-----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, KW4mo2l9uAKA5vl6je/hIYAVPoMnMCk90Un1ipjTwUmeQv4j8EzgrfcyM4fjRV1k 40Bm+eGSa4OF5HuSNvRnow== 0000950136-99-000408.txt : 19990402 0000950136-99-000408.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950136-99-000408 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: 99582102 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, 1998 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 $.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 26, 1999: Common Stock par value $.01 per share, $39,091,942. As of March 26, 1999, there were 8,563,740 shares of Common Stock outstanding. Documents Incorporated by Reference Selected portions of the Proxy Statement for the 1999 Annual Meeting of Stockholders are incorporated by reference in Part III as set forth herein. 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. During the fourth quarter 1998, the Company restructured its brokerage operations in Tokyo as part of an effort to reduce operating costs and to improve the profitability of the Company's international brokerage operations. Once the restructuring is complete, which is expected to be the end of the first quarter 1999, the Tokyo office will focus primarily on sales and marketing activities. The Company will continue to provide trade execution services in Japanese equities through its Hong Kong office. 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 assess performance. The Company's new operating segments are domestic brokerage, international brokerage and asset management. This change also reflects the restructuring of the Company's brokerage operations in Japan. 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 in connection with providing independent research and other services to investment managers; o in exchange for paying expenses of, or commission refunds to, customers under directed brokerage or commission recapture arrangements; o in connection with providing proprietary research to investment managers; and o for execution-only services. Approximately 77% of the Company's total brokerage commissions are earned in connection with the provision of independent research and directed brokerage arrangements. The remaining 23% 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 27%) 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 10% of international commissions earned in 1998. Directed brokerage arrangements are less common in international markets and do not represent 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 the 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 is an important factor 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 1 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 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 is typically 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 which supply quotation, news and database systems, 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 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 corporations, pension plans and investment limited partnerships. 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 2 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. The Company introduced a new proprietary research product in 1999 which focuses on high technology products and services, with an emphasis on electronic commerce and the Internet. This weekly report, authored by Jose Rasco, Hoenig's Internet economist, analyzes top-down trends and macro-economic forces driving electronic commerce and the Internet and how those forces affect the U.S. and global economies. 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 23% of its total commission revenues in 1998, 20% in 1997 and 16% in 1996 from execution-only brokerage and proprietary research. SALES AND MARKETING As of December 31, 1998, the sales and marketing staff for the Company's domestic and international brokerage operations comprised 11 full-time professionals: 7 in the United States, 1 in London, 2 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 seek to introduce the Company's proprietary research to customers. They also promote and sell the Company's other brokerage services, including execution-only services. 3 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 through Sanford C. Bernstein & Co., Inc. Under the Company's clearing arrangement, Sanford Bernstein 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. Sanford Bernstein 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 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 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 an asset management company registered as an investment adviser under the Investment Advisers Act of 1940. Axe Houghton provides professional investment management for public and corporate employee benefit plans 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 capitalization value management and large capitalization value management, as well as international indexing using American Depositary Receipts (ADRs). As of December 31, 1998, Axe-Houghton's assets under management were $4.02 billion, as compared with $3.82 billion at the end of 1997 and $4.27 billion at the end of 1996. Assets under management increased in 1998 notwithstanding the end of a temporary assignment from one client to manage approximately $510 million. The loss of these assets was offset by increases in assets managed by Axe-Houghton 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 management. Axe-Houghton managed $698.5 million in small capitalization growth equities at the end of 1998. Assets under management as of February 28, 1999 were $3.82 billion, of which $676.3 million represents assets managed in small capitalization growth equities. Growth in assets under management is dependent on numerous factors, including: o Axe-Houghton's ability to attract new clients; o its investment performance; o the number and variety of investment disciplines offered; 4 o the capacity limitations of a particular investment discipline, such as small capitalization growth equities; o the market performance of various investment disciplines; 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. 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, 1998, the Company employed 108 people on a full-time basis, which includes 7 in executive positions, 28 in floor positions or positions as brokers, 14 in sales and marketing positions, 15 in accounting, legal and compliance positions, 9 in investment positions, 2 in information technology and 33 in clerical or other positions. Of the 108 employees, 62 are employed by Hoenig & Co., including 7 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 to be good. CUSTOMER RELATIONSHIPS The Company has existing brokerage relationships with over 500 institutional customers worldwide. The Company's 10 and 20 largest customers accounted for 29.0% and 41.1%, respectively, of total revenues for the year ended December 31, 1998 and 27.7% and 39.5%, respectively, of total revenues for the year ended December 31, 1997. A significant percentage of the Company's largest customers are investment limited partnerships and private investment funds. No single customer accounted for 10% or more of the Company's revenues for the years ended December 31, 1998, 1997 and 1996. The Company believes that its brokerage customer list is broadly based and not dependent on any one sector of the market. Approximately 80% 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. 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, 1998, the Company had 34 advisory clients which maintained 48 investment advisory accounts. Four of these accounts are maintained for affiliates. COMPETITION The institutional brokerage and asset management businesses are very 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- 5 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 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 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 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 quality of the portfolio management and client services 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 and higher valuations on businesses that the Company may seek to acquire. REGULATION 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 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 states and 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), which took over responsibility from the Ministry of Finance in June 1998, and the Japan Association of Securities Dealers. 6 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 London Stock Exchange. 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. Broker-dealers and investment advisers are subject to regulation covering virtually all aspects of their businesses. 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, as amended. 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 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 November 1996, the SEC's Office of Compliance, Inspection and Examinations began conducting special examinations of the soft dollar practices of brokerage firms, investment advisers and mutual funds engaged in soft dollar arrangements. In September 1998, the SEC released a report on its soft dollar examinations. 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 the failure 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: o The SEC should publish the report in order to reiterate the guidance provided in the SEC's 1986 interpretative release regarding the Section 28(e) safe harbor, particularly with respect to what types of research and brokerage services are covered by Section 28(e). 7 o The SEC should reiterate (by publishing the report) the obligations of mutual fund boards to review benefits received in soft dollar arrangements and to fully disclose the use of commissions to reduce fund expenses. o The SEC should reiterate (by publishing the report) that a broker may incur aiding and abetting liability in soft dollar transactions if it causes or assists an adviser in fraudulent and deceptive practices. o The SEC should consider adopting various record-keeping rules that would apply to brokers and advisers engaged in soft dollar arrangements. o The SEC should modify existing forms filed by registered investment advisers to require more meaningful disclosure of soft dollar arrangements. o The SEC should (by publishing the report) emphasize the obligations of registered brokers, investment advisers and mutual funds that participate in soft dollar arrangements to establish and implement reasonable internal controls and system of supervision. 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 who 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. 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 by the Year 2000. These reforms are intended to promote a more liberalized market driven by competition and market forces, rather than on government regulation. One of the most significant of these reforms is the deregulation of commissions, which began in April 1998 and is expected to be completed by October 1999. Once instituted, these reforms are likely to increase competition for brokerage business and create opportunities for those firms that can meet price and service requirements. 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, 1998, Hoenig & Co.'s net capital ratio was .99 to 1. The capital requirement of Hoenig & Co.'s Tokyo branch office at December 31, 1998 was (Y) 45,000,000 ($396,000). Hoenig & Company Limited is required to maintain financial resources of at least 110% of its capital requirement (as defined). Hoenig (Far East) Limited is required to maintain liquid capital of the greater of HK$3,000,000 ($388,000) or 5% of the average quarterly liabilities. The table below summarizes the minimum capital requirements for each brokerage subsidiary: 8
Actual Minimum Capital Required Capital 12/31/98 Excess of Requirement ---------------- -------- --------------------- Hoenig & Co., Inc. $ 855,000 $12,904,000 $12,049,000 Hoenig & Company Limited $ 689,000 $ 2,025,000 $ 1,336,000 ((pound)415,000) ((pound)1,220,000) ((pound)805,000) Hoenig (Far East) Limited $1,462,000 $ 5,403,000 $ 3,941,000 (HK$ 11,325,000) (HK$41,851,000) (HK$30,527,000)
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 office space in New Rochelle, NY, Boston, London, Hong Kong and Tokyo totaling approximately 11,000 square feet. These leases expire or are terminable at various times in 1999 through 2002. Item 3. Legal Proceedings - -------------------------- The description of legal proceedings required by this Item is hereby incorporated by reference to Note 4 of the Notes 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 1998. 9 PART II ------- Item 5. Market for Registrant's Common Equity and Related Stockholders Matters - ------------------------------------------------------------------------------- The Company's Common Stock is listed on National Association of Securities Dealers Automatic 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, 1998: Period Ended Common Stock - ------------ ------------ High Low ---- --- March 31, 1997 $5.875 $4.625 June 30, 1997 6.125 4.0625 September 30, 1997 6.0 5.0 December 31, 1997 6.625 5.25 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 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 492 holders of record and beneficial owners of Common Stock on March 26, 1999. The closing price of the Common Stock was $8.50 on March 26, 1999. Item 6. Selected Financial Data - --------------------------------
Summary Consolidated Financial Data (In thousands except per share amounts) Year ended December 31, ------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Income Statement Operating revenues $83,944 $76,315 $70,030 $53,527 $59,046 Operating income (loss) 7,142 3,900 3,230 (1,862) 4,594 Net investment income (loss) & other 1,280 2,097 1,737 7,252 (121) Income before income taxes 8,422 5,997 4,967 5,389 4,473 Net income 4,686 3,580 2,887 4,919 2,596 Net income per share basic(1) .53 .38 .31 .50 .25 Net income per share diluted(1) .50 .37 .31 .50 .25 Dividends per share - - .10 .10 .125 Weighted average shares and equivalents outstanding(1) 9,446 9,771 9,391 9,881 10,263
10
Year ended December 31, ------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Balance Sheet Data Total assets $63,340 $61,021 $51,528 $45,135 $40,573 Stockholders' equity $40,017 $39,526 $37,851 $34,458 $33,034
- ----------------- (1) See footnote 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 the effects of future growth, cost reduction measures taken to address operating losses in certain international operations, industry consolidation, acquisition and expansion plans, plans to address the Year 2000 issue and other technology issues, market risk, the Company's investment activities and its current equity capital levels. Actual events might differ materially due to a variety of important factors that cannot be predicted with certainty. These factors involve risks and uncertainties relating to, among other things, general economic conditions, market fluctuations, competitive conditions within the brokerage and asset management businesses, stock market prices and trading volumes, changes in demand for asset management and securities brokerage services, the Company's ability to recruit and retain key employees, changes in U.S. and foreign securities laws and regulations, particularly regarding independent research and directed brokerage arrangements, trading and investment activities, litigation and other factors discussed throughout this report. 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 Tokyo. The Company's wholly-owned subsidiary, Axe-Houghton Associates, Inc., provides professional asset management to U.S. public and corporate employee benefit plans, investment partnerships and other institutional clients from its offices in the United States. The Company's principal source of revenues is commissions earned for executing trades on behalf of its customers. The Company executes trades in equity securities on the world's major stock exchanges, acting primarily as agent for its customers, and also executes trades in U.S. fixed income securities on an agency and riskless principal basis. The Company earns commissions in connection with four types of brokerage services: commissions received in connection with providing independent research and other services to investment managers; commissions received in exchange for paying expenses of, or commission refunds to, customers under directed brokerage arrangements; commissions received in connection with providing proprietary research; and commissions received for execution-only services. See "Business - Domestic and International Securities Brokerage". The Company's profit margin on execution-only brokerage and commissions earned in connection with providing proprietary research is higher than that on commissions earned in connection with independent research and directed brokerage arrangements because the Company does not incur direct expenses for research and other services in connection with such activities. The percentage of the Company's total commission revenues attributed to proprietary research and execution-only brokerage increased to 23% in 1998 as compared with 20% in 1997. 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. 11 The Company's earnings in any period are affected by its ability to earn commissions under independent research and directed brokerage arrangements on a timely basis, since revenues are recorded only when earned. The timing of the receipt of these commissions could cause variations in earnings from year to year and quarter to quarter. The Company's second largest source of revenues is investment management fees earned by Axe-Houghton, the Company's asset management subsidiary, in connection with the provision of asset management services to institutional clients. Investment management fee revenues are a function of assets under management and the management fee charged. The profit margin on the Company's asset management business is higher than those on the Company's brokerage activities and also varies with the types of asset management services provided by the Company. Growth in assets under management is affected by numerous factors, including the ability to attract new clients, investment performance results, the number and variety of investment disciplines offered and capacity limitations of such disciplines (such as small capitalization growth equities) the market performance of particular investment disciplines, as well as the performance of the securities markets generally. As of February 28, 1999, Axe-Houghton had total assets under management of $3.82 billion, of which approximately $676 million represents assets managed in small capitalization growth equities. Axe-Houghton charges its highest fees for small capitalization growth equities management. Axe-Houghton does not accept any new clients for small capitalization growth equities management because of capacity limitations, which could limit the growth in assets under management and management fee revenues. In 1998, the Company negotiated new employment arrangements with several key employees, including an executive officer of Axe-Houghton and an executive officer and another employee of Hoenig. These new arrangements, two of which took effect in 1999, provide for increased variable, performance-based compensation which, assuming current levels of activity, will result in increased compensation expense as compared to prior periods. As the brokerage and asset management industries continue to consolidate, the Company considers various strategies to enhance stockholder value and continues to explore opportunities to increase distribution capabilities, expand its client base and supplement its product line through the hiring of additional personnel, strategic alliances, joint ventures and other business combinations. In 1998, the Company changed its reporting of business segments in accordance with new Statement of Financial Standards No. 131 ("Disclosures about Segments of an Enterprise and Related Information") and to reflect the restructuring of the Company's brokerage operations in Japan. The Company has three reportable operating segments - domestic brokerage, international brokerage and asset management - and has restated information regarding prior periods to reflect this change. In determining whether brokerage commissions earned are domestic or international, the Company primarily looks to the geographic location of the customer. YEAR ENDED DECEMBER 31, 1998 VERSUS DECEMBER 31, 1997 The Company's operating income before income taxes 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 is 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, versus $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 operating 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. 12 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 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 the same period in 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 expects to complete the restructuring by the end of the first quarter 1999 and to incur additional non-recurring operating expenses of approximately $300,000. Following the restructuring, the Tokyo office will focus on sales and marketing activities, and the Company's Hong Kong operations will be responsible for the execution and settlement of transactions in Japanese equities. The Company does not believe that the restructuring will have a material adverse effect on the Company's international brokerage revenues. 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 is 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 on 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 in 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 13 1998 and 15.2% of commissions earned in 1997. The decrease in these expenses as a percentage of commissions is primarily due to: (1) an increase in the percentage of commissions earned 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 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 some 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. YEAR ENDED DECEMBER 31, 1997 VERSUS DECEMBER 31, 1996 The Company's operating income before income taxes for 1997 increased 20.7% to $3.9 million versus $3.2 million in 1996. The increase in operating income is primarily attributed to a 8.1% increase in commission revenues, a 19.1% increase in investment management fee revenues, as well as an increase in the Company's overall operating margins. This increase in operating margins is primarily attributable to increased revenues generated by Axe-Houghton, as well as a reduction in the Company's execution and settlement costs related to trades executed on The Stock Exchange of Hong Kong. The Company's net income for the twelve months ended December 31, 1997 was $3.6 million versus $2.9 million in the same period in 1996. Operating revenues increased 9.0% to $76.3 million for the year ended December 31, 1997 from $70.0 million for the year ended December 31, 1996. Global commission revenues, the principal source of the Company's revenues, increased 8.1% to $69.2 million for the year ended December 31, 1997 from $64.0 million for the year ended December 31, 1996. The increase in commission revenues resulted primarily from higher trading volume in the U.S. and Hong Kong equity markets. Commission revenues from international brokerage operations represented 32.7% of the Company's total commissions, as compared to 34.6% for the same period in 1996. 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 increased 11.2% to $47.0 million as compared to $42.3 million in 1996, primarily due to increased commission revenues generated in the U.S. equity and fixed income markets. Operating income of domestic brokerage operations decreased slightly (1.0%) to $5.8 million due to an increase in infrastructure costs. These costs included compensation and office-related expenses associated with the addition of sales, client service and trading personnel who were hired in 1997 as part of an effort to expand the Company's brokerage network and account base. 14 Operating revenues of the Company's international brokerage operations in 1997 increased slightly (2.3%) due to increased trading activity in the Hong Kong equity markets, offset by decreased revenues in Japan. The Company's international brokerage operations experienced operating losses of $0.3 million in 1997 compared to modest operating income of $0.02 million in 1996. These losses primarily resulted from increased operating losses in Japan, which more than offset increased operating income in Hong Kong. In late 1997, the Company began a process of restructuring its Tokyo brokerage operations in an effort to reduce operating costs. Investment management fee revenues increased 19.1% to $6.7 million in 1997 from $5.6 million in 1996, notwithstanding an overall decrease in assets under management. Assets under management at December 31, 1997 decreased to $3.82 billion as compared to $4.27 billion in 1996 primarily due to the withdrawal of $1.1 billion of assets which were part of a temporary assignment from one client. Approximately $474 million of assets under management at December 31, 1997 represent a temporary assignment. The increase in investment management fee revenues reflects an increase in small capitalization growth equities assets which are managed for a higher fee, as well as appreciation on existing assets. Assets managed in small capitalization growth equities increased 32.7% to $591 million at December 31, 1997 from $446 million at December 31, 1996. At December 31, 1997, Axe-Houghton had 36 advisory clients which maintained 52 investment advisory accounts, as compared to 38 advisory clients that maintained 50 investment advisory accounts at December 31, 1996. Expenses related to research and other services provided to the Company's brokerage clients, including commission refunds, increased 7.3% to $31.2 million in 1997 from $29.1 million in 1996. These expenses were 45.1% of commissions in 1997 as compared with 45.4% in 1996. These expenses increased at a lower rate than commission revenues for the year ended December 31, 1997 primarily due to an increase in revenues resulting from execution-only brokerage and proprietary research. Clearing, execution, exchange charges and related expenses decreased 8.1% to $10.5 million in 1997 from $11.4 million in 1996. These expenses represented 15.2% of commissions in 1997 and 17.8% of commissions in 1996. The decrease in these expenses as a percentage of commissions is primarily due to a reduction in execution costs related to trades executed in the Hong Kong market. The Company has reduced the costs of executing transactions on The Stock Exchange of Hong Kong as a result of Hoenig (Far East) Limited becoming a self-clearing member of The Stock Exchange of Hong Kong in the fourth quarter 1996. Employee compensation increased 17.8% to $20.2 million in 1997 from $17.2 million in 1996. This resulted primarily from: (1) a $1.8 million increase due to the addition of new personnel as well as increases in base compensation of existing employees and (2) a $1.2 million increase in discretionary, performance-based and other compensation. All other expenses increased 15.1% to $10.5 million in 1997 as compared to $9.2 million in 1996. This resulted primarily from an increase in depreciation, amortization ($0.2 million), communications ($0.3 million) and office and marketing related expenses ($0.6 million) during the year ended December 31, 1997. Gain on investment and interest and dividends income increased 20.7% to $2.1 million in 1997 from $1.7 million in 1996. This increase primarily reflects interest earned on corporate cash invested in U.S. Government, corporate obligations and money market funds during 1997. LIQUIDITY AND CAPITAL RESOURCES The Company's financial condition remained strong during 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 15 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 of $5.5 million, offset by the issuance of treasury stock of $0.7 million. The Company modified its cash management program during 1998 in an effort to increase its rate of return on investments. The Company invested a portion of funds previously held as cash and equivalents, U.S. government obligations and corporate bonds in investments which included limited partnership interests in two multi-manager, market neutral limited partnerships; a diversified portfolio of investment grade preferred stock and U.S. Treasury futures used to hedge the preferred stock positions; and a bank-sponsored, flexible, market-linked deposit account which maintains investments in U.S. and foreign equity indices, floating rate deposits, baskets of European equity securities and a U.S. Treasury zero coupon bond. Each of these investments is managed by professional money managers. The flexible, market-linked deposit is not federally insured; however, the sponsoring bank has agreed to protect 100% of the Company's principal investment, less the bank's management fees, if the deposit is maintained for one year. These investments generally are not transferable and are less liquid than investments in U.S. government obligations and corporate bonds. Investment losses of $0.7 million incurred during 1998 with respect to the Company's limited partnership investments and preferred stock portfolio have not had a material effect on the Company's liquidity or capital resources. In 1999, the Company intends to reduce its investments in the market neutral limited partnerships from $4.6 million (as of December 31, 1998) to $1 million by withdrawing from one of the partnerships and reducing its investment in the other. The Company does not plan to renew its investment in the bank-sponsored deposit account once it matures in March 1999. The funds previously invested in the limited partnerships and the deposit account (totaling approximately $4.6 million) will be invested in U.S. Treasury securities and money market funds. 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 has a line of credit aggregating $1,350,000, which is secured by certain U.S. Government obligations. Interest is paid at a variable rate based upon the Federal Funds rate plus 1%. In addition, the Company maintains overseas overdraft facilities as follows: (1) (pound)750,000 ($1,245,000), which bears a variable rate of interest based upon market rates in the U.K. and Europe; (2) HK$ 50,000,000 ($6,455,000), which bears a variable rate of interest based upon market rates in Hong Kong; and (3) HK$100,000,000 ($12,910,000) in an intra-day overdraft facility for the settlement of trades, which bears a variable rate of interest. In addition, the Company maintains a $5,000,000 foreign exchange line for its trading operations in Hong Kong. At December 31, 1997, the Company had cash, U.S. Government obligations, net accounts receivable and other securities of $47.6 million compared with $43.6 million at December 31, 1996. Cash and equivalents increased to $20.5 million in 1997 from $18.3 million in 1996. The principal source of cash was net income of $3.6 million. In addition, the Company increased its payables to brokers and dealers and accrued research/services payable by $3.9 million and $1.8 million, respectively (increasing liquidity). These increases were offset by increases in receivables from customers and net securities owned of $3.6 million and $0.7 million, respectively (decreasing liquidity). The decrease in cash from investing activities was primarily attributed to an increase in the Company's investment in U.S. Treasury obligations and purchases of equipment, furniture and leasehold improvements of $1.0 million (decreasing liquidity). The decrease in cash from financing activities was primarily attributable to purchases of shares of the Company's Common Stock of $3.1 million, offset by the issuance of treasury stock of $0.8 million and discontinuance of the payment of quarterly dividends during 1997. 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 continues to explore 16 opportunities to expand existing businesses and to acquire new businesses, which could potentially have an impact on liquidity and capital resources. YEAR 2000 READINESS DISCLOSURE The year 2000 issue ("Y2K Issue") is the result of computer systems and applications that currently use two digits rather than four to recognize a particular year. The Y2K Issue affects the Company's information technology ("IT") systems (i.e., computer systems, network elements and software applications), as well as other business systems that have time-sensitive programs or microprocessors ("non-IT systems") that may not properly reflect or recognize the year 2000. The failure to reflect or recognize dates after 1999 could cause the Company's IT and non-IT systems to fail or cause errors which could lead to disruptions in operations or increased costs. Such failures could, for example, limit the Company's ability to execute trades, cause settlement of trades to fail, lead to incomplete or inaccurate accounting, recording or processing of securities trades, result in the generation of erroneous results or give rise to uncertainty about the Company's exposure to certain risks. If not remedied, potential risks include business interruption or shutdown, financial loss, regulatory actions, reputational harm and legal liability. The Company's operating subsidiaries are regulated by the SEC and comparable foreign regulators, as well as by NASDR and securities exchanges of which its subsidiaries are members. See "Business - Regulation". The Company's principal operating subsidiary, Hoenig & Co., is a U.S. registered broker-dealer and New York Stock Exchange member. As such, Hoenig & Co., is expected to achieve various milestones with respect to the Y2K Issue (i.e., remediation and testing) by March 31, 1999 and must submit a written certification that it is Y2K compliant by June 30, 1999. The Stock Exchange of Hong Kong requires that its members, including Hoenig (Far East) Limited, meet similar milestones by March 31, 1999 and file periodic status reports regarding its Y2K preparedness. Hoenig & Co. also is required to file a Form BD-Y2K with the SEC by April 30, 1999 which details its progress with respect to the Y2K Issue. In addition, under new SEC Rule 17a-5, Hoenig & Co. has retained an independent accounting firm to perform agreed upon procedures pursuant to AICPA Statement of Position 98-8 with regard to Hoenig & Co.'s Y2K effort and to prepare a report which must be filed with the SEC by April 30, 1999. The Company's U.S. registered investment adviser, Axe-Houghton Associates, must file a Form ADV-Y2K with the SEC detailing its Y2K effort and state of preparedness. The first such report was filed in December 1998, and the next one is due by June 7, 1999. The Company has developed a five-phase program for addressing the Y2K Issue, which consists of the following: o Phase I is defining the Y2K Issue and what constitutes Y2K compliance and educating Company personnel about the Y2K Issue. o Phase II is identifying those systems which may be affected by the Y2K Issue. o Phase III is developing action plans to address the Y2K Issue for identified systems. o Phase IV is the testing of the action plans intended to resolve the Y2K Issue. o Phase V is the implementation of the action plans. The Company has completed Phase I of its program and has completed Phase II with respect to internal IT systems and non-IT systems that may be affected by the Y2K Issue, except with respect to several systems provided by certain third-party software vendors who have not yet confirmed their Y2K readiness. Like many financial services companies, the Company is heavily reliant upon third parties for many of the IT and non-IT systems that are essential to the Company's ability to perform its day-to-day operations. These third parties include trading counter-parties, financial intermediaries, securities exchanges, depositories, clearing brokers and agencies, clearing houses, commercial banks and various vendors, including providers of market data and pricing services, telecommunication services and other utilities. The Company continues to communicate with, and evaluate responses from, such third parties to determine the extent to which they are vulnerable to the Y2K Issue. As of December 31, 1998, the Company had not yet received sufficient information from certain third parties regarding their Y2K readiness. Based on current information, these third parties are expected to confirm their Y2K readiness by May 31, 1999. Most of the Company's third-party service providers issued upgrades or replacement products that are Y2K compliant in 1998; however, certain third parties failed to deliver Y2K upgrades by December 31, 1998 as expected. These third-party delays have delayed the Company's completion of Phases II and III from December 31, 1998, as previously reported. The Company has identified a number of internal IT and non-IT systems as being Y2K compliant. With respect to all systems identified as not Y2K compliant, the Company is in the process of remediating any Y2K problems through upgrades, corrections and replacements. As of February 28, 1999, the Company has completed 70% of Phase III and expects to complete Phase III with respect to its mission critical systems by March 31, 1999 and all other systems by May 31, 1999. The Company is in the process of testing its mission critical systems for Y2K compliance (Phase IV), which includes internal testing, industry-wide testing, point-to-point testing with third parties and integration testing. Hoenig (Far East) Limited was the Company's only brokerage subsidiary that was required to participate in industry-wide testing. Hoenig (Far East) Limited achieved successful results in the industry-wide tests conducted by The Stock Exchange of Hong Kong in March 1999. The Company anticipates that it will complete testing its mission critical systems for Y2K compliance by May 31, 1999. The Company also has begun to implement the changes necessary to address potential Y2K failures of its mission critical systems (Phase V) and anticipates that it will complete Phases IV and V of its program by June 30, 1999. Phases III and IV also involve developing contingency plans to address mission critical systems. The Company has developed contingency plans for its mission critical IT and non-IT systems located in the United States and is developing contingency plans for mission critical systems located in its international offices to timely address any potential Y2K problems. These plans define alternate services or products to be used (e.g., market data systems) or alternate processes to be followed in the event that a mission critical system fails. The failure to develop and implement, if necessary, adequate contingency plans could have a material adverse effect on the Company's financial condition, results of operations, and cash flows. Notwithstanding the Company's efforts to make contingency plans, there may not be readily available alternatives for the services provided by the Company's clearing brokers, securities exchanges and utilities. Even if the Company succeeds in addressing the Y2K Issue with respect to its internal systems, it can be materially adversely affected by the failures of third parties, such as its clearing brokers, clients, market counter-parties and exchanges, to remediate their own Y2K problems. In particular, in some international markets where the Company conducts business, the level of awareness and remediation efforts relating to the Y2K Isssue are believed to be less advanced than in the United States, and it is more difficult to obtain information from third parties about their Y2K readiness. As is true for other companies, the Company is vulnerable to Y2K failures beyond its control, particularly with respect to utility and transportation service providers. The Company has hired one full-time consultant as well as other consultants on an as needed basis to assist Company personnel in effecting the Company's Y2K program. In order to focus attention on the Y2K Issue, management has deferred certain other technology projects, but this deferral is not expected to have a material adverse effect on the Company's financial condition, results of operations and cash flows. Based on current information, the Company believes that,during 1999 and 2000, it will spend approximately $600,000 to $675,000 to complete the five-phase Y2K program and address the Y2K Issue, which includes the costs of software replacements and corrections, additional hardware and hardware upgrades, consulting fees and costs of additional personnel needed to implement contingency plans. The increase in estimated Y2K costs reflects additional anticipated consulting fees and an increase in the allocation of internal resources to the Y2K effort. The Company does not expect these costs to be material to its financial condition, results of operations or cash flows in a given period. The Company has funded, and will continue to fund, Y2K costs through operating cash flow. Y2K costs are expensed as they are incurred. The total amount of Y2K expenses incurred through February 28, 1999 was $269,598. The costs of addressing the Y2K Issue and anticipating dates for completing various Phases of the Company's Y2K Plan are based on management's best estimates, which were derived using numerous assumptions of future events, including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, the ability of third parties to address the Y2K Issue, the availability of cost-effective alternatives or replacements for third-party products and services which are not Y2K compliant and similar uncertainties. EUROPEAN ECONOMIC MONETARY UNION (EMU) Beginning January 1, 1999, the "Euro" was adopted as the common legal currency of the participating countries in the European Economic Monetary Union (EMU). As a result, various issuers re-denominated their securities in Euro. The Euro and participating member currencies will co-exist for a three-year transition period, with the Euro replacing the national currencies of participating countries at the end of the transition period. The Company completed a successful conversion to the Euro and has commenced trading and settlement in Euro without material exceptions. The costs associated with preparing the Company's IT systems for the Euro conversion, all of which were incurred and expensed in 1998, were immaterial. 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 market value, cash flows and earnings of an investment and related derivatives as a result of fluctuations in interest rates, foreign exchange rates and equity prices. Market risk is inherent in investments that contain derivative and non-derivative financial instruments. The Company has established procedures to manage its exposure to market fluctuations and the changes in the market value of its investments. At December 31, 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 o Two market-neutral limited partnerships 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. The flexible, market-linked deposit is not federally insured; however, the sponsoring bank has agreed to protect 100% of the Company's principal investment, less the bank's management fees, if the deposit is maintained for one year. Each of the two market-neutral limited partnerships 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. 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. The value of these investments at December 31, 1998 was $4,637,881. 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. In 1999, the Company intends to reduce 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. This is expected to occur by the end of March 1999. The Company does not plan to renew its investment in the bank-sponsored deposit account once it matures in March 1999. The funds previously invested in the limited partnerships and the deposit account will be invested in U.S. Treasury securities and money market funds. The Company will be subject to market risk (equity price risk) during the period prior to the redemption of these investments. 19 The following paragraphs address the significant market risks associated with the Company's investments and related derivatives as of December 31, 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 depend upon the performance of each of the investment managers chosen. The Company attempts to reduce the risk of loss in its investments by using several professional money managers, whose results are reviewed on a monthly basis by management. In addition, the Company regularly consults with each of these managers regarding their investment processes. RISK MEASUREMENT: SENSITIVITY ANALYSIS The Company measures market risk related to its holdings of financial instruments based on changes in interest rates, foreign currency 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 year ended December 31, 1998, the Company used interest rates and equity prices on its financial instruments to perform the sensitivity analysis. The sensitivity analysis has been prepared separately for each of the Company's market risk exposures (interest rate, equity price, foreign exchange), related to its non-trading financial instrument portfolios. The Company does not maintain a portfolio for trading purposes. 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 prices. 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 20 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 and equity prices 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 interest rate sensitive portfolios. However, the Company 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 interest rate sensitive portfolios as of December 31, 1998. Non-Trading portfolio: Potential Losses on Interest Rate Sensitive Portfolios Fair values $280,985 Cash flows $547,098 Earnings $547,098 A hypothetical 10% change in equity prices, does not have a material effect on the fair values, earnings and cash flows of the Company. In addition, a hypothetical 10% change in foreign currency exchange rates would result in a potential loss of $301,290 in the fair value of the Company's foreign currency position, and would have an immaterial effect on the earnings and cash flows of the Company. 21 Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------- See Index to Financial Statements on Page F-1 in Item 14. Item 9. Changes in and Disagreements with Accountants on Accounting and - ------------------------------------------------------------------------- Financial Disclosure -------------------- Not applicable. 22 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 1999 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 1999 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 1999 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 1999 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 1999 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference. 23 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. *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 between the Registrant and Max H. Levine. (Incorporated herein by reference to Exhibit 10(a)(2) to the Registrant's Registration Statement on Form S-1 filed August 23, 1991.) *10.5 Employment Agreement between the Registrant and Alan B. Herzog. (Incorporated herein by reference to Exhibit 10(a)(3) to the Registrant's Registration Statement on Form S-1 filed August 23, 1991.) *10.6 Employment Agreement between Axe-Houghton Associates, Inc. and J. Richard Walton, including form of Convertible Subordinated Debenture. (Incorporated herein by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.) *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. (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.) *10.10 Separation Agreement between the Registrant and J. Richard Walton, dated October 31, 1996. (Incorporated by reference to Exhibit 10.10 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.) - ---------------- * Identifies a management contract or compensatory plan or arrangement. 24 *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 on 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 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 of 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. 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. 25 HOENIG GROUP INC. INDEX TO FINANCIAL STATEMENTS PAGE FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FINANCIAL STATEMENTS: Independent Auditors' Report F-2 Consolidated Financial Statements: Statements of Financial Condition December 31, 1998 and December 31, 1997 F-3 Statements of Income For the Years Ended December 31, 1998, 1997 and 1996 F-4 Statements of Comprehensive Income For the Years Ended December 31, 1998, 1997 and 1996 F-5 Statements of Changes in Stockholders' Equity For the Years Ended December 31, 1998, 1997 and 1996 F-6 Statements of Cash Flows For the Years Ended December 31, 1998, 1997 and 1996 F-7 Notes to Consolidated Financial Statements F-8 - F-20 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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP New York, New York March 29, 1999 F-2
HOENIG GROUP INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 1998 and DECEMBER 31, 1997 1998 1997 ---- ---- ASSETS Cash and equivalents $19,575,824 $20,468,926 U.S. Government obligations, at market value 10,909,066 17,754,737 Receivables from correspondent brokers and dealers 8,179,525 6,837,648 Receivables from customers 78,864 4,031,489 Equipment, furniture and leasehold improvements, net of accumulated depreciation and amortization 1,704,407 2,207,121 Securities owned, at market value 9,016,826 2,065,399 Exchange memberships, at cost 1,321,235 1,321,235 Investment management fees receivable 1,963,374 1,297,684 Deferred research/services expense 1,153,861 1,070,079 Investment in limited partnerships 5,343,787 633,858 Other assets 4,092,770 3,333,167 ----------- ----------- Total Assets $63,339,539 $61,021,343 =========== =========== LIABILITIES and STOCKHOLDERS' EQUITY LIABILITIES Accrued research/services payable $11,927,766 $8,341,475 Accrued compensation 7,317,812 5,701,392 Payable to brokers and dealers 269,997 4,579,680 Payable to customers 1,688,298 902,914 Accrued expenses 1,474,478 728,726 Other liabilities 644,003 1,241,435 ------------- ----------- Total Liabilities 23,322,354 21,495,622 ----------- ----------- STOCKHOLDERS' EQUITY Common Stock $.01 par value per share; Voting- authorized 40,000,000 shares, issued - 10,846,150 shares in 1998 and 10,809,750 shares in 1997 108,462 108,098 Additional paid in capital 27,301,478 26,628,159 Accumulated other comprehensive loss (883,750) (930,035) Retained earnings 24,876,560 20,190,841 ------------ ------------ 51,402,750 45,997,063 Less restricted stock (150,000) - Less treasury stock at cost - 2,202,911 shares in 1998 and 1,618,378 shares in 1997 (11,235,565) (6,471,342) ------------ ----------- Total Stockholders' Equity 40,017,185 39,525,721 ------------ ---------- Total Liabilities and Stockholders' Equity $63,339,539 $61,021,343 =========== =========== 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, 1998, 1997 and 1996 Operating Revenues 1998 1997 1996 ---- ---- ---- Gross commissions ............................... $76,234,097 $69,218,634 $64,015,412 Investment management fees....................... 7,568,122 6,688,773 5,616,415 Other............................................ 141,962 407,927 398,413 ---------- ---------- ---------- Total operating revenues....................... 83,944,181 76,315,334 70,030,240 ---------- ---------- ---------- Expenses Clearing, floor brokerage and exchange charges... 9,542,635 10,490,055 11,415,464 Employee compensation............................ 21,983,653 20,198,409 17,150,265 Independent research and services................ 33,656,253 31,194,531 29,083,205 Other............................................ 11,619,379 10,532,372 9,151,384 ---------- ---------- ---------- Total expenses................................ 76,801,920 72,415,367 66,800,318 ---------- ---------- ---------- Operating Income.................................. 7,142,261 3,899,967 3,229,922 Investment Income and Other Interest, dividends.............................. 1,861,714 1,956,162 1,577,749 Gain (loss) on investments and other............. (581,529) 140,925 159,140 ---------- ---------- ---------- Net investment income and other.................. 1,280,185 2,097,087 1,736,889 ---------- ---------- ---------- Income before income taxes....................... 8,422,446 5,997,054 4,966,811 Provision for income taxes....................... 3,736,727 2,417,390 2,080,024 ---------- ---------- ---------- Net income ...................................... $4,685,719 $3,579,664 $2,886,787 ========== ========== ========== Net income per share basic ..................... $ .53 $ .38 $ .31 ========== ========== ========== Net income per share diluted..................... $ .50 $ .37 $ .31 ========== ========== ========== 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, 1998, 1997 and 1996 1998 1997 1996 ---- ---- ---- Net income $4,685,719 $3,579,664 $2,886,787 ---------- ---------- ---------- Other comprehensive income (loss), net of tax Foreign currency translation adjustment 79,092 (162,344) (21,419) Tax expense (benefit) 32,807 (59,157) (8,953) ---------- ---------- --------- 46,285 (103,187) (12,466) ---------- ---------- --------- Comprehensive income $4,732,004 $3,476,477 $2,874,321 ========== ========== ========== 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, 1998, 1997 and 1996 Accumulated Other Additional Comprehensive Common Paid In Retained Treasury Income Restricted Stock Capital Earnings Stock (Loss) Stock Totals - ---------------------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1996 $106,372 $25,724,382 $14,656,408 $(5,214,535) $(814,382) - $34,458,245 Net income 2,886,787 2,886,787 Dividends (932,018) (932,018) Employee stock options and purchase plans 303,465 303,465 Issuance of treasury stock (151,959) 1,062,458 910,499 Issuance of common stock 1,262 235,516 236,778 Foreign currency translation adjustment (12,466) (12,466) -------- ----------- ----------- ------------- ---------- ---------- -------------- Balance, December 31, 1996 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 Issuance of restricted stock 300,000 (150,000) 150,000 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 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 ======== =========== =========== ============= ========== ========== ============== 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, 1998, 1997 and 1996
1998 1997 1996 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,685,719 $ 3,579,664 $ 2,886,787 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,262,500 1,185,518 855,016 Loss on disposal of fixed assets 420,225 - 80,950 Foreign currency translation adjustment 46,285 (103,187) (12,466) Issuance of stock compensation 447,057 516,334 303,465 Changes in assets and liabilities: Securities owned, net 690,945 (709,444) (47,438) Receivable from correspondent brokers and dealers (1,341,877) (673,519) (1,414,426) Receivable from customers 3,952,625 (3,595,163) (436,326) Investment management fees receivable (665,690) (498,313) (311,967) Payable to customers 785,384 673,547 229,367 Deferred research/services expense (83,782) (437,165) 237,009 Other assets (759,603) (597,443) 265,065 Payable to brokers and dealers (4,309,683) 3,938,975 478,277 Accrued research/services payable 3,586,291 1,788,350 1,706,186 Accrued compensation 1,616,420 1,252,303 2,012,684 Accrued expenses 745,752 (235,019) (1,601,539) Other liabilities (512,307) 359,610 198,224 ------------- ------------- ------------- Net cash provided by operations 10,566,261 6,445,048 5,428,868 ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in U.S. Government obligations 6,845,671 (972,325) (5,126,818) Investment in limited partnerships, at equity (4,709,929) (130,270) 495,158 Investment in securities (7,727,497) 144,057 796,720 Acquisition of exchange seat - - (511,272) Purchase of equipment, furniture and leasehold improvements (1,180,011) (1,007,090) (1,105,390) ------------- ------------- ------------- Net cash (used in) investing activities (6,771,766) (1,965,628) (5,451,602) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends - - (932,018) Issuance of restricted stock 150,000 - - Treasury stock purchased (5,478,302) (3,110,060) - Issuance of treasury stock 640,705 791,680 910,499 Issuance of common stock - - 236,778 ------------- ------------- ------------- Net cash (used in) provided by financing activities (4,687,597) (2,318,380) 215,259 ------------- ------------- ------------- Net increase (decrease) in cash and equivalents (893,102) 2,161,040 192,525 Cash and equivalents beginning of year 20,468,926 18,307,886 18,115,361 ------------- ------------- ------------- Cash and equivalents end of year $19,575,824 $20,468,926 $18,307,886 ============= ============= ============= Supplemental disclosure of cash flow information: Interest paid: $ 160,540 $ 187,067 $ 40,767 Taxes paid: $ 4,240,580 $ 1,958,250 $ 1,419,169
- - Non-cash item: 1996 conversion of subordinated debenture to common stock was $62,500. 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, 1998 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: Securities transactions 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 and a bank sponsored flexible market-linked deposit, are valued at market. Unrealized gains and losses are reflected in the 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 Statements of Financial Condition. Included in accrued research/services payable and in the Company's 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 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 Statements of Comprehensive Income and are accumulated in a separate component of stockholders' equity in the Company's Statements of Financial Condition. F-8 For purposes of the 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 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 paid. All receivables from correspondent brokers and dealers are fully collectible; therefore, no provision for uncollectibles is required. Payables to brokers and dealers represent amounts due for execution and settlement of customer transactions. Receivables from and payables to customers represent 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 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 fee receivables; 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, 1998 and 1997, goodwill net of accumulated amortization was $1,534,349 and $1,007,056, respectively, and is included in other assets in the Statements of Financial Condition. The Financial Accounting Standards Board has issued Statement of Financials Standards No. 130, "Reporting Comprehensive Income", which is effective for fiscal years beginning after December 15, 1997. This Statement establishes standards of reporting of comprehensive income and its components. Comprehensive income includes gains or losses resulting from the translation of the Company's foreign currency financial statements which are included in stockholder's equity in the Statements of Financial Condition. Certain reclassifications have been made to periods prior to 1998 to conform to the 1998 presentation. 3. EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS Equipment, furniture and leasehold improvements are summarized as follows:
December 31, --------------------------- 1998 1997 ---- ------ Equipment $2,747,163 $2,863,405 Furniture 963,468 925,612 Leasehold Improvements 1,181,451 1,171,148 --------- --------- Total 4,892,082 4,960,165 Less: Accumulated depreciation and amortization (3,187,675) (2,753,044) ----------- ----------- $1,704,407 $2,207,121
4. COMMITMENTS AND CONTINGENCIES. The Company has leases covering office space and automobiles which expire or are terminable on various dates beginning in May 1999 and ending in 2002. Future minimum annual rental payments under these leases approximate $820,000 in 1999, $571,000 in F-9 2000, $482,000 in 2001 and $223,000 in 2002. Various leases contain provisions for escalation of rental payments based on increases in certain costs incurred by the landlord. The composition of total rental expense for the years ended December 1998, 1997 and 1996 was as follows:
1998 1997 1996 ---- ---- ---- Minimum rentals $ 921,000 $ 924,000 $ 925,000 Contingent rentals 168,000 193,000 155,000 --------- ------- ------- Total rental expense $1,089,000 $1,117,000 $1,080,000 ========== ========== ==========
Pursuant to an employment agreement expiring on December 31, 1999, the Company is obligated to pay one executive officer aggregate minimum annual compensation of $400,000. Pursuant to employment agreements expiring on December 31, 2001, Hoenig is obligated to pay one employee and one executive officer aggregate minimum compensation of $825,000. In addition, Hoenig has employment arrangements with seven employees, which provide for severance payments in the event of termination of employment without cause. The total amount due under these agreements, which expire at various times through August 4, 2000, is approximately $587,000. 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 shareholders' 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 a shareholder's agreement in order to cover its potential liability under those shareholder agreements. The cash surrender value of these insurance policies was $628,065 and $517,815 at December 31, 1998 and 1997, respectively. In 1998, a former employee of the Company instituted an arbitration before NASD Regulation against the Company and Fredric P. Sapirstein, the Company's Chief Executive Officer. The former employee principally alleges that defendants wrongfully terminated his employment in breach of the employment agreement and falsely stated the reason for his termination in a securities regulatory filing on Form U-5. The former employee is seeking approximately $2.2 million in compensatory damages against each of the defendants, plus punitive damages, liquidated damages, interest, reasonable attorneys' fees and modification of the Form U-5. The Company has filed an answer, denying the former employee's allegations, and a counter-claim against the former employee seeking damages of not less than $220,000, based on the former employee's breach of his employment agreement with the Company. The Company believes that it has meritorious defenses to the arbitration, and intends to vigorously oppose the claims and pursue its counter-claim against the former employee. In the opinion of management, resolution of this matter is not expected to have a material adverse affect on the Company's financial condition, results of operations or cash flows. 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, 1998, Hoenig's minimum required net capital was $855,000, its net capital ratio was .99 to 1, and its actual net capital was approximately $12,904,000, which was approximately $12,049,000 in excess of regulatory requirements. Hoenig's Tokyo office (a branch of Hoenig & Co., Inc.) capital requirement at December 31, 1998 was (Y)45,000,000 ($396,000). 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, 1998 was (pound)415,000 F-10 ($689,000). It had actual capital of (pound)1,220,000 ($2,025,000), and excess financial resources at such date of (pound)805,000 ($1,336,000). Far East is required to maintain liquid capital of the greater of HK$3,000,000 ($388,000) or 5% of the average quarterly liabilities. Far East's required liquid capital was approximately HK$11,325,000 ($1,462,000) at December 31, 1998, and it had actual capital of HK$41,851,000 ($5,403,000) and excess liquid capital of approximately HK$30,527,000 ($3,941,000). 6. PENSION PLAN. 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 $524,000 for 1998, $475,000 for 1997, and $423,000 for 1996. 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, mutual funds, limited partnerships 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 agents on a daily basis. 8. FINANCIAL INSTRUMENTS. For purposes of increasing its rate of return on investments, in 1998 the Company modified its cash management program and invested in, among other things, a diversified portfolio of investment grade preferred stock and U.S. Treasury futures used to hedge the preferred stock positions and a bank-sponsored, flexible, market-linked deposit which maintains investments in U.S. foreign equity indices, floating rate deposits, baskets of European equity securities and a U.S. Treasury zero coupon bond. Each of these investments is managed by professional money managers. The flexible, market-linked deposit is not federally insured; however, the sponsoring bank has agreed to protect 100% of the Company's principal investment, less management fees due to the bank, if the Company maintains the deposit for one year. Each of these investments uses or includes derivative financial instruments for the purpose of reducing exposure to certain investment risks, including interest rate fluctuations. These investments are accounted for at fair market value based upon available market information and valuations received from the managers. Changes in the market value, as well as gains or losses resulting from the termination or maturity of these instruments, are recognized as gains or losses on investments in the period in which they occur. The Company does not hold financial instruments for trading purposes as part of its business operations. The Company has determined that it will not renew the flexible deposit account after the one year term matures in March 1999. These funds will be reinvested in U.S. Treasury obligations and money market funds. Substantially all of the Company's financial instrument assets and liabilities are carried at fair value or contracted amounts which approximate fair value. 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 0.29% ($41,328) and 18.56% ($664,578) at December 31, 1998 and 0.41% ($41,506 and 17.1% ($592,352) at December 31, 1997. Axe-Houghton does not maintain control of the partnerships for consolidation purposes. These investments are accounted for under the equity method. In 1998, the Company modified its cash management program for the purpose of increasing its rate of return on investments. As part of that program, the Company invested in two multi-manager, market neutral limited partnerships. These multi-manager limited partnerships, which are managed by professional F-11 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. The Company's investment interest in one of the limited partnerships was approximately 16.25% ($1,718,109) at December 31, 1998 and is accounted for under the equity method. The remaining limited partnership investment was less than a 5% interest at December 31, 1998 and is accounted for at Fair Market Value. The aggregate value of these investments at December 31, 1998 was $4,637,881. The Company has determined that it would reduce its investments in these limited partnerships by approximately $3.6 million in 1999. This reduction will occur during the first half of 1999. The Company expects to reinvest these funds in U.S. Treasury obligations and money market funds. 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. The primary differences are deferred compensation charges and unrealized losses and gains on investments. Income from operations before provision for taxes on income consists of: 1998 1997 1996 ---- ---- ---- Domestic $7,718,709 $4,759,747 $4,434,054 Foreign 703,737 1,237,307 532,757 ------- --------- ---------- $8,422,446 $5,997,054 $4,966,811 ========== ========== ========== The provision for taxes on income from operations consists of: 1998 1997 1996 ---- ---- ---- Current tax expense Federal $2,525,506 $1,490,837 $1,418,766 State and local 1,090,174 673,118 489,704 Foreign 196,651 83,722 15,021 ------- --------- --------- Total current provision 3,812,331 2,247,677 1,923,491 --------- --------- --------- Deferred tax expense (benefit) Federal (53,202) 127,222 75,225 State and local (22,402) 42,491 81,308 ---------- ------- -------- Total Deferred (75,604) 169,713 156,533 ---------- ------- ------- Total Provision $3,736,727 $2,417,390 $2,080,024 ========== ========== ========== Deferred tax assets and liabilities consist of the following: 1998 1997 1996 ASSETS ASSETS ASSETS (LIABILITIES) (LIABILITIES) (LIABILITIES) Deferred assets and liabilities Fixed assets $169,119 $147,016 $157,688 Accrued compensation 32,988 195,492 301,451 Investments 61,935 - - Other 34,343 9,107 34,344 ---------- --------- ------- Gross deferred assets 298,385 351,615 493,483 Deferred tax liabilities - Investments (258,290) (426,505) (393,059) Other (32,882) - - ---------- ----------- --------------- Net deferred taxes receivable (payable) $ 7,213 $ (74, 890) $100,424 =========== =========== ========
F-12 The provision for taxes on income for the years ended December 31, 1998, 1997 and 1996 differed from the amount computed by applying the statutory federal income tax rate of 34% as follows:
1998 1997 1996 ---- ---- ---- Computed tax provision $2,863,632 $2,038,998 $1,688,716 State and local taxes, net of Federal benefit 704,729 472,302 277,821 Differential on foreign tax rates (42,620) (336,962) (166,116) Other 210,986 243,052 279,603 ------------ ----------- ----------- Totals $3,736,727 $2,417,390 $2,080,024 ========== ========== ========== Effective tax rate 44.3% 40.3% 41.9% ============ =========== ============
At December 31, 1998, the Company had approximately $2.6 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 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 has a line of credit of approximately $1,350,000 which is secured by certain U.S. Government obligations. No amounts were due under this line of credit at December 31, 1998 or December 31, 1997. Interest is charged at a variable rate equal to the Federal Funds rate plus 1%. In addition, the Company maintains overseas overdraft facilities as follows: (1) (pound)750,000 ($1,245,000), which bears a variable rate of interest based upon prevailing market rates in the United Kingdom and Europe; (2) HK$50,000,000 (approximately $6,455,000), which bears a variable rate of interest based upon current market rates in Hong Kong; and (3) HK$100,000,000 (approximately $12,910,000) in an intra-day overdraft facility to facilitate the settlement of trades, which bears a variable rate of interest. In addition, the Company maintains a $5,000,000 foreign exchange line for trading operations in Hong Kong. No amounts were due under these facilities at December 31, 1998 or December 31, 1997. 12. SEGMENT REPORTING. The Financial Accounting Standards Board issued Statement of Financial Standards No 131, "Disclosures about Segments of an Enterprise and Related Information" to assist financial statement users in assessing the performance of an enterprise, prospect for future cash flows, and to make informed decisions about an enterprise. 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 Company changed its segment presentation in 1998 to better reflect the way in which management evaluates the Company's business in deciding how to allocate resources and assess performance. This change also reflects the restructuring of the Company's international brokerage operations, in particular its Tokyo brokerage operations. The accounting policies of the segment are the same as those described in the summary of significant accounting policies (see footnote 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. F-13 The following table illustrates significant financial data for each reportable segment:
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 profit(loss) 10,617,793 (939,290) 2,539,375 12,217,878 Interest & 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 ----------- ----------- ---------- ----------- 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 profit(loss) 5,782,548 (310,391) 2,261,875 7,734,032 Interest & 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 ----------- ----------- ---------- ----------- DOMESTIC INTERNATIONAL 1996 BROKERAGE BROKERAGE ASSET MGMT TOTAL --------- --------- ---------- ----- Revenues from external customers $42,250,929 $22,162,896 $5,616,415 $70,030,240 Segment operating profit(loss) 5,854,302 26,154 952,342 6,832,798 Interest & investment income 753,735 265,593 136,660 1,155,988 Interest expense 6,113 48,115 60,789 115,017 Depreciation and amortization 37,593 253,516 57,667 348,776 Segment assets 21,820,000 12,927,230 2,390,227 37,137,457 ----------- ----------- ---------- -----------
F-14 Information for the Company's reportable segments as it relates to the consolidated totals are as follows:
1998 1997 1996 ---- ---- ---- OPERATING REVENUES: Domestic brokerage $60,132,665 $46,963,302 $42,250,929 International brokerage 16,243,394 22,663,259 22,162,896 Asset management 7,568,122 6,688,773 5,616,415 ----------- ----------- ----------- Total Operating Revenues $83,944,181 $76,315,334 $70,030,240 =========== =========== =========== OPERATING PROFIT OR LOSS: Domestic brokerage $10,617,793 $5,782,548 $5,854,302 International brokerage (939,290) (310,391) 26,154 Asset management 2,539,375 2,261,875 952,342 General corporate (5,075,617) (3,834,065) (3,602,876) ----------- ----------- ----------- Total operating profit 7,142,261 3,899,967 3,229,922 Interest & investment income 1,280,185 2,097,087 1,736,889 ----------- ----------- ----------- Income before income taxes $8,422,446 $5,997,054 $4,966,811 ========== ========== ========== ASSETS: Domestic brokerage $32,558,465 $23,602,501 $21,820,000 International brokerage 14,795,567 18,450,043 12,927,230 Asset management 5,984,872 3,902,730 2,390,227 General corporate 7,562,438 12,954,891 12,711,281 Unallocated goodwill 1,534,349 1,007,056 739,155 Unallocated fixed assets 903,848 1,104,122 940,002 ----------- ----------- ----------- Total $63,339,539 $61,021,343 $51,527,895 =========== =========== ===========
Prior periods have been restated to conform to the 1998 segment presentation. No one single customer accounted for greater than 10% of total revenues for the years ended December 31, 1998, 1997 and 1996. 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 $.01 per share and 1,000,000 authorized shares of preferred stock with a par value of $.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, 1998, no preferred stock had been issued. On June 17, 1998, the Company's Board authorized the management of the Company to repurchase up to an additional one million shares of the Company's Common Stock from time to time in open-market and privately negotiated transactions. At June 30, 1998, the Company had completed the one million-share repurchase program announced in November 1994. The 1994 repurchase program was in addition to the one million shares repurchased in a previous program announced in the fourth quarter 1992. During 1998, the Company repurchased 790,000 shares of Common Stock at an aggregate cost of $5.5 million, 265,712 shares of which were purchased under the 1998 repurchase program. At December 31, 1998, the Company has repurchased a total of 2,265,712 shares of Common Stock under these three F-15 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 712,801 shares issued out of Treasury Stock) has been $11,235,565. 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 Company's 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 which 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, SARs, 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 Company's 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 shares 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 1,988,000 of shares of stock that would have been issuable under the two earlier stock option plans. 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 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. 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: F-16
WEIGHTED NUMBER NUMBER OF EXERCISE PRICE AVERAGE OF SHARES SHARES PER SHARE EXERCISE PRICE EXERCISABLE ------ --------- -------------- ----------- Outstanding at December 31, 1995 597,367 $2.813-6.325 $4.70 353,700 ======= Granted . . . . . . 253,334 3.625-4.750 3.91 Canceled or expired . . . . . . (208,200) 5.46 -------- ---- Outstanding at December 31, 1996 642,501 2.813-5.750 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 ======== ============ ===== =======
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 December 31, 1995 67,833 $0.10-4.688 $ 0.77 42,500 ====== Granted . . . . . . 941,666 0.10-5.000 4.33 Canceled or expired . . . . . (2,000) 3.625 Exercised . . . . . (42,500) 0.10 0.10 --------- ------ Outstanding at December 31, 1996 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 ========= =========== ====== =======
F-17 U.S. AND U.K. incentive stock options outstanding at December 31, 1998 were as follows:
WEIGHTED AVERAGE NUMBER OF EXERCISE EXERCISABLE SHARES PRICE OPTIONS ------ ----- ------- Price Range $3.625 - 3.875 141,168 $3.66 104,892 (Weighted average contractual life 7.55 yrs) Price Range $4.00 - 4.75 219,917 $4.19 182,697 (Weighted average contractual life 7.02 yrs) Price Range $5.594 - 7.063 158,167 $6.22 51,503 (Weighted average contractual life 8.91 yrs) _______ _____ _______ Total 519,252 $4.66 339,092 ======= ===== =======
U.S. non-qualified stock options outstanding at December 31, 1998 were as follows:
WEIGHTED AVERAGE NUMBER OF EXERCISE EXERCISABLE SHARES PRICE OPTIONS ------ ----- ------- Price Range $0.1 14,999 $ 0.10 12,777 (Weighted average contractual life 2.03 yrs) Price Range $3.625 - 4.75 328,000 $3.70 218,500 (Weighted average contractual life 7.07 yrs) Price Range $5.00 - 6.00 562,500 $5.08 508,334 (Weighted average contractual life 7.90 yrs) Price Range $6.188 - 6.75 (Weighted average contractual life 9.19 yrs) 280,000 $6.32 - ------- ---- ------------ Total 1,185,499 $4.93 739,611 ========= ===== =======
At December 31, 1998, U.S. incentive stock options and U.K. stock options to purchase 519,252 shares were outstanding, but due to vesting requirements, options to purchase 180,160 shares were not exercisable at December 31, 1998. At December 31, 1998, U.S. non-qualified stock options to purchase 1,185,499 shares were outstanding, but due to vesting requirements, 445,888 shares were not exercisable at December 31, 1998. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). 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 No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated in the following table: F-18
1998 1997 1996 ---- ---- ---- Net Income - as reported $4,685,719 $3,579,664 $2,886,787 ========== ========== ========== Net Income - pro forma $3,877,826 $3,098,167 $2,541,407 ========== ========== ========== Earnings per share basic - as reported $ .53 $ .38 $ .31 ========== ========== ========== Earnings per share diluted - as reported $ .50 $ .37 $ .31 ========== ========== ========== Earnings per share basic - pro forma $ .44 $ .33 $ .27 ========== ========== ========== Earnings per share diluted - pro forma $ .41 $ .32 $ .27 ========== ========== ==========
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:
1998 1997 1996 ---- ---- ---- Risk free interest rate 4.75% 5.7% 6.0%-6.5% Dividend yield - - 2.0% Expected life of option 5 years 5 years 5 years Expected volatility as calculated at the time of each grant 24.6%-39.9% 30.4%-135.6% 48.2%-72.0%
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 1996. Transactions related to deferred stock were as follows:
VALUE AT THE NUMBER OF DATE OF SHARES SHARES GRANT VESTED ------ ----- ------ Outstanding at December 31, 1996 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 ====== ========= ======
Restricted Stock. During 1998, the Company issued 41,380 restricted shares of Common Stock to certain employees of the Company under the 1996 Plan. The restricted stock issued vests 50% on the date of F-19 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, 1998, 70 employees were eligible to participate in the 1996 Employee Stock Purchase Plan. During 1998, a total of 36,000 shares of Common Stock 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. During 1996, a total of 53,500 shares were purchased at an average price of $3.45 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, 1998, 24 employees were eligible to participate in the 1997 Foreign Employee Stock Purchase Plan. During 1998, a total of 400 shares were purchased under the 1997 Foreign Employee Stock Purchase Plan 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, 1998, 363,700 shares remain available for issuance under these plans. 16. EARNINGS PER SHARE. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128") with respect to financial statements issued for periods ending after December 15, 1997. SFAS 128 simplifies the standards for computing and presenting earnings per share ("EPS") previously found in APB Opinion No. 15, 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. The following table presents the computations of basic and diluted earnings per share:
1998 1997 1996 ---- ---- ---- Net income available to common stockholders $4,685,719 $3,579,664 $2,886,787 Weighted average shares outstanding 8,808,765 9,397,742 9,253,557 Effect of dilutive instruments Employee stock awards 637,247 373,515 137,559 ---------- ---------- ---------- Total weighted average dilutive shares 9,446,012 9,771,257 9,391,116 Basic earnings per share $ .53 $ .38 $ .31 ========= ========= ========= Diluted earnings per share $ .50 $ .37 $ .31 ========= ========= =========
Stock options on the following number of shares were anti-dilutive and were not included in the calculation above: 1998 - 0 shares, 1997 - 696,500 shares and 1996 - 1,000,667 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 expects to complete the restructuring by the end of the first quarter 1999 and to incur additional expenses of approximately $300,000. F-20 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, 1999 - -------------------------- Officer and Director Fredric P. Sapirstein /s/ Alan B. Herzog Chief Operating Officer, March 29, 1999 - -------------------------- Principal Financial/Accounting Alan B. Herzog Officer and Director /s/ Max H. Levine Executive Vice President March 29, 1999 - -------------------------- and Director Max H. Levine /s/ Kathryn L. Hoenig General Counsel, March 29, 1999 - -------------------------- Secretary and Director Kathryn L. Hoenig /s/ Robert L. Cooney Director March 29, 1999 - -------------------------- Robert L. Cooney /s/ Martin F.C. Emmett Director March 29, 1999 - -------------------------- Martin F.C. Emmett /s/ Robert Spiegel Director March 29, 1999 - -------------------------- Robert Spiegel
EXHIBIT INDEX Exhibit No. Description 3.2 Amended and Restated By-laws. 10.17 Employment Agreement, dated as of April 9, 1998, between Seth M. Lynn, Jr. and Axe-Houghton Associates, Inc. 21.1 Subsidiaries of the Registrant. 23.1 Independent Auditors' Consent. 27.1 Financial Data Schedule. EX-3.2 2 AMENDED AND RESTATED BY-LAWS HOENIG GROUP INC. AMENDED AND RESTATED BY-LAWS ARTICLE 1 OFFICES SECTION 1. REGISTERED OFFICE. The registered office of the Corporation in the State of Delaware shall be located at the principal place of business in such state of the corporation or individual acting as the Corporation's registered agent in Delaware. SECTION 2. OTHER OFFICES. In addition to its registered office in the State of Delaware, the Corporation may have an office or offices in such other places as shall be determined from time to time by the Board of Directors or as the business of the Corporation may require. ARTICLE II MEETING OF STOCKHOLDERS SECTION 1. ANNUAL MEETINGS. The annual meeting of the stockholders of the Corporation shall be held at such time and place (within or without the State of Delaware) as may be designated by the Board of Directors, on the third Thursday in May of each year (or if said day be a legal holiday, then on the next succeeding day which is not a legal holiday), for the purpose of electing directors and transacting such other business as properly may be brought before the meeting. SECTION 2. SPECIAL MEETINGS. Special meetings of the stockholders may be held only upon call of the Board of Directors, of the Executive Committee, of the Chairman of the Board, of the Chief Executive Officer or of the President, at such time and at such place, within or without the State of Delaware, as may be fixed by the Board of Directors, the Executive Committee, the Chairman of the Board, the Chief Executive Officer or the President, as the case may be, and as may be stated in the notice of the meeting. SECTION 3. NOTICE OF MEETINGS. Notice of the time and place of every meeting of the stockholders, and of the purposes of every special meeting of the stockholders, shall be given not less than ten (10) days nor more than sixty (60) days before the date of the meeting, to each stockholder of record then entitled to vote at such meeting, in the manner prescribed by Section 2 of Article VII of these By-laws, except that where the matter to be acted upon is a merger or consolidation of the Corporation, or a sale, lease or exchange of all or substantially all of its assets, such notice shall be given not less than twenty (20) nor more than sixty (60) days prior to such meeting. Such further notice shall be given as may be required by law. Meetings may be held without notice if all stockholders then entitled to vote are present or represented thereat, or if notice is waived by those not present or represented. SECTION 4. QUORUM AND ADJOURNMENT OF MEETINGS. (a) The holders of record of a majority of the shares of the capital stock issued and outstanding, and then entitled to vote, present in person, or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by the law, by the Certificate of Incorporation or by these By-laws. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person, or represented by proxy, shall have power to adjourn the meeting, from time to time, by majority vote of those present, without notice other than announcement at the meeting, until the requisite number of shares of stock then entitled to vote shall be present or represented by proxy. At such adjourned meeting at which such requisite number of shares of stock shall be represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of adjourned meeting shall be given to each stockholder of record entitled to vote thereat. (b) The number of shares required to constitute a quorum, as set forth above, may not be reduced to less than a majority of the shares issued and outstanding without approval of the stockholders. SECTION 5. VOTING. At each meeting of the stockholders every stockholder then having the right to vote at such meeting shall be entitled to vote in person, or by proxy appointed by an instrument in writing subscribed by such stockholder and bearing a date not more than three years prior to such meeting, unless said instrument provides for a longer period. No shares of stock of the Corporation may be voted by proxy at any stockholder meeting by any person unless, prior to or at the time of the commencing of the meeting or reconvening of any adjournment thereof, such proxy shall have been filed with the Secretary of the Corporation. To determine the stockholders entitled to notice of or to vote at any meeting of the stockholders or any adjournment thereof, the Board of Directors may fix, in advance, a record date which shall be not more than sixty (60) days nor less than ten (10) days before the date of such meeting. Except as otherwise provided by the Certificate of Incorporation or by statute, each stockholder of record shall be entitled to one vote for each outstanding share of capital stock standing in his or her name on the books of the Corporation as of the record date. The vote for directors and on any other matter properly coming before the meeting shall be by ballot, except as otherwise provided in the Certificate of Incorporation or as may be required by law. Directors shall be elected by a plurality of votes, and all other matters shall be decided by the affirmative vote of the majority the shares present in person or represented by proxy and entitled to vote on the matter, unless the matter is one for which, by express provisions of statute, of the Certificate of Incorporation or of these By-laws, a different vote is required, in which case such express provision shall govern and control the determination of such matter. There shall be no cumulative voting. Stockholder written consents shall not be permitted. SECTION 6. ELECTION OF DIRECTORS. Nominations for the election of directors may be made by the Board or a committee appointed by the Board or by any stockholder entitled to vote in the election of directors generally; provided, however, any stockholder -2- entitled to vote in the election of directors generally may nominate one or more persons for election as directors at a meeting only if written notice of such stockholder's intent to make such nomination is given to the Secretary of the Corporation not later than (i) with respect to an election to be held at an annual meeting of stockholders, ninety (90) days before the anniversary of the date on which the Corporation first mailed its proxy materials for the prior year's annual meeting of stockholders, and (ii) with respect to an election to be held at a special meeting of stockholders for the election of directors, the close of business on the seventh day following the date on which notice of such meeting is first given to stockholders. Each such notice shall set forth: (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of common stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, had the nominee been nominated, or intended to be nominated, by the Board; and (e) the consent of each nominee to serve as a director of the Corporation if so elected. The presiding officer of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure. SECTION 7. STOCKHOLDERS LIST. It shall be the duty of the officer who shall have charge of the stock ledger to prepare or make, at least ten (10) days before every election, a complete list of stockholders entitled to vote, arranged in alphabetical order. Such list shall be open to the examination of any stockholder for any purpose germane to the meeting during ordinary business hours for said ten (10) days, at the locations specified by the Delaware General Corporation Law. The list shall also be produced and kept at the time and place of election during the whole time thereof, and subject to the inspection of any stockholder who may be present. SECTION 8. INSPECTION OF ELECTION. The Chairman of the Board, prior to each meeting of stockholders, may appoint two judges or inspectors of election to assist the Secretary of the Corporation in the conduct of elections at such meeting. If any judge or inspector of election shall for any reason fail to attend and to act at such meeting, a judge or inspector of election, as the case may be, may be appointed by the chairman of the meeting. In the event action to be taken at any such meeting involves the amendment of the Certificate of Incorporation of the Corporation or the dissolution of the Corporation, the judges or inspectors of election shall be appointed by the Board of Directors or by the meeting. -3- ARTICLE III BOARD OF DIRECTORS SECTION 1. BOARD OF DIRECTORS. The business and affairs of the Corporation shall be managed by a Board of Directors. The Board of Directors may exercise all such powers of the Corporation and do all such lawful acts and things on its behalf as are not by statute or by the Certificate of Incorporation or these By-laws directed or required to be exercised or done by stockholders. SECTION 2. NUMBER; ELECTION; TENURE AND CLASSIFICATION. The number of directors of the Corporation shall be fixed from time to time by resolution of the Board of Directors. Directors need not be stockholders. They shall be elected at the annual meeting of the stockholders, and shall serve until their respective successors shall be elected and qualified. The Board of Directors shall be classified, providing for a staggered three year term for directors in each class. SECTION 3. MEETINGS. Meetings of the Board of Directors shall be held at such place, within or without the State of Delaware, as may from time to time be fixed by resolution of the Board or may be specified in the call of any meeting. Regular meetings of the Board shall be held at such times and at such places as may from time to time be fixed by resolution of the Board, and no notice of such regular meetings need be given. Special meetings may be held at any time upon the call of the Executive Committee, the Chairman of the Board, the Chief Executive Officer, the President or of three directors, on two (2) days' notice to each director by mail or on one day's notice personally, by overnight courier service or by telecopy, telephone, telegraph or electronic mail. A meeting of the Board may be held, without notice, immediately after the annual meeting of the stockholders, at the same place at which such meeting was held. Meetings may be held at any time without notice if all the directors are present or if those not present waive notice of the meeting in writing, either before or after the meeting. SECTION 4. QUORUM. A quorum for the transaction of business at all meetings of the Board of Directors shall consist of a majority of the directors then in office, which in no case shall be less than one third of the whole Board. If, however, such quorum shall not be present, the directors present shall have power to adjourn the meeting, from time to time, by majority vote, without notice other than announcement at the meeting, until the requisite number of directors shall be present. The act of the majority of the directors present at any meeting at which there is a quorum shall be the act of the Board. SECTION 5. VACANCIES. Vacancies in the Board of Directors and newly created directorships resulting from an increase in the authorized number of directors may be filled only by a majority of the directors then in office, although less than a quorum, and the directors so chosen shall hold office until their successors are duly elected and qualified or until their earlier death, resignation or removal. -4- SECTION 6. RESIGNATION AND REMOVAL. A director may resign at any time by giving written notice to the Board of Directors or to the Chief Executive Officer of the Corporation. Such resignation shall take effect upon receipt thereof by the Board of Directors or by the Chief Executive Officer, unless otherwise specified therein. Any director may be removed with or without cause by directors or stockholders as provided in the Certificate of Incorporation, to the extent consistent with the Delaware General Corporation Law. SECTION 7. COMPENSATION. Each director shall receive for services rendered as a director of the Corporation such compensation as may be fixed by the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. SECTION 8. CONSENTS. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting if all members of the Board of Directors consent to such action in writing, and such writing or writings are filed with the minutes of the proceedings of the Board of Directors. SECTION 9. TELEPHONIC MEETINGS OF DIRECTORS. The Board of Directors may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation by such means shall constitute presence in person at such meeting. ARTICLE IV COMMITTEES SECTION 1. EXECUTIVE COMMITTEE. (a) There may be an Executive Committee of three or more directors designated by resolution passed by a majority of the whole Board, who shall hold office during their terms as directors, provided the Board shall have the power at any time to remove any of the members thereof and to appoint other persons in lieu of the persons so removed. The Board of Directors shall also designate the chairman of the Executive Committee. During the intervals between the meetings of the Board of Directors, the Executive Committee shall possess and may exercise all the powers of the Board of Directors, to the extent permitted by the Delaware General Corporation Law, including the power to authorize the seal of the Corporation to be affixed to all papers which may require it, provided, however, that the Executive Committee shall not have power to amend these By-laws, or to fill vacancies in the Board of Directors, or to fill vacancies in or to change the membership of the Executive Committee. The Executive Committee shall also have, and may exercise, all the powers of the Board of Directors, except as aforesaid, whenever a quorum or the Board shall fail to be present at any meeting of the Board. (b) All action of the Executive Committee shall be reported to the Board of Directors at its meeting next succeeding such action, and shall be subject to revision and alteration by the Board, provided that no rights of third parties shall be affected by any such provision or alteration. Regular minutes of the proceedings of the Executive Committee shall -5- be kept in a book provided for that purpose. Vacancies in the Executive Committee shall be filled by the Board of Directors. (c) A majority of the Executive Committee shall be necessary to constitute a quorum, and, in every case, an affirmative vote of a majority of the members shall be necessary for the passage of any resolution. It shall fix its own rules of procedure and shall meet as provided by such rules or by resolution of the Board, and it shall also meet at the call of the chairman or of any two members of the Committee. If the Executive Committee fails to fix its own rules, the provisions in these By-laws, pertaining to the calling of meetings and conduct of business by the Board of Directors, shall apply as nearly as may be. SECTION 2. DESIGNATION AND POWERS OF OTHER COMMITTEES. The Board of Directors may, in its discretion, by the affirmative vote of a majority of the whole Board, appoint such other committee of two or more directors which shall have and may exercise such powers as shall be conferred or authorized by the resolution appointing them, to the extent permitted by the Delaware General Corporation Law. A majority of any such committee, if the committee be composed of more than two members, may determine its action and fix the time and place of its meetings unless the Board of Directors shall otherwise provide. The Board shall have the power at any time to fill vacancies in, to change the membership of, or to discharge any such committees. ARTICLE V OFFICERS SECTION 1. EXECUTIVE OFFICERS. The Board of Directors, at its first meeting after incorporation, and at its first meeting after each annual meeting of stockholders, may choose a Chairman of the Board and shall elect a Chief Executive Officer, President, Chief Operating Officer, Secretary and Treasurer and from time to time may elect one or more Executive or Senior Vice Presidents, Assistant Secretaries or Assistant Treasurers and such other officers as it shall deem necessary. Except for the Chairman of the Board, no executive officer need be a member of the Board. Any number of offices may be held by the same person, except that the office of Secretary may not be held by the Chairman of the Board, the Chief Executive Officer or the President. The Chief Executive Officer or the President may grant Executive Vice President, Senior Vice President and other types of Vice President titles to employees of the Corporation, but such persons shall not be officers of the Corporation within the meaning of the Delaware General Corporation Law unless such appointment is approved by the Board of Directors. SECTION 2. OTHER OFFICERS; AGENTS. The Board of Directors may, by resolution, at any time, appoint such other officers and agents as it shall deem necessary, who shall hold their offices for such terms and shall exercise such powers and perform such offices as shall be determined from time to time by the Board. -6- SECTION 3. TENURE; RESIGNATION; REMOVAL; VACANCIES. Each officer of the Corporation shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal; provided, that if the term of office of any officer elected or appointed pursuant to Section 2 of this Article V shall have been fixed by the Board of Directors, he or she shall cease to hold such office not later than the date of expiration of such term regardless of whether any other person shall have been elected or appointed to succeed him or her. Any officer or agent elected or appointed by the Board of Directors may be removed at any time, with or without cause, by the affirmative vote of the majority of the whole Board of Directors; provided, that any such removal shall be without prejudice to the rights, if any, of the officer so employed under any employment contract or other agreement with the Corporation. An officer may resign at any time upon written notice to the Board of Directors or the Chief Executive Officer. If the office of any officer becomes vacant by reason of death, resignation, retirement, disqualification, removal from office or otherwise, the Board of Directors may choose a successor or successors to hold office for such term as may be specified by the Board of Directors. SECTION 4. COMPENSATION. The salaries of all officers and agents of the Corporation shall be fixed by the Board of Directors or in such manner as shall be determined by the Board of Directors. SECTION 5. AUTHORITY AND DUTIES. All officers as between themselves and the Corporation, shall have such authority and perform such duties in the management of the Corporation as may be provided in these By-laws. In addition to the powers and duties hereinafter specifically prescribed for the respective officers, the Board of Directors may from time to time impose or confer upon any of the officers such additional duties and powers as the Board of Directors may see fit, and the Board of Directors may from time to time impose or confer any or all of the duties and powers hereinafter specifically prescribed for any officer upon any other officer or officers. SECTION 6. CHAIRMAN OF THE BOARD. The Chairman of the Board of Directors, who shall be a director, shall preside at all meetings of the stockholders and of the Board of Directors at which he or she is present; and, in his or her absence, the Chief Executive Officer shall preside at such meetings. Except where by law the signature of the Chief Executive Officer or the President is required, the Chairman shall possess the power to sign all certificates, contracts, and other instruments of the Corporation. During the absence or disability of the Chief Executive Officer, the Chairman shall exercise all the powers and discharge all the duties of the Chief Executive Officer. The Chairman shall have such other powers and perform such other duties as from time to time may be conferred or imposed upon him or her by the Board of Directors. SECTION 7. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer of the Corporation shall have general control and management of the business affairs of the Corporation, shall see that all resolutions and orders of the Board of Directors are carried into effect, and in connection therewith, shall be authorized to delegate to other officers of the Corporation such of his or her powers and duties as Chief Executive Officer at such times and -7- in such manner as he or she may deem to be advisable. If there is no Chairman of the Board or during the absence or disability of the Chairman of the Board, the Chief Executive Officer shall exercise all of the powers and discharge all of the duties of the Chairman of the Board. Except where by law the signature of the President is required, the Chief Executive Officer shall possess the power to sign all certificates, contracts, and other instruments of the Corporation. He or she shall, in the absence of the Chairman of the Board, preside at all meetings of the stockholders and of the Board of Directors. The Chief Executive Officer shall from time to time report to the Board of Directors all matters within his or her knowledge which the interest of the Corporation may require to be brought to their notice. The Chief Executive Officer shall have such other powers and perform such other duties as from time to time may be conferred or imposed upon him or her by the Board of Directors. SECTION 8. PRESIDENT. The President of the Corporation shall have general control and management of the business affairs of the Corporation, shall see that all resolutions and orders of the Board of Directors are carried into effect, and in connection therewith, shall be authorized to delegate to other officers of the Corporation such of his or her powers and duties as President at such times and in such manner as he or she may deem to be advisable. If there is no Chairman of the Board and no Chief Executive Officer, or during the absence or disability of the Chairman of the Board and the Chief Executive Officer, the President shall exercise all of the powers and discharge all of the duties of the Chairman of the Board and of the Chief Executive Officer. He or she shall possess power to sign all certificates, contracts, and other instruments of the Corporation. He or she shall, in the absence of the Chairman of the Board and the Chief Executive Officer preside at all meetings of the stockholders and of the Board of Directors. He or she shall vote, in the name of the Corporation, stock or securities in other Corporations or associations held by the Corporation, unless another officer is designated by the Board of Directors for the purpose. The President shall from time to time report to the Board of Directors all matters within his or her knowledge which the interest of the Corporation may require to be brought to their notice. The President shall perform all such other duties as are incident to such office or are properly required of him or her by the Board of Directors, the Chairman of the Board or the Chief Executive Officer. SECTION 9. CHIEF OPERATING OFFICER. The Chief Operating Officer of the Corporation shall assist the President in the general control and management of the business affairs of the Corporation and shall have such other authority and responsibilities and perform such other duties as the President shall delegate or as the President, the Board of Directors, the Chairman of the Board or the Chief Executive Officer shall assign to him or her. If there is no Chairman of the Board, no Chief Executive Officer and no President or during the absence or disability of the Chairman of the Board, Chief Executive Officer and President, the Chief Operating Officer shall exercise all of the powers and discharge all of the duties of Chairman of the Board, Chief Executive Officer and President. Except where by law the signature of the Chief Executive Officer or the President is required, the Chief Operating Officer shall possess power to sign all certificates, contracts, and other instruments of the Corporation. The Chief Operating Officer shall, in the absence of the Chairman of the Board, Chief Executive Officer and President, preside at all meetings of the stockholders and of the Board of Directors. He or she shall from time to time report to the Board of Directors all matters within his or her -8- knowledge which the interest of the Corporation may require to be brought to their notice. The Chief Operating Officer shall perform all such other duties as are incident to such office or are properly required of him or her by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President. SECTION 10. EXECUTIVE AND SENIOR VICE PRESIDENTS. The Executive Vice President and Senior Vice President, or if there be more than one Executive or Senior Vice President, shall perform such duties as may be assigned to them from time to time by the Board of Directors or as may be designated by the Chairman of the Board, the Chief Executive Officer, the Chief Operating Officer or the President. In the case of the absence or disability of the Chief Operating Officer, the duties of the office shall, if the Board of Directors has so authorized, be performed by such Executive Vice President or Senior Vice President as the Board of Directors shall designate. SECTION 11. SECRETARY. (a) The Secretary shall attend all meetings of the Board of Directors, any committee of the Board of Directors and all meetings of the stockholders and act as secretary thereof, and shall record all votes and the minutes of all proceedings in a book for that purpose belonging to the Corporation to be kept in his or her custody, and shall perform like duties for all committees of the Board. He or she shall give or cause to be given notice of all meetings of the stockholders and when necessary, of the Board of Directors and any committee of the Board of Directors. He or she shall keep in safe custody the seal of the Corporation and shall in general perform all of the duties incident to the office of Secretary, subject to the control of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors, Executive Committee, Chairman of the Board, Chief Executive Officer, President or Chief Operating Officer. (b) The Secretary shall act as transfer agent of the Corporation and/or registrar of its capital stock, with the usual duties pertaining thereto; provided that the Board may, by resolution, as to any class of its capital stock appoint one or more persons or corporations as transfer agents and/or registrars in the Secretary's stead. (c) Each Assistant Secretary shall have the powers of the Secretary subject to the direction of the Chairman of the Board, Chief Executive Officer, President, Chief Operating Officer, Secretary, Board of Directors or the Executive Committee. SECTION 12. TREASURER. (a) The Treasurer shall have custody of all funds and securities of the Corporation. He or she may endorse on behalf of the Corporation, for collection, checks, notes and other obligations, and shall deposit the same to the credit of the Corporation in such banks or depositories as the Board of Directors may designate, or pursuant to the authority of general or special resolutions of the Board. Whenever required by the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Board of Directors or the Executive Committee, he or she shall render a statement of accounts. The Treasurer shall enter regularly, in books of the Corporation to be kept for the purpose, full and accurate accounts of all moneys received and paid on the account of the Corporation, shall at any reasonable time exhibit such books and accounts to any director of -9- the Corporation during business hours, and shall perform all acts incident to the position of Treasurer, subject to the control of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors, the Executive Committee, the Chairman of the Board, Chief Executive Officer, President or Chief Operating Officer. The Treasurer shall give a bond for the faithful discharge of his or her duties in such sum as the Board of Directors or the Executive Committee may require. (b) Each Assistant Treasurer shall have and perform such of the duties of the Treasurer as may be prescribed by the Board of Directors, Executive Committee, Chairman of the Board, Chief Executive Officer, President, Chief Operating Officer or Treasurer. ARTICLE VI CERTIFICATES OF STOCK SECTION 1. FORM AND SIGNATURE. Every stockholder shall have a certificate signed by the Chairman of the Board, the President or a Vice-President and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, certifying the number of shares owned by such stockholder in the Corporation. Such certificate shall be in such form as the Board of Directors may from time to time prescribe, and shall be countersigned and registered in such manner, if any, as the Board of Directors, by resolution, may prescribe. If the Corporation has a transfer agent or an assistant transfer agent or a transfer clerk acting on its behalf, and a registrar, the signature of any such officer of the Corporation may be facsimile. In case any officer or officers of the Corporation who shall have signed, or whose facsimile signature or signatures shall have been used on, any such certificate or certificates shall cease to be such officer or officers of the Corporation before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures shall have been used thereon had not ceased to be such officer or officers of the Corporation. SECTION 2. REGISTRATION OF TRANSFER. To the extent consistent with applicable law and any stockholder agreement to which the Corporation is a party, the shares of stock of the Corporation shall be transferable on the books of the Corporation by the holder thereof, in person or by his duly authorized attorney, upon surrender for cancellation of a certificate or certificates for the same number of shares, with an assignment and power of transfer duly endorsed thereon or ascribed thereto, duly executed, with such proof of the authenticity of the signature as the Corporation or its agents may reasonably require; provided, however, that if the Corporation has a transfer agent such transfers of stock in accordance with this Section 2 of Article VI shall be the responsibility of such transfer agent. SECTION 3. RECORD DATE. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or -10- entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. SECTION 4. ISSUANCE OF NEW SHARES OF STOCK. (a) In the event the Corporation issues new shares of stock, the stockholders shall not be entitled to preemptive rights. (b) The Corporation shall be authorized to issue "Blank Check" preferred stock. ARTICLE VII GENERAL PROVISIONS SECTION 1. CONTRACTS, CHECKS, ETC. Contracts and other instruments in writing may be made on behalf and in the name of the Corporation: (i) by the officers authorized so to do under Article V of these By-laws, and if required by law, under the corporate seal, attested by the Secretary or an Assistant Secretary; and (ii) by such officers and such other persons as the Chairman of the Board, the Chief Executive Officer or the President of the Corporation may, in writing, authorize so to do with respect to specified types of contracts and other instruments, such authorizations to also specify whether the corporate seal and attestation by the Secretary or an Assistant Secretary shall be required; and, if so executed, shall be binding upon the Corporation, provided that the Board of Directors may, by resolution, authorize the execution of contracts, deeds and other instruments in writing generally or in specific instances in such manner and by such persons as may therein be designated. No person shall have authority, on behalf of the Corporation, to sign checks, drafts, or orders for the payment of money or notes or acceptances unless specifically authorized by the Board of Directors or these By-laws. SECTION 2. NOTICES. (a) Notices to directors and stockholders shall be in writing and may be delivered personally, by overnight courier service or by mail. Notice by mail shall be deemed to be given at the time when deposited in the United States mail, postage prepaid, and addressed to directors or stockholders at their respective addresses appearing on the books of the Corporation, unless any such director or stockholder shall have filed with the Secretary of the Corporation a written request that notices intended for him or her be mailed or delivered to some other address, in which case the notice shall be mailed to or delivered at the address designated in such request. Notice to directors may also be given by telecopy, telephone, telegraph or electronic mail. (b) Whenever notice is required to be given by statute, the Certificate of Incorporation or these By-laws, a waiver thereof in writing, signed by the person or persons entitled to such notice whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Attendance of a person at a meeting of stockholders, -11- directors or any committee of directors, as the case may be, shall constitute a waiver of notice of such meeting, except where the person is attending for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of stockholders, directors or committee of directors need be specified in any written waiver of notice. SECTION 3. FISCAL YEAR. The fiscal year shall begin the first day of January in each year. SECTION 4. DIRECTOR'S ANNUAL STATEMENT. The Board of Directors shall present at each annual meeting, and when called for by vote of the stockholders at any special meeting of the stockholders, a full and clear statement of the business and condition of the Corporation. SECTION 5. AMENDMENTS. The Board of Directors, at any regular meeting or at any special meeting, may alter, amend or repeal these By-laws or any part thereof, and, except as provided in the Certificate of Incorporation, these By-laws may also be altered or amended by the affirmative vote of a majority of the holders of the Corporation's stock issued and outstanding and entitled to vote thereat at any regular or special meeting of the stockholders if the notice for the meeting shall have set forth the substance of such proposed alteration or amendment; provided, however, that no change of the time or place for the annual election of directors shall be made within sixty (60) days next before the day on which such election is to be held, and that in case of any change of such time or place, notice thereof shall be given to each stockholder in person, by overnight courier service or by letter mailed to his last known post-office address, at least twenty (20) days before the election is held. A waiver of notice for any such meeting of the stockholders need not set forth the substance of the amendment but only that an amendment is contemplated. SECTION 6. APPLICATION OF BY-LAWS. In the event that any provision of these By-laws is or may be in conflict with any law of the United States, of the State of Delaware, or of any other governmental body or power having jurisdiction over this Corporation, or over the subject matter to which such provision of these By-laws applies, or may apply, such provision of these By-laws shall be inoperative to the extent only that the operation thereof unavailably conflicts with such law, and shall in all other respects be in full force and effect. SECTION 7. INDEMNIFICATION BY CORPORATION. (a) ACTIONS, SUITS OR PROCEEDINGS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION. Any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as director, officer, employee or agent (including trustee) of another corporation, partnership, joint venture, trust or other enterprise (including employee benefit plans), shall be indemnified by the Corporation (funds paid or required to be paid to any person as a result of the -12- provisions of this Section 7 shall be returned to the Corporation or reduced, as the case may be, to the extent that such person receives funds pursuant to an indemnification from any such other corporation, partnership, joint venture, trust or enterprise) to the fullest extent permissible under Delaware law, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person seeking indemnification did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was unlawful. Entry of a judgment by consent as part of a settlement shall not be deemed a final adjudication of liability for negligence or misconduct in the performance of any duty, nor of any other issue or matter. (b) ACTIONS OR SUITS BY OR IN THE RIGHT OF THE CORPORATION. Any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent (including trustee) of another corporation, partnership, joint venture, trust or other enterprise (including employee benefit plans), shall be indemnified by the Corporation (funds paid or required to be paid to any person as a result of the provisions of this Section 7 shall be returned to the Corporation or reduced, as the case may be, to the extent that such person receives funds pursuant to an indemnification from any such other corporation, partnership, joint venture, trust or enterprise) to the fullest extent permissible under Delaware law, against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action, suit or proceeding, if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action, suit or proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) INDEMNIFICATION FOR EXPENSES OF SUCCESSFUL PARTY. To the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in paragraph (a) or (b) of this Section 7, or in defense of any claim, issue or matter therein, such person shall be indemnified -13- by the Corporation against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection therewith. (d) DETERMINATION OF RIGHT TO INDEMNIFICATION. Any indemnification under paragraph (a) or (b) of this Section 7 (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because such person has met the applicable standard of conduct set forth in paragraphs (a) and (b) of this Section 7. Such determination shall be made (1) by the Board of Directors by a majority vote of the directors who were not parties to such action, suit or proceeding, even though less than a quorum, or (2) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, or (3) if there are no such directors, or, if such directors so direct, by independent legal counsel in a written opinion, or (4) by the holders of a majority of the shares of capital stock of the Corporation entitled to vote thereon. (e) ADVANCEMENT OF EXPENSES. Expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding, upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this Section 7. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. (f) OTHER RIGHTS. The indemnification and advancement of expenses provided by, or granted pursuant to, the other paragraphs of this Section 7 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any By-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office. (g) INSURANCE. By action of the Board of Directors, notwithstanding an interest of the directors in the action, the Corporation may purchase and maintain insurance, in such amounts as the Board of Directors deems appropriate, on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent (including trustee) of another corporation, partnership, joint venture, trust or other enterprise (including employee benefit plans), against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the Corporation shall have the power to indemnify such person against such liability under the provisions of this Section 7. (h) CONTINUATION OF RIGHTS TO INDEMNIFICATION. The indemnification and advancement of expenses provided by, or granted pursuant to, this Section 7 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a -14- director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (i) PROTECTION OF RIGHTS EXISTING AT TIME OF REPEAL OR MODIFICATION. Any repeal or modification of this Section 7 shall not adversely affect any right or protection of an indemnified person existing at the time of such repeal or modification. SECTION 8. CORPORATE SEAL. The corporate seal shall have inscribed thereon the name of the Corporation and the words "Corporate Seal, Delaware". EX-10.17 3 EMPLOYMENT AGREEMENT, DATED AS OF APRIL 9, 1998, BETWEEN SETH M. LYNN, JR. AND AXE - HOUGHTON ASSOCIATES, INC. EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of April 9, 1998 (this "Agreement"), by and between Axe-Houghton Associates, Inc., a Delaware corporation (the "Company"), and Seth M. Lynn, Jr. ("Executive"). WHEREAS, the Company desires to continue to employ Executive as President of the Company and also as Managing Director of the Axe Core Disciplines, and Executive desires to continue to be retained in such capacities, on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and the mutual agreements made herein, the Company and Executive agree as follows: 1. Employment; Duties. (A) The Company shall employ Executive as President of the Company and Managing Director of the Axe Core Disciplines for the "Employment Period" as defined in Section 2. The Executive, in his capacity as President and Managing Director of the Axe Core Disciplines, shall have such duties, responsibilities and authority with the Company normally incident to such offices, subject to the provisions of the By-laws of the Company, and shall be responsible for overseeing the Axe Core Disciplines. The "Axe Core Disciplines" as used herein shall mean the Core International American Depositary Receipts (ADR) investment discipline, balanced account management, the fixed income special assignment from the Arizona State Retirement System, the domestic index account managed on behalf of the City and County of San Francisco Employees' Retirement System, diversified small capitalization value equity management, and such other disciplines as may be developed or managed by Executive on behalf of the Company from time to time during the Employment Period. Notwithstanding anything to the contrary set forth herein, no discipline may be removed from the Axe Core Disciplines without the mutual agreement of the parties hereto. Subject to the provisions of Section 4 herein, the precise duties, responsibilities and authority of 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 President and Managing Director of the Axe Core Disciplines and the policies and procedures of the Company. (B) During the Employment Period, Executive shall render his services solely in the performance of his duties and responsibilities hereunder. 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 referred to as "Affiliates"). The Executive may not serve as an officer or director of, make investments in, or otherwise participate in any other entity without the prior written approval of the Board; provided, however, that the foregoing shall not be deemed to prohibit Executive from acquiring, directly or indirectly, solely as an investment, not more than two percent (2%) of any securities of any class that are registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), or investments in non-public entities, in all events consistent with Section 8 of this Agreement 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 Executive's employment, Executive may serve as an officer, director or otherwise participate in purely educational, welfare, social, religious and civic organizations. (C) The parties acknowledge and agree that Executive also serves currently as a director on the Company's Board. The Company shall use its best efforts to nominate and continue to have Executive serve as a member of the Board during the Employment Period. 2. Employment Period. (A) Executive's employment under this Agreement shall commence on April 9, 1998 and end on April 8, 2001 (the "Initial Period"), unless sooner terminated in accordance with the provisions of Section 4. (B) On the expiration of the Initial Period and on each yearly anniversary thereof, such employment 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 Executive notifies the other in writing of its or his intention not to renew the employment not less than six (6) months prior to such expiration date or anniversary, as the case may be. The period of Executive's employment under this Agreement, as in effect from time to time, is referred to herein as the "Employment Period". 3. Compensation and Benefits. Executive shall be entitled to the following compensation and benefits, in each case subject to applicable deductions and withholdings: (A) Base Compensation. Executive shall be paid an aggregate base salary (the "Base Salary") at the rate of $350,000 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 of Directors of Hoenig Group Inc. (the "Compensation Committee"), may increase (but not decrease) the Base Salary, at any time. 2 (B) Annual Bonus. In addition to the Base Salary, Executive shall be entitled to participate in a bonus pool (the "Bonus Pool") for employees of the group responsible for providing separate account management of institutional assets invested in the Axe Core Disciplines (the "Axe Core Group"), and the Company shall pay to Executive a minimum annual bonus for the Fiscal Year (as specified below) ended December 31, 1998 at the rate of $100,000 per annum (the "Minimum Bonus Award"), which shall operate as a draw against, and be deducted from, the Bonus Pool. The composition of the Axe Core Group shall be determined by the Board from time to time. The Bonus Pool for a particular Fiscal Year shall equal thirty percent (30%) of the Pre-Bonus Pre-Tax Profits (as defined below), less the deductions specified in Section 3(B)(2) below. The Minimum Bonus Award plus any additional amounts paid to Executive out of the Bonus Pool, including any deferred bonus amounts as hereinafter provided, are collectively referred to herein as the "Bonus Award". To the extent necessary to avoid the limitation on the federal tax deductibility of the Bonus Award for any year under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), payment thereof may, at the sole discretion of the Board, or at the recommendation of the Compensation Committee, be deferred only to the extent necessary to avoid exceeding such Section 162(m) limitation to the first taxable year of the Company in which the payment would be fully deductible; provided, however, that the Bonus Award or portion thereof shall be deferred only in the event that the compensation of other executives of the Company whose compensation is subject to Section 162(m) is deferred under circumstances similar to those of Executive. Except as provided in the previous sentence, the Bonus Award for a Fiscal Year shall be payable as soon as practicable after the release of Hoenig Group Inc.'s audited financial statements for such Fiscal Year, but in no event later than ninety (90) days after the end of such Fiscal Year. In the case of a deferral as described above, amounts deferred shall be credited with such interest and on such other terms as the Company and Executive shall mutually agree. All deferred Bonus Awards shall be payable within thirty (30) days after the beginning of the first Fiscal Year in which such amounts may be paid. (1) "Pre-Bonus Pre-Tax Profits" shall mean the amount, if any, determined in accordance with Generally Accepted Accounting Principles ("GAAP") consistently applied from year to year, by which the total revenues of the Axe Core Group for a particular Fiscal Year exceed all direct expenses incurred in generating such revenues and in the operation and conduct of the Axe Core Group's business during that Fiscal Year. Such expenses include, but are not limited to: (a) all salaries and non-bonus compensation paid to all employees of the Axe Core Group, including Executive, which includes related payroll taxes, insurance and other benefits, any profit-sharing contributions made on behalf of such employees, the cost of any stock options or other equity awards made to such employees and any amounts paid to such employees upon termination of employment; (b) rent (at the Company's cost per square foot); (c) telephones; (d) quotation, pricing, portfolio management and client accounting systems; (e) computer hardware and software; (f) electronic and other office equipment; (g) sales commissions payable to Company sales personnel and third-parties, (h) consulting and solicitation fees; (i) business travel and entertainment determined in accordance with the 3 Company's policies; (j) legal and professional fees; and (k) membership dues and subscriptions. (2) For each Fiscal Year during the Employment Period, the following amounts shall be deducted from the Bonus Pool prior to the award of bonuses to any employees, including Executive, of the Axe Core Group: (a) the Minimum Bonus Award, if any, and any minimum bonuses paid to other members of the Axe Core Group with respect to the particular Fiscal Year and (b) any Bonus Shortfall (as defined below) from prior Fiscal Years. (3) The amount remaining in the Bonus Pool after making the deductions specified in Section 3(B)(2) shall be distributed by Executive to employees of the Axe Core Group, including Executive, as Executive shall determine, subject to the approval of the Board and, where appropriate, the Compensation Committee. In the event that, after making the necessary deductions specified in Section 3(B)(2), the Bonus Pool for a particular Fiscal Year is not sufficient to pay bonuses to employees of the Axe Core Group other than any Minimum Bonus Award paid to Executive and minimum bonuses paid to any other employee entitled to guaranteed minimum bonuses, the Company may determine, in its sole discretion, to pay bonuses to such employees. The amount by which the total bonuses paid to employees of the Axe Core Group, including Executive and the other employees entitled to guaranteed minimum bonuses, exceeds the amount of the Bonus Pool (the "Bonus Shortfall") shall be deducted from the Bonus Pool for the next Fiscal Year, as described in Section 3(B)(2). (4) "Fiscal Year" shall mean the year beginning on each January 1st and ending on each December 31st of the same year; provided, however, that for purposes of this Agreement, the first Fiscal Year shall commence on April 9, 1998 and end on December 31, 1998 and, in the case of a termination of employment during a particular Fiscal Year, the Fiscal Year shall consist of the Pre-Termination Period (as defined below). (C) 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 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. Executive also shall be entitled to reimbursement for reasonable out-of-pocket expenses incurred in connection with the business of the Company in accordance with the Company's policies and procedures. Such policies and procedures shall be consistent with prior practice unless Executive is provided with written notice of such changes. 4 4. Termination. (A) The Company may, with or without prior notice, terminate the Employment Period with or without Cause (as defined below) or for Disability (as defined below). Executive may terminate the Employment Period only for Good Reason (as defined below) or pursuant to Section 4(G). The Employment Period shall automatically terminate upon Executive's death or upon expiration of the Initial Period or a Renewal Period, as the case may be, in the event that the Company or Executive elects not to renew Executive's employment under this Agreement in accordance with Section 2(B) herein. Except as otherwise provided in this Agreement, Executive's rights and the obligations of the Company hereunder shall cease as of the date of the termination of the Employment Period (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 of the Termination Date as provided pursuant to the terms of such plans. The amounts referred to in subsections (i) through (iii) of this Section 4(A) shall constitute the "Accrued Obligations." (B) In the event the Company terminates the Employment Period for any reason other than Cause, or if Executive terminates the Employment Period for Good Reason, Executive shall be entitled to receive, in addition to the Accrued Obligations, termination payments, in each case subject to applicable deductions and withholdings, as follows: (1) a pro-rated bonus for the year in which the termination of employment occurs for the period commencing on the first day of the Fiscal Year in which the termination occurs and ending on the Termination Date (the "Pre-Termination Period"), calculated as follows: (a) in the event that the Termination Date occurs on or before December 31, 1998, the greater of (i) an amount equal to $100,000 multiplied by a fraction, the numerator of which is the number of days in the Pre-Termination Period and the denominator of which is 365; or (ii) an amount equal to the Bonus Pool for the Pre-Termination Period multiplied by the percentage, if any, of the Bonus Pool that was paid to Executive with respect to the Fiscal Year immediately preceding the Fiscal Year in which termination of employment occurred; or (b) in the event that the Termination Date occurs after December 31, 1998 an amount equal to the Bonus Pool for the Pre-Termination Period, multiplied by the percentage, if any, of the Bonus Pool that was paid to Executive with respect to the Fiscal Year immediately preceding the Fiscal Year in which termination of employment occurred. 5 (2) in the event the Termination Date occurs on or before December 31, 1998, an amount equal to $450,000, multiplied by the number of years or fraction thereof beginning with the Termination Date and ending on December 31, 1998, plus $350,000 multiplied by the number of years or fraction thereof beginning with January 1, 1999 and ending on the date the Initial Period expires; or (3) in the event the Termination Date occurs after December 31, 1998, an amount equal to $350,000 multiplied by the number of years or fraction thereof beginning with the Termination Date and ending on the date the Initial Period or Renewal Period, as the case may be, expires. The amounts referred to above in subsections 4(B)(2) and (3) shall be referred to herein as the "Termination Amount". Such Termination Amount shall be paid out over the remaining term of the Initial Period or the Renewal Period, as the case may be, in equal monthly installments ("Termination Payments"). (C) Except as otherwise provided herein, the Accrued Obligations and any amounts due under Section 4(B)(1) shall be payable within thirty (30) days following the Termination Date. (D) In the event of Executive's death after the Employment Period has been terminated by the Company other than for Cause or by Executive for Good Reason, the Company shall make any Termination Payments due under Section 4(B) and shall pay any unpaid Accrued Obligations which would otherwise have been payable to Executive to Executive's estate or designated beneficiary. (E) A termination of the Employment Period (1) upon expiration of the Initial Period or any Renewal Period pursuant to Section 2(B), whether at the Company's or Executive's election, (2) by reason of Executive's death or Disability, or (3) pursuant to Section 4(G) of this Agreement shall not constitute a termination by the Company other than for Cause or by Executive for Good Reason, and therefore, upon such termination, Executive shall be entitled to receive only the Accrued Obligations and any amounts due under Section 4(B)(1). (F) As a condition to his entitlement to receive Termination Payments, Executive (or his estate or designated beneficiary) shall (1) have executed and delivered to the Company an irrevocable waiver and release satisfactory to the Company waiving and releasing all rights and claims against the Company (other than the rights to receive Accrued Obligations and Termination Payments) and its Affiliates and their respective officers, agents, directors and employees, and such waiver and release shall have become irrevocable, and (2) not engage in Prohibited Conduct (as defined below). The Company shall have the right to discontinue the payment of any Termination Payments in the event that Executive engages in Prohibited Conduct, but this shall not 6 affect the Company's obligation to pay the Accrued Obligations and any amounts due under Section 4(B)(1). (G) In the event the Company appoints a new Chief Executive Officer, Executive shall have the right to terminate the Employment Period upon thirty (30) days' written notice to the Company; provided, however, that Executive's right under this Section 4(G) to terminate the Employment Period must be exercised no later than sixty (60) days after the date such new Chief Executive Officer commences employment with the Company. (H) In the event the Employment Period terminates for any reason (except 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. (I) Notwithstanding anything contained herein to the contrary, the Company may reduce the Termination Payments to the extent such Termination Payments, when added to other payments made to Executive, constitute an "excess parachute payment" as defined in Section 280G of the Code. (J) For purposes of this Agreement: (1) "Cause" shall mean an event where Executive: (a) commits any act of fraud or dishonesty in connection with his employment or willful misconduct or other act which materially injures the Company or any of its Affiliates; (b) breaches Section 5, 6, 7, 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 which, if curable, is not cured within thirty (30) days after the date the Company notifies Executive thereof or, if not curable within thirty (30) days, Executive fails to commence curing such default within the thirty (30) days and fails to diligently pursue such cure, but in no event shall the cure period exceed forty-five (45) days after the date of notification of the default; (c) fails, refuses or neglects to timely perform any material duty or obligation under this Agreement and such failure, refusal or neglect is not cured by Executive within thirty (30) days after the date the Company notifies Executive thereof in writing in reasonable detail necessary for Executive to correct the matter; (d) commits a material violation of any 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 Executive; (e) is convicted of a crime involving moral turpitude, dishonesty, fraud or unethical business conduct, or a felony; (f) is subject to the occurrence of an event or condition which makes it unlawful for Executive to perform his duties hereunder, including the issuance of any order, decree, decision or judgment, which remains in effect for eight (8) weeks or more; (g) gives or accepts undisclosed commissions or other payments in cash 7 or in kind in connection with the affairs of the Company or any of its Affiliates or their respective clients in violation of any 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 written policy or directive of the Company or any of its Affiliates; (h) is expelled or suspended in excess of eight (8) weeks, or is subject to an order temporarily (for a period in excess of eight weeks) or permanently enjoining Executive from the securities, investment management or investment banking business or from acting in the capacity contemplated by this Agreement by the Securities and Exchange Commission ("SEC"), the National Association of Securities Dealers ("NASD"), any securities exchange or any self-regulatory agency or governmental authority (state, foreign or federal); or (i) 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 Executive to perform his duties and responsibilities hereunder. Any termination for Cause under this Agreement shall be made by delivering written notice thereof to Executive, which notice shall include the specific section(s) of this Agreement which is relied upon and the reason(s) that has given rise to a termination for Cause. (2) "Good Reason" shall mean (a) the Company changes Executive's status, title or position as President of the Company or Managing Director of the Axe Core Disciplines and such change represents a material adverse change in the status, title or position conferred hereunder; (b) the Company materially breaches this Agreement, (c) the Company wrongfully fails to pay any Base Salary or Bonus Award when due; or (d) the Company seeks to relocate Executive more than fifty (50) miles from the Company's current office location. In order to terminate the Employment Period for Good Reason, Executive must deliver to the Company a written notice of termination which includes the specific section(s) of this Agreement which is relied upon and reasonable detail as to the reason(s) that the Company's act or failure to act has given rise to Executive's termination for Good Reason. With respect to a termination for Good Reason within the meaning of Section 4(J)(2)(a), (b) or (d), the Company shall have thirty (30) days after Executive delivers a notice of termination for Good Reason to correct the matters constituting "Good Reason" as specified in the notice 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 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. With respect to a termination for Good Reason within the meaning of Section 4(J)(2)(c), the Company shall have fifteen (15) days after the Executive delivers a notice of termination for Good Reason to correct the matters constituting Good Reason as specified in the notice. Notwithstanding the foregoing, Executive acknowledges that the Company may appoint a new Chief Executive Officer during the Employment Period and agrees that the appointment of such a Chief Executive Officer, in and of itself, shall not constitute Good Reason hereunder. 8 (3) "Disability" shall mean Executive's inability to perform his duties and responsibilities 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 Executive is disabled within the meaning hereof, either party may from time to time request a medical examination of 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, and the written medical opinion of such doctor shall be conclusive and binding upon the parties as to whether Executive has become disabled and the date when such disability arose. The cost of any such medical examination shall be borne by the Company. (4) "Prohibited Conduct" shall mean conduct which: (i) violates the terms of Sections 5, 6, 7, 8 or 9 of this Agreement; or (ii) disparages the Company or any of its Affiliates or any of their respective officers or directors. 5. Trade Secrets and Confidential Information. Executive recognizes that it is in the legitimate business interests of the Company and its Affiliates to restrict his disclosure and use of Trade Secrets and Confidential Information (as defined below) 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 Executive. Executive therefore agrees that all Trade Secrets and Confidential Information relating to the Company and its Affiliates heretofore or in the future obtained by Executive shall be considered confidential and the proprietary information of the Company and its Affiliates. During the Employment Period, 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" means information which is confidential or proprietary to the Company, including, by way of example and without limitation, matters of a technical nature, formulas, secret or proprietary processes, works of authorship, computer programs (including documentation of such programs), materials, patent applications, new product plans, other plans, technical information, technical improvements, test data, progress reports and research projects, and all other matters of a business nature, such as business plans, prospects, financial information, marketing plans and strategies, proprietary information about costs, profits, markets and sales, lists of clients and suppliers of the Company and its Affiliates, procurement and promotional information, credit and financial data concerning clients or suppliers of the Company and its Affiliates, information relating to the management, operation and planning of the Company and its Affiliates, plans for future development, and other information of a similar nature, in each case to the extent not available to the public. After termination of the Employment Period for any reason, Executive shall not use or disclose Trade Secrets and Confidential Information. 9 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 the clients, products, services or processes, records relating to the Performance Record (as defined below), 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, as the case may be. (B) Upon termination of the Employment Period, or at any time upon the request of the Company, 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 and its Affiliates, and (2) all Company Property which is in the possession or under the control of Executive (or his heirs or personal representatives). 7. Discoveries and Work. (A) All Discoveries and Works (as defined below) made or conceived by Executive during his employment by the Company, jointly or with others, that relate to the present or anticipated activities of the Company or its Affiliates, or are used by the Company or its Affiliates, shall be owned by the Company or its Affiliates, as the case may be. The term "Discoveries and Works" includes, by way of example and 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. Executive shall (1) 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; (2) renounce any and all claims, including without limitation claims of ownership and royalty, with respect to all Discoveries and Works and all other property owned or licensed by the Company or its Affiliates; (3) assist the Company and 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 (4) promptly execute, whether during his employment with the Company 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 10 rights. 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. ss.101. (B) Executive hereby acknowledges and agrees that the investment performance record of each of the investment disciplines managed by the Axe Core Group existing as of the date hereof as well as achieved during the Employment Period, which includes without limitation the investment performance records of each of the Axe Core Disciplines (each a "Performance Record", collectively the "Performance Records"), is the sole and exclusive property of the Company, and that the Company retains all rights, title and interest in the Performance Records, including the sole right to advertise and market such Performance Records. Executive further agrees that he shall not have any right, during the Employment Period or thereafter, to use or claim any ownership interest in any of the Performance Records, or any portion thereof, without the prior written consent of the Company. Notwithstanding the foregoing provision and subject to all applicable rules and laws and interpretations thereof, including but not limited to the Investment Advisers Act of 1940, as amended, the Investment Company Act of 1940, as amended, the rules of the NASD, the rules of the Association for Investment Management and Research ("AIMR"), state securities laws, and the other provisions of this Agreement, Executive may cite and/or refer to the published Performance Records of the particular investment discipline which Executive was responsible for managing for the sole and limited purpose of informing third parties of Executive's prior employment experience. 8. Non-Competition. During the Non-Competition Period (as defined below), Executive shall not (except as an officer, director, employee, agent or consultant of the Company or any of 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 any business or enterprise, wherever located, which is similar to or competitive with the Axe Core Disciplines, the business carried on or planned by the Axe Core Group, or the business carried on by Executive at any time during the one year immediately preceding the termination of the Employment Period, unless 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 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 securities exchange or in the over-the-counter market; provided further, that such ownership represents a passive investment and that neither Executive nor any group of persons including 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 "Non-Competition 11 Period" shall mean (A) the Employment Period, (B) one year following termination of the Employment Period if terminated by the Company for Cause or by Executive for any reason other than either pursuant to Section 4(G) or for Good Reason; and (C) any period during which Executive is receiving Termination Payments as a result of the Company's termination of the Employment Period other than for Cause or Executive's termination of the Employment Period for Good Reason. In the event that the Company terminates the Employment Period other than for Cause, or if Executive terminates the Employment Period for Good Reason, Executive may elect at any time after such termination, by ten (10) days' advance written notice to the Company, to terminate the Non-Competition Period. On and after such election, the Company shall have no further obligation to make any Termination Payments, except for such amounts as shall have been accrued prior to the date of such election. Such election shall not affect any of the rights of the Company with respect to the Non-Competition Period occurring prior to such election. Notwithstanding anything contained herein to the contrary, Executive shall be relieved of the provisions of this Section 8 upon termination of the Employment Period by Executive pursuant to Section 4(G) or upon a termination of the Employment Period as a result of non-renewal, whether at the Company's or Executive's election. (A) The parties acknowledge and agree that, except as restricted by the terms of this Agreement, including without limitation Sections 5, 6, 7, 8 and 9, nothing in this Agreement is intended to preclude Executive from obtaining employment in the investment management industry following termination of the Employment Period. 9. Non-Solicitation. (A) During the Non-Competition Period and for one year following termination of the Employment Period pursuant to Section 4(G), Executive shall not, directly or indirectly, whether for his own account or for the account of any other individual or entity, solicit or canvass the trade, business or patronage of any individuals or entities that were customers of the Company, or any Affiliate for which Executive was working at the time of such termination, during the twelve (12) months immediately preceding the termination of the Employment Period, or prospective customers with respect to whom a sales effort, presentation or proposal (other than just a mass mailing) was made by the Company, or any Affiliate for which Executive was working at the time of such termination, during the twelve (12) months immediately preceding the date of termination. Upon the written request of Executive following termination of the Employment Period, the Company shall provide a list of customers and prospective customers subject to this Section 9(A). (B) Executive further agrees that, during the Non-Competition Period and for one year following termination of the Employment Period pursuant to Section 4(G), he shall not, directly or indirectly, (1) solicit, induce, enter into any agreement with, or attempt to influence any individual who was an employee or consultant of the Company at any time during the time Executive was employed by the Company, to terminate his employment or other relationship with the Company or to become employed by or enter into any other relationship with Executive or any individual 12 or entity by which Executive is employed or associated with, or (2) interfere in any other way with the employment or other relationship of any employee or consultant of the Company. 10. Enforcement. (A) Executive agrees that the remedies at law for any breach or threatened 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 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 Executive. (B) It is expressly understood and agreed that, although the Company and 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 feature of any restriction contained in such Sections 5 through 9 is an unenforceable restriction on 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 or any remedy provided herein 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. 11. Executive's Representations. Executive represents and warrants to the Company that (A) he is able to perform fully his duties, responsibilities and authority 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. Assignment. The rights and obligations of the parties under this Agreement shall not be assignable by either the Company or Executive; provided, however, that this Agreement is assignable by the Company to any of its Affiliates, 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 which agrees to be bound by the terms of this Agreement. 13 13. 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, or on the first business day after having been delivered to a reputable overnight delivery service. Unless otherwise changed by notice, notice shall be properly addressed to Executive if addressed to: Seth M. Lynn, Jr. 32 Ritch Avenue Greenwich, CT 06830 With a copy to: Kurzman & Eisenberg, LLP One North Broadway White Plains, NY 10601 Attn: Richard Danzig, Esq. and properly addressed to the Company if addressed to: Axe-Houghton Associates, Inc. 4 International Drive Rye Brook, NY 10573 Attention: Chief Operating Officer With a copy to: Hoenig Group Inc. 4 International Drive Rye Brook, NY 10573 Attn: General Counsel 14. Severability. Except as otherwise provided in this Agreement, 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 such requirements. In the event that any provision of this Agreement shall be held by a court of proper jurisdiction to be illegal, invalid, void or voidable or otherwise unenforceable, the balance of the Agreement shall continue in full force and effect unless such construction would clearly be contrary to the intentions of the parties or would result in an unconscionable injustice. 14 15. 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. 16. Disputes and Jurisdiction. Any claim or controversy arising out of or relating to this Agreement, or any breach thereof, or otherwise arising out of or relating to Executive's employment, compensation and benefits hereunder or the termination thereof, shall be brought in a court of record in the State of New York, County of Westchester, or in the United States District Court for the Southern District of New York, on the condition that, with respect to any federal litigation, the jurisdictional requirements are met with respect to such controversy for litigation in federal court. Each of the parties hereto expressly submits to and consents to the jurisdiction and venue of the courts specified in this Section 16 in connection with any claim or controversy between them. 17. Legal Expenses. The Company shall pay Executive's reasonable legal fees and expenses incurred in connection with this Agreement in an amount not to exceed $7,500. 18. Miscellaneous; Choice of Law. This Agreement constitutes the entire agreement, and supersedes all prior written or oral agreements or understandings, 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 and enforced 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. 19. Mitigation. Executive shall not be required to mitigate the amount of any payment provided for hereunder by seeking other employment or otherwise. Nor shall the amount of any payment or benefit provided for hereunder be reduced by any compensation earned by Executive as a result of employment by another employer or by retirement benefits. 15 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. AXE-HOUGHTON ASSOCIATES, INC. By: ------------------------------- Its: ------------------------------ - ------------------------------ SETH M. LYNN, JR. 16 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 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 29, 1999, appearing in the Annual Report on Form 10-K for the year ended December 31, 1998. /s/Deloitte & Touche LLP New York, New York March 29, 1999 EX-27.1 6 FINANCIAL DATA SCHEDULE
BD THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HOENING GROUP INC. DECEMBER 31, 1998 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 12-MOS DEC-31-1998 DEC-31-1998 19,575,824 10,221,763 0 0 25,269,679 1,704,407 63,339,539 0 13,886,061 0 0 0 0 0 0 108,462 39,908,723 63,339,539 0 1,861,714 76,234,097 0 7,568,122 0 21,983,653 8,422,446 0 0 0 4,685,719 .53 .50
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