2008. The below market lease is carried at $17.0 million (which is 157 on January 1, 2008. This partial adoption did not result in any transi - net of accumulated amortization of $4.3 million) and is being amortized tion adjustment to opening retained earnings. The full adoption of the pro - on a straight-line basis over 60 months commencing in January 2008. visions of SFAS 157 is not expected to have a material impact on the Company’s consolidated financial statements. See Note 4 to the consoli - Trademarks and trade names recorded as at December 31, 2008 have dated financial statements for the year ended December 31, 2008 appear - been tested for impairment and it has been determined that no impair - ing in Item 8 for further information on SFAS 157. ment has occurred. See note 15 to the consolidated financial statements for the year ended December 31, 2008. In February 2007, the FASB issued SFAS 159, “ The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Share-Based Compensation Plans Statement No. 115 ”, which permits entities to choose to measure many The Company estimates the fair value of share-based awards using the financial instruments and certain other items at fair value. SFAS 159 pro - Black-Scholes option-pricing model and applies to it a forfeiture rate vides entities with the option to mitigate volatility in reported earnings by based on historical experience. Key input assumptions used to estimate measuring related assets and liabilities differently without having to apply the fair value of share-based awards include the expected term and the complex hedge accounting provisions. In addition, SFAS 159 allows enti - expected volatility of the Company’s Class A Shares over the term of the ties to measure eligible items at fair value at specified election dates and award, the risk-free interest rate over the expected term, and the Com - to report unrealized gains and losses on items for which the fair value pany’s expected annual dividend yield. Estimates of fair value are not option has been elected in earnings. SFAS 159 is effective for financial intended to predict actual future events or the value ultimately realized by statements issued for fiscal years beginning after November 15, 2007, persons who receive share-based awards. and interim periods within those fiscal years with early adoption permit - ted provided that the entity also elects to apply the provisions of SFAS Income Taxes 157. The Company adopted the provisions of SFAS 159 for its loan trad - The Company accounts for income taxes in accordance with Statement ing portfolio effective January 1, 2008. The adoption of SFAS 159 did not of Financial Accounting Standards No. 109, “ Accounting for Income result in any transition adjustment to opening retained earnings. See note Taxes ”. Deferred income tax assets and liabilities arise from temporary 4 to the consolidated financial statements for the year ended December differences between the tax basis of an asset or liability and its 31, 2008 for more information on SFAS 159. reported amount in the consolidated financial statements. Deferred tax balances are determined by applying the enacted tax rates applicable On October 10, 2008, the FASB issued FASB Staff Position No. FAS 157-3 to the periods in which items will reverse. “Determining the Fair Value of a Financial Asset When the Market for That In June 2006, the FASB issued Interpretation 48, Accounting for Uncer - Asset Is Not Active ” (“FSP 157-3”). FSP 157-3 clarifies the application of tainty in Income Taxes, an interpretation of FASB Statement No. 109, SFAS 157 in a market that is not active and provides an example to illus - “Accounting for Income Taxes ” (“FIN 48”). FIN 48 clarifies the trate key considerations in determining the fair value of a financial asset accounting for uncertainty in income taxes recognized in a company’s when the market for that financial asset is not active. FSP 157-3 is effective financial statements and prescribes a recognition threshold and meas - October 10, 2008 which includes prior periods in which financial state - urement attribute for financial statement recognition and measure - ments have not been issued. The adoption of FSP 157-3 did not have a ment of a tax position taken or expected to be taken in a tax return. material impact on the Company’s consolidated financial statements. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Recently Issued In December 2007, the FASB issued SFAS No. 141(R), “ Business Combina - The Company adopted the provisions of FIN 48 on January 1, 2007 tions ” (“SFAS No. 141(R)”). SFAS No. 141(R) requires the acquiring entity which resulted in a cumulative adjustment to opening retained earnings in a business combination to recognize the full fair value of assets in the amount of $823,000. The Company has evaluated its tax posi - acquired and liabilities assumed in the transaction (whether a full or par - tions for the year ended December 31, 2008 and determined that it has tial acquisition); establishes the acquisition-date fair value as the measure - no uncertain tax positions requiring financial statement recognition as ment objective for all assets acquired and liabilities assumed; requires of December 31, 2008. See note 11 to the consolidated financial state - expensing of most transaction and restructuring costs; and requires the ments for the year ended December 31, 2008. acquirer to disclose to investors and other users all of the information needed to evaluate and understand the nature and financial effect of the New Accounting Pronouncements business combination. SFAS No. 141(R) applies to all transactions or other Recently Adopted events in which the Company obtains control of one or more businesses, In September 2006, the FASB issued SFAS 157, “Fair Value Measure - including those sometimes referred to as “true mergers” or “mergers of ments ”, which provides expanded information about the extent to which equals” and combinations achieved without the transfer of consideration, companies measure assets and liabilities at fair value, the information for example, by contract alone or through the lapse of minority veto used to measure fair value, and the effect of fair value measurements on rights. SFAS No. 141(R) applies prospectively to business combinations for earnings. SFAS 157 applies whenever other standards require (or permit) which the acquisition date is on or after December 1, 2009. assets or liabilities to be measured at fair value and does not expand the In February 2008, the FASB issued FSP FAS No. 140-3, “ Accounting for use of fair value in any new circumstances. In addition, SFAS 157 prohibits Transfers of Financial Assets and Repurchase Financing Transactions ” recognition of “block discounts” for large holdings of unrestricted finan - (“FSP No. 140-3”). FSP No. 140-3 requires an initial transfer of a financial cial instruments where quoted prices are readily and regularly available in asset and a repurchase financing that was entered into contemporane - an active market. SFAS 157 is effective for financial statements issued for ously or in contemplation of the initial transfer to be evaluated as a fiscal years beginning after November 15, 2007, and interim periods linked transaction under SFAS No. 140 unless certain criteria are met, within those fiscal years with early adoption permitted. including that the transferred asset must be readily obtainable in the On February 12, 2008, the FASB issued FASB Staff Position No. 157-2 (FAS marketplace. FSP No. 140-3 is effective for fiscal years beginning after 157-2) which delays the effective date of SFAS 157 for non financial assets November 15, 2008, and will be applied to transactions entered into
14 | Oppenheimer Holdings Inc. after the date of adoption. Early adoption is prohibited. The Company is Sales and Trading and Equities Research divisions to form the Capital Mar - currently evaluating the impact of adopting FSP No. 140-3 on its finan - kets Division (OIB Division). The Company did not foresee in 2007 the cial condition, results of operations and cash flows. extremely challenging environment that would develop during 2008 when it determined to expand its existing capital markets business. Agreements In December 2008, the FASB issued FSP No. FAS 140-4 and FIN 46(R)-8, made for compensation to former employees of CIBC World Markets as “Disclosures by Public Entities (Enterprises) about Transfers of Financial well as payments made to CIBC during the transition of the acquired busi - Assets and Interests in Variable Interest Entities. ” FSP No. FAS 140-4 and nesses to the Company’s platform substantially and negatively impacted FIN 46(R)-8 requires enhanced disclosures about transfers of financial the Company’s financial results throughout the 2008 year. See note 18 to assets and interests in variable interest entities. The FSP is effective for the consolidated financial statements. interim and annual periods ending after December 15, 2008. Since the FSP requires only additional disclosures concerning transfers of financial assets As previously reported, the Company is not involved in the sub-prime and interests in variable interest entities, adoption of the FSP did not affect mortgage business, and does not have any exposure to that business as the Company’s financial condition, results of operations or cash flows. a result of its recent acquisition or otherwise. In March 2008, the FASB issued SFAS No. 161, “ Disclosures about Deriv - For a number of years, the Company has offered auction rate securities ative Instruments and Hedging Activities — an amendment of FASB (“ARS”) to its clients. A significant portion of the market in auction rate Statement No. 133 ” (“SFAS No. 161”). SFAS No. 161 requires enhanced securities has ‘failed’ because, in the current tight credit market, the dealers disclosures about an entity’s derivative and hedging activities, and is are no longer willing or able to purchase the imbalance between supply and effective for financial statements issued for fiscal years beginning after demand for auction rate securities. These securities have auctions scheduled November 15, 2008, with early application encouraged. The Company on either a 7, 28 or 35 day cycle. Clients of the Company own a significant will adopt SFAS No. 161 in the first quarter of 2009. Since SFAS No. 161 amount of ARS in their individual accounts. The absence of a liquid market requires only additional disclosures concerning derivatives and hedging for these securities presents a significant problem to clients and, as a result, activities, adoption of SFAS No. 161 is not expected to affect the Com - to the Company. It should be noted that this is a failure of liquidity and not a pany’s financial condition, results of operations or cash flows. default. These securities in almost all cases have not failed to pay interest or principal when due. These securities are fully collateralized for the most part Business Environment and, for the most part, remain good credits. The Company has not acted as The securities industry is directly affected by general economic and mar - an auction agent for auction rate securities nor does it have a significant ket conditions, including fluctuations in volume and price levels of secu - exposure in its proprietary accounts. Recently, some of these auction rate rities and changes in interest rates, inflation, political events, investor securities have been redeemed at par (100% of issue value) plus accrued participation levels, legal and regulatory, accounting, tax and compliance dividends by their issuers thus reducing the scope of the issue for clients and requirements and competition, all of which have an impact on commis - the Company. However, in excess of fifty percent of the overall ARS issued sions, firm trading, fees from accounts under investment management into the ARS market remain outstanding. There is no way to predict the pace as well as fees for investment banking services, and investment income of future redemptions or whether all of these securities will be redeemed by as well as on liquidity. Substantial fluctuations can occur in revenues and their issuers. There has been pressure by regulators for financial services net income due to these and other factors. firms to redeem ARS held by clients. Settlements with regulators by our competitors have created inconsistencies in the treatment between firms Fiscal 2008 was the most difficult economic environment in over 50 that are redeeming ARS from clients with their own funds and firms, like the years. It began with a period of substantially increasing commodity Company, which have yet to do so. prices and a weakening U.S. dollar during the first six months and ended with a complete reversal of each of these trends amid falling home The Company continues to review this situation and explore options to prices, seized credit markets, failing financial institutions, weakening help bring liquidity to the Company’s clients holding ARS. The Company is economic activity and increasing unemployment as economists recog - reviewing various programs initiated by the U.S. government to restore liq - nized the presence of the longest period of recession in the post-war uidity to the markets. The Company has taken or is considering taking var - period. Intervention in the credit markets by the U.S. Treasury and the ious actions to facilitate the purchase of client-held ARS including filing an U.S. Federal Deposit Insurance Corporation (“FDIC”) through their sup - amendment to the charter of Oppenheimer Trust Company to become a port of commercial and investment banks as well as Fannie Mae and depository bank eligible for FDIC insurance as well as to obtain access to Freddie Mac and the prompt reduction of interest rates by the Federal the U.S. Federal Reserve Discount Window; filing an application with the Reserve to the lowest levels in history failed to staunch the lack of confi - FDIC for Oppenheimer Trust Company to obtain deposit insurance; and fil - dence brought on by illiquid markets and a falling economy. ing applications on behalf of Oppenheimer Trust Company and Oppen - heimer Holdings to participate in the U.S. Treasury Capital Purchase Interest rate changes impact the Company’s fixed income businesses as Program. The Company believes that one or more of these programs well as its cost of borrowed funds. As a result of the Federal Reserve’s might lead to a solution to bring liquidity to client-held ARS. In addition, reductions in the Federal Funds target rate, average interest rates were the Company is considering applying to become a bank holding company. lower for the year ended December 31, 2008 compared to 2007. Man - The Company has been reviewing its charter with a view to moving the agement constantly monitors its exposure to interest rate fluctuations to situs of the Company to the United States in order to, among other mitigate risk of loss in volatile environments. things, potentially avail itself of various programs sponsored by the U.S. It is anticipated that these and other issues will continue to affect the Treasury and the FDIC which may be available only to U.S.-based compa - health and activity levels in the leveraged loan market and thus will affect nies. The Company believes that one or more of these programs might merger and acquisition activity, and security issuance as well as signifi - under certain circumstances provide the liquidity necessary to permit the cantly hamper investment banking activity and thus negatively impact the Company to redeem ARS from its clients. See “Factors Affecting ‘Forward- business of the Company and its recent acquisition described below. Looking Statements’.” As previously reported, the Company’s results were impacted throughout The Company is focused on growing its private client and asset manage - the year by its acquisition on January 14, 2008 of the New Capital Markets ment businesses through strategic additions of experienced financial Business. The New Capital Markets Business including operations in the advisors in its existing branch system and employment of experienced United Kingdom, Hong Kong and Israel were combined with the Com - money management personnel in its asset management business. In pany’s existing Investment Banking, Corporate Syndicate, Institutional addition, the Company is committed to the improvement of its technol -
Oppenheimer Holdings Inc . | 15 ogy capability to support client service and the expansion of its capital institution capable of evaluating commissions charged for services ren - markets capabilities while addressing the issue of managing its expenses dered. Oppenheimer is in discussions with the SEC to resolve this matter. to better align them with the current investment environment. There is no guarantee the matter will be settled. Oppenheimer has been responding to the SEC, FINRA and several state Regulatory Environment regulators as part of an industry-wide review of the marketing and sale The brokerage business is subject to regulation by, among others, the SEC of auction rate securities (“ARS”). The Company has answered several and FINRA (formerly the NYSE and NASD) in the United States, the Finan - document requests and subpoenas and there have been on-the-record cial Services Authority (“FSA”) in the United Kingdom, the Israeli Securities interviews of Company personnel. The Company is continuing to coop - Authority (“ISA”) in Israel and various state securities regulators. Events in erate with the investigating entities. On November 18, 2008 the Massa - recent years surrounding corporate accounting and other activities leading chusetts Securities Division filed an Administrative Complaint (the to investor losses resulted in the enactment of the Sarbanes-Oxley Act and “Complaint”), captioned In the Matter of Oppenheimer & Co. Inc., have caused increased regulation of public companies. New regulations Albert Lowenthal, Robert Lowenthal and Greg White , Docket No. 2008- and new interpretations and enforcement of existing regulations are creat - 0080, alleging violations of the Massachusetts General Law, the Massa - ing increased costs of compliance and increased investment in systems chusetts Uniform Securities Act and regulations thereunder with respect and procedures to comply with these more complex and onerous require - to the sale by Oppenheimer of ARS to its clients. The Complaint alleges, ments. Increasingly, the various states are imposing their own regulations inter alia, that Oppenheimer improperly misrepresented the nature of that make the uniformity of regulation a thing of the past, and make com - ARS and the overall stability and health of the ARS market. The Com - pliance more difficult and more expensive to monitor. FINRA has recently plaint also alleges that key Oppenheimer executives and Auction Rate completed the unification and codification of its legacy NYSE and NASD Department personnel sold their personal ARS holdings while in posses - rules. Recent events connected to the worldwide credit crisis has made it sion of information that the entire ARS market was in danger of failing highly likely the self-regulatory framework for financial institutions will be and that those individuals failed to disclose this information to investors. changed in the United States and around the world. The changes are likely The Massachusetts Securities Division seeks various relief including an to significantly reduce leverage available to financial institutions and order requiring Oppenheimer to offer rescission of sales of ARS at par increase transparency to regulators and investors of risks taken by such and requiring Oppenheimer to make full restitution to investors who institutions. It is impossible to presently predict the nature of such rule - have already sold their ARS below par. The Division also seeks an order making, but when enacted such regulations will likely reduce returns revoking the Chairman of Oppenheimer’s Massachusetts registration as a earned by financial service providers. broker-dealer agent and requiring Oppenheimer and the named execu - The impact of the rules and requirements that were created by the pas - tives and other personnel to pay an administrative fine in an amount to sage of the Patriot Act, and the anti-money laundering regulations (AML) be determined. Oppenheimer and all individual respondents have filed in the U.S. and similar laws in other countries that are related thereto have an answer to the Complaint denying that the allegations in the Com - created significant costs of compliance and can be expected to continue plaint have any basis in fact or law. All respondents intend to vigorously to do so. Intervention by governments and monetary authorities around defend against the allegations in the Complaint. See “RISK FACTORS – the world as a result of the current credit market dislocations will most The Company may be adversely affected by the failure of the Auction likely result in new regulations around the world that will significantly Rate Securities Market.” reduce the availability of leverage to the balance sheets of financial institu - tions. It is impossible to predict the impact or costs associated with these Other Matters yet to be announced programs and regulations. A subsidiary of the Company was the administrative agent for two closed- end funds until December 5, 2005. The Company has been advised by Pursuant to FINRA Rule 3130 (formerly NASD Rule 3013 and NYSE Rule the current administrative agent for these two funds that the Internal Rev - 342), the chief executive officers (“CEOs”) of regulated broker-dealers enue Service may file a claim for interest and penalties for one of these (including the CEO of Oppenheimer) are required to certify that their com - funds with respect to the 2004 tax year as a result of an alleged failure of panies have processes in place to establish and test policies and proce - such subsidiary to take certain actions. The Company will continue to dures reasonably designed to achieve compliance with federal securities monitor developments in this matter. laws and regulations, including applicable regulations of self-regulatory organizations. The CEO of the Company is required to make such a certifi - The Company operates in all state jurisdictions in the United States and is cation on an annual basis and did so on March 27, 2008. thus subject to regulation and enforcement under the laws and regula - tions of each of these jurisdictions. The Company has been and expects Other Regulatory Matters that it will continue to be subject to investigations and some or all of On July 30, 2008, the Financial Industry Regulatory Authority (“FINRA”) these may result in enforcement proceedings as a result of its business issued a Notice of Acceptance accepting a settlement of the previously conducted in the various states. reported investigation into Oppenheimer’s securities lending practices. As part of its ongoing business, the Company records reserves for legal The investigation concerned Oppenheimer’s supervision of its securities expenses, judgments, fines and/or awards attributable to litigation and lending activities including, but not limited to, failing to detect and pre - regulatory matters. In connection therewith, the Company has main - vent stock loan personnel from engaging in business dealings with finders tained its legal reserves at levels it believes will resolve outstanding mat - in violation of Oppenheimer policy. Pursuant to the Notice of Acceptance, ters, but may increase or decrease such reserves as matters warrant. Oppenheimer, without admitting or denying any allegations, agreed to a censure and the payment of a fine in the amount of $100,000. Business Continuity On April 17, 2008, Oppenheimer received an invitation from the SEC to The Company is committed to an on-going investment in its technology and make a “Wells Submission” with respect to its activities as a broker-dealer communications infrastructure including extensive business continuity plan - in connection with Oppenheimer’s supervision of a former retail financial ning and investment. These costs are on-going and the Company believes advisor’s dealings with a single institutional customer and the commis - that current and future costs will exceed historic levels due to business and sions earned with respect thereto. The Company believes that the activity regulatory requirements. This investment has increased over the last several alleged was not inappropriate and that the customer was a sophisticated quarters as a result of the acquisition of the New Capital Markets Business
16 | Oppenheimer Holdings Inc. from CIBC and the Company’s need to build out its platform to accommo - The following table sets forth the amount and percentage of the Company’s date this business. The Company successfully transitioned these businesses revenue from each principal source for each of the following years ended to its platform in the third quarter of 2008. December 31. Amounts are expressed in thousands of dollars.
(Dollars in thousands, except percentages) Outlook The Company’s long term plan is to continue to expand existing offices by 2008 % 2007 % 2006 % hiring experienced professionals as well as through the purchase of operat - ing branch offices from other broker dealers or the opening of new branch Commissions $494,773 54% $366,437 40% $355,459 44% offices in attractive locations, thus maximizing the potential of each office Principal and the development of existing trading, investment banking, investment transactions, net 20,651 2% 41,441 5% 42,834 5% advisory and other activities. Equally important is the search for viable acquisition candidates. As opportunities are presented, it is the long-term Interest 61,793 7% 110,114 12% 108,025 14% intention of the Company to pursue growth by acquisition where a com - fortable match can be found in terms of corporate goals and personnel and Investment at a price that would provide the Company’s shareholders with incremental banking 121,450 13% 119,350 13% 67,528 8% value. The Company acquired on January 14, 2008, the New Capital Mar - Advisory fees 198,960 22% 249,358 27% 180,602 23% kets Business described under Item 1, Business. The Company may review additional potential acquisition opportunities, and will continue to focus its Other 22,443 2% 27,697 3% 46,375 6% attention on the management of its existing business. In addition, the Company is committed to improving its technology capabilities to support Total revenue $920,070 100% $914,397 100% $800,823 100% client service and the expansion of its capital markets capabilities. The Company derives most of its revenue from the operations of its prin - Results of Operations cipal subsidiaries, Oppenheimer and OAM. Although maintained as sep - The net loss for the year ended December 31, 2008 was $20.8 million or arate entities, the operations of the Company’s brokerage subsidiaries $(1.57) per share, compared to net profit of $75.4 million or $5.70 per both in the US and other countries are closely related because Oppen - share in the same period of 2007. Revenue for the year ended December heimer acts as clearing broker and omnibus clearing agent in transac - 31, 2008 was $920.1 million compared to $914.4 million for the same tions initiated by these subsidiaries. Except as expressly otherwise stated, period in 2007, an increase of 1%. The turmoil in the financial markets the discussion below pertains to the operations of Oppenheimer. during 2008 substantially impacted all of the Company’s businesses result - ing in flat revenues. The Company incurred significantly increased Fiscal 2008 compared to Fiscal 2007 expenses associated with the acquisition of a major part of CIBC World Revenue, other than interest Markets’ U.S. Capital Markets Businesses in January 2008. The Company’s Commission income and, to a large extent, income from principal transac - 2008 results were impacted considerably by a decrease in performance tions depend on investor participation in the markets. Commissions for fees associated with investments in various alternative investments where the year ended December 31, 2008 increased 35% compared to the same the Company serves as the general partner. period in 2007 primarily as a result of the acquired businesses. For the year The year ended December 31, 2008 was the most difficult year in the Com - ended December 31, 2008, 32% of total commissions were generated by pany’s history measured by net profit and earnings per share. The Com - the OIB Division’s institutional equity business, representing an increase of pany’s acquisition of the New Capital Markets Business from CIBC affected $160.6 million compared to the same period in 2007. This increase was results adversely throughout the year. While the assumptions made by the offset by a decline of $32.3 million in commissions generated by the Com - Company in making the decision to purchase the New Capital Markets Busi - pany’s other commission generating businesses. ness in 2007 were based on a reduced capital markets environment, the Principal transactions, net decreased 50% for the year ended December 31, reality proved significantly more problematic as the costs built into the trans - 2008 compared to the same period in 2007, primarily due to losses in con - action affected financial results by approximately $85 million in fiscal 2008 vertible bond arbitrage and failed hedging strategies as the prices of U.S. through expenditures on transition costs, for personnel and for the support Treasuries diverged from the rest of the credit market during the difficult of systems. Markets were weak throughout the year, producing disappoint - market conditions experienced in the third and fourth quarters of 2008. ing revenues particularly through weak investment banking fees and limited Investment banking revenues increased 2% for the year ended December fee based leveraged finance revenues. Transactional business from both pri - 31, 2008 compared to the same period in 2007. Despite the expansion of vate client and capital markets and fees from fee-based programs held up the Company’s investment banking presence as a result of the acquisition in somewhat better but came in below the levels of the prior year after adjust - January 2008, market conditions were not conducive to activities generating ing for the addition of the New Capital Markets Business. Interest income for investment banking revenue. 2008 was impacted by lower rates on lower customer debit balances and substantially decreased activity in the securities lending business. Perform - Advisory fees decreased 20% for the year ended December 31, 2008 com - ance fees associated with the Company’s management of alternative invest - pared to the same period in 2007. Declining market values of client assets ments did not make a significant contribution to the Company’s results in negatively impacted fee levels in the third and fourth quarters of 2008. fiscal 2008 compared with the fourth quarter of 2007. Assets under management decreased 28% to $12.5 billion at December 31, 2008 compared to $17.5 billion at December 31, 2007, as a result of Revenues for the OIB Division, $220.7 million for the year ended Decem - declining market values of client fee-paying accounts associated with the ber 31, 2008, were substantially less (approximately 41%) than the com - general decline in securities markets. In addition, performance fees earned parable fiscal periods last year on a pro-forma combined basis, due to as a result of participation as a general partner in various alternative invest - significantly reduced investment banking activity. As previously reported, ments amounted to $1.3 million in fiscal 2008 compared with $44.8 mil - the results of the OIB Division will be tracked for the five years following lion in fiscal 2007 due to generally disappointing investment results the acquisition for purposes of determining payments that may be due to compared to the prior year. The number of client accounts under manage - CIBC as part of the acquisition price. ment increased 1% at December 31, 2008 compared to December 31,
Oppenheimer Holdings Inc . | 17 2007. Included in assets under management at December 31, 2008 were Expenses, other than interest approximately $9.8 billion in assets under the Company’s fee-based pro - The Company’s expenses for the year ended December 31, 2008 increased grams ($14.3 billion at December 31, 2007). 21% compared to the same period of 2007, primarily due to the effect of the Company’s recent acquisition. Acquisition-related expenses included Other revenue decreased 19% for the year ended December 31, 2008 $40.2 million for the year ended December 31, 2008 for deferred incentive compared to the same period in 2007. Other revenue includes the mark-to- compensation to former CIBC employees for awards made by CIBC prior to market change of company-owned insurance policies that underpin the the January 14, 2008 acquisition by the Company. Such payments will sig - Company’s deferred compensation programs. Due to market conditions nificantly decline in future periods. These accrued expenses are net of an the fair value of these policies decreased $3.9 million in 2008 compared to expense reversal of $6.1 million recorded in November 2008 arising from an increase of $7.1 million in 2007. This loss was offset by an increase of the resolution of a number of issues with CIBC associated with the imple - $8.9 million in income from sponsored FDIC covered deposits, introduced mentation and interpretation of the Acquisition Agreement. Transition serv - as a new product in 2008. Additionally, other revenue for the year ended ice charges of $27.3 million in the year ended December 31, 2008 were December 31, 2007 included a gain of $2.5 million on the extinguishment incurred for interim support of the acquired businesses which substantially of the zero coupon notes issued by the Company on January 2, 2003 in terminated upon the transition of those businesses to Oppenheimer’s plat - connection with an acquisition. form in the second half of 2008. The Company continues to review its Interest costs across all expense categories but expects to have reduced costs by Net interest revenue (interest revenue less interest expense) decreased by approximately $85 million in 2009 compared to 2008 due to the elimina - 57% in the year ended December 31, 2008 compared to the same period tion of many costs associated with the 2008 acquisition. in 2007 amidst lower short-term interest rates and lower client debit bal - ances. Interest revenue declined 44% for the year ended December 31, Compensation costs increased 16% in the year ended December 31, 2008 2008 compared to the same period in 2007 primarily due to lower interest compared to the same period of 2007. The main driver of the increase for rates. In addition, average stock borrow balances and average customer the year ended December 31, 2008 was the increased compensation debit balances decreased 32% and 15%, respectively, in the year ended expense associated with personnel within the acquired businesses, as December 31, 2008 compared to the same period in 2007, impacted by described above. A decrease in deferred compensation obligations of $11.0 tight credit conditions and liquidation of positions by investors in a declin - million driven by declining market values in the underlying benchmark port - ing market in 2008 compared to better market conditions in 2007. Interest folios offset the overall increase in compensation costs. Also offsetting the expense decreased 31% for the year ended December 31, 2008 compared increase in compensation costs was a decrease of $8.6 million related to the to the same period of 2007. The interest expense on the Company’s Senior Company’s stock appreciation rights that are pegged to the price of Com - Secured Credit Note declined by $3.4 million for the year ended December pany’s Class A Shares. For the year ended December 31, 2008, clearing and 31, 2008 compared to the same period in 2007 due to declining interest exchange fees increased 89% due to increased transaction volumes associ - rates and payments of principal, offset by interest expense of $6.9 million ated with the acquired businesses as well as transition service charges. Com - on the Subordinated Note issued in January 2008 and higher interest munications and technology costs and occupancy and equipment costs expense associated with higher bank call loan balances incurred as alterna - increased 44% in the year ended December 31, 2008 compared to the tive sources of financing such as stock loan balances declined. same period in 2007, primarily to support the acquired businesses.
The following table and discussion summarizes the changes in the major revenue and expense categories for the past two years. Amounts are expressed in thousands of dollars. Period to Period Change Composition of 2008 Revenue Increase (Decrease) 2008 versus 2007 2007 versus 2006 Amount Percentage Amount Percentage Revenue Commissions ...... $128,336 . . . . +35% $10,978 . . . . . +3% Principal transactions, net ...... (20,790) . . . . . -50% (1,393) ...... -3% Interest ...... (48,321) . . . . . -44% 2,089 . . . . . +2% Investment banking ...... 2,100 . . . . . +2% 51,822 . . . . +77% Advisory fees ...... (50,398) . . . . . -20% 68,756 . . . . +38% Other ...... (5,254) . . . . . -19% (18,678) . . . . . -40% Total revenue ...... 5,673 +1% 113,574 . . . . +14% Expenses Commissions Compensation and related expenses . . . . 85,830 . . . . +16% 71,591 . . . . +15% • Clearing and exchange fees ...... 14,619 . . . . +89% 4,286 . . . . +35% • Principal transactions Communications and technology ...... 23,071 . . . . +44% 4,814 . . . . +10% Interest Occupancy and equipment costs ...... 21,338 . . . . +44% (1,721) ...... -3% • Investment banking Interest ...... (17,645) . . . . . -31% (6,224) . . . . . -10% • Other ...... 41,897 . . . . +57% (6,116) ...... -8% • Advisory fees Total expenses ...... 169,110 +21% 66,630 . . . . . +9% • Other Profit before taxes ...... (163,437) . . . . -128% 46,944 . . . . +58% Income taxes ...... (67,300) . . . . -129% 16,154 . . . . +45% Net profit ...... $(96,137) . . . . . -57% $30,790 . . . . +69%
18 | Oppenheimer Holdings Inc. Other expenses increased 57% for the year ended December 31, 2008 Expenses, other than interest compared to the same period in 2007 and includes substantial transition Compensation and related expense increased by 15% in the year ended costs related to the acquisition of the acquired businesses, as described December 31, 2007 compared to fiscal 2006. Compensation expense, above. Such transition costs represent 65% of the increase in other including the Company’s accrual for year-end bonuses, has volume-related expenses in 2008 compared to 2007. In addition, legal fees, registration components and, therefore, will increase with the increased level of underly - fees and various employee support costs increased in 2008 compared to ing business conducted in the year ended December 31, 2007, compared to 2007 related to the acquisition and integration of the acquired businesses. fiscal 2006. The amortization of forgivable loans to financial advisors is The cost of professional fees increased 31% and represented 5% of the included in compensation expense. This expense is relatively fixed and is not increase in other expenses associated with the business acquired and with influenced by increases or decreases in revenue levels, but rather by the net increased litigation and regulatory costs. Bad debt expense increased by number of financial advisors hired in one period compared to another. Note $1.3 million for the year ended December 31, 2008 compared to the same amortization expense in fiscal 2007 was approximately $19.4 million com - period in 2007. pared to approximately $21.0 million in fiscal 2006. As of January 1, 2006, the Company adopted SFAS 123 (R), resulting in approximately $8.9 million Fiscal 2007 compared to Fiscal 2006 of compensation expense in fiscal 2007 compared to approximately $3.3 million in fiscal 2006 relating to the expensing of share-based awards. The Revenue, other than interest Company’s stock appreciation rights which, under accounting guidelines, Commission income and, to a large extent, income from principal transac - are re-measured at fair value at each period end based on the closing price tions depend on investor participation in the markets. In the year ended of the Company’s Class A Shares were the largest component of share- December 31, 2007, commission revenue increased by 3% compared to based compensation expense. The cost of clearing and exchange fees fiscal 2006 derived primarily from stronger investor interest in the OTC increased by 35% in the year ended December 31, 2007 compared to fiscal markets in 2007 compared to 2006. Commission revenue has been 2006 due to higher transactional volume in 2007. The cost of communica - impacted by a general compression in rates charged to clients for transac - tions and technology increased 10% in the year ended December 31, 2007 tions as well as clients’ changing their accounts to fee-based arrange - compared to fiscal 2006. The increase was driven largely by the increased ments. Net revenue from principal transactions decreased by 3% in the costs of external data services employed to support the increased require - year ended December 31, 2007 compared to fiscal 2006. With increased ments of the business in 2007 compared to 2006. Occupancy and equip - market volatility in 2007, the Company has scaled back its exposure to ment costs decreased 3% in fiscal 2007 compared to fiscal 2006 due proprietary trading activities. Investment banking revenues increased 77% primarily to reduced equipment costs. Other expenses decreased by 8% for in the year ended December 31, 2007 compared with fiscal 2006. the year ended December 31, 2007 compared to fiscal 2006. In fiscal 2007 Approximately 41% of this increase was generated by new issue and sec - increased third party finders fees were offset by decreased costs for legal ondary issuance and 26% of this increase was generated by corporate and regulatory settlement costs. The cost of professional fees decreased by finance advisory and placement fees. Advisory fees increased by 38% for 19% and represented 37% of the decrease in other expenses in fiscal 2007 the year ended December 31, 2007 compared to fiscal 2006. Assets compared to 2006 as the Company resolved matters previously reserved. under management by the asset management groups were $17.5 billion at December 31, 2007, compared to $15.5 billion at December 31, 2006. The decrease in the effective tax rate (40.8% for the year ended Decem - Performance fees earned by OAM and Oppenheimer as a result of partici - ber 31, 2007 compared to 44.6% for the year ended December 31, 2006) pation as general partner in various alternative investments produced rev - was the result of favorable resolutions of tax matters in 2007. enue of $44.8 million in 2007 compared to $14.7 million in 2006, representing 44% of the increase in 2007 compared to 2006. Other rev - Liquidity and Capital Resources enue decreased by 40% in the year ended December 31, 2007 compared Total assets at December 31, 2008 decreased by 28% from December 31, to fiscal 2006. Fiscal 2006 included a net gain of $13.7 million arising from 2007 levels due to decreases in receivables from brokers and clearing organi - the exchange of NYSE seats for cash and NYSE Group common shares zations and customers resulting from concerns throughout the credit mar - and the subsequent sale of a portion of such NYSE Group common shares kets with counter-party risk and due to customers paying down margin and $4.1 million relating to the gain on extinguishment of Variable Rate debt. Total assets at December 31, 2007 decreased by 1% from December Exchangeable Debentures issued by the Company on January 6, 2003 in 31, 2006 levels. The market environment that developed in 2008 in the connection with an acquisition, while fiscal 2007 included a $2.5 million wake of the failure of financial institutions and seizures in the credit markets, gain from the extinguishment of the zero coupon notes issued on January resulted in declining markets around the world and higher levels of risk. 2, 2003 in connection with an acquisition. The Company satisfies its need for short-term funds from internally gen - Interest erated funds, collateralized and uncollateralized borrowings, consisting Net interest revenue (interest revenue less interest expense) increased 18% primarily of bank loans, stock loans and uncommitted lines of credit. The in the year ended December 31, 2007 compared to fiscal 2006. Interest Company’s longer term capital needs are met through the issuance of the revenue (which primarily relates to revenue from customer margin balances Senior Secured Credit Note and the Subordinated Note. The amount of and securities lending activities) increased 2% in fiscal 2007 compared to Oppenheimer’s bank borrowings fluctuates in response to changes in the fiscal 2006. Average stock borrow balances increased by approximately level of the Company’s securities inventories and customer margin debt, 9%, offset by lower average customer debit balances and lower interest changes in stock loan balances and changes in notes receivable from rates. Interest expense in fiscal 2007 decreased by 10% compared to fiscal employees. The Company believes that such availability will continue going forward but current conditions in the credit markets may make the 2006. The decrease was primarily due to lower interest expense related to availability of bank financing more challenging in the months ahead. the Company’s Debentures (repaid in full on October 23, 2006) and Senior Oppenheimer has arrangements with banks for borrowings on a fully col - Secured Credit Note (originally issued on July 31, 2006 in the amount of lateralized basis. At December 31, 2008, $6.5 million of such borrowings $125 million and with an outstanding balance of $83.3 million at Decem - were outstanding compared to outstanding borrowings of $29.0 million ber 31, 2007). See the discussion under Business – Other Requirements and at December 31, 2007 and $79.5 million at December 31, 2006. At note 7 to the Company’s consolidated financial statements, included in December 31, 2008, the Company had available collateralized and uncol - Item 8. The other significant reason for the decrease in interest expense lateralized letters of credit of $127.2 million. arose because of lower average bank call loan balances in fiscal 2007 com - pared to fiscal 2006 as a result of stronger business and cash flows in fiscal The unprecedented volatility of the financial markets, accompanied by a 2007 compared to fiscal 2006. severe deterioration of economic conditions worldwide, has had a pro -
Oppenheimer Holdings Inc . | 19 nounced adverse affect on the availability of credit through traditional the interest rate to LIBOR plus 525 basis points (an increase of 150 basis sources. As a result of concern about the ability of markets generally and the points). In the Company’s view, the maximum leverage ratio and minimum strength of counterparties specifically, many lenders have reduced and, in fixed charge ratio represent the most restrictive covenants. At December 31, some cases, ceased to provide funding to the Company on both a secured 2008, the Company was in compliance with all of its covenants. and unsecured basis. Further the current environment is not conducive to The effective interest rate on the Subordinated Note for the year ended most new financing and renegotiation of existing loans has become expen - December 31, 2008 was 6.96%. Interest expense, as well as interest paid on sive and problematic. a cash basis for the year ended December 31, 2008, on the Subordinated On July 31, 2006, the Company issued a Senior Secured Credit Note in the Note was $6.9 million. amount of $125.0 million at a variable interest rate based on LIBOR with a seven-year term to a syndicate led by Morgan Stanley Senior Funding Inc., as Funding Risk agent. On April 28, 2008, the Company paid down principal of $20.0 mil - Year ended December 31, lion, of which $16.3 million was due pursuant to the excess cash flow com - Amounts are expressed in thousands of dollars. 2008 2007 2006 putation as of December 31, 2007 and the balance of $3.7 million was a Cash provided by operations $59,759 $113,667 $114,303 voluntary repayment of principal. In accordance with the Senior Secured Cash used in investing activities (65,578) (11,553) (7,272) Credit Note, the Company has provided certain covenants to the lenders with respect to the maintenance of a minimum fixed charge ratio and maxi - Cash provided by (used in) mum leverage ratio driven from EBITDA and minimum net capital require - financing activities 24,802 (97,954) (115,502) ments with respect to Oppenheimer. Net increase (decrease) in cash and cash equivalents $18,983 $4,160 $(8,471) On December 22, 2008, certain terms of the Senior Secured Credit Note were amended, including (1) revised financial covenant levels that require Management believes that funds from operations, combined with the that (i) the Company maintain a maximum leverage ratio (total long-term Company’s capital base and available credit facilities, are sufficient for debt divided by EBITDA) of 5.45 and (ii) the Company maintain a minimum the Company’s liquidity needs in the foreseeable future. (See Factors fixed charge ratio (EBITDA adjusted for capital expenditures and income Affecting “Forward-Looking Statements”). taxes divided by the sum of principal and interest payments on long-term debt) of 2.05; (2) an increase in scheduled principal payments as follows: Other Matters 2009 – $400,000 per quarter plus $4.0 million on September 30, 2009 and During the fourth quarter of 2008, the Company purchased 173,524 2010 – $500,000 per quarter plus $8.0 million on September 30, 2010; (3) Class A Shares at an average price per share of $20.63 pursuant to the an increase in the interest rate to LIBOR plus 450 basis points (an increase Normal Course Issuer Bid. of 150 basis points); and (4) a pay-down of principal equal to the cost of During the fourth quarter of 2008, the Company did not issue any Class A any share repurchases made pursuant to the Normal Course Issuer Bid. In Shares pursuant to the Company’s share-based compensation programs. addition, the Company made a voluntary pre-payment of principal in the amount of $15 million plus interest. In the Company’s view, the maximum On November 28, 2008, the Company paid cash dividends of U.S. $0.11 leverage ratio and minimum fixed charge ratio represent the most restric - per Class A and Class B Share totaling $1.5 million from available cash tive covenants. At December 31, 2008, the Company was in compliance on hand. with all of its covenants. On January 29, 2009, the Board of Directors declared a regular quarterly The effective interest rate on the Senior Secured Credit Note for the year cash dividend of U.S. $0.11 per Class A and Class B Share payable on ended December 31, 2008 was 6.48%. Interest expense, as well as interest February 28, 2009 to shareholders of record on February 14, 2009. paid on a cash basis for the year ended December 31, 2008 on the Senior The book value of the Company’s Class A and Class B Shares was Secured Credit Note, was $4.6 million ($8.0 million in 2007 and $4.3 million $32.75 at December 31, 2008 compared to $33.22 at December 31, in 2006). Of the $47.7 million principal amount outstanding at December 2007, a decrease of approximately 1%, based on total outstanding 31, 2008, $5.6 million of principal is expected to be paid within 12 months. shares of 12,999,145 and 13,366,276, respectively. The Company’s The obligations under the Senior Secured Credit Note are guaranteed by book value per share was impacted by operating losses, the repurchase certain of the Company’s subsidiaries, other than broker-dealer subsidiaries, of Class A Shares pursuant to the Normal Course Issuer Bid and divi - with certain exceptions, and are collateralized by a lien on substantially all dends, offset by the effect of share-based awards and the issuance to of the assets of each guarantor, including a pledge of the ownership inter - CIBC of warrants in connection with the acquisition of the New Capital ests in each first-tier broker-dealer subsidiary held by a guarantor, with cer - Markets Business in January 2008. tain exceptions. The diluted weighted average number of Class A and Class B Shares On January 14, 2008, in connection with the acquisition of the New Capi - outstanding for the year ended December, 2008 was 13,199,580 com - tal Markets Business, CIBC made a loan in the amount of $100.0 million pared to 13,532,287 outstanding for the year ended December 31, and the Company issued a Subordinated Note to CIBC in the amount of 2007, a net decrease of 2% primarily due to the repurchase of Class A $100.0 million at a variable interest rate based on LIBOR. The Subordi - Shares pursuant to the Normal Course Issuer Bid. nated Note is due and payable on January 31, 2014 with interest payable On January 29, 2009, Moody’s Investor Services announced that it had on a quarterly basis. The purpose of this note is to support the capital lowered the credit rating on the Company’s Senior Secured Credit Note requirements of the New Capital Markets Business. In accordance with the and on Oppenheimer Holdings Inc. from B-1 to B-2 with negative out - Subordinated Note, the Company has provided certain covenants to CIBC look, due largely to the poor performance of the business in 2008. This with respect to the maintenance of a minimum fixed charge ratio and change in rating will not trigger any covenant violations in connection maximum leverage ratio and minimum net capital requirements with with any currently outstanding debt. respect to Oppenheimer. Effective December 23, 2008, certain terms of the Subordinated Note were Off-Balance Sheet Arrangements amended, including (1) revised financial covenant levels that require that (i) Information concerning the Company’s off-balance sheet arrangements is the Company maintain a maximum leverage ratio of 6.45 and (ii) the Com - included in note 4 of the notes to the consolidated financial statements pany maintain a minimum fixed charge ratio of 1.70; and (2) an increase in appearing in Item 8. Such information is hereby incorporated by reference.
20 | Oppenheimer Holdings Inc. Contractual and Contingent Obligations Factors Affecting “Forward-Looking Statements” The Company has contractual obligations to make future payments in From time to time, the Company may publish “Forward-looking state - connection with non-cancelable lease obligations and debt assumed upon ments” within the meaning of Section 27A of the Securities Act, and Sec - the acquisition of the New Capital Markets Business as well as debt issued tion 21E of the Exchange Act or make oral statements that constitute in 2006. The Company also has contractual obligations to make payments forward-looking statements. These forward-looking statements may relate to CIBC in connection with deferred compensation earned by former CIBC to such matters as anticipated financial performance, future revenues or employees in connection with the acquisition as well as the earn-out to be earnings, business prospects, projected ventures, new products, anticipated paid in 2013 as described in note 18 of the consolidated financial state - market performance, and similar matters. The Private Securities Litigation ments. Such information is hereby incorporated by reference. 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 The following table sets forth these contractual and contingent commitments readers that a variety of factors could cause the Company’s actual results to as at December 31, 2008. Amounts are expressed in millions of dollars. differ materially from the anticipated results or other expectations expressed Less than 1–3 3–5 More than in the Company’s forward-looking statements. These risks and uncertainties, Total 1 Year Years Years 5 Years many of which are beyond the Company’s control, include, but are not lim - Minimum rentals $172 $39 $69 $40 $24 ited to: (i) transaction volume in the securities markets, (ii) the volatility of the Committed capital 33–– –securities markets, (iii) fluctuations in interest rates, (iv) changes in regulatory Earn-out 25 ––25 – requirements which could affect the cost and method of doing business, (v) Deferred compensation fluctuations in currency rates, (vi) general economic conditions, both domes - commitments (1) 49 18 31 ––tic and international, (vii) changes in the rate of inflation and the related Senior Secured impact on the securities markets, (viii) competition from existing financial Credit Note 48 6 28 14 – institutions and other participants in the securities markets, (ix) legal devel - Subordinated Note 100 –––100 opments affecting the litigation experience of the securities industry and the Total $397 $66 $128 $79 $124 Company, including developments arising from the failure of the Auction (1) Represents payments to be made to CIBC in relation to deferred Rate Securities markets, (x) changes in federal and state tax laws which incentive compensation to former CIBC employees for awards made could affect the popularity of products sold by the Company, (xi) the effec - by CIBC prior to the January 14, 2008 acquisition by the Company. tiveness of efforts to reduce costs and eliminate overlap, (xii) war and nuclear confrontation, (xiii) the Company’s ability to achieve its business plan, (xiv) Inflation corporate governance issues, (xv) the impact of the credit crisis on business Because the assets of the Company’s brokerage subsidiaries are highly liq - operations, (xvi) the effect of bailout and related legislation, (xvii) the consoli - uid, and because securities inventories are carried at current market values, dation of the banking and financial services industry, (xviii) the effects of the the impact of inflation generally is reflected in the financial statements. economy on the Company’s ability to find and maintain financing options However, the rate of inflation affects the Company’s costs relating to and liquidity; (xix) credit, operations, legal and regulatory risks; and (xx) risks employee compensation, rent, communications and certain other operat - related to foreign operations. There can be no assurance that the Company ing costs, and such costs may not be recoverable in the level of commis - has correctly or completely identified and assessed all of the factors affecting sions or fees charged. To the extent inflation results in rising interest rates the Company’s business. The Company does not undertake any obligation and has other adverse effects upon the securities markets, it may adversely to publicly update or revise any forward-looking statements. See Item 1A – affect the Company’s financial position and results of operations. Risk Factors.
Quantitative and Qualitative Disclosures about Market Risk
Risk Management position limits determined by senior management and regularly reviews The Company’s principal business activities by their nature involve signifi - the age and composition of its proprietary accounts. Positions and prof - cant market, credit and other risks. The Company’s effectiveness in man - its and losses for each trading department are reported to senior man - aging these risks is critical to its success and stability. agement on a daily basis. As part of its normal business operations, the Company engages in the In its market-making activities, Oppenheimer must provide liquidity in trading of both fixed income and equity securities in both a proprietary the equities for which it makes markets. As a result of this, Oppen - and market-making capacity. The Company makes markets in over-the- heimer has risk containment policies in place, which limit position size counter equities in order to facilitate order flow and accommodate its and monitor transactions on a minute-to-minute basis. institutional and retail customers. The Company also makes markets in municipal bonds, mortgage-backed securities, government bonds and Credit Risk. Credit risk represents the loss that the Company would high yield bonds and short term fixed income securities and loans issued incur if a client, counterparty or issuer of securities or other instruments by various corporations. held by the Company fails to perform its contractual obligations. Given the problems in the credit markets that occurred in 2008 and continue Market Risk. Market risk generally means the risk of loss that may currently, there has been an increased focus in the industry about credit result from the potential change in the value of a financial instrument as risk. The Company follows industry practice to reduce credit risk related a result of fluctuations in interest and currency exchange rates and in to various investing and financing activities by obtaining and maintain - equity and commodity prices. Market risk is inherent in all types of finan - ing collateral wherever possible. The Company adjusts margin require - cial instruments, including both derivatives and non-derivatives. The ments if it believes the risk exposure is not appropriate based on market Company’s exposure to market risk arises from its role as a financial conditions. When Oppenheimer advances funds or securities to a coun - intermediary for its customers’ transactions and from its proprietary terparty in a principal transaction or to a customer in a brokered transac - trading and arbitrage activities. tion, it is subject to the risk that the counterparty or customer will not Oppenheimer monitors market risks through daily profit and loss state - repay such advances. If the market price of the securities purchased or ments and position reports. Each trading department adheres to internal loaned has declined or increased, respectively, Oppenheimer may be
Oppenheimer Holdings Inc . | 21 unable to recover some or all of the value of the amount advanced. A Value-at-Risk similar risk is also present where a customer is unable to respond to a Value-at-risk is a statistical measure of the potential loss in the fair value of margin call and the market price of the collateral has dropped. In addi - a portfolio due to adverse movements in underlying risk factors. In tion, Oppenheimer’s securities positions are subject to fluctuations in response to the SEC’s market risk disclosure requirements, the Company market value and liquidity. has performed a value-at-risk analysis of its trading of financial instruments In addition to monitoring the credit-worthiness of its customers, Oppen - and derivatives. The value-at-risk calculation uses standard statistical tech - heimer imposes more conservative margin requirements than those of niques to measure the potential loss in fair value based upon a one-day the NYSE. Generally, Oppenheimer limits customer loans to an amount holding period and a 95% confidence level. The calculation is based upon not greater than 65% of the value of the securities (or 50% if the securi - a variance-covariance methodology, which assumes a normal distribution ties in the account are concentrated in a limited number of issues). Partic - of changes in portfolio value. The forecasts of variances and co-variances ular attention and more restrictive requirements are placed on more used to construct the model, for the market factors relevant to the portfo - highly volatile securities traded in the NASDAQ market. In comparison, lio, were generated from historical data. Although value-at-risk models are the NYSE permits loans of up to 75% of the value of the equity securities sophisticated tools, their use can be limited as historical data is not always in a customer’s account. Further discussion of credit risk appears in note 4 an accurate predictor of future conditions. The Company attempts to man - to the Company’s consolidated financial statements, included in Item 8. age its market exposure using other methods, including trading authoriza - tion limits and concentration limits. Operational Risk. Operational risk generally refers to the risk of loss result - ing from the Company’s operations, including, but not limited to, improper At December 31, 2008 and 2007, the Company’s value-at-risk for each or unauthorized execution and processing of transactions, deficiencies in its component of market risk was as follows (in thousands of dollars): operating systems, business disruptions and inadequacies or breaches in its VAR for Fiscal 2008 VAR for Fiscal 2007 internal control processes. The Company operates in diverse markets and it High Low Avg High Low Avg is reliant on the ability of its employees and systems to process high num - Equity price risk $538 $11 $446 $437 $123 $286 bers of transactions often within short time frames. In the event of a break - down or improper operation of systems, human error or improper action Interest rate risk 2,415 1,554 1,746 648 409 544 by employees, the Company could suffer financial loss, regulatory sanctions Commodity price risk 233 133 187 119 128 143 or damage to its reputation. In order to mitigate and control operational Diversification benefit (1,757) (951) (1,260) (695) (332) (556) risk, the Company has developed and continues to enhance policies and Total $1,429 $747 $1,119 $509 $328 $417 procedures (including the maintenance of disaster recovery facilities and procedures related thereto) that are designed to identify and manage oper - VAR at December 31, ational risk at appropriate levels. With respect to its trading activities, the 2008 2007 Company has procedures designed to ensure that all transactions are accu - Equity price risk $936 $437 rately recorded and properly reflected on the Company’s books on a timely Interest rate risk 1,378 648 basis. With respect to client activities, the Company operates a system of internal controls designed to ensure that transactions and other account Commodity price risk 264 119 activity (new account solicitation, transaction authorization, transaction Diversification benefit (1,469) (695) processing, billing and collection) are properly approved, processed, Total $1,109 $509 recorded and reconciled. The Company has procedures designed to assess and monitor counterparty risk. For details of funding risk, see Item 7, under The potential future loss presented by the total value-at-risk generally falls the caption “Liquidity and Capital Resources”. within predetermined levels of loss that should not be material to the Com - pany’s results of operations, financial condition or cash flows. The changes Legal and Regulatory Risk . Legal and regulatory risk includes the risk of in the value-at-risk amounts reported in 2008 from those reported in 2007 non-compliance with applicable legal and regulatory requirements, client reflect changes in the size and composition of the Company’s trading port - claims and the possibility of sizeable adverse legal judgments. The Com - folio at December 31, 2008 compared to December 31, 2007. The Com - pany is subject to extensive regulation in the different jurisdictions in which pany’s portfolio as at December 31, 2008 includes approximately $10.7 it conducts its activities. Regulatory oversight of the securities industry has million ($15.4 million in 2007) in corporate equities, which are related to become increasingly intense over the past few years and the Company, as deferred compensation liabilities and which do not bear any value-at-risk to well as others in the industry, has been directly affected by this increased the Company. The Company used derivative financial instruments to hedge regulatory scrutiny. Timely and accurate compliance with regulatory market risk in fiscal 2008 and 2007, including in connection with the Sen - requests has become increasingly problematic, and regulators have tended ior Secured Credit Note, which is described in note 7 of the notes to the to bring enforcement proceedings in relation to such matters. See further consolidated financial statements, appearing in Item 8. Such information is discussion in Item 7, under the caption “Regulatory Environment”. hereby incorporated by reference. Further discussion of risk management The Company has comprehensive procedures for addressing issues such as appears in Item 7, “Management’s Discussion and Analysis of the Results of regulatory capital requirements, sales and trading practices, use of and safe - Operations” and Item 1A, “Risk Factors”. keeping of customer funds and securities, granting of credit, collection activ - The value-at-risk estimate has limitations that should be considered in ities, money laundering, and record keeping. The Company has designated evaluating the Company’s potential future losses based on the year-end Anti-Money Laundering Compliance Officers who monitor compliance with portfolio positions. Recent market conditions, including increased volatility, regulations under the U.S. Patriot Act. See further discussion on the Com - may result in statistical relationships that result in higher value-at-risk than pany’s reserve policy in Item 7, under the caption “Critical Accounting Esti - would be estimated from the same portfolio under different market condi - mates”, Item 3, “Legal Proceedings” and Item 1, “Regulation”. tions. Likewise, the converse may be true. Critical risk management strat - Off-Balance Sheet Arrangements . In certain limited instances, the Com - egy involves the active management of portfolio levels to reduce market pany utilizes off-balance sheet arrangements to manage risk. See further risk. The Company’s market risk exposure is continuously monitored as the discussion in note 4 to the consolidated financial statements in Item 8. portfolio risks and market conditions change.
22 | Oppenheimer Holdings Inc. Management’s Report on Internal Control over Financial Reporting
Management of Oppenheimer Holdings Inc. is responsible for establishing The Company’s internal control over financial reporting includes policies and maintaining adequate internal control over financial reporting. The and procedures that pertain to the maintenance of records that, in reason - Company’s internal control over financial reporting is a process designed able detail, accurately and fairly reflect transactions and dispositions of under the supervision of the Company’s principal executive and principal assets; provide reasonable assurances that transactions are recorded as financial officers to provide reasonable assurance regarding the reliability necessary to permit preparation of financial statements in accordance with of financial reporting and the preparation of the Company’s financial U.S. generally accepted accounting principles, and that receipts and statements for external reporting purposes in accordance with U.S. gener - expenditures are being made only in accordance with authorizations of ally accepted accounting principles. management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acqui - As of December 31, 2008, management conducted an assessment of the sition, use or disposition of the Company’s assets that could have a mate - effectiveness of the Company’s internal control over financial reporting rial effect on the Company’s financial statements. based on the framework established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the The Company’s internal control over financial reporting as of December 31, Treadway Commission (COSO). Based on this assessment, management 2008 has been audited by PricewaterhouseCoopers LLP, an independent has determined that the Company’s internal control over financial report - registered public accounting firm, as stated in their report included herein, ing as of December 31, 2008 was effective. which expresses an unqualified opinion on the effectiveness of the Com - pany’s internal control over financial reporting as of December 31, 2008.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Oppenheimer control based on the assessed risk. Our audits also included performing Holdings Inc.: such other procedures as we considered necessary in the circumstances. In our opinion, the consolidated financial statements listed in the accompa - We believe that our audits provide a reasonable basis for our opinions. nying index present fairly, in all material respects, the financial position of Oppenheimer Holdings Inc. and its subsidiaries at December 31, 2008 and A company’s internal control over financial reporting is a process designed 2007, and the results of their operations and their cash flows for each of to provide reasonable assurance regarding the reliability of financial report - the three years in the period ended December 31, 2008 in conformity with ing and the preparation of financial statements for external purposes in accounting principles generally accepted in the United States of America. accordance with generally accepted accounting principles. A company’s Also in our opinion, the Company maintained, in all material respects, internal control over financial reporting includes those policies and proce - effective internal control over financial reporting as of December 31, 2008, dures that (i) pertain to the maintenance of records that, in reasonable based on criteria established in Internal Control – Integrated Framework detail, accurately and fairly reflect the transactions and dispositions of the issued by the Committee of Sponsoring Organizations of the Treadway assets of the company; (ii) provide reasonable assurance that transactions Commission (COSO). The Company’s management is responsible for these are recorded as necessary to permit preparation of financial statements in financial statements, for maintaining effective internal control over financial accordance with generally accepted accounting principles, and that receipts reporting and for its assessment of the effectiveness of internal control over and expenditures of the Company are being made only in accordance with financial reporting, included in the accompanying Management’s Report authorizations of management and directors of the Company; and (iii) pro - on Internal Control over Financial Reporting. Our responsibility is to express vide reasonable assurance regarding prevention or timely detection of opinions on these financial statements, and on the Company’s internal con - unauthorized acquisition, use, or disposition of the Company’s assets that trol over financial reporting based on our integrated audits. We conducted could have a material effect on the financial statements. our audits in accordance with the standards of the Public Company Because of its inherent limitations, internal control over financial reporting Accounting Oversight Board (United States). Those standards require that may not prevent or detect misstatements. Also, projections of any evalua - we plan and perform the audits to obtain reasonable assurance about tion of effectiveness to future periods are subject to the risk that controls whether the financial statements are free of material misstatement and may become inadequate because of changes in conditions, or that the whether effective internal control over financial reporting was maintained degree of compliance with the policies or procedures may deteriorate. in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclo - sures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over PricewaterhouseCoopers LLP financial reporting, assessing the risk that a material weakness exists, and March 2, 2009 testing and evaluating the design and operating effectiveness of internal New York, New York
Oppenheimer Holdings Inc . | 23 Oppenheimer Holdings Inc. Consolidated Balance Sheets As at December 31
Assets 2008 2007
(Expressed in thousands of dollars)
Cash and cash equivalents ...... $ 46,685 $ 27,702 Cash and securities segregated for regulatory and other purposes ...... 57,033 67,562 Deposits with clearing organizations ...... 14,355 16,402 Receivable from brokers and clearing organizations ...... 278,235 672,282 Receivable from customers, net of allowance for doubtful accounts of $2.0 million ($628 in 2007) ...... 647,486 879,732 Income taxes receivable ...... 12,647 – Securities owned including amounts pledged of $1.9 million ($1.3 million in 2007), at fair value ...... 127,479 128,495 Notes receivable, net ...... 53,446 44,923 Office facilities, net ...... 27,224 18,340 Intangible assets, net ...... 50,117 32,925 Goodwill ...... 132,472 132,472 Other ...... 82,405 117,406 $1,529,584 $2,138,241
Liabilities and Shareholders’ Equity 2008 2007
Liabilities Drafts payable ...... $ 52,565 $ 56,925 Bank call loans ...... 6,500 29,000 Payable to brokers and clearing organizations ...... 159,648 809,025 Payable to customers ...... 408,303 446,299 Securities sold, but not yet purchased, at fair value ...... 27,454 9,413 Accrued compensation ...... 178,983 153,786 Accounts payable and other liabilities ...... 112,031 82,912 Income taxes payable ...... – 11,020 Senior secured credit note ...... 47,663 83,325 Subordinated note ...... 100,000 – Deferred income tax, net ...... 4,538 12,556 Excess of fair value of assets acquired over cost ...... 6,173 – 1,103,858 1,694,261 Commitments and contingencies (note 13) Shareholders’ equity Share capital Class A non-voting shares (2008 – 12,899,465 shares issued and outstanding 2007 – 13,266,596 shares issued and outstanding) ...... 43,520 52,921 99,680 Class B voting shares issued and outstanding ...... 133 133 43,653 53,054 Contributed capital ...... 34,924 16,760 Retained earnings ...... 348,477 375,137 Accumulated other comprehensive loss ...... (1,328) (971) 425,726 443,980 $1,529,584 $2,138,241
Approved on behalf of the Board:
Director Director
The accompanying notes are an integral part of these consolidated financial statements.
24 | Oppenheimer Holdings Inc. Oppenheimer Holdings Inc. Consolidated Statements of Operations For the year ended December 31
2008 2007 2006
(Expressed in thousands of dollars, except per share amounts)
Revenue: Commissions ...... $494,773 $366,437 $355,459 Principal transactions, net ...... 20,651 41,441 42,834 Interest ...... 61,793 110,114 108,025 Investment banking ...... 121,450 119,350 67,528 Advisory fees ...... 198,960 249,358 180,602 Other ...... 22,443 27,697 46,375 920,070 914,397 800,823 Expenses: Compensation and related expenses ...... 626,030 540,200 468,609 Clearing and exchange fees ...... 31,007 16,388 12,102 Communications and technology ...... 75,359 52,288 47,474 Occupancy and equipment costs ...... 69,945 48,607 50,328 Interest ...... 38,998 56,643 62,867 Other ...... 114,774 72,877 78,993 956,113 787,003 720,373 Profit (loss) before income taxes ...... (36,043) 127,394 80,450
Income tax provision (benefit) ...... (15,273) 52,027 35,873 Net profit (loss) for year ...... $(20,770) $75,367 $44,577 Earnings (loss) per share Basic ...... $(1.57) $5.70 $3.50 Diluted ...... $(1.57) $5.57 $2.76
Consolidated Statements of Comprehensive Income (Loss) For the year ended December 31
2008 2007 2006
(Expressed in thousands of dollars)
Net profit (loss) for year ...... $(20,770) $ 75,367 $ 44,577 Other Comprehensive income (loss), net of tax: Currency translation adjustment ...... 31 –– Change in cash flow hedges ...... (388) (971) – Comprehensive income (loss) for year ...... $(21,127) $74,396 $44,577
The accompanying notes are an integral part of these consolidated financial statements.
Oppenheimer Holdings Inc . | 25 Oppenheimer Holdings Inc. Consolidated Statements of Changes in Shareholders’ Equity For the year ended December 31
2008 2007 2006
(Expressed in thousands of dollars)
Share Capital Balance at beginning of year ...... $ 53,054 $ 41,226 $ 32,631 Issuance of Class A Shares ...... 7,786 11,828 10,850 Repurchase of Class A Shares for cancellation ...... (17,187) – (2,255)
Balance at end of year ...... $ 43,653 $ 53,054 $ 41,226
Contributed Capital Balance at beginning of year ...... $ 16,760 $ 11,662 $ 8,810 Issuance of warrant to purchase 1 million Class A Shares . . . 10,487 –– Tax benefit from share-based awards ...... 698 915 315 Share-based expense ...... 7,334 4,183 2,537 Vested employee share plan awards ...... (355) ––
Balance at end of year ...... $ 34,924 $ 16,760 $ 11,662
Retained Earnings Balance at beginning of year ...... $375,137 $306,153 $266,682 Cumulative effect of an accounting change ...... – (823) – Net profit (loss) for year ...... (20,770) 75,367 44,577 Dividends paid ($0.44 per share in 2008; $0.42 per share in 2007; $0.40 per share in 2006) ...... (5,890) (5,560) (5,106)
Balance at end of year ...... $348,477 $375,137 $306,153
Accumulated Other Comprehensive Loss Balance at beginning of year ...... $ (971) –– Currency translation adjustment, net of tax ...... 31 –– Change in cash flow hedges, net of tax ...... (388) $ (971) – Balance at end of year ...... $ (1,328) $ (971) –
Total Shareholders’ Equity ...... $425,726 $443,980 $359,041
The accompanying notes are an integral part of these consolidated financial statements.
26 | Oppenheimer Holdings Inc. Oppenheimer Holdings Inc. Consolidated Statements of Cash Flows For the year ended December 31
2008 2007 2006 (Expressed in thousands of dollars) Cash flows from operating activities: Net profit (loss) for year ...... $ (20,770) $ 75,367 $ 44,577 Adjustments to reconcile net profit to net cash provided by operating activities: Non-cash items included in net profit (loss): Depreciation and amortization of office facilities and leasehold improvements ...... 11,474 9,691 9,583 Deferred income tax ...... (12,300) 7,621 382 Amortization of notes receivable ...... 16,761 19,419 20,676 Amortization of debt issuance costs ...... 1,227 1,218 352 Amortization of intangible assets ...... 5,058 735 735 Provision for doubtful accounts ...... 1,473 (37) (200) Share-based compensation ...... (112) 9,657 5,000 Gain on extinguishment of zero coupon note ...... – (2,455) – Gain on extinguishment of Debentures ...... – – (4,146) Decrease (increase) in operating assets: Cash and securities segregated for regulatory and other purposes ...... 10,529 (22,527) (13,708) Deposits with clearing organizations ...... 2,047 (5,047) 2,885 Receivable from brokers and clearing organizations . . . . . 394,047 (28,368) (116,424) Receivable from customers ...... 230,773 99,655 138,064 Income taxes receivable ...... (12,647) –– Securities owned ...... 81,618 8,597 9,553 Notes receivable ...... (25,284) (12,002) (13,142) Other assets ...... 43,990 (33,164) (16,578) Increase (decrease) in operating liabilities: Drafts payable ...... (4,360) (716) 11,629 Payable to brokers and clearing organizations ...... (649,734) (115,502) 93,078 Payable to customers ...... (37,996) 61,418 (88,331) Securities sold, but not yet purchased ...... (14,333) 2,098 (2,471) Accrued compensation ...... 34,334 32,935 26,732 Accounts payable and other liabilities ...... 14,984 7,283 (6,005) Income taxes payable ...... (11,020) (2,209) 12,062 Cash provided by operating activities ...... 59,759 113,667 114,303 Cash flows from investing activities: Acquisition, net of cash acquired ...... (50,335) –– Purchase of office facilities ...... (15,243) (11,553) (7,272) Cash used in investing activities ...... (65,578) (11,553) (7,272) Cash flows from financing activities: Cash dividends paid on Class A and Class B Shares ...... (5,890) (5,560) (5,106) Issuance of Class A Shares ...... 5,740 10,970 10,850 Repurchase of Class A Shares for cancellation ...... (17,187) – (2,255) Tax benefit from share-based awards ...... 698 915 315 Repayments of zero coupon promissory notes ...... – (12,121) (8,246) Issuance of subordinated note ...... 100,000 –– Issuance of senior secured credit note ...... – – 125,000 Repayments of senior secured credit note ...... (35,662) (41,050) (625) Debt issuance costs ...... (397) (608) (4,035) Redemption of Debentures ...... – – (156,676) Bank loan repayments ...... – – (14,524) Decrease in bank call loans, net ...... (22,500) (50,500) (60,200) Cash provided by (used in) financing activities ...... 24,802 (97,954) (115,502) Net increase (decrease) in cash and cash equivalents ...... 18,983 4,160 (8,471) Cash and cash equivalents, beginning of year ...... 27,702 23,542 32,013 Cash and cash equivalents, end of year ...... $ 46,685 $ 27,702 $ 23,542 Schedule of non-cash investing and financing activities: Warrants issued ...... $ 10,487 –– Employee share plan issuance ...... $ 2,046 $ 2,408 $ 590 Supplemental disclosure of cash flow information: Cash paid during the year for interest ...... $ 32,078 $ 57,429 $ 61,258 Cash paid during the year for income taxes ...... $ 13,750 $ 45,900 $ 23,400
The accompanying notes are an integral part of these consolidated financial statements. Oppenheimer Holdings Inc . | 27 Oppenheimer Holdings Inc. Notes to Consolidated Financial Statements December 31, 2008 (Expressed in U.S. dollars) the dates of the consolidated financial statements and the reported 1. Summary of Significant Accounting Policies amounts of revenue and expenses during the reporting periods. Basis of Presentation In presenting the consolidated financial statements, management makes Oppenheimer Holdings Inc. (“OPY”) is incorporated under the laws of estimates regarding valuations of financial instruments, loans and Canada. The consolidated financial statements include the accounts of allowances for doubtful accounts, the outcome of legal and regulatory OPY and its subsidiaries (together, the “Company”). The principal sub - matters, the carrying amount of goodwill and other intangible assets, valu - sidiaries of OPY are Oppenheimer & Co. Inc. (“Oppenheimer”), a regis - ation of stock-based compensation plans, and income taxes. Estimates, by tered broker dealer in securities, Oppenheimer Asset Management Inc. their nature, are based on judgment and available information. Therefore, (“OAM”) and its wholly owned subsidiary, Oppenheimer Investment actual results could be materially different from these estimates. A discus - Management Inc. (“OIM”), both registered investment advisors under sion of certain areas in which estimates are a significant component of the the Investment Advisors Act of 1940, Oppenheimer Trust Company, a amounts reported in the consolidated financial statements follows. limited purpose trust company chartered by the State of New Jersey to provide fiduciary services such as trust and estate administration and Financial Instruments and Fair Value investment management, Evanston Financial Corporation (“Evanston”), which is engaged in mortgage brokerage and servicing, OPY Credit Financial Instruments Corp., which offers syndication as well as trading of issued corporate Securities owned and securities sold but not yet purchased, investments loans, and Oppenheimer Israel (OPCO) Ltd., which is engaged in offering and derivative contracts are carried at fair value with changes in fair value investment services in the State of Israel as a local broker dealer. Oppen - recognized in earnings each period. The Company’s other financial instru - heimer EU Ltd., based in the United Kingdom, provides institutional equi - ments are generally short-term in nature or have variable interest rates ties brokerage and corporate financial services and is regulated by the and as such their carrying values approximate fair value, with the excep - Financial Services Authority. Oppenheimer EU Ltd. began operations on tion of notes receivable from employees which are carried at cost. September 5, 2008. Oppenheimer Investments Asia Limited, based in Financial Instruments Used for Asset and Liability Management Hong Kong, China, provides assistance in accessing the U.S. equities mar - The Company utilizes interest rate swap agreements to manage interest rate kets and limited mergers and acquisitions advisory services to Asia-based risk of its variable rate Senior Secured Credit Note. These swaps have been companies. Oppenheimer operates as Fahnestock & Co. Inc. in Latin designated as cash flow hedges under Statement of Financial Accounting America. Oppenheimer owns Freedom Investments, Inc. (“Freedom”), a Standards No. 133, “ Accounting for Derivative Instruments and Hedging registered broker dealer in securities, which also operates as the BUYand - Activities ”. Changes in the fair value of the swap hedges are expected to be HOLD division of Freedom, offering on-line discount brokerage and dol - highly effective in offsetting changes in the interest payments due to lar-based investing services. Oppenheimer holds a trading permit on the changes in the 3-Month London Interbank Offering Rate (“LIBOR”). New York Stock Exchange, and is a member of the American Stock Exchange and several other regional exchanges in the United States. On Fair Value Measurements October 1, 2008, NYSE Euronext completed its acquisition of the Ameri - Effective January 1, 2008, the Company adopted the provisions of State - can Stock Exchange and, as a result, the Company received 15,336 ment of Financial Accounting Standards No. 157 (“SFAS 157”), “ Fair Value shares of NYSE Euronext common stock and future cash consideration in Measurements ”, which defines fair value, establishes a framework for exchange for its American Stock Exchange membership interests. measuring fair value, establishes a fair value measurement hierarchy, and expands fair value measurement disclosures. Fair value, as defined by SFAS On January 14, 2008, the Company acquired a major part of CIBC World 157, is the price that would be received to sell an asset or paid to transfer a Market Inc.’s U.S. capital markets businesses, as well as CIBC Israel Ltd., liability in an orderly transaction between market participants at the meas - now operating as Oppenheimer Israel (OPCO) Ltd. and on September 5, urement date. The fair value hierarchy established by SFAS 157 prioritizes 2008 and November 4, 2008, the Company acquired CIBC’s operations the inputs used in valuation techniques into the following three categories in the U.K. and Asia, (collectively the “New Capital Markets Business”) (highest to lowest priority): This acquisition is being accounted for under the purchase method in Level 1: Observable inputs that reflect quoted prices (unadjusted) for accordance with Statement of Financial Accounting Standards No. 141 identical assets or liabilities in active markets; (“SFAS 141”), Business Combinations . See note 18. Level 2: Inputs other than quoted prices included in Level 1 that are These consolidated financial statements have been prepared in conform - observable for the asset or liability either directly or indirectly; and ity with accounting principles generally accepted in the United States of America for purpose of inclusion in the Company’s Annual Report on Level 3: Unobservable inputs Form 10-K and in its annual report to shareholders. All material intercom - The Company’s financial instruments are recorded at fair value and gener - pany transactions and balances have been eliminated in the preparation ally are classified within level 1 or level 2 within the fair value hierarchy of the consolidated financial statements. Since operations are predomi - using quoted market prices or quotes from market makers or broker-deal - nantly based in the United States of America, these consolidated financial ers. Financial instruments classified within level 1 are valued based on statements are presented in U.S. dollars. quoted market prices in active markets and consist of U.S. government, Description of Business federal agency, and sovereign government obligations, corporate equities, The Company engages in a broad range of activities in the securities and certain money market instruments. Level 2 financial instruments prima - industry, including retail securities brokerage, institutional sales and trad - rily consist of investment grade and high-yield corporate debt, convertible ing, investment banking (both corporate and public finance), research, bonds, mortgage and asset-backed securities, municipal obligations, and market-making, securities lending activities, trust services, and invest - certain money market instruments. Financial instruments classified as Level ment advisory and asset management services. 2 are valued based on quoted prices for similar assets and liabilities in active markets and quoted prices for identical or similar assets and liabilities in Use of Estimates markets that are not active. Some financial instruments are classified within The preparation of the consolidated financial statements in conformity Level 3 within the fair value hierarchy as observable pricing inputs are not with generally accepted accounting principles requires management to available due to limited market activity for the asset or liability. Such finan - make estimates and assumptions that affect the reported amounts of cial instruments include investments in hedge funds and private equity assets and liabilities and disclosures of contingent assets and liabilities at funds where the Company is general partner, less-liquid private label mort -
28 | Oppenheimer Holdings Inc. gage and asset-backed securities, and auction rate securities. A description derives the estimated carrying amount of its operating segments by esti - of the valuation techniques applied and inputs used in measuring the fair mating the amount of shareholders’ equity required to support the activi - value of the Company’s financial instruments is located in note 4. ties of each operating segment. Fair Value Option SFAS 142 requires goodwill of a reporting unit to be tested for impairment The Company adopted the provisions of Statement of Financial between annual tests if an event occurs or circumstances change that Accounting Standards No. 159 (“SFAS 159”), “ The Fair Value Option for would more likely than not reduce the fair value of a reporting unit below Financial Assets and Financial Liabilities, Including an Amendment of its carrying amount. In 2008, the financial services industry and the securi - FASB Statement No. 115 ” effective January 1, 2008. SFAS 159 provides ties markets generally were materially and adversely affected by significant entities the option to measure certain financial assets and financial liabil - declines in the values of nearly all financial asset classes and by a significant ities at fair value with changes in fair value recognized in earnings each lack of liquidity. The Company’s stock price, consistent with stock prices in period. SFAS 159 permits the fair value option election on an instru - the broader financial services sector, declined significantly during this period ment-by-instrument basis at initial recognition of an asset or liability or of time. Beginning in June 2008, the Company’s market capitalization fell upon an event that gives rise to a new basis of accounting for that below recorded book value on a consistent basis which continued through instrument. The Company has elected to apply the fair value option to the end of the year. Due to the significant discount between the market its loan trading portfolio which resides in the newly formed entity, OPY capitalization and book value, the Company viewed this discount as a trig - Credit Corp. Management has elected this treatment as it is consistent gering event to performing an interim goodwill impairment test under with the manner in which the business is managed as well as the way SFAS 142. As a result, the Company performed an impairment analysis that financial instruments in other parts of the business are recorded. between annual tests as of September 30, 2008 and also performed its There were no loan positions held in the secondary loan trading portfo - annual test for goodwill impairment as of December 31, 2008. See note 15 lio during the year ended December 31, 2008. for further discussion. Loans and Allowances for Doubtful Accounts Excess of fair value of assets acquired over cost arose from the acquisition of Customer receivables, primarily consisting of margin loans collateralized the New Capital Markets Business. If the earn-out from the acquisition of by customer-owned securities, are charged interest at rates similar to other the New Capital Markets Business (see note 18) exceeds $5.0 million in any such loans made throughout the industry. Customer receivables are stated of the five years from 2008 through 2012, the excess will first reduce the net of allowance for doubtful accounts. The Company reviews large cus - excess of fair value of acquired assets over cost and second will create good - tomer accounts that do not comply with the Company’s margin require - will, as applicable. ments on a case-by-case basis to determine the likelihood of collection Intangible Assets and records an allowance for doubtful accounts following that process. Intangible assets arose upon the acquisition, in January 2003, of the U.S. For small customer accounts that do not comply with the Company’s mar - Private Client and Asset Management Divisions of CIBC World Markets gin requirements, the allowance for doubtful accounts is generally Inc. (the “Oppenheimer Divisions”) and are comprised of customer rela - recorded as the amount of unsecured or partially secured receivables. tionships and trademarks and trade names. Customer relationships are The Company also makes loans or pays advances to financial advisors as carried at $490,000 (which is net of accumulated amortization of $4.4 part of its hiring process. Reserves are established on these receivables if million) and are being amortized on a straight-line basis over 80 months the financial advisor is no longer associated with the Company and the commencing in January 2003. Trademarks and trade names, carried at receivable has not been promptly repaid or if it is determined that it is $31.7 million, which are not amortized, are subject to at least an annual probable the amount will not be collected. test for impairment to determine if the fair value is less than their carry - ing amount. See note 15 for further discussion. Legal and Regulatory Reserves The Company records reserves related to legal and regulatory proceedings Intangible assets also arose from the acquisition of the New Capital Mar - in accounts payable and other liabilities. The determination of the kets Business in January 2008 and are comprised of customer relationships amounts of these reserves requires significant judgment on the part of and a below market lease. Customer relationships are carried at $880,600 management. Management considers many factors including, but not (which is net of accumulated amortization of $60,500) and are being limited to: the amount of the claim; specifically in the case of client litiga - amortized on a straight-line basis over 180 months commencing in Janu - tion, the amount of the loss in the client’s account and the possibility of ary 2008. The below market lease is carried at $17.0 million (which is net wrongdoing, if any, on the part of an employee of the Company; the basis of accumulated amortization of $4.3 million) and is being amortized on a and validity of the claim; previous results in similar cases; and legal prece - straight-line basis over 60 months commencing in January 2008. dents and case law as well as the timing of the resolution of such matters. Trademarks and trade names recorded as at December 31, 2008 have Each legal and regulatory proceeding is reviewed with counsel in each been tested for impairment and it has been determined that no impair - accounting period and the reserve is adjusted as deemed appropriate by ment has occurred. management. Any change in the reserve amount is recorded in the results of that period. The assumptions of management in determining the esti - Share-Based Compensation Plans mates of reserves may be incorrect and the actual disposition of a legal or The Company estimates the fair value of share-based awards using the regulatory proceeding could be greater or less than the reserve amount. Black-Scholes option-pricing model and applies to it a forfeiture rate based on historical experience. Key input assumptions used to estimate Goodwill the fair value of share-based awards include the expected term and the The Company determines the fair value of each of its reporting units and expected volatility of the Company’s Class A Shares over the term of the the fair value of the reporting unit’s goodwill under the provisions of SFAS award, the risk-free interest rate over the expected term, and the Com - No. 142, “ Goodwill and Other Intangible Assets ” (“SFAS 142”). Goodwill pany’s expected annual dividend yield. Estimates of fair value are not arose upon the acquisitions of Oppenheimer, Old Michigan Corp., Joseph - intended to predict actual future events or the value ultimately realized by thal & Co. Inc., Grand Charter Group Incorporated and the Oppenheimer persons who receive share-based awards. Divisions, as defined below. The Company defines a reporting unit as an operating segment. The Company’s goodwill resides in its Private Client Income Taxes Division (“PCD”). Goodwill of a reporting unit is subject to at least an The Company estimates taxes payable and records income tax reserves. annual test for impairment to determine if the fair value of goodwill of a These reserves are based on historic experience and may not reflect the ulti - reporting unit is less than its estimated carrying amount. The Company mate liability. The Company monitors and adjusts these reserves as necessary.
Oppenheimer Holdings Inc . | 29 Revenue Recognition advisors and key revenue producers as part of the Company’s overall growth strategy. These loans are generally forgiven over a service period of Brokerage 3 to 5 years from the initial date of the loan or based on productivity levels Customers’ securities and commodities transactions are reported on a set - of employees and all such notes are contingent on the employees’ contin - tlement date basis, which is generally three business days after trade date ued employment with the Company. The unforgiven portion of the notes for securities transactions and one day for commodities transactions. becomes due on demand in the event the employee departs during the Related commission income and expense is recorded on a trade date basis. service period. Management monitors and compares individual financial Principal transactions advisor production to each loan issued to ensure future recoverability. Transactions in proprietary securities and related revenue and expenses are Amortization of notes receivable is included in the statements of opera - recorded on a trade date basis. Securities owned and securities sold, but tions in compensation and related expenses. not yet purchased, are reported at fair value generally based upon quoted Office Facilities prices. Realized and unrealized changes in fair value are recognized in prin - Office facilities are stated at cost less accumulated depreciation and cipal transactions, net in the period in which the change occurs. amortization. Depreciation and amortization of furniture, fixtures, and Fees equipment is provided on a straight-line basis generally over 3-7 years. Underwriting revenues and advisory fees from mergers, acquisitions and Leasehold improvements are amortized on a straight-line basis over the restructuring transactions are recorded when services for the transac - shorter of the life of the improvement or the remaining term of the tions are substantially completed and income is reasonably deter - lease. Leases with escalating rents are expensed on a straight-line basis minable, generally as set forth under the terms of the engagement. over the life of the lease. Landlord incentives are recorded as deferred Transaction-related expenses, primarily consisting of legal, travel and rent and amortized, as reductions to lease expense, on a straight-line other costs directly associated with the transaction, are deferred and rec - basis over the life of the applicable lease. ognized in the same period as the related investment banking transac - tion revenue. Underwriting revenues are presented net of related Debt Issuance Costs expenses. Non-reimbursed expenses associated with advisory transac - Debt issuance costs, included in other assets, from the issuance and tions are recorded within other expenses. amendment of the Senior Secured Credit Note are reported in the con - solidated balance sheet as deferred charges and amortized using the Asset Management interest method. Debt issuance costs include underwriting and legal fees Asset management fees are generally recognized over the period the as well as other incremental expenses directly attributable to realizing related service is provided based on the account value at the valuation the proceeds of the Senior Secured Credit Note. date per the respective asset management agreements. In certain circum - stances, OAM is entitled to receive performance fees when the return on Drafts Payable assets under management exceeds certain benchmark returns or other Drafts payable represent amounts drawn by the Company against a bank. performance targets. Performance fees are generally based on investment Foreign Currency Translations performance over a 12-month period and are not subject to adjustment Foreign currency balances have been translated into U.S. dollars as fol - once the measurement period ends. Such fees are computed as at the lows: monetary assets and liabilities at exchange rates prevailing at period fund’s year-end when the measurement period ends and generally are recorded as earned in the fourth quarter of the Company’s fiscal year. end; revenue and expenses at average rates for the period; and non- Asset management fees and performance fees are included in advisory monetary assets and shareholders’ equity at historical rates. Cumulative fees in the consolidated statements of operations. Assets under manage - translation adjustments of $31,000 are included in accumulated other ment are not included as assets of the Company. comprehensive loss. The functional currency of the overseas operations is the local currency in each location. Balance Sheet Items Income Taxes Cash and Cash Equivalents The Company accounts for income taxes in accordance with Statement The Company defines cash equivalents as highly liquid investments with of Financial Accounting Standards No. 109, “ Accounting for Income original maturities of less than 90 days that are not held for sale in the Taxes ”. Deferred income tax assets and liabilities arise from temporary ordinary course of business. differences between the tax basis of an asset or liability and its reported Receivables From/Payables To Brokers and Clearing Organizations amount in the consolidated financial statements. Deferred tax balances Securities borrowed and securities loaned are carried at the amounts of are determined by applying the enacted tax rates applicable to the peri - cash collateral advanced or received. Securities borrowed transactions ods in which items will reverse. require the Company to deposit cash or other collateral with the lender. In June 2006, the FASB issued Interpretation 48, “ Accounting for Uncer - The Company receives cash or collateral in an amount generally in excess tainty in Income Taxes ”, an interpretation of FASB Statement No. 109, of the market value of securities loaned. The Company monitors the mar - Accounting for Income Taxes. (“FIN 48”). FIN 48 clarifies the accounting ket value of securities borrowed and loaned on a daily basis and may for uncertainty in income taxes recognized in a company’s financial state - require counterparties to deposit additional collateral or return collateral ments and prescribes a recognition threshold and measurement attribute pledged, when appropriate. for the financial statement recognition and measurement of a tax posi - Securities failed to deliver and receive represent the contract value of tion taken or expected to be taken in a tax return. FIN 48 also provides securities which have not been received or delivered by settlement date. guidance on derecognition, classification, interest and penalties, account - ing in interim periods, disclosure and transition. Notes Receivable The Company had notes receivable, net from employees of approximately The Company adopted the provisions of FIN 48 on January 1, 2007 $53.4 million at December 31, 2008. The notes are recorded in the con - which resulted in a cumulative adjustment to opening retained earnings solidated balance sheet at face value of approximately $95.4 million less in the amount of $823,000. See note 11. Management has evaluated its accumulated amortization and reserves of $34.5 million and $7.5 million, tax positions for the year ended December 31, 2008 and determined that respectively, at December 31, 2008. These amounts represent recruiting it has no uncertain tax positions requiring financial statement recognition and retention payments generally in the form of upfront loans to financial as of December 31, 2008.
30 | Oppenheimer Holdings Inc. Share-Based Payments SFAS 157 in a market that is not active and provides an example to illus - The Company has share-based compensation plans. In December 2004, trate key considerations in determining the fair value of a financial asset the Financial Accounting Standards Board issued a revision to SFAS No. when the market for that financial asset is not active. FSP 157-3 is effec - 123, “ Accounting for Stock-Based Compensation ”, SFAS No. 123(R), tive October 10, 2008 which includes prior periods in which financial “Share-Based Payment ”. SFAS No. 123(R) requires that share-based pay - statements have not been issued. The adoption of FSP 157-3 did not have ments be accounted for at fair value. The Company commenced a material impact on the Company’s consolidated financial statements. expensing share-based compensation awards on January 1, 2006 using Recently Issued the ‘modified prospective method’. Under that method, the provisions In December 2007, the FASB issued SFAS No. 141(R), “ Business Combi - of SFAS No. 123(R) are applied to remaining unvested share-based nations ” (“SFAS No. 141(R)”). SFAS No. 141(R) requires the acquiring awards outstanding at December 31, 2005 as well as to share-based entity in a business combination to recognize the full fair value of assets awards granted subsequent to adoption. The consolidated financial acquired and liabilities assumed in the transaction (whether a full or par - statements for periods prior to adoption are not restated for the effects tial acquisition); establishes the acquisition-date fair value as the measure - of adopting SFAS No. 123(R). ment objective for all assets acquired and liabilities assumed; requires Interest Expense expensing of most transaction and restructuring costs; and requires the Interest expense is primarily comprised of interest on bank call loans, the acquirer to disclose to investors and other users all of the information Senior Secured Credit Note, the Subordinated Note, securities loaned, needed to evaluate and understand the nature and financial effect of the and customer payables. business combination. SFAS No. 141(R) applies to all transactions or other events in which the Company obtains control of one or more businesses, New Accounting Pronouncements including those sometimes referred to as “true mergers” or “mergers of Recently Adopted equals” and combinations achieved without the transfer of considera - In September 2006, the FASB issued Statement of Financial Accounting tion, for example, by contract alone or through the lapse of minority veto Standards No. 157 (“SFAS 157”), “ Fair Value Measurements ”, which rights. SFAS No. 141(R) applies prospectively to business combinations for provides expanded information about the extent to which companies which the acquisition date is on or after December 1, 2009. measure assets and liabilities at fair value, the information used to meas - ure fair value, and the effect of fair value measurements on earnings. In February 2008, the FASB issued FSP FAS No. 140-3, “ Accounting for SFAS 157 applies whenever other standards require (or permit) assets or Transfers of Financial Assets and Repurchase Financing Transactions ” liabilities to be measured at fair value and does not expand the use of fair (“FSP No. 140-3”). FSP No. 140-3 requires an initial transfer of a financial value in any new circumstances. In addition, SFAS 157 prohibits recogni - asset and a repurchase financing that was entered into contemporane - tion of “block discounts” for large holdings of unrestricted financial ously or in contemplation of the initial transfer to be evaluated as a linked instruments where quoted prices are readily and regularly available in an transaction under SFAS No. 140 unless certain criteria are met, including active market. SFAS 157 is effective for financial statements issued for fis - that the transferred asset must be readily obtainable in the marketplace. cal years beginning after November 15, 2007, and interim periods within FSP No. 140-3 is effective for fiscal years beginning after November 15, those fiscal years with early adoption permitted. 2008, and will be applied to transactions entered into after the date of adoption. Early adoption is prohibited. The Company is currently evaluat - On February 12, 2008, the FASB issued FASB Staff Position No. 157-2 (FAS ing the impact of adopting FSP No. 140-3 on its financial condition, 157-2) which delays the effective date of SFAS 157 for non financial assets results of operations and cash flows. and liabilities except for items that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis (at least annu - In December 2008, the FASB issued FSP No. FAS 140-4 and FIN 46(R)-8, ally). As a result, the Company only partially adopted the provisions of “Disclosures by Public Entities (Enterprises) about Transfers of Financial SFAS 157 on January 1, 2008. This partial adoption did not result in any Assets and Interests in Variable Interest Entities. ” FSP No. FAS 140-4 and transition adjustment to opening retained earnings. The full adoption of FIN 46(R)-8 requires enhanced disclosures about transfers of financial assets the provisions of SFAS 157 is not expected to have a material impact on and interests in variable interest entities. The FSP is effective for interim and the Company’s consolidated financial statements. See Note 4 to the con - annual periods ending after December 15, 2008. Since the FSP requires solidated financial statements for further information on SFAS 157. only additional disclosures concerning transfers of financial assets and inter - ests in variable interest entities, adoption of the FSP did not affect the Com - In February 2007, the FASB issued Statement of Financial Accounting pany’s financial condition, results of operations or cash flows. Standards No. 159 (“SFAS 159”), “ The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB State - In March 2008, the FASB issued SFAS No. 161, “ Disclosures about Deriva - ment No. 115 ”, which permits entities to choose to measure many finan - tive Instruments and Hedging Activities — an amendment of FASB State - cial instruments and certain other items at fair value. SFAS 159 provides ment No. 133 ” (“SFAS No. 161”). SFAS No. 161 requires enhanced entities with the option to mitigate volatility in reported earnings by meas - disclosures about an entity’s derivative and hedging activities, and is uring related assets and liabilities differently without having to apply com - effective for financial statements issued for fiscal years beginning after plex hedge accounting provisions. In addition, SFAS 159 allows entities to November 15, 2008, with early application encouraged. The Company measure eligible items at fair value at specified election dates and to report will adopt SFAS No. 161 in the first quarter of 2009. Since SFAS No. 161 unrealized gains and losses on items for which the fair value option has requires only additional disclosures concerning derivatives and hedging been elected in earnings. SFAS 159 is effective for financial statements activities, adoption of SFAS No. 161 is not expected to affect the Com - issued for fiscal years beginning after November 15, 2007, and interim pany’s financial condition, results of operations or cash flows. periods within those fiscal years with early adoption permitted provided that the entity also elects to apply the provisions of SFAS 157. The Com - 2. Cash and Securities Segregated For Regulatory and Other pany adopted the provisions of SFAS 159 for its loan trading portfolio Purposes effective January 1, 2008. The adoption of SFAS 159 did not result in any Deposits of $25.1 million (2007 – $39.8 million) were held at year-end in transition adjustment to opening retained earnings. See Note 4 to the special reserve bank accounts for the exclusive benefit of customers in accor - consolidated financial statements for more information on SFAS 159. dance with regulatory requirements. To the extent permitted, these deposits are invested in interest bearing accounts collateralized by qualified securities. On October 10, 2008, the FASB issued FASB Staff Position No. FAS 157-3 “Determining the Fair Value of a Financial Asset When the Market for That Evanston had client funds held in escrow totaling $31.4 million at December Asset Is Not Active ” (“FSP 157-3”). FSP 157-3 clarifies the application of 31, 2008 (2007 – $27.8 million).
Oppenheimer Holdings Inc . | 31 3. Receivable from and Payable to Brokers and Clearing based on quoted market prices when available or a valuation model that Organizations generally utilizes interest rate yield curves and credit spreads as inputs. Sov - As at December 31, ereign obligations are categorized in Level 1 or 2 of the fair value hierarchy. Amounts are expressed in thousands of dollars. 2008 2007 Corporate Debt & Other Obligations Receivable from brokers and The fair value of corporate bonds is estimated using recent transactions, clearing organizations consist of: Deposits paid for securities borrowed $192,980 $511,978 broker quotations, and bond spread information. Corporate bonds are Receivable from brokers 27,517 78,125 generally categorized in Level 2 of the fair value hierarchy. Securities failed to deliver 17,965 38,626 Mortgage and Other Asset-Backed Securities Clearing organizations 14,318 13,176 The Company holds non-agency securities primarily collateralized by home Omnibus accounts 8,233 17,672 equity and manufactured housing which are valued based on external Other 17,222 12,705 pricing and spread data provided by independent pricing services and are $278,235 $672,282 generally categorized in Level 2 of the fair value hierarchy. When position specific external pricing is not observable, the valuation is based on yields Payable to brokers and clearing and spreads for comparable bonds and, consequently, the positions are organizations consist of: Deposits received for securities loaned $114,919 $759,368 categorized in Level 3 of the fair value hierarchy. Securities failed to receive 31,502 49,504 Convertible Bonds Clearing organizations and other 13,227 153 The fair value of convertible bonds is estimated using recently executed $159,648 $809,025 transactions and dollar-neutral price quotations, where observable. When observable price quotations are not available, fair value is determined 4. Financial instruments and Fair Value Measurement based on cash flow models using yield curves and bond spreads as key inputs. Convertible bonds are generally categorized in Level 2 of the fair Financial Instruments value hierarchy; in instances where significant inputs are unobservable, Securities owned and securities sold but not yet purchased, investments they are categorized in Level 3 of the hierarchy. and derivative contracts are carried at fair value with changes in fair value recognized in earnings each period. The Company’s other financial instru - Corporate Equities ments are generally short-term in nature or have variable interest rates and Exchange-traded equity securities and options are generally valued based as such their carrying values approximate fair value, with the exception of on quoted prices from the exchange and categorized as Level 1 in the fair notes receivable from employees which are carried at cost. value hierarchy. Securities Owned and Securities Sold, But Not Yet Purchased at Fair Value Other Amounts are expressed in thousands of dollars. The Company holds Auction Rate Preferred Securities (“ARPS”) issued by December 31, December 31, closed-end funds with interest rates that reset through periodic auctions. 2008 2007 Due to the auction mechanism and generally liquid markets, ARPS have Owned Sold Owned Sold historically been categorized as Level 1 in the fair value hierarchy. Begin - U.S. Government, agency ning in February 2008, uncertainties in the credit markets have resulted in and sovereign obligations $20,751 $1,212 $17,274 $2,303 substantially all of the auction rate securities market experiencing failed Corporate debt and auctions. Once the auctions failed, the ARPS could no longer be valued other obligations 23,667 6,370 28,329 1,051 using observable prices set in the auctions. As a result, the Company has Mortgage and other resorted to less observable determinants of the fair value of ARPS includ - asset-backed securities 7,535 4 6,737 23 ing the strength in the underlying credits, announced issuer redemptions, Municipal obligations 15,051 1,024 25,340 687 completed issuer redemptions, and announcements from issuers regard - Convertible bonds 19,730 3,806 ––ing their intentions with respect to their outstanding auction rate securi - ties. The failure of auctions has resulted in a Level 3 categorization of ARPS Corporate equities 33,959 14,595 48,181 5,147 in the fair value hierarchy. Other 6,786 443 2,634 202 Investments Total $127,479 $27,454 $128,495 $9,413 In its role as general partner in certain hedge funds and private equity Securities owned and securities sold, but not yet purchased, consist of trad - funds, the Company holds direct investments. The Company uses the net ing and investment securities at fair values. Included in securities owned at asset value of the underlying fund as a basis for estimating the fair value of December 31, 2008 are corporate equities with estimated fair values of its investment. Due to the illiquid nature of these investments and difficul - approximately $10.7 million ($15.4 million at December 31, 2007), which ties in obtaining observable inputs, these investments are included in Level are related to deferred compensation liabilities to certain employees 3 of the fair value hierarchy. As a result of recent market conditions, the included in accrued compensation on the consolidated balance sheet. Company reclassified its investments in hedge funds to Level 3 during the quarter ended December 31, 2008. Valuation Techniques A description of the valuation techniques applied and inputs used in meas - Derivative Contracts uring the fair value of the Company’s financial instruments is as follows: From time to time, the Company transacts in exchange-traded and over- the-counter derivative transactions to manage its interest rate risk. U.S. Government, Agency, & Sovereign Obligations Exchange-traded derivatives, namely U.S. Treasury futures, are valued based U.S. Government securities are valued using quoted market prices obtained on quoted prices from the exchange and are categorized as Level 1 of the from active market makers and inter-dealer brokers and, accordingly, are fair value hierarchy. Over-the-counter derivatives, namely interest rate swap categorized in Level 1 of the fair value hierarchy. Agency securities primarily contracts, are valued using a discounted cash flow model using observable consist of mortgage pass-through securities issued by federal agencies and interest rate inputs and are categorized in Level 2 of the fair value hierarchy. are valued based on quoted market prices when available or by bench - marking model-derived prices to quoted market prices and trade data for As described below in “Credit Concentrations”, the Company participates identical or comparable securities and are categorized in Level 1 or 2 of the in loan syndications and operates as underwriting agent in leveraged financ - fair value hierarchy. The fair value of sovereign obligations is determined ing transactions where it utilizes a warehouse facility provided by CIBC to
32 | Oppenheimer Holdings Inc. extend financing commitments to third-party borrowers identified by the Level 3 Assets and Liabilitie s Company. The Company uses broker quotations on loans trading in the sec - The following table presents additional information about Level 3 assets ondary market as a proxy to determine the fair value of the underlying loan and liabilities measured at fair value on a recurring basis: commitment which is categorized in Level 3 of the fair value hierarchy. Amounts are expressed in thousands of dollars except per share amounts. Fair Value Measurement The Company’s assets and liabilities recorded at fair value on a recurring for the year ended December 31, 2008 Purchases basis as of December 31, 2008 have been categorized based upon the fair Realized Unrealized Sales value hierarchy as follows: Opening Gains Gains Issuances Transfers Ending Balance (Losses) (Losses) Settlements In (Out) Balance Fair Value Measurement: Assets Assets: Amounts are expressed in thousands of dollars. As of December 31, 2008 Convertible bonds $ – 33 46 – 736 $815 Level 1 Level 2 Level 3 Total Mortgage and other asset-backed Cash equivalents $8,627 $ – $ – $8,627 securities (1) $881 (14) (64) 898 (91) $1,610 Securities segregated Short-term for regulatory and instruments other purposes 11,499 ––11,499 and other (2) $ –– –5,347 (22) $5,325 Deposits with clearing Investments (3) $1,820 140 (3,706) 2,821 11,010 $12,085 organizations 8,295 ––8,295 Liabilities: Securities owned: Other (2) $ –– –(375) – $(375) U.S. Government, agency, and Derivative sovereign obligations 17,738 3,013 – 20,751 contracts (4) $ –– –(2,516) – $(2,516) (1) Represents non-agency securities primarily collateralized by home Corporate debt and other obligations – 23,667 – 23,667 equity and and manufactured housing. Mortgage and other (2) Represents auction rate preferred securities that failed in the auction asset-backed securities – 5,925 1,610 7,535 rate market. Positions are marked at par due to strength in the underly - Municipal obligations – 15,051 – 15,051 ing credits and the recent trend in issuer redemptions. Convertible bonds – 18,915 815 19,730 (3) Primarily represents general partner ownership interests in hedge funds Corporate equities 33,959 ––33,959 and private equity funds sponsored by the Company. Other 1,461 – 5,325 6,786 (4) Represents unrealized losses on excess retention exposure on lever - aged finance underwriting activity, described below under Credit Securities owned, at fair value 53,158 66,571 7,750 127,479 Concentrations. Investments (1) 597 19,121 12,085 31,803 Derivative Activities Derivative contracts (2) – 71 – 71 The Company transacts, on a limited basis, in exchange traded and over- Total $82,176 $85,763 $19,835 $187,776 the-counter derivatives for both trading and investment as well as for asset and liability management. The notional amounts and fair values of (1) Included in other assets on the consolidated balance sheet. the Company’s derivatives at December 31, 2008 and 2007 by product (2) Included in receivable from brokers and clearing organizations on the were as follows: consolidated balance sheet. Dollar amounts are expressed in thousands. Fair Value Measurement: Liabilities December 31, 2008 December 31, 2007 Amounts are expressed in thousands of dollars. As of December 31, 2008 Notional Assets Liabilities Notional Assets Liabilities Level 1 Level 2 Level 3 Total Interest rate Securities sold, but not yet purchased: swaps $47,000 – $2,315 $77,000 – $1,674 U.S. Government, agency, and U.S. Treasury sovereign obligations $1,212 $– $– $1,212 futures $30,000 – $341 $29,600 – $152 Corporate debt Purchase and other obligations – 6,370 – 6,370 of TBAs $1,120 $71 – $17,262 $232 – Sale of TBAs $1,090 – $58 $17,222 – $324 Mortgage and other asset-backed securities –4–4 On September 29, 2006, the Company entered into interest rate swap Municipal obligations – 1,024 – 1,024 transactions to hedge the interest payments associated with the floating Convertible bonds – 3,806 – 3,806 rate Senior Secured Credit Note, which is subject to change due to changes Corporate equities 14,595 ––14,595 in 3-Month LIBOR. See Note 7 for further information. These swaps have Other 68 – 375 443 been designated as cash flow hedges under Statement of Financial Accounting Standards No. 133, “ Accounting for Derivative Instruments Securities sold, but not yet and Hedging Activities ”. Changes in the fair value of the swap hedges are purchased, at fair value 15,875 11,204 375 27,454 expected to be highly effective in offsetting changes in the interest pay - Derivative contracts (3) 341 2,373 2,516 5,230 ments due to changes in 3-Month LIBOR. For the year ended December 31, Total $16,216 $13,577 $2,891 $32,684 2008, the effective portion of the loss on the interest rate swaps net of tax was approximately $388,000 and this amount has been recorded as other (3) Included in payable to brokers and clearing organizations (Levels 1 and comprehensive loss on the consolidated statements of other comprehen - 2) and accounts payable and other liabilities (Level 3) on the consoli - sive income (loss). The amount of the effective portion was zero for the dated balance sheet. year ended December 31, 2008. The interest rate swaps had a weighted-
Oppenheimer Holdings Inc . | 33 average fixed interest rate of 5.44% and 5.45% and a weighted-average The Company obtains short-term borrowing through bank call loans maturity of 0.8 years and 1.1 years at December 31, 2008 and December which are generally payable on demand and bear interest at various rates 31, 2007, respectively. not exceeding the broker call rate. See note 6. Futures contracts represent commitments to purchase or sell securities or Credit Concentrations other commodities at a future date and at a specified price. Market risk Credit concentrations may arise from trading, investing, underwriting and exists with respect to these instruments. Notional or contractual amounts financing activities and may be impacted by changes in economic, industry are used to express the volume of these transactions and do not represent or political factors. In the normal course of business, the Company may be the amounts potentially subject to market risk. At December 31, 2008, the exposed to risk in the event customers, counterparties including other bro - Company had 300 open short contracts for 10-year U.S. Treasury notes. kers and dealers, issuers, banks, depositories or clearing organizations are The Company has some limited trading activities in pass-through mort - unable to fulfill their contractual obligations. The Company seeks to miti - gage-backed securities eligible to be sold in the “to-be-announced” or gate these risks by actively monitoring exposures and obtaining collateral TBA market. TBAs provide for the forward or delayed delivery of the as deemed appropriate. Included in receivable from brokers and clearing underlying instrument with settlement up to 180 days. The contractual or organizations as of December 31, 2008 are receivables from three major notional amounts related to these financial instruments reflect the volume U.S. broker-dealers totaling approximately $108.8 million. of activity and do not reflect the amounts at risk. Unrealized gains and The Company participates in loan syndications through the Debt Capital losses on TBAs are recorded in the consolidated balance sheets in receiv - Markets business acquired from CIBC (see note 18). Through OPY Credit able from brokers and clearing organizations and payable to brokers and Corp., the Company operates as underwriting agent in leveraged financing clearing organizations, respectively, and in the consolidated statement of transactions where it utilizes a warehouse facility provided by CIBC to operations as principal transactions revenue. extend financing commitments to third-party borrowers identified by the Collateralized Transactions Company. The Company has exposure, up to a maximum of 10%, of the The Company enters into collateralized borrowing and lending transac - excess underwriting commitment provided by CIBC over CIBC’s targeted tions in order to meet customers’ needs and earn residual interest rate loan retention (defined as “Excess Retention”). The Company quantifies its spreads, obtain securities for settlement and finance trading inventory Excess Retention exposure by assigning a fair value to the underlying loan positions. Under these transactions, the Company either receives or pro - commitment provided by CIBC (in excess of what CIBC has agreed to vides collateral, including U.S. government and agency, asset-backed, cor - retain) which is based on the fair value of the loans trading in the secondary porate debt, equity, and non-U.S. government and agency securities. market. To the extent that the fair value of the loans has decreased, the Company records an unrealized loss on the Excess Retention. Underwriting The Company receives collateral in connection with securities borrowed transactions and customer margin loans. Under many agreements, the of loans pursuant to the warehouse facility is subject to joint credit approval Company is permitted to sell or repledge the securities received (e.g., use by the Company and CIBC. The maximum aggregate principal amount of the securities to enter into securities lending transactions, or deliver to the warehouse facility is $1.5 billion of which the Company utilized $80.3 counterparties to cover short positions). At December 31, 2008, the fair million and had Excess Retention of $5.3 million as of December 31, 2008. value of securities received as collateral under securities borrowed transac - The Company recorded an unrealized loss of $2.5 million on mark-to-mar - tions was $188.8 million, of which the Company has re-pledged approxi - ket exposures related to Excess Retention as of December 31, 2008. mately $61.0 million under securities loaned transactions. As a result of the acquisition from CIBC of the New Capital Markets Busi - The Company pledges its securities owned for securities lending and to ness (see note 18), for a transition period, the Company has a clearing collateralize bank call loan transactions. The carrying value of pledged arrangement with CIBC World Markets Inc. to clear transactions relating securities owned that can be sold or re-pledged by the counterparty was to Oppenheimer Israel (OPCO) Ltd. trading and sales. Additionally, the $1.9 million as at December 31, 2008 ($1.3 million at December 31, Company also has clearing arrangements with Pershing LLC (foreign secu - 2007). The carrying value of securities owned by the Company that have rities) and R.J. O’Brien & Associates (commodities). These clearing brokers been loaned or pledged to counterparties where those counterparties do have the right to charge the Company for losses that result from a client’s not have the right to sell or re-pledge the collateral was $33.2 million as at failure to fulfill its contractual obligations. Accordingly, the Company has December 31, 2008. credit exposures with these clearing brokers. The clearing brokers can re- hypothecate the securities held on behalf of the Company. As the right to The Company monitors the market value of collateral held and the market charge the Company has no maximum amount and applies to all trades value of securities receivable from others. It is the Company’s policy to executed through the clearing brokers, the Company believes there is no request and obtain additional collateral when exposure to loss exists. In maximum amount assignable to this right. At December 31, 2008, the the event the counterparty is unable to meet its contractual obligation to Company had recorded no liabilities with regard to this right. The Com - return the securities, the Company may be exposed to off-balance sheet risk of acquiring securities at prevailing market prices. pany’s policy is to monitor the credit standing of the clearing brokers and banks with which it conducts business. One of the Company’s funds in which it acts as a general partner and also owns a limited partnership interest had a prime brokerage relationship Variable Interest Entities (VIEs) with Lehman Brothers Inc. and a Margin Lending Agreement with Lehman FASB Interpretation No. 46, as revised (“FIN 46R”), “ Consolidation of Vari - Brothers International Europe (“LBIE”). On September 15, 2008 Lehman able Interest Entities ”, applies to certain entities in which equity investors Brothers Holding Incorporated, the parent company of LBIE, filed for bank - do not have the characteristics of a controlling financial interest or do not ruptcy in the U.S. courts. As a result, the fund’s account at LBIE was frozen have sufficient equity at risk for the entity to finance its activities without as of September 15, 2008 when LBIE was placed under administration additional subordinated financial support from other parties. The primary and began winding down its business. As of December 31, 2008, the beneficiary of a VIE is the party that absorbs a majority of the entity’s fund had fully-paid securities with a fair value of approximately $5.3 mil - expected losses, receives a majority of its expected residual returns or lion, all of which remain frozen at LBIE. Pursuant to the Margin Lending both, as a result of holding variable interests. In its role as general partner Agreement, fully-paid securities are held at LBIE in a segregated account in certain private equity funds, the Company holds variable interests in and not re-hypothecated. The Company believes the fund will receive which the Company is not considered the primary beneficiary and there - these amounts from LBIE, but is unable to estimate a timetable for their fore does not consolidate the entities. The primary beneficiary in these pri - return. The securities cannot be sold while held by the administrator. vate equity funds resides among the limited partnership interests.
34 | Oppenheimer Holdings Inc. 5. Office Facilities charge ratio and maximum leverage ratio and minimum net capital December 31, requirements with respect to Oppenheimer. Amounts are expressed in thousands of dollars. 2008 2007 On December 22, 2008, certain terms of the Senior Secured Credit Note Cost Accumulated Net book Net book were amended, including (1) revised financial covenant levels that require depreciation/ value value that (i) the Company maintain a maximum leverage ratio (total long-term amortization Furniture, fixtures debt divided by EBITDA) of 5.45 and (ii) the Company maintain a mini - and equipment $74,137 $54,410 $19,727 $10,210 mum fixed charge ratio (EBITDA adjusted for capital expenditures and income taxes divided by the sum of principal and interest payments on Leasehold long-term debt) of 2.05; (2) an increase in scheduled principal payments improvements 28,891 21,394 7,497 8,130 as follows: 2009 - $400,000 per quarter plus $4.0 million on September $103,028 $75,804 $27,224 $18,340 30, 2009 and 2010 - $500,000 per quarter plus $8.0 million on Septem - ber 30, 2010; (3) an increase in the interest rate to LIBOR plus 450 basis points (an increase of 150 basis points); and (4) a pay-down of principal Depreciation and amortization expense, included in occupancy and equal to the cost of any share repurchases made pursuant to the Normal equipment costs, was $11.5 million, $9.7 million and $9.6 million in the Course Issuer Bid. In addition, the Company made a voluntary pre-pay - years ended December 31, 2008, 2007 and 2006, respectively. ment of principal in the amount of $15 million plus interest. In the Com - pany’s view, the maximum leverage ratio and minimum fixed charge ratio 6. Bank Call Loans represent the most restrictive covenants. At December 31, 2008, the Bank call loans, primarily payable on demand, bear interest at various Company was in compliance with all of its covenants. rates but not exceeding the broker call rate, which was 2.75% at Decem - The effective interest rate on the Senior Secured Credit Note for the year ber 31, 2008. These loans, collateralized by firm and customer securities ended December 31, 2008 was 6.48%. Interest expense, as well as interest (with market values of approximately $41.3 million and $80.8 million, paid on a cash basis for the year ended December 31, 2008 on the Senior respectively, at December 31, 2008) are with one U.S. money center Secured Credit Note was $4.6 million ($8.0 million in 2007 and $4.3 million bank. Details of the bank call loans are as follows. in 2006). Of the $47.7 million principal amount outstanding at December Amounts are expressed in thousands of dollars except percentages. 31, 2008, $5.6 million of principal is expected to be paid within 12 months. Year ended December 31, The obligations under the Senior Secured Credit Note are guaranteed by 2008 2007 certain of the Company’s subsidiaries, other than broker-dealer sub - Year-end balance $6,500 $29,000 sidiaries, with certain exceptions, and are collateralized by a lien on sub - stantially all of the assets of each guarantor, including a pledge of the Weighted interest rate ownership interests in each first-tier broker-dealer subsidiary held by a (at end of year) 1.25% 4.63% guarantor, with certain exceptions. Maximum balance (at any month end) $315,900 $102,700 (b) Subordinated Note On January 14, 2008, in connection with the acquisition of the New Cap - Average amount outstanding (during the year) (1) $120,283 $42,019 ital Markets Business, CIBC made a loan in the amount of $100.0 million and the Company issued a Subordinated Note to CIBC in the amount of Average interest rate $100.0 million at a variable interest rate based on LIBOR. The Subordi - (during the year) 2.51% 4.44% nated Loan is due and payable on January 31, 2014 with interest payable (1) The average amount outstanding during the year was computed by on a quarterly basis. The purpose of this note is to support the capital adding amounts outstanding at the end of each month and dividing requirements of the New Capital Markets Business. In accordance with by twelve. the Subordinated Note, the Company has provided certain covenants to CIBC with respect to the maintenance of a minimum fixed charge ratio Interest expense for the year ended December 31, 2008 on bank call and maximum leverage ratio and minimum net capital requirements with loans was $3.0 million ($1.9 million in 2007 and $7.5 million in 2006) respect to Oppenheimer.
7. Long-Term Liabilities Effective December 23, 2008, certain terms of the Subordinated Note were amended, including (1) revised financial covenant levels that require that (i) Amounts are expressed in thousands of dollars. the Company maintain a maximum leverage ratio of 6.45 and (ii) the Com - December pany maintain a minimum fixed charge ratio of 1.70; and (2) an increase in 31, 2008 December December the interest rate to LIBOR plus 525 basis points (an increase of 150 basis Maturity Interest 31, 2008 31, 2007 points). In the Company’s view, the maximum leverage ratio and minimum Issued Date Rate Balance Balance fixed charge ratio represent the most restrictive covenants. At December Senior Secured 31, 2008, the Company was in compliance with all of its covenants. Credit Note (a) 7/31/2013 6.77% $47,663 $83,325 The effective interest rate on the Senior Secured Credit Note for the year Subordinated Note (b) 1/31/2014 7.51% $100,000 – ended December 31, 2008 was 6.96%. Interest expense, as well as inter - (a) Senior Secured Credit Note est paid on a cash basis for the year ended December 31, 2008, on the On July 31, 2006, the Company issued a Senior Secured Credit Note in Subordinated Note was $6.9 million. the amount of $125.0 million at a variable interest rate based on LIBOR with a seven-year term to a syndicate led by Morgan Stanley Senior Fund - 8. Share Capital ing Inc., as agent. On April 28, 2008, the Company paid down principal of $20.0 million, of which $16.3 million was due pursuant to the excess The Company’s authorized share capital, all of which is without par value, cash flow computation as of December 31, 2007 and the balance of $3.7 consists of (a) an unlimited number of first preference shares issuable in million was a voluntary repayment of principal. In accordance with the series; (b) an unlimited number of Class A non-voting shares (“Class A Senior Secured Credit Note, the Company has provided certain covenants Shares”); and (c) 99,680 Class B voting shares (“Class B Shares”). No first to the lenders with respect to the maintenance of a minimum fixed preference shares have been issued.
Oppenheimer Holdings Inc . | 35 The Class A and the Class B Shares are equal in all respects except that the Earnings per share has been calculated as follows: Class A Shares are non-voting. Amounts are expressed in thousands of dollars, except share and per share The following table reflects changes in the number of Class A Shares out - amounts. standing for the years indicated. 2008 2007 2006 Basic weighted average number 2008 2007 2006 of shares outstanding 13,199,580 13,223,442 12,749,712 Class A Shares outstanding, Net dilutive effect of warrants, beginning of year 13,266,596 12,834,682 12,496,141 treasury method (1) – –– Net dilutive effect of share-based Issued to Oppenheimer & Co. awards, treasury method (2) – 308,845 65,479 Inc. 401(k) Plan – 95,425 104,725 Net effect, if converted method (3) – – 4,224,651 Diluted common shares 13,199,580 13,532,287 17,039,842 Issued pursuant to share-based compensation plans 282,869 336,489 344,516 2008 2007 2006 Repurchased and cancelled Net profit (loss), as reported $(20,770) $75,367 $44,577 pursuant to the issuer bid (650,000) – (110,700) Effect of dilutive exchangeable debentures (3) – – 2,454 Class A Shares outstanding, end of year 12,899,465 13,266,596 12,834,682 Net profit (loss) available to shareholders and assumed conversions $(20,770) $75,367 $47,031 Share-based compensation plans are described in note 12. Basic earnings per share $(1.57) $5.70 $3.50 Issuer Bid Diluted earnings per share $(1.57) $5.57 $2.76 During the 12-month period that commenced on August 19, 2008, the (1) As part of the consideration for the 2008 acquisition of a portion of Company may purchase up to 700,000 Class A Shares by way of a Normal CIBC World Markets Corp.’s U.S. capital markets businesses, the Com - Course Issuer Bid (“Issuer Bid”) through the facilities of the New York pany issued a warrant to CIBC to purchase 1 million Class A Shares of Stock Exchange. In the year ended December 31, 2008, the Company the Company at $48.62 per share exercisable five years from the Janu - purchased 650,000 Class A Shares under the current Issuer Bid. All shares ary 14, 2008 acquisition date. For the year ended December 31, 2008, purchased pursuant to Issuer Bids are cancelled. the effect of the warrants is anti-dilutive. (2) The diluted earnings per share computations do not include the Amounts are expressed in thousands of dollars, except per share amounts . antidilutive effect of the following items: 2008 2007 2006 2008 2007 2006 Class A Shares purchased Number of antidilutive warrants, and cancelled pursuant options and restricted shares, to an Issuer Bid 650,000 – 110,700 for the period 1,460,194 84,103 1,024,414 Total consideration $17,187 – $2,255 (3) As part of the consideration for the 2003 acquisition of the U.S. private Average price per share $26.44 – $20.37 client and asset management divisions from CIBC World Markets, the Company issued First and Second Variable Rate Exchangeable Deben - tures which were exchangeable for approximately 6.9 million Class A Dividends Shares of the Company at the rate of $23.20 per share (approximately In 2008, the Company paid cash dividends to holders of Class A and 35% of the outstanding Class A Shares, if exchanged). On July 31, 2006 Class B Shares as follows ($0.42 in 2007 and $0.40 in 2006): and October 23, 2006, the Company redeemed $140.8 million and the Dividend per share Record Date Payment Date remaining $20 million, respectively, of such Debentures thereby extin - guishing all such Debentures outstanding. $0.11 February 15, 2008 February 29, 2008 $0.11 May 16, 2008 May 30, 2008 11. Income Taxes $0.11 August 15, 2008 August 29, 2008 The income tax provision shown in the consolidated statements of opera - $0.11 November 14, 2008 November 28, 2008 tions is reconciled to amounts of tax that would have been payable (recover - able) from the application of the federal tax rate to pre-tax profit as follows. 9. Contributed Capital Year ended December 31, Contributed capital includes the impact of share-based awards accounted 2008 2007 2006 for in accordance with SFAS 123(R). See note 12 for further discussion. Also U.S. federal statutory income tax rate 35.0% 35.0% 35.0% included in contributed capital is the grant date fair value of warrants U.S. state and local income taxes, net of issued in relation to the acquisition of the New Capital Markets Business as U.S. federal income tax benefits 5.0% 6.7% 8.1% described in note 18. Tax exempt income, including dividends 2.8% -0.4% -0.6% 10. Earnings Per Share Business promotion and other non-deductible expenses -1.5% –– Basic earnings per share was computed by dividing net profit (loss) by the Non-U.S. Operations -0.1% –– weighted average number of Class A and Class B Shares outstanding. Other (1) 1.0% -0.5% 2.1% Diluted earnings per share includes the weighted average Class A and Class B Shares outstanding and the effects of the exchangeable deben - Effective income tax rate 42.4% 40.8% 44.6% tures using the if converted method and Class A Share options using the (1) In 2006, 2007 and 2008, other primarily includes the effect of tax treasury stock method. authority audits.
36 | Oppenheimer Holdings Inc. Income taxes included in the consolidated statements of income repre - Accounting for Income Taxes ” (“FIN 48”). This interpretation requires sent the following: that a tax position be recognized only if it is “more likely than not” to be Year ended December 31, sustained upon examination, including resolution of related appeals or Amounts are expressed in thousands of dollars. 2008 2007 2006 litigation processes, based solely on its technical merits, as of the report - Current: ing date. A tax position that meets the “more likely than not” criterion U.S. federal tax $(2,430) $35,241 $25,852 shall be measured at the largest amount of benefit that is more than State and local tax (791) 9,165 9,047 fifty percent likely of being realized upon ultimate settlement. Non-U.S. operations 248 –– The Company adopted the provisions of FIN 48 on January 1, 2007, (2,973) 44,406 34,899 which resulted in a cumulative adjustment to opening retained earnings Deferred: in the amount of $823,000. The Company has evaluated its tax posi - U.S. federal tax (9,198) 5,700 919 tions for the year ended December 31, 2008 and determined that it has State and local tax (2,992) 1,921 55 no uncertain tax positions requiring financial statement recognition as of Non-U.S. operations (110) ––December 31, 2008. (12,300) 7,621 974 The Company is under continuous examination by the Internal Revenue $(15,273) $52,027 $35,873 Service (the “IRS”) and States in which the Company has significant Deferred income taxes reflect the net tax effects of temporary differences business operations. The tax years under examination vary by jurisdic - between the financial reporting and tax bases of assets and liabilities and tion; for example, the current IRS examination covers 2006. The Com - are measured using enacted tax rates and laws that will be in effect when pany regularly assesses the likelihood of additional assessments in each such differences are expected to reverse. Significant components of the of the taxing jurisdictions resulting from these and subsequent years’ Company’s deferred tax assets and liabilities at December 31, 2008 and examinations. The Company has established tax reserves that the Com - 2007 were as follows. pany believes are adequate in relation to the potential for additional December 31, assessments. Once established, the Company adjusts tax reserves only Amounts are expressed in thousands of dollars. 2008 2007 when more information is available or when an event occurs necessitat - Deferred tax assets: ing a change to the reserves. The Company believes that the resolution Employee deferred compensation plans $25,999 $17,844 of tax matters will not have a material effect on the consolidated finan - Reserve for litigation and legal fees 1,576 2,033 cial condition of the Company, although a resolution could have a mate - Allowance for doubtful accounts 884 296 rial impact on the Company’s consolidated statement of operations for a particular future period and on the Company’s effective income tax rate Other 9,985 2,206 for any period in which such resolution occurs. Total deferred tax assets 38,444 22,379 A reconciliation of the beginning and ending amount of unrecognized Deferred tax liabilities: tax benefits is as follows. Section 197 amortization of goodwill 25,810 22,693 December 31, Investment in partnerships 8,221 7,283 Amounts are expressed in thousands of dollars. 2008 2007 Involuntary conversion 2,712 3,016 Gain on NYSE Group shares 324 1,943 Balance at beginning of year $ – $823 Acquisition 4,380 – Tax positions taken related to prior years – 676 Other 1,535 – Settlements with taxing authorities – (1,499) Total deferred tax liabilities 42,982 34,935 U.S. deferred income tax, net (4,538) 12,556 Balance at end of year $ – $ – Non U.S. deferred income tax benefit (1) 4,113 – Deferred income tax, net $(425) $12,556 12. Employee Compensation Plans Share-based Compensation (1) Included in other assets on the consolidated balance sheet. Effective January 1, 2006, the Company adopted SFAS No. 123(R), “ Share- Goodwill arising from the acquisitions of Josephthal Group Inc. and the Based Payment ”, which is a revision to SFAS No. 123, “ Accounting for Oppenheimer Divisions is being amortized for tax purposes on a Stock-Based Compensation ”. SFAS No. 123(R) requires share-based pay - straight-line basis over 15 years. The difference between book and tax is ment awards to be accounted for at fair value. Under SFAS No. 123(R), recorded as a deferred tax liability. share-based compensation awards that require future service (i.e., are sub - ject to a vesting schedule) are amortized over the relevant service period. The On a cash basis, the Company paid income taxes for the year ended Company adopted SFAS No. 123(R) under the ‘modified prospective December 31, 2008 in the amount of $13.7 million ($45.9 million in method’. Under that method, the provisions of SFAS No. 123(R) are applied 2007 and $23.4 million in 2006). to remaining unvested share-based awards outstanding at December 31, As a result of the acquisition of the New Capital Market Business, the 2005 as well as to share-based awards granted subsequent to adoption. Company recorded deferred tax liabilities of $4.4 million that arises from tax allocation to the acquired US business. In addition, the Company The Company estimates the fair value of share-based awards using the recorded a deferred tax asset of $4.1 million relating to accumulated net Black-Scholes option-pricing model and applies to it a forfeiture rate based operating losses on the acquired Israeli business. on historical experience. The accuracy of this forfeiture rate is reviewed at least annually for reasonableness. Key input assumptions used to estimate The Company believes that the realization of its net operating losses is the fair value of share-based awards include the expected term and the more likely than not based on expectations as to future taxable income expected volatility of the Company’s Class A Shares over the term of the in the jurisdictions in which it operates. award, the risk-free interest rate over the expected term, and the Com - In June 2006, the FASB issued Interpretation 48, “ Accounting for Uncer - pany’s expected annual dividend yield. The Company believes that the val - tainty in Income Taxes, an interpretation of FASB Statement No. 109, uation technique and the approach utilized to develop the underlying
Oppenheimer Holdings Inc . | 37 assumptions are appropriate in calculating fair values of the Company’s The aggregate intrinsic value of options outstanding as of December 31, outstanding unvested share-based awards. Estimates of fair value are not 2008 was nil. The aggregate intrinsic value of options vested as of intended to predict actual future events or the value ultimately realized by December 31, 2008 was nil. The aggregate intrinsic value of options persons who receive share-based awards. that are expected to vest is nil as of December 31, 2008. The fair value of each award grant was estimated on the grant date using The following table summarizes stock options outstanding and exercis - the Black-Scholes option- pricing model with the following assumptions: able as at December 31, 2008: Weighted Weighted Grant date assumptions 2008 2007 2006 2005 2004 2003 Weighted average average average exercise exercise Expected term (1) 2.4 years 5 years 5 years 5 years 5 years 5 years Range of remaining price of Number price of exercise Number contractual outstanding exercisable vested Expected volatility prices outstanding life options (vested) options factor (2) 36.41% 39.67% 26.57% 23.50% 21.08% 22.61% $19.42 – $25.00 265,091 1.6 years $21.59 166,393 $21.00 Risk-free interest $25.01 – $36.13 685,641 0.9 years $34.69 412,756 $32.71 rate (3) 2.13% 4.54% 4.51% 3.89% 3.01% 2.92% $19.42 – $36.13 950,732 1.1 years $31.04 579,149 $29.35 Actual dividends (4) $0.44 $0.40 $0.38 $0.36 $0.36 $0.36 The following table summarizes the status of the Company’s non-vested (1) The expected term was determined based on actual awards. options for the year ended December 31, 2008. (2) The volatility factor was measured using the weighted average of histor - Year ended December 31, 2008 ical daily price changes of the Company’s Class A Shares over a historical period commensurate to the expected term of the awards. Weighted Number average (3) The risk-free interest rate was based on periods equal to the expected of options fair value term of the awards based on the U.S. Treasury yield curve in effect at the Non-vested beginning of year 533,511 $7.48 time of grant. Granted 322,261 $6.99 (4) Actual dividends were used to compute the expected annual divi - dend yield. Vested (369,800) $5.97 Forfeited or expired (114,389) $7.27 Equity Incentive Plan Non-vested end of period 371,583 $8.63 Under the Company’s 2006 Equity Incentive Plan, adopted December 11, 2006 and its 1996 Equity Incentive Plan, as amended March 10, 2005 In the year ended December 31, 2008, the Company has included (together “EIP”), the Compensation and Stock Option Committee of the approximately $2.5 million ($2.3 million in 2007 and $3.3 million in Board of Directors of the Company may grant options to purchase Class A 2006) of compensation expense in its consolidated statement of opera - Shares to officers and key employees of the Company and its subsidiaries. tions relating to the expensing of stock options. Grants of options are made to the Company’s non-employee directors on a formula basis. Prior to 2008, options were generally granted for a five- As of December 31, 2008, there was approximately $1.7 million of total year term and generally vest at the rate of 25% of the amount granted on unrecognized compensation cost related to unvested share-based com - the second anniversary of the grant, 25% on the third anniversary of the pensation arrangements granted under the EIP. The cost is expected to grant, 25% on the fourth anniversary of the grant and 25% six months be recognized over a weighted average period of 1.1 years. before expiration. In 2008, options were generally granted for a three year term and generally vested at the rate of 33% of the amount granted on Stock Appreciation Rights both the first and second anniversary of the grant and 33% three months The Company has awarded Oppenheimer stock appreciation rights before expiration. At December 31, 2008, the number of Class A Shares (“OARs”) to certain employees as part of their compensation package available under the EIP, but not yet awarded, was 520,525. based on a formula reflecting gross production and length of service. Stock option activity under the EIP since January 1, 2007 is summarized These awards are granted once per year in January with respect to the as follows: prior year’s production. The OARs vest five years from grant date and will Year ended Year ended be settled in cash at vesting. The OARs are being accounted for as liability December 31, 2008 December 31, 2007 awards and are revalued on a monthly basis. The adjusted liability is being Weighted Weighted amortized on a straight-line basis over the vesting period. average average Number exercise Number exercise The fair value of each OARs award was estimated as at December 31, of shares price of shares price 2008 using the Black-Scholes option-pricing model. Options outstanding, beginning of year 979,475 $29.32 1,168,392 $27.93 Fair value Number Remaining as at Options granted 322,261 $33.61 79,103 $34.99 of OARS contractual December 31, Options exercised (224,115) $24.97 (257,491) $24.96 Grant date outstanding Strike price life 2008 Options forfeited January 13, 2004 145,770 $32.78 13 days $0.00 or expired (126,889) $33.87 (10,529) $24.79 January 13, 2005 240,555 $24.53 1 year $1.26 Options outstanding, January 13, 2006 255,700 $20.53 2 years $1.17 end of year 950,732 $31.04 979,475 $29.32 January 12, 2007 367,120 $35.44 3 years $0.53 Options vested, January 10, 2008 492,405 $37.78 4 years $0.41 end of year 579,149 $29.35 445,964 $28.96 Total 1,501,550 Weighted average fair value of options granted during Total weighted the year $6.99 – $13.45 – average values $31.66 2.6 years $0.66
38 | Oppenheimer Holdings Inc. At December 31, 2008, all outstanding OARs were unvested. The aggre - Defined Contribution Plan gate intrinsic value of OARs outstanding and expected to vest as of Decem - The Company, through its subsidiaries, maintains a defined contribution ber 31, 2008 was nil. In the year ended December 31, 2008, the Company plan covering substantially all full-time U.S. employees. The Oppenheimer & included a credit of approximately $7.5 million (expense of $5.5 million in Co. Inc. 401(k) Plan provides that Oppenheimer may make discretionary 2007 and $2.5 million in 2006) in compensation expense in its consoli - contributions. Eligible Oppenheimer employees may make voluntary contri - dated statement of operations relating to OARs awards. The liability related butions which may not exceed $15,500, $15,500 and $15,000 per annum to the OARs was approximately $493,800 as of December 31, 2008. in 2008, 2007 and 2006, respectively. The Company made contributions to As of December 31, 2008, there was approximately $402,900 of total the 401(k) Plan of $736,400, $5.5 million and $4.5 million in 2008, 2007 unrecognized compensation cost related to unvested OARs. The cost is and 2006, respectively. expected to be recognized over a weighted average period of 2.6 years. Deferred Compensation Plans On January 12, 2009, 454,940 OARs were awarded to Oppenheimer The Company maintains an Executive Deferred Compensation Plan employees related to fiscal 2008 performance. These OARs will be (“EDCP”) and a Deferred Incentive Plan (“DIP”) in order to offer certain expensed over 5 years (the vesting period). qualified high-performing financial advisors a bonus based upon a for - Employee Share Plan mula reflecting years of service, production, net commissions and a valua - On March 10, 2005, the Company approved the Oppenheimer & Co. Inc. tion of their clients’ assets. The bonus amounts resulted in deferrals in Employee Share Plan (“ESP”) for employees of the Company and its sub - fiscal 2008 of approximately $7.7 million ($8.7 million in 2007 and $6.8 sidiaries resident in the U.S. to attract, retain and provide incentives to million in 2006). These deferrals normally vest after five years. The liability key management employees. The Compensation and Stock Option Com - is being recognized on a straight-line basis over the vesting period. The mittee of the Board of Directors of the Company may grant stock awards EDCP also includes voluntary deferrals by senior executives that are not and restricted stock awards pursuant to the ESP. ESP awards are being subject to vesting. The Company maintains a company-owned life insur - accounted for as equity awards and valued at grant date fair value. ESP ance policy, which is designed to offset approximately 60% of the EDCP awards are generally awarded for a three or five year term and 100% liability. The EDCP liability is being tracked against the value of a phantom vest at the end of the term. investment portfolio held for this purpose. At December 31, 2008, the The Company has awarded restricted Class A Shares to certain employees Company’s liability with respect to the EDCP and DIP totaled $21.5 mil - as part of their compensation package pursuant to the ESP. These awards lion and is included in accrued compensation on the consolidated bal - are granted from time to time throughout the year based upon the recom - ance sheet as at December 31, 2008. mendation of the Compensation and Stock Option Committee of the In addition, the Company is maintaining a deferred compensation plan Board of Directors of the Company. These ESP awards are priced at fair on behalf of certain employees who were formerly employed by CIBC value on the date of grant and typically require the completion of a service World Markets. The liability is being tracked against the value of an period (determined by the Compensation Committee). Dividends may or investment portfolio held by the Company for this purpose and, there - may not accrue during the service period, depending on the terms of indi - fore, the liability fluctuates with the fair value of the underlying portfolio. vidual ESP awards. At December 31, 2008, the number of Class A Shares At December 31, 2008, the Company’s liability with respect to this plan available under the ESP, but not yet awarded, was 414,472. totaled $10.7 million. See note 4. The following table summarizes the status of the Company’s non-vested ESP awards for the year ended December 31, 2008. The total amount expensed in 2008 for the Company’s deferred compen - sation plans was a net credit of $3.9 million (net expense of $7.1 million Number of and $6.1 million, respectively, in 2007 and 2006). Class A Shares Weighted subject to average Remaining ESP awards fair value contractual life 13. Commitments and Contingencies Non-vested beginning of year 110,805 $23.32 2.2 years The Company and its subsidiaries have operating leases for office space, Granted 439,839 $36.38 2.3 years equipment and furniture and fixtures expiring at various dates through Vested (17,543) $19.29 – 2019. Future minimum rental commitments under such office and equip - ment leases as at December 31, 2008 are as follows. Forfeited or expired (24,654) $34.27 – Non-vested end of period 508,447 $34.87 2.2 years Amounts are expressed in thousands of dollars. 2009 $38,680 At December 31, 2008, all outstanding ESP awards were non-vested. The 2010 36,173 aggregate intrinsic value of ESP awards outstanding as of December 31, 2008 was approximately $6.5 million. The aggregate intrinsic value of ESP 2011 33,256 awards that are expected to vest is $5.1 million as of December 31, 2008. In 2012 25,644 the year ended December 31, 2008, the Company included approximately 2013 14,270 $4.8 million ($1.1 million in 2007 and $957,000 in 2006) of compensation 2014 and thereafter 23,490 expense in its consolidated statements of operations relating to ESP awards. Total $171,513 As of December 31, 2008, there was approximately $11.5 million of total unrecognized compensation cost related to unvested ESP awards. The cost Certain of the leases contain provisions for rent increases based on changes is expected to be recognized over a weighted average period of 2.2 years. in costs incurred by the lessor. In January 2009, the Company issued 112,297 Class A Shares to certain The Company’s rent expense for the years ended December 31, 2008, 2007 Oppenheimer employees who had elected to take a portion of their year- and 2006 was $47.1 million, $33.1 million and $33.3 million, respectively. end bonus in Class A Shares in lieu of cash under the ESP. The cost of these shares (priced at market on January 5, 2009) is included in compensation At December 31, 2008, the Company had capital commitments of approxi - and related expenses in the consolidated statement of operations for the mately $3.3 million with respect to its obligations in its role as sponsor for year ended December 31, 2008. certain private equity funds.
Oppenheimer Holdings Inc . | 39 At December 31, 2008, the Company had collateralized and uncollater - 14. Regulatory Requirements alized letters of credit for $127.2 million in favor of Options Clearing The Company’s major subsidiaries, Oppenheimer and Freedom, are sub - Corporation. Collateral for these letters of credit include customer secu - ject to the uniform net capital requirements of the SEC under Rule 15c3- rities with a market value of approximately $197.9 million pledged to 1 (the “Rule”). Oppenheimer computes its net capital requirements two financial institutions. under the alternative method provided for in the Rule which requires that Many aspects of the Company’s business involve substantial risks of liability. Oppenheimer maintain net capital equal to two percent of aggregate In the normal course of business, the Company has been named as defen - customer related debit items, as defined in SEC Rule 15c3-3. At Decem - dant or co-defendant in lawsuits creating substantial exposure. The Com - ber 31, 2008, Oppenheimer had net capital of $180.5 million which pany is the subject of customer complaints, has been named as defendant exceeded required net capital by $163.7 million. Freedom computes its or codefendant in various lawsuits seeking, in total, substantial damages net capital requirement under the basic method provided for in the Rule, and is involved in certain governmental and self-regulatory agency investi - which requires that Freedom maintain net capital equal to the greater of gations and proceedings. These proceedings arise primarily from securities $250,000 or 6 2/3% of aggregate indebtedness, as defined. At Decem - brokerage, asset management and investment banking activities. The ber 31, 2008, Freedom had net capital of $4.2 million, which was $3.9 Company is also involved from time to time in governmental and self-regu - million in excess of the $250,000 required to be maintained at that date. latory agency investigations and proceedings. At December 31, 2008, Oppenheimer and Freedom had $13.2 million The investigations include, among other things, inquiries from the SEC, and $11.8 million, respectively, in cash and U.S. Treasury securities segre - FINRA and several state regulatory authorities concerning the Company’s gated under Federal and other regulations. activities with respect to auction rate securities (“ARS”). Regulators have In accordance with the SEC’s No-Action Letter dated November 3, 1998, concluded, in many cases, that securities firms, primarily those that under - the Company has computed a reserve requirement for the proprietary wrote and supported the auctions for ARS, should be compelled to redeem accounts of introducing firms as of December 31, 2008. The Company them from customers. Underwriters and dealers in such securities have set - had no deposit requirements as of December 31, 2008. tled with various regulators and have commenced purchasing ARS from their clients. The Company is presently in discussions with several state regu - 15. Goodwill and intangibles latory agencies and FINRA with respect to such actions. The Company and several of its executives and employees are also the subject of enforcement The Company determines the fair value of each of its reporting units and action by the Massachusetts Securities Division in which the Division seeks to the fair value of the reporting unit’s goodwill under the provisions of compel the Company to redeem the ARS held by the Company’s clients that SFAS No. 142, “ Goodwill and Other Intangible Assets ” (“SFAS 142”). are residents of that state and certain other relief. Moreover, the Company is Goodwill arose upon the acquisitions of Oppenheimer, Old Michigan also named as a respondent in a number of arbitrations by its current or for - Corp., Josephthal & Co. Inc., Grand Charter Group Incorporated and the mer clients as well as lawsuits, including two class action lawsuits, related to Oppenheimer Divisions. The Company defines a reporting unit as an its sale of ARS. See “Legal Proceedings” and “Management’s Discussion and operating segment. The Company’s goodwill resides in its Private Client Analysis of Financial Condition and Results of Operations – Regulatory Envi - Division (“PCD”). Goodwill of a reporting unit is subject to at least an ronment – Other Regulatory Matters.” The Company has been and contin - annual test for impairment to determine if the fair value of goodwill of a ues to review this situation and explore options to help bring liquidity to the reporting unit is less than its estimated carrying amount. The Company Company’s clients holding ARS. The Company is reviewing various programs derives the estimated carrying amount of its operating segments by esti - initiated by the U.S. government to restore liquidity to the markets. The mating the amount of shareholders’ equity required to support the Company has taken or is considering taking various actions to facilitate the activities of each operating segment. purchase of client-held ARS. However, there is no assurance that these SFAS 142 requires goodwill of a reporting unit to be tested for impair - efforts, if undertaken, will be successful. If the Company were to purchase ment between annual tests if an event occurs or circumstances change all of the ARS held by former or current clients who purchased such securi - that would more likely than not reduce the fair value of a reporting unit ties prior to the beginning of the market’s failure in February 2008, these below its carrying amount. In 2008, the financial services industry and purchases would likely have a material adverse effect on the Company’s the securities markets generally were materially and adversely affected financial condition including its cash position. Therefore, before purchasing by significant declines in the values of nearly all financial asset classes any of these securities, the Company would need to assess whether it had and by a significant lack of liquidity. The Company’s stock price, consis - sufficient regulatory capital or borrowing capacity to do so. The Company tent with stock prices in the broader financial services sector, declined does not currently believe that it is obligated to make any such purchases. significantly during this period of time. Beginning in June 2008, the Company’s market capitalization fell below recorded book value on a In accordance with SFAS No. 5 “ Accounting for Contingencies ,” the Com - consistent basis which continued through the end of the year. Due to pany has established provisions for estimated losses from pending com - the significant discount between the market capitalization and book plaints, legal actions, regulatory investigations and proceedings. The value, the Company viewed this discount as a triggering event to per - ultimate resolution may differ materially from the amounts accrued. forming an interim goodwill impairment test under SFAS 142. As a Because litigation is inherently unpredictable, the Company cannot deter - result, the Company performed an impairment analysis between annual mine with certainty the ultimate resolution of pending litigation and other tests as of September 30, 2008 and also performed its annual test for matters. Consequently, the Company cannot estimate with certainty the goodwill impairment as of December 31, 2008. losses or ranges of loses for matters, how such matters will be resolved, when they will ultimately be resolved or what the eventual relief might be. In estimating the fair value of the PCD, the Company used traditional stan - The materiality of legal matters to the Company’s future operating results dard valuation methods, including the market comparable approach and depends on the level of future results of operations as well as the timing income approach. The market comparable approach is based on compar - and ultimate outcome of such legal matters. However, if the Company isons of the subject company to public companies whose stocks are actively were to purchase ARS from some or all of its clients in order to resolve traded (“Price Multiples”) or to similar companies engaged in an actual pending lawsuits and/or regulatory inquiries regarding ARS, the purchases merger or acquisition (“Precedent Transactions”). As part of this process, likely would have a material adverse effect on the Company’s results of multiples of value relative to financial variables, such as earnings or stock - operations and financial condition. holders’ equity, are developed and applied to the appropriate financial vari -
40 | Oppenheimer Holdings Inc. ables of the subject company to indicate its value. The income approach Based on the above quantitative and qualitative factors, the Company’s involves estimating the present value of the subject company’s future cash goodwill was not considered impaired as of December 31, 2008. flows by using projections of the cash flows that the business is expected to Although the Company’s overall business, particularly the Capital Mar - generate, and discounting these cash flows at a given rate of return (“Dis - kets business segment, was negatively impacted by the current eco - counted Cash Flow” or “DCF”). Each of these standard valuation method - nomic environment, the PCD operating segment continued to produce ologies requires the use of management estimates and assumptions. strong revenues, cash flows and earnings in 2008, reflective of the Com - In its Price Multiples valuation analysis, the Company used various operat - pany’s strong franchise and the attractive economics of the underlying ing metrics of comparable companies, including revenues, pre-tax and transaction and fee-based revenues in the private wealth management after-tax earnings, EBITDA on a trailing-twelve-month basis as well as price- business. If the current economic market conditions persist and/or if to-book value ratios at a point in time. The Company analyzed prices paid there is a prolonged period of further weakness in the business environ - in Precedent Transactions that are comparable to the business conducted in ment and financial markets, the Company’s PCD businesses may be the PCD, primarily focusing on the amounts paid per financial advisor. The adversely affected which may result in an impairment of its goodwill, DCF analysis included the Company’s assumptions regarding growth rates particularly if there were a significant loss of financial advisors and corre - of the PCD’s revenues, expenses, EBITDA, and capital expenditures, sponding client assets under administration. adjusted for current economic conditions and expectations. The Company’s Excess of fair value of assets acquired over cost arose from the acquisition assumptions also included a discount rate of 14.2% and a terminal growth of the New Capital Markets Business. If the earn-out from the acquisition rate of 3% in its calculations. The Company weighted each of the three val - of the New Capital Markets Business (see note 18) exceeds $5.0 million in uation methods equally in its overall valuation. Given the subjectivity any of the five years from 2008 through 2012, the excess will first reduce involved in selecting which valuation method to use, the corresponding the excess of fair value of acquired assets over cost and second will create weightings, and the input variables for use in the analyses, it is possible that goodwill, as applicable. The earn-out for 2008 was $5.0 million. a different valuation model and the selection of different input variables could produce a materially different estimate of the fair value of our good - Intangible assets arose upon the acquisition, in January 2003, of the will. Based on the analysis performed, the Company concluded that the Oppenheimer Divisions and are comprised of customer relationships and PCD’s fair value exceeded its carrying amount including goodwill as of trademarks and trade names. Customer relationships are carried at December 31, 2008. $490,000 (which is net of accumulated amortization of $4.4 million) and are being amortized on a straight-line basis over 80 months commencing As of December 31, 2008, the Company also performed a valuation of in January 2003. Trademarks and trade names, carried at $31.7 million, the consolidated Oppenheimer Holdings Inc. enterprise. Using a DCF which are not amortized, are subject to at least an annual test for impair - model, the Company determined that the aggregate fair value of the ment to determine if the fair value is less than their carrying amount. Company’s equity was greater than both the Company’s carrying value of $425.7 million and market value (based on the Company’s stock price Intangible assets also arose from the acquisition of the New Capital Mar - at December 31, 2008) of $166 million. The difference between the fair kets Business in January 2008 and are comprised of customer relationships value of the Company’s equity and its market value at December 31, and a below market lease. Customer relationships are carried at $880,600 2008 can be partially attributed to a control premium, which represents (which is net of accumulated amortization of $60,500) and are being the premium to market value that a market participant would pay to amortized on a straight-line basis over 180 months commencing in January acquire the Company as a whole and gain control of the enterprise. The 2008. The below market lease is carried at $17.0 million (which is net of remaining difference can be primarily attributed to the following qualita - accumulated amortization of $4.3 million) and is being amortized on a tive factors which cannot be quantified: straight-line basis over 60 months commencing in January 2008.
• Low average daily trading volume of the Company’s outstanding shares Trademarks and trade names recorded as at December 31, 2008 have been tested for impairment and it has been determined that no impair - • Information asymmetry caused by lack of equity research analyst cov - ment has occurred. erage
• Dual class share structure whereby voting control is not publicly traded 16. Segment Information
• Employees and directors own a high percentage of outstanding Class The Company has determined its reportable segments based on the A Non-Voting shares and Class B Voting shares Company’s method of internal reporting, which disaggregates its retail business by branch and its proprietary and investment banking busi - • The Company is Canadian-domiciled while substantially all of the nesses by product. The Company’s segments are: Private Client which Company’s operations are in the U.S. This arrangement negatively includes all business generated by the Company’s 86 offices in 21 U.S. impacts the level of investor participation in the Company’s shares. states, 2 offices in Latin America through local broker dealers and Free - dom, including commission and fee income earned on client transac - • Significant losses in the Capital Markets business segment of $93 mil - tions, net interest earnings on client margin loans and cash balances, lion due to acquisition of New Capital Markets Business from CIBC stock loan activities and financing activities; Capital Markets which • In 2008 the Company’s stock price declined 69%, generally tracking includes investment banking, market-making activities in over-the- broader financial services stocks. Many financial services firms incurred counter equities, institutional trading in both fixed income and equities, significant asset impairments in 2008, and an inaccurate perception of structured assets transactions, bond trading, trading in mortgage- the level of risk involved in the Company’s trading activities may have backed securities, corporate underwriting activities, public finance activi - negatively impacted the Company’s stock price. The Company has no ties, and syndicate participation; and Asset Management which includes exposure to sub-prime and credit derivatives . fees from money market funds and the investment management serv - ices of Oppenheimer Asset Management Inc. and Oppenheimer’s asset • The Company’s Price to Book Value ratio as at December 31, 2008 was management divisions employing various programs to professionally 0.4x compared to 0.9x for its peer group. Historically, the Company has manage client assets either in individual accounts or in funds. The Com - traded at an average Price to Book Ratio of 1.1x (from 2004 – 2008) pany evaluates the performance of its segments and allocates resources compared to its peer group’s average of 1.4x over the same period. to them based upon profitability.
Oppenheimer Holdings Inc . | 41 The table below presents information about the reported revenue and along with the Company’s existing Investment Banking, Corporate Syndi - profit before income taxes of the Company for the years ended Decem - cate, Institutional Sales and Trading and Equities Research divisions were ber 31, 2008, 2007 and 2006. The Company’s business is conducted combined to form the Oppenheimer Investment Banking Division (OIB primarily in the United States with additional operations in the United Division) within the Capital Markets business segment. Kingdom, Hong Kong, Israel and Latin America. Asset information by The acquisition is being accounted for under the purchase method in reportable segment is not reported, since the Company does not pro - accordance with SFAS 141, which requires the acquiring entity to allocate duce such information for internal use. the cost of an acquired business to the assets acquired and liabilities Year ended December 31, assumed based on their estimated fair values as at the date of acquisition. Amounts are expressed in thousands of dollars. 2008 2007 2006 Revenue: Consideration paid in cash is measured based on the amount of cash paid, while non-cash consideration is recorded at estimated fair value. Private Client (2) $574,331 $662,486 $593,896 Capital Markets 273,203 156,477 124,375 The purchase price for the transaction is comprised of (1) an earn-out based on the annual performance of the OIB Division for the calendar Asset Management (2) 61,527 87,051 59,237 years 2008 through 2012 (in no case to be less than $5 million per year) to Other (1) 11,009 8,383 23,315 be paid in the first quarter of 2013 (the “Earn-Out Date”). On the Earn- Total $920,070 $914,397 $800,823 Out Date, 25% of the earn-out will be paid in cash and the balance may Profit (loss) before income taxes: be paid, at the Company’s option, in any combination of cash, the Com - pany’s Class A Shares (at the then prevailing market price) and/or deben - Private Client $64,264 $84,207 $52,146 tures to be issued by the Company payable in two equal tranches – 50% Capital Markets (3) (4) (93,975) 27,155 11,547 one year after the Earn-Out Date and the balance two years after the Asset Management 12,303 16,944 3,832 Earn-Out Date, (2) warrants to purchase 1,000,000 Class A Shares of the Other (1) (18,635) (912) 12,925 Company at $48.62 per share exercisable five years from the January 2008 closing, (3) consideration at closing equal to the fair market value of Total $(36,043) $127,394 $80,450 net securities owned in the amount of $48.2 million, (4) cash considera - (1) For the year ended December 31, 2007, other revenue and profit tion at closing in the amount of $2.7 million for office facilities, (5) a cash before income taxes include approximately $2.5 million relating to a payment at closing in the amount of $1.1 million to extinguish a demand gain on extinguishment of the Company’s zero coupon promissory note, and (6) cash paid to cover acquisition costs of $1.8 million. notes. For the year ended December 31, 2006, other revenue and profit before income taxes include approximately $13.7 million relating Amounts are expressed in thousands of dollars. to the NYSE Group transactions and a gain upon extinguishment of the Cash consideration: Company’s Debentures of approximately $4.1 million. Acquisition costs $1,783 Extinguishment of demand note 1,144 (2) The Asset Management and the Private Client segments earned per - Office facilities 2,694 formance fees of approximately $552,900 and $815,300, respectively in Securities owned, net 48,229 2008 ($21.3 million and $22.0 million, respectively, in 2007 and $7.3 53,850 million and $7.4 million, respectively, in 2006). These fees are based on participation as general partner in various alternative investments. Warrants issued, at fair value 10,487 Earn-out, at fair value 11,068 (3) For the year ended December 31, 2008, the Capital Markets segment Aggregate purchase price $75,405 includes accrued expenses of $40.2 million for deferred incentive com - pensation to former CIBC employees for awards made by CIBC prior to The following table summarizes the estimated fair value of assets acquired the January 14, 2008 acquisition by the Company. and liabilities assumed. (4) For the year ended December 31, 2008, the Capital Markets segment Amounts are expressed in thousands of dollars. includes transition service charges of $27.3 million paid to CIBC for interim support of the acquired businesses which substantially termi - Cash and cash equivalents $ 3,515 nated upon the transition of such businesses to Oppenheimer’s platform Securities owned 80,602 in mid August 2008. Office facilities 5,115 Intangible assets: 17. Related-Party Transactions Customer relationships 941 The Company does not make loans to its officers and directors except under Below-market lease 21,309 normal commercial terms pursuant to client margin account agreements. Deferred tax asset 4,211 Prepaid compensation 2,400 These loans are fully collateralized by such employee-owned securities. Other assets 3,305 18. Acquisition Total assets acquired 121,398 On January 14, 2008, the Company acquired CIBC World Markets Corp.’s Less- U.S. Investment Banking, Corporate Syndicate, Institutional Sales and Securities sold, but not yet purchased 32,374 Trading, Equity Research, Options Trading and a portion of the Debt Capi - Accounts payable and other liabilities 3,067 tal Markets business which includes Convertible Bond Trading, Loan Syndi - Deferred tax liability 4,379 Excess of fair value of acquired net assets over cost 6,173 cation and Trading, High Yield Origination and Trading as well as Oppenheimer Israel (OPCO) Ltd., formerly CIBC Israel Ltd., and businesses Total liabilities assumed 45,993 operating in the United Kingdom on September 5, 2008 (now operating Net assets acquired $75,405 as Oppenheimer EU Ltd.) and Hong Kong, China on November 4, 2008 (now operating as Oppenheimer Investments Asia Limited). Per the terms Intangible assets arose upon the acquisition of the New Capital Markets of the purchase agreement, the operating results of the New Capital Mar - Business and are comprised of customer relationships and the estimated kets Business for the period January 1, 2008 to January 14, 2008 were fair value of a below-market lease on the premises located at 300 Madison transferred and assumed by the Company. The newly acquired businesses Avenue in New York City. Customer relationships are carried at $880,600
42 | Oppenheimer Holdings Inc. (which is net of accumulated amortization of $60,500) at December 31, The Company incurred transition service charges paid to CIBC for interim 2008 and are being amortized on a straight-line basis over 180 months support of the New Capital Markets Business which substantially termi - commencing in January 2008. The below-market lease, which represents nated upon transition of such businesses to the Company’s platform in the difference between what the Company is paying to occupy the prem - mid-August 2008. For the year ended December 31, 2008, transition serv - ises at 300 Madison Avenue, New York, NY and the fair market value of ice charges of $19.6 million and $7.7 million, respectively, are included in comparable real estate in midtown Manhattan, is carried at $17.0 million other expenses and clearing and exchange fees in the consolidated state - (which is net of accumulated amortization of $4.3 million) at December 31, ment of operations. 2008 and is being amortized over the life of the lease (60 months com - Presented below are the unaudited pro forma consolidated results of mencing in January 2008). operations. Amounts presented give effect to the acquisition of the New The earn-out, which will amount to no less than $25.0 million, has been Capital Markets Business as if the transaction was consummated as at Jan - assigned a fair value of $11.1 million at acquisition date. The difference uary 1, 2007. The Company’s actual results for the year ended December between the full liability and the grant date fair value is being amortized 31, 2008 include the results of the New Capital Markets Business since over 60 months commencing in January 2008 and approximately $2.8 mil - January 1, 2008. lion for the year ended December 31, 2008 is included as interest expense The pro forma information is for comparative purposes only and is not in the consolidated statement of operations. If the earn-out exceeds $5.0 indicative either of the actual results that would have occurred if the million in any of the five years from 2008 through 2012, the excess will first acquisition had been consummated at the beginning of the periods pre - reduce the excess of fair value of acquired assets over cost and second will sented, or of future operations of the combined companies. CIBC has an create goodwill, as applicable. The earn-out for 2008 was $5.0 million. October 31st fiscal year end and, therefore, the financial information for As part of the transaction, the Company borrowed $100.0 million from the New Capital Markets Business relates to the year ended October 31, CIBC in the form of a five-year Subordinated Note to support the New 2007. Revenue and expenses included in the pro forma presentation for Capital Markets Business. In addition, CIBC is providing a warehouse facil - the year ended December 31, 2007 include certain CIBC corporate alloca - ity, initially up to $1.5 billion, to OPY Credit Corp., to extend financing tions, reflecting the manner in which this business was managed within commitments to third-party borrowers identified by the Company. Under - CIBC. Such allocations may distort the comparability of the infor mation writing of loans pursuant to the warehouse facility will be subject to joint presented below. credit approval by Oppenheimer and CIBC. Dollar amounts are expressed in thousands, except per share amounts. Year ended In addition, in conjunction with the transaction, the Company has agreed (unaudited) December 31, 2007 to pay to CIBC an estimated $54.3 million over three years from 2008 through 2010 (2008 – $5.3 million; 2009 – $18.4 million; 2010 – $30.6 Revenue $1,340,815 million) for future payments of deferred incentive compensation to former Profit before tax from operations $113,111 CIBC employees for awards made by CIBC prior to January 14, 2008. The Net profit $64,702 Company recorded approximately $40.2 million of such expense in the Basic earnings per share $4.89 consolidated statement of operations for the year ended December 31, 2008 ($33.2 million is included in compensation and related expenses and Diluted earnings per share $4.78 $7.0 million is included in interest expense). In excess of 50% of these total incentive compensation commitments were accrued in 2008. The 19. Subsequent Events estimated amounts are based on forfeiture assumptions and actual amounts may differ from these estimates. These accrued expenses are net Dividend of an expense reversal of $6.1 million recorded in November 2008 arising On January 29, 2009, a cash dividend of U.S. $0.11 per share (totaling from the resolution of a number of issues with CIBC associated with the $1.5 million) was declared payable on February 27, 2009 to Class A and implementation and interpretation of the acquisition agreement. Class B shareholders of record on February 13, 2009.
20. Quarterly Information (unaudited) (Expressed in thousands of dollars, except per share amounts)
Year ended December 31, 2008 Year ended December 31, 2007 Fiscal Quarters Fourth Third Second First Total Fiscal Quarters Fourth Third Second First Total Revenue $209,767 $222,187 $256,241 $231,875 $920,070 Revenue $258,358 $215,173 $226,750 $214,116 $914,397 Profit (loss) before Profit before income taxes $(7,728) $(3,711) $2,185 $(26,789) $(36,043) income taxes $44,305 $27,021 $27,886 $28,182 $127,394 Net profit (loss) $(3,824) $(2,477) $1,646 $(16,115) $(20,770) Net profit $26,537 $16,274 $15,766 $16,790 $75,367 Earnings (loss) per share: Earnings per share: Basic $(0.29) $(0.18) $0.12 $(1.19) $(1.57) Basic $2.00 $1.23 $1.19 $1.28 $5.70 Diluted $(0.29) $(0.18) $0.12 $(1.19) $(1.57) Diluted $1.94 $1.19 $1.16 $1.26 $5.57 Dividends per share $0.11 $0.11 $0.11 $0.11 $0.44 Dividends per share $0.11 $0.11 $0.10 $0.10 $0.42 Market price of Market price of Class A Shares: Class A Shares: High $25.62 $31.51 $46.99 $48.19 $48.19 High $48.18 $57.50 $51.50 $37.66 $57.50 Low $7.70 $20.51 $27.27 $34.50 $7.70 Low $37.05 $36.75 $32.53 $31.80 $31.80
The price quotations above were obtained from the New York Stock Exchange web site.
Oppenheimer Holdings Inc . | 43 Branch Offices (U.S.)
Arizona Florida 325 N. Old Woodward Avenue 4717 Grand Avenue Birmingham, MI 48009 Kansas City, MO 64112 16427 North Scottsdale Road 4855 Technology Way 248-593-3700 816-932-7000 Scottsdale, AZ 85254 Boca Raton, FL 33431 480-596-1211 561-416-8600 6102 Abbott Road One North Brentwood Boulevard East Lansing, MI 48823 St. Louis, MO 63105 100 NE 3rd Avenue 517-332-8000 314-746-2500 California Fort Lauderdale, FL 33301 10880 Wilshire Boulevard 954-356-8200 130 Mayer Road Los Angeles, CA 90024 Frankenmuth, MI 48734 New Hampshire 2601 South Bayshore Drive 310-446-7100 989-652-3251 Miami, FL 33133 30 Penhallow Street Portsmouth, NH 03801 111 North Sepulveda Boulevard 305-860-2600 2240 E. Hill Road 603-436-7626 Manhattan Beach, CA 90266 Grand Blanc, MI 48439 777 Brickell Avenue 310-798-7777 810-694-2980 Miami, FL 33131 New Jersey 2460 Sand Hill Road 305-577-3761 250 Pearl Street NW 18 Columbia Turnpike Menlo Park, CA 94025 Grand Rapids, MI 49503 2000 PGA Boulevard Florham Park, NJ 07932 650-234-2400 616-732-3380 Palm Beach Gardens, FL 33408 973-245-4600 620 Newport Center Drive 561-383-3900 63 Kercheval Avenue 302 Carnegie Center Newport Beach, CA 92660 Grosse Pointe Farms, MI 48236 4221 W. Boy Scout Boulevard Princeton, NJ 08540 949-219-1000 313-886-1200 Tampa, FL 33607 609-734-0400 580 California Street 813-871-6207 170 College Avenue 3 Harding Road San Francisco, CA 94104 Holland, MI 49423 Red Bank, NJ 07701 415-438-3000 616-546-3557 Georgia 732-224-9000 One Post Street 1111 Alderman Drive 555 W. Crosstown Parkway Park 80 West, Plaza 1 San Francisco, CA 94104 Alpharetta, GA 30005 Kalamazoo, MI 49008 Saddlebrook, NJ 07663 415-399-5700 770-442-0368 269-381-4800 201-845-2300 21800 Burbank Boulevard 3414 Peachtree Road, N.E. 25 W. Nepessing Street Woodland Hills, CA 91367 Atlanta, GA 30326 Lapeer, MI 48446 New York 866-860-4388 404-262-5300 810-664-0050 300 Westage Business Center 1007 W. Ann Arbor Trail Fishkill, NY 12524 Colorado Illinois Plymouth, MI 48170 845-897-8100 4643 Ulster Street 500 West Madison 734-454-3751 700 Veterans Memorial Highway Denver, CO 80237 Chicago, IL 60661 810 Michigan Street Hauppauge, NY 11788 720-554-1100 312-360-5500 Port Huron, MI 48060 631-382-2500 501 St. Vrain Lane 810-987-1500 100 Jericho Quadrangle Estes Park, CO 80517 Kansas 12900 Hall Road Jericho, NY 11753 970-586-1895 200 North Main Street Sterling Heights, MI 48313 516-433-2800 Hutchinson, KS 67501 586-726-5000 620-663-5461 Connecticut 115 Broadhollow Road 2714 West Jefferson Avenue Melville, NY 11747 534 S. Kansas Avenue 1781 Highland Avenue Trenton, MI 48183 631-424-0700 Topeka, KS 66603 Cheshire, CT 06410 734-675-0550 203-272-9400 785-235-9281 125 Broad Street 3310 W. Big Beaver Road New York, NY 10004 100 Mill Plain Road Maryland Troy, MI 48084 212-859-9200 Danbury, CT 06811 248-637-8300 203-748-2626 111 S. Calvert Street 200 Park Avenue Baltimore, MD 21202 New York, NY 10166 1291 Boston Post Road 410-223-1936 Minnesota 212-907-4000 Madison, CT 06443 50 South 6th Street 203-318-1050 300 Madison Avenue Massachusetts Minneapolis, MN 55402 612-337-2700 New York, NY 10017 466 Heritage Road One Federal Street 212-856-4000 Southbury, CT 06488 Boston, MA 02110 203-264-6511 617-428-5500 Missouri 810 7th Avenue New York, NY 10019 750 Washington Boulevard 386 High Street 16401 Swingley Ridge 212-699-7700 Stamford, CT 06901 Fall River, MA 02720 Chesterfield, MO 63017 203-328-1160 508-324-4450 636-733-1000 505 Park Avenue New York, NY 10022 333 Kennedy Drive 1109-E Southwest Boulevard 212-644-3260 Torrington, CT 06790 Michigan Jefferson City, MO 65109 860-489-3151 573-636-3141 825 3rd Avenue 301 E. Liberty Street New York, NY 10022 Ann Arbor, MI 48104 212-716-8001 734-747-8040
44 | Oppenheimer Holdings, Inc. Ohio 1400 Woodloch Forest Drive Officers Principal Offices The Woodlands, TX 77380 255 East Fifth Street A.G. Lowenthal Oppenheimer Holdings Inc. 281-465-3200 Cincinnati, OH 45202 Chairman of the Board P.O. Box 2015, Suite 1110 513-723-9200 and Chief Executive Officer 20 Eglinton Avenue West Toronto, Canada M4R 1K8 Washington E.K. Roberts, C.A. 30100 Chagrin Boulevard (416) 322-1515 President and Treasurer Pepper Pike, OH 44124 500 108th Avenue NE FAX (416) 322-7007 216-765-5900 Bellevue, WA 98004 D.P. McNamara [email protected] 425-709-0400 Secretary Oppenheimer & Co. Inc. North Carolina 719 Second Avenue Board of Directors Corporate Headquarters 301 North Main Street Seattle, WA 98104 125 Broad Street Winston-Salem, NC 27101 206-757-3400 J.L. Bitov e" New York, NY 10004 336-714-0327 R. Crysta l" W. Ehrhard t (212) 668-8000 Washington, D.C. *° FAX (212) 943-8728 M. Keehne r*°" Pennsylvania 2000 K Street NW A.G. Lowenthal Capital Markets Washington, DC 20006 K.W. McArthu r 300 Madison Avenue 2103 Stefko Boulevard * 202-296-3030 A.W. Oughtred New York, NY 10017 Bethlehem, PA 18017 E.K. Roberts (212) 856-4000 610-867-8631 B. Winber g*° www.opco.com 136 W. Main Street (International) members of the audit committee Bloomsburg, PA 17815 * Oppenheimer Asset 570-784-4210 ° members of the compensation Management Inc. and stock option committee Buenos Aires, Argentina 200 Park Avenue 60 North Main Street " members of the nominating/ New York, NY 10166 Doylestown, PA 18901 San Martin 551 corporate governance committee (212) 907-4000 215-348-8104 Buenos Aires, Argentina FAX (212) 907-4080 011-541-393-7552 Auditors www.opco.com 500 Old York Road PricewaterhouseCoopers LLP Jenkintown, PA 19046 Oppenheimer Trust Caracas, Venezuela 215-887-7660 Counsel Company Avenida Francisco De Miranda Borden Ladner Gervais LLP 18 Columbia Turnpike 1180 Welsh Road Seguros Venezuela Toronto, Canada Florham Park, NJ 07932 North Wales, PA 19454 Piso 1 Oficina 1-B (973) 245-4635 215-412-0586 Campo Alegre, Blank Rome LLP FAX (973) 245-4699 Caracas 1061 Venezuela New York, NY www.opco.com 1818 Market Street 011-58-212-9530733 Philadelphia, PA 19103 Registrar and Transfer Agent OPY Credit Corp. 215-656-2800 CIBC Mellon Trust Company 300 Madison Avenue 301 Grant Street P.O. Box 7010 New York, NY 10017 Adelaide Street Postal Station Pittsburgh, PA 15219 (212) 885-4489 Toronto, Ontario Canada M5C 2W9 412-642-4301 Capital Markets FAX (212) 885-4838 Mellon Investor Services, LLC Offices Freedom Investments, Inc. 101 South Centre Street 85 Challenger Road, 375 Raritan Center Parkway Pottsville, PA 17901 (International) Ridgefield Park, NJ 07660 U.S.A. 570-622-4844 Edison, NJ 08837 (732) 934-3000 Hong Kong, China 1015 Mumma Road The Company’s financial information FAX (732) 225-6289 Wormleysburg, PA 17043 Executive Center and press releases are available on 717-763-8200 Three Pacific Place its website, www.opco.com, under Evanston Financial Suites 1A, 1B, 2 and 3 “Investor Relations ”. Corporation 1180 Welsh Road, Suite 210 Rhode Island 1 Queens Road East A copy of the Company’s Annual Report Central, Hong Kong North Wales, PA 19454 1 Financial Plaza on Form 10-K is available by request. (215) 412-0586 852-2855-688 [email protected] Providence, RI 02903 FAX (215) 631-9591 401-331-1932 London, England Texas Cottons Centre Cottons Lane 13455 Noel Road Certifications Regarding Public Disclosure and London SE1 2QL Listing Requirements Dallas, TX 75240 United Kingdom 972-450-3800 44-207-234-8400 The Company has filed with the Securities and Exchange Commission as Exhibits 31.1 and 31.2 to its Form 10-K for the years ended December 31, 505 Main Street 2007 and 2008, the certification required by Section 302 of the Sarbanes- Fort Worth, TX 76102 Tel Aviv, Israel Oxley Act regarding the quality of the Company’s public disclosure. In addition 817-333-3900 Oppenheimer Israel (OPCO) Ltd. the annual certification of the Chief Executive Officer regarding the Company’s compliance with the corporate governance listing standards of the New York 711 Louisiana Street Top Tower, 50 Dizengoff Street 15th Floor Stock Exchange was submitted without qualification to the New York Stock Houston, TX 77002 Exchange following the May 2008 annual and special shareholder meeting. 713-650-2000 Tel-Aviv 64332 Israel 972-3-526-2666
Design by DeSola Group, Inc. Oppenheimer & Co. Inc. Corporate Headquarters 125 Broad Street New York, NY 10004 Capital Markets 300 Madison Avenue New York, NY 10017 Oppenheimer Asset Management Inc. 200 Park Avenue New York, NY 10166