XNYS:OPY Oppenheimer Holdings Inc Class A Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended June 30, 2012

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 1-12043

 

 

OPPENHEIMER HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   98-0080034

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

125 Broad Street

New York, New York 10004

(Address of principal executive offices) (Zip Code)

(212) 668-8000

(Registrant’s telephone number, including area code)

None

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

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of the Company’s Class A non-voting common stock and Class B voting common stock (being the only classes of common stock of the Company) outstanding on July 31, 2012 was 13,493,912 and 99,680 shares, respectively.

 

 

 


Table of Contents

OPPENHEIMER HOLDINGS INC.

INDEX

 

          Page
No.

PART I

   FINANCIAL INFORMATION   

Item 1.

  

Financial Statements (unaudited)

  
  

Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011

   1
  

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011

   3
  

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2012 and 2011

   4
  

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011

   5
  

Condensed Consolidated Statements of Changes in Equity for the six months ended June 30, 2012 and 2011

   7
  

Notes to Condensed Consolidated Financial Statements

   8

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   45

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   62

Item 4.

  

Controls and Procedures

   62

PART II

  

OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

   64

Item 1A.

  

Risk Factors

   71

Item 6.

  

Exhibits

   71
  

Signatures

   72
  

Certifications

  


Table of Contents
PART I FINANCIAL INFORMATION

Item. 1 Financial Statements (unaudited)

OPPENHEIMER HOLDINGS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

 

     June 30,
2012
     December 31,
2011
 
(Expressed in thousands of dollars)              

ASSETS

     

Cash and cash equivalents

   $ 93,541       $ 70,329   

Cash and securities segregated for regulatory and other purposes

     32,487         30,086   

Deposits with clearing organizations

     64,806         35,816   

Receivable from brokers and clearing organizations

     294,444         288,113   

Receivable from customers, net of allowance for credit losses of $2,659 ($2,548 in 2011)

     839,769         837,822   

Income taxes receivable

     5,811         6,743   

Securities purchased under agreements to resell

     5,225         847,688   

Securities owned, including amounts pledged of $755,395 ($653,651 in 2011), at fair value

     1,100,644         924,541   

Notes receivable, net

     52,799         54,044   

Office facilities, net

     25,923         16,976   

Intangible assets, net

     32,356         35,589   

Goodwill

     137,889         137,889   

Other

     211,048         241,803   
  

 

 

    

 

 

 
   $ 2,896,742       $ 3,527,439   
  

 

 

    

 

 

 

(Continued on next page)

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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OPPENHEIMER HOLDINGS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

 

     June 30,
2012
    December 31,
2011
 
(Expressed in thousands of dollars)             

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Liabilities

    

Drafts payable

   $ 46,592      $ 51,848   

Bank call loans

     86,900        27,500   

Payable to brokers and clearing organizations

     378,700        335,610   

Payable to customers

     538,354        479,896   

Securities sold under agreements to repurchase

     734,883        1,508,493   

Securities sold, but not yet purchased, at fair value

     94,153        69,415   

Accrued compensation

     108,306        144,283   

Accounts payable and other liabilities

     193,507        184,669   

Senior secured note

     195,000        195,000   

Deferred income taxes, net

     3,533        10,302   

Excess of fair value of acquired assets over cost

     7,020        7,020   
  

 

 

   

 

 

 
     2,386,948        3,014,036   
  

 

 

   

 

 

 

Stockholders’ equity

    

Share capital

    

Class A non-voting common stock (2012 – 13,489,162 shares issued and outstanding 2011 – 13,572,265 shares issued and outstanding)

     61,266        62,593   

Class B voting common stock 99,680 shares issued and outstanding

     133        133   
  

 

 

   

 

 

 
     61,399        62,726   

Contributed capital

     38,702        36,832   

Retained earnings

     403,495        408,720   

Accumulated other comprehensive income (loss)

     (862     (208
  

 

 

   

 

 

 

Total Oppenheimer Holdings Inc. stockholders’ equity

     502,734        508,070   

Non-controlling interest

     7,060        5,333   
  

 

 

   

 

 

 
     509,794        513,403   
  

 

 

   

 

 

 
   $ 2,896,742      $ 3,527,439   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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OPPENHEIMER HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

 

    

Three months ended

June 30,

   

Six months ended

June 30,

 
     2012      2011     2012     2011  
Expressed in thousands of dollars, except share and per share amounts                          

REVENUE:

         

Commissions

   $ 112,429       $ 120,790      $ 238,063      $ 257,645   

Principal transactions, net

     13,460         13,313        26,015        24,304   

Interest

     14,246         13,649        27,639        28,438   

Investment banking

     24,971         33,717        45,058        62,158   

Advisory fees

     53,704         50,055        103,781        98,504   

Other

     14,335         12,994        30,803        26,886   
  

 

 

    

 

 

   

 

 

   

 

 

 
     233,145         244,518        471,359        497,935   
  

 

 

    

 

 

   

 

 

   

 

 

 

EXPENSES:

         

Compensation and related expenses

     150,896         160,436        309,547        330,851   

Clearing and exchange fees

     5,989         6,300        12,020        12,613   

Communications and technology

     15,328         16,069        31,466        32,008   

Occupancy and equipment costs

     17,409         18,524        41,753        37,070   

Interest

     8,230         10,669        17,022        18,443   

Other

     27,454         30,816        58,201        55,417   
  

 

 

    

 

 

   

 

 

   

 

 

 
     225,306         242,814        470,009        486,402   
  

 

 

    

 

 

   

 

 

   

 

 

 

Profit before income taxes

     7,839         1,704        1,350        11,533   

Income tax provision

     4,464         1,266        1,858        5,334   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net profit (loss) for the period

     3,375         438        (508     6,199   

Less net profit attributable to non-controlling interest, net of tax

     953         747        1,727        1,422   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net profit (loss) attributable to Oppenheimer Holdings Inc.

   $ 2,422       $ (309   $ (2,235   $ 4,777   
  

 

 

    

 

 

   

 

 

   

 

 

 

Profit (loss) per share attributable to Oppenheimer Holdings Inc.:

         

Basic

   $ 0.18       ($ 0.02   ($ 0.16   $ 0.35   

Diluted

   $ 0.17       ($ 0.02   ($ 0.16   $ 0.34   

Weighted average common shares:

         

Basic

     13,588,842         13,658,720        13,593,496        13,605,020   

Diluted

     14,009,645         13,937,375        13,593,496        13,929,521   

Dividends declared per share

   $ 0.11       $ 0.11      $ 0.22      $ 0.22   

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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OPPENHEIMER HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

 

    

Three months ended

June 30,

   

Six months ended

June 30,

 
     2012     2011     2012     2011  
Expressed in thousands of dollars                         

Net profit (loss) for the period

   $ 3,375      $ 438      $ (508   $ 6,199   

Other comprehensive income:

        

Currency translation adjustment

     (288     (120     (654     119   

Change in cash flow hedges, net of tax

     —          1,250        —          1,322   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) for the period

   $ 3,087      $ 1,568      $ (1,162   $ 7,640   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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OPPENHEIMER HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 

    

Six months ended

June 30,

 
     2012     2011  
Expressed in thousands of dollars             

Cash flows from operating activities:

    

Net profit (loss) for the period

   $ (508   $ 6,199   

Adjustments to reconcile net profit to net cash used in operating activities:

    

Non-cash items included in net profit:

    

Depreciation and amortization

     5,553        6,437   

Deferred income tax

     (6,769     2,177   

Amortization of notes receivable

     9,760        10,140   

Amortization of debt issuance costs

     319        571   

Amortization of intangibles

     3,233        2,163   

Provision for credit losses

     111        (286

Share-based compensation

     2,224        2,720   

Decrease (increase) in operating assets:

    

Cash and securities segregated for regulatory and other purposes

     (2,401     (4,496

Deposits with clearing organizations

     (28,990     (1,830

Receivable from brokers and clearing organizations

     (6,331     (54,894

Receivable from customers

     (2,058     1,437   

Income taxes receivable

     932        1,824   

Securities purchased under agreement to resell

     842,463        (215,412

Securities owned

     (176,103     (680,609

Notes receivable

     (8,515     (10,404

Other

     23,103        41,151   

Increase (decrease) in operating liabilities:

    

Drafts payable

     (5,256     (22,765

Payable to brokers and clearing organizations

     43,090        23,905   

Payable to customers

     58,458        153,570   

Securities sold under agreement to repurchase

     (773,610     777,999   

Securities sold, but not yet purchased

     24,738        21,422   

Accrued compensation

     (36,148     (58,966

Accounts payable and other liabilities

     8,838        (23,194
  

 

 

   

 

 

 

Cash used in operating activities

     (23,867     (21,141
  

 

 

   

 

 

 

 

(Continued on next page)

 

 

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OPPENHEIMER HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) -Continued

 

    

Six months ended

June 30,

 
     2012     2011  
Expressed in thousands of dollars             

Cash flows from investing activities:

    

Purchase of office facilities

     (7,821     (3,013
  

 

 

   

 

 

 

Cash used in investing activities

     (7,821     (3,013
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Cash dividends paid on Class A non-voting and Class B voting common stock

     (2,990     (3,003

Issuance of Class A non-voting common stock

     —          337   

Repurchase of Class A non-voting common stock for cancellation

     (1,551     —     

Tax benefit (shortfall) from share-based compensation

     41        (1,624

Debt issuance costs

     —          (4,346

Senior secured note issuance

     —          200,000   

Senior secured credit note repayments

     —          (22,503

Subordinated note repayment

     —          (100,000

Increase (decrease) in bank call loans, net

     59,400        12,000   
  

 

 

   

 

 

 

Cash provided by financing activities

     54,900        80,861   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     23,212        56,707   

Cash and cash equivalents, beginning of period

     70,329        52,854   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 93,541      $ 109,561   
  

 

 

   

 

 

 

Schedule of non-cash investing and financing activities:

    

Employee share plan issuance

   $ 224      $ 10,392   

Supplemental disclosure of cash flow information:

    

Cash paid during the periods for interest

   $ 20,456      $ 13,345   

Cash paid during the periods for income taxes

   $ 6,309      $ 4,087   

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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OPPENHEIMER HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited)

 

    

Six months ended

June 30,

 
     2012     2011  
Expressed in thousands of dollars             

Share capital

    

Balance at beginning of period

   $ 62,726      $ 51,901   

Issuance of Class A non-voting common stock

     224        10,729   

Repurchase of Class A non-voting common stock

     (1,551     —     
  

 

 

   

 

 

 

Balance at end of period

   $ 61,399      $ 62,630   
  

 

 

   

 

 

 

Contributed capital

    

Balance at beginning of period

   $ 36,832      $ 47,808   

Vested employee share plan awards

     (180     (13,303

Tax benefit (shortfall) from share-based awards

     41        (1,624

Share-based expense

     2,009        2,179   
  

 

 

   

 

 

 

Balance at end of period

   $ 38,702      $ 35,060   
  

 

 

   

 

 

 

Retained earnings

    

Balance at beginning of period

   $ 408,720      $ 394,648   

Net profit (loss) for the period attributable to Oppenheimer Holdings Inc.

     (2,235     4,777   

Dividends ($0.22 per share in 2012 and 2011)

     (2,990     (3,003
  

 

 

   

 

 

 

Balance at end of period

   $ 403,495      $ 396,422   
  

 

 

   

 

 

 

Accumulated other comprehensive income (loss)

    

Balance at beginning of period

   $ (208   $ 207   

Currency translation adjustment

     (654     119   

Change in cash flow hedges, net of tax

     —          1,322   
  

 

 

   

 

 

 

Balance at end of period

   $ (862   $ 1,648   
  

 

 

   

 

 

 

Stockholders’ Equity

   $ 502,734      $ 495,760   
  

 

 

   

 

 

 

Non-controlling interest

    

Balance at beginning of period

   $ 5,333      $ 3,032   

Net profit attributable to non-controlling interest for the period, net of tax

     1,727        1,422   
  

 

 

   

 

 

 

Balance at end of period

   $ 7,060      $ 4,454   
  

 

 

   

 

 

 

Total equity

   $ 509,794      $ 500,214   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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OPPENHEIMER HOLDINGS INC.

Notes to Condensed Consolidated Financial Statements

1. Summary of significant accounting policies

Basis of Presentation

Oppenheimer Holdings Inc. (“OPY”) is incorporated under the laws of the State of Delaware. On May 11, 2009, the jurisdiction of incorporation of OPY was changed from Canada to Delaware. The condensed consolidated financial statements include the accounts of OPY and its subsidiaries (together, the “Company”). The principal subsidiaries of OPY are Oppenheimer & Co. Inc. (“Oppenheimer”), a registered broker dealer in securities, Oppenheimer Asset Management Inc. (“OAM”) and its wholly owned subsidiary, Oppenheimer Investment Management Inc. (“OIM”), both registered investment advisors under the Investment Advisors Act of 1940, Oppenheimer Trust Company, a limited purpose trust company chartered by the State of New Jersey to provide fiduciary services such as trust and estate administration and investment management, Oppenheimer Multifamily Housing and Healthcare Finance, Inc. (“OMHHF”), which is engaged in mortgage brokerage and servicing, and OPY Credit Corp., which offers syndication as well as trading of issued corporate loans. Oppenheimer Europe Ltd. (formerly Oppenheimer E.U. Ltd.), based in the United Kingdom, provides institutional equities and fixed income brokerage and corporate financial services and is regulated by the Financial Services Authority. Oppenheimer Investments Asia Limited, based in Hong Kong, China, provides assistance in accessing the U.S. equities markets and limited mergers and acquisitions advisory services to Asia-based companies. Oppenheimer operates as Fahnestock & Co. Inc. in Latin America. Oppenheimer owns Freedom Investments, Inc. (“Freedom”), a registered broker dealer in securities, which also operates as the BUYandHOLD division of Freedom, offering on-line discount brokerage and dollar-based investing services, and Oppenheimer Israel (OPCO) Ltd., which is engaged in offering investment services in the State of Israel as a local broker dealer. Oppenheimer holds a trading permit on the New York Stock Exchange and is a member of several other regional exchanges in the United States.

The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These accounting principles are set out in the notes to the Company’s consolidated financial statements for the year ended December 31, 2011 included in its Annual Report on Form 10-K for the year then ended.

Accounting standards require the Company to present non-controlling interests (previously referred to as minority interests) as a separate component of stockholders’ equity on the Company’s consolidated balance sheet. As of June 30, 2012, the Company owned 67.34% of OMHHF and the non-controlling interest recorded in the condensed consolidated balance sheet was $7.1 million. The Company intends to purchase non-controlling interest shares of 16.33% in 2012 which will take its interest to 83.67%.

Disclosures reflected in these condensed consolidated financial statements comply in all material respects with those required pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) with respect to quarterly financial reporting.

During the three month period ended June 30, 2012, the Company recorded adjustments of $1.3 million, net of taxes, related to prior periods to establish additional reserves for tax positions. These out-of-period adjustments, which were not material to any prior period, resulted in an increase to income tax expense of $1.85 million offset by a decrease of interest expense of $588,000 on an after tax basis.

 

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2. New Accounting Pronouncements

Recently Adopted

In April 2011, the FASB issued ASU No. 2011-03, “Transfers and Servicing: Reconsideration of Effective Control for Repurchase Agreements,” which removes the requirement to consider whether sufficient collateral is held when determining whether to account for repurchase agreements and other agreements that both entitle and obligate the transferor to repurchase or redeem financial assets before their maturity as sales or as secured financings. The guidance is effective prospectively for transactions beginning on January 1, 2012. The Company adopted this guidance in the period ending March 31, 2012.

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS,” which provides clarifying guidance on how to measure fair value and has additional disclosure requirements. The amendments prohibit the use of blockage factors at all levels of the fair value hierarchy and provide guidance on measuring financial instruments that are managed on a net portfolio basis. Additional disclosure requirements include transfers between Levels 1 and 2 and, for Level 3 fair value measurements, a description of the valuation processes and additional information about unobservable inputs impacting Level 3 measurements. The updates are effective for fiscal years beginning after December 15, 2011. The Company adopted this guidance in the period ending March 31, 2012. See note 6 for further details.

In September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment,” which gives entities the option of performing a qualitative assessment before the quantitative analysis. If entities determine the fair value of a reporting unit is more likely than not less than the carrying amount based on the qualitative factors, the two-step quantitative test would be required. Otherwise, further testing would not be needed. The ASU is effective for fiscal years beginning after December 15, 2011 and early adoption is permitted. The Company evaluated this ASU and decided to continue to perform quantitative analysis for goodwill impairment.

On December 31, 2011, the FASB issued ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities,” which requires new disclosures about balance sheet offsetting and related arrangements. For derivatives and financial assets and liabilities, the ASU requires disclosure of gross asset and liability amounts, amounts offset on the balance sheet, and amounts subject to the offsetting requirements but not offset on the balance sheet. The ASU is effective for annual reporting periods beginning on or after January 1, 2013. The Company is currently evaluating the impact, if any, that these updates will have on its financial condition, results of operations and cash flows.

3. Revision to financial statements

During the year ended December 31, 2011, the Company identified historical errors relating to its tax treatment of deferred compensation obligations assumed as part of the 2003 acquisition of the Private Client Division from Canadian Imperial Bank of Commerce (“CIBC”) that affected prior periods. As a result, the Company determined the need to reestablish book basis of goodwill related to the 2003 transaction in the amount of $5.4 million. Further analysis revealed uncertain tax positions, that were inadvertently taken as a result of the errors, leading to the establishment

 

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of a reserve in the amount of $3.0 million, including accrued interest, as well as cumulative adjustments primarily related to current and deferred tax items of $2.8 million for periods prior to 2009.

The Company assessed the impact of the errors, including the impact of previously disclosed out-of-period adjustments, on its prior period financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2010 and concluded that these errors were not material, individually or in the aggregate, to any of those financial statements. Although the effect of these errors was not material to any previously issued financial statements, the cumulative effect of correcting these historical errors during the fiscal year 2011 would have been material. As part of this revision process, the Company also reversed other previously disclosed out-of-period adjustments which were immaterial, and recorded them instead in the periods in which the errors originated. These revisions have no net impact on the Company’s net cash amounts provided by (used in) operating, financing or investing activities for the any of the periods previously reported, nor in the current period. The cumulative effect of the above adjustments resulted in a $9.8 million credit to opening retained earnings as of January 1, 2011.

The financial statements as of June 30, 2011, included herein, have been prepared in light of the cumulative revisions above. The financial statements for all other periods affected by the revisions can continue to be relied upon, and will be revised to reflect the revisions discussed above, the next time such financial statements are included in future reports for comparative purposes.

4. Earnings per share

Basic earnings per share was computed by dividing net profit (loss) by the weighted average number of shares of Class A and Class B Stock outstanding. Diluted earnings per share includes the weighted average number of shares of Class A and Class B Stock outstanding and the effects of the warrant using the if converted method and options to purchase the Class A Stock and restricted stock awards of Class A Stock using the treasury stock method.

 

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Earnings per share has been calculated as follows:

Expressed in thousands of dollars, except share and per share amounts.

 

     Three months ended June 30,     Six months ended June 30,  
     2012      2011     2012     2011  

Basic weighted average number of shares outstanding

     13,588,842         13,658,720        13,593,496        13,605,020   

Net dilutive effect of warrant, treasury method (1)

     —           —          —          —     

Net dilutive effect of share-based awards, treasury method (2)

     420,803         —          —          324,501   
  

 

 

    

 

 

   

 

 

   

 

 

 

Diluted weighted average number of shares outstanding

     14,009,645         13,658,720        13,593,496        13,929,521   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net profit (loss) for the period

   $ 3,375       $ 438      $ (508   $ 6,199   

Net profit attributable to non-controlling interests

     953         747        1,727        1,422   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net profit (loss) attributable to Oppenheimer Holdings Inc.

   $ 2,422       ($ 309   $ (2,235   $ 4,777   
  

 

 

    

 

 

   

 

 

   

 

 

 

Basic profit (loss) per share

   $ 0.18       ($ 0.02   $ (0.16   $ 0.35   

Diluted profit (loss) per share

   $ 0.17       ($ 0.02   $ (0.16   $ 0.34   

 

(1) As part of the consideration for the 2008 acquisition of certain businesses from CIBC World Markets Corp., the Company issued a warrant to CIBC to purchase 1 million shares of Class A Stock of the Company at $48.62 per share exercisable five years from the January 14, 2008 acquisition date. For the three and six months ended June 30, 2012 and 2011, the effect of the warrant is anti-dilutive.
(2) For the both the three and six months ended June 30, 2012, the diluted earnings per share computations do not include the anti-dilutive effect of 1,059,638 shares of Class A Stock granted under share-based compensation arrangements together with the warrant described in (1) (1,139,695 and 1,142,028 shares of Class A Stock, respectively, for the three and six months ended June 30, 2011).

5. Receivable from and Payable to Brokers and Clearing Organizations

Expressed in thousands of dollars.

 

     June 30,
2012
     December 31,
2011
 

Receivable from brokers and clearing organizations consist of:

     

Deposits paid for securities borrowed

   $ 207,252       $ 217,353   

Receivable from brokers

     22,668         23,516   

Securities failed to deliver

     23,154         11,551   

Clearing organizations

     20,505         19,209   

Omnibus accounts

     19,864         15,907   

Other

     1,001         577   
  

 

 

    

 

 

 
   $ 294,444       $ 288,113   
  

 

 

    

 

 

 

 

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     June 30,
2012
     December 31,
2011
 

Payable to brokers and clearing organizations consist of:

     

Deposits received for securities loaned

   $ 295,729       $ 318,834   

Securities failed to receive

     24,188         15,236   

Clearing organizations and other

     58,783         1,540   
  

 

 

    

 

 

 
   $ 378,700       $ 335,610   
  

 

 

    

 

 

 

6. Financial instruments

Securities owned and securities sold but not yet purchased, investments and derivative contracts are carried at fair value with changes in fair value recognized in earnings each period. The Company’s other financial instruments are generally short-term in nature or have variable interest rates and as such their carrying values approximate fair value, with the exception of notes receivable from employees which are carried at cost.

Securities Owned and Securities Sold, But Not Yet Purchased at Fair Value

Expressed in thousands of dollars.

 

     June 30,
2012
     December 31,
2011
 
     Owned      Sold      Owned      Sold  

U.S. Treasury, agency and sovereign obligations

   $ 796,655       $ 45,797       $ 682,805       $ 27,509   

Corporate debt and other obligations

     26,233         4,636         27,188         3,696   

Mortgage and other asset-backed securities

     3,416         7         4,609         14   

Municipal obligations

     111,104         461         54,963         485   

Convertible bonds

     50,923         10,953         50,157         8,533   

Corporate equities

     44,630         32,284         38,634         29,056   

Other

     67,683         15         66,185         122   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,100,644       $ 94,153       $ 924,541       $ 69,415   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities owned and securities sold, but not yet purchased, consist of trading and investment securities at fair values. Included in securities owned at June 30, 2012 are mutual funds with estimated fair values of approximately $13.1 million ($13.2 million at December 31, 2011), which are related to deferred compensation liabilities to certain employees included in accrued compensation on the condensed consolidated balance sheet. As of June 30, 2012, the Company did not have any exposure to European sovereign debt.

 

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Valuation Techniques

A description of the valuation techniques applied and inputs used in measuring the fair value of the Company’s financial instruments is as follows:

U.S. Treasury Obligations

U.S. Treasury securities are valued using quoted market prices obtained from active market makers and inter-dealer brokers and, accordingly, are categorized in Level 1 in the fair value hierarchy.

U.S. Agency Obligations

U.S. agency securities consist of agency issued debt securities and mortgage pass-through securities. Non-callable agency issued debt securities are generally valued using quoted market prices. Callable agency issued debt securities are valued by benchmarking model-derived prices to quoted market prices and trade data for identical or comparable securities. The fair value of mortgage pass-through securities are model driven with respect to spreads of the comparable To-be-announced (“TBA”) security. Actively traded non-callable agency issued debt securities are categorized in Level 1 of the fair value hierarchy. Callable agency issued debt securities and mortgage pass-through securities are generally categorized in Level 2 of the fair value hierarchy.

Sovereign Obligations

The fair value of sovereign obligations is determined based on quoted market prices when available or a valuation model that generally utilizes interest rate yield curves and credit spreads as inputs. Sovereign obligations are categorized in Level 1 or 2 of the fair value hierarchy.

Corporate Debt & Other Obligations

The fair value of corporate bonds is estimated using recent transactions, broker quotations and bond spread information. Corporate bonds are generally categorized in Level 2 of the fair value hierarchy.

Mortgage and Other Asset-Backed Securities

The Company holds non-agency securities collateralized by home equity and various other types of collateral which are valued based on external pricing and spread data provided by independent pricing services and are generally categorized in Level 2 of the fair value hierarchy. When specific external pricing is not observable, the valuation is based on yields and spreads for comparable bonds and, consequently, the positions are categorized in Level 3 of the fair value hierarchy.

Municipal Obligations

The fair value of municipal obligations is estimated using recently executed transactions, broker quotations, and bond spread information. These obligations are generally categorized in Level 2 of the fair value hierarchy; in instances where significant inputs are unobservable, they are categorized in Level 3 of the hierarchy.

Convertible Bonds

The fair value of convertible bonds is estimated using recently executed transactions and dollar-neutral price quotations, where observable. When observable price quotations are not available, fair value is determined 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 value hierarchy; in instances where significant inputs are unobservable, they are categorized in Level 3 of the hierarchy.

Corporate Equities

Equity securities and options are generally valued based on quoted prices from the exchange or market where traded and categorized as Level 1 in the fair value hierarchy. To the extent quoted prices are not available, prices are generally derived using bid/ask spreads, and these securities are generally categorized in Level 2 of the fair value hierarchy.

 

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Other

In February 2010, Oppenheimer finalized settlements with each of the New York Attorney General’s office (“NYAG”) and the Massachusetts Securities Division (“MSD” and, together with the NYAG, the “Regulators”) concluding investigations and administrative proceedings by the Regulators concerning Oppenheimer’s marketing and sale of auction rate securities (“ARS”). Pursuant to those settlements and legal settlements, as of June 30, 2012, the Company purchased and holds approximately $77.7 million in ARS from its clients pursuant to several purchase offers and legal settlements. The Company’s purchases of ARS from its clients will continue on a periodic basis pursuant to the settlements with the Regulators. In addition, the Company is committed to purchase another $40.4 million in ARS from clients through 2016. The ultimate amount of ARS to be repurchased by the Company cannot be predicted with any certainty and will be impacted by redemptions by issuers and legal and other actions by clients during the relevant period, which cannot be predicted. In addition to the ARS held pursuant to purchases from clients of $77.7 million as of June 30, 2012 referred to above, the Company also held $150,000 in ARS in its proprietary trading account as of June 30, 2012 as a result of the failed auctions in February 2008. These ARS positions primarily represent Auction Rate Preferred Securities issued by closed-end funds and, to a lesser extent, Municipal Auction Rate Securities which are municipal bonds wrapped by municipal bond insurance and Student Loan Auction Rate Securities which are asset-backed securities backed by student loans.

Interest rates on ARS typically reset through periodic auctions. Due to the auction mechanism and generally liquid markets, ARS have historically been categorized as Level 1 in the fair value hierarchy. Beginning in February 2008, uncertainties in the credit markets resulted in substantially all of the ARS market experiencing failed auctions. Once the auctions failed, the ARS could no longer be valued using observable prices set in the auctions. The Company has used less observable determinants of the fair value of ARS, including the strength in the underlying credits, announced issuer redemptions, completed issuer redemptions, and announcements from issuers regarding their intentions with respect to their outstanding ARS. The Company has also developed an internal methodology to discount for the lack of liquidity and non-performance risk of the failed auctions. Key inputs include spreads on comparable Treasury yields to derive a discount rate, an estimate of the ARS duration, and yields based on current auctions in comparable securities that have not failed. Additional information regarding the valuation technique and inputs used is as follows:

Expressed in thousands of dollars.

 

Quantitative Information about Level 3 Fair Value Measurements at June 30, 2012

Product

   Principal      Valuation
Adjustment
     Fair Value      Valuation
Technique
   Unobservable
Input
   Range

Auction Rate Securities(1)

   $ 118,264       $ 5,731       $ 112,533       Discounted Cash Flow    Discount Rate    1.14% to 3.01%
               Duration    5 to 8 Years
               Current Yield(2)    0.27% to 1.37%

Total

                 

 

(1) Includes ARS owned by the Company of $77.9 million and included in the condensed consolidated balance sheet at June 30, 2012 as well as additional commitments to purchase ARS from clients of $40.4 million which is disclosed in the notes to the condensed consolidated balance sheet.
(2) Based on current auctions in comparable securities that have not failed.

 

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The fair value of ARS is particularly sensitive to movements in interest rates. Increases in short-term interest rates would increase the discount rate input used in the ARS valuation and thus reduce the fair value of the ARS (increase the valuation adjustment). Conversely, decreases in short-term interest rates would decrease the discount rate and thus increase the fair value of ARS (decrease the valuation adjustment). However, an increase (decrease) in the discount rate input would be partially mitigated by an increase (decrease) in the current yield earned on the underlying ARS asset increasing the cash flows and thus the fair value. Furthermore, movements in short term interest rates would likely impact the ARS duration (i.e., sensitivity of the price to a change in interest rates), which would also have a mitigating affect on interest rate movements. For example, as interest rates increase, issuers of ARS have an incentive to redeem outstanding securities as servicing the interest payments gets prohibitively expensive which would lower the duration assumption thereby increasing the ARS fair value. Alternatively, ARS issuers are less likely to redeem ARS in a lower interest rate environment as it is a relatively inexpensive source of financing which would increase the duration assumption thereby decreasing the ARS fair value.

Due to the less observable nature of these inputs, the Company categorizes ARS in Level 3 of the fair value hierarchy. As of June 30, 2012, the Company had a valuation adjustment (unrealized loss) of $5.7 million for ARS.

Investments

In its role as general partner in certain hedge funds and private equity funds, the Company, through its subsidiaries, holds direct investments in such funds. The Company uses the net asset value of the underlying fund as a basis for estimating the fair value of its investment. Due to the illiquid nature of these investments and difficulties in obtaining observable inputs, these investments are included in Level 3 of the fair value hierarchy.

 

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The following table provides information about the Company’s investments in Company-sponsored funds at June 30, 2012.

Expressed in thousands of dollars.

 

     Fair Value      Unfunded
Commitments
     Redemption
Frequency
   Redemption
Notice Period

Hedge Funds(1)

   $ 905       $ —         Quarterly - Annually    30 - 120 Days

Private Equity Funds(2)

     3,108         1,307       N/A    N/A

Distressed Opportunities Investment Trust(3)

     7,662         —         N/A    N/A
  

 

 

    

 

 

       

Total

   $ 11,675       $ 1,307         
  

 

 

    

 

 

       

 

(1) Includes investments in hedge funds and hedge fund of funds that pursue long/short, event-driven, and activist strategies.
(2) Includes private equity funds and private equity fund of funds with a focus on diversified portfolios, real estate and global natural resources.
(3) Special purpose vehicle that invests in distressed debt of U.S. companies.

Derivative Contracts

From time to time, the Company transacts in exchange-traded and over-the-counter derivative transactions to manage its interest rate risk. Exchange-traded derivatives, namely U.S. Treasury futures, Federal funds futures, and Eurodollar futures, are valued based on quoted prices from the exchange and are categorized in Level 1 of the fair value hierarchy. Over-the-counter derivatives, namely interest rate swap and interest rate cap contracts, are valued using a discounted cash flow model and the Black-Scholes model, respectively, using observable interest rate inputs and are categorized in Level 2 of the fair value hierarchy.

As described below in “Credit Concentrations”, the Company participates in loan syndications and operates as underwriting agent in leveraged financing transactions where it utilizes a warehouse facility provided by Canadian Imperial Bank of Commerce (“CIBC”) to extend financing commitments to third-party borrowers identified by the Company. The Company uses broker quotations on loans trading in the secondary market as a proxy to determine the fair value of the underlying loan commitment which is categorized in Level 3 of the fair value hierarchy. The Company also purchases and sells loans in its proprietary trading book. The Company uses broker quotations to determine the fair value of loan positions held which are categorized in Level 2 of the fair value hierarchy.

The Company from time to time enters into securities financing transactions that mature on the same date as the underlying collateral (referred to as “repo-to-maturity” transactions). Such transactions are treated as a sale of financial assets and a forward repurchase commitment, or conversely as a purchase of financial assets and a forward reverse repurchase commitment. The forward repurchase and reverse repurchase commitments are valued based on the spread between the market value of the government security and the underlying collateral and are categorized in Level 2 of the fair value hierarchy.

 

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Table of Contents

Fair Value Measurements

The Company’s assets and liabilities, recorded at fair value on a recurring basis as of June 30, 2012 and December 31, 2011, have been categorized based upon the above fair value hierarchy as follows:

Assets and liabilities measured at fair value on a recurring basis as of June 30, 2012

Expressed in thousands of dollars.

 

     Fair Value Measurement: Assets
As of June 30, 2012
 
     Level 1      Level 2      Level 3      Total  

Cash equivalents

   $ 44,035       $ —         $ —         $ 44,035   

Cash and securities segregated for regulatory and other purposes

     11,498         —           —           11,498   

Deposits with clearing organization

     9,094         —           —           9,094   

Securities owned:

           

U.S. Treasury securities

     708,063         —           —           708,063   

U.S. Agency securities

     44,923         43,640         —           88,563   

Sovereign obligations

     —           29         —           29   

Corporate debt and other obligations

     13,369         12,864         —           26,233   

Mortgage and other asset-backed securities

     —           3,404         12         3,416   

Municipal obligations

     —           100,984         10,120         111,104   

Convertible bonds

     —           50,923         —           50,923   

Corporate equities

     33,153         11,477         —           44,630   

Other

     3,039         —           64,644         67,683   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities owned, at fair value

     802,547         223,321         74,776         1,100,644   

Investments(1)

     368         35,619         12,760         48,747   

Derivative contracts

     —           —           —           —     

TBAs

     —           5,846         —           5,846   

Securities purchased under agreements to resell

     —           5,225         —           5,225   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 867,542       $ 270,011       $ 87,536       $ 1,225,089   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value Measurement: Liabilities
As of June 30, 2012
 
     Level 1      Level 2      Level 3      Total  

Securities sold, not yet purchased:

           

U.S. Treasury securities

   $ 35,563       $ —         $ —         $ 35,563   

U.S. Agency securities

     10,197         37         —           10,234   

Corporate debt and other obligations

     —           4,636         —           4,636   

Mortgage and other asset-backed securities

     —           7         —           7   

Municipal obligations

     —           461         —           461   

Convertible bonds

     —           10,953         —           10,953   

Corporate equities

     19,087         13,197         —           32,284   

Other

     15         —           —           15   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities sold, not yet purchased at fair value

     64,862         29,291         —           94,153   

Investments

     67         —           —           67   

Derivative contracts

     69         146         2,334         2,549   

TBAs

     —           168         —           168   

Securities sold under agreements to repurchase(2)

     —           52,584         —           52,584   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $   64,998       $   82,189       $   2,334       $    149,521   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Included in other assets on the condensed consolidated balance sheet.

(2) 

Includes securities sold under agreements to repurchase agreements where the Company has elected fair value option treatment.

 

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Assets and liabilities measured at fair value on a recurring basis as of December 31, 2011

Expressed in thousands of dollars.

 

     Fair Value Measurement: Assets
As of December 31, 2011
 
     Level 1      Level 2      Level 3      Total  

Cash equivalents

   $ 30,924       $ —         $ —         $ 30,924   

Cash and securities segregated for regulatory and other purposes

     11,500         —           —           11,500   

Deposits with clearing organizations

     9,095         —           —           9,095   

Securities owned:

           

U.S. Treasury securities

     627,870         —           —           627,870   

U.S. Agency securities

     32,663         21,695         —           54,358   

Sovereign obligations

     —           577         —           577   

Corporate debt and other obligations

     12,538         14,650         —           27,188   

Mortgage and other asset-backed securities

     —           4,593         16         4,609   

Municipal obligations

     —           51,401         3,562         54,963   

Convertible bonds

     —           50,157         —           50,157   

Corporate equities

     29,150         9,484         —           38,634   

Other

     1,184         —           65,001         66,185   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities owned, at fair value

     703,405         152,557         68,579         924,541   

Investments(1)

     1,512         32,964         12,482         46,958   

Derivative contracts

     —           20         —           20   

TBAs

     —           5,791         —           5,791   

Securities purchased under agreements to resell

     —           847,610         —           847,610   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 756,436       $ 1,038,942       $ 81,061       $ 1,876,439   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value Measurement: Liabilities
As of December 31, 2011
 
     Level 1      Level 2      Level 3      Total  

Securities sold, not yet purchased:

           

U.S. Treasury securities

   $ 27,462       $ —         $ —         $ 27,462   

U.S. Agency securities

     —           47         —           47   

Sovereign obligations

     —           —           —           —     

Corporate debt and other obligations

     —           3,696         —           3,696   

Mortgage and other asset-backed securities

     —           14         —           14   

Municipal obligations

     —           485         —           485   

Convertible bonds

     —           8,533         —           8,533   

Corporate equities

     16,467         12,589         —           29,056   

Other

     72         —           50         122   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities sold, not yet purchased at fair value

     44,001         25,364         50         69,415   

Investments

     26         —           —           26   

Derivative contracts

     66         8         2,347         2,421   

TBAs

     —           2,254         —           2,254   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $   44,093       $      27,626       $   2,397       $      74,116   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Included in other assets on the condensed consolidated balance sheet.

(2) 

Includes securities purchased under agreements to resell where the Company has elected fair value option treatment.

There were no significant transfers between Level 1 and Level 2 assets and liabilities in the three months ended June 30, 2012.

 

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Table of Contents

The following tables present changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended June 30, 2012 and 2011.

Expressed in thousands of dollars.

 

    For the Three-Month Period Ended June 30, 2012  
    Beginning
Balance
    Realized
Gains
(Losses)(4)
    Unrealized
Gains
(Losses)(4) (5)
    Purchases &
Issuances
    Sales &
Settlements
    Transfers
In / Out
    Ending
Balance
 

Assets:

             

Mortgage and other asset-backed securities(1)

  $ 98        (7     (16     3        (64     (2   $ 12   

Municipals

    11,789        (5     586        —          (2,250     —          10,120   

Other(2)

    66,831        —          738        4,425        (7,350     —          64,644   

Investments(3)

    13,132        —          (78     3        (297     —          12,760   

Liabilities:

             

Mortgage and other asset-backed securities(1)

  $ —          —          —          —          —          —        $ —     

Other(2)

    —          —          —          —          —          —          —     

Derivative contracts

    3,907        —          (1,573     —          —          —          2,334   

 

(1)

Represents private placements of non-agency collateralized mortgage obligations.

(2)

Represents auction rate securities that failed in the auction rate market.

(3)

Primarily represents general partner ownership interests in hedge funds and private equity funds sponsored by the Company.

(4)

Included in principal transactions on the consolidated statement of operations, except for investments which are included in other income on the consolidated statement of operations.

(5)

Unrealized gains (losses) are attributable to assets or liabilities that are still held at the reporting date.

Expressed in thousands of dollars.

 

    For the Three-Month Period Ended June 30, 2011  
    Beginning
Balance
    Realized
Gains
(Losses)
    Unrealized
Gains
(Losses)
    Purchases &
Issuances
    Sales &
Settlements
    Transfers
In / Out
    Ending
Balance
 

Assets:

             

Mortgage and other asset-backed securities(1)

  $ —          —          3        102          —        $ 105   

Municipals

    2,165        —          (43     1,882        (175     —          3,829   

Other(2)

    36,582        —          1,966        27,575        (3,025     —          63,098   

Investments(3)

    17,308        —          1        426        (1,607     13        16,141   

Liabilities:

             

Mortgage and other asset-backed securities(1)

  $ —          —          —          —          11        —        $ 11   

 

(1)

Represents private placements of non-agency collateralized mortgage obligations.

(2)

Represents auction rate securities that failed in the auction rate market.

(3)

Primarily represents general partner ownership interests in hedge funds and private equity funds sponsored by the Company.

 

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The following tables present changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the six months ended June 30, 2012 and 2011.

Expressed in thousands of dollars.

 

     For the Six-Month Period Ended June 30, 2012  
     Beginning
Balance
     Realized
Gains
(Losses)(4)
    Unrealized
Gains
(Losses)(4) (5)
    Purchases &
Issuances
    Sales &
Settlements
    Transfers
In / Out
    Ending
Balance
 

Assets:

               

Mortgage and other asset-backed securities(1)

   $ 16         (8     1        83        (79     (2   $ 12   

Municipals

     3,562         (5     (491     9,305        (2,250     —          10,120   

Other(2)

     65,001         —          (761     14,725        (14,321     —          64,644   

Investments(3)

     12,482         —          437        127        (297     11        12,760   

Liabilities:

               

Other(2)

     50         —          —          (50     —          —          —     

Derivative contracts

     2,347         —          (13     —          —          —          2,334   

 

(1)

Represents private placements of non-agency collateralized mortgage obligations

(2)

Represents auction rate securities that failed in the auction rate market

(3)

Primarily represents general partner ownership interests in hedge funds and private equity funds sponsored by the Company

(4)

Included in principal transactions on the consolidated statement of operations, except for investments which are included in other income on the consolidated statement of operations

(5)

Unrealized gains (losses) are attributable to assets or liabilities that are still held at the reporting date

Expressed in thousands of dollars.

 

     For the Six-Month Period Ended June 30, 2011  
     Beginning
Balance
     Realized
Gains
(Losses)
     Unrealized
Gains
(Losses)
    Purchases &
Issuances
     Sales &
Settlements
    Transfers
In / Out
    Ending
Balance
 

Assets:

                 

Mortgage and other asset-backed securities(1)

   $ 14         —           3        102         (14     —        $ 105   

Municipals

     1,787         —           (190     2,407         (175     —          3,829   

Other(2)

     35,909         —           (936     34,150         (6,025     —          63,098   

Investments(3)

     17,208         —           (1     552         (1,607     (11     16,141   

Liabilities:

                 

Mortgage and other asset-backed securities(1)

   $ —           —           —          —             —        $ (11

 

(1)

Represents private placements of non-agency collateralized mortgage obligations

(2)

Represents auction rate securities that failed in the auction rate market

(3)

Primarily represents general partner ownership interests in hedge funds and private equity funds sponsored by the Company

 

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Fair Value Option

The Company has the option to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period. The Company may make a fair value option election on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The Company has elected to apply the fair value option to its loan trading portfolio which resides in OPY Credit Corp. and is included in other assets on the condensed consolidated balance sheet. Management has elected this treatment as it is consistent with the manner in which the business is managed as well as the way that financial instruments in other parts of the business are recorded. There were no loan positions held in the secondary loan trading portfolio at June 30, 2012 (none at December 31, 2011).

The Company also elected the fair value option for those securities sold under agreements to repurchase (“repurchase agreements”) and securities purchased under agreements to resell (“reverse repurchase agreements”) that do not settle overnight or have an open settlement date or that are not accounted for as purchase and sale agreements (such as repo-to-maturity transactions). The Company has elected the fair value option for these instruments to more accurately reflect market and economic events in its earnings and to mitigate a potential imbalance in earnings caused by using different measurement attributes (i.e. fair value versus carrying value) for certain assets and liabilities. At June 30, 2012, the fair value of the reverse repurchase agreements and repurchase agreements was $5.2 million and $52.6 million, respectively.

Fair Value of Derivative Instruments

The Company transacts, on a limited basis, in exchange traded and over-the-counter derivatives for both asset and liability management as well as for trading and investment purposes. Risks managed using derivative instruments include interest rate risk and, to a lesser extent, foreign exchange risk. Interest rate swaps and interest rate caps are entered into to manage the Company’s interest rate risk associated with floating-rate borrowings. All derivative instruments are measured at fair value and are recognized as either assets or liabilities on the condensed consolidated balance sheet. The Company designates interest rate swaps and interest rate caps as cash flow hedges of floating-rate borrowings.

Cash flow hedges used for asset and liability management

For derivative instruments that were designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative was reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains or losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

On September 29, 2006, the Company entered into interest rate swap transactions to hedge the interest payments associated with its floating rate Senior Secured Credit Note, which was subject to change due to changes in 3-Month LIBOR. See note 7 for further information. These swaps were designated as cash flow hedges. Changes in the fair value of the swap hedges were expected to be highly effective in offsetting changes in the interest payments due to changes in 3-Month LIBOR. The swaps expired on March 31, 2011. For the three months ended March 31, 2011, the effective portion of the net gain on the interest rate swaps, after tax, was approximately $69,000 and was recorded as other comprehensive income on the condensed consolidated statement of comprehensive income (loss).

 

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On January 20, 2009, the Company entered into an interest rate cap contract, incorporating a series of purchased caplets with fixed maturity dates ending December 31, 2012, to hedge the interest payments associated with its floating rate Subordinated Note, which was subject to change due to changes in 3-Month LIBOR. With the repayment of the Subordinated Note in the second quarter of 2011, this cap is no longer designated as a cash flow hedge. The Company recorded $573 and $19,775, respectively, in interest expense with respect to the interest rate cap for the three and six months ended June 30, 2012.

Foreign exchange hedges

From time to time, the Company also utilizes forward and options contracts to hedge the foreign currency risk associated with compensation obligations to Oppenheimer Israel (OPCO) Ltd. employees denominated in New Israeli Shekels. Such hedges have not been designated as accounting hedges. At June 30, 2012, the Company did not have any such hedges in place.

“To-be-announced” securities”

The Company also transacts in pass-through mortgage-backed securities eligible to be sold in the “To-Be-Announced” or TBA market. TBAs provide for the forward or delayed delivery of the underlying instrument with settlement up to 180 days. The contractual or notional amounts related to these financial instruments reflect the volume of activity and do not reflect the amounts at risk. Unrealized gains and losses on TBAs are recorded in the condensed consolidated balance sheet in receivable from brokers and clearing organizations and payable to brokers and clearing organizations, respectively, and in the condensed consolidated statement of operations as principal transactions revenue.

The TBA market for certain types of underlying collateral has recently experienced increased levels of transactions reaching their anticipated settlement dates where the government agency (Fannie Mae, Freddie Mac, or Ginnie Mae) has not issued pool allocations. Delays in the settlement of these trades increases risk of counterparty failure and resulting market exposures of having to cover the trades in the open market. At June 30, 2012, the Company had TBA purchases with a notional value of $1.2 million and corresponding TBA sales with a notional value of $1.2 million (both included in the below table) where the expected settlement date was reached but the pool allocations were not issued.

The following table summarizes the notional and fair values of the TBAs as of June 30, 2012 and December 31, 2011.

Expressed in thousands of dollars.

 

     June 30, 2012      December 31, 2011  
     Notional      Fair Value      Notional      Fair Value  

Sale of TBAs (1)

   $ 634,240       $ 5,846       $ 574,365       $ 5,791   

Purchase of TBAs

   $ 131,857       $ 168       $ 137,572       $ 2,254   

 

(1)

TBAs are used to offset exposures related to commitments to provide funding for FHA loans at OMHHF. At June 30, 2012, the loan commitments balance was $421.5 million ($326.7 million at December 31, 2011). In addition, at June 30, 2012, OMHHF had a loan receivable balance (included in other assets) of $80.9 million ($109.3 million at December 31, 2011) which relates to prior loan commitments that have been funded but have not yet been securitized. The “when issued” securitizations of these loans have been sold to market counter-parties.

Derivatives used for trading and investment purposes

Futures contracts represent commitments to purchase or sell securities or other commodities at a future date and at a specified price. Market risk exists with respect to these instruments. Notional

 

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or contractual amounts are used to express the volume of these transactions, and do not represent the amounts potentially subject to market risk. The futures contracts the Company used include U.S. Treasury notes, Federal Funds and Eurodollar contracts. At June 30, 2012, the Company had 200 open short contracts for 10-year U.S. Treasury notes with a fair value of $68,750 used primarily as an economic hedge of interest rate risk associated with a portfolio of fixed income investments. At June 30, 2012, the Company had 7.3 billion open contracts for Federal Funds futures with a fair value of approximately $154,615 used primarily as an economic hedge of interest rate risk associated with government trading activities.

From time-to-time, the Company enters into securities financing transactions that mature on the same date as the underlying collateral (referred to as “repo-to-maturity” transactions). These transactions are treated as a sale of financial assets and a forward repurchase commitment, or conversely as a purchase of financial assets and a forward reverse repurchase commitment. At June 30, 2012, the Company did not have any repo-to-maturity transactions outstanding.

The notional amounts and fair values of the Company’s derivatives at June 30, 2012 and December 31, 2011 by product were as follows:

Expressed in thousands of dollars.

 

Fair Value of Derivative Instruments

As of June 30, 2012

                  
     Description    Notional      Fair Value  

Assets:

  

Derivatives designated as hedging instruments (1)

  

Interest rate contracts

   Cap (2)    $ 100,000       $ 0   
     

 

 

    

 

 

 

Total Assets

      $ 100,000       $ 0   
     

 

 

    

 

 

 

Liabilities:

  

Derivatives not designated as hedging instruments (1)

  

Commodity contracts

   U.S Treasury Futures  (3)    $ 20,000       $ 69   
   Federal Funds Futures  (3)      7,580,000         145   
   Euro Dollars Futures      37,000         1   

Other contracts

   Auction rate securities purchase commitment (4)      40,389         2,334   
     

 

 

    

 

 

 

Total Liabilities

      $ 7,677,389       $ 2,549   
     

 

 

    

 

 

 

 

(1) See “Fair Value of Derivative Instruments” below for description of derivative financial instruments.
(2) Included in receivable from brokers and clearing organizations on the condensed consolidated balance sheet.
(3) Included in payable from brokers and clearing organizations on the condensed consolidated balance sheet.
(4) Included in securities owned on the condensed consolidated balance sheet.

 

23


Table of Contents

Expressed in thousands of dollars.

 

Fair Value of Derivative Instruments

As of December 31, 2011

                  
     Description    Notional      Fair Value  

Assets:

  

Derivatives designated as hedging instruments (1)

  

Interest rate contracts

   Cap (2)    $ 100,000       $ 20   
     

 

 

    

 

 

 

Total Assets

      $ 100,000       $ 20   
     

 

 

    

 

 

 

Liabilities:

  

Derivatives not designated as hedging instruments (1)

  

Commodity contracts

   U.S Treasury Futures (3)    $ 20,000       $ 66   
   Federal Funds Futures (3)      5,985,000         8   

Other contracts

   Auction rate securities purchase commitment (4)      57,292         2,347   
     

 

 

    

 

 

 

Total Liabilities

      $ 6,062,292       $ 2,421   
     

 

 

    

 

 

 

 

(1) See “Fair Value of Derivative Instruments” below for description of derivative financial instruments.
(2) Included in receivable from brokers and clearing organizations on the condensed consolidated balance sheet.
(3) Included in payable from brokers and clearing organizations on the condensed consolidated balance sheet.
(4) Included in securities owned on the condensed consolidated balance sheet.

 

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Table of Contents

The following table presents the location and fair value amounts of the Company’s derivative instruments and their effect on the statement of operations for the three months ended June 30, 2012.

Expressed in thousands of dollars.

 

    

Recognized in Income

on Derivatives

(pre-tax)

   

Recognized

in Other
Comprehensive

Income on

Derivatives
-Effective
Portion

(after–tax)

    

Reclassified from
Accumulated Other
Comprehensive
Income into Income
-Effective Portion (2)

(after–tax)

 

Hedging Relationship

  

Description

  

Location

   Gain/
(Loss)
    Gain/
(Loss)
     Location    Gain/
(Loss)
 

Cash Flow Hedges used for asset and liability management:

  

   Caps (3)    N/A    $ —        $ —         Interest expense    $ —     

Derivatives used for trading and investment (1):

  

Commodity contracts

   U.S Treasury Futures    Principal transaction revenue      (894     —         None      —     
   Federal Funds Futures    Principal transaction revenue      71        —         None      —     
   Euro-Dollars Futures    Principal transaction revenue      (28     —              —     

Other contracts

   Auction rate securities purchase commitment    Principal transaction revenue      1,572        —         None      —     
        

 

 

   

 

 

       

 

 

 

Total

         $ 721      $ —            $ —     
        

 

 

   

 

 

       

 

 

 

 

(1) See “Fair Value of Derivative Instruments” above for description of derivative financial instruments.
(2) There is no ineffective portion included in income for the period ended June 30, 2012.
(3) As noted above in “Cash flow hedges used for asset and liability management”, interest rate caps are used to hedge interest rate risk associated with the Subordinated Note. With the repayment of the Subordinated Note in the second quarter of 2011, this cap is no longer designated as a cash flow hedge.

 

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Table of Contents

The following table presents the location and fair value amounts of the Company’s derivative instruments and their effect on the statement of operations for the six months ended June 30, 2012.

Expressed in thousands of dollars.

 

    

Recognized in Income

on Derivatives

(pre-tax)

   

Recognized

in Other
Comprehensive
Income on
Derivatives

-Effective
Portion

(after–tax)

    

Reclassified from
Accumulated Other
Comprehensive

Income into Income
-Effective Portion  (2)

(after–tax)

 

Hedging Relationship

  

Description

  

Location

   Gain/
(Loss)
    Gain/
(Loss)
     Location    Gain/
(Loss)
 

Cash Flow Hedges used for asset and liability management:

  

Interest rate contracts

   Swaps    N/A    $ —        $ —         Interest expense    $ —     
   Caps (3)    N/A      (12     —         Interest expense      —     

Derivatives used for trading and investment (1):

  

Commodity contracts

   U.S Treasury Futures    Principal transaction revenue      (638     —         None      —     
   Federal Funds Futures    Principal transaction revenue      260        —         None      —     
   Euro-dollar Futures    Principal transaction revenue      (28     —         None      —     

Other contracts

   Auction rate securities purchase commitment    Principal transaction revenue      13        —         None      —     
        

 

 

   

 

 

       

 

 

 

Total

         $ (405   $ —            $ —     
        

 

 

   

 

 

       

 

 

 

 

(1) See “Fair Value of Derivative Instruments” above for description of derivative financial instruments.
(2) There is no ineffective portion included in income for the year ended December 31, 2011.
(3) As noted above in “Cash flow hedges used for asset and liability management”, interest rate caps are used to hedge interest rate risk associated with the Subordinated Note. With the repayment of the Subordinated Note in the second quarter of 2011, this cap is no longer designated as a cash flow hedge and, as a result, a loss of $1.3 million, net of tax, has been reclassified from other comprehensive income (loss) to other expenses on the condensed consolidated statement of operations.

Collateralized Transactions

The Company enters into collateralized borrowing and lending transactions in order to meet customers’ needs and earn residual interest rate spreads, obtain securities for settlement and finance trading inventory positions. Under these transactions, the Company either receives or provides collateral, including U.S. government and agency, asset-backed, corporate debt, equity, and non-U.S. government and agency securities.

 

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The Company obtains short-term borrowings primarily through bank call loans. Bank call loans are generally payable on demand and bear interest at various rates but not exceeding the broker call rate. At June 30, 2012, bank call loans were $86.9 million ($27.5 million at December 31, 2011).

At June 30, 2012, the Company had collateralized loans, collateralized by firm and customer securities with market values of approximately $95.7 million and $208.1 million, respectively, primarily with two U.S. money center banks. At June 30, 2012, the Company had approximately $1.2 billion of customer securities under customer margin loans that are available to be pledged, of which the Company has repledged approximately $269.8 million under securities loan agreements.

At June 30, 2012, the Company had deposited $622.8 million of customer securities directly with the Options Clearing Corporation to secure obligations and margin requirements under option contracts written by customers.

At June 30, 2012, the Company had no outstanding letters of credit.

The Company finances its government trading operations through the use of repurchase agreements and reverse repurchase agreements. Except as described below, repurchase and reverse repurchase agreements, principally involving government and agency securities, are carried at amounts at which the securities subsequently will be resold or reacquired as specified in the respective agreements and include accrued interest. Repurchase and reverse repurchase agreements are presented on a net-by-counterparty basis, when the repurchase and reverse repurchase agreements are executed with the same counterparty, have the same explicit settlement date, are executed in accordance with a master netting arrangement, the securities underlying the repurchase and reverse repurchase agreements exist in “book entry” form and certain other requirements are met.

Certain of the Company’s repurchase agreements and reverse repurchase agreements are carried at fair value as a result of the Company’s fair value option election. The Company elected the fair value option for those repurchase agreements and reverse repurchase agreements that do not settle overnight or have an open settlement date or that are not accounted for as purchase and sale agreements (such as the repo-to-maturity transactions described above). The Company has elected the fair value option for these instruments to more accurately reflect market and economic events in its earnings and to mitigate a potential imbalance in earnings caused by using different measurement attributes (i.e. fair value versus carrying value) for certain assets and liabilities. At June 30, 2012, the fair value of the reverse repurchase agreements and repurchase agreements was $5.2 million and $52.6 million, respectively.

At June 30, 2012, the gross balances of reverse repurchase agreements and repurchase agreements were $5.7 billion and $6.4 billion, respectively ($5.5 billion and $6.1 billion, respectively, at December 31, 2011).

The Company receives collateral in connection with securities borrowed and reverse repurchase agreement transactions and customer margin loans. Under many agreements, the Company is permitted to sell or repledge the securities received (e.g., use the securities to enter into securities lending transactions, or deliver to counterparties to cover short positions). At June 30, 2012, the fair value of securities received as collateral under securities borrowed transactions and reverse repurchase agreements was $206.4 million ($209.9 million at December 31, 2011) and $5.7 billion ($5.5 billion at December 31, 2011), respectively, of which the Company has sold and re-pledged approximately $20.5 million ($44.0 million at December 31, 2011) under securities loaned transactions and $5.7 billion under repurchase agreements ($5.5 billion at December 31, 2011).

 

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The Company pledges certain of its securities owned for securities lending and repurchase agreements and to collateralize bank call loan transactions. The carrying value of pledged securities owned that can be sold or re-pledged by the counterparty was $755.4 million, as presented on the face of the condensed consolidated balance sheet at June 30, 2012 ($653.7 million at December 31, 2011). The carrying value of securities owned by the Company that have been loaned or pledged to counterparties where those counterparties do not have the right to sell or re-pledge the collateral was $152.6 million as at June 30, 2012 ($119.8 million at December 31, 2011).

The Company manages credit exposure arising from repurchase and reverse repurchase agreements by, in appropriate circumstances, entering into master netting agreements and collateral arrangements with counterparties that provide the Company, in the event of a customer default, the right to liquidate and the right to offset a counterparty’s rights and obligations. The Company also monitors the market value of collateral held and the market value of securities receivable from others. It is the Company’s policy to request and obtain additional collateral when exposure to loss exists. In the event the counterparty is unable to meet its contractual obligation to return the securities, the Company may be exposed to off-balance sheet risk of acquiring securities at prevailing market prices.

As of December 31, 2011, the interest in securities formerly held by one of the Company’s funds which utilized Lehman Brothers International (Europe) as a prime broker was transferred to an investment trust. As of June 30, 2012, the fair value of the Company’s investment in the securities held by Lehman Brothers International (Europe) that were segregated and not re-hypothecated was $7.7 million. This investment has been included in the condensed consolidated financial statements of the Company.

Credit Concentrations

Credit concentrations may arise from trading, investing, underwriting and financing activities and may be impacted by changes in economic, industry or political factors. In the normal course of business, the Company may be exposed to risk in the event customers, counterparties including other brokers and dealers, issuers, banks, depositories or clearing organizations are unable to fulfill their contractual obligations. The Company seeks to mitigate these risks by actively monitoring exposures and obtaining collateral as deemed appropriate. Included in receivable from brokers and clearing organizations as of June 30, 2012 are receivables from four major U.S. broker-dealers totaling approximately $138.5 million.

The Company participates in loan syndications through its debt capital markets business. The Company participates in loan syndications through its debt capital markets business. Through OPY Credit Corp., the Company operates as underwriting agent or arranger in leveraged financing transactions. At June 30, 2012, it utilized a warehouse facility provided by CIBC to extend financing commitments to third-party borrowers identified by the Company. As of June 30, 2012, the maximum aggregate principal amount of the warehouse facility was $1.5 billion, of which the Company utilized $61.2 million ($65.9 million as of December 31, 2011) and had $nil in Excess Retention ($nil as of December 31, 2011). This warehouse facility arrangement terminated on July 15, 2012. However, the Company will remain liable for some minimal expenses in relation to this facility related to commitments made by CIBC to borrowers introduced by the Company until such borrowings are repaid by the borrower or until 2016, whichever is the sooner to occur. All such owed amounts will continue to be reflected in the Company’s condensed consolidated statement of operations as incurred.

 

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Table of Contents

The Company is obligated to settle transactions with brokers and other financial institutions even if its clients fail to meet their obligations to the Company. Clients are required to complete their transactions on settlement date, generally one to three business days after trade date. If clients do not fulfill their contractual obligations, the Company may incur losses. The Company has clearing/participating arrangements with the National Securities Clearing Corporation (“NSCC”), the Fixed Income Clearing Corporation (“FICC”), R.J. O’Brien & Associates (commodities transactions) and others. With respect to its business in reverse repurchase and repurchase agreements, substantially all open contracts at June 30, 2012 are with the FICC. In addition, the Company recently began clearing its non-U.S. international equities business carried on by Oppenheimer Europe Ltd. through BNP Paribas Securities Services. The clearing corporations have the right to charge the Company for losses that result from a client’s failure to fulfill its contractual obligations. Accordingly, the Company has credit exposures with these clearing brokers. The clearing brokers can re-hypothecate the securities held on behalf of the Company. As the right to charge the Company has no maximum amount and applies to all trades executed through the clearing brokers, the Company believes there is no maximum amount assignable to this right. At June 30, 2012, the Company had recorded no liabilities with regard to this right. The Company’s policy is to monitor the credit standing of the clearing brokers and banks with which it conducts business.

Through its Debt Capital Markets business, the Company also participates, with other members of loan syndications, in providing financing commitments under revolving credit facilities in leveraged financing transactions. As of June 30, 2012, the Company had $4.7 million committed under such financing arrangements. This loan was settled in full on July 2, 2012.

OMHHF, which is engaged in mortgage brokerage and servicing, has obtained an uncommitted warehouse facility line through PNC Bank (“PNC”) under which OMHHF pledges Federal Housing Administration (“FHA”) guaranteed mortgages for a period of up to 10 business days and PNC table funds the principal payment to the mortgagee. OMHHF repays PNC upon the securitization of the mortgage by the Government National Mortgage Association (“GNMA”) and the delivery of the security to the counter party for payment pursuant to a contemporaneous sale on the date the mortgage is funded. At June 30, 2012, OMHHF had $54.0 million outstanding under the warehouse facility line at a variable interest rate of 1 month LIBOR plus 2.15%. Interest expense for the three and six months ended June 30, 2012 was $235,000 and $700,000, respectively ($332,000 and $1.16 million, respectively, for the three and six months ended June 30, 2011).

As discussed in note 6, Financial Instruments, the Company enters into TBA transactions to offset exposures related to commitments to provide funding for FHA loans at OMHHF. In the normal course of business, the Company may be exposed to the risk that counterparties to these TBAs are unable to fulfill their contractual obligations.

Variable Interest Entities (VIEs)

VIEs are entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The primary beneficiary of a VIE is the party that absorbs a majority of the entity’s expected losses, receives a majority of its expected residual returns, or both, as a result of holding variable interests. The enterprise that is considered the primary beneficiary of a VIE consolidates the VIE.

 

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A subsidiary of the Company serves as general partner of hedge funds and private equity funds that were established for the purpose of providing investment alternatives to both its institutional and qualified retail clients. The Company holds variable interests in these funds as a result of its right to receive management and incentive fees. The Company’s investment in and additional capital commitments to these hedge funds and private equity funds are also considered variable interests. The Company’s additional capital commitments are subject to call at a later date and are limited in amount.

The Company assesses whether it is the primary beneficiary of the hedge funds and private equity funds in which it holds a variable interest in the context of the total general and limited partner interests held in these funds by all parties. In each instance, the Company has determined that it is not the primary beneficiary and therefore need not consolidate the hedge funds or private equity funds. The subsidiaries’ general partnership interests, additional capital commitments, and management fees receivable represent its maximum exposure to loss. The subsidiaries’ general partnership interests and management fees receivable are included in other assets on the condensed consolidated balance sheet.

The following tables set forth the total VIE assets, the carrying value of the subsidiaries’ variable interests, and the Company’s maximum exposure to loss in Company-sponsored non-consolidated VIEs in which the Company holds variable interests and other non-consolidated VIEs in which the Company holds variable interests at June 30, 2012 and December 31, 2011:

As of June 30, 2012

Expressed in thousands of dollars.

 

     Total
VIE  Assets
(1)
     Carrying Value of the
Company’s Variable
Interest
     Capital
Commitments
     Maximum
Exposure
to Loss in Non-
consolidated VIEs
 
        Assets (2)      Liabilities        

Hedge Funds

   $ 1,831,365       $ 305       $ —         $ —         $ 305   

Private Equity Funds

     171,681         30         —           10         40   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,003,046       $ 335       $ —         $ 10       $ 345   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

As of December 31, 2011

Expressed in thousands of dollars.

 

     Total
VIE  Assets
(1)
     Carrying Value of the
Company’s Variable
Interest
     Capital
Commitments
     Maximum
Exposure

to  Loss in Non-
consolidated VIEs
 
        Assets (2)      Liabilities        

Hedge Funds

   $ 1,668,508       $ 393       $ —         $ —         $ 393   

Private Equity Funds

     142,275         27         —           13         40   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,810,783       $ 420       $ —         $ 13       $ 433   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents the total assets of the VIEs and does not represent the Company’s interests in the VIEs.
(2) Represents the Company’s interests in the VIEs and is included in other assets on the condensed consolidated balance sheet.

7. Long-term debt

Expressed in thousands of dollars.

 

Issued

   Maturity Date     June 30, 2012      December 31, 2011  

Senior Secured Notes (a)

     4/15/2018      $ 195,000       $ 195,000   

Senior Secured Credit Note (b)

     7/31/2013   $ —         $ —     

Subordinated Note (c)

     1/31/2014   $ —         $ —     

 

* Retired on April 12, 2011
(a)

On April 12, 2011, the Company completed the private placement of $200 million in aggregate principal amount of 8.75 percent Senior Secured Notes due April 15, 2018 at par (the “Notes”). The interest on the Notes is payable semi-annually on April 15th and October 15th. Proceeds from the private placement were used to retire the Senior Secured Credit Note due 2013 ($22.4 million) and the Subordinated Note due 2014 ($100 million) and for other general corporate purposes. The private placement resulted in the fixing of the interest rate over the term of the Notes compared to the variable rate debt that was retired and an extension of the debt maturity dates as described above. The cost to issue the Notes was approximately $4.6 million which was capitalized in the second quarter of 2011 and will be amortized over the period of the Notes. The Company wrote off $344,000 in unamortized debt issuance costs related to the Senior Secured Credit Note during the second quarter of 2011. Additionally, as a result of the retirement of the Subordinated Note, the effective portion of the net loss of $1.3 million related to the interest rate cap cash flow hedge was reclassified from accumulated other comprehensive income (loss) on the condensed consolidated balance sheet to interest expense in the condensed consolidated statement of operations during the second quarter of 2011.

 

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The indenture for the Notes contains covenants which place restrictions on the incurrence of indebtedness, the payment of dividends, sale of assets, mergers and acquisitions and the granting of liens. The Notes provide for events of default including nonpayment, misrepresentation, breach of covenants and bankruptcy. The Company’s obligations under the Notes are guaranteed, subject to certain limitations, by the same subsidiaries that guaranteed the obligations under the Senior Secured Credit Note and the Subordinated Note which were retired. These guarantees may be shared, on a senior basis, under certain circumstances, with newly incurred debt outstanding in the future. At June 30, 2012, the Company was in compliance with all of its covenants.

On July 12, 2011, the Company’s Registration Statement on Form S-4 filed to register the exchange of the Notes for fully registered Notes was declared effective by the SEC. The Exchange Offer was completed in its entirety on August 9, 2011.

In November, 2011, the Company repurchased $5.0 million of its Notes at a cost of $4.7 million resulting in the recording of a gain during the three months ending December 31, 2011 of $300,000.

On April 4, 2012, the Company’s Registration Statement on Form S-3 filed to enable the Company to act as a market maker in connection with the Notes was declared effective by the SEC.

Interest expense on the Notes for the three and six months ended June 30, 2012 was $4.3 million and $8.5 million, respectively ($3.8 million in both the three and six months ended June 30, 2011). Interest is due on the Notes semi-annually on April 15 and October 15.

 

(b) In 2006, the Company issued a Senior Secured Credit Note in 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 Funding Inc., as agent. In accordance with the Senior Secured Credit Note, the Company provided certain covenants to the lenders with respect to the maintenance of a minimum fixed charge ratio and maximum leverage ratio and minimum net capital requirements with respect to Oppenheimer.

The remaining principal balance of the Senior Secured Credit Note in the amount of $22.4 million was repaid in full on April 12, 2011 in connection with the issuance of the Notes described in (a) above.

Interest expense, as well as interest paid, for the three and six months ended June 30, 2011 on the Senior Secured Credit Note was $35,000 and $306,000, respectively.

 

(c) On January 14, 2008, in connection with the acquisition of certain businesses from CIBC World Markets Corp., CIBC made a loan in the amount of $100 million and the Company issued a Subordinated Note to CIBC in the amount of $100 million at a variable interest rate based on LIBOR. The purpose of this Subordinated Note was to support the capital requirements of the acquired business. In accordance with the Subordinated Note, the Company provided certain covenants to CIBC with respect to the maintenance of a minimum fixed charge ratio and maximum leverage ratio and minimum net capital requirements with respect to Oppenheimer.

The principal balance of the Subordinated Note in the amount of $100 million was repaid in full on April 12, 2011 in connection with the issuance of the Notes described in (a) above.

 

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Interest expense, as well as interest paid, for the three and six months ended June 30, 2011 on the Subordinated Note was $185,000 and $1.6 million, respectively.

8. Share capital

The Company’s authorized share capital consists of (a) 50,000,000 shares of Preferred Stock, par value $0.001 per share; (b) 50,000,000 shares of Class A non-voting common stock, par value $0.001 per share (“Class A Stock”); and (c) 99,680 shares of Class B voting common stock, par value $0.001 per share (“Class B Stock”). No Preferred Stock has been issued. 99,680 shares of Class B Stock have been issued and are outstanding.

The Class A and the Class B Stock are equal in all respects except that the Class A Stock is non-voting.

The following table reflects changes in the number of shares of Class A Stock outstanding for the periods indicated:

 

    

Three months ended

June 30,

    

Six months ended

June 30,

 
     2012      2011      2012     2011  

Class A Stock outstanding, beginning of period

     13,489,162         13,535,063         13,572,265        13,268,522   

Issued pursuant to the share-based compensation plans

     —           33,882         16,797        300,423   

Repurchased and cancelled pursuant to the stock buy-back

     —           —           (99,900     —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Class A Stock outstanding, end of period

     13,489,162         13,568,945         13,489,162        13,568,945   
  

 

 

    

 

 

    

 

 

   

 

 

 

Stock buy-back

On October 7, 2011, the Company announced its intention to purchase up to 675,000 shares of its Class A Stock in compliance with the rules and regulations of the New York Stock Exchange and the Securities and Exchange Commission and the terms of its senior secured debt. The 675,000 shares represented approximately 5% of its then 13,572,265 issued and outstanding shares of Class A Stock. Any such purchases are being made by the Company in the open market at the prevailing open market price using cash on hand. All shares purchased will be cancelled. The repurchase program is expected to continue indefinitely. The repurchase program does not obligate the Company to repurchase any dollar amount or number of shares of Class A Stock. Depending on market conditions and other factors, these repurchases may be commenced or suspended from time to time without prior notice.

In the six months ended June 30, 2012, the Company purchased and cancelled 99,900 shares of Class A Stock for total consideration of $1.6 million ($15.52 per share).

9. Regulatory requirements

The Company’s U.S. broker dealer subsidiaries, Oppenheimer and Freedom, are subject to the uniform net capital requirements of the SEC under Rule 15c3-1 (the “Rule”) promulgated under Securities Exchange Act of 1934, as amended (the “Exchange Act”). Oppenheimer computes its net

 

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capital requirements under the alternative method provided for in the Rule which requires that Oppenheimer maintain net capital equal to two percent of aggregate customer-related debit items, as defined in SEC Rule 15c3-3. At June 30, 2012, the net capital of Oppenheimer as calculated under the Rule was $142.3 million or 11.8% of Oppenheimer’s aggregate debit items. This was $118.3 million in excess of the minimum required net capital at that date. Freedom computes its net capital requirement under the basic method provided for in the Rule, which requires that Freedom maintain net capital equal to the greater of $250,000 or 6-2/3% of aggregate indebtedness, as defined. At June 30, 2012, Freedom had net capital of $4.8 million, which was $4.6 million in excess of the $250,000 required to be maintained at that date.

At June 30, 2012, Oppenheimer and Freedom had $17.4 million and $14.9 million, respectively, in cash and U.S. Treasury securities segregated under Federal and other regulations.

At June 30, 2012, the regulatory capital of Oppenheimer Europe Ltd. was $5.0 million which was $1.5 million in excess of the $3.5 million required to be maintained at that date. Oppenheimer Europe Ltd. computes its regulatory capital pursuant to the Fixed Overhead Method prescribed by the Financial Services Authority of the United Kingdom.

At June 30, 2012, the regulatory capital of Oppenheimer Investments Asia Ltd. was $1.1 million, which was $753,000 in excess of the $386,000 required to be maintained on that date. Oppenheimer Investments Asia Ltd. computes its regulatory capital pursuant to the requirements of the Securities and Futures Commission in Hong Kong.

In accordance with the SEC’s No-Action Letter dated November 3, 1998, the Company has computed a reserve requirement for the proprietary accounts of introducing firms as of June 30, 2012. The Company had no deposit requirements as of June 30, 2012.

10. Related party transactions

The Company does not make loans to its officers and directors except under normal commercial terms pursuant to client margin account agreements. These loans are fully collateralized by employee-owned securities.

11. Segment Information

The Company has determined its reportable segments based on the Company’s method of internal reporting, which disaggregates its retail business by branch and its proprietary and investment banking businesses by product. The Company’s segments are: Private Client which includes commission and fee income earned on client transactions, net interest earnings on client margin loans and cash balances, stock loan activities and financing activities; Capital Markets which includes investment banking, market-making activities in over-the-counter equities, institutional trading in both fixed income and equities, structured assets transactions, bond trading, trading in mortgage-backed securities, corporate underwriting activities, public finance activities, syndicate participation as well as the Company’s operations in the United Kingdom, Hong Kong, and Israel; and Asset Management which includes fees from money market funds and the investment management services of Oppenheimer Asset Management Inc. and Oppenheimer’s asset management divisions employing various programs to professionally manage client assets either in individual accounts or in funds. The Company evaluates the performance of its segments and allocates resources to them based upon profitability. The Company has allocated all revenue and

 

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expenses to its segments and has eliminated the “Other” category as these are now allocated by the Chief Executive Officer and Chief Financial Officer in their analysis. Previously reported segment information has been revised to reflect this change.

The table below presents information about the reported revenue and profit (loss) before income taxes of the Company for the three months and six months ended June 30, 2012 and 2011. Asset information by reportable segment is not reported, since the Company does not produce such information for internal use.

Expressed in thousands of dollars.

 

    

Three months ended

June 30,

   

Six months ended

June 30,

 
     2012      2011     2012     2011  

Revenue:

         

Private Client (1)

   $ 128,631       $ 136,116      $ 270,459      $ 284,963   

Capital Markets

     82,547         88,893        157,350        174,978   

Asset Management (1)

     21,967         19,509        43,550        37,994   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 233,145       $ 244,518      $ 471,359      $ 497,935   
  

 

 

    

 

 

   

 

 

   

 

 

 

Profit (loss) before income taxes:

         

Private Client (1)

   $ 348       $ 4,302      $ 10,098      $ 14,340   

Capital Markets

     2,852         (7,161     (18,691     (11,947

Asset Management (1)

     4,639         4,563        9,943        9,140   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 7,839       $ 1,704      $ 1,350      $ 11,533   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) Asset management revenue is allocated 22.5% to the Asset Management segment and 77.5% to the Private Client segment.

Revenue, classified by the major geographic areas in which it was earned for the three and six months ended June 30, 2012 and 2011, was as follows:

Expressed in thousands of dollars.

 

    

Three months ended

June 30,

    

Six months ended

June 30,

 
     2012      2011      2012      2011  

United States

   $ 222,478       $ 232,272       $ 448,113       $ 471,562   

Europe / Middle East

     7,258         6,554         4,265         14,787   

Asia

     1,620         3,246         15,534         6,385   

South America

     1,789         2,446         3,447         5,201   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 233,145       $ 244,518       $ 471,359       $ 497,935   
  

 

 

    

 

 

    

 

 

    

 

 

 

12. Subsequent events

On July 15, 2012, the Company terminated its warehouse facility provided by CIBC which was used to extend loans and financing commitments to third-party borrowers.

 

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On July 23, 2012, the Company reached an agreement with RBS Citizens, NA (“Citizens”) whereby Citizens will provide warehouse financing for loans and financing commitments originated by the Company.

On July 25, 2012, the Company declared a cash dividend of $0.11 per share (totaling $1.5 million) payable on August 24, 2012 to Class A and Class B Stockholders of record on August 10, 2012.

13. Supplemental Guarantor Consolidated Financial Statements (unaudited)

The Company’s Notes are jointly and severally and fully and unconditionally guaranteed on a senior basis by E.A. Viner International Co. and Viner Finance Inc. (together, the “Guarantors”), unless released as described below. Each of the Guarantors is 100% owned by the Company. The following consolidating financial statements present the financial position, results of operations and cash flows of the Company (referred to as “Parent” for purposes of this note only), the Guarantor subsidiaries, the Non-Guarantor subsidiaries and elimination entries necessary to consolidate the Company. Investments in subsidiaries are accounted for using the equity method for purposes of the consolidated presentation.

Each Guarantor will be automatically and unconditionally released and discharged upon: the sale, exchange or transfer of the capital stock of a Guarantor and the Guarantor ceases to be a direct or indirect subsidiary of the Company if such sale does not constitute an asset sale under the indenture for the Notes or does not constitute an asset sale effected in compliance with the asset sale and merger covenants of the indenture for the Notes; a Guarantor being dissolved or liquidated; a Guarantor being designated unrestricted in compliance with the applicable provisions of the Notes; or the exercise by the Company of its legal defeasance option or covenant defeasance option or the discharge of the Company’s obligations under the indenture for the Notes in accordance with the terms of such indenture.

 

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OPPENHEIMER HOLDINGS INC.

CONDENSED CONSOLIDATING BALANCE SHEET (unaudited)

AS OF JUNE 30, 2012

 

Expressed in thousands of dollars

   Parent      Guarantor
subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

ASSETS

           

Cash and cash equivalents

   $ 1,113       $ 25,864      $ 66,564      $ —        $ 93,541   

Cash and securities segregated for regulatory and other purposes

     —           —          32,487        —          32,487   

Deposits with clearing organizations

     —           —          64,806        —          64,806   

Receivable from brokers and clearing organizations

     —           —          294,444        —          294,444   

Receivable from customers, net of allowance for credit losses of $2,659

     —           —          839,769        —          839,769   

Income taxes receivable

     10,795         29,465        (879     (33,570     5,811   

Securities purchased under agreements to resell

     —           —          5,225        —          5,225   

Securities owned, including amounts pledged of $755,395, at fair value

     —           13,588        1,087,056        —          1,100,644   

Subordinated loan receivable

     —           112,558        —          (112,558     —     

Notes receivable, net

     —           —          52,799        —          52,799   

Office facilities, net

     —           —          25,923        —          25,923   

Deferred tax asset

     —           2,166        29,097        (31,263     —     

Intangible assets, net

     —           —          32,356        —          32,356   

Goodwill

     —           —          137,889        —          137,889   

Other

     3,759         949        206,340          211,048   

Investment in subsidiaries

     499,480         889,006        (194,935     (1,193,551     —     

Intercompany receivables

     188,864         (132,139     (20,122     (36,603     —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
   $ 704,011       $ 941,457      $ 2,658,819      $ (1,407,545   $ 2,896,742   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

           

Liabilities

           

Drafts payable

   $ —         $ —        $ 46,592      $ —        $ 46,592   

Bank call loans

     —           —          86,900        —          86,900   

Payable to brokers and clearing organizations

     —           —          378,700        —          378,700   

Payable to customers

     —           —          538,354        —          538,354   

Securities sold under agreements to repurchase

     —           —          734,883        —          734,883   

Securities sold, but not yet purchased, at fair value

     —           —          94,153        —          94,153   

Accrued compensation

     —           —          108,306        —          108,306   

Accounts payable and other liabilities

     3,696         10,096        182,529        (2,814     193,507   

Income taxes payable

     2,440         19,951        8,941        (31,332     —     

Senior secured note

     195,000         —          —          —          195,000   

Subordinated indebtedness

     —           —          112,558        (112,558     —     

Deferred income tax, net

     141         —          34,656        (31,264     3,533   

Excess of fair value of acquired assets over cost

     —           —          7,020        —          7,020   

Intercompany payables

     —           36,604        —          (36,604     —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     201,277         66,651        2,333,592        (214,572     2,386,948   

Stockholders’ equity attributable to Oppenheimer Holdings Inc.

     502,734         874,806        318,167        (1,192,973     502,734   

Noncontrolling interest

     —           —          7,060        —          7,060   

Stockholders’ equity

     502,734         874,806        325,227        (1,192,973     509,794   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
   $ 704,011       $ 941,457      $ 2,658,819      $ (1,407,545   $ 2,896,742   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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OPPENHEIMER HOLDINGS INC.

CONDENSED CONSOLIDATING BALANCE SHEET (unaudited)

AS OF DECEMBER 31, 2011

 

Expressed in thousands of dollars.

   Parent      Guarantor
subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

ASSETS

           

Cash and cash equivalents

   $ 2,555       $ 11,882      $ 55,892      $ —        $ 70,329   

Cash and securities segregated for regulatory and other purposes

     —           —          30,086        —          30,086   

Deposits with clearing organizations

     —           —          35,816        —          35,816   

Receivable from brokers and clearing organizations

     —           20        288,093          288,113   

Receivable from customers, net of allowance for credit losses of $2,716

     —           —          837,822        —          837,822   

Income taxes receivable

     6,785         30,942        (702     (30,282     6,743   

Securities purchased under agreements to resell

     —           —          847,688        —          847,688   

Securities owned, including amounts pledged of $102,501, at fair value

     —           17,811        906,730        —          924,541   

Subordinated loan receivable

     —           112,558        —          (112,558     —     

Notes receivable, net

     —           —          54,044        —          54,044   

Office facilities, net

     —           —          16,976        —          16,976   

Deferred tax asset

     —           2,164        21,130        (23,294     —     

Intangible assets, net

     —           —          35,589        —          35,589   

Goodwill

     —           —          137,889        —          137,889   

Other

     4,055         1,533        236,215          241,803   

Investment in subsidiaries

     496,512         896,819        (199,063     (1,194,268     —     

Intercompany receivables

     199,387         (128,746     (33,506     (37,135     —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
   $ 709,294       $ 944,983      $ 3,270,699      $ (1,397,537   $ 3,527,439   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

           

Liabilities

           

Drafts payable

   $ —         $ —        $ 51,848      $ —        $ 51,848   

Bank call loans

     —           —          27,500        —          27,500   

Payable to brokers and clearing organizations

     —           —          335,610        —          335,610   

Payable to customers

     —           —          479,896        —          479,896   

Securities sold under agreements to repurchase

     —           —          1,508,493        —          1,508,493   

Securities sold, but not yet purchased, at fair value

     —           —          69,415        —          69,415   

Accrued compensation

     —           —          144,283        —          144,283   

Accounts payable and other liabilities

     3,734         6,915        174,318        (298     184,669   

Income taxes payable

     2,440         22,189        5,653        (30,282     —     

Senior secured note

     195,000         —          —          —          195,000   

Subordinated indebtedness

     —           —          112,558        (112,558     —     

Deferred income tax, net

     50         —          33,546        (23,294     10,302   

Excess of fair value of acquired assets over cost

     —           —          7,020        —          7,020   

Intercompany payables

     —           37,126        —          (37,126     —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     201,224         66,230        2,950,140        (203,558     3,014,036   

Stockholders’ equity attributable to Oppenheimer Holdings Inc.

     508,070         878,753        315,226        (1,193,979     508,070   

Noncontrolling interest

     —           —          5,333        —          5,333   

Stockholders’ equity

     508,070         878,753        320,559        (1,193,979     513,403   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
   $ 709,294       $ 944,983      $ 3,270,699      $ (1,397,537   $ 3,527,439   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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OPPENHEIMER HOLDINGS INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (unaudited)

FOR THE SIX MONTHS ENDED JUNE 30, 2012

 

Expressed in thousands of dollars

   Parent     Guarantor
subsidiaries
     Non-guarantor
Subsidiaries
    Elimination     Consolidated  

REVENUE

           

Commissions

   $ —        $ —         $ 238,063      $ —        $ 238,063   

Principal transactions, net

     —          290         25,725      $ —          26,015   

Interest

     —          6,154         27,816        (6,331     27,639   

Investment banking

     —          —           45,058        —          45,058   

Advisory fees

     —          —           105,038        (1,257     103,781   

Other

     —          84         30,803        (84     30,803   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
     —          6,528         472,503        (7,672     471,359   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

EXPENSES

           

Compensation and related expenses

     212        —           309,335        —          309,547   

Clearing and exchange fees

     —          —           12,020        —          12,020   

Communications and technology

     44        —           31,422        —          31,466   

Occupancy and equipment costs

     —          —           41,837        (84     41,753   

Interest

     8,750        20         14,583        (6,331     17,022   

Other

     772        37         58,649        (1,257     58,201   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
     9,778        57         467,846        (7,672     470,009   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Profit before income taxes

     (9,778     6,471         4,657        —          1,350   

Income tax provision (benefit)

     (3,910     4,286         1,482        —          1,858   

Net profit for the period

     (5,868     2,185         3,175        —          (508

Less net profit attributable to non-controlling interest, net of tax

     —          —           (1,727     —          (1,727

Equity in subsidiaries

     3,633        —           —          (3,633     —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net profit attributable to Oppnheimer Holdings Inc.

   $ (2,235   $ 2,185       $ 1,448      $ (3,633   $ (2,235
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (1   $ —         $ (653   $ —        $ (654
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

39


Table of Contents

OPPENHEIMER HOLDINGS INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (unaudited)

FOR THE THREE MONTHS ENDED JUNE 30, 2012

 

Expressed in thousands of dollars

   Parent     Guarantor
subsidiaries
    Non-guarantor
Subsidiaries
    Elimination     Consolidated  

REVENUE

          

Commissions

   $ —        $ —        $ 112,429      $ —        $ 112,429   

Principal transactions, net

     —          (198     13,658        —          13,460   

Interest

     —          3,057        14,820        (3,631     14,246   

Investment banking

     —          —          24,971        —          24,971   

Advisory fees

     —          —          54,324        (620     53,704   

Other

     —          42        14,335        (42     14,335   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     —          2,901        234,537        (4,293     233,145