<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
-------------------------------------------------------
For Quarter Ended: Commission File Number: 000-19619
March 31, 1999
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)
Reckson Executive Park
4 International Drive
Rye Brook, NY 10573
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(914) 935-9000
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- ------------------------------------------------------------------------------
(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 May 14, 1999, there were 8,564,240 shares of common stock, par value $.01
per share, outstanding.
<PAGE>
HOENIG GROUP INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition -
March 31, 1999 and December 31, 1998 1
Consolidated Statements of Income -
Three Months Ended March 31, 1999 and 1998 2
Consolidated Statements of Comprehensive Income -
Three Months Ended March 31, 1999 and 1998 3
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and 1998 4
Notes to Unaudited Consolidated Financial Statements 5-9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 10-16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibit Index 19
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOENIG GROUP INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1999 AND DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Cash and equivalents $ 15,057,354 $ 19,575,824
U.S. Government obligations, at market value 11,579,523 10,909,066
Receivables from correspondent brokers and dealers 8,633,047 8,179,525
Receivables from customers 3,149,176 78,864
Equipment, furniture and leasehold improvements,
net of accumulated depreciation and amortization 1,597,053 1,704,407
Securities owned, at market value 8,386,464 9,016,826
Exchange memberships, at cost 1,321,235 1,321,235
Investment management fees receivable 2,007,920 1,963,374
Deferred research/services expense 1,446,551 1,153,861
Investment in limited partnerships 3,704,114 5,343,787
Other assets 3,626,386 4,092,770
------------ ------------
Total Assets $ 60,508,823 $ 63,339,539
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accrued research/services payable $ 10,878,086 $ 11,927,766
Accrued compensation 2,764,318 7,317,812
Payable to brokers and dealers 3,376,246 269,997
Payable to customers 636,048 1,688,298
Securities sold, but not yet purchased 95,550 --
Accrued expenses 1,531,580 1,474,478
Short-term bank loan payable 49,123 --
Other liabilities 888,285 644,003
------------ ------------
Total Liabilities 20,219,236 23,322,354
------------ ------------
STOCKHOLDERS' EQUITY
Common Stock $.01 par value per
share; Voting- authorized
40,000,000 shares, issued
- - 10,846,150 shares in 1999 and in 1998 108,462 108,462
Additional paid in capital 27,277,965 27,301,478
Accumulated other comprehensive loss (924,788) (883,750)
Retained earnings 26,094,142 24,876,560
------------ ------------
52,555,781 51,402,750
Less restricted stock (112,500) (150,000)
Less treasury stock at cost - 2,282,410
shares in 1999 and 2,202,911 shares in 1998 (12,153,694) (11,235,565)
------------ ------------
Total Stockholders' Equity 40,289,587 40,017,185
------------ ------------
Total Liabilities and Stockholders' Equity $ 60,508,823 $ 63,339,539
============ ============
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1
<PAGE>
HOENIG GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
OPERATING REVENUES 1999 1998
---- ----
<S> <C> <C>
Gross commissions $18,648,058 $17,562,219
Investment management fees 1,957,767 1,965,734
Other 14,888 52,810
----------- -----------
Total operating revenues 20,620,713 19,580,763
EXPENSES
Clearing, floor brokerage and
exchange charges 2,415,407 2,479,424
Employee compensation 5,721,581 5,273,725
Independent research and services 8,182,825 8,117,197
Other 2,742,612 2,501,349
----------- -----------
Total expenses 19,062,425 18,371,695
----------- -----------
OPERATING INCOME 1,558,288 1,209,068
INVESTMENT INCOME AND OTHER
Interest, dividends 469,454 474,832
Gain on investments, other 227,528 76,058
----------- -----------
Net investment income and other 696,982 550,890
Income before income taxes 2,255,270 1,759,958
Provision for income taxes 1,037,688 770,101
----------- -----------
Net income $ 1,217,582 $ 989,857
=========== ===========
NET INCOME PER SHARE
Basic $ .14 $ .11
=========== ===========
Diluted $ .13 $ .10
=========== ===========
Weighted average shares outstanding
Basic 8,636,392 9,139,022
=========== ===========
Diluted 9,363,098 9,572,842
=========== ===========
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2
<PAGE>
HOENIG GROUP INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31
1999 1998
---- ----
<S> <C> <C>
Net income $ 1,217,582 $ 989,857
----------- -----------
Other comprehensive income (loss),
net of tax
Foreign currency translation adjustment (71,248) 67,643
Tax expense (benefit) (30,210) 38,083
----------- -----------
(41,038) 29,560
----------- -----------
Comprehensive income $ 1,176,544 $ 1,019,417
=========== ===========
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
HOENIG GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
CASH FLOWS FROM OPERATING ACTIVITIES: 1999 1998
---- ----
<S> <C> <C>
Net income $ 1,217,582 $ 989,857
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 363,984 321,244
Foreign currency translation adjustment (41,038) 29,560
Issuance of stock compensation 39,375 42,083
Issuance of restricted stock 37,500 --
Changes in assets and liabilities:
Securities owned, net 63,836 945,394
Receivable from correspondent brokers and dealers (453,522) (3,399,998)
Receivable from customers (3,070,312) (855,319)
Investment management fees receivable (44,546) (294,278)
Payable to customers (1,052,250) 236,114
Deferred research/services expense (292,690) (804,904)
Other assets 373,986 (266,950)
Payable to brokers and dealers 3,106,249 2,597,446
Accrued research/services payable (1,049,680) 568,692
Accrued compensation (4,553,494) (3,097,906)
Accrued expenses 57,102 275,551
Other liabilities 244,282 159,045
------------ ------------
Net cash used in operations (5,053,636) (2,554,369)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in U.S. Government obligations (670,457) 5,244,052
Investment in limited partnerships, at equity 1,639,673 (5,090,601)
Investment in securities 662,076 (5,919,085)
Purchases of equipment, furniture and leasehold --
improvements (164,234) (156,323)
------------ ------------
Net cash provided by (used in) investing activities 1,467,058 (5,921,957)
CASH FLOWS FROM FINANCING ACTIVITIES:
Treasury stock purchased (1,094,476) (1,021,153)
Issuance of treasury stock 113,461 31,543
Short-term bank loan payable 49,123 390,813
------------ ------------
Net cash (used in) financing activities (931,892) (598,797)
Net decrease in cash and equivalents (4,518,470) (9,075,123)
Cash and equivalents beginning of period 19,575,824 20,468,926
------------ ------------
Cash and equivalents end of period $ 15,057,354 $ 11,393,803
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 24,826 $ 23,754
============ ============
Taxes paid $ 271,418 $ 317,220
============ ============
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
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") as of March 31, 1999 and December 31, 1998,
and the results of its operations, changes in comprehensive income and changes
in cash flows for the three months ended March 31, 1999 and 1998. 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 have 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 year ended December
31, 1998. The results of operations for the period ended March 31, 1999 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 March 31, 1999, Hoenig's minimum
required net capital was approximately $642,000, its net capital ratio was .64
to 1, and its actual net capital was approximately $15,104,000, which was
approximately $14,462,000 in excess of regulatory requirements. Hoenig's Tokyo
office's (a branch of Hoenig) capital requirement was approximately
(Y)37,000,000 ($311,000). Hoenig & Company Limited ("Limited") is required to
maintain financial resources of at least 110% of its capital requirement (as
defined). Limited's financial resources requirement at March 31, 1999 was
approximately (pound)442,000 ($712,000); it had actual capital of approximately
(pound)1,119,000 ($1,803,000), and excess financial resources at such date of
approximately (pound)677,000 ($1,091,000). Hoenig (Far East) Limited ("Far
East") is required to maintain liquid capital of the greater of HK$3,000,000
($387,000) or 5% of average quarterly total liabilities. Far East's required
liquid capital was approximately HK$11,331,000 ($1,463,000) at March 31, 1999,
and it had actual capital of approximately HK$42,576,000 ($5,497,000) and excess
liquid capital of approximately HK$31,245,000 ($4,034,000).
NOTE 3 - INVESTMENTS IN LIMITED PARTNERSHIPS.
Axe-Houghton Associates, Inc., the Company's wholly-owned 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 19.0% ($621,219) and 0.47% ($45,396) at March 31, 1999.
Axe-Houghton does not maintain control of the partnerships for consolidation
purposes. These investments are accounted for under the equity method.
During the periods presented, the Company also maintained investments
in two unaffiliated 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.
5
<PAGE>
During the first quarter 1999, the Company reduced its investments in
these unaffiliated limited partnerships by approximately $1.6 million. Each of
these investments represented less than a 5% interest in the respective
partnership at March 31, 1999, and is accounted for at fair market value. The
aggregate value of these investments at March 31, 1999 was $3,037,499. In April
1999, the Company further reduced these investments by an additional $2.0
million by withdrawing from one of the partnerships and reducing its investment
in the other to $1.1 million.
NOTE 4 - FINANCIAL INSTRUMENTS.
The Company maintains a diversified portfolio of investment grade
preferred stock and U.S. Treasury futures used to hedge the preferred stock
positions. This investment is managed by a professional money manager and uses
or includes derivative financial instruments for the purpose of reducing
exposure to certain investment risks, including interest rate fluctuations. This
investment is accounted for at fair market value based upon available market
information and valuations received from the manager. 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.
During the periods presented, the Company maintained an investment in a
bank-sponsored deposit account which maintained investments in U.S. foreign
equity indices, floating rate deposits, baskets of European equity securities
and a U.S. Treasury zero coupon bond. The deposit account matured in March 1999,
and the Company did not renew the investment.
NOTE 5 - STOCKHOLDERS' EQUITY.
From January 1, 1999 through March 31, 1999, the Company repurchased
131,750 shares of Common Stock at an aggregate cost of $1.1 million under the
Company's 1998 one million-share repurchase program. As of March 31, 1999, the
Company had repurchased a total of 397,462 shares under the 1998 repurchase
program. The Company has repurchased a total of 2,397,462 shares under the 1998
repurchase program and two earlier repurchase programs as of March 31, 1999. The
Company purchased an additional 650,000 shares of Common Stock in December 1995
from the Estate of Ronald H. Hoenig pursuant to an agreement with Mr. Hoenig.
The total cost of the purchases under the repurchase programs and the purchase
from the Estate (net of 765,052 shares issued out of Treasury Stock) is
$12,153,694.
NOTE 6- EARNINGS PER SHARE.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). 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 and diluted earnings per share for
the periods indicated:
6
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Net Income available to common stockholders $1,217,582 $ 989,857
Weighted average shares outstanding 8,636,392 9,139,022
Effect of dilutive instruments
Employee stock awards 726,706 433,820
---------- ----------
Total weighted average diluted shares 9,363,098 9,572,842
---------- ----------
Basic earnings per share $ .14 $ .11
========== ==========
Diluted earnings per share $ .13 $ .10
========== ==========
</TABLE>
NOTE 7- COMMITMENTS AND CONTINGENCIES.
In 1998, a former employee of the Company instituted an arbitration
before NASD Regulation, Inc. against the Company and Fredric P. Sapirstein, the
Company's Chief Executive Officer. The former employee principally alleges that
the defendants wrongfully terminated his employment in breach of an employment
agreement and falsely stated the reason for his termination in a securities
regulatory filing on Form U-5. The former employee 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. The Company has filed an answer, denying the
former employee's allegations, and a counter-claim against the former employee
seeking damages of not less than $220,000, based on the former employee's breach
of his employment agreement with the Company. The Company believes that it has
meritorious defenses to the arbitration, and intends to vigorously oppose the
claims and pursue its counter-claim against the former employee. In the opinion
of management, resolution of this matter is not expected to have a material
adverse affect on the Company's financial condition, results of operations or
cash flows.
NOTE 8 - SEGMENT REPORTING.
The Financial Accounting Standards Board issued Statement of Financial
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information", effective for fiscal years ending after December 31, 1998, to
assist financial statement users in assessing the performance of an enterprise,
prospect for future cash flows, and to make informed decisions about an
enterprise. For the full year ended December 31, 1998, the Company changed its
reporting of business segments in accordance with SFAS No. 131. The Company has
restated information regarding periods ending prior to December 31, 1998 to
reflect this change. The Company has three reportable operating segments:
domestic brokerage, international brokerage and asset management. The Company's
brokerage segments provide independent third-party and proprietary research,
global securities brokerage and other services primarily to institutional
clients from its domestic (United States), and international (United Kingdom,
Hong Kong and Tokyo) brokerage operations. In attributing commission revenues to
its brokerage segments, the Company primarily relies on the geographic location
of the customer. The Company's wholly-owned asset management subsidiary provides
professional investment management to U.S. public and corporate employee benefit
plans, investment partnerships and other U.S. institutional clients from its
U.S. office.
The accounting policies of the segments are the same as those described
in Note 2 of the Notes to Consolidated Financial Statements contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998. There
have been no material changes to the Company's segment presentation in 1999. The
Company evaluates performance based upon operating profit or loss, not including
interest
7
<PAGE>
and investment income, as well as certain intercompany expenses. The Company
does not allocate certain corporate assets (goodwill and certain fixed assets)
to its reportable segments.
The following table illustrates significant financial data for each reportable
segment for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED DOMESTIC INTERNATIONAL
MARCH 31, 1999 BROKERAGE BROKERAGE ASSET MGMT TOTAL
- ------------------------ --------- --------- ---------- -----
<S> <C> <C> <C> <C>
Revenues from external customers $15,202,299 $3,460,648 $1,957,766 $20,620,713
Segment operating profit (loss) 2,391,073 (381,357) 637,764 2,647,480
Segment assets 31,401,021 15,838,586 4,572,698 51,812,305
---------- ---------- --------- ----------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED DOMESTIC INTERNATIONAL
MARCH 31, 1998 BROKERAGE BROKERAGE ASSET MGMT TOTAL
- ------------------------ --------- --------- ---------- -----
<S> <C> <C> <C> <C>
Revenues from external customers $13,352,592 $4,262,437 $1,965,734 $19,580,763
Segment operating profit (loss) 1,795,066 (370,077) 715,641 2,140,630
Segment assets 24,091,728 20,713,889 3,480,658 48,286,275
---------- ---------- --------- ----------
</TABLE>
Information for the Company's reportable segments as it relates to the
consolidated totals is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
---- ----
<S> <C> <C>
OPERATING REVENUES:
Domestic brokerage $ 15,202,299 $ 13,352,592
International brokerage 3,460,648 4,262,437
Asset management 1,957,766 1,965,734
------------ ------------
Total operating revenues $ 20,620,713 $ 19,580,763
============ ============
OPERATING PROFIT OR LOSS:
Domestic brokerage $ 2,391,073 $ 1,795,066
International brokerage (381,357) (370,077)
Asset management 637,764 715,641
General corporate (1,089,192) (931,562)
------------ ------------
Total operating profit 1,558,288 1,209,068
Interest & investment income 696,982 550,890
------------ ------------
Income before income taxes $ 2,255,270 $ 1,759,958
============ ============
</TABLE>
NOTE 9 - SUBSEQUENT EVENTS.
In September 1997, Murphy & Walsh Associates, Inc. filed a complaint in
the Supreme Court of the State of New York, County of Westchester, against
Axe-Houghton Associates, Inc., a subsidiary of the Company, and its President
and Chief Executive Officer, Seth M. Lynn, as well as against USF&G Corporation
and two of its subsidiaries. The complaint seeks damages of not less than
$280,000, plus interest, based on a claim that defendants breached an agreement
to pay Murphy & Walsh trailing commissions allegedly due Murphy & Walsh for
introducing investment advisory clients to defendants. The contract at issue was
entered into in April 1989 and terminated in October 1991, at which time
Axe-
8
<PAGE>
Houghton Associates was a subsidiary of Axe-Houghton Management, Inc., a
wholly-owned subsidiary of USF&G. The complaint alleges that the defendants
breached the 1989 agreement by failing to pay trailing commissions during the
five years following termination of the agreement. It also contains a claim for
quantum meruit against all of the defendants and alleges fraudulent conveyance
against USF&G and Mr. Lynn.
On April 8, 1999, Murphy & Walsh moved for partial summary judgment
against all of the corporate defendants on its breach of contract claim, now
alleging that it is entitled to damages of $1,800,000 plus interest and
reasonable attorneys' fees. Plaintiff now claims that it was entitled under the
1989 agreement to receive certain retainers or advance payments during the five
years immediately following termination of the agreement. Defendants
Axe-Houghton Associates and Mr. Lynn intend to answer the complaint denying its
substantive allegations and to vigorously oppose plaintiff's motion for partial
summary judgment.
9
<PAGE>
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 to address operating losses in certain international operations,
industry consolidation, acquisition and expansion plans, plans to address the
Year 2000 issue and other technology issues, market risk, the Company's
investment activities and its current equity capital levels. Actual events 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, 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
year ended December 31, 1998.
INTRODUCTION
The Company provides global securities brokerage to institutional clients
through its wholly-owned brokerage subsidiaries in the United States, United
Kingdom, Hong Kong and Tokyo. The Company's wholly-owned subsidiary,
Axe-Houghton Associates, Inc., provides professional asset management to U.S.
public and corporate employee benefit plans, investment partnerships and other
institutional clients from its offices in the United States.
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 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;
commissions received in exchange for paying expenses of, or commission refunds
to, customers under directed brokerage arrangements; commissions received in
connection with providing proprietary research; and commissions received for
execution-only services.
The Company's profit margin on execution-only brokerage and commissions earned
in connection with providing proprietary research is higher than that on
commissions earned in connection with independent research 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
independent research, other services and commission refunds provided under
independent research and directed brokerage arrangements. This ratio is
negotiated on an individual customer basis. Ratios continue to be under modest
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, because revenues are recorded only when earned, and related
expenses are recorded when incurred. The timing of the receipt of these
commissions could cause variations in earnings from year to year and quarter to
quarter.
10
<PAGE>
The Company's second largest source of revenues is investment management fees
earned by Axe-Houghton, the Company's asset management subsidiary, in connection
with the provision of asset management services to institutional clients.
Investment management fee revenues are a function of assets under management and
the management fee charged. 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.
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 the capacity limitations of such
disciplines (such as small capitalization growth equities), the market
performance of particular investment disciplines, as well as the performance of
the securities markets generally.
As the brokerage and asset management industries continue to consolidate, the
Company considers various strategies to enhance stockholder value and continues
to explore opportunities to increase distribution capabilities, expand its
client base and supplement its product line through the hiring of additional
personnel, strategic alliances, joint ventures and other business combinations.
For the full year ended December 31 1998, the Company changed its reporting of
business segments in accordance with new Statement of Financial Standards No.
131 ("Disclosures About Segments of an Enterprise and Related Information") and
to reflect the restructuring of the Company's brokerage operations in Japan. The
Company has three reportable operating segments -- domestic brokerage,
international brokerage and asset management -- and has restated information for
periods ending prior to December 31, 1998 to reflect this change. In determining
whether brokerage commissions earned are domestic or international, the Company
primarily relies on the geographic location of the customer.
THREE MONTHS ENDED MARCH 31, 1999 VERSUS MARCH 31, 1998
The Company's operating income before income taxes for the three months ended
March 31, 1999 increased 28.9% to $1.6 million, versus $1.2 million during the
same period in 1998. The increase in operating income is primarily attributable
to a 33.2% increase in operating income from domestic brokerage operations. The
Company's net income for the three months ended March 31, 1999 increased 23.0%
to $1.2 million, versus $1.0 million in 1998.
Operating revenues increased 5.3% to $20.6 million for the three months ended
March 31, 1999 from $19.6 million during the same period in 1998. This increase
resulted primarily from a 13.9% increase in operating revenues from domestic
brokerage operations, offset in part by a 18.8% decrease in operating revenues
from international brokerage operations. Operating revenues from international
brokerage operations represented 16.8% of the operating revenues during the
three months ended March 31, 1999 as compared to 21.8% during the same period in
1998. Operating revenues from asset management were essentially the same in the
first quarter 1999 as compared to the same period in 1998.
Operating revenues from the Company's domestic brokerage operations for the
three months ended March 31, 1999 were $15.2 million as compared to $13.4
million in 1998 due to increased trading activity. Operating income of the
Company's domestic brokerage operations increased 33.2% to $2.4 million in the
first quarter 1999 as compared to $1.8 million in the first quarter 1998,
primarily due to increased commission revenues, coupled with a decrease in
execution, settlement and research costs as a percentage of commission revenues.
Operating revenues from international brokerage operations decreased during the
three months ended March 31, 1999 as compared to the same period in 1998 as a
result of reduced trading activity of the
11
<PAGE>
Company's Japanese (54.6%) and United Kingdom (20.19%) clients. International
brokerage operations incurred operating losses of $0.4 million in the first
quarter 1999, the same as during the comparable period in 1998, with cost
reduction measures offsetting the decline in operating revenues.
Operating income for international brokerage operations for the three months
ended March 31, 1999 include non-recurring operating expenses of approximately
$0.3 million related to the previously announced restructuring of the Company's
brokerage operations in Tokyo, Japan. The restructuring of the
Tokyo operations was substantially completed as of March 31, 1999. The Tokyo
office now focuses primarily on sales and marketing activities, and the
Company's Hong Kong operations are responsible for the execution and settlement
of transactions in Japanese equities.
Investment management fee revenues remained at $2.0 million for the three months
ended March 31, 1999 as compared to the same period in 1998, notwithstanding a
decrease in total assets under management. Total assets under management were
$3.9 billion as of March 31, 1999, as compared with $4.0 billion as of December
31, 1998 and $4.3 billion as of March 31, 1998. The decrease in total assets
under management since December 31, 1998 is due to partial withdrawals of assets
by certain clients invested primarily in Core International ADRs, offset by
investment performance. Management fee revenues remained constant during the
first quarter 1999 as compared to the same period in 1998 due to an increase in
small capitalization growth equities assets under management, which are managed
at the Company's highest fee rate. Assets managed in small capitalization growth
equities increased 8.1% to $755.2 million as of March 31, 1999 from $698.5
million as of December 31, 1998. Small capitalization growth equity assets under
management were $714.0 million as of March 31, 1998. Operating income for asset
management for the first quarter 1999 declined 10.9% to $0.6 million from $0.7
million during the same period in 1998.
Expenses related to independent research and other services provided to the
Company's brokerage clients, including commission refunds, during the three
months ended March 31, 1999 increased 1.0% to $8.2 million from $8.1 million in
1998. These expenses were 43.9% of commission revenues during the first quarter
1999 as compared to 46.2% during the first quarter 1998. These expenses
increased at a lower rate than commission revenues in 1999, primarily due to an
increase in commissions resulting from execution-only brokerage, as well as the
timing of research expense incurred relative to the receipt of commission
revenues.
Clearing, floor brokerage and exchange charges decreased 2.6% to $2.4 million
during the three months ended March 31, 1999 from $2.5 million during the same
period in 1998. These expenses represented 13.0% of commissions earned in the
first quarter 1999 and 14.1% of commissions earned in the first quarter 1998.
The decrease in these expenses as a percentage of commissions is primarily due
to an increase in the percentage of commissions earned in U.S. equity markets,
where such expenses are charged at lower rates.
Employee compensation increased 8.5% to $5.7 million for the three months ended
March 31, 1999 from $5.3 million for the same period in 1998. This resulted
primarily from an increase in discretionary and performance-based bonus
compensation expense for the three months ended March 31, 1999.
All other expenses increased 9.6% to $2.7 million in the three months ended
March 31, 1999 as compared to $2.5 million during the same period in 1998. This
resulted primarily from an increase in expenses related to market data and year
2000-related expenses.
Net investment income for the first quarter ended March 31, 1999 increased 26.5%
to $0.7 million as compared to $0.6 million during the same period in 1998.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had cash, U.S. Government obligations, net
accounts receivable and other net investments of $48.4 million. All receivables
from correspondent brokers and dealers are fully collectible, and no provision
for uncollectibles is required.
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.
During the three months ended March 31, 1999, the Company repurchased 131,750
shares of its common stock under a previously announced stock repurchase program
at a total cost of $1.1 million. These repurchases have not had a material
effect on the Company's liquidity or capital resources.
During the first quarter 1999, the Company reduced its investments in
unaffiliated limited partnerships by approximately $1.6 million. In April 1999,
the Company further reduced these investments by an additional $2.0 million by
withdrawing from one of the partnerships and reducing its investment in the
other to approximately $1.1 million.
YEAR 2000 READINESS DISCLOSURE
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
("IT") systems (i.e., computer systems, network elements and software
applications), as well as other business systems that have time-sensitive
programs or microprocessors ("non-IT systems") that may not properly reflect or
recognize the year 2000. The failure to reflect or recognize dates after 1999
could cause the Company's IT and non-IT systems to fail or cause errors which
could lead to disruptions in operations or increased costs. Such failures could,
for example, limit the Company's ability to execute trades, cause settlement of
trades to fail, lead to incomplete or inaccurate accounting, recording or
processing of securities trades, result in the generation of erroneous results
or give rise to uncertainty about the Company's exposure to certain risks. If
not remedied, potential risks include business interruption or shutdown,
financial loss, regulatory actions, reputational harm and legal liability.
The Company's operating subsidiaries are regulated by the Securities and
Exchange Commission (SEC) and comparable foreign regulators, as well as by NASD
Regulation, Inc. and securities exchanges of which its subsidiaries are members.
The Company's principal operating subsidiary, Hoenig & Co. is a U.S. registered
broker-dealer and New York Stock Exchange member. As such, Hoenig & Co. was
expected to achieve various milestones with respect to the Y2K Issue (i.e.,
remediation and testing) by March 31, 1999 and must submit a written
certification that it is Y2K compliant by June 30, 1999. The Stock Exchange of
Hong Kong required that its members, including Hoenig (Far East) Limited, meet
similar milestones by March 31, 1999 and file periodic status reports regarding
its Y2K preparedness.
As required, Hoenig & Co. also filed a Form BD-Y2K with the SEC on April 30,
1999 which details its progress with respect to the Y2K Issue. In addition,
under new SEC Rule 17a-5, Hoenig & Co. retained an independent accounting firm
to perform agreed upon procedures pursuant to AICPA Statement of Position 98-8
with regard to Hoenig & Co.'s Y2K effort and filed a copy of the accounting
firm's report with the SEC on April 30, 1999. The Company's U.S. registered
investment adviser, Axe-Houghton Associates, must file a Form ADV-Y2K with the
SEC detailing its Y2K effort and state of preparedness.
13
<PAGE>
The first such report was filed in December 1998, and the next one is due by
June 7, 1999.
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 developing 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 and has completed Phase II with
respect to internal IT systems and non-IT systems that may be affected by the
Y2K Issue, except with respect to several systems provided by certain
third-party software vendors who have not yet confirmed their Y2K readiness.
These third-party delays have delayed the Company's completion of Phases II and
III from the dates previously reported.
Like many financial services companies, the Company is heavily reliant upon
third parties for many of the IT and non-IT systems that are essential to the
Company's ability to perform its day-to-day operations. These third parties
include trading counter-parties, financial intermediaries, securities exchanges,
depositories, clearing brokers and agencies, clearing houses, commercial banks
and various vendors, including providers of market data and pricing services,
telecommunication services and other utilities. The Company continues to
communicate with, and evaluate responses from, such third parties to determine
the extent to which they are vulnerable to the Y2K Issue. As of April 30, 1999,
the Company had not yet received sufficient information from certain third
parties regarding their Y2K readiness. Based on current information, these third
parties are expected to confirm their Y2K readiness by May 31, 1999. Most of the
Company's third-party service providers issued upgrades or replacement products
that are Y2K compliant in 1998 and the first quarter 1999; however, certain
third parties have not yet confirmed that their Y2K upgrades are Y2K compliant
and others have not yet delivered their Y2K upgrades.
The Company has identified a number of internal IT and non-IT systems as being
Y2K compliant. With respect to all systems identified as not Y2K compliant, the
Company is in the process of remediating any Y2K problems through upgrades,
corrections and replacements. As of April 30, 1999, the Company has completed
90% of Phases III and IV. The Company expects to complete Phase III with respect
to all systems by May 31, 1999, with the exception of one system provided by a
third party, which is expected to be remediated by July 30, 1999.
The Company is in the process of testing its mission critical systems for Y2K
compliance (Phase IV), which includes internal testing, industry-wide testing,
point-to-point testing with third parties and integration testing. Hoenig (Far
East) Limited was the Company's only brokerage subsidiary that was required to
participate in industry-wide testing. Hoenig (Far East) Limited achieved
successful results in the industry-wide tests conducted by The Stock Exchange of
Hong Kong in March 1999. The Company anticipates that it will complete testing
its mission critical systems for Y2K compliance by June 15, 1999 for systems in
the United States and by July 30, 1999 for mission critical systems in the
Company's international offices. The Company also has begun to implement the
changes necessary to address potential Y2K failures of its mission critical
systems (Phase V) and anticipates that it will complete Phases IV and V of its
program by June 30, 1999 for systems in the United States and by July 30, 1999
14
<PAGE>
for systems in the Company's international offices.
Phases III and IV also involve developing contingency plans to address mission
critical systems. The Company has developed contingency plans for its mission
critical IT and non-IT systems to timely address any potential Y2K problems.
These plans define alternate services or products to be used (e.g., market data
systems) or alternate processes to be followed in the event that a mission
critical system fails. The failure to develop and implement, if necessary,
adequate contingency plans could have a material adverse effect on the Company's
financial condition, results of operations and cash flows.
Notwithstanding the Company's efforts to make contingency plans, there may not
be readily available alternatives for the services provided by the Company's
clearing brokers, securities exchanges and utilities. Even if the Company
succeeds in addressing the Y2K Issue with respect to its internal systems, it
can be materially adversely affected by the failures of third parties, such as
its clearing brokers, clients, trading counter-parties and exchanges, to
remediate their own Y2K problems. In particular, in some international markets
where the Company conducts business, the level of awareness and remediation
efforts relating to the Y2K Issue are believed to be less advanced than in the
United States, and it is more difficult to obtain information from third parties
about their Y2K readiness. As is true for other companies, the Company is
vulnerable to Y2K failures beyond its control, particularly with respect to
utility and transportation service providers.
The Company has hired one full-time consultant as well as other consultants on
an as-needed basis to assist Company personnel in effecting the Company's Y2K
program. In order to focus attention on the Y2K Issue, management has deferred
certain other technology projects, but this deferral is not expected to have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
Based on current information, the Company believes that it will spend a total of
approximately $600,000 to $675,000 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, consulting fees and
additional personnel needed to implement contingency plans. The Company does not
expect these costs to be material to its financial condition, results of
operations or cash flows in a given period. The Company has funded, and will
continue to fund, Y2K costs through operating cash flow. Y2K costs are expensed
as they are incurred. The total amount of Y2K expenses incurred through April
30, 1999 was $456,591.
The costs of addressing the Y2K Issue and anticipating dates for completing
various phases of the Company's Y2K program 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 ability of third parties to address the Y2K Issue, the
availability of cost-effective alternatives or replacements for third-party
products and services which are not Y2K compliant and similar uncertainties.
IMPACT OF INFLATION
The Company's business is not capital intensive, and management believes that
the financial results as reported would not have been significantly affected had
such results been adjusted to reflect the effects of inflation and price
changes. However, inflation affects the cost of operations, particularly
salaries and related benefits.
15
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All of the Company's investments are subject to certain market risks. Market
risk represents the risk of loss that may result from the potential change in
the market value, cash flows and earnings of an investment and related
derivatives as a result of fluctuations in interest rates, foreign exchange
rates and equity prices. Market risk is inherent in investments that contain
derivative and non-derivative financial instruments. The Company has established
procedures to manage its exposure to market fluctuations and changes in the
market value of its investments.
The Company is exposed to foreign currency risk arising from exchange rate
fluctuations on its foreign denominated bank accounts, which are used in its
international brokerage operations. The Company's primary exposure is in
Japanese Yen, U.K. Pounds Sterling and Hong Kong dollars. The Company mitigates
its foreign exchange exposure by maintaining foreign currency balances only to
the extent necessary to meet the operational needs of its international
subsidiaries.
For information regarding the Company's exposure to certain market risks, see
Item 7A "Quantitative and Qualitative Disclosures About Market Risk" in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
Significant changes which have occurred since December 31, 1998 are as follows:
During the first quarter 1999, the Company reduced its investments in
unaffiliated limited partnerships (valued at $4.6 million at December 31, 1998)
by approximately $1.6 million to $3,037,499. In April 1999, the Company further
reduced these investments by an additional $2.0 million by withdrawing from one
of the partnerships and reducing its investment in the other to approximately
$1.1 million. Further information regarding these investments is hereby
incorporated by reference to Note 3 of the Notes to the Unaudited Consolidated
Financial Statements contained in this report. The Company's investment in a
bank-sponsored deposit account matured in March 1999 (valued at $1.0 million at
December 31, 1998), and the Company did not renew the investment. The funds
previously invested in the limited partnerships and the deposit account have
been invested in U.S. Treasury securities and money market funds.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in the arbitration instituted by
Lawrence W. Gallo, a former employee of Hoenig before the NASD Regulation Inc.
against Hoenig and Fredric P. Sapirstein, Hoenig's Chairman and Chief Executive
Officer. Additional information regarding this arbitration is hereby
incorporated by reference to Note 7 of the Notes to Unaudited Consolidated
Financial Statements contained in this report.
A description of the other legal proceeding required by this Item is hereby
incorporated by reference to Note 9 of the Notes to Unaudited Consolidated
Financial Statements contained in this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27.1 Financial Data Schedule
(B) REPORTS ON FORM 8-K
The Registrant did not file any reports on Form 8-K during the quarter
ended March 31, 1999.
17
<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: May 14, 1999 By: /s/ Fredric P. Sapirstein
-------------------------------
Fredric P. Sapirstein,
Chairman and
Chief Executive Officer
Date: May 14, 1999 By: /s/ Alan B. Herzog
-------------------------------
Alan B. Herzog,
Chief Operating Officer and
Chief Financial Officer
18
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HOENIG
GROUP INC. MARCH 31, 1999 FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS AND NOTES THERETO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 15,057,354
<RECEIVABLES> 13,790,143
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 23,670,101
<PP&E> 1,597,053
<TOTAL-ASSETS> 60,508,823
<SHORT-TERM> 49,123
<PAYABLES> 4,012,294
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 95,550
<LONG-TERM> 0
0
0
<COMMON> 108,462
<OTHER-SE> 40,181,125
<TOTAL-LIABILITY-AND-EQUITY> 60,508,823
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 469,454
<COMMISSIONS> 18,648,058
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 1,957,767
<INTEREST-EXPENSE> 0
<COMPENSATION> 5,721,581
<INCOME-PRETAX> 2,255,270
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,217,582
<EPS-PRIMARY> .14
<EPS-DILUTED> .13
</TABLE>
