Item 1. Business
GENERAL Hoenig Group Inc., through its wholly-owned brokerage subsidiaries, Hoenig & Co., Inc. ("Hoenig"), Hoenig & Company Limited ("Limited") and Hoenig (Far East) Limited ("Far East"), provides global securities brokerage, marketing and distribution of proprietary and independent third-party research and related services to institutional investors. Through its investment advisory subsidiary, Axe-Houghton Associates, Inc. ("Axe-Houghton"), the Company provides professional investment management to public and corporate employee benefit plans, investment partnerships and other institutional clients. The term "Company" refers to Hoenig Group Inc. and its subsidiaries, Hoenig, Limited, Far East and Axe-Houghton. The Company's brokerage clients are primarily banks, insurance companies, corporations, employee benefit plans, mutual funds, investment advisers, hedge funds, investment partnerships and other investment professionals. The Company provides its clients with execution services for equity and fixed income securities transactions. Approximately 84% of those services are provided in connection with the provision of independent, third-party research products and services and directed brokerage arrangements.
The Company conducts business from its headquarters in Rye Brook, New York, its international offices in London, Tokyo and Hong Kong and its regional offices in New York and Boston. Through its subsidiaries, the Company is a member of the New York Stock Exchange ("NYSE"), all major regional U.S. exchanges, the London Stock Exchange ("LSE") and The Stock Exchange of Hong Kong, and is an associate member of the American Stock Exchange. See Note 10 to the Financial Statements for specific information regarding operating revenues and operating profits by location and geographic region.
GLOBAL SECURITIES BROKERAGE
INDEPENDENT RESEARCH
The principal activity of the Company is the marketing and distribution of third-party research and services to professional investment managers in exchange for a commitment to direct securities trades which generate specified amounts of commission revenues ("Independent Research Arrangements"). These types of arrangements are sometimes referred to as soft dollar arrangements.
An important aspect of the Company's business involves identifying independent sources of investment research and information which add value to its customers' investment decision-making process. The Company seeks research services from private research groups, independent analysts, information services organizations and other entities in the United States and overseas and collaborates with these providers to obtain products and services that assist the Company's investment management clientele in carrying out their investment management responsibilities. The Company presently obtains research products and services from over 300 independent sources and regularly communicates the availability and suitability of these products and services to its clients.
Through its relationships with independent research analysts and service providers, the Company offers a wide variety of specialized and sophisticated research products, including fundamental research, economic research and forecasting, quantitative analysis, global research services, quotation, news and fixed income research services, software for securities analysis, portfolio management and performance measurement services. Many of these services are available from other brokerage firms, including specialty firms offering only independent research, as well as firms that provide proprietary research.
The Company's relationship with independent research providers is typically one in which the research organization agrees to supply research products or services to the Company's customers for a specified period
of time (generally one year or less), and the Company agrees to pay for such research. Some of these relationships, particularly those with organizations which supply quotation, news and database systems, are contractual in nature. The Company's business is not dependent on any one or select number of research organizations; however, collectively, quotation, news and database systems represent a significant portion of the independent research provided by the Company, the loss of which could materially affect the Company's business.
DIRECTED BROKERAGE
The Company also engages in directed brokerage arrangements with certain institutional investors, particularly corporations, pension plans and investment limited partnerships. A directed brokerage arrangement is a contractual arrangement between a brokerage firm and its customer whereby the broker agrees to pay for certain direct expenses of the customer, such as custodian fees, or to refund to the customer a portion of commissions paid in consideration of the customer directing commission business to the broker ("Directed Brokerage Arrangement"). These types of arrangements are commonly known as Directed Brokerage because the customer typically instructs its money managers to direct trades for the customer's account to the broker with whom the customer has a Directed Brokerage Arrangement. In the case of pension plans, Directed Brokerage Arrangements often involve the payment of commission refunds to the pension plan and thus are often referred to as "commission recapture" programs. The term "soft dollars" sometimes is used to describe directed brokerage arrangements.
The Company's general practice is to require between $1.50 and $2 in commissions for every $1 in research, other services and commission refunds provided under Independent Research Arrangements and Directed Brokerage Arrangements. This ratio is not fixed and may vary on an individual customer basis. The ratio the Company charges its customers has been, and continues to be, under competitive pressure in the United States as well as in the United Kingdom, Europe and the Far East.
The Company's commission rates and ratios generally are negotiated between the Company's brokers and customers, and vary with the volume and nature of trading involved. The Company believes that its ability to provide customers with domestic and international execution capabilities is an important factor in its ability to compete for customers seeking Independent Research Arrangements and Directed Brokerage Arrangements. The Company typically provides a periodic global statement to each customer, which allows the customer to easily track the research and other services provided, the commission commitment to the Company and the commissions generated to date.
Although these are extremely competitive businesses, management believes that by emphasizing its global execution capabilities and marketing activities it will be able to compete effectively for Independent Research and Directed Brokerage business. Accordingly, the Company has devoted additional resources, in terms of both capital and personnel, to developing its Hong Kong and Tokyo operations. The Company also has committed resources to enhancing its information systems to meet customer reporting and other business needs. The Company expects to continue to devote resources to its Asian operations as well as to establishing execution capabilities in emerging markets, actively working with independent research service providers in marketing and distributing their research products and further developing its information systems capabilities.
PROPRIETARY RESEARCH
During 1996, the Company broadened the range of brokerage services it offers by developing a proprietary research capability. In October 1996, Hoenig hired Dr. Robert Barbera, a noted Wall Street economist and strategist, as its Chief Economist, and Dr. Barbera's colleague, Jose Rasco, as Economist. Together, Dr. Barbera and Mr. Rasco have over 25 years of experience in providing top-down economic research and market analysis to institutional investment professionals.
Dr. Barbera and Mr. Rasco produce a weekly report, which discusses global economic events and market developments, as well as provides economic forecasts. In addition, they also produce interim reports which address important economic and market developments as they occur and periodically consult with customers on a range of global economic issues and market trends.
The Company provides its customers with this proprietary economic research and access to its economists in the traditional Wall Street manner, with the expectation that customers will direct commission business to the Company. Unlike Independent Research Arrangements, the Company does not expect a specified amount of commissions from a customer in return for its proprietary economic research, nor does the Company generally put a dollar price on this research or offer to sell it for cash rather than commissions.
EXECUTION-ONLY SERVICES
The Company derived approximately 16% of its commission revenues in 1996, and 13% in 1995 and 1994, from Execution-Only Brokerage. Execution-Only Brokerage refers to the execution of equity trades for customers on a competitive commission rate basis and the execution of transactions in fixed income securities as riskless principal. These types of transactions include corporate stock repurchase programs and accumulations or liquidation's of large blocks of equity and fixed income securities on a discrete basis. In addition, the Company generates Execution-Only Brokerage in fixed income securities by identifying merchandise (i.e., fixed income securities) available in the market that may meet their particular portfolio needs. This is a growing part of the Company's Execution-Only Brokerage business.
SALES AND MARKETING
As of December 31, 1996, the sales and marketing staff for the Company's global brokerage business was comprised of fourteen (14) full-time professionals: eight (8) in the United States, two (2) in London, three (3) in Tokyo and one (1) in Hong Kong. These individuals manage established customer relationships and solicit new business for the Company's brokerage services. In doing so, the sales and marketing staff works to identify investment styles, trading techniques, and research requirements of customers.
The sales and marketing representatives are important to the Company's Independent Research business because they serve as a link between new research service providers and existing or potential customers. They work closely with the Company's customers to identify which products and services suit their investment needs and continuously seek to introduce independent research products and other services to existing and prospective customers. An important facet of the relationship between the Company and research providers is the active cooperation the Company provides in marketing. The Company consults with these organizations on marketing questions and periodically identifies new research requirements. Almost all of the Company's research relationships are non-exclusive arrangements.
Similarly, the Company's sales and marketing personnel seek to introduce the Company's proprietary economic research to customers. They also promote and sell the Company's other brokerage services, including its Execution-Only Brokerage services.
BROKERAGE AND CUSTODY
The Company does not maintain custody or possession of customer funds or securities, except with respect to transactions in securities listed on The Stock Exchange of Hong Kong. Custody of assets of institutional customers is normally maintained by banks, trust companies, large brokerage firms or other custodians selected by each customer. Transactions for such customers generally are settled on a delivery-versus-payment or receipt-versus-payment basis directly with the customer through the Company's clearing agents or settlement accounts. The assets of some customers are maintained in the custody of the Company's clearing agents. The Company is thus relieved of many of the significant regulatory and administrative burdens associated with the custody or possession of customer assets.
The Company introduces on a fully-disclosed basis all accounts trading in U.S. equity and fixed income securities through Sanford C. Bernstein & Co., Inc. ("Bernstein"). Under the Company's clearing arrangement, Bernstein performs administrative functions with respect to transactions of the Company's customers, such as record keeping, confirmation of transactions and preparation and transmission of monthly statements. Bernstein also extends margin credit to some of the Company's brokerage customers. The Company has a similar arrangement (other than the extension of margin credit) with Pershing & Co. Ltd. in London for accounts trading in the United Kingdom and certain European securities markets. The Company pays a fee to its clearing and settlement agents based on a fixed amount per transaction. Commissions, net of clearing expenses, are paid on a monthly basis by the clearing agents to the Company.
In November 1996, Far East became a member of The Stock Exchange of Hong Kong, and as a result became a member of the Central Clearing and Settlement System (CCASS) in December 1996. As a member of CCASS, Far East is self-clearing only with respect to transactions in securities listed on The Stock Exchange of Hong Kong. The Company also maintains settlement accounts with various banks and brokerage firms throughout the world with respect to transactions in other Asian securities. Transactions for Far East customers generally are settled on a delivery-versus-payment or receipt-versus-payment basis directly with the customer or the customer's custodian.
ASSET MANAGEMENT AND BUSINESS DEVELOPMENT
Axe-Houghton, an asset management company registered as an investment adviser under the Investment Advisers Act of 1940, provides professional investment management for public and corporate employee benefit plans and other institutional clients and also acts as the general partner of two investment limited partnerships. It specializes in active small capitalization growth equity and active fixed income investment management, international indexing through the use of American Depositary Receipts (ADRs), and large capitalization value management.
As of December 1996, Axe-Houghton's assets under management were $4.27 billion, as compared with $3.61 billion at the end of 1995. The greatest growth in assets during 1996 occurred in assets managed in small capitalization growth equities. Approximately $1.46 billion of assets under management at December 31, 1996 and $1.27 billion of assets under management at December 31, 1995 represent temporary assignments from one client, which are intended to be of limited duration. One of these temporary assignments, representing $1.1 billion in assets under management, ended in mid-February 1997. Assets under management as of February 28, 1997 were $3.36 billion.
Axe-Houghton's marketing department is comprised of three full-time professionals. These individuals work directly with potential clients, as well as various investment management consulting firms, to introduce Axe-Houghton's different investment styles and performance records to institutional clients. They also provide administrative services to client accounts.
The Company intends to continue to seek and evaluate, through acquisition or otherwise, opportunities in investment management and other financial service businesses which complement the Company's existing businesses.
EMPLOYEES
At December 31, 1996, the Company employed one hundred fifteen (115) persons on a full-time basis, of whom ten (10) were in executive positions, thirty (30) in floor positions or positions as brokers, sixteen (16) in sales and marketing positions, fourteen (14) in accounting, legal and compliance positions, eight (8) in investment positions and thirty-seven (37) in clerical or other positions. Of the one hundred fifteen (115) employees, sixty-eight (68) are employed by Hoenig, including twelve (12) in Tokyo, six (6) by Hoenig Group Inc., fourteen (14) by Axe-Houghton, fourteen (14) by Far East, and the remaining thirteen (13) are employed by
Limited. All of the Company's offices engage in both marketing and brokerage activities. The Company considers its relations with employees to be good.
On September 5, 1996, the Company appointed Fredric P. Sapirstein as Chief Executive Officer and Chairman of the Company's Board of Directors. The Company expects to hire additional sales and marketing professionals in its brokerage and asset management operations in 1997.
CUSTOMER RELATIONSHIPS
The Company has existing brokerage relationships with over 500 institutional customers worldwide. The Company's 10 and 20 largest customers accounted for 29.2% and 40.8%, respectively, of total revenues for the year ended December 31, 1996 and 28.0% and 41.6%, respectively, of the total revenues for the year ended December 31, 1995. A significant percentage of the Company's largest customers are investment limited partnerships and private investment funds. No single customer accounted for 10% or more of the Company's revenues for the years ended December 31, 1996, 1995 and 1994.
The Company believes that its brokerage customer list is broadly based and not dependent on any one sector of the market. Approximately 68% of the Company's brokerage business is executed in U.S. markets and the majority of its customers are located in the United States. The Company's ability to allow its customers to execute securities transactions in the world's major markets reduces its reliance on volume and trading in any one particular market. Sales and marketing personnel located in the Company's international offices are responsible for developing local customer relationships which help to diversify the Company's customer base.
The Company maintains a limited number of retail brokerage accounts. These accounts are primarily the accounts of employees (who generally are required to trade through the Company), relatives and friends of the Company. The Company does not compete for retail business.
As of December 31, 1996, the Company had thirty-eight (38) advisory clients which maintained fifty (50) investment advisory accounts. Four of these accounts are maintained by affiliates. Two of these accounts, representing $1.46 billion in assets under management as of December 31, 1996, are temporary assignments from one client. These temporary assignments are intended to be of a limited duration. In mid-February 1997, one of these assignments, representing $1.1 billion in assets, ended.
COMPETITION
The institutional brokerage and investment management businesses are very competitive. The Company's brokerage business competes directly and indirectly with independent specialty firms as well as traditional full service brokerage firms, both domestic and foreign, that offer Independent Research and engage in Directed Brokerage. In addition, the Company competes directly with traditional full service firms that offer economic research and forecasting similar to the Company's proprietary economic research and research similar to the Independent Research provided by the Company. In competing for Execution-Only Brokerage, the Company generally does not make position bids or offers or otherwise commit its capital to trading. Consequently, the Company may not be able to compete for brokerage business in cases where another broker-dealer commits its own capital.
The Company believes it successfully competes for brokerage business because of the quality of its trade execution, its global execution capabilities, and the variety and quality of the independent and proprietary research and other services it provides. The Company believes that important competitive factors in the securities brokerage business are the ability of professional personnel to understand and anticipate the customer's requirements and expectations and to provide quality services at competitive prices. The Company must meet price competition commensurate with the products and level of service it offers.
The Company's asset management business competes with registered investment advisers, full service brokerage firms, mutual funds, investment counselors and other investment professionals. A significant number of these competitors have greater capital and other resources than the Company and offer clients a broader range of asset management disciplines and products. Some of the competing firms offer these services at rates lower than those offered by the Company. The Company believes that it successfully competes with other investment professionals because of the quality of the portfolio management services it provides, which often is more important to attracting and retaining investment management clients than the fee rate charged.
The low capital requirements of the institutional agency brokerage and asset management businesses mean that there are no true financial barriers to entry into these businesses. However, the Company's relationships with major institutional investors and direct lines of communication to these institutional investors are not easily duplicated. Established U.S. and international brokerage firms as well as independent specialty firms are the most likely candidates to compete successfully for customers seeking Independent Research Arrangements and Directed Brokerage Arrangements. However, for some full service firms, this business line is not their primary business and may conflict with their existing operations.
REGULATION
The Company is subject to extensive regulation under U.S. federal and state law and by certain U.S. self-regulatory bodies including the NYSE and various other stock exchanges, the Securities and Exchange Commission ("SEC"), the National Association of Securities Dealers, Inc. ("NASD") and several foreign regulatory bodies. The Company's United States brokerage subsidiary, Hoenig, is registered as a broker-dealer with the SEC and the NASD. The Company's brokerage operations are subject to regulation by self-regulatory organizations, including NASD Regulation, Inc. and the NYSE, which has been designated by the SEC as the primary regulator of the Company's largest operating subsidiary, Hoenig. The Company's brokerage subsidiaries are registered as broker-dealers in a number of states and countries. Axe-Houghton is registered as an investment adviser with the SEC and in a number of states. Limited is subject to regulation by the Securities and Futures Authority ("SFA") and the LSE. Far East is registered as a dealer and investment adviser with the Securities and Futures Commission ("SFC") in Hong Kong and is a member of The Stock Exchange of Hong Kong. Hoenig's Tokyo office is subject to regulation by the Japanese Ministry of Finance and the Japan Association of Securities Dealers by virtue of its status as a branch office.
Broker-dealers and investment advisers are subject to regulation covering virtually all aspects of their businesses. These regulatory authorities have adopted rules that govern the securities industry and, as a normal part of their procedures, conduct periodic examinations of the Company's securities and investment management operations. Additional legislation, changes in rules promulgated by the SEC, the SFA or the SFC or any self-regulatory organization, or changes in the interpretation or enforcement of existing laws and rules, may directly affect the mode of operation and profitability of the Company. In the United States, brokerage firms and investment advisers are also subject to regulation by state securities commissions in the states in which they conduct business. These regulatory authorities, including state securities commissions, may conduct administrative proceedings which can result in censure, fine, suspension or expulsion of a broker-dealer or investment adviser, its officers or employees. In October 1996, the Congress adopted the National Securities Markets Improvement Act of 1996, which generally preempts state regulation of certain investment advisers and securities offerings. This Act limits the extent to which individual States may regulate certain types of offerings and registered investment advisers with $25 million or more in assets under management. This portion of the Act is expected to take effect in July 1997.
In the United States, the provision of research to investment professionals in consideration of commission business is conducted in reliance upon the safe harbor provided under Section 28(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The protections of Section 28(e) apply equally to the provision of independent research as well as proprietary research.
Section 28(e) permits money managers and other investment fiduciaries to obtain research from a broker in exchange for portfolio commissions. It provides, in effect, that it is not a breach of fiduciary duty for an investment manager to cause an account over which it has investment discretion to pay a broker a commission in excess of the amount of commission another broker would have charged for effecting the transaction if the investment manager determined in good faith that the amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker. The safe harbor protection of Section 28(e) does not extend to transactions where the broker-dealer executes the transaction as principal or in a riskless principal transaction. It also does not apply to Directed Brokerage Arrangements, which generally are governed by contractual agreement and State or Federal laws, including the Employee Retirement Income Security Act of 1976 ("ERISA").
The SEC from time to time has been urged by competitors of the Company and others to seek Congressional reconsideration of Section 28(e) or narrow its scope through interpretation. Most recently, in November 1996, the SEC's Office of Compliance, Inspection and Examinations began conducting special examinations of the soft dollar practices of hundreds of brokerage firms, investment advisers and mutual funds throughout the United States. The SEC has stated that the purpose of the examinations is twofold: to gather facts about soft dollar practices and to uncover non-compliance with existing guidelines and bring enforcement actions.
The SEC staff has stated that it expects to conclude its examinations by the end of March 1997, but has not yet specified what, if any, action it will recommend. The SEC has not proposed specific rule changes or issued new interpretations relating to soft dollar practices. In November 1996, the SEC withdrew previously proposed amendments to rules under the Investment Adviser's Act of 1940 which would have required investment advisers to disclose to their clients the identity of brokers they use to execute client trades, the percentage of total commission business done with each broker, the average commission per share paid and a description of all research and other services received by the adviser from the broker. It is therefore difficult to assess the effect, if any, that these special examinations will have on the Company's brokerage business. Any changes that limit the definition of research provided in Section 28(e) or exclude independent research from that definition would have a material adverse effect on the Company's Independent Research business and place it at a competitive disadvantage as compared to brokerage firms with greater proprietary research capabilities.
On July 1, 1997, sovereignty over Hong Kong will be transferred from the United Kingdom to the People's Republic of China, and Hong Kong will become a Special Administrative Region of China. It is unclear what, if any, political and economic changes may result from this transfer or what effect, if any, the transfer may have on the Company's business.
NET CAPITAL REQUIREMENTS
Hoenig is subject to the Uniform Net Capital Rule (Rule 15c3-1) under the Exchange Act. This rule requires that Hoenig maintain net capital of the greater of $100,000 or one fifteenth of aggregate indebtedness, as defined. At December 31, 1996, Hoenig's net capital ratio was .67 to 1. The capital requirement of Hoenig's Tokyo branch office at December 31, 1996 was (Y) 78,000,000 ($673,000). In accordance with new rules which took effect January 1, 1996, Limited is required to maintain financial resources, as defined, of at least 110% of its capital requirement. The new rules have not had a material effect on Limited's financial resource requirement. Far East is required to maintain liquid capital of the greater of HK$3,000,000 ($388,000) or 5% of the average quarterly liabilities. The table below summarizes the capital requirements for each subsidiary:
Axe-Houghton has similar net capital requirements with respect to its registrations in various states. Its maximum net capital requirement is $50,000. It is not clear what, if any, net capital requirements Axe- Houghton will have after the National Securities Markets Improvement Act of 1996 takes effect.
Item 2.
Item 2. Properties
The Company's headquarters occupies office space of approximately 25,000 square feet at Royal Executive Park, 4 International Drive, Rye Brook, New York 10573, including 12,000 square feet under a lease which expires on May 31, 2002 and 13,000 square feet under a lease which expires in August 1999. In February 1997, the Company entered into a lease expiring on May 31, 2002 with respect to an additional 2,950 square feet at Royal Executive Park. In addition, the Company leases office space in New York, Boston, London, Hong Kong, and Tokyo totaling 8,250 square feet. These leases expire or are terminable at various times through 1998.
Item 3.
Item 3. Legal Proceedings
On September 19, 1995, a complaint was filed in the Supreme Court of the State of New York, County of Westchester, by Thomas C. Hellman against Hoenig Group Inc. ("Hoenig Group"), Hoenig, Robert F. Donahue, Alan B. Herzog, Ronald H. Hoenig, Thomas J. Compono, Stephen D. Garrow, Max H. Levine and Robert Spiegel as directors and officers of Hoenig. The complaint sought specific performance of a 1987 agreement to sell to plaintiff Hellman, a former officer, director and shareholder of Hoenig, 14% of the common stock of Hoenig and sought an unspecified amount of dividends or other moneys which allegedly had accrued on the stock. On January 30, 1996, the court dismissed the claims against defendants Donahue, Herzog, Compono, Garrow, Levine and Spiegel, but denied the motions of Hoenig Group and Hoenig to dismiss the balance of the complaint for failure to provide sufficient evidence. On or about March 8, 1996, plaintiff Hellman amended the complaint to add allegations of breach of contract, conversion and fraud and to seek an accounting, $5 million in compensatory damages and $5 million in punitive damages. Hoenig Group and Hoenig answered the complaint, denied its substantive allegations, and filed a motion for summary judgment seeking dismissal. On September 11, 1996, the Supreme Court of the State of New York, County of Westchester, granted summary judgment in favor of defendants Hoenig Group Inc. and Hoenig and dismissed the amended complaint in its entirety. Mr. Hellman filed a motion to reargue this decision, which was denied on December 13, 1996. He also filed a notice of appeal of the decision granting summary judgment in favor of Hoenig Group Inc. and Hoenig, which is still pending. Information regarding this litigation previously was disclosed in Item 3 of the Company's annual report on Form 10-K for the fiscal year ended December 31, 1995 and was referenced in the Company's Forms 10-Q for the second quarter ended June 30, 1996 and third quarter ended September 30, 1996.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the fourth quarter of 1996.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholders Matters
The Company's common stock ("Common Stock") is listed on National Association of Securities Dealers Automatic Quotation System ("NASDAQ") under the symbol HOEN.
The following table sets forth the high and low sales prices for the securities as reported by NASDAQ for the eight quarters ending December 31, 1996.
DIVIDENDS PERIOD ENDED COMMON STOCK PER SHARE - ------------ ---------------- --------- HIGH LOW ------ ------
March 31, 1995 $3.625 $ 2.75 $.025 June 30, 1995 3.75 2.625 .025 September 30, 1995 3.75 2.75 .025 December 31, 1995 4.375 3.125 .025
March 31, 1996 4.25 3.0 .025 June 30, 1996 4.75 3.0 .025 September 30, 1996 4.50 3.375 .025 December 31, 1996 5.375 3.75 .025
Based on information supplied by Continental Stock Transfer & Trust Company, the Company's transfer agent, the Company believes that there were approximately 737 holders of record and beneficial owners of Common Stock on March 24, 1997. The closing price of the Common Stock was $4.75 on March 24, 1997.
On February 20, 1997, the Company's Board of Directors voted to discontinue the payment of a regular quarterly dividend of $0.025 per share.
Item 6.
Item 6. Selected Financial Data
SUMMARY CONSOLIDATED FINANCIAL DATA1 (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- -------------------------- 1 Certain reclassifications have been made to Income Statement balances prior to 1994 to conform to the 1994 Income Statement presentation.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS
Hoenig Group Inc. provides global securities brokerage to institutional clients through its wholly-owned brokerage subsidiaries in the United States, United Kingdom and Hong Kong. The Company's wholly-owned subsidiary, Axe-Houghton Associates, Inc., 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 other services to investment managers ("Independent Research Arrangements"), commissions received in exchange for paying expenses of, or commission refunds to, the customer ("Directed Brokerage"), commissions received in exchange for providing the Company's proprietary research; and commissions received for execution-only services ("Execution - Only Brokerage"). See "Business - Global Securities Brokerage - Independent Research", "- Directed Brokerage", "- Proprietary Research" and "- Execution-Only Services".
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 the Far East. 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 percentage of the Company's commission revenues attributed to Execution-Only Brokerage increased to 16% in 1996 as compared with 13% in both 1995 and 1994.
The Company's earnings in any year are affected by its ability to collect commissions under Independent Research and Directed Brokerage Arrangements on a timely basis, since revenues are recorded only when earned. The timing of the collection of these commissions could affect year to year earnings.
In late 1994 and 1995, the Company committed increased capital and hired additional personnel in its Hong Kong and Tokyo operations in an effort to enhance the Company's global execution capabilities and further develop its client base in Far East markets. During 1996 the Company more than doubled the amount of commission revenues earned by its Far East Operations. See Note 10 to the Financial Statements for information regarding operating revenues and operating profits by location and geographic region. Generally the costs of doing business are higher in certain international markets. In particular, the Company has experienced higher operating costs in Tokyo and Hong Kong. Notwithstanding those higher costs, the Company's Far East operations were profitable in 1996 as a result of significantly increased revenues.
The Company's second largest source of revenues is investment management fees earned by Axe-Houghton Associates, Inc., the Company's asset management subsidiary, in connection with the provision of asset management services to institutional clients. The profit margin on the Company's asset management business is higher than those on the Company's brokerage activities and also varies with the types of asset management services provided by the Company. At December 31, 1996, Axe-Houghton had $4.27 billion in assets under management, of which approximately $1.46 billion represents temporary assignments that are of limited duration. The temporary assignments represented $1.27 billion of the assets under management at December 31, 1995. Approximately $1.1 billion of those assets were withdrawn in February 1997, resulting in $3.36 billion in assets under management as of February 28, 1997. It is unclear when the other temporary assignment, which represents approximately $438 million as of February 28, 1997, will end.
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.
YEAR ENDED DECEMBER 31, 1996 VERSUS DECEMBER 31, 1995 The Company's operating income before income taxes for 1996 was $3.2 million versus an operating loss of $(1.9) million in 1995. The increase in operating income is primarily attributed to a 27.6% increase in commission revenues, an 85.1% increase in investment management fee revenues, as well as an increase in the Company's profit margin. The increased profit margin is attributed to an increase in Execution-Only Brokerage, as well as the timing of research expense incurred in 1995 relative to the receipt of commissions. The Company's net income for the twelve months ended December 31, 1996 was $2.9 million versus $4.9 million in the same period in 1995. This decrease was primarily due to the fact that during the fourth quarter of 1995, the Company received approximately $4.4 million in insurance proceeds (net of expenses) following the death of Ronald H. Hoenig, the Company's former Chairman and Chief Executive Officer.
Operating revenues increased 30.8% to $70.0 million for the year ended December 31, 1996 from $53.5 million for the year ended December 31, 1995. Commission revenues, the principal source of the Company's revenues, increased 27.6% to $64.0 million for the year ended December 31, 1996 from $50.2 million for the year ended December 31, 1995. The increase in commission revenues resulted from higher
trading volume in all of the major markets in which the Company operates, with the greatest increases in Far East markets. Commission revenues derived from international markets represented 32.5% of the Company's total commissions, as compared to 25.0% for the same period in 1995.
Investment management fees increased 85.1% to $5.6 million in 1996 from $3.0 million in 1995. Assets under management increased in 1996 to $4.27 billion as compared to $3.61 billion in 1995. During 1996, the number of advisory clients increased from 31 to 38. The increase in investment management fees reflects increased assets under management, resulting from the receipt of new assets and appreciation on existing assets, and an increase in the average investment management fee charged. Approximately 35% of the increase in assets under management since December 31, 1995 represents assets managed at the Company's highest fee rates.
Expenses related to research and other services provided to the Company's clients, including commission refunds, increased 12.6% to $29.1 million in 1996 from $25.8 million in 1995. These expenses were 45.4% of commissions in 1996 as compared with 51.5% in 1995. These expenses increased at a lower rate than commission revenues for the year ended December 31, 1996, primarily due to two factors: the timing of research expenses incurred relative to the receipt of commissions in 1995 and an increase in Execution-Only Brokerage during the year ended December 31, 1996.
Clearing, execution, exchange charges and related expenses increased 46.9% to $11.4 million in 1996 from $7.8 million in 1995. These expenses represented 17.8% of commissions in 1996 and 15.5% of commissions in 1995. The increase in these expenses as a percentage of commissions is primarily due to an increase in the percentage of commissions generated in certain Far East markets where such expenses are charged at higher rates than comparable U.S. equity trades.
Employee compensation increased 22.5% to $17.2 million in 1996 from $14.0 million in 1995. This resulted primarily from an increase of: (1) $1.5 million in discretionary and performance-based compensation, and (2) $1.2 million in base compensation of existing and new employees.
All other expenses increased 17.5% to $9.2 million in 1996, compared to $7.8 million in 1995. This resulted primarily from an increase in consulting and other professional expenses ($0.6 million) and office-related expenses ($0.4 million) during the year ended December 31, 1996.
Gain (loss) on investment and interest and dividends income decreased 38.1% to $1.7 million in 1996 from $2.8 million in 1995. This decline reflects unrealized gains of $1.1 million on cash invested in U.S. Government and corporate obligations during 1995 as compared to a loss of ($0.3) million in 1996.
Insurance proceeds, net of expenses, received during 1995 of $4.4 million related to the death of Ronald H. Hoenig, the Company's former Chairman and Chief Executive Officer. The Company received $5.5 million in life insurance proceeds (in excess of recorded cash surrender value) and incurred $1.1 million in expenses primarily due to certain obligations owed to the estate of Ronald H. Hoenig (the "Estate") pursuant to Mr. Hoenig's employment agreement with the Company.
YEAR ENDED DECEMBER 31, 1995 VERSUS DECEMBER 31, 1994
The Company incurred an operating (loss) before income taxes for 1995 of ($1.9 million) versus operating income of $4.6 million in 1994. The operating loss is primarily attributed to a 12.0% decrease in commission revenues without a commensurate decrease in expenses associated with research and other services. The decrease in commission revenues is attributable to lower trading volume from the Company's clients during 1995 as well as the loss of certain clients. The resignation of certain trading personnel in the first quarter 1995 resulted in the loss of certain client accounts and may have been responsible for the reduction in trading volume of certain clients.
Operating revenues decreased to $53.5 million for the year ended December 31, 1995 from $59.0 million for the year ended December 31, 1994 (decreasing 9.3%). Commission revenues, the principal source of the Company's revenues, decreased to $50.1 million for the year ended December 31, 1995 versus $57.0 million for the year ended December 31, 1994 (decreasing 12.0%). The decrease in commission revenues is primarily attributed to a decrease in commissions generated in 1995 in the U.S. equity and Hong Kong market of $4.7 and $2.2 million respectively. In 1995, domestic commission revenues were 75.0% of commission revenues and international commission revenues were 25.0% of commission revenues, versus 73.7% and 26.3% of commission revenues, respectively, in 1994.
Investment management fees increased to $3.0 million in 1995 from $1.4 million in 1994 (increasing 112.9%). Assets under management increased in 1995 to $3.61 billion for 31 advisory clients as compared to $1.21 billion for 23 accounts in 1994.
Expenses related to research and other services provided to the Company's clients, including commission refunds, decreased 2.6% to $25.8 million in 1995 (which represents 51.5% of commission revenues) from $26.5 million in 1994 (which represents 46.5% of commission revenues). Expenses related to research and other services as a percentage of commission revenues for the year ended December 31, 1995 were greater than the comparable period in 1994, primarily due to the incurrence of research and services expense in advance of the realization of related commission revenues and a reduction in the ratio charged to certain major customers of the Company during the year ended December 31, 1995.
Clearing, execution, exchange charges and related expenses decreased to $7.8 million in 1995 from $9.0 million in 1994 (decreasing 13.9%). These expenses represented 15.5% of commissions in 1995 and 15.8% of commissions in 1994. These expenses decreased as a percentage of commissions primarily due to a decrease in clearing and execution costs of domestic equity trades and a decrease in the percentage of commissions generated in certain Far East markets where such expenses are charged at higher rates than comparable domestic equity trades.
Employee compensation increased to $14.0 million in 1995 from $11.8 million in 1994 (increasing 19.1%). This resulted primarily from an increase of $1.1 million in the compensation of additional personnel hired in the Company's operations in Hong Kong and Tokyo and an increase of $1.3 million in compensation for Axe-Houghton employees related to a full year compensation for senior executives hired during the fourth quarter 1994, and 1995 performance-based compensation.
All other expenses increased to $7.8 million in 1995 compared to $7.1 million in 1994 (increasing 8.9%). This resulted primarily from an increase in office and other expenses related to the Company's operations in Hong Kong and Tokyo in 1995.
Gain (loss) on investment and interest and dividends income increased to $2.8 million in 1995 from a loss of ($0.1) million in 1994. The gain (loss) on investments is primarily the result of unrealized appreciation or depreciation of investments of cash invested in U.S. Government obligations. The $2.9 million increase in 1995 is primarily due to realized gains on investments of $0.4 million and unrealized gains of $1.1 million on U.S. Government and corporate obligations. This compares with unrealized losses of ($1.4) million in 1994.
Insurance proceeds, net of expenses, related to the October 1995 death of Ronald H. Hoenig, the Company's former Chairman and Chief Executive Officer, were $4.4 million. The Company received $5.5 million in life insurance proceeds (in excess of recorded cash surrender value) and incurred $1.1 million in expenses primarily due to certain obligations owed to the Estate pursuant to Mr. Hoenig's employment agreement with the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition continued to remain strong during 1996. At December 31, 1996, the Company had cash, U.S. Government obligations, accounts receivable and other securities of $43.7 million compared with $37.8 million at December 31, 1995. Cash and equivalents increased to $18.3 million in 1996 from $18.1 million in 1995. The principal source of cash was net income of $2.9 million. In addition, the Company increased its accrued compensation and accrued research/services payable by $2.0 million and $1.7 million respectively (increasing liquidity). These increases were offset by decreases in accrued expenses of $1.6 million (decreasing liquidity). The decrease in cash from investing activities was primarily attributed to an increase in the Company's investment in U.S. Treasury obligations of $5.1 million (decreasing liquidity). The increase in cash from financing activities was primarily attributed to the issuance of treasury stock of $0.9 million plus the issuance of Common Stock of $0.2 million, offset by dividends of $0.9 million paid during 1996.
The Company has a line of credit aggregating $7,000,000, of which $2,000,000 is secured by certain U.S. Government obligations and $5,000,000 is unsecured. Interest is paid at a variable rate based upon the Federal Funds rate plus 1%. In addition, the Company maintains overseas overdraft facilities as follows: (1) (pounds sterling)2,200,000 ($3,767,000), which bears a variable rate of interest based upon market rates in the U.K. and Europe; and (2) HK$ 50,000,000 ($6,465,000) which bears a variable rate of interest based upon market rates in Hong Kong. In addition, the Company maintains a $5,000,000 foreign exchange line for its trading operations in Hong Kong.
At December 31, 1995, the Company had cash, U.S. Government obligations, accounts receivable and other securities of $37.8 million compared with $33.6 million at December 31, 1994. Cash and equivalents increased to $18.1 million in 1995 from $10.4 million in 1994. The principal source of cash was net income of $4.9 million. In addition, the Company reduced its investment in U.S. obligations and securities by $1.5 and $2.0 million respectively, increased its accrued expenses by $2.1 million (increasing liquidity). The decrease in cash from financing activities was primarily attributed to the purchase of 650,000 shares of common stock from the Estate ($2.0 million) and dividends paid during the year ($1.0 million).
The Company believes that its current cash resources and liquidity, plus additional funds generated by operations, will be sufficient to meet current and future needs. The Company continues to explore opportunities to expand existing businesses and to acquire new businesses, which could potentially have an impact on liquidity and capital resources.
IMPACT OF INFLATION
The Company's business is not capital intensive, and management believes that the financial results as reported would not have been significantly affected had such results been adjusted to reflect the effects of inflation and price changes. However, inflation affects the cost of operations, particularly salaries and related benefits.
Item 8.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements on Page in Item 14.
Item 9.
Item 9. Changes in or Disagreements with Accountants and Financial Disclosure
There were no changes in or disagreements with accountants and financial disclosure.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
(A) DIRECTORS
Information concerning directors of the Registrant is contained under the captions, "Management" and "Proposal I" in the Proxy Statement for the 1997 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference.
(B) EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning executive officers of the Registrant is contained under the caption, "Management" in the Proxy Statement for the 1997 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
Information concerning executive compensation is contained under the caption, "Compensation of Executive Officers and Directors" in the Proxy Statement for the 1997 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and management is contained under the caption, "Ownership of Common Stock of Certain Beneficial Owners and Management" in the Proxy Statement for the 1997 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions is contained under the caption, "Compensation of Executive Officers and Directors" in the Proxy Statement for the 1997 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this Report.
(1) Financial statements - The index to consolidated financial statements appears on page.
(b) Reports on Form 8-K
None.
(c) Exhibits to Form 10-K
3.1 Articles of Incorporation of the Registrant.
3.2 Amended and Restated By-laws of the Registrant. (Incorporated herein by reference to Exhibit 3(b) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991.)
*10.1 1991 Stock Option Plan. (Incorporated herein by reference to Exhibit 10(b) to the Registrant's Registration Statement on Form S-1 filed August 23, 1991.)
*10.2 1994 Stock Option Plan. (Incorporated herein by reference to Exhibit 99.2 to the Registrant's Registration Statement on Form S-8 filed September 30, 1994.)
*10.4 Employment Agreement between the Registrant and Max H. Levine (Incorporated herein by reference to Exhibit 10(a)(2) to the Registrant's Registration Statement on Form S-1 filed August 23, 1991.)
*10.5 Employment Agreement between the Registrant and Alan B. Herzog (Incorporated herein by reference to Exhibit 10(a)(3) to the Registrant's Registration Statement on Form S-1 filed August 23, 1991.)
*10.6 Employment Agreement between Axe-Houghton Associates, Inc. and J. Richard Walton, including form of Convertible Subordinated Debenture (Incorporated herein by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994).
*10.7 1996 Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 10.7 to the Registrant's Registration Statement on Form S-8 filed December 6, 1996).
*10.8 Employment Agreement between the Registrant and Fredric P. Sapirstein (Incorporated herein by reference to Exhibit 10.8 to Registrant's Current Report on Form 8-K filed September 17, 1996).
*10.9 Employment Agreement between the Registrant and Max H. Levine dated November 25, 1996.
*10.10 Separation Agreement between the Registrant and J. Richard Walton, dated October 31, 1996.
- --------
* Each asterisk identifies a management contract or compensatory plan or arrangement as defined in Item 601 (b)(10)(iii) of Regulation S-K of the Exchange Act of 1934.
*10.11 Section 162(m) Cash Bonus Plan.
*10.12 Hoenig Group Inc. Long-Term Stock Incentive Plan.
10.13 Rights Agreement dated as of January 14, 1997 between the Registrant and Continental Stock Transfer & Trust Company (Incorporated herein by reference to Exhibit 1 to the Registrant's Form 8-A filed on January 21, 1997.)
11.1 Computation of Per Share Earnings.
21.1 Subsidiaries of the Registrant.
23.1 Consents of Experts and Counsel.
27.1 Financial Data Schedule
- --------
* Each asterisk identifies a management contract or compensatory plan or arrangement as defined in Item 601 (b)(10)(iii) of Regulation S-K of the Exchange Act of 1934.
`
HOENIG GROUP INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (ITEM 1(A))
PAGE ---- FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
FINANCIAL STATEMENTS: Independent Auditors' Report
Consolidated Financial Statements:
Statements of Financial Condition December 31, 1996 and 1995
Statements of Income Years Ended December 31, 1996, 1995 and 1994
Statements of Changes in Stockholders' Equity Years Ended December 31, 1996, 1995 and 1994
Statements of Cash Flows Years Ended December 31, 1996, 1995 and 1994
Notes to Financial Statements -
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Hoenig Group Inc. Rye Brook, New York
We have audited the accompanying consolidated statements of financial condition of Hoenig Group Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Hoenig Group Inc. and subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
March 18, 1997
`
HOENIG GROUP INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 1996 AND DECEMBER 31, 1995
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART HEREOF.
HOENIG GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART HEREOF.
HOENIG GROUP INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART HEREOF.
HOENIG GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- Non cash item: 1996 conversion of subordinated debenture to common stock was $62,500. THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART HEREOF.
HOENIG GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying Financial Statements include the accounts of Hoenig Group Inc. and its wholly-owned subsidiaries Hoenig & Co., Inc. ("Hoenig"), Hoenig & Company Limited ("Limited"), Hoenig (Far East) Limited ("Far East") and Axe-Houghton Associates, Inc. ("Axe-Houghton") referred to as the "Company". The Company, through its wholly-owned brokerage subsidiaries, provides global securities brokerage, marketing and distribution of proprietary and independent third-party research and other related services to institutional clients. The Company's wholly-owned investment management subsidiary provides professional investment management to public and corporate employee benefit plans, investment partnerships and other institutional clients. All material intercompany accounts and transactions have been eliminated in consolidation.
2. SIGNIFICANT ACCOUNTING POLICIES. The following is a summary of significant accounting policies followed by the Company in the preparation of its financial statements:
Securities transactions and the related revenues and expenses are recorded on a trade date basis. Securities owned are recorded at market value. Unrealized gains and losses are reflected in the Statement of Income.
Independent research and directed brokerage arrangements are accounted for on an accrual basis in accordance with generally accepted accounting principles. Commission revenue is recorded when earned on a trade date basis. Deferred research/services expense and accrued research/services payable pursuant to these arrangements are accounted for on a customer-by-customer basis and separately identified on the Statement of Financial Condition. Included in accrued research/services payable and in the Company's Statement of Income under Independent Research and Services are accruals for commission refunds and services to be provided under directed brokerage arrangements as well as for independent research services provided in accordance with Section 28(e) of the Securities Exchange Act of 1934.
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of consolidated revenues and expenses during those periods. Actual results could differ from those estimates.
Furniture, equipment and leasehold improvements are stated at cost, net of accumulated depreciation and amortization, computed using the straight-line method. Depreciation of furniture and equipment is provided over estimated useful lives ranging from three to seven years. Leasehold improvements are amortized over the shorter of their useful lives or the remainder of the term of the related lease.
EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Equipment, furniture and leasehold improvements are summarized as follows:
December 31, -------------------------- 1996 1995 ---- ---- Equipment $2,051,843 $1,428,852 Furniture 833,040 830,815 Leasehold Improvements 1,096,613 1,011,119 ---------- ---------- Total 3,981,496 3,270,786 Less: Accumulated depreciation and amortization (1,890,847) (1,349,561) ---------- ---------- $2,090,649 $1,921,225 ========== ==========
Assets and liabilities of Limited, Far East and Hoenig's branch office in Tokyo are translated at year-end rates of exchange, and revenues and expenses are translated at average rates of exchange during the year. Gains or losses from foreign currency transactions are included in net income. Gains or losses resulting from translating foreign currency financial statements are accumulated in a separate component of stockholders' equity.
For the purposes of the Statement of Cash Flows, the Company considers money market funds and certificates of deposit with maturities of three months or less when acquired to be cash equivalents.
Investments in limited partnerships are accounted for under the equity method.
The Company uses the asset and liability method for accounting for income taxes (Statement of Financial Accounting Standard 109).
The Financial Accounting Standards Board has adopted Statement of Financial Accounting Standard No. 123, effective for fiscal years that begin after December 15, 1995. The Company has adopted the pro-forma disclosure requirements of this standard.
Amounts due from correspondent brokers and dealers represent net commissions and other brokerage transactions earned but not yet paid. All receivables from correspondent brokers and dealers are fully collectible, therefore no provision for uncollectibles is required. Receivables from and payables to customers represent amounts due on cash securities transactions.
3. COMMITMENTS. The Company has leases covering office space and automobiles which expire or are terminable on various dates through 2002. Future minimum annual rental payments under these leases approximate $905,000 in 1997, $717,000 in 1998, $452,000 in 1999, $302,000 in 2000 and 2001 and $126,000 thereafter. Various leases contain provisions for escalation based on increases in certain costs incurred by the landlord. The composition of total rental expense for the years ended December 1996, 1995 and 1994 was as follows:
1996 1995 1994 ---- ---- ---- Minimum rentals $ 925,000 $ 676,000 $626,000 Contingent rentals 155,000 223,000 165,000 ------- ------- ------- Total rental expense $1,080,000 $899,000 $791,000 ========== ======== ========
Pursuant to employment agreements expiring on December 31, 1999 and December 31, 1998, the Company is obligated to pay two executive officers aggregate minimum annual compensation of $1,250,000. Pursuant to an employment agreement expiring December 31, 1998, Hoenig is obligated to pay one employee aggregate minimum compensation of $175,000. Axe-Houghton is obligated to pay seven individuals aggregate minimum annual compensation of $1,020,000 pursuant to employment agreements expiring on April 8, 1998.
The Company and each of the holders of Common Stock outstanding prior to the Company's 1991 initial public offering have entered into a shareholders' agreement whereby upon the death of each such holder, the shareholder's estate has an option to sell shares of Common Stock to the Company at a price equal to 10% below the market value of these shares, as defined. The Company is obligated to purchase the number of shares of Common Stock which results in an aggregate purchase price equal to the greater of the actual insurance proceeds received by the Company or $1,000,000. The Company is the beneficiary of life insurance policies on certain shareholders to cover its liability under these shareholder agreements.
4. NET CAPITAL AND RESERVE REQUIREMENTS. Hoenig is subject to the Uniform Net Capital Rule (Rule 15c3- 1) under the Securities Exchange Act of 1934. This rule requires that the Company maintain net capital of the greater of $100,000 or one fifteenth of aggregate indebtedness as defined. At December 31, 1996, Hoenig's net capital ratio was .67 to 1 and its net capital was approximately $11,438,000, which was approximately $10,926,000 in excess of regulatory requirements. Hoenig's Tokyo office (a branch of Hoenig & Co., Inc.) capital requirement at December 31, 1996 was (Y)78,000,000 ($673,000). Limited is required to maintain financial resources, as defined, of at least 110% of its capital requirement. Limited's financial resources requirement at December 31, 1996, was (pounds sterling)318,000 ($545,000). It had excess financial resources at such date of (pounds sterling)834,000 ($1,428,000). Far East is required to maintain liquid capital of the greater of HK$ 3,000,000 ($388,000) or 5% of the average quarterly liabilities. Far East's required liquid capital was approximately HK$10,851,000 ($1,403,000) at December 31, 1996, and it had excess liquid capital of approximately HK$ 11,191,000 ($1,447,000).
5. PENSION PLAN. The Company has defined contribution plans covering substantially all of its regular employees. Contributions under these plans are made annually at the discretion of management. Contributions were approximately $423,000 for 1996, $237,000 for 1995, and $245,000 for 1994.
6. CONCENTRATION OF CREDIT RISK. Hoenig, Far East and Limited are securities broker-dealers engaged in various trading and brokerage activities on behalf of institutional customers, including insurance companies, pension plans, mutual funds, limited partnerships and other financial institutions on an agency and riskless principal basis only. Their exposure to off balance sheet credit risk occurs in the event a customer, clearing agent or counterparty does not fulfill its obligations arising from a transaction. The agreement between Hoenig and its clearing broker provides that Hoenig is obligated to assume any exposure related to nonperformance by its customers. Hoenig monitors its customer brokerage activity by reviewing information it receives from its clearing brokers on a daily basis.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS. Substantially all of the Company's financial instrument assets and liabilities are carried at fair value or contracted amounts which approximate fair value.
8. INCOME TAXES. The Company and its U.S. affiliates file consolidated Federal and combined New York State and New York City income tax returns. Deferred income taxes are recorded to reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end. The primary differences are deferred compensation charges and unrealized losses and gains on investments.
Income from operations before provision for taxes on income is comprised of:
The provision for taxes on income for the years ended December 31, 1996, 1995 and 1994, differed from the amount computed by applying the statutory federal income tax rate of 34% as follows:
9. SHORT-TERM BORROWINGS. The Company has a committed line of credit aggregating $7,000,000 of which $2,000,000 is secured by certain U.S. Government obligations and $5,000,000 is unsecured. The line was not utilized at December 31, 1996 and 1995. Interest is paid at a variable rate of the Federal Funds rate plus 1%.
In addition, the Company maintains overseas overdraft facilities as follows: (1) (pounds sterling)2,200,000 (approximately $3,767,000) which bears a variable rate of interest based upon prevailing market rates in the U.K. and Europe; and (2) HK$ 50,000,000 (approximately $6,465,000) which bears a variable rate of interest based upon current market rates in Hong Kong. The balance outstanding as of December 31, 1996 was $29,570. The lines were not utilized as of December 31, 1995.
10. GEOGRAPHIC AREA DATA/MAJOR CUSTOMERS. The Company's brokerage subsidiaries provide independent third-party and proprietary research, securities brokerage and other services primarily to institutional clients from its United States, United Kingdom, Hong Kong and Tokyo offices. The Company's wholly-owned asset management subsidiary provides professional investment management to public and corporate employee benefit plans, investment partnerships and other institutional clients. The table below summarizes the Company's operations by geographic region and location. The following assumptions were made when computing the information below.
Operating Revenues by brokerage location includes commissions from unaffiliated customers of the location indicated and other operating revenues earned by the location. Operating Revenues by geographic region represents commissions and other operating revenues based on transactions executed in markets within the geographic region. Operating revenues for asset management include fees earned by the Company's asset management subsidiary. Operating profit is calculated based on total operating revenues less operating expenses by location. In computing operating profit, corporate expenses have not been allocated to the locations.
Assets are those used primarily by each location. General corporate assets primarily include loan receivables, cash surrender value of life insurance policies, certain fixed assets and intangibles.
OPERATING REVENUES BY LOCATION: 1
1 Certain reclassifications have been made to periods prior to 1996 to conform to the 1996 presentation.
No one single customer accounted for greater than 10% of total revenues for the years ended December 31, 1996, 1995 and 1994.
11. STOCKHOLDERS' EQUITY. The Company, which was incorporated in Delaware in August 1991, has 40,000,000 authorized shares of common stock with a par value of $.01 per share and 1,000,000 authorized shares of preferred stock with a par value of $.01 per share.
The Board of Directors of the Company has the power, without further action by the shareholders, to issue 1,000,000 shares of preferred stock as a class without series, or in one or more series, and to fix the voting rights, designations, preferences and relative, participating, optional, and other special rights, and the qualifications, limitations and restrictions applicable thereto. As of December 31, 1996, no preferred stock had been issued.
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. As of December 31, 1996, the Company had repurchased (net of shares reissued out of Treasury Stock) a total of 1,239,540 shares of Common Stock in open market and private transactions at a total cost of $4,152,077.
12.STOCK OPTIONS. The Company has three compensation plans which provide for stock-based awards, the 1994 Stock Option plan (the "1994 Plan"), the 1991 Stock Option plan (the "1991 Plan"), and the 1996 Long Term Stock Incentive Plan (the "1996 Plan"). The 1994 Plan provides for an aggregate of up to 1,000,000 shares of Common Stock to be made available for the grant of stock options. Stock options may be either U.S. Stock Options (which may be either incentive stock options that qualify for certain tax treatment under the Internal Revenue Code or non-qualified options) or U.K. Stock Options (which meet certain qualifications and
are intended to qualify for favorable treatment under the tax laws of the United Kingdom). The component of the 1994 Plan regarding U.K. Stock Options has been approved by the United Kingdom Board of Inland Revenue under the Income and Corporation Taxes Act of 1988.
The 1991 Stock Option Plan consists of the U.S. Plan (the "U.S. Plan") and the 1991 UK Approved Stock Option Plan (the "UK Plan") (collectively the "1991 Plan") pursuant to which options to purchase the Company's Common Stock may be granted. The U.S. Plan includes a component which conforms to the requirements of the Internal Revenue Code (the "Incentive Plan") and also includes a component which does not conform to the requirements of the Code (the "Non-Qualified Plan"). The UK Plan has been approved by the United Kingdom Board of Inland Revenue under the Income and Corporation Taxes Act of 1988. A total of 2,000,000 shares of Common Stock initially were reserved for issuance upon exercise of options that may be granted under the 1994 Plan and the 1991 Plan.
The 1996 Long-Term Stock Incentive Plan provides for the Company to award or grant to directors, officers and other key employees and consultants of the Company and its subsidiaries, U.S. stock options, U.K. stock options, SARs, restricted stock, deferred stock and stock granted as a bonus or in lieu of other awards as authorized by the Compensation and Stock Option Committee. The 1996 Incentive Plan was adopted by the Board on November 14, 1996, subject to stockholder approval at the 1997 Annual Meeting of Stockholders. Upon approval of the 1996 Incentive Plan by stockholders, the 1991 Plan and 1994 Plan will be merged into the 1996 Incentive Plan. The total amount of shares reserved under the 1996 Incentive Plan shall be the aggregate of 1,000,000 shares plus the number of shares of stock that otherwise would have been available under the Company's 1991 Plan and 1994 Plan.
Transactions related to Incentive Stock Options and U.K. Stock Options granted under the 1994, 1991 and the 1996 Plans were as follows:
EXHIBIT INDEX