10-Q 1 file001.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------------------------------------- For Quarter Ended: Commission File Number: 000-19619 June 30, 2002 HOENIG GROUP INC. ------------------------------------------------------------------------------ (Exact name of Registrant as specified in its charter) Delaware 13-3625520 ------------------------------------ ------------------------ (State or other jurisdiction (I.R.S. Employer I.D. No.) of incorporation or organization) Reckson Executive Park 4 International Drive Rye Brook, NY 10573 ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (914) 935-9000 ------------------------------------------------------------------------------ (Registrant's telephone number, including area code) ------------------------------------------------------------------------------ (Former name, former address and former fiscal year if changed since last report) Indicated by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No___ As of August 13, 2002, there were 8,030,317 shares of common stock, par value $0.01 per share, outstanding. HOENIG GROUP INC. FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2002 INDEX

PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HOENIG GROUP INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION JUNE 30, 2002 AND DECEMBER 31, 2001

SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1 HOENIG GROUP INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 2 HOENIG GROUP INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 3 HOENIG GROUP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 4 HOENIG GROUP INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments (which include only normal recurring accruals) necessary to present fairly the financial position of Hoenig Group Inc. (the "Company") as of June 30, 2002 and December 31, 2001 and its results of operations, changes in comprehensive income and cash flows for the three and six months ended June 30, 2002 and 2001. The consolidated financial statements included herein have been prepared by the Company without independent audit. Certain information normally included in the consolidated financial statements and related notes prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. The results of operations for the three- and six-month periods ended June 30, 2002 are not necessarily indicative of operating results for the full year. The Consolidated Statements of Income and Cash Flows, and related Notes to the Unaudited Consolidated Financial Statements, have been prepared to conform to the discontinued operations presentation. NOTE 2 - NET CAPITAL AND RESERVE REQUIREMENTS. Hoenig & Co., Inc. ("Hoenig"), the Company's principal operating subsidiary, is subject to the Uniform Net Capital Rule (Rule 15c3-1), which requires that Hoenig maintain net capital of the greater of $250,000 or one-fifteenth of aggregate indebtedness. At June 30, 2002, Hoenig's minimum required net capital was approximately $988,000, its net capital ratio was 104 to 1, and its actual net capital was approximately $14,188,000, which was approximately $13,200,000 in excess of regulatory requirements. Hoenig & Company Limited ("Limited") is required to maintain financial resources of at least 110% of its capital requirement (as defined). Limited's financial resources requirement at June 30, 2002 was approximately (pounds)1,064,000 ($1,629,000); it had eligible capital of approximately (pounds)2,576,000 ($3,944,000), and excess financial resources at such date of approximately (pounds)1,512,000 ($2,315,000). Hoenig (Far East) Limited ("Far East") is required to maintain liquid capital of the greater of HK$3,000,000 ($375,000) or 5% of average quarterly total liabilities. Far East's required liquid capital was approximately HK$17,909,000 ($2,239,000) at June 30, 2002, and it had actual liquid capital of approximately HK$71,381,000 ($8,923,000) and excess liquid capital of approximately HK$53,472,000 ($6,684,000). 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 securities exchanges and regulatory bodies, including the Financial Services Authority in the United Kingdom and the Securities and Futures Commission in Hong Kong. In the normal course of business, the Company is subject to inquiries and regulatory examinations by many of these regulatory authorities. NOTE 3 - AXE-HOUGHTON SALES/DISCONTINUED OPERATIONS. The Company has sold Axe-Houghton Associates, Inc. ("Axe-Houghton"), its wholly-owned asset management subsidiary, 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. The Company received $5.4 million from this sale, recognizing a gain of $2.7 million, net of taxes and expenses. The second and third transactions to sell the remaining businesses of Axe-Houghton were announced on 5 February 12, 2002. The second transaction was completed on March 28, 2002 and involved the sale of Axe-Houghton's Value and Balanced Equity institutional investment management businesses to Byram Capital Management LLC ("Byram"). The Company received $0.1 million in the first quarter 2002 and recognized a gain of $0.05 million net of taxes and expenses from the sale to Byram. The third transaction involved the sale of all of the stock of Axe-Houghton, together with the remaining Small Capitalization Growth Equity institutional investment management businesses, to Axe Holding Corp., an entity formed by the principals of Palisade Capital Management LLC, a privately-owned registered investment adviser. The third transaction was completed on April 26, 2002. Two executives of Axe-Houghton responsible for managing the Small Capitalization Growth Equity-related disciplines received equity in the continuing business after the sale of Axe-Houghton to the Palisade Capital Management group, and no additional payments were made to them by Axe-Houghton or the Company in connection with the sale. The Company received $3.2 million in proceeds from this sale and recognized a gain of $1.2 million, net of taxes and expenses, in the second quarter 2002. Axe-Houghton's historical operating results are presented in the Consolidated Statements of Income for the three and six months ended June 30, 2002 and 2001 as discontinued operations. NOTE 4 - INVESTMENTS IN LIMITED PARTNERSHIPS. Axe-Houghton was the general partner of two limited partnerships and maintained investments in each of the partnerships. The Company has dissolved these investment partnerships. The first partnership was dissolved during March 2002. The second partnership was dissolved in April 2002. Axe-Houghton's partnership investments were 12.2% ($373,974) and 0.41% ($21,058) of the partnerships at December 31, 2001 and 0.41% ($19,615) at March 31, 2002. The Company also maintained an investment in an unaffiliated multi-manager, market-neutral limited partnership, which investment was liquidated during the first quarter 2002. The investment was $1.5 million at December 31, 2001 and at the time it was liquidated. NOTE 5 - SECURITIES RECEIVED IN FOREIGN SECURITIES EXCHANGES. In June 2000, the Company received 805,000 shares of common stock of Hong Kong Stock 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. At 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, valued at $0.6 million, were sold during the first quarter 2002. The value of the London shares, which were 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. NOTE 6 - 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 and diluted earnings per share for the periods indicated: 6

----------------------- (1) In computing earnings per share resulting in a net loss, common stock equivalents are not included in the calculation as it would result in anti-dilution. NOTE 7 - SEGMENT AND DISCONTINUED OPERATIONS REPORTING. The FASB has issued SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information," to assist financial statement users in assessing the performance of an enterprise and its prospects for future cash flows, and to make informed decisions about the enterprise. The Company had two reportable operating segments during the periods presented: domestic brokerage and international brokerage. 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 and Hong Kong) brokerage operations. In attributing commission revenues to its brokerage segments, the Company primarily relies on the geographic location of the customer. The accounting policies related to the Company's two brokerage segments are the same as those described in Note 2 of the Notes to Consolidated Financial Statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. The Company evaluates performance based upon operating income or loss, not including interest and investment income, as well as certain allocations of intercompany expenses. The Company does not allocate certain corporate assets (goodwill and certain fixed assets) to its reportable segments. The Company sold Axe-Houghton, its asset management operations, in three separate transactions which were completed on January 31, 2002, March 28, 2002, and April 26, 2002. The results of operations of Axe-Houghton are reflected as discontinued operations in the table below. The following table illustrates significant financial data for each reportable segment and discontinued operations for the periods indicated: 7

Information for the Company's reportable segments as it relates to the consolidated totals is as follows:

NOTE 8 -LOSS AT LIMITED On May 9, 2002, the Company announced that a former employee of Hoenig & Company Limited ("Limited") had engaged in unauthorized trading in foreign securities while employed by Limited, in violation of Limited's policies and procedures. Limited incurred a pre-tax loss of approximately $7.1 million plus approximately $0.6 million of related expenses from the unauthorized trading which took place beginning in mid-April 2002. Notwithstanding the loss, Limited is in compliance with all regulatory capital requirements. The Company continues to pursue claims against insurers and others relating to the $7.1 million loss and the unauthorized trading. While the Company believes that it has meritorious claims, there can be no 8 assurance that these claims will result in any recovery. NOTE 9 - SALE OF HOENIG GROUP. On February 28, 2002, the Company announced that it had signed a merger agreement providing for Investment Technology Group, Inc. ("ITG") to acquire Hoenig Group Inc. for approximately $115 million, or $12.55 per share, subject to, among other things, obtaining stockholder approval and the approval of regulatory authorities and satisfaction of customary closing conditions. On July 2, 2002, the Company announced that it had entered into an amendment to its previously announced merger agreement with ITG. The amendment provides that, upon completion of the merger, for each share of Company common stock a Company stockholder will receive $11.35 in cash, plus one right (a "Contingent Payment Right") entitling the stockholder to receive a cash payment equal to: o (a) the amounts recovered, if any, in connection with the pursuit of certain insurance and other claims (net of expenses and applicable taxes) related to the loss and unauthorized trading at Limited, plus (b) any unexpended portion of the initial funding of the escrow established to pay expenses incurred in pursuing such claims, divided by o the number of shares of the Company's common stock outstanding plus the number of shares of the Company's common stock issuable upon the exercise of options outstanding on the date of completion of the merger (excluding shares subject to certain incentive stock options). In no event will more than $1.20 be paid per Contingent Payment Right. The Company has deposited $2.365 million into the escrow to fund the continued pursuit of the claims. The Company has established the close of business on July 17, 2002 as the record date for the special meeting of stockholders to vote on the merger, and the date of the special meeting of stockholders is August 26, 2002. It is expected that the transaction, if approved by the Hoenig Group stockholders and certain regulatory authorities and if customary closing conditions are satisfied, will be consummated by the end of the third quarter 2002. As of June 30, 2002, the Company has incurred $1.2 million ($0.7 million after taxes) in legal, investment banking and other professional fees and expenses related to the sale to ITG. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements in this report that relate to future plans, events or performance are forward-looking statements. Such statements may include, but are not limited to, those relating to 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 risk that the conditions to the closing of the sale to ITG described herein will not be satisfied and the sale not completed, general economic conditions, market fluctuations, competitive conditions within the brokerage business, stock market prices and trading volumes, changes in demand for 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. 9 Sale of Axe-Houghton in Three Transactions The Company has sold Axe-Houghton and its institutional investment management 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. The second and third transactions to sell the remaining businesses of Axe-Houghton were announced on February 12, 2002. On March 28, 2002, the Company sold the Value and Balanced Equity institutional investment management businesses of Axe-Houghton to Byram Capital Management LLC. On April 26, 2002, the Company sold all of the stock of Axe-Houghton, together with its remaining Small Capitalization Growth Equity institutional investment management businesses, to Axe Holding Corp., an entity formed by the principals of Palisade Capital Management LLC. Two executives of Axe-Houghton responsible for managing the small capitalization growth equity-related investment disciplines received equity in the continuing business after the sale of Axe-Houghton to the Palisade Capital Management group. These executives had employment agreements with Axe-Houghton which terminated upon the closing of the sale of Axe-Houghton to the Palisade Capital Management group. Neither the Company nor Axe-Houghton was required to make any change of control or other additional payments to these executives in connection with the sale of Axe-Houghton. The Company received $5.5 million from the two Axe-Houghton sales completed during the first quarter 2002, recognizing a gain of $2.7 million after taxes and expenses. The Company received an additional $3.2 million from the sale of Axe-Houghton that was completed on April 26, 2002, recognizing a $1.2 million gain, after taxes and expenses, in the second quarter 2002. The historical operating results of Axe-Houghton are presented as discontinued operations in this report. The Loss at Hoenig & Company Limited On May 9, 2002, the Company announced that a former employee of Limited had engaged in unauthorized trading in foreign securities while employed by Limited, in violation of Limited's policies and procedures. Limited has incurred a pre-tax loss of approximately $7.1 million, plus approximately $0.6 million of related expenses, from the unauthorized trading, which took place beginning in mid-April 2002. Notwithstanding the loss, Limited is in compliance with all regulatory capital requirements. The Company continues to pursue claims against insurers and others relating to the $7.1 million loss and the unauthorized trading. While the Company believes that it has meritorious claims, there can be no assurance that these claims will result in any recovery. Sale of the Company to ITG On February 28, 2002, the Company announced that it had signed a merger agreement providing for Investment Technology Group, Inc. ("ITG") to acquire Hoenig Group Inc. for approximately $115 million, or $12.55 per share, subject to, among other things, obtaining stockholder approval and the approval of regulatory authorities and satisfaction of customary closing conditions. On July 2, 2002, the Company announced that it had entered into an amendment to its previously announced merger agreement with ITG. The amendment provides that, upon completion of the merger, for each share of Company common stock a Company stockholder will receive $11.35 in cash, plus one right (a "Contingent Payment Right") entitling the stockholder to receive a cash payment equal to: o (a) the amounts recovered, if any, in connection with the pursuit of certain insurance and 10 other claims (net of expenses and applicable taxes) related to the loss and unauthorized trading at Limited, plus (b) any unexpended portion of the initial funding of the escrow established to pay expenses incurred in pursuing such claims, divided by o the number of shares of the Company's common stock outstanding plus the number of shares of the Company's common stock issuable upon the exercise of options outstanding on the date of completion of the merger (excluding shares subject to certain incentive stock options). In no event will more than $1.20 be paid per Contingent Payment Right. The Company has deposited $2.365 million into the escrow to fund the continued pursuit of the claims. The Company has established the close of business on July 17, 2002 as the record date for the special meeting of stockholders to vote on the merger, and the date of the special meeting of stockholders is August 26, 2002. It is expected that the transaction, if approved by the Hoenig stockholders and certain regulatory authorities and if customary closing conditions are satisfied, will be consummated by the end of the third quarter 2002. As of June 30, 2002, the Company has incurred $1.2 million ($0.7 million after taxes) in legal, investment banking and other professional fees and expenses related to the sale to ITG. 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. During the periods discussed in this report, the Company's wholly-owned subsidiary, Axe-Houghton, provided 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 sold Axe-Houghton in three separate transactions, the last of which was completed on April 26, 2002. The historical operating results of Axe-Houghton are reported as discontinued operations. 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 closed its fixed income trading operations in Boston in March 2002 and reduced the staff of its Boston domestic equity trading operations in June 2002. 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 11 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. FINANCIAL RESULTS The Company's financial results for the three and six months ended June 30, 2002 were affected by the Axe-Houghton sales and the loss at Limited. The Company's historical financial results for the periods presented reflect Axe-Houghton as a discontinued operation. THREE MONTHS ENDED JUNE 30, 2002 VERSUS JUNE 30, 2001 The Company's financial results for the three months ended June 30, 2002 and June 30, 2001 are as follows: Financial Data Three Months Ended June 30, ------------------------------------------

----------------------------------------------- (1) Financial data for the three months ended June 30, 2002, excluding the $7.1 million loss at Limited and $0.6 million of related expenses ($6.7 million net of tax), would be as follows: operating loss from continuing operations of $466,614, loss from continuing operations before income taxes of $170,730, net loss from continuing operations of $205,568. The Company incurred a net loss of $5.7 million for the second quarter 2002, as compared to net income of $2.1 million for the same period in 2001. The Company's net loss for the second quarter 2002 includes a net loss from continuing operations of $6.9 million, partially offset by $1.2 million of net income from discontinued operations. Excluding the $7.1 million loss at Limited and related expenses ($6.7 million net of tax), the Company had net loss from continuing operations of $0.2 million in the 12 second quarter 2002. In the second quarter 2001, net income from continuing operations was $1.8 million, and net income from discontinued operations was $0.4 million. Continuing Operations The Company incurred an operating loss from continuing operations of $8.2 million for the second quarter 2002, as compared to operating income from continuing operations of $1.6 million for the same period in 2001, due primarily to the $7.1 million loss at Limited and related expenses ($0.6 million). Excluding the $7.1 million loss and related expenses, operating loss from continuing operations for the second quarter 2002 was $0.5 million, due to $1.2 million in legal, investment banking and other professional fees and expenses related to the sale of the Company to ITG and a 31.5% decrease in domestic brokerage operating income. The decrease in domestic brokerage operating income reflects an increase in research and services expense as a percentage of commission revenues and a decrease in execution only business which does not have any associated research expense for the three months ended June 30, 2002. Operating revenues from continuing operations for the three months ended June 30, 2002 increased 8.8% to $25.6 million, from $23.5 million during the same period in 2001. This increase resulted from a 6.7% increase in operating revenues from domestic brokerage operations and a 22.9% increase in operating revenues from international brokerage operations. Operating revenues from domestic brokerage operations for the three months ended June 30, 2002 increased 6.7% to $21.8 million, as compared to $20.4 million during the same period in 2001, due to increased trading activity. Operating income of the Company's domestic brokerage operations for the second quarter 2002 decreased 31.5% to $2.0 million, as compared to $2.9 million during the same period in 2001, primarily due to an increase in research and services expenses as a percentage of commission revenues and a decrease in execution only business which does not have any associated research expense. Operating revenues from international brokerage operations increased 22.9% to $3.8 million for the three months ended June 30, 2002, as compared to $3.1 million for the same period in 2001. This increase reflects a 139.4% increase in operating revenues of the United Kingdom brokerage operations primarily resulting from increased trading volume in the United Kingdom and Europe, which more than offset an 11.3% decrease in operating revenues from the Hong Kong brokerage operations. As a result of the loss at Limited and related expenses, international brokerage operations incurred an operating loss of $7.6 million for the three months ended June 30, 2002, as compared to an operating loss of $0.2 million during the same period in 2001. Expenses related to independent research and other services provided to the Company's brokerage clients, including commission refunds, during the three months ended June 30, 2002 increased 22.5% to $14.1 million, from $11.5 million during the same period in 2001. These expenses were 55.3% of commission revenues during the three months ended June 30, 2002, as compared to 49.1% during the same period in 2001. These expenses increased as a percentage of commission revenues primarily due to the decrease in execution-only business, which does not have any associated research and services expenses, and the timing of research expenses incurred relative to the receipt of commissions earned during the second quarter 2002. Clearing, floor brokerage and exchange charges increased 9.5% to $2.8 million during the three months ended June 30, 2002, from $2.6 million during the same period in 2001. These expenses represented 11.1% of commission revenues during both the three months ended June 30, 2002 and the same period in 2001. Employee compensation increased 5.2% to $5.1 million for the second quarter 2002, from $4.9 million in 2001. Employee compensation expenses for the second quarter 2002 includes $0.3 million in severance payments relating to the reduction in personnel in the Company's Boston equity brokerage operations in June 2002. 13 All other expenses increased 36.2% to $4.0 million, as compared to $2.9 million for the same period in 2001. This resulted primarily from $1.2 million in legal, investment banking and other professional fees and expenses related to the sale of the Company to ITG, offset by a decrease in expenses from trading errors in the Company's domestic brokerage operations. Net investment income and other from continuing operations was $0.3 million during the second quarter ended June 30, 2002, reflecting, among other things, a decrease in interest and dividends earned due to lower interest rates. Net investment income and other from continuing operations was $1.3 million in the second quarter 2001, of which $0.8 million related to the unrealized gains on the Hong Kong and London shares. Discontinued Operations Revenues from discontinued operations for the three months ended June 30, 2002 decreased 85.6% to $0.3 million, as compared to $2.0 million for the same period in 2001, as a result of the sale of the remaining businesses of Axe-Houghton during April 2002. Net income from discontinued operations increased to $1.2 million during the three months ended June 30, 2002, as compared to $0.4 million during the same period in 2001, due to the $1.2 million gain, after taxes and expenses, on the last of the Axe-Houghton sales. SIX MONTHS ENDED JUNE 30, 2002 VERSUS JUNE 30, 2001 The Company's financial results for the six months ended June 30, 2002 and 2001 are as follows: Financial Data Six Months Ended June 30, ----------------------------------------

------------------------------------- (1) Financial data for the six months ended June 30, 2002, excluding the $7.1 loss at Limited and $0.6 million of related expenses ($6.7 million net of tax), would be as follows: operating income from continuing operations of $692,037, income from continuing operations before income taxes of $1,201,237, net income from continuing operations of $636,003, basic earnings per share from continuing operations of $0.08, and diluted earnings per share from continuing operations of $0.07. (2) Financial data for the six months ended June 30, 2001, excluding the $9.2 million ($5.5 million net of tax) impairment write-off of the Company's investment in InstiPro Group, Inc., would be as follows: net investment income and other from continuing operations of $2,941,520, income from continuing operations before income taxes of $5,704,688, net income from continuing operations of $3,486,229, basic earnings per share from continuing 14 operations of $0.44, and diluted earnings per share from continuing operations of $0.39. The Company incurred a net loss of $2.0 million for the six months ended June 30, 2002 as compared to a loss of $1.3 million for the same period in 2001. The Company's net loss for the six months ended June 30, 2002 includes a net loss from continuing operations of $6.1 million, offset by $4.1 million of net income from discontinued operations. Excluding the $7.1 million loss at Limited and related expenses ($6.7 million net of tax), net income from continuing operations for the six months ended June 30, 2002 was $0.6 million. For the six months ended June 30, 2001, the Company had a net loss from continuing operations of $2.0 million and net income from discontinued operations of $0.7 million. Net income from continuing operations for the six months ended June 30, 2001, excluding the $9.2 million InstiPro Group impairment write-off ($5.5 million net of tax), was $3.5 million. Continuing Operations The Company incurred an operating loss from continuing operations of $7.0 million for the six months ended June 30, 2002, as compared to operating income from continuing operations of $2.8 million for the same period in 2001, primarily due to the $7.1 million loss at Limited and $0.6 million in related expenses. Excluding the $7.1 million loss at Limited and related expenses, operating income from continuing operations for the six months ended June 30, 2002 decreased 75.0% to $0.7 million, due primarily to a 23.4% decrease in domestic brokerage operating income during the period and $1.2 million in legal, investment banking and other professional fees and expenses related to the sale of the Company to ITG. The decrease in domestic brokerage operating incomes reflects an increase in research and services expense as a percentage of commission revenues and a decrease in execution only business which does not have any associated research expense for the six months ended June 30, 2002. Operating revenues from continuing operations for the six months ended June 30, 2002 increased 10.1% to $50.5 million, from $45.9 million during the same period in 2001. This increase resulted from a 7.4% increase in operating revenues from domestic brokerage operations and a 28.6% increase in operating revenues from international brokerage operations. Operating revenues from domestic brokerage operations for the six months ended June 30, 2002 increased 7.4% to $43.1 million, as compared to $40.2 million during the same period in 2001, due to increased trading activity. Operating income of the Company's domestic brokerage operations for the six months ended June 30, 2002 decreased 23.4% to $3.9 million, as compared to $5.1 million during the same period in 2001, primarily due to an increase in research and services expenses as a percentage of commission revenues and a decrease in execution only business which does not have any associated research expense. Operating revenues from international brokerage operations increased 28.6% to $7.4 million for the six months ended June 30, 2002, as compared to $5.8 million for the same period in 2001. This increase reflects a 154.9% increase in operating revenues of the United Kingdom brokerage operations, primarily resulting from new account activity and increased trading volume in the United Kingdom and Europe, which more than offset a 14.8% decrease in operating revenues from the Hong Kong brokerage operations. Including the loss at Limited plus related expenses, international brokerage operations incurred an operating loss of $7.4 million for the six months ended June 30, 2002, as compared to an operating loss of $0.3 million during the same period in 2001. Expenses related to independent research and other services provided to the Company's brokerage clients during the six months ended June 30, 2002, including commission refunds, increased 20.2% to $27.7 million, from $23.0 million during the same period in 2001. These expenses were 55.1% of commission revenues during the six months ended June 30, 2002, as compared to 50.5% during the same period in 2001. These expenses increased as a percentage of commission revenues primarily due to the decrease in execution-only business, which does not have any associated research and services expenses, and the timing of research expenses incurred relative to the receipt of commissions earned during 2002. 15 Clearing, floor brokerage and exchange charges increased 9.6% to $5.7 million during the six months ended June 30, 2002, from $5.2 million during the same period in 2001. These expenses represented 11.2% of commission revenues during the six months ended June 30, 2002, as compared to 11.3% of commission revenues during the same period in 2001. The decrease in these expenses as a percentage of commission revenues was primarily due to the absence in 2002 of commissions earned by the Company under correspondent broker arrangements where the Company executes trades on behalf of other brokers. Expenses associated with these arrangements had been higher than on other types of brokerage services provided by the Company. Employee compensation increased 5.2% to $10.1 million for the second quarter 2002, from $9.6 million in 2001. The increase in employee compensation expenses for the six months ended June 30, 2002 was primarily due to $0.5 million in severance payments relating to the closing of the Company's Boston fixed income brokerage operations and the reduction in personnel at the Company's Boston domestic equity trading operations. Net investment income and other from continuing operations was $0.5 million during the six months ended June 30, 2002. The Company had a net investment loss and other from continuing operations of $6.4 million during the same period in 2001, due to the first quarter 2001 pre-tax impairment write-off of the Company's $9.2 million investment in InstiPro. Net investment income and other from continuing operations for the six months ended June 30, 2001 before the InstiPro write-off was $2.9 million, which included $1.5 million in realized and unrealized gains on the Hong Kong and London shares. All other expenses increased 19.3% to $6.4 million, from $5.4 million during the same period in 2001. This increase was primarily due to $1.2 million in legal, investment banking and other professional fees and expenses related to the sale of the Company to ITG, offset by a decrease in expenses relating to trading errors in the Company's domestic brokerage operations for the six months ended June 30, 2002. Discontinued Operations Revenues from discontinued operations for the six months ended June 30, 2002 decreased 59.1% to $1.7 million as compared to $4.0 million for the same period in 2001, as a result of the sale of the Axe-Houghton businesses during the first six months of 2002. Net income from discontinued operations for the six months ended June 30, 2002 increased to $4.1 million, from $0.7 million during the same period in 2001, due to the $3.9 million gain, after taxes and expenses, on the Axe-Houghton sales. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2002, the Company had cash, U.S. Government obligations, net accounts receivable and other net investments of $55.3 million. All receivables from correspondent brokers and dealers are deemed to be fully collectible, and no provision for uncollectibles was required. The Company believes that its current capital resources and liquidity, plus additional funds generated by operations, will be sufficient to meet current and future operating needs. The Company maintains overseas overdraft facilities, which bear variable rates of interest based upon prevailing market rates in the United Kingdom, Europe, Hong Kong and Japan. These facilities are used to facilitate the settlement of daily trading activities. There were no amounts outstanding under these facilities as of June 30, 2002. The Company announced on May 9, 2002 that a former employee of Limited, the Company's United Kingdom brokerage subsidiary, had engaged in unauthorized trading in foreign securities while employed by Limited, resulting in a pre-tax loss of approximately $7.1 million plus $0.6 million in expenses. 16 Pursuant to the terms of the amendment to the Company's merger agreement with ITG, on July 5, 2002, Limited deposited $2.365 million in escrow to fund the continued pursuit of insurance and other claims relating to the $7.1 million loss at Limited and the unauthorized trading. 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 or price changes. However, inflation affects the cost of operations, particularly salaries and related benefits. ITEM 3. 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 market value, cash flows and earnings of an investment as a result of fluctuations in interest rates, foreign exchange rates and equity prices. The Company has established procedures to manage its exposure to market fluctuations and changes in the market value of its investments. 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. The Company's primary exposure is in U.K. Pounds Sterling and Hong Kong Dollars. During the periods presented in this report, the Company was exposed to foreign currency risk with respect to its investment in the London shares. The Company sold all of its remaining London shares during the first quarter 2002. 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. 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 fair market value, are a result of trading errors that occur in the ordinary course of business. These positions are normally closed out during the next trading day. For information regarding the Company's exposure to certain market risks, see Item 7A "Quantitative and Qualitative Disclosures About Market Risk" in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. Significant changes which have occurred since December 31, 2001 are as follows: The Company maintained an investment in an unaffiliated multi-manager, market-neutral limited partnership. The Company liquidated this investment, valued at $1.5 million, during the first quarter 2002. At December 31, 2001, the Company owned 99,945 London shares with a market value of $0.6 million. All of the remaining London shares were sold during the first quarter 2002. The Company valued the London shares at market. Through its discontinued operations, Axe-Houghton, the Company maintained investments in two equity limited partnerships. Axe-Houghton was the general partner of each of these limited partnerships. During the periods presented in this report, these limited partnership interests are reflected in the Consolidated Statement of Financial Condition and in discontinued operations in the Consolidated Statements of Income under the equity method of accounting. The Company dissolved these limited partnerships and liquidated its investments in the partnerships in March and April 2002. The Company received the value of these limited partnership investments upon their liquidation. 17 On May 9, 2002, the Company announced that a former employee of Limited had engaged in unauthorized trading in foreign securities while employed by Limited, in violation of Limited's policies and procedures. Limited incurred a pre-tax loss of approximately $7.1 million, plus approximately $0.6 million of related expenses, from the unauthorized trading which took place beginning in mid-April 2002. Pursuant to the amendment to the Company's merger agreement with ITG, on July 5, 2002, Limited deposited $2.365 million into escrow to fund the pursuit of claims against insurers and others relating to the $7.1 million loss and the unauthorized trading. While the Company believes that it has meritorious claims, there can be no assurance that these claims will result in any recovery. Notwithstanding the loss and the $2.365 million deposit to the escrow, Limited is in compliance with all regulatory capital requirements. 18 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (B) REPORTS ON FORM 8-K 1. Form 8-K, dated May 13, 2002, Item 2. (Announcing completion of sale of all of the stock of Axe-Houghton Associates, Inc. and remaining institutional investment businesses to Axe Holding Corp.) 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Hoenig Group Inc. Date: August 14, 2002 By: /s/Fredric P. Sapirstein ------------------------ Fredric P. Sapirstein, Chairman and Chief Executive Officer Date: August 14, 2002 By: /s/Alan B. Herzog ----------------- Alan B. Herzog, Chief Operating Officer and Chief Financial Officer 20 EXHIBIT INDEX Exhibit No. Description ----------- ----------- 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 21

HOENIG GROUP INC 10-Q