Hoenig Group Inc.: 10-Q Filing 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: 0-19619 June 30, 1997 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) Royal Executive Park 4 International Drive Rye Brook, NY 10573 - -------------------------------------------------------------------------------- (Address of principal executive offices) (zip code) (914) 935-9000 - -------------------------------------------------------------------------------- (Registrant's Telephone Number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year 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 shorted period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- ------- As of August 13, 1997, there were 9,319,605 shares of common stock outstanding. HOENIG GROUP INC. FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997 INDEX PAGE PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS Consolidated Statement of Financial Condition - June 30, 1997 and December 31, 1996 1 Consolidated Statement of Income - Three and Six Months Ended June 30, 1997 and 1996 2 Consolidated Statement of Cash Flows - Six Months Ended June 30, 1997 and 1996 3 Notes to Unaudited Consolidated Financial Statements 4 ITEM 2 - Management's Discussion and Analysis of Results of Operations and Financial Condition 5-7 PART II - OTHER INFORMATION ITEMS 1 - 6 8 Signatures 9 Exhibits 10 HOENIG GROUP INC. CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AS OF JUNE 30, 1997 & DECEMBER 31, 1996 (UNAUDITED) June 30, 1997 December 31, 1996 ------------- ----------------- ASSETS Cash & equivalents $20,569,111 $18,307,886 U.S. Government obligations, at market value 15,124,967 16,782,412 Securities owned, at market value 1,304,524 1,458,761 Investment in limited partnerships 564,470 503,588 Receivables from correspondent brokers and dealers 14,469,379 6,164,129 Receivables from customers 2,947,223 436,326 Exchange memberships - at cost 1,343,016 1,347,522 Equipment, furniture and leasehold improvements - net of depreciation and amortization 2,267,291 2,090,649 Deferred research/services expense 1,327,030 632,914 Other assets 4,165,671 3,803,708 ---------- ------------ Total Assets $64,082,682 $51,527,895 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Payable to brokers and dealers $2,780,861 $ 640,705 Payable to customers 8,761,903 229,367 Accrued research/services payable 7,356,093 6,553,125 Accrued compensation 3,468,120 4,449,089 Accrued expenses 670,544 963,745 Other liabilities 1,539,222 840,574 ------------ ----------- Total Liabilities 24,576,743 13,676,605 ---------- ---------- STOCKHOLDERS' EQUITY Common stock $.01 par value per share Voting-authorized 40,000,000 shares, issued - 10,800,650 in 1997 and 10,763,350 in 1996 108,007 107,634 Additional paid in capital 26,380,492 26,111,404 Foreign currency translation adjustment (854,346) (826,848) Retained earnings 18,508,980 16,611,177 ---------- ---------- 44,143,133 42,003,367 Less treasury stock at cost - 1,340,545 shares in 1997 and 1,239,540 shares in 1996 (4,637,194) (4,152,077) ----------- ----------- Total Stockholders' Equity 39,505,939 37,851,290 ---------- ---------- Total Liabilities and Stockholders' Equity $64,082,682 $51,527,895 =========== =========== SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1 HOENIG GROUP INC. CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) Three Months Ended Six Months Ended ------------------ ---------------- June 30, June 30, -------- -------- REVENUES 1997 1996 1997 1996 ---- ---- ---- ---- Gross commissions $18,049,150 $15,180,769 $34,272,946 $29,765,259 Investment management fees 1,502,921 1,364,635 3,021,707 2,531,837 Other 93,123 109,036 260,274 145,078 ------------ ----------- ----------- ----------- Total operating revenues 19,645,194 16,654,440 37,554,927 32,442,174 EXPENSES Independent research and services 8,397,505 6,756,554 15,700,853 13,268,883 Clearing, floor brokerage and exchange charges 2,706,826 2,701,062 5,401,838 5,200,475 Employee compensation 5,013,183 4,120,535 9,611,664 8,021,208 Other 2,576,712 2,424,944 4,819,550 4,268,246 ---------- ---------- ---------- ---------- Total expenses 18,694,226 16,003,095 35,533,905 30,758,812 OPERATING INCOME 950,968 651,345 2,021,022 1,683,362 INVESTMENT INCOME AND OTHER Interest, dividends 475,459 360,592 919,247 727,736 Gain (loss) on investments, other 181,818 13,716 126,584 (12,355) ---------- ---------- ---------- ----------- Net investment income and other 657,277 374,308 1,045,831 715,381 Income before income taxes 1,608,245 1,025,653 3,066,853 2,398,743 Provision for income taxes 584,198 370,977 1,169,051 988,637 ---------- ---------- ---------- ------------ Net income $1,024,047 $ 654,676 $1,897,802 $ 1,410,106 ========== ========== ========== =========== Net income per share primary and fully diluted $ .10 $ .07 $ .19 $ .15 ========== ========== ========== =========== Weighted average shares outstanding 9,817,814 9,256,582 9,855,974 9,229,976 ========= ========= ========= ========= SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 2 HOENIG GROUP INC. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1997 & JUNE 30, 1996 (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES 1997 1996 ---- ---- Net income $ 1,897,802 $ 1,410,106 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 569,735 401,213 Foreign currency translation adjustment (27,498) (154,654) Issuance of stock options 86,566 31,792 Change in unrealized (appreciation)/loss on investments (234,589) 79,331 Changes in assets and liabilities: Securities owned, at market (5,149) (1,768,567) Receivables from correspondent brokers and dealers (8,305,250) 109,365 Receivables from customers (2,510,897) -- Deferred research/services expense (694,116) (375,193) Other assets (518,849) (542,511) Payable to brokers and dealers 2,140,156 2,623,321 Payable to customers 8,532,536 -- Accrued research/services payable 802,968 (174,433) Accrued compensation (980,969) 860,365 Accrued expenses (293,201) (1,977,697) Other liabilities 693,173 393,990 ------------ ------------ Net cash provided by operations 1,152,418 916,428 CASH FLOWS FROM INVESTING ACTIVITIES: U.S. Government obligations at market 1,836,893 2,009,319 Investment in securities 159,120 (1,000,000) Purchases of equipment, furniture and leasehold improvements (584,984) (327,592) ------------ ------------ Net cash provided by investing activities: 1,411,029 681,727 CASH FLOWS FROM FINANCING ACTIVITIES: Treasury stock purchased (588,452) -- Dividends -- (459,015) Issuance of common stock 286,230 500 ------------ ------------ Net cash (used in) financing activities: (302,222) (458,515) Net increase in cash, and equivalents 2,261,225 1,139,640 Cash and equivalents, beginning of period 18,307,886 18,115,361 ------------ ------------ Cash and equivalents end of period $ 20,569,111 $ 19,255,001 ============ ============ Supplemental disclosure of cash flow information: Interest paid: $ 123,255 $ 22,514 Taxes paid: $ 987,905 $ 541,803 1996 Non-Cash Item: Conversion of Subordinated Debentures to Common Stock - $62,500 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 Company's financial position as of June 30, 1997 and December 31, 1996, the results of its operations for the three and six months ended June 30, 1997 and 1996 and changes in cash flows for the six months ended June 30, 1997 and 1996. 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 should be read in conjunction with the Company's December 31, 1996 annual report on Form 10-K. NOTE 2 - NET CAPITAL AND RESERVE REQUIREMENTS. Hoenig & Co., Inc. ("Hoenig"), the Company's principal operating subsidiary, is subject to the SEC Net Capital Rule 15c3-1 which requires that Hoenig maintain net capital of the greater of $100,000 or one-fifteenth of aggregate indebtedness. As of June 30, 1997, Hoenig's net capital ratio was .78 to 1 and its net capital was approximately $9,586,000, which was $9,085,000 in excess of regulatory requirements. Hoenig's Tokyo office (a branch of Hoenig) capital requirement was (Y)77,000,000 ($672,000). Hoenig & Company Limited ("Limited"), the Company's United Kingdom brokerage subsidiary, is required to maintain financial resources of at least 110% of its capital requirement. Limited's financial resources requirement as of June 30, 1997 was approximately (British pounds) 375,000 ($624,000); it had excess financial resources at such date of approximately (British pounds) 841,000 ($1,400,000). Hoenig (Far East) Limited ("Far East"), the Company's Hong Kong brokerage subsidiary, is required to maintain liquid capital of the greater of HK$3,000,000 ($387,000) or 5% of the average quarterly total liabilities. Far East's required liquid capital as of June 30, 1997 was approximately HK$13,340,000 ($1,722,000), and it had excess liquid capital of approximately HK$16,204,000 ($2,092,000). NOTE 3 - STOCKHOLDERS' EQUITY. During the fourth quarter 1992, the Company's Board of Directors approved a stock repurchase program which would enable 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, from time to time, an additional one million shares of Common Stock in open market and private transactions. From January 1, 1997 through August 8, 1997, the Company repurchased 268,172 shares of Common Stock. As of August 8, 1997 the Company has repurchased 1,165,712 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 these purchases (net of 334,667 shares issued out of Treasury Stock) is $5,426,133. NOTE 4 - EARNINGS PER SHARE. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share", ("SFAS 128"). SFAS 128 simplifies the standards for computing and presenting earnings per share ("EPS") previously found in APB Opinion No. 15, Earnings per Share. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997. The Company does not expect the adoption of SFAS 128 to have a material impact on its earnings per share computation. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 Tokyo. The Company's wholly-owned subsidiary, Axe-Houghton Associates, Inc. ("Axe-Houghton"), provides professional investment 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 as agent for its customers, and in certain instances as principal, 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 principal types of brokerage services: commissions received in exchange for providing independent research and brokerage ("Independent Research Arrangements"), commissions received in exchange for paying expenses of, or commission refunds to, directed brokerage customers ("Directed Brokerage"), commissions received in exchange for providing the Company's proprietary research; and commissions received for execution-only services ("Execution - Only Brokerage"). The Company believes that the business of providing Independent Research and Directed Brokerage Arrangements is relatively mature in the United States and the United Kingdom, but expects it to grow at a faster rate in foreign markets, particularly in the Far East. Ratios relating to Independent Research and Directed Brokerage Arrangements (the ratio of commissions received by the Company to the cost of research and other services provided or commission refunds paid) generally have decreased during the past several years as a result of competition, but they are higher in certain international markets, particularly in the Far East. The Company is able to maintain profit margins on commissions earned in Far East markets that are comparable to the profit margin on U.S. commissions, notwithstanding higher clearing and execution costs in certain Far East markets. The Company's profit margin on Execution-Only Brokerage is higher than that on Independent Research and Directed Brokerage Arrangements because the Company does not incur direct expenses for research and other services in connection with Execution-Only Brokerage. The Company's second largest source of revenues is investment management fees earned by Axe- Houghton in connection with the provision of asset management services to institutional clients. The profit margin on the Company's asset management business is higher than those on the Company's brokerage activities and also varies with the types of asset management services provided by the Company. In February 1997, approximately $1.1 billion of assets managed under a temporary assignment were withdrawn from Axe-Houghton, resulting in $3.77 billion in assets under management as of June 30, 1997. As of June 30, 1997, Axe-Houghton manages approximately $449.7 million on a temporary basis. With respect to its asset management and brokerage businesses, the Company will continue to evaluate opportunities to increase distribution capabilities, expand its client base and supplement its product line through acquisitions and the hiring of additional personnel. 5 THREE MONTHS ENDED JUNE 30, 1997 VERSUS THREE MONTHS ENDED JUNE 30, 1996. The Company's operating income before income taxes for the three months ended June 30, 1997 was $950,968, versus $651,345 in 1996. The increase in operating income is primarily attributed to an 18.9% increase in commission revenues and a 10.1% increase in investment management fee revenue. Operating revenues increased 18.0% to $19.6 million for three months ended June 30, 1997 from $16.7 million for the three months ended June 30, 1996. Commission revenues increased 18.9% to $18.0 million for the three months ended June 30, 1997 from $15.2 million for the same period in 1996. This increase resulted primarily from an increase in commission revenues in U.S. equity markets and certain Far East markets. Commission revenues derived from international operations represented 35.1% of the Company's total commissions during the second quarter 1997 as compared to 35.0% for the same period in 1996. Investment management fees increased 10.1% to $1.5 million for the three months ended June 30, 1997, from $1.4 million in 1996 based on assets under management of $3.77 billion as of June 30, 1997, as compared with $4.0 billion as of June 30, 1996. This increase in management fees reflects an increase in those assets which are managed for a higher average fee, which more than offset the overall decrease in assets. Research and other services provided to the Company's brokerage clients during the second quarter 1997 increased 24.3% to $8.4 million from $6.8 million for the same period in 1996. These expenses were 46.5% of commission revenues for the quarter ended June 30, 1997 as compared with 44.5% for the corresponding period in 1996. Clearing, execution, exchange charges and related expenses remained at $2.7 million in both 1997 and 1996. These expenses represented 15.0% 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 an increase in the percentage of commissions generated in the U.S. equity markets, where such expenses are charged at lower rates than comparable trades in certain international markets, and to a reduction in execution costs related to commissions generated 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 21.7% to $5.0 million in 1997 from $4.1 million in 1996. This resulted primarily from an increase in the compensation of existing personnel, as well as the hiring of new employees during the first six months of 1997. All other expenses increased 6.3% to $2.6 million in the second quarter 1997, compared to $2.4 million in 1996. This resulted primarily from an increase in depreciation, amortization and office related expenses during the quarter ended June 30, 1997. SIX MONTHS ENDED JUNE 30, 1997 VERSUS SIX MONTHS ENDED JUNE 30, 1996. The Company's operating income before income taxes for the six months ended June 30, 1997 increased 20.1% to $2,021,022, versus $1,683,362 in 1996. The increase in operating income is primarily attributed to a 15.1% increase in commission revenues and a 19.4% increase in investment management fee revenue. 6 Operating revenues increased 15.8% to $37.6 million for six months ended June 30, 1997 from $32.4 million for the six months ended June 30, 1996. Commission revenues increased 15.1% to $34.3 million for the six months ended June 30, 1997 from $29.8 million for the same period in 1996. This increase resulted primarily from an increase in commission revenues in U.S. equity markets and Far East markets. Commission revenues derived from international operations represented 34.9% of the Company's total commissions during the six months ended June 30, 1997 as compared to 35.3% for the same period in 1996. Investment management fees increased 19.4% to $3.0 million for the six months ended June 30, 1997, from $2.5 million in 1996 based on assets under management of $3.77 billion as of June 30, 1997, as compared with $4.0 billion as of June 30, 1996. This increase in management fees reflects an increase in those assets which are managed for a higher average fee, which more than offset the overall decrease in assets. Research and other services provided to the Company's brokerage clients during the six months ended June 30, 1997 increased 18.3% to $15.7 million from $13.3 million for the same period in 1996. These expenses were 45.8% of commission revenues for the six months ended June 30, 1997 as compared with 44.6% for the corresponding period in 1996. Clearing, execution, exchange charges and related expenses increased 3.9% to $5.4 million in 1997 from $5.2 million in 1996. These expenses represented 15.8% of commissions in 1997 and 17.5% of commissions in 1996. 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 markets, where such expenses are charged at lower rates than comparable trades in certain international markets, and to a reduction in execution costs related to commissions generated 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 19.8% to $9.6 million in 1997 from $8.0 million in 1996. This resulted primarily from an increase in reserves for discretionary and performance-based compensation and in compensation of existing personnel, as well as the hiring of new employees during the six months ended June 30, 1997. All other expenses increased 12.9% to $4.8 million in the six months ended June 30, 1997, as compared to $4.3 million in 1996. This resulted primarily from an increase in depreciation, amortization and office related expenses during the six months ended June 30, 1997. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1997, the Company had cash, U.S. Government obligations, net accounts receivable and other securities of $43.4 million. All receivables from correspondent brokers and dealers are fully collectible and no provision for uncollectibles is required. The Company believes that its cash resources and liquidity plus additional funds generated by operations will be sufficient to meet current and future needs. The Company is currently exploring opportunities to expand existing businesses and/or to acquire new businesses, which could potentially have an impact on liquidity and capital resources. 7 HOENIG GROUP INC. PART II. OTHER INFORMATION -------------------------- ITEM 1. LEGAL PROCEEDINGS On September 19, 1995, a complaint was filed in the Supreme Court of the State of New York, County of Westchester, by Thomas C. Hellman against Hoenig Group Inc., Hoenig & Co., Inc. and certain individuals, as directors and officers of Hoenig & Co., Inc. On September 11, 1996, the Supreme Court of the State of New York, County of Westchester, granted summary judgment in favor of defendants Hoenig Group Inc. and Hoenig & Co., Inc. and dismissed the amended complaint in its entirety. Hellman filed a notice of appeal of this decision in October 1996 and submitted his appeal brief to the Supreme Court State of New York Appellate Division, Second department, on April 15, 1997. Defendants Hoenig Group Inc. and Hoenig & Co., Inc. have opposed the appeal, and the appeal is sub judice. Information regarding this litigation previously was disclosed in Item 3 of the Company's annual report on Form 10-K for the fiscal year ended December 31, 1996. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's Annual meeting of Stockholders held on May 15, 1997, Messrs Fredric P. Sapirstein, Robert L. Cooney and Ms. Kathryn L. Hoenig, who were nominated by the Board of Directors, were elected to serve as Class III Directors of the Company, each for a three year term. Messrs. Alan B. Herzog, Robert Spiegel, Martin F.C. Emmett and Max H. Levine continue to serve as directors after such meeting. The results of the election were as follows: Sapirstein: Voted for-7,369,831, Against-355,000, Abstain-0, Broker Non-Votes-0. Cooney: Voted for-7,364,531, Against-360,300, Abstain-0, Broker Non-Votes-0. Hoenig: Voted for- 7,368,531, Against-356,300, Abstain-0, Broker Non-Votes-0. In addition, the Company's Section 162 (m) Cash Bonus Plan and the Company's 1996 Long- Term Stock Incentive Plan were approved. The results of the voting were as follows: Section 162 (m) Cash Bonus Plan: Voted for-7,598,966, Against-81,400, Abstain-3,800, Broker Non- Votes-40,665. 1996 Long-Term Stock Incentive Plan: Voted for-5,355,084, Against-663,414, Abstain-5,800, Broker Non-Votes-1,700,533. ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits: Computation of Earnings Per Share (Exhibit 11) Financial Data Schedule (Exhibit 27) Reports on Form 8K: None 8 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Hoenig Group Inc. Date: August 13, 1997 Fredric P. Sapirstein --------------------- Fredric P. Sapirstein Chairman and Chief Executive Officer Date: August 13, 1997 Alan B. Herzog -------------- Alan B. Herzog, Chief Operating Officer 9 EXHIBIT 11 HOENIG GROUP INC. COMPUTATION OF EARNINGS PER SHARE (UNAUDITED) Three Months Ended Six Months Ended ------------------ ---------------- Primary and Primary and Primary and Primary and Fully Diluted Fully Diluted Fully Diluted Fully Diluted 6/30/97 6/30/96 6/30/97 6/30/96 ------- ------- ------- ------- EARNINGS: Net Income $1,024,047 $654,676 $1,897,802 $1,410,106 ========== ======== ========== ========== NUMBER OF SHARES: Weighted average of shares outstanding 9,486,306 9,182,042 9,515,811 9,153,565 Additional shares assuming conversion of outstanding options and warrants 331,508 74,540 340,163 76,411 ---------- --------- ---------- ----------- Average shares and equivalents outstanding 9,817,814 9,256,582 9,855,974 9,229,976 ========== ========= ========== =========== Primary and fully diluted earnings per share $ .10 $ .07 $ .19 $ .15 ========== ========= ========== =========== End