Hoenig Group: 10-Q for Quarter ended 9/30/97 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 September 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) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 13, 1997, there were 9,211,772 shares of common stock outstanding. HOENIG GROUP INC. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 INDEX PAGE PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS Consolidated Statement of Financial Condition - September 30, 1997 and December 31, 1996 1 Consolidated Statement of Income - Three and Nine Months Ended September 30, 1997 and 1996 2 Consolidated Statement of Cash Flows - Nine Months Ended September 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 SEPTEMBER 30, 1997 & DECEMBER 31, 1996 (UNAUDITED) September 30, 1997 December 31, 1996 ------------------ ----------------- ASSETS Cash & equivalents $20,244,219 $18,307,886 U.S. Government obligations, at market value 17,265,658 16,782,412 Securities owned, at market value 1,296,225 1,458,761 Investment in limited partnerships 634,198 503,588 Receivables from correspondent brokers and dealers 13,106,708 6,164,129 Receivables from customers 1,311,043 436,326 Exchange memberships - at cost 1,340,762 1,347,522 Equipment, furniture and leasehold improvements - net of depreciation and amortization 2,302,602 2,090,649 Deferred research/services expense 1,067,047 632,914 Other assets 4,239,820 3,803,708 ----------- ----------- Total Assets $62,808,282 $51,527,895 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Payable to brokers and dealers $ 1,454,870 $ 640,705 Payable to customers 8,026,229 229,367 Accrued research/services payable 7,396,137 6,553,125 Accrued compensation 4,674,683 4,449,089 Accrued expenses 864,012 963,745 Other liabilities 1,393,593 840,574 ----------- ----------- Total Liabilities 23,809,524 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 26,403,332 26,111,404 Foreign currency translation adjustment (920,719) (826,848) Retained earnings 19,153,748 16,611,177 ---------- ---------- 44,744,368 42,003,367 Less treasury stock at cost - 1,510,378 shares in 1997 and 1,239,540 shares in 1996 (5,745,610) (4,152,077) ----------- ----------- Total Stockholders' Equity 38,998,758 37,851,290 ---------- ---------- Total Liabilities and Stockholders' Equity $62,808,282 $51,527,895 =========== =========== SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1 HOENIG GROUP INC. CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- REVENUES 1997 1996 1997 1996 ---- ---- ---- ---- Gross commissions $16,398,169 $15,806,745 $50,671,115 $45,572,004 Investment management fees 1,750,076 1,553,094 4,771,783 4,084,931 Other 68,556 114,088 328,830 259,166 ----------- ----------- ----------- ----------- Total operating revenues 18,216,801 17,473,927 55,771,728 49,916,101 EXPENSES Independent research and services 7,478,163 7,559,472 23,179,016 20,828,355 Clearing, floor brokerage and exchange charges 2,485,943 2,912,834 7,887,781 8,113,309 Employee compensation 5,058,752 4,252,657 14,670,416 12,273,865 Other 2,696,110 2,153,030 7,515,660 6,421,276 ----------- ----------- ----------- ----------- Total expenses 17,718,968 16,877,993 53,252,873 47,636,805 OPERATING INCOME 497,833 595,934 2,518,855 2,279,296 INVESTMENT INCOME AND OTHER Interest, dividends 500,533 370,371 1,419,780 1,098,107 Gain (loss) on investments, other 63,407 42,418 189,991 30,063 ----------- ----------- ----------- ----------- Net investment income and other 563,940 412,789 1,609,771 1,128,170 Income before income taxes 1,061,773 1,008,723 4,128,626 3,407,466 Provision for income taxes 417,005 399,027 1,586,056 1,387,664 ----------- ----------- ----------- ----------- Net income $ 644,768 $ 609,696 $ 2,542,570 $ 2,019,802 =========== =========== =========== =========== Net income per share primary and fully diluted $ .07 $ .07 $ .26 $ .22 =========== =========== =========== =========== Weighted average shares outstanding 9,749,853 9,333,620 9,810,778 9,282,182 ========= ========= ========= ========= SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 2 HOENIG GROUP INC. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 & SEPTEMBER 30, 1996 (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1996 ---- ---- Net income $ 2,542,570 $ 2,019,802 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 858,406 608,607 Foreign currency translation adjustment (93,871) (129,909) Issuance of stock options 138,323 50,866 Change in unrealized (appreciation)/depreciation on investments (304,771) 238,844 Changes in assets and liabilities: Securities owned, at market 12,766 (52,048) Receivables from correspondent brokers and dealers (6,942,579) 218,828 Receivables from customers (874,717) -- Deferred research/services expense (434,133) (501,306) Other assets (657,180) (44,160) Payable to brokers and dealers 814,165 43,572 Payable to customers 7,796,862 -- Accrued research/services payable 843,012 918,239 Accrued compensation 225,594 2,171,134 Accrued expenses (99,733) (1,784,145) Other liabilities 554,550 (144,472) ------------ ------------ Net cash provided by operations 4,379,264 3,613,852 CASH FLOWS FROM INVESTING ACTIVITIES: U.S. Government obligations at market (319,966) (4,152,156) Investment in Limited Partnership -- (1,000,000) Investment in securities 159,120 527,803 Purchases of equipment, furniture and leasehold improvements (842,530) (580,870) ------------ ------------ Net cash (used in) investing activities: (1,003,376) (5,205,223) CASH FLOWS FROM FINANCING ACTIVITIES: Treasury stock purchase (1,593,533) -- Dividends -- (695,261) Issuance of common stock 153,978 845,949 ------------ ------------ Net cash provided by (used in) financing activities: (1,439,555) 150,688 Net increase (decrease) in cash, and equivalents 1,936,333 (1,440,683) Cash and equivalents, beginning of period 18,307,886 18,115,361 Cash and equivalents end of period $ 20,244,219 $ 16,674,678 Supplemental disclosure of cash flow information: Interest paid: $ 146,873 $ 32,881 Taxes paid: $ 1,357,275 $ 707,892 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 September 30, 1997 and December 31, 1996, the results of its operations for the three and nine months ended September 30, 1997 and 1996 and changes in cash flows for the nine months ended September 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 September 30, 1997, Hoenig's net capital ratio was .58 to 1 and its net capital was approximately $10,330,000, which was $9,933,000 in excess of regulatory requirements. Hoenig's Tokyo office (a branch of Hoenig) capital requirement was (Yen)69,000,000 ($573,000). 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 September 30, 1997 was approximately (British pounds)343,000 ($555,000); it had excess financial resources at such date of approximately (British pounds)809,000 ($1,308,000). 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 ($388,000) or 5% of the average quarterly total liabilities. Far East's required liquid capital as of September 30, 1997 was approximately HK$16,702,000 ($2,158,000), and it had excess liquid capital of approximately HK$16,850,000 ($2,177,000). 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 September 30, 1997, the Company repurchased 407,172 shares of Common Stock. As of September 30, 1997 the Company has repurchased a total of 1,304,712 shares under these repurchase programs. The Company purchased an additional 650,000 shares in December 1995, pursuant to a contract with the Estate of Ronald H. Hoenig. The total cost of these purchases under the repurchase programs and the purchase from the Estate (net of 444,334 shares issued out of Treasury Stock) is $5,745,610. 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 adopting 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 Arrangements"), 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. Axe-Houghton had $4.0 billion in assets under management as of September 30, 1997, of which $463.0 million is managed under a temporary assignment. 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 SEPTEMBER 30, 1997 VERSUS THREE MONTHS ENDED SEPTEMBER 30, 1996. The Company's operating income before income taxes for the three months ended September 30, 1997 was $497,833, versus $595,934 in 1996. This decrease in operating income was primarily attributed to an increase in infrastructure costs of the Company's global brokerage operations. These costs included compensation and office related expenses related to the addition of sales/marketing and trading personnel who were hired as part of an effort to expand the Company's global brokerage network and account base. Operating revenues increased 4.3% to $18.2 million for three months ended September 30, 1997 from $17.5 million for the three months ended September 30, 1996. Commission revenues increased 3.7% to $16.4 million for the three months ended September 30, 1997 from $15.8 million for the same period in 1996. This increase resulted primarily from an increase in commission revenues in certain Far East markets. Commission revenues derived from international operations represented 34.5% of the Company's total commissions during the third quarter 1997 as compared to 32.4% for the same period in 1996. Investment management fees increased 12.7% to $1.8 million for the three months ended September 30, 1997, from $1.6 million in 1996 based on assets under management of $4.0 billion as of September 30, 1997, as compared with $4.1 billion as of September 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 third quarter 1997 decreased 1.1% to $7.5 million from $7.6 million for the same period in 1996. These expenses were 45.6% of commission revenues for the quarter ended September 30, 1997 as compared with 47.8% for the corresponding period in 1996. Clearing, execution, exchange charges and related expenses decreased 14.7% to $2.5 million from $2.9 million in 1996. These expenses represented 15.2% of commissions in 1997 and 18.4% of commissions in 1996. The decrease in these expenses as a percentage of commissions is primarily due to a reduction in execution costs related to 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 19.0% to $5.1 million in 1997 from $4.3 million in 1996. This increase reflects: (1) compensation of new employees hired during the fourth quarter 1996 and during 1997, (2) an increase in reserves for discretionary bonuses and performance-based compensation, and (3) an increase in the compensation of existing personnel. All other expenses increased 25.2% to $2.7 million in the third quarter 1997, compared to $2.2 million in 1996. This resulted primarily from an increase in depreciation, amortization and office and marketing related expenses during the quarter ended September 30, 1997. NINE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1996. The Company's operating income before income taxes for the nine months ended September 30, 1997 increased 10.5% to $2,518,855, versus $2,279,296 in 1996. The increase in operating income is primarily attributed to an 11.2% increase in commission revenues and a 16.8% increase in investment management fee revenues. 6 Operating revenues increased 11.7% to $55.8 million for nine months ended September 30, 1997 from $49.9 million for the nine months ended September 30, 1996. Commission revenues increased 11.2% to $50.7 million for the nine months ended September 30, 1997 from $45.6 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 34.8% of the Company's total commissions during the nine months ended September 30, 1997 as compared to 34.2% for the same period in 1996. Investment management fees increased 16.8% to $4.8 million for the nine months ended September 30, 1997, from $4.1 million in 1996 based on assets under management of $4.0 billion as of September 30, 1997, as compared with $4.1 billion as of September 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 nine months ended September 30, 1997 increased 11.3% to $23.2 million from $20.8 million for the same period in 1996. These expenses remained at 45.7% of commission revenues for both the nine months ended September 30, 1997 and 1996. Clearing, execution, exchange charges and related expenses decreased 2.8% to $7.9 million in 1997 from $8.1 million in 1996. These expenses represented 15.6% of commissions in 1997 and 17.8% of commissions in 1996. The decrease in these expenses as a percentage of commissions is primarily due to a reduction in execution costs related to 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 19.5% to $14.7 million in 1997 from $12.3 million in 1996. This resulted primarily from: (1) the year-to-date effect of compensation paid to employees hired in the third and fourth quarters of 1996 and in 1997, (2) an increase in reserves for discretionary bonuses and performance-based compensation, and (3) an increase in compensation of existing personnel. All other expenses increased 17.0% to $7.5 million in the nine months ended September 30, 1997, compared to $6.4 million in 1996. This resulted primarily from an increase in depreciation, amortization and office and marketing related expenses during the nine months ended September 30, 1997. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1997, the Company had cash, U.S. Government obligations, net accounts receivable and other securities of $44.4 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 6. EXHIBITS Exhibits: Computation of Earnings Per Share (Exhibit 11) Financial Data Schedule (Exhibit 27) 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: November 13, 1997 Fredric P. Sapirstein --------------------- Fredric P. Sapirstein Chairman and Chief Executive Officer Date: November 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 Nine Months Ended ------------------ ----------------- Primary and Primary and Primary and Primary and Fully Diluted Fully Diluted Fully Diluted Fully Diluted 9/30/97 9/30/96 9/30/97 9/30/96 ------- ------- ------- ------- EARNINGS: Net Income $ 644,768 $ 609,696 $2,542,570 $2,019,802 ========== ========== ========== ========== NUMBER OF SHARES: Weighted average of shares outstanding 9,342,978 9,250,201 9,457,567 9,186,012 Additional shares assuming conversion of outstanding options and warrants 406,875 83,419 353,211 96,170 ---------- ---------- ---------- ---------- Average shares and equivalents outstanding 9,749,853 9,333,620 9,810,778 9,282,182 ========== ========== ========== ========== Primary and fully diluted earnings per share $ .07 $ .07 $ .26 $ .22 ========== ========== ========== ========== End