Hoenig Group: 10-Q for Quarter to 03/31/98 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------------------------------------- For Quarter Ended: Commission File Number: 000-19619 March 31, 1998 HOENIG GROUP INC. - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 13-3625520 - ------------------------------------ ------------------------ (State or other jurisdiction (I.R.S. Employer I.D. No.) of incorporation or organization) 4 International Drive Rye Brook, NY 10573 - ------------------------------------------------------------------------------ (Address of principal executive offices) (zip code) (914) 935-9000 - ------------------------------------------------------------------------------ (Registrant's Telephone Number, including area code) - ------------------------------------------------------------------------------ (Former name, former address and former fiscal year is changed since last report) Indicated by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ As of May 14, 1998, there were 9,073,540 shares of common stock, par value $.01 per share, outstanding. HOENIG GROUP INC. FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998 INDEX PAGE PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Statements of Financial Condition - March 31, 1998 and December 31, 1997 1 Consolidated Statements of Income - Three Months Ended March 31, 1998 and 1997 2 Consolidated Statements of Cash Flows - Three Months Ended March 31, 1998 and 1997 3 Notes to Unaudited Consolidated Financial Statements 4-5 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6-9 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings 10 ITEM 6. Exhibits and Reports on Form 8-K 10 Signatures 11 Exhibit Index 12 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HOENIG GROUP INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AS OF MARCH 31, 1998 & DECEMBER 31, 1997 (UNAUDITED) March 31, 1998 December 31, 1997 -------------- ----------------- ASSETS Cash and equivalents $ 11,393,803 $20,468,926 U.S. Government obligations, at market value 12,510,685 17,754,737 Receivables from correspondent brokers and dealers 7,692,967 6,837,648 Receivables from customers 7,431,487 4,031,489 Equipment, furniture and leasehold improvements - net of accumulated depreciation and amortization 2,137,527 2,207,121 Securities owned, at market value 7,223,364 2,065,399 Exchange memberships - at cost 1,321,235 1,321,235 Investment management fees receivable 1,591,962 1,297,684 Deferred research/services expense 1,874,983 1,070,079 Investment in limited partnerships, at equity 5,724,459 633,858 Other assets 3,504,788 3,333,167 --------- --------- Total Assets $62,407,260 $61,021,343 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Accrued research/services payable $ 8,910,167 $ 8,341,475 Accrued compensation 2,603,486 5,701,392 Payable to brokers and dealers 7,177,126 4,579,680 Payable to customers 1,139,028 902,914 Accrued expenses 1,004,277 728,726 Short term bank loan payable 390,813 - Other liabilities 1,584,754 1,241,435 --------- --------- Total Liabilities 22,809,651 21,495,622 ---------- ---------- STOCKHOLDERS' EQUITY Common stock $.01 par value per share Voting-authorized 40,000,000 shares, issued - 10,809,750 in both 1998 and 1997 108,098 108,098 Additional paid in capital 26,555,715 26,628,159 Accumulated comprehensive income (900,475) (930,035) Retained earnings 21,180,699 20,190,841 ---------- ---------- 46,944,037 45,997,063 Less treasury stock at cost - 1,746,211 shares in 1998 and 1,618,378 shares in 1997 (7,346,428) (6,471,342) ----------- ----------- Total Stockholders' Equity 39,597,609 39,525,721 ---------- ---------- Total Liabilities and Stockholders' Equity $62,407,260 $61,021,343 =========== =========== SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1 HOENIG GROUP INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended March 31, -------- REVENUES 1998 1997 ---- ---- Gross commissions $17,562,219 $16,223,796 Investment management fees 1,965,734 1,518,786 Other 52,810 167,151 ------------ ----------- Total operating revenues 19,580,763 17,909,733 EXPENSES Clearing, floor brokerage and exchange charges 2,479,424 2,695,012 Employee compensation 5,273,725 4,598,481 Independent research and services 8,117,197 7,303,348 Other 2,501,349 2,242,838 --------- --------- Total expenses 18,371,695 16,839,679 ---------- ---------- OPERATING INCOME 1,209,068 1,070,054 INVESTMENT INCOME AND OTHER Interest, dividends 474,832 443,788 Gain/(loss) on investments, other 76,058 (55,234) -------- -------- Net investment income and other 550,890 388,554 Income before income taxes 1,759,958 1,458,608 Provision for income taxes 770,101 584,853 ---------- ---------- Net income $ 989,857 $ 873,755 ========= ========== Net income per share Basic $ .11 $ .09 ============== ============== Diluted $ .10 $ .09 ============== ============== Weighted average shares outstanding Basic 9,139,022 9,545,644 ========= ========= Diluted 9,572,842 9,874,324 ========= ========= SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 2 HOENIG GROUP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1998 & MARCH 31, 1997 (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES 1998 1997 ---- ---- Net income $989,857 $873,755 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 321,244 280,305 Foreign currency translation adjustment 29,560 (104,196) Issuance of stock options 42,083 47,191 Changes in assets and liabilities: Securities owned, net 945,394 (62,031) Receivables from correspondent brokers and dealers (3,399,998) (2,698,413) Receivables from customers (855,319) (1,389,235) Investment management fees receivables (294,278) 295,183 Payable to customers 236,114 3,855,247 Deferred research/services expense (804,904) (595,552) Other assets (266,950) (348,879) Payable to brokers and dealers 2,597,446 1,394,449 Accrued research/services payable 568,692 (173,190) Accrued compensation (3,097,906) (2,431,263) Accrued expenses 275,551 (5,260) Other liabilities 159,045 92,433 ----------- ----------- Net cash used in operations (2,554,369) (969,456) CASH FLOWS FROM INVESTING ACTIVITIES: U.S. Government obligations 5,244,052 953,814 Investment in limited partnerships, at equity (5,090,601) (600) Investment in securities (5,919,085) 157,668 Purchases of equipment, furniture and leasehold - improvements (156,323) (294,233) ---------- ----------- Net cash provided by (used in) investing activities: (5,921,957) 816,649 CASH FLOWS FROM FINANCING ACTIVITIES: Treasury stock purchased (1,021,153) - Issuance of treasury stock 31,543 76,417 Short term bank loan payable 390,813 - ---------- ----------- Net cash provided by (used in) financing activities: (598,797) 76,417 Net decrease in cash and equivalents (9,075,123) (76,390) Cash and equivalents beginning of period 20,468,926 18,307,886 ---------- ----------- Cash and equivalents end of period $11,393,803 $18,231,496 =========== =========== Supplemental disclosure of cash flow information: Interest paid: $ 23,754 $ 78,969 =========== =========== Taxes paid: $ 317,220 $ 297,900 =========== =========== SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 3 HOENIG GROUP INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments (which include only normal recurring accruals) necessary to present fairly the financial position of Hoenig Group Inc. (the "Company") as of March 31, 1998 and December 31, 1997, the results of its operations and changes in cash flows for the three months ended March 31, 1998 and 1997. The consolidated financial statements included herein have been prepared by the Company without independent audit. Certain information normally included in the financial statements and related notes prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's December 31, 1997 Annual Report on Form 10-K. The results of operations for the period ended March 31, 1998 are not necessarily indicative of operating results for the full year. NOTE 2 - NET CAPITAL AND RESERVE REQUIREMENTS. Hoenig & Co., Inc. ("Hoenig"), the Company's principal operating subsidiary, is subject to the Uniform Net Capital Rule (Rule 15c3-1) which requires that Hoenig maintain net capital of the greater of $100,000 or one-fifteenth of aggregate indebtedness. At March 31, 1998, Hoenig's minimum required net capital was $566,000, its net capital ratio was .76 to 1, and its net capital was approximately $11,118,000, which was $10,552,000 in excess of regulatory requirements. Hoenig's Tokyo office (a branch of Hoenig & Co., Inc.) capital requirement was (Y)67,000,000 ($503,000). Hoenig & Company Limited ("Limited") is required to maintain financial resources of at least 110% of its capital requirement (as defined). Limited's financial resources requirement at March 31, 1998 was approximately (pounds)556,000 ($929,000); it had excess financial resources at such date of approximately (pounds)595,000 ($995,000). Hoenig (Far East) Limited ("Far East") is required to maintain liquid capital of the greater of HK$3,000,000 ($387,000) or 5% of the average quarterly total liabilities. Far East's required liquid capital was approximately HK$16,938,000 ($2,187,000) at March 31, 1998, and it had excess liquid capital of approximately HK$20,215,000 ($2,610,000). NOTE 3 - INVESTMENTS IN LIMITED PARTNERSHIPS. Axe Houghton Associates, Inc., the Company's wholly-owned asset management subsidiary, is the general partner of two limited partnerships and maintains investments in each of the partnerships. Axe Houghton's partnership investments were 0.34% ($46,526) and 17.1% ($643,813) at March 31, 1998. Axe Houghton does not maintain control of the partnerships for consolidation purposes. During the first quarter 1998, the company modified its cash management program for the purpose of increasing its rate of return on investments. As part of that program the Company invested in two multi-manager, market neutral limited partnerships. These multi-manager limited partnerships, which are managed by professional money managers, make investments in other unaffiliated limited partnerships and funds which employ a variety of alternative investment strategies. These strategies include relative-value, event-driven, hedged-directional, convertible arbitrage, convertible hedging and basis spread trading. All of the Company's investments in limited partnerships are accounted for under the equity method. NOTE 4 - FINANCIAL INSTRUMENTS. As part of its cash management program, during the first quarter 1998 the Company invested in a diversified portfolio of investment grade preferred stock and U.S. Treasury futures used to hedge the preferred stock positions and a bank-sponsored, flexible, market-linked deposit which maintains investments in U.S. and foreign equity indices, floating rate deposits, baskets of European equity securities and a U.S. Treasury zero coupon bond. Each of these investments is managed by professional money managers. The flexible, market-linked deposit is not federally insured; however, the sponsoring bank has agreed to protect 100% of the Company's principal investment, less management fees due to the bank, if the Company maintains the deposit for one year. 4 Each of these investments use or include 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 terminations 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. NOTE 5 - STOCKHOLDERS' EQUITY. During the fourth quarter 1992, the Company's Board of Directors approved a stock repurchase program which enables the Company to repurchase up to one million shares of its Common Stock from time to time. In November 1994, the Company's Board of Directors authorized management to repurchase an additional one million shares of Common Stock from time to time in open market and private transactions. From January 1, 1998 through March 31, 1998, the Company repurchased 165,000 shares of Common Stock at an aggregate cost of $1.0 million. As of March 31, 1998, the Company has repurchased a total of 1,640,712 shares under these repurchase programs. The Company purchased an additional 650,000 shares in December 1995, pursuant to a contract with the Estate of Ronald H. Hoenig. The total cost of the purchases under the repurchase programs and the purchase from the Estate (net of 544,501 shares issued out of Treasury Stock) is $7,346,428. NOTE 6 - COMPREHENSIVE INCOME The Financial Accounting Standards Board has issued Statement of Financial Standards No. 130, "Reporting Comprehensive Income", which is effective for fiscal Years begining after December 15, 1997. This Statement establishes standards of reporting of comprehensive income and its components. Comprehensive income includes gains or losses resulting from the translation of the Company's foreign currency financial statements included in stockholders' equity in the Statement of Financial Condition. Comprehensive income for the periods ended March 31, 1998 and 1997 is as follows: 1998 1997 ---- ---- Net income $ 989,857 $873,755 Other comprehensive income: Foreign currency translation adjustment 29,560 (104,196) Tax expense (benefit) 12,933 (41,678) -------- --------- 16,627 (62,518) Comprehensive income $1,006,484 $811,237 ========== ========= NOTE 7 - SUBSEQUENT EVENTS. In March 1998, Lawrence W. Gallo, a former employee of Hoenig, instituted an arbitration before the NASD Regulation against Hoenig and Fredric P. Sapirstein, Hoenig's Chairman and Chief Executive Officer. Mr. Gallo principally alleges defendants wrongfully terminated Mr. Gallo's employment in breach of his employment agreement and falsely stated the reason for his termination in a securities regulatory filing on Form U-5. Mr. Gallo is seeking approximately $2.2 million in compensatory damages against each of the defendants, plus punitive damages, liquidated damages, interest, reasonable attorneys' fees and modification of the Form U-5. The Company believes that Hoenig and Mr. Sapirstein have meritorious defenses to the arbitration and intend to vigorously oppose Mr. Gallo's claims. 5 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Certain statements in this report that relate to future plans, events or performance are forward-looking statements. Such statements may include, but are not limited to, those relating to the effects of future growth, cost reduction measures taken in certain international operations, acquisition and expansion plans, the Company's investment activities and its current equity capital levels. Actual results might differ materially due to a variety of important factors that cannot be predicted with certainty. These factors involve risks and uncertainties relating to, among other things, general economic conditions, market fluctuations, competitive conditions within the brokerage and asset management businesses, stock market prices and trading volumes, changes in demand for asset management and securities brokerage services, the Company's ability to recruit and retain key employees, changes in U.S. and foreign securities laws and regulations, particularly regarding Independent Research and Directed Brokerage Arrangements, trading and investment activities, litigation and other factors discussed throughout this report and in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. GENERAL Hoenig Group Inc. (the "Company") provides global securities brokerage to institutional clients through its wholly-owned brokerage subsidiaries in the United States, United Kingdom, Hong Kong and Japan. The Company's wholly-owned subsidiary, Axe-Houghton Associates, Inc. ("Axe-Houghton"), provides professional asset management to public and corporate employee benefit plans, investment partnerships and other institutional clients. The Company's principal source of revenues is commissions earned for executing trades on behalf of its customers. The Company executes trades in equity securities on all of the world's major stock exchanges, acting primarily as agent for its customers, and also executes trades in U.S. fixed income securities on an agency and riskless principal basis. The Company earns commissions in connection with four types of brokerage services: commissions received in connection with providing independent research and other services to investment managers ("Independent Research Arrangements"), commissions received in exchange for paying expenses of, or commission refunds to, the customer ("Directed Brokerage Arrangement"), commissions received in connection with providing the Company's proprietary research ("Proprietary Research"); and commissions received for execution-only services ("Execution - Only Brokerage"). The Company's profit margin on Execution-Only Brokerage and Proprietary Research is higher than that on Independent Research Arrangements and Directed Brokerage Arrangements because the Company does not incur direct expenses for research and other services in connection with such activities. The Company generally expects a certain amount of commissions for every $1 in research, other services and commission refunds provided under Independent Research Arrangements and Directed Brokerage Arrangements. This ratio is negotiated on an individual customer basis. Ratios continue to be under downward competitive pressure in most of the markets in which the Company conducts brokerage activities. The Company's earnings in any period are affected by its ability to earn commissions under Independent Research and Directed Brokerage Arrangements on a timely basis, since revenues are recorded only when earned. The timing of the receipt of these commissions could cause variations in earnings from year to year and quarter to quarter. The Company's second largest source of revenues is investment management fees earned by Axe-Houghton, the Company's asset management subsidiary, in connection with the provision of asset management services to institutional clients. The profit margin on the Company's asset management business is higher than those on the Company's brokerage activities and also varies with the types of asset management services provided 6 by the Company. At March 31, 1998, Axe-Houghton had $4.3 billion in assets under management, of which approximately $481.7 million represented a temporary assignment. On April 8, 1998, employment contracts between Axe-Houghton and certain of its employees expired. These contracts were entered into at the time the Company acquired Axe-Houghton with each of the seven employee-shareholders who sold their interests in Axe-Houghton to the Company. Of these seven employees, two who are responsible for small capitalization growth equities management have executed new employment agreements, two others have agreed to new employment arrangements, one has retired. Axe-Houghton currently is negotiating new employment arrangements with the remaining two. While the Company anticipates that these negotiations will result in mutually satisfactory employment arrangements with these individuals, no assurances can be given as to when or how the negotiations will conclude. The financial results of Axe-Houghton could be adversely affected if such negotiations are not successfully resolved. With respect to its asset management and securities brokerage businesses, the Company continues to evaluate opportunities to increase distribution capabilities, expand its client base and supplement its product line through acquisitions and the hiring of additional personnel. THREE MONTHS ENDED MARCH 31, 1998 VERSUS THREE MONTHS ENDED MARCH 31, 1997. The Company's operating income before income taxes for the three months ended March 31, 1998 increased 13.0% to $1,209,068, versus $1,070,054 in 1997. The increase in operating income is primarily attributable to an increase in operating income from U.S. operations, offset in part by operating losses from international brokerage operations. The Company's net income for the three-months ended March 31, 1998 increased 13.3% to $989,857 versus $873,755 in 1997. Operating revenues increased 9.3% to $19.6 million for three months ended March 31, 1998 from $17.9 million for the three months ended March 31, 1997. Commission revenues increased 8.2% to $17.6 million for the three months ended March 31, 1998 from $16.2 million for the same period in 1997. This increase resulted primarily from an increase in commission revenues in U.S. equity markets, offset by a decrease in commission revenues earned by the Company's operations in Hong Kong and Japan (" Asian Brokerage"). Commission revenues derived from international locations represented 24.2% of the Company's total commissions during the first quarter 1998 as compared to 34.7% for the same period in 1997. The financial markets in Japan and Southeast Asia continued to experience difficulty during the quarter ended March 31, 1998, which resulted in volatility and overall declines, as well as reduced trading volumes in those markets. Reduced trading activity has resulted in a decline in commission revenues from the Company's Asian Brokerage operations and operating losses in those operations. Continued declines in commission revenues in Japan and Southeast Asia would result in additional losses by the Company's Asian Brokerage operations. The Company continues to explore cost reduction and other means to address operating losses in its Asian Brokerage operations. Investment management fee revenues increased 29.4% to $2.0 million for the three months ended March 31, 1998, from $1.5 million in 1997. This increase in investment management fees reflects an increase in small capitalization growth equities assets, which are managed for a higher average fee. Assets managed in small capitalization growth equities increased 65.2% to $714.0 million as of March 31, 1998 from $432.1 million as of March 31, 1997. Total assets under management increased to $4.3 billion as of March 31, 1998, as compared with $3.3 billion as of March 31, 1997. Expenses related to independent research and other services provided to the Company's brokerage clients during the first quarter 1998, including commission refunds, increased 11.1% to $8.1 million from $7.3 million for the same 7 period in 1997. These expenses were 46.2% of commission revenues for the quarter ended March 31, 1998 as compared with 45.0% for the corresponding period in 1997. These expenses increased at a higher rate than commission revenues, primarily due to the timing of research expenses incurred relative to the receipt of commissions. Clearing, floor brokerage and exchange charges decreased 8.0% to $2.5 million during the first quarter 1998 from $2.7 million in 1997. These expenses represented 14.1% of commissions in 1998 and 16.6% of commissions in 1997. The decrease in these expenses as a percentage of commissions is primarily due to an increase in the percentage of commissions generated in the U.S. equity market, where such expenses are charged at lower rates than comparable trades in certain Asian markets. Commissions generated in certain Asian markets represented a smaller percentage of total commissions during the quarter ended March 31, 1998 as compared to the same period in 1997. Employee compensation increased 14.7% to $5.3 million in 1998 from $4.6 million in 1997. This resulted primarily from an increase in reserves for discretionary and performance-based compensation, as well as an increase in the base compensation of existing employees during the three months ended March 31, 1998. All other expenses increased 11.5% to $2.5 million in the first quarter 1998, compared to $2.2 million in 1997. This resulted primarily from an increase in expenses related to market data, communications, depreciation and amortization during the quarter ended March 31, 1998. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1998, the Company had cash, U.S. Government obligations, net accounts receivable and other investments of $45.3 million. All receivables from correspondent brokers and dealers are fully collectible, and no provision for uncollectibles is required. The Company modified its cash management program during the quarter ended March 31, 1998 to increase its rate of return on investments. The Company invested a portion of funds previously held as cash and equivalents, U.S. government obligations and corporate bonds in investments which include limited partnership interests in two multi-manager, market neutral limited partnerships; a diversified portfolio of investment grade preferred stock and U.S. Treasury futures used to hedge the preferred stock positions; and a bank-sponsored, flexible, market-linked deposit account which maintains investments in U.S. and foreign equity indices, floating rate deposits, baskets of European equity securities and a U.S. Treasury zero coupon bond. Each of these investments is managed by professional money managers. The flexible market-linked deposit is not federally insured; however, the bank has agreed to protect 100% of the Company's principal investment, less its management fee, if the deposit is maintained for one year. These investments generally are not transferable and are less liquid than investments in U.S. government obligations and corporate bonds. These investments have not had a material effect on the Company's liquidity and results of operations. During the quarter ended March 31, 1998, the Company repurchased 165,000 shares of common stock, totaling $1.0 million, under previously announced stock repurchase programs. These repurchases have not had a material effect on the Company's liquidity and results of operations. The Company believes that its current cash resources and liquidity, plus additional funds generated by operations, will be sufficient to meet current and future operating needs. The Company continues to explore opportunities to expand existing businesses and to acquire new businesses, which could potentially have an impact on liquidity and capital resources. 8 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In March 1998, Lawrence W. Gallo, a former employee of Hoenig & Co., Inc. ("Hoenig"), instituted an arbitration before the NASD Regulation against Hoenig and Fredric P. Sapirstein, Hoenig's Chairman and Chief Executive Officer. Mr. Gallo principally alleges defendants wrongfully terminated Mr. Gallo's employment in breach of his employment agreement, and falsely stated the reason for his termination in a securities regulatory filing on Form U-5. Mr. Gallo is seeking approximately $2.2 million in compensatory damages against each of the defendants, plus punitive damages, liquidated damages, interest, reasonable attorneys' fees and modification of the Form U-5. The Company believes that Hoenig and Mr. Sapirstein have meritorious defenses to the arbitration and intend to vigorously oppose the claim. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 10.16 Employment Agreement between Axe-Houghton Associates, Inc. and Seth M. Lynn, Jr., dated April 8, 1993. 10.17 Amendment No. 1 to the Employment Agreement between Axe-Houghton Associates, Inc. and Seth M. Lynn, Jr., dated August 18, 1994. 10.18 Client Agreement and Trading Authorization between Spectrum Asset Management, Inc. and Hoenig Group Inc., dated March 18, 1998. 11.1 Computation of Per Share Earnings. 27.1 Financial Data Schedule. (b) REPORTS ON FORM 8-K The Registrant did not file any reports on Form 8-K during the quarter ended March 31, 1998. 9 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Hoenig Group Inc. Date: May 14, 1998 By:/s/ Fredric P. Sapirstein Fredric P. Sapirstein, Chairman and Chief Executive Officer Date: May 14, 1998 By:/s/ Alan B. Herzog Alan B. Herzog, Chief Operating Officer and Chief Financial Officer 10 EXHIBIT INDEX Exhibit No. Description - ---------- ------------ 10.16 Employment Agreement between Axe-Houghton Associates, Inc. and Seth M. Lynn, Jr., dated April 8, 1993. 10.17 Amendment No. 1 to the Employment Agreement between Axe- Houghton Associates, Inc. and Seth M. Lynn, Jr., dated August 18, 1994 10.18 Client Agreement and Trading Authorization between Spectrum Asset management, Inc. and Hoenig Group Inc., dated March 18, 1998. 11.1 Computation of Per Share Earnings 27.1 Financial Data Schedule EXHIBIT 10.16 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT made and entered into this 8th day of April 1993, between Axe-Houghton Associates, Inc. a Delaware corporation (the "Company") and wholly-owned subsidiary of Hoenig Group Inc. ("Hoenig"), and Seth M. Lynn, Jr. (the "Employee"). WITNESSETH: ----------- WHEREAS, the Employee together with others have on the date hereof sold all of the outstanding stock of the Company to Hoenig pursuant to a purchase agreement dated February 18, 1993 (the "Purchase Agreement"); WHEREAS, the business of the Company, which became a wholly-owned subsidiary of Hoenig effective upon the closing of the sale of the outstanding stock of the Company (the "Closing"), shall be carried on after the Closing substantially as conducted prior to the Closing; WHEREAS, the Company desires to retain the exclusive services of Employee and Employee desires to be employed by the Company for the term of this Agreement; and WHEREAS, Employee will become an executive officer of the Company and Employee's experience in the business to be carried on by the Company renders Employee's services of a special, unique, unusual and extraordinary character which gives such services peculiar value, the loss of which cannot be reasonably or adequately compensated in damages in an action at law; NOW, THEREFORE, in consideration of the mutual covenants and conditions herein contained, the Company and the Employee hereby agree as follows: 1. Definitions. All accounting terms used in this Agreement and not separately defined shall have the meanings ordinarily given them under generally accepted accounting principles ("GAAP"). For purposes of the Agreement, the following terms shall have the meanings ascribed below. (a) Base Salary. "Base Salary" shall mean those amounts paid by the Company to the Employee on a regular basis as salary pursuant to this Agreement and the payroll policies of the Company as in effect from time to time. (b) Benchmark. "Benchmark" shall mean $120,000 plus the total of any Shortfalls (as defined in Section 1(1) hereof) from previous Fiscal Years (as defined in Section 1(g) hereof). The applicable Benchmark for any Fiscal Year consisting of less than twelve months shall equal the sum of (i) $120,000 multiplied by a fraction the numerator of which shall be the number of months or fractions thereof within such Fiscal Year and the denominator of which shall be twelve, and (ii) the total of any Shortfalls from previous Fiscal Years. (c) Bonus. "Bonus" shall mean those amounts paid by the Company to the Employee in addition to Base Salary as set forth in Section 6(b) hereof. (d) Company. "Company" shall mean Axe-Houghton Associates, Inc. or any subsidiary or division formed or used by the Company for the purpose of continuing the business now or hereafter operated by the Company. (e) Date of Termination. "Date of Termination" shall mean (i) in the case of termination for which a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein, as the case may be, and (ii) in all other cases, the actual date on which the Employee's employment terminates. (f) Disciplinary Termination. " Disciplinary Termination" shall mean termination of the Employee's employment by the Company as a result of the Employee's becoming the subject or target of any investigation or disciplinary action by the Securities and Exchange Commission ("SEC"), the National Association of Securities dealers ("NASD"), any securities exchange, any self-regulatory organization or any governmental authority, state, federal or foreign. (g) Fiscal Year. "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 the date hereof and end on December 31, 1993 and, in the event this Agreement is not renewed as provided in Section 2 hereof, the last Fiscal Year shall commence on January 1, 1998 and end on the fifth anniversary of the date hereof. (h) Initial Employment Term. "Initial Employment Term" shall mean a term commencing on the date hereof and continuing for five (5) years until April 8, 1998. (i) Net Pre-Tax Profit. "Net Pre-Tax Profit" means the amount, if any, determined in accordance with GAAP consistently applied from year to year, by which the Company's total revenues exceed expenses incurred in the operation and conduct of the Company's business, which expenses include but are not limited to rent (at Hoenig's cost per square foot), telephones, salaries, any amounts paid to Company employees upon termination of employment, consulting, solicitation or other fees paid to third parties, business travel and entertainment expenses, legal and professional fees incurred in connection with Company business, and any other direct expenses incurred by the Company; provided, however, that the following expenses shall not be deducted from the Company's revenues when calculating the Earnout: (i) general corporate allocations or charges by Hoenig; (ii) interest paid on the Company Note referred to in Section 1.6 of the Purchase Agreement; (iii) any expenses reasonably incurred in the relocation of the Company's offices to Royal Executive Park, 4 International Drive, Rye Brook, New York up to a maximum $100,000, including but not limited to any expenses incurred in the subletting of the Company's present premises located at 580 White Plains Road, Tarrytown, New York, and charges on service contracts incurred solely as a result of the relocation; (iv) the cost of any stock options granted to Company employees; (v) for each of the first two 2 years following the Closing, marketing expenses of up to $500,000 provided such expenses are approved for reimbursement by Hoenig as provided in Section 1.5 of the Purchase Agreement; (vi) the incurrence of any indebtedness or contractual obligation which is outside the ordinary course of business and is in excess of $50,000; (vii) the compromise, settlement or other forgiveness of indebtedness owed to the Company which involves an amount in excess of $50,000; (viii) the guarantee or assumption of liability, contingent or otherwise, with respect to obligations of third parties which involves an amount in excess of $50,000; and (ix) interest paid on the Marketing Note referred to in Section 1.5(c)(i) of the Purchase Agreement. (j) Notice of Termination. "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth the basis for termination of the Employee's employment under the provision so indicated, and (iii) if the Date of Termination is other than the date of receipt of such notice, specifies such Date of Termination. (k) Permanent Disability. "Permanent Disability" shall have the meaning given to the term "Disability" in the Long-term Disability Plan of Hoenig & Co., Inc. (l) Shortfall. "Shortfall" shall mean for each Fiscal Year the amount by which the Net Pre-tax Profit for such Fiscal year is less than $120,000; provided, however, that for Fiscal years consisting of less than twelve months, the Shortfall, if any, shall equal the amount by which the Net Pre-tax profit for such Fiscal Year is less than an amount equal to $120,000 multiplied by a fraction, the numerator of which shall be the number of months or fraction thereof within such Fiscal Year and the denominator of which shall be twelve. The maximum Shortfall for any given Fiscal Year shall be $20,000; provided, however, that the Shortfall for any Fiscal year consisting of less than twelve months shall equal $20,000 multiplied by a fraction, the numerator of which shall be the number of months or fraction thereof within such Fiscal Year and the denominator of which shall be twelve. (m) Special Consideration. "Special Consideration" shall mean that amount paid to Employee by Hoenig at the Closing and upon execution of this Agreement in consideration for Employee's covenant not to compete as set forth in Section 7 hereof. (n) Termination for Cause. "Termination for Cause" shall mean termination of the Employee's employment by the Company as a result of any of the following: (i) willful and repeated failure of the Employee to adequately perform Employee's duties pursuant to this Agreement; or (ii) any material failure of Employee to comply with the terms of this Agreement or any breach of this Agreement by Employee which would have a material adverse effect on the business, properties, assets, liabilities, operations, results of operations, prospects or condition, financial or otherwise, of the Company; or (iii) Employee's conviction of a crime involving moral turpitude, dishonesty, theft, unethical business conduct, or conduct which significantly impairs the reputation of the Company, any of its affiliates or Hoenig; or (iv) the expulsion or suspension of 3 Employee, or issuance of an order temporarily or permanently enjoining Employee, from the securities, money management or investment advisory business or from acting in the capacity contemplated by this Agreement by the SEC, the NASD, any securities exchange, any self-regulatory organization or governmental authority, state, federal or foreign. (o) Year of Service. "Year of Service" shall mean each period of 52 weeks of continuous employment of the Employee with the Company, the first Year of Service commencing on the date hereof. 2. Employment Term. The Company hereby employs Employee, and Employee hereby accepts such employment, under and subject to all of the terms, conditions and provisions hereof, for the Initial Employment term. At the end of the Initial Employment Term, this Agreement automatically will be renewed for successive one (1) year terms unless either party elects not to renew by providing written notice delivered to the other party not less than 60 days and not more than 90 days prior to the end of the Initial Employment Term or any subsequent renewal term. 3. Duties. During the term of this Agreement, the Company hereby employs the Employee and the Employee hereby accepts employment as the President of the Company responsible for the day-to-day business and operation of the Company, and agrees to continue the types of services previously rendered by the Employee to the Company. Subject to the direction of the Board of Directors of the Company, Employee shall have the authority and discretion to take those actions necessary to operate, manage and develop the business of the Company; provided, however, that Employee shall have full and complete authority and discretion, without the prior approval of the Board of Directors, to fire any employee except those with employment agreements and to hire any employee whose total annual compensation (including but not limited to the value of any bonus, perquisites and any securities, options or other rights to acquire securities) does not exceed $100,000. During the term of this Agreement, including any successive renewal terms, the Company shall and use its best efforts to cause Employee to be nominated and elected as President of the Company. 4. Conditions of Employment. ------------------------- (a) The Employee shall devote his full time and all professional activities to the performance of his duties and the business of the Company and its subsidiaries. (b) The Company shall furnish Employee with offices at the principal office of the Company. (c) The Employee shall be entitled to such vacation or vacations as he may deem desirable in accordance with Company policy, which shall not be more than 4 weeks in any year. 4 (d) The Employee shall be entitled to all benefits generally provided to employees of Hoenig and its affiliates, as of the date hereof, and will be eligible to participate in the Hoenig stock option plan on the same basis as employees of Hoenig and its affiliates. 5. Covenant to Serve the Company. Employee further agrees to well and faithfully serve the Company and its subsidiaries and affiliates in the capacities above mentioned and to devote his full time to perform such services. 6. Compensation. ------------- (a) During the Initial Employment term and any renewal term, the Company agrees to pay Employee, as compensation for his services hereunder, Base Salary at the rate of $210,000 per annum. The Company shall pay such compensation in equal payments no less regularly than monthly, subject to any deductions or withholdings that applicable law might require. (b) In addition, for each of the Fiscal Years during the Initial Employment Term and any renewal term, the Employee shall be eligible to participate in a bonus pool equal to 20% of the amount, if any, by which the Net Pre-tax profit (as defined in Section 1(i) hereof) of the Company for the Fiscal Year exceeds the benchmark (as defined in Section 1(b) hereof). Employee's portion of the bonus pool, if any, (the "Bonus") shall be determined by the President of the Company in the reasonable exercise of his discretion. 7. Non-Competition. ---------------- In consideration of $117,900 paid by Hoenig to Employee at the Closing (the "Special Consideration"), Employee hereby covenants and agrees that: (a) During the term of this Agreement and any subsequent renewal terms, Employee will not directly or indirectly (whether as a proprietor, partner, stockholder, creditor, officer, director, agent, employee, consultant, trustee, affiliate or otherwise) (i) own, manage, operate, control, promote or participate in the ownership, management, operation or control of, or be connected with, or have any financial interest in, or aid or assist anyone else in the conduct of, any business which is competitive with the business conducted by the Company or any of its subsidiaries (provided that ownership of one percent (1%) or less of the voting stock of any publicly held corporation shall not constitute a violation hereof); (ii) solicit any present or future client or prospect of the Company or its subsidiaries or affiliates in connection with any such activity or other business competitive with the business of the Company or its subsidiaries or affiliates; or (iii) employ, solicit for employment, induce or persuade, or advise or recommend to any other persons that they employ or solicit for employment, any employee of the Company. (b) For a period of time equal to one year from the Date of termination, Employee agrees that he will not directly or indirectly (either as a proprietor, partner, 5 stockholder, creditor, officer, director, agent, employee, consultant, trustee, affiliate or otherwise) (i) own, manage, operate, control, promote or participate in the ownership, management, operation or control of, or be connected with, or have any financial interest in, or aid or assist anyone else in the conduct of, any business which is competitive with the business conducted by the Company or any of its subsidiaries (provided that ownership of one percent (1%) or less of the voting stock of any publicly held corporation shall not constitute a violation hereof); (ii) solicit any present or future client or prospect of the Company or its subsidiaries or affiliates in connection with any such activity; or (iii) employ, solicit for employment, induce or persuade, or advise or recommend to any other persons that they employ or solicit for employment, any employee of the Company. However, Employee shall not be bound by the terms of this subsection 7(b) if the Company terminates Employee's employment other than for cause pursuant to Section 10(b) or upon Employee's death or permanent disability pursuant to Section 10(a), or if Employee terminates his employment pursuant to Section 10(d). If the Company terminates Employee's employment pursuant to Section 10(e), Employee shall not be bound by the terms of subsections (ii) and (iii) of this Section 7(b) for a period of time equal to one year from the date of termination. 8. Company Property. ----------------- (a) Employee agrees not to disclose or use, except in pursuit of the business of the Company or any of its subsidiaries or affiliates, any proprietary information of the Company or its subsidiaries or affiliates. For purposes of this Agreement, the phrase "proprietary information of the Company or its subsidiaries or affiliates" means all information which is known or intended to be known only to employees of the Company, its subsidiaries or affiliates or others in a confidential relationship with the Company or its subsidiaries or affiliates, and relates to business matters such as the identity of present and future clients and prospects of the Company or of its subsidiaries or affiliates. (b) Any patents, inventions, discoveries, applications, computer programs, mathematical algorithms, formulas, strategies or processes devised, planned, applied, created, discovered, invented or employed by Employee, alone or jointly with others, in the course of Employee's employment under this Agreement and which pertain to any aspect of the Company's business shall be the sole and absolute property of the Company, and Employee shall make prompt report thereof to the Company and promptly execute any and all documents reasonably requested to assure the Company the full and complete ownership thereof. (c) All records, files, drawings, documents, reports, computer programs, software, discs or magnetic tape, equipment and similar items relating to the business of the Company or its subsidiaries or affiliates which Employee shall prepare or receive from the Company shall remain the sole and exclusive property of the Company and its subsidiaries or affiliates. Upon termination of Employee's employment under this Agreement, Employee shall promptly return to the Company and its subsidiaries or affiliates all property of the Company or its subsidiaries or affiliates in Employee's possession at the Date of Termination, including but not limited to all correspondence, drawings, blueprints, manuals, 6 letters, notes, notebooks, reports, flowcharts, computer programs, proposals, any documents concerning the Company's clients or products, licensed software or processes, including any copies thereof, used by the Company. 9. Standard of Conduct. Employee agrees at all times during the term of this Agreement to conduct himself in such manner as to not injure or reflect negatively on the standing, credit reputation or business of the Company or its subsidiaries of affiliates. 10. Termination. ------------ (a) Death or Permanent Disability. The Employee's employment with the Company shall automatically terminate upon the Employee's death and may be terminated by the Company upon the Permanent Disability of the Employee. (b) Termination by the Company Other Than a Termination For Cause, Permanent Disability or Death. The Company may, by action of the Board of Directors or any Committee thereof, upon not less than 90 calendar days written or oral notice to the Employee, terminate the employment of the Employee for any reason at any time; provided, however, that any Termination for Cause or Permanent Disability shall not be treated as a termination under this Section 10(b). (c) Termination for Cause. At any time during the term of this Agreement, the Company may notify the Employee of a Termination for Cause in the manner provided in Section 10(f) hereof and the employment of the Employee shall terminate as set forth in the Notice of termination. (d) Termination by Employee. Employee may, upon 30 days written notice to the Company, terminate this Agreement upon any material failure by the Company to comply with the terms of this Agreement (other than any failure remedied within a reasonable time after receipt of written notice from Employee). (e) Disciplinary Termination. At any time during the Term of this Agreement, the Company may notify the Employee of a Disciplinary Termination in the manner provided in Section 10(f) hereof and the employment of Employee shall terminate as set forth in the Notice of Termination. (f) Notice of Termination. Any Termination for cause or Disciplinary Termination shall be communicated by a Notice of termination delivered to the Employee in accordance with Section 1 hereof. If the Agreement is terminated by the Company pursuant to Section 10(b) hereof such termination must be communicated in writing, giving 90 days written notice. If this Agreement is terminated by the Employee pursuant to Section 10(d) hereof, such termination must be communicated in writing, giving 30 days written notice. 11. Obligations of the Company Upon Termination. -------------------------------------------- 7 (a) Death or Permanent Disability. If the Employee's employment is terminated by reason of the Employee's death or Permanent Disability, this Agreement shall terminate without further obligations to the Employee or the Employee's legal representatives under this Agreement other than those obligations accrued at the date of termination, including, for this purpose (I) the Employee's full Base Salary through the date of Termination, including Employee's portion of any unpaid Bonus previously awarded pursuant to Section 6(b) hereof, (ii) the Employee's portion, if any, of any Bonus awarded pursuant to Section 6(b) hereof after the Date of Termination for the year during which the termination occurred; (iii) any compensation previously deferred by the Employee (together with any accrued earnings thereon) and not yet paid by the Company and (iv) any other amounts or benefits owing to the Employee under the then applicable employee benefit plans or policies of the Company (such amounts specified in clauses (i), (iii) and (iv) above are hereinafter referred to as "Accrued Obligations"). Unless otherwise directed by the Employee (or, in the case of any employee benefit plan qualified (a "Qualified Plan") under Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), as may be required by such plan) all such Accrued Obligations shall be paid to the Employee or the Employee's legal representative in a lump sum in cash within 30 days of the Date of termination. (b) Termination by the Company Other Than For Cause and Termination By Employee. In the event of a Termination Other Than For Cause pursuant to Section 10(b) hereof, or termination by Employee pursuant to Section 10(d) hereof, the Company shall pay to the Employee within 30 days after the Date of Termination the Employee's Accrued Obligations and within 90 days after the Date of termination, shall pay to Employee an additional amount which shall be determined as follows: (i) If the termination occurs during the first or second year of Service, an amount equal to Employee's Base Salary for one Year of Service ($210,000). (ii) If the termination occurs during the third Year of Service, an amount equal to 75% of Employee's Base Salary for one Year of Service ($157,000). (iii) If the termination occurs during the fourth Year of Service, an amount equal to 50% of Employee's Base Salary for one Year of Service ($105,000). (iv) If the termination occurs during the fifth Year of Service, an amount equal to 25% of Employee's Base Salary for one Year of Service ($52,500) or the remaining unpaid Base Salary for the Year of Service during which the Date of Termination occurs, whichever is less. (c) Termination for Cause and Disciplinary Termination. In the event of a Termination for Cause pursuant to Section 10(c) hereof or a Disciplinary termination pursuant to Section 10(e) hereof, the Company shall pay the Employee the Employee's Accrued Obligations subject to set-offs by the Company for any amounts reasonably believed by the Company to be owed by the Employee to the Company or any of its subsidiaries or affiliates. Unless otherwise directed by the Employee (or, in the case of any 8 Qualified Plan, as may be required by such plan), the Employee shall be paid all such benefits in a lump sum within 30 days of the Date of Termination, and neither the Company nor any of its subsidiaries or affiliates shall have any further obligations to the Employee under this Agreement. Notwithstanding the foregoing, and only with respect to a Disciplinary termination, if after a Disciplinary Termination Employee is ultimately found by the highest applicable appellate court or tribunal not to have engaged in any disciplinary violations or unethical business conduct or to have violated any applicable law, statute, rule, regulation or requirement of the SEC, the NASD, any securities exchange, any self-regulatory organization or any governmental authority, state, federal or foreign, the Company shall, within 90 days of receipt of written notice thereof from the Employee, pay to Employee those amounts which Employee would have been entitled to receive on the Date of Termination (without interest thereon and less any such amounts already paid) had his employment been terminated other than for cause pursuant to Section 10(b) hereof. 12. Employee's Representations and Warranties. Employee represents and warrants as follows: (a) Employee represents and declares that in entering into this Agreement he has relied solely upon his own judgment, belief and knowledge, and the advice and recommendations of his own independent counsel, concerning the nature, extent and duration of Termination, without interest thereon, of his rights and duties hereunder. (b) Employee will not, by entering into, executing, delivering and performing this Agreement, breach or cause to be breached any undertaking, contract, agreement, statute, rule or regulation to which Employee is a party or by which Employee is bound which would limit or materially affect the performance of Employee's duties and obligations hereunder, including but not limited to any contract of employment or covenants, promises or agreements not to compete. (c) Employee has not during the course of his previous employment engaged in or performed any acts in connection with this Agreement or his employment by the Company which involve a breach of any fiduciary or other duty owed to Employee's former employer or any of its affiliates or subsidiaries. (d) Employee has not during the course of his previous employment disclosed to the Company any proprietary information of any third party, including but not limited to Employee's former employer, Axe-Houghton Management, inc. or USF&G Corporation, nor has Employee at any time used any such proprietary information except in the proper pursuit of the business of the entity or person to whom the proprietary information belongs. 13. Miscellaneous. -------------- (a) In the event that Employee's services hereunder are terminated under any of the provisions of this Agreement (except by death), Employee agrees that if at that time he is a director or officer of the Company, or any of its subsidiaries 9 or affiliates, he immediately will deliver his written resignation as such director or officer to the applicable Board of Directors, such resignation to become effective immediately. (b) Any controversy or claim arising out of or relating to this Agreement (including, without limitation, whether termination, if any, has been Termination for Cause, as that phrase is defined in Section 1 hereof) shall be settled by binding arbitration in the City of New York before a panel of three arbitrators in accordance with the Rules of the New York Stock Exchange if the Company or any subsidiary or affiliate is a member thereof, the National Association of Securities Dealers Inc. if neither the Company nor any subsidiary or affiliate is a member of the New York Stock Exchange, or the American Arbitration Association if neither the New York Stock Exchange nor the National Association of Securities Dealers Inc. has jurisdiction over the parties in this matter, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The parties hereby submit to jurisdiction and venue in New York Supreme Court in New York County and the United States District Court for the Southern District of New York, and waives any and all objections to jurisdiction and venue. Employee hereby consents to service of process delivered personally, by overnight courier, by registered mail return receipt requested or by facsimile addressed to Employee at the address listed in subsection 13(c) hereof. (c) Any notice required or permitted to be given under this Agreement by one party hereto to the other shall be sufficient if given or confirmed in writing delivered personally, by overnight courier or by registered mail return receipt requested addressed as respectively indicated: To Axe-Houghton Associates, Inc.: Axe-Houghton Associates, Inc. Royal Executive Park 4 International Drive Rye brook, NY 10573 Attention: Seth M. Lynn, Jr. with a copy to: Hoenig Group Inc. Royal Executive Park 4 International Drive Rye Brook, NY 10573 Attention: Alan B. Herzog To Employee: Seth M. Lynn, Jr. 87 Clinton Road Bedford Hills, NY 10507 10 or to such other addresses as the respective parties may in writing to the other designate. (d) This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of new York without reference to the conflicts of law provisions thereof. (e) Employee's rights and interests under this Agreement cannot be assigned, pledged or encumbered by him without the Company's prior written consent. The Company's rights and obligations shall be assignable to any parent, affiliate or subsidiary of the Company or any entity which succeeds to a substantial part of the assets and business of the Company. (f) This Agreement constitutes the entire agreement between the parties and supersedes all other agreements, written or oral, between them relating to the Company's employment of Employee. (g) All representations, warranties, covenants and agreements contained in this Agreement by or on behalf of the parties hereto shall survive termination of this Agreement, except as otherwise provided herein, and, in the event of any assignment, shall bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its officer thereunto duly authorized, and Employee has executed this Agreement, all as of the day and year first above written. AXE-HOUGHTON ASSOCIATES, INC. By: /s/ Lloyd Buchanan -------------------------- Vice-President Employee: /s/ Seth M. Lynn, Jr. ----------------------------- 11 AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT Amendment No. 1 dated as of August 18, 1994 (the "Amendment") to the Employment Agreement referred to below between Axe-Houghton Associates, Inc. (the "Company") and Seth M. Lynn, Jr. ("Employee"). W I T N E S S E T H WHEREAS, the Company and Employee are parties to the Employment Agreement, dated April 8, 1993 (the "Employment Agreement") (unless otherwise defined herein, all capitalized terms used herein shall have the same meaning as set forth in the Employment Agreement); WHEREAS, the Company plans to hire certain additional employees from time to time (through acquisitions or otherwise) and wishes to make certain amendments to the Employment Agreement to exclude from the calculation of Bonus revenues generated by such parties consistent with the Purchase Agreement dated as of February 18, 1993 (the "Purchase Agreement") among Hoenig Group Inc. ("Hoenig"), the Company, and the Sellers (as defined below), as amended by Amendment No. 1 to the Purchase Agreement, dated as of August 18, 1994 among Hoenig, the Company and the Sellers (as defined below); NOW THEREFORE, the parties hereto hereby agree as follows: ARTICLE I AMENDMENT Section 1.01. Amendment of Employment Agreement. The Employment Agreement is hereby amended as follows: (a) Section 1(i) is hereby deleted and replaced in its entirety by the following: (i) "Net Pre-tax Profits" means the amount, if any, determined in accordance with GAAP consistently applied from year to year, by which the Company's total revenues generated by the Included Accounts (but excluding revenues generated by the Excluded Accounts) exceed expenses incurred in the operation and conduct of the Company's business excluding all such expenses relating to the Excluded Accounts and Excluded Employees as determined in good faith by the Board of Directors of the Company, which expenses include but are not limited to rent (at Hoenig's cost per square foot), telephones, salaries, any amounts paid to Company employees upon termination of employment, consulting, solicitation or other fees paid to third parties, business travel and entertainment expenses, legal and professional fees incurred in connection with Company business, and any other direct expenses incurred by the Company; provided, however, that the following expenses shall not be deducted from the Company's revenues when calculating the Earnout; (i) general corporate allocations or charges by Hoenig; (ii) interest paid on the Company Note referred to in Section 1.6 of the Purchase Agreement; (iii) any expenses reasonably incurred in the relocation of the Company's offices to Royal Executive Park, 4 International Drive, Rye Brook, New York of up to a maximum $100,000, including but not limited to any expenses incurred in the subletting of the Company's present premises located at 580 White Plains Road, Tarrytown, New York, and charges on service contracts incurred solely as a result of the relocation; (iv) the cost of any stock options granted to Company employees; (v) for each of the first two years following the Closing, marketing expenses of up to $500,000 provided such expenses are approved for reimbursement by Hoenig as provided in Section 1.5 of the Purchase Agreement; (vi) the incurrence of any indebtedness or contractual obligation which is outside the ordinary course of business and is in excess of $50,000; (vii) the compromise, settlement or other forgiveness of indebtedness owed to the Company which involves an amount in excess of $50,000; (viii) the guarantee or assumption of liability, contingent or otherwise, with respect to obligations of third parties which involves an amount in excess of $50,000; and (ix) interest paid on the Marketing Note referred to in Section 1.5(c)(i) of the Purchase Agreement. (b) Section 1 is hereby amended by adding the following after clause (o): (p) "Included Accounts" shall mean client accounts presently or hereafter managed by the Included Employees, except those client accounts managed using the Vortex Investment style. (q) "Included Employees" shall mean the Sellers and such present and future employees hired by the Sellers and working with the Sellers on Included Accounts. (r) "Excluded Accounts" shall mean client accounts presently or hereafter managed by employees other than the Included Employees. (s) "Excluded Employees" shall mean present and future employees other than the Included Employees. (t) "Sellers" shall mean Ellen W. Adnopoz, Lloyd Buchanan, Richard Franks, Robin N. Kerr, Seth M. Lynn, Jr., Porter H. Sutro and Robert A. Windsor, collectively. 2 ARTICLE II MISCELLANEOUS (a) The parties hereby agree that upon the commencement of employment of the Excluded Employees all responsibilities relating to client accounts managed using the Vortex investment style shall become the responsibility of the Excluded Employees. (b) Except for the matters specifically amended herein, the Employment Agreement shall remain and continue to be in full force and effect in accordance with its terms, and the Employment Agreement is hereby ratified, confirmed and acknowledged by each party thereto. (c) This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original, and all of which taken together shall constitute one and the same instrument. (d) This Amendment shall be governed by, and construed in accordance with the laws of the State of New York, without regard to principles of conflict of laws. IN WITNESS WHEREOF, the parties have caused this Amendment to be executed as of the date first above written. AXE-HOUGHTON ASSOCIATES, INC. By: /s/ Richard Franks ------------------------- Vice-President Employee: /s/ Seth M. Lynn, Jr. ------------------------- Seth M. Lynn, Jr. 3 AUTHORIZATION EXHIBIT 10.18 SPECTRUM ASSET MANAGEMENT, INC. CLIENT AGREEMENT AND TRADING AUTHORIZATION This Agreement sets forth the terms and conditions upon which Spectrum Asset Management, Inc. (hereinafter referred to as the "Advisor") shall act as agent and investment manager with full discretionary authority to buy, sell and trade in preferred stocks, bonds, commodity futures and/or contracts relating to the same, on behalf of Hoenig Group Inc. (hereinafter referred to as the "Client"). 1. The Client acknowledges its receipt and understanding of the Advisor's Disclosure Document to prospective Clients which, except as otherwise provided, is incorporated by reference herein and made a part hereof; 2. In consideration of the Advisor's rendering its services, the Client shall pay the Advisor a quarterly fee, to be billed at the end of each calendar quarter, based on the average daily equity value of assets under management during such quarter according to the following schedule: Net Asset Value Annualized Fee Rate ------------------ --------------------- $2-20 million 0.45% over $20 million 0.40% Upon termination of this Agreement, the quarterly fee shall be pro rated. 3. In the absence of specific written instructions from Client to the contrary, Advisor will maintain, either directly or through a clearing broker designated by Advisor, custody of the cash, securities and other investments (the "Assets") in the Client's account and will receive and credit to the account all interest, dividends, and other distributions received by the Advisor on the Assets in the account. Advisor, either directly or through its clearing broker, shall provide Client with monthly statements of Client's account and such other information as Client shall request from time to time. 4. The Client shall establish and maintain a commodity futures account and/or options account with FIMAT Futures USA, Inc. 5. In the absence of specific written instructions from Client to the contrary, Advisor will provide brokerage and execution services to the Client and shall have discretion to issue directly to other brokers or dealers orders for the purchases and sales of securities, commodity futures and contracts relating to the same on behalf of Client's account. Advisor shall, either directly or through other brokers or dealers, execute transactions for the purchase or sale of securities and other investments in the Client's account provided it is able to provide best execution. Advisor will send to the Client confirmations of all transactions it executes for the Client's account and shall and prepare and supply to the Client monthly account statements summarizing such transactions. To the extent Advisor uses other brokers or dealers to execute transactions on behalf of the Client's account, Advisor shall instruct such other brokers and dealers to send to the Client confirmations for all such transactions and monthly account statements summarizing such transactions. The Client hereby ratifies and confirms that the Advisor may effect transactions in which it acts as agent for the buyer and the seller and consents to this arrangement heretofore and hereafter. This consent may be revoked at any time by written notice to the Advisor. 6. All transactions executed for the Client's accounts shall be at the Client's risk and no express or implied assurance of profit nor guarantee against loss has been made to the undersigned Client, and accordingly, it is hereby confirmed that the Advisor has not warranted in any way that the Advisor's program will attain successful performance results. 7. The Client understands that the Advisor has not been retained for the purpose of providing tax advice. The Advisor does not assume responsibility for tax-related matters and the Client's accounting that pertain to the transactions effectuated for the Client's account(s). 8. This authorization is a continuing one and shall remain in full force and effect until revoked by the Client by written notice to Spectrum Asset Management, Inc., 4 High Ridge Park, Stamford, CT 06905, attention Mark Lieb. The Client may terminate the Advisor's management of its account(s) and direct the close-out of its account(s), and the withdrawal of funds, at any time, upon five (5) days' written notice to the Advisor. Subsequent to the date of receipt by Advisor of such notice of termination, the Client acknowledges that Advisor shall have no responsibility or liability, including losses resulting in the maintaining of positions in existence after the effective date of the termination. Similarly, the Advisor may terminate its management services at any time upon reasonable (30 days) notice to the Client. 9. This authorization granted by the Client in this Agreement shall inure to the benefit of the Advisor and its successors and/or assigns, notwithstanding any change at any time in the personnel of the Client, the Advisor or their respective successors and assigns. 10. The Advisor agrees to provide the Client with monthly performance evaluation reports within five (5) business days of the end of the month. These reports will include a detailed transaction log, dividend schedule, portfolio position reports, performance evaluation and summary. 11. In accordance with the provisions of the Investment Advisor's Act of 1940, as amended, this Agreement may not be assigned, transferred, sold or in any manner 2 hypothecated or pledged by the Advisor without the prior written consent of the Client. The Advisor agrees to maintain strict confidence regarding all aspects of the Client's account(s), its financial condition and business affairs. 12. The Client hereby confirms it is fully empowered and authorized to enter into this Agreement and shall be binding on the Client, its successors, administrators and assigns and governed by the laws of the state of New York. The Client agrees to retain the Advisor and to establish and maintain managed hedged accounts for securities options and commodity trading which it has independently determined to be in accordance with its Certificate of Incorporation and By-Laws and to appropriately meet its financial objectives. Submitted herewith for execution by the Client, are certain forms required by FIMAT Futures USA, Inc. and the Advisor, including but not limited to: (i) this Client Agreement and Trading Authorization; (ii) Discretionary Account Disclosure Statement; (iii) all forms in the Futures Account Agreement for Institutional Customers; 13. Advisor represents and warrants that it is, and shall remain, duly registered as an investment adviser under the Investment Advisers Act of 1940, as amended, and as a broker-dealer under the Securities and Exchange Act of 1934, as amended. 14. Adviser agrees to provide its best judgment and efforts in rendering the services set forth in this Agreement, including without limitation advisory and brokerage services, and the parties agree that the standard of care imposed upon Adviser, its employees and agents, is to act without negligence and in good faith with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent investor, acting in a like capacity, would undertake and to comply with all other duties of a fiduciary. Advisor shall manage and invest the funds in Client's account in accordance with the investment guidelines attached hereto as Exhibit A, as may be amended by Client from time to time. 15. Advisor guarantees that all services provided under this Agreement will be "Year 2000 compliant" by December 31, 1998, meaning that all services are designed to operate without regard to the turning of the century and that any process involved in these services which involves dates will operate in a manner that takes into account dates occurring before and after the turning of the century and that any process involved in these services creates, processes and stores dates in a format that accurately reflects whether the date is before or after the year 2000. 16. The Client and its designated auditors have the right to examine, audit and review all documents, reports, transaction confirmations and other materials relating to the Advisor's management of the account at any time on reasonable prior notice. The Client does not waive any rights available under federal and State statutes. 17. The Client authorizes the Advisor to transfer money (but not securities) at any time from the Client's Custody Account and to and from FIMAT Futures USA, 3 Inc. Customer's Segregated Funds Account from time to time to meet variation margin calls that may arise from cross-hedging the preferred portfolio. 18. Any disputes relating to or arising out of this Agreement or Client's transactions with Advisor shall be subject to arbitration before the National Association of Securities Dealers, Inc., at its New York District Headquarters, presently located at 33 Whitehall Street, New York, NY 10004. Hoenig & Co. Inc. Royal Executive Park 4 International Drive Rye Brook, NY 10573 /s/ Fredric P. Sapirstein 3/16/98 - ------------------------------------------------------------------------------- Signature/Title Date SPECTRUM ASSET MANAGEMENT, INC. /s/ Mark Lieb 3/18/98 - -------------------------------------------------------------------------------- Signature/Title Date 4 EXHIBIT 11.1 HOENIG GROUP INC. COMPUTATION OF PER SHARE EARNINGS (UNAUDITED) Three Months Ended ------------------- 3/31/98 3/31/97 ------- ------- Basic Diluted Basic Diluted ----- ------- ----- ------- EARNINGS: Net Income $989,857 $989,857 $ 873,755 $873,755 ======== ======== ========== ======= NUMBER OF SHARES: Weighted average of shares outstanding 9,139,022 9,139,022 9,545,644 9,545,644 Additional shares assuming conversion of outstanding options and warrants N/A 433,820 N/A 328,680 ---------- ------- ----------- ------- Average shares and equivalents outstanding 9,139,022 9,572,842 9,545,644 9,874,324 ========= ========= ========= ========= Earnings per share $ .11 $ .10 $ .09 $ .09 ============= ============ ============= ============ THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HOENIG GROUP INC. MARCH 31, 1998 FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND NOTES THERETO. End.