-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VrgtYs9/4p5dGs2RW4qSAYCexi4SqWnatmTmtew0WIfldQ6+MGAXdopJSkXjjLKy zqYIwXgIkvTKEEjHxirdEA== 0000950136-00-000444.txt : 20000331 0000950136-00-000444.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950136-00-000444 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOENIG GROUP INC CENTRAL INDEX KEY: 0000878551 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 133625520 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19619 FILM NUMBER: 586942 BUSINESS ADDRESS: STREET 1: ROYAL EXECUTIVE PARK STREET 2: 4 INTERNATIONAL DR CITY: RYE BROOK STATE: NY ZIP: 10573 BUSINESS PHONE: 9149359000 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1999 COMMISSION FILE NUMBER 0-19619 Hoenig Group Inc. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-3625520 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.) OF INCORPORATION OR ORGANIZATION) RECKSON EXECUTIVE PARK, 4 INTERNATIONAL DRIVE, RYE BROOK, NEW YORK 10573 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE): (914) 935-9000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $0.01 PER SHARE ----------------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months or for such shorter period that the Registrant was required to file such reports, and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the Common Stock held by non-affiliates of the Registrant as of March 24, 2000: Common Stock, par value $0.01 per share, $37,922,553. As of March 24, 2000, there were 8,178,805 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Selected portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders are incorporated by reference in Part III as set forth herein. Certain exhibits are incorporated by reference in Part IV from prior filings. PART I Item 1. Business GENERAL Hoenig Group Inc., through its wholly-owned brokerage subsidiaries, Hoenig & Co., Inc., Hoenig & Company Limited and Hoenig (Far East) Limited, provides global securities brokerage, marketing and distribution of proprietary and independent research and other services to institutional investors. Through its asset management subsidiary, Axe-Houghton Associates, Inc., the Company provides professional investment management services to public and corporate employee benefit plans, investment partnerships and other institutional clients. The term "Company" refers to Hoenig Group Inc. and its operating subsidiaries. The Company conducts business from its headquarters in Rye Brook, New York, its international offices in London, Hong Kong and Tokyo and its regional office in Boston. The Company maintains securities trading operations in Rye Brook, Boston, London and Hong Kong, and a sales and marketing office in Tokyo. The Company conducts its asset management business from its Rye Brook offices. The Company changed its operating segment presentation in 1998 to better reflect the way in which management evaluates the Company's businesses in deciding how to allocate resources and in assessing performance. The Company's operating segments are domestic brokerage, international brokerage and asset management. See Note 12 to the Consolidated Financial Statements for specific information regarding operating revenues and profits by reportable segments. DOMESTIC AND INTERNATIONAL SECURITIES BROKERAGE The principal activity of the Company is providing quality trade execution services in global equities and domestic fixed income securities to institutional customers. The Company's brokerage customers are primarily investment advisers, banks, insurance companies, corporations, employee benefit plans, mutual funds, hedge funds, investment partnerships and other investment professionals. The Company also provides its customers with proprietary and independent research and other services. The Company earns commissions in connection with four types of brokerage services: o providing independent research and other services to investment managers; o paying expenses of, or commission refunds to, customers under directed brokerage or commission recapture arrangements; o providing proprietary research to investment managers; and o execution-only services. Approximately 74% of the Company's total brokerage commissions are earned in connection with the provision of independent research and directed brokerage arrangements. The remaining 26% of total commissions relate to execution-only services and proprietary research. Commissions earned in connection with providing execution-only services and proprietary research represent a higher percentage (approximately 30%) of commissions earned by the Company's domestic brokerage operations. The Company's international brokerage operations rely more heavily on the provision of independent research than domestic brokerage operations, with execution-only services and proprietary research representing 13% of international commissions earned in 1999. Directed brokerage arrangements are less common in international markets and have not historically represented a significant part of the Company's international brokerage business. The Company generally expects a certain amount of commissions for every $1 in research, other services and commission refunds provided under independent research and directed brokerage arrangements. This ratio is not fixed and may vary on an individual customer basis. Ratios have been, and continue to be, under competitive pressure in the United States, as well as in international markets. The Company's commission rates and ratios generally are negotiated between the Company and its customers, and vary with the volume and nature of trading involved. The Company believes that its ability to provide customers with domestic and international trade execution capabilities and high quality customer service are important factors 1 in its ability to compete for customers seeking independent research and directed brokerage arrangements. The Company typically provides a periodic global statement to each customer, which allows the customer to easily track the research and other services provided, the commission expectation and the commissions generated during the period. INDEPENDENT RESEARCH The Company actively markets and distributes independent third-party research products and services to professional investment managers with the expectation that these managers will use the Company to execute securities trades which generate specified amounts of commission revenues. These types of arrangements are sometimes referred to as independent research arrangements or "soft dollar" arrangements. An important aspect of the Company's business involves identifying independent sources of investment research and information which add value to its customers' investment decision-making process. The Company seeks research services from private research groups, independent analysts, information services organizations and other entities in the United States and overseas and collaborates with these providers to obtain products and services that assist the Company's investment management clientele in carrying out their investment management responsibilities. The Company obtains research products and services from over 400 independent sources and regularly communicates the availability and suitability of these products and services to its customers. Through its relationships with independent research analysts and other service providers, the Company offers a wide variety of specialized and sophisticated research products and services, including fundamental research, economic research and forecasting, quantitative analysis, global research, quotation, news and database systems, fixed income research, software for securities analysis, portfolio management and performance measurement services. Many of these products and services are available directly from the research analyst or service provider, as well as from other brokerage firms, including specialty firms offering only independent research and firms that also provide proprietary research. The Company's relationship with an independent research provider typically is one in which the research organization agrees to supply research products or services to the Company's customers for a specified period of time (generally one year or less), and the Company agrees to pay for such research. Almost all of the Company's research relationships are non-exclusive arrangements. Some of these relationships, particularly those with organizations that supply quotation, news and database systems, and software for securities analysis, portfolio management and performance measurement, are contractual in nature. The Company's business is not dependent on any one or a select number of research organizations; however, collectively, quotation, news and database systems and portfolio management and performance measurement systems represent a significant portion of the independent research provided by the Company, the loss of which could materially affect the Company's business. DIRECTED BROKERAGE The Company also engages in directed brokerage arrangements with certain institutional investors, particularly hedge funds, private investment funds and investment partnerships, corporations and pension plans. A directed brokerage arrangement is a contractual arrangement between a brokerage firm and its customer whereby the broker pays certain expenses of the customer, such as custodian fees, or refunds to the customer a portion of commissions paid in consideration of the customer directing commission business to the broker. These types of arrangements are commonly known as directed brokerage because the customer instructs its money managers to direct trades for the customer's account to the broker with whom the customer has a directed brokerage arrangement. In the case of pension plans, directed brokerage arrangements often involve the payment of commission refunds to the pension plan and are often referred to as "commission recapture" programs. The term "soft dollars" also has been used to refer to directed brokerage arrangements. PROPRIETARY RESEARCH The Company offers proprietary research consisting of top-down economic research and market analysis. The Company's economic research group, headed by Dr. Robert Barbera, a noted Wall Street economist and strategist, produces a weekly report, which discusses global economic events and market developments, as well as provides economic forecasts. The economic research group also produces interim reports and periodically consults with customers on a range of global economic issues and market trends. 2 The Company provides its customers with proprietary research and access to its economists in the traditional Wall Street manner, with the expectation that customers will direct commission business to the Company. Unlike independent research arrangements, the Company generally does not expect a specified amount of commissions from a customer in return for its proprietary research, nor does the Company generally put a dollar price on this research or offer to sell it for cash. EXECUTION-ONLY SERVICES Execution-only brokerage refers to the execution of equity trades for customers on a competitive commission rate basis and the execution of transactions in U.S. fixed income securities as riskless principal. These types of transactions include corporate stock repurchase programs and accumulations or liquidations of large blocks of equity and fixed income securities on a discrete basis. In addition, the Company generates execution-only brokerage in fixed income securities by identifying fixed income securities available in the market that may meet the particular portfolio needs of customers. The Company derived approximately 26% of its total commission revenues in 1999, 23% in 1998 and 20% in 1997 from execution-only brokerage and proprietary research. SALES AND MARKETING As of December 31, 1999, the sales and marketing staff for the Company's domestic and international brokerage operations comprised 10 full-time professionals: 8 in the United States, 1 in Tokyo and 1 in Hong Kong. These individuals manage established customer relationships and solicit new business for the Company's brokerage services. In doing so, the sales and marketing staff works to identify investment styles, trading techniques and research requirements of customers. The sales and marketing representatives serve as a link between research service providers and existing or potential customers. They work closely with the Company's customers to identify which products and services suit their investment needs and continuously seek to introduce independent research products and other services to existing and prospective customers. Similarly, the Company's sales and marketing personnel also promote and sell the Company's proprietary research and other brokerage services, including execution-only services. CUSTODY The Company does not maintain custody or possession of customer funds or securities, except with respect to transactions in securities listed on The Stock Exchange of Hong Kong. Custody of assets of institutional customers is normally maintained by banks, trust companies, large brokerage firms or other custodians selected by the customer. Transactions for such customers generally are settled on a delivery-versus-payment or receipt-versus-payment basis directly with the customer through the Company's clearing agents or settlement accounts. The assets of some customers are maintained in the custody of the Company's clearing agents. The Company is thus relieved of many of the significant regulatory and administrative burdens associated with the custody or possession of customer assets. The Company introduces on a fully-disclosed basis all accounts trading in U.S. equity and fixed income securities to Pershing, Division of Donaldson, Lufkin & Jenrette Corporation. Under the Company's clearing arrangement, Pershing performs administrative functions with respect to the transactions of the Company's customers, such as record keeping, confirmation of transactions and preparation and transmission of monthly statements. Pershing also extends margin credit to some of the Company's brokerage customers. The Company has a similar arrangement (other than the extension of margin credit) with Pershing & Co. Ltd. in London for accounts trading in the United Kingdom and certain European securities markets. The Company maintains settlement accounts with various banks and brokerage firms throughout the world with respect to transactions in Asian securities other than those listed on The Stock Exchange of Hong Kong. The Company pays a fee to its clearing and settlement agents based on a fixed amount per transaction. Commissions, net of clearing expenses, are remitted on a monthly basis by the clearing and settlement agents to the Company. The Company's Hong Kong brokerage subsidiary, Hoenig (Far East) Limited, is a member of The Stock Exchange of Hong Kong and of the Central Clearing and Settlement System (CCASS) in Hong Kong. As a member of CCASS, Hoenig (Far East) Limited is self-clearing only with respect to transactions in securities listed on The Stock 3 Exchange of Hong Kong. Transactions for Hoenig (Far East) Limited customers generally are settled on a delivery-versus-payment or receipt-versus-payment basis directly with the customer or the customer's custodian. ASSET MANAGEMENT Axe-Houghton Associates, Inc. is a registered investment adviser under the Investment Advisers Act of 1940. Axe Houghton provides professional investment management for public and corporate employee benefit plans, investment partnerships and other institutional clients in the United States and also acts as the general partner of two investment limited partnerships. It specializes in active small capitalization growth equity, small and mid-capitalization value management, as well as international indexing using American Depositary Receipts (ADRs). As of December 31, 1999, Axe-Houghton's assets under management were $4.96 billion, as compared with $4.02 billion at the end of 1998 and $3.82 billion at the end of 1997. Assets under management increased in 1999 due to investment performance, the receipt of additional assets from existing clients, and the development of two new small-capitalization growth-related investment disciplines, Focused Growth Equities and Technology Growth. Assets managed in Small Capitalization Growth Equities experienced the greatest growth, increasing from $698.5 million at the end of 1998 to $1.2 billion at the end of 1999. Assets managed in Small Capitalization Growth Equities was $591.3 million as of December 31, 1997. Assets under management in the two new disciplines was $181 million at the end of 1999. Assets under management as of February 29, 2000 were $5.21 billion, of which $1.5 billion represents assets managed in Small Capitalization Growth Equities and $328 million represents assets managed in the two new disciplines. Growth in assets under management is dependent on numerous factors, including: o Axe-Houghton's ability to attract new clients and retain existing clients; o its ability to attract and retain highly skilled personnel; o its investment performance relative to market benchmarks and others offering similar disciplines; o the number and variety of investment disciplines offered; o the market performance of various investment disciplines; o the capacity limitations of a particular investment discipline, such as small capitalization growth equities; and o the performance of the securities markets in general. Axe-Houghton has not accepted any new clients in the small capitalization growth equities discipline since the first quarter 1998 because of capacity limitations, but has accepted additional investments from existing clients. The Company believes that the growth of the U.S. small capitalization equity market and increasing market capitalizations over the past two years has resulted in increased capacity of the Small Capitalization Growth Equities discipline. As a result, Axe-Houghton intends to accept new clients in its Small Capitalization Growth Equity discipline in 2000. Axe-Houghton's marketing department consists of three full-time professionals. These individuals work directly with potential clients, as well as with various investment management consulting firms, to introduce Axe-Houghton's investment disciplines and performance records to institutional clients. They also provide client service to managed accounts. EMPLOYEES At December 31, 1999, the Company employed 104 people on a full-time basis, which includes 8 in executive positions, 27 in floor positions or positions as brokers, 13 in sales and marketing positions, 14 in accounting, legal and compliance positions, 9 in investment positions, 3 in information technology and 30 in clerical or other positions. Of the 104 employees, 58 are employed by Hoenig & Co. (including 2 in Tokyo), 5 by Hoenig Group Inc., 16 by Axe-Houghton, 15 by Hoenig (Far East) Limited and the remaining 10 are employed by Hoenig & Company Limited. All of the Company's offices, except the Tokyo office, engage in both marketing and brokerage activities. The Company considers its relations with employees generally to be good. 4 CUSTOMER RELATIONSHIPS The Company has existing brokerage relationships with over 500 institutional customers worldwide. The Company's 10 and 20 largest customers accounted for 33.4% and 45.5%, respectively, of total revenues for the year ended December 31, 1999 and 29.0% and 41.1%, respectively, of total revenues for the year ended December 31, 1998. A significant percentage of the Company's largest customers are hedge funds, investment partnerships and private investment funds. No single customer accounted for 10% or more of the Company's revenues for any of the years ended December 31, 1999, 1998 and 1997. The Company believes that its brokerage customer list is broadly based, with a particular expertise among hedge funds, investment partnerships and private investment funds. Approximately 70% of the Company's brokerage business is executed in U.S. markets, and the majority of its customers are located in the United States. The Company's ability to assist its customers in executing securities transactions in many of the world's major markets reduces its reliance on volume and trading in any one particular market, other than the United States. Sales and marketing personnel located in the Company's international offices are responsible for developing local customer relationships which help to diversify the Company's customer base. The Company maintains a limited number of retail brokerage accounts. These accounts are primarily the accounts of employees (who generally are required to trade through the Company), their relatives and friends of the Company. The Company does not compete for retail business. As of December 31, 1999, the Company had 31 advisory clients which maintained 42 investment advisory accounts. Four of these accounts are maintained for affiliates. As of December 31, 1998, the Company had 34 advisory clients which maintained 48 investment advisory accounts, including four of affiliates. COMPETITION The institutional brokerage and asset management businesses are highly competitive. The Company must meet price competition commensurate with the products and level of service that it offers. Such competition affects not only the Company's ability to compete for new clients, but also its ability to attract and retain highly skilled employees. The Company's brokerage business competes directly and indirectly with independent specialty firms, as well as with traditional full-service brokerage firms, both domestic and foreign, that offer independent research and engage in directed brokerage. In addition, the Company competes directly with traditional full-service firms that offer economic research and forecasting similar to the Company's proprietary economic research, as well as other types of research and brokerage services not offered by the Company. Established U.S. and international brokerage firms, as well as independent specialty firms, are the most likely candidates to compete successfully for customers seeking independent research and directed brokerage arrangements. This is especially true as larger investment management firms seek to consolidate the number of brokers that they use and obtain proprietary and independent research from the same broker. The quality and cost of execution are the primary considerations in competing for execution-only brokerage. The Company generally does not make position bids or offers or otherwise commit its capital to trading. Consequently, the Company may not be able to compete for brokerage business in cases where another broker-dealer commits its own capital or is able to execute transactions at a lower cost. The Company believes that it successfully competes for brokerage business because of the quality of its trade execution, its global execution capabilities and the variety and quality of the independent and proprietary research and other services that it provides. The Company believes that important competitive factors in the securities brokerage business are the ability of professional personnel to understand and anticipate the customer's requirements and expectations and to provide high quality products and services at competitive prices. Management believes that its knowledge of, and relationships with, numerous third-party service providers enable it to compete effectively for commission business. The Company's asset management business competes with other registered investment advisers, full-service brokerage firms, mutual funds, banks, trust companies, investment counselors and other investment professionals. A significant number of these competitors have greater capital and other resources than the Company and offer clients a broader range of asset management disciplines. Some of the competing firms offer these services at rates lower than those charged by the Company. The Company's asset management business also competes with other 5 investment managers on the basis of historical investment performance results, some of which have better investment performance records than the Company. The Company believes that it successfully competes with other investment professionals because of the high quality of the portfolio management and client services that it provides, which often is more important to attracting and retaining investment management clients than the fee rate charged. The low capital requirements of the institutional brokerage and asset management businesses mean that there are no true financial barriers to entry into these businesses. However, the Company's relationships with major institutional investors and direct lines of communication to these institutional investors are not easily duplicated. The institutional brokerage and asset management businesses have undergone considerable consolidation in the last few years, both domestically and cross-border. Such activity not only creates larger competitors with greater resources, but also results in increased competition for highly skilled employees. REGULATION Broker-dealers and investment advisers are subject to regulation covering virtually all aspects of their businesses. The Company is subject to extensive regulation under U.S. federal and state law and by certain U.S. self-regulatory bodies, including the New York Stock Exchange (NYSE) and various other stock exchanges, the U.S. Securities and Exchange Commission (SEC), the National Association of Securities Dealers Regulation, Inc. (NASDR), and several foreign regulatory bodies. Through its subsidiaries, the Company is a member of the New York Stock Exchange (NYSE), all major regional U.S. exchanges, the London Stock Exchange (LSE) and The Stock Exchange of Hong Kong, and is an associate member of the American Stock Exchange. The Company's brokerage subsidiaries are registered as broker-dealers in a number of countries. o Hoenig & Co. is a U.S. registered broker-dealer and is regulated by the SEC, NASDR, and various securities exchanges, including the NYSE which has been designated as its primary regulator. o Hoenig & Co.'s Tokyo office is regulated by the Japanese Financial Supervisory Agency (FSA) and the Japan Association of Securities Dealers. o Hoenig & Company Limited is a U.K. registered broker-dealer and is regulated by the Securities Futures Authority (SFA) in the United Kingdom and the LSE. o Hoenig (Far East) Limited is registered as a dealer and investment adviser with the Hong Kong Securities and Futures Commission (SFC) and is a member of The Stock Exchange of Hong Kong. o Axe-Houghton is registered in the U.S. as an investment adviser with the SEC. Hoenig & Co., Inc. is also subject to regulation in various states. These regulatory authorities have adopted rules that govern the securities industry and, as a normal part of their procedures, conduct periodic examinations of the Company's securities brokerage and asset management operations. Additional legislation, changes in rules promulgated by the SEC, the SFA, the SFC, the FSA or any self-regulatory organization, or changes in the interpretation or enforcement of existing laws and rules, may directly affect the mode of operation and profitability of the Company. In the United States, brokerage firms and certain investment advisers also are subject to regulation by state securities commissions in the states in which they conduct business. These regulatory authorities, including state securities commissions, may conduct administrative proceedings which can result in censure, fine, suspension or expulsion of a broker-dealer or investment adviser, its officers or employees. In the United States, the provision of research to investment managers in consideration of commissions is conducted in reliance upon the safe harbor provided under Section 28(e) of the Securities Exchange Act of 1934. The protections of Section 28(e) apply equally to the provision of independent third-party research, as well as proprietary research. Section 28(e) permits money managers and other investment fiduciaries to obtain research and brokerage services from a broker in exchange for commissions. It provides, in effect, that it is not a breach of fiduciary duty for an investment manager to cause an account over which it has investment discretion to pay a broker a higher commission rate than another broker would have charged for executing the transaction if the investment manager determined in good faith that the amount of commission paid was reasonable in relation to the value of the 6 brokerage and research services provided by the broker. The safe harbor protection of Section 28(e) does not extend to transactions where the broker executes the transaction as principal or in a riskless principal transaction. Section 28(e) does not relate to directed brokerage arrangements, which generally are governed by contractual agreements and state or federal laws, including the Employee Retirement Income Security Act of 1974 (ERISA). The SEC from time to time has been urged by competitors of the Company and others to seek Congressional reconsideration of Section 28(e) or narrow its scope through interpretation. In September 1998, the SEC released a report on soft dollar examinations conducted by the SEC in 1996 and 1997. The report summarizes the SEC's findings and makes recommendations with respect to the soft dollar practices of registered brokers, investment advisers and mutual funds. Most of the findings relate to failures to abide by the requirements of the Section 28(e) safe harbor and to inadequate disclosure of soft dollar arrangements. The report also comments on a lack of internal controls (record-keeping, procedures, supervision) at brokers and investment advisers regarding soft dollar arrangements. Based on the examination findings, the SEC's report makes several specific recommendations, including that the SEC should consider adopting various record-keeping rules that would apply to brokers and investment advisers engaged in soft dollar arrangements and that it require more meaningful disclosure of soft dollar arrangements in forms filed by registered investment advisers. The SEC has not to date proposed specific rule changes or issued new interpretations relating to soft dollar practices. In November 1997, a working group of the Advisory Council on Employee Welfare and Benefit Plans published a report which included recommendations to the Department of Labor and the SEC regarding regulatory and statutory changes and recommendations to plan sponsors and other fiduciaries regarding how soft dollar and directed brokerage arrangements should be handled. The report included a recommendation that the Department of Labor and the SEC should require additional disclosure of soft dollar and directed brokerage activities and tighten the definition of research under Section 28(e). The report also contained a recommendation from a minority of the Advisory Council's working group that the Section 28(e) safe harbor be repealed with respect to fiduciaries of employee benefit plans only. Neither the Department of Labor nor the SEC has acted on the Advisory Council Group report and recommendations. In addition, various industry associations, including the Securities Industry Association and the Association for Investment Management and Research, have issued best practices and standards of conduct which provide guidance to brokers and investment managers that receive proprietary and independent research from brokers and/or are involved in directed brokerage arrangements. It is difficult to assess the effect, if any, that these regulatory reports and industry standards will have on the Company's brokerage business. Any changes that limit or narrow the definition of research provided in Section 28(e) or exclude independent research from that definition would have a material adverse effect on the Company's business and place it at a competitive disadvantage as compared to brokerage firms with greater proprietary research capabilities. The degree of regulation of soft dollar and directed brokerage arrangements varies among the countries in which the Company has customers. Many countries, like Japan, do not have specific rules, or safe harbors like Section 28(e) in the United States, regarding the provision of research in exchange for commissions. Other countries, like the United Kingdom, Hong Kong, Singapore and Australia, have adopted regulations that are similar to those in the United States. In June 1997, the Japanese Securities and Exchange Council issued a report recommending comprehensive reform of the Japanese securities markets. These reforms began in April 1998 and are expected to be completed in the Year 2000. These reforms are intended to promote a more liberalized market driven by competition and market forces, rather than government regulation. One of the most significant of these reforms is the deregulation of commissions, which began in April 1998 and was completed in October 1999. These reforms have resulted in the registration of many new broker-dealers in Japan and increased competition for brokerage business in both the institutional and retail markets. NET CAPITAL REQUIREMENTS The Company's brokerage subsidiaries are subject to various net capital requirements. Hoenig & Co. is subject to the Uniform Net Capital Rule (Rule 15c3-1) under the Securities Exchange Act of 1934. This rule requires that Hoenig & Co. maintain net capital of the greater of $100,000 or one fifteenth of aggregate indebtedness, as defined. At December 31, 1999, Hoenig & Co.'s net capital ratio was 1.05 to 1. The capital requirement of Hoenig & Co.'s Tokyo branch office at December 31, 1999 was ((Yen)) 30,000,000 ($293,000). Hoenig & Company Limited is required to maintain financial resources of at least 110% of its capital requirement (as defined). Hoenig (Far East) Limited is 7 required to maintain liquid capital of the greater of HK$3,000,000 ($386,000) or 5% of the average quarterly liabilities. The table below summarizes the capital positions for each brokerage subsidiary at December 31, 1999:
Actual/ Eligible Minimum Capital Required Capital 12/31/99 Excess of Requirement ---------------- -------- --------------------- Hoenig & Co., Inc. $892,000 $12,772,000 $11,880,000 Hoenig & Company Limited $638,000 $1,378,000 $740,000 ((pounds)395,000) ((pounds)853,000) ((pounds)458,000) Hoenig (Far East) Limited $2,117,000 $7,412,000 $5,295,000 (HK$16,463,000) (HK$57,636,000) (HK$41,173,000)
Item 2. Properties The Company's headquarters occupies office space of approximately 28,000 square feet at Reckson Executive Park, 4 International Drive, Rye Brook, New York 10573, under a lease which expires on May 31, 2002. In addition, the Company leases an additional 11,000 square feet of office space in Boston, London, Hong Kong and Tokyo under leases which expire or are terminable at various times beginning April 2001 through May 2003, and in New Rochelle, NY on a month-to-month basis. Item 3. Legal Proceedings The description of legal proceedings required by this Item is incorporated by reference to Note 4 to the Consolidated Financial Statements included herein. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the fourth quarter of 1999. PART II Item 5. Market for Registrant's Common Equity and Related Stockholders Matters The Company's Common Stock is listed on the National Association of Securities Dealers Automated Quotation System National Market (Nasdaq) under the symbol HOEN. The following table sets forth the high and low sales prices for the Common Stock as reported by Nasdaq for the eight quarters ending December 31, 1999:
PERIOD ENDED COMMON STOCK - ------------ ------------ HIGH LOW ---- --- March 31, 1998 $6.75 $6.125 June 30, 1998 7.438 6.563 September 30, 1998 8.00 6.75 December 31, 1998 8.25 6.75 8 March 31, 1999 15.00 6.25 June 30, 1999 10.375 7.25 September 30, 1999 12.25 9.00 December 31, 1999 12.75 8.375
The Company has not paid dividends on its Common Stock since February 1997. At the present time, the Company does not intend to reinstate the dividend. Based on information supplied by Continental Stock Transfer & Trust Company, the Company's transfer agent, the Company believes that there were approximately 532 holders of record and beneficial owners of Common Stock on March 24, 2000. The closing price of the Common Stock was $9.00 on March 24, 2000. Item 6. Selected Financial Data Summary Consolidated Financial Data (In thousands except per share amounts)
Year ended December 31, 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Income Statement Operating revenues $91,786 $83,944 $76,315 $70,030 $53,527 Operating income (loss) 8,733 7,142 3,900 3,230 (1,862) Investment income and other 2,296 1,280 2,097 1,737 7,252 Income before income taxes 11,029 8,422 5,997 4,967 5,389 Net income 6,377 4,686 3,580 2,887 4,919 Net income per share basic(1) .74 .53 .38 .31 .50 Net income per share diluted(1) .67 .50 .37 .31 .50 Dividends per share - - - .10 .10 Weighted average shares and equivalents outstanding(1) 9,495 9,446 9,771 9,391 9,881
Year ended December 31, 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Balance Sheet Total assets $70,508 $63,340 $61,021 $51,528 $45,135 Stockholders' equity $41,253 $40,017 $39,526 $37,851 $34,458
- -------------- (1) See Note 16 to the Consolidated Financial Statements for information regarding changes to the earnings per share computation. Item 7. 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 future growth, cost reduction measures taken to address operating losses in certain international operations, including the risk that such measures will not improve the profitability of international brokerage operations, industry consolidation, acquisition and expansion plans, strategic alliances, joint ventures and other business combinations, plans to address various technology issues, market risk, the Company's investment activities and its equity capital requirements. 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, 9 changes in demand for asset management and securities brokerage services, fluctuations in asset management performance, the Company's ability to recruit and retain highly skilled 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. See "Business - Competition" and "Regulation". 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 Japan. 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 U.S. 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 has been 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 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 commissions could cause variations in earnings from year to year and quarter to quarter. The Company's earnings also may be affected by regulatory changes or industry sentiment regarding independent research arrangements and directed brokerage. Two of the Company's international customers recently indicated that, beginning in 2000, they will no longer engage in independent research arrangements. The loss of business from these customers could have a material affect on the Company's international brokerage operations. During the fourth quarter 1998, the Company restructured its brokerage operations in Tokyo as part of an effort to reduce operating costs and improve the profitability of its international brokerage operations. The Company completed the restructuring during the first quarter 1999. The Company's Tokyo operations now focuses on sales and marketing activities. The Company continues to evaluate maintaining operations in Tokyo. 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 investment management services to institutional clients. Investment management fee revenues are a function of assets under management and the management fees 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. The amount of assets under management is affected by numerous factors, including the ability to attract and retain clients and highly skilled personnel, investment performance results, the number and variety of investment disciplines offered and the capacity limitations of such disciplines (such as small capitalization growth-related disciplines), the market performance of particular investment disciplines, as well as the performance of the securities markets generally. The Axe-Houghton investment professionals who are responsible for managing small capitalization 10 growth equity-related assets are employed under contracts expiring on December 31, 2000. Axe-Houghton currently is negotiating new employment arrangements with these individuals, but no assurances can be given as to when or how these negotiations will conclude. The financial results of the Company could be materially adversely affected if such negotiations are not successfully resolved. As the brokerage and asset management industries continue to consolidate, the Company considers various strategies to enhance stockholder value. These include, among others, strategic alliances, investments, and joint ventures; spin-offs; purchase, sale or merger transactions with other companies; a reorganization of the Company; and other similar transactions. In considering any of these strategies, the Company evaluates the consequences of such strategy including, among other things, the tax effects of the transaction and the accounting consequences of the transaction. In addition, such strategies could have various other significant consequences, including changes in the management, control or operational or acquisition strategies of the Company. There can be no assurance that any one of these strategies will be undertaken, or that, if undertaken, any such strategy will be completed successfully. In 1998, the Company changed its reporting of business segments in accordance with new Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information". The Company has three reportable operating segments -- domestic brokerage, international brokerage and asset management. In determining whether brokerage commissions earned are domestic or international, the Company primarily relies on the geographic location of the customer. See Note 12 to the Consolidated Financial Statements for information regarding operating revenues and profits by reportable segments. YEAR ENDED DECEMBER 31, 1999 VERSUS DECEMBER 31, 1998 The Company's operating income for the year ended December 31, 1999 increased 22.3% to $8.7 million, as compared to $7.1 million in 1998. The increase in operating income for the year ended December 31, 1999 is primarily attributable to an increase in operating income from international brokerage operations to $0.5 million from a loss of $0.9 million during 1998 and a 13.8% increase in operating income from asset management operations. The Company's net income for the year ended December 31, 1999 increased 36.1% to $6.4 million, as compared to $4.7 million in 1998. Net income increased at a higher rate than operating income due to a 79.4% increase in investment income and other, coupled with a decrease in the Company's overall tax rate in 1999. The decrease in the tax rate is attributable to an increase in income derived from the Company's operations in Hong Kong, which is taxed at a lower rate than income earned in the U.S. Operating revenues increased 9.3% to $91.8 million for the year ended December 31, 1999 from $83.9 million during the same period in 1998. This resulted primarily from a 6.5% increase in operating revenues from domestic brokerage operations and a 19.4% increase in operating revenues from international brokerage operations. Operating revenues from international brokerage operations represented 21.1% of the operating revenues during the year ended December 31, 1999, as compared to 19.4% during the same period in 1998. Commission revenues from international brokerage operations represented 23.3% of the Company's total commissions during the year ended December 31, 1999, as compared to 21.3% in 1998. Operating revenues from asset management for the year ended December 31, 1999 increased 10.1% to $8.3 million, as compared to $7.6 million for 1998. Operating revenues from the Company's domestic brokerage operations for the year ended December 31, 1999 increased 6.5% to $64.1 million, as compared to $60.1 million in 1998 due to increased trading activity. Operating income of the Company's domestic brokerage operations decreased 5.8% to $10.0 million in the year ended December 31, 1999, as compared to $10.6 million in 1998, primarily due to an increase in discretionary and performance-based bonus compensation in the year ended December 31, 1999. Operating revenues from international brokerage operations increased 19.4% to $19.4 million for the year ended December 31, 1999, as compared to $16.2 million in 1998 as a result of increased commission revenues earned by the Company's Hong Kong brokerage operations, offset by a 44.8% decrease in revenues earned in Japan which resulted primarily from the restructuring of the Company's Tokyo operations. Operating income from international brokerage operations increased to $0.5 million for the year ended December 31, 1999, as compared to an operating loss of $0.9 million in 1998. Operating income of international brokerage operations for the year ended December 31, 1999 includes non-recurring operating expenses of approximately $0.3 million related to the restructuring of the Company's brokerage operations in Tokyo, Japan, which was completed as 11 of March 31, 1999. Investment management fee revenues increased 10.1% to $8.3 million during the year ended December 31, 1999, as compared to $7.6 million in 1998. This increase in investment management fee revenues is due to an increase in the percentage of assets managed in small capitalization growth-related disciplines, which assets are managed at the Company's highest fee rates. Assets managed in Small Capitalization Growth Equities increased 71.9% to $1.2 billion as of December 31, 1999 (24.2% of total assets under management as of December 31, 1999) from $698.5 million (17.4% of total assets under management as of December 31, 1998), as a result of additional funds received from existing clients, as well as appreciation of existing assets. Total assets under management increased 23.3% to $4.96 billion as of December 31, 1999 from $4.02 billion as of December 31, 1998. Assets under management increased in 1999 due primarily to investment performance, the receipt of additional assets from existing Small Capitalization Growth Equity clients, and the development of two new small capitalization growth-related investment disciplines, Focused Growth Equities and Technology Growth, which together represented $181.1 million of assets under management at December 31, 1999. Operating income of the Company's asset management operations for the year ended December 31, 1999 increased 13.8% to $2.9 million from $2.5 million in 1998. As of December 31, 1999, the Company had 31 advisory clients which maintained 42 investment advisory accounts, as compared to 34 advisory clients that maintained 48 investment advisory accounts as of December 31, 1998. Expenses related to independent research and other services provided to the Company's brokerage clients, including commission refunds, during the year ended December 31, 1999 increased 9.5% to $36.8 million from $33.7 million in 1998. These expenses were 44.2% of commission revenues during the year ended December 31, 1999, as compared to 44.1% in 1998. Clearing, floor brokerage and exchange charges increased 11.5% to $10.6 million during the year ended December 31, 1999 from $9.5 million in 1998. These expenses represented 12.8% of commissions earned during the year ended December 31, 1999 and 12.5% of commissions earned in 1998. These expenses increased at a higher rate than commissions due to an increase in the percentage of commissions earned in certain Asian markets, where such expenses are charged at higher rates than comparable U.S. equity trades. Employee compensation increased 8.8% to $23.9 million for the year ended December 31, 1999 from $22.0 million in 1998. This resulted primarily from an increase in discretionary and performance-based bonus compensation expense for the year ended December 31, 1999. All other expenses remained at $11.6 million for the year ended December 31, 1999 and 1998, including non-recurring Year 2000-related expenses (excluding internal cost allocations) of $0.4 million in 1999 and $0.1 million in 1998. Net investment income and other for the year ended December 31, 1999 increased 79.4% to $2.3 million, as compared to $1.3 million in 1998. This increase in investment income and other reflects the absence of realized and unrealized losses of $0.7 million, which the Company incurred during the third and fourth quarters 1998. YEAR ENDED DECEMBER 31, 1998 VERSUS DECEMBER 31, 1997 The Company's operating income for the year ended December 31, 1998 increased 83.1% to $7.1 million, versus $3.9 million in 1997. The increase in operating income was primarily attributable to an 83.6% increase in operating income from domestic brokerage operations and a 12.3% increase in operating income from asset management operations, offset in part by continued operating losses of $0.9 million from international brokerage operations. The Company's net income for the year ended December 31, 1998 increased 30.9% to $4.7 million, as compared to $3.6 million in 1997. Net income increased at a lower rate than pre-tax operating income due to a net loss of $0.6 million on certain investments, as well as a higher tax rate in 1998. The higher tax rate resulted from an increase in pre-tax income from domestic brokerage and asset management operations, which are taxed at a higher rate, a decrease in income derived from the Company's brokerage operation in Hong Kong, which is taxed at a lower rate than income earned in the U.S., as well as a higher overall effective tax rate in Hong Kong in 1998. Operating revenues increased 10.0% to $83.9 million for the year ended December 31, 1998 from $76.3 million in 1997. Global commission revenues, the principal source of the Company's revenues, increased 10.1% to $76.2 million in 1998 from $69.2 million in 1997. This increase resulted primarily from an increase in commission revenues earned by domestic brokerage operations, offset in part by a decrease in commission revenues earned by the Company's international brokerage operations. Commission revenues from international brokerage operations 12 represented 21.3% of the Company's total commissions during the year ended December 31, 1998 as compared to 32.7% in 1997. See Note 12 to the Consolidated Financial Statements for information regarding operating revenues and profits by reportable segments. Operating revenues of the Company's domestic brokerage operations for the year ended December 31, 1998 increased 28.0% to $60.1 million as compared to $47.0 million in 1997 due to increased trading activity and the addition of new accounts. Operating income of the Company's domestic brokerage operations increased 83.6% to $10.6 million in 1998 as compared to $5.8 million in 1997, primarily due to an increase in commission revenues earned per transaction (larger trades), as well as 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 year ended December 31, 1998, resulting in operating losses. Operating revenues of the international brokerage operations decreased 28.3% during the year ended December 31, 1998 as compared to 1997 as a result of continued volatility and reduced trading volumes in Japan and Southeast Asia, with the greatest decline in Japan (61.9%) and Hong Kong (36.2%). International brokerage operations incurred operating losses of $0.9 million in 1998 as compared to operating losses of $0.3 million in 1997. This increase in losses resulted from a 31.0% decrease in operating income of the Company's Hong Kong operations, coupled with increased operating losses in Japan (13.6%) and the United Kingdom (33.0%). During the fourth quarter 1998, the Company began restructuring its Tokyo brokerage operations in an effort to reduce operating costs and to improve the profitability of its international brokerage operations. The Company incurred a restructuring charge of approximately $321,000 ($185,000 after tax) or $0.02 per share in 1998. The Company completed the restructuring by the end of the first quarter 1999 and incurred additional non-recurring operating expenses of approximately $300,000. Since the restructuring, the Tokyo office focuses 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 increased 13.1% to $7.6 million for the year ended December 31, 1998, from $6.7 million in 1997. The increase was primarily attributable to an increase in the amount of assets under management in Small Capitalization Growth Equities, which are managed at a higher management fee rate, as well as appreciation of existing assets. Total assets under management increased 5.3% to $4.02 billion as of December 31, 1998, as compared with $3.82 billion as of December 31,1997, notwithstanding the termination of the Company's sole temporary assignment to manage $510 million in fixed income securities. The loss of these assets was offset by increases in assets managed in other investment disciplines, with the greatest growth in assets managed in International ADRs and Small Capitalization Growth Equities, and the addition of a new investment discipline, Small Capitalization Value Equities. Assets managed in Small Capitalization Growth Equities increased 18.1% to $698.5 million as of December 31, 1998 from $591.3 million as of December 31, 1997. As of December 31, 1998, the Company had 34 advisory clients which maintained 48 investment advisory accounts, as compared to 36 advisory clients that maintained 52 investment advisory accounts as of December 31, 1997. Expenses related to independent research and other services provided to the Company's brokerage clients, including commission refunds, during the year ended December 31, 1998 increased 7.9% to $33.7 million from $31.2 million in 1997. These expenses were 44.1% of commission revenues in 1998 as compared to 45.1% in 1997. These expenses increased at a lower rate than commission revenues in 1998, primarily due to an increase in commissions resulting from execution-only brokerage and proprietary research. Clearing, floor brokerage and exchange charges decreased 9.0% to $9.5 million during the year ended December 31, 1998 from $10.5 million in 1997. These expenses represented 12.5% of commissions earned in 1998 and 15.2% of commissions earned in 1997. The decrease in these expenses as a percentage of commissions was 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 executed in certain Asian markets; (2) a reduction in the costs of execution and settlement of U.S. equity transactions due in part to an increase in the average trade size; and (3) a decrease in the percentage of commissions earned on transactions executed in Southeast Asian markets, where execution and settlement costs are higher, coupled with an increase in the percentage of 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 8.8% to $22.0 million for the year ended December 31, 1998 from $20.2 million 13 in 1997. This resulted primarily from an increase in discretionary and performance-based bonus compensation for 1998. All other expenses increased 10.3% to $11.6 million in the year ended December 31, 1998 as compared to $10.5 million in 1997. This resulted primarily from an increase in expenses related to market data, communications and Year 2000 related expenses ($0.7 million), the write-off of certain fixed assets which consisted primarily of computer software and other technology expenses ($0.4 million) and the restructuring of the Company's office in Tokyo, Japan ($0.3 million). These increases were offset by decreases in office and marketing related expenses of $0.3 million. Net investment income for the year ended December 31, 1998 decreased 39.0% to $1.3 million as compared to $2.1 million in 1997. This decrease was primarily attributable to realized and unrealized losses of $0.7 million incurred during the third and fourth quarters 1998 on the Company's investments in limited partnerships and a managed portfolio of preferred stock and U.S. Treasury futures and options used to hedged the preferred stock, offset by other investment income. These losses resulted from significant declines in the global financial markets that occurred during the second half of 1998. See Item 7A, Qualitative and Quantitative Disclosures About Market Risk. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity continued to remain strong during 1999. At December 31, 1999, the Company had cash, U.S. Government obligations, net accounts receivable and other securities of $54.8 million, as compared with $53.1 million at December 31, 1998. Cash and equivalents increased to $28.5 million in 1999 from $19.6 million in 1998. The principal source of cash in 1999 was net income from operations of $6.4 million. In addition, the Company increased its accrued compensation payable and net securities owned by $2.6 million and $2.7 million, respectively (increasing liquidity). These increases were offset by decreases in accrued research payable and receivable from customers of $3.3 million and $2.2 million, respectively (decreasing liquidity). The increase in cash from investing activities was primarily attributable to a decrease in the Company's investment in securities and limited partnerships of $4.7 million and $3.5 million, respectively (increasing liquidity), offset by a increase in investments in U.S. Treasury obligations of $4.2 million (decreasing liquidity). The decrease in cash from financing activities was primarily attributable to purchases of 643,250 shares of the Company's Common Stock for $6.1 million, offset by the issuance of treasury stock of $0.2 million. In 1999, the Company liquidated its investment in one market-neutral limited partnership and reduced its investment in another market-neutral limited partnership by $1.9 million to $1.1 million. The Company also did not renew its investment in a bank-sponsored, market-linked deposit account (valued at $1.0 million as of December 31, 1998) after it matured in March 1999. The funds previously invested in the limited partnerships and the deposit account (totaling approximately $4.6 million as of December 31, 1998) were invested in U.S. Treasury securities and money market funds. During 1999, the Company reduced its investment in the diversified portfolio of preferred stocks and U.S. Treasury futures to hedge the preferred stock positions by $4.0 million. The funds previously invested in this diversified portfolio were invested in U.S Treasury securities and money market funds. The Company expects to liquidate the remaining balance in this investment during the first six months of 2000. The Company maintains overseas overdraft facilities as follows: (1) (pounds)750,000 ($1,212,000), which bears a variable rate of interest based upon prevailing market rates in the United Kingdom and Europe; (2) HK$50,000,000 ($6,430,000), which bears a variable rate of interest based upon current market rates in Hong Kong; and (3) HK$100,000,000 ($12,860,000) and (pounds)5,000,000 ($8,079,000) in intra-day overdraft facilities to facilitate the settlement of trades, each of which bears a variable rate of interest based upon current market rates; and (4) (yen)500,000,000 ($4,889,000) in an overnight Libor facility. In addition, the Company maintains a (pounds)1,000,000 ($1,616,000) foreign exchange line for its trading operations in the United Kingdom. The amount outstanding under these facilities at December 31, 1999 was $20,553. No amounts were outstanding under these facilities at December 31, 1998. At December 31, 1998, the Company had cash, U.S. Government obligations, net accounts receivable and other securities of $53.1 million compared with $47.6 million at December 31, 1997. Cash and equivalents decreased to $19.6 million in 1998 from $20.5 million in 1997. The principal source of cash in 1998 was net income of $4.7 million. In addition, the Company increased its accrued research/services payable and decreased receivables from customers by $3.6 million and $4.0 million, respectively (increasing liquidity). These increases were offset by 14 decreases in payables to brokers and dealers of $4.3 million (decreasing liquidity). The decrease in cash from investing activities was primarily attributable to an increase in the Company's investment in securities owned and investments in limited partnerships of $7.7 million and $4.7 million, respectively, offset by a decrease in investments in U.S. Treasury obligations of $6.8 million (decreasing liquidity). The decrease in cash from financing activities was primarily attributable to purchases of 790,000 shares of the Company's Common Stock for $5.5 million, offset by the issuance of treasury stock of $0.7 million. During 1998, the Company disposed of certain fixed assets, which included computer software and other information technology assets, resulting in a write-off of $420,000. The Company believes that its current cash resources and liquidity, plus additional funds generated by operations, will be sufficient to meet current and future needs. The Company from time to time considers various strategies to enhance stockholder value, including strategic alliances, investments and joint ventures; purchase, sale or merger transactions with other companies; and other similar transactions, which could potentially have an impact on liquidity and capital resources. YEAR 2000 READINESS DISCLOSURE The Company successfully completed its Year 2000 program. The costs associated with completing the Year 2000 program and addressing Year 2000 issues were $758,000, which includes third-party expenses, as well as internal cost allocations. The Company's Year 2000-related costs were less than the anticipated $800,000 to $950,000 due primarily to the fact that the Company did not incur any expenses related to contingency plans. The Company's Year 2000 costs were funded through operating cash flow and were expensed as they were incurred. 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. Item 7A. 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 fair 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 the changes in the fair value of its investments. At December 31, 1999 and 1998, the Company maintained investments in the following: o Money market funds o U.S. Government obligations o a diversified portfolio of investment grade preferred stock and U.S. Treasury futures to hedge the preferred stock positions o a bank-sponsored, flexible, market-linked deposit account which maintains investments in U.S. and foreign equity indices, floating rate deposits, a basket of European equity securities and a U.S. Treasury zero coupon bond (terminated in March 1999) o Two market-neutral limited partnerships (one as of December 31, 1999) o Two equity limited partnership investments managed by Axe-Houghton. Each of these investments (except U.S. Government obligations) is managed by professional money managers. In addition, as a result of its daily brokerage activities, the Company may hold (normally overnight) long and short 15 security positions. These positions, which are valued at market, are a result of trading errors that occur in the ordinary course of business. These positions are normally closed out during the next day of trading. Each of the market-neutral limited partnerships made investments in other unaffiliated limited partnerships and funds which employ a variety of alternative investment strategies. These strategies included relative-value, event-driven, hedged-directional, convertible arbitrage, convertible hedging and basis spread trading. These instruments were not included in the analysis of market risk due to the unavailability of information about the underlying securities held by these partnerships. The potential losses on these limited partnerships are limited to the value of the limited partnership interests. During the first six months of 1999, the Company reduced its investments in the market-neutral limited partnerships by approximately $3.6 million, by withdrawing from one of the partnerships and reducing its investment in the other to $1 million. The Company did not renew its investment in the bank-sponsored deposit account after it matured in March 1999. The funds previously invested in the limited partnerships and the deposit account were invested in U.S. Treasury securities and money market funds. The value of these investments at December 31, 1999 and 1998 was $1.1 million and $5.6 million, respectively. During 1999, the Company reduced its investment in the diversified portfolio of preferred stocks and U.S. Treasury futures to hedge the preferred stock positions by $4.0 million. The funds previously invested in this diversified portfolio were invested in U.S. Treasury securities and money market funds. The Company expects to liquidate the remaining balance in this investment during the first six months of 2000. Through Axe-Houghton, the Company maintains investments in two equity limited partnerships. Axe-Houghton is the general partner of each of these investment limited partnerships. These partnership interests are accounted for under the equity method of accounting and are excluded from the market risk analysis. The following paragraphs address the significant market risks associated with the Company's investments and related derivatives as of December 31, 1999 and 1998: INTEREST RATE RISK. The Company's cash, U.S. Treasury obligations and investment in the diversified portfolio of preferred stock is subject to interest rate risk. Changes in preferred stock prices closely correlate with interest rate fluctuations. This risk is mitigated by investments in financial futures contracts and options which are intended to hedge interest rate risk. If interest rates rise, the preferred stock portfolio will decline in value, but this decline should be offset by a profit earned on the financial futures or option position. Conversely, if interest rates decline, the value of the preferred stock portfolio should generally rise, but will be reduced by a loss on the financial futures or option positions. The manager of the Company's preferred stock portfolio continually monitors the hedge positions and adjusts them accordingly. In addition, the Company monitors this investment on an ongoing basis. FOREIGN EXCHANGE RISK. 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. EQUITY PRICE RISK. The Company is exposed to equity price risk as a result of changes in the level or volatility of equity prices which effect the value of securities or other investments that derive their value from a particular stock or investment. The Company's equity-based investments (e.g., the flexible deposit account) depend upon the performance of the investment manager chosen. The Company monitors these investments on a monthly basis and regularly consults with the manager regarding its investment process. The Company is exposed to equity price risk on long and short security positions held as a result of its daily brokerage activities. The Company does not engage in securities trading for its own account, but from time to time may hold either long or short security positions (normally overnight) as a result of trading errors that occur in the ordinary course of business. These positions are valued at market on a daily basis. The Company reduces its equity price risk by reviewing all trading activity and monitoring any open positions and resulting profits and losses on a daily basis, and by closing out these positions as soon as reasonably practicable given prevailing market conditions. The Company also obtains independent pricing of these positions from its clearing agent. The Company believes that these procedures are important in reducing its equity price risk. 16 RISK MEASUREMENT: SENSITIVITY ANALYSIS The Company measures market risk related to its holdings of financial instruments based on changes in interest rates, foreign currency exchange rates and equity prices utilizing a sensitivity analysis. The sensitivity analysis set forth below measures the potential loss in fair values, cash flows and earnings based on a hypothetical 10% change (increase and decrease) in interest rates, foreign currency exchange rates and equity prices. For the years ended December 31, 1999 and 1998, the Company performed sensitivity analysis with respect to the effects of changes in interest rates, foreign currency exchange rates and equity prices on its financial instruments. The sensitivity analysis has been prepared separately for each of the Company's market risk exposures (interest rate, foreign currency exchange, equity price) related to its trading and non-trading financial instrument portfolios. FAIR VALUES. The potential loss in fair values is based on an immediate change in: o the net present values of the Company's interest rate sensitive investments resulting from a 10% change in interest rates; o the U.S. dollar equivalent balances of the Company's foreign currency exposures due to a 10% shift in foreign currency exchange rates; and o the market value of the Company's equity positions due to a 10% change in equity prices. CASH FLOWS AND EARNINGS. The potential loss in cash flows and earnings is based on the change in the Company's cash flows and earnings over a one-year time horizon based on an immediate 10% change in interest rates, equity prices and foreign currency rates. This sensitivity analysis is an estimate and should not be viewed as predictive of the Company's future financial performance, and there can be no assurance that the Company's actual losses in a particular year will not exceed the amounts indicated in the following table. Limitations in the analysis include: o the market risk information is limited by the assumptions and parameters established in creating the related sensitivity analysis; and o the model assumes that the composition of the Company's assets and liabilities remains unchanged throughout the year. Therefore, such models are tools and do not substitute for the experience and judgment of management. Based on the Company's analysis of the impact of a 10% change in interest rates, equity prices and foreign currency exchange rates on its fair values, cash flows and earnings, the Company has determined that such a change would have a material impact on the fair values, earnings and cash flows of the Company's non-trading interest rate sensitive portfolios and trading equity price sensitive portfolios. However, the Company believes that it has adequate capital to absorb short-term market volatility. The table below shows the potential loss to fair values, earnings and cash flows of the Company's non-trading interest rate sensitive portfolios and trading equity price sensitive portfolios as of December 31, 1999 and 1998. Non-Trading portfolio: Potential Losses on Interest Rate Sensitive Portfolios 1999 1998 ---- ---- Fair values $161,581 $280,985 Cash flows $467,908 $547,098 Earnings $467,908 $547,098 Trading Portfolio: Potential Losses on Equity Price Risk Portfolios 1999 1998 ---- ---- Fair values $322,651 -- Cash flows $322,651 -- Earnings $322,651 -- A hypothetical 10% change in equity prices, did not have a material effect on the fair values, earnings and cash 17 flows of the Company's non-trading portfolio as of December 31, 1999 and December 31, 1998. In addition, a hypothetical 10% change in foreign currency exchange rates as of December 31, 1999 and December 31, 1998 would result in a potential loss of $323,016 and $301,290, respectively, in the fair values of the Company's foreign currency position and would not have a material effect on the cash flows and earnings of the Company. Item 8. Financial Statements and Supplementary Data See Index to Financial Statements on Page F-1 in Item 14. The Company's Consolidated Financial Statements are incorporated by reference in response to this Item. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant Information concerning directors and executive officers of the Registrant is contained under the caption "Management" in the Proxy Statement for the 2000 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference. Item 11. Executive Compensation Information concerning executive compensation is contained under the caption, "Compensation of Executive Officers" in the Proxy Statement for the 2000 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference. Information concerning compensation of directors is contained under the caption, "Proposal I - Compensation of Directors" in the Proxy Statement for the 2000 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management Information concerning security ownership of certain beneficial owners and management is contained under the caption, "Ownership of Common Stock of Certain Beneficial Owners and Management" in the Proxy Statement for the 2000 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions Information concerning certain relationships and related transactions is contained under the caption, "Interest of Management in Certain Transactions" in the Proxy Statement for the 2000 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference. 18 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are filed as a part of this report. (1) Financial statements - The index to consolidated financial statements appears on page F-1. (2) Schedules - None (3) Exhibits to Form 10-K 3.1 Articles of Incorporation of the Registrant. (Incorporated herein by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.) 3.2 Amended and Restated By-laws of the Registrant. (Incorporated herein by reference to Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998). *10.1 1991 Stock Option Plan. (Incorporated herein by reference to Exhibit 10(b) to the Registrant's Registration Statement on Form S-1 filed August 23, 1991.) *10.2 1994 Stock Option Plan. (Incorporated herein by reference to Exhibit 99.2 to the Registrant's Registration Statement on Form S-8 filed September 30, 1994.) *10.4 Employment Agreement, dated as of January 1, 2000, between the Registrant and Fredric P. Sapirstein. *10.5 Employment Agreement, dated as of March 29, 1999, between Hugh Humfrey and Hoenig & Company Limited. 10.6 [Reserved] *10.7 1996 Employee Stock Purchase Plan. (Incorporated herein by reference to Exhibit 10.7 to the Post-Effective Amendment No. 1 to the Registrant's Registration Statement on Form S-8 filed December 30, 1997.) *10.8 Employment Agreement between the Registrant and Fredric P. Sapirstein, dated September 5, 1996, (Incorporated herein by reference to Exhibit 10.8 to the Registrant's Current Report on Form 8-K filed September 17, 1996.) *10.9 Employment Agreement between the Registrant and Max H. Levine, dated November 25, 1996. (Incorporated by reference to Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.) *10.11 Section 162(m) Cash Bonus Plan. (Incorporated by reference to Exhibit 10.11 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.) *10.12 1996 Long-Term Stock Incentive Plan. (Incorporated by reference to Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.) 10.13 Rights Agreement dated as of January 14, 1997 between the Registrant and Continental Stock Transfer & Trust Company. (Incorporated herein by reference to Exhibit 1 to the Registrant's Form 8-A filed January 21, 1997.) *10.14 1997 Foreign Employee Stock Purchase Plan. (Incorporated herein by reference to Exhibit 10.8 to the Post-Effective Amendment No. 1 to the Registrant's Registration Statement on - -------------- * Identifies a management contract or compensatory plan or arrangement. 19 Form S-8 filed December 30, 1997.) *10.15 Amendment No. 1 to the 1996 Long-Term Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997.) *10.16 Employment Agreement, dated October 8, 1998, between Max H. Levine and the Registrant (Incorporated by reference to Exhibit 10.16 to the Registrant's Form 10-Q for the quarter ended September 30, 1998 filed on November 14, 1998.) *10.17 Employment Agreement, dated as of April 9, 1998, between Seth M. Lynn, Jr. and Axe-Houghton Associates, Inc. (Incorporated by reference to Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998.) 21.1 Subsidiaries of the Registrant. 23.1 Independent Auditors' Consent. 27.1 Financial Data Schedule. (b) Reports on Form 8-K The Registrant did not file any reports on Form 8-K during the last quarter of the period covered by this report. 20 HOENIG GROUP INC. INDEX TO FINANCIAL STATEMENTS FINANCIAL STATEMENTS PAGE ---- Independent Auditors' Report F-2 Consolidated Financial Statements: Statements of Financial Condition December 31, 1999 and December 31, 1998 F-3 Statements of Income For the Years Ended December 31, 1999, 1998 and 1997 F-4 Statements of Comprehensive Income For the Years Ended December 31, 1999, 1998 and 1997 F-5 Statements of Changes in Stockholders' Equity For the Years Ended December 31, 1999, 1998 and 1997 F-6 Statements of Cash Flows For the Years Ended December 31, 1999, 1998 and 1997 F-7 Notes to Consolidated Financial Statements F-8 - F-19 F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Hoenig Group Inc.: We have audited the accompanying consolidated statements of financial condition of Hoenig Group Inc. and subsidiaries ("Hoenig") as of December 31, 1999 and 1998, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of Hoenig's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Hoenig Group Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP New York, New York March 24, 2000 F-2 HOENIG GROUP INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 1999 AND DECEMBER 31, 1998
1999 1998 ---- ---- ASSETS Cash and equivalents $28,554,972 $19,575,824 U.S. Government obligations, at market value 15,088,027 10,909,066 Receivables from correspondent brokers and dealers 8,076,725 8,179,525 Receivables from customers 2,269,191 78,864 Equipment, furniture and leasehold improvements, net of accumulated depreciation and amortization 1,909,907 1,704,407 Securities owned, at market value 4,964,494 9,016,826 Exchange memberships, at cost 1,321,235 1,321,235 Investment management fees receivable 1,927,869 1,963,374 Deferred research/services expense 1,094,074 1,153,861 Investment in limited partnerships 1,869,014 5,343,787 Other assets 3,432,104 4,092,770 --------- --------- Total Assets $70,507,612 $63,339,539 =========== =========== LIABILITIES and STOCKHOLDERS' EQUITY LIABILITIES Accrued research/services payable $8,595,219 $11,927,766 Accrued compensation 9,963,838 7,317,812 Payable to brokers and dealers 2,543,174 269,997 Payable to customers 2,087,767 1,688,298 Accrued expenses 1,423,831 1,474,478 Securities sold not yet purchased 3,287,061 - Bank loan payable 20,553 - Other liabilities 1,333,330 644,003 --------- ------- Total Liabilities 29,254,773 23,322,354 ---------- ---------- STOCKHOLDERS' EQUITY Common Stock $0.01 par value per share; Voting-authorized 40,000,000 shares, issued - 10,895,150 shares in 1999 and 10,846,150 shares in 1998 108,952 108,462 Additional paid in capital 27,991,857 27,301,478 Accumulated other comprehensive loss (873,016) (883,750) Retained earnings 31,253,880 24,876,560 ---------- ---------- 58,481,673 51,402,750 Less restricted stock (225,000) (150,000) Less treasury stock at cost - 2,739,845 shares in 1999 and 2,202,911 shares in 1998 (17,003,834) (11,235,565) ------------ ------------ Total Stockholders' Equity 41,252,839 40,017,185 ---------- ---------- Total Liabilities and Stockholders' Equity $70,507,612 $63,339,539 =========== =========== THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART HEREOF.
F-3 HOENIG GROUP INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997 ---- ---- ---- Operating Revenues Gross commissions $83,386,112 $76,234,097 $69,218,634 Investment management fees 8,333,334 7,568,122 6,688,773 Other 66,607 141,962 407,927 ---------- ---------- ---------- Total operating revenues 91,786,053 83,944,181 76,315,334 ---------- ---------- ---------- Expenses Clearing, floor brokerage and exchange charges 10,643,545 9,542,635 10,490,055 Employee compensation 23,918,673 21,983,653 20,198,409 Independent research and other services 36,846,459 33,656,253 31,194,531 Other 11,644,874 11,619,379 10,532,372 ---------- ---------- ---------- Total expenses 83,053,551 76,801,920 72,415,367 ---------- ---------- ---------- Operating Income 8,732,502 7,142,261 3,899,967 Investment Income and Other Interest and dividends 2,157,235 1,861,714 1,956,162 Gain (loss) on investments and other 138,911 (581,529) 140,925 ---------- ---------- ---------- Net investment income and other 2,296,146 1,280,185 2,097,087 ---------- ---------- ---------- Income before income taxes 11,028,648 8,422,446 5,997,054 Provision for income taxes 4,651,328 3,736,727 2,417,390 ---------- ---------- ---------- Net income $6,377,320 $4,685,719 $3,579,664 ========== ========== ========== Net income per share basic $ .74 $ .53 $ .38 ========== ========== ========== Net income per share diluted $ .67 $ .50 $ .37 ========== ========== ========== THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART HEREOF.
F-4 HOENIG GROUP INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997 ---- ---- ---- Net income $6,377,320 $4,685,719 $3,579,664 ---------- ---------- ---------- Other comprehensive income (loss), net of tax Foreign currency translation adjustment 24,902 79,092 (162,344) Tax expense (benefit) 14,168 32,807 (59,157) ---------- ---------- ---------- Other comprehensive income (loss) 10,734 46,285 (103,187) ---------- ---------- ---------- Comprehensive income $6,388,054 $4,732,004 $3,476,477 ========== ========== ========== THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART HEREOF.
F-5 HOENIG GROUP INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Accumulated Other Additional Comprehensive Common Paid In Retained Treasury Income Restricted Stock Capital Earnings Stock (Loss) Stock Totals ----- ------- -------- ----- ------ ----- ------ Balance, January 1, 1997 $107,634 $26,111,404 $16,611,177 $(4,152,077) $(826,848) $- $37,851,290 Net income 3,579,664 3,579,664 Employee stock options and purchase plans 464 515,870 516,334 Purchase of treasury stock (3,110,060) (3,110,060) Issuance of treasury stock 885 790,795 791,680 Foreign currency translation adjustment (103,187) (103,187) -------- ----------- ----------- ------------ --------- --------- ----------- Balance, December 31, 1997 108,098 26,628,159 20,190,841 (6,471,342) (930,035) - 39,525,721 Net income 4,685,719 4,685,719 Employee stock options and purchase plans 364 446,693 447,057 Purchase of treasury stock (5,478,302) (5,478,302) Issuance of treasury stock (73,374) 714,079 640,705 Issuance of restricted stock 300,000 (150,000) 150,000 Foreign currency translation adjustment 46,285 46,285 -------- ----------- ----------- ------------ --------- --------- ----------- Balance, December 31, 1998 108,462 27,301,478 24,876,560 (11,235,565) (883,750) (150,000) 40,017,185 Net income 6,377,320 6,377,320 Employee stock options and purchase plans 490 514,227 514,717 Purchase of treasury stock (6,127,084) (6,127,084) Issuance of treasury stock (123,848) 358,815 234,967 Issuance of restricted stock 300,000 (75,000) 225,000 Foreign currency translation adjustment 10,734 10,734 -------- ----------- ----------- ------------ --------- --------- ----------- Balance, December 31, 1999 $108,952 $27,991,857 $31,253,880 $(17,003,834) $(873,016) $(225,000) $41,252,839 ======== =========== =========== ============ ========= ========= =========== THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART HEREOF.
F-6 HOENIG GROUP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $6,377,320 $4,685,719 $3,579,664 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,104,257 1,262,500 1,185,518 Loss on disposal of fixed assets 7,556 420,225 - Foreign currency translation adjustment 10,734 46,285 (103,187) Issuance of stock compensation 514,717 447,057 516,334 Changes in assets and liabilities: Securities owned, net 2,681,585 690,945 (709,444) Receivable from correspondent brokers and dealers 102,800 (1,341,877) (673,519) Receivable from customers (2,190,327) 3,952,625 (3,595,163) Investment management fees receivable 35,505 (665,690) (498,313) Payable to customers 399,469 785,384 673,547 Deferred research/services expense 59,787 (83,782) (437,165) Other assets 300,091 (759,603) (597,443) Payable to brokers and dealers 2,273,177 (4,309,683) 3,938,975 Accrued research/services payable (3,332,547) 3,586,291 1,788,350 Accrued compensation 2,646,026 1,616,420 1,252,303 Accrued expenses (50,647) 745,752 (235,019) Other liabilities 689,327 (512,307) 359,610 ----------- ----------- ----------- Net cash provided by operations 11,628,830 10,566,261 6,445,048 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in U.S. Government obligations (4,178,961) 6,845,671 (972,325) Investment in limited partnerships 3,474,773 (4,709,929) (130,270) Investment in securities 4,657,808 (7,727,497) 144,057 Purchase of equipment, furniture and leasehold improvements (956,738) (1,180,011) (1,007,090) ----------- ----------- ----------- Net cash provided by (used in) investing activities 2,996,882 (6,771,766) (1,965,628) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Loan payable 20,553 - - Issuance of restricted stock 225,000 150,000 - Treasury stock purchased (6,127,084) (5,478,302) (3,110,060) Issuance of treasury stock 234,967 640,705 791,680 ----------- ----------- ----------- Net cash (used in) financing activities (5,646,564) (4,687,597) (2,318,380) ----------- ----------- ----------- Net increase (decrease) in cash and equivalents 8,979,148 (893,102) 2,161,040 Cash and equivalents beginning of year 19,575,824 20,468,926 18,307,886 ----------- ----------- ----------- Cash and equivalents end of year $28,554,972 $19,575,824 $20,468,926 =========== =========== =========== Supplemental disclosure of cash flow information: Interest paid: $177,712 $160,540 $187,067 Taxes paid: $4,054,997 $4,240,580 $1,958,250 THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART HEREOF.
F-7 HOENIG GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1999 1. The accompanying financial statements include the accounts of Hoenig Group Inc. and its wholly-owned operating subsidiaries, Hoenig & Co., Inc. ("Hoenig"), Hoenig & Company Limited ("Limited"), Hoenig (Far East) Limited ("Far East") and Axe-Houghton Associates, Inc. ("Axe-Houghton"), referred to as the "Company". The Company, through its wholly-owned brokerage subsidiaries, provides global securities brokerage, marketing and distribution of proprietary and independent third-party research and other related services to institutional clients. The Company's wholly-owned asset management subsidiary, Axe-Houghton, provides professional investment management to public and corporate employee benefit plans, investment partnerships and other institutional clients. All material intercompany accounts and transactions have been eliminated in consolidation. 2. SIGNIFICANT ACCOUNTING POLICIES. The following is a summary of significant accounting policies followed by the Company in the preparation of its Consolidated Financial Statements: Transactions in securities owned and the related revenues and expenses are recorded on a trade date basis. U.S. Government obligations consist of U.S. Treasury bills and U.S. Treasury notes with varying maturities. Securities owned, which consist primarily of a diversified portfolio of investment grade preferred stock and U.S. Treasury futures and options used to hedge the preferred stock positions, are valued at market. Unrealized gains and losses are reflected in the Consolidated Statements of Income. Independent research and directed brokerage arrangements are accounted for on an accrual basis in accordance with generally accepted accounting principles. Commission revenue is recorded when earned on a trade date basis. Deferred research/services expense and accrued research/services payable relating to these arrangements are accounted for on a customer-by-customer basis and are separately identified in the Consolidated Statements of Financial Condition. Included in accrued research/services payable and in the Company's Consolidated Statements of Income under independent research and services are accruals for commission refunds and services to be provided under directed brokerage arrangements, as well as accruals for research and brokerage services to be provided under independent research arrangements. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of consolidated revenues and expenses during those periods. Significant estimates are made with respect to the accruals for independent research and services to be provided in the future. Actual results could differ from those estimates. Furniture, equipment and leasehold improvements are stated at cost, net of accumulated depreciation and amortization, computed using the straight-line method. Depreciation of furniture and equipment is provided over estimated useful lives ranging from three to seven years. Leasehold improvements are amortized over the shorter of their useful lives or the remainder of the term of the related lease. Assets and liabilities of Limited, Far East and Hoenig's branch office in Tokyo are translated at year-end rates of exchange, and revenues and expenses are translated at average rates of exchange during the year. Gains or losses from foreign currency transactions are included in net income. Gains or losses resulting from foreign currency translation adjustments are reflected in the Company's Consolidated Statements of Comprehensive Income and are accumulated in a separate component of stockholders' equity in the Company's Consolidated Statements of Financial Condition. The majority of the accumulated foreign currency translation loss relates to Hoenig's branch office in Tokyo. This loss would result in a charge to operating income in the event the Company were to close operations in Tokyo. For purposes of the Company's Consolidated Statement of Cash Flows, the Company considers money market funds and certificates of deposit with maturities of three months or less when acquired to be cash equivalents. The Company uses the asset and liability method in providing for income taxes on all transactions that have been recognized in the consolidated financial statements. The asset and liability method requires that deferred taxes be F-8 adjusted to reflect the taxes at which future taxable amounts will be settled or realized. The effects of tax rate changes on future deferred tax liabilities and deferred tax assets, as well as other changes in income tax laws, are recognized in net earnings in the period such changes are enacted. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Amounts due from correspondent brokers and dealers represent net commissions and other brokerage transactions earned but not yet received. All receivables from correspondent brokers and dealers are fully collectible; therefore, no provision for uncollectibles is required. Payable to brokers and dealers represents amounts due for execution and settlement of customer transactions. Receivable from and payable to customers represents amounts due on cash securities transactions. Investment management fees receivable represents amounts due for professional investment management services provided to public and corporate employee benefit plans, investment partnerships and other institutional clients. Management fees are based upon assets under management and are billed on a quarterly basis. The Company expects to fully collect all outstanding management fees receivable; therefore, no provision for uncollectibles is required. The Company has classified goodwill as the cost in excess of fair value of the net assets acquired in a purchase transaction. Goodwill is amortized on a straight-line method over the life of the asset. The carrying value of costs in excess of net assets acquired is reviewed for impairment periodically by the Company. As of December 31, 1999 and 1998, goodwill net of accumulated amortization was $1,173,773 and $1,534,349, respectively, and is included in other assets in the Statements of Financial Condition. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. In June 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS 133 - an Amendment of FASB Statement 133". SFAS 137 delays the effective date of SFAS 133 for one year, to fiscal years beginning after June 15, 2000. Management is currently reviewing the impact of the implementation of SFAS 133 on the Company's consolidated financial statements. The FASB has issued SFAS 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 which are included in stockholders' equity in the Consolidated Statements of Financial Condition. 3. EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS Equipment, furniture and leasehold improvements are summarized as follows:
DECEMBER 31, 1999 1998 ---- ---- Equipment $3,503,972 $2,747,163 Furniture 889,830 963,468 Leasehold Improvements 1,195,144 1,181,451 ---------- ---------- Total 5,588,946 4,892,082 Less: Accumulated depreciation and amortization (3,679,039) (3,187,675) ---------- ---------- $1,909,907 $1,704,407 ========== ==========
4. COMMITMENTS AND CONTINGENCIES. The Company has leases covering office space that expire or are terminable on various dates beginning in April 2001 through May 2003. The Company also leases 575 square feet of office space on a month-to-month basis. Future minimum annual rental payments under these leases approximate $1,022,000 in 2000, $927,000 in 2001, $459,000 in 2002 and $32,000 in 2003. Various leases contain provisions for escalation of rental payments based on increases in certain costs incurred by the landlord. The composition of total F-9 rental expense for the years ended December 31, 1999, 1998 and 1997 is as follows:
1999 1998 1997 ---- ---- ---- Minimum rentals $805,515 $921,000 $924,000 Contingent rentals 284,620 168,000 193,000 ------- ------- ------- Total rental expense $1,090,135 $1,089,000 $1,117,000 ========== ========== ==========
Pursuant to employment agreements expiring on December 31, 2001, the Company is obligated to pay one employee and two executive officers aggregate minimum compensation of $1,825,000. In addition, Hoenig has employment arrangements with three employees, which provide for severance payments in the event of termination of employment without cause. The total amount of these severance commitments, which expire at various times through August 4, 2000, is approximately $254,000. Axe-Houghton is obligated to pay two individuals aggregate minimum annual compensation of $555,000 pursuant to employment agreements expiring on April 8, 2001, and two individuals aggregate minimum annual compensation of $1,200,000 pursuant to employment agreements expiring on December 31, 2000. The Company and each of the holders of Common Stock outstanding prior to the Company's 1991 initial public offering have entered into a shareholder's agreement whereby, upon the death of each such holder, the shareholder's estate has an option to sell those shares of Common Stock to the Company at a price equal to 10% below the market value of these shares, as defined. The Company is obligated to purchase the number of shares of Common Stock which results in an aggregate purchase price equal to the greater of any insurance proceeds received by the Company or $1,000,000. The Company maintains life insurance on the lives of shareholders owning more than 350,000 shares of Common Stock and certain other shareholders who are parties to the shareholder's agreement in order to cover its potential liability under the shareholder's agreements. The cash surrender value of these insurance policies was $740,644 and $628,065 at December 31, 1999 and 1998, respectively. In 1998, a former employee of Hoenig instituted an arbitration before NASD Regulation against the Company and Fredric P. Sapirstein, the Company's Chief Executive Officer. The former employee principally alleged defendants wrongfully terminated his employment in breach of his employment agreement with Hoenig and falsely stated the reason for his termination in a securities regulatory filing on Form U-5. The former employee sought 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 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. On December 9, 1999, Hoenig entered into a settlement agreement with the former employee, wherein the parties agreed to resolve all matters between them. The amount incurred to settle these matters was not material to the Company's financial condition, results of operations or cash flows. 5. NET CAPITAL AND RESERVE REQUIREMENTS. Hoenig is subject to the Uniform Net Capital Rule (Rule 15c3-1) under the Securities Exchange Act of 1934. This rule requires that Hoenig maintain net capital of the greater of $100,000 or one fifteenth of aggregate indebtedness, as defined. At December 31, 1999, Hoenig's minimum required net capital was $892,000, its net capital ratio was 1.05 to 1, and its actual net capital was approximately $12,772,000, which was approximately $11,880,000 in excess of regulatory requirements. Hoenig's Tokyo office (a branch of Hoenig) had capital requirements at December 31, 1999 of (yen)30,000,000 ($293,000). Limited is required to maintain financial resources of at least 110% of its capital requirement (as defined). Limited's financial resources requirement at December 31, 1999 was (pounds)395,000 ($638,000). It had eligible capital of (pounds)853,000 ($1,378,000), and excess financial resources at such date of (pounds)458,000 ($740,000). Far East is required to maintain liquid capital of the greater of HK$3,000,000 ($386,000) or 5% of the average quarterly liabilities. Far East's required liquid capital was approximately HK$16,463,000 ($2,117,000) at December 31, 1999, and it had liquid capital of HK$57,636,000 ($7,412,000) and excess liquid capital of approximately HK$41,173,000 ($5,295,000). 6. PENSION PLANS. The Company has defined contribution plans covering substantially all of its regular employees. Company contributions under these plans are made annually at the discretion of management. Contributions were approximately $557,000 for 1999, $524,000 for 1998 and $475,000 for 1997. 7. OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK. Hoenig, Far East and Limited are securities broker-dealers engaged in various trading and brokerage activities on behalf of institutional customers, including insurance companies, pension plans, investment limited partnerships and private investment funds, mutual funds, F-10 and other financial institutions on an agency and riskless principal basis only. Their exposure to off balance sheet credit risk occurs in the event a customer, clearing agent or counterparty does not fulfill its obligations arising from a transaction. Each of Hoenig and Limited has an agreement with its clearing agent that provides that it is obligated to assume any losses related to the nonperformance of its customers. Hoenig and Limited each monitor customer brokerage activity by reviewing information received from their clearing agent on a daily basis. Far East, which self-clears all transactions executed on The Stock Exchange of Hong Kong, monitors its customer brokerage activity by reviewing information received from market counterparties, settlement agents and the Central Clearing and Settlement System ("CASS") in Hong Kong on a daily basis. 8. FINANCIAL INSTRUMENTS. The Company maintains a diversified portfolio of investment grade preferred stock and U.S. Treasury futures and options used to hedge the preferred stock positions. This investment is managed by a professional money manager. This investment 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. During 1999 the Company reduced its investment in the diversified portfolio of preferred stocks and U.S Treasury futures and options to hedge the preferred stock positions by $4.0 million. The Company expects to liquidate the remaining balance of this investment during the first six months of 2000. The balance of this investment was $4,359,018 and $8,016,228 at December 31, 1999 and 1998, respectively. During 1998 and the first quarter 1999, the Company maintained an investment in a bank-sponsored, market-linked 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. Substantially all of the Company's financial instrument assets and liabilities are carried at fair value or contracted amounts which approximate fair value. The Company does not hold financial instruments for trading purposes as part of its business operations. 9. INVESTMENT IN LIMITED PARTNERSHIPS. Axe-Houghton is the general partner of two limited partnerships and maintains investments in each of the partnerships. Axe-Houghton's partnership investments were 20.26% ($654,776) and 0.51% ($65,412) at December 31, 1999 and 18.56% ($664,578) and 0.29% ($41,328) at December 31, 1998. 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. During 1999, the Company reduced its investments in these unaffiliated limited partnerships by a total of $3.6 million, by withdrawing its $1.7 million investment in one and reducing its investment in the other by $1.9 million to approximately $1.1 million. The remaining investment in the unaffiliated partnership at December 31, 1999 was $1.1 million, which represented less than a 5% interest in the partnership. This investment is accounted for at fair value. 10. INCOME TAXES. The Company, excluding its foreign affiliates, files consolidated federal and combined New York State and New York City income tax returns. Deferred income taxes are recorded to reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end. F-11 Income from operations before provision for taxes on income consists of the following:
1999 1998 1997 ---- ---- ---- Domestic $9,599,586 $7,718,709 $4,759,747 Foreign 1,429,062 703,737 1,237,307 ----------- ---------- ---------- $11,028,648 $8,422,446 $5,997,054 =========== ========== ==========
The provision for taxes on income from operations consists of the following:
1999 1998 1997 ---- ---- ---- Current tax expense Federal $3,034,646 $2,525,506 $1,490,837 State and local 1,220,701 1,090,174 673,118 Foreign 387,130 196,651 83,722 ---------- ---------- ---------- Total current provision 4,642,477 3,812,331 2,247,677 ---------- ---------- ---------- Deferred tax expense (benefit) Federal 10,243 (53,202) 127,222 State and local (1,392) (22,402) 42,491 ---------- ---------- ---------- Total Deferred 8,851 (75,604) 169,713 ---------- ---------- ---------- Total Provision $4,651,328 $3,736,727 $2,417,390 ========== ========== ==========
Deferred tax assets and liabilities consist of the following:
1999 1998 1997 ASSETS ASSETS ASSETS (LIABILITIES) (LIABILITIES) (LIABILITIES) ------------- ------------- ------------- Deferred assets and liabilities Fixed assets $195,984 $169,119 $147,016 Accrued compensation 370 32,988 195,492 Investments - 61,935 - Other 1,157 34,343 9,107 -------- -------- -------- Gross deferred assets 197,511 298,385 351,615 Deferred tax liabilities - investments (176,303) (258,290) (426,505) Other (45,651) (32,882) - -------- -------- -------- Net deferred taxes (payable) receivable $(24,443) $ 7,213 $(74,890) ======== ======== ========
The provision for taxes on income for the years ended December 31, 1999, 1998 and 1997 differed from the amount computed by applying the statutory federal income tax rate of 34% as follows:
1999 1998 1997 ---- ---- ---- Computed tax provision $3,749,740 $2,863,632 $2,038,998 State and local taxes, net of Federal benefit 805,663 704,729 472,302 Differential on foreign tax rates (98,751) (42,620) (336,962) Other 194,676 210,986 243,052 ---------- ---------- ---------- Totals $4,651,328 $3,736,727 $2,417,390 ========== ========== ========== Effective tax rate 42.2% 44.3% 40.3% ===== ===== =====
At December 31, 1999, the Company had approximately $4.0 million of accumulated earnings of foreign subsidiaries. The Company has not recorded a tax provision for income tax that could occur upon repatriation. It is the Company's intent to keep such earnings permanently invested abroad until they can be repatriated in a tax F-12 efficient manner. It is not practicable to determine the amount of income taxes payable in the event all such earnings are repatriated. 11. SHORT-TERM BORROWINGS. The Company maintains overseas overdraft facilities as follows: (1) (pounds)750,000 ($1,212,000), which bears a variable rate of interest based upon prevailing market rates in the United Kingdom and Europe; (2) HK$50,000,000 ($6,430,000), which bears a variable rate of interest based upon current market rates in Hong Kong; (3) HK$100,000,000 ($12,860,000) and (pounds)5,000,000 ($8,079,000) in intra-day overdraft facilities to facilitate the settlement of trades in Asian and European markets, each of which bears a variable rate of interest based upon current market rates; and (4) (yen)500,000,000 ($4,889,000) in an overnight Libor facility. In addition, the Company maintains a (pounds)1,000,000 ($1,616,000) foreign exchange line for its trading operations in the United Kingdom. The amount due under these facilities at December 31, 1999 was $20,553. No amounts were due under these facilities at December 31, 1998. 12. SEGMENT REPORTING. The FASB has issued SFAS 131, "Disclosures About Segments of an Enterprise and Related Information", to assist financial statement users in assessing the performance of an enterprise, and prospects for future cash flows, and to make informed decisions about an enterprise. 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 the summary of significant accounting policies (see Note 2). The Company evaluates performance based upon operating profit or loss, not including interest 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:
DOMESTIC INTERNATIONAL 1999 BROKERAGE BROKERAGE ASSET MGMT TOTAL --------- --------- ---------- ----- Revenues from external customers $64,054,036 $19,398,683 $8,333,334 $91,786,053 Segment operating income 10,002,244 480,165 2,889,304 13,371,713 Interest and investment income 1,276,943 486,837 172,700 1,936,480 Interest expense 94,206 147,803 -- 242,009 Depreciation and amortization 36,752 275,900 24,252 336,904 Segment assets 34,646,118 20,184,247 7,061,458 61,891,823 DOMESTIC INTERNATIONAL 1998 BROKERAGE BROKERAGE ASSET MGMT TOTAL --------- --------- ---------- ----- Revenues from external customers $60,132,665 $16,243,394 $7,568,122 $83,944,181 Segment operating income (loss) 10,617,793 (939,290) 2,539,375 12,217,878 Interest and investment income 790,976 430,775 175,206 1,396,957 Interest expense 94,292 94,803 -- 189,095 Depreciation and amortization 39,863 299,168 36,194 375,225 Segment assets 32,558,465 14,795,567 5,984,872 53,338,904
F-13
DOMESTIC INTERNATIONAL 1997 BROKERAGE BROKERAGE ASSET MGMT TOTAL --------- --------- ---------- ----- Revenues from external customers $46,963,302 $22,663,259 $6,688,773 $76,315,334 Segment operating income (loss) 5,782,548 (310,391) 2,261,875 7,734,032 Interest and investment income 894,511 363,363 174,073 1,431,947 Interest expense 40,741 151,487 - 192,228 Depreciation and amortization 48,037 385,420 46,045 479,502 Segment assets 23,602,501 18,450,043 3,902,730 45,955,274
Information for the Company's reportable segments as it relates to the consolidated totals is as follows:
1999 1998 1997 ---- ---- ---- OPERATING REVENUES: Domestic brokerage $64,054,036 $60,132,665 $46,963,302 International brokerage 19,398,683 16,243,394 22,663,259 Asset management 8,333,334 7,568,122 6,688,773 --------- --------- --------- Total Operating Revenues $91,786,053 $83,944,181 $76,315,334 =========== =========== =========== OPERATING PROFIT OR LOSS: Domestic brokerage $10,002,244 $10,617,793 $5,782,548 International brokerage 480,165 (939,290) (310,391) Asset management 2,889,304 2,539,375 2,261,875 General corporate (4,639,211) (5,075,617) (3,834,065) ----------- ----------- ----------- Total operating income 8,732,502 7,142,261 3,899,967 Interest and investment income 2,296,146 1,280,185 2,097,087 --------- --------- --------- Income before income taxes $11,028,648 $8,422,446 $5,997,054 =========== ========== ========== ASSETS: Domestic brokerage $34,646,118 $32,558,465 $23,602,501 International brokerage 20,184,247 14,795,567 18,450,043 Asset management 7,061,458 5,984,872 3,902,730 General corporate 6,163,377 7,562,438 12,954,891 Unallocated goodwill 1,173,773 1,534,349 1,007,056 Unallocated fixed assets 1,278,639 903,848 1,104,122 --------- ------- --------- Total $70,507,612 $63,339,539 $61,021,343 =========== =========== ===========
No one single customer accounted for greater than 10% of total revenues for any of the years ended December 31, 1999, 1998 and 1997. 13. STOCKHOLDERS' EQUITY. The Company, which was incorporated in Delaware in August 1991, has 40,000,000 authorized shares of Common Stock with a par value of $0.01 per share and 1,000,000 authorized shares of preferred stock with a par value of $0.01 per share. The Board of Directors of the Company (the "Board") has the power, without further action by the stockholders, to issue 1,000,000 shares of preferred stock as a class without series, or in one or more series, and to fix the voting rights, designations, preferences and relative participating, optional and other special rights, and the qualifications, limitations and restrictions applicable thereto. At December 31, 1999, no preferred stock had been issued. On November 4, 1999, the Company's Board authorized the Company's management to repurchase up to one million shares of the Company's Common Stock from time to time in open-market and privately negotiated transactions subject to the availability of shares for repurchase at prices that the Company considers to be attractive. This repurchase program replaced the 1998 stock repurchase program, under which the Company had purchased a total of 397,462 shares as of November 4, 1999. During 1999, the Company repurchased 643,250 shares of its Common Stock at an aggregate cost of $6.1 million. As of December 31, 1999, the Company has repurchased a total of 2,908,962 shares of Common Stock under its F-14 various stock repurchase programs. The total cost of all purchases under the repurchase programs and the purchase of 650,000 shares from the Estate of Ronald H. Hoenig in December 1995 (net of 819,117 shares issued out of treasury stock) has been $17,003,834. These shares were repurchased for use in connection with the Company's stock compensation plans. On January 14, 1997, the Company adopted a Stockholders' Rights Plan, under which rights were distributed as a dividend at the rate of one right for each share of Common Stock of the Company held by stockholders of record as of the close of business on January 31, 1997 and thereafter will be attached to each share of Common Stock until the rights become exercisable or expire. Each right initially entitles stockholders to purchase one one-hundredth of a share of preferred stock for $18. Upon exercise of the right, the holder will receive Common Stock having a value equal to twice the value of the $18 price of the fractional preferred share. The rights generally will be exercisable only if a person or group acquires beneficial ownership of 20% or more of the Common Stock or commences a tender or exchange offer upon consummation of which such person or group would beneficially own 20% or more of the Common Stock. The Company generally will be entitled to redeem the rights prior to their expiration at $0.01 per right at any time until 10 days following a public announcement that a 20% position in the Company's common stock has been acquired. The rights expire on January 14, 2007. 14. STOCK-BASED AWARDS. The Company has a compensation plan that provides for stock-based awards. The 1996 Long-Term Stock Incentive Plan (the "1996 Plan") provides for the Company to award or grant to directors, officers and other key employees and consultants of the Company and its subsidiaries, U.S. stock options, U.K. stock options, stock appreciation rights, restricted stock, deferred stock and stock granted as a bonus or in lieu of other awards as authorized by the Compensation and Stock Option Committee of the Board. The 1996 Plan was adopted by the Board on November 14, 1996, and approved at the 1997 Annual Meeting of Stockholders. Upon approval of the 1996 Plan, two earlier stock option plans were merged into the 1996 Plan, and no new awards have since been issued under those plans. The total number of shares issuable under the 1996 Plan when approved was 2,988,000 shares, 1,000,000 shares issuable under the 1996 Plan plus (1) 1,988,000 of shares of stock that would have been issuable under the two earlier stock option plans, and (2) shares issuable under canceled and expired stock options. The 1996 Plan provides for the issuance of U.S. stock options (which may be either incentive stock options that qualify for certain tax treatment under the Internal Revenue Code or non-qualified stock options) and U.K. stock options. The 1996 Plan has been approved by the United Kingdom Board of Inland Revenue under the Income and Corporation Taxes Act of 1988. Each of the two earlier stock option plans initially provided for the issuance of up to 1,000,000 shares of Common Stock in connection with the grant of U.S. stock options (which were either incentive stock options that qualify for certain tax treatment under the Internal Revenue Code or non-qualified stock options) and U.K. stock options. Stock options granted under these plans generally vest over a one to three-year period and expire 5-10 years from the date of grant. Transactions related to U.S. incentive stock options and U.K. stock options granted under the Company's plans were as follows:
WEIGHTED NUMBER NUMBER OF EXERCISE PRICE AVERAGE OF SHARES SHARES PER SHARE EXERCISE PRICE EXERCISABLE ------ --------- -------------- ----------- Outstanding at January 1, 1997 642,501 $2.813 - 5.75 $4.24 311,389 ======= Granted 199,000 4.75 - 6.50 5.77 Canceled or expired (70,333) 4.63 Exercised (97,667) 2.813 - 5.088 4.39 -------- -------------- ---- Outstanding at December 31, 1997 673,501 3.625 - 5.00 4.63 319,224 ======= Granted 37,500 6.188 - 7.063 6.25 Canceled or expired (59,329) 4.91 Exercised (132,420) 3.813 - 5.225 4.83 --------- -------------- ---- Outstanding at December 31, 1998 519,252 3.625 - 7.063 4.66 339,092 ======= Granted 172,500 6.50 6.50 Canceled or expired (500) 3.88 Exercised (32,251) 3.813 - 6.50 4.91 -------- ------------- ---- Outstanding at December 31, 1999 659,001 $3.625 - 7.063 $5.13 423,171 ======= =============== ==== =======
F-15 Transactions related to U.S. non-qualified stock options granted under the Company's plans were as follows:
WEIGHTED NUMBER NUMBER OF EXERCISE PRICE AVERAGE OF SHARES SHARES PER SHARE EXERCISE PRICE EXERCISABLE ------ --------- -------------- ----------- Outstanding at January 1, 1997 964,999 $0.10 - 5.00 $4.27 151,945 ======= Granted 72,500 4.75 - 6.00 5.62 Canceled or expired (25,333) 3.55 Exercised (101,667) 0.10 - 3.625 3.57 --------- ------------- ----- Outstanding at December 31, 1997 910,499 0.10 - 6.00 4.48 132,444 ======= Granted 280,000 6.188 - 6.75 6.32 Canceled or expired (3,333) 0.10 Exercised (1,667) 0.10 0.10 --------- ------------- ----- Outstanding at December 31, 1998 1,185,499 0.10 - 6.75 4.93 739,611 ======= Granted 202,000 6.375 - 9.563 6.71 Canceled or expired (16,667) 6.69 Exercised (13,333) 3.625 - 6.688 5.76 --------- ------------- ----- Outstanding at December 31, 1999 1,357,499 $.10 - 9.563 $5.17 940,333 ========= ============= ===== =======
U.S. incentive stock options and U.K. stock options outstanding at December 31, 1999 were as follows:
WEIGHTED NUMBER OF NUMBER OF AVERAGE SHARES SHARES EXERCISE PRICE EXERCISABLE ------ -------------- ----------- Price Range $3.625 - 3.875 131,334 $3.64 131,334 (Weighted average contractual life 6.58 yrs) Price Range $4.00 - 4.75 204,667 4.15 185,501 (Weighted average contractual life 6.36 yrs) Price Range $5.594 - 7.063 323,000 6.37 106,336 (Weighted average contractual life 8.52 yrs) ------- ----- ------- Total 659,001 $5.13 423,171 ======= ===== =======
F-16 U.S. non-qualified stock options outstanding at December 31, 1999 were as follows:
WEIGHTED NUMBER OF NUMBER OF AVERAGE SHARES SHARES EXERCISE PRICE EXERCISABLE ------ -------------- ----------- Price $0.1 14,999 $0.10 14,999 (Weighted average contractual life 1.03 yrs) Price Range $3.625 - 4.75 324,000 3.70 321,000 (Weighted average contractual life 6.14 yrs) Price Range $5.00 - 6.00 562,500 5.08 516,667 (Weighted average contractual life 6.90 yrs) Price Range $6.188 - 6.75 (Weighted average contractual life 8.53 yrs) 436,000 6.33 87,667 Price 9.563 (Weighted average contractual life 9.38 yrs) 20,000 9.56 - --------- ----- ------- Total 1,357,499 $5.17 940,333 ========= ===== =======
At December 31, 1999, U.S. incentive stock options and U.K. stock options to purchase 659,001 shares were outstanding, but due to vesting requirements, options to purchase 235,830 shares were not exercisable at December 31, 1999. At December 31, 1999, U.S. non-qualified stock options to purchase 1,357,499 shares were outstanding, but due to vesting requirements, 417,166 shares were not exercisable at December 31, 1999. The Company has adopted the disclosure-only provisions of SFAS 123, "Accounting for Stock-Based Compensation". Accordingly, no compensation cost has been recognized for the fair value of stock-based awards granted under the Company's plans. Had compensation cost for stock-based awards granted under these plans been determined based on the fair value at the grant date for awards consistent with the provisions of SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated in the following table:
1999 1998 1997 ---- ---- ---- Net Income - as reported $6,377,320 $4,685,719 $3,579,664 ========== ========== ========== Net Income - pro forma $5,719,349 $3,877,826 $3,098,167 ========== ========== ========== Earnings per share basic - as reported $.74 $.53 $.38 ==== ==== ==== Earnings per share diluted - as reported $.67 $.50 $.37 ==== ==== ==== Earnings per share basic - pro forma $.67 $.44 $.33 ==== ==== ==== Earnings per share diluted - pro forma $.60 $.41 $.32 ==== ==== ====
The fair value of each stock-based award is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants during the period:
1999 1998 1997 ---- ---- ---- Risk free interest rate 6.47% 4.75% 5.7% Dividend yield - - - Expected life of option 5 years 5 years 5 years Expected volatility 48.1%-67.3% 24.6%-39.9% 30.4%-135.6%
F-17 DEFERRED STOCK. During 1997, the Company granted 107,000 shares of deferred stock to certain employees of the Company under the 1996 Plan. The deferred stock granted vests equally over a three-year period. The Company records compensation expense over the vesting period based upon the fair market value of the stock at the time of the grant. No shares of deferred stock were granted during 1998 or 1999. Transactions related to deferred stock were as follows:
VALUE AT THE NUMBER OF DATE OF SHARES SHARES GRANT VESTED ------ ----- ------ Outstanding at January 1, 1997 Granted 107,000 $5.25-6.25 Canceled (12,000) 5.25 -------- ---- Outstanding at December 31, 1997 95,000 5.25-6.25 Granted - - Canceled (5,000) 6.25 ------- ---- Outstanding at December 31, 1998 90,000 5.25 30,000 ------ ---- ------ Granted - - Canceled - - Outstanding at December 31, 1999 90,000 $5.25 60,000 ====== ===== ======
RESTRICTED STOCK. During 1998 and 1999, the Company issued, 41,380 and 32,432 shares of restricted Common Stock, respectively, to certain employees of the Company under the 1996 Plan. The restricted stock issued vests 50% on the date of grant and 25% on each of the next two anniversaries of the grant date. The Company records compensation expense over the vesting period based upon the fair market value at the time of grant. 15. STOCK PURCHASE PLAN. The Company adopted the 1996 Employee Stock Purchase Plan on May 15, 1996. The plan allows eligible employees of the Company and its U.S. subsidiaries to purchase shares of the Company's Common Stock at 85% of the fair market value at specified dates. At December 31, 1999, 64 employees were eligible to participate in the 1996 Employee Stock Purchase Plan. During 1999, a total of 45,300 shares of Common Stock were purchased at an average price of $6.39 per share. During 1998, a total of 36,000 shares were purchased at an average price of $5.65 per share. During 1997, a total of 46,400 shares were purchased at an average price of $4.65 per share. In November 1997, the Company adopted the 1997 Foreign Employee Stock Purchase Plan, which is a corollary to the Company's 1996 Employee Stock Purchase Plan. At December 31, 1999, 24 employees were eligible to participate in the 1997 Foreign Employee Stock Purchase Plan. During 1999 a total of 2,000 shares were purchased under the 1997 Foreign Employee Stock Purchase Plan at an average price of $6.96 per share. During 1998, a total of 400 shares were purchased at an average price of $6.06 per share. The maximum number of shares issuable under these two stock purchase plans is 500,000. At December 31, 1999, 316,400 shares remain available for issuance under these plans. 16. EARNINGS PER SHARE. The FASB has issued SFAS 128, "Earnings Per Share". 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. F-18 The following table presents the computations of basic and diluted earnings per share:
1999 1998 1997 ---- ---- ---- Net income available to common stockholders $6,377,320 $4,685,719 $3,579,664 Weighted average shares outstanding 8,570,936 8,808,765 9,397,742 Effect of dilutive instruments Employee stock awards 924,528 637,247 373,515 ------- ------- ------- Total weighted average dilutive shares 9,495,464 9,446,012 9,771,257 Basic earnings per share $ .74 $ .53 $ .38 ========== ========== ========== Diluted earnings per share $ .67 $ .50 $ .37 ========== ========== ==========
Stock options on the following number of shares were anti-dilutive and were not included in the calculation above: 1999 - 20,000 shares, 1998 - 0 shares and 1997 - 696,500 shares. 17. RESTRUCTURING. During the fourth quarter 1998, the Company incurred a restructuring charge of approximately $321,000 or $185,000 on an after tax basis. This charge related to the restructuring of the Company's brokerage operations in Tokyo, Japan. The Company completed the restructuring during the first quarter of 1999 and incurred additional expenses of approximately $300,000. The Company's Tokyo operations focuses on sales and marketing activities. F-19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. By: /s/ Fredric P. Sapirstein ------------------------- Fredric P. Sapirstein Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ Fredric P. Sapirstein Chairman, Chief Executive March 29, 2000 - ------------------------- Officer and Director Fredric P. Sapirstein /s/ Alan B. Herzog Chief Operating Officer, March 29, 2000 - ------------------ Principal Financial/Accounting Alan B. Herzog Officer and Director /s/ Max H. Levine Executive Vice President March 29, 2000 - ----------------- and Director Max H. Levine /s/ Kathryn L. Hoenig General Counsel, March 29, 2000 - --------------------- Secretary and Director Kathryn L. Hoenig /s/ Robert L. Cooney Director March 29, 2000 - -------------------- Robert L. Cooney /s/ Martin F.C. Emmett Director March 29, 2000 - ---------------------- Martin F.C. Emmett /s/ Robert Spiegel Director March 29, 2000 - ------------------ Robert Spiegel EXHIBIT INDEX Exhibit No. Description 10.4 Employment Agreement, dated as of January 1, 2000, between Registrant and Fredric P. Sapirstein. 10.5 Employment Agreement, dated March 29, 1999, between Hugh Humfrey and Hoenig & Company Limited. 21.1 Subsidiaries of the Registrant. 23.1 Independent Auditors' Consent. 27.1 Financial Data Schedule. EX-10.4 2 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of January 1, 2000 (this "Agreement"), by and between Hoenig Group Inc., a Delaware corporation (the "Company"), and Fredric P. Sapirstein (the "Executive"). WHEREAS, the Executive is employed by the Company as President and Chief Executive Officer of the Company and serves as Chief Executive Officer of Hoenig & Co., Inc., a wholly-owned subsidiary of the Company ("Hoenig"). WHEREAS, the Company desires to continue to employ the Executive in such capacities, and the Executive desires to continue to be so retained, on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual agreements made herein, the Company and the Executive agree as follows: 1. Employment; Duties. (a) The Company shall employ the Executive as President and Chief Executive Officer of the Company for the "Employment Period" as defined in Section 2. The Executive, in his capacity as President and Chief Executive Officer of the Company and Chief Executive Officer of Hoenig, shall have such duties, responsibilities and authority normally incident to such offices, subject to the provisions of the bylaws of the Company and Hoenig, respectively. The precise duties, responsibilities and authority of the Executive may be expanded, limited or modified, from time to time, at the discretion of the Board of Directors of the Company (the "Board"), consistent with the ordinary duties, responsibilities and authority of a President and Chief Executive Officer. (b) The Company shall use its best efforts to cause the Executive to be elected to the Board and serve as its Chairman and shall include him in the management slate for election as a director at every stockholders' meeting at which his term as a director would otherwise expire. If requested by the Board, the Executive shall serve as a member of the board of directors of any one or more subsidiaries of the Company. (c) During the Employment Period, the Executive shall render his services solely in the performance of his duties and responsibilities hereunder. The Executive agrees that, during the Employment Period, he shall devote his full working time, attention, knowledge and experience and give his best effort, skill and abilities, exclusively to promote the business and interests of the Company and its direct or indirect parents, subsidiaries and affiliates (collectively, the "Affiliates"). The Executive may not serve as an officer or director of, make investments in, or otherwise participate in, any 2 other entity without the prior written approval of the Board; provided, however, that the foregoing shall not be deemed to prohibit the Executive from acquiring, directly or indirectly, solely as an investment, not more than two percent (2%) of any class of securities of any corporation having a class of securities registered pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended (the "1934 Act"),which securities are publicly owned and regularly traded on any national exchange or in the over-the-counter market, or investments in non-public entities, in all events consistent with Section 8 and the policies and procedures generally applicable to executives of the Company and its Affiliates; and provided further, that, so long as it does not interfere with the Executive's employment, the Executive may serve as an officer, director or otherwise participate in purely educational, welfare, social, religious and civic organizations. 2. Employment Term. Executive's employment under this Agreement shall commence on the date hereof and end on December 31, 2001 (the "Initial Period"), unless sooner terminated in accordance with the provisions of Section 4. On the expiration of the Initial Period and on each yearly anniversary thereof, this Agreement shall automatically renew for an additional one-year period (each such one-year period being referred to as a "Renewal Period"), unless sooner terminated in accordance with the provisions of Section 4; provided, however, that no renewal shall occur if the Company or the Executive notifies the other in writing of its intention not to renew this Agreement not less than [three] months prior to such expiration date or anniversary, as the case may be. The period during which Executive is employed under this Agreement, as in effect from time to time, is referred to herein as the "Employment Period". 3. Compensation and Benefits. The Executive shall be entitled to the following compensation and benefits, in each case subject to applicable statutory withholdings: (a) Base Compensation. The Executive shall be paid an aggregate base salary (the "Base Salary") of $400,000 per annum. The Base Salary shall be payable in a manner consistent with the normal payroll practices of the Company in effect from time to time. The Board, in its sole discretion, or at the recommendation of the Compensation and Stock Option Committee of the Board (the "Compensation Committee"), may increase (but not decrease) the Base Salary, at any time. (b) Annual Bonus. In addition to the Base Salary, the Executive shall be entitled to receive a discretionary annual bonus for each fiscal year of the Company that ends during the Employment Period (the "Bonus Award") based upon the achievement of annual Company and individual performance goals to be set by the Compensation Committee in consultation with the Executive; provided, however, that in no case shall the Bonus Award for fiscal years ending December 31, 2000 and December 31, 2001 be less than $600,000 (the "Minimum Bonus Award"). The Minimum Bonus Award shall operate as a draw against the Bonus Award otherwise payable. To the extent necessary to avoid the limitation on the federal tax deductibility of the Bonus Award for 3 any year under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), payment thereof may, at the discretion of the Company, be either (i) made pursuant to the Company's 1996 Cash Bonus Plan or such other comparable plan adopted by the Company, which plan may be contingent upon approval by the Company's stockholders, or (ii) deferred to the first taxable year of the Company in which the payment would be fully deductible. Except as provided in the preceding sentence, the Bonus Award for a fiscal year shall be payable as soon as practicable after the release of the Company's audited financial statements for such fiscal year. In the case of clause (i) above, such a plan shall conform to the requirements of Section 162(m) of the Code and shall be adopted by the Board prior to, and presented for the approval of stockholders at, a meeting of the Company's stockholders. In the case of clause (ii) above, amounts deferred shall be credited with such interest and on such other terms as the Company and the Executive shall mutually agree. (c) Stock Options. (1) The Executive shall be granted, as soon as practicable after the execution of this Agreement (the "Grant Date"), a non-qualified stock option (the "Option") with respect to 150,000 shares of the Company's common stock, par value $0.01 per share (the "Common Stock"), under the Company's 1996 Long-Term Stock Incentive Plan (the "1996 Plan") or such other comparable plan in effect at that time. The exercise price per share of Common Stock subject to the Option shall equal one hundred percent (100%) of the Fair Market Value (as defined in the 1996 Plan) of a share of Common Stock on the Grant Date (as defined in the 1996 Plan). Subject to Section 3(c)(2) herein, the Option shall become vested and exercisable with respect to 50,000 shares on each of the first three anniversaries of the Grant Date. The term of the Option shall be ten years. (2) Upon the Executive's termination of employment with the Company for any reason, (i) any portion of the Option that is not then vested shall immediately terminate, and (ii) that portion of the Option which was vested at the Date of Termination (as defined herein) shall remain exercisable thereafter for a period of three months, or, if such termination is by reason of death or Disability, for a period of one year; provided, however, that in the event of termination of the Executive's employment by the Company other than for Cause or by Executive for Good Reason, the Option shall become fully vested and exercisable at the Termination Date and shall remain exercisable for three months. If such termination is for Cause, all Options, whether or not vested and exercisable, shall terminate immediately. In no event may any Option be exercised after the tenth anniversary of the date such Option is granted. (3) The Option shall be subject to the terms and conditions of the plan or plans pursuant to which it is granted (including acceleration of vesting upon a change in control of the Company) and the availability of options under such plan or plans, and shall be evidenced by an option agreement which shall contain terms not inconsistent with the provisions of this Section 3(c). 4 (d) Benefits. Executive also shall be entitled to participate in the employee and fringe benefit and group insurance programs provided by the Company for its officers and employees generally and in accordance with the terms of the applicable plan documents as they may be revised from time to time. Executive shall be entitled to receive such other benefits as are generally provided to executives of the Company and itsAffiliates. Executive also shall be entitled to reimbursement for reasonable out-of-pocket expenses incurred in connection with the business of the Company and its Affiliates in accordance with the Company's policies and procedures. 4. Termination. (a) The Company may, with or without prior notice, terminate the Employment Period with or without Cause, or upon the Executive's Disability. Executive may terminate the Employment Period for Good Reason or upon the Executive's Disability. The Employment Period shall automatically terminate upon the Executive's death and upon expiration of the Initial Period or any Renewal Period, as the case may be, if either party elects not to renew Executive's employment under this Agreement in accordance with Section 2. Except as otherwise provided in this Agreement, Executive's rights and the obligations of the Company hereunder shall cease as of the effective date of the termination of the Executive's employment under this Agreement (the "Termination Date"); provided, however, that Executive shall be entitled to receive (i) any accrued but unpaid Base Salary as of the Termination Date; (ii) any awarded but unpaid Bonus Awards (including any deferred Bonus Awards) as of the Termination Date; and (iii) any amount accrued under Company benefit plans as provided pursuant to the terms of such plans (collectively, the "Accrued Obligations"). (b) In the event that the Company terminates the Employment Period other than for Cause, or if the Executive terminates the Employment Period for Good Reason, Executive shall be entitled to receive, in addition to the Accrued Obligations, the following payments ("Termination Payments"), in each case subject to applicable statutory withholdings : (1) a payment equal to the product of (i) the sum of Executive's Base Salary and Bonus Awards payable (without regard to any deferral) for the three fiscal years ending prior to such termination, divided by three, and (ii) the greater of one or the number of years and/or fraction thereof remaining in the then existing Initial Period or Renewal Period, as the case may be; and (2) a Bonus Award equal to the greater of the Bonus Award earned by the Executive for the immediately preceding fiscal year or the Minimum Bonus Award, in either case, multiplied by a fraction, (i) the numerator of which shall be the number of days elapsed in the fiscal year in which the Termination Date occurred, and (ii) the denominator of which shall be 365; provided, however, that there shall be 5 deducted from any such Bonus Award the amount of any Bonus Award previously paid to the Executive with respect to such period. (3) Payment of the amounts due under Sections 4(b)(1) and 4(b)(2) shall be made in equal monthly installments over such remaining Initial Period or Renewal Period or such one year period, as the case may be. (4) In the event of the Executive's death after the Employment Period is terminated other than for Cause or for Good Reason, the Company shall make any Termination Payments which would otherwise have been payable to the Executive if he had lived under this Section 4(b) to Executive's estate or designated beneficiary. (c) In the event that the Employment Period is terminated by reason of the Executive's Disability, the Executive shall be entitled to receive, in addition to the Accrued Obligations: (1) a payment equal to the product of (i) the sum of Executive's then current Base Salary and the Minimum Bonus Award and (ii) the number of years and/or fraction thereof then remaining in the Initial Period or any Renewal Period, as the case may be, which amount shall be paid in equal monthly installments over such remaining Initial Period or Renewal Period; provided, however, that such installments shall cease upon any employment by the Executive on a full-time basis; and (2) Executive shall participate, and the Company shall continue contributions on the Executive's behalf, in all Company-sponsored health and welfare plans on terms no less favorable than as in effect on the Termination Date, which benefits shall continue until the earlier of: (A) one year from the Termination Date; (B) the entitlement to coverage of the Executive under a comparable plan provided by a new employer; (C) the death of the Executive; or (D) expiration of the Initial Period or Renewal Period, as the case may be. The cash amounts and benefits set forth in Sections 4(c)(1) and 4(c)(2) are collectively referred to herein as "Disability Benefits." (d) In the event that the Employment Period terminates by reason of Executive's death, in addition to the Accrued Obligations, the Company shall pay to the Executive's estate or designated beneficiaries within ninety (90) days after the 6 Termination Date, a lump sum equal to the greater of the Minimum Bonus Award or the amount of any Bonus Award (without regard to any deferral) for the fiscal year ending immediately prior to such termination, in either such case, multiplied by a fraction, (i) the numerator of which shall be the number of days elapsed in the fiscal year during which the Termination Date occurred, and (ii) the denominator of which shall be 365 (the "Death Benefit"); provided, however, that there shall be deducted from any such Death Benefit the amount of any Bonus Award previously paid to the Executive with respect to such period. (e) A termination of the Executive's employment (i) upon expiration of the Initial Period or any Renewal Period, whether at the Company's option or the Executive's option, or (ii) by reason of the Executive's death or Disability, shall not constitute a termination other than for Cause or for Good Reason under this Agreement. (f) As a condition to his entitlement to receive Death or Disability Benefits or Termination Payments, Executive or his estate or designated beneficiary shall (i) have executed and delivered to the Company a waiver and release satisfactory to the Company waiving and releasing all rights and claims against the Company and its Affiliates and their respective officers, agents, directors and employees, and such waiver and release shall have become irrevocable, and (ii) comply with Sections 5 through 9. (g) In the event that the Employment Period is terminated for any reason (except by death), Executive agrees that, if at that time he is a director or officer of the Company or any of its Affiliates, he will immediately deliver his written resignation as such director or officer, such resignation to become effective immediately. (h)(1) If any of the payments or benefits received or to be received by the Executive in connection with a Change in Control (as defined in the 1996 Plan) or the Executive's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person (within the meaning of Section 3(a)(9) of the Securities Exchange Act of 1934, as amended, as modified and used in Sections 13(d) and 14(d) thereof) whose actions result in a Change of Control or any Person affiliated with the Company or any such Person) (all such payments and benefits, excluding the Gross-Up Payment, collectively, the "Total Payments") will be subject to the excise tax imposed under section 4999 of the Code (the "Excise Tax"), the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. (2) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of 7 the Total Payments shall be treated as "parachute payments" (within the meaning of section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of section 280G(b)(4)(B) of the Code) in excess of the Base Amount (as defined in section 280G(b)(3) of the Code) allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the date on which the Gross-Up Payment is calculated for purposes of this Section, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. (3) In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, the Executive shall repay to the Company, within five (5) business days following the time that the amount of such reduction in the Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive, to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) within five (5) business days following the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. (i) For purposes of this Agreement: 8 (1) "Cause" shall mean an event where the Executive: (i) commits any act of fraud, willful misconduct or dishonesty in connection with his employment or which materially injures the Company or any of its Affiliates; (ii) breaches Section 8 or 9, or any other material provision of this Agreement or any material representation, warranty, covenant or condition in this Agreement or any material fiduciary duty to the Company or any of its Affiliates; (iii) fails, refuses or neglects to timely perform any material duty, responsibility or obligation under this Agreement and such failure, refusal or neglect is not cured by the Executive within fifteen (15) days from the date the Company notifies the Executive thereof; (iv) commits a material violation of any material law, rule, regulation or by-law of any governmental authority (state, federal or foreign), any securities exchange or association or other regulatory or self-regulatory body or agency applicable to the Company or any of its Affiliates or any general policy or directive of the Company or any of its Affiliates communicated in writing to the Executive; (v) is charged with a crime involving moral turpitude, dishonesty, fraud or unethical business conduct, or a felony; (vi) is subject to the occurrence of an event or condition which makes it unlawful for the Executive to perform his duties or responsibilities hereunder, including the issuance of any order, decree, decision or judgment, which remains in effect for eight (8) weeks or more; (vii) gives or accepts undisclosed commissions or other payments in cash or in kind in connection with the affairs of the Company or any of its Affiliates or their respective clients; (viii) is expelled or suspended in excess of eight (8) weeks, or is subject to an order temporarily (for a period in excess of eight (8) weeks) or permanently enjoining the Executive from the securities, investment management or investment banking business or from acting in the capacity contemplated by this Agreement by the Securities Exchange Commission ("SEC"), the National Association of Securities Dealers ("NASD"), any national securities exchange or any self-regulatory agency or governmental authority, state, foreign or federal; or (ix) fails to obtain or maintain any registration, license or other authorization or approval that the Company or any of its Affiliates in their discretion reasonably believes is required for the Executive to perform his duties and responsibilities hereunder. (2) "Good Reason" shall mean (i) the Company changes the Executive's status, title, duties, responsibilities, authority or position as President and Chief Executive Officer of the Company, and such change represents a material reduction in such status, title, duties, responsibilities, authority or position conferred hereunder; (ii) the Executive is not elected to the Board or not elected Chairman of the Board, or does not remain a director of the Board or Chairman of the Board, at any time during the Employment Period while the Company is the ultimate parent of the businesses carried on by the Company and its Affiliates (other than as a result of a resignation by the Executive pursuant to Section 4(c) or otherwise); (iii) the failure of the Company to make a timely grant to the Executive of the stock options described in Section 3(c)(1); or (iv) the Company materially breaches this Agreement. With respect to a termination for Good Reason within the meaning of Section 4(i)(2)(i), (ii), (iii) or (iv), the Company shall have thirty (30) days after the date the Executive delivers a notice of termination for Good 9 Reason to correct the matters constituting Good Reason as specified in the notice of termination or, if not curable within thirty (30) days, shall have thirty (30) days in which to commence correcting the matters constituting Good Reason as specified in the notice of termination and diligently pursue such correction, but in no event shall the period to correct such matters exceed forty-five (45) days after the date of delivery of a notice of termination for Good Reason. Such notice of termination for Good Reason shall include the specific section of this Agreement which was relied upon and the reason that the Company's act or failure to act has given rise to his termination for Good Reason. (3) "Disability" shall mean the Executive's inability to perform his duties by reason of mental or physical disability for at least one hundred and twenty (120) consecutive days or any one hundred and twenty (120) days (whether or not consecutive) in any one-hundred eighty (180) consecutive day period. In the event of a dispute as to whether the Executive is disabled within the meaning hereof, either party may from time to time request a medical examination of the Executive by a doctor appointed by the Chief of Staff of a hospital selected by mutual agreement of the parties, or as the parties may otherwise agree, or, failing agreement, a hospital selected in good faith by the Board. The written medical opinion of such doctor shall be conclusive and binding upon the parties as to whether the Executive has become disabled and the date when such disability arose. The cost of any such medical examination shall be borne by the Company. 5. Trade Secrets. The Executive recognizes that it is in the legitimate business interest of the Company and its Affiliates to restrict his disclosure or use of Trade Secrets and Confidential Information relating to the Company and its Affiliates for any purpose other than in connection with his performance of his duties and responsibilities to the Company and its Affiliates, and to limit any potential appropriation of such Trade Secrets and Confidential Information by the Executive. The Executive therefore agrees that all Trade Secrets and Confidential Information relating to the Company and its Affiliates heretofore or in the future obtained by the Executive shall be considered confidential and the proprietary information of the Company and its Affiliates. During the Employment Period, the Executive shall not use or disclose, or authorize any other person or entity to use or disclose, any Trade Secrets and Confidential Information, other than as necessary to further the business objectives of the Company and its Affiliates in accordance with the terms of his employment hereunder. The term "Trade Secrets and Confidential Information" includes, by way of example and without limitation, matters of a technical nature, "know-how", formulas, secret processes, works of authorship, computer programs (including without limitation documentation of such programs), services, materials, patent applications, new product plans, other plans, technical information, technical improvements, test data, progress reports and research projects, and matters of a business nature of the Company and its Affiliates, such as business plans, prospects, financial information, marketing plans and strategies, proprietary information about costs, profits, markets and sales, lists of customers and suppliers, procurement and promotional information, credit and financial data concerning customers or suppliers, information relating to the management, operation and planning, 10 plans for future development, and other information of a similar nature to the extent not available to the public. After termination of the Employment Period for any reason, the Executive shall not use or disclose Trade Secrets and Confidential Information. 6. Company Property; Return of Documents and Property. (a) All records, files, documents, computer programs, software, discs and magnetic tape, equipment and similar items relating to the business of, or provided by, the Company or its Affiliates, including but not limited to all correspondence, manuals, letters, notes, notebooks, reports, flow-charts, proposals, documents concerning clients, products, services or processes, and all materials derived therefrom, in each case in whatever medium, (collectively, "Company Property"), which Executive shall prepare or receive from the Company or its Affiliates, shall remain the sole and exclusive property of the Company and its Affiliates. (b) Upon the termination of the Employment Period, or at any time upon the request of the Company, the Executive (or his heirs or personal representatives) shall deliver to the Company (1) all documents and materials (including, without limitation, computer files) containing Trade Secrets and Confidential Information relating to the business and affairs of the Company or any of its Affiliates, and (2) all Company Property, which is in the possession or under the control of the Executive (or his heirs or personal representatives). 7. Discoveries and Work. All Discoveries and Works made or conceived by the Executive during his employment by the Company or any of its Affiliates, whether during the Employment Period or prior thereto, jointly or with others, that relate to the present or anticipated activities of the Company or any of its Affiliates, or are used or usable by the Company or any of its Affiliates, shall be owned by the Company and its Affiliates. The term "Discoveries and Works" includes, by way of example but without limitation, Trade Secrets and Confidential Information, patents and patent applications, trademarks and trademark registrations and applications, service marks and service mark registrations and applications, trade names, copyrights and copyright registrations and applications. The Executive shall (a) promptly notify, make full disclosure to, and execute and deliver any documents requested by, the Company or any of its Affiliates, as the case may be, to evidence or better assure title to Discoveries and Works in the Company or its Affiliates; (b) renounce any and all claims, including but not limited to claims of ownership and royalty, with respect to all Discoveries and Works and all other property owned or licensed by the Company or any of its Affiliates; (c) assist the Company or any of its Affiliates in obtaining or maintaining for itself at its own expense United States and foreign patents, copyrights, trade secret protection or other protection of any and all Discoveries and Works; and (d) promptly execute, whether during the Employment Period or thereafter, at the Company's expense, all applications or other endorsements necessary or appropriate to maintain patents and other rights for the Company and its Affiliates and to protect the title of the Company and its Affiliates thereto, including but not limited to assignments of such patents and other rights. Any 11 Discoveries and Works which, within six (6) months after the termination of the Employment Period, are made, disclosed, reduced to a tangible or written form or description, or are reduced to practice by the Executive and which pertain to the business carried on or products or services being sold or developed by the Company or any of its Affiliates at the time of such termination shall, as between the Executive and the Company and its Affiliates, be rebuttably presumed to have been made during the Executive's employment by the Company. The Executive acknowledges that all Discoveries and Works shall be deemed "works made for hire" under the Copyright Act of 1976, as amended, 17 U.S.C. (Section)101. 8. NonCompetition. From and after the date hereof, the Executive shall not, except pursuant to the terms hereof, directly or indirectly, own, manage, operate, join, finance, control or participate in the ownership, management, operation or control of, or be employed or be otherwise connected in any manner with, any business under a name similar to the name of the Company or any of its Affiliates. During the Noncompetition Period, the Executive shall not (except as an officer, director, employee, agent or consultant of the Company or its Affiliates) directly or indirectly, own, manage, operate, join, or have a financial interest in, control or participate in the ownership, management, operation or control of, or be employed as an employee, agent or consultant, or in any other individual or representative capacity whatsoever, or use or permit his name to be used in connection with, or be otherwise connected in any manner with, (i) any business or enterprise engaged (wherever located) in the design, development, manufacture, distribution or sale of any products, or the provision of any services, which the Company or any of its subsidiaries were designing, developing, manufacturing, distributing, selling or providing at any time during the one year immediately preceding the termination of Executive's employment with the Company or (ii) any business which is similar to or competitive with the business carried on or planned by the Company or any of its subsidiaries at any time during the one year immediately preceding the termination of the Executive's employment with the Company, unless the Executive shall have obtained the prior written consent of the Board; provided, however, that the foregoing restriction shall not be construed to prohibit the ownership by the Executive of not more than two percent (2%) of any class of securities of any corporation which is engaged in any of the foregoing businesses, having a class of securities registered pursuant to Section 12(b) or 12(g) of the 1934 Act, which securities are publicly owned and regularly traded on any national exchange or in the over-the-counter market; provided further, that such ownership represents a passive investment and that neither the Executive nor any group of persons including the Executive in any way, either directly or indirectly, manages or exercises control of any such corporation, guarantees any of its financial obligations, otherwise takes part in its business other than exercising his rights as a stockholder or seeks to do any of the foregoing. For purposes of this Agreement, the Noncompetition Period shall mean (i) the Employment Period; (ii) the lesser of one year following termination of the Employment Period or the remaining term of the Initial Period or any Renewal Period, as the case may be, if such termination is by the Company for Cause or by the Executive other than for Good Reason; and (iii) the period during which the Executive is receiving Termination Payments or Disability 12 Benefits. Notwithstanding the foregoing, in the event that the Company terminates the Employment Period other than for Cause, or if the Executive terminates the Employment Period for Good Reason, the Executive may elect at any time after such termination, by ten (10) days' advance written notice to the Company, to be relieved of the provisions of this Section 8 and Section 9(a). On and after such election, the Company shall have no further obligation to make any payments to the Executive pursuant to Section 4, except for such amounts as shall have been accrued prior to the date of such election. Such election shall not effect any of the rights of the Company with respect to any violation of this Section 8 or Section 9 occurring prior to such election. 9. Non-Solicitation. (a) During the Noncompetition Period, the Executive shall not, directly or indirectly, whether for his own account or for the account of any other individual or entity, solicit or canvas the trade, business or patronage of, or sell any products or services which are the same as or similar to those designed, developed, manufactured, distributed or sold by the Company or any of its subsidiaries to, any individuals or entities that were either customers of the Company or any of its subsidiaries during the twelve (12) months immediately preceding the termination of the Executive's employment with the Company, or prospective customers with respect to whom a sales effort, presentation or proposal was made by the Company or any of its subsidiaries during the twelve months immediately preceding the Termination Date. (b) Executive further agrees that, during the longer of the Noncompetition Period or one-year after termination of employment, he shall not, directly or indirectly, (i) solicit, induce, enter into any agreement with, or attempt to influence any individual, who was an employee or consultant of the Company or any of its Affiliates at any time during the time that the Executive was employed by the Company or any of its Affiliates, to terminate his or her employment relationship with the Company or any of its Affiliates or to become employed by the Executive or any individual or entity by which Executive is employed or (ii) interfere in any other way with the employment, or other relationship, of any employee or consultant of the Company or any of its subsidiaries. 10. Enforcement. (a) The Executive agrees that the remedies at law for any breach or threat of breach by him of any of the provisions of Sections 5 through 9 will be inadequate, and that, in addition to any other remedy to which the Company may be entitled at law or in equity, the Company shall be entitled to a temporary or permanent injunction or injunctions or temporary restraining order or orders to prevent breaches of any of the provisions of Sections 5 through 9 and to enforce specifically the terms and provisions thereof, in each case without the need to post any security or bond. Nothing herein contained shall be construed as prohibiting the Company from pursuing, in addition, any other remedies available to the Company for such breach or threatened breach. A waiver by the Company of any breach of any provision hereof shall not operate or be construed as a waiver of a breach of any other provision of this Agreement or of any subsequent breach by the Executive. 13 (b) It is expressly understood and agreed that although the Company and the Executive consider the restrictions contained in Sections 5 through 9 to be reasonable for the purpose of preserving the goodwill, proprietary rights and going concern value of the Company and its Affiliates, if a final judicial determination is made by a court having jurisdiction that the time or territory or any other restriction contained in such Sections 5 through 9 is an unenforceable restriction on the Executive's activities, the provisions of such Sections 5 through 9 shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such other extent as such court may judicially determine or indicate to be reasonable. Alternatively, if the court referred to above finds that any restriction contained in Sections 5 through 9 is unenforceable, and such restriction or remedy cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained therein or the availability of any other remedy. The provisions of Sections 5 through 9 shall in no respect limit or otherwise affect the Executive's obligations under other agreements with the Company. 11. Executive's Representations. The Executive represents and warrants to the Company that (a) he is able to perform fully his duties and responsibilities contemplated by this Agreement and (b) there are no restrictions, covenants, agreements or limitations of any kind on his right or ability to enter into and fully perform the terms of this Agreement. 12. Key Man Life Insurance. During the Employment Period, the Company and any of its Affiliates may at any time apply for insurance on the Executive's life and/or health in such amounts and in such form as the Company or any of its Affiliates may in its sole discretion decide. The Executive shall not have any interest in such insurance, but shall, if the Company or any of its Affiliates requests, submit to such medical examinations, supply such information and execute such documents as may be required in connection with, or so as to enable the Company to obtain, such insurance. The Company's or any of its Affiliates' inability to obtain insurance on the Executive's life and/or health shall not constitute a breach of this Agreement; provided, however, that the Executive has submitted to medical examinations, supplied information, executed documents and otherwise cooperated with the Company and its Affiliates in their efforts to obtain such insurance. 13. Assignment. The rights and obligations of the parties under this Agreement shall not be assignable by either the Company or the Executive, provided, however, that this Agreement is assignable by the Company to any Affiliate of the Company, to any successor in interest to the business of the Company, or to a purchaser of all or substantially all of the assets of the Company. 14. Notices. Any notice required or permitted under this Agreement shall be in writing and shall be deemed to have been effectively made or given upon receipt if personally delivered, on the third business day after having been mailed properly addressed in a sealed envelope, postage prepaid by certified or registered mail, 14 or on the first business day after having been delivered by a reputable overnight delivery service. Unless otherwise changed by notice, notice shall be properly addressed to the Executive if addressed to: Fredric P. Sapirstein 1140 Fifth Avenue New York, NY 10019 and properly addressed to the Company if addressed to: Hoenig Group Inc. Reckson Executive Park 4 International Drive Rye Brook, NY 10573 Attention: General Counsel 15. Severability. Wherever there is any conflict between any provision of this Agreement and any statute, law, regulation or judicial precedent, the latter shall prevail, but in such event the provisions of this Agreement thus affected shall be curtailed and limited only to the extent necessary to bring them within the requirements of the law. 16. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 17. Effect of Termination. Any termination of the Employment Period shall not terminate any provision of this Agreement except as expressly provided herein. 18. Disputes. Any claim or controversy arising out of or relating to this Agreement, or any breach thereof, or otherwise arising out of or relating to the Executive's employment, compensation and benefits with the Company or the termination thereof, shall be settled by arbitration in New York, New York in accordance with the Voluntary Labor Arbitration Rules of the American Arbitration Association ("AAA"), or if the AAA refuses to accept and process any such claim or controversy for arbitration, then the rules of procedure established by the Center for Public Resources; provided, however, that the parties agree that (a) the panel of arbitrators shall be prohibited from disregarding, adding to or modifying the terms of this Agreement; (b) the panel of arbitrators shall be required to follow established principles of substantive law and the law governing burdens of proof; (c) only legally protected rights may be enforced in arbitration; (d) the panel of arbitrators shall be without authority to award punitive or exemplary damages; (e) the chairperson of the arbitration panel shall be an attorney licensed to practice law in New York who has experience in similar matters; (f) the panel of arbitrators shall consist solely of arbitrators from the securities industry; and (g) any 15 demand for arbitration made by the Executive must be filed and served, if at all, within 180 days of the occurrence of the act or omission complained of. Any claim or controversy not submitted to arbitration in accordance with this Section 18 shall be considered waived and, thereafter, no arbitration panel or tribunal or court shall have the power to rule or make any award on any such claim or controversy. The award rendered in any arbitration proceeding held under this Section 18 shall be final and binding, and judgment upon the award may be entered in any court having jurisdiction thereof; provided, however, that the judgment conforms to established principles of law and is supported by substantial record evidence. Notwithstanding the foregoing, either the Company or the Executive may elect not to have this Section 18 apply with respect to matters arising from the provisions of Sections 5 through 9, in which case such matters shall be subject to the enforcement provisions of Section 10. 19. Miscellaneous; Choice of Law. This Agreement constitutes the entire agreement, and supersedes all prior agreements, of the parties hereto relating to the subject matter hereof, and there are no written or oral terms or representations made by either party other than those contained herein. This Agreement shall be governed by and construed in accordance with the domestic laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. IN WITNESS WHEREOF, the parties have executed this Employment Agreement as of the day and year first above written. HOENIG GROUP INC. By:/s/ Alan B. Herzog ------------------------------------ Its: Chief Operating Officer ------------------------------------ EXECUTIVE /s/ Fredric P. Sapirstein - ------------------------------------ Fredric P. Sapirstein 16 EX-10.5 3 EMPLOYMENT AGREEMENT 29th March 1999 Hugh Humfrey Esq. Lower Churn South Cerney Cirencester GL7 5TN Dear Hugh, I am pleased that you have accepted the position of Managing Director (designate) of Hoenig & Company Limited. We look forward to you joining us on May 1, 1999. As Managing Director (designate), you shall be responsible for performing such duties as the Company's Board of Directors shall from time to time designate, consistent with your position. We trust that you shall use your best efforts to perform these duties consistent with the policies of the Company and shall devote your full working time, attention and efforts toward the performance of your duties and the business of the Company. Your employment by the Company shall be subject to the following terms: 1. Salary: (pounds sterling)100,000 per annum. 2. Pension: the Company will pay an amount equal to 10% of your annual salary into your pension fund. 3. Payment of Salary: monthly in arrears. 4. Probationary period: 5 months from starting date. On confirmation (1st October 1999), your salary will rise to (pounds sterling)115,000 per annum. On 1st January 2000, your job title will change to Managing Director (i.e., without the epithet designate). 5. Notice period: one month on either side, during and after the probationary period. 6. Health cover: BUPA - London hospital rate, or equivalent, for you and your immediate family. Health check every year at BUPA or equivalent. Permanent Health insurance. 7. Holiday: 25 days within a calendar year (determined pro rata), plus normal public holidays. 8. Bonus scheme: a guaranteed minimum bonus for the year ended December 31, 1999 equal to(pounds sterling)33,333, which shall operate as a draw against any amounts awarded to you 2 under a bonus pool, consisting of two components, based on the net operating profits (as defined) of the management accounts in a given year, as described on the attached Schedule A. The formula used to determine the bonus pool may be amended from time to time by the Company in its sole discretion. The Managing Director shall be responsible for determining how the bonus pool will be distributed to employees, including yourself, subject to the approval of the Board of Directors and, where appropriate, the Compensation and Stock Option Committee of Hoenig Group Inc. All bonus amounts shall be paid as soon as practicable after the satisfactory completion of the Company's annual audit. For the years after December 31, 1999, there shall be no guaranteed bonus, but, you shall be entitled to participate in the bonus pool. 9. Referees: this offer is subject to receipt of satisfactory references of two independent referees and to our standard terms of employment. 10. Registration: this offer is subject to your obtaining and maintaining any registration, license or other authorization or approval that the Company considers is required for you to perform your duties. All compensation shall be subject to all applicable deductions and shall be payable in accordance with the Company's policies. In the event that the Company terminates your employment other than for "cause" prior to December 31, 1999, the Company shall pay you your pro-rated salary and pension contribution for the year and your guaranteed bonus of (pounds sterling)33,333, less all applicable deductions. For purposes of calculating this amount, your salary to be pro-rated will be based on a salary of (pounds sterling)100,000 per annum for the period 1st May through and including 30th September 1999 and, subject to confirmation following your probationary period, a salary of (pounds sterling)115,000 per annum for the period 1st October 1999 through and including 31st December 1999. For purposes of this letter, the term "cause" shall have the same meaning given it in the Hoenig Group Inc. Section 162(m) Cash Bonus Plan, a copy of which is attached. The Company's obligation to make this payment to you is subject to the receipt of an irrevocable waiver and release from you in a form that is satisfactory to the Company. As a matter of course, we expect, and you agree that, you shall not, directly or indirectly, use, disclose or permit to be known, to any person or entity, any non-public or confidential information acquired by you during the course of, or as an incident to, your employment, which relates to the Company, its affiliates, any of their officers or directors or any of their clients. Some examples of confidential information include competitive analyses, pricing policies, business plans or proposals, the substance of 3 agreements with customers and others, marketing arrangements, servicing arrangements, customer lists, information about customers, customer prospects, profits, or markets, information relating to management operations and future planning. We also need to ask you to agree that, during your employment with the Company and for a period of six months thereafter, you shall not, directly or indirectly, (i) solicit or induce any person or entity that currently is, or at any time during your employment was, a customer or customer prospect of the Company to engage in business with someone other than the Company, or (ii) solicit, interfere with, or induce any employee of the Company to leave its employ or join the employ of another. Please sign and return to us the duplicate copy of this letter to acknowledge your agreement to use these terms. Now that most of the formalities have been addressed, I welcome you to the Hoenig organization. Yours sincerely, /s/ Nigel Johnson-Hill Nigel Johnson-Hill Managing Director Agreed and acknowledged /s/ Hugh Humfrey - ------------------------- Date: April 5, 1999 ------------------------- 4 EX-21.1 4 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT Hoenig & Co., Inc.* Reckson Executive Park 4 International Drive Rye Brook, New York 10573 Incorporated in Delaware, April 1970. Hoenig (Far East) Limited* 3404 Tower 1 - Lippo Centre 89, Queensway Central, Hong Kong Incorporated in Hong Kong under the Companies Ordinance, January 1990. Hoenig & Company Limited* 5 London Wall Buildings Finsbury Circus London EC2M 5NT United Kingdom Registered Company, September 1985. Axe-Houghton Associates, Inc.* Reckson Executive Park 4 International Drive Rye Brook, New York 10573 Incorporated in Delaware, March 1984. * 100%-owned subsidiary of Hoenig Group Inc. EX-23.1 5 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-34745) pertaining to the Hoenig Group Inc. 1996 Long-Term Stock Incentive Plan, the 1994 Stock Option Plan and the 1991 Stock Option Plan, and the Registration Statement on Form S-8 (No. 333-17435) pertaining to the Hoenig Group Inc. 1996 Employee Stock Purchase Plan and the 1997 Foreign Employee Stock Purchase Plan, of our report dated March 24, 2000, appearing in the Hoenig Group Inc. Annual Report on Form 10-K for the year ended December 31, 1999. /s/ Deloitte & Touche LLP New York, New York March 24, 2000 EX-27.1 6 FINANCIAL DATA SCHEDULE
BD EXHIBIT 27.1 FINANCIAL DATA SCHEDULE THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HOENIG GROUP INC. DECEMBER 31, 1999 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 12-MOS DEC-31-1999 DEC-31-1999 28,554,972 12,273,785 0 0 21,921,535 1,909,907 70,507,612 20,553 13,226,160 0 0 3,287,061 0 0 0 108,952 41,143,887 70,507,612 0 2,157,235 83,386,112 0 8,333,334 0 23,918,673 11,028,648 0 0 0 6,377,320 .74 .67
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