<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
-------------------------------------------------------
For Quarter Ended: Commission File Number: 000-19619
June 30, 1998
HOENIG GROUP INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3625520
- --------------------------------- ------------------------
(State or other jurisdiction (I.R.S. Employer I.D. No.)
of incorporation or organization)
4 International Drive
Rye Brook, NY 10573
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(Address of principal executive offices) (Zip Code)
(914) 935-9000
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicated 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 twelve 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 [ ]
As of August 13, 1998, there were 8,564,808 shares of common stock, par value
$.01 per share, outstanding.
<PAGE>
HOENIG GROUP INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Statements of Financial Condition -
June 30, 1998 and December 31, 1997 1
Consolidated Statements of Income - Three and
Six Months Ended June 30, 1998 and 1997 2
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and 1997 3
Notes to Unaudited Consolidated Financial Statements 4-6
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 7-12
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 13
ITEM 4. Submission of Matters to a Vote of Security Holders 13
ITEM 5. Other Events 13
ITEM 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Exhibit Index 15
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOENIG GROUP INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
ASSETS
Cash and equivalents $ 13,543,245 $ 20,468,926
U.S. Government obligations, at market value 8,818,826 17,754,737
Receivables from correspondent brokers and dealers 8,738,888 6,837,648
Receivables from customers 3,524,213 4,031,489
Equipment, furniture and leasehold improvements
- net of accumulated depreciation and amortization 2,102,627 2,207,121
Securities owned, at market value 8,838,039 2,065,399
Exchange memberships - at cost 1,321,235 1,321,235
Investment management fees receivable 1,536,634 1,297,684
Deferred research/services expense 2,279,377 1,070,079
Investment in limited partnerships, at equity 5,814,106 633,858
Other assets 3,716,125 3,333,167
------------ ------------
Total Assets $ 60,233,315 $ 61,021,343
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accrued research/services payable $ 10,191,530 $ 8,341,475
Accrued compensation 3,664,375 5,701,392
Payable to brokers and dealers 3,427,428 4,579,680
Payable to customers 2,497,617 902,914
Accrued expenses 938,147 728,726
Short-term bank loan payable 493,508 --
Other liabilities 1,246,608 1,241,435
------------ ------------
Total Liabilities 22,459,213 21,495,622
============ ============
STOCKHOLDERS' EQUITY
Common stock $.01 par value per share
Voting-authorized 40,000,000 shares, issued
10,838,850 in 1998 and 10,809,750 in 1997 108,389 108,098
Additional paid in capital 26,830,407 26,628,159
Accumulated comprehensive income (935,908) (930,035)
Retained earnings 22,410,366 20,190,841
------------ ------------
48,413,254 45,997,063
Less treasury stock at cost - 2,199,042
shares in 1998 and 1,618,378 shares in 1997 (10,639,152) (6,471,342)
------------ ------------
Total Stockholders' Equity 37,774,102 39,525,721
------------ ------------
Total Liabilities and Stockholders' Equity $ 60,233,315 $ 61,021,343
============ ============
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1
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HOENIG GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
REVENUES 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross commissions $18,114,546 $18,049,150 $35,676,765 $34,272,946
Investment management fees 1,972,442 1,502,921 3,938,176 3,021,707
Other 42,444 93,123 95,254 260,274
----------- ----------- ----------- -----------
Total operating revenues 20,129,432 19,645,194 39,710,195 37,554,927
EXPENSES
Clearing, floor brokerage and
exchange charges 2,111,673 2,706,826 4,591,097 5,401,838
Employee compensation 5,220,875 5,013,183 10,494,600 9,611,664
Independent research and services 8,515,479 8,397,505 16,632,676 15,700,853
Other 2,562,405 2,576,712 5,063,754 4,819,550
----------- ----------- ----------- -----------
Total expenses 18,410,432 18,694,226 36,782,127 35,533,905
OPERATING INCOME 1,719,000 950,968 2,928,068 2,021,022
INVESTMENT INCOME AND OTHER
Interest, dividends 453,946 475,459 928,778 919,247
Gain on investments, other 63,832 181,818 139,890 126,584
----------- ----------- ----------- -----------
Net investment income and other 517,778 657,277 1,068,668 1,045,831
Income before income taxes 2,236,778 1,608,245 3,996,736 3,066,853
Provision for income taxes 1,007,110 584,198 1,777,211 1,169,051
----------- ----------- ----------- -----------
Net income $ 1,229,668 $ 1,024,047 $ 2,219,525 $ 1,897,802
=========== =========== =========== ===========
NET INCOME PER SHARE
Basic $ .14 $ .11 $ .24 $ .20
=========== =========== =========== ===========
Diluted $ .13 $ .10 $ .23 $ .19
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 8,986,406 9,486,307 9,062,292 9,515,811
=========== =========== =========== ===========
Diluted 9,551,433 9,817,814 9,593,195 9,855,974
=========== =========== =========== ===========
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2
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HOENIG GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES 1998 1997
---- ----
<S> <C> <C>
Net income $ 2,219,525 $ 1,897,802
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 638,028 569,735
Foreign currency translation adjustment (5,873) (27,498)
Issuance of stock options 93,840 86,566
Changes in assets and liabilities:
Securities owned, net 625,069 (5,149)
Receivables from correspondent brokers and dealers (1,901,240) (8,305,250)
Receivables from customers 507,276 (2,510,897)
Investment management fees receivables (238,950) (69,911)
Payable to customers 1,594,703 8,532,536
Deferred research/services expense (1,209,298) (694,116)
Other assets (582,261) (448,938)
Payable to brokers and dealers (1,152,252) 2,140,156
Accrued research/services payable 1,850,055 802,968
Accrued compensation (2,037,017) (980,969)
Accrued expenses 209,421 (293,201)
Other liabilities 55,198 693,173
------------ ------------
Net cash provided by operations 666,224 1,387,007
CASH FLOWS FROM INVESTING ACTIVITIES:
U.S. Government obligations 8,935,911 1,657,445
Investment in limited partnerships, at equity (5,180,248) (60,882)
Investment in securities (7,447,734) 164,861
Purchases of equipment, furniture and leasehold
improvements (334,234) (584,984)
------------ ------------
Net cash provided by (used in) investing activities: (4,026,305) 1,176,440
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 212,779 209,813
Treasury stock purchased (4,371,821) (588,452)
Issuance of treasury stock 99,934 76,417
Short term bank loan payable 493,508 --
------------ ------------
Net cash used in financing activities: (3,565,600) (302,222)
Net increase (decrease) in cash and equivalents (6,925,681) 2,261,225
Cash and equivalents beginning of period 20,468,926 18,307,886
------------ ------------
Cash and equivalents end of period $ 13,543,245 $ 20,569,111
============ ============
Supplemental disclosure of cash flow information:
Interest paid: $ 75,440 $ 123,255
============ ============
Taxes paid: $ 1,601,698 $ 987,905
============ ============
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3
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HOENIG GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION.
In the opinion of management, the accompanying unaudited interim
consolidated financial statements reflect all adjustments (which include only
normal recurring accruals) necessary to present fairly the financial position
of Hoenig Group Inc. (the "Company"), the results of its operations and changes
in cash flows for the periods presented. The consolidated financial statements
included herein have been prepared by the Company without independent audit.
Certain information normally included in the financial statements and related
notes prepared in accordance with generally accepted accounting principles has
been condensed or omitted. These consolidated financial statements and notes
thereto should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997. The results of operations for
the periods ended June 30, 1998 are not necessarily indicative of operating
results for the full year.
NOTE 2 - NET CAPITAL AND RESERVE REQUIREMENTS.
Hoenig & Co., Inc. ("Hoenig"), the Company's principal operating subsidiary, is
subject to the Uniform Net Capital Rule (Rule 15c3-1), which requires that
Hoenig maintain net capital of the greater of $100,000 or one-fifteenth of
aggregate indebtedness. At June 30, 1998, Hoenig's minimum required net capital
was $586,000, its net capital ratio was .84 to 1, and its net capital was
approximately $10,498,000, which was $9,912,000 in excess of regulatory
requirements. Hoenig's Tokyo office (a branch of Hoenig) capital requirement
was (Y)61,000,000 ($438,000). Hoenig & Company Limited ("Limited"), the
Company's United Kingdom brokerage subsidiary, is required to maintain
financial resources of at least 110% of its capital requirement (as defined).
Limited's financial resources requirement at June 30, 1998 was approximately
(pounds Sterling) 547,000 ($912,000); it had excess financial resources at such
date of approximately (pounds Sterling) 585,000 ($975,000). Hoenig (Far East)
Limited ("Far East"), the Company's Hong Kong brokerage subsidiary, is required
to maintain liquid capital of the greater of HK$3,000,000 ($387,000) or 5% of
the average quarterly total liabilities. Far East's required liquid capital was
approximately HK$19,724,000 ($2,546,000) at June 30, 1998, and it had excess
liquid capital of approximately HK$15,481,000 ($1,999,000).
NOTE 3 - INVESTMENTS IN LIMITED PARTNERSHIPS.
Axe-Houghton Associates, Inc., the Company's asset management
subsidiary, is the general partner of two limited partnerships and maintains
investments in each of the partnerships. Axe-Houghton's partnership investments
were 0.33% ($43,859) and 17.4% ($635,390) at June 30, 1998. Axe-Houghton does
not maintain control of the partnerships for consolidation purposes.
During the first quarter 1998, the Company modified its cash
management program for the purpose of increasing its rate of return on
investments. As part of that program, the Company invested in two
multi-manager, market neutral limited partnerships. These multi-manager limited
partnerships, which are managed by professional money managers, make
investments in other unaffiliated limited partnerships and funds which employ a
variety of alternative investment strategies. These strategies include
relative-value, event-driven, hedged-directional, convertible arbitrage,
convertible hedging and basis spread trading.
All of the Company's investments in limited partnerships are accounted
for under the equity method.
4
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NOTE 4 - FINANCIAL INSTRUMENTS.
As part of its cash management program, during the first quarter 1998
the Company invested in a diversified portfolio of investment grade preferred
stock and U.S. Treasury futures used to hedge the preferred stock positions and
a bank-sponsored, flexible, market-linked deposit which maintains investments
in U.S. and foreign equity indices, floating rate deposits, baskets of European
equity securities and a U.S. Treasury zero coupon bond.
Each of these investments is managed by professional money managers.
The flexible, market-linked deposit is not federally insured; however, the
sponsoring bank has agreed to protect 100% of the Company's principal
investment, less management fees due to the bank, if the Company maintains the
deposit for one year.
Each of these investments uses or includes derivative financial
instruments for the purpose of reducing exposure to certain investment risks,
including interest rate fluctuations. These investments are accounted for at
fair market value based upon available market information and valuations
received from the managers. Changes in the market value, as well as gains or
losses resulting from the termination or maturity of these instruments, are
recognized as gains or losses on investments in the period in which they occur.
The Company does not hold financial instruments for trading purposes as part of
its business operations.
NOTE 5 - STOCKHOLDERS' EQUITY.
One June 17, 1998, the Company's Board of Directors authorized the
management of the Company to repurchase up to an additional one million shares
of the Company's Common Stock from time to time in open-market and privately
negotiated transactions. As of June 30, 1998, the Company completed the one
million-share repurchase program announced in November 1994. The 1994
repurchase program was in addition to the one million shares repurchased in a
previous program announced in the fourth quarter 1992. As of June 30, 1998, the
Company has repurchased a total of 2,110,712 shares under these three
repurchase programs.
From January 1, 1998 through June 30, 1998, the Company repurchased
635,000 shares of Common Stock at an aggregate cost of $4.4 million. The total
cost of the purchases under the repurchase programs and the purchase of shares
from the Estate of Ronald H. Hoenig in December 1995 (net of 561,670 shares
issued out of Treasury Stock) is $10,639,152.
NOTE 6 - COMPREHENSIVE INCOME.
The Financial Accounting Standards Board has issued Statement of
Financial Standards No. 130, "Reporting Comprehensive Income", which is
effective for fiscal years beginning after December 15, 1997. This Statement
establishes standards of reporting of comprehensive income and its components.
Comprehensive Income includes gains or losses resulting from the translation of
the Company's foreign currency financial statements included in stockholders'
equity in the Statements of Financial Condition.
Comprehensive Income for the periods ended June 30, 1998 and 1997 is
as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net income $2,219,525 $1,897,802
Other Comprehensive Income:
Foreign currency translation adjustment (5,873) (27,498)
Tax expense (benefit) (2,607) (10,477)
---------- ----------
(3,266) (17,021)
Comprehensive Income $2,216,259 $1,880,781
========== ==========
</TABLE>
5
<PAGE>
NOTE 7. EARNINGS PER SHARE.
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS
128 simplifies the standards for computing and presenting earnings per share
("EPS") previously found in APB Opinion No. 15, Earnings per Share. SFAS 128 is
effective for financial statements issued for periods ending after December 15,
1997. Basic earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per
share is similar to basic, but adjusts for the effect of potential common
shares.
The following table presents the computations of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income available to common stockholders $2,219,525 $1,897,802 $1,229,668 $1,024,047
Weighted average shares outstanding 9,062,292 9,515,811 8,986,406 9,486,307
Effect of dilutive instruments
Employee stock options 530,903 340,163 565,027 331,507
---------- ---------- ---------- ----------
Total weighted average dilutive shares 9,593,195 9,855,974 9,551,433 9,817,814
========== ========== ========== ==========
Basic earnings per share $ .24 $ .20 $ .14 $ .11
========== ========== ========== ==========
Diluted earnings per share $ .23 $ .19 $ .13 $ .10
========== ========== ========== ==========
</TABLE>
NOTE 8 - CONTINGENCIES.
In March 1998, Lawrence W. Gallo, a former employee of Hoenig,
instituted an arbitration before the NASD Regulation against Hoenig and Fredric
P. Sapirstein, Hoenig's Chairman and Chief Executive Officer. Mr. Gallo
principally alleges defendants wrongfully terminated Mr. Gallo's employment in
breach of his employment agreement and falsely stated the reason for his
termination in a securities regulatory filing on Form U-5. Mr. Gallo is seeking
approximately $2.2 million in compensatory damages against each of the
defendants, plus punitive damages, liquidated damages, interest, reasonable
attorneys' fees and modification of the Form U-5. Hoenig has filed an answer,
denying Mr. Gallo's allegations and a counter-claim against Mr. Gallo, seeking
damages of not less than $220,000, based on Mr. Gallo's breach of his
employment agreement with Hoenig. The Company believes that Hoenig and Mr.
Sapirstein have meritorious defenses to the arbitration and intends to
vigorously oppose Mr. Gallo's claims and pursue its counter-claim against Mr.
Gallo.
NOTE 9 - SUBSEQUENT EVENTS
The Company has determined that certain fixed assets, which include
computer software and other information technology expenses, will be written
off beginning in the third quarter 1998. The total amount of the write off will
not exceed $375,000.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements in this report that relate to future plans, events
or performance are forward-looking statements. Such statements may include, but
are not limited to, those relating to the effects of future growth, cost
reduction measures taken in certain international operations, acquisition and
expansion plans, plans to address the institution of the European Monetary Unit
currency in 1999, plans to address the Year 2000 issue and other technology
issues, the Company's investment activities and its current equity capital
levels. Actual results might differ materially due to a variety of important
factors that cannot be predicted with certainty. These factors involve risks
and uncertainties relating to, among other things, general economic conditions,
market fluctuations, competitive conditions within the brokerage and asset
management businesses, declines in stock market prices and trading volumes,
changes in demand for asset management and securities brokerage services, the
Company's ability to recruit and retain key employees, changes in U.S. and
foreign securities laws and regulations, particularly regarding Independent
Research and Directed Brokerage Arrangements, trading and investment
activities, litigation and other factors discussed throughout this report and
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997.
GENERAL
Hoenig Group Inc. (the "Company") provides global securities brokerage
to institutional clients through its wholly-owned brokerage subsidiaries in the
United States, United Kingdom, Hong Kong and Japan. The Company's wholly-owned
subsidiary, Axe-Houghton Associates, Inc. ("Axe-Houghton"), provides
professional asset management to public and corporate employee benefit plans,
investment partnerships and other institutional clients.
The Company's principal source of revenues is commissions earned for executing
trades on behalf of its customers. The Company executes trades in equity
securities on all of the world's major stock exchanges, acting primarily as
agent for its customers, and also executes trades in U.S. fixed income
securities on an agency and riskless principal basis. The Company earns
commissions in connection with four types of brokerage services: commissions
received in connection with providing independent research and other services
to investment managers ("Independent Research Arrangements"), commissions
received in exchange for paying expenses of, or commission refunds to, the
customer ("Directed Brokerage Arrangements"), commissions received in
connection with providing the Company's proprietary research ("Proprietary
Research"); and commissions received for execution-only services ("Execution -
Only Brokerage"). The Company's profit margin on Execution-Only Brokerage and
Proprietary Research is higher than that on Independent Research Arrangements
and Directed Brokerage Arrangements because the Company does not incur direct
expenses for research and other services in connection with such activities.
The Company generally expects a certain amount of commissions for
every $1 in research, other services and commission refunds provided under
Independent Research Arrangements and Directed Brokerage Arrangements. This
ratio is negotiated on an individual customer basis. Ratios continue to be
under downward competitive pressure in most of the markets in which the Company
conducts brokerage activities. The Company's earnings in any period are
affected by its ability to earn commissions under Independent Research and
Directed Brokerage Arrangements on a timely basis, since revenues are recorded
only when earned. The timing of the receipt of these commissions could cause
variations in earnings from year to year and quarter to quarter.
The Company's second largest source of revenues is investment
management fees earned by Axe-Houghton in connection with the provision of
asset management services to institutional clients. The profit margin on the
Company's asset management business is higher than those on the Company's
brokerage activities and also varies with the types of asset management
services provided by the Company. At June 30, 1998, Axe-Houghton had $4.4
billion in assets under management, of which approximately $491.1 million
represented a temporary assignment.
7
<PAGE>
Growth in assets under management is affected by numerous factors,
including the ability to attract new clients, investment performance results,
the number and variety of investment disciplines offered and capacity
limitations of such disciplines, the market performance of particular
investment disciplines, such as small capitalization growth equities, as well
as the performance of the securities markets generally. The market performance
of small capitalization growth equities, as measured by market indices, has
declined approximately 11% since June 30, 1998. As a result, the Company's
small capitalization growth equities under management were $632 million as of
August 12, 1998. Continued declines in the performance of small capitalization
growth equities may adversely affect the Company's assets under management and
related revenues and income.
Axe-Houghton is negotiating new employment arrangements with two
employees whose employment contracts expired on April 8, 1998. While the
Company anticipates that these negotiations will result in mutually
satisfactory employment arrangements with these individuals, no assurances can
be given as to when or how the negotiations will conclude. The financial
results of Axe-Houghton could be adversely affected if such negotiations are
not successfully resolved.
With respect to its asset management and securities brokerage
businesses, the Company continues to evaluate opportunities to increase
distribution capabilities, expand its client base and supplement its product
line through acquisitions, strategic alliances and the hiring of additional
personnel.
THREE MONTHS ENDED JUNE 30, 1998 VERSUS THREE MONTHS ENDED JUNE 30, 1997.
The Company's operating income before income taxes for the three
months ended June 30, 1998 increased 80.8% to $1,719,000, versus $950,968 in
1997. The increase in operating income is primarily attributable to an increase
in operating income from U.S. brokerage and asset management operations and a
reduction in overall expenses for the quarter, offset in part by operating
losses from international brokerage operations (United Kingdom, Hong Kong and
Japan). The Company's net income for the three-months ended June 30, 1998
increased 20.1% to $1,229,668 versus $1,024,047 in 1997. Net income increased
at a lower rate than pre-tax and operating income, due to a higher tax rate in
1998. The higher tax rate results from an increase in operating and pre-tax
income of the U.S. operations, which is taxed at a higher rate, as well as a
decrease in income derived from the Company's brokerage operation in Hong Kong,
which is taxed at a lower rate than the U.S. tax rates.
Operating revenues increased 2.5% to $20.1 million for three months
ended June 30, 1998 from $19.6 million for the three months ended June 30,
1997. Commission revenues remained at approximately $18.1 million for the three
months ended June 30, 1998 as compared to the same period in 1997. During the
second quarter 1998, commission revenues earned in U.S. equity markets
increased, which was offset by a decrease in commission revenues earned by the
Company's international operations, particularly the Company's operations in
Hong Kong and Japan ("Asian Brokerage"). As a result, commission revenues
derived from international operations represented 19.4% of the Company's total
commissions during the second quarter 1998 as compared to 35.1% for the same
period in 1997.
Operating revenues derived from the Company's U.S. brokerage
operations for the second quarter ended June 30, 1998 increased 24.1% as
compared to the same period in 1997, resulting in a 75.5% increase in operating
income as compared to the second quarter ended June 30, 1997. This increase in
operating income also reflects a decrease in execution and settlement costs, as
a percentage of commission revenues.
Operating revenues and operating income derived from international
brokerage operations continued to decline during the second quarter ended June
30, 1998 as compared to the same period in 1997. Operating revenues derived
from the Company's Asian Brokerage operations decreased 59.9% during the three
months ended June 30, 1998 as compared to the same period in 1997, resulting
from continued volatility and reduced trading volumes in Japan and Southeast
Asia. Asian Brokerage operations incurred operating losses of $0.2 million
during
8
<PAGE>
the second quarter ended June 30, 1998 as compared with operating income of
$0.1 million for the same period in 1997. These losses resulted primarily from
a 83.1% decrease in operating income earned by the Company's Hong Kong
operation in the second quarter 1998 as compared to the second quarter 1997 and
continued operating losses in Japan. The losses in Japan have remained
unchanged as a result of cost reduction measures taken at the end of 1997 and
during the first quarter 1998. Continued declines in commission revenues in
Japan and Southeast Asia would result in additional operating losses by the
Company's Asian Brokerage operations. The Company continues to explore various
means of addressing operating losses in Japan.
Investment management fee revenues increased 31.2% to $2.0 million for
the three months ended June 30, 1998, from $1.5 million in 1997. This increase
in investment management fees reflects an increase in small capitalization
growth equities assets under management which are managed at the Company's
highest fee rates. Assets managed in small capitalization growth equities
increased 41.1% to $715.7 million as of June 30, 1998 from $507.2 million as of
June 30, 1997. Total assets under management increased 14.3% to $4.4 billion as
of June 30, 1998, as compared to $3.8 billion as of June 30, 1997. These
increases in small capitalization growth equity assets and total assets under
management primarily resulted from the receipt of additional assets to manage
from existing and new clients.
Expenses related to independent research and other services provided
to the Company's brokerage clients during the second quarter 1998, including
commission refunds, increased 1.4% to $8.5 million from $8.4 million for the
same period in 1997. These expenses were 47.0% of commission revenues for the
quarter ended June 30, 1998 as compared to 46.5% for the corresponding period
in 1997.
Clearing, floor brokerage and exchange charges decreased 22.0% to $2.1
million during the second quarter 1998 from $2.7 million in 1997. These
expenses represented 11.7% of commissions in the second quarter 1998 and 15.0%
of commissions in the second quarter 1997. The decrease in these expenses as a
percentage of commissions is primarily due to: (1) an increase in the
percentage of commissions earned in U.S. equity markets, where such expenses
are charged at lower rates than comparable trades in certain Asian markets; (2)
a reduction in the costs of execution and settlement of U.S. equity
transactions; and (3) a decrease in the percentage of commissions earned on
transactions executed in certain Southeast Asian markets where execution and
settlement costs are higher, coupled with an increase in the percentage of
commissions earned on transactions executed in the Hong Kong market, which cost
less to execute and settle.
Employee compensation increased 4.1% to $5.2 million in the second
quarter 1998 from $5.0 million during the same period in 1997. This resulted
primarily from an increase in reserves for discretionary and performance-based
compensation during the three months ended June 30, 1998.
All other expenses remained at $2.6 million in the second quarter 1998
as compared to the same period in 1997. This resulted from an increase in
expenses related to market data, communication depreciation and amortization,
offset by a decrease in travel and entertainment expenses for the three months
ended June 30, 1998.
SIX MONTHS ENDED JUNE 30, 1998 VERSUS SIX MONTHS ENDED JUNE 30, 1997.
The Company's operating income before income taxes for the six months
ended June 30, 1998 increased 44.9% to $2,928,068, versus $2,021,022 in 1997.
The increase in operating income is primarily attributable to an increase in
operating income from U.S. brokerage and investment management operations,
offset in part by operating losses from international brokerage operations. The
Company's net income for the six months ended June 30, 1998 increased 17.0% to
$2,219,525, versus $1,897,802 in 1997. Net income increased at a lower rate
than pre-tax and operating income due to a higher tax rate in 1998. The higher
tax rate was a result of an increase in operating and pre-tax income from the
U.S. operations, which is taxed at a higher rate, as well as a decrease in
income derived from the Company's operation in Hong Kong, which is taxed at a
lower rate than U.S. tax rates.
9
<PAGE>
Operating revenues increased 5.7% to $39.7 million for the six months
ended June 30, 1998 from $37.6 million for the six months ended June 30, 1997.
Commission revenues increased 4.1% to $35.7 million for the six months ended
June 30, 1998 from $34.3 million for the same period in 1997. This increase,
most of which occurred in the first quarter, resulted primarily from an
increase in commission revenues earned by the Company's U.S. brokerage
operations, offset in part by a decrease in commission revenues earned by the
Company's international brokerage operations, particularly Asian Brokerage
operations. Commission revenues derived from international operations
represented 21.8% of the Company's total commissions during the six months
ended June 30, 1998 as compared to 34.9% for the same period in 1997.
Operating revenues derived from the Company's U.S. brokerage
operations for the six months ended June 30, 1998 increased 24.1% as compared
to the same period in 1997. Operating income derived from the Company's U.S.
brokerage operations during the six months ended June 30, 1998 increased 52.1%
as compared to the same period in 1997 due to an increase in commission
revenues and a decrease in execution and settlement costs, as a percentage of
commission revenues.
Operating revenues and operating income from international brokerage
operations declined during the six months ended June 30, 1998, resulting in
operating losses. Operating revenues derived from the Company's Asian Brokerage
operations decreased 50% during the six months ended June 30, 1998 as compared
to the same period in 1997, resulting from continued volatility and reduced
trading volumes in Japan and Southeast Asia. Asian Brokerage operations
incurred operating losses of $0.35 million for the six months ended June 30,
1998 as compared to operating income of $0.26 million for the same period in
1997. These losses resulted from a 66.9% decrease in operating income in Hong
Kong, most of which occurred during the second quarter 1998, and continued
operating losses in Japan.
Investment management fees increased 30.3% to $3.9 million for the six
months ended June 30, 1998, from $3.0 million in 1997. This increase in
investment management fees reflects an increase in small capitalization growth
equities assets. Assets managed in small capitalization growth equities
increased 41.1% to $715.7 million as of June 30, 1998 from $507.2 million as of
June 30, 1997. During the six months ended June 30, 1998, assets managed in
small capitalization growth equities have increased due to the receipt of
additional assets under management and market appreciation, offset by decreases
in the investment performance of small capitalization growth equities during
the second quarter. Total assets under management increased 14.3% to $4.4
billion as of June 30, 1998, as compared with $3.8 billion as of June 30,1997.
Expenses related to research and other services provided to the
Company's brokerage clients during the six months ended June 30, 1998 increased
5.9% to $16.6 million from $15.7 million for the same period in 1997. These
expenses were 46.6% of commission revenues for the six months ended June 30,
1998 as compared to 45.8% for the corresponding period in 1997. These
expenses increased at a higher rate than commission revenues primarily due to
the timing of research expenses incurred relative to the receipt of commissions
during the first quarter 1998.
Clearing, floor brokerage and exchange charges decreased 15.0% to $4.6
million during the six months ended June 30, 1998 from $5.4 million in 1997.
These expenses represented 12.9% of commissions earned during the six months
ended June 30, 1998 and 15.8% of commissions earned during the same period in
1997. The decrease in these expenses as a percentage of commissions is
primarily due to: (1) an increase in the percentage of commissions earned on
U.S. equity transactions, where such expenses are charged at lower rates than
comparable trades executed in certain Asian markets; (2) a reduction in the
costs of execution and settlement of U.S. equity transactions; and (3) a
decrease in the percentage of commissions earned on transactions executed in
certain Southeast Asian markets where execution and settlement costs are
higher, coupled with an increase in the percentage of Asian Brokerage
commission revenues earned on transactions executed in the Hong Kong market,
which cost less to execute and settle than comparable trades in other Asian
markets.
Employee compensation increased 9.2% to $10.5 million in 1998 from
$9.6 million in 1997. This resulted primarily from an increase in reserves for
discretionary and performance-based compensation throughout the six-
10
<PAGE>
month period, as well as an increase in the base compensation of personnel
which took effect in the first quarter 1998.
All other expenses increased 5.1% to $5.1 million in the six months
ended June 30, 1998, compared to $4.8 million in 1997. This resulted primarily
from an increase in expenses related to market data, communications,
depreciation and amortization incurred during the six months ended June 30,
1998.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had cash, U.S. Government obligations,
net accounts receivable and other investments of $44.9 million. All receivables
from correspondent brokers and dealers are fully collectible, and no provision
for uncollectibles is required.
The Company modified its cash management program during the first
quarter 1998 to increase its rate of return on investments. The Company
invested a portion of funds previously held as cash and equivalents, U.S.
government obligations and corporate bonds in investments which include limited
partnership interests in two multi-manager, market neutral limited
partnerships; a diversified portfolio of investment grade preferred stock and
U.S. Treasury futures used to hedge the preferred stock positions; and a
bank-sponsored, flexible, market-linked deposit account which maintains
investments in U.S. and foreign equity indices, floating rate deposits, baskets
of European equity securities and a U.S. Treasury zero coupon bond. Each of
these investments is managed by professional money managers. The flexible
market-linked deposit is not federally insured; however, the sponsoring bank
has agreed to protect 100% of the Company's principal investment, less the
bank's management fee, if the deposit is maintained for one year. These
investments generally are not transferable and are less liquid than investments
in U.S. government obligations and corporate bonds. These investments have not
had a material effect on the Company's liquidity or results of operations.
During the six months ended June 30, 1998, the Company repurchased
635,000 shares of Common Stock, at a total cost of $4.4 million, under
previously announced stock repurchase programs. These repurchases have not had
a material effect on the Company's liquidity or results of operations.
The Company has determined that certain fixed assets, which include
computer software and other information technology expenses, will be written
off beginning in the third quarter 1998. The total amount of the write off will
not exceed $375,000.
The Company believes that its current capital resources and liquidity,
plus additional funds generated by operations, will be sufficient to meet
current and future operating needs. The Company continues to explore
opportunities to expand existing businesses and to acquire new businesses,
which could potentially have an impact on liquidity and capital resources.
YEAR 2000 AND EUROPEAN MONETARY UNIT ("EMU")
The Year 2000 issue ("Y2K Issue") is the result of computer systems
and applications that currently use two digits rather than four to recognize a
particular year. The Y2K Issue affects the Company's information technology
systems (i.e., computer systems, network elements and software applications) as
well as other business systems that have time-sensitive programs or
microprocessors that may not properly reflect or recognize the year 2000
("non-IT systems"). The failure to reflect or recognize dates after 1999 could
cause the Company's information technology and non-IT systems to fail or cause
errors which would lead to disruptions in operations or increased costs.
11
<PAGE>
Like many financial services companies, the Company is heavily reliant
upon the third-parties for many of its information technology and non-IT
systems that are essential to the Company's ability to perform its day-to-day
operations. As a result, the Company's operations and financial results may be
adversely affected in the event that third-parties do not adequately address
the Y2K Issue.
The Company has developed a five-phase program for addressing the Y2K
Issue, which consists of the following:
o Phase I is defining the Y2K Issue and what constitutes Y2K
compliance and educating Company personnel about the Y2K Issue.
o Phase II is identifying those systems which may be affected by
the Y2K Issue.
o Phase III is the development of action plans to address the Y2K
Issue for identified systems.
o Phase IV is the testing of the action plans intended to resolve
the Y2K Issue.
o Phase V is the implementation of the action plans.
The Company has completed Phase I of its program, has completed Phase
II with respect to internal information technology systems and is in the
process of identifying external (or third-party) information technology and
non-IT systems which may be affected by the Y2K Issue. The Company has
identified a number of internal systems as being Y2K compliant. With respect to
internal information technology systems that are not yet Y2K compliant, the
Company has begun Phase III of the program and is in the process of developing
action plans to remediate any Y2K problems through upgrades, corrections or
replacements. Phases III and IV also involves developing contingency plans to
address non-compliant systems. The Company will address the need for
contingency plans once it completes its assessment of systems likely to be
affected by the Y2K Issue.
With respect to external systems, the Company has solicited
information and assurances from third-party service providers, customers and
suppliers and is in the process of collecting and evaluating responses. Most of
the Company's external service providers and suppliers have indicated that they
will issue upgrades or replacement products that will be Y2K compliant during
the fourth quarter 1998. The Company anticipates that it will complete Phases
II and III of its program with respect to all information technology and non-IT
systems by the end of 1998 and will complete Phases IV and V by the end of
1999. The Company has hired a consulting firm to assist Company personnel in
effecting the Company's Y2K program.
Based on current information, the Company believes that it will spend
approximately $300,000 to complete the five-phase Y2K program and address the
Y2K Issue, which includes the costs of software replacements and corrections,
additional hardware and hardware upgrades and consulting fees. The Company does
not expect these costs to be material to its financial position, results of
operations or cash flows in a given year. The Company will expense Y2K costs as
they are incurred.
The costs of addressing the Y2K Issue are based on management's best
estimates, which were derived using numerous assumptions of future events,
including the continued availability of certain resources, third-party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved, and actual results could differ materially
from those anticipated. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, the availability of cost-effective alternatives or replacements
for third-party products and services which are not expected to be Y2K
compliant, and similar uncertainties.
The Company's information technology and non-IT systems are also being
reviewed to determine what modifications will be necessary to accommodate the
upcoming EMU. The EMU is scheduled to begin on January 1, 1999. Costs
associated with the modifications necessary to prepare for the EMU are not
anticipated to be material to the Company's financial position, results of
operations or cash flows in a given year and will be expensed as incurred.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The description of legal proceedings required by this Item is hereby
incorporated by reference to Note 8 of Notes of Unaudited Consolidated
Financial Statements included herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual meeting of Stockholders held on May 21, 1998,
Messrs. Alan B. Herzog, Robert Spiegel and Martin F.C. Emmett, who
were nominated by the Board of Directors, were elected to serve as
Class I Directors of the Company, each for a three-year term. Messrs.
Fredric P. Sapirstein, Robert L. Cooney and Max H. Levine and Ms.
Kathryn L. Hoenig continue to serve as directors after such Meeting.
The results of the election were as follows: Herzog: Voted For -
7,756,333, Withhold - 70,200, Broker Non-Votes - 0; Spiegel: Voted For
- 7,756,333, Withhold - 70,200, Broker Non-Votes - 0; Emmett: Voted
For - 7,751,333, Withhold - 75,200, Broker Non-Votes - 0.
ITEM 5. OTHER INFORMATION
The Securities and Exchange Commission (the "SEC") recently amended
its proxy rules to provide that a registrant, such as the Company, may
specify, in its proxy statement or form of proxy for its annual
meeting of stockholders, that proxies solicited by the registrant will
confer authority to vote with regard to matters that may be raised at
the meeting, including matters to be raised by stockholders that were
not properly submitted to the registrant as shareholder proposals in
accordance with SEC Rule 14a-8, if the registrant did not receive
notice of such matters at least 45 days before the date on which the
registrant first mailed its proxy materials for the prior year. The
Company first mailed its proxy materials for its 1998 Annual Meeting
of Stockholders on April 17, 1998. Under the SEC's amended proxy
rules, the 45-day deadline for notice to the Company of non-Rule 14a-8
matters to be raised at the Company's 1999 Annual Meeting of
Stockholders is March 3, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule.
(B) REPORTS ON FORM 8-K
The Registrant did not file any reports on Form 8-K during the quarter
ended June 30, 1998.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Hoenig Group Inc.
Date: August 14, 1998 By: /s/ Fredric P. Sapirstein
-------------------------
Fredric P. Sapirstein,
Chairman and Chief
Executive Officer
Date: August 14, 1998 By: /s/ Alan B. Herzog
------------------
Alan B. Herzog,
Chief Operating Officer and
Chief Financial Officer
14
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HOENIG
GROUP INC. FORM 10-Q FOR THE PERIODS ENDED JUNE 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND NOTES THERETO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 13,543,245
<RECEIVABLES> 13,799,735
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 23,470,971
<PP&E> 2,102,627
<TOTAL-ASSETS> 60,233,315
<SHORT-TERM> 493,508
<PAYABLES> 5,925,045
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 0
0
0
<COMMON> 108,389
<OTHER-SE> 37,665,713
<TOTAL-LIABILITY-AND-EQUITY> 60,233,315
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 928,778
<COMMISSIONS> 35,676,765
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 3,938,176
<INTEREST-EXPENSE> 0
<COMPENSATION> 10,494,600
<INCOME-PRETAX> 3,996,736
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,219,525
<EPS-PRIMARY> .24
<EPS-DILUTED> .23
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE HOENIG GROUP INC. FORM 10-Q FOR THE PERIODS ENDED JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND NOTES
THERETO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 20,569,111
<RECEIVABLES> 17,416,602
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 16,993,961
<PP&E> 2,267,291
<TOTAL-ASSETS> 64,082,682
<SHORT-TERM> 0
<PAYABLES> 11,542,764
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<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 0
0
0
<COMMON> 108,007
<OTHER-SE> 39,397,932
<TOTAL-LIABILITY-AND-EQUITY> 64,082,682
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 919,247
<COMMISSIONS> 34,272,946
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 3,021,707
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<COMPENSATION> 9,611,664
<INCOME-PRETAX> 3,066,853
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<NET-INCOME> 1,897,802
<EPS-PRIMARY> .20
<EPS-DILUTED> .19
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