OPY

Business Context and Reporting Period

Company: Oppenheimer Holdings Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: A diversified financial services firm engaged in retail securities brokerage, institutional sales and trading, investment banking, and asset management. The reporting period was significantly impacted by the January 14, 2008, acquisition of a major portion of CIBC World Markets' U.S. capital markets businesses (the "New Capital Markets Business").

Key Financial Metrics

Note: Debt includes $63.0 million Senior Secured Credit Note and $100.0 million Subordinated Note issued to CIBC.

Material Changes vs. Prior Period

• Profitability Decline: Net profit for the quarter dropped 90% year-over-year ($1.6M vs. $15.8M). For the six-month period, the company reported a net loss of $14.5 million compared to a net profit of $32.6 million in the prior year.
• Revenue Growth: Total revenue increased 13% for the quarter and 11% year-to-date, driven primarily by the CIBC acquisition. Commissions rose 33% (quarter) and 37% (YTD).
• Expense Surge: Total expenses increased 28% for the quarter and 33% YTD. This was largely due to acquisition-related costs, including $27.7 million in accrued deferred incentive compensation for former CIBC employees and $20.6 million in transition service charges.
• Interest Income: Interest revenue decreased 39% due to lower interest rates, though interest expense also decreased 20-22% due to rate reductions and reduced stock loan activity.
• Capital Markets Segment: The Capital Markets segment reported a pre-tax loss of $57.3 million for the six months ended June 30, 2008, compared to a profit of $18.8 million in the prior year, heavily impacted by the transition costs and reduced investment banking activity.

Guidance, Outlook, and Risks

• Acquisition Integration: Management anticipates the transition of the acquired CIBC business to Oppenheimer's platform will be completed in the third quarter of 2008. This is expected to eliminate approximately $20.6 million in transition service charges, resulting in substantially reduced costs.
• Deferred Compensation: Expenses related to deferred incentive compensation for former CIBC employees are expected to decline to $7.0 million in the fourth quarter of 2008 and continue to decrease significantly in subsequent periods.
• Market Environment: The company faces an extremely volatile market environment characterized by liquidity problems in credit markets, high oil/food prices, and a weak U.S. dollar. Investment banking activity has been significantly hampered.
• Auction Rate Securities (ARS): The company notes a liquidity failure in the ARS market. While clients hold significant amounts, the company states it has no significant proprietary exposure and these are liquidity failures, not credit defaults.
• Regulatory Matters: The company settled a FINRA investigation regarding securities lending practices with a $100,000 fine. It is also responding to an SEC "Wells Submission" regarding a former advisor's dealings with an institutional customer.

Investor Verification Checklist

• Transition Cost Run-off: Verify the timing and magnitude of the reduction in transition service charges and deferred compensation expenses in Q3 and Q4 2008.
• Capital Markets Performance: Monitor the profitability of the new Oppenheimer Investment Banking Division (OIB) as it integrates, given the current loss position.
• Liquidity and Funding: Assess the impact of the credit market freeze on the company's ability to secure financing and the status of client-held Auction Rate Securities.
• Debt Covenants: Confirm continued compliance with leverage ratios (2.0x for Senior Note, 2.4x for Subordinated Note) given the current net loss position.
• Regulatory Outcomes: Track the resolution of the SEC Wells Submission and any potential additional legal or regulatory costs.