ITEM 1. BUSINESS
NEW DEVELOPMENTS
Sale of Hoenig Group Inc.
On February 28, 2002, Hoenig Group Inc. announced that it has signed an agreement under which Investment Technology Group, Inc. (ITG) will acquire Hoenig Group Inc. for approximately $115 million, or approximately $12.34 to $12.59 per share, in cash, subject to stockholder approval at a special meeting of stockholders expected to be held before the end of the second quarter 2002.
The sale price is subject to adjustment depending upon the amount received by Hoenig Group Inc. in its previously announced sales of the businesses of Axe-Houghton Associates, Inc., its asset management subsidiary. The exact amount per share that Hoenig Group Inc. stockholders will receive upon completion of the sale to ITG will be announced when the Axe-Houghton sales are complete, but in no event less than ten business days before the special meeting. The sale to ITG is contingent upon, among other things, completion of the sales of the Axe-Houghton businesses and obtaining approval from Hoenig Group Inc. stockholders and from regulatory authorities, and is expected to be completed by the end of the second quarter 2002.
Sale of Axe-Houghton Businesses in Three Transactions
Hoenig Group Inc. has agreed to sell the Axe-Houghton businesses in three separate transactions. The first transaction, which was announced on November 29, 2001 and completed on January 31, 2002, involved the sale of Axe-Houghton's Core International ADR and Domestic Equity Index institutional investment management businesses to The Bank of New York in exchange for approximately $5.4 million in cash.
The second and third transactions to sell the remaining businesses of Axe-Houghton were announced on February 12, 2002 and are expected to be completed by April 30, 2002, subject to the receipt of client consents and satisfaction of customary closing conditions. Hoenig Group Inc. has agreed to sell the Value and Balanced Equity institutional investment management businesses of Axe-Houghton to Byram Capital Management LLC, a registered investment adviser formed by Seth M. Lynn, Jr., Axe-Houghton's current President, and four other Axe-Houghton employees.
In a separate transaction, Hoenig Group Inc. has agreed to sell all of the stock of Axe-Houghton, together with the remaining small capitalization growth equity-related investment disciplines, to Axe Holding Corp., an entity formed by the principals of Palisade Capital Management LLC, a privately-owned registered investment adviser. Two executives of Axe-Houghton responsible for managing the small capitalization growth equity-related disciplines will receive equity in the continuing business after the sale of Axe-Houghton to the Palisade Capital Management group, with no additional payments to them from Axe-Houghton or Hoenig Group Inc. in connection with the sale.
GENERAL
Hoenig Group Inc., through its wholly-owned brokerage subsidiaries, Hoenig & Co., Inc., Hoenig & Company Limited and Hoenig (Far East) Limited, provides global securities brokerage, marketing and distribution of proprietary and independent research and other services to institutional investors. Through its asset management subsidiary, Axe-Houghton Associates, Inc., the Company provides professional investment management services to public and corporate employee benefit plans and other institutional clients. The term "Company" refers to Hoenig Group Inc. and its operating subsidiaries.
The Company conducts business from its headquarters in Rye Brook, NY, its international offices in London and Hong Kong, and its branch offices in Boston, MA and New York, NY. The Company maintains securities trading operations in Rye Brook, Boston, London and Hong Kong. The Company conducts its asset management business from its Rye Brook offices.
The Company's operating segments are domestic securities brokerage, international securities brokerage and asset management. See Note 15 to the Consolidated Financial Statements for specific information regarding operating revenues and profits by reportable segments.
DOMESTIC AND INTERNATIONAL SECURITIES BROKERAGE
The principal activity of the Company is providing high quality trade execution services in global equities to institutional customers. The Company's brokerage customers are primarily hedge funds, investment partnerships, investment advisers, banks, insurance companies, corporations, employee benefit plans, mutual funds, and other investment professionals. The Company also provides its customers with proprietary and independent research and other services.
The Company earns commissions in connection with various brokerage services:
o providing independent research and other services to investment managers;
o paying expenses of, or commission refunds to, customers under directed brokerage or commission recapture arrangements;
o providing proprietary research to investment managers; and
o execution-only services.
Approximately 78% of the Company's total brokerage commissions in 2001 were earned in connection with the provision of independent research and directed brokerage arrangements. The remaining 22% of total commissions relate to execution-only services and proprietary research. The Company's international brokerage operations rely more heavily on the provision of independent research, with execution-only services and proprietary research representing 17% of international commissions earned in 2001. Directed brokerage arrangements are less common in international markets and have not historically represented a significant part of the Company's international brokerage business. Commissions earned in connection with providing execution-only services and proprietary research represent a higher percentage (approximately 22%) of commissions earned by the Company's domestic brokerage operations.
The Company generally expects a certain amount of commissions for every $1 in research, other services and commission refunds provided under independent research and directed brokerage arrangements. This ratio is not fixed and may vary on an individual customer basis. Ratios have been, and continue to be, under competitive downward pressure in the United States, as well as in international markets.
The Company's commission rates and ratios generally are negotiated between the Company and its customers, and vary with the volume and nature of trading involved. The Company believes that its ability to provide customers with domestic and international trade execution capabilities and high quality customer service are important factors in its ability to compete for customers seeking independent research and directed brokerage arrangements. The Company typically provides a periodic global statement to each customer, which allows the customer to easily monitor the research and other services provided, the commission expectation and the commissions generated during the period.
INDEPENDENT RESEARCH
The Company actively markets and distributes independent third-party research products and services to professional investment managers with the expectation that these managers will use the Company to execute securities trades which generate specified amounts of commission revenues. These types of arrangements are sometimes referred to as independent research arrangements or "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 obtains research products and services from over 400 independent sources and regularly communicates the availability and suitability of these products and services to its customers.
Through its relationships with independent research analysts and other service providers, the Company offers a wide variety of specialized and sophisticated research products and services, including fundamental research, economic
research and forecasting, quantitative analysis, global research, quotation, news and database systems, fixed income research, software for securities analysis, portfolio management and performance measurement services. Many of these products and services are available directly from the research analyst or service provider, as well as from other brokerage firms, including specialty firms offering only independent research and firms that also provide proprietary research.
The Company's relationship with an independent research provider typically is 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. All of the Company's research relationships are non-exclusive arrangements. Some of these relationships, particularly those with organizations that supply quotation, news and database systems, and software for securities analysis, portfolio management and performance measurement, are contractual in nature. The Company's business is not dependent on any one or a select number of research organizations; however, collectively, quotation, news and database systems and portfolio management and performance measurement systems represent a significant portion of the independent research provided by the Company, the loss of which could have a material adverse effect on the Company's business.
DIRECTED BROKERAGE
The Company also engages in directed brokerage arrangements with certain institutional investors, particularly hedge funds, private investment funds and investment partnerships, corporations and pension plans. A directed brokerage arrangement is a contractual arrangement between a brokerage firm and its customer whereby the broker pays certain expenses of the customer, such as custodian fees, or refunds to the customer a portion of commissions paid in consideration of the customer directing commission business to the broker. These types of arrangements are commonly known as directed brokerage because the customer 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 are often referred to as "commission recapture" programs. The term "soft dollars" also has been used to refer to directed brokerage arrangements.
PROPRIETARY RESEARCH
The Company offers proprietary research consisting of top-down economic research and market analysis. The Company's economic research group, headed by Dr. Robert Barbera, a noted Wall Street economist and strategist, produces a weekly report, which discusses global economic events and market developments, as well as provides economic forecasts. The economic research group also produces interim reports and periodically consults with customers on a range of global economic issues and market trends.
The Company provides its customers with proprietary research in the traditional Wall Street manner, with the expectation that customers will direct commission business to the Company. Unlike independent research arrangements, the Company generally does not expect a specified amount of commissions from a customer in return for its proprietary research, nor does the Company generally put a dollar price on this research or offer to sell it for cash.
EXECUTION-ONLY SERVICES
Execution-only brokerage refers to the execution of equity trades for customers as agent on a competitive commission rate basis and, through March 8, 2002, the execution of transactions in U.S. fixed income securities as riskless principal. These types of transactions include executing orders of large blocks of equity and fixed income securities on a discrete basis and corporate stock repurchase programs. In addition, the Company generated execution-only brokerage in fixed income securities by identifying fixed income securities available in the market that may meet the particular portfolio needs of customers.
The Company derived approximately 22% of its total commission revenues in 2001, 24% in 2000, and 26% in 1999 from execution-only brokerage and proprietary research.
SALES AND MARKETING
As of December 31, 2001, the sales, marketing and client services staff for the Company's domestic and international brokerage operations comprised 14 full-time professionals: 10 in the United States, 2 in London, and 2 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 also serve as a link between 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. Similarly, the Company's sales and marketing personnel also promote and sell the Company's proprietary research and other brokerage services, including execution-only services.
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 the 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 to Pershing, Division of Donaldson, Lufkin & Jenrette Corporation. Under the Company's clearing arrangement, Pershing performs administrative functions with respect to the transactions of the Company's customers, such as record keeping, confirmation of transactions and preparation and transmission of monthly statements. Pershing 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 maintains settlement accounts with various banks and brokerage firms throughout the world with respect to transactions in Asian securities other than those listed on The Stock Exchange of Hong Kong. The Company pays a fee to its clearing and settlement agents based on a fixed amount per transaction. Commissions, net of clearing expenses, are remitted on a monthly basis by the clearing and settlement agents to the Company.
The Company's Hong Kong brokerage subsidiary, Hoenig (Far East) Limited, is a member of The Stock Exchange of Hong Kong and of the Central Clearing and Settlement System (CCASS) in Hong Kong. As a member of CCASS, Hoenig (Far East) Limited is self-clearing only with respect to transactions in securities listed on The Stock Exchange of Hong Kong. Transactions for Hoenig (Far East) Limited 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
Axe-Houghton Associates, Inc. is a U.S. investment adviser registered under the Investment Advisers Act of 1940. Axe-Houghton provides professional investment management for public and corporate employee benefit plans, investment partnerships and other institutional clients in the United States and also acts as the general partner of two investment limited partnerships. In 2001, it specialized in active small capitalization growth equity management, small and mid-capitalization value management, as well as international indexing using American Depositary Receipts (ADRs).
As of December 31, 2001, Axe-Houghton's assets under management were $3.94 billion, as compared with $4.43 billion at the end of 2000 and $4.96 billion at the end of 1999. Assets under management decreased in 2001 due primarily to decreased investment performance and the resulting loss of assets managed in certain disciplines, primarily in Axe-Houghton's small capitalization growth equity-related disciplines, Small Capitalization Growth Equities and Focused Growth. Assets managed in the Small Capitalization Growth Equities discipline decreased to $679.3 million at the end of 2001 from $901.3 million at the end of 2000. Assets managed in Small Capitalization Growth Equities were $1.2 billion as of December 31, 1999. Assets under management in Focused Growth
decreased to $11.8 million at December 31, 2001 from $103.4 million at the end of 2000.
Growth in assets under management is dependent on numerous factors, including:
o the ability to attract new clients and retain existing clients;
o the ability to attract and retain highly skilled personnel;
o the number and variety of investment disciplines offered;
o the market performance of various investment disciplines;
o Axe-Houghton's investment performance relative to market benchmarks and the performance of others offering similar disciplines;
o the capacity limitations of a particular investment discipline, such as Small Capitalization Growth Equities; and
o the performance of the securities markets in general.
At December 31, 2001, Axe-Houghton's marketing and client services staff consisted of three full-time professionals. These individuals work directly with potential clients, as well as with various investment management consulting firms, to introduce Axe-Houghton's investment disciplines and performance records to institutional clients. They also provide client service to managed accounts.
EMPLOYEES
At December 31, 2001, the Company employed 103 people on a full-time basis, which included 6 in executive positions, 27 in floor positions or positions as brokers, 17 in sales and marketing positions, 6 in proprietary research, 13 in accounting, legal and compliance positions, 7 in investment positions, 3 in information technology and 24 in clerical or other positions. Of the 103 employees, 56 were employed by Hoenig & Co., 5 by Hoenig Group Inc., 15 by Axe-Houghton, 16 by Hoenig (Far East) Limited and the remaining 11 by Hoenig & Company Limited. All of the Company's offices, except the New York, NY office, engage in both marketing and brokerage activities. The Company considers its relations with employees generally to be good.
CUSTOMER RELATIONSHIPS
The Company has existing brokerage relationships with over 500 institutional customers worldwide. The Company's 10 and 20 largest customers accounted for 30.5% and 43.5%, respectively, of total revenues for the year ended December 31, 2001, and 33.6% and 45.4% and 33.4% and 45.5%, respectively, of total revenues for the years ended December 31, 2000 and 1999. A significant percentage of the Company's largest customers are hedge funds, investment partnerships and other private investment funds. One domestic brokerage customer accounted for 10.8% of the Company's revenues for the year ended December 31, 2001. No single customer accounted for 10% or more of the Company's revenues for any of the years ended December 31, 2000 and 1999.
The Company believes that its brokerage customer list is broadly based, with a particular expertise among hedge funds, investment partnerships and other private investment funds. Approximately 84% 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 assist its customers in executing securities transactions in many of the world's major markets reduces its reliance on volume and trading in any one particular market, other than the United States. Sales and marketing personnel located in the Company's international offices are responsible primarily 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), their relatives and friends of the Company. The Company does not compete for retail business.
As of December 31, 2001, the Company had 26 advisory clients which maintained 36 investment advisory accounts. Five of these accounts are maintained for affiliates. As of December 31, 2000, the Company had 31 advisory clients which maintained 41 investment advisory accounts, including four of affiliates. As of December 31, 1999, the Company had 31 advisory clients which maintained 42 investment advisory accounts, including four of affiliates.
COMPETITION
The institutional brokerage and asset management businesses are highly competitive. The Company must meet price competition commensurate with the products and level of service that it offers. Such competition affects not only the Company's ability to compete for new clients, but also its ability to attract and retain highly skilled employees.
The Company's brokerage business competes directly and indirectly with independent specialty firms, as well as with 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 trade execution and proprietary research similar to the Company's, as well as other types of research and brokerage services not offered by the Company. 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 and directed brokerage arrangements. This is especially true as larger investment management firms seek to consolidate the number of brokers that they use and obtain both proprietary and independent research from the same broker.
The quality and cost of trade execution are the primary considerations 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 or is able to execute transactions at a lower cost.
The Company believes that it successfully competes for brokerage business because of the quality of its trade execution and customer service, its global execution capabilities and the variety and quality of the independent and proprietary research and other services that 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 high-quality products and services at competitive prices. Management believes that its knowledge of, and relationships with, numerous third-party service providers enable it to compete effectively for commission business.
The Company's asset management business competes with other registered investment advisers, full-service brokerage firms, mutual funds, banks, trust companies, 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. Some of the competing firms offer these services at rates lower than those charged by the Company. The Company's asset management business also competes with other investment managers on the basis of historical investment performance results, some of which have better or longer-term investment performance records than the Company. The Company believes that it successfully competes with other investment professionals because of the high quality of the portfolio management and client services that it provides, which often is more important to attracting and retaining investment management clients than the fee rate charged. The Company has agreed to sell its asset management businesses. See "New Developments - Sale of Axe-Houghton Businesses in Three Transactions."
The low capital requirements of the institutional 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.
The institutional brokerage and asset management businesses have undergone considerable consolidation in the last few years, both domestically and cross-border. Such activity not only creates larger competitors with greater resources, but also results in increased competition for highly skilled employees.
REGULATION
Broker-dealers and investment advisers are subject to regulation covering virtually all aspects of their businesses. The Company is subject to extensive regulation under U.S. federal and state law and by certain U.S. self-regulatory bodies, including the New York Stock Exchange (NYSE) and various other stock exchanges, the U.S. Securities and Exchange Commission (SEC), the National Association of Securities Dealers Regulation, Inc. (NASDR) and several foreign regulatory bodies. Through its subsidiaries, the Company is a member of the 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. The Company's brokerage subsidiaries are registered as broker-dealers in a number of countries.
o Hoenig & Co. is a U.S. registered broker-dealer and is regulated by the SEC, NASDR, and various securities exchanges, including the NYSE which has been designated as its primary regulator.
o Hoenig & Company Limited is a U.K. registered broker-dealer and is regulated by the Securities Futures Authority (SFA) in the United Kingdom and the LSE.
o Hoenig (Far East) Limited is registered as a dealer and investment adviser with the Hong Kong Securities and Futures Commission (SFC) and is a member of The Stock Exchange of Hong Kong.
o Axe-Houghton is registered in the U.S. as an investment adviser with the SEC.
Hoenig & Co. also is subject to regulation in various states.
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 brokerage and asset management operations. Additional legislation, changes in rules promulgated by the SEC, the SFA, 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 also are 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 the United States, the provision of research to investment managers in consideration of commissions is conducted in reliance upon the safe harbor provided under Section 28(e) of the Securities Exchange Act of 1934. The safe harbor protections of Section 28(e) apply equally to the provision of independent third-party research, as well as proprietary research.
Section 28(e) permits money managers and other investment fiduciaries to obtain research and brokerage services from a broker in exchange for 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 higher commission rate than another broker would have charged for executing the transaction if the investment manager determines in good faith that the amount of commission paid is reasonable in relation to the value of the brokerage and research services provided by the broker. Section 28(e) does not relate to directed brokerage arrangements, which generally are governed by contractual agreements and state or federal laws, including the Employee Retirement Income Security Act of 1974 (ERISA).
On December 27, 2001, the SEC issued an interpretative release extending the Section 28(e) safe harbor to certain riskless principal transactions. The SEC issued the release in a response to a request from The Nasdaq Stock Market, Inc. to reconsider the SEC's prior interpretation that the Section 28(e) safe harbor does not extend to transactions where the broker executes the transaction as principal, including riskless principal. In its release, the SEC stated that the Section 28(e) safe harbor would apply to riskless principal trades provided that
o any markup, markdown, commission equivalent or other fee paid to the dealer for executing the transaction and the transaction price are fully and separately disclosed on a confirmation;
o both legs of the riskless principal transaction are executed at the same price to be reported once, like an agency trade; and
o the transaction is reported under conditions that provide independent and objective verification of the transaction price, subject to regulatory oversight.
The SEC's interpretation effectively broadens the scope of the Section 28(e) safe harbor so that it may be applied to a greater variety of transactions that previously were not covered by the safe harbor, in particular riskless principal trades in Nasdaq-listed securities.
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 alter its scope through interpretation. From time to time, other regulatory or governmental entities, as well as industry groups, have issued statements, reports and best practices regarding soft
dollars. Any regulatory changes or industry best practices that narrow the definition of research provided in Section 28(e) or limit the scope of the Section 28(e) safe harbor, or impose onerous record-keeping, reporting or other obligations regarding soft dollar and directed brokerage arrangements would have a material adverse effect on the Company's business.
The degree of regulation of soft dollar and directed brokerage arrangements varies among the countries in which the Company has customers. Many countries do not have specific rules, or safe harbors like Section 28(e) in the United States, regarding the provision of research in exchange for commissions. Other countries, like the United Kingdom, Hong Kong, Singapore and Australia, have adopted regulations that are similar to those in the United States.
NET CAPITAL REQUIREMENTS
The Company's brokerage subsidiaries are subject to various net capital requirements. Hoenig & Co. is subject to the Uniform Net Capital Rule (Rule 15c3-1) under the Securities Exchange Act of 1934. This rule requires that Hoenig & Co. maintain net capital of the greater of $100,000 or one fifteenth of aggregate indebtedness, as defined. At December 31, 2001, Hoenig & Co.'s net capital ratio was 2.32 to 1. Hoenig & Company Limited is required to maintain financial resources of at least 110% of its capital requirement (as defined). Hoenig (Far East) Limited is required to maintain liquid capital of the greater of HK$3,000,000 ($385,000) or 5% of the average quarterly liabilities. The table below summarizes the capital positions for each brokerage subsidiary at December 31, 2001:
ITEM 2.
ITEM 2. PROPERTIES
The Company's headquarters occupies office space of approximately 28,000 square feet at Reckson Executive Park, 4 International Drive, Rye Brook, NY 10573, under a lease which expires on December 31, 2010. The Company leases an additional 9,425 square feet of office space in Boston, New York City, London and Hong Kong under leases which expire or are terminable at various times beginning in September 2002 through June 2005. The Company also leases 575 square feet in New Rochelle, NY on a month-to-month basis.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There were no legal proceedings required to be disclosed by this Item.
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 2001.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Company's Common Stock is listed on The National Market of The Nasdaq Stock Market under the symbol HOEN.
The following table sets forth the high and low sales prices for the Common Stock as reported by Nasdaq for the eight quarters ended December 31, 2001:
PERIOD ENDED COMMON STOCK - ------------ ------------ HIGH LOW ---- --- March 31, 2001 $14.875 $10.000 June 30, 2001 11.625 9.900 September 30, 2001 12.000 9.780 December 31, 2001 11.250 8.500
PERIOD ENDED COMMON STOCK - ------------ ------------ HIGH LOW ---- --- March 31, 2000 $10.062 $8.062 June 30, 2000 10.125 8.00 September 30, 2000 11.00 9.75 December 31, 2000 11.00 9.50
The Company has not paid dividends on its Common Stock since February 1997. At the present time, the Company does not intend to reinstate the dividend.
Based on information supplied by Continental Stock Transfer & Trust Company, the Company's transfer agent, the Company believes that there were approximately 470 holders of record and beneficial owners of Common Stock on March 25, 2002. The closing price of the Common Stock was $12.31 on March 25, 2002.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
- -------------- (1) Financial data excluding the $9.3 million ($5.6 million after tax) write-off of the Company's investment in InstiPro Group, Inc. See Note 12 to the Consolidated Financial Statements for information relating to the Company's investment in InstiPro Group, Inc. and the resulting write-off. (2) Financial data before (i) special charge of $1.0 million (before taxes) and $0.6 million (after taxes) taken in 2000 with respect to the closing of the Company's Tokyo brokerage operations, and (ii) the $4.6 million (before taxes) and $3.7 million (after taxes) of appreciation in value and realized gains on publicly-traded shares of common stock received by the Company in connection with its ownership of seats on the London Stock Exchange and The Stock Exchange of Hong Kong. See Notes 9 and 13 to the Consolidated Financial Statements for information relating to the London and Hong Kong shares and the Tokyo office closing, respectively. (3) See Note 20 to the Consolidated Financial Statements for information regarding earnings per share computations.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements in this report that relate to future plans, events or performance are forward-looking statements. Such statements may include, but are not limited to, those relating to future growth, industry consolidation, acquisition and expansion plans, strategic alliances, investments, joint ventures, sales and other business combinations, plans to address various technology issues, market risk, the Company's investment activities and its equity capital requirements. Actual events might differ materially due to a variety of important factors that cannot be predicted with certainty. These factors involve risks and uncertainties relating to, among other things, the ability to satisfy conditions to closing the sales described herein, general economic conditions, market fluctuations, competitive conditions within the brokerage and asset management businesses, stock market prices and trading volumes, changes in demand for asset management and securities brokerage services, the Company's ability to recruit and retain highly skilled employees, changes in U.S. and foreign securities laws and regulations, particularly regarding independent research and directed brokerage arrangements, trading and investment activities, litigation and other factors discussed throughout this report.
NEW DEVELOPMENTS
Sale of Hoenig Group Inc.
On February 28, 2002, the Company announced that it has signed an agreement under which Investment Technology Group, Inc. (ITG) will acquire the Company for approximately $115 million, or approximately $12.34 to $12.59 per share, in cash, subject to stockholder approval at a special meeting of stockholders expected to be held before the end of the second quarter 2002.
The sale price is subject to adjustment depending upon the amount received by the Company in its previously announced sales of the businesses of Axe-Houghton Associates, Inc., its asset management subsidiary. The exact amount per share that Hoenig Group Inc. stockholders will receive upon completion of the sale to ITG will be announced when the Axe-Houghton sales are complete, but in no event less than ten business days before the special meeting. The sale to ITG is contingent upon, among other things, completion of the sales of the Axe-Houghton businesses and obtaining approval from Hoenig Group Inc. stockholders and from regulatory authorities, and is expected to be completed by the end of the second quarter 2002.
Sale of Axe-Houghton Businesses in Three Transactions
The Company has agreed to sell its Axe-Houghton businesses in three separate transactions. The first transaction, which was announced on November 29, 2001 and completed on January 31, 2002, involved the sale of Axe-
Houghton's Core International ADR and Domestic Equity Index institutional investment management businesses to The Bank of New York in exchange for approximately $5.4 million in cash.
The second and third transactions to sell the remaining businesses of Axe-Houghton were announced on February 12, 2002 and are expected to be completed by April 30, 2002, subject to the receipt of client consents and satisfaction of customary closing conditions. The Company has agreed to sell the Value and Balanced Equity institutional investment management businesses of Axe-Houghton to Byram Capital Management LLC, a registered investment adviser formed by Seth M. Lynn, Jr., Axe-Houghton's current President and four other Axe-Houghton employees.
In a separate transaction, the Company has agreed to sell all of the stock of Axe-Houghton, together with the remaining small capitalization growth equity-related investment disciplines, to Axe Holding Corp., an entity formed by the principals of Palisade Capital Management LLC, a privately-owned registered investment adviser. Two executives of Axe-Houghton responsible for managing the small capitalization growth equity-related disciplines will receive equity in the continuing business after the sale of Axe-Houghton to the Palisade Capital Management group. In October 2000, Axe-Houghton entered into new employment arrangements with these two executives which expire on January 1, 2003. These new arrangements provide for increased variable, performance-based compensation and certain payments in the event of a change of control (as defined) of the small capitalization growth equity-related business, Axe-Houghton or the Company. These employment agreements will terminate upon the closing of the sale of Axe-Houghton to the Palisade Capital Management group, and neither the Company nor Axe-Houghton shall be required to make the change of control payments provided for in these employment agreements.
INTRODUCTION
The Company 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 asset management to U.S. public and corporate employee benefit plans, investment partnerships and other U.S. institutional clients from its offices in the United States.
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 the world's major stock exchanges, acting primarily as agent for its customers, and through March 8, 2002, executed trades in U.S. fixed income securities on a riskless principal basis. The Company earns commissions in connection with various types of brokerage services: commissions received in connection with providing independent research and other services to investment managers; commissions received in exchange for paying expenses of, or commission refunds to, customers under directed brokerage arrangements; commissions received in connection with providing proprietary research; and commissions received for execution-only services.
The Company's profit margin on execution-only brokerage and commissions earned in connection with providing proprietary research has been higher than that on commissions earned in connection with independent research and directed brokerage arrangements because the Company does not incur direct expenses for research and other services in connection with such activities.
The Company generally expects a certain amount of commissions for every $1 in independent research, other services and commission refunds provided under independent research and directed brokerage arrangements. This ratio is negotiated on an individual customer basis. Ratios fluctuate depending upon the markets of execution and continue to be under downward competitive pressure in most of the markets in which the Company conducts brokerage activities.
The Company's earnings in any period are affected by its ability to earn commissions under independent research and directed brokerage arrangements on a timely basis because commission revenues are recorded only when earned, and related expenses are recorded when incurred. The timing of the receipt of commissions could cause variations in earnings from year to year and quarter to quarter. The Company's earnings also may be affected by regulatory changes or industry sentiment regarding independent research arrangements and directed brokerage.
The Company's second largest source of revenues is investment management fees earned by Axe-Houghton, the Company's asset management subsidiary, in connection with the provision of investment management services to institutional clients. Investment management fee revenues are a function of assets under management and the
management fees charged. 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.
The amount of assets under management is affected by numerous factors, including the ability to attract and retain clients and highly skilled personnel, investment performance results, the number and variety of investment disciplines offered and the capacity limitations of such disciplines (such as small capitalization growth equity-related disciplines), the market performance of particular investment disciplines, as well as the performance of the securities markets generally.
In June 2000, the Company received 805,000 shares of the common stock of the Hong Kong Exchanges and Clearing Limited (the Hong Kong shares) in connection with its ownership of a seat on The Stock Exchange of Hong Kong. In July 2000, the Company received 100,000 shares of common stock of the London Stock Exchange (the London shares) in connection with its ownership of a seat on the London Stock Exchange. In July 2001, the London shares split 10 for 1. As of December 31, 2001, the Company owned 99,945 London shares valued at $0.6 million. The Company sold all of its Hong Kong shares during 2001 and the remaining London shares in the first quarter 2002. The Company marked to market the value of the London and Hong Kong shares and the changes in value were included in investment income for the relevant periods.
In 2000, the Company made a $7.5 million strategic investment in InstiPro Group, Inc., the parent company of InstiPro Inc., a business-to-business (B2B) on-line brokerage firm. The investment consisted of convertible notes and warrants. In addition, on January 10, 2001, the Company and Instinet Clearing Services, Inc. each invested $1.0 million in InstiPro Group, Inc. in the form of a six-month bridge loan. These bridge loans, each of which were convertible into 400,000 shares, ranked senior to the other debt of InstiPro Group, including the Company's $7.5 million in convertible notes, and pari passu with each other.
As of March 31, 2001, InstiPro Group was unable to obtain additional capital needed to meet its operating and debt requirements. As a result, during the first quarter 2001, the Company wrote-off $9.3 million before taxes and $5.6 million after taxes, representing the full value (including acquisition costs and accrued interest on the convertible notes) of its investment in InstiPro Group, Inc. The value of the InstiPro Group investment (including acquisition costs and interest receivable) at December 31, 2000 was $7,944,273. As a result of the write-off, the Company ceased earning interest income on the convertible notes as it had in 2000. On July 5, 2001, InstiPro Group, Inc. filed a petition for bankruptcy under Chapter 7 of the Bankruptcy Code. The bankruptcy trustee liquidated InstiPro Group's assets at auction, and in 2002, the Company received $15,012 in net proceeds as a senior secured creditor.
FINANCIAL RESULTS 2001
The Company's financial results for the year ended December 31, 2001, particularly net investment (loss) income and other, net income and net income per share, were affected adversely by the one-time $9.3 million ($5.6 million after taxes) impairment write-off of the Company's investment in InstiPro Group, Inc.
The Company's financial results for the year ended December 31, 2001, before and after the impairment write-off, and for the year ended December 31, 2000 are as follows:
- ---------------------- (1) Financial data excluding the $9.3 million ($5.6 million after tax) write-off of the Company's investment in InstiPro Group, Inc. See Note 12 to the Consolidated Financial Statements. (2) Included in the financial results for the year ended December 31, 2000 is a $1.0 million ($0.6 million after tax) one-time charge related to the closing of the Company's Tokyo brokerage office. See Note 13 to the Consolidated Financial Statements. (3) For the year ended December 31, 2001, includes investment gains of $1.9 million ($1.4 million after tax) related to the Hong Kong and London shares. For the year ended December 31, 2000, includes investment gains of $4.6 million ($3.7 million after tax) related to the Hong Kong and London shares. See Note 9 to the Consolidated Financial Statements.
FINANCIAL RESULTS 2000
The Company's financial results for the year ended December 31, 2000, particularly operating income, net income and earnings per share, were affected by three events. The first was the closing of the Company's brokerage operations in Tokyo at the end of June 2000. As a result, the Company incurred in the second quarter a one-time charge to earnings of $1.0 million before taxes and $0.6 million ($0.7 per share basic and $0.6 per share diluted) after taxes. Included in the Tokyo charge was the recognition of the foreign currency translation loss of $0.7 million, which was previously reflected in the Company's financial statements as a reduction of stockholders' equity, and $0.3 million of severance, termination fees and other administrative costs relating to the closing of the Tokyo brokerage office.
The second event was the Company's receipt in June 2000 of 805,000 Hong Kong shares. The third event was the Company's receipt in July 2000 of 100,000 London shares. As of December 31, 2000, the Company owned 177,000 Hong Kong shares and 100,000 London shares. The Company marks these shares to market. The market value of the Hong Kong and London shares as of December 31, 2000 was $0.4 million and $3.4 million, respectively. The total gains realized by the Company on its sale of Hong Kong shares and the increase in market value of the remaining Hong Kong and London shares was $4.6 million and is included in investment income and other for the year ended December 31, 2000.
The Company's financial results for the year ended December 31, 2000, before and after the one-time charge relating to the Tokyo office closing and the increase in investment income and other associated with the Hong Kong and London shares, and for the year ended December 31, 1999 are as follows:
- ----------------------- (1) Financial data before the Tokyo charge and the appreciation in market value of, and realized gains on, the Hong Kong and London shares.
YEAR ENDED DECEMBER 31, 2001 VERSUS DECEMBER 31, 2000
The Company's operating income for the year ended December 31, 2001 decreased 20.2% to $7.9 million, as compared to $9.9 million during 2000. The decrease in operating income for the year ended December 31, 2001 is primarily attributable to a 55.2% decrease ($2.6 million) in the operating income of the asset management operations and a 4.2% decrease in operating income of domestic brokerage operations.
Net income for the year ended December 31, 2001 decreased 83.2% to $1.9 million, as compared to net income of $11.4 million in 2000, due to (i) the $5.6 million after tax write-off of the InstiPro Group investment in the first quarter 2001, (ii) decreased investment income from the Hong Kong and London shares, and (iii) decreased operating income. Net income for 2000 included the one-time charge to earnings of $0.6 million after taxes related to the closing of the Company's Tokyo brokerage operations in June 2000. Net income for the year ended December 31, 2001 before the InstiPro Group write-off was $7.5 million.
Operating revenues for the year ended December 31, 2001 increased 1.5% to $101.6 million from $100.1 million in 2000. This increase resulted primarily from a 10.1% increase in operating revenues of domestic brokerage operations, which more than offset a 36.9% decrease in operating revenues of asset management operations and a 13.5% decrease in operating revenues of international brokerage operations.
Domestic brokerage revenues in 2001 increased 10.1% to $82.8 million, as compared to $75.2 million during 2000. Operating income of the Company's domestic brokerage operations for 2001 decreased 4.2% to $10.9 million, as compared to $11.4 million in 2000, primarily due to an increase in trade execution and settlement expense and research and services expense as a percentage of commission revenue..
International brokerage revenues decreased 13.5% to $11.2 million for the year ended December 31, 2001, as compared to $12.9 million in 2000, as a result of reduced trading volume in certain foreign markets and a decrease in trading activity of existing customers. The decrease in international brokerage revenues reflects (i) a 18.0% decline in operating revenues of the United Kingdom brokerage operation; (ii) a 9.2% decline in operating revenues of the Hong Kong brokerage operations; and (iii) the absence of approximately $0.2 million in revenues earned in Tokyo in 2000 prior to the closing of the Company's Tokyo brokerage operations in June 2000. International brokerage operations incurred a 39.2% lower operating loss of $0.7 million for the year ended December 31, 2001. International brokerage operations had an operating loss of $1.2 million in 2000, which includes the $1.0 million one-time charge related to the closing of the Company's Tokyo brokerage operations.
Investment management fee revenues decreased 36.9% to $7.6 million for the year ended December 31, 2001, as compared to $12.0 million in 2000. This decrease in investment management fee revenues is due to declines in investment performance and a decrease in assets managed in small capitalization growth equity-related disciplines, which assets are managed at the Company's highest fee rates. Assets managed in the small capitalization growth equity-related disciplines decreased 24.6% to $679.3 million as of December 31, 2001 (17.2% of the total assets under management as of December 31, 2001) from $901.3 million as of December 31, 2000 (20.3% of total assets under management as of December 31, 2000), as a result of declines in investment performance and withdrawals of assets. Axe-Houghton's small capitalization growth equity-related discipline, Focused Growth Equities, decreased to $11.8 million at December 31, 2001 from $103.4 million as of December 2000, due to declines in investment performance and withdrawals of assets. Total assets under management decreased 11.1% to $3.9 billion as of December 31, 2001 from $4.4 billion as of December 31, 2000. Operating income of the Company's asset management operations for the year ended December 31, 2001 decreased 55.2% to $2.1 million from $4.7 million in 2000, primarily as a result of the decrease in small capitalization growth equity-related assets under management.
During the year ended December 31, 2001, expenses related to independent research and other services provided to the Company's brokerage clients, including commission refunds, increased 9.5% to $45.8 million from $41.8 million during 2000. These expenses were 49.0% of commission revenues in 2001, as compared to 47.7% in 2000. These expenses increased as a percentage of commission revenues primarily due to (i) an increase in the proportion of research expenses incurred in advance of commission revenues earned; (ii) a decrease in execution-only commissions as a percentage of total commissions earned; and (iii) a modest decline in the average ratio charged to the Company's brokerage customers for the provision of research and services.
Clearing, floor brokerage and exchange charges increased 20.2% to $10.8 million during the year ended December 31, 2001, from $9.0 million during the same period in 2000. These expenses represented 11.6% of commission revenues during the year ended December 31, 2001, as compared to 10.3% of commission revenues during the same period in 2000. The increase in these expenses as a percentage of commission revenues primarily was due to (i) an increase in the percentage of commissions earned by the Company under correspondent broker arrangements where the Company's profit margin is lower; and (ii) an increase in costs incurred on domestic trades executed through ECNs and various electronic trading networks.
Employee compensation decreased 3.7% to $25.4 million for the year ended December 31, 2001 from $26.4 million during 2000. This resulted primarily from a decrease in discretionary and performance-based bonus compensation expense.
All other expenses for the year ended December 31, 2001 decreased 2.9% to $11.7 million in 2001 from $12.0 million in 2000. This resulted primarily from decreases in interest expense associated with the clearing and settlement of domestic brokerage transactions and consulting expense, which was partially offset by an increase in expenses relating to trading errors.
Principally as a result of the InstiPro Group write-off of $9.3 million, the Company had a net investment loss and other of $5.0 million for the year ended December 31, 2001, as compared to net investment income and other of $7.8 million in 2000. Excluding the write-off, net investment income and other for the year ended December 31, 2001 decreased 44.5% to $4.3 million, as compared to $7.8 million during the same period in 2000, primarily as a result of the decrease in investment gains on the Hong Kong and London shares. Net investment income and other for the year ended December 31, 2001 includes $1.9 million in investment gains on the Hong Kong and London shares as compared to $4.6 million in such gains for the year ended December 31, 2000.
YEAR ENDED DECEMBER 31, 2000 VERSUS DECEMBER 31, 1999
The Company's operating income for the year ended December 31, 2000 increased 12.9% to $9.9 million, as compared to $8.7 million in 1999. This increase in operating income was primarily attributable to a 62.4% increase in operating income from asset management operations and a 13.5% increase in operating income from domestic brokerage operations, offset by the $1.0 million Tokyo charge and operating losses from international brokerage operations.
The Company's net income for the year ended December 31, 2000 increased 79.2% to $11.4 million, as compared to $6.4 million in 1999. Included in net income was the one-time Tokyo charge of $1.0 million ($0.6 million after taxes) and investment income of $4.6 million ($3.7 million after taxes) related to the appreciation in market value of, and realized gains on, the Hong Kong and London shares. Net income for the year ended December 31, 2000 before the Tokyo charge and excluding the appreciation in the market value of, and realized gains on, the Hong Kong and London shares was $8.4 million, representing a 31.2% increase over net income in 1999.
Operating revenues increased 9.1% to $100.1 million for the year ended December 31, 2000 from $91.8 million in 1999. This resulted primarily from a 17.4% increase in operating revenues from domestic brokerage operations and a 43.9% increase in investment management fee revenues, offset by a 33.3% decrease in operating revenues from international brokerage operations.
Operating revenues of the Company's domestic brokerage operations for the year ended December 31, 2000 increased 17.4% to $75.2 million, as compared to $64.1 million in 1999. Operating income of the Company's domestic brokerage operations increased 13.5% to $11.4 million in 2000, as compared to $10.0 million in 1999, primarily due to the increase in revenues.
Operating revenues from international brokerage operations for the year ended December 31, 2000 decreased 33.3% to $12.9 million, as compared to $19.4 million in 1999. This decrease was primarily attributable to a (i) 43.4% decline in the operating revenues of the United Kingdom brokerage operations, (ii) a 22.7% decrease in operating revenues of the Hong Kong brokerage operations, and (iii) a loss of approximately $0.5 million in revenues due to the closing of the Tokyo office. International brokerage operations incurred an operating loss of $1.2 million for the year ended December 31, 2000, as compared to operating income of $0.5 million in 1999, primarily due to the $1.0 million Tokyo charge and operating losses in the United Kingdom, offset by operating income earned in Hong Kong. International brokerage operations experienced an operating loss of $0.2 million for the year ended December 31, 2000, excluding the Tokyo charge, as compared to operating income of $0.5 million in 1999, which included $0.3 million of non-recurring operating expenses related to the 1999 restructuring of the Company's brokerage operations in Tokyo.
Investment management fee revenues increased 43.9% to $12.0 million during the year ended December 31, 2000, as compared to $8.3 million in 1999, notwithstanding a decrease in assets under management as of December 31, 2000, as compared to December 31, 1999. This increase in investment management fee revenues was due to an increase during the first nine months of 2000 in the percentage of assets managed in small capitalization growth equity-related disciplines, which assets are managed at the Company's highest fee rates. Assets managed in the small capitalization growth equity-related disciplines increased 80% to $1.4 billion as of September 30, 2000 (29.7% of total assets under management), from $752.5 million as of September 30, 1999 (19.4% of total assets under management), as a result of additional funds received from existing clients and appreciation of existing assets. However, these assets decreased 28.6% in the fourth quarter 2000 to $1.0 billion as of December 31, 2000 (22.7% of
total assets under management), as compared to $1.4 billion as of December 31, 1999 (27.8% of total assets under management). The decrease in assets managed in small capitalization growth equity-related disciplines resulted from decreased investment performance and the withdrawal of client assets. Axe-Houghton's two most recent small capitalization growth equity-related disciplines, Focused Growth Equities and Technology Growth, which together represented $245.9 million of assets under management as of September 30, 2000, decreased to $103.4 million at December 31, 2000 as a result of decreased investment performance and withdrawals of assets during the fourth quarter 2000, including all assets managed in the Technology Growth discipline. These assets were $181.1 million at December 31, 1999.
Total assets under management decreased 10.7% to $4.43 billion as of December 31, 2000 from $4.96 billion as of December 31, 1999. Total assets under management were $4.75 billion at September 30, 2000. The decrease in total assets under management since September 30, 2000 was primarily due to the decrease in assets managed in small capitalization growth equity-related disciplines. As of December 31, 2000, the Company had 31 advisory clients that maintained 41 investment advisory accounts, compared to 31 advisory clients that maintained 42 advisory accounts as of December 31, 1999.
Operating income of the Company's asset management operations for the year ended December 31, 2000 increased 62.4% to $4.7 million from $2.9 million in 1999 as a result of the growth in small capitalization growth equity-related assets under management during the first nine months of 2000. Revenues and operating income of asset management are likely to decline in future periods in 2001 as compared to comparable periods in 2000 due to the decrease in small capitalization growth equity-related assets under management and continued decreased performance of the small capitalization growth equity markets generally.
During the year ended December 31, 2000, expenses related to independent research and other services provided to the Company's brokerage clients, including commission refunds, increased 13.5% to $41.8 million from $36.8 million in 1999. These expenses were 47.7% of commission revenues in 2000, as compared to 44.2% in 1999. These expenses increased as a percentage of commission revenues primarily due to the timing of research expense incurred relative to the receipt of commissions earned during the year ended December 31, 2000 and a decrease in execution-only brokerage commissions earned during 2000.
Clearing, floor brokerage and exchange charges decreased 15.4% to $9.0 million in 2000 from $10.6 million in 1999. These expenses represented 10.3% of commission revenues in 2000 and 12.8% of commission revenues in 1999. The decrease in these expenses as a percentage of commission revenues was due primarily to a reduction in the Company's cost of execution and settlement of U.S. equity transactions, coupled with an increase in the percentage of commissions earned on transactions executed in the Hong Kong market, which cost less to execute than comparable trades in other Asian markets.
Employee compensation increased 10.3% to $26.4 million for the year ended December 31, 2000 from $23.9 million in 1999. This resulted primarily from an increase in discretionary and performance-based bonus compensation expense for the year ended December 31, 2000.
All other expenses increased 3.3% to $12.0 million for the year ended December 31, 2000 from $11.6 million in 1999 due to increased marketing expenses and interest expenses related to the clearing and settlement of brokerage transactions, offset by the absence in 2000 of expenses related to Year 2000 issues incurred in 1999.
Net investment income and other for the year ended December 31, 2000 increased to $7.8 million, as compared to $2.3 million in 1999. This increase resulted primarily from $4.6 million in realized and unrealized gains earned on the Hong Kong and London shares received by the Company in the second half of 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity remained strong during 2001. At December 31, 2001, the Company had cash, U.S. Government obligations, net accounts receivable and other securities of $63.9 million, as compared to $61.1 million at December 31, 2000. Cash and equivalents increased to $38.7 million in 2001 from $34.7 million in 2000. Net income from operations contributed $1.9 million of cash in 2001. In addition, the Company increased its payable to customers by $12.5 million and decreased its receivable from customers by $8.3 million (increasing liquidity). These items were offset by increases in receivable from brokers and dealers of $16.5 million and a decrease in payable to brokers and dealers of $8.3 million (decreasing liquidity). The increase in cash from investing activities
was primarily attributable to a decrease in the Company's investment in the London and Hong Kong shares of $3.2 million and U.S. Treasury obligations of $1.9 million, increasing liquidity. The decrease in cash used in financing activities was primarily attributable to the purchase of only 78,000 shares of the Company's Common Stock for $0.8 million in 2001, as compared to the Company's purchase of 371,000 shares for $3.7 million in 2000.
At December 31, 2000, the Company had cash, U.S. Government obligations, net accounts receivable and other securities of $61.1 million, as compared to $54.8 million at December 31, 1999. Cash and equivalents increased to $34.7 million from $28.5 million in 1999. The principal source of cash in 2000 was net income from operations of $11.4 million. In addition, the Company increased its payable to brokers and dealers and accrued compensation payable by $12.3 million and $2.9 million, respectively, and decreased its receivable from correspondent broker dealers by $2.9 million (increasing liquidity). These items were offset by increases in receivable from customers and securities owned (net) of $12.1 million and $2.6 million, respectively (decreasing liquidity). The decrease in cash from investing activities was primarily attributable to the Company's $7.5 million investment in convertible notes ($7.9 million including acquisition costs) of InstiPro Group, Inc., which decreased liquidity. The decrease in cash from financing activities was primarily attributable to the purchase of 371,000 shares of the Company's Common Stock for $3.7 million, offset by the issuance of treasury stock of $0.2 million.
In June 2000, the Company received 805,000 Hong Kong shares. In July 2000, the Company received 100,000 London shares. In July 2001, the London shares split 10 for 1. As of December 31, 2001, the Company owned 99,945 London shares valued at $0.6 million. The Company sold all of its remaining Hong Kong shares during 2001 and the remaining London shares in the first quarter 2002. The Company marked to market the value of the London and Hong Kong shares and the changes in value were included in investment income and other for the relevant periods.
The Company, through Axe-Houghton, the general partner of two limited partnerships, maintains investments in each of the partnerships. Axe-Houghton's partnership investments were $373,974 and $21,058 at December 31, 2001 and $352,365 and $26,067 at December 31, 2000. The Company also maintains an investment in an unaffiliated multi-manager, market-neutral limited partnership. This multi-manager limited partnership, which is managed by a professional money manager, makes investments in other unaffiliated limited partnerships and funds which employ a variety of alternative investment strategies. These strategies include relative-value, event-driven, hedged-directional, convertible arbitrage, convertible hedging and basis spread trading. The Company's investment in this unaffiliated partnership as of December 31, 2001 and December 31, 2000 was $1.5 million and $1.4 million, respectively. The potential loss on the Company's investment in the market-neutral limited partnership is limited to the value of its limited partnership interest. This investment is accounted for at fair value. The Company expects that the two Axe-Houghton partnerships will dissolve during the first quarter of 2002. The Company expects to liquidate its investment in the market neutral limited partnership during the first quarter 2002.
The Company has agreed to sell Axe-Houghton in three separate transactions.On November 29, 2001, the Company announced that it had signed an agreement to sell the Core International ADR and Domestic Equity Index institutional investment management businesses of Axe-Houghton to The Bank of New York for approximately $5.4 million. This sale was completed on January 31, 2002, and the Company recognized a gain of approximately $2.7 million or $0.30 per share diluted after taxes and expenses related to the sale of these businesses. The second and third transactions to sell the remaining businesses of Axe-Houghton were announced on February 12, 2002 and are expected to be completed by April 30, 2002, subject to the receipt of client consents and satisfaction of customary closing conditions. The second transaction involves the sale of the Value and Balanced Equity institutional investment management businesses of Axe-Houghton to Byram Capital Management LLC. The third transaction involves the sale of all of the stock of Axe-Houghton, together with the remaining small capitalization growth equity-related investment disciplines, to Axe Holding Corp., an entity formed by the principals of Palisade Capital Management LLC, a privately-owned registered investment adviser.
Upon the closing of these two transactions, the Company expects to receive approximately $3.3 million, subject in the case of the sale to the Palisade Capital Management group to adjustments based upon receipt of client consents and fees receivable from clients at the time of closing. Upon completion of these two transactions, the Company expects to recognize a gain of approximately $1.3 million or $0.15 per share diluted, after taxes and expenses, depending upon possible purchase price adjustments provided for in the agreement for the sale to the Palisade Capital Management group.
The Company maintains overseas overdraft facilities as follows: (1) (pounds)750,000 ($1,092,000), which bears a variable rate of interest based upon prevailing market rates in the United Kingdom and Europe; (2) HK$50,000,000 ($6,410,000), which bears a variable rate of interest based upon current market rates in Hong Kong; (3) HK$100,000,000 ($12,820,000) and (pounds)5,000,000 ($7,281,000) in intra-day overdraft facilities to facilitate the settlement of trades, each of which bears a variable rate of interest based upon current market rates; and (4) (Y)500,000,000 ($3,799,000) in an overnight Libor facility used to facilitate trades in Japanese securities. In addition, the Company maintains an $5,000,000 foreign exchange line for its trading operations in Hong Kong. The amount outstanding under these facilities at December 31, 2001 was $4,080. No amounts were outstanding under these facilities at December 31, 2000.
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.
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 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
All of the Company's investments are subject to certain market risks. Market risk represents the risk of loss that may result from the potential change in the fair value, cash flows and earnings of an investment and related derivatives as a result of fluctuations in interest rates, foreign exchange rates and equity prices. Market risk is inherent in investments that contain derivative and non-derivative financial instruments. The Company has established procedures to manage its exposure to market fluctuations and the changes in the fair value of its investments.
At December 31, 2001 and 2000, the Company maintained investments in the following:
o Money market funds
o U.S. Government obligations
o One market-neutral limited partnership
o Two equity limited partnership investments managed by Axe-Houghton
o Convertible notes of InstiPro Group, Inc. (until March 2001)
o Common stock of the London Stock Exchange (the London shares) and the Hong Kong Exchanges and Clearing Limited (the Hong Kong shares, until November 2001)
The limited partnership investments are managed by professional money managers.
In addition, as a result of its daily brokerage activities, the Company may hold (normally overnight) long and short security positions. These positions, which are valued at market, are a result of trading errors that occur in the ordinary course of business. These positions are normally closed out during the next day of trading.
The market-neutral limited partnership makes investments in other unaffiliated limited partnerships and funds which employ a variety of alternative investment strategies. These strategies included relative-value, event-driven, hedged-directional, convertible arbitrage, convertible hedging and basis spread trading. The individual partnership investments made by the market-neutral limited partnership are not included in the analysis of market risk due to the unavailability of information about the underlying securities held by the partnership. The potential loss on the Company's investment in the market-neutral limited partnership is limited to the value of its limited partnership interest. The Company intends to liquidate its investment in this limited partnership as of March 31, 2002.
In 2000, the Company made a $7.5 million strategic investment in InstiPro Group, Inc., the parent company of InstiPro, Inc., a business-to-business (B2B) on-line brokerage firm. The investment consisted of convertible notes and a warrant. The Company made an initial investment of $5.0 million on May 10, 2000, and two additional investments of $1.25 million each on September 6, 2000 and November 27, 2000. In addition, on January 10, 2001, the Company and Instinet Clearing Services, Inc. each made a $1.0 million investment in the form of a six-month bridge loan. These bridge loans, each of which were convertible into 400,000 shares, ranked senior to the other debt of InstiPro Group, including the Company's $7.5 million in convertible notes, and pari passu with each other.
As of March 31, 2001, InstiPro Group was unable to obtain additional capital needed to meet its operating and debt requirements. As a result, the Company incurred a one-time write-off during the first quarter 2001 of $9.3 million before taxes and $5.5 million after taxes, representing the full value of the Company's investment in InstiPro Group, including acquisition costs and interest receivable on the convertible notes. The value of this investment (including acquisition costs and interest receivable) at December 31, 2000 was $7,944,273. On July 5, 2001, InstiPro Group, Inc. filed a petition for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code. The bankruptcy trustee liquidated InstiPro Group's assets at auction, and in 2002, the Company received $15,012 in net proceeds as a senior secured creditor.
At December 31, 2001, the Company owned 99,945 London shares with a market value of $0.6 million. All of the remaining Hong Kong shares were sold during 2001, and the remaining London shares were sold during the first quarter 2002. The Company's investments in the Hong Kong and London shares were valued at market.
Through Axe-Houghton, the Company maintains investments in two equity limited partnerships. Axe-Houghton is the general partner of each of these investment limited partnerships. These partnership interests are accounted for under the equity method of accounting and are excluded from the market risk analysis. The Company expects that these two partnerships will be dissolved during the first quarter 2002.
The following paragraphs address the significant market risks associated with the Company's investments and related derivatives as of December 31, 2001 and 2000:
INTEREST RATE RISK. The Company's cash, investments in U.S. Treasury obligations and the investment in InstiPro Group (through March 31,2001) are subject to interest rate risk.
FOREIGN EXCHANGE RISK. The Company is exposed to foreign currency risk arising from exchange rate fluctuations on its foreign denominated bank accounts, which are used in its international brokerage operations, and on its investments in the Hong Kong and London shares. The Company's primary exposure is in U.K. Pounds Sterling and Hong Kong Dollars. The Company mitigates its foreign exchange exposure by maintaining foreign currency balances only to the extent necessary to meet the operational needs of its international subsidiaries and by monitoring its investments in the Hong Kong and London shares on an ongoing basis.
EQUITY PRICE RISK. The Company is exposed to equity price risk as a result of changes in the level or volatility of equity prices which effect the value of securities or other investments that derive their value from a particular stock or investment. The Company's investments in the London and Hong Kong shares and InstiPro Group were subject to equity price risk. The Company monitors investments subject to equity price risk on an ongoing basis.
The Company is exposed to equity price risk on long and short security positions held as a result of its daily brokerage activities. The Company does not engage in securities trading for its own account, but from time to time may hold either long or short security positions (normally overnight) as a result of trading errors that occur in the ordinary course of business. These positions are valued at market on a daily basis. The Company reduces its equity price risk by reviewing all trading activity and monitoring any open positions and resulting profits and losses on a daily basis, and by closing out these positions as soon as reasonably practicable given prevailing market conditions. The Company also obtains independent pricing of these positions from its clearing agent. The Company believes that these procedures are important in reducing its equity price risk.
RISK MEASUREMENT: SENSITIVITY ANALYSIS
The Company measures market risk related to its holdings of financial instruments based on changes in interest rates, foreign currency exchange rates and equity prices utilizing a sensitivity analysis. The sensitivity analysis set forth below measures the potential loss in fair values, cash flows and earnings based on a hypothetical 10% change (increase and decrease) in interest rates, foreign currency exchange rates and equity prices. For the years ended December 31, 2001 and 2000, the Company performed sensitivity analyses with respect to the effects of changes in interest rates, foreign currency exchange rates and equity prices on its financial instruments. The sensitivity analysis has been prepared separately for each of the Company's market risk exposures (interest rate, foreign currency exchange, equity price) related to its trading (which consists of brokerage long and short security positions) and non-trading (which consists of financial instruments held for investment) financial instrument portfolios.
The potential loss in fair values is based on an immediate change in:
o the net present values of the Company's interest rate sensitive investments resulting from a 10% change in interest rates;
o the U.S. dollar equivalent balances of the Company's foreign currency exposures due to a 10% change in foreign currency exchange rates; and
o the market value of the Company's equity positions due to a 10% change in equity prices.
The potential loss in cash flows and earnings is based on the change in the Company's cash flows and earnings over
a one-year time horizon based on an immediate 10% change in interest rates, foreign currency rates and equity prices.
This sensitivity analysis is an estimate and should not be viewed as predictive of the Company's future financial performance, and there can be no assurance that the Company's actual losses in a particular year will not exceed the amounts indicated in the table below. Limitations in the analysis include:
o the market risk information is limited by the assumptions and parameters established in creating the related sensitivity analysis; and
o the model assumes that the composition of the Company's assets and liabilities remains unchanged throughout the year.
Therefore, such models are tools and do not substitute for the experience and judgment of management.
Based on the Company's analysis of the impact of a hypothetical 10% change in interest rates, the Company has determined that such a change would not have a material impact on the fair values of the Company's non-trading interest rate sensitive portfolios or on the Company's cash flows and earnings as of December 31, 2001. Based on the Company's analysis of a hypothetical 10% change in equity prices, the Company has determined that such a change would not have a material impact on the fair values of the non-trading equity price sensitive portfolios or on the Company's cash flows and earnings as of December 31, 2001. Based upon the Company's analysis of a hypothetical 10% change in equity prices, the Company has determined that such a change would not have a material impact on the fair values of the Company's trading equity price portfolio or on the Company's earnings or cash flows as of December 31, 2001. The Company believes that it has adequate capital to absorb short-term market volatility.
The table below shows the potential loss to fair values of the portfolios and to the earnings and cash flows of the Company as of December 31, 2001 and 2000.
Non-Trading portfolio: Potential Losses on Interest Rate Sensitive Portfolios
2001 2000 ---- ---- Fair values $23,382 $67,303 Cash flows $64,861 $158,817 Earnings $64,861 $158,817
Non-Trading Portfolio: Potential Losses on Equity Price Risk Portfolios
2001 2000 ---- ---- Fair values $61,418 $380,596 Cash flows $61,418 $380,596 Earnings $61,418 $380,596
Trading Portfolio: Potential Losses on Equity Price Risk Portfolios
2001 2000 ---- ---- Fair values - $7,989 Cash flows - $7,989 Earnings - $7,989
In addition, a hypothetical 10% change in foreign currency exchange rates as of December 31, 2001 and December 31, 2000 would have resulted in a material loss of $690,878 and $646,563, respectively, in the fair values of the Company's foreign currency instruments, but would not have had a material effect on the cash flows and earnings of the Company.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements on Page in Item 14. The Company's Consolidated Financial Statements are incorporated by reference in response to this Item.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and executive officers of the Registrant will be supplied by amendment to this Form 10-K by April 30, 2002.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation will be supplied by amendment to this Form 10-K by April 30, 2002.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and management will be supplied by amendment to this Form 10-K by April 30, 2002.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions will to be supplied by amendment to this Form 10-K by April 30, 2002.
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 and supplementary financial data appears on page .
(2) Schedules - None
(3) Exhibits to Form 10-K
2.1 Agreement and Plan of Merger, dated as of February 28, 2002 by and among Registrant, Investment Technology Group, Inc. and Indigo Acquisition Corp. (Incorporated herein by reference to Exhibit 2.1 to Registrant's Form 8-K dated March 4, 2002).
3.1 Articles of Incorporation of the Registrant. (Incorporated herein by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996).
3.2 Amended and Restated By-laws of the Registrant.
*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).
- -------- * Identifies a management contract or compensatory plan or arrangement.
*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, dated as of January 1, 2000, between the Registrant and Fredric P. Sapirstein. (Incorporated herein by reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999).
*10.5 Employment Agreement, dated as of March 29, 1999, between Hugh Humfrey and Hoenig & Company Limited. (Incorporated herein by reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999).
*10.6 Amendment, dated September 26, 2001, to the Employment Agreement dated January 1, 2000, between the Registrant and Fredric P. Sapirstein. (Incorporated herein by reference to Exhibit 10.6 to Registrant's Form 10-Q for the third quarter ended September 30, 2001).
*10.7 1996 Employee Stock Purchase Plan. (Incorporated herein by reference to Exhibit 10.7 to the Post-Effective Amendment No. 1 to the Registrant's Registration Statement on Form S-8 filed December 30, 1997).
*10.8 Employment Agreement between the Registrant and Fredric P. Sapirstein, dated September 5, 1996, (Incorporated herein by reference to Exhibit 10.8 to the 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. (Incorporated herein by reference to Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996).
*10.10 First Amendment, dated December 3, 2001, to Employment Agreement, dated January 1, 2000, between the Registrant and Fredric P. Sapirstein.
*10.11 Section 162(m) Cash Bonus Plan. (Incorporated herein by reference to Exhibit 10.11 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996).
*10.12 Amended and Restated 1996 Long-Term Stock Incentive Plan. (Incorporated by reference to Annex A to the Registrant's Definitive Proxy Statement for the 2000 Annual Meeting of Stockholders held on May 18, 2000).
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 January 21, 1997).
*10.14 1997 Foreign Employee Stock Purchase Plan. (Incorporated herein by reference to Exhibit 10.8 to the Post-Effective Amendment No. 1 to the Registrant's Registration Statement on Form S-8 filed December 30, 1997).
*10.15 Amendment No. 1 to the 1996 Long-Term Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997).
*10.16 Employment Agreement, dated October 8, 1998, between Max H. Levine and the Registrant (Incorporated herein by reference to Exhibit 10.16 to the Registrant's Form 10-Q for the quarter ended September 30, 1998 filed on November 14, 1998).
*10.17 Employment Agreement, dated as of April 9, 1998, between Seth M. Lynn, Jr. and Axe-Houghton Associates, Inc. (Incorporated herein by reference to Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998).
*10.18 Employment Agreement, dated December 1997, as amended January 1999, between Robin N. Kerr and Axe-Houghton Associates, Inc. (Incorporated herein by reference to Exhibit 10.18
to the Registrant's Form 10-Q for the quarter ended September 30, 2000).
*10.19 Employment Agreement Extension and Amendment, dated October 4, 2000, between Robin N. Kerr and Axe-Houghton Associates, Inc. (Incorporated herein by reference to Exhibit 10.19 to the Registrant's Form 10-Q for the quarter ended September 30, 2000).
*10.20 Employment Agreement dated December 1997, as amended January 1999, between Ellen W. Adnopoz and Axe-Houghton Associates, Inc. (Incorporated herein by reference to Exhibit 10.20 to the Registrant's Form 10-Q for the quarter ended September 30, 2000).
*10.21 Employment Agreement Extension and Amendment, dated October 4, 2000, between Ellen W. Adnopoz and Axe-Houghton Associates, Inc. (Incorporated herein by reference to Exhibit 10.21 to the Registrant's Form 10-Q for the quarter ended September 30, 2000).
*10.22 First Amendment, dated March 22, 2001, to Employment Agreement, dated October 8, 1998, between the Registrant and Max H. Levine (Incorporated herein by reference to Exhibit 10.22 to the Registrant's Form 10-Q for the quarter ended March 31, 2001).
*10.23 Second Amendment, dated December 20, 2001, to Employment Agreement, dated October 8, 1998, between the Registrant and Max H. Levine.
10.24 Amendment to the Rights Agreement, dated as of February 28, 2002, between the Registrant and Continental Stock Transfer & Trust Company. (Incorporated herein by reference to Exhibit 99.2 to the Registrant's Form 8-K dated March 4, 2002).
10.25 Transfer and Assumption Agreement, dated as of November 28, 2001, by and among The Bank of New York, Registrant and Axe-Houghton Associates, Inc.
10.26 Stock Purchase Agreement, dated as of February 11, 2002, between Axe Holding Corp. and Registrant.
21.1 Subsidiaries of the Registrant.
23.1 Independent Auditors' Consent.
(b) Reports on Form 8-K
1. Form 8-K, dated November 29, 2001, Item 5 (announcing agreement to sell certain assets of Axe-Houghton to The Bank of New York).
HOENIG GROUP INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA
FINANCIAL STATEMENTS PAGE ----
Independent Auditors' Report
Consolidated Financial Statements:
Statements of Financial Condition December 31, 2001 and December 31, 2000
Statements of Income For the Years Ended December 31, 2001, 2000 and 1999
Statements of Comprehensive Income For the Years Ended December 31, 2001, 2000 and 1999
Statements of Changes in Stockholders' Equity For the Years Ended December 31, 2001, 2000 and 1999
Statements of Cash Flows For the Years Ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements -
Supplementary Financial Data
Selected Quarterly Financial Data (Unaudited)
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Hoenig Group Inc.:
We have audited the accompanying consolidated statements of financial condition of Hoenig Group Inc. and subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.
/s/Deloitte & Touche LLP New York , New York March 22, 2002
HOENIG GROUP INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 2001 AND DECEMBER 31, 2000
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART HEREOF.
HOENIG GROUP INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART HEREOF.
HOENIG GROUP INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART HEREOF.
HOENIG GROUP INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART HEREOF.
HOENIG GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART HEREOF.
HOENIG GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2001
1. The accompanying financial statements include the accounts of Hoenig Group Inc. and its wholly-owned operating 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 asset management subsidiary, Axe-Houghton, 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 Consolidated Financial Statements:
Transactions in securities owned and securities sold, not yet purchased are recorded on a trade date basis at fair value. U.S. Government obligations consist of U.S. Treasury notes with varying maturities. Included in securities owned are the shares of common stock of the Hong Kong Exchanges and Clearing Limited (the "Hong Kong shares") and shares of common stock of the London Stock Exchange (the "London shares"), which are valued at market. Unrealized gains and losses are reflected in the Consolidated Statements of Income.
Independent research and directed brokerage arrangements are accounted for on an accrual basis in accordance with accounting principles generally accepted in the United States of America. Commission revenue is recorded when earned on a trade date basis. Deferred research/services expense and accrued research/services payable relating to these arrangements are accounted for on a customer-by-customer basis and are separately identified in the Consolidated Statements of Financial Condition. Included in accrued research/services payable and in the Company's Consolidated Statements of Income under independent research and services are accruals for commission refunds and services to be provided under directed brokerage arrangements, as well as accruals for research and brokerage services to be provided under independent research arrangements.
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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. Significant estimates are made with respect to the accruals for independent research and services to be provided in the future. 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.
Assets and liabilities of Limited, Far East and Hoenig's branch office in Tokyo (through June 2000) 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 foreign currency translation adjustments are reflected in the Company's Consolidated Statements of Comprehensive Income and are accumulated in a separate component of stockholders' equity in the Company's Consolidated Statements of Financial Condition.
For purposes of the Company's Consolidated Statements of Cash Flows, the Company considers certificates of deposit with maturities of three months or less when acquired to be cash equivalents.
The Company uses the asset and liability method in providing for income taxes on all transactions that have been recognized in the Consolidated Financial Statements. The asset and liability method requires that deferred taxes be adjusted to reflect the taxes at which future taxable amounts will be settled or realized. The effects of tax rate changes on future deferred tax liabilities and deferred tax assets, as well as other changes in income tax laws, are
recognized in net earnings in the period such changes are enacted. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.
Amounts due from correspondent brokers and dealers represent net commissions, fails to deliver and other brokerage transactions earned but not yet received. All receivables from correspondent brokers and dealers are fully collectible; therefore, no provision for uncollectibles is required. Payable to brokers and dealers represents amounts due for execution and settlement of customer transactions. Receivable from and payable to customers represents amounts due on cash securities transactions.
Investment management fees receivable represents amounts due for professional investment management services provided to public and corporate employee benefit plans, investment partnerships and other institutional clients. Management fees are based upon assets under management and are billed on a quarterly basis. The Company expects to fully collect all outstanding management fees receivable; therefore, no provision for uncollectibles is required.
The Company has classified goodwill as the cost in excess of fair value of the net assets acquired in a purchase transaction. Goodwill is amortized on a straight-line method over the life of the asset. The carrying value of costs in excess of net assets acquired is reviewed for impairment periodically by the Company. As of December 31, 2001 and 2000, goodwill net of accumulated amortization was $452,621 and $813,197, respectively, and is included in other assets in the Statements of Financial Condition.
The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", which is effective for all fiscal years beginning after June 15, 2000. SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company adopted SFAS 133 effective January 1, 2001. The adoption of SFAS 133 did not have a material impact on the financial position, results of operations, or cash flows of the Company.
The FASB has issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 applies to all business combinations initiated after June 30, 2001 or business combinations accounted for under the purchase method for which the date of acquisition is after July 1, 2001. All business combinations in the scope of SFAS 141 are to be accounted for only under the purchase method of accounting. The Company's adoption of SFAS 141 did not have a material impact on the financial position, results of operations, or cash flows of the Company.
SFAS 142 applies for fiscal years beginning after December 15, 2001. SFAS 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. SFAS 142 no longer permits the amortization of goodwill and indefinite lived assets. These assets must be reviewed annually for impairment. SFAS 142 is required to be applied at the beginning of an entity's fiscal year to all goodwill and other intangible assets recognized in its financial statements at that date. Impairment losses for goodwill that arise due to the initial application of this statement (resulting from a transitional impairment test) are to be reported as resulting from a change in accounting principle. The adoption of SFAS 142 did not have a material impact on the financial position, results of operations, or cash flows of the Company.
3. EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Equipment, furniture and leasehold improvements are summarized as follows:
4. COMMITMENTS AND CONTINGENCIES. The Company has leases covering office space that expire or are terminable on various dates beginning in September 2002 through December 2010. The Company also leases 575 square feet of office space on a month-to-month basis. Future minimum annual rental payments under these leases approximate $1,128,000 in 2002, $920,000 in 2003, $893,000 in 2004 and $880,000 in 2005 and $4,733,000 thereafter. The lease on the Company's principal offices in Rye Brook expires in December 2010. Various leases contain provisions for escalation of rental payments based on increases in certain costs incurred by the landlord. The composition of total rental expense for the years ended December 31, 2001, 2000 and 1999 is as follows:
2001 2000 1999 ---- ---- ---- Minimum rentals $1,009,780 $1,020,805 $805,515 Contingent rentals 92,200 111,992 284,620 ---------- ---------- ---------- Total rental expense $1,101,980 $1,132,797 $1,090,135 ========== ========== ==========
Pursuant to employment agreements expiring on June 30, 2002, the Company is obligated to pay one employee and one executive officer aggregate minimum compensation of $825,000. Pursuant to an employment arrangement expiring on December 31, 2002 the Company is obligated to pay one executive officer aggregate minimum compensation of $1,000,000. In addition, Hoenig has an at-will employment arrangement with one employee, which provides for a severance payment in the event of termination of employment without cause prior to December 31, 2002. The maximum severance payable under this arrangement at December 31, 2001 is approximately $400,000.
In October 2000, Axe-Houghton entered into new employment arrangements with two executives responsible for managing the small capitalization growth equity-related disciplines. These new arrangements, which expire on January 1, 2003, provide for increased variable, performance-based compensation and certain payments in the event of a change of control (as defined) of the small capitalization growth equity-related business, Axe-Houghton or the Company. These employment agreements will terminate upon the closing of the sale of Axe-Houghton to the Palisade Capital Management group, and neither the Company nor Axe-Houghton shall be required to make the change of control payments provided for in these employment agreements.
The Company and each of the holders of Common Stock outstanding prior to the Company's 1991 initial public offering have entered into a shareholder's agreement whereby, upon the death of each such holder, the shareholder's estate has an option to sell those 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 any insurance proceeds received by the Company or $1,000,000. The Company maintains life insurance on the lives of shareholders owning more than 350,000 shares of Common Stock and certain other shareholders who are parties to the shareholder's agreement in order to cover its potential liability under the shareholder's agreements. The cash surrender value of these insurance policies was $997,997 and $872,178 at December 31, 2001 and 2000, respectively. The shareholder's agreements, and the Company's obligations thereunder, will terminate upon the closing of the sale of the Company. See Note 21.
5. 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 Hoenig maintain net capital of the greater of $100,000 or one fifteenth of aggregate indebtedness, as defined. At December 31, 2001, Hoenig's minimum required net capital was $2,149,000, its net capital ratio was 2.32 to 1, and its actual net capital was approximately $13,907,000, which was approximately $11,758,000 in excess of regulatory requirements. Limited is required to maintain financial resources of at least 110% of its capital requirement (as defined). Limited's financial resources requirement at December 31, 2001 was (pounds)999,000 ($1,455,000). It had eligible capital of (pounds)2,256,000 ($3,285,000), and excess financial resources at such date of (pounds)1,257,000 ($1,830,000). Far East is required to maintain liquid capital of the greater of HK$3,000,000 ($385,000) or 5% of the average quarterly liabilities. Far East's required liquid capital was approximately HK$9,879,000 ($1,267,000) at December 31, 2001, and it had liquid capital of HK$75,990,000 ($9,742,000), and excess liquid capital of approximately HK$66,111,000 ($8,475,000).
The Company is subject to regulation covering virtually all aspects of its business. It is subject to extensive regulation under U.S. federal and state law and by certain self-regulatory bodies, including the New York Stock Exchange (NYSE) and various other stock exchanges, the U.S. Securities and Exchange Commission (SEC), the National Association of Securities Dealers Regulation, Inc. (NASDR) and several foreign regulatory bodies, including the London Stock Exchange and The Stock Exchange of Hong Kong. In the normal course of business,
the Company is subject to inquiries and regulatory examinations by many of these regulatory authorities.
6. PENSION PLANS. The Company has defined contribution plans covering substantially all of its regular employees. Company contributions under these plans are made annually at the discretion of management. Contributions were approximately $648,000 for 2001, $605,000 for 2000, and $557,000 for 1999.
7. OFF BALANCE SHEET RISK AND 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, investment limited partnerships and private investment funds, mutual funds, 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. Each of Hoenig and Limited has an agreement with its clearing agent that provides that it is obligated to assume any losses related to the nonperformance of its customers. Hoenig and Limited each monitors customer brokerage activity by reviewing information received from its clearing agent on a daily basis. Far East, which self-clears all transactions executed on The Stock Exchange of Hong Kong, monitors its customer brokerage activity on a daily basis by reviewing information received from market counterparties, settlement agents and the Central Clearing and Settlement System ("CCASS") in Hong Kong.
8. FINANCIAL INSTRUMENTS. Substantially all of the Company's financial instruments, which include cash and cash equivalents, securities owned, securities sold not yet purchased and U.S. Government obligations, are carried at fair value. The Company does not hold financial instruments for trading purposes as part of its business operations.
9. SECURITIES RECEIVED IN FOREIGN SECURITIES EXCHANGES. In June 2000, the Company received 805,000 Hong Kong shares in connection with its ownership of a seat on The Stock Exchange of Hong Kong. In July 2000, the Company received 100,000 London shares in connection with its ownership of a seat on the London Stock Exchange. As of December 31, 2000, the Company owned 177,000 Hong Kong shares and 100,000 London shares. In July 2001, the London shares split 10 for 1. As of December 31, 2001, the Company owned 99,945 London shares. All of the remaining Hong Kong shares were sold during 2001 and the remaining London shares were sold during the first quarter 2002.
The value of the London shares, which are accounted for at fair market value, was $614,178 at December 31, 2001, and is included in securities owned in the Consolidated Statements of Financial Condition. The value of the London and Hong Kong shares was $3,399,760 and $406,202, respectively, as of December 31, 2000.
Included in investment income and other is $1.9 million and $4.6 million, respectively, of realized and unrealized gains earned on these shares for the years ended December 31, 2001 and 2000.
10. INVESTMENT IN LIMITED PARTNERSHIPS. Axe-Houghton is the general partner of two limited partnerships and maintains investments in each of the partnerships. Axe-Houghton's partnership investments were $373,974 (12.2%) and $21,058 (0.41%) at December 31, 2001 and $352,365 (11.5%) and $26,067 (0.41%) at December 31, 2000. Axe-Houghton does not maintain control of the partnerships for consolidation purposes. These investments are accounted for under the equity method.
The Company also maintains an investment in an unaffiliated multi-manager, market-neutral limited partnership. This multi-manager limited partnership, which is managed by a professional money manager, makes investments in other unaffiliated limited partnerships and funds which employ a variety of alternative investment strategies. These strategies include relative-value, event-driven, hedged-directional, convertible arbitrage, convertible hedging and basis spread trading. The Company's investment in this unaffiliated partnership as of December 31, 2001 and 2000 was $1.5 million and $1.4 million, respectively, which represented less than a 5% interest in the partnership. The potential loss on the Company's investment in the market-neutral limited partnership is limited to the value of its limited partnership interest. This investment is accounted for at fair value.
The Company expects that the two Axe-Houghton partnerships will dissolve during the first quarter 2002, and the Company expects to liquidate its investment in the market neutral limited partnership during the first quarter 2002.
11. INCOME TAXES. The Company, excluding its foreign affiliates, files 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.
Income from operations before provision for taxes on income consists of the following:
The provision for taxes on income from operations consists of the following:
Deferred tax assets and liabilities consist of the following:
The provision for taxes on income for the years ended December 31, 2001, 2000 and 1999 differed from the amount computed by applying the statutory federal income tax rate of 34% as follows:
At December 31, 2001, the Company had approximately $8.5 million of accumulated earnings of foreign subsidiaries. The Company has not recorded a tax provision for income tax that could occur upon repatriation
of those earnings. It is the Company's intent to keep such earnings invested abroad until they can be repatriated in a tax efficient manner. It is not practicable to determine the amount of income taxes payable in the event all such earnings are repatriated.
NOTE 12 - INVESTMENT IN CONVERTIBLE NOTES.
In 2000, the Company made a $7.5 million strategic investment in InstiPro Group, Inc., the parent company of InstiPro, Inc., a business-to-business (B2B) on-line brokerage firm. The investment consisted of convertible notes and warrants. In addition, on January 10, 2001, the Company and Instinet Clearing Services, Inc. each invested $1.0 million in InstiPro Group, Inc. in the form of a six-month bridge loan. These bridge loans, each of which were convertible into 400,000 shares, ranked senior to the other debt of InstiPro Group, including the Company's $7.5 million in convertible notes, and pari passu with each other. As of December 31, 2000, the investment in InstiPro was classified as available-for-sale as defined in SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and was carried at fair market value.
As of March 31, 2001, InstiPro Group was unable to obtain additional capital needed to meet its operating and debt requirements. As a result, during the first quarter 2001, the Company incurred a one-time impairment write-off of $9.3 million before taxes and $5.6 million after taxes, representing the full value (including acquisition costs and accrued interest on the convertible notes) of its investment in InstiPro Group. As a result of the write-off, the Company no longer earned interest income on the convertible notes, as it had in 2000.
On July 5, 2001, InstiPro Group, Inc., filed a petition in bankruptcy under Chapter 7 of the Bankruptcy Code. The bankruptcy trustee liquidated InstiPro Group's assets at auction and in 2002 the Company received $15,012 in net proceeds as a senior secured creditor.
13. TOKYO OFFICE CLOSING. In June 2000, the Company closed its Tokyo brokerage operations. As a result of the closing, the Company incurred a one-time charge to earnings of $1,013,519 before taxes and $589,767 ($0.07 per share basic and $0.06 per share diluted) after taxes. Included in the one-time charge was recognition of the foreign currency translation loss of $0.7 million, which was previously reflected in the Company's financial statements as a reduction of stockholders' equity, and $0.3 million of severance, termination fees and other administrative costs relating to the closing of the Tokyo brokerage office.
14. SHORT-TERM BORROWINGS. The Company maintains overseas overdraft facilities as follows: (1) (pound)750,000 ($1,092,000), which bears a variable rate of interest based upon prevailing market rates in the United Kingdom and Europe; (2) HK$50,000,000 ($6,410,000), which bears a variable rate of interest based upon current market rates in Hong Kong; (3) HK$100,000,000 ($12,820,000) and (pounds)5,000,000 ($7,281,000) in intra-day overdraft facilities to facilitate the settlement of trades in Asian and European markets, each of which bears a variable rate of interest based upon current market rates; and (4) (Y)500,000,000 ($3,799,000) in an overnight Libor facility used to facilitate trades in Japanese securities. In addition, the Company maintains an $5,000,000 foreign exchange line for its trading operations in Hong Kong. The amount outstanding under these facilities at December 31, 2001 was $4,080. There were no amounts outstanding under these facilities as of December 31, 2000.
15. SEGMENT REPORTING. The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information", to assist financial statement users in assessing the performance of an enterprise and prospects for future cash flows, and to make informed decisions about the enterprise. The Company has three reportable operating segments: domestic brokerage, international brokerage and asset management. The Company's brokerage segments provide independent third-party and proprietary research, global securities brokerage and other services primarily to institutional clients from its domestic (United States) and international (United Kingdom, Hong Kong and, through June 2000, Tokyo) brokerage operations. In attributing commission revenues to its brokerage segments, the Company primarily relies on the geographic location of the customer. The Company's wholly-owned asset management subsidiary provides professional investment management to U.S. public and corporate employee benefit plans, investment partnerships and other U.S. institutional clients from its U.S. office.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. See Note 2. The Company evaluates performance based upon operating profit or loss, not including interest and investment income, as well as certain intercompany expenses. The Company does not allocate certain corporate assets (goodwill and certain fixed assets) to its reportable segments.
The following table illustrates significant financial data for each reportable segment:
Information for the Company's reportable segments as it relates to the consolidated totals is as follows:
- --------------- (1) Included in interest and investment income of international brokerage for the years ended December 31, 2001 and December 31, 2000 is $1,870,604 and $4,646,428, respectively, of realized and unrealized gains related to the ownership of the Hong Kong shares and the London shares. (2) Included in international brokerage operating income (loss) for the year ended December 31, 2000 is a $1,013,519 one-time charge related to the closing of the Company's Tokyo brokerage operations in June 2000. (3) Included in interest and investment (loss) income and other for the year ended December 31, 2001 is the $9,292,407 impairment write-off of the Company's investment in InstiPro Group, Inc.
One domestic brokerage customer accounted for 10.8% of the Company's revenues for the year ended December 31, 2001. No one single customer accounted for greater than 10% of total revenues for any of the years ended December 31, 2000 and 1999.
16. ASSET SALES. On November 29, 2001, the Company announced that it had signed an agreement to sell the Core International ADR and Domestic Equity Index Institutional investment management businesses of its wholly-owned subsidiary, Axe-Houghton, to The Bank of New York for approximately $5.4 million. This sale was completed on January 31, 2002, and the Company recognized a gain of approximately $2.7 million or $0.30 per share diluted after taxes and expenses on the sale of these businesses.
17. 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 $0.01 per share and 1,000,000 authorized shares of preferred stock with a par value of $0.01 per share.
The Board of Directors of the Company (the "Board") has the power, without further action by the stockholders, 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. At December 31, 2001, no preferred stock had been issued.
On September 21, 2001, the Board authorized the Company to repurchase up to an additional five hundred thousand (500,000) shares of the Company's Common Stock from time to time in open-market and privately negotiated transactions subject to the availability of shares for repurchase at prices that the Company considers to be attractive.
During 2001, the Company repurchased 78,000 shares of its Common Stock at an aggregate cost of $0.8 million. As of December 31, 2001, the Company had repurchased a total of 3,357,962 shares of Common Stock under its various stock repurchase programs. The total cost of all purchases under the repurchase programs and the purchase of 650,000 shares from the Estate of Ronald H. Hoenig in December 1995 (net of 970,829 shares issued out of treasury stock) has been $21,012,704. These shares were repurchased for use in connection with the Company's stock compensation plans.
On January 14, 1997, the Company adopted a Stockholders' Rights Plan, under which rights were distributed as a dividend at the rate of one right for each share of Common Stock of the Company held by stockholders of record as of the close of business on January 31, 1997 and thereafter will be attached to each share of Common Stock until the rights become exercisable or expire. Each right initially entitles stockholders to purchase one one-hundredth of a share of preferred stock for $18. Upon exercise of the right, the holder will receive Common Stock having a value equal to twice the value of the $18 price of the fractional preferred share. The rights generally will be exercisable only if a person or group acquires beneficial ownership of 20% or more of the Common Stock or commences a tender or exchange offer upon consummation of which such person or group would beneficially own 20% or more of the Common Stock. The Company generally will be entitled to redeem the rights prior to their expiration at $0.01 per right at any time until 10 days following a public announcement that a 20% position in the Company's common stock has been acquired. The rights expire on January 14, 2007. The Company amended its Stockholders' Rights Plan immediately prior to the execution of the agreement to sell the Company. See Note 21.
18. STOCK-BASED AWARDS. The Company has a compensation plan that provides for stock-based awards. The Amended and Restated 1996 Long-Term Stock Incentive Plan (the "Amended 1996 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 (which may be either incentive stock options that qualify for certain tax treatment under the Internal Revenue Code or non-qualified stock options), U.K. stock options, stock appreciation rights, 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 of the Board. The original 1996 Plan was adopted by the Board on November 14, 1996, and approved at the 1997 Annual Meeting of Stockholders. Upon approval of the original 1996
Plan, two earlier stock option plans were merged into the 1996 Plan, and no new awards have since been issued under those plans. At the 2000 Annual Meeting of Stockholders, the Company's stockholders approved the Amended 1996 Plan, which among other things, increased the number of shares of Common Stock reserved for issuance under the Plan by 1,000,000 shares. The total number of shares issuable under the Amended 1996 Plan when approved was 3,988,000 shares, 2,000,000 shares issuable under the Amended 1996 Plan plus (1) 1,988,000 of shares of stock that would have been issuable under the two earlier stock option plans, and (2) shares issuable under canceled and expired stock options. The Amended 1996 Plan provides for the issuance of 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 stock options) and U.K. stock options. The Amended 1996 Plan has been approved by the United Kingdom Board of Inland Revenue under the Income and Corporation Taxes Act of 1988. Each of the two earlier stock option plans initially provided for the issuance of up to 1,000,000 shares of Common Stock in connection with the grant of U.S. stock options and U.K. stock options. Stock options granted under the Company's plans generally vest over a one to three-year period and expire 5-10 years from the date of grant.
Transactions related to U.S. incentive stock options and U.K. stock options granted under the Company's plans were as follows:
Transactions related to U.S. non-qualified stock options granted under the Company's plans were as follows:
U.S. incentive stock options and U.K. stock options outstanding at December 31, 2001 were as follows:
U.S. non-qualified stock options outstanding at December 31, 2001 were as follows:
At December 31, 2001, U.S. incentive stock options and U.K. stock options to purchase 715,501 shares were outstanding, but due to vesting requirements, options to purchase 138,331 shares were not exercisable at December 31, 2001. At December 31, 2001, U.S. non-qualified stock options to purchase 1,720,000 shares were outstanding, but due to vesting requirements, options to purchase 372,832 shares were not exercisable at December 31, 2001.
The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". Accordingly, no compensation cost has been recognized for the fair value of stock-based awards granted under the Company's plans. Had compensation cost for stock-based awards granted under these plans been determined based on the fair value at the grant date for awards consistent with the provisions of SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated in the following table:
The fair value of each stock-based award is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants during the period:
DEFERRED STOCK. During 1997, the Company granted 107,000 shares of deferred stock to certain employees of the Company under the 1996 Plan. The deferred stock granted vested equally over a three-year period. The Company recorded compensation expense over the vesting period based upon the fair market value of the stock at the time of the grant. No shares of deferred stock were granted during 1999, 2000 or 2001.
RESTRICTED STOCK. During 1999, 2000 and 2001, the Company issued 32,432, 27,586 and 28,626 shares of restricted Common Stock, respectively, to certain employees of the Company under the Amended 1996 Plan. The restricted stock issued vests 50% on the date of grant and 25% on each of the next two anniversaries of the grant date. The Company records compensation expense over the vesting period based upon the fair market value at the time of grant.
19. STOCK PURCHASE PLAN. The Company adopted the 1996 Employee Stock Purchase Plan on May 15, 1996. The plan allows eligible employees of the Company and its U.S. subsidiaries to purchase shares of Common Stock at 85% of the fair market value at specified dates. During 2001, a total of 17,000 shares were purchased at an average price of $9.36 per share. During 2000, a total of 16,200 shares of Common Stock were purchased at an average price of $8.00 per share. During 1999, a total of 45,300 shares of Common Stock were purchased at an average price of $6.39 per share.
In November 1997, the Company adopted the 1997 Foreign Employee Stock Purchase Plan, which is a corollary to the Company's 1996 Employee Stock Purchase Plan. During 2001, a total of 2,100 shares of common stock were purchased under the 1997 Foreign Employees Stock Purchase Plan at an average price of $8.57 per share. During 2000, there were no shares of Common Stock purchased under the 1997 Foreign Employee Stock Purchase Plan. During 1999, a total of 2,000 shares of Common Stock were purchased under the 1997 Foreign Employee Stock Purchase Plan at an average price of $6.96 per share.
The maximum number of shares of Common Stock issuable under these two stock purchase plans is 500,000. At December 31, 2000, 281,100 shares remained available for issuance under these plans.
20. EARNINGS PER SHARE. The FASB has issued SFAS No. 128, "Earnings Per Share". Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share is similar to basic, but adjusts for the effect of potential common shares.
The following table presents the computations of basic and diluted earnings per share:
Stock options on the following number of shares were anti-dilutive and were not included in the calculation above: 2001 - 65,000 shares, 2000 - 187,500 shares, and 1999 - 20,000 shares.
21. SUBSEQUENT EVENTS
On February 28, 2002, Hoenig Group Inc. announced that it has signed an agreement under which Investment Technology Group, Inc. (ITG) will acquire Hoenig Group Inc. for approximately $115 million, or approximately $12.34 to $12.59 per share, in cash, subject to stockholder approval at a special meeting of stockholders expected to be held before the end of the second quarter 2002.
The sale price is subject to adjustment depending upon the amount received by Hoenig Group Inc. in its previously announced sales of the businesses of Axe-Houghton, its asset management subsidiary. The exact amount per share that Hoenig Group Inc. stockholders will receive upon completion of the sale to ITG will be announced when the Axe-Houghton sales are complete, but in no event less than ten business days before the special meeting. The sale to ITG is contingent upon, among other things, completion of the sales of the Axe-Houghton businesses and obtaining approval from Hoenig Group Inc. stockholders and from regulatory authorities, and is expected to be completed by the end of the second quarter 2002.
Immediately prior to the execution of the agreement with ITG, the Company amended its Stockholders' Rights Plan to provide that ITG is not an acquiring person within the meaning of that Plan.
The Company has agreed to sell Axe-Houghton in three separate transactions. The first transaction, which was announced on November 29, 2001 and completed on January 31, 2002, involved the sale of Axe-Houghton's Core International ADR and Domestic Equity Index institutional investment management businesses to The Bank of New York in exchange for approximately $5.4 million in cash.
The second and third transactions to sell the remaining businesses of Axe-Houghton were announced on February 12, 2002 and are expected to be completed by April 30, 2002, subject to the receipt of client consents and satisfaction of customary closing conditions. Hoenig Group Inc. has agreed to sell the Value and Balanced Equity institutional investment management businesses of Axe-Houghton to Byram Capital Management LLC, a registered investment adviser formed by Seth M. Lynn, Jr., Axe-Houghton's current President and four other Axe-Houghton employees. In a separate transaction, Hoenig Group Inc. has agreed to sell all of the stock of Axe-Houghton, together with the remaining small capitalization growth equity-related investment disciplines, to Axe Holding Corp., an entity formed by the principals of Palisade Capital Management LLC, a privately-owned registered investment adviser. Two executives of Axe-Houghton responsible for managing the small capitalization growth equity-related disciplines will receive equity in the continuing business after the sale of Axe-Houghton to the Palisade Capital Management group, with no additional payments to them from Axe-Houghton or Hoenig Group Inc. in connection with the sale.
Upon the closing of these two transactions, the Company expects to receive approximately $3.3 million, subject in the case of the sale to the Palisade Capital Management group to adjustments based upon receipt of client consents and fees receivable from clients at the time of closing. Upon completion of these two transactions, the Company expects to recognize a gain of approximately $1.3 million or $0.15 per share diluted, after taxes and expenses, depending upon possible purchase price adjustments provided for in the agreement for the sale to the Palisade Capital Management group.
* * * *
HOENIG GROUP INC. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (in thousands except per share amounts)
(1) Financial data excluding $9.3 million ($5.6 million after tax) write-off of the Company's investment in InstiPro Group, Inc.
(2) Financial data before the Tokyo charge and the appreciation in market value of, and the realized gains on, the Hong Kong and London shares.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Fredric P. Sapirstein ------------------------------------- Fredric P. Sapirstein Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Fredric P. Sapirstein Chairman, Chief Executive March 28, 2002 - ------------------------- Officer and Director Fredric P. Sapirstein
/s/ Alan B. Herzog Chief Operating Officer, March 28, 2002 - ------------------ Principal Financial/Accounting Alan B. Herzog Officer and Director
/s/ Max H. Levine Executive Vice President March 28, 2002 - ----------------- and Director Max H. Levine
/s/ Kathryn L. Hoenig General Counsel, March 28, 2002 - --------------------- Secretary and Director Kathryn L. Hoenig
/s/ Robert L. Cooney Director March 28, 2002 - -------------------- Robert L. Cooney
/s/ Martin F.C. Emmett Director March 28, 2002 - ---------------------- Martin F.C. Emmett
/s/ Robert Spiegel Director March 28, 2002 - ------------------ Robert Spiegel
EXHIBIT INDEX
Exhibit No. Description
3.2 Amended and Restated By-laws of the Registrant.
*10.10 First Amendment, dated December 3, 2001, to Employment Agreement, dated January 1, 2000, between the Registrant and Fredric P. Sapirstein.
*10.23 Second Amendment, dated December 20, 2001, to Employment Agreement, dated October 8, 1998, between the Registrant and Max H. Levine.
10.25 Transfer and Assumption Agreement, dated as of November 28, 2001, by and among The Bank of New York, Registrant and Axe-Houghton Associates, Inc.
10.26 Stock Purchase Agreement dated as of February 11, 2002 between Axe Holding Corp. and Registrant.
21.1 Subsidiaries of the Registrant.
23.1 Independent Auditors' Consent.