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 September 30, 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, if changed since last report) Indicated by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of November 14, 1998, there were 8,530,309 shares of common stock, par value $.01 per share, outstanding. HOENIG GROUP INC. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 INDEX Page PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Statements of Financial Condition - September 30, 1998 and December 31, 1997 1 Consolidated Statements of Income - Three and Nine Months Ended September 30, 1998 and 1997 2 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1998 and 1997 3 Notes to Unaudited Consolidated Financial Statements 4-6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-13 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings 14 ITEM 6. Exhibits and Reports on Form 8-K 14 Signatures 15 Exhibit Index 16 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HOENIG GROUP INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 (UNAUDITED) September 30, 1998 December 31, 1997 ------------------ ----------------- ASSETS Cash and equivalents $16,771,346 $20,468,926 U.S. Government obligations, at market value 9,916,377 17,754,737 Receivables from correspondent brokers and dealers 10,266,853 6,837,648 Receivables from customers 1,162,160 4,031,489 Equipment, furniture and leasehold improvements - net of accumulated depreciation and amortization 1,836,579 2,207,121 Securities owned, at market value 9,461,514 2,065,399 Exchange memberships - at cost 1,321,235 1,321,235 Investment management fees receivable 1,260,629 1,297,684 Deferred research/services expense 2,053,160 1,070,079 Investment in limited partnerships, at equity 5,156,687 633,858 Other assets 3,554,481 3,333,167 ------------ ----------- Total Assets $62,761,021 $61,021,343 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Accrued research/services payable $11,404,102 $ 8,341,475 Accrued compensation 5,813,721 5,701,392 Payable to brokers and dealers 1,562,661 4,579,680 Payable to customers 3,006,379 902,914 Accrued expenses 1,156,121 728,726 Securities sold, but not yet purchased, at market value 662,850 85,125 Short-term bank loan payable 29,097 - Other liabilities 1,056,001 1,156,310 --------- ---------- Total Liabilities 24,690,932 21,495,622 ---------- ---------- STOCKHOLDERS' EQUITY Common stock $.01 par value per share Voting-authorized 40,000,000 shares, issued 10,838,850 in 1998 and 10,809,750 in 1997 108,389 108,098 Additional paid in capital 26,900,933 26,628,159 Accumulated comprehensive income (888,232) (930,035) Retained earnings 23,485,117 20,190,841 ---------- ---------- 49,606,207 45,997,063 Less treasury stock at cost - 2,313,541 shares in 1998 and 1,618,378 shares in 1997 (11,536,118) (6,471,342) ------------ ----------- Total Stockholders' Equity 38,070,089 39,525,721 ---------- ---------- Total Liabilities and Stockholders' Equity $62,761,021 $61,021,343 =========== =========== See Notes to Unaudited Consolidated Financial Statements 1 HOENIG GROUP INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, -------------------------------- --------------------------------------- Revenues 1998 1997 1998 1997 ---- ---- ---- ---- Gross commissions $19,803,593 $16,398,169 $55,480,358 $50,671,115 Investment management fees 1,789,006 1,750,076 5,727,181 4,771,783 Other 27,720 68,556 122,975 328,830 ----------- ----------- -------------- ------------ Total operating revenues 21,620,319 18,216,801 61,330,514 55,771,728 Expenses Clearing, floor brokerage and exchange charges 2,524,795 2,485,943 7,115,892 7,887,781 Employee compensation 5,633,220 5,058,752 16,127,820 14,670,416 Independent research and services 8,003,410 7,478,163 24,636,086 23,179,016 Other 2,922,558 2,696,110 7,986,312 7,515,660 ----------- --------- ------------ ---------- Total expenses 19,083,983 17,718,968 55,866,110 53,252,873 Operating Income 2,536,336 497,833 5,464,404 2,518,855 Investment Income and Other Interest, dividends 424,643 500,533 1,353,422 1,419,780 Gain (loss) on investments, other (907,758) 63,407 (767,869) 189,991 ----------- --------- --------- --------- Net investment income (loss) and other (483,115) 563,940 585,553 1,609,771 Income before income taxes 2,053,221 1,061,773 6,049,957 4,128,626 Provision for income taxes 978,470 417,005 2,755,681 1,586,056 ----------- ---------- ----------- ---------- Net income $1,074,751 $ 644,768 $3,294,276 $2,542,570 =========== ========== ========== ========== Net income per share Basic $ .13 $ .07 $ .37 $ .27 =========== ========== ========== ========== Diluted $ .12 $ .07 % .35 $ .26 =========== ========== ========== ========== Weighted average shares outstanding Basic 8,572,743 9,342,978 8,897,316 9,457,567 =========== ========= ========= ========= Diluted 9,165,260 9,749,853 9,448,538 9,810,778 =========== ========= ========= ========= See Notes to Unaudited Consolidated Financial Statements 2 HOENIG GROUP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997 (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES 1998 1997 ---- ---- Net income $3,294,276 $2,542,570 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 978,366 858,406 Loss on write-off of fixed assets 193,210 - Foreign currency translation adjustment 41,800 (93,871) Issuance of stock options 139,407 138,323 Changes in assets and liabilities: Securities owned, net 843,208 12,766 Receivables from correspondent brokers and dealers (3,429,205) (6,942,579) Receivables from customers 2,869,329 (874,717) Investment management fees receivables 37,055 (283,079) Payable to customers 2,103,465 7,796,862 Deferred research/services expense (983,081) (434,133) Other assets (528,018) (374,101) Payable to brokers and dealers (3,017,019) 814,165 Accrued research/services payable 3,062,627 843,012 Accrued compensation 112,329 225,594 Accrued expenses 427,395 (99,733) Other liabilities (100,309) 554,550 ------------ ------------ Net cash provided by operations 6,044,835 4,684,035 CASH FLOWS FROM INVESTING ACTIVITIES: U.S. Government obligations 7,838,360 (483,246) Investment in limited partnerships, at equity (4,522,829) (130,610) Investment in securities (7,661,598) 148,239 Purchases of equipment, furniture and leasehold improvements (494,330) (842,530) ------------ ------------ Net cash (used in) investing activities: (4,840,397) (1,308,147) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock 212,779 153,978 Treasury stock purchased (5,346,416) (1,593,533) Issuance of treasury stock 202,522 - Short term bank loan payable 29,097 - ------------ ------------ Net cash (used in) financing activities: (4,902,018) (1,439,555) Net increase (decrease) in cash and equivalents (3,697,580) 1,936,333 Cash and equivalents beginning of period 20,468,926 18,307,886 ------------ ---------- Cash and equivalents end of period $16,771,346 $20,244,219 ============ =========== Supplemental disclosure of cash flow information: Interest paid: $ 90,190 $ 146,873 ============ ============ Taxes paid: $ 2,532,796 $ 1,357,275 ============ ============ 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"), the results of its operations and changes in cash flows for the periods presented. The interim 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 has been condensed or omitted. These consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. The results of operations for the periods ended September 30, 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 September 30, 1998, Hoenig's minimum required net capital was $688,000, its net capital ratio was .77 to 1, and its net capital was approximately $13,311,000, which was $12,623,000 in excess of regulatory requirements. Hoenig's Tokyo office (a branch of Hoenig) capital requirement was (Y)55,000,000 ($402,000). 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 (as defined). Limited's financial resources requirement at September 30, 1998 was approximately (pound)509,000 ($865,000); it had excess financial resources at such date of approximately (pound)568,000 ($965,000). 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 was approximately HK$16,149,000 ($2,085,000) at September 30, 1998, and it had excess liquid capital of approximately HK$20,263,000 ($2,616,000). NOTE 3 - INVESTMENTS IN LIMITED PARTNERSHIPS. Axe-Houghton Associates, Inc. ("Axe-Houghton"), the Company's 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% ($31,916) and 18.56% ($541,675) at September 30, 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. 4 NOTE 4 - FINANCIAL INSTRUMENTS. As part of its modified cash management program, 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. Each of these investments uses or includes derivative financial instruments for the purpose of reducing exposure to certain investment risks, including interest rate fluctuations. These investments are accounted for at fair market value based upon available market information and valuations received from the managers. Changes in the market value, as well as gains or losses resulting from the termination or maturity of these instruments, are recognized as gains or losses on investments in the period in which they occur. The Company does not hold financial instruments for trading purposes as part of its business operations. NOTE 5 - STOCKHOLDERS' EQUITY. On June 17, 1998, the Company's Board of Directors authorized the management of the Company to repurchase up to an additional one million shares of the Company's Common Stock from time to time in open-market and privately negotiated transactions. As of June 30, 1998, the Company completed the one million-share repurchase program announced in November 1994. The 1994 repurchase program was in addition to the one million shares repurchased in a previous program announced in the fourth quarter 1992. As of September 30, 1998, the Company has repurchased a total of 2,248,212 shares under these three repurchase programs. From January 1, 1998 through September 30, 1998, the Company repurchased 772,500 shares of Common Stock at an aggregate cost of $5.3 million. The total cost of the purchases under the repurchase programs and the purchase of shares from the Estate of Ronald H. Hoenig in December 1995 (net of 584,671 shares issued out of Treasury Stock) is $11,536,118. 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 beginning after December 15, 1997. This Statement establishes standards of reporting of comprehensive income and its components. Comprehensive Income includes gains or losses resulting from the translation of the Company's foreign currency financial statements included in stockholders' equity in the Statements of Financial Condition. Comprehensive Income for the periods ended September 30, 1998 and 1997 is as follows: 1998 1997 ---- ---- Net income $3,294,276 $2,542,570 Other Comprehensive Income: Foreign currency translation adjustment 41,803 (93,871) Tax expense (benefit) 19,037 (36,056) ---------- ---------- 22,766 (57,815) Comprehensive Income $3,317,042 $2,484,755 ========== ========== 5 NOTE 7. EARNINGS PER SHARE. The Financial Accounting Standards Board has 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. Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share is similar to basic, but adjusts for the effect of potential common shares. The following table presents the computations of basic and diluted earnings per share for the periods indicated: Nine Months Ended Three Months Ended September 30, September 30, ----------------------------- --------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Net Income available to common stockholders $3,294,276 $2,542,570 $1,074,751 $ 644,768 Weighted average shares outstanding 8,897,316 9,457,567 8,572,743 9,342,978 Effect of dilutive instruments Employee stock options 551,222 353,211 592,517 406,875 ------- --------- ---------- ---------- Total weighted average diluted shares 9,448,538 9,810,778 9,165,260 9,749,853 ========== ========== ========== ========== Basic earnings per share $ .37 $ .27 $ .13 $ .07 ========== ========== ========== ========== Diluted earnings per share $ .35 $ .26 $ .12 $ .07 ========== ========== ========== ========== NOTE 8- CONTINGENCIES. In March 1998, Lawrence W. Gallo, a former employee of Hoenig, instituted an arbitration before 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. Hoenig has filed an answer, denying Mr. Gallo's allegations, and a counter-claim against Mr. Gallo, seeking damages of not less than $220,000, based on Mr. Gallo's breach of his employment agreement with Hoenig. The Company believes that Hoenig and Mr. Sapirstein have meritorious defenses to the arbitration, and Hoenig intends to vigorously oppose Mr. Gallo's claims and pursue its counter-claim against Mr. Gallo. NOTE 9 - SUBSEQUENT EVENTS. On October 8, 1998, the Company entered into new employment arrangements with two employees of Hoenig, which are effective January 1, 1999. Minimum aggregate annual compensation to be paid under these arrangements is $825,000. These arrangements provide for increased variable, performance-based compensation, which, assuming current levels of activity, will result in increased compensation expense as compared to prior periods. 6 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, measures taken to address operating losses in certain international operations, acquisition and expansion plans, plans to address the institution of the Euro in 1999, plans to address the Year 2000 issue and other technology issues, 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, declines in 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 Arrangements"); 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 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. At September 30, 1998, Axe-Houghton had $3.9 billion in assets under management, of which approximately $507.3 million represented a temporary assignment. Growth in assets under management is affected by numerous factors, including the ability to attract new clients, investment performance results, the number and variety of investment disciplines offered, as well as the 7 performance of the securities markets generally. Declines in the performance of small capitalization growth equities may adversely affect the Company's assets under management and related revenues and income. Axe-Houghton is negotiating new employment arrangements with two employees whose employment contracts expired on April 8, 1998. 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. The Company has entered into new employment arrangements with an executive officer and another employee of Hoenig which take effect in 1999. These new arrangements provide for increased variable, performance-based compensation which, assuming current levels of activity, will result in increased compensation expense as compared to prior periods. 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, strategic alliances and the hiring of additional personnel. THREE MONTHS ENDED SEPTEMBER 30, 1998 VERSUS THREE MONTHS ENDED SEPTEMBER 30, 1997. The Company's operating income before income taxes for the three months ended September 30, 1998 increased 409.5% to $2.5 million, versus $0.5 million in 1997. The increase in operating income is primarily attributable to an increase in operating income from the U.S. brokerage operations, offset in part by continued operating losses from international brokerage operations (United Kingdom, Hong Kong and Japan). The Company's net income for the three-months ended September 30, 1998 increased 66.7% to $1.1 million, versus $0.6 million in 1997. Net income increased at a lower rate than pre-tax and operating income due to net investment losses, as well as a higher tax rate in 1998. The higher tax rate results from an increase in operating and pre-tax income from the U.S. operations, which are taxed at a higher rate, as well as a decrease in income derived from the Company's brokerage operation in Hong Kong, which is taxed at a lower rate than the U.S. tax rates. Operating revenues increased 18.7% to $21.6 million for three months ended September 30, 1998 from $18.2 million for the three months ended September 30, 1997. Commission revenues increased 20.8% to $19.8 million from $16.4 million for the same period in 1997. During the third quarter 1998, commission revenues earned in U.S. equity markets increased, which was offset by a decrease in commission revenues earned by the Company's international operations, particularly the Company's operations in Hong Kong and Japan ("Asian Brokerage"). As a result, commission revenues derived from international brokerage operations represented 18.0% of the Company's total commissions during the third quarter 1998 as compared to 34.5% for the same period in 1997. Operating revenues derived from the Company's U.S. brokerage operations for the third quarter ended September 30, 1998 increased 50.4% as compared to the same period in 1997, resulting in a 316.1% increase in operating income derived from U.S. brokerage operations as compared to the third quarter ended September 30, 1997. This increase in operating income also reflects a decrease in execution and settlement costs and in expenses associated with independent research and other services, each as a percentage of commission revenues. Operating revenues derived from international brokerage operations continued to decline during the third quarter ended September 30, 1998 as compared to the same period in 1997. Operating revenues derived from the Company's Asian Brokerage operations decreased 49.6% during the three months ended September 30, 1998 as compared to the same period in 1997, resulting from continued market volatility and reduced trading volumes in Japan and Southeast Asia. Despite the reduction in operating revenues, international brokerage operating losses remained at 8 $0.2 million in both 1998 and 1997 as a result of cost reduction measures taken with respect to Asian Brokerage operations within the last year. These losses resulted from a 63.8% decrease in operating income earned by the Company's Hong Kong operation in the third quarter 1998 as compared to the third quarter 1997 and continued operating losses in Japan. Continued declines in commission revenues in Japan and Southeast Asia would result in additional operating losses by the Company's Asian Brokerage operations. The Company continues to explore various means of addressing operating losses in Japan. Investment management fee revenues remained at $1.8 million for the three months ended September 30, 1998 as compared to the same period in 1997. Assets managed in small capitalization growth equities decreased 19.8% to $516.0 million as of September 30, 1998 from $643.0 million as of September 30, 1997 as a result of market declines in small capitalization growth equities. Total assets under management decreased to $3.9 billion as of September 30, 1998 as compared to $ 4.0 billion as of September 30, 1997. The decrease in assets under management for the quarter ended September 30, 1998 was attributable to significant declines in the global financial markets during the third quarter which resulted in a decline in investment performance for the three-month period ended September 30, 1998. During the third quarter, total assets under management decreased 11.2% from June 30, 1998. Assets managed in small capitalization growth equities decreased 27.9% from the prior quarter. The effect on revenues of these declines, particularly with respect to small capitalization growth equities, will be seen in future periods, as the majority of Axe-Houghton's clients are billed in advance based on assets under management as of the end of the prior quarter. Expenses related to independent research and other services provided to the Company's brokerage clients during the third quarter 1998, including commission refunds, increased 7.0% to $8.0 million from $7.5 million for the same period in 1997. These expenses were 40.4% of commission revenues for the quarter ended September 30, 1998 as compared to 45.6% for the corresponding period in 1997. These expenses increased at a lower rate than commission revenues primarily due to an increase in execution-only brokerage, as well as the timing of commission revenues earned relative to independent research and services expenses incurred for the three months ended September 30, 1998. Clearing, floor brokerage and exchange charges remained at $2.5 million during the third quarter 1998 as compared to the same period in 1997. These expenses represented 12.8% of commissions in the third quarter 1998 and 15.2% of commissions in the third quarter 1997. The decrease in these expenses as a percentage of commissions is primarily due to: (1) an increase in the percentage of commissions earned in U.S. equity markets, where such expenses are charged at lower rates than comparable trades in certain Asian markets; (2) a reduction in the costs of execution and settlement of U.S. equity transactions; and (3) a decrease in the percentage of commissions earned on transactions executed in Southeast Asian markets where execution and settlement costs are higher, coupled with an increase in the percentage of Asian Brokerage commissions earned on transactions executed in the Hong Kong market, which cost less to execute and settle than comparable trades in other Asian markets. Employee compensation increased 11.4% to $5.6 million in the third quarter 1998 from $5.1 million during the same period in 1997. This resulted primarily from an increase in reserves for discretionary and performance-based bonus compensation. All other expenses increased 8.4% to $2.9 million in the third quarter 1998 as compared to $2.7 million in the same period in 1997. This resulted primarily from an increase in expenses related to market data and the write-off of certain fixed assets. Net investment loss for the three months ended September 30, 1998 was $0.5 million as compared to net investment income of $0.6 million in 1997. This decrease was primarily attributed to realized and unrealized losses of $0.9 million incurred on the Company's investments in limited partnerships and a managed portfolio of preferred stock and U.S. Treasury Futures used to hedged the preferred stock. This loss was attributed to significant declines in the global financial markets during the three months ended September 30, 1998. The Company monitors these investments on an ongoing basis and may make adjustments in the cash management program as warranted. 9 NINE MONTHS ENDED SEPTEMBER 30, 1998 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1997. The Company's operating income before income taxes for the nine months ended September 30, 1998 increased 116.9% to $5.4 million, versus $2.5 million in 1997. The increase in operating income is primarily attributable to an increase in operating income from U.S. brokerage and investment management operations, offset in part by continued operating losses from international brokerage operations. The Company's net income for the nine months ended September 30, 1998 increased 29.6% to $3.3 million, versus $2.5 million in 1997. Net income increased at a lower rate than pre-tax and operating income due to a loss on investments, as well as a higher tax rate in 1998. The higher tax rate resulted from an increase in operating and pre-tax income from U.S. operations, which are taxed at a higher rate, as well as a decrease in income derived from the Company's brokerage operation in Hong Kong, which is taxed at a lower rate than U.S. tax rates. Operating revenues increased 10.0% to $61.3 million for the nine months ended September 30, 1998 from $55.8 million for the nine months ended September 30, 1997. Commission revenues increased 9.5% to $55.5 million for the nine months ended September 30, 1998 from $50.7 million for the same period in 1997. This increase resulted primarily from an increase in commission revenues earned by the Company's U.S. brokerage operations, offset in part by a decrease in commission revenues earned by the Company's international brokerage operations, particularly Asian Brokerage operations. Commission revenues derived from international brokerage operations represented 20.4% of the Company's total commissions during the nine months ended September 30, 1998 as compared to 34.8% for the same period in 1997. Operating revenues derived from the Company's U.S. brokerage operations for the nine months ended September 30, 1998 increased 32.6% as compared to the same period in 1997. Operating income derived from the Company's U.S. brokerage operations during the nine months ended September 30, 1998 increased 119.1% as compared to the same period in 1997 primarily due to an increase in commission revenues and a decrease in execution and settlement costs as a percentage of commission revenues. Operating revenues and operating income from international brokerage operations declined during the nine months ended September 30, 1998, resulting in operating losses. Operating revenues of the Company's Asian Brokerage operations decreased 49.8% during the nine months ended September 30, 1998 as compared to the same period in 1997 as a result of continued volatility and reduced trading volumes in Japan and Southeast Asia. International brokerage operations incurred operating losses of $0.8 million for the nine months ended September 30, 1998 as compared to operating income of $0.1 million for the same period in 1997. These losses resulted from a 65.7% decrease in operating income in Hong Kong and operating losses in Japan and the United Kingdom. Investment management fees increased 20.0% to $5.7 million for the nine months ended September 30, 1998, from $4.8 million in 1997. Total assets under management decreased 1.8% to $3.9 billion as of September 30, 1998, as compared with $4.0 billion as of September 30,1997. Assets managed in small capitalization growth equities decreased 19.8% to $516.0 million as of September 30, 1998 from $643.0 million as of September 30, 1997. The decrease in assets under management for the period ended September 30, 1998 was attributed to significant declines in global financial markets during the third quarter which resulted in a decline in investment performance for the nine months ended September 30, 1998. Expenses related to independent research and other services provided to the Company's brokerage clients during the nine months ended September 30, 1998 increased 6.3% to $24.6 million from $23.2 million for the same period in 1997. These expenses were 44.4% of commission revenues for the nine months ended September 30, 1998 as compared to 45.7% for the corresponding period in 1997. Clearing, floor brokerage and exchange charges decreased 9.8% to $7.1 million during the nine months ended September 30, 1998 from $7.9 million in 1997. These expenses represented 12.8% of commissions earned during the 10 nine months ended September 30, 1998 and 15.6% of commissions earned during the same period in 1997. The decrease in these expenses as a percentage of commissions is primarily due to: (1) an increase in the percentage of commissions earned in U.S. equity markets, where such expenses are charged at lower rates than comparable trades executed in certain Asian markets; (2) a reduction in the costs of execution and settlement of U.S. equity transactions; and (3) a decrease in the percentage of commissions earned on transactions executed in Southeast Asian markets where execution and settlement costs are higher, coupled with an increase in the percentage of Asian Brokerage commission revenues earned on transactions executed in the Hong Kong market, which cost less to execute and settle than comparable trades in other Asian markets. Employee compensation increased 9.9% to $16.1 million for the nine-month period ended September 30, 1998 from $14.7 million in 1997. This resulted primarily from an increase in reserves for discretionary and performance-based bonus compensation. All other expenses increased 6.3% to $8.0 million in the nine months ended September 30, 1998 as compared to $7.5 million in 1997. This resulted primarily from an increase in expenses related to market data, communications, and depreciation and amortization during the nine months ended September 30, 1998 and the write-off of certain fixed assets during the third quarter 1998. Net investment income for the nine months ended September 30, 1998 decreased to $0.6 million as compared to $1.6 million in 1997. This decrease was primarily attributable to realized and unrealized losses of $0.9 million incurred during the third quarter 1998 on the Company's investments in limited partnerships and a managed portfolio of preferred stock and U.S. Treasury Futures used to hedged the preferred stock. These losses resulted from significant declines in the global financial markets during the three months ended September 30, 1998. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1998, the Company had cash, U.S. Government obligations, net accounts receivable and other investments of $48.8 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 first quarter 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 sponsoring bank has agreed to protect 100% of the Company's principal investment, less the bank's management fees, if the deposit is maintained for one year. These investments generally are not transferable and are less liquid than investments in U.S. government obligations and corporate bonds. Investment losses incurred during the third quarter 1998 have not had a material effect on the Company's liquidity or capital resources. During the nine months ended September 30, 1998, the Company repurchased 772,500 shares of its common stock under previously announced stock repurchase programs at a total cost of $5.3 million. These repurchases have not had a material effect on the Company's liquidity or capital resources. The Company has determined that certain fixed assets, which include computer software and other information technology assets, will be written off during the third and fourth quarter 1998. The total amount of the write-off is not expected to exceed $375,000. Approximately $165,000 was written off in the third quarter 1998. 11 The Company believes that its current capital resources and liquidity, plus additional funds generated by operations, will be sufficient to meet current and future operating needs. The Company continues to explore opportunities to expand existing businesses and to acquire new businesses, which could potentially have an impact on liquidity and capital resources. YEAR 2000 AND EURO The Year 2000 issue ("Y2K Issue") is the result of computer systems and applications that currently use two digits rather than four to recognize a particular year. The Y2K Issue affects the Company's information technology ("IT") systems (i.e., computer systems, network elements and software applications), as well as other business systems that have time-sensitive programs or microprocessors that may not properly reflect or recognize the year 2000 ("non-IT systems"). The failure to reflect or recognize dates after 1999 could cause the Company's IT and non-IT systems to fail or cause errors which would lead to disruptions in operations or increased costs. Such failure could, for example, limit the Company's ability to execute trades, cause settlement of trades to fail, lead to incomplete or inaccurate accounting, recording or processing of securities trades, result in generation of erroneous results or give rise to uncertainty about the Company's exposure to certain risks. If not remedied, potential risks include business interruption or shutdown, financial loss, regulatory actions, reputational harm and legal liability. Like many financial services companies, the Company is heavily reliant upon third parties for many of the IT and non-IT systems that are essential to the Company's ability to perform its day-to-day operations. These third parties include trading counter parties, financial intermediaries, securities exchanges, depositories, clearing agencies, clearing houses, commercial banks and various vendors, including providers of market data and pricing services, telecommunication services and other utilities. As a result, the Company's operations and financial results may be adversely affected in the event that such third parties do not adequately address the Y2K Issue and the Company is not able to make contingency plans. As is true for other companies, the Company is vulnerable to Y2K failures beyond its control, particularly with respect to utility and transportation service providers. The Company has developed a five-phase program for addressing the Y2K Issue, which consists of the following: o Phase I is defining the Y2K Issue and what constitutes Y2K compliance and educating Company personnel about the Y2K Issue. o Phase II is identifying those systems which may be affected by the Y2K Issue. o Phase III is developing action plans to address the Y2K Issue for identified systems. o Phase IV is the testing of the action plans intended to resolve the Y2K Issue. o Phase V is the implementation of the action plans. The Company has completed Phase I of its program and has completed Phase II with respect to internal IT systems and non-IT systems that may be affected by the Y2K Issue. The Company has identified a number of internal IT and non-IT systems as being Y2K compliant. With respect to all systems identified as not Y2K compliant, the Company has begun Phase III of the program and is in the process of developing action plans to remediate any Y2K problems through upgrades, corrections or replacements. Phases III and IV also involve developing contingency plans to address non-compliant systems and testing of those plans. The Company has not yet developed comprehensive contingency plans in the event that the Company is unable to timely resolve any Y2K problems. The Company will address the need for contingency plans once it completes its assessment of systems likely to be affected by the Y2K Issue. The failure to develop and implement, if necessary, appropriate contingency plans could have a material adverse impact on the Company's operations and financial results. 12 With respect to external systems(both IT and non-IT), the Company has solicited information and assurances from third-party service providers, customers and suppliers and is in the process of collecting and evaluating responses. Most of the Company's external service providers and suppliers have indicated that they will issue upgrades or replacement products that will be Y2K compliant during the fourth quarter 1998. The Company anticipates that it will complete Phases II and III of its program with respect to all IT and non-IT systems by the end of 1998 and will complete Phases IV and V by June 1999. The Company has hired a consulting firm to assist Company personnel in effecting the Company's Y2K program. Based on current information, the Company believes that during 1998 and 1999, it will spend approximately $400,000 to complete the five-phase Y2K program and address the Y2K Issue, which includes the costs of software replacements and corrections, additional hardware and hardware upgrades and consulting fees. The Company does not expect these costs to be material to its financial position, results of operations or cash flows in a given period. The Company will expense Y2K costs as they are incurred. The total amount of Y2K expenses incurred through September 30, 1998 was $95,635. The costs of addressing the Y2K Issue and anticipating dates for the Y2K Issue are based on management's best estimates, which were derived using numerous assumptions of future events, including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, the availability of cost-effective alternatives or replacements for third-party products and services which are not expected to be Y2K compliant and similar uncertainties. The Company's systems are also being reviewed to determine what modifications will be necessary to accommodate the upcoming introduction of the "Euro", which is scheduled to begin on January 1, 1999. As of January 1, 1999, the Euro will be adopted as the common legal currency of eleven participating member countries of the Economic and Monetary Union. The Euro and participating member currencies will co-exist through July 1, 2002, with the Euro gradually replacing national currencies. The Company expects to be prepared for the introduction of the Euro by January 1, 1999. The Company is in the process of implementing modifications to its IT systems and programs in order to prepare for transition to the Euro. The Company is engaged in testing those systems and processes which may be affected by the institution of the Euro. The Company also is communicating with third parties with which it regularly transacts business regarding the implications of the Euro and the effect it will have on their business dealings with the Company. These third parties include financial intermediaries, trading counter parties, securities exchanges, depositions, clearing agencies, clearing houses, commercial banks and various vendors, including information and pricing service providers. The Company is dependent on the successful implementation of its Euro conversion procedures by such third parties. If these thrid parties do not appropriately address the introduction of the Euro, the Company's trade execution, clearance, settlement and other operations could be adversely affected. Costs associated with the modifications necessary to prepare for the Euro are not anticipated to be material to the Company's financial position, results of operations or cash flows in a given period and will be expensed as incurred. 13 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The description of legal proceedings required by this Item is hereby incorporated by reference to Note 8 of Notes to Unaudited Consolidated Financial Statements included herein. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 10.16 Employment Agreement, dated October 8, 1998, between Max H. Levine and Hoenig Group Inc. 27.1 Financial Data Schedule. 27.2 Restated Financial Data Schedule. (b) REPORTS ON FORM 8-K The Registrant did not file any reports on Form 8-K during the quarter ended September 30, 1998. 14 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: November 13, 1998 By:/s/Fredric P. Sapirstein --------------------- Fredric P. Sapirstein, Chairman and Chief Executive Officer Date: November 13, 1998 By:/s/Alan B. Herzog -------------- Alan B. Herzog, Chief Operating Officer and Chief Financial Officer 15 EXHIBIT INDEX Exhibit No. Description ----------- ----------- 10.16 Employment Agreement, dated October 8, 1998 between Max H. Levine and Hoenig Group Inc. 27.1 Financial Data Schedule 27.2 Restated Financial Data Schedule 16 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated October 8, 1998 (this "Agreement"), by and between Hoenig Group Inc., a Delaware corporation (the "Company"), and Max H. Levine (the "Executive"). WHEREAS, the Company desires to continue to employ the Executive as Executive Vice President of the Company and President of Hoenig & Co., Inc. ("Hoenig"), a wholly-owned subsidiary of the Company, and the Executive desires to continue to be retained in such capacities, on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual agreements made herein, the Company and the Executive agree as follows: 1. Employment; Duties. (a) The Company shall employ the Executive as Executive Vice President of the Company and President of Hoenig for the "Employment Period" as defined in Section 2. The Executive, in his capacity as Executive Vice President of the Company and President of Hoenig, shall have such duties, responsibilities and authority normally incident to such offices, subject to the provisions of the bylaws of the Company and Hoenig, respectively. The precise duties, responsibilities and authority of the Executive as Executive Vice President of the Company may be expanded, limited or modified, from time to time, at the discretion of the Board of Directors of the Company (the "Board") or the Chief Executive Officer of the Company, consistent with the ordinary duties, responsibilities and authority of such an Executive Vice President. The precise duties, responsibilities and authority of the Executive as President of Hoenig may be expanded, limited, or modified from time to time, at the discretion of the Board of Directors of Hoenig (the "Hoenig Board") or the Chief Executive Officer of Hoenig, consistent with the duties, responsibilities and authority of a President. (b) During the Employment Period, the Executive shall render his services solely in the performance of his duties and responsibilities hereunder. The Executive agrees that during the Employment Period, he shall devote his full working time, attention, knowledge and experience and give his best effort, skill and abilities, exclusively to promote the business and interests of the Company and its direct or indirect subsidiaries. The Executive may not serve as an officer or director of, make investments in, or otherwise participate in, any other entity without the prior written approval of the Board; provided, that the foregoing shall not be deemed to prohibit the Executive from acquiring, directly or indirectly, solely as an investment, not more than two percent (2%) of any class of securities of any entity that are registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended (the "1934 Act") or investments in non-public entities pursuant to Section 8 of this Agreement and the policies and procedures generally applicable to executives of the Company and its direct or indirect subsidiaries; and provided further, that so long as it does not interfere with the Executive's 2 employment, the Executive may serve as an officer, director or otherwise participate in purely educational, welfare, social, religious and civic organizations. (c) Subject to the conditions set forth in this Section 1(c)(1), during the Employment Period, Executive shall be assigned as the trader responsible for servicing certain accounts in the business areas specified as shall be agreed upon from time to time in writing by the Executive and the Company("Assigned Accounts"). (1) The Company retains the right to reassign any of the Assigned Accounts to someone other than the Executive under any one of the following circumstances: (i) Executive fails to obtain or maintain in good standing any registration, license or other authorization or approval with all appropriate regulatory authorities, including maintaining or taking and passing all necessary federal or state registration examinations, compliance with applicable continuing education requirements, and compliance in all material respects with the rules of applicable self-regulatory organizations (including without limitation the New York Stock Exchange and the National Association of Securities Dealers Regulation, Inc. (the "NASDR")) and the Securities and Exchange Commission ("SEC"); (ii) an Assigned Account requests that the Assigned Account be reassigned to someone other than Executive or requests that Executive be removed from covering the Assigned Account; or (iii) the level of commission revenues of an Assigned Account is not commensurate with the prior level of commission revenues generated by such Assigned Account given prevailing market conditions. (2) In the event that an Assigned Account is reassigned to someone other than Executive pursuant to Section 1(c)(1), such Assigned Account shall not constitute a Client Account for purposes of determining the Bonus Formula payable to Executive under Section 3(b) or any payment due Executive under Section 4(d)(2). 2. Employment Term. The Executive's employment under this Agreement shall have a term commencing January 1, 1999 and ending on December 31, 2001 (the "Employment Term"), unless sooner terminated in accordance with the provisions of Section 4 (the "Employment Period"). 3. Compensation and Benefits. The Executive shall be entitled to the following compensation and benefits, in each case subject to applicable statutory withholdings and applicable deductions: 3 (a) Base Compensation. The Executive shall be paid an aggregate base salary (the "Base Salary") at the rate of $400,000 per annum. The Base Salary shall be payable in a manner consistent with the normal payroll practices of the Company in effect from time to time. The Board, in its sole discretion, or at the recommendation of the Compensation and Stock Option Committee of Hoenig Group Inc. (the "Compensation Committee"), may increase (but not decrease) the Base Salary, at any time. (b) Annual Bonus. In addition to the Base Salary, the Executive shall be entitled to receive an annual bonus for each fiscal year of the Company that ends during the Employment Period equal to 30% of the amount of Net Pre-Tax Profits (as defined in Section 3(b)(1) herein) for such fiscal year (the "Bonus Formula"). In addition, Executive shall be entitled to a minimum bonus award for each fiscal year of the Employment Period of $150,000 (the "Minimum Bonus Award"). The Minimum Bonus Award and the Bonus Formula are collectively referred to herein as the "Bonus Award". To the extent necessary to avoid the limitation on the federal tax deductibility of the Bonus Award for any year under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), payment thereof may, at the sole discretion of the Company, be deferred to the first taxable year of the Company in which the payment would be fully deductible. Except as provided in the preceding sentence, the Bonus Award for a fiscal year shall be payable as soon as practicable after the release of the Company's audited financial statements for such fiscal year, but in no event later than 90 days after the end of the fiscal year. In the case of a deferral as described above, amounts deferred shall be credited with such interest and on such other terms as the Company and the Executive shall mutually agree. (1) "Net Pre-Tax Profits" shall mean the amount, if any, determined in accordance with Generally Accepted Accounting Principles (GAAP) consistently applied from year to year, by which the total gross equity commission revenues and underwriting designation revenues generated by client brokerage accounts which Executive is responsible for servicing, including the Assigned Accounts (collectively, "Client Accounts"), exceed all expenses incurred in generating such commissions, servicing those Client Accounts and in the operation and conduct of the Executive's business. Such expenses include, but are not limited to: the Base Salary paid to Executive, including related payroll taxes; the Minimum Bonus Award payable to Executive; insurance and other benefits relating to Executive, including any profit-sharing contributions made on behalf of Executive and any benefits provided pursuant to Section 3(c); the cost of research and other services provided to Client Accounts; telephones; market data and quotation equipment and services; electronic and other office equipment; business travel and entertainment; clearance and settlement costs on transactions executed for Client Accounts, determined in accordance with the Company's practices; registration fees and expenses; and exchange and association membership dues and subscriptions. (c) Benefits. Executive also shall be entitled to participate in the employee and fringe benefit and group insurance programs provided by the Company for its officers and employees generally and in accordance with the terms of the applicable plan documents as they may be revised from time to time. Executive shall be entitled to receive such other benefits as are generally provided to executives of the Company and its direct or indirect 4 subsidiaries. The Executive shall also be entitled to reimbursement for reasonable out-of-pocket expenses incurred in connection with the business of the Company in accordance with the Company's policies and procedures. In addition, upon the request of Executive, the Company shall pay the premiums on certain life insurance policies identified by the Executive up to an annual maximum of $200,000. The cost of such premiums shall be deducted from any Bonus Award due to Executive pursuant to Section 3(b). (d) On January 4, 1999 (the "Grant Date"), the Compensation Committee shall grant Executive a non-qualified option to purchase 50,000 shares of the Company's common stock, par value $0.01 per share ("Common Stock"), under the Company's 1996 Long-Term Stock Incentive Plan (the "1996 Plan") at an exercise price per share equal to one hundred percent (100%) of the Fair Market Value (as defined in the 1996 Plan) of a share of the Common Stock on the Grant Date. Subject to Section 3(d)(1) herein, the Option shall become vested and exercisable with respect to 16,667 shares of Common Stock on each of the first two anniversaries of the Grant Date and with resepct to 16,666 shares of common stock on the third anniversary of the Grant Date. The term of the Option shall be ten years. (1) Upon termination of Executive's employment for any reason (except termination for Cause) (i) any portion of the Option that is not vested shall immediately terminate, and (ii) that portion of the Option which has vested at the time of such termination of employment shall remain exercisable thereafter for a period of three months, or if such termination is by reason of Death or Disability, for a period of one year. If Executive's employment is terminated for Cause, the Option (both the vested and unvested portions) immediately shall terminate. In no event may the Option, or any portion thereof, be exercised more than ten years after the Grant Date. 4. Termination. (a) The Company may, with or without prior notice, terminate the Employment Period with or without Cause, or upon Executive's Disability. Executive may terminate the Employment Period only for Good Reason. This Agreement shall automatically terminate upon the Executive's death. The Employment Period shall also terminate upon expiration of the Employment Term. Except as provided in Sections 4(b), 4(c) and 4(d), in the event that the Employment Period is terminated, the Executive's rights and the obligations of the Company hereunder shall cease as of the effective date of such termination; provided, however, that the Executive shall be entitled to receive any accrued but unpaid Base Salary, any earned or deferred but unpaid Bonus Awards and any amount accrued under Company benefit plans as provided pursuant to the terms of such plans (the "Accrued Obligations"). (b) In the event that the Employment Period is terminated by reason of the Executive's Disability, the Executive shall be entitled to receive, in addition to the Accrued Obligations: (1) a payment equal to the product of (i) the sum of Executive's current Base Salary and the Minimum Bonus Award and (ii) the number of years 5 and/or fraction thereof then remaining in the Employment Term, which amount shall be paid in equal monthly installments over such remaining Employment Term, provided that such installments shall cease upon any employment by the Executive on a full-time basis; and (2) Executive shall participate, and the Company shall continue contributions on the Executive's behalf, in all Company-sponsored health and welfare plans on terms no less favorable than as in effect on the date of termination by reason of Disability, which shall continue until the earlier of: (A) one year from the date of termination; (B) the entitlement to coverage of the Executive under plans provided by a new employer; or (C) the death of the Executive; or (D) expiration of the Employment Term. The cash amounts and benefits set forth in subsections 4(b)(1) and 4(b)(2) are collectively referred to herein as "Disability Benefits." (c) In the event that the Employment Period terminates by reason of Executive's death, in addition to the Accrued Obligations, the Company shall pay to the Executive's estate or designated beneficiaries within ninety (90) days of such termination, a lump sum equal to (i) the Minimum Bonus Award, plus (ii) the amount of any Bonus Formula (without regard to any deferral), for the fiscal year ending immediately prior to such termination, such sum multiplied by a fraction, the numerator of which shall be the number of days elapsed in the fiscal year to the date of such termination and the denominator of which shall be 365 ("Death Benefit"); provided that there shall be deducted from any such Death Benefit the amount of any Bonus Award previously paid to the Executive with respect to such period and the cost of any life insurance premiums paid during such period pursuant to Section 3(c) hereof. (d) In the event that the Company terminates the Employment Period other than for Cause, or if the Executive terminates the Employment Period for Good Reason, the Executive shall be entitled to receive, in addition to the Accrued Obligations, the following payments ("Termination Payments"): (1) a payment equal to the greater of (i) five hundred thousand dollars ($500,000), or (ii) five hundred thousand dollars ($500,000) multiplied by the number of years and/or fraction thereof then remaining in the Employment Term; and (2) a payment equal to (i) thirty percent (30%) of the Net Pre-Tax Profits for the period beginning January 1 of the year in which such termination occurs and ending on the date of such termination, plus (ii) the Minimum Bonus Award multiplied by a 6 fraction, the numerator of which shall be the number of days elapsed in the fiscal year to the date of such termination and the denominator of which shall be 365. (3) The Company shall pay Executive the Termination Payments in a lump sum within thirty (30) days of termination of the Employment Period other than for Cause or for Good Reason; provided, however, that there shall be deducted from such Termination Payments the amount of any bonus previously paid to the Executive with respect to the period and the cost of any life insurance premiums paid during such period pursuant to Section 3(c) herein. (4) In the event of the Executive's death after the Employment Period is terminated other than for Cause or for Good Reason, the Company shall make any Termination Payments which would otherwise have been payable to the Executive if he had lived under this Section 4(d) to Executive's estate or designated beneficiary. (e) All amounts payable pursuant to this Section 4 shall be subject to applicable statutory withholdings and applicable deductions. (f) A termination of the Executive's employment (i) upon expiration of the Employment Term, or (ii) by reason of the Executive's Death or Disability, shall not constitute a termination without Cause, a termination for Cause or a termination for Good Reason under this Agreement. (g) As a condition to his entitlement to receive Death or Disability Benefits or Termination Payments, the Executive (or his estate or designated beneficiary) shall (i) have executed and delivered to the Company a waiver and release reasonably satisfactory to the Company waiving and releasing all rights and claims against the Company (other than the right to receive Death or Disability Benefits or Termination Payments) and its direct or indirect subsidiaries and their respective officers, agents, directors and employees, and such waiver and release shall have become irrevocable, and (ii) comply with Sections 5 through 9. (h) In the event that the Employment Period is terminated for any reason (except by death), the Executive agrees that if at that time he is a director or officer of the Company or any of its direct or indirect subsidiaries, he will immediately deliver his written resignation as such director or officer, such resignation to become effective immediately. (i) Notwithstanding anything contained herein to the contrary, the Company may reduce the Termination Payments to the extent such Termination Payments, when added to other payments made to the Executive (including the vesting of stock options), constitute an "excess parachute payment" as defined in Section 280G of the Code. 7 (j) For purposes of this Agreement: (1) "Cause" shall mean an event where the Executive: (i) commits any act of fraud, willful misconduct or dishonesty in connection with his employment or which materially injures the Company or its direct or indirect subsidiaries; (ii) breaches Section 8 or 9, or any other material provision of this Agreement or any material representation, warranty, covenant or condition in this Agreement or any material fiduciary duty to the Company or any of its direct or indirect subsidiaries; (iii) fails, refuses or neglects to timely perform any material duty or obligation under this Agreement and such failure, refusal or neglect is not cured by the Executive within thirty (30) days from the date the Company notifies the Executive thereof or, if such default is curable but cannot reasonably be cured within thirty (30) days, Executive fails to commence curing such default within such thirty (30) days and fails to diligently pursue such cure, but in no event shall the total cure period under this subsection 4(j)(1)(iii) exceed forty-five (45) days from the date of notification; (iv) commits a material violation of any material law, rule, regulation or by-law of any governmental authority (state, federal or foreign), any securities exchange or association or other regulatory or self-regulatory body or agency applicable to the Company or its direct or indirect subsidiaries or any general policy or directive of the Company or its direct or indirect subsidiaries communicated in writing to the Executive; (v) is charged with a crime involving dishonesty, fraud or unethical business conduct, or a felony; (vi) knowingly gives or accepts undisclosed commissions or other payments in cash or in kind in connection with the affairs of the Company or any of its direct or indirect subsidiaries or their respective clients; (vii) is expelled or suspended in excess of eight weeks, or is subject to an order temporarily (for a period in excess of eight weeks) or permanently enjoining the Executive from the securities, investment management or investment banking business or from acting in the capacity contemplated by this Agreement by the SEC, the NASDR, any national securities exchange or any self-regulatory agency or governmental authority, state, foreign or federal; or (viii) fails to obtain or maintain any registration, license or other authorization or approval that the Company or its direct or indirect subsidiaries in their discretion reasonably believe is required for the Executive to perform his duties and responsibilities hereunder after having received notice form the Company of the need to obtain such registration, license or other authorization or approval and such failure is not cured by Executive within thirty (30) days from the date the Company notifies Executive thereof. Any termination for Cause under this Agreement shall be made by delivering written notice thereof to Executive, which notice shall include the specific reason(s) that has given rise to a termination for Cause. (2) "Disability" shall mean the Executive's inability to perform his duties and responsibilities by reason of mental or physical disability for at least one hundred and twenty (120) consecutive days or any one hundred and twenty (120) days (whether or not consecutive) in any one-hundred eighty (180) consecutive day period. In the event of a dispute as to whether the Executive is Disabled within the meaning hereof, either party may from time to time request a medical examination of the Executive by a doctor appointed by the Chief of Staff of a hospital selected by mutual agreement of the parties, or as the parties may otherwise agree, or, failing agreement, a hospital selected in good faith by the Board of Directors of the Company. The written medical opinion of such doctor shall be conclusive and binding upon the parties as to 8 whether the Executive has become disabled and the date when such disability arose. The cost of any such medical examination shall be borne by the Company. (3) "Good Reason" shall mean (i) the Company changes the Executive's status, title or position as Executive Vice President of the Company and/or President of Hoenig and such change represents a material change or alteration in such status, title or position conferred hereunder; (ii) the Company requires Executive to be based at an office located more than fifty (50) miles from Rye Brook, New York; or (iii) the Company materially breaches this Agreement, and such change or breach is not cured by the Company within thirty (30) days from the date the Executive delivers a Notice of Termination for Good Reason. Such "Notice of Termination for Good Reason" shall include the specific section of this Agreement which is relied upon and the reasons that the Company's act or failure to act has given rise to a termination for Good Reason. 5. Trade Secrets. The Executive recognizes that it is in the legitimate business interest of the Company and its direct and indirect subsidiaries to restrict his disclosure or use of Trade Secrets and Confidential Information relating to the Company and its direct or indirect subsidiaries for any purpose other than in connection with his performance of his duties and responsibilities to the Company and its direct or indirect subsidiaries, and to limit any potential appropriation of such Trade Secrets and Confidential Information by the Executive. The Executive therefore agrees that all Trade Secrets and Confidential Information relating to the Company and its direct or indirect subsidiaries heretofore or in the future obtained by the Executive shall be considered confidential and the proprietary information of the Company and its direct or indirect subsidiaries. During the Employment Period, the Executive shall not use or disclose, or authorize any other person or entity to use or disclose, any Trade Secrets and Confidential Information, other than as necessary to further the business objectives of the Company and its direct or indirect subsidiaries in accordance with the terms of his employment hereunder. The term "Trade Secrets and Confidential Information" includes, by way of example and without limitation, matters of a technical nature, "know-how", formulas, secret processes, works of authorship, computer programs (including without limitation documentation of such programs), services, materials, patent applications, new product plans, other plans, technical information, technical improvements, test data, progress reports and research projects, and matters of a business nature, such as business plans, prospects, financial information, marketing plans and strategies, proprietary information about costs, profits, markets and sales, lists of customers and suppliers of the Company and its direct or indirect subsidiaries, procurement and promotional information, credit and financial data concerning customers or suppliers of the Company and its direct or indirect subsidiaries, information relating to the management, operation and planning of the Company and its direct and indirect subsidiaries, plans for future development, and other information of a similar nature to the extent not available to the public. After termination of the Employment Period for any reason, the Executive shall not knowingly use or disclose Trade Secrets and Confidential Information. 6. Return of Documents and Property. Upon the termination of the Employment Period, or at any time upon the request of the Company, the Executive (or his heirs or personal representatives) shall deliver to the Company (a) all documents and materials 9 (including, without limitation, computer files) containing Trade Secrets and Confidential Information relating to the business and affairs of the Company or its direct and indirect subsidiaries, and (b) all documents, materials and other property (including, without limitation, computer files) belonging to the Company or its direct or indirect subsidiaries, which in either case are in the possession or under the control of the Executive (or his heirs or personal representatives). 7. Discoveries and Work. All Discoveries and Works made or conceived by the Executive during his employment by the Company, whether during the Employment Period or prior thereto, jointly or with others, that relate to the present or anticipated activities of the Company or its direct or indirect subsidiaries, or are used or usable by the Company or its direct or indirect subsidiaries, shall be owned by the Company or its direct or indirect subsidiaries. The term "Discoveries and Works" includes, by way of example but without limitation, Trade Secrets and Confidential Information, patents and patent applications, trademarks and trademark registrations and applications, service marks and service mark registrations and applications, trade names, copyrights and copyright registrations and applications. The Executive shall (a) promptly notify, make full disclosure to, and execute and deliver any documents requested by, the Company, as the case may be, to evidence or better assure title to Discoveries and Works in the Company or its direct or indirect subsidiaries, (b) renounce any and all claims, including but not limited to claims of ownership and royalty, with respect to all Discoveries and Works and all other property owned or licensed by the Company or its direct or indirect subsidiaries, (c) assist the Company or its direct or indirect subsidiaries in obtaining or maintaining for itself at its own expense United States and foreign patents, copyrights, trade secret protection or other protection of any and all Discoveries and Works, and (d) promptly execute, whether during the Employment Period or thereafter at the Company's expense, all applications or other endorsements necessary or appropriate to maintain patents and other rights for the Company or its direct or indirect subsidiaries and to protect the title of the Company or its direct or indirect subsidiaries thereto, including but not limited to assignments of such patents and other rights. Any Discoveries and Works which, within six months after the termination of the Employment Period, are made, disclosed, reduced to a tangible or written form or description, or are reduced to practice by the Executive and which pertain to the business carried on or products or services being sold or developed by the Company or its direct or indirect subsidiaries at the time of such termination shall, as between the Executive and, the Company, be rebuttably presumed to have been made during the Executive's employment by the Company. The Executive acknowledges that all Discoveries and Works shall be deemed "works made for hire" under the Copyright Act of 1976, as amended, 17 U.S.C. ss.101. 8. Non-Competition. From and after the date hereof, the Executive will not, except pursuant to the terms hereof, directly or indirectly, own, manage, operate, join, finance, control or participate in the ownership, management, operation, financing or control of, or be employed or be otherwise connected in any manner with, any business under a name similar to the name of the Company or any direct or indirect subsidiary thereof. During the Non-competition Period, the Executive will not (except as an officer, director, employee, agent or consultant of the Company or its direct or indirect subsidiaries) directly or indirectly, own, manage, operate, join, or have a financial interest in, control or participate in the ownership, 10 management, operation, financing or control of, or be employed as an employee, agent or consultant, or in any other individual or representative capacity whatsoever, or use or permit his name to be used in connection with, or be otherwise connected in any manner with (i) any business or enterprise engaged (wherever located) in the design, development, manufacture, distribution or sale of any products, or the provision of any services, which the Company or its direct or indirect subsidiaries were designing, developing, manufacturing, distributing, selling or providing at any time during the one year immediately preceding the termination of the Employment Period or (ii) any business which is similar to or competitive with the business carried on or planned by the Company or its direct or indirect subsidiaries at any time during the one year immediately preceding the termination of the Employment Period, unless the Executive shall have obtained the prior written consent of the Board, provided that the foregoing restriction shall not be construed to prohibit the ownership by the Executive of not more than two percent (2%) of any class of securities of any corporation which is engaged in any of the foregoing businesses, having a class of securities registered pursuant to Sections 12(b) or 12(g) of the 1934 Act, which securities are publicly owned and regularly traded on any national exchange or in the over-the-counter market, provided further, that such ownership represents a passive investment and that neither the Executive nor any group of persons including the Executive in any way, either directly or indirectly, manages or exercises control of any such corporation, guarantees any of its financial obligations, otherwise takes part in its business other than exercising his rights as a stockholder, or seeks to do any of the foregoing. For purposes of this Agreement, the Noncompetition Period shall mean (i) the Employment Period, and (ii) the lesser of one year following termination of the Employment Period or the remaining term of the Employment Term if Executive's employment is terminated by the Company for Cause or by the Executive for other than Good Reason. Notwithstanding anything hereinabove contained to the contrary, Executive shall be relieved of the provisions of this Section 8 and Section 9 solely upon expiration of the Employment Term or in the event of termination of the Employment Period by the Executive for Good Reason. 9. Non-Solicitation. (a) During the Noncompetition Period, the Executive agrees that he shall not, directly or indirectly, whether for his own account or for the account of any other individual or entity, solicit or canvas the trade, business or patronage of, or sell any products or services which are the same as or similar to those designed, developed, manufactured, distributed or sold by the Company or its direct or indirect subsidiaries to, any individuals or entities that were either customers of the Company or any of its direct or indirect subsidiaries during the twelve months immediately preceding the termination of the Employment Period, or prospective customers with respect to whom a sales effort, presentation or proposal was made by the Company or any of its direct or indirect subsidiaries during the twelve months immediately preceding such termination. Upon the written request of Executive following termination of the Employment Period, the Company shall provide Executive with a list of customers and prospective customers subject to this Section 9. (b) The Executive further agrees that, during the Noncompetition Period, he shall not, directly or indirectly, (i) solicit, induce, enter into any 11 agreement with, or attempt to influence any individual who was an employee or consultant of the Company or any of its direct or indirect subsidiaries at any time during the time the Executive was employed by the Company, to terminate his or her employment relationship with the Company or any of its direct or indirect subsidiaries or to become employed by the Executive or any individual or entity by which Executive is employed or (ii) interfere in any other way with the employment, or other relationship, of any employee or consultant of the Company or any of its direct or indirect subsidiaries. 10. Enforcement. (a) The Executive agrees that the remedies at law for any breach or threat of breach by him of any of the provisions of Sections 5 through 9 will be inadequate, and that, in addition to any other remedy to which the Company may be entitled at law or in equity, the Company shall be entitled to seek a temporary or permanent injunction or injunctions or temporary restraining order or orders to prevent breaches of any of the provisions of Sections 5 through 9 and to enforce specifically the terms and provisions thereof, in each case without the need to post any security or bond. Nothing herein contained shall be construed as prohibiting the Company from pursuing, in addition, any other remedies available to the Company for such breach or threatened breach. A waiver by the Company of any breach of any provision hereof shall not operate or be construed as a waiver of a breach of any other provision of this Agreement or of any subsequent breach by the Executive. (b) It is expressly understood and agreed that if a final judicial determination is made by a court having jurisdiction that the time or territory or any other restriction contained in such Sections 5 through 9 is an unenforceable restriction on the Executive's activities, the provisions of such Sections 5 through 9 shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such other extent as such court may judicially determine or indicate to be reasonable. Alternatively, if the court referred to above finds that any restriction contained in such Sections 5 through 9 herein is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained therein. The provisions of Sections 5 through 9 shall in no respect limit or otherwise affect the Executive's obligations under other agreements with the Company. 11. Executive's Representations. The Executive represents and warrants to the Company that (a) he is able to perform fully his duties and responsibilities contemplated by this Agreement and (b) there are no restrictions, covenants, agreements or limitations of any kind on his right or ability to enter into and fully perform the terms of this Agreement. 12. Key Man Life Insurance. During the Employment Period, the Company may at any time apply for insurance on the Executive's life and/or health in such amounts and in such form as the Company may in its sole discretion decide. The Executive shall not have any interest in such insurance, but shall, if the Company requests, submit to such medical examinations, supply such information and execute such documents as may be required in connection with, or so as to enable the Company to effect, such insurance. The Company's inability to obtain insurance on the Executive's life and/or health shall not constitute a breach of 12 this Agreement; provided Executive has submitted to medical examinations, supplied information, executed documents and otherwise cooperated with the Company in its efforts to obtain such insurance. 13. Assignment. The rights and obligations of the parties under this Agreement shall not be assignable by either the Company or the Executive, provided that this Agreement is assignable by the Company to any affiliate of the Company, to any successor in interest to the business of any of the Company or Hoenig, or to a purchaser of all or substantially all of the assets of the Company or Hoenig. 14. Notices. Any notice required or permitted under this Agreement shall be in writing and shall be deemed to have been effectively made or given upon receipt if personally delivered, on the third business day after having been mailed properly addressed in a sealed envelope, postage prepaid by certified or registered mail, or on the first business day after having been delivered by a reputable overnight delivery service. Unless otherwise changed by notice, notice shall be properly addressed to the Executive if addressed to: Max H. Levine 32 Locust Avenue Larchmont, NY 10538 and properly addressed to the Company if addressed to: Hoenig Group Inc. 4 International Drive Rye Brook, NY 10573 Attention: General Counsel 15. Severability. Wherever there is any conflict between any provision of this Agreement and any statute, law, regulation or judicial precedent, the latter shall prevail, but in such event the provisions of this Agreement thus affected shall be curtailed and limited only to the extent necessary to bring them within the requirements of the law. 16. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 17. Effect of Termination. Any termination of the Employment Period shall not terminate any provisions of this Agreement except as expressly provided herein. 18. Governing Law and Consent to Jurisdiction. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York without giving effect to principles of conflicts of law. Notwithstanding and superceding any prior agreement to which Executive and/or the Company or Hoenig is a party that might otherwise require arbitration or non-judicial litigation of the claims described in this Section 18, 13 each of the parties hereto expressly submits to and consents to the jurisdiction and venue of the courts of the State of New York within the counties of New York and Westchester and the United States District Court for the Southern District of New York in connection with any claim or controversy between them arising out of or relating to this Agreement or Executive's employment by the Company or Hoenig on the condition that, with respect to any federal litigation, the jurisdictional requirements are met with respect to such controversy for litigation in federal court. Each of the parties hereto agrees that service of process may be effected by personal delivery, overnight courier or registered mail, postage prepaid, to the respective addresses listed in Section 14 hereof. 19. Complete Agreement. Other than the Employment Agreement between the parties dated November 25, 1996 which expires on December 31, 1998, this Agreement constitutes the entire agreement, and supersedes all prior agreements, of the parties hereto relating to the subject matter hereof, and there are no written or oral terms or representations made by either party other than those contained herein. IN WITNESS WHEREOF, the parties have executed this Employment Agreement on this day and year first above written. HOENIG GROUP INC. By: /s/ Fredric P. Sapirstein ----------------------------- Title: Chief Executive Officer -------------------------- /s/ Max H. Levine - ----------------------------- Max H. Levine 14 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HOENIG GROUP INC. FORM 10-Q FOR THE PERIODS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND NOTES THERETO. THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HOENIG GROUP INC. FORM 10-Q FOR THE PERIODS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND NOTES THERETO. -----END PRIVACY-ENHA