<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 20, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
HAMBRECHT & QUIST GROUP, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 6211 94-3246636
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
ONE BUSH STREET
SAN FRANCISCO, CALIFORNIA 94104
(415) 576-3300
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
DANIEL H. CASE III
PRESIDENT AND CHIEF EXECUTIVE OFFICER
HAMBRECHT & QUIST
ONE BUSH STREET
SAN FRANCISCO, CALIFORNIA 94104
(415) 576-3300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
FRANCIS S. CURRIE KENNETH L. GUERNSEY
NEIL J. WOLFF KARYN R. SMITH
GAIL C. HUSICK ANN CHIGA
YOICHIRO TAKU COOLEY GODWARD CASTRO HUDDLESON &
CHRISTOPHER G. NICHOLSON TATUM
WILSON SONSINI GOODRICH & ROSATI ONE MARITIME PLAZA
PROFESSIONAL CORPORATION 20TH FLOOR
650 PAGE MILL ROAD SAN FRANCISCO, CALIFORNIA 94111-3580
PALO ALTO, CALIFORNIA 94304-1050 (415) 693-2000
(415) 493-9300
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
--------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If the only securities being delivered pursuant to this Form are being
offered pursuant to dividend or interest reinvestment plans, please check the
following box. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
AMOUNT TO PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF BE OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) PER UNIT (1) PRICE (2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per
share............................ $ $80,000,000 $27,587
</TABLE>
(1) To be provided by amendment.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o).
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS SEC, ACTING PURSUANT TO SUCH SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
HAMBRECHT & QUIST GROUP, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION IN
PROSPECTUS OF PART I ITEMS OF FORM S-1
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING IN FORM S-1 REGISTRATION STATEMENT LOCATION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<S> <C> <C>
Outside Front Cover Page
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus......................
Inside Front Cover Page; Outside Back Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus.......................................
Prospectus Summary; Risk Factors
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges...........................
Use of Proceeds
4. Use of Proceeds......................................
Outside Front Cover Page; Underwriting
5. Determination of Offering Price......................
Dilution
6. Dilution.............................................
Not Applicable
7. Selling Security Holders.............................
Outside and Inside Front Cover Pages; Underwriting;
Outside Back Cover Page
8. Plan of Distribution.................................
Prospectus Summary; Capitalization; Description of
Capital Stock; Shares Eligible for Future Sale
9. Description of Securities to be Registered...........
Legal Matters
10. Interests of Named Experts and Counsel...............
Outside and Inside Front Cover Pages; Prospectus
Summary; Risk Factors; The Company; Restructuring;
Use of Proceeds; Dividend Policy; Dilution;
Capitalization; Selected Combined Financial Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Regulation; Net Capital Requirements; Management;
Certain Transactions; Principal Stockholders;
Description of Capital Stock; Shares Eligible for
Future Sale; Combined Financial Statements; Outside
Back Cover Page
11. Information with Respect to the Registrant...........
Not Applicable
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities......................
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 20, 1996
PROSPECTUS
SHARES
HAMBRECHT & QUIST
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by Hambrecht
& Quist Group ("Hambrecht & Quist," "H&Q" or the "Company"). Prior to this
offering, there has been no public market for the Common Stock of the Company.
It is currently estimated that the initial public offering price will be between
$ and $ per share. The initial public offering price will be determined
by agreement between the Company and the Underwriters in accordance with the
recommendation of a "qualified independent underwriter" as required by the
By-Laws of the National Association of Securities Dealers, Inc. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price. The Company has applied for the listing of its
Common Stock on the New York Stock Exchange under the symbol HMQ.
--------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" AT
PAGE 5.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
Per Share................................ $ $ $
Total (3)................................ $ $ $
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company, estimated at $ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
additional shares of Common Stock solely to cover over-allotments, if
any. If such option is exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
--------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about August , 1996 at the office of the agent of Hambrecht
& Quist LLC in New York, New York.
HAMBRECHT & QUIST
MORGAN STANLEY & CO.
INCORPORATED
SMITH BARNEY INC.
, 1996
<PAGE>
The Company intends to distribute to its stockholders annual reports
containing consolidated financial statements audited by its independent auditors
and will make available copies of quarterly reports for the first three quarters
of each fiscal year containing unaudited financial information.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, THE
PACIFIC STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS. THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
THE COMPANY
Hambrecht & Quist is a major bracket investment bank focused on emerging
growth companies and growth-oriented investors in the United States and,
increasingly, worldwide. The Company's core strength has been the early
identification of trends, industries and entrepreneurial companies that have the
potential to become broad-based drivers of economic growth and change. The
Company believes that its research-oriented industry specialization is crucial
to meeting the demands of its investor and issuer clients for sophisticated and
informed investment and strategic advice, and to building long-term
relationships with these clients. Since its inception in 1968, Hambrecht & Quist
has broadened its industry focus from technology and healthcare to encompass the
business information and outsourcing services, healthcare services and branded
consumer industries.
H&Q organizes its research, investment banking and venture capital
professionals into industry teams. Each team endeavors to develop and maintain
an in-depth understanding of the secular and cyclical trends driving that
particular industry sector. In addition, each team of professionals maintains
close relationships not only with private and public growth companies, but also
with venture capital and institutional investors, technical experts,
professional service providers and other key industry participants. Through
these relationships, H&Q gains the opportunity to participate actively in the
growth of promising entrepreneurial companies.
H&Q has leveraged its industry expertise by providing an increasingly broad
range of investment banking and brokerage services and by investing its own
capital in emerging growth companies. It has grown its business by expanding the
range of services it provides to growth companies and investors, by addressing
the needs of larger companies and by developing expertise in new industries and
markets. The Company has significantly expanded its underwriting capability;
added advisory services in mergers, acquisitions and strategic partnerships; and
begun providing private placement, asset-based and mezzanine financing. H&Q also
has achieved a leading role in Nasdaq market-making, expanded its retail
brokerage services and increased its trading of NYSE-listed securities.
The Company brings together growth companies and growth investors through
the sponsorship of eight regular conferences, each focusing on a different
industry or geographic region. In addition, to facilitate the analysis of long-
term trends, the Company has developed 11 industry indices, starting with the
H&Q Technology Index, a number of which are regularly cited in the media. The
Company believes that these efforts, together with the Company's investment
banking and brokerage activities, have closely associated the name Hambrecht &
Quist with entrepreneurial, high growth companies in its chosen areas of focus.
Hambrecht & Quist believes that its industry focus and long-term
orientation, together with the depth of its resources committed to the growth
company sector, have made H&Q a leading provider of investment banking and
brokerage services for emerging growth companies and investors. Since 1968,
Hambrecht & Quist has managed or co-managed over 600 public offerings for over
400 growth companies in the technology, healthcare, business information and
outsourcing services, healthcare services, branded consumer and related
industries, including Adobe, Apple, Genentech and Netscape.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............ shares
Common Stock to be outstanding after the shares (1)
offering.....................................
Use of proceeds................................ General corporate purposes
Proposed New York Stock Exchange symbol........ HMQ
</TABLE>
- ------------------------------
(1) Based on shares outstanding at March 31, 1996. Excludes 8,327,384 shares of
Common Stock reserved for issuance under the Company's stock plans, of which
5,327,384 shares were issuable upon exercise of stock options outstanding at
March 31, 1996 at a weighted average exercise price of $6.90 per share.
3
<PAGE>
SUMMARY COMBINED FINANCIAL INFORMATION(1)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH
FISCAL YEAR ENDED SEPTEMBER 30, 31,
----------------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- ----------- -----------
COMBINED STATEMENT OF OPERATIONS
DATA:
Revenues:
Principal transactions........... $ 23,480 $ 33,438 $ 30,045 $ 36,411 $ 53,425 $ 22,253 $ 43,997
Agency commissions............... 11,135 12,557 14,221 14,242 24,603 8,852 17,365
Investment banking............... 23,176 51,517 42,960 29,234 70,360 18,920 84,053
Corporate finance fees........... 7,409 8,371 9,993 18,561 20,709 12,403 26,256
Net investment gains............. 7,026 8,193 3,524 10,270 33,852 15,637 15,309
Other............................ 9,620 11,418 9,804 10,612 17,074 8,797 17,521
--------- --------- --------- --------- --------- ----------- -----------
Total revenues................... 81,846 125,494 110,547 119,330 220,023 86,862 204,501
--------- --------- --------- --------- --------- ----------- -----------
Expenses:
Compensation and benefits........ 37,424 58,044 54,917 60,175 105,370 42,979 103,879
Brokerage and clearance.......... 5,611 6,184 6,892 7,367 10,441 4,073 6,118
Occupancy and equipment.......... 6,003 6,040 6,045 6,679 7,803 3,687 4,593
Communications................... 3,461 4,135 4,377 6,244 7,394 3,517 4,528
Interest......................... 303 1,141 1,464 987 1,266 484 762
Other(3)......................... 44,382 32,226 10,256 11,315 15,131 6,474 12,142
--------- --------- --------- --------- --------- ----------- -----------
Total expenses................... 97,184 107,770 83,951 92,767 147,405 61,214 132,022
--------- --------- --------- --------- --------- ----------- -----------
Minority interest(4)............... 453 794 352 526 719 289 546
--------- --------- --------- --------- --------- ----------- -----------
Income (loss) before income tax
provision......................... (15,791) 16,930 26,244 26,037 71,899 25,359 71,933
Income tax provision (credit)...... (5,878) 7,200 10,940 10,119 22,461 6,895 24,352
--------- --------- --------- --------- --------- ----------- -----------
Net income (loss).................. $ (9,913) $ 9,730 $ 15,304 $ 15,918 $ 49,438 $ 18,464 $ 47,581
--------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- ----------- -----------
Pro forma net income per
share(5)..........................
Pro forma weighted average shares
outstanding(5)....................
<CAPTION>
MARCH 31,
1996
-----------
ACTUAL
-----------
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED BALANCE SHEET DATA:
Total assets....................... $ 458,437
Debt obligations................... 11,851
Stockholders' equity............... 146,398
Book value per common share
outstanding.......................
<CAPTION>
FISCAL YEAR SIX MONTHS
ENDED SEPTEMBER 30, ENDED
----------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total employees(7)................. 291 327 350 426 500 584
Return on average equity........... -- 34% 37% 28% 58% 76%(8)
Compensation and benefits expense
as a percentage of total
revenues.......................... 46% 46% 50% 50% 48% 51%
Non-compensation and benefits
expense as a percentage of total
revenues.......................... 73% 40% 26% 27% 19% 14%
<CAPTION>
FISCAL YEAR SIX MONTHS
ENDED ENDED
SEPTEMBER 30, MARCH 31,
------------- -------------
<S> <C> <C>
1995 1996
------------- -------------
PRO FORMA(2)
COMBINED STATEMENT OF OPERATIONS
DATA:
Revenues:
Principal transactions........... $ 53,425 $ 43,997
Agency commissions............... 24,603 17,365
Investment banking............... 70,360 84,053
Corporate finance fees........... 20,709 26,256
Net investment gains............. 26,439 13,331
Other............................ 16,396 17,182
------------- -------------
Total revenues................... 211,932 202,184
------------- -------------
Expenses:
Compensation and benefits........ 105,370 103,879
Brokerage and clearance.......... 10,441 6,118
Occupancy and equipment.......... 7,803 4,593
Communications................... 7,394 4,528
Interest......................... 1,266 762
Other(3)......................... 15,131 12,142
------------- -------------
Total expenses................... 147,405 132,022
------------- -------------
Minority interest(4)............... 300 227
------------- -------------
Income (loss) before income tax
provision......................... 64,227 69,935
Income tax provision (credit)...... 28,260 30,771
------------- -------------
Net income (loss).................. $ 35,967 $ 39,164
------------- -------------
------------- -------------
Pro forma net income per
share(5)..........................
Pro forma weighted average shares
outstanding(5)....................
AS ADJUSTED
PRO FORMA(2) (2)(6)
------------- -------------
<S> <C> <C>
COMBINED BALANCE SHEET DATA:
Total assets....................... $ 411,553 $
Debt obligations................... 11,851
Stockholders' equity............... 124,457
Book value per common share
outstanding.......................
<S> <C> <C>
OPERATING DATA:
Total employees(7).................
Return on average equity...........
Compensation and benefits expense
as a percentage of total
revenues..........................
Non-compensation and benefits
expense as a percentage of total
revenues..........................
</TABLE>
- ------------------------------
(1) See Note 1 of Notes to Combined Financial Statements--September 30, 1995 for
an explanation of the basis of presentation.
(2) Gives effect to the transactions described under "Restructuring" and to the
Tax Distribution. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
(3) Includes $36.9 million in fiscal 1991 and $22.9 million in fiscal 1992 for
settlement of certain litigation relating to MiniScribe Corporation. See
"Business--Legal Proceedings."
(4) Minority interest represents the pro rata interest of owners other than the
Company in the earnings of Hambrecht & Quist Guaranty Finance.
(5) See Note 9 of Notes to Pro Forma Combined Financial Statements for a
discussion of the number of shares used in calculating pro forma net income
per share.
(6) As adjusted to reflect the sale of the shares of Common Stock offered hereby
at an assumed initial public offering price of $ per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Capitalization."
(7) Shown at end of period.
(8) Shown on an annualized basis.
------------------------------
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) REFLECTS
THE TRANSACTIONS DESCRIBED UNDER "RESTRUCTURING," PRIOR TO THE COMPLETION OF
THIS OFFERING WITH NO EXERCISE OF DISSENTERS' RIGHTS AND (II) ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "RESTRUCTURING,"
"DESCRIPTION OF CAPITAL STOCK" AND "UNDERWRITING."
4
<PAGE>
RISK FACTORS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE
SET FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS. THE FOLLOWING FACTORS SHOULD
BE CONSIDERED CAREFULLY IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS BEFORE PURCHASING THE COMMON STOCK OFFERED HEREBY:
RISKS ASSOCIATED WITH SECURITIES BUSINESS. The securities business is, by
its nature, subject to numerous and substantial risks, particularly in volatile
or illiquid markets, including the risk of losses resulting from the
underwriting or ownership of securities, trading, principal activities,
counterparty failure to meet commitments, customer fraud, employee errors,
misconduct and fraud (including unauthorized transactions by traders), failures
in connection with the processing of securities transactions and litigation.
The securities business and its profitability are affected by many national
and international factors, including economic, political and market conditions;
the level and volatility of interest rates; legislative and regulatory changes;
currency values; inflation; and the availability of short-term and long-term
funding and capital. Any one or more of these factors may contribute to reduced
levels of securities offerings and merger and acquisition activities, which
would result in lower revenues from the Company's investment banking, trading
and sales activities.
The securities business is also subject to declines in the volume of
securities transactions and in market liquidity, which generally result in lower
revenues from trading activities and commissions. Lower price levels of
securities may also result in a reduced volume of transactions, as well as
losses from declines in the market value of securities held in trading,
investment and underwriting positions. Sudden sharp declines in market values of
securities and the failure of issuers and counterparties to perform their
obligations can result in illiquid markets. In such markets, the Company may
incur losses in its principal trading and market-making activities.
These varied risks associated with the securities business, which are beyond
the Company's control, can adversely affect the Company's investment banking and
sales and trading revenues. Any reduction in revenues or any loss resulting from
the underwriting or ownership of securities could adversely affect the Company's
operating results and financial condition.
DEPENDENCE ON SECURITIES OFFERINGS BY EMERGING GROWTH COMPANIES. The
Company's business depends to a substantial extent on the market for equity
offerings by emerging growth companies, particularly companies in the
technology, healthcare, business information and outsourcing services,
healthcare services and branded consumer products industries. These markets have
historically experienced significant volatility not only in the number and size
of equity offerings, but also in the after-market trading volume and prices of
newly issued securities. In addition, the number of major investors and the size
of managed funds in the market for growth company securities is smaller than in
many other industrial sectors, producing higher volatility in the number and
size of corporate financing transactions, and in the volume of after-market
trading, for growth company securities.
Securities offerings by growth companies can vary significantly due to
economic and political factors. The recent growth in the Company's revenues has
arisen in large part from the significantly increased number and size of
underwritten transactions by companies in the Company's targeted industries, and
by the related increase in after-market trading for such companies during fiscal
1995 and 1996. During other periods, relatively few public offerings for
companies in these industries were completed, which materially adversely
affected the Company's operating results. Underwriting activities in H&Q's
targeted industries can decline for a number of reasons. For example,
underwriting activities decreased significantly in the period from August 1990,
when hostilities commenced between Iraq and Kuwait, until the first quarter of
calendar 1991. Underwriting activity experienced a similar drop in the third
quarter of calendar 1994, after interest rates in the United States increased
sharply. Underwriting and brokerage activity can also be materially adversely
affected for a growth company or industry segment by disappointments in
quarterly performance relative to analysts' expectations, or by changes in
long-term prospects.
5
<PAGE>
The market for securities offerings in each of the industries on which the
Company focuses may also be subject to industry-specific risks. For example, the
prospects for growth in the personal computer market affect companies in a
number of other industries, such as semiconductor-related companies and
companies in the software and networking equipment industries. Similarly,
changes in policies by the United States Food and Drug Administration or the
United States Health Care Financing Administration can produce sharp swings in
the market for biotechnology and healthcare services companies. Although the
Company has recently expanded its activities in equity offerings for services
and branded consumer products companies, technology and healthcare underwriting
transactions continue to play a relatively larger role in the Company's
investment banking and research activities, continuing the Company's historic
exposure to downturns in underwriting activities in these industries.
H&Q also derives a significant portion of its revenues from institutional
brokerage transactions related to the securities of growth companies. In the
past, revenues from such institutional brokerage transactions have declined when
underwriting activities in these industry sectors declined, the volume of
trading on the Nasdaq National Market or New York Stock Exchange ("NYSE")
declined, or when industry sectors or individual companies reported results
below investors' expectations.
As a result of its dependence on revenues related to securities issued by
technology, healthcare, business information and outsourcing services,
healthcare services and branded consumer products companies, any downturn in the
market for equity offerings by emerging growth companies in these industries
could adversely affect the Company's operating results and financial condition.
See "Business--Investment Banking" and "-- Sales, Trading and Syndicate."
SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's
revenues and operating results may fluctuate from quarter to quarter and from
year to year due to a combination of factors, including the number of
underwriting and merger and acquisition transactions completed by the Company's
clients, access to public markets for companies in which the Company has
invested as a principal, valuations of the Company's principal investments, the
level of institutional and retail brokerage transactions, variations in
expenditures for personnel, litigation expenses, and the expenses of
establishing new business units. The Company's revenues from an underwriting
transaction are recorded only when the underwritten security commences trading,
and revenues from a merger or acquisition transaction are recorded only when
retainer fees are received or the transaction closes. Accordingly, the timing of
the Company's recognition of revenue from a significant transaction can
materially affect the Company's quarterly operating results. The Company's cost
structure currently is oriented to meeting the level of demand for corporate
finance transactions experienced during fiscal 1995 and the first half of fiscal
1996. As a result, despite the variability of professional incentive
compensation, the Company could experience losses if demand for these
transactions declines more quickly than the Company's ability to change its cost
structure. Due to the foregoing and other factors, there can be no assurance
that the Company will be able to sustain profitability on a quarterly or annual
basis. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
DEPENDENCE ON ABILITY TO RETAIN AND RECRUIT PERSONNEL. The Company's
business is dependent on the highly skilled, and often highly specialized,
individuals it employs. Retention of research, investment banking, sales and
trading, venture capital, money management and administrative professionals is
particularly important to the Company's prospects. Hambrecht & Quist's strategy
is to establish relationships with the Company's prospective corporate clients
in advance of any transaction and to maintain such relationships over the long
term by providing advisory services to corporate clients in equity, convertible
debt and merger and acquisition transactions. Research professionals contribute
significantly to the Company's ability to secure a role in managing public
offerings. From time to time, Hambrecht & Quist has experienced losses of
research, investment banking and sales and trading professionals, including
recent losses of research analysts. The level of competition for key personnel
has increased recently, particularly due to the market entry efforts of certain
international commercial banks and other investment banks targeting or
increasing their efforts in some of the same industries that H&Q serves, most
notably technology and healthcare. There can be no assurance that losses of key
personnel due to such competition or otherwise will not occur in the future. The
loss of an
6
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investment banking, research or sales and trading professional, particularly a
senior professional with a broad range of contacts in an industry, could
materially and adversely affect the Company's operating results. See
"Business--Employees" and "Management."
The Company depends on many key employees, including its managing directors,
and in particular on its senior executive officers. The loss of any key employee
could materially and adversely affect the Company. While Hambrecht & Quist
generally does not have employment agreements with its employees, it attempts to
retain its employees with incentives such as long-term deferred compensation
plans, the issuance of Company stock subject to continued employment and the
grant of options to buy Company stock that vest over a number of years of
employment. These incentives, however, may be insufficient in light of the
increasing competition for experienced professionals in the securities industry,
particularly if the Company's stock price declines or fails to appreciate
sufficiently to be a competitive source of a portion of professional
compensation. See "--Significant Competition" and "Management--Compensation
Plans."
The Company expects further growth in the number of its personnel,
particularly if current market conditions continue. Competition for employees
with the qualifications desired by the Company is intense, especially with
respect to research and investment banking professionals with expertise in
industries in which underwriting or advisory activity is robust. Competition for
the recruiting and retention of employees has recently increased the Company's
compensation costs, and the Company expects that continuing competition will
cause its compensation costs to continue to increase. There can be no assurance
that the Company will be able to recruit a sufficient number of new employees
with the desired qualifications in a timely manner. The failure to recruit new
employees could materially and adversely affect the Company's operating results.
SIGNIFICANT COMPETITION. The securities business is intensely competitive.
The Company competes worldwide with domestic and foreign securities firms, many
of which have greater capital, financial and other resources than the Company.
In addition to competition from firms currently in the securities business,
domestic commercial banks and investment banking boutiques have recently entered
the business. In recent years, large international banks have entered the
markets served by United States investment banks, including the markets in which
the Company competes. Certain large international banks have hired investment
banking, research and sales and trading professionals from the Company and its
competitors in the recent past, and the Company expects that these and other
competitors will continue to try to recruit professionals away from the Company.
The loss of any key professional could materially and adversely affect the
Company's operating results. The Company expects competition from domestic and
international banks to increase as a result of recent and anticipated
legislative and regulatory initiatives in the United States to remove or relieve
certain restrictions on commercial banks. The Company's focus on growth
companies also subjects it to direct competition from a group of specialty
securities firms and smaller investment banking boutiques that specialize in
providing services to the emerging growth company sector. Such competition could
adversely affect the Company's operating results, as well as its ability to
attract and retain highly skilled individuals. As a result of increasing
competition, revenues from individual underwriting transactions have been
increasingly allocated among a greater number of co-managers, which has resulted
in reduced revenues for certain transactions.
The Company also faces competition from companies offering electronic
brokerage services, a rapidly developing industry. These competitors may have
lower costs or provide fewer services, and may offer these customers more
attractive pricing or other terms, than the Company offers. The Company also
anticipates competition from underwriters who attempt to effect public offerings
for emerging growth companies through new means of distribution, including
transactions effected using electronic media such as the Internet. In addition,
disintermediation may occur as issuers attempt to sell their securities directly
to purchasers, including sales using electronic media such as the Internet. To
the extent that issuers and purchasers of securities transact business without
the assistance of financial intermediaries such as the Company, the Company's
operating results could be adversely affected. See "Business--Competition."
RISKS ASSOCIATED WITH FEDERAL, STATE AND FOREIGN REGULATION. The securities
industry and the business of the Company are subject to extensive regulation in
the United States by the Securities and Exchange Commission ("SEC"), state
securities regulators and other governmental regulatory authorities. The
business of the Company also is regulated in the United States by industry
self-regulatory organizations ("SROs"), including the
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National Association of Securities Dealers, Inc. ("NASD"), the NYSE and other
exchanges. In addition, the business of the Company is subject to regulation by
governmental authorities and SROs in other countries or territories in which the
Company operates, including France, Hong Kong, Japan, Malaysia, the Philippines,
Singapore, Taiwan, Thailand and the United Kingdom. The Company's international
operations also require compliance with the United States Foreign Corrupt
Practices Act.
As a registered broker-dealer and member of the NYSE, the Company's
principal subsidiary, Hambrecht & Quist LLC ("H&Q LLC"), is subject to the net
capital rules of the SEC, NYSE and NASD. The Company's other registered
broker-dealer subsidiary, RvR Securities Corp. ("RvR Securities"), is also
subject to the net capital rules of the SEC and NASD. These rules, which specify
minimum net capital requirements for registered broker-dealers and NYSE and NASD
members, are designed to assure that broker-dealers maintain adequate regulatory
capital in relation to their liabilities and the size of their customer
business. These requirements have the effect of requiring that at least a
substantial portion of a broker-dealer's assets be kept in cash or highly liquid
investments. Compliance with the net capital requirements could limit those
operations that require the intensive use of capital, such as underwriting and
trading activities. These rules also could restrict the Company's ability to
withdraw capital from H&Q LLC and RvR Securities even in circumstances where H&Q
LLC and RvR Securities have more than the minimum amount of required capital.
See "Net Capital Requirements."
In connection with the Company's venture capital activities, H&Q and its
affiliates, as well as the venture capital funds that they manage, are relying
on exemptions from registration under the Investment Advisers Act of 1940, as
amended (the "Advisers Act"), the Investment Company Act of 1940, as amended,
state securities laws and laws of various foreign countries. Failure to meet the
requirements of any such exemptions could have a material adverse effect on the
manner in which the Company, its affiliates and the venture capital funds they
manage carry out their investment activities and on the compensation received by
the Company and its affiliates from the venture capital funds.
Compliance with many of the regulations applicable to the Company involves a
number of risks, particularly in areas where applicable regulations may be
subject to interpretation. In the event of non-compliance by H&Q LLC or RvR
Securities with an applicable regulation, governmental regulators and SROs may
institute administrative or judicial proceedings that may result in censure,
fine, civil penalties (including treble damages in the case of insider trading
violations), the issuance of cease-and-desist orders, the deregistration or
suspension of the non-compliant broker-dealer or investment adviser, the
suspension or disqualification of the broker-dealer's officers or employees or
other adverse consequences. The imposition of any such penalties or orders on
H&Q LLC could have a material adverse effect on the Company's operating results
and financial condition.
The regulatory environment in which the Company operates is subject to
change. The Company may be adversely affected as a result of new or revised
legislation or regulations imposed by the SEC, other United States or foreign
governmental regulatory authorities or SROs. The Company also may be adversely
affected by changes in the interpretation or enforcement of existing laws and
rules by these governmental authorities and SROs.
Much of the Company's underwriting and market-making business involves
securities traded on Nasdaq. Nasdaq's operations, including allegations of
collusion among Nasdaq market-makers, have been the subject of extensive
scrutiny in the media and by government regulators, including by the Antitrust
Division of the United States Department of Justice. H&Q LLC and other Nasdaq
market-makers have responded to Civil Investigation Demands by the Department of
Justice as part of its ongoing investigation. It has been reported in the media
that the SEC has recently submitted to Nasdaq a draft of the SEC's disciplinary
complaint concerning Nasdaq's operations. Nasdaq officials have made a number of
proposed changes in its operations, which currently are being reviewed by
government regulators. The Company is unable to predict the outcome of any of
these proposals, and certain of the changes proposed by Nasdaq officials, if
effected, could adversely affect the Company's operating results.
The Company's businesses may be materially affected not only by regulations
applicable to it as a financial market intermediary, but also by regulations of
general application. For example, the volume of the Company's underwriting,
merger and acquisition and principal investment businesses in a given time
period could be affected by, among other things, existing and proposed tax
legislation, antitrust policy and other governmental
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regulations and policies (including the interest rate policies of the Federal
Reserve Board) and changes in interpretation or enforcement of existing laws and
rules that affect the business and financial communities. The level of business
and financing activity in each of the industries on which the Company focuses
can be affected not only by such legislation or regulations of general
applicability, but also by industry-specific legislation or regulations. See
"Business--Legal Proceedings" and "Regulation."
RISKS ASSOCIATED WITH PRINCIPAL INVESTMENT ACTIVITIES. The Company uses a
portion of its own capital in a variety of principal investment activities, each
of which involves risks of illiquidity, loss of principal and revaluation of
assets. The Company purchases equity securities and, to a lesser extent, debt
securities, in venture capital and other high risk financings of early-stage,
pre-public or "mezzanine stage" and turnaround companies. The Company also
provides asset-based financing and purchases equity securities as part of bridge
or mezzanine financing transactions. The Company's nonmarketable investments
represent a material portion of the Company's assets, and the report of the
Company's independent public accountants on the Company's combined financial
statements includes a statement regarding the inherent uncertainty of valuation
of the Company's nonmarketable investments. The Company's investments, like its
other activities, are concentrated in a small number of industries and
companies, and the companies in which the Company has invested as
principal face rapidly changing and highly competitive environments, increasing
the risks of illiquidity and loss of principal, and creating risks associated
with asset revaluation as market conditions change. In addition, the management
of principal investments often requires substantial attention from the Company's
professionals, particularly if the entity in which the Company has invested
experiences financial difficulties, a restructuring or a sale.
The absence of a public market for securities received in principal
investments means that the Company will not receive a return on its capital
invested for an indeterminate period of time, if at all. A public market for
these securities may not develop for several years, if ever. The timing of
access to liquidity depends on the general market for initial public offerings
of securities or mergers and acquisitions as well as the particular company's
results and prospects and trends in the relevant industry. Delayed access to
liquidity could adversely affect the Company's returns on its principal
investments, which would adversely affect the Company's operating results.
The Company also risks the loss of capital it has invested as a principal.
The companies in which H&Q invests often rely on new or developing technologies
or novel business models, or concentrate on markets which have not yet developed
and may never develop sufficiently to support successful operations. Companies
supported by venture capital have a high incidence of operating losses and
business failure, which typically results in loss of capital invested. Companies
to which H&Q provides mezzanine financing often require substantial cash to
support their operations, risking loss of H&Q's principal if the company in
which H&Q has invested is unable to raise additional capital through an initial
public offering of its securities. If a business that has received asset-based
financing from H&Q fails, H&Q will be required to repossess collateral, which
may not be salable at a price equal to H&Q's initial investment. The entities in
which H&Q invests as a principal often are unable to obtain conventional
financing. The equity securities that H&Q receives will be subordinate to the
issuer's debt, may also be subordinate to other classes of equity and typically
will not provide dividend income. Debt securities purchased by H&Q may rank
subordinate to other debt of the issuer. There can be no assurance that H&Q will
not experience significant losses as a result of its principal investment
activities. A material loss of capital would adversely affect H&Q's operating
results and financial condition.
H&Q may be required to mark up or mark down the value of its principal
investments as a result of industry- or company-specific factors over which H&Q
has no control. Publicly traded securities held as principal investments are
subject to significant volatility, increasing the risk of a mark-down as a
result of a decline in market prices generally or the price of the particular
security. If a significant mark-down of a material asset were to occur, the
Company's operating results and financial condition would be materially and
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business--Venture Capital and Principal
Investment Activities" and "--Risk Management", Notes 2 and 6 of Notes to
Combined Financial Statements--September 30, 1995 and Note 4 of Condensed Notes
to Combined Financial Statements--March 31, 1996.
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RISKS ASSOCIATED WITH UNDERWRITING AND TRADING ACTIVITIES. The Company's
underwriting, securities trading and market-making activities are conducted by
the Company as principal and subject the Company's capital to significant risks,
including market, credit, counterparty and liquidity risks. These activities
often involve the purchase, sale or short sale of securities as principal in
markets that may be characterized by relative illiquidity or that may be
particularly susceptible to rapid fluctuations in liquidity. The Company from
time to time has large position concentrations in securities of, or commitments
to, a single issuer, or issuers engaged in a specific industry, particularly as
a result of the Company's underwriting activities. The Company tends to
concentrate its trading positions and underwriting activities in a more limited
number of industry sectors and portfolio companies than many other investment
banks, which might result in higher trading losses than would occur if the
Company's positions and activities were less concentrated. In addition, the
trend in all major capital markets, for competitive and other reasons, toward
larger commitments on the part of lead underwriters means that, from time to
time, an underwriter (including a co-manager) may retain significant position
concentrations in individual securities. See "Business--Risk Management."
LITIGATION AND POTENTIAL SECURITIES LAWS LIABILITY. Many aspects of the
Company's business involve substantial risks of liability. An underwriter is
exposed to substantial liability under federal and state securities laws, other
federal and state laws and court decisions, including decisions with respect to
underwriters' liability and limitations on indemnification of underwriters by
issuers. For example, a firm that acts as an underwriter may be held liable for
material misstatements or omissions of fact in a prospectus used in connection
with the securities being offered or for statements made by its securities
analysts or other personnel.
In recent years, there has been an increasing incidence of litigation
involving the securities industry, including class actions that seek substantial
damages. The Company has been active in the underwriting of initial public
offerings and follow-on offerings of the securities of emerging and mid-size
growth companies, which often involve a higher degree of risk and are more
volatile than the securities of more established companies. In comparision with
more established companies, such emerging and mid-size growth companies are also
more likely to be the subject of securities class actions, to carry directors
and officers liability insurance policies with lower limits, or no such
insurance, and to become insolvent. Each of these factors increases the
likelihood that an underwriter of an emerging or mid-size growth company's
securities will be required to contribute to any adverse judgment or settlement
of a securities lawsuit.
The plaintiffs' attorneys in securities class action lawsuits frequently
name as defendants the managing underwriters of a public offering. H&Q LLC is a
named defendant in a number of class action lawsuits relating to public
offerings in which it served as a managing underwriter. In addition, H&Q LLC is
currently directly or indirectly subject to over 30 shareholder class action
lawsuits relating to public offerings in which H&Q LLC served as a member of the
underwriting syndicate but not as a managing underwriter. Plaintiffs' attorneys
also name as defendants investment banks which provide advisory services in
merger and acquisition transactions. H&Q LLC is currently a defendant in one
such lawsuit. The Company anticipates that additional securities class action
lawsuits naming H&Q LLC as a defendant will be filed from time to time in the
future, particularly in light of the increased number of public offerings H&Q
LLC has underwritten, and the increased number of merger and acquisition
transactions in which H&Q LLC has provided advisory service, in recent years,
and the fact that the securities sold in certain of such public offerings have
experienced, or may in the future experience, significant declines in market
value. In such lawsuits, all members of the underwriting syndicate typically are
included as members of a defendant class and/or are required by law, or pursuant
to the terms of the underwriting agreement, to bear a portion of any expenses or
losses (including amounts paid in settlement of the litigation) incurred by the
underwriters as a group in connection with the litigation, to the extent not
covered by the indemnification obligation of the issuer of the securities
underwritten. H&Q LLC has on occasion participated in settlements of these types
of lawsuits by making payments to the plaintiff class. There can be no assurance
that the Company, H&Q LLC or RvR Securities will not find it necessary to make
substantial settlement payments in the future. The Company has agreed to
indemnify H&Q LLC against any expense or liability it may incur in connection
with any such lawsuits.
As the number of suits to which the Company is a party increases, the risk
to the Company's assets also increases. If the plaintiffs in any suits against
the Company were to successfully prosecute their claims, or if the Company were
to settle such suits by making significant payments to the plaintiffs, the
Company's operating
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results and financial condition could be materially and adversely affected. As
is common in the securities industry, the Company does not carry insurance that
would cover any such payments. In addition, the Company's charter documents
allow indemnification of the Company's officers, directors and agents to the
maximum extent permitted under Delaware law. The Company has entered into
indemnification agreements with these persons. The Company has been and in the
future may be the subject of indemnification assertions under these charter
documents or agreements by officers, directors or agents of the Company who are
or may become defendants in litigation.
In addition to these financial costs and risks, the defense of litigation
has, to a certain extent, diverted, and is expected to divert in the future, the
efforts and attention of the Company's management and staff. The amount of time
that management and other employees are required to devote in connection with
the defense of litigation could be substantial and might materially divert their
attention from other responsibilities within the Company. Securities class
action litigation in particular is highly complex and can extend for a
protracted period of time, thereby consuming substantial time and effort of the
Company's management and substantially increasing the cost of such litigation.
Further, the laws relating to securities class actions are currently in a state
of flux. The eventual impact of the recently-passed Federal Private Securities
Litigation Reform Act of 1995 on securities class action litigation is not
known. In addition, there are certain proposed California ballot initiative
provisions which the Company believes would, if passed, make it easier for
securities class action plaintiffs to litigate in California state court.
The Company also has been subject to litigation in state and federal courts
relating to companies in which the Company has invested as a principal. The risk
of such litigation is magnified where H&Q has a substantial or controlling
interest in a company, or where one or more of H&Q's employees serves on a
company's Board of Directors. On occasion, such litigation has produced results
materially adverse to H&Q. In particular, during 1991 and 1992, the Company
settled litigation relating to MiniScribe Corporation ("MiniScribe") at an
aggregate cost, including expenses, of approximately $59.8 million. All payments
relating to such MiniScribe settlements were made prior to May 31, 1996. There
can be no assurance that the Company, as a result of its investments as a
principal or the service of the Company's employees as directors of other
entities or otherwise, will not lead to similar litigation or settlement
payments in the future.
In the normal course of business, the Company is also a defendant in various
civil actions and arbitrations arising out of its activities as a broker-dealer
in securities, as an underwriter, as an employer and as a result of other
business activities. The Company has in the past made substantial payments in
connection with the resolution of disputed claims, and there can be no assurance
that substantial payments in connection with the resolution of disputed claims
will not occur in the future.
An adverse resolution of any pending or future lawsuits against H&Q LLC, RvR
Securities or the Company could materially affect the Company's operating
results and financial condition. See "Business--Legal Proceedings."
MANAGEMENT OF GROWTH. Over the past several years, the Company has
experienced significant growth in its business activities and the number of its
employees. This growth has required and will continue to require increased
investment in management personnel, financial and management systems and
controls, and facilities, which, in the absence of continued revenue growth,
would cause the Company's operating margins to decline from current levels. In
addition, as is common in the securities industry, the Company is and will
continue to be highly dependent on the effective and reliable operation of its
communications and information systems. The Company believes that its current
and anticipated future growth will require implementation of new and enhanced
communications and information systems and training of its personnel to operate
such systems. Any difficulty or significant delay in the implementation or
operation of existing or new systems or the training of personnel could
adversely affect the Company's ability to manage growth. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Accounting, Administration and Operations."
DEPENDENCE ON SYSTEMS. The Company's business is highly dependent on
communications and information systems. Any failure or interruption of the
Company's systems, or of the systems of the Company's clearing broker, could
cause delays in the Company's securities trading activities, which could have a
material adverse
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effect on the Company's operating results. There can be no assurance that the
Company or its clearing broker will not suffer any such systems failure or
interruption, whether caused by an earthquake, fire, other natural disaster,
power or telecommunications failure, act of God, act of war or otherwise, or
that the Company's back-up procedures and capabilities in the event of any such
failure or interruption will be adequate.
DEPENDENCE UPON AVAILABILITY OF CAPITAL AND FUNDING. A substantial portion
of the Company's total assets consists of highly liquid marketable securities
and short-term receivables arising from securities transactions. The funding
needs of the Company to date have been satisfied from internally generated funds
and paid-in capital. In addition, the Company borrows limited amounts on a
collateralized basis from a bank to support the activities of its Executive
Financial Services group. The Company's cash at March 31, 1996 will have been
reduced prior to the completion of this offering by approximately $32.2 million
through the transactions described under "Restructuring" and the satisfaction of
commitments of Hambrecht & Quist L.P. to make a tax distribution of a portion of
the partnership's taxable income to its partners. There can be no assurance that
adequate financing to support the Company's businesses will be available in the
future on attractive terms, or at all. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Overview" and "--Liquidity and
Capital Resources."
EFFECTS OF RESTRUCTURING. The transactions described in "Restructuring"
will involve a distribution, principally to the Company's existing equity
securityholders, of approximately $17.0 million in cash (including an estimated
$2.0 million of net profits generated after March 31, 1996) and a distribution
of securities with a book value at March 31, 1996 of approximately $19.3
million. These distributions will not only reduce the Company's total assets and
stockholders' equity by approximately $29.7 million and $21.9 million,
respectively, but will also reduce the amount of investment assets, including
the amount of non-marketable investments, from which the Company can generate
future net investment gains or losses. The restructuring transactions will also
result in a higher effective income tax rate on the Company's future taxable
income. Holders of interests in the entities participating in the restructuring
transactions who perfect their statutory dissenters' rights under the California
Corporations Code will not receive shares of Company Common Stock, but instead
will be entitled to have their interests purchased by the entity in which they
hold an interest for cash at fair market value, determined as of the day before
the first announcement of the terms of the restructuring transactions. To the
extent that holders of interests in the entities participating in the
restructuring transactions exercise their dissenters' rights, the Company will
be required to pay cash for dissenters' interests, and fewer shares of the
Company's Common Stock will be outstanding. Any substantial cash payments to
dissenters may have a material adverse effect on the Company's financial
condition. See "Restructuring."
CONTROL OF THE COMPANY; ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER
PROVISIONS. Upon the completion of this offering, the Company's current
executive officers and directors will own approximately % of the outstanding
Common Stock. Accordingly, these stockholders, if they were to act as a group,
would be able to elect all of the Company's directors, increase the authorized
capital and otherwise control the policies of the Company. Upon the completion
of this offering, the Company's Board of Directors will have the authority to
issue up to 5,000,000 shares of Preferred Stock and to determine the price,
rights, preferences and privileges of those shares without any further vote or
action by the stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of shares of
Preferred Stock, while potentially providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect
of making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. In addition, the Company is subject to
the provisions of Section 203 of the Delaware General Corporation Law, which
will prohibit the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. The application of
Section 203 also could have the effect of delaying or preventing a change of
control of the Company. Certain provisions of the Company's Certificate of
Incorporation, including provisions that provide for the Board of Directors to
be divided into three classes to serve for staggered three-year terms, may have
the effect of delaying or preventing a change of control of the Company, which
could adversely affect the market price of the Company's Common Stock. See
"Management," "Principal Stockholders" and "Description of Capital Stock."
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ABSENCE OF PRIOR MARKET FOR COMMON STOCK. Prior to this offering, there has
been no public market for the Common Stock, and there can be no assurance that
an active public market will develop or, if developed, will be sustained
following this offering. The initial public offering price of the Common Stock
will be determined through negotiations between the Company and the
Representatives of the Underwriters, based upon several factors. For a
discussion of the factors to be taken into account in determining the initial
public offering price, see "Underwriting." Certain factors, such as sales of
Common Stock into the market by existing stockholders, fluctuations in operating
results of the Company or its competitors, market conditions for similar stocks
and market conditions generally for emerging growth companies, particularly in
the technology and healthcare industries, could cause the market price of the
Common Stock to fluctuate substantially. In addition, the stock market has
experienced significant price and volume fluctuations that have particularly
affected the market prices of equity securities of companies and that have often
been unrelated to the operating performance of such companies. Accordingly, the
market price of the Common Stock may decline even if the Company's operating
results or prospects have not changed.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of a substantial number of shares of
Common Stock in the public market, whether by purchasers in this offering or
other stockholders of the Company, could adversely affect the prevailing market
price of the Common Stock, and could impair the Company's future ability to
raise capital through an offering of its equity securities. There will be
shares of Common Stock outstanding immediately after completion of this
offering, all of which will be freely tradeable in the public markets, subject
in certain cases to the volume and other limitations set forth in Rule 144
promulgated under the Securities Act of 1933 ("Securities Act"). All of the
18,620,711 shares outstanding immediately prior to this offering will be subject
to lockup restrictions ("Lockup"), unless released by all of Hambrecht & Quist
LLC, Morgan Stanley & Co. Incorporated and the Company. The Lockup prohibits the
disposition of any such shares until the date 18 months after the date of this
Prospectus ("Effective Date"), provided that six months after the Effective
Date, each stockholder may sell the greater of 10,000 shares or 5% of the
holder's shares outstanding on the Effective Date (an aggregate maximum of
approximately 2,115,000 shares), and 12 months after the Effective Date, each
stockholder may sell an additional number of shares equal to the greater of
10,000 shares or 5% of the holder's shares outstanding on the Effective Date (an
additional aggregate maximum of approximately 1,519,000 shares). Any shares
subject to the Lockup may be released at any time with or without notice to the
public. See "Shares Eligible for Future Sale" and "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of Common Stock in this
offering will experience immediate dilution in net tangible book value of $ per
share, based on an assumed initial public offering price of $ per share. To the
extent that currently outstanding options to purchase Common Stock are
exercised, purchasers of Common Stock will experience additional dilution. See
"Dilution."
FORWARD-LOOKING STATEMENTS. This Prospectus contains forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act of 1934. Such forward-looking statements may
be deemed to include the Company's plans to identify emerging trends and
industries, expand the range of services it offers, increase the number of its
investor and company clients, expand its role in capital markets outside the
United States (particularly in Europe and Asia), increase its principal
investment activities and increase the number of its personnel. Actual results
could differ from those projected in any forward-looking statements for the
reasons detailed in the other sections of this "Risk Factors" portion of the
Prospectus.
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THE COMPANY
Hambrecht & Quist Group, Inc., a Delaware corporation, was formed as a
holding company for all of the operations of Hambrecht & Quist following the
Restructuring described below. The Restructuring will take place prior to the
completion of this offering. The Company will be the successor to the businesses
conducted by Hambrecht & Quist Group, a California corporation established in
1983 ("Group California"), and Hambrecht & Quist L.P., a California limited
partnership established in 1993 ("LP"). In 1983 Group California succeeded to
the business of Hambrecht & Quist, a California partnership formed in 1968.
Unless the context otherwise requires, "Hambrecht & Quist," "H&Q" and the
"Company" refer to Hambrecht & Quist Group, Inc., a Delaware corporation, and
its predecessors, affiliates and subsidiaries. Hambrecht & Quist, H&Q and the
H&Q logo are registered trademarks of the Company.
Following the Restructuring, the Company will operate primarily as a holding
company and will own all of the subsidiaries and equity interests in affiliated
entities that presently are owned by either Group California or LP. Hambrecht &
Quist LLC ("H&Q LLC") is the Company's principal investment banking subsidiary
and securities broker-dealer. In addition, the Company's other principal
operating subsidiaries or affiliated entities, which will be wholly owned except
as indicated, are as follows: RvR Securities Corp. ("RvR Securities"), a
registered broker-dealer serving companies with smaller capitalizations than H&Q
LLC's typical underwriting clients; Hambrecht & Quist Capital Management
Incorporated ("Capital Management"), a registered investment adviser to two
publicly traded closed-end mutual funds; Hambrecht & Quist Venture Partners
("Venture Partners"), a venture capital fund management partnership in which the
Company has a general partnership interest; Hambrecht & Quist Guaranty Finance,
L.P. ("Guaranty Finance"), an 87.5%-owned subsidiary of the Company engaged in
asset-based financing; and Hambrecht & Quist Transition Capital, LLC
("Transition Capital"), an 87.5%-owned subsidiary of the Company formed in 1996
to provide bridge loans and mezzanine financings to emerging growth companies.
In addition, the Company's international activities are carried out in part
through Hambrecht & Quist Saint Dominique, a 50%-owned joint venture formed in
1996 that provides investment banking services to emerging growth companies in
Europe. The Company also maintains minority investments in H&Q Asia Pacific,
Ltd. ("Asia Pacific"), which provides financial advisory and fund management
services in the Asia Pacific region, Beeson Gregory Holdings Limited, a
London-based brokerage firm and financial advisor specializing in growth
companies, De Santis Capital Management, LP, a registered investment adviser,
and EASDAQ S.A., a Nasdaq-type stock market for emerging growth companies in
Europe. The Company also has a 20% interest in Lewco Securities Corp. ("Lewco"),
which acts as a clearing broker and depository for Schroder Wertheim & Co. and
the Company.
The Company's executive offices are located at One Bush Street, San
Francisco, California 94104, and its telephone number is (415) 576-3300. The
Company maintains a "home page" on the World Wide Web at http://
www.hambrecht.com. Information contained on the Company's home page shall not be
deemed to be a part of this Prospectus.
14
<PAGE>
RESTRUCTURING
Prior to the completion of this offering, the Company will engage in a
series of restructuring transactions (collectively, the "Restructuring").
Immediately prior to the Restructuring, the Company operated through two
entities, Group California and LP. A majority of the outstanding shares and
options of Group California are owned by members of the Board of Directors,
Managing Directors and Principals of the Company, and ownership positions of the
shareholders and optionholders of Group California and the beneficial owners of
partnership interests in LP are substantially the same.
Prior to the Restructuring, Group California owned 70% of H&Q LLC and all of
the Company's interests in its subsidiaries and affiliates, other than Guaranty
Finance, as well as certain securities held for investment; LP owned 30% of H&Q
LLC and 70% of Guaranty Finance; and Guaranty Finance was 15% owned indirectly
by Daniel H. Case III, President and Chief Executive Officer of the Company
("Case"), and 15% owned indirectly by the President of the General Partner of
Guaranty Finance, who is otherwise unaffiliated with the Company.
The principal objective of the Restructuring is to eliminate the dual
ownership structure of Group California and LP in order to create a simpler
organizational structure, while retaining the tax efficiencies achieved to date
with respect to portfolio investments presently held by LP. In the
Restructuring, LP will distribute to a liquidating trust for the benefit of its
partners (i) $15.0 million in cash, (ii) an additional cash amount (estimated to
be approximately $2.0 million) representing 50% of LP's profits between June 1,
1996 and the closing date of the Mergers, as defined below, and (iii) certain
securities with a book value as of March 31, 1996 of approximately $17.3
million. These securities represent investments that have a market value higher
than their tax basis and are being distributed in order to achieve the tax
efficiencies afforded by the LP partnership structure. The securities include
519,000 shares of BISYS Group Inc. ("BISYS") (Nasdaq: BSYS) with a book value on
March 31, 1996 of approximately $11.8 million and other securities with a book
value on such date of approximately $700,000, in each case currently owned by
LP, and other investments with a book value on such date of approximately $4.8
million being distributed to LP by Guaranty Finance. Guaranty Finance will also
distribute to its minority shareholders securities with a book value, as of
March 31, 1996, of approximately $2.0 million. Immediately following the LP and
Guaranty Finance distributions, LP will be merged with and into Hambrecht &
Quist Group, Inc. ("Group Delaware"), and Group California will merge with a
subsidiary of Group Delaware and become a wholly owned subsidiary of Group
Delaware (the "Mergers"). Pursuant to the Mergers, the partners of LP and the
shareholders of Group California who do not perfect their statutory dissenters'
rights under the California Corporations Code will receive shares of the Common
Stock of Group Delaware. Such shares will be subject to the restrictions on
transfer set forth in "Shares Eligible for Future Sale." The information set
forth in this Prospectus assumes that the Mergers will become effective without
the exercise of dissenters' rights. The Mergers are intended to be non-taxable
transactions under Sections 351 and 368 of the Internal Revenue Code of 1986, as
amended. See "Risk Factors--Effects of Restructuring."
Prior to the effectiveness of the Mergers, Group California will purchase
Case's interest in Guaranty Finance at its fair market value. Case co-founded
Guaranty Finance in 1983 and purchased his interest at fair market value at the
time Guaranty Finance was initially capitalized in 1985. Subsequently, Case made
additional investments or increased his percentage ownership indirectly in
Guaranty Finance, principally by paying taxes on his share of Guaranty Finance's
partnership income for which there were not always distributions by Guaranty
Finance, and by foregoing his share of a $1.7 million distribution that Group
California received from Guaranty Finance in 1992. The repurchase by Group
California of this interest will be effected in order to avoid the possibility
or appearance of a conflict of interest between Case and the Company, and to
align more directly Case's equity interests related to the Company with those of
other Company stockholders. In addition, Group California will purchase a
portion of the interest in Guaranty Finance held by the other minority
shareholder, and will sell interests in Guaranty Finance to certain Guaranty
Finance employees and to a non-officer employee of the Company who devotes
significant time to Guaranty Finance. As a result of such purchases and sales,
the Company will have an 87.5% interest in Guaranty Finance following the
Restructuring. Prior to effectiveness of the Mergers, the Company will also sell
12.5% of Transition Capital to certain employees and consultants of Transition
Capital and to a non-officer employee of the Company who devotes significant
time to Transition Capital. Prior to the effectiveness of the Mergers, Group
California will also create a trust ("Group Trust") to hold its limited
partnership interest in LP for the benefit of certain current and former
employees. See "Certain Transactions."
15
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Common
Stock offered hereby, based on an assumed initial public offering price of $
per share and after deducting underwriting discounts and commissions and
estimated offering expenses, are estimated to be approximately $ ($ if the
Underwriters' over-allotment option is exercised in full). The proceeds will be
used for general corporate purposes, including increased levels of principal
investments. Pending such use, the proceeds will be invested in short-term
securities. The Company expects that it will, from time to time, engage in
additional financings as the need arises to support the growth of the Company's
businesses. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Business--Venture
Capital and Principal Investment Activities."
DIVIDEND POLICY
The Company has not previously paid dividends on its Common Stock and has no
present intention to pay dividends in the future. The timing and amount of
future dividends, if any, will be determined by the Board and will depend, among
other factors, upon the Company's earnings, financial condition and cash
requirements at the time such payment is considered.
16
<PAGE>
CAPITALIZATION
The following table sets forth the Company's combined capitalization as of
March 31, 1996 (i) on an actual basis, (ii) on a pro forma basis giving effect
to the transactions described under "Restructuring" and to the Tax Distribution
and (iii) on such pro forma basis, as further adjusted to reflect the receipt by
the Company of the net proceeds from the sale of the shares of Common Stock
offered hereby at an assumed initial public offering price of $ per share,
after deducting estimated underwriting discounts and commissions and offering
expenses and the application of the net proceeds therefrom. See "Use of
Proceeds." This table should be read in conjunction with the Combined Financial
Statements--March 31, 1996 and Condensed Notes thereto, "Selected Combined
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------------
ACTUAL PRO FORMA AS ADJUSTED
---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt............................................................... $ -- $ -- $
---------- ---------- -----------
Stockholders' equity (1):
Preferred Stock, none authorized, actual; par value $0.01, 5,000,000 shares -- --
authorized, no shares issued and outstanding, pro forma and as adjusted...
Common Stock, no par value, 40,000,000 shares authorized, 16,031,772 shares 21,738 49,438
issued and outstanding, actual; par value $.01, 100,000,000 shares
authorized, pro forma and as adjusted; 18,620,711 shares issued and
outstanding pro forma; shares issued and outstanding as
adjusted..................................................................
Additional paid-in capital................................................... -- --
Retained earnings............................................................ 96,302 75,019
---------- ---------- -----------
Total stockholders' equity................................................. 118,040 124,457
---------- ---------- -----------
Hambrecht & Quist, L.P. partners' capital.................................... 28,358 -- --
---------- ---------- -----------
Total long-term debt, stockholders' equity and partners' capital......... $ 146,398 $ 124,457 $
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
- ------------------------
(1) Excludes 8,327,384 shares of Common Stock reserved for issuance under the
Company's stock plans, of which 5,327,384 were subject to outstanding
options as of March 31, 1996 at a weighted average exercise price of $6.90
per share. See "Management--Compensation Plans" and Note 7 of Condensed
Notes to Combined Financial Statements--March 31, 1996.
17
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1996
was $ or approximately $ per share of Common Stock. Pro forma net
tangible book value per share represents the amount of the Company's pro forma
tangible assets, after giving effect to the Restructuring, but prior to the sale
of the shares offered hereby, less its pro forma total liabilities, divided by
the pro forma number of shares of Common Stock outstanding. After giving effect
to the sale of the shares of Common Stock offered hereby (at an assumed
initial public offering price of $ per share, after deducting estimated
underwriting discounts and commissions and offering expenses), the pro forma net
tangible book value of the Company as of March 31, 1996 would have been $ ,
or approximately $ per share. This represents an immediate increase of $
per share to existing stockholders and an immediate dilution of $ per
share to new investors. The following table illustrates this per share dilution:
<TABLE>
<CAPTION>
Assumed initial public offering price per share(1)................ $
<S> <C> <C>
Pro forma net tangible book value per share as of March 31,
1996........................................................... $
Increase per share attributable to new investors................
---------
Pro forma net tangible book value per share after the offering....
---------
Dilution per share to new investors............................... $
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1996,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
the existing stockholders and by the investors purchasing shares of Common Stock
offered hereby:
<TABLE>
<CAPTION>
TOTAL CONSIDERATION
SHARES PURCHASED AVERAGE
------------------------ ------------------------ PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders........................................... % $ % $
New investors(1)................................................
----- ----- ----- -----
Total......................................................... 100.0% $ 100.0%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
- ------------------------
(1) Before deducting estimated underwriting discounts and commissions and
offering expenses.
The foregoing computations exclude 8,327,384 shares of Common Stock reserved
for issuance under the Company's stock plans, of which 5,327,384 shares were
subject to outstanding stock options as of March 31, 1996, at a weighted
average exercise price of $6.90 per share. To the extent that any
outstanding options are exercised, there will be further dilution to new
investors. See "Management--Compensation Plans" and Note 7 of Condensed
Notes to Combined Financial Statements--March 31, 1996.
18
<PAGE>
SELECTED COMBINED FINANCIAL DATA
The selected combined financial data set forth below include the combined
operations of Group California and LP and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Combined Financial Statements and Notes thereto included
elsewhere in this Prospectus. The combined statement of operations data set
forth below with respect to the fiscal years ended September 30, 1993, 1994 and
1995 and the combined balance sheet data as of September 30, 1994 and 1995 are
derived from the audited Combined Financial Statements and Notes thereto
included elsewhere in this Prospectus. The combined statement of operations data
for the six months ended March 31, 1995 and 1996, and the combined balance sheet
data as of March 31, 1996, are derived from unaudited financial statements
included elsewhere in this Prospectus, and include, in the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial position and results of
operations of the Company for such periods. The results for the year ended
September 30, 1995 and the six-month period ended March 31, 1996 are not
necessarily indicative of the results to be expected for the entire year ending
September 30, 1996 or any future period. The combined balance sheet data as of
September 30, 1991, 1992 and 1993 and the combined statement of operations data
for the years ended September 30, 1991 and 1992 have been derived from audited
financial statements of the Company which are not included in this Prospectus.
The selected pro forma combined financial data set forth below should be read in
conjunction with the Pro Forma Combined Balance Sheet as of March 31, 1996 and
Notes thereto included elsewhere in this Prospectus. The Pro Forma Combined
Statements of Operations for the year ended September 30, 1995 and the six
months ended March 31, 1996 present the results for the Company as if the
Restructuring had occurred on October 1,
19
<PAGE>
1994, and are based on the historical Combined Financial Statements after giving
effect to the Restructuring. The pro forma adjustments are described in the
accompanying Notes to Pro Forma Combined Financial Statements.
<TABLE>
<CAPTION>
FISCAL YEAR
SIX MONTHS ENDED MARCH ENDED
FISCAL YEAR ENDED SEPTEMBER 30, 31, SEPTEMBER 30,
----------------------------------------------------- ---------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995
-------------
PRO FORMA(1)
1991 1992 1993 1994 1995 1995 1996 -------------
--------- --------- --------- --------- --------- ----------- ---------
COMBINED STATEMENT OF
OPERATIONS DATA:
Revenues:
Principal
transactions........... $ 23,480 $ 33,438 $ 30,045 $ 36,411 $ 53,425 $ 22,253 $ 43,997 $ 53,425
Agency commissions...... 11,135 12,557 14,221 14,242 24,603 8,852 17,365 24,603
Investment banking...... 23,176 51,517 42,960 29,234 70,360 18,920 84,053 70,360
Corporate finance
fees................... 7,409 8,371 9,993 18,561 20,709 12,403 26,256 20,709
Net investment gains.... 7,026 8,193 3,524 10,270 33,852 15,637 15,309 26,439
Other................... 9,620 11,418 9,804 10,612 17,074 8,797 17,521 16,396
--------- --------- --------- --------- --------- ----------- --------- -------------
Total revenues.......... 81,846 125,494 110,547 119,330 220,023 86,862 204,501 211,932
--------- --------- --------- --------- --------- ----------- --------- -------------
Expenses:
Compensation and
benefits............... 37,424 58,044 54,917 60,175 105,370 42,979 103,879 105,370
Brokerage and
clearance.............. 5,611 6,184 6,892 7,367 10,441 4,073 6,118 10,441
Occupancy and
equipment.............. 6,003 6,040 6,045 6,679 7,803 3,687 4,593 7,803
Communications.......... 3,461 4,135 4,377 6,244 7,394 3,517 4,528 7,394
Interest................ 303 1,141 1,464 987 1,266 484 762 1,266
Other (2)............... 44,382 33,226 10,256 11,315 15,131 6,474 12,142 15,131
--------- --------- --------- --------- --------- ----------- --------- -------------
Total expenses.......... 97,184 107,770 83,951 92,767 147,405 61,214 132,022 147,405
--------- --------- --------- --------- --------- ----------- --------- -------------
Minority interest (3)..... 453 794 352 526 719 289 546 300
--------- --------- --------- --------- --------- ----------- --------- -------------
Income (loss) before
income tax provision..... (15,791) 16,930 26,244 26,037 71,899 25,359 71,933 64,227
Income tax provision
(credit)................. (5,878) 7,200 10,940 10,119 22,461 6,895 24,352 28,260
--------- --------- --------- --------- --------- ----------- --------- -------------
Net income (loss)......... $ (9,913) $ 9,730 $ 15,304 $ 15,918 $ 49,438 $ 18,464 $ 47,581 $ 35,967
--------- --------- --------- --------- --------- ----------- --------- -------------
--------- --------- --------- --------- --------- ----------- --------- -------------
Pro forma net income per
share (4)................
Pro forma weighted average
shares outstanding (4)...
<CAPTION>
SIX MONTHS ENDED
MARCH 31, 1996
FISCAL YEAR ENDED SEPTEMBER 30, MARCH 31, ------------------------
----------------------------------------------------- -----------
1991 1992 1993 1994 1995 1996 ACTUAL PRO FORMA(1)
--------- --------- --------- --------- --------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMBINED BALANCE SHEET
DATA:
Total assets.............. $ 106,314 $ 126,420 $ 131,878 $ 155,160 $ 319,630 $ 458,437 $ 458,437 $ 411,553
Debt obligations.......... 1,702 9,242 16,913 12,684 13,771 11,851 11,851 11,851
Stockholders' equity...... 23,985 33,219 50,290 63,591 105,462 146,398 146,398 124,457
Book value per common
share outstanding........ -- -- -- -- --
OPERATING DATA:
Total employees (6)....... 291 327 350 426 500 584
Return on average
equity................... -- 34% 37% 28% 58% 76%(7)
Compensation and benefits
expense as a percentage
of total revenues........ 46% 46% 50% 50% 48% 51%
Non-compensation and
benefits expense as a
percentage of total
revenues................. 73% 40% 26% 27% 19% 14%
<CAPTION>
SIX MONTHS
ENDED MARCH 31,
---------------
<S> <C>
1996
---------------
COMBINED STATEMENT OF
OPERATIONS DATA:
Revenues:
Principal
transactions........... $ 43,997
Agency commissions...... 17,365
Investment banking...... 84,053
Corporate finance
fees................... 26,256
Net investment gains.... 13,331
Other................... 17,182
---------------
Total revenues.......... 202,184
---------------
Expenses:
Compensation and
benefits............... 103,879
Brokerage and
clearance.............. 6,118
Occupancy and
equipment.............. 4,593
Communications.......... 4,528
Interest................ 762
Other (2)............... 12,142
---------------
Total expenses.......... 132,022
---------------
Minority interest (3)..... 227
---------------
Income (loss) before
income tax provision..... 69,935
Income tax provision
(credit)................. 30,771
---------------
Net income (loss)......... $ 39,164
---------------
---------------
Pro forma net income per
share (4)................
Pro forma weighted average
shares outstanding (4)...
AS
ADJUSTED(1)(5)
---------------
<S> <C>
COMBINED BALANCE SHEET
DATA:
Total assets..............
Debt obligations..........
Stockholders' equity......
Book value per common
share outstanding........
OPERATING DATA:
Total employees (6).......
Return on average
equity...................
Compensation and benefits
expense as a percentage
of total revenues........
Non-compensation and
benefits expense as a
percentage of total
revenues.................
</TABLE>
- ------------------------------
(1) Gives effect to the transactions described under "Restructuring" and to the
Tax Distribution.
(2) Includes $36.9 million in fiscal 1991 and $22.9 million in fiscal 1992 for
settlement of certain litigation relating to Miniscribe Corporation. See
"Business -- Legal Proceedings."
(3) Minority interest represents the pro rata interest of owners other than the
Company in the earnings of Hambrecht & Quist Guaranty Finance.
(4) See Note 9 of Notes to Pro Forma Combined Financial Statements for a
discussion of the number of shares used in calculating pro forma net income
per share.
(5) As adjusted to reflect the sale of the shares of Common Stock offered hereby
at an assumed initial public offering price of $ per share and the
application of the net proceeds therefrom. See "Use of Proceeds" and
"Capitalization"
(6) Shown at end of period.
(7) Shown on an annualized basis.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with "Selected Combined
Financial Data" and the Combined Financial Statements -- September 30, 1995 and
Notes thereto and Combined Financial Statements -- March 31, 1996 and Condensed
Notes thereto contained elsewhere in this Prospectus. In addition to historical
information, the following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
significantly from those anticipated in these forward-looking statements as a
result of certain factors, including those discussed in "Risk Factors" and
elsewhere in this Prospectus.
OVERVIEW
EFFECT OF RECENT MARKET CONDITIONS
The Company's business depends to a substantial extent on the market for
public equity offerings by emerging growth companies, particularly companies in
the technology and healthcare industries. These markets are affected by general
economic and market conditions, including fluctuations in interest rates, the
volume and price levels of securities and the flow of investor funds into and
out of equity mutual funds, and by factors that apply to particular industries,
such as technological advances and changes in the regulatory environment.
Substantial fluctuations can occur in the Company's operating results due to
these and other factors.
Market conditions for equity securities of emerging growth companies in the
technology, healthcare, business information and outsourcing services,
healthcare services and branded consumer products industries were negatively
affected by the increase in interest rates during the second half of the fiscal
year ended September 30, 1994. Declining interest rates and an improving
economic environment contributed to a significant increase in activity in the
equity markets in the United States during fiscal 1995 and the six months ended
March 31, 1996. The investment climate for emerging growth company stocks,
particularly technology and healthcare stocks, was strong during these periods,
with a series of records established for the Nasdaq Composite Index and for the
Nasdaq average daily share volume. These factors, among others, resulted in
increased revenues in the Company's operations in fiscal 1995 and the first six
months of fiscal 1996 and also contributed to improved valuations of the
Company's principal investments.
The Company's results of operations for the six months ended March 31, 1996
were achieved during extremely favorable market conditions. There can be no
assurance that such market conditions will continue. Any deterioration in market
conditions will result in reduced Company revenues and profitability.
EFFECTS OF RESTRUCTURING AND TAX DISTRIBUTION
Group California succeeded in January 1983 to the business of Hambrecht &
Quist, a partnership formed in 1968. Between January 1983 and November 1993,
Group California conducted, either directly or through subsidiaries or
affiliates, all of the Company's activities. LP was formed in November 1993 for
the purpose of owning and managing investments in certain operating affiliates.
Fiscal 1994 net income reflects the tax efficiencies associated with such
reorganization. In May 1995, through a contribution of cash and securities, LP
acquired a 30% ownership interest in the Company's broker-dealer subsidiary that
was reorganized as H&Q LLC, leaving Group California with a 70% ownership
position. The Selected Combined Financial Data set forth herein includes the
combined operations of Group California and LP.
Immediately prior to the completion of this offering, the Company will
undertake the Restructuring, pursuant to which, among other things, (i) LP will
transfer cash estimated at $17.0 million (including an estimated $2.0 million of
net profits generated after March 31, 1996) and assets whose book value at March
31, 1996 was approximately $17.3 million to a liquidating trust for the benefit
of LP's partners, (ii) Guaranty Finance will distribute assets whose book value
at March 31, 1996 was approximately $2.0 million to its equity owners other than
LP, (iii) LP and Group California will enter into the Mergers, pursuant to which
LP will be merged into Group Delaware, Group California will become a wholly
owned subsidiary of Group Delaware, and Group Delaware will be a holding company
which beneficially owns all of Hambrecht & Quist's operations, and (iv) the
equity holders of Group California and LP will own shares of Group Delaware
Common Stock. See "Restructuring."
21
<PAGE>
In addition to the Restructuring, prior to the completion of this offering,
LP will have paid to its partners approximately $17.2 million, which had been
accrued as of March 31, 1996 ("Tax Distribution"), in order to provide the
partners with sufficient cash to enable them to pay income taxes on partnership
profits that have been or will be allocated to the partners for income tax
reporting purposes.
The Restructuring and the Tax Distribution together will have the effect of
reducing the Company's total assets and stockholders' equity by approximately
$46.9 million and $21.9 million, respectively. The distribution of securities in
the Restructuring will not only reduce the Company's balance sheet, but also
will decrease the amount of investment assets from which the Company can expect
to generate future net investment gains or losses. In addition, the Company's
effective income tax rate following the Restructuring will increase because the
income of LP was not subject to corporate income tax.
COMPONENTS OF REVENUES AND EXPENSES
REVENUES. Principal transactions revenue includes net revenue from the
trading of securities by the Company as principal, including principal sales
credits and trading profits, and is primarily derived from the Company's
activities as a market-maker. Agency commissions revenue includes revenue
resulting from executing listed and over-the-counter transactions as agent,
including executing trades through a stock exchange. Investment banking revenue
includes the Company's underwriting revenue, composed of underwriting selling
concessions, management fees and underwriting fees. The Company believes that
revenue from principal transactions, agency commissions and investment banking
is substantially dependent on the market for public offerings of equity
securities by emerging growth companies, on the Company's ability to lead or
co-manage public offerings of the securities of such companies and on Nasdaq
trading volume and spreads in the securities of such companies.
Corporate finance fees includes the Company's merger and acquisition,
private placement and other corporate finance advisory fee revenues. Net
investment gains includes realized and unrealized gains on the Company's
long-term investment portfolio, which includes investments in publicly traded
and private companies and venture capital and public investment partnerships.
One such investment, BISYS, has had a significant effect on the Company's net
investment gains in recent years. In 1987, the Company made an investment in a
private company, Concord Holdings Corp. ("Concord"), which subsequently was
acquired by BISYS. Appreciation in the value of the Company's shares of Concord,
and subsequently in those of BISYS, resulted in pre-tax investment gains for the
Company amounting to $2.2 million, $5.5 million and $19.9 million in fiscal
1993, 1994 and 1995, respectively, and $10.4 million for the six months ended
March 31, 1996. Approximately two-thirds of the Company's BISYS holdings will be
distributed as part of the Restructuring. Corporate finance fees and net
investment gains or losses depend on a small number of significant transactions
and are likely to fluctuate significantly. Other revenue includes asset
management fees, profit participation distributions from managed venture
investment funds, interest and miscellaneous income.
EXPENSES. Compensation and benefits expense includes sales, trading and
incentive compensation, which are primarily variable based on revenue
production, and salaries, payroll taxes, employee benefits, temporary employee
costs and placement agency fees, which are relatively fixed in nature. Brokerage
and clearance expense includes the cost of securities clearance, floor brokerage
and exchange fees. The Company clears its securities transactions through Lewco,
which acts as a clearing broker and depository for the Company. A proportionate
share of Lewco's expenses, net of certain revenues, is reimbursed by the Company
based on the volume of transactions processed on its behalf. As a result of its
relationship with Lewco, the Company benefits from the economies of scale
provided by a large, externally managed clearing organization.
Occupancy and equipment expense includes the rent and utility charges paid
for the Company's facilities, expenditures for facilities repairs and upgrades,
and depreciation of computer, telecommunications and office equipment.
Communications expense includes charges from third-party providers of
telecommunications services and news and market data services. Interest expense
relates primarily to bank borrowings.
Other expense includes professional services and litigation expenses, travel
and entertainment and miscellaneous expenses. Although the Company has not
experienced significant fluctuations from the settlement of lawsuits in the
ordinary course of business, a significant litigation judgment or settlement
could have a material
22
<PAGE>
adverse effect on the Company's operating results and financial condition. In
fiscal 1991 and 1992, the Company incurred $36.9 million and $22.9 million,
respectively, of pre-tax settlement expenses related to litigation involving
MiniScribe. Payments of the settlement accruals were made in each fiscal year
beginning in fiscal 1991 and ending in the third quarter of fiscal 1996. As of
May 31, 1996, all payments related to such litigation settlements had been paid
in full. See "Business--Legal Proceedings."
MINORITY INTEREST. Minority interest reflects the pro rata interest of the
owners other than the Company in earnings of Guaranty Finance. See
"Restructuring."
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
total revenues:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH
31, FISCAL YEAR SIX MONTHS
---------------------------------- ---------------------- ENDED SEPTEMBER ENDED MARCH
1993 1994 1995 1995 1996 30, 1995 31, 1996
---------- ---------- ---------- ---------- ---------- --------------- -------------
PRO FORMA(1)
------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF OPERATIONS
DATA:
Revenues:
Principal transactions.......... 27.2% 30.5% 24.3% 25.6% 21.5% 25.3% 21.8%
Agency commissions.............. 12.9 11.9 11.2 10.2 8.5 11.6 8.6
Investment banking.............. 38.9 24.5 32.0 21.8 41.1 33.3 41.6
Corporate finance fees.......... 9.0 15.6 9.4 14.3 12.8 9.7 13.0
Net investment gains............ 3.2 8.6 15.4 18.0 7.5 12.5 6.6
Other........................... 8.8 8.9 7.7 10.1 8.6 7.6 8.4
----- ----- ----- ----- ----- ----- -----
Total revenues................ 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- -----
Expenses:
Compensation and benefits....... 49.7% 50.4% 47.9% 49.5% 50.8% 49.8% 51.4%
Brokerage and clearance......... 6.2 6.2 4.7 4.7 3.0 4.9 3.0
Occupancy and equipment......... 5.4 5.6 3.5 4.2 2.2 3.7 2.3
Communications.................. 4.0 5.2 3.4 4.0 2.2 3.5 2.2
Interest........................ 1.3 0.9 0.6 0.6 0.4 0.6 0.4
Other........................... 9.3 9.5 6.9 7.5 5.9 7.1 6.0
----- ----- ----- ----- ----- ----- -----
Total expenses................ 75.9 77.8 67.0 70.5 64.5 69.6 65.3
----- ----- ----- ----- ----- ----- -----
Minority interest................. 0.3 0.4 0.3 0.3 0.3 0.1 0.1
----- ----- ----- ----- ----- ----- -----
Income before income tax
provision........................ 23.8 21.8 32.7 29.2 35.2 30.3 34.6
Income tax provision.............. 10.0 8.5 10.2 7.9 11.9 13.3 15.2
----- ----- ----- ----- ----- ----- -----
Net income........................ 13.8% 13.3% 22.5% 21.3% 23.3% 17.0% 19.4%
----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- -----
</TABLE>
- ------------------------
(1) Gives effect to the Restructuring and the Tax Distribution. See
"Restructuring" and "-- Overview."
SIX MONTHS ENDED MARCH 31, 1996 AND 1995
REVENUES. Total revenues increased 135% from $86.9 million in the 1995
fiscal period to $204.5 million in the 1996 fiscal period.
Principal transactions revenue increased 97% from $22.3 million in the 1995
fiscal period to $44.0 million in the 1996 fiscal period. This increase was due
to a significant increase in underwriting activity, resulting in substantial
after-market trading, an increase in Nasdaq market activity overall, as well as
the benefit derived from the Company's expansion of its equity sales and trading
capabilities.
Agency commissions increased 96% from $8.9 million in the 1995 fiscal period
to $17.4 million in the 1996 fiscal period. This increase was due to the
expansion of the Company's institutional listed equity business and an increase
in both the number of retail brokers in its Executive Financial Services group
and the average production of these brokers.
23
<PAGE>
Investment banking revenue increased 345% from $18.9 million in the 1995
fiscal period to $84.1 million in the 1996 fiscal period, and increased as a
percentage of revenues from 21.8% to 41.1%. The Company managed or co-managed 22
public offerings during the 1995 fiscal period compared to 75 during the 1996
fiscal period.
Corporate finance fees increased 112% from $12.4 million in the 1995 fiscal
period to $26.3 million in the 1996 fiscal period. This increase was due to the
completion of several large advisory assignments during the 1996 fiscal period.
Net investment gains for the period decreased 2% from $15.6 million in the
1995 fiscal period to $15.3 million in the 1996 fiscal period. The net gains
related primarily to the Company's investment in BISYS, which accounted for
$12.0 million of total investment gains in the 1995 fiscal period and $10.4
million in the 1996 fiscal period.
Other revenue increased by 99% from $8.8 million in the 1995 fiscal period
to $17.5 million in the 1996 fiscal period. The increase was due primarily to an
increase in asset management fees, profit participation distributions from the
management of venture investments, and an increase in interest income on margin
loans outstanding.
EXPENSES. Total expenses increased 116% from $61.2 million in the 1995
fiscal period to $132.0 million for the 1996 fiscal period.
Compensation and benefits expense increased 142% from $43.0 million in the
1995 fiscal period to $103.9 million in the 1996 fiscal period. The increase was
due primarily to increased sales, trading and incentive compensation.
Compensation and benefits expense as a percentage of total revenues increased
from 49.5% to 50.8%; this change was attributable to a change in revenue mix and
the related differences in compensation payout rates for the different sources
of revenue. Average employee headcount was 440 in the 1995 fiscal period
compared to 538 in the 1996 fiscal period.
Brokerage and clearance expense increased 50% from $4.1 million in the 1995
fiscal period to $6.1 million in the 1996 fiscal period. As a percentage of
total revenues, brokerage and clearance expense decreased from 4.7% in the 1995
fiscal period to 3.0% in the 1996 fiscal period. The percentage decline was due
primarily to efficiencies experienced by Lewco.
Occupancy and equipment expense increased 25% from $3.7 million in the 1995
fiscal period to $4.6 million in the 1996 fiscal period as a result of
expenditures to repair and upgrade office facilities in San Francisco and New
York and an increase in depreciation expense due to acquisitions of computer and
telecommunications equipment.
Communications expense increased 29% from $3.5 million in the 1995 fiscal
period to $4.5 million in the 1996 fiscal period. This increase was due to
increases in telecommunications and market data expenses resulting from the
hiring of additional employees in the 1996 fiscal period.
Interest expense increased 57% from approximately $500,000 in the 1995
fiscal period to approximately $800,000 in the 1996 fiscal period. This increase
related primarily to fluctuations in bank financing levels during the two
periods.
Other expense increased 88% from $6.5 million in the 1995 fiscal period to
$12.1 million in the 1996 fiscal period. Of this increase, $2.6 million was due
to increased accruals for professional services due to higher levels of business
activity, and the remainder was due primarily to increases in travel,
entertaining, conferences and miscellaneous expenses.
INCOME TAX PROVISION. The Company's effective income tax rate was 27.2% in
the 1995 fiscal period and increased to 33.9% in the 1996 fiscal period. The
Company's effective income tax rate in each fiscal period was less than the
combined federal and state statutory income tax rates because LP was not subject
to corporate federal or state income tax. The lower effective tax rate for the
six months ended March 31, 1995 was due to the fact that net investment gains
were reported primarily through LP and, therefore, were not subject to corporate
income tax. The Restructuring will result in higher effective income tax rates
on the Company's future taxable income.
24
<PAGE>
FISCAL YEARS ENDED SEPTEMBER 30, 1995 AND 1994
REVENUES. Total revenues increased 84% from $119.3 million in fiscal 1994
to $220.0 million in fiscal 1995.
Principal transactions revenue increased 47% from $36.4 million in fiscal
1994 to $53.4 million in fiscal 1995. The increase was due in part to benefits
realized from investments made in prior periods in the Company's Nasdaq trading
capabilities as well as a significant improvement in market conditions during
the last six months of fiscal 1995.
Agency commissions increased 73% from $14.2 million in fiscal 1994 to $24.6
million in fiscal 1995. This increase resulted from increased market activity as
well as growth in the number of brokers in the Company's Executive Financial
Services and institutional equity businesses.
Investment banking revenue increased 141% from $29.2 million in fiscal 1994
to $70.4 million in fiscal 1995. This increase resulted from the increased level
of underwriting transactions in fiscal 1995, particularly in the technology and
healthcare industries. The Company managed or co-managed 36 public offerings in
fiscal 1994 and 71 in fiscal 1995.
Corporate finance fees increased 11% from $18.6 million in fiscal 1994 to
$20.7 million in fiscal 1995.
Net investment gains increased 229% from $10.3 million in fiscal 1994 to
$33.9 million in fiscal 1995. The Company's investment in BISYS accounted for
$5.5 million and $19.9 million of the total net investment gains in fiscal 1994
and fiscal 1995, respectively. No other single investment accounted for a
significant portion of the total gain.
Other revenues increased 61% from $10.6 million in fiscal 1994 to $17.1
million in fiscal 1995. This increase was due primarily to an increase in profit
participation distributions received from venture capital investment funds the
Company manages and higher margin interest income attributable to the
above-described expansion of the Executive Financial Services group.
25
<PAGE>
EXPENSES. Total expenses increased 59% from $92.8 million in fiscal 1994 to
$147.4 million in fiscal 1995.
Compensation and benefits expense increased 75% from $60.2 million in fiscal
1994 to $105.4 million in fiscal 1995 but decreased as a percentage of total
revenues from 50.4% to 47.9%. This percentage decrease was attributable
primarily to a change in the mix of revenue in fiscal 1995, which included a
larger percentage of net investment gains with lower incremental compensation
costs. Average employee headcount was 396 in fiscal 1994 and 458 in fiscal 1995.
Brokerage and clearance expense increased 41% from $7.4 million in fiscal
1994 to $10.4 million in fiscal 1995, consistent with the increase in the
Company's brokerage business, partially offset by lower per ticket transaction
costs from economies of scale achieved by Lewco.
Occupancy and equipment expense increased 17% from $6.7 million in fiscal
1994 to $7.8 million in fiscal 1995, primarily due to a scheduled rent increase
for the Company's San Francisco office facility.
Communications expense increased 18% from $6.2 million in fiscal 1994 to
$7.4 million in fiscal 1995, due in part to increases in telephone, market
quotation and news services for new employees and an increase in
telecommunications supplies.
Interest expense increased 28% from $1.0 million in fiscal 1994 to $1.3
million in fiscal 1995, primarily due to an increase in borrowings to support
the operations of Guaranty Finance.
Other expense increased 34% from $11.3 million in fiscal 1994 to $15.1
million in fiscal 1995. Of the increase, $2.5 million was due to an increase in
the cost of the industry conferences sponsored by the Company. The balance of
the increase was primarily due to an increase in professional services resulting
from the overall increase in the Company's business activities.
INCOME TAX PROVISION. The Company's effective income tax rate was 38.9% in
fiscal 1994 and 31.2% in fiscal 1995. The Company's effective income tax rate in
each year was less than the combined federal and state statutory rate due to the
fact that H&Q LLC and LP were not subject to material federal or state income
tax. The decrease in the effective combined tax rate in fiscal 1995 was a result
of the higher percentage of the combined pretax income that was reported through
LP in fiscal 1995.
FISCAL YEARS ENDED SEPTEMBER 30, 1994 AND 1993
REVENUES. Total revenues increased 8% from $110.5 million in fiscal 1993 to
$119.3 million in fiscal 1994. Underwriting and sales activity declined
significantly during the second half of fiscal 1994 as a result of many factors,
including rising interest rates.
Principal transactions revenue increased 21% from $30.0 million in fiscal
1993 to $36.4 million in fiscal 1994. The increase occurred primarily during the
first half of the year, prior to the aforementioned reduction in market
activity.
Agency commissions was unchanged at $14.2 million in each fiscal year. The
effect of the slowdown in market activity that occurred during the second half
of fiscal 1994 was offset in part by incremental revenue resulting from the
addition of new brokers in the Company's Executive Financial Services group.
Investment banking revenue decreased 32% from $43.0 million in fiscal 1993
to $29.2 million in fiscal 1994. This decline was due to a substantial reduction
in underwriting activity during the second half of fiscal 1994. The Company
managed or co-managed 45 public offerings during fiscal 1993 and 36 during
fiscal 1994.
Corporate finance fees increased 86% from $10.0 million in fiscal 1993 to
$18.6 million in fiscal 1994. This increase was principally the result of an
expansion in H&Q's mergers and acquisitions advisory business.
Net investment gains increased 191% from $3.5 million in fiscal 1993 to
$10.3 million in fiscal 1994. Net gains attributable to the Company's investment
in BISYS were $2.2 million and $5.5 million for fiscal 1993 and fiscal 1994,
respectively.
Other revenue increased 8% from $9.8 million in fiscal 1993 to $10.6 million
in fiscal 1994.
EXPENSES. Total expenses increased 11% from $84.0 million in fiscal 1993 to
$92.8 million in fiscal 1994.
26
<PAGE>
Compensation and benefits expense increased 10% from $54.9 million in fiscal
1993 to $60.2 million in fiscal 1994. This increase was due primarily to an
increase in performance-related compensation. Compensation and benefits expense
as a percentage of total revenues increased from 49.7% to 50.4%. Average
employee headcount was 336 in fiscal 1993 and 396 in fiscal 1994.
Brokerage and clearance expense increased 7% from $6.9 million in fiscal
1993 to $7.4 million in fiscal 1994. The increase was consistent with the
increase in the Company's brokerage revenue.
Occupancy and equipment expense increased by 10% from $6.0 million in fiscal
1993 to $6.7 million in fiscal 1994. This increase reflected a small addition to
space leased in San Francisco as well as normal annual increases in occupancy
costs.
Communications expense increased by 42% from $4.4 million in fiscal 1993 to
$6.2 million in fiscal 1994. This increase was primarily due to increased
telecommunications expenditures.
Interest expense declined by 33% from $1.5 million in fiscal 1993 to $1.0
million in fiscal 1994. The decrease was due to lower interest incurred on the
principal amount of obligations incurred to settle certain MiniScribe litigation
as a result of scheduled repayments.
Other expense increased by 11% from $10.2 million in fiscal 1993 to $11.3
million in fiscal 1994. This increase was due primarily to increases in travel,
conference and professional services resulting from generally higher levels of
business activities.
INCOME TAX PROVISION. The Company's combined effective income tax rate was
41.7% for fiscal 1993 and 38.9% for fiscal 1994. The lower rate for fiscal 1994
was due to income reported by LP, an entity not subject to corporate tax, which
was formed in December 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically satisfied its funding needs with its own
capital resources, consisting almost entirely of internally generated retained
earnings and, more recently, capital raised from the sale of its Common Stock to
employee shareholders. As of March 31, 1996, H&Q LLC had liquid assets
consisting primarily of cash and cash equivalents of $36.5 million and
receivables of $92.4 million from Lewco, its clearing affiliate. The cash
equivalents consisted of United States Treasury bills with maturities of 90 days
or less. As of March 31, 1996, the Company had a bank line of credit in the
amount of $12.0 million, with a balance of $5.0 million outstanding. While the
Company has not required additional bank financing during the past several
years, it is currently negotiating a $20.0 million standby revolving credit
agreement with a commercial bank.
The Company's balance sheet reflects the Company's relatively unleveraged
financial position. The ratio of assets to equity as of March 31, 1996 was
approximately 3:1. Upon completion of this offering, this ratio will decline to
a ratio of approximately . The Company's principal assets consist of
receivables from customers and Lewco, securities held for trading purposes,
short-term investments and securities held for investment purposes.
Substantially all of the Company's receivables are secured by customer
securities or security transactions in the process of settlement. Securities
held for trading purposes are actively traded and readily marketable. Short-term
investments are comprised primarily of United States Treasury securities with
maturities of less than one year. Securities held for investment purposes are
for the most part illiquid and are carried at valuations that reflect this lack
of liquidity.
H&Q LLC and RvR Securities, as broker-dealers, are registered with the SEC
and are members of the NASD, and, in the case of H&Q LLC, the NYSE. As such,
they are subject to the capital requirements of these regulatory entities. Their
regulatory net capital has historically exceeded these minimum requirements. As
of March 31, 1996, H&Q LLC was required to maintain minimum regulatory net
capital in accordance with SEC rules of approximately $3.8 million and had total
regulatory net capital of approximately $43.2 million, or approximately $39.4
million in excess of its requirement. H&Q LLC's regulatory net capital is
expected to decline as a result of the Restructuring, and to increase upon the
completion of this offering. RvR Securities had total regulatory net capital of
$1.7 million and a minimum regulatory net capital requirement of $250,000. See
"Net Capital Requirements."
The Company believes that its current level of equity capital, combined with
funds anticipated to be generated from operations and the anticipated proceeds
of this offering, will be adequate to fund its operations for the foreseeable
future.
27
<PAGE>
BUSINESS
INDUSTRY BACKGROUND
During the last three decades, high-growth entrepreneurial companies have
played an increasingly important role in the United States and global economies.
These "growth companies," which are characterized by innovation and rapidly
evolving markets, have emerged in a number of industries. Technology-oriented
growth companies have evolved from a cyclical niche industry to a significant
driver of economic growth, job creation and business productivity. Healthcare
companies in the United States, while continuing to improve human health, have
responded to structural opportunities arising from the aging population and the
drive to reduce healthcare costs. Service companies have also become catalysts
for economic change as they add technology to traditional service offerings,
particularly in the healthcare, business information and outsourcing industries.
Branded consumer companies are responding to the convergence of changing
demographics, structural changes in distribution channels and the use of
information technology.
Since January 1991, publicly traded growth company securities in general,
and technology-related equity issues in particular, have generally outperformed
the broader market indices. For example, from January 1991 through March 1996,
the H&Q Technology Index increased by 24.8% compounded annually, while the S&P
500 increased by 13.6% compounded annually. This performance has been
accompanied by a greatly increased inflow of funds for investment in growth
companies, and has led to increased demand by institutional investors for
investment information and analysis focused on the growth company sector. Many
of these investors believe that effective investment participation in the
rapidly changing growth company universe requires a deeper understanding of
underlying technologies, products and distribution channels than is required to
invest in more mature, less volatile or slower growing sectors of the economy.
The unique characteristics of the growth company sector have led both growth
companies and growth-oriented investors to seek the services of investment
banking professionals with a high degree of industry knowledge and capital
market expertise. Growth companies in their early years of public trading
require a high level of research, sales and trading coverage and aftermarket
consultation from their investment bankers. In addition, as these companies
mature, the investment banks serving them must provide expert advice with
respect to strategic partnership and merger and acquisition transactions and
financing strategies. Investment banks serving growth companies must also meet
the investment needs of the entrepreneurs who manage such companies. Fund
managers and other growth-oriented investors require focused securities research
both to understand underlying technologies, products and distribution channels
for particular growth industries, and also to assist in identifying specific
growth companies that are the most likely to succeed in their respective market
segments.
HAMBRECHT & QUIST
Hambrecht & Quist is a major bracket investment bank focused on emerging
growth companies in the United States and, increasingly, worldwide. The
Company's core strength has been the early identification and sponsorship of
leading growth companies in its chosen areas of focus through analysis of
industry and technology trends. The Company leverages its industry expertise by
providing growth companies and growth investors with a full range of investment
banking and brokerage services, and by investing its own capital in emerging
growth companies.
Hambrecht & Quist was formed in 1968 to focus on the needs of emerging
growth companies and their investors. It has grown its business by expanding the
range of services it provides to growth companies and investors, by servicing
the needs of larger size companies, and by developing expertise in new
industries and markets. H&Q, from its inception, combined equity underwriting
and brokerage services for emerging growth companies with venture capital
investing. The Company has significantly expanded its underwriting capability;
added advisory services in mergers, acquisitions and strategic partnerships; and
begun providing private placement, asset-based and mezzanine financing. H&Q also
has achieved a leading role in Nasdaq market-making, expanded its retail
brokerage services and increased its trading of NYSE-listed securities. From its
early concentration on the technology and healthcare industries, Hambrecht &
Quist has broadened its focus to encompass the business information and
outsourcing services, healthcare services and branded consumer industries.
28
<PAGE>
H&Q was founded with and maintains a commitment to working closely with
entrepreneurial companies and investors interested in such companies. H&Q
believes that it has developed a strong internal culture that emphasizes a
long-term investment outlook. H&Q believes that its client focus on rapidly
growing entrepreneurial companies and growth-oriented investors and its
tradition of principal investing, along with its broad internal distribution of
equity ownership, have combined to sustain this culture.
H&Q organizes its research, investment banking and venture capital
professionals into industry teams. Each team develops and maintains an in-depth
understanding of the secular and cyclical trends driving that particular
industry sector. In addition, each team of professionals maintains close
relationships not only with private and public growth companies, but also with
venture capital and key institutional investors, technical experts, professional
service providers and other key industry participants. Through these
relationships, H&Q gains the opportunity to participate actively in the growth
of promising entrepreneurial companies.
Hambrecht & Quist believes that its industry focus and long-term
orientation, together with the depth of its resources committed to the growth
company sector, have made H&Q a leading provider of investment banking and
brokerage services for emerging growth companies. Hambrecht & Quist has managed
or co-managed more than 600 public offerings of equity securities for more than
400 growth companies.
STRATEGY
Hambrecht & Quist employs a research-oriented approach to building
relationships with growth companies and growth investors. The Company's overall
strategy is to continue its commitment to targeted high-growth industries and
investors in those industries by providing comprehensive research coverage, an
increasing range of investment banking and brokerage services, and investment
capital to entrepreneurial companies. The Company's strategy includes the
following key elements:
-CONTINUOUSLY IDENTIFY EMERGING TRENDS AND INDUSTRIES. Hambrecht & Quist
intends to continue its tradition of identifying, in their nascent stages,
trends and industries that have the potential to become broad-based drivers
of economic growth and change. H&Q was an early participant in the personal
computer revolution led by Apple Computer, the applications of
biotechnology pioneered by Genentech and, more recently, the emergence of
the Internet and the World Wide Web facilitated by Netscape. H&Q believes
that its focus on the early identification of emerging trends and
industries distinguishes it from other investment banking firms and
provides it with a key competitive advantage.
-LEAD WITH IN-DEPTH, FOCUSED INDUSTRY COVERAGE. H&Q believes that industry
specialization is crucial to meeting the demands of its clients for
sophisticated and informed investment advice. The Company organizes its
research, investment banking and venture capital activities along sharply
defined industry lines and periodically reexamines its industry categories
to ensure adequate coverage of emerging opportunities. For example, the
Company's software focus is divided into several subcategories, one of
which is enterprise software/Internet, which, in turn, has been subdivided
into client/server, productivity software, database, and Web
software/Internet segments. The Company's strategy is to continue to focus
on a limited number of high potential growth industries and the segments
within such industries.
-BRING GROWTH COMPANIES TO GROWTH INVESTORS. H&Q's strategy is to add value
where growth capital and growth companies intersect. Because of its
fundamental understanding of the industries it covers and its long history
of providing services to emerging growth industries, H&Q believes it is
well-positioned to bring together growth companies and growth investors.
The Company's strategy is to maintain strong relationships with major
institutional investors in emerging growth companies. An important element
of this strategy is the Company's sponsorship of regular conferences for
growth companies and growth-oriented investors, each focusing on a
different industry or geographic region. The Company's annual Technology
Conference and Healthcare Conference are recognized as leading conferences
in their industries. The Company believes its Branded Consumer,
plaNET.wall.street (Internet Conferencing) and other newer conferences are
gaining similar recognition in their respective areas.
-ESTABLISH EARLY AND LASTING RELATIONSHIPS WITH ENTREPRENEURIAL
COMPANIES. H&Q's strategy is to build relationships with promising
entrepreneurial companies at an early stage in their development. H&Q often
establishes contact with such companies through its long-term relationships
with leading venture
29
<PAGE>
capital investors. In some cases, H&Q participates directly in the growth
of these companies by providing venture capital or otherwise investing as a
principal in their early years. As these entrepreneurial companies grow,
the Company sustains these relationships, often on a long-term basis,
through research coverage, equity and convertible debt offerings,
institutional and retail brokerage, Nasdaq market-making and merger,
acquisition and strategic partnering and general corporate advice.
-OFFER EXPANDED RANGE OF SERVICES TO CORPORATE CLIENTS. In recent years,
the Company has greatly enhanced its equity underwriting and convertible
debt capability and its merger and acquisition advisory services while
adding new products and services, including private placement/structured
finance and a corporate services group. The Company has also added
asset-based and mezzanine financing to its principal investment activities.
At the same time, H&Q has increased the number of its syndicate personnel
and has begun offering specialized brokerage services to the venture
capital industry. The Company's strategy is to continue to expand the range
of its investment banking services and principal investment activities.
-INCREASE DISTRIBUTION AND TRADING FOR GROWTH INVESTORS. Since 1994, the
Company has increased the number of brokers in its Executive Financial
Services group and in domestic and international institutional sales.
During this period, the Company also has increased the number of coverage
and position traders, has increased the amount of capital available for
both Nasdaq and NYSE-listed securities trading operations and has expanded
its syndicate desk. The Company intends to continue these efforts, as well
as to expand the number of research analysts and the number of companies
for which it provides research coverage.
-EXPAND GLOBAL PRESENCE. H&Q's strategy is to extend its success in
financing domestic growth companies in United States capital markets to
non-U.S. companies and capital markets. In addition to its United States
underwritings of European, Israeli and Asian companies, the Company has
recently made significant investments in Europe through joint ventures
focused on enabling European companies to access United States capital
markets, as well as on making capital available locally to European growth
companies. H&Q also has extensive operations which provide venture capital
to Asian growth companies, both as principal and as a manager of Asian
venture capital funds.
30
<PAGE>
RESEARCH FOCUS
H&Q believes that industry specialization is crucial to meeting the demands
of its clients for sophisticated and informed investment and strategic advice.
The Company's approach is to serve its clients through an in-depth understanding
of sharply defined industry segments and the leading participants in those
segments. H&Q's research universe is presently divided into the industry groups
and industry segments set forth below. Rather than dedicating, for example, just
one senior analyst to cover all aspects of a broadly defined industry, the
Company dedicates focused research support to many segments within each of the
industries it serves. In certain instances an H&Q analyst provides coverage for
more than one industry segment.
HAMBRECHT & QUIST RESEARCH
[CHART]
There are four rectangular shaped boxes in the graphic.
In the upper middle part of the rectangular box at the top of the graphic is
a triangular shaped icon with the letter "T" inside with the word "Technology"
underneath. From the bottom of the icon labeled 'Technology' is a downward
vertical line which perpendicularly connects to a horizontal line from which six
short vertical lines connect to six small rectangular boxes below the horizontal
line. The small rectangular box on the far left contains the word
"Communications." The small rectangular box which is second from the left
contains the words "Distributed Systems." The small rectangular box which is
third from the left contains the words "Enterprise Software/Internet." The small
rectangular box which is third from the right contains the words "Semiconductor/
Capital Equipment." The small rectangular box which is on the far right contains
the words "Technical Systems."
From the bottom left corner of the small rectangular box containing the word
"Communications" is a downward vertical line from which five short horizontal
lines connect to five groups of words not enclosed by boxes. The first group of
words underneath the small rectangular box containing the word "Communications"
is "Internet Access." The second group of words underneath the small rectangular
box containing the word "Communications" is "Internetworking/LAN." The third
group of words underneath the small rectangular box containing the word
"Communications" is "Mobile Communications." The fourth group of words
underneath the small rectangular box containing the word "Communications" is
"Telecommunications Equipment." The fifth group of words underneath the small
rectangular box containing the word "Communications" is "Wireless
Communications."
From the bottom left corner of the small rectangular box containing the
words "Distributed Systems" is a downward vertical line from which four short
horizontal lines connect to four groups of words not enclosed by boxes. The
first group of words underneath the small rectangular box containing the words
"Distributed Systems" is "Consumer Software & Digital Media." The second group
of words underneath the small rectangular box containing the words "Distributed
Systems" is "Distribution." The third group of words underneath the small
rectangular box containing the words "Distributed Systems" is "Distribution."
The fourth group of words underneath the small rectangular box containing the
words "Distributed Systems" is "PC Peripherals."
From the bottom left corner of the small rectangular box containing the word
"Enterprise Software/Internet" is a downward vertical line from which four short
horizontal lines connect to four groups of words not enclosed by boxes. The
first group of words underneath the small rectangular box containing the words
"Enterprise Software/ Internet" is "Database tools." The second group of words
underneath the small rectangular box containing the words "Enterprise
Software/Internet" is "Systems Management." The third group of words underneath
the small rectangular box containing the words "Enterprise Software/Internet" is
"Productivity Applications." The fourth group of words underneath the small
rectangular box containing the words "Enterprise Software/Internet" is "PC
Software." The fifth group of words underneath the small rectangular box
containing the words "Enterprise Software/Internet" is "Web Software."
From the bottom left corner of the small rectangular box containing the
words "Technical Systems" is a downward vertical line from which three short
horizontal lines connect to three groups of words not enclosed by boxes. The
first group of words underneath the small rectangular box containing the words
"Technical Systems" is "Design Automation." The second group of words underneath
the small rectangular box containing the words "Technical Systems" is "Embedded
Control." The third group of words underneath the small rectangular box
containing the words "Technical Systems" is "Technical Software."
In the upper middle part of the rectangular box in the middle of the graphic
is a cross shaped icon containing a serpent wrapped around a barbed staff
representing a Caduceus with the words "Healthcare" underneath. From the bottom
of the icon labeled "Healthcare" is a downward vertical line which
perpendicularly connects to a horizontal line from which four short vertical
lines connect to four small rectangular boxes below the horizontal line. The
small rectangular box on the far left contains the word "Biotechnology." The
small rectangular box which is second from the left contains the words "Emerging
Pharmaceuticals/Drug Delivery." The small rectangular box which is second from
the right contains the words "Medical Devices." The small rectangular box which
is on the far right contains the words "Healthcare Services."
From the bottom left corner of the small rectangular box containing the
words, "Medical Devices" is a downward vertical line from which four short
horizontal lines connect to four groups of words not enclosed by boxes. The
first group of words underneath the small rectangular box containing the words
"Medical Devices" is "Cardiovascular." The second group of words underneath the
small rectangular box containing the words "Medical Devices" is "Orthopedics."
The third group of words underneath the small rectangular box containing the
words "Medical Devices" is "Urology." The fourth group of words underneath the
small rectangular box containing the words "Medical Devices" is "Women's
Health."
From the bottom left corner of the small rectangular box containing the
words "Healthcare Services" is a downward vertical line from which four short
horizontal lines connect to four groups of words not enclosed by boxes. The
first group of words underneath the small rectangular box containing the words
"Healthcare Services" is "CROS." The second group of words underneath the small
rectangular box containing the words "Healthcare Services" is "HMO." The third
group of words underneath the small rectangular box containing the words "Health
Care Services" is "Physician Network Management." The fourth group of words
underneath the small rectangular box containing the words "Healthcare Services"
is "Subacute."
In the upper middle part of the rectangular box in the bottom left of the
graphic is a three dimensional cube with three faces visible with the word
"Services" underneath. On the lower left face of the cube is the word
"Business." On the upper face of the cube are the words "Healthcare." On the
lower right face of the cube is the word "Financial." From the bottom of the
cube labeled "Services" is a downward vertical line which perpendicularly
connects to a horizontal line from which four short vertical lines connect to
four small rectangular boxes below the horizontal line. The small rectangular
box on the far left left contains the words "Financial Services" The small
rectangular box which is second from the left contains the words "Healthcare
Information Services." The small rectangular box which is second from the right
contains the words "Business Services." The small rectangular box which is on
the far right contains the words "Special Situations."
From the bottom left corner of the small rectangular box containing the
words "Financial Services" is a downward vertical line from which two short
horizontal lines connect to two groups of words not enclosed by boxes. The first
group of words underneath the small rectangular box containing the words
"Financial Services" is "Internet." The second group of words underneath the
small rectangular box containing the words "Financial Services" is "Transaction
Processors."
In the upper middle part of the rectangular box in the bottom right of the
graphic is a square tilted on its side labeled "Consumer." There is a downward
vertical line from which four short horizontal lines connect to four groups of
words not enclosed by boxes. The first group of words underneath the small
rectangular box containing the words "Branded Consumer" is "Food and Beverage."
The second group of words beneath the small rectangular box containing the words
"Branded Consumer" is "Services." The third group of words beneath the small
rectangular box containing the words "Branded Consumer" is "Specialty Apparel."
The fourth group of words underneath the small rectangular box containing the
words "Branded Consumer" is "Sports & Leisure."
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In order to achieve this depth and specialization, the Company typically
recruits or trains analysts with significant technical and industry expertise,
in addition to financial services expertise. H&Q believes this specialized
approach enables it to generate analytical research that enhances the quality of
investment decisions in the fast-changing and technologically sophisticated
industries it covers.
H&Q's research analysts cover over 300 publicly traded companies. The
Company's analysts also periodically publish comprehensive studies of an
industry or a long-term investment theme. In addition to written publications,
the Company's analysts play a prominent role at the Company's investor
conferences by presenting summaries of key industry trends.
The Company's research analysts and its investment banking and venture
capital professionals work closely together to identify promising privately held
companies. H&Q believes that early contacts with private companies are important
not only to develop its underwriting and principal transactions activities, but
also to achieve and maintain an understanding of the rapidly evolving growth
industries on which the Company focuses. The research analysts also, from time
to time, assist in screening and/or evaluating proposed financings for the
Company's venture capital and investment banking professionals. In addition,
H&Q's research analysts work closely with sales and trading professionals to
enhance the access of the Company's institutional investor clients to up-to-date
industry analysis.
H&Q has been recognized for its success in bringing together leading growth
companies and growth investors at the annual conferences it sponsors. Each
conference focuses on a different growth industry or geographic region. Since
October 1995, H&Q sponsored the following investment conferences:
<TABLE>
<CAPTION>
HAMBRECHT & QUIST CONFERENCE DATE LOCATION
- --------------------------------------------- ------------- --------------
<S> <C> <C>
plaNET.wall.street (Internet Conference) October 1995 New York
Healthcare Conference January 1996 San Francisco
European Growth Company Conference February 1996 Paris
Interactive Entertainment Conference March 1996 Snowbird, Utah
Technology Conference April 1996 San Francisco
and plaNET.wall.street West
Investing in Life Sciences May 1996 London
Branded Consumer Growth Company Conference June 1996 Napa Valley
Annual Private Equity CFO Conference June 1996 San Francisco
</TABLE>
More than 675 public and private companies made presentations to investment
professionals, venture capitalists and other participants in the securities and
emerging growth company industries at the most recent sessions of the Company's
annual conferences. The Hambrecht & Quist Technology Conference, which held its
24th annual session in 1996, was the first annual investment conference focusing
exclusively on emerging growth companies in the technology sector. For 14 years,
the Company's annual Healthcare Conference has provided a forum for companies in
the healthcare industry to give presentations to growth investors, and was the
first conference of its kind. In October 1995, H&Q sponsored the first major
investment conference dedicated solely to Internet-related companies, and held a
follow-up conference in 1996.
The Company has developed 11 industry indices to facilitate the analysis of
long-term trends, including the H&Q Technology Index, the H&Q Growth Index, the
H&Q Branded Consumer Growth Index, and the H&Q Internet Index. Certain of these
indices are regularly cited in the media. These indices serve as a tool for
comparing certain technology industry groups with one another, with the
technology marketplace as a whole, and with the overall economy. Many growth
companies use the H&Q indices to compare their stock price performance with
other companies, for example, in annual proxy statements.
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INVESTMENT BANKING
H&Q is a major bracket underwriter. The Company is a leading participant in
raising equity capital for and providing financial advice to emerging growth
companies within its areas of focus throughout the United States, and has
significantly expanded its activities abroad. Hambrecht & Quist provides its
corporate clients with a broad range of services, principally involving public
offerings of equity and convertible debt securities, private placements of
equity securities, and advice in merger, acquisition and strategic partnering
transactions, as well as after-market services and support.
H&Q's investment banking professionals focus their activities along the same
industry lines as the Company's research analysts. The Company believes that by
developing an in-depth understanding of the industries they serve, these
investment banking professionals enhance their ability to advise issuers with
respect to strategic and financing options.
The following table shows the distribution of the number of public offering
transactions lead or co-managed by H&Q since 1991 among the different industries
which the Company serves.
HAMBRECHT & QUIST'S PUBLIC EQUITY OFFERINGS
JANUARY 1991 THROUGH MARCH 1996
[PIE CHART]
A pie chart representing Hambrecht & Quist Public Equity Offerings from
January 1991 through March 1996 is divided into four segments. The largest
segment represents "Technology" which accounts for 49% of the pie chart. The
second largest segment represents "Healthcare" which accounts for 35% of the pie
chart. The third largest segment represents "Services" which accounts for 12% of
the pie chart. The smallest segment represents "Branded Consumer" which accounts
for 4% of the pie chart.
DOMESTIC UNDERWRITING
H&Q is a leading underwriter of public offerings of equity securities for
emerging growth companies. Between January 1991 and March 1996, the Company
managed or co-managed offerings of equity and convertible debt securities by
over 220 companies that raised an aggregate of over $15.0 billion. Of this
amount, approximately $7.6 billion was raised during the period from January
1995 through March 1996. H&Q concentrates its domestic underwriting efforts in
high-growth industry sectors where the Company believes it has a relative
competitive advantage due to its investment banking relationships and its
research, trading and distribution capabilities. Within its selected industries,
the Company concentrates on emerging companies that it believes have the
potential to become industry leaders. H&Q is regularly among the leading
underwriters of software, communications and biotechnology company securities,
and H&Q has established a strong record underwriting securities of hardware,
semiconductor, Internet, business information and outsourcing services and
healthcare services companies. The Company has also underwritten an increased
number of securities offerings by branded consumer products companies and is
attempting to establish a leadership position in this area.
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<PAGE>
H&Q's strategy is to maintain long-term relationships with its corporate
clients by serving their capital raising needs beyond their initial public
offerings of securities. H&Q also seeks to increase its base of publicly held
clients by serving as a lead or co-manager in follow-on offerings for companies
which H&Q believes have attractive investment characteristics, whether or not
H&Q participated as a lead or co-manager in the initial public offering of
securities for such companies. The Company believes it has been successful in
retaining clients and obtaining new clients, based on the number of transactions
in which it has been retained or added as lead manager or co-manager of
follow-on offerings.
The average size of the Company's lead or co-managed underwriting
transaction has increased from approximately $40.0 million in calendar 1991 to
approximately $60.0 million in calendar 1995. The Company has increased the
number of its lead or co-managed underwriting transactions above $50.0 million
from 10 in calendar 1991 to 38 in calendar 1995 and in the six months ended
June 30, 1996. In calendar 1995, H&Q served as lead or co-manager of 12
underwriting transactions above $100 million.
The following table sets forth the distribution among industries, on a
calendar year basis, of public offerings completed between January 1991 and June
1996 in which the Company acted as lead or co-managing underwriter:
HAMBRECHT & QUIST'S PUBLIC OFFERINGS BY INDUSTRY
JANUARY 1991 THROUGH JUNE 1996
<TABLE>
<CAPTION>
NUMBER OF TRANSACTIONS COMPLETED
----------------------------------------------------------------------------
INDUSTRY 1991 1992 1993 1994 1995 1996 (1)
- ------------------------------------------- --- --- --- --- --- -----------
<S> <C> <C> <C> <C> <C> <C>
Technology................................. 15 13 22 19 59
Healthcare................................. 21 19 20 11 16
Services................................... 6 6 3 4 9
Branded Consumer Products.................. -- 1 2 3 6
-- - - - - --
Total.................................. 42 39 47 37 90
-- - - - - --
-- - - - - --
</TABLE>
- ------------------------
(1) As of June 30, 1996
H&Q has recently significantly increased its expertise in providing private
and public offerings of convertible debt securities. Since January 1995,
Hambrecht & Quist has completed six convertible debt transactions (which are
included in the data above) involving an aggregate of more than $1.5 billion in
securities. To the extent that interest rates and other market conditions remain
favorable, the Company expects convertible debt securities to be a growing part
of its underwriting business in the future as its newly public corporate clients
develop in size and begin to leverage their balance sheets.
H&Q also offers equity underwriting services to smaller emerging growth
companies through RvR Securities, which underwrites public equity offerings of
selected smaller-capitalization growth companies in cases where the transaction
is smaller and requires less after-market support than those typically managed
by H&Q LLC and other major bracket investment banking firms. Since 1993, RvR
Securities has completed five underwriting transactions. The Company believes
that RvR Securities enables H&Q to provide a valuable service to these smaller
capitalization growth companies and to maintain a relationship that enhances
opportunities for H&Q LLC to provide underwriting and advisory services in the
future.
Hambrecht & Quist provides after-market support to its underwriting clients
through the supply of information concerning institutional holdings within the
issuer's shareholder base, as well as data concerning the market performance of
the corporate client's stock, as well as other stocks in the issuer's industry.
The Company's Corporate Services group identifies and accesses relevant
research, company news, market trends, institutional ownership data, trading
activity and performance reporting, and arranges meetings with institutional
shareholders to assist newly public companies in developing their investor
relations efforts.
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<PAGE>
INTERNATIONAL ACTIVITIES
H&Q is actively developing its international investment banking business
both by assisting non-U.S. companies in raising capital in the United States and
by improving access to local capital for growth companies in other countries.
The Company believes it has established itself in underwriting transactions
for European growth companies that seek to issue shares on Nasdaq. From January
1995 through March 1996, the Company managed or co-managed five initial public
offerings on Nasdaq for European technology companies, and two initial public
offerings and one follow-on offering on Nasdaq for Israeli growth companies.
Hambrecht & Quist has developed strategic relationships with local financial
institutions in Europe in order to build relationships with leading European
growth companies and with the financial communities which serve these companies.
These relationships are also intended to develop H&Q's European investment
banking presence in anticipation of the launch of the EASDAQ market, currently
expected to occur in late 1996. EASDAQ's charter is to serve as a Nasdaq-type
stock market for emerging growth companies in Europe. H&Q is a charter member of
the European Association of Securities Dealers ("EASD") and a founding investor
in EASDAQ.
In January 1996, Hambrecht & Quist announced the formation of a 50%-owned
joint venture with Financiere Saint Dominique, a leading private equity investor
in France and among the largest in Europe. The joint venture, Hambrecht & Quist
Saint Dominique ("Saint Dominique"), will be an underwriter and market-maker on
the EASDAQ market, as well as le Nouveau Marche, a Paris-based stock market for
emerging growth companies that was launched in February 1996. Saint Dominique
has completed two initial public offerings on le Nouveau Marche.
In the United Kingdom, H&Q holds a minority equity position in Beeson
Gregory, a London-based brokerage firm and financial advisor specializing in
growth companies. In addition, the Company recently opened a London
institutional sales office.
The Company's strategy in Asian markets has been to focus initially on
venture capital investments in promising growth companies through Asia Pacific.
H&Q believes that this strategy will enable the Company to develop and maintain
relationships with growth companies in the region.
MERGER AND ACQUISITION ADVISORY SERVICES
Hambrecht & Quist offers a broad range of merger and acquisition ("M&A")
advisory services to growth companies. The Company markets its M&A advisory
services both to H&Q's existing base of corporate clients and to other companies
that can benefit from the Company's expertise. The Company offers advisory
services with respect to purchases and sales of businesses; strategic and
cross-border partnerships; divestitures and corporate restructurings; hostile
takeover defense strategies; fairness opinions in acquisition, investment and
defensive transactions; and valuations of businesses and technology assets. From
January 1991 through March 1996, the Company provided M&A services in over 90
assignments representing approximately $8.4 billion of completed transactions.
While a majority of these transactions and fees were for companies for which H&Q
had previously acted as underwriter, H&Q also completes a substantial number of
advisory assignments for corporations whose first transaction with H&Q is an M&A
advisory transaction. Some of these advisory clients have subsequently become
underwriting clients of H&Q.
The Company's M&A expertise has been developed over the years and has been
supported by the close involvement of professionals from the industry groups in
both investment banking and research. The Company believes that early
identification of emerging industry and technical trends, together with focused
industry research coverage, enhances the effectiveness of its M&A professionals'
strategic and valuation advice. H&Q's
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M&A professionals combine industry, technology, legal and accounting expertise
with substantial transactional experience. The group's success is reflected in
the growth in the volume of completed M&A transactions in which H&Q has provided
advice to emerging growth companies:
HAMBRECHT & QUIST'S MERGER AND ACQUISITION ADVISORY ASSIGNMENTS
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996 (1)
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Number of Completed Assignments................... 10 8 11 24 29
Aggregate Transaction Value $ 237 $ 174 $ 377 $ 2,028 $ 3,713 $
(in millions)....................................
</TABLE>
- ------------------------
(1) Through June 30, 1996
PRIVATE PLACEMENTS AND STRUCTURED FINANCE
H&Q formalized its private placement capabilities in 1991 with the creation
of a group which focuses on acting as placement agent in private securities
transactions. H&Q assists in the placement of these securities for a fee, but
without underwriting the offered securities. The private placement/structured
finance group places equity and convertible debt securities with institutional
investors, strategic corporate investors and sophisticated, high net worth
individuals. Since 1991, the group has completed over 30 private placement
transactions, raising over $600 million for growth companies, with 16 of these
transactions completed since January 1995. This group often serves corporate
clients in their early stages and, as these entrepreneurial companies grow, H&Q
seeks to sustain the relationship and provide other services. The group also
assists publicly traded corporate clients that undertake convertible debt
financings or conduct private offerings of registered and unregistered
securities.
SALES, TRADING AND SYNDICATE
H&Q provides a broad range of sales and trading services to investors
worldwide and holds a leading position as a market-maker for emerging growth
company equity securities. The Company leverages its research capability by
identifying companies that it believes have the potential to become leaders in
their respective industries and attempting to become a leading market-maker in
the shares of those companies, often taking large positions to satisfy the needs
of institutional clients for a liquid market in this group of companies.
INSTITUTIONAL SALES AND TRADING
H&Q has over 35 institutional sales professionals covering growth-oriented
investors worldwide. H&Q's focus on growth industries enables its sales and
trading organization to develop an in-depth of understanding of these sectors
and companies and to better serve its investor clients.
H&Q has 15 trading professionals involved in market making in both Nasdaq
and exchange-listed securities. The most significant portion of the Company's
institutional revenues arises from trading in Nasdaq-listed securities. At March
31, 1996, H&Q made a market in over 300 Nasdaq stocks. During the period from
January 1991 through March 1996, H&Q was one of the top three market makers in
over 70% of the Nasdaq-listed equity securities issued by companies for which
H&Q served as lead or co-manager in a public offering. Additionally, H&Q has 25
coverage traders, servicing the trading desks of major institutions worldwide.
Orders are executed daily as principal or agent in both the listed and Nasdaq
markets for equities, convertible and non-convertible debt, including municipal
bonds, options and other derivative securities. The Company's sales and trading
operations are conducted from offices in San Francisco, New York, Boston and San
Diego. Hambrecht & Quist clears its trading transactions through Lewco.
36
<PAGE>
EXECUTIVE FINANCIAL SERVICES
Since its founding in 1968, H&Q has provided retail brokerage services to
individual investors and small institutions interested in emerging growth
company securities. In 1994, this business unit was renamed Executive Financial
Services ("EFS") and its strategies were realigned in an effort to grow the
business. This strategic realignment entailed: (i) increasing the focus of this
business on broadening the range and depth of services provided to executives of
growth companies; (ii) providing appropriate services to all employees of this
client base, rather than only the top executives; (iii) attracting new high net
worth investors to H&Q by providing differentiated investment ideas and services
and (iv) recruiting and retaining additional experienced and productive brokers
to serve high net worth individuals.
The EFS group operates out of the Company's San Francisco, New York, and
Boston offices. In addition to handling Nasdaq and exchange-listed brokerage
transactions, EFS brokers provide other services, including sales of restricted
securities, fixed income investments and consulting for options, hedging, the
selection of outside money managers, mutual funds and cash management. At March
31, 1996, the EFS group included 71 retail brokers.
VENTURE SERVICES
H&Q provides specialized services to the general and limited partners of
venture capital and buyout funds, corporate development functions within large
corporations and certain high net worth individuals who participate actively in
venture capital investments. These services include the sale of restricted
securities, management of in-kind stock distributions by venture capital funds
to their investors, sales of shelf-registered securities, private placements and
acquisition or sale of large equity positions. The Company also provides venture
capitalists with timely information concerning the publicly traded shares
included in venture capital investment portfolios. This group was established in
1994 as a separate department within H&Q in recognition of the strategic role
played by venture capital investors in H&Q's areas of focus and in establishing
and developing a close relationship between the Company and the companies in
which venture capitalists hold equity positions.
SYNDICATE
The Company participates in public offerings of securities either by acting
as manager or co-manager of an underwriting syndicate, or by acting as a member
of an underwriting syndicate managed by other investment banks. In both cases,
the Company risks its capital through its participation in a commitment to
purchase securities from an issuer and to resell them to the public. The
Company's syndicate activities include managing the marketing and book-building
process of underwritten transactions the Company is managing, participating in
discussions leading to the offering price of securities and the supervision of
initial market-making for lead-managed deals. The Syndicate department is also
responsible for developing and maintaining relationships with the syndicate
departments of other investment banks. At March 31, 1996, the Syndicate
department was comprised of 11 employees, including two senior managers who have
an aggregate of over 50 years of experience in the securities industry, and was
located in the Company's San Francisco headquarters.
VENTURE CAPITAL AND PRINCIPAL INVESTMENT ACTIVITIES
From the Company's inception, venture capital investing has been an
important component of H&Q's strategy of identifying and building early
relationships with promising emerging growth companies. H&Q currently conducts a
broad range of venture capital and principal investment activities. H&Q intends
to increase the range and size of these activities.
INSTITUTIONAL VENTURE FUND MANAGEMENT
Hambrecht & Quist raised its first venture capital fund shortly after the
Company was founded. The institutional venture fund management business grew
substantially, and by the mid-1980s the Company, principally through affiliated
venture capital management partnerships, managed over $600 million in venture
capital assets. Each institutional fund was structured so that the Company
received management fees and a participation in any net profits of the fund.
In the late 1980s, the Company determined that its domestic venture
activities would be most effectively carried out through a strategy of making
fewer and smaller venture capital investments and more direct Company
participation in these investments. Since then, the Company has reduced the
number of investment
37
<PAGE>
professionals in its venture capital department. Substantial assets and funds
have been distributed as the previously raised funds have matured, and assets
under management by the venture capital group currently amount to over $200.0
million.
SOLE PURPOSE VENTURE CAPITAL PARTNERSHIPS AND DIRECT STRATEGIC INVESTMENTS
Since 1992, the Company has made venture capital and mezzanine investments
by means of limited partnerships that are each formed for the sole purpose of
enabling the Company, its senior employees and others to invest in a specific
private company. The Company receives no management fees in connection with such
investments, but it participates in any profits of the partnerships. Certain of
the Company's professionals share in the profit participation of each
partnership based on their specific contribution to identifying, structuring and
managing the partnership's investment. In fiscal 1994 and 1995 and the six month
period ended March 31, 1996, approximately $18.0 million, $15.0 million and
$13.0 million, respectively, was invested in such partnerships, of which $2.2
million, $3.3 million and $2.7 million, respectively, was invested by the
Company.
Since the mid-1980s, the Company has, from time to time, invested solely for
its own account in private companies that offer a strategic and financial
opportunity. The Company in recent years has also invested capital and obtained
minority, non-controlling interests in a number of relatively small
asset-management organizations, including De Santis Capital Management, LP, a
registered investment adviser that manages approximately $100 million in assets.
Since January 1995, the Company has invested approximately $4.0 million for
similar strategic purposes.
STRATEGIC AND SPECIALTY FUNDS
ASIA PACIFIC. Asia Pacific, was established in 1985 to provide financial
advisory and fund management services to investors and entrepreneurs throughout
the Asia Pacific region. As of March 31, 1996, Asia Pacific's operations were
among the largest of venture capital firms in the region, with 29 professionals
in seven countries. At such date, Asia Pacific managed ten funds with a combined
total of over $300.0 million in committed capital. Of this amount, $258.0
million had been invested in over 150 companies located in Asia, including $8.5
million in ten companies located in the United States with operations in Asia.
Seven of these funds, totaling $193.0 million in committed capital, are
generally available for investment only in one specific country, and three of
these funds, totaling $115.0 million in committed capital, may be invested in
companies located in any one of a number of countries in a specified region.
Asia Pacific has commitments for an additional $145.0 million for a fourth
regional fund, and is currently raising a second tranche for this new fund. Asia
Pacific is also raising $35.0 million for investment in a new country-specific
fund for Indonesia. There can be no assurance that these fund-raising activities
will be completed successfully.
Assuming the successful completion of these fund-raising activities,
Hambrecht & Quist will have a minority interest in Asia Pacific's management
entity, with the majority interest held by Asia Pacific's management team. H&Q
also is entitled to certain participations in the profits of existing and future
Asia Pacific funds.
HAMBRECHT & QUIST CAPITAL MANAGEMENT. In 1987, the Company formed Hambrecht
& Quist Capital Management Incorporated ("Capital Management") to make and
manage investments in publicly traded and privately held companies principally
engaged in the development, production or distribution of products or services
generally related to scientific advances in healthcare, agriculture and
environmental management. As of March 31, 1996, Capital Management managed two
publicly traded closed-end mutual funds: H&Q Healthcare Investors (NYSE:HQH) and
H&Q Life Sciences Investors (NYSE:HQL). At March 31, 1996, these funds had
combined net assets of approximately $276.0 million, of which approximately 31%
was comprised of venture capital and other private investments. Capital
Management is compensated solely on the basis of management fees as a percentage
of assets under management. Capital Management is wholly owned by H&Q.
ADOBE VENTURES, L.P. In 1994, Hambrecht & Quist formed a limited
partnership with Adobe Systems Incorporated ("Adobe") that invests in companies,
products or technologies strategic to Adobe's interests. Adobe has committed
approximately $40.0 million in capital to date. The Company receives an annual
management fee based on assets under management and participates in any profits
of the partnership. Certain of the Company's venture capital professionals share
in the profit participation. At March 31, 1996, this fund had invested an
aggregate of approximately $26.0 million in 13 companies.
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<PAGE>
TI VENTURES L.P. In June 1996, Hambrecht & Quist formed a limited
partnership with Texas Instruments, Inc. ("TI") for the purpose of investing in
companies that operate in the field of digital communications, with an emphasis
on applications and markets requiring integrated technology, such as digital
video. TI has committed $30.0 million of capital to the partnership. The Company
will receive an annual management fee based on assets under management and will
participate in any profits of the partnership.
ASSET-BASED FINANCING AND MEZZANINE INVESTMENTS
HAMBRECHT & QUIST GUARANTY FINANCE. In 1983, the Company established the
entity that became Hambrecht & Quist Guaranty Finance, L.P. ("Guaranty Finance")
to provide equipment leasing to emerging technology companies. Today, Guaranty
Finance provides secured, asset-based financings that include tenant improvement
and real estate leases, equipment leases, accounts receivable and inventory
financing and loan guarantees for private and public emerging technology,
biotechnology and healthcare companies. Guaranty Finance provides financing that
generally would not otherwise be commercially available to emerging growth
companies because they are perceived as too risky, or because the financing is
too customized in nature, to be attractive to conventional sources of financing.
In addition to receiving payments on loans and leases, Guaranty Finance has the
opportunity to purchase warrants for structuring and providing the funding or
for guaranteeing the repayment of funds provided by a bank or other financial
institution. As of March 31, 1996, Guaranty Finance had provided a total of
$77.0 million of financing to 37 client companies in 59 transactions, of which
$16.4 million remained outstanding. After the Restructuring, Hambrecht & Quist
Group will own approximately 87.5% of Guaranty Finance, with the balance owned
by Guaranty Finance's senior management and employees, together with one
non-officer employee of the Company.
HAMBRECHT & QUIST TRANSITION CAPITAL. The Company recently formed Hambrecht
& Quist Transition Capital, LLC ("Transition Capital") to provide bridge loans
and mezzanine financings for emerging growth companies. Transition Capital's
investments will consist of secured and unsecured debt with equity
participation. The term of the loans will typically be less than three years,
and Transition Capital seeks to obtain financial returns through interest
income, fees and the receipt of warrants, rights to convert loans into equity,
or the right to share in profits. Transition Capital's activities have not been
significant, with only one financing, in the amount of $3.8 million, completed
to date. After the Restructuring, Hambrecht & Quist Group will own approximately
87.5% of Transition Capital, with the balance owned by Transition Capital's
senior management and employees, together with one non-officer employee of the
Company.
ACCOUNTING, ADMINISTRATION AND OPERATIONS
H&Q's accounting, administration and operations personnel are responsible
for financial controls, internal and external financial reporting, compliance
with regulatory and legal requirements, office and personnel services, the
Company's management information and telecommunications systems, and the
processing of the Company's securities transactions. The Company's employees
perform most of these functions. With the exception of payroll processing, which
is performed by an outside service bureau, all data processing functions are
performed by the Company's management information systems department. The
Company believes that future growth will require implementation of new and
enhanced communications and information systems and training of its personnel to
operate such systems. Any difficulty or significant delay in the implementation
or operation of new systems or the training of personnel could adversely affect
the Company's ability to manage growth. See "Risk Factors--Management of
Growth."
Lewco acts as a clearing broker and depository for the Company. A portion of
Lewco's expenses, net of certain revenues, are reimbursed by the Company based
on the level of transactions processed on behalf of the Company.
COMPETITION
The securities business is intensely competitive. The Company competes
worldwide with domestic and foreign securities firms, many of which have greater
capital, financial and other resources than the Company. In addition to
competition from firms currently in the securities business, domestic commercial
banks and investment banking boutiques have recently entered the business. In
recent years, large international banks have attempted to enter the markets
served by United States investment banks, including the markets in which
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the Company competes. These large international banks have hired investment
banking, research and sales and trading professionals from the Company and its
competitors in the past, and the Company expects that these and other
competitors will continue to try to recruit professionals away from the Company.
The loss of any key professional could materially and adversely affect the
Company's operating results. The Company expects competition from domestic and
international banks to increase as a result of recent and anticipated
legislative and regulatory initiatives in the United States to remove or relieve
certain restrictions on commercial banks. The Company's focus on growth
companies also subjects it to direct competition from a group of specialty
securities firms and smaller investment banking boutiques that specialize in
providing services to the emerging growth company sector. Such competition could
adversely affect the Company's operating results, as well as its ability to
attract and retain highly skilled individuals. As a result of increasing
competition, revenues from individual underwriting transactions have been
increasingly allocated among a greater number of co-managers, which has resulted
in reduced revenues for certain transactions.
The Company also faces competition from companies offering electronic
brokerage services, a rapidly developing and intensely competitive industry.
These competitors may undertake promotional activities focused on the Company's
brokerage customers and offer these customers more attractive pricing or other
terms than the Company offers. The Company also anticipates competition from
underwriters who attempt to effect public offerings for emerging growth
companies through new means of distribution, including using electronic media
such as the Internet. In addition, disintermediation may result as issuers
attempt to sell their securities directly to purchasers, including sales using
electronic media such as the Internet. To the extent that issuers and purchasers
of securities transact business without the assistance of financial
intermediaries such as the Company, the Company's operating results could be
adversely affected.
The principal competitive factors influencing the Company's business are its
professional staff, industry expertise, client relationships and its mix of
market and product capabilities.
EMPLOYEES
At March 31, 1996, the Company had a total of 584 employees, of whom 61 were
engaged in research, 109 in investment banking, 258 in sales, trading and
syndicate, 37 in venture capital, principal investment and money management
activities and 119 in accounting, administration and operations. Of these
employees, 313 were classified as professionals and 271 were classified in
support positions. None of the Company's employees are subject to a collective
bargaining agreement. The Company believes that its relations with its employees
are good.
PROPERTIES
The Company's principal executive offices are located at The Hambrecht &
Quist Building, One Bush Street, San Francisco, California and occupy
approximately 132,000 square feet under a lease which terminates December 31,
1998, subject to two 10-year extension options. The Company also leases
approximately 33,000 square feet at 230 Park Avenue, New York, New York, under a
lease expiring in 2007; approximately 24,000 square feet at 50 Rowes Wharf,
Boston, Massachusetts, under a lease expiring in 1998, subject to an option to
extend the term; and approximately 2,000 square feet at 4365 Executive Drive,
San Diego, California, under a lease expiring in 1999. The Company believes that
its present facilities, together with its current options to extend lease terms
and occupy additional space, are adequate for its current and projected needs.
LEGAL PROCEEDINGS
OVERVIEW
Many aspects of the Company's business involve substantial risks of
liability. An underwriter is exposed to substantial liability under federal and
state securities laws, other federal and state laws and court decisions,
including decisions with respect to underwriters' liability and limitations on
indemnification of underwriters by issuers. For example, a firm that acts as an
underwriter may be held liable for material misstatements or omissions of fact
in a prospectus used in connection with the securities being offered or for
statements made by its securities analysts or other personnel.
In recent years, there has been an increasing incidence of litigation
involving the securities industry, including class actions that seek substantial
damages. The Company has been active in the underwriting of
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initial public offerings and follow-on offerings of the securities of emerging
and mid-size growth companies, which often involve a higher degree of risk and
often are more volatile than the securities of more established companies. In
comparison with more established companies, such emerging and mid-size growth
companies are also more likely to be the subject of securities class actions, to
carry directors and officers liability insurance policies with lower limits than
more established companies, and to become insolvent. Each of these factors
increases the likelihood that an underwriter of an emerging or mid-size growth
company's securities will be required to contribute to any judgment or
settlement of a securities lawsuit.
The plaintiffs' attorneys in securities class action lawsuits frequently
name as defendants in lawsuits the managing underwriters of a public offering.
H&Q LLC is named a defendant in a number of class action lawsuits relating to
public offerings in which it served as a managing underwriter. In addition, H&Q
LLC is currently directly or indirectly subject to over 30 shareholder class
action lawsuits relating to public offerings in which H&Q LLC served as a member
of the underwriting syndicate but not as a managing underwriter. Plaintiffs'
attorneys also name as defendants investment banks which provide advisory
services in merger and acquisition transactions. H&Q LLC is currently a
defendant in one such lawsuit. The Company anticipates that additional
securities class-action lawsuits naming H&Q LLC as a defendant will be filed
from time to time in the future, particularly in light of the increased number
of public offerings H&Q LLC has underwritten, and the increased number of merger
and acquisition transactions in which H&Q LLC provided advisory services, in
recent years and the fact that the securities sold in certain of such public
offerings have experienced or may in the future experience significant declines
in market value. In such lawsuits, all members of the underwriting syndicate
typically are included as members of a defendant class and/or are required by
law, or pursuant to the terms of the underwriting agreement, to bear a portion
of any expenses or losses (including amounts paid in settlement of the
litigation) incurred by the underwriters as a group in connection with the
litigation, to the extent not covered by the indemnification obligation of the
issuer of the securities underwritten. H&Q LLC has on occasion participated in
settlements of these types of lawsuits by making payments to the plaintiff
class. There can be no assurance that the Company, H&Q LLC or RvR Securities
will not find it necessary to make substantial settlement payments in the
future. The Company has agreed to indemnify H&Q LLC against any expense or
liability it may incur in connection with any such lawsuits.
As the number of suits to which the Company is a party increases, the risk
to the Company's assets also increases. If the plaintiffs in any suits against
the Company were to successfully prosecute their claims, or if the Company were
to settle such suits by making significant payments to the plaintiffs, the
Company's operating results and financial condition could be materially and
adversely affected. As is common in the securities industry, the Company does
not carry insurance that would cover any such payments. In addition, the
Company's charter documents allow indemnification of the Company's officers,
directors and agents to the maximum extent permitted under Delaware law. The
Company has entered into indemnification agreements with these persons. The
Company has been and in the future may be the subject of indemnification
assertions under these charter documents or agreements by officers, directors or
agents of the Company who are or may become defendants in litigation.
In addition to these financial costs and risks, the defense of litigation
has, to a certain extent, diverted, and is expected to divert in the future, the
efforts and attention of the Company's management and staff. The amount of time
which management and other employees are required to devote in connection with
the defense of litigation could be substantial and might materially divert their
attention from other responsibilities within the Company. Securities class
action litigation in particular is highly complex, and can extend for a
protracted period of time, thereby consuming substantial time and effort of the
Company's management and substantially increasing the cost of such litigation.
Further, the laws relating to securities class actions are currently in a state
of flux. The eventual impact of the recently-passed Federal Private Securities
Litigation Reform Act of 1995 on securities class action litigation is not
known. In addition, there are certain proposed California ballot initiative
provisions which, if passed, the Company believes would make it easier for
securities class action plaintiffs to litigate in California state court.
The Company also has been subject to litigation in state and federal courts
relating to companies in which the Company has invested as a principal. The risk
of such litigation is magnified where H&Q has a substantial or controlling
interest in the Company, or where one or more of H&Q's employees serves on the
Company's Board
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of Directors. On occasion, such litigation has produced results materially
adverse to H&Q. In particular, during 1991 and 1992, the Company settled
litigation relating to MiniScribe at an aggregate cost, including expenses, of
approximately $59.8 million. All of such payments relating to such MiniScribe
settlements were made prior to May 31, 1996. There can be no assurance that the
Company, as a result of its investments as a principal, or the service of the
Company's employees as directors of other entities or otherwise, will not lead
to similar litigation or settlement payments in the future.
In the normal course of business, the Company is also a defendant in various
civil actions and arbitrations arising out of its activities as a broker-dealer
in securities, as an underwriter, as an employer and as a result of other
business activities. H&Q has in the past made substantial payments in connection
with the resolution of disputed claims, and there can be no assurance that
substantial payments in connection with the resolution of disputed claims will
not occur in the future.
An adverse resolution of any pending or future lawsuits against H&Q LLC, RvR
Securities or the Company could materially affect the Company's operating
results and financial condition.
Set forth below are summaries of certain pending litigation matters to which
H&Q LLC is a party. The Company believes that the resolution of such matters and
the other pending litigation matters to which the Company is a party will not
have a material adverse effect on the Company's operating results or financial
condition.
SECURITIES LITIGATION
The following paragraphs describe litigation in which H&Q has been named as
a defendant relating to transactions in which H&Q LLC acted as a managing
underwriter or provided merger and acquisition advice.
ADOBE SECURITIES LITIGATION. In February 1996, H&Q LLC and two of its
employees, one of whom is also an outside director of Adobe Systems, Inc.
("Adobe") were named as defendants in a shareholders' securities class action
suit filed in the Superior Court of California, County of Santa Clara. Other
defendants include Adobe, certain of Adobe's officers and directors, and certain
former officers of Frame Technology Corporation ("Frame"). The lawsuit relates
to the merger of Frame into Adobe in October 1995. H&Q LLC acted as a financial
advisor to Frame in the merger. The complaint alleges that the defendants made
misrepresentations regarding the merger and/or Adobe's and Frame's business
operations and prospects of the merged entity, and omitted to disclose material
adverse facts regarding the merger and business prospects and engaged in a
scheme to defraud investors, thereby artificially inflating the price of Adobe
stock during the class period. The lawsuit seeks unspecified damages including
compensatory and punitive damages, pre- and post-judgment interest, costs and
attorneys' fees, and equitable and injunctive relief based on alleged violations
of California law. The Adobe defendants and the H&Q defendents have each filed a
demurrer on the ground that the allegations are not actionable under state law.
There has been no ruling on the demurrer.
COMPUTERVISION SECURITIES LITIGATION. On August 14, 1992, H&Q LLC acted as
one of four co-managers of an underwriting of $600 million of debt and equity
issued by Computervision Corporation ("Computervision"). Numerous class action
suits were filed against H&Q and other defendants after Computervision
announced, in September 1992, that revenue and operating profit for its third
quarter would fall substantially below its plan and the previous year's third
quarter. These cases were eventually consolidated in the United States District
Court in Boston. The operative complaint alleges claims against H&Q, the other
managing underwriters, Computervision, certain of its officers and directors,
under various sections of the federal securities laws and a claim for common law
misrepresentation.
After completion of substantially all discovery, the Court, relying in part
on the fact that the prospectus "bespoke caution," issued a decision dismissing
every factual allegation in the complaint except one. On January 20, 1995, the
plaintiffs served a motion for leave to file a further amended complaint. On
February 24, 1995, the defendants served a response in opposition, and also
served summary judgment motions to dismiss the sole allegation that survived the
motion to dismiss. By stipulation, dated April 11, 1995, plaintiffs subsequently
withdrew the sole surviving allegation. On September 20, 1995, the court denied
plaintiffs' motion for leave to
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amend the complaint, dismissed plaintiffs' case and entered judgment for all
defendants. Plaintiffs have appealed these rulings to the First Circuit Court of
Appeals, which heard oral argument on May 7, 1996. The appeal is SUB JUDICE.
DATAWARE TECHNOLOGIES SECURITIES LITIGATION. Dataware Technologies, Inc.
("Dataware") effected a $29,250,000 initial public offering in July 1993
lead-managed by H&Q LLC. In December 1993, Dataware announced that its quarterly
earnings would be below expectations. Its share price dropped, and in November
1994, a shareholder class action suit was filed in the United States District
Court in Boston against the Company, certain of its officers and directors, and
the managing underwriters, including H&Q LLC, in connection with the company's
public offering, subsequent sales by its insiders and research reports issued by
H&Q LLC.
Defendants have denied the material allegations of the complaint. A motion
for class certification has been made and opposed, and has not yet been
resolved.
OAK TECHNOLOGY SECURITIES LITIGATION. On June 6, 1996, Oak Technology, Inc.
("Oak"), certain of its officers and directors, H&Q LLC, two of its employees
and others were named as defendants in a shareholders' securities class action
suit filed in the Superior Court of California, County of Santa Clara. H&Q LLC
acted as the lead manager of Oak's February 1995 initial public offering and May
1995 follow-on equity offering. The complaint alleges, among other things, that
during the alleged class period of July 1995 to May 1996, H&Q LLC issued false
research reports and otherwise engaged in wrongdoing in order to please Oak and
obtain large commissions or discounts as well as future investment banking work.
The lawsuit seeks unspecified damages based on alleged violations of California
law. Defendants have not yet filed any pleading responding to the complaint and
no discovery has occurred.
NASDAQ ANTITRUST LITIGATION
In December 1994, a consolidated amended complaint was filed in the United
States District Court for the Southern District of New York against thirty-three
broker-dealer defendants, including H&Q LLC. The consolidated amended complaint
alleged that H&Q LLC and other participants and market-makers on Nasdaq engaged
in a conspiracy to fix the "spread" between bid and asked prices for securities
traded on the Nasdaq in violation of Section 1 of the Sherman Act. The plaintiff
class was alleged to include persons throughout the United States who are
customers of the defendants or their affiliates and who purchased or sold
securities on the Nasdaq during the period from May 1, 1989 through May 27,
1994. Plaintiffs allege to have been damaged in that they paid more for
securities purchased on the Nasdaq, or received less for securities sold, than
they would have but for the alleged conspiracy. The consolidated amended
complaint seeks compensatory damages, treble damages, declaratory and injunctive
relief, attorneys' fees and costs. Judgment against each of the defendants was
sought on a joint and several basis. In February 1995, H&Q LLC and the other
defendants filed a motion to dismiss. In August 1995, the Court granted such
motion on the ground that plaintiffs had not specified the stocks in which
collusion allegedly occurred, but gave plaintiffs leave to amend. The plaintiffs
thereafter filed a Refiled Consolidated Complaint which is identical in
substance to the dismissed pleading and lists over one thousand securities that
plaintiffs allege were the subject of the alleged conspiracy. H&Q LLC thereafter
filed its answer, and discovery is proceeding.
On December 15, 1995, a class action suit alleging similar claims to the
class action pending in New York was filed in Alabama state court against the
same defendants. The Alabama case has been removed to federal court and
transferred to the federal judge hearing the pending New York action. In
addition, allegations of collusion among the market-makers became the subject of
investigations by the NASD, the SEC and the Antitrust Division of the Department
of Justice ("DOJ"). H&Q LLC and other market makers have responded to Civil
Investigative Demands by the DOJ. The DOJ investigation has been ongoing and is
expected to conclude in the near future.
RISK MANAGEMENT
The Company has established various policies and procedures for the
management of its exposure to operating, principal and credit risks. Operating
risk arises out of the daily conduct of the Company's business and relates to
the possibility that one or more of the Company's personnel could commit the
Company to imprudent business activities. Principal risk relates to the fact
that the Company owns a variety of investments
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which are subject to changes in value and could result in the Company incurring
material gains or losses. Credit risk occurs because the Company extends credit
to various of its customers in the form of margin and other types of loans.
Operating risk is monitored by the Company's Risk Management Committee and
Commitment Committee. The Risk Management Committee reviews the overall business
activities of the Company and makes recommendations for addressing issues which,
in the judgment of its members, could result in a material loss to the Company.
The Commitment Committee meets weekly to evaluate and approve potential
investment banking transactions prior to their execution by the Company.
Principal risk is managed primarily through the daily monitoring of funds
committed to the various types of securities owned by the Company and by
limiting the exposure to any one investment or type of investment. The two most
common categories of securities owned are those related to the daily trading
activities of the Company's brokerage and underwriting operations and those
which arise out of the Company's principal investing activities. The Company
attempts to limit its exposure to market risk on securities held as a result of
its daily trading activities by limiting its inventory of trading securities to
that needed to provide the appropriate level of liquidity in the securities for
which it is a market maker. Security inventory positions are balanced daily.
The Company's credit risk is monitored by its Credit Committee, which
consists of senior management from its brokerage, operations, financial and
legal departments. This committee meets when specific situations arise to review
large, concentrated or high profile accounts and to take any appropriate actions
to limit the Company's exposure to loss on these accounts. Such actions
typically consist of setting higher margin requirements for large or
concentrated accounts, requiring a reduction of either the level of margin debt
or investment in high risk securities or, in some cases, requiring the transfer
of the account to another broker-dealer.
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REGULATION
H&Q's business and the securities industry in general are subject to
extensive regulation in the United States at both the Federal and state level,
as well as by SROs. Its business also is subject to regulation by various
foreign governments and regulatory bodies.
In the United States, a number of Federal regulatory agencies are charged
with safeguarding the integrity of the securities and other financial markets
and with protecting the interests of customers participating in those markets.
The SEC is the Federal agency that is primarily responsible for the regulation
of broker-dealers and investment advisers doing business in the United States,
and the Board of Governors of the Federal Reserve System promulgates regulations
applicable to securities credit transactions involving broker-dealers and
certain other United States institutions. Broker-dealers and investment advisers
are subject to registration and regulation by state securities regulators in
those states in which they conduct business. Industry SROs, each of which has
authority over the firms that are its members, include the NASD, the NYSE and
other securities exchanges.
H&Q LLC is registered as a broker-dealer with the SEC and in all of the 50
states, Puerto Rico and the District of Columbia, and is a member of, and
subject to regulation by, a number of securities industry SRO's, including the
NASD, the NYSE, the American, Chicago and Pacific Stock Exchanges, and the
Options Clearing Corporation. RvR Securities is registered as a broker-dealer
with the SEC and in 41 states, and is a member of the NASD. H&Q LLC also has a
20% interest in Lewco, which is registered as a broker-dealer with the SEC and
in 13 states and is a member of the NASD, the NYSE and other securities
exchanges.
As a result of federal and state registration and SRO memberships, H&Q LLC,
RvR Securities and Lewco are subject to overlapping schemes of regulation which
cover all aspects of their securities business. Such regulations cover matters
including capital requirements, the use and safekeeping of customers' funds and
securities, record keeping and reporting requirements, supervisory and
organizational procedures intended to assure compliance with securities laws and
to prevent the improper trading on material nonpublic information,
employee-related matters, including qualification, and licensing of supervisory
and sales personnel, limitations on extensions of credit in securities
transactions, clearance and settlement procedures, requirements for the
registration, underwriting, sale and distribution of securities and rules of the
SROs designed to promote high standards of commercial honor and just and
equitable principles of trade. A particular focus of the applicable regulations
concerns the relationship between broker-dealers and their customers. As a
result, the many aspects of the broker-dealer customer relationship are subject
to regulation including in some instances "suitability" determinations as to
certain customer transactions, limitations in the amounts that may be charged to
customers, timing of proprietary trading in relation to customers' trades and
disclosures to customers.
Much of the Company's underwriting and market-making business involves
securities traded on Nasdaq. Nasdaq's operations, including allegations of
collusion among Nasdaq market-makers, have been the subject of extensive
scrutiny in the media and by government regulators, including by the Antitrust
Division of the United States Department of Justice. H&Q LLC and other Nasdaq
market-makers have responded to Civil Investigation Demands by the Department of
Justice as part of its ongoing investigation. It has been reported in the media
that the SEC has recently submitted to Nasdaq a draft of the SEC's disciplinary
complaint concerning Nasdaq's operations. Nasdaq officials have made a number of
proposed changes in its operations, which currently are being reviewed by
government regulators. The Company is unable to predict the outcome of any of
these proposals, and certain of the changes proposed by Nasdaq officials, if
effected, could adversely affect the Company's operating results.
Capital Management and two other subsidiaries, Atlantic Investment Advisers,
Inc. and Hambrecht & Quist Investment Advisers, Inc., are registered as
investment advisers with the SEC and in several states. As investment advisers
registered with the SEC, each is subject to the requirements of the Investment
Advisers Act and the SEC's regulations thereunder, as well as state securities
laws and regulations. Such requirements relate to, among other things,
limitations on the ability of investment advisers to charge performance-based or
non-refundable fees to clients, record-keeping and reporting requirements,
disclosure requirements, limitations on principal transactions between an
adviser or its affiliates and advisory clients, as well as general anti-fraud
prohibitions. The state securities law requirements applicable to registered
investment advisers are in certain
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cases more comprehensive than those imposed under the Federal securities laws.
In addition, Capital Management and the mutual funds it manages are subject to
the requirements of the Investment Company Act of 1940 and the SEC's regulations
thereunder.
H&Q LLC and Lewco also are subject to "Risk Assessment Rules" imposed by the
SEC. These rules require, among other things, that certain broker-dealers
maintain and preserve certain information, describe risk management policies and
procedures and report on the financial condition of certain affiliates whose
financial and securities activities are reasonably likely to have a material
impact on the financial and operational condition of the broker-dealers. Certain
"Materially Associated Persons" (as defined in the Risk Assessment Rules) of the
broker-dealers and the activities conducted by such Materially Associated
Persons may not be subject to regulation by the SEC. However, the possibility
exists that, on the basis of the information it obtains from the Risk Assessment
Rules, the SEC could seek legislative or regulatory changes in order to expand
its authority over the Company's unregulated subsidiaries either directly or
through its existing authority over the Company's regulated subsidiaries.
Violations of federal or state laws or regulations or rules of SROs could
subject the Company, its subsidiaries and/or its employees to disciplinary
proceedings or civil or criminal liability, including revocation of licenses,
censures, fines or temporary suspension or permanent bar from the conduct of
their business. Any such proceeding could have a material adverse effect upon
the Company's business.
In addition to being regulated in the United States, the Company's business
is subject to regulation by various foreign governments and regulatory bodies.
H&Q LLC is registered with and subject to regulation by the Ontario Securities
Commission, the Securities and Futures Authority of the United Kingdom pursuant
to the United Kingdom Financial Services Act of 1986, and the Ministry of
Finance, Tokyo, Japan. Foreign regulation governs all aspects of the investment
business, including regulatory capital, sales and trading practices, use and
safekeeping of customer funds and securities, record-keeping, margin practices
and procedures, registration standards for individuals, periodic reporting and
settlement procedures. In addition, Hambrecht & Quist Asset Management Ltd., a
subsidiary of the Company, is a member of and is subject to regulation by the
Investment Management Regulatory Organization Limited in the United Kingdom,
which regulates all aspects of its investment advisory business. The Company
recently formed and acquired an interest in H&Q Saint Dominique, a
broker-dealer, located in Paris, France. It is subject to regulation by the
Nouveau Marche and other French and European regulatory authorities and is in
the process of preparing an application to become an approved person of the
NYSE.
In connection with the Company's venture capital activities, H&Q, its
affiliates and the venture capital funds which they manage are relying on
exemptions from registration under the Advisers Act, the Investment Company Act
of 1940, as amended, state securities laws and the laws of various foreign
countries. Failure to meet the requirements of any such exemptions could have a
material adverse effect on the manner in which the Company, its affiliates and
the venture capital funds carry out their investment activities and on the
compensation received by the Company and its affiliates from the venture capital
funds.
Additional legislation and regulations, including those relating to the
activities of broker-dealers and investment advisers, changes in rules
promulgated by the SEC or other United States or foreign governmental regulatory
authorities and SROs or changes in the interpretation or enforcement of existing
laws and rules may adversely affect the manner of operation and profitability of
the Company. H&Q's businesses may be materially affected not only by regulations
applicable to it as a financial market intermediary, but also by regulations of
general application. For example, the volume of H&Q's underwriting, merger and
acquisition, or venture capital activities in any year could be affected by,
among other things, existing and proposed tax legislation, antitrust policy and
other governmental regulations and policies (including the interest rate
policies of the Federal Reserve Board) and changes in interpretation or
enforcement of existing laws and rules that affect the business and financial
communities.
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NET CAPITAL REQUIREMENTS
As broker-dealers registered with the SEC and member firms of the NYSE
and/or the NASD, H&Q LLC, RvR Securities and Lewco are each subject to the
capital requirements of the SEC, the NYSE and/or the NASD. These capital
requirements specify minimum levels of capital, computed in accordance with
regulatory requirements ("net capital"), that each firm is required to maintain
and also limit the amount of leverage that each firm is able to obtain in its
respective business.
H&Q LLC has elected to compute its net capital requirement under the
"alternative method" permitted by the SEC. Under this method, H&Q LLC is
required by the SEC to maintain regulatory net capital, computed in accordance
with the SEC's regulations, equal to the greater of $1.0 million or 2% of the
amount of its securities "customer-related receivables," calculated in
accordance with SEC's regulations.
The customer-related receivables referred to in the preceding paragraph
(also referred to as "aggregate debit items") are the money owed to a
broker-dealer by its customers and certain other customer-related assets. "Net
capital" is essentially defined as net worth (assets minus liabilities, as
determined under generally accepted accounting principles), plus qualifying
subordinated borrowings, less the value of all of a broker-dealer's assets that
are not readily convertible into cash (such as goodwill, furniture, prepaid
expenses, exchange seats and unsecured receivables), and further reduced by
certain percentages (commonly called "haircuts") of the market value of a
broker-dealer's positions in securities and other financial instruments.
A failure of a broker-dealer to maintain its minimum required capital would
require it to cease executing customer transactions until it came back into
capital compliance, and could cause it to lose its membership on an exchange, or
in an SRO, its registration with the SEC, or require its liquidation. Further,
the decline in a broker-dealer's net capital below certain "early warning
levels," even though above minimum capital requirements, could cause material
adverse consequences to the broker-dealer. For example, the SEC's capital
regulations prohibit payment of dividends, redemption of stock and the
prepayment of subordinated indebtedness if a broker-dealer's net capital
thereafter would be less than 5% of aggregate debit items. These regulations
also prohibit principal payments in respect of subordinated indebtedness if a
broker-dealer's net capital thereafter would be less than 5% of aggregate debit
items. Under NYSE Rule 326, a member firm is required to reduce its business if
its net capital (after giving effect to scheduled maturities of subordinated
indebtedness or other planned withdrawals of regulatory capital during the
following six months) is less than $312,500 or 4% of aggregate debit items for
15 consecutive days. NYSE Rule 326 also prohibits the expansion of a member's
business if its net capital (after giving effect to scheduled maturities of
subordinated indebtedness or other planned withdrawals of regulatory capital
during the following six months) is less than $375,000 or 5% of aggregate debt
items for 15 consecutive days.
The SEC's capital rules also (i) require that broker-dealers notify it and
the NYSE, in writing, two business days prior to making withdrawals or other
distributions of equity capital or lending money to certain related persons, if
those withdrawals would exceed, in any 30-day period, 30% of the broker-dealer's
excess net capital and that they provide such notice within two business days
after any such withdrawal or loan that would exceed, in any 30-day period, 20%
of the broker-dealer's excess net capital, (ii) prohibit a broker-dealer from
withdrawing or otherwise distributing equity capital or making related party
loans if after such distribution or loan, the broker-dealer has net capital of
less than $300,000 or 5% of aggregate debit items and certain other
circumstances, and (iii) provide that the SEC may, by order, prohibit
withdrawals of capital from a broker-dealer for a period of up to 20 business
days, if the withdrawals would exceed, in any 30-day period, 30% of the broker-
dealer's excess net capital and the SEC believes such withdrawals would be
detrimental to the financial integrity of the firm or would unduly jeopardize
the broker-dealer's ability to pay its customer claims or other liabilities.
Compliance with regulatory capital requirements could limit those operations
of H&Q LLC, RvR Securities and Lewco that require the intensive use of capital,
such as underwriting and trading activities, and financing of customer account
balances, and also could restrict the Company's ability to withdraw capital from
its affiliated broker-dealers, which in turn could limit its ability to pay
dividends, repay debt and redeem or purchase shares of its outstanding capital
stock.
47
<PAGE>
The Company believes that at all times H&Q LLC, RvR Securities and Lewco
have been in compliance in all material respects with the applicable minimum
capital rules of the SEC, the NYSE, and the NASD. As of March 31, 1996, H&Q LLC
was required to maintain minimum "net capital," in accordance with SEC rules, of
approximately $3.8 million and had total net capital of approximately $43.2
million, or approximately $39.2 million in excess of the amount required. RvR
Securities also computes its minimum net capital requirement under the
alternative method. As of March 31, 1996, RvR Securities was required to
maintain minimum net capital of $250,000. Its total net capital on that date was
$1.75 million, consisting of $250,000 in equity capital and a $1.5 million
subordinated loan from H&Q Group. Lewco also computes its minimum net capital
requirement under the alternative method. As of March 31, 1996, Lewco was
required to maintain minimum net capital of $1.5 million. Lewco's total net
capital on that date was $8.7 million.
48
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
March 31, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ----------------------------------- --- -----------------------------------------------------------------------
<S> <C> <C>
60 Chairman of the Company and H&Q LLC; Director
William R. Hambrecht...............
38 President and Chief Executive Officer of the Company and H&Q LLC;
Director
Daniel H. Case III.................
60 Vice Chairman of the Company and H&Q LLC; Director
William R. Timken..................
49 Executive Vice President and Director of Institutional Equity, H&Q LLC
Paul L. Hallingby..................
43 Managing Director and Co-Director of Investment Banking, H&Q LLC
Cristina M. Morgan.................
47 Managing Director and Co-Director of Investment Banking, H&Q LLC
David M. McAuliffe.................
40 Managing Director and Director of Research, H&Q LLC
Bruce M. Lupatkin..................
54 Chief Financial Officer of the Company and H&Q LLC; Managing Director
of H&Q LLC
Raymond J. Minehan.................
46 General Counsel and Secretary of the Company and H&Q LLC; Managing
Director of H&Q LLC
Steven N. Machtinger...............
34 Vice President, Finance of the Company and H&Q LLC
Patrick J. Allen...................
61 Director
Howard B. Hillman (1)..............
55 Director
William E. Mayer (1)(2)............
66 Director
Edmund H. Shea, Jr. (2)............
50 Director
Lawrence J. Stupski (1)(2).........
</TABLE>
- ------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
WILLIAM R. HAMBRECHT is Chairman of Hambrecht & Quist Group and its
principal subsidiary, Hambrecht & Quist LLC. He has continuously served as an
officer, director or principal of those entities or their predecessors since he
and the late George Quist co-founded Hambrecht & Quist in 1968. Mr. Hambrecht is
primarily responsible for directing the Company's venture capital investment
activities. He also serves on the Boards of Directors of Adobe Systems
Incorporated, a print and electronic media software company, Redbrick Systems,
Inc., a provider of relational database products and services for data warehouse
applications, Castelle, a provider of network enhancement software and hardware,
and several privately held companies. He holds a B.A. degree from Princeton
University.
DANIEL H. CASE III joined the Company in 1981, and was initially an
associate and then a principal in the Corporate Finance Department. He also
served as Vice President and then a partner in the Venture Capital Department,
both in San Francisco and in London. In 1983 he co-founded the business which
became Hambrecht & Quist Guaranty Finance. Mr. Case rejoined Corporate Finance
in 1986 as co-director of mergers and acquisitions, and became Managing Director
and head of Investment Banking in December 1987. In October of 1989, he was
elected Executive Vice President and in October 1991 he was elected to the Board
of Directors of the Company. In April of 1992 he was elected President and
Co-Chief Executive Officer. He became Chief Executive Officer in October 1994.
Mr. Case also serves as a director of Rational Software Corporation, a maker of
object-oriented software development tools, Electronic Arts, a global
interactive entertainment software company, the Securities Industry Association
and the Bay Area Council. He has a B.A. in Economics and Public Policy from
Princeton University and studied management at the University of Oxford as a
Rhodes Scholar.
49
<PAGE>
WILLIAM R. TIMKEN joined Hambrecht & Quist in 1969 and has been employed by
the Company in senior capacities since then. Mr. Timken was appointed Vice
Chairman of the Company in 1992. He is responsible for the activities of the
Company's Syndicate Department. Mr. Timken is a past member of the Board of
Governors of the Pacific Stock Exchange and the Board of Governors of the
National Association of Securities Dealers, Inc. Mr. Timken holds a B.A. degree
in Economics from Colby College.
PAUL L. "BARNEY" HALLINGBY joined the Company in 1983 as an institutional
salesman. He was named Managing Director of the Research Department in June
1988, and was elected Executive Vice President in October 1990. In July 1992 he
became Managing Director of Sales and Trading and in October 1994 became
Managing Director of Institutional Equity. He holds a B.A. in Political Science
from the University of Pennsylvania and an M.B.A. in Finance from Columbia
University.
CRISTINA M. MORGAN joined the Company in 1982 as a research analyst, became
a principal in Corporate Finance in 1984 and has been a Senior Vice President of
H&Q LLC and its predecessor entity since March 1990. In 1990, Ms. Morgan was
elected Managing Director, Technology Equities in Corporate Finance and in 1992
she was named Co-Director of Investment Banking. Ms. Morgan holds a B.S. in
Finance and an M.B.A. in Finance from Arizona State University.
DAVID M. MCAULIFFE joined the Company in July 1995 as Managing Director &
Co-Director of Investment Banking. Prior to joining the Company, Mr. McAuliffe
served in various capacities in the Investment Banking and Merchant Banking
divisions of Kidder Peabody & Co., an investment bank, from 1974 to 1995. From
April 1992 to May 1995 he served as Kidder Peabody & Co.'s Co-Director of the
Global Investment Banking Division. Mr. McAuliffe holds a B.A. in Accounting
from Boston College and an M.B.A. from Harvard Business School.
BRUCE M. LUPATKIN joined the Company in 1984 as a research analyst and
became a Senior Vice President of H&Q LLC and its predecessor in May 1991. In
1992, Mr. Lupatkin was named Co-Director of Research. Since October 1994, Mr.
Lupatkin also served as Director of Research. From October 1995 to June 1996 he
was also responsible for management of Institutional Sales for the west coast.
Mr. Lupatkin holds a B.S. in Chemistry from the University of Michigan and an
M.B.A. in Finance from the University of Texas.
RAYMOND J. MINEHAN has served as the Company's Chief Financial Officer, and
a Managing Director since November 1989. Prior to joining H&Q, he had been with
Arthur Andersen LLP, a public accounting firm, in San Francisco since 1972, and
a partner with that firm from 1984 to 1989. Mr. Minehan holds a B.A. in Finance
and Accounting from Golden Gate University and is a Certified Public Accountant.
STEVEN N. MACHTINGER has served as the Company's General Counsel and
Secretary since 1988. He was named Managing Director in 1990. Mr. Machtinger was
an attorney with the United States Securities and Exchange Commission from 1974
to 1983 and was General Counsel of Birr, Wilson & Co., Inc., an investment bank,
from 1983 to 1988. Mr. Machtinger holds a B.A. in Government from Harvard
College and a J.D. from the University of California, Davis.
PATRICK J. ALLEN joined Hambrecht & Quist in May 1995 as Vice President,
Finance. From November 1993 to April 1995 Mr. Allen was the Chief Operating
Officer of Cruttenden Roth, an investment bank. Mr. Allen was previously a
Senior Vice President with Kemper Securities, an investment bank, and held
various positions from 1988 to 1993 including Chief Financial Officer of a
predecessor firm. Mr. Allen had been an auditor with Price Waterhouse, a public
accounting firm, in Newport Beach from 1984 to 1988 and holds a B.S. in Business
Administration from California Polytechnic University in San Luis Obispo.
HOWARD B. HILLMAN joined the Board of Directors of the Company in July 1989.
He was an officer of Chemical Bank from 1960 to 1969, and has been a venture
capitalist since leaving Chemical Bank. Mr. Hillman became a Director of
Auto-trol Technology Corporation, a maker of computer-based technical
information management solutions, in 1973 and its President in April 1985. He
also currently serves as Auto-trol's Chairman.
WILLIAM E. MAYER has been a director of the Company since April 1992, except
during the period of March 1995 to January 1996. Since October 1992, Mr. Mayer
has been Dean of the College of Business and Management at the University of
Maryland, College Park. From September 1991 to July 1992 Mr. Mayer was Dean of
the Simon Graduate School of Business at the University of Rochester. He is the
former Chairman and Chief Executive Officer of CS First Boston Merchant Bank.
Before the establishment of CS First Boston Merchant Bank in 1990, he was
President and Chief Executive Officer of the First Boston Corporation.
50
<PAGE>
Mr. Mayer serves as a director of Chart House Enterprises, a restaurant
management company and Schuller Corporation, a manufacturer of insulation and
building products, and is a trustee of the Colonial Group of Mutual Funds, a
mutual fund company. Mr. Mayer holds a B.S. and an M.B.A. from the University of
Maryland.
EDMUND H. SHEA, JR. was elected a director of the Company in November of
1986. He is a co-founder of J.F. Shea Company, Inc., a diversified civil
construction, land development and venture capital company, and has served as
its Executive Vice President in charge of Venture Capital since 1968. Mr. Shea
serves on the Board of Directors of ADAC Laboratories Inc., a supplier of
radiology and laboratory information systems, Ironstone Group, Inc., a real
estate information services company, and Vanguard Airlines, a passenger airline
company. Mr. Shea is also on the Advisory Committee of Bay Partners, a venture
capital firm. Mr. Shea holds a B.S. in Engineering from Massachusetts Institute
of Technology.
LAWRENCE J. STUPSKI was elected a director of the Company in October 1994.
He has been Vice Chairman of The Charles Schwab Corporation, a brokerage firm,
since August 1992. Mr. Stupski has also served as a director of Charles Schwab
since November 1986. Before assuming the position of Vice Chairman, he was
President and Chief Operating Officer of Charles Schwab between March 1986 and
March 1994. Mr. Stupski also served on the Board of Governors of the Pacific
Stock Exchange from 1982 to 1985, as Director for the Chicago Board Options
Exchange from 1990 to 1991, and on the Securities and Exchange Commission
Consumer Advisory Committee in 1994. Mr. Stupski holds an A.B. in Politics from
Princeton University and a J.D. from Yale Law School.
EXECUTIVE COMPENSATION
The following table shows compensation earned during the fiscal year ended
September 30, 1995 to (i) the Chief Executive Officer and (ii) the Company's
four other most highly compensated individuals who were serving as officers on
September 30, 1995 and whose salary plus bonus exceeded $100,000 for the year
ended September 30, 1995 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
FISCAL 1995 ANNUAL COMPENSATION ------------------------------
--------------------------------------------- SECURITIES
OTHER ANNUAL RESTRICTED STOCK UNDERLYING ALL OTHER
COMPENSATION AWARDS OPTIONS/ COMPENSATION
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($)(1) ($) ($) SARS (#) ($)(2)
- ------------------------------------ ---------- -------------- ----------------- ----------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Daniel H. Case III ................. 300,000 2,000,000 -- -- 156,636 4,000
President, Chief Executive
Officer and Director(3)
William R. Hambrecht ............... 300,000 933,688(4) -- -- -- 4,000
Chairman and Director(4)
William R. Timken .................. 240,000 700,000 -- -- 40,000 4,000
Vice Chairman and Director(5)
Paul L. Hallingby .................. 240,000 907,000 -- -- 180,000 4,000
Executive Vice President,
Institutional Equity,
H&Q LLC(5)
Cristina M. Morgan ................. 240,000 1,425,363(6) -- -- 80,000 4,000
Managing Director, Co-Director of
Investment Banking, H&Q LLC(5)
</TABLE>
- ------------------------
(1) Includes bonuses earned in fiscal 1995 and paid in fiscal 1996; excludes
bonuses earned in fiscal 1994 which were paid in fiscal 1995.
51
<PAGE>
(2) Represents payments by the Company pursuant to the Company's Savings and
Employee Stock Ownership Plan under Internal Revenue Code Section 401(k).
(3) Excludes amounts received from Guaranty Finance. See "Certain Transactions."
(4) Includes $933,688 received in connection with participations in venture
capital funds profits provided by the Company. See "Certain Transactions."
(5) Excludes $28,933, $50,950 and $43,400 in SAR payouts received by Mr. Timken,
Mr. Hallingby and Ms. Morgan, respectively. See "--Aggregated SAR Payouts
for Fiscal 1995" and "Management--Compensation Plans."
(6) Includes $45,363 received in connection with participations in venture
capital funds profits provided by the Company. See "Certain Transactions."
OPTION AND SAR GRANTS DURING FISCAL 1995
The following tables set forth for each of the Named Executive Officers
certain information concerning stock options and SARs granted during fiscal
1995, giving effect to the Restructuring:
OPTIONS.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM (1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ----------------------------------------- ----------- ------------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
William R. Hambrecht..................... -- -- -- -- -- --
Daniel H. Case III....................... 156,636 17.3% 4.7375 12/01/01 205,018 453,037
William R. Timken........................ -- -- -- -- -- --
Paul L. Hallingby........................ 40,000 4.4% 4.7375 10/01/01 52,355 115,692
Cristina M. Morgan....................... -- -- -- -- -- --
</TABLE>
- ------------------------
(1) Potential Realizable Value is based on certain assumed rates of appreciation
pursuant to rules prescribed by the SEC. Actual gains, if any, on stock
option exercises are dependent on the future performance of the stock. There
can be no assurance that the amounts reflected in this table will be
achieved. In accordance with rules promulgated by the SEC, Potential
Realizable Value is based upon the exercise price of the options, which is
substantially less than the expected initial public offering price.
SARS.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS (1) VALUE AT ASSUMED
-------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL SARS APPRECIATION FOR
UNDERLYING GRANTED TO BASE SAR TERM (2)
SARS EMPLOYEES IN PRICE MATURITY --------------------
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ---------------------------------------------- ----------- --------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
William R. Hambrecht.......................... -- -- -- -- -- --
Daniel H. Case III............................ -- -- -- -- -- --
William R. Timken............................. 40,000 2.7% 4.975 9/30/95 9,950 19,900
Paul L. Hallingby............................. 140,000 9.4% 4.975 9/30/95 34,825 69,650
Cristina M. Morgan............................ 80,000 5.4% 4.975 9/30/95 19,900 39,800
</TABLE>
- ------------------------
(1) SARs are awarded for a term of one fiscal year. At the end of the fiscal
year the grantee is allocated an amount equal to the number of SARs granted
multiplied by the increase in the net book value per share (if
52
<PAGE>
any) of the Company's stock during such period. This amount vests and is
paid out over a three year period with one third paid out in the first,
second and third years after the grant date if the grantee remains an
employee of the Company. See "Management--Compensation Plans."
(2) Potential Realizable Value is based on certain assumed rates of appreciation
pursuant to rules prescribed by the SEC. Actual gains, if any, on SARs are
dependent on the future performance of the stock. There can be no assurance
that the amounts reflected in this table will be achieved. In accordance
with rules promulgated by the SEC, Potential Realizable Value is based upon
the base price of the SARs, which is substantially less than the expected
initial public offering price.
AGGREGATED OPTION EXERCISES DURING FISCAL 1995 AND FISCAL YEAR END OPTION VALUES
The following table sets forth for each of the Named Executive Officers
certain information concerning options exercised during fiscal year 1995 and the
number of shares subject to both exercisable and unexercisable stock options as
of September 30, 1995, giving effect to the Restructuring. Also reported are
values for "in-the-money" options that represent the positive spread between the
respective exercise prices of outstanding options and the fair market value of
the Company's Common Stock as of September 30, 1995:
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
NUMBER OF OPTIONS AT AT SEPTEMBER 30,
SHARES VALUE SEPTEMBER 30, 1995 (#) 1995 (1)($)
ACQUIRED ON REALIZED -------------------------- --------------------------
NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William R. Hambrecht........... -- -- -- -- -- --
Daniel H. Case III............. 110,000 274,875 1,045,928 192,900 4,053,856 466,444
William R. Timken.............. -- -- 32,000 8,000 141,360 35,340
Paul L. Hallingby.............. 70,000 203,975 74,000 76,000 199,465 156,210
Cristina M. Morgan............. 72,000 209,460 56,000 4,000 223,205 17,670
</TABLE>
- ------------------------
(1) Calculated by determining the difference between the fair market value of
the securities underlying the option at September 30, 1995 and the exercise
price of the Named Executive Officer's option. There was no established
public trading market for the Common Stock underlying the options as of
September 30, 1995. Accordingly, the amounts set forth have been calculated
based on the difference between the net book value per share at September
30, 1995 ($6.52 per share) and the exercise price of the option, which the
Company's Board of Directors determined to be the fair market value at the
date of grant.
AGGREGATED SAR PAYOUTS FOR FISCAL 1995
The following table sets forth for each of the Named Executive Officers
certain information concerning SAR payouts during fiscal year 1995, the number
of securities underlying SARs outstanding at September 30, 1995 and the
unrealized value of unvested SARs at September 30, 1995.
<TABLE>
<CAPTION>
SAR PAYOUTS IN SECURITIES UNDERLYING UNREALIZED VALUE OF
FISCAL 1995 SARS AT FISCAL YEAR END SARS AT FISCAL YEAR END
($)(1) (#SAR'S) ($)(2)
-------------- ----------------------- -----------------------
<S> <C> <C> <C>
William R. Hambrecht............................ -- -- --
Daniel H. Case III.............................. -- -- --
William R. Timken............................... 28,933 120,000 144,633
Paul L. Hallingby............................... 50,950 280,000 433,250
Cristina M. Morgan.............................. 43,400 200,000 133,117
</TABLE>
- ------------------------
(1) SAR payouts for fiscal 1995 reflect payouts of SARs granted during fiscal
1993 and 1994.
(2) The unrealized value of SARs at the fiscal year end is calculated by adding
the unvested and unpaid value of SARs granted in fiscal years 1993, 1994 and
1995.
53
<PAGE>
EMPLOYMENT AGREEMENT
The Company entered into an employment agreement with Daniel H. Case III in
1992. The currently effective provisions of this agreement provide that if H&Q
terminates Case's employment without cause, or if Case resigns within six months
after a change in control of H&Q, then (i) H&Q shall pay Case the greater of
$400,000 or 25% of his compensation during the preceding two years, (ii) 50% of
his unvested options shall become vested, (iii) all options may be exercised
within two years after termination for cash or on a net-exercise basis and (iv)
unless within two years he becomes employed by another full service investment
bank, Case can co-invest during such period in H&Q venture capital opportunities
on the same basis as H&Q's executive officers.
COMPENSATION PLANS
The Company's philosophy is to compensate employees based on their
individual performance and the Company's overall performance. Two main
principles guiding this philosophy are to pay market rates and to provide
long-term employee stock ownership. H&Q considers equity ownership by employees
to be critical to its long-term success. When calculating total compensation, it
considers both cash compensation and equity awarded through stock or options
that vest over time.
1996 BONUS AND DEFERRED SALES COMPENSATION PLANS. The Company's current
intention is to pay semi-annual bonuses to its research, investment banking,
trading and administrative professionals. If an eligible employee's compensation
amount equals or exceeds $100,000 for the applicable six-month period, then 80%
of the employee's bonus will be paid in cash and 20% will consist of Common
Stock, valued at 90% of current market value. Institutional sales professionals
will be paid 80% of their commission earnings in cash and 20% in the form of
Common Stock, valued at 90% of current market value, granted at the end of each
six month period. The stock will vest over three years following the date of
grant. At the time of the bonus payment, the employee will have the choice of
declining to accept Common Stock, and instead to receive cash in exchange for a
three-year note payable to the Company. Such stock will vest and such note will
be forgiven by the Company only to the extent that the employee is employed by
the Company on the first three anniversaries of the bonus date.
1996 EQUITY PLAN. In June 1996 the Company's Board of Directors adopted the
Company's 1996 Equity Plan (the "1996 Plan"). The 1996 Plan provides for the
granting to employees (including officers and employee directors) of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and for the granting to employees (including
officers and employee directors) and consultants of nonstatutory stock options.
The 1996 Plan also provides for the granting of contingent equity rights to
employees. Unless terminated sooner, the 1996 Plan will terminate automatically
in October 2006. The Board has authority to amend, suspend or terminate the 1996
Plan, provided that no such action may affect any shares of Common Stock
previously issued and sold or any option previously granted under the 1996 Plan.
A total of 3,000,000 shares of Common Stock has been reserved for issuance under
the 1996 Plan. As of the date of this Prospectus, no options or contingent
equity rights have been issued under the 1996 Plan.
The 1996 Plan may be administered by the Board of Directors or a committee
appointed by the Board (the "Administrator"), and is currently administered by
the Board of Directors. With respect to grants to directors and officers of the
Company who are subject to short-swing liability under Section 16(b) of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"), the
Administrator will be constituted in a manner intended to comply with the
requirements of Rule 16b-3 under the Exchange Act pertaining to the
disinterested administration of employee benefit plans. If the 1996 Plan
satisfies the disinterested administration and other requirements of Rule 16b-3,
discretionary grants of options and contingent equity rights under the 1996 Plan
to persons subject to liability under Section 16(b) will be exempt from such
liability to the extent provided by Rule 16b-3. The Administrator has the power
to determine the terms of the options and contingent equity rights granted,
including the exercise price, the number of shares subject to the option or
contingent equity right and the exercisability thereof, and the form of
consideration payable upon exercise.
Options and contingent equity rights granted under the 1996 Plan are not
generally transferable by the grantee except by will or by the laws of descent
or distribution. Options are exercisable during the lifetime of the optionee
only by such optionee. Options granted under the 1996 Plan must be exercised
within three months after the end of the optionee's status as an employee or
consultant of the Company, or within six months (or such
54
<PAGE>
other period of time, not exceeding twelve months, as is determined by the Board
of Directors) after such optionee's death or disability, but in no event later
than the expiration of the option term. The exercise price of all nonstatutory
stock options granted under the 1996 Plan shall be determined by the
Administrator.
With respect to any participant who owns stock possessing more than 10% of
the voting power of all classes of the Company's outstanding capital stock (a
"10% Shareholder"), the exercise price of any incentive stock option granted
must equal at least 110% of the fair market value on the date of grant. The
exercise price of incentive stock options for all other employees shall be no
less than 100% of the fair market value per share on the date of grant. The
maximum term of an option granted under the 1996 Plan may not exceed ten years
from the date of grant (five years in the case of an incentive stock option
granted to a 10% Shareholder).
In the event of a change of control of the Company, each outstanding option
under the 1996 Plan may be assumed or an equivalent option substituted by the
successor corporation or a parent or subsidiary of the successor corporation. In
the event that the option is not assumed or substituted, the vesting of the
option shall accelerate by 12 months, the optionee shall have the right to
exercise the option for a period of 15 days after receiving notice of such
change of control, and the option will terminate upon the expiration of such
period. In such event, the vesting of any unvested shares of stock granted under
a contingent equity right shall accelerate by 12 months.
1995 STOCK OPTION PLAN. The 1995 Stock Option Plan (the "1995 Option Plan")
was adopted by the Board of Directors of Group California and approved by the
shareholders of Group California. In connection with the Restructuring, options
granted under the 1995 Option Plan were assumed by the Company, and such options
became exercisable for Common Stock of the Company. At March 31, 1996, 3,835,504
shares were subject to outstanding options under the 1995 option plan. Options
granted under the 1995 Option Plan will remain outstanding in accordance with
their terms, but no further options will be granted under the 1995 Option Plan.
1995 RESTRICTED STOCK PLAN. The 1995 Restricted Stock Plan (the "1995 Stock
Plan") was adopted by the Board of Directors and approved by the shareholders of
Group California. In connection with the Restructuring, shares of common stock
of Group California sold under the 1995 Stock Plan were exchanged for Common
Stock of the Company. At March 31, 1996, 1,920,380 shares had been sold under
the 1995 Stock Plan. No additional shares will be sold under the 1995 Stock
Plan.
1985 STOCK OPTION PLAN. The 1985 Stock Option Plan (the "1985 Option Plan")
was adopted by the Board of Directors of Group California and approved by the
shareholders of Group California. In connection with the Restructuring, options
granted under the 1985 Option Plan were assumed by the Company, and such options
became exercisable for Common Stock of the Company. The 1985 Plan provided for
the granting of options to purchase 4,000,000 shares of Common Stock of Group
California. At March 31, 1996, options to purchase 774,658 shares under the 1985
Option Plan were outstanding. Options granted under the 1985 Option Plan will
remain outstanding in accordance with their terms. The 1985 Option Plan expired
by its terms in 1994.
1995 PARTNERSHIP UNIT PLAN. The 1995 Limited Partnership Unit Plan (the
"Unit Plan") was adopted by LP in order to sell limited partnership units of LP
to directors, officers, and key employees of LP and Group California. A total of
28,780 limited partnership units were sold under the Unit Plan. In connection
with the Restructuring, LP was merged with and into the Company, and limited
partnership units granted under the Unit Plan were exchanged for shares of the
Company's Common Stock. No further sales will be made under the Unit Plan.
OPTION GRANTS OUTSIDE OF PLANS. From time to time Group California has
granted options outside of its plans to certain officers and directors. Such
options have covered a total of 2,340,700 shares, and have been exercisable at a
per share exercise price equal to Group California's net book value per share,
which approximates its fair market value, on the date of grant.
SESOP. The Company has adopted a Savings and Employee Stock Ownership Plan
("SESOP") in which all salaried employees are eligible to participate after six
months of service. The SESOP is comprised of two major benefit plans: (1) a
salary deferral (or 401(k)) plan, in which the Company matches every dollar
contributed by employees with a dollar's worth of its Common Stock up to a
certain amount (currently $4,000.00 per year); and (2) a profit-sharing plan
which was instituted in 1976 for the predecessor partnership. Subsequent to the
55
<PAGE>
adoption of the SESOP no contributions to the profit-sharing plan have been made
and none are anticipated (although the plan continues to allocate participant
forfeitures). The Company's matching contributions and the employees' own
contributions are always fully vested. Employees' units in their profit-sharing
accounts begin vesting after three years of service, at 30%, and become fully
vested after 7 years of service with the Company. The Company's total matching
contribution to the SESOP for fiscal 1995 was $1,246,645.
SAR PROGRAM. Effective October 1, 1992 the Company established a Stock
Appreciation Rights ("SAR") program for certain key executives. The SARs are
granted as of each October 1st, for a term of one year (to coincide with the
Company's fiscal year) and vest over three years. The Company awarded 1,260,000,
1,794,000, and 2,859,520 SARs as of October 1, 1993, 1994, and 1995,
respectively. The SARs will result in additional compensation to the executives
based on the increase, if any, in the Company's book value during the fiscal
year following the date of award. Effective March 31, 1996, 2,179,520 of the
SARs granted as of October 1, 1995 were revised to a six-month term ended March
31, 1996. The Company does not expect to make SAR grants in the future.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation limits the liability of directors
for monetary damages to the maximum extent permitted by Delaware law. Such
limitation of liability has no effect on the availability of equitable remedies,
such as injunctive relief or rescission. The Company's certificate also provides
for indemnification of any director, officer or employee made party to any
action by reason of the fact that the individual holds such a position.
The Company's Bylaws provide that the Company will indemnify its directors
and officers and may indemnify its employees and agents (other than officers and
directors) against certain liabilities to the fullest extent permitted by
Delaware law. The Company is also empowered under its Bylaws to enter into
indemnification agreements with its directors and officers and to purchase
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation or serving in those and certain other positions at the
request of the Company. The Company has entered into indemnification agreements
with each of its current directors and officers which provide for
indemnification of, and advancement of expenses to, such persons to the greatest
extent permitted by Delaware law, including by reason of action or inaction
occurring in the past and circumstances in which indemnification and advancement
of expenses are discretionary under Delaware law. It is the opinion of the staff
of the SEC that indemnification provisions such as those contained in these
agreements have no effect on a director's or officer's liability under the
federal securities laws.
56
<PAGE>
CERTAIN TRANSACTIONS
INCREASE IN EQUITY OWNERSHIP OF DANIEL H. CASE III
In March 1996, the Company's Board of Directors approved a series of
transactions proposed by the Company's Compensation Committee designed to
increase the equity ownership of Daniel H. Case III, the Company's President and
Chief Executive Officer to a level commensurate with his position and
responsibilities. Mr. Case was promoted to Chief Executive Officer effective
October 1, 1994. The Board of Directors decided at that time that Mr. Case's
access to equity ownership in the Company should be increased as of Mr. Case's
promotion date to be equivalent to the ownership position of Company Chairman
William R. Hambrecht. The Board delegated to the Compensation Committee the
determination of Mr. Case's equity programs. Because the Compensation
Committee's determination was not completed until early in fiscal 1996, Mr.
Case's options to purchase Common Stock, described below, were valued as of
September 30, 1995. As a partial make-up, the Board determined to pay Mr. Case a
bonus of $1,951,929 (the "Make-Up Bonus") which on a pre-tax basis equalled the
difference in the fair value of the Company's Common Stock between October 1994
and October 1995. In March 1996: (i) The Board accelerated the vesting of
options to purchase 161,576 shares of Common Stock; (ii) Mr. Case exercised all
of his then outstanding options covering 1,238,828 shares of Common Stock, with
a weighted average exercise price of approximately $2.838 per share; (iii) Mr.
Case exercised such options with promissory notes for $3,515,352; (iv) Mr. Case
resold 169,428 of the purchased shares to the Company for $6.518 cash per share
(the then fair market value of the shares in the opinion of the Board of
Directors), or a total of $1,104,247; (v) the Company's Board of Directors
granted Mr. Case a nonstatutory stock option to purchase 892,680 shares of
Common Stock at an exercise price of $6.518 per share. Mr. Case also purchased
3,616 Units of LP with a promissory note for $1,133,698. As part of the
Restructuring, such Units were exchanged for 86,784 additional shares of Common
Stock. Each of the above-referenced promissory notes has a five-year term, bears
interest of six percent per annum, and is to be repaid from Mr. Case's cash
bonuses at a rate of 20% of any such bonuses. Mr. Case has applied all of the
proceeds of the Make-Up Bonus described above after withholding for taxes to
prepay approximately $1,260,000 such notes. Mr. Case also intends to apply all
cash proceeds, net of tax, from his Restructuring distribution and a portion of
the Guaranty Finance transactions described below as an additional prepayment of
notes.
GUARANTY FINANCE
Prior to the Restructuring, LP owned seventy percent of Guaranty Finance and
Mr. Case indirectly owned approximately 15% of the outstanding equity of
Guaranty Finance and indirectly held an option to purchase approximately 3%
additional equity in Guaranty Finance. Mr. Case has also rendered certain
consulting services to Guaranty Finance. Mr. Case co-founded Guaranty Finance in
1983 and purchased his interest at fair market value at the time Guaranty
Finance was initially capitalized in 1985. Subsequently, Mr. Case made
additional investments or increased his percentage ownership indirectly in
Guaranty Finance, principally by paying taxes on his share of Guaranty Finance's
partnership income for which there were not always distributions by Guaranty
Finance, and by foregoing his share of a $1.7 million distribution that Group
California received from Guaranty Finance in 1992. During fiscal 1993, 1994 and
1995 and the six months ended March 31, 1996, Mr. Case received $86,300,
$51,653, $241,189 and $179,583, respectively from Guaranty Finance as
compensation for consulting services, distribution on capital and profit
sharing. Of such aggregate of $558,735 paid to Mr. Case since October 1, 1992,
the portions relating to consulting services, profit sharing and distributions
on capital were $86,250, $139,999 and $332,677, respectively.
Immediately prior to the Restructuring, Guaranty Finance will (a) distribute
certain non-operating assets to its equity holders, including Case and LP, (b)
repurchase all outstanding options to purchase additional equity in Guaranty
Finance and (c) accrue and pay out deferred profit sharing obligations
representing approximately 10% of all net investment gains (the "Distribution").
Mr. Case's proportionate share of the Distribution had a value as of May 31,
1996 of approximately $1.9 million, of which approximately $325,000 is subject
to repayment in part if Mr. Case terminates his employment with the Company
prior to December 31, 1999.
In connection with the Restructuring and in order to avoid any appearance of
conflict of interest in the future, the Company will purchase Mr. Case's
interest in Guaranty Finance for $1,734,000 plus Mr. Case's proportionate part
of the proceeds from the sales, after May 31, 1996 and prior to the
Restructuring, of any
57
<PAGE>
additional assets which otherwise would have been distributed as part of the
Distribution. The $1,734,000 represents the fair market value at May 31, 1996,
of Mr. Case's proportionate part of assets expected to remain in Guaranty
Finance after the Distribution. Following the Restructuring, Mr. Case will have
no further interest in the profits of Guaranty Finance and has waived his rights
to any further consulting fees or profit sharing from Guaranty Finance.
ISSUANCES OF SECURITIES TO OFFICERS AND DIRECTORS
H&Q has made numerous sales of Common Stock to directors, executive officers
and other employees during the last three fiscal years and since the beginning
of the current fiscal year. The following table summarizes such sales, as
adjusted to reflect the Restructuring:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED MARCH
31, 1996
FISCAL 1993 (1) FISCAL 1994 (1) FISCAL 1995 (1) (1)
------------------------ ------------------------ ---------------------- -----------
AGGREGATE AGGREGATE AGGREGATE
PURCHASE PURCHASE PURCHASE
NAME SHARES (#) PRICE SHARES (#) PRICE SHARES (#) PRICE SHARES (#)
- -------------------------------------- ----------- ----------- ----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Daniel H. Case III.................... 36,000 $ 86,980 265,852 $ 396,714 110,000 $ 266,125 1,541,371
William R. Hambrecht.................. 16,000 $ 44,880 323,296 $ 258,277 -- -- --
William R. Timken..................... 140,000 $ 297,840 165,600 $ 106,053 -- -- --
Cristina M. Morgan.................... 11,080 $ 25,152 66,880 $ 146,612 72,000 $ 171,390 115,845
Paul L. Hallingby..................... 50,000 $ 102,000 86,680 $ 145,445 85,680 $ 243,675 278,000
Bruce M. Lupatkin..................... -- -- 24,544 $ 29,767 60,000 $ 143,250 66,783
William E. Mayer...................... 20,000 $ 56,100 25,120 $ 80,651 22,400 $ 99,500 34,400
Edmund H. Shea, Jr.................... 6,664 $ 18,693 55,759 $ 35,709 -- -- 49,984
Patrick J. Allen...................... -- -- -- -- -- -- 37,520
Howard B. Hillman..................... 20,000 $ 56,100 8,160 $ 5,226 -- -- --
Steven N. Machtinger.................. 12,000 $ 33,660 15,840 $ 10,144 44,480 $ 122,100 46,561
David M. McAuliffe.................... -- -- -- -- 186,400 $1,039,275 13,281
Raymond J. Minehan.................... 12,000 $ 33,000 18,720 $ 11,989 60,000 $ 157,050 33,121
Lawrence J. Stupski................... -- -- -- -- 22,400 $ 99,500 --
<CAPTION>
AGGREGATE
PURCHASE
NAME PRICE
- -------------------------------------- ---------
<S> <C>
Daniel H. Case III.................... $5,926,661
William R. Hambrecht.................. --
William R. Timken..................... --
Cristina M. Morgan.................... $ 642,086
Paul L. Hallingby..................... $1,596,974
Bruce M. Lupatkin..................... $ 477,323
William E. Mayer...................... $ 100,080
Edmund H. Shea, Jr.................... $ 151,964
Patrick J. Allen...................... $ 271,930
Howard B. Hillman..................... --
Steven N. Machtinger.................. $ 212,730
David M. McAuliffe.................... $ 174,386
Raymond J. Minehan.................... $ 164,941
Lawrence J. Stupski................... --
</TABLE>
- ------------------------------
(1) Share number and aggregate purchase price figures have been adjusted to
reflect the exchange of Group California shares and LP units for shares of
Hambrecht & Quist Group, Inc. in connection with the Restructuring.
PARTICIPATION BY EMPLOYEES AND OFFICERS IN VENTURE CAPITAL INVESTMENTS
Employees and officers of the Company are required to offer to the Company
opportunities which they encounter to invest in private companies in the
Company's areas of focus. The Company has the right to take its desired
investment position in such opportunities. If the Company rejects such
opportunity, the originating employee may make such investment. If the Company
invests in such opportunities, it typically will invest an amount equal to at
least twice the amount of the largest investment by a Company employee. After
the Company takes its desired investment position it will typically syndicate
such opportunities for investment by eligible employees and selected outside
investors. Occasionally, H&Q will be asked to participate in an investment which
is not a candidate for syndication to all eligible H&Q employees. In such
instance, a small number of H&Q employees directly involved with the Company or
the transaction may invest side-by-side with H&Q (or one of its wholly-owned
subsidiaries) on a direct, non-syndicated basis. A Small Business Investment
Company that is wholly-owned by William R. Hambrecht and his family, and J.F.
Shea Co., Inc. and other affiliates of Edmund H. Shea, a director of the
Company, each regularly invests side-by-side with the Company's venture capital
funds and commits capital to venture capital funds affiliated with H&Q. Other
directors of the Company may also invest side-by-side with the Company's venture
capital funds or may commit capital to H&Q affiliated venture capital funds and
have from time to time done so. Side-by-side investments are generally made on
the same terms as those applicable to other participants in the same
transaction. The following table summarizes venture capital investments made and
capital committed to H&Q affiliated venture capital funds by the Company's
Directors and Executive Officers in each of the last three fiscal years and in
the six month period ended March 31, 1996:
58
<PAGE>
VENTURE INVESTMENTS BY OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
MARCH 31,
NAME FISCAL 1993 FISCAL 1994 FISCAL 1995 1996
- ------------------------------------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
William R. Hambrecht (1)........................ $ 1,111,625 $ 1,401,668 $ 749,354 $ 591,312
Daniel H. Case III (2).......................... 234,449 132,145 238,196 207,222
William R. Timken (3)........................... 732,170 764,725 549,771 323,431
Paul L. Hallingby............................... 27,380 32,000 15,000 52,503
Cristina M. Morgan.............................. 111,174 88,076 71,215 151,522
David M. McAuliffe.............................. -- -- -- --
Bruce M. Lupatkin............................... 45,565 31,792 6,000 32,992
Raymond J. Minehan.............................. -- -- 2,500 8,001
Steven N. Machtinger............................ 6,982 11,900 11,500 19,000
Patrick J. Allen................................ -- -- 7,000 4,501
William E. Mayer................................ 410,161 230,412 240,079 153,002
Howard B. Hillman............................... 567,934 374,310 680,811 447,800
Edmund H. Shea, Jr. (4)......................... 2,513,579 7,905,869 2,623,206 1,451,011
Lawrence J. Stupski............................. -- 47,000 180,280 90,502
</TABLE>
- ------------------------
(1) Includes investments made by a Small Business Investment Company owned by
Mr. Hambrecht and his family. Also includes investments in venture funds
managed by Asia Pacific.
(2) Includes investments made by Stacey Case, Mr. Case's wife.
(3) Includes investments in venture funds managed by Asia Pacific.
(4) Includes investments made by Edmund & Mary Shea Real Property Trust, and
J.F. Shea Co., Inc. which Mr. Shea may be deemed to control.
In addition to their pro rata return on investment, the Company allocates to
certain of its professionals, including certain of those listed above, a portion
of the profits realized from particular venture investments based on their
specific contribution to identifying, structuring and managing the investment.
INDEBTEDNESS OF OFFICERS AND DIRECTORS
The Company's executive officers and directors listed below have been
indebted to the Company in the amounts and for the periods set forth below. The
purpose of the indebtedness in each case is to permit the exercise of options to
purchase Common Stock of the Company, to purchase restricted Common Stock or to
purchase LP units. All such indebtedness is due five years after issuance, bears
interest at approximately the minimum rate necessary to avoid imputation of
interest income for tax purposes and is secured by the shares purchased with
recourse against the borrower only to the extent of the borrower's equity
interest in the
59
<PAGE>
Company and the borrower's contractual rights to receive compensation from the
Company. "Type A" indebtedness is repayable with 15% of the gross amount of each
semi-annual Company bonus withheld from the borrower's net pay. "Type B"
indebtedness is forgiven at the rate of 20% of the initial principal amount and
accrued interest at January 15, of each year of the term of such indebtedness.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL 1993 FISCAL 1994 FISCAL 1995 MARCH 31, 1996
-------------------- ---------------------- ---------------------- ------------------------
TYPE A TYPE B TYPE A TYPE B TYPE A TYPE B TYPE A TYPE B
--------- --------- ---------- ---------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William R. Hambrecht................ $ -- $ -- $ -- $ 49,184 $ -- $ 36,688 $ -- $ 24,592
Daniel H. Case III (1).............. -- 67,280 -- 173,420 648,523 341,880 5,186,288 302,206
William R. Timken................... 72,368 -- -- -- -- -- -- --
Paul L. Hallingby................... 91,650 -- 127,445 -- 499,963 -- 762,492 --
Cristina M. Morgan.................. -- 67,280 -- 142,680 143,250 210,805 93,801 174,883
David M. McAuliffe.................. -- -- -- -- -- 216,000 246,844 208,519
Bruce M. Lupatkin................... -- 67,280 -- 50,460 359,250 33,640 584,999 16,820
Raymond J. Minehan.................. 92,328 -- 53,828 -- 242,130 -- 306,370 --
Steven N. Machtinger................ 79,828 -- 41,328 -- 139,515 18,950 272,485 14,970
Patrick J. Allen.................... -- -- -- -- 108,000 43,200 204,957 44,781
William E. Mayer.................... -- -- -- -- -- -- 170,980 --
</TABLE>
- ------------------------
(1) Mr. Case's indebtedness is repayable in installments of 20% of Mr. Case's
cash bonuses, if any.
SECURITIES TRADING FOR EMPLOYEES
From time to time, directors, officers and other employees of the Company
may buy or sell securities to or from H&Q LLC as principal or through H&Q LLC as
agent in its capacity as a registered securities broker-dealer. Such
transactions are generally executed on terms (i.e., commissions, mark-ups and
mark-downs) more favorable to the employee-customer than those available to
similarly-situated non-employee customers of the Company.
60
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of May 31, 1996, and as
adjusted to reflect the completion of this offering, by (i) each Named Executive
Officer, (ii) each director, (iii) each holder of more than five percent of the
Company's Common Stock and (iv) all current directors and executive officers as
a group. Except as indicated in the footnotes to this table, the persons named
in the table have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them, subject to community property
laws where applicable.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY
NUMBER OF OWNED (1)
SHARES --------------------
BENEFICIALLY BEFORE AFTER
DIRECTORS, NAMED EXECUTIVE OFFICERS AND 5% BENEFICIAL OWNERS OWNED (1) OFFERING OFFERING
- -------------------------------------------------------------------------- ----------- --------- ---------
<S> <C> <C> <C>
William R. Hambrecht (2).................................................. 2,893,416 15.5%
Daniel H. Case III (3).................................................... 2,000,736 10.7%
William R. Timken (4)..................................................... 1,564,644 8.4%
Paul L. Hallingby (5)..................................................... 639,546 3.4%
Cristina M. Morgan (6).................................................... 404,918 2.2%
William E. Mayer (7)...................................................... 112,800 * *
Howard B. Hillman (8)..................................................... 80,320 * *
Edmund H. Shea, Jr. (9)................................................... 524,584 2.8%
Lawrence J. Stupski (10).................................................. 43,200 * *
Savings and Employee Stock Ownership Plan (11)............................ 1,920,571 10.3%
All executive officers and directors as a group (14 persons) (12)......... 9,229,474 48.6%
</TABLE>
- ------------------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the SEC.
In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of Common Stock subject to
options held by that person that are currently exercisable or exercisable
within 60 days of May 31, 1996 are deemed outstanding. Such shares, however,
are not deemed outstanding for the purposes of computing the percentage
ownership of each other person. To the Company's knowledge, except as set
forth in the footnotes to this table and subject to applicable community
property laws, each person named in the table has sole voting and investment
power with respect to the shares set forth opposite such person's name.
Except as otherwise indicated, the address of each of the persons in this
table is as follows: c/o Hambrecht & Quist, One Bush Street, San Francisco,
California 94104.
(2) Includes 27,560 shares held in trust by SESOP and in the Group Trust.
(3) Includes 18,144 shares held in trust by SESOP and in the Group Trust.
(4) Includes options to purchase 32,000 shares exercisable within 60 days of May
31, 1996 and 27,044 shares held in trust by SESOP and in the Group Trust.
(5) Includes options to purchase 16,000 shares exercisable within 60 days of May
31, 1996 and 27,546 shares held in trust by SESOP and in the Group Trust.
(6) Includes options to purchase 16,000 shares exercisable within 60 days of May
31, 1996 and 26,193 shares held in trust by SESOP and in the Group Trust.
(7) Includes options to purchase 8,000 shares exercisable within 60 days of May
31, 1996.
(8) Includes options to purchase 51,200 shares exercisable within 60 days of May
31, 1996.
(9) Includes options to purchase 1,600 shares exercisable within 60 days of May
31, 1996.
61
<PAGE>
(10) Includes options to purchase 16,000 shares exercisable within 60 days of
May 31, 1996.
(11) Represents shares held in the SESOP for the benefit of employees of the
Company. See "Management-- Compensation Plans". The Trustee of the SESOP is
BZW Barclays Global Investors located at 420 Montgomery Street, Third Floor,
San Francisco, CA 94104. Each beneficiary is entitled to instruct the
Trustee as to the voting or tendering of any full or partial shares of
Company Stock held on his or her behalf. Excludes 230,468 shares held by
Group Trust.
(12) Includes options to purchase 152,800 shares exercisable within 60 days of
May 31, 1996 and 174,701 shares held in trust by SESOP and in the Group
Trust.
DESCRIPTION OF CAPITAL STOCK
Prior to the closing of this offering, the authorized capital stock of the
Company will consist of 100,000,000 shares of Common Stock, $0.01 par value per
share, and 5,000,000 shares of Preferred Stock, $0.01 par value per share.
COMMON STOCK
As of May 31, 1996, there were 18,620,711 shares of Common Stock outstanding
(after giving effect to the Restructuring) held of record by approximately 260
stockholders. Holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Except as otherwise provided by
law, the holders of shares of Common stock vote as one class, together with any
other class or series of stock conferred with general class voting rights by the
Company's Certificate of Incorporation. Holders of Common Stock may cumulate
their votes in the election of directors. After the completion of this offering,
the officers and directors of the Company will beneficially own, in the
aggregate, approximately --% of the outstanding Common Stock. These persons may
be able to elect all of the directors to be elected at each annual meeting and
to cast a sufficient number of votes to control all other matters subject to a
vote of the stockholders. Subject to preferences that may be applicable to any
outstanding Preferred Stock, the holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by the
Board of Directors out of funds legally available therefor. Dividend payments
and advances to the Company by H&Q LLC are restricted by the provisions of the
net capital rules of the NYSE, the SEC and the NASD. See "Net Capital
Requirements." In the event of a liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior liquidation rights of
Preferred Stock, if any, then outstanding. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Common Stock. All outstanding shares
of Common Stock are fully paid and non-assessable, and the shares of Common
Stock to be outstanding upon completion of the offering contemplated by this
Prospectus will be fully paid and non-assessable.
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes 5,000,000 shares of
Preferred Stock, none of which are outstanding. The Board of Directors has the
authority to issue the shares of Preferred Stock in one or more series and to
fix the rights, preferences, privileges and restrictions granted to or imposed
upon any unissued shares of Preferred Stock and to fix the number of shares
constituting any series and the designations of such series, without any further
vote or action by the stockholders. The Board of Directors, without stockholder
approval, can issue Preferred Stock with voting and conversion rights which
could adversely affect the voting power of the holders of Common Stock. The
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change of control of the Company. The Company has no present plans
to issue any of the Preferred Stock.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
Certain provisions of the Company's Certificate of Incorporation and Bylaws
and applicable law, could make the acquisition of the Company by means of a
tender offer, a proxy contest or otherwise and the removal of incumbent officers
and directors more difficult. The Company's Certificate of Incorporation
authorizes the Board of Directors to designate and issue Preferred Stock as
described above.
62
<PAGE>
The Company's Bylaws permit the Board of Directors to establish by
resolution the authorized number of directors, and the Company currently has
seven directors authorized. The Company's Certificate of Incorporation provides
for a classified Board of Directors divided into three classes: Class I expires
at the annual meeting of stockholders to be held in 1997; Class II expires at
the annual meeting of the stockholders to be held in 1998; and Class III expires
at the annual meeting of stockholders to be held in 1999. The Class I directors
are Messrs. Timken and Hillman; the Class II directors are Messrs. Mayer, Shea
and Case; and the Class III directors are Messrs. Stupski and Hambrecht. At each
annual meeting of stockholders beginning with the 1996 annual meeting, the
successors to directors whose terms are expiring will be elected to serve from
the time of election and qualification until the third annual meeting following
election and until their successors have been duly elected and qualified. Any
additional directorships resulting from an increase in the number of directors
will be distributed among the three classes so that, as nearly as possible, each
class will consist of an equal number of directors. This system of electing
directors may tend to discourage a third party from making a tender offer or
otherwise attempting to obtain control of the Company and may maintain the
incumbency of the Board of Directors, as it generally makes it more difficult
for stockholders to replace a majority of the directors.
The Company's Bylaws also provide for cumulative voting. Cumulative voting
generally means that each stockholder is entitled to as many votes as there are
directors to be elected at a meeting or by written consent, and a stockholder
can aggregate all such votes in the election of one director, or allocate such
votes among the nominees as the stockholder desires. The Bylaws further provide
that a special meeting of stockholders may be called only by the Company's Chief
Executive officer, the Chairman of the Board, a majority of the members of the
Company's Board of Directors or stockholders holding shares entitled to cast ten
percent of the votes at a meeting
The Company is subject to Section 203 of the Delaware General Corporation
Law, which prohibits a public Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which such person became an interested
stockholder unless: (i) prior to such date, the Board of Directors approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder; or (ii) upon becoming an
interested stockholder, the stockholder then owned at least 85% of the voting
stock, as defined in Section 203; or (iii) subsequent to such date, the business
combination is approved by both the Board of Directors and by holders of at
least 66 2/3% of the corporation's outstanding voting stock, excluding shares
owned by the interested stockholder. For these purposes, the term "business
combination" includes mergers, asset sales and other similar transactions with
an "interested stockholder." An "interested stockholder" is a person who,
together with affiliates and associates, owns (or, within the prior three years,
did own) 15% or more of the corporation's voting stock.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
shares of Common Stock (assuming no exercise of outstanding options. In
reliance upon "no-action" letters issued by the SEC relating to transactions
under Section 3(a)(10) of the Securities Act, these shares will be freely
tradeable without restriction under the Securities Act assuming the issuance of
a permit qualifying the shares following a public hearing conducted by the
California Commissioner of Corporations on the fairness of the terms and
conditions of the Restructuring.
The shares issued in the Restructuring, and the shares issuable
upon the exercise of options assumed in connection with the Restructuring, will
be subject to lockup restrictions (the "Lockup"), unless released earlier by all
of Hambrecht & Quist LLC, Morgan Stanley & Co. Incorporated and the Company. The
Lockup prohibits the disposition of any such shares until the date 18 months
after the date of this Prospectus ("Effective Date"), provided that six months
after the Effective Date each stockholder may sell the greater of 10,000 shares
or 5% of such stockholder's shares outstanding on the Effective Date (an
aggregate maximum of approximately 2,115,000 shares), and twelve months after
the Effective Date each stockholder may sell an
63
<PAGE>
additional amount equal to the greater of 10,000 shares or 5% of the holder's
shares outstanding on the Effective Date (an additional aggregate maximum of
approximately 1,519,000 shares). Any shares subject to the Lockup may be
released at any time with or without notice to the public.
In addition to the Lockup, certain stockholders will be subject to volume
limitations imposed by Rule 144 under the Securities Act.
At March 31, 1996, the Company had reserved 8,327,384 shares of Common Stock
for issuance pursuant to its stock plans, of which options to purchase 5,327,384
shares were outstanding under the stock plans. The Company intends to file a
registration statement under the Securities Act approximately 180 days after the
date of this Prospectus to register shares to be issued pursuant to the stock
plans. Shares of Common Stock issued under the stock plans after the effective
date of such registration statement will be freely tradeable in the public
market, subject to lockup restrictions and subject in the case of sales by
affiliates to the amount, manner of sale, notice and public information
requirements of Rule 144.
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market will develop
or, if developed, will be sustained following this offering. Sales of
substantial amounts of Common Stock in the public market could adversely affect
the market price of the Common Stock.
64
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives, Hambrecht & Quist LLC,
Morgan Stanley & Co. Incorporated and Smith Barney Inc. have severally agreed to
purchase from the Company the following respective numbers of shares of Common
Stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ---------------------------------------------------------------------------------- ----------
<S> <C>
Hambrecht & Quist LLC.............................................................
Morgan Stanley & Co. Incorporated.................................................
Smith Barney Inc..................................................................
----------
Total.......................................................................
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow and such dealers may re-allow a
concession not in excess of $ per share to certain other dealers. The
Underwriters have informed the Company that they do not intend to confirm sales
to any accounts over which they exercise discretionary authority. After the
initial public offering of the shares, the offering price and other selling
terms may be changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to
additional shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent the Underwriters exercise such option, each of the Underwriters will have
a firm commitment to purchase approximately the same percentage thereof that the
number of shares of Common Stock to be purchased by it shown in the table above
bears to the total number of shares of Common Stock offered hereby. The Company
will be obligated, pursuant to the option, to sell shares to the Underwriters to
the extent the option is exercised. The Underwriters may exercise such option
only to cover over-allotments made in connection with the sale of Common Stock
offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
The Company has agreed that it will not, without the Representatives' prior
written consent, offer, sell or otherwise dispose of any shares of Common Stock,
options, rights or warrants to acquire shares of Common Stock, or securities
exchangeable for or convertible into shares of Common Stock during the 180-day
period commencing on the date of this Prospectus, except that the Company may
grant additional options under its stock option plans.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiation among the Company and the Representatives. Among the factors to
be considered in determining the initial public offering price are prevailing
market conditions, revenues and earnings of the Company, market valuations of
other companies engaged in activities similar to the Company, estimates of the
business potential and prospects of the Company, the present state of
65
<PAGE>
the Company's business operations, the Company's management and other factors
deemed relevant. The estimated initial public offering price range set forth on
the cover of this Prospectus is subject to change as a result of market
conditions and other factors.
Under the provisions of Schedule E to the by-laws of the National
Association of Securities Dealers, Inc. ("NASD"), when an NASD member such as
Hambrecht & Quist LLC participates in the distribution of its parent company's
securities, the public offering price can be no higher than that recommended by
a "qualified independent underwriter" meeting certain standards. In accordance
with this requirement, Morgan Stanley & Co. Incorporated has agreed to serve in
such role and to recommend a price in compliance with the requirements of
Schedule E.
SUBSEQUENT RESTRICTIONS
NYSE Rule 312(g) prohibits a member corporation, after the distribution of
securities of its parent to the public, from effecting any transaction (except
on an unsolicited basis) for the account of any customer in, or making any
recommendation with respect to, any such security. Thus, following the offering
of the shares, Hambrecht & Quist LLC and the Company's other subsidiaries will
not be permitted to make recommendations regarding the purchase or sale of the
Company's Common Stock.
The current by-laws of the NASD prohibit employees of the Company, their
spouses and, under certain circumstances, other members of their immediate
families who purchase any of the shares offered hereby from selling, pledging,
assigning, hypothecating or transferring such shares for a period of six months
following the effective date of the offering.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California. Certain legal matters will be passed upon
for the Underwriters by Cooley Godward Castro Huddleson & Tatum, San Francisco,
California. Each of these firms has in the past represented and continues to
represent, the Company on a regular basis and in a variety of matters other than
this offering. In addition, an investment fund associated with Cooley Godward
Castro Huddleson & Tatum currently has approximately $200,000 invested in
certain limited partnerships established by the Company to make venture capital
investments.
EXPERTS
The audited financial statements included in this Prospectus and elsewhere
in the Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, to the extent and for the periods indicated in
their reports, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission, Washington, D.C. 20549, a
Registration Statement on Form S-1 under the Securities Act of 1933, as amended,
with respect to the Common Stock offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and such Common Stock, reference is made to the Registration Statement
and the exhibits and schedules filed as part thereof. Statements contained in
this Prospectus as to the contents of any contract or any other document
referred to are not necessarily complete, and, in each instance, if such
contract or document is filed as an exhibit, reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference to such
exhibit. A copy of the Registration Statement, and the exhibits and schedules
thereto, may be inspected without charge at the public reference facilities
maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices located at the Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and
Seven World Trade Center, 13th Floor, New York, New York 10048, and copies of
all or any part of the Registration Statement may be obtained from such offices
upon the payment of the fees prescribed by the Commission.
66
<PAGE>
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Combined Balance Sheets as of September 30, 1994 and 1995............................. F-3
Combined Statements of Operations for the years ended September 30, 1993, 1994 and
1995................................................................................. F-4
Combined Statements of Changes of Shareholders' Equity and Partners' Capital for the
years ended September 30, 1993, 1994 and 1995........................................ F-5
Combined Statements of Cash Flows for the years ended September 30, 1993, 1994 and
1995................................................................................. F-6
Notes to Combined Financial Statements--September 30, 1995............................ F-8
Combined Balance Sheets as of September 30, 1995 and March 31, 1996 (unaudited)....... F-23
Combined Statements of Operations for the six months ended March 31, 1995 and 1996
(unaudited).......................................................................... F-24
Combined Statements of Cash Flows for the six months ended March 31, 1995 and 1996
(unaudited).......................................................................... F-25
Condensed Notes to Combined Financial Statements--March 31, 1996 (unaudited).......... F-26
Selected Pro Forma Financial Data (unaudited)......................................... F-30
Pro Forma Combined Balance Sheet as of March 31, 1996 (unaudited)..................... F-31
Pro Forma Combined Statements of Operations for the six months ended March 31, 1996
and the year ended September 30, 1995 (unaudited).................................... F-32
Notes to Pro Forma Combined Financial Statements--March 31, 1996 (unaudited).......... F-34
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Hambrecht & Quist Group:
We have audited the accompanying combined balance sheets of Hambrecht &
Quist Group (a California corporation) and Hambrecht & Quist, L.P. (a California
limited partnership) as of September 30, 1994 and 1995, and the related combined
statements of operations, changes in shareholders' equity and partners' capital
and cash flows for the years ended September 30, 1993, 1994 and 1995. These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Hambrecht &
Quist Group and Hambrecht & Quist, L.P. as of September 30, 1994 and 1995, and
the results of their operations and their cash flows for the years ended
September 30, 1993, 1994 and 1995, in conformity with generally accepted
accounting principles.
As discussed in Notes 2 and 6 to the combined financial statements,
long-term investments include nonmarketable investments amounting to $24,579,237
and $44,519,474 (39 and 42 percent of total shareholders' equity and partners'
capital) as of September 30, 1994 and 1995, respectively, which have been valued
at fair value as determined by management. We have reviewed the procedures
applied by management in valuing such investments and have inspected the
underlying documentation, and in the circumstances we believe the procedures are
reasonable and the documentation appropriate. However, because of the inherent
uncertainty of valuation, management's estimate of fair values may differ
significantly from the values that would have been used had a ready market
existed for the securities and the differences could be material.
ARTHUR ANDERSEN LLP
San Francisco, California,
January 11, 1996
F-2
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
COMBINED BALANCE SHEETS
AS OF SEPTEMBER 30, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
-------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents........................................................ $ 6,782,335 $ 34,754,568
Receivables:
Customers (net of allowance of $177,166 and $170,254, respectively)............ 42,840,120 100,435,213
Lewco Securities Corp.......................................................... 17,240,020 41,990,309
Syndicate managers............................................................. 421,658 9,538,902
Related parties................................................................ 2,417,360 3,340,955
Lease.......................................................................... 1,750,153 3,255,635
Other.......................................................................... 4,470,852 3,274,378
Marketable trading securities, at market value................................... 23,914,140 26,224,167
Long-term investments, at estimated fair value................................... 34,819,316 70,822,157
Deferred income taxes............................................................ 9,421,662 10,627,856
Furniture, equipment and leasehold improvements, net of accumulated depreciation
and amortization................................................................ 5,308,337 6,009,696
Leased assets, net of accumulated depreciation................................... 5,117,841 8,700,289
Exchange memberships, at cost (market value--$916,000 and $1,018,100,
respectively)................................................................... 656,000 656,000
-------------- --------------
Total assets............................................................... $ 155,159,794 $ 319,630,125
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY AND PARTNERS' CAPITAL
Payables:
Customers...................................................................... $ 24,089,348 $ 71,654,381
Compensation and benefits...................................................... 21,334,648 46,227,242
Syndicate settlements.......................................................... 1,735,621 25,409,777
Income taxes payable........................................................... 223,920 6,368,059
Trade accounts payable......................................................... 2,067,448 944,775
Customer lease deposits........................................................ 2,670,363 478,603
Accrued expenses and other..................................................... 4,223,073 9,848,303
Securities sold, not yet purchased, at market value.............................. 17,359,122 25,218,036
Debt obligations................................................................. 12,683,532 13,770,737
Payable to partners of Hambrecht & Quist, L.P.................................... 2,679,918 10,445,367
-------------- --------------
Total liabilities.......................................................... 89,066,993 210,365,280
-------------- --------------
Minority interest in Hambrecht & Quist Guaranty Finance, L.P..................... 2,502,081 3,802,762
-------------- --------------
Commitments and contingencies
Shareholders' equity and partners' capital:
Common stock (no par value--40,000,000 shares authorized in 1994 and 1995,
12,475,188 and 14,609,188 shares issued and outstanding in 1994 and 1995,
respectively)................................................................. 13,078,867 25,412,585
Notes receivable from employees for purchases of common stock.................. (966,315) (7,659,714)
Retained earnings.............................................................. 50,929,131 72,205,112
-------------- --------------
Total shareholders' equity................................................. 63,041,683 89,957,983
Hambrecht & Quist, L.P. partners' capital...................................... 549,037 15,504,100
-------------- --------------
Total shareholders' equity and partners' capital........................... 63,590,720 105,462,083
-------------- --------------
Total liabilities and shareholders' equity and partners' capital........... $ 155,159,794 $ 319,630,125
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
-------------- -------------- --------------
<S> <C> <C> <C>
REVENUES:
Principal transactions......................................... $ 30,045,592 $ 36,410,993 $ 53,424,647
Agency commissions............................................. 14,220,782 14,241,964 24,602,992
Investment banking............................................. 42,959,978 29,234,148 70,359,967
Corporate finance fees......................................... 9,992,668 18,561,517 20,709,345
Interest and dividends......................................... 2,793,020 3,361,970 3,157,489
Asset management fees.......................................... 5,183,960 4,984,956 10,067,390
Net investment gains from long-term investments................ 3,523,810 10,269,641 33,852,073
Leasing and other.............................................. 1,826,941 2,265,037 3,848,687
-------------- -------------- --------------
Total revenues............................................. 110,546,751 119,330,226 220,022,590
-------------- -------------- --------------
EXPENSES:
Compensation and benefits...................................... 54,916,825 60,175,102 105,370,141
Brokerage and clearance........................................ 6,891,548 7,367,023 10,441,253
Occupancy and equipment........................................ 6,045,172 6,678,675 7,802,859
Communications................................................. 4,377,354 6,244,066 7,394,101
Professional services.......................................... 3,006,635 3,700,241 5,347,739
Travel, entertainment and conference........................... 2,941,736 4,234,523 6,145,108
Interest....................................................... 1,464,298 987,456 1,265,966
Other.......................................................... 4,306,643 3,380,554 3,637,374
-------------- -------------- --------------
Total expenses............................................. 83,950,211 92,767,640 147,404,541
-------------- -------------- --------------
Income before minority interest and income tax provision... 26,596,540 26,562,586 72,618,049
MINORITY INTEREST IN INCOME OF SUBSIDIARY........................ 352,092 525,934 718,651
-------------- -------------- --------------
Income before income tax provision......................... 26,244,448 26,036,652 71,899,398
INCOME TAX PROVISION............................................. 10,940,013 10,119,459 22,461,147
-------------- -------------- --------------
Net income................................................. $ 15,304,435 $ 15,917,193 $ 49,438,251
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND PARTNERS' CAPITAL
FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
HAMBRECHT & QUIST,
HAMBRECHT & QUIST GROUP L.P.
------------------------------------------------------------- ----------------------
NUMBER OF
COMMON COMMON NOTES RETAINED SUBTOTAL H&Q PARTNERS' NOTES
SHARES STOCK RECEIVABLE EARNINGS GROUP CAPITAL RECEIVABLE
----------- ---------- ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1992................ 11,817,908 $9,817,433 $(1,153,443) $24,555,009 $33,218,999
Sales of common stock.................... 1,467,408 3,721,365 -- -- 3,721,365
Notes received for purchases of common
stock................................... -- -- (1,677,273) -- (1,677,273)
Reductions of notes received for
purchases of common stock............... -- -- 1,188,824 -- 1,188,824
Repurchases of common stock.............. (524,980) (1,336,515) -- (129,974) (1,466,489)
Net income............................... -- -- -- 15,304,435 15,304,435
----------- ---------- ---------- ---------- ------------ ---------- ----------
BALANCE, SEPTEMBER 30, 1993................ 12,760,336 12,202,283 (1,641,892) 39,729,470 50,289,861
Sales of common stock or partners'
capital additions....................... 901,472 3,342,896 -- -- 3,342,896 $1,322,324 $ --
Notes received for purchases of common
stock or partnership units.............. -- -- (295,093) -- (295,093) -- (69,526)
Reductions of notes received for
purchases of common stock............... -- -- 970,670 -- 970,670 -- --
Repurchases of common stock or partners'
capital withdrawals..................... (1,186,620) (2,466,312) -- (2,524,238) (4,990,550) (217,137) --
Net income............................... -- -- -- 13,723,899 13,723,899 2,193,294 --
Partners' capital distributions
payable................................. -- -- -- -- -- -- --
----------- ---------- ---------- ---------- ------------ ---------- ----------
BALANCE, SEPTEMBER 30, 1994................ 12,475,188 13,078,867 (966,315) 50,929,131 63,041,683 3,298,481 (69,526)
Sales of common stock or partners'
capital additions....................... 2,963,892 14,406,194 -- -- 14,406,194 2,557,915 --
Notes received for purchases of common
stock or partnership units.............. -- -- (7,935,534) -- (7,935,534) -- (2,162,487)
Reductions of notes received for
purchases of common stock............... -- -- 1,242,135 -- 1,242,135 -- --
Repurchases of common stock or partners'
capital withdrawals..................... (829,892) (2,072,476) -- (2,396,760) (4,469,236) (1,241,100) --
Net income............................... -- -- -- 23,672,741 23,672,741 25,765,510 --
Partners' capital distributions.......... -- -- -- -- -- (4,186,804) --
Partners' capital distributions
payable................................. -- -- -- -- -- -- --
Net unrealized investment gains of
leasing subsidiary...................... -- -- -- -- -- -- --
----------- ---------- ---------- ---------- ------------ ---------- ----------
BALANCE, SEPTEMBER 30, 1995................ 14,609,188 $25,412,585 $(7,659,714) $72,205,112 $89,957,983 $26,194,002 $(2,232,013)
----------- ---------- ---------- ---------- ------------ ---------- ----------
----------- ---------- ---------- ---------- ------------ ---------- ----------
<CAPTION>
UNREALIZED
DISTRIBUTIONS GAINS, NET SUBTOTAL COMBINED
PAYABLE (NOTE 2) H&Q LP TOTAL
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1992................ $33,218,999
Sales of common stock.................... 3,721,365
Notes received for purchases of common
stock................................... (1,677,273)
Reductions of notes received for
purchases of common stock............... 1,188,824
Repurchases of common stock.............. (1,466,489)
Net income............................... 15,304,435
------------ ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1993................ 50,289,861
Sales of common stock or partners'
capital additions....................... $ -- $ -- $ 1,322,324 4,665,220
Notes received for purchases of common
stock or partnership units.............. -- -- (69,526) (364,619)
Reductions of notes received for
purchases of common stock............... -- -- -- 970,670
Repurchases of common stock or partners'
capital withdrawals..................... -- -- (217,137) (5,207,687)
Net income............................... -- -- 2,193,294 15,917,193
Partners' capital distributions
payable................................. (2,679,918) -- (2,679,918) (2,679,918)
------------ ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1994................ (2,679,918) -- 549,037 63,590,720
Sales of common stock or partners'
capital additions....................... -- -- 2,557,915 16,964,109
Notes received for purchases of common
stock or partnership units.............. -- -- (2,162,487) (10,098,021)
Reductions of notes received for
purchases of common stock............... -- -- -- 1,242,135
Repurchases of common stock or partners'
capital withdrawals..................... -- -- (1,241,100) (5,710,336)
Net income............................... -- -- 25,765,510 49,438,251
Partners' capital distributions.......... 4,186,804 -- -- --
Partners' capital distributions
payable................................. (11,952,253) -- (11,952,253) (11,952,253)
Net unrealized investment gains of
leasing subsidiary...................... -- 1,987,478 1,987,478 1,987,478
------------ ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1995................ ($10,445,367) $1,987,478 $15,504,100 $105,462,083
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................... $ 15,304,435 $ 15,917,193 $ 49,438,251
------------ ------------ ------------
Adjustments to reconcile net income to net cash and cash equivalents
provided by operating activities--
Depreciation and amortization..................................... 2,624,400 3,229,208 5,664,070
Net investment gains from long-term investments................... (3,523,810) (10,269,641) (33,852,073)
Net gain on sales of leased assets................................ -- (1,613) (407,436)
Deferred tax provision (benefit).................................. (1,499,721) 2,005,896 (1,206,194)
Minority interest in income of subsidiary......................... 352,092 525,934 718,651
Net decrease in allowance for losses on guarantees, loans and
leases........................................................... -- (92,627) (610,837)
Changes in operating assets and liabilities--
Customers, net.................................................. 7,006,114 (1,264,519) (10,030,060)
Lewco Securities Corp........................................... (8,465,211) (2,666,093) (24,750,289)
Syndicate managers.............................................. (3,815,234) 4,969,031 (9,117,244)
Related parties and other receivables........................... (3,554,384) 57,131 (1,296,032)
Marketable trading securities, net.............................. (1,896,495) 1,194,830 1,262,314
Compensation and benefits payable............................... 5,158,694 2,186,557 27,533,054
Syndicate settlements........................................... 2,786,531 (4,764,232) 23,674,156
Income taxes payable............................................ 2,208,932 (1,176,471) 6,144,139
Trade accounts payable.......................................... -- 2,067,448 (1,122,673)
Customer lease deposits......................................... -- 2,670,363 (2,191,760)
Accrued expenses and other payables............................. (2,291,167) (1,945,820) 5,625,230
Other, net...................................................... (73,705) 732,684 (150,606)
------------ ------------ ------------
Total adjustments............................................. (4,982,964) (2,541,934) (14,113,590)
------------ ------------ ------------
Net cash and cash equivalents provided by operating
activities................................................... 10,321,471 13,375,259 35,324,661
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of long-term investments.................................. (2,298,867) (7,844,120) (10,690,049)
Proceeds from sales/distributions of long-term investments.......... 8,486,587 5,432,665 15,843,334
Purchases of furniture, equipment and leasehold improvements........ (1,944,937) (2,776,824) (3,060,061)
Purchases of leased assets.......................................... -- (2,180,943) (6,504,911)
Sales of leased assets.............................................. 6,831 -- 638,002
Increase in lease receivables....................................... -- (1,714,108) (1,505,482)
Proceeds from payments of lease receivables......................... -- 2,947,756 1,568,911
------------ ------------ ------------
Net cash and cash equivalents provided by (used in) investing
activities................................................... 4,249,614 (6,135,574) (3,710,256)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt obligations...................................... -- 1,100,000 19,738,066
Repayments of debt obligations...................................... (15,029,367) (5,328,968) (18,650,861)
Proceeds from sales of common stock................................. 3,360,748 3,257,770 5,072,335
Repurchases of common stock......................................... (1,466,489) (4,990,550) (4,469,236)
Partners' capital contributions..................................... -- 1,252,798 395,428
Partners' capital withdrawals....................................... -- (217,137) (1,241,100)
Partners' capital distributions..................................... -- -- (4,186,804)
Distributions to minority interestholder............................ -- (90,000) (300,000)
------------ ------------ ------------
Net cash and cash equivalents used in financing activities.... (13,135,108) (5,016,087) (3,642,172)
------------ ------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS................................. 1,435,977 2,223,598 27,972,233
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........................ 3,122,760 4,558,737 6,782,335
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR.............................. $ 4,558,737 $ 6,782,335 $ 34,754,568
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-6
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
COMBINED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
SCHEDULE OF SUPPLEMENTAL INFORMATION:
Taxes paid to taxing authorities.................................... $ 9,900,000 $ 9,174,792 $ 14,841,855
Interest paid....................................................... 1,104,883 2,121,126 4,617,047
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
H&Q Group long-term investments, net, were reclassified from/(to)
marketable securities.............................................. -- (656,084) 4,286,573
H&Q Group common stock sales and H&Q LP partners' capital
contributions were made with notes receivable from employees....... 1,677,273 364,619 10,098,021
H&Q Group common stock was issued to employees in exchange for
reductions in compensation and benefits payable.................... -- 1,355,290 3,055,280
Reductions to H&Q LP's partners' capital were made via accruals of
distributions payable to partners.................................. -- 2,679,918 11,952,253
Unrealized gains, net, on long-term investments held by H&Q GF were
recorded as increases in equity and minority interest.............. -- -- 2,880,791
Subordinated notes payable were issued by RvR in exchange for
subordinated notes receivable of the same amount................... -- 1,800,000 --
A line of credit receivable was converted into preferred stock of
the issuer......................................................... 2,000,000 -- --
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
NOTE 1 -- ORGANIZATION AND NATURE OF OPERATIONS
The financial statements include the combined operations of Hambrecht &
Quist Group, a California corporation (H&Q Group or the Company), and Hambrecht
& Quist L.P., a California limited partnership (H&Q LP). In fiscal 1996, H&Q
Group and H&Q LP will make distributions and restructure their operations, which
will result in one surviving holding company, Hambrecht & Quist Group, a
Delaware corporation (H&Q Group Delaware).
PRIOR TO RESTRUCTURING
H&Q Group is owned primarily by its key employees. As of September 30, 1995,
approximately 13.70 percent of H&Q Group is owned by the Hambrecht & Quist
Employee Savings and Employee Stock Ownership Plan (see Note 12). As a privately
held company, all of H&Q Group's stock transactions are recorded pursuant to the
terms of the Hambrecht & Quist Group Shareholders' Agreement (the Agreement).
Since inception, all stock issuances and repurchases and all stock option grants
have been recorded using a formula value, as determined by management and
required by the Agreement. The formula value results in transactions being
recorded at premiums over the Company's GAAP net book value. The formula value
approximates fair market value. There is no public market for the Company's
stock. As such, selling shareholders are required to offer their shares to the
Company first before seeking an independent buyer. Historically, the Company has
repurchased all selling shareholders' shares.
H&Q Group operates primarily as a holding company with various consolidated
operating subsidiaries. Hambrecht & Quist LLC, a Delaware limited liability
company (H&Q LLC), is a 70 percent owned investment banking subsidiary and
securities broker-dealer that primarily services companies in the technology,
healthcare, services and branded consumer products industries. RvR Securities
Corp., a California corporation (RvR), is a wholly owned registered
broker-dealer serving companies with smaller capitalizations than H&Q LLC's
typical underwriting clients. Hambrecht & Quist Capital Management Incorporated,
a California corporation (H&Q CM), is a wholly owned registered investment
adviser. H&Q CM is the investment adviser to two publicly traded closed-end
mutual funds, H&Q Healthcare Investors and H&Q Life Sciences Investors.
Hambrecht & Quist Venture Partners, a California limited partnership (H&Q VP),
is a wholly owned venture capital fund management partnership.
Other affiliates of the Company include nonconsolidated operating entities.
H&Q Group owns a 50 percent interest in Hambrecht & Quist Asia Pacific, Ltd., a
British Virgin Islands limited liability company (H&Q AP). H&Q AP provides
financial advisory and fund management services in the Asia Pacific region. H&Q
LLC owns a 20 percent interest in Lewco Securities Corporation, a Delaware
corporation (Lewco). Lewco is a clearing broker and depository for H&Q LLC and
Schroder Wertheim & Co. (Schroder), which owns the remaining 80 percent
interest. All expenses, net of certain revenues, are reimbursed by both owners.
Lewco, H&Q AP and other affiliated investment and venture capital partnerships
are recorded in long-term investments at their estimated fair value (see Note
2).
H&Q LP operates primarily as a holding partnership for certain current and
prior operating affiliates of H&Q Group. H&Q Group is the 1 percent general
partner of H&Q LP, and the same shareholders of H&Q Group are the limited
partners. As of September 30, 1995, H&Q Group also owns a 14.76 percent limited
partnership interest. Similar to H&Q Group, all partnership unit sales and
repurchases have been recorded at the partnership's formula value, as defined in
the Hambrecht & Quist Limited Partnership Agreement.
H&Q LP owns the remaining 30 percent interest of H&Q LLC and consolidates
its 70 percent limited partner interest in Hambrecht & Quist Guaranty Finance, a
California limited partnership (H&Q GF). The 30 percent general partner interest
is owned by Guaranty Finance Management Corp., a California corporation, which
is owned almost equally by the CEO of H&Q Group and an independent third party.
H&Q GF provides
F-8
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
NOTE 1 -- ORGANIZATION AND NATURE OF OPERATIONS (CONTINUED)
secured, asset-based financings that include tenant improvement and real estate
leases, equipment leases, accounts receivable and inventory financing, and loan
guarantees for emerging technology, biotechnology and healthcare companies. H&Q
LP's other investments in public and private companies are recorded in long-term
investments at their market or estimated fair value (see Note 2).
DISTRIBUTIONS AND RESTRUCTURING ACTIVITIES
H&Q Group plans to sell shares of its stock in an initial public offering
(the Offering) that will result in new shareholders owning a portion of the
Company. Prior to the Offering, the Company will make distributions and
restructure (the Transactions) in order to simplify its structure.
H&Q GF will distribute securities on a pro rata basis to its partners. H&Q
GF will merge into Hambrecht & Quist Guaranty Finance, LLC (H&Q GF LLC), a new
Delaware limited liability company. H&Q Group will purchase an additional 17.5
percent of H&Q GF LLC from other members (including 15 percent from H&Q Group's
CEO).
H&Q Group will distribute its limited partnership interest in H&Q LP
primarily to a liquidating trust benefiting certain current and former
employees. H&Q LLC will distribute cash and securities to H&Q LP, resulting in a
reduction in H&Q LP's ownership in H&Q LLC. H&Q LP will distribute cash and
securities to a liquidating trust benefiting the partners of H&Q LP.
All shares of H&Q Group will be exchanged for four shares of H&Q Group
Delaware, a new Delaware holding company, and H&Q Group will become a subsidiary
of H&Q Group Delaware. All references to the number of shares and per-share
amounts have been restated to reflect the effect of the four-for-one exchange of
shares.
H&Q LP will be merged into H&Q Group Delaware and the partners of H&Q LP who
do not perfect their statutory dissenters' rights under the California
Corporations Code will receive shares of the Company's common stock. H&Q Group
Delaware will transfer H&Q LLC and H&Q GF LLC to H&Q Group.
POST-TRANSACTIONS STRUCTURE
As a consequence of the foregoing and other Transactions, H&Q Group Delaware
will consolidate 100 percent of H&Q LLC and 87.5 percent of H&Q GF LLC. Its
ownership of and accounting for other subsidiaries and affiliates will be the
same as H&Q Group and will be unaffected by the Transactions listed above. H&Q
LP will cease to exist.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND COMBINATION
All significant intercompany accounts and transactions have been eliminated
in consolidation and combination.
USE OF ESTIMATES
The preparation of these combined financial statements require the use of
certain estimates by management in determining the entity's assets, liabilities,
revenue and expenses. The most significant estimates with regard to these
financial statements relate to long-term investments, as discussed below. Actual
results could differ from those estimates.
F-9
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, cash and cash equivalents
include cash on hand, demand deposits with banks, money market accounts and U.S.
Treasury bills totaling $6,782,335 and $34,754,568 at September 30, 1994 and
1995, respectively. Cash equivalents have original maturities of 90 days or
less.
SECURITIES TRANSACTIONS
Customers' securities transactions are recorded on a settlement-date basis,
with related commission income and expenses recorded on a trade-date basis.
Marketable securities owned and securities sold, not yet purchased are recorded
on a trade-date basis. Final underwriting settlements are recorded when
received.
MARKETABLE TRADING SECURITIES
Marketable trading securities and securities sold, not yet purchased are
reported at prevailing market prices. Realized and unrealized gains and losses
on market trading securities and securities sold, not yet purchased are included
in revenues from principal transactions.
LONG-TERM INVESTMENTS
Long-term investments include marketable equity securities and nonmarketable
securities (which include restricted securities of publicly traded companies,
securities of private companies and investment partnership and other venture
capital interests).
H&Q Group and H&Q LLC own marketable equity securities and nonmarketable
investments. Marketable equity securities are reported at prevailing market
prices. Discounts are applied for holdings in excess of typical daily trading
volumes. Nonmarketable investments are not registered for public sale or carry
restrictions on sale and are reported at estimated fair value as determined by
management. Factors considered by management in valuing nonmarketable
investments include the type of investment, purchase cost, marketability,
restrictions on disposition, subsequent purchases of the same or similar
investments by other investors, and current financial position and operating
results of the investee entities. Warrants and other rights to purchase
nonmarketable investments are valued at cost, which approximates estimated fair
value. Realized and unrealized gains and losses on long-term investments owned
by H&Q Group and H&Q LLC are included in revenues from net investment gains from
long-term investments.
Also included in long-term investments are investments owned by H&Q GF. H&Q
GF primarily owns marketable equity securities. Effective October 1, 1994, H&Q
GF adopted Statement of Financial Accounting Standards No. 115 (SFAS 115),
"Accounting for Certain Investments in Debt and Equity Securities." As required
by SFAS 115, H&Q GF revalued its available-for-sale securities at market value
and recorded $3,049,227 as an increase to its partners' capital as of October 1,
1994. At September 30, 1995, H&Q GF's unrealized net holding gain was
$2,880,791. H&Q LP's recorded portion of the unrealized net holding gain was
$1,987,478 and is recorded in H&Q LP's partners' capital. Prior to October 1,
1994, H&Q GF recorded its long-term investments at the lower of cost or market.
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements are recorded at cost.
Depreciation of furniture and equipment is provided using accelerated and
straight-line methods. These assets are depreciated over periods ranging from
five to seven years based on estimated useful lives. Leasehold improvements are
amortized over the lesser of the useful life of the improvement or the term of
the lease. Expenditures for repairs and maintenance that do not significantly
increase the life of the asset are charged to operations as incurred.
F-10
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LEASE RECEIVABLES AND LEASED ASSETS
H&Q GF leases land, a building, equipment and tenant improvements under
operating leases and direct financing leases. Assets leased under operating
leases are recorded at cost and are included in leased assets. Depreciation of
the building and tenant improvements is provided using straight-line methods
over 31.5 years and accelerated methods over 15 years. Depreciation of leased
equipment is provided using accelerated methods over five to seven years. Direct
financing leases are included in lease receivables and are carried at the total
of the future minimum lease payments less unearned income.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No 109,
"Accounting for Income Taxes" (SFAS 109). Under this method, the Company
recognizes taxes payable or refundable for the current year and deferred tax
liabilities and assets for future consequences of events that have been
recognized in the Company's financial statements or tax returns.
No provision has been made in the financial statements for income taxes
related to the operations of H&Q LP. Pursuant to applicable federal and state
income tax regulations, all income or loss of H&Q LP is reportable by each
partner directly to the taxing authority.
PARTNERS' CAPITAL DISTRIBUTIONS PAYABLE
In accordance with the terms of the H&Q LP partnership agreement, an accrual
has been made for distributions to H&Q LP partners to satisfy their federal and
state income tax obligations for partnership taxable income. The accrual was
$2,679,918 and $10,445,367 at September 30, 1994 and 1995, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Company's financial assets and liabilities are
carried at market or estimated fair value or are carried at amounts that
approximate current fair value because of their short-term nature. Estimates are
made at a specific point in time, based on relevant market information and
information about the financial instrument.
EARNINGS PER SHARE
Earnings per share are not presented, as they would not be meaningful
because of the impact of the Transactions (see Note 1).
STOCK OPTION PLANS
The Company uses the intrinsic value method to account for stock option
plans. Under this method, compensation expense is recognized for awards of
options to purchase shares of common stock to employees under compensatory plans
only if the fair market value of the stock at the option grant date (or other
measurement date, if later) is greater than the amount the employee must pay to
acquire the stock. In October 1995, the Financial Accounting Standards Board
issued SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS
123 permits companies to adopt a new fair value based method to account for
stock option plans or to continue using the intrinsic value method. If the
intrinsic value method is used, information concerning the pro forma effects on
net earnings and earnings per share of adopting the fair value based method is
required to be presented in the notes to the financial statements. The Company
intends to continue using the intrinsic value method and will provide the pro
forma disclosures in its 1997 financial statements, as required by SFAS 123.
F-11
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain amounts in the 1993 and 1994 financial statements have been
reclassified to conform to the 1995 presentation.
NOTE 3 -- RECEIVABLES FROM AND PAYABLES TO CUSTOMERS
Receivables from and payables to customers include amounts due to or from
customers as a result of cash and margin transactions. Securities owned by
customers are held as collateral for these receivables. Such collateral is not
reflected in the combined financial statements.
NOTE 4 -- RECEIVABLES FROM RELATED PARTIES
Receivables from related parties include receivables of $2,176,299 and
$2,912,333 at September 30, 1994 and 1995, respectively, from H&Q AP (see Notes
1 and 11).
NOTE 5 -- MARKETABLE TRADING SECURITIES AND SECURITIES SOLD, NOT YET PURCHASED
At September 30, 1994 and 1995, marketable trading securities and securities
sold, not yet purchased, consisted of the following:
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Marketable trading securities--
Equity securities....................................................... $ 13,352,773 $ 21,385,307
Convertible bonds....................................................... 10,320,641 3,941,812
Options................................................................. 240,726 897,048
------------- -------------
$ 23,914,140 $ 26,224,167
------------- -------------
------------- -------------
Securities sold, not yet purchased--
Equity securities....................................................... $ 16,855,598 $ 24,532,549
Convertible bonds....................................................... 257,500 --
Options................................................................. 246,024 685,487
------------- -------------
$ 17,359,122 $ 25,218,036
------------- -------------
------------- -------------
</TABLE>
F-12
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
NOTE 6 -- LONG-TERM INVESTMENTS
At September 30, 1994 and 1995, the Company's long-term investments at
estimated fair value consisted of the following:
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Marketable equity securities.............................................. $ 10,240,079 $ 20,302,683
BISYS Group, Inc. common stock--unrestricted.............................. - 6,000,000
------------- -------------
Total marketable investments.......................................... 10,240,079 26,302,683
------------- -------------
------------- -------------
BISYS Group, Inc. common stock--restricted................................ 5,580,000 21,481,390
Nonmarketable securities and investment partnership interests............. 7,653,982 14,906,421
H&Q Venture Partners and affiliated venture capital funds................. 6,829,447 4,790,144
Venture capital funds managed by others................................... 2,405,529 1,231,240
Lewco Securities--
Equity ownership........................................................ 1,810,279 1,810,279
Subordinated note receivable............................................ 300,000 300,000
------------- -------------
Total nonmarketable investments....................................... 24,579,237 44,519,474
------------- -------------
Total long-term investments........................................... $ 34,819,316 $ 70,822,157
------------- -------------
------------- -------------
</TABLE>
The cost of the Company's long-term investments at September 30, 1994 and
1995, were $26,935,646 and $47,046,599, respectively.
Following is an analysis of the net investment gains for the years ended
September 30, 1993, 1994 and 1995:
<TABLE>
<CAPTION>
1993 1994 1995
------------ ------------- -------------
<S> <C> <C> <C>
Realized gains.............................................. $ 4,165,589 $ 5,360,747 $ 3,346,270
Change in unrealized gains and losses, net.................. (641,779) 4,908,894 30,505,803
------------ ------------- -------------
Net investment gains from long-term investments........... $ 3,523,810 $ 10,269,641 $ 33,852,073
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
Both H&Q Group and H&Q LLC own shares of BISYS Group, Inc. (BISYS) common
stock. As of September 30, 1995, H&Q Group owns restricted shares with a
carrying value of $5,136,390 and H&Q LLC owns both restricted and unrestricted
shares with carrying values of $16,345,000 and $6,000,000, respectively.
Included in net investment gains are realized and unrealized gains on BISYS
holdings of $2,190,000, $5,457,500 and $19,948,390 for 1993, 1994 and 1995,
respectively.
NOTE 7 -- FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
The following summarizes the Company's furniture, equipment and leasehold
improvements as of September 30, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Furniture and equipment................................................... $ 12,615,904 $ 15,142,026
Leasehold improvements.................................................... 4,420,588 4,949,524
Less--Accumulated depreciation and amortization........................... (11,728,155) (14,081,854)
------------- -------------
$ 5,308,337 $ 6,009,696
------------- -------------
------------- -------------
</TABLE>
For the years ended September 30, 1993, 1994 and 1995, occupancy and
equipment expense included depreciation and amortization expense on furniture,
equipment and leasehold improvements of $1,865,774, $2,052,512 and $2,358,337,
respectively.
F-13
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
NOTE 8 -- LEASING ACTIVITIES
H&Q GF negotiates lease lines, purchases equipment, property and leasehold
improvements for lease to customers under the lines and administers them. H&Q GF
also negotiates and guarantees secured loans and lines of credit for customers,
which are generally funded and administered by a financial partner, such as a
bank or other financial institution. H&Q GF's customers are primarily emerging
technology companies.
At September 30, 1994 and 1995, lease receivables consist of direct
financing capital leases with terms ranging from three to four years of
$1,750,153 and $3,255,635, respectively. At September 30, 1994 and 1995, lease
receivables related to noncancelable operating leases are not material and are
included in other receivables. Future minimum rentals to be received under
direct financing leases and operating leases in effect at September 30, 1995,
are as follows:
<TABLE>
<CAPTION>
DIRECT
FINANCING NONCANCELABLE
LEASE OPERATING
RECEIVABLES LEASES
------------ -------------
<S> <C> <C>
1996............................................................. $ 1,502,136 $ 4,019,471
1997............................................................. 1,309,677 3,356,766
1998............................................................. 778,626 108,333
------------ -------------
Total minimum lease payments................................. 3,590,439 $ 7,484,570
-------------
-------------
Less--Unearned income............................................ (334,804)
------------
Present value of net minimum lease payments...................... $ 3,255,635
------------
------------
</TABLE>
At September 30, 1994 and 1995, leased assets subject to noncancelable
operating leases consist of:
<TABLE>
<CAPTION>
1994 1995
------------ -------------
<S> <C> <C>
Land and building............................................... $ 5,000,000 $ 5,000,000
Equipment....................................................... 2,876,694 8,287,004
------------ -------------
7,876,694 13,287,004
Less--Accumulated depreciation.................................. (2,758,853) (4,586,715)
------------ -------------
$ 5,117,841 $ 8,700,289
------------ -------------
------------ -------------
</TABLE>
The Company's depreciation expense on leased assets was $758,626, $1,176,696
and $3,305,733 for the years ended September 30, 1993, 1994 and 1995,
respectively.
F-14
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
NOTE 9 -- DEBT OBLIGATIONS
Debt obligations consist of the following:
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Lines of credit--
$7,500,000 bank line of credit (H&Q Group); interest at prime plus 1 percent (9.75
percent at September 30, 1995); collateralized in full by marketable securities
and certain customer receivables; average balance outstanding in 1994 and 1995
was $362,500 and $2,014,951, respectively; advances due December 31, 1995 $ 1,100,000 $ 3,823,790
$20,000,000 bank line of credit ($5,000,000 in 1994) (H&Q Group); interest at
prime plus 2 percent (10.75 percent at September 30, 1995); unsecured; no amounts
drawn in 1994 or 1995; advances payable within seven days; expires May 1996 -- --
$11,000,000 bank line of credit ($7,000,000 in 1994) (H&Q GF); interest at prime
plus 0.50 percent (9.25 percent at September 30, 1995); unsecured; due December
10, 1995 -- 3,515,000
Notes payable--
Bank note payable (H&Q Group); interest at prime plus 1 percent (8.75 percent at
September 30, 1994); collateralized by H&Q LLC shares; repaid in 1995 5,000,000 --
Bank note payable (H&Q Group); noninterest-bearing; collateralized by
nonmarketable securities valued at $3,574,380 at September 30, 1994, and U.S.
Treasury bills valued at $636,659 at September 30, 1995; $687,500 due September
30, 1995; $637,500 due September 30, 1996 1,325,000 637,500
Other--
Bank nonrecourse loan (H&Q GF); interest at 9 percent, payable monthly;
collateralized by land and a building leased to a customer; principal payments of
$63,338 due beginning in 1997 through 2007 5,000,000 5,000,000
Other 258,532 794,447
------------- -------------
$ 12,683,532 $ 13,770,737
------------- -------------
------------- -------------
</TABLE>
The average prime rate for 1994 and 1995 was 6.61 percent and 8.68 percent,
respectively.
The scheduled repayment of debt obligations is as follows:
<TABLE>
<S> <C>
1996........................................... $8,834,075
1997........................................... 63,338
1998........................................... 63,338
1999........................................... 63,338
2000........................................... 63,338
Thereafter..................................... 4,683,310
----------
$13,770,737
----------
----------
</TABLE>
F-15
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
NOTE 9 -- DEBT OBLIGATIONS (CONTINUED)
Interest expense on debt obligations was $1,420,294, $932,974 and $960,353
during fiscal 1993, 1994 and 1995, respectively.
NOTE 10 -- INCOME TAXES
The income tax provision consisted of the following components for the years
ended September 30, 1993, 1994 and 1995:
<TABLE>
<CAPTION>
STATE AND
FEDERAL CITY TOTAL
------------- ------------- -------------
<S> <C> <C> <C>
1993--
Current....................................... $ 8,989,372 $ 3,450,362 $ 12,439,734
Deferred...................................... (673,418) (826,303) (1,499,721)
------------- ------------- -------------
Total....................................... $ 8,315,954 $ 2,624,059 $ 10,940,013
------------- ------------- -------------
------------- ------------- -------------
1994--
Current....................................... $ 5,833,636 $ 2,279,928 $ 8,113,564
Deferred...................................... 1,418,775 587,120 2,005,895
------------- ------------- -------------
Total....................................... $ 7,252,411 $ 2,867,048 $ 10,119,459
------------- ------------- -------------
------------- ------------- -------------
1995--
Current....................................... $ 15,702,697 $ 7,964,644 $ 23,667,341
Deferred...................................... (1,152,901) (53,293) (1,206,194)
------------- ------------- -------------
Total....................................... $ 14,549,796 $ 7,911,351 $ 22,461,147
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The net deferred income tax asset as of September 30, 1994 and 1995, is
composed of the following:
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Deferred income tax asset--
Deferred compensation......................................... $ 6,042,535 $ 11,879,290
Litigation accruals........................................... 4,720,403 2,043,238
Other......................................................... 273,829 780,205
------------- -------------
11,036,767 14,702,733
Gross deferred income tax liabilities........................... (1,615,105) (4,074,877)
------------- -------------
Net deferred income tax asset............................... $ 9,421,662 $ 10,627,856
------------- -------------
------------- -------------
</TABLE>
There was no valuation allowance against deferred tax assets at September
30, 1994 and 1995.
F-16
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
NOTE 10 -- INCOME TAXES (CONTINUED)
The following is a reconciliation of the income tax expense to the amount
computed by applying the federal statutory rate to income before income tax
expense:
<TABLE>
<CAPTION>
1993 1994 1995
------------------------ ------------------------ ------------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------------- --------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Tax expense computed at statutory
rate............................... $ 9,119,945 34.7% $ 9,112,828 35.0% $ 25,164,789 35.0%
State and local tax provision, net
of federal income tax benefit...... 1,961,708 7.5 1,735,734 6.7 5,244,299 7.3
Federal income tax rate change...... (182,388) (0.7) (66,993) (0.3) -- --
Nondeductible expenses.............. 40,748 0.2 105,543 0.4 155,164 0.2
H&Q LP income not subject to tax.... -- -- (767,653) (2.9) (8,103,105) (11.3)
------------- --- ------------- --- ------------- ---------
$ 10,940,013 41.7% $ 10,119,459 38.9% $ 22,461,147 31.2%
------------- --- ------------- --- ------------- ---------
------------- --- ------------- --- ------------- ---------
</TABLE>
NOTE 11 -- RELATED-PARTY TRANSACTIONS
INVESTMENT TRANSACTIONS
The Company makes investments in private companies directly and through the
venture capital funds it manages. H&Q VP manages the majority of the Company's
venture capital funds (see Note 1) and earns management fees and profit
participation distributions. Included in asset management fees are management
fees and profit participation distributions from venture capital funds of
$3,067,286, $2,768,287 and $7,653,320 for 1993, 1994 and 1995, respectively.
Directors, officers and employees of H&Q Group or its subsidiaries may have
additional interests in such private companies directly or through various
affiliated venture capital or other investment entities. Such parties may also
be operating officers of and serve on the boards of directors of companies in
which the Company has invested.
H&Q GF provides lease financing to companies in which H&Q Group, its
subsidiaries and its affiliates have equity investments.
OPERATING ADVANCES
H&Q Group pays operating expenses on behalf of certain affiliates, primarily
H&Q AP (see Notes 1 and 4) and is reimbursed for those expenses. Operating
expenses that have not yet been reimbursed are included in receivables from
related parties (see Note 4).
EMPLOYEE NOTES RECEIVABLE
In connection with sales of the Company's common stock, the Company received
notes from employees, which, at September 30, 1994 and 1995, had principal
balances of $966,315 and $7,659,714, respectively, and are treated as a
reduction of shareholders' equity. These notes bear interest at rates ranging
from 6 percent to 8 percent and have maturity dates ranging from 1996 through
2000.
Receivables from H&Q LP partners represent amounts due from partners,
including H&Q Group, for their capital contributions to H&Q LP. Such amounts are
recorded as a reduction of partners' capital. Receivables from H&Q LP partners
were $69,526 and $2,232,013 at September 30, 1994 and 1995, respectively.
F-17
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
NOTE 11 -- RELATED-PARTY TRANSACTIONS (CONTINUED)
LEWCO SECURITIES CORP.
H&Q LLC is a co-owner of Lewco (see Note 1), a securities clearing firm that
is a registered broker-dealer and member of each major stock exchange. H&Q LLC
holds a subordinated note for $300,000 issued by Lewco. The interest on this
note is paid quarterly at the prime rate, with the principal balance due
December 31, 1997. The subordinated note receivable and H&Q LLC's investment in
Lewco are carried in long-term investments (see Note 6). H&Q LLC uses Lewco,
which renders its services to its owners on a cost-sharing basis, to process its
securities transactions and all other related clearing services. Lewco also
maintains the Company's customer and broker accounts.
Amounts receivable from Lewco result from customer and H&Q LLC proprietary
transactions. Interest on amounts receivable from Lewco is earned at a
fluctuating rate (5 percent at September 30, 1993, and 6.5 percent at September
30, 1994 and 1995) that generally corresponds to the broker call rate. Interest
income recorded by the Company on amounts receivable from Lewco are $1,346,344,
$1,479,547 and $1,482,118 during 1993, 1994 and 1995, respectively.
NOTE 12 -- EMPLOYEE BENEFIT PLANS
SAVINGS AND EMPLOYEE STOCK OWNERSHIP TRUST
Under a Savings and Employee Stock Ownership Trust (or SESOT), the Company
established an Employee Stock Ownership Plan (ESOP) and a profit-sharing plan
(PSP) with an employee salary deferral (or 401(k)) feature. Collectively, the
ESOP and PSP are referred to as the Hambrecht & Quist Group Savings and Employee
Stock Ownership Plan (the Plan or SESOP). Substantially all full-time employees
of H&Q Group and its subsidiaries and certain affiliates are eligible to
participate in the Plan.
Under the Plan, the Company matches employees' 401(k) PSP contributions up
to $4,000 per employee per year by making Company common stock contributions to
the ESOP. The Company may also make discretionary cash contributions to the PSP.
For 1993, 1994 and 1995, the Company recorded compensation expense of $799,565,
$1,059,812 and $1,246,645, respectively, to the ESOP under the matching
provision. No discretionary contributions were made to the PSP in 1993, 1994 or
1995.
STOCK OPTION PLANS
The Company has two stock option plans, a 1985 Plan and a 1995 Plan.
Additionally, the Company has granted stock options outside the 1985 and 1995
plans.
The Company's 1985 Plan, which provided for the granting of nonqualified
options to purchase 4,000,000 shares of the Company's common stock, expired
September 30, 1994, except as to the options then outstanding. The Company's
1995 Plan provides for the granting of incentive options and nonqualified
options to purchase 2,000,000 shares of the Company's common stock to officers
and key employees at a price not less than fair market value at the date the
option is granted. Outside the 1985 and 1995 plans, 1,448,020 options have been
granted to certain officers and directors. Such options were granted with an
exercise price equal to fair market value (see Notes 1 and 2), at the date of
grant.
Options become exercisable as determined at the date of grant by a committee
of the Board of Directors. Options expire 10 years after the date of grant
unless an earlier expiration date is set at the time of grant.
F-18
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
NOTE 12 -- EMPLOYEE BENEFIT PLANS (CONTINUED)
Details of stock options are as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES EXERCISE PRICE
----------- --------------
<S> <C> <C>
Outstanding at September 30, 1992............................... 4,459,288 $ 2.04 - $3.08
Granted....................................................... 172,168 $ 2.81
Exercised..................................................... (932,796) $ 2.04 - $2.81
Canceled...................................................... (90,084) $ 2.10 - $2.81
-----------
Outstanding at September 30, 1993............................... 3,608,576 $ 2.04 - $3.08
Granted....................................................... 301,216 $ 3.84 - $4.53
Exercised (475,516) $ 2.10 - $2.88
Canceled...................................................... (62,000) $ 2.10 - $2.88
-----------
Outstanding at September 30, 1994 3,372,276 $ 2.04 - $4.53
Granted 904,636 $ 4.60 - $5.54
Exercised..................................................... (1,326,484) $ 2.10 - $2.88
Canceled...................................................... (16,000) $ 2.10
-----------
Outstanding at September 30, 1995............................... 2,934,428 $ 2.04 - $5.54
-----------
-----------
</TABLE>
Of the outstanding options at September 30, 1995, 1,668,404 had vested. As
of September 30, 1995, options to purchase 1,392,000 shares were available for
grant under the 1995 Plan.
No compensation expense was recorded in 1993, 1994 and 1995 because all
options were granted at H&Q Group's fair market value (see Notes 1 and 2).
STOCK APPRECIATION RIGHTS
In fiscal 1993, 1994 and 1995, the Company awarded Stock Appreciation Rights
(SARs) to key employees and executives. These SARs have a service period of one
year and result in additional cash compensation to the individuals based on the
increase in the Company's formula value (see Note 1) during the service period
to which the SARs relate. The SARs vest and are paid over three years, with
immediate cancellation of vesting upon employment termination. Compensation
expense recorded for SARs awards was $361,050, $785,258 and $4,210,216 for 1993,
1994 and 1995, respectively.
The following summarizes SARs as of September 30, 1993, 1994 and 1995:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Initial grant................................. 1,044,000 1,260,000 1,794,000
Canceled...................................... (196,000) (142,000) (146,000)
---------- ---------- ----------
SARs remaining................................ 848,000 1,118,000 1,648,000
---------- ---------- ----------
---------- ---------- ----------
SARs issuance price........................... $ 2.81 $ 3.84 $ 4.98
</TABLE>
The total SARs liability at September 30, 1995, included in compensation and
benefits payable, will be paid out as follows:
<TABLE>
<CAPTION>
Fiscal 1996..................................... $2,117,425
<S> <C>
Fiscal 1997..................................... 1,824,159
Fiscal 1998..................................... 1,398,364
---------
Total......................................... $5,339,948
---------
---------
</TABLE>
F-19
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
NOTE 12 -- EMPLOYEE BENEFIT PLANS (CONTINUED)
Subsequent to September 30, 1995, the Company issued 2,859,520 SARs that
will result in additional compensation to the awardees based on the increase in
the Company's net book value in the 1996 fiscal year. These SARs have a service
period of one year and vest and are paid over three years.
NOTE 13 -- NET CAPITAL REQUIREMENTS
As a registered broker-dealer, H&Q LLC is subject to the Securities and
Exchange Commission's Uniform Net Capital Rule 15c3-1 (the Rule) and the capital
rules of the New York Stock Exchange, Inc., of which H&Q LLC is a member. H&Q
LLC has elected to compute its net capital requirement under the "alternative"
method, which requires minimum net capital to be the greater of $1,000,000 or 2
percent of aggregate debit balances arising from customers' transactions, as
defined. The Rule also provides that equity capital may not be withdrawn or cash
distributions paid if the resulting net capital would be less than the amounts
required under the Rule. Accordingly, the payment of distributions and advances
to H&Q Group by H&Q LLC is limited to excess net capital under the most
restrictive of these requirements. At September 30, 1994 and 1995, H&Q LLC's
regulatory net capital of $14,994,039 and $30,286,118, respectively, was 38
percent and 28 percent, respectively, of aggregate debit items and its net
capital in excess of the minimum required was $13,994,039 and $28,191,905,
respectively.
As a registered broker-dealer, RvR is also subject to the Rule. RvR has also
elected to compute its net capital requirement under the alternative method.
RvR's minimum net capital requirement is $250,000. At September 30, 1994 and
1995, RvR had regulatory net capital under Rule 15c3-1 of $895,904 and $345,010,
respectively, and its net capital in excess of the minimum required was $645,904
and $95,010, respectively.
NOTE 14 -- COMMITMENTS AND CONTINGENCIES
Aggregate annual rentals for office space under noncancelable operating
leases are as follows:
<TABLE>
<CAPTION>
FISCAL YEARS
ENDING SEPTEMBER 30
- -----------------------------------------------------------
<S> <C>
1996....................................................... $ 4,897,824
1997....................................................... 4,926,256
1998....................................................... 4,686,662
1999....................................................... 1,818,796
Thereafter................................................. 151,158
-------------
$ 16,480,696
-------------
-------------
</TABLE>
Certain of these leases have escalation clauses. Rental expense, net of
sublease income, charged to occupancy and equipment expense for the years ended
September 30, 1993, 1994 and 1995, was $3,588,776, $3,731,112 and $4,297,622,
respectively.
Lewco Securities Corp. conducts a stock borrow/stock lending business. On
behalf of Lewco, the Company has agreed to guarantee its proportional share of
secured loans resulting from this business. The Company's contingent liability
relating to its net unsecured position under this indemnity agreement was
$72,211 and $3,796,907 at September 30, 1994 and 1995, respectively.
The Company has contingent liabilities, including contractual commitments
arising in the normal course of business, the resolution of which, in
management's opinion, will not have an adverse effect on the Company's financial
position.
As is the case with many firms in the securities industry, the Company is a
defendant or co-defendant in a number of lawsuits that seek substantial and
usually unspecified damages. These suits have arisen in the normal
F-20
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
NOTE 14 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
course of the Company's business and are incidental to the securities and
investment banking business. Most of the proceedings relate to public
underwritings of securities in which H&Q LLC participated as a manager, co-
manager or member of the underwriting syndicate. These cases involve claims
under federal and state securities laws and seek compensatory and other monetary
damages. It is possible that H&Q Group and/or H&Q LLC may be called upon as a
member of a class of defendants or under the terms of the underwriting,
indemnification or other agreements to contribute to settlements or judgments
arising out of these cases. The Company is contesting the complaints in all
cases and believes that there are meritorious defenses in each of these
lawsuits. Although the ultimate outcome of such litigation cannot be ascertained
at this time, it is the opinion of the Company's management, based on
discussions with counsel, that the resolution of these actions and others will
not have a material adverse effect on the Company's combined financial position
or its operations.
H&Q Group has indemnified certain of its officers, directors, agents and
certain of its affiliates as permitted under California law. Under these
provisions, H&Q Group itself is and will be subject to indemnification
assertions by officers, directors, agents or certain of its affiliates who are
or may become defendants in litigation that may result in the normal course of
business. Although the ultimate outcome of indemnification assertions
outstanding as of September 30, 1995, cannot be ascertained at this time, it is
the opinion of the Company's management, based on discussions with counsel, that
the resolution of these assertions will not have a material adverse effect on
the Company's combined financial position or its operations.
NOTE 15 -- FINANCIAL INSTRUMENTS WITH MARKET RISK AND CONCENTRATIONS OF CREDIT
RISK
In the normal course of business, H&Q LLC enters into various financial
transactions with off-balance-sheet risk in connection with its proprietary
trading activities. These transactions primarily include purchases and sales of
index and equity options. H&Q LLC records its options at market value. H&Q LLC's
options are primarily executed to minimize its market risk exposure of its
underlying trading positions as well as to benefit from changing market
conditions. All options transacted by H&Q LLC are exchange-traded in organized
markets and have terms of less than one year. H&Q LLC's exposure to market risk
is determined by a number of factors, including the size, composition and
diversification of positions held and market volatility. Management actively
monitors its market risk exposure by reviewing the effectiveness of hedging
strategies and setting market risk limits. H&Q LLC's exposure to market risk is
immaterial.
The market values of options included in the balance sheets are as follows:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Options included in--
Marketable securities..................................... $ 240,726 $ 897,048
Securities sold, not yet purchased........................ 246,024 685,487
</TABLE>
In the normal course of business, H&Q LLC's customer and correspondent
clearance activities involve the execution, settlement and financing of various
customer securities transactions. These activities may expose H&Q LLC to
off-balance-sheet credit risk in the event that the customer is unable to
fulfill its contracted obligations. H&Q LLC's customer securities activities are
transacted on either a cash or margin basis. In margin transactions, H&Q LLC
extends credit to the customer, subject to various regulatory and internal
margin requirements, collateralized by cash and securities in the customer's
account. H&Q LLC monitors collateral and required margin levels daily and,
pursuant to such guidelines, requests customers to deposit additional collateral
or reduce securities positions when necessary. H&Q LLC is also exposed to credit
risk when its margin accounts or a margin account is collateralized by a
concentration of a particular security and when that security decreases in
value.
F-21
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
NOTE 15 -- FINANCIAL INSTRUMENTS WITH MARKET RISK AND CONCENTRATIONS OF CREDIT
RISK (CONTINUED)
In addition, H&Q LLC executes and clears customer short-sale transactions.
Such transactions may expose H&Q LLC to off-balance-sheet risk in the event that
margin requirements are not sufficient to fully cover losses that customers may
incur. In the event that the customer fails to satisfy its obligations, H&Q LLC
may be required to purchase financial instruments at prevailing market prices in
order to fulfill the customer's obligations.
In accordance with industry practice, H&Q LLC records customer transactions
on a settlement-date basis, which is generally three business days after trade
date. H&Q LLC is therefore exposed to risk of loss on these transactions in the
event of the customers' or brokers' inability to meet the terms of their
contracts, in which case H&Q LLC may have to purchase or sell financial
instruments at prevailing market prices. Settlement of these transactions is not
expected to have a material effect on H&Q LLC's balance sheet.
As a securities broker-dealer, H&Q LLC provides services to diverse groups
of corporations and institutional and individual investors. A substantial
portion of H&Q LLC's transactions is executed with and on behalf of
institutional investors, including other broker-dealers, commercial banks,
insurance companies, pension plans, mutual funds and other financial
institutions. H&Q LLC's exposure to credit risk associated with the
nonperformance of these customers in fulfilling their contractual obligations
pursuant to securities transactions can be directly impacted by volatile trading
markets.
As of September 30, 1995, the Company did not have significant
concentrations of credit risk with any single counterparty or with any single
security.
NOTE 16 -- INDUSTRY SEGMENT AND GEOGRAPHIC AREA DATA
The Company is primarily engaged in a single line of business as a
securities firm, which comprises several types of services, such as principal
and agency transactions, underwriting and investment banking and long-term
equity investing. These activities constitute a single business segment.
The assets and revenues related to the company's foreign operations are not
significant.
F-22
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
COMBINED BALANCE SHEETS
AS OF SEPTEMBER 30, 1995, AND MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995
-------------- MARCH 31, 1996
--------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents........................................................ $ 34,754,568 $ 36,554,486
Receivables:
Customers...................................................................... 100,435,213 144,238,724
Lewco Securities Corp.......................................................... 41,990,309 92,424,104
Syndicate managers............................................................. 9,538,902 15,519,486
Related parties................................................................ 3,340,955 12,315,817
Lease.......................................................................... 3,255,635 4,794,645
Other.......................................................................... 3,274,378 12,448,838
Marketable trading securities, at market value................................... 26,224,167 39,224,593
Long-term investments, at estimated fair value................................... 70,822,157 74,347,711
Deferred income taxes............................................................ 10,627,856 10,873,034
Furniture, equipment and leasehold improvements, net of accumulated depreciation
and amortization................................................................ 6,009,696 8,116,544
Leased assets, net of accumulated depreciation................................... 8,700,289 6,922,743
Exchange memberships, at cost.................................................... 656,000 656,000
-------------- --------------
Total assets............................................................... $ 319,630,125 $ 458,436,725
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY AND PARTNERS' CAPITAL
Payables:
Customers...................................................................... $ 71,654,381 $ 133,790,766
Compensation and benefits...................................................... 46,227,242 90,041,998
Syndicate settlements.......................................................... 25,409,777 29,599,789
Income taxes payable........................................................... 6,368,059 1,537,452
Trade accounts payable......................................................... 944,775 2,200,522
Customer lease deposits........................................................ 478,603 452,632
Accrued expenses and other..................................................... 9,848,303 13,161,777
Securities sold, not yet purchased, at market value.............................. 25,218,036 7,888,938
Debt obligations................................................................. 13,770,737 11,850,667
Payable to partners of Hambrecht & Quist, L.P.................................... 10,445,367 17,192,631
-------------- --------------
Total liabilities.......................................................... 210,365,280 307,717,172
-------------- --------------
Minority interest in Hambrecht & Quist Guaranty Finance, L.P..................... 3,802,762 4,322,042
Commitments and contingencies
Shareholders' equity and partners' capital....................................... 105,462,083 146,397,511
-------------- --------------
Total liabilities and shareholders' equity and partners' capital........... $ 319,630,125 $ 458,436,725
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
COMBINED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
------------- --------------
(UNAUDITED)
<S> <C> <C>
REVENUES:
Principal transactions........................................................... $ 22,252,638 $ 43,997,192
Agency commissions............................................................... 8,852,142 17,364,800
Investment banking............................................................... 18,920,444 84,053,248
Corporate finance fees........................................................... 12,403,138 26,255,967
Net investment gains from long-term investments.................................. 15,636,675 15,308,482
Other............................................................................ 8,797,374 17,521,329
------------- --------------
Total revenues............................................................... 86,862,411 204,501,018
------------- --------------
EXPENSES:
Compensation and benefits........................................................ 42,979,149 103,878,913
Brokerage and clearance.......................................................... 4,072,783 6,118,161
Occupancy and equipment.......................................................... 3,687,424 4,593,220
Communications................................................................... 3,517,148 4,527,791
Interest......................................................................... 483,830 762,467
Other............................................................................ 6,473,649 12,141,185
------------- --------------
Total expenses............................................................... 61,213,983 132,021,737
------------- --------------
Income before minority interest and income tax provision..................... 25,648,428 72,479,281
MINORITY INTEREST IN INCOME OF SUBSIDIARY.......................................... 289,262 546,206
------------- --------------
Income before income tax provision........................................... 25,359,166 71,933,075
INCOME TAX PROVISION............................................................... 6,894,535 24,351,832
------------- --------------
Net income................................................................... $ 18,464,631 $ 47,581,243
------------- --------------
------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
------------ --------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES................................................ $ 4,782,088 $ 1,629,754
------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of long-term investments................................................ (6,415,612) (14,484,034)
Proceeds from sales/distributions of long-term investments........................ 9,095,597 26,266,962
Purchases of furniture, equipment and leasehold improvements...................... (1,325,263) (3,715,820)
Purchases of leased assets........................................................ (6,517,993) --
Other............................................................................. 1,581,467 (1,312,897)
------------ --------------
Net cash and cash equivalents provided by (used in) investing activities...... (3,581,804) 6,754,211
------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt obligations.................................................... 4,000,000 --
Repayments of debt obligations.................................................... (6,833,532) (1,920,070)
Proceeds from sales of common stock and partners' capital contributions........... 1,699,347 1,399,994
Repurchases of common stock and partners' capital withdrawals..................... (82,128) (655,436)
Partners' capital distributions................................................... (160,525) (5,408,535)
------------ --------------
Net cash and cash equivalents used in financing activities.................... (1,376,838) (6,584,047)
------------ --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................... (176,554) 1,799,918
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................................... 6,782,335 34,754,568
------------ --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................................... $ 6,605,781 $ 36,554,486
------------ --------------
------------ --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
CONDENSED NOTES TO COMBINED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
NOTE 1 -- GENERAL
The information contained in the following notes to the combined financial
statements is condensed from that which would appear in the annual combined
financial statements; accordingly, the accompanying combined financial
statements should be read in conjunction with the 1995 combined financial
statements and related notes thereto contained elsewhere in this Prospectus. Any
capitalized terms used but not defined have the same meaning given to them in
the 1995 combined financial statements. Accounting measurements at interim dates
inherently involve greater reliance on estimates than at year-end. The results
of operations for the interim periods presented are not necessarily indicative
of the results to be expected for the entire year.
The combined financial statements included herein are unaudited; however,
they include all adjustments of a normal recurring nature which, in the opinion
of management, are necessary to present fairly the financial position of the
Company at March 31, 1996, and the combined results of operations and cash flows
for the six months ended March 31, 1995 and 1996.
NOTE 2 -- RECEIVABLES FROM RELATED PARTIES
Receivables from related parties include receivables of $2,912,333 and
$3,245,720 at September 30, 1995, and March 31, 1996, respectively, from H&Q AP.
Also included in receivables from related parties at March 31, 1996, are
receivables of $7,800,000 for profit participation distributions from H&Q VP and
$1,270,097 for advances made to employees.
NOTE 3 -- MARKETABLE TRADING SECURITIES AND SECURITIES SOLD, NOT YET PURCHASED
At September 30, 1995, and March 31, 1996, marketable trading securities and
securities sold, not yet purchased, consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1995 1996
------------- -------------
<S> <C> <C>
Marketable trading securities--
Equity securities....................................................... $21,385,307 $ 29,404,071
Convertible bonds....................................................... 3,941,812 8,760,612
Options................................................................. 897,048 1,059,910
------------- -------------
$26,224,167 $ 39,224,593
------------- -------------
------------- -------------
Securities sold, not yet purchased--
Equity securities....................................................... $24,532,549 $ 6,720,896
Options................................................................. 685,487 1,168,042
------------- -------------
$25,218,036 $ 7,888,938
------------- -------------
------------- -------------
</TABLE>
F-26
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
CONDENSED NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
(UNAUDITED)
NOTE 4 -- LONG-TERM INVESTMENTS
At September 30, 1995, and March 31, 1996, the Company's long-term
investments at estimated fair value consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1995 1996
------------- -------------
<S> <C> <C>
Marketable equity securities.............................................. $20,302,683 $ 31,848,477
BISYS Group, Inc. common stock--unrestricted.............................. 6,000,000 --
------------- -------------
Total marketable investments.......................................... 26,302,683 31,848,477
------------- -------------
BISYS Group, Inc. common stock--restricted................................ 21,481,390 18,559,237
Nonmarketable securities and investment partnership interests............. 14,906,421 16,212,873
H&Q Venture Partners and affiliated venture capital funds................. 4,790,144 4,629,121
Venture capital funds managed by others................................... 1,231,240 987,725
Lewco Securities--
Equity ownership........................................................ 1,810,279 1,810,278
Subordinated note receivable............................................ 300,000 300,000
------------- -------------
Total nonmarketable investments....................................... 44,519,474 42,499,234
------------- -------------
Total long-term investments........................................... $70,822,157 $ 74,347,711
------------- -------------
------------- -------------
</TABLE>
The costs of the Company's long-term investments at September 30, 1995, and
March 31, 1996, were $47,046,599 and $58,221,679, respectively.
Following is an analysis of the net investment gains for the periods ended
March 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Realized gains............................................................ $ 1,251,833 $ 20,970,368
Change in unrealized gains and losses, net................................ 14,384,842 (5,661,886)
------------- -------------
Net investment gains from long-term investments....................... $ 15,636,675 $ 15,308,482
------------- -------------
------------- -------------
</TABLE>
At March 31, 1996, both H&Q Group and H&Q LLC own restricted shares of BISYS
Group, Inc. (BISYS) common stock, H&Q Group owns shares with a carrying value of
$6,702,989, and H&Q LLC owns shares with a carrying value of $11,856,248.
Included in net investment gains are realized and unrealized gains on BISYS
holdings of $11,985,282 and $10,437,857 at March 31, 1995 and 1996,
respectively.
NOTE 5 -- RELATED-PARTY TRANSACTIONS
INVESTMENT TRANSACTIONS
Included in other revenues are asset management fees which include
management fees and profit participation distributions from venture capital
funds of $3,953,912 and $9,150,795 for the periods ended March 31, 1995 and
1996, respectively.
EMPLOYEE NOTES RECEIVABLE
As of September 30, 1995, and March 31, 1996, H&Q Group's notes receivable
from employees for their stock purchases were $7,659,714 and $10,659,409,
respectively, and H&Q LP's notes receivable from partners for their capital
contributions were $2,232,013 and $7,475,736, respectively.
F-27
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
CONDENSED NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
(UNAUDITED)
NOTE 6 -- STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
During the period ended March 31, 1996, 2,002,140 shares of H&Q Group common
stock were issued to employees in exchange for cash and notes receivable (see
Note 5) totaling $7,096,654 and 579,556 shares were repurchased from terminated
employees for $3,753,136.
Also during the period, H&Q LP partners' capital contributions, in the form
of cash and notes receivable, and withdrawals totaled $5,748,693 and $458,801,
respectively. Partners' capital distributions of $11,643,713 were accrued as
partners' capital distribution payable and as a deduction to partners' capital.
NOTE 7 -- EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN
During the period ended March 31, 1996, the Company amended the 1995 Stock
Option Plan to provide for the granting of 4,972,000 options to purchase company
stock.
Details of stock options are as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES EXERCISE PRICE
----------- --------------
<S> <C> <C>
Outstanding at September 30, 1994......................................... 3,372,276 $2.04 - $4.53
Granted................................................................. 904,636 $4.60 - $5.54
Exercised............................................................... (1,326,484) $2.10 - $2.88
Canceled................................................................ (16,000) $2.10
-----------
Outstanding at September 30, 1995......................................... 2,934,428 $2.04 - $5.54
Granted................................................................. 4,132,192 $6.52 - $8.38
Exercised............................................................... (1,569,628) $2.10 - $4.74
Canceled................................................................ (169,608) $2.62 - $5.54
-----------
Outstanding at March 31, 1996............................................. 5,327,384 $2.04 - $8.38
-----------
-----------
</TABLE>
During the period ended March 31, 1996, 504,272 options were granted at an
exercise price below fair market value on the date of grant, resulting in a
$940,467 charge to compensation expense.
STOCK APPRECIATION RIGHTS
Effective October 1, 1995, 2,859,520 SARs were awarded to employees for the
fiscal 1996 service period. Effective March 31, 1996, modifications were made to
some employees' awards. Of the 2,859,520 SARs issued for the fiscal 1996 service
period, 180,000 SARs were canceled in exchange for issuances of stock and
approximately 2,179,520 were revised to a six-month service period ended March
31, 1996, from a fiscal year period ending September 30, 1996. The remaining
SARs stay in effect with their original terms. For the periods ended March 31,
1995 and 1996, compensation expense recorded for SARs awards was $2,958,756 and
$6,634,876, respectively.
The total SARs liability at March 31, 1996, included in compensation and
benefits payable, will be paid out as follows:
<TABLE>
<S> <C>
Fiscal 1997............................................................. $3,721,668
Fiscal 1998............................................................. 3,320,763
Fiscal 1999............................................................. 2,075,000
---------
Total............................................................... $9,117,431
---------
---------
</TABLE>
F-28
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
CONDENSED NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
(UNAUDITED)
NOTE 8 -- NET CAPITAL REQUIREMENTS
At September 30, 1995, and March 31, 1996, H&Q LLC's regulatory net capital
of $30,286,118 and $43,204,179, respectively, was 28 percent and 22.5 percent,
respectively, of aggregate debit items, and its net capital in excess of the
minimum required was $28,191,905 and $39,370,142, respectively.
NOTE 9 -- CONTINGENCIES
Lewco Securities Corp. conducts a stock borrow/stock lending business. On
behalf of Lewco, the Company has agreed to guarantee its proportional share of
secured loans resulting from this business. The Company's contingent liability
relating to its net unsecured position under this indemnity agreement was
$6,826,445 at March 31, 1996.
The Company has contingent liabilities, including contractual commitments
arising in the normal course of business, the resolution of which, in
management's opinion, will not have an adverse effect on the Company's financial
position.
As is the case with many firms in the securities industry, the Company is a
defendant or co-defendant in a number of lawsuits that seek substantial and
usually unspecified damages. These suits have arisen in the normal course of the
Company's business and are incidental to the securities and investment banking
business. Most of the proceedings relate to public underwritings of securities
in which H&Q LLC participated as a manager, co-manager or member of the
underwriting syndicate. These cases involve claims under federal and state
securities laws and seek compensatory and other monetary damages. It is possible
that H&Q Group and/or H&Q LLC may be called upon as a member of a class of
defendants or under the terms of the underwriting, indemnification or other
agreements to contribute to settlements or judgments arising out of these cases.
The Company is contesting the complaints in all cases and believes that there
are meritorious defenses in each of these lawsuits. Although the ultimate
outcome of such litigation cannot be ascertained at this time, it is the opinion
of the Company's management, based on discussions with counsel, that the
resolution of these actions and others will not have a material adverse effect
on the Company's combined financial position or its operations.
H&Q Group has indemnified certain of its officers, directors, agents and
certain of its affiliates as permitted under California law. Under these
provisions, H&Q Group itself is and will be subject to indemnification
assertions by officers, directors, agents or certain of its affiliates who are
or may become defendants in litigation that may result in the normal course of
business. Although the ultimate outcome of indemnification assertions
outstanding as of March 31, 1996, cannot be ascertained at this time, it is the
opinion of the Company's management, based on discussions with counsel, that the
resolution of these assertions will not have a material adverse effect on the
Company's combined financial position or its operations.
NOTE 10 -- SUBSEQUENT EVENTS
On April 1, 1996, H&Q Group entered into an agreement (the Recapitalization)
with H&Q AP to reduce H&Q Group's ownership of H&Q AP from 50 percent to 15
percent. Upon closing of the Recapitalization, H&Q Group will loan H&Q AP
$850,000. Also, as part of the Recapitalization, H&Q Group's receivables from
H&Q AP (see Note 2) will be restructured into interest- and noninterest-bearing
term notes receivable.
On May 1, 1996, H&Q GF sold its leased land and building to a third party.
Proceeds of $8,208,945 were used to repay the $5,000,000 nonrecourse loan. A
$3,298,246 gain was recognized on the sale.
F-29
<PAGE>
SELECTED PRO FORMA FINANCIAL DATA
The following Pro Forma Combined Balance Sheet as as March 31, 1996 presents
the Restructuring (see "Restructuring") as if it occurred on March 31, 1996. The
following Pro Forma Combined Statements of Operations for the six months ended
March 31, 1996 and the year ended September 30, 1995 present the results for the
Company as if the Restructuring had occurred on October 1, 1994. The pro forma
information is based on the historical combined financial statements after
giving effect to the Restructuring. The pro forma adjustments are described in
the accompanying Notes to Pro Forma Combined Financial Statements.
The pro forma financial statements have been prepared by the Company's
management. The pro forma financial statements do not indicate future results or
the results that would have occurred if the Restructuring had occurred on the
dates indicated. The pro forma financial statements should be read in
conjunction with the audited combined financial statements of the Company as of
September 30, 1994 and 1995, the notes thereto, and the unaudited combined
financial statements as of September 30, 1995 and March 31, 1996, the notes
thereto, and management's discussion thereof, contained elsewhere in this
Prospectus. See "Combined Financial Statements" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
F-30
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS COMBINED
---------- ------------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............................................. $ 36,554 $ (32,170)(1)(2)(5) $ 4,384
Receivables: (7)
Customers........................................................... 144,239 144,239
Lewco Securities Corp............................................... 92,424 92,424
Syndicate managers.................................................. 15,519 15,519
Related parties..................................................... 12,316 12,316
Lease............................................................... 4,795 4,795
Other............................................................... 12,449 12,449
Marketable trading securities, at market value........................ 39,225 39,225
Long-term investments, at estimated fair value........................ 74,348 (19,314)(3) 55,034
Deferred income taxes................................................. 10,873 4,600(6) 15,473
Furniture, equipment and leasehold improvements, net.................. 8,116 8,116
Leased assets, net.................................................... 6,923 6,923
Exchange memberships, at cost......................................... 656 656
---------- ------- ----------
Total assets...................................................... $ 458,437 $ (46,884) $ 411,553
---------- ------- ----------
---------- ------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY AND PARTNERS' CAPITAL
Payables:
Customers........................................................... $ 133,790 $ 133,790
Compensation and benefits........................................... 90,042 $ (3,954)(4)(5) 86,088
Syndicate settlements............................................... 29,600 29,600
Income taxes payable................................................ 1,537 1,537
Trade accounts payable.............................................. 2,200 2,200
Customer lease deposits............................................. 453 453
Accrued expenses and other.......................................... 13,162 13,162
Securities sold, not yet purchased, at market value................... 7,889 7,889
Debt obligations...................................................... 11,851 11,851
Payable to partners of Hambrecht & Quist, L.P......................... 17,193 (17,193)(7) 0
---------- ------- ----------
Total liabilities................................................. 307,717 (21,147) 286,570
Minority interest in Hambrecht & Quist Guaranty Finance, L.P.......... 4,322 (3,796)(2) 526
Shareholders' equity and partners' capital............................ 146,398 (21,941)(1)(2)(3) 124,457
---------- ------- ----------
(4)(5)(6
Total liabilities and shareholders' equity and partners'
capital.......................................................... $ 458,437 $ (46,884) $ 411,553
---------- ------- ----------
---------- ------- ----------
</TABLE>
See Notes to Pro Forma Combined Financial Statements.
F-31
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS COMBINED
---------- -------------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Principal transactions.................................................. $ 43,997 $ 43,997
Agency commissions...................................................... 17,365 17,365
Investment banking...................................................... 84,053 84,053
Corporate finance fees.................................................. 26,256 26,256
Net investment gains from long-term investments......................... 15,309 $ (1,978)(3) 13,331
Other................................................................... 17,521 (339)(1)(2) 17,182
---------- ------ ----------
Total revenues........................................................ 204,501 (2,317) 202,184
Expenses:
Compensation and benefits............................................... 103,879 103,879
Brokerage and clearance................................................. 6,118 6,118
Occupancy and equipment................................................. 4,593 4,593
Communications.......................................................... 4,528 4,528
Interest................................................................ 762 762
Other................................................................... 12,142 12,142
---------- ------ ----------
Total expenses........................................................ 132,022 0 132,022
---------- ------ ----------
Minority interest in income of subsidiary................................. 546 (319)(2) 227
---------- ------ ----------
Income before income tax provision...................................... 71,933 (1,998) 69,935
Income tax provision...................................................... 24,352 6,419(8) 30,771
---------- ------ ----------
Net income.............................................................. $ 47,581 $ (8,417) $ 39,164
---------- ------ ----------
---------- ------ ----------
Pro forma weighted average shares outstanding (9).........................
Pro forma earnings per share..............................................
</TABLE>
See Notes to Pro Forma Combined Financial Statements.
F-32
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS COMBINED
---------- --------------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Principal transactions................................................ $ 53,425 $ 53,425
Agency commissions.................................................... 24,603 24,603
Investment banking.................................................... 70,360 70,360
Corporate finance fees................................................ 20,709 20,709
Net investment gains.................................................. 33,852 $ (7,413)(3) 26,439
Other................................................................. 17,074 (678)(1)(2) 16,396
---------- ------- ----------
Total revenues...................................................... 220,023 (8,091) 211,932
---------- ------- ----------
Expenses:
Compensation and benefits............................................. 105,370 105,370
Brokerage and clearance............................................... 10,441 10,441
Occupancy and equipment............................................... 7,803 7,803
Communications........................................................ 7,394 7,394
Interest.............................................................. 1,266 1,266
Other................................................................. 15,131 15,131
---------- ------- ----------
Total expenses...................................................... 147,405 0 147,405
---------- ------- ----------
Minority interest in income of subsidiary............................... 719 (419)(2) 300
---------- ------- ----------
Income before income tax provision.................................... 71,899 (7,672) 64,227
Income tax provision.................................................... 22,461 5,799(8) 28,260
---------- ------- ----------
Net income............................................................ $ 49,438 $ (13,471) $ 35,967
---------- ------- ----------
---------- ------- ----------
Pro forma weighted average shares outstanding (9).......................
Pro forma earnings per share............................................
</TABLE>
See Notes to Pro Forma Combined Financial Statements.
F-33
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
(1) Prior to the Offering, H&Q LP will distribute $15,000 in cash to a
liquidating trust benefiting the partners of H&Q LP. From the proceeds of the
distribution, the partners of H&Q LP will repay approximately $5.6 million in
notes receivable recorded as a reduction to partners' capital. Cash and cash
equivalents totaling $9,400 and the related interest income (included in Other
revenues) of $282 and $564 for the six months ended March 31, 1996, and the year
ended September 30, 1995, respectively, have been reduced to reflect the net
reduction in interest-earning assets.
(2) H&Q Group will purchase an additional 17.5 percent of H&Q GF from other
members (including 15 percent from H&Q Group's CEO). Cash and cash equivalents
totaling $1,900 and the related interest income (included in Other revenues) of
$57 and $114 for the six months ended March 31, 1996, and the year ended
September 30, 1995, respectively, have been reduced to reflect the reduction in
interest-earning assets.
To reflect H&Q Group's ownership percentage change and the effects of other
H&Q GF restructuring transactions described in the preceding paragraph and in
Notes 3 and 4, Minority interest liability has been reduced by $3,796 and
Minority interest expense has been reduced by $319 and $419 for the six months
ended March 31, 1996 and the year ended September 30, 1995, respectively.
(3) Prior to the Offering, H&Q LP and H&Q GF will distribute securities with
a book value of approximately $19,314. $17,314 will be distributed to a
liquidating trust benefiting the partners of H&Q LP and $2,000 will be
distributed to H&Q GF's 30% general partner. To reflect the distribution,
Long-term investments have been reduced by $19,314 and Net investment gains
recorded during the periods presented have been reduced by $1,978 and $7,413 for
the six months ended March 31, 1996 and the year ended September 30, 1995,
respectively.
(4) Certain employees of H&Q GF have been granted options to purchase H&Q GF
partnership interests. As part of the Restructuring, H&Q GF will buy-out all
options outstanding for approximately $2,000. A $2,000 Compensation payable has
been recorded for the amount of this deferred buy-out in the Pro Forma Combined
Balance Sheet. Pursuant to H&Q GF's profit sharing plan, employees are entitled
to an approximate 10 percent of all net investment gains. As a result of the
distribution of securities by H&Q GF, H&Q GF will record approximately $1,400 of
additional Compensation payable for the profit sharing liability. Compensation
expense for the deferred option buy-out and deferred profit sharing liability
are not reflected in the Pro Forma Combined Statements of Operations but will
decrease net income reported in the Company's combined financial statements for
the quarter ended June 30, 1996.
(5) H&Q Group will distribute cash of $3,677 and its limited partnership
interest in H&Q LP, with a recorded book value of approximately $3,677,
primarily to employees. Cash and cash equivalents and the recorded Compensation
payable for the total distribution will be reduced by $3,677 and $7,354,
respectively.
(6) As a result of the merger of H&Q LP into H&Q Group, Deferred income tax
assets will increase by approximately $4,600 for the tax effect of H&Q LP's
previously unrecorded temporary differences. As a partnership, H&Q LP was not
subject to taxes that result in temporary differences. The related income tax
benefit of $4,600 is not reflected in the Pro Forma Combined Statements of
Operations but will increase net income reported in the Company's combined
financial statements for the quarter ended September 30, 1996.
(7) Prior to the Offering, the $17,193 Liability to partners of H&Q LP will
be paid in cash. Cash and cash equivalents and the Liability to partners will be
reduced by $17,193.
(8) The Income tax provision has been adjusted to reflect a combined
effective income tax rate of 44 percent as applied to the pro forma results.
(9) Pro forma earnings per share are calculated using Pro forma combined net
income divided by Pro forma weighted average shares outstanding. Pro forma
weighted average shares outstanding include the shares to be issued prior to the
Offering related to the H&Q Group and H&Q LP merger.
F-34
<PAGE>
- ----------------------------------------------
----------------------------------------------
- ----------------------------------------------
----------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Summary....................................... 3
Risk Factors.................................. 5
The Company................................... 13
Restructuring................................. 14
Use of Proceeds............................... 15
Dividend Policy............................... 15
Capitalization................................ 16
Dilution...................................... 17
Selected Combined Financial Data.............. 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 20
Business...................................... 26
Regulation.................................... 42
Net Capital Requirements...................... 44
Management.................................... 46
Certain Transactions.......................... 53
Principal Stockholders........................ 57
Description of Capital Stock.................. 58
Shares Eligible for Future Sale............... 59
Underwriting.................................. 60
Legal Matters................................. 61
Experts....................................... 61
Additional Information........................ 61
Index to Financial Statements................. F-1
</TABLE>
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
SHARES
[LOGO]
COMMON STOCK
--------------
PROSPECTUS
--------------
HAMBRECHT & QUIST
MORGAN STANLEY & CO.
INCORPORATED
SMITH BARNEY INC.
, 1996
- ----------------------------------------------
----------------------------------------------
- ----------------------------------------------
----------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale of
Common Stock being registered.
<TABLE>
<CAPTION>
AMOUNT TO BE
PAID BY
COMPANY
------------
<S> <C>
SEC registration fee...................................................................... $ 27,587
NASD filing fee........................................................................... 30,500
New York Stock Exchange listing fee....................................................... 81,100
Pacific Stock Exchange listing fee........................................................ 10,000
Printing and engraving.................................................................... 75,000
Legal fees and expenses................................................................... 300,000
Accounting fees and expenses.............................................................. 200,000
Blue sky fees and expenses................................................................ 15,000
Transfer agent and registrar fees and expenses............................................ 5,000
Miscellaneous............................................................................. 55,813
------------
Total................................................................................. $ 800,000
------------
------------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Eight of the registrant's Certificate of Incorporation (Exhibit 3.01
hereto) and Article VI of the registrant's By-laws (Exhibit 3.02 hereto) provide
for indemnification of its directors, officers, employees and other agents to
the maximum extent permitted by the Delaware Law. In addition, the Registrant
has entered into Indemnification Agreements (Exhibit 10.19 hereto) with its
officers and directors. Reference is also made to the Underwriting Agreement
contained in Exhibit 1.01 hereto, which provides for the indemnification of
officers, directors and controlling persons of the Registrant against certain
liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the three year period ended May 31, 1996, the Registrant and its
predecessor entities, Hambrecht & Quist Group, a California corporation ("Group
California") and Hambrecht & Quist L.P., a California limited partnership ("LP")
sold the following securities without registration under the Securities Act (as
adjusted for the Restructuring, as such term is defined in the Prospectus):
(1) Group California sold a total of 5,477,956 shares of its Common Stock to
employees and directors of the Registrant and of Group California in a
series of transactions under stock plans, for aggregate consideration of
$24,086,587 in the form of cash and promissory notes.
(2) Group California granted options to purchase a total of 4,433,356 shares of
its Common Stock to employees and directors of the Registrant and Group
California in a series of transactions under stock plans.
(3) Group California granted options to purchase 2,340,700 shares of its Common
Stock to officers outside of stock plans.
(4) LP sold limited partnership units to each employee and director of the
Registrant and Group California holding stock or options of the Company,
with one LP unit issued for each 50 shares of stock or options under a unit
plan.
(5) In addition Registrant issued one share of Common Stock to an officer for
$1.00 cash.
There were no underwriters, brokers or finders employed in connection with
any of the transactions set forth above. The sales of the above securities were
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, or
Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by
an issuer not involving a public offering
II-1
<PAGE>
or transactions pursuant to the compensatory benefit plans and contracts
relating to compensation. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were attached to the certificates issued in such
transactions. All recipients had adequate access to information about the
registrant.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- -------------------------------------------------------------------------------------------------------
<C> <C> <S>
1.01 -- Form of Underwriting Agreement.*
2.01 -- Agreement and Plan of Reorganization by and among Hambrecht & Quist Group, Hambrecht & Quist, Inc., H &
Q Reorganization Subsidiary, Inc., and Hambrecht & Quist, L.P., with exhibits, dated June 10, 1996.
3.01 -- Registrant's Certificate of Incorporation, dated June 6, 1996.
3.02 -- Registrant's Bylaws.
4.01 -- Form of Specimen Certificate for Registrant's Common Stock.*
5.01 -- Opinion of Wilson Sonsini Goodrich & Rosati, A Professional Corporation.*
10.01 -- Registrant's 1996 Stock Plan.
10.02 -- Hambrecht & Quist Group 1995 Restricted Stock Plan, 1995 Stock Option Plan, and Hambrecht & Quist, L.P.
1995 Limited Partnership Unit Plan.
10.03 -- Form of Hambrecht & Quist Group 1995 Stock Option Plan Nonstatutory Stock Option Agreement.
10.04 -- Hambrecht & Quist Group Savings and Employee Stock Ownership Plan, effective as of October 1, 1994.
10.05 -- Lease and Amendment Number Four between The Equitable Life Assurance Society of the United States and
Hambrecht & Quist L.L.C. for office space at One Bush Street, San Francisco, California, dated January
8, 1996.*
10.06 -- Assignment of Lease from Apple Computer, Inc. to Hambrecht & Quist L.L.C. for office space at One Bush
Street, San Francisco, California, dated March 27, 1996.*
10.07 -- Lease and Fifth Amendment between Hambrecht & Quist L.L.C. and Rowes Wharf Associates for office space
at 50 Rowes Wharf, Boston, Massachusetts, dated February 6, 1996.*
10.08 -- Lease, Riders, and Addenda between 230 Park Avenue Associates and Hambrecht & Quist L.L.C. for office
space at 230 Park Avenue, New York, New York, dated December 1, 1995.*
10.09 -- Line of Credit Agreement between The Bank of California, N.A. and Hambrecht & Quist Group, dated
October 29, 1993.
10.10 -- Amended and Restated Line of Credit Agreement between The Bank of California, N.A., and Hambrecht &
Quist Group, dated March 21, 1996.
10.11 -- Line of Credit Note between The Bank of California, N.A., and Hambrecht & Quist Group, dated March 21,
1996.
10.12 -- Continuing Guaranty by Hambrecht & Quist Group in favor of The Bank of California, N.A., dated March
21, 1996.
10.13 -- Employment Agreement between Hambrecht & Quist Group and Daniel H. Case III, dated June 17, 1996.
10.14 -- Hambrecht & Quist L.L.C.'s Operating Agreement, dated March 6, 1995.
10.15 -- Hambrecht & Quist Executive Officer Bonus Plan.
10.16 -- Master Agreement between Hambrecht & Quist Incorporated, Wertheim Schroder & Co. Incorporated, WSCI
Limited Partnership and Lewco Securities Corp., dated December 23, 1991, as amended.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- -------------------------------------------------------------------------------------------------------
10.17 -- Clearing and Other Services Agreement between Hambrecht & Quist Incorporated, Wertheim Schroder & Co.
Incorporated, WSCI Limited Partnership and Lewco Securities Corp., dated December 23, 1991, as
amended.
<C> <C> <S>
10.18 -- Letter Agreement between Hambrecht & Quist Group and H&Q Asia Pacific, Ltd., dated April 1, 1996.
10.19 -- Form of Indemnification Agreement.*
11.01 -- Computation of Per Share Earnings.*
15.01 -- Letter from Arthur Andersen, LLP regarding unaudited interim financial information.*
21.01 -- List of Subsidiaries of the Registrant.
23.01 -- Consent of Independent Public Accountants.
23.02 -- Consent of Counsel (included in Exhibit 5.01).*
24.01 -- Power of Attorney (see page II-4 of this Registration Statement).
</TABLE>
- ------------------------
* To be provided by amendment.
(b) FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) That for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this Registration Statement as of the time it was declared effective.
(2) That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To provide to the underwriter at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of
such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Francisco, State of
California, on the 20th day of June 1996.
HAMBRECHT & QUIST GROUP, INC.,
a Delaware corporation
By: /s/_DANIEL H. CASE III____________
Daniel H. Case III,
President and Chief Executive
Officer
POWER OF ATTORNEY
Know all these men by these presents, that each of the undersigned does
hereby constitute and appoint Daniel H. Case III, Raymond J. Minehan and Steven
Machtinger, or any of them (with full power to each of them to act alone), his
true and lawful attorney-in-fact and agent, with full power of substitution, for
him and on his behalf to sign, execute and file this Registration Statement and
any or all amendments (including, without limitation, post-effective amendments
and any amendment or amendments or abbreviated registration statement increasing
the amount of securities for which registration is being sought) to this
Registration Statement, with all exhibits and any and all documents required to
be filed with respect thereto, with the Securities and Exchange Commission or
any regulatory authority, granting unto such attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as he might or could do
if personally present, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ---------------------------------- ---------------------
<C> <S> <C>
/s/WILLIAM R. HAMBRECHT
(William R. Hambrecht) Chairman of the Board of Directors June 20, 1996
President, Chief Executive Officer
/s/DANIEL H. CASE III and Director (Principal Executive June 20, 1996
(Daniel H. Case III) Officer)
/s/WILLIAM R. TIMKEN Vice Chairman of the Board of
(William R. Timken) Directors June 20, 1996
Vice President and Chief Financial
/s/RAYMOND J. MINEHAN Officer (Principal Financial and June 20, 1996
(Raymond J. Minehan) Accounting Officer)
/s/WILLIAM E. MAYER
(William E. Mayer) Director June 20, 1996
/s/HOWARD B. HILLMAN
(Howard B. Hillman) Director June 20, 1996
/s/EDMUND H. SHEA, JR.
(Edmund H. Shea, Jr.) Director June 20, 1996
/s/LAWRENCE J. STUPSKI
(Lawrence J. Stupski) Director June 20, 1996
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- -------------------------------------------------------------------------------------------------------
<C> <C> <S>
1.01 -- Form of Underwriting Agreement.*
2.01 -- Agreement and Plan of Reorganization by and among Hambrecht & Quist Group, Hambrecht & Quist, Inc., H &
Q Reorganization Subsidiary, Inc., and Hambrecht & Quist, L.P., with exhibits, dated June 10, 1996.
3.01 -- Registrant's Certificate of Incorporation, dated June 6, 1996.
3.02 -- Registrant's Bylaws.
4.01 -- Form of Specimen Certificate for Registrant's Common Stock.*
5.01 -- Opinion of Wilson Sonsini Goodrich & Rosati, A Professional Corporation.*
10.01 -- Registrant's 1996 Stock Plan.
10.02 -- Hambrecht & Quist Group 1995 Restricted Stock Plan, 1995 Stock Option Plan, and Hambrecht & Quist, L.P.
1995 Limited Partnership Unit Plan.
10.03 -- Form of Hambrecht & Quist Group 1995 Stock Option Plan Nonstatutory Stock Option Agreement.
10.04 -- Hambrecht & Quist Group Savings and Employee Stock Ownership Plan, effective as of October 1, 1994.
10.05 -- Lease and Amendment Number Four between The Equitable Life Assurance Society of the United States and
Hambrecht & Quist L.L.C. for office space at One Bush Street, San Francisco, California, dated January
8, 1996.*
10.06 -- Assignment of Lease from Apple Computer, Inc. to Hambrecht & Quist L.L.C. for office space at One Bush
Street, San Francisco, California, dated March 27, 1996.*
10.07 -- Lease and Fifth Amendment between Hambrecht & Quist L.L.C. and Rowes Wharf Associates for office space
at 50 Rowes Wharf, Boston, Massachusetts, dated February 6, 1996.*
10.08 -- Lease, Riders, and Addenda between 230 Park Avenue Associates and Hambrecht & Quist L.L.C. for office
space at 230 Park Avenue, New York, New York, dated December 1, 1995.*
10.09 -- Line of Credit Agreement between The Bank of California, N.A. and Hambrecht & Quist Group, dated
October 29, 1993.
10.10 -- Amended and Restated Line of Credit Agreement between The Bank of California, N.A., and Hambrecht &
Quist Group, dated March 21, 1996.
10.11 -- Line of Credit Note between The Bank of California, N.A., and Hambrecht & Quist Group, dated March 21,
1996.
10.12 -- Continuing Guaranty by Hambrecht & Quist Group in favor of The Bank of California, N.A., dated March
21, 1996.
10.13 -- Employment Agreement between Hambrecht & Quist Group and Daniel H. Case III, dated June 17, 1996.
10.14 -- Hambrecht & Quist L.L.C.'s Operating Agreement, dated March 6, 1995.
10.15 -- Hambrecht & Quist Executive Officer Bonus Plan.
10.16 -- Master Agreement between Hambrecht & Quist Incorporated, Wertheim Schroder & Co. Incorporated, WSCI
Limited Partnership and Lewco Securities Corp., dated December 23, 1991, as amended.
10.17 -- Clearing and Other Services Agreement between Hambrecht & Quist Incorporated, Wertheim Schroder & Co.
Incorporated, WSCI Limited Partnership and Lewco Securities Corp., dated December 23, 1991, as
amended.
10.18 -- Letter Agreement between Hambrecht & Quist Group and H&Q Asia Pacific, Ltd., dated April 1, 1996.
10.19 -- Form of Indemnification Agreement.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- -------------------------------------------------------------------------------------------------------
11.01 -- Computation of Per Share Earnings.*
<C> <C> <S>
15.01 -- Letter from Arthur Andersen, LLP regarding unaudited interim financial information.*
21.01 -- List of Subsidiaries of the Registrant.
23.01 -- Consent of Independent Public Accountants.
23.02 -- Consent of Counsel (included in Exhibit 5.01).*
24.01 -- Power of Attorney (see page II-4 of this Registration Statement).
</TABLE>
- ------------------------
* To be provided by amendment.
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
HAMBRECHT & QUIST GROUP,
a California Corporation
HAMBRECHT & QUIST GROUP, INC.
a Delaware Corporation
H & Q REORGANIZATION SUBSIDIARY, INC.
a California Corporation
AND HAMBRECHT & QUIST, L.P.,
a California Limited Partnership
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I - THE MERGERS. . . . . . . . . . . . . . . . . . . . . . . . 3
1.1 Mergers. . . . . . . . . . . . . . . . . . . . . . . . . 3
1.2 Filing and Effectiveness . . . . . . . . . . . . . . . . 4
1.3 Closing. . . . . . . . . . . . . . . . . . . . . . . . . 4
1.4 Effects of the Mergers . . . . . . . . . . . . . . . . . 4
1.5 Tax-Free Treatment . . . . . . . . . . . . . . . . . . . 5
ARTICLE II - EFFECT OF THE MERGER ON CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS AND ON PARTNERSHIP INTERESTS IN
THE CONSTITUENT LIMITED PARTNERSHIP; EXCHANGE OF
CERTIFICATES; SUPPLEMENTARY ACTION . . . . . . . . . . . . . . . 6
2.1 Effect on Capital Stock. . . . . . . . . . . . . . . . . 6
2.2 Effect on Partnership Interests. . . . . . . . . . . . . 9
2.3 Exchange of Certificates; Exchange of Interests . . . . 10
2.4 Supplementary Action . . . . . . . . . . . . . . . . . . 13
ARTICLE III - ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . . . . 14
3.1 Fairness Hearing and Permit. . . . . . . . . . . . . . . 14
3.2 Hambrecht & Quist California Shareholders' Consent . . . 14
3.3 LP Limited Partners' Consent . . . . . . . . . . . . . . 14
3.4 Hambrecht & Quist Group Stockholder's Consent. . . . . . 15
3.5 Termination of Shareholder Agreement . . . . . . . . . . 15
3.6 Consents . . . . . . . . . . . . . . . . . . . . . . . . 15
3.7 Best Efforts . . . . . . . . . . . . . . . . . . . . . . 15
3.8 Qualifications; Franchise Tax . . . . . . . . . . . . . 15
3.9 Legal Conditions to the Mergers . . . . . . . . . . . . 15
ARTICLE IV - CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . 16
4.1 Conditions to Each Party's Obligation to Effect
the Merger . . . . . . . . . . . . . . . . . . . . . . . 16
4.2 Conditions of Obligations of Hambrecht & Quist
Group and Merger Sub in Connection with the
California Merger . . . . . . . . . . . . . . . . . . . 17
4.3 Conditions of Obligations of Hambrecht & Quist
California in Connection with the California Merger. . . 17
4.4 Conditions of Obligations of LP . . . . . . . . . . . . 18
4.5 Conditions of Obligations of Hambrecht & Quist
Group with respect to the LP Merger. . . . . . . . . . . 18
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<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
----
ARTICLE V - TERMINATION . . . . . . . . . . . . . . . . . . . . . . . 18
5.1 Termination . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE VI - GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . 18
6.1 Survival of Representations and Warranties . . . . . . . 18
6.2 Amendment. . . . . . . . . . . . . . . . . . . . . . . . 19
6.3 Extension; Waiver . . . . . . . . . . . . . . . . . . . 19
6.4 Notices . . . . . . . . . . . . . . . . . . . . . . . . 19
6.5 Interpretation . . . . . . . . . . . . . . . . . . . . . 20
6.6 Counterparts . . . . . . . . . . . . . . . . . . . . . . 20
6.7 Entire Agreement . . . . . . . . . . . . . . . . . . . . 20
6.8 No Transfer . . . . . . . . . . . . . . . . . . . . . . 20
6.9 Severability . . . . . . . . . . . . . . . . . . . . . . 20
6.10 Other Remedies . . . . . . . . . . . . . . . . . . . . . 20
6.11 Further Assurances . . . . . . . . . . . . . . . . . . . 20
6.12 Absence of Third-Party Beneficiary Rights . . . . . . . 21
6.13 Mutual Drafting . . . . . . . . . . . . . . . . . . . . 21
6.14 Governing Law . . . . . . . . . . . . . . . . . . . . . 21
EXHIBITS
Exhibit 1.1(a) Agreement of Merger between Merger Sub and
Hambrecht & Quist California
Exhibit 1.1(b)(1) Agreement of Merger between LP and Hambrecht &
Quist Group
Exhibit 1.1(b)(2) Certificate of Merger between LP and Hambrecht &
Quist Group
Exhibit 1.4(a) Amended and Restated Articles of Incorporation of
Hambrecht & Quist Group
Exhibit 1.4(b) Amended and Restated Certificate of Incorporation
of Hambrecht & Quist Group, Inc.
Exhibit 2.1(c) Underwriters' Market Stand-off
-ii-
<PAGE>
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement"), is made and
entered into as of June 10, 1996 by and among Hambrecht & Quist Group, a
California corporation ("Hambrecht & Quist California"), Hambrecht & Quist
Group, Inc., a Delaware Corporation ("Hambrecht & Quist Group"), H & Q
Reorganization Subsidiary, Inc., a California corporation and wholly owned
subsidiary of Hambrecht & Quist Group ("Merger Sub"), and Hambrecht & Quist,
L.P. ("LP"), a California limited partnership (each, a "Party" and collectively,
the "Parties").
RECITALS
A. Hambrecht & Quist California is a corporation duly organized and
existing under the laws of the State of California and has an authorized
capital of 10,000,000 shares, all of which are designated "Common Stock", no
par value. As of May 31, 1996, 4,007,942 shares of Common Stock were issued
and outstanding and 1,331,846 options to purchase Common Stock were issued
and outstanding.
B. Hambrecht & Quist Group is a corporation duly organized and existing
under the laws of the State of Delaware and has an authorized capital of
105,000,000 shares, 100,000,000 of which are designated "Common Stock", $.0l
par value and 5,000,000 of which are designated "Preferred Stock", $.01 par
value. As of the date of this Agreement, one (1) share of Common Stock was
issued and outstanding and no shares of Preferred Stock were issued and
outstanding.
C. Merger Sub is a corporation duly organized and existing under the laws
of the State of California and has an authorized capital of 10,000 shares, all
of which are designated "Common Stock", $. 001 par value. As of the date of
this Agreement, 10,000 shares of Common Stock were issued and outstanding, all
of which were held by Hambrecht & Quist Group.
D. LP is a limited partnership duly organized and existing under the laws
of the state of California. Hambrecht & Quist California is the sole general
partner of LP (the "General Partner") and has a one percent (1%) general
partnership interest in LP. As of May 31,1996, the outstanding limited
partnership interests, representing in the aggregate a 99% interest in LP,
consisted of 106,795.78 Class A Units, calculated on an as-converted basis,
(the "LP Units"), which are held by the partners of LP (the "Limited
Partners").
E. LP intends to establish, pursuant to a Liquidating Trust Agreement
with the trustees named therein (the "Liquidating Trust Agreement") a
Liquidating Trust (the "Liquidating Trust") for the benefit of the partners of
LP. LP intends to distribute, immediately prior to the LP Merger, as defined
below, the Assets, as defined in the Liquidating Trust Agreement, which will be
held in the Liquidating Trust for the benefit of the partners of LP in
accordance with the Liquidating Trust Agreement.
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<PAGE>
F. The boards of directors of Hambrecht & Quist Group, Hambrecht & Quist
California, and Merger Sub, respectively, have determined that it is advisable
and in the best interests of their respective entities and their respective
shareholders to merge Merger Sub with and into Hambrecht & Quist California in
a merger under Chapter 11 of the California General Corporation Law (the
"CGCL") (the "California Merger"). Under the terms of the merger, among other
things, all of the outstanding shares of Common Stock, no par value, of
Hambrecht & Quist California ("California Common Stock") shall be converted
into the right to receive a number of shares of Common Stock, $.01 par value,
of Hambrecht & Quist Group ("Group Common Stock") in the ratio and upon the
terms and conditions set forth in this Agreement.
G. The respective boards of directors of Hambrecht & Quist California,
Hambrecht & Quist Group, and Merger Sub have approved this Agreement and the
California Merger contemplated hereby and directed that this Agreement be
executed by the undersigned officers of such entities.
H. The board of directors of Hambrecht & Quist California has directed
that the principal terms of the California Merger be submitted to a vote of the
shareholders of Hambrecht & Quist California. Pursuant to Section 1201 of the
CGCL, the approval by affirmative vote of a majority of outstanding shares of
California Common Stock is required to approve the California Merger.
I. Pursuant to Section 1201(b) of the CGCL, no vote of Merger Sub
shareholders is required to approve the California Merger.
J. The board of directors of Hambrecht & Quist Group and Hambrecht &
Quist California, as the general partner of LP, have determined that it is
advisable and in the best interests of Hambrecht & Quist Group and its
stockholders and LP and its partners to merge LP with and into Hambrecht & Quist
Group in a merger pursuant to Article 7.5 of the California Revised Limited
Partnership Act ("CRLPA") and Section 263 of the Delaware General Corporation
Law (the "DGCL") (the "LP Merger"). Under the terms of the merger, among other
things, all of the partnership interests in LP shall be converted into the right
to receive a number of shares of Group Common Stock in the ratio and upon the
terms and conditions set forth in this Agreement.
K. Hambrecht & Quist California, the general partner of LP, has approved
this Agreement and the LP Merger contemplated hereby and has directed that the
principal terms of the LP Merger he submitted to a vote of the Limited Partners
and that this Agreement be executed by the General Partner. Pursuant to Section
263 of the DGCL and Section 15678.2 of the CRLPA, the approval of a majority in
interest of the holders of LP Units is required to approve the LP Merger.
L. The board of directors of Hambrecht & Quist Group has approved this
Agreement and the LP Merger contemplated hereby and has directed that the
principal terms of the LP Merger be submitted to a vote of the stockholder of
Hambrecht & Quist Group and that this Agreement be executed by the undersigned
officers of Hambrecht & Quist Group. Pursuant to Sections 263(c) and
-2-
<PAGE>
251 of the DGCL, a vote of the sole stockholder of Hambrecht & Quist Group is
required to approve the LP Merger.
M. Hambrecht & Quist Group will, as part of the LP Merger, amend its
certificate of incorporation to change its name from Hambrecht & Quist Group,
Inc. to Hambrecht & Quist Group.
N. Hambrecht & Quist California will, as part of the California Merger,
amend its articles of incorporation to change its name from Hambrecht & Quist
Group to Hambrecht & Quist California, Inc.
0. The Parties intend, by executing this Agreement, to adopt, with
respect to the California Merger, a plan of reorganization within the meaning of
Section 368 of the Internal Revenue Code of 1986 (the "Code"), as amended, and,
with respect to the LP Merger, except with respect to cash payments in lieu of
fractional shares, a tax-free transaction under Section 351 of the Code.
P. The Parties desire to make certain agreements in connection with the
California Merger and the LP Merger (collectively, the "Mergers") and also to
prescribe various conditions to the Mergers.
NOW, THEREFORE, in consideration of the premises, mutual agreements and
covenants herein, the Parties hereby agree, subject to the terms and conditions
hereinafter set forth, as follows:
ARTICLE I
THE MERGERS
1.1 MERGERS.
(a) Subject to the terms and conditions of this Agreement and as
contemplated by the Agreement of Merger between Merger Sub and Hambrecht & Quist
California attached hereto as EXHIBIT 1.1(a)(the "Agreement of California
Merger"), Merger Sub will be merged with and into Hambrecht & Quist California
in accordance with the applicable provisions of the CGCL.
(b) Subject to the terms and conditions of this Agreement and as
contemplated by the Agreement of Merger between LP and Hambrecht & Quist Group
to be filed pursuant to Section 263 of the DCGL attached hereto as EXHIBIT
1.1(b)(1) (the "Agreement of LP Merger") and the Certificate of Merger of
Hambrecht & Quist Group and LP to be filed pursuant to Section 15678.4 of the
CRLPA attached hereto as EXHIBIT 1.1(b)(2) (the "California Certificate of LP
Merger"), LP will be merged with and into Hambrecht & Quist Group.
-3-
<PAGE>
(c) The California Merger and the LP Merger collectively shall herein
be called the "Mergers".
1.2 FILING AND EFFECTIVE
(a) Subject to the provisions of this Agreement, the Agreement of
California Merge, together with the required officers certificates, shall be
executed and filed with the California Secretary of State in accordance with the
CGCL following satisfaction or waiver of all of the conditions precedent set
forth in ARTICLE IV.
The date and time upon which the California Merger shall become effective
is herein called the "Effective Time of the California Merger" or "California
Effective Time." The date upon which the California Effective Time occurs shall
be herein called the "California Effective Date."
(b) Subject to the provisions of this Agreement, the Agreement of LP
Merger shall be executed and filed with the Delaware Secretary State in
accordance with the DGCL and the California Certificate of LP Merger with the
California Secretary of State shall be executed and filed in accordance with the
CRLPA following satisfaction or waiver of all of the Conditions Precedent set
forth in ARTICLE IV.
The date and time upon which the LP Merger shall become effective is herein
called the "Effective Time of the LP Merger" or "LP Effective Time." The date
upon which the LP Effective Time occurs shall be herein called the "LP Effective
Date."
1.3 CLOSING. The closing of the Mergers shall take place as soon as
practicable after each of the filings described in SECTION 1.2 has been made, at
the offices of Wilson Sonsini Goodrich & Rosati, P.C., 650 Page Mill Road, Palo
Alto, California, unless a different date or place is agreed to in writing by
the Parties hereto.
1.4 EFFECTS OF THE MERGER.
(a) At the Effective Time of the California Merger,
(i) the separate existence of Merger Sub shall cease and
Merger Sub shall be merged with and into Hambrecht & Quist California (Hambrecht
& Quist California shall sometimes be referred to herein as the "Surviving
Subsidiary");
(ii) the Articles of Incorporation of Hambrecht & Quist
California will be amended and restated in their entirety to read as they appear
in Exhibit 1.4(a) until duly amended in accordance with the provisions thereof
and applicable law;
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<PAGE>
(iii) the By-Laws of Hambrecht & Quist California as in effect
immediately prior to the Effective Time of the California Merger shall be the
By-Laws of the Surviving Subsidiary until duly amended in accordance with the
provisions thereof and applicable law;
(iv) the officers and directors of Hambrecht & Quist California
immediately prior to the Effective Time of the California Merger shall be the
officers and directors, respectively, of the Surviving Subsidiary each to hold
office in accordance with the Articles and By-laws of the Surviving Subsidiary;
(v) the California Merger shall, from and after the Effective
Time of the California Merger, have all the effects provided by applicable law.
(b) At the effective time of the LP Merger,
(i) the separate existence of LP shall cease and LP shall be
merged with and into Hambrecht & Quist Group (Hambrecht & Quist Group shall
sometimes be referred to herein as the "Surviving Corporation");
(ii) the Certificate of Incorporation of Hambrecht & Quist
Group will be amended and restated in its entirety to read as it appears in
Exhibit 1.4(b) until duly amended in accordance with the provisions thereof and
applicable law;
(iii) the By-Laws of Hambrecht & Quist Group as in effect
immediately prior to the Effective Time of the LP Merger shall be the By-Laws of
the Surviving Corporation until duly amended in accordance with the provisions
thereof and applicable law;
(iv) the officers and directors of Hambrecht & Quist Group
immediately prior to the Effective Time of the LP Merger shall be the officers
and directors, respectively, of the Surviving Corporation, each to hold office
in accordance with the Certificate of Incorporation and By-laws of the Surviving
Corporation;
(v) the LP Merger shall, from and after the Effective Time of
the LP Merger, have all the effects provided by applicable law.
1.5 TAX-FREE TREATMENT. The California Merger is intended to be a tax-free
reorganization within the meaning of 368 of the Code. Except with respect to
cash payments in lieu of fractional shares, the LP Merger is intended to be tax-
free under Section 351 of the Code.
-5-
<PAGE>
ARTICLE II
EFFECT OF THE MERGER ON CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS AND
ON PARTNERSHIP INTERESTS IN THE CONSTITUENT
LIMITED PARTNERSHIP; EXCHANGE OF
CERTIFICATES; SUPPLEMENTARY ACTION
2.1 EFFECT ON CAPITAL STOCK. As of the Effective Time of the California
Merger, by virtue of the California Merger and without any action on the part of
any holder of any securities of Hambrecht & Quist California:
(a) CAPITAL STOCK OF MERGER SUB. All issued and outstanding shares of
capital stock of Merger Sub shall continue to be issued and outstanding and
shall be converted into 10,000 shares of California Common Stock. Each stock
certificate of Merger Sub evidencing ownership of any such shares shall continue
to evidence ownership of such shares of California Capital Stock.
(b) CANCELLATION OF CALIFORNIA COMMON STOCK.
(i) All shares of California Common Stock that are owned
directly or indirectly by Hambrecht & Quist California shall be canceled and no
Group Common Stock or other consideration shall be delivered in exchange
therefor.
(ii) Each holder of a certificate representing any shares of
California Common Stock after the Effective Time of the California Merger,
except the shares of California Common Stock issued upon conversion of shares of
Merger Sub, shall cease to have any rights with respect to such shares, except
the right either to (A) receive the California Merger Consideration Per Share,
(as defined in SECTION 2.1(c) below) multiplied by the number of shares
represented by such certificate, upon surrender of such certificate, or (B) to
exercise such holder's dissenters' rights as provided in SECTION 2.1(f) hereof
and the CGCL.
(c) CONVERSION OF CALIFORNIA COMMON STOCK OR CAPITAL STOCK RIGHTS OF
HAMBRECHT & QUIST CALIFORNIA. Each share of California Common Stock, except
canceled shares, Dissenting California Shares (as defined in SECTION 2.1(f)
below) and shares of California Common Stock issued upon conversion of shares of
Merger Sub but including shares issued upon the exercise of any Hambrecht &
Quist California Option (as defined in Section 2.1(d) below) prior to the
Effective Time of the California Merger, that is issued and outstanding
immediately prior to the Effective Time of the California Merger shall
automatically be canceled and extinguished and converted, without any action on
the part of the holder thereof, into the right to receive four (4) shares of
Group Common Stock (the "California Merger Consideration Per Share"). All shares
of Group Common Stock received pursuant to this SECTION 2.1(c) ("California
Merger Group Common Stock") shall be subject to the terms and conditions on
transfer of the "Underwriters' Market Stand-
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Off" set forth in EXHIBIT 2.1(c) and each certificate representing any such
share shall carry a legend describing the terms and conditions on transfer as
described in the Underwriters' Market Stand-Off. Any reference to California
Merger Group Common Stock, including without limitation references contained in
SECTION 2.1(d) below, shall be deemed to refer to Group Common Stock restricted
by the Underwriters' Market Stand-Off. The ratio pursuant to which each share of
California Common Stock & Quist California, including assumed convertible and
exercisable securities, will be exchanged for shares of Hambrecht & Quist Group,
determined in accordance with the foregoing provisions, is hereinafter referred
to as the "California Exchange Ratio."
(d) ASSUMPTION OF HAMBRECHT & QUIST CALIFORNIA OPTIONS.
(i) At the Effective Time of the California Merger, each
unexpired and unexercised option to purchase shares of California Common Stock
(a "Hambrecht & Quist California Option") granted under the stock option plans
and agreements of Hambrecht & Quist California outstanding immediately prior to
the Effective Time of the California Merger shall be assumed by Hambrecht &
Quist Group (an "Assumed Hambrecht & Quist California Option") together with the
stock option plans under which those options are outstanding (the "Assumed
Option Plans"). Each Hambrecht & Quist California Option so assumed by Hambrecht
& Quist Group will continue to have, and be subject to, substantially the same
terms and conditions set forth in the documents governing such Hambrecht & Quist
California Option, including the Assumed Option Plans, immediately prior to the
Effective Time of the California Merger, except that (A) such Assumed Hambrecht
& Quist California Option will be exercisable for that number of whole shares of
California Merger Group Common Stock (which shall be subject to the
Underwriters' Market Stand-Off) equal to the product of the number of shares of
California Common Stock that were purchasable under such Assumed Hambrecht &
Quist California Option immediately prior to the Effective Time of the
California Merger multiplied by the California Exchange Ratio, and (B) the per
share exercise price for the shares of California Merger Group Common Stock
issuable upon exercise of such Assumed Hambrecht & Quist California Option will
be equal to the quotient obtained by dividing the exercise price per share of
California Common Stock (on an as converted to Common Stock basis) at which such
Assumed Hambrecht & Quist California Option was exercisable immediately prior to
the Effective Time of the California Merger by the California Exchange Ratio,
rounded up to the nearest whole cent. Consistent with the terms of the Hambrecht
& Quist California Options and the documents governing such Hambrecht & Quist
California Options, including the Assumed Option Plans, the California Merger
will not terminate or accelerate any Assumed Hambrecht & Quist California Option
or any right of exercise, vesting or repurchase relating thereto with respect to
shares of California Merger Group Common Stock acquired upon exercise of the
Assumed Hambrecht & Quist California Option. Holders of Assumed Hambrecht &
Quist California Options will not be entitled to acquire California Common Stock
following the Merger.
(ii) As soon as practicable after the Effective Time of the
California Merger, Hambrecht & Quist Group shall issue to each holder of an
Assumed Hambrecht & Quist California Option a document evidencing the stock
option assumption by Hambrecht & Quist Group.
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The right to receive an Assumed Hambrecht & Quist California Option may not be
assigned or transferred, except as provided under the Assumed Option Plan under
which that option was granted. Any attempted assignment contrary to this
SECTION 2.1(d) shall be null and void.
(iii) It is the intention of the Parties that the Hambrecht &
Quist California Options assumed by Hambrecht & Quist Group qualify following
the Effective Time of the California Merger as incentive stock options as
defined in Section 422 of the Code to the extent the Hambrecht & Quist
California Options qualified as incentive stock options prior to the Effective
Time of the California Merger.
(e) CALIFORNIA COMMON STOCK SUBJECT TO REPURCHASE. All shares of
California Merger Group Common Stock that are received in the California Merger
in exchange for shares of California Common Stock that, under applicable stock
purchase, stock restriction or similar agreements with Hambrecht & Quist
California, are unvested or subject to a repurchase option or other condition of
forfeiture which by its terms does not terminate due to the California Merger
("Hambrecht & Quist California Restricted Stock") will also be unvested or
subject to the same repurchase option or other condition, as the case may be,
and all such repurchase options shall automatically inure to Hambrecht & Quist
Group in the California Merger and shall thereafter be exercisable by Hambrecht
& Quist Group upon the same terms and conditions in effect for Hambrecht & Quist
California immediately prior to the Effective Time of the California Merger,
except that the shares purchasable under any such repurchase option shall be
shares of California Merger Group Common Stock and the price payable by
Hambrecht & Quist Group shall be equal to the quotient determined by dividing
the aggregate purchase price at which the California Common Stock was
repurchasable under each applicable agreement by the California Exchange Ratio
and rounding the resulting aggregate price payable by Hambrecht & Quist Group to
the nearest whole cent. The certificates evidencing such shares will be marked
with appropriate legends.
(f) DISSENTERS' RIGHTS. If, as of the Effective Time of the
California Merger, holders of California Common Stock have properly exercised
and not lost dissenters' rights ("Dissenting California Shares") in connection
with the California Merger under Chapter 13 of the CGCL, such Dissenting
California Shares shall not be converted into California Merger Group Common
Stock but shall be converted into the right to receive such consideration as may
be determined to be due with respect to such Dissenting California Shares
pursuant to the CGCL. Hambrecht & Quist California shall give Hambrecht & Quist
Group prompt notice of any demand received by Hambrecht & Quist California to
require Hambrecht & Quist California to purchase shares of California Common
Stock, and Hambrecht & Quist Group shall have the right to participate in all
negotiations and proceedings with respect to such demand. Each holder of
Dissenting California Shares (a "Dissenting California Security Holder") who,
pursuant to the provisions of the CGCL, becomes entitled to payment of the value
of shares of California Common Stock shall receive payment therefor (but only
after the value therefor shall have been agreed upon or finally determined
pursuant to such provisions). In the event of a legal obligation, after the
Effective Time of be California Merger, to deliver shares of California Merger
Group Common Stock to any holder of
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shares of California Common Stock who shall have failed to make an effective
purchase demand or shall have lost his status as a Dissenting California
Security Holder, Hambrecht & Quist Group shall issue and deliver, upon surrender
by such Dissenting California Security Holder of his certificate or certificates
representing shares of California Common Stock, the shares of California Merger
Group Common Stock to which such Dissenting California Security Holder is then
entitled under this SECTION 2.1.
(g) ADJUSTMENT TO EXCHANGE RATIO. If, between the date of this
Agreement and the Effective Time of the California Merger, the outstanding
shares of California Common Stock shall have been changed into a different
number of shares or a different class by reason of any reclassification,
recapitalization, split-up, combination, exchange of shares or readjustment, the
California Exchange Ratio shall be correspondingly adjusted.
2.2 EFFECT ON PARTNERSHIP INTERESTS. As of the Effective Time of the LP
Merger, by virtue of the LP Merger and without any action on the part of any
partner, limited or general, of LP:
(a) CANCELLATION OF GENERAL PARTNERSHIP INTEREST: CONVERSION OF
GENERAL PARTNERSHIP. The General Partner shall cease to have any rights with
respect to its general partnership interest in LP except the right to receive
25,889 shares of Hambrecht & Quist Group Common Stock (the "LP Merger General
Partner Consideration Per Share"). All shares of Hambrecht & Quist Group Common
Stock received pursuant to this SECTION 2.2(a) ("LP Merger General Partner Group
Common Stock") shall be subject to the terms and conditions on transfer of the
"Underwriters' Market Stand-Off" set forth in EXHIBIT 2.1(c) and each such share
shall carry a legend describing the terms and conditions on transfer as
described in the Underwriters' Market Stand-Off. Any reference herein to LP
Merger General Partner Group Common Stock shall be deemed to refer to Group
Common Stock restricted by the Underwriters' Market Stand-Off.
(b) CANCELLATION OF LP UNITS. Each holder of an LP Unit after the
Effective Time of the LP Merger shall cease to have any rights with respect to
such LP Unit, except the right either to receive the LP Merger Consideration Per
Share, as defined in SECTION 2.2(c) below, plus any cash in lieu of fractional
shares pursuant to SECTION 2.2(e) below, upon delivery of written notice of
ownership and surrender of such Units, or to exercise such holder's dissenters'
rights as provided in SECTION 2.2(d) hereof and the CRLPA.
(c) CONVERSION OF LP UNITS. Each LP Unit outstanding prior to the
Effective Time of the LP Merger except Dissenting LP Units (as defined in
SECTION 2.2(d) below) shall automatically be canceled and extinguished and
converted, without any action on the part of the holder thereof, into the right
to receive 24 shares of Group Common Stock (the "LP Merger Consideration Per
Share"). All shares of Group Common Stock received pursuant to this SECTION
2.2(c) ("LP Merger Group Common Stock") shall be subject to the terms and
conditions on transfer of the "Underwriters' Market Stand-Off" set forth in
EXHIBIT 2.1(c) and each such share shall carry a legend describing the terms and
conditions on transfer as described in the Underwriters' Market Stand-Off. Any
reference
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herein to LP Merger Group Common Stock shall be deemed to refer to Group Common
Stock restricted by the Underwriters' Market Stand-Off. The ratio pursuant to
which each LP Unit will be exchanged for shares of Hambrecht & Quist Group,
determined in accordance with the foregoing provisions, is hereinafter referred
to as the "LP Exchange Ratio."
(d) DISSENTERS' RIGHTS. If, as of the Effective Time of the LP Merger,
holders of LP Units have properly exercised and not lost dissenters' rights
("Dissenting LP Units") in connection with the LP Merger under Article 7.6 of
the CRLPA, such Dissenting LP Units shall not be converted into LP Merger Group
Common Stock but shall be converted into the right to receive such consideration
as may be determined to be due with respect to such Dissenting LP Units pursuant
to the CRLPA. LP shall give Hambrecht & Quist Group prompt notice of any demand
received by LP to require LP to purchase LP Units, and Hambrecht & Quist Group
shall have the right to participate in all negotiations and proceedings with
respect to such demand. Each holder of Dissenting LP Units (a "Dissenting LP
Unitholder") who, pursuant to the provisions of the CGCL, becomes entitled to
payment of the value of LP Units shall receive payment therefor (but only after
the value therefor shall have been agreed upon or finally determined pursuant to
such provisions). In the event of a legal obligation, after the Effective Time
of the LP Merger, to deliver shares of LP Merger Group Common Stock to any
holder of LP Units who shall have failed to make an effective purchase demand or
shall have lost his status as a Dissenting LP Unitholder, Hambrecht & Quist
Group shall issue and deliver, upon delivery by such Dissenting LP Unitholder of
a written notice of the ownership and surrender of such LP Units, the shares of
LP Merger Group Common Stock to which such Dissenting LP Unitholder is then
entitled under this SECTION 2.2.
(e) FRACTIONAL SHARES. No fractional shares of LP Merger Group Common
Stock shall be issued, but in lieu thereof each holder of LP Units who would
otherwise be entitled to receive a fraction of a share of LP Merger Group Common
Stock shall receive from Hambrecht & Quist Group an amount of cash equal to the
price at which shares of Group Common Stock are offered to the public pursuant
to Hambrecht & Quist Group's initial public offering multiplied by the fraction
of a share of LP Merger Group Common Stock to which such holder would otherwise
be entitled. The fractional interests of each holder of LP Units shall be
aggregated, so that no holder of LP Limited Partnership Units shall receive cash
in an amount greater than the value of one (1) full share of LP Merger Group
Common Stock.
(f) ADJUSTMENT TO EXCHANGE RATIO. If, between the date of this
Agreement and the Effective Time of the LP Merger, the outstanding LP Units
shall have been changed into a different number of Units or a different class by
reason of any reclassification, recapitalization, split-up, combination,
exchange of Units or readjustment, the LP Exchange Ratio shall be
correspondingly adjusted.
2.3 EXCHANGE OF CERTIFICATES; EXCHANGE OF INTERESTS.
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(a) EXCHANGE AGENT. Prior to the Closing Date, Hambrecht & Quist
Group shall appoint a third party to act as exchange agent (the "Exchange
Agent") in the Mergers.
(b) HAMBRECHT & QUIST GROUP TO PROVIDE COMMON STOCK AND CASH.
Promptly after the earlier of (i) the Effective Date of the California Merger
and (ii) the Effective Date of the LP Merger (but in no event later than thirty
(30) business days thereafter), Hambrecht & Quist Group shall make available for
exchange in accordance with this ARTICLE II, through such reasonable procedures
as Hambrecht & Quist Group may adopt, the California Merger Group Common Stock
issuable pursuant to SECTION 2.1 in exchange for outstanding shares of
California Common Stock, the LP Merger Group Common Stock issuable pursuant to
SECTION 2.2 in exchange for LP Units, and the LP Merger General Partner Group
Common Stock issuable pursuant to SECTION 2.2 in exchange for the general
partnership interest in LP, and cash in an amount sufficient to satisfy any
obligations with respect to fractional shares pursuant to SECTION 2.2(e).
(c) EXCHANGE PROCEDURES FOR CALIFORNIA COMMON STOCK. Within thirty
(30) calendar days after the Effective Time of the California Merger, the
Exchange Agent shall mail to each holder of record of a certificate or
certificates that immediately prior to the Effective Time of the California
Merger represented outstanding shares of California Common Stock (the
"California Certificates") whose interests are being converted into California
Merger Group Common Stock pursuant to SECTION 2.1 hereof (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the California Certificates shall pass, only upon delivery of
the California Certificates to the Exchange Agent and shall be in such form and
have such other provisions as Hambrecht & Quist Group may reasonably specify)
and (ii) instructions for use in effecting the surrender of the California
Certificates in exchange for California Merger Group Common Stock. Upon
surrender of a California Certificate for cancellation to the Exchange Agent or
to such other agent or agents as may be appointed by Hambrecht & Quist Group,
together with such letter of transmittal, duly executed and completed in
accordance with the instructions thereto, the holder of such California
Certificate shall be entitled to receive in exchange therefor the number of
shares of California Merger Group Common Stock to which the holder of such
certificate is entitled pursuant to SECTION 2.1 hereof The California
Certificate so surrendered shall forthwith be canceled. In the event of a
transfer of ownership of California Common Stock that is not registered on the
transfer records of Hambrecht & Quist California, the appropriate number of
shares of California Merger Group Common Stock may be delivered to a transferee
if the California Certificate representing such California Common Stock is
presented to the Exchange Agent and accompanied by all documents required to
evidence and effect such transfer and to evidence that any applicable stock
transfer taxes have been paid. Until surrendered as contemplated by this SECTION
2.3, each California Certificate shall be deemed at all times after the
Effective Time of the California Merger to represent the right to receive upon
such surrender the number of shares of California Merger Group Common Stock as
provided by this Article II and the provisions of the CGCL but shall, subject to
SECTION 2.1(f), have no other right; provided, however, that customary and
appropriate certifications and indemnities allowing exchange against lost or
destroyed certificates shall be provided; and provided further that nothing in
this SECTION 2.3(c) shall require Hambrecht & Quist Group to issue California
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Merger Group Common Stock to any holder of California Common Stock who shall
fail to surrender a certificate representing such shares or the certification
and indemnities relating to a lost certificate. Notwithstanding the foregoing,
neither the Exchange Agent nor any Party hereto shall be liable to a holder of
shares of California Common Stock for any California Merger Group Common Stock
delivered to a public official pursuant to applicable abandoned property,
escheat and similar laws. Promptly following the date that is six (6) months
after the California Effective Date, the Exchange Agent shall return to the
Surviving Subsidiary all shares of California Merger Group Common Stock in its
possession relating to the transactions described in this Agreement, and the
Exchange Agent's duties shall terminate. Thereafter, each holder of a California
Certificate may surrender such Certificate to the Surviving Subsidiary and
(subject to applicable abandoned property, escheat and similar laws) receive in
exchange therefor the shares of California Merger Group Common Stock to which
such holder is entitled pursuant hereto.
(d) EXCHANGE PROCEDURES FOR LP GENERAL PARTNER. Within thirty (30)
calendar days after the Effective Time of the LP Merger, the Exchange Agent
shall deliver to the General Partner, whose interest is being converted into LP
Merger General Partner Group Common Stock pursuant to SECTION 2.2 hereof
certificates representing the total number of LP Merger General Partner Group
Common Stock to which the holder of such general partnership interest is
entitled pursuant to SECTION 2.2 hereof. The general partnership interest shall
forthwith be canceled. Until the shares are delivered as contemplated by this
SECTION 2.3(d), the general partnership interest in LP shall be deemed at all
times after the Effective Time of the LP Merger to represent the right to
receive the number of shares of LP Merger General Partner Group Common Stock as
provided by this Article II and the provisions of the CGCL but shall have no
other right.
(e) EXCHANGE PROCEDURES FOR LP LIMITED PARTNERSHIP UNITS. Within
thirty (30) calendar days after the Effective Time of the LP Merger, the
Exchange Agent shall mail to each holder of record of LP Units immediately prior
to the Effective Time of the LP Merger whose interests are being converted into
LP Merger Group Common Stock pursuant to SECTION 2.2 hereof (i) a letter of
transmittal and (ii) instructions for use in effecting the surrender of the LP
Units in exchange for Hambrecht & Quist Group Common Stock. Upon delivery of a
written notice of ownership and surrender of LP Units to the Exchange Agent or
to such other agent or agents as may be appointed by Hambrecht & Quist Group,
together with such letter of transmittal, duly executed and completed in
accordance with the instructions thereto, the holder of any such LP Units shall
be entitled to receive in exchange therefor the number of shares of LP Merger
Group Common Stock, and cash in lieu of any fractional LP Units, to which the
holder of such LP Units is entitled pursuant to SECTION 2.2 hereof. The LP Unit
so surrendered shall forthwith be canceled. In the event of a transfer of
ownership of an LP Unit that is not registered on the transfer records of LP,
the appropriate number of shares of LP Merger Group Common Stock may be
delivered to a transferee if written notice of the ownership and surrender of
the LP Unit is presented to the Exchange Agent and accompanied by all documents
required to evidence and effect such transfer and to evidence that any
applicable transfer taxes have been paid. Until surrendered as contemplated by
this SECTION 2.3, each LP Unit shall be deemed at all times after the Effective
Time of the LP Merger to represent the right
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to receive upon written notice of such surrender the number of shares of LP
Merger Group Common Stock, and cash in lieu of any fractional LP Units, as
provided by this Article II and the provisions of the CGCL but shall, subject to
SECTION 2.2(d), have no other right, provided that nothing in this SECTION
2.3(d) shall require Hambrecht & Quist Group to exchange LP Merger Group Common
Stock to any holder of LP Units who shall fail to deliver a written notice of
the surrender of such LP Units. Notwithstanding the foregoing, neither the
Exchange Agent nor any Party hereto shall be liable to a holder of shares of LP
Units for any LP Merger Group Common Stock delivered to a public official
pursuant to applicable abandoned property, escheat and similar laws. Promptly
following the date that is six (6) months after the LP Effective Date, the
Exchange Agent shall return to the Hambrecht & Quist Group all shares of LP
Merger Group Common Stock in its possession relating to the transactions
described in this Agreement, and the Exchange Agent's duties shall terminate.
Thereafter, each holder of an LP Unit may deliver written notice of the
surrender of such Unit to Hambrecht & Quist Group and (subject to applicable
abandoned property, escheat and similar laws) receive in exchange therefor the
shares of LP Merger Group Common Stock to which such holder is entitled pursuant
hereto.
(f) NO FURTHER OWNERSHIP RIGHTS IN CAPITAL STOCK HAMBRECHT & QUIST
CALIFORNIA. All California Group Common Stock delivered upon the surrender for
exchange of shares of California Common Stock in accordance with the terms
hereof shall be deemed to have been delivered in full satisfaction of all rights
pertaining to such shares of California Common Stock. There shall be no further
registration of transfers on the stock transfer books of the Surviving
Subsidiary of the shares of California Common Stock which were outstanding
immediately prior to the Effective Time of the California Merger. If, after the
Effective Time of the California Merger, California Certificates are presented
to the Surviving Subsidiary for any reason, they shall be canceled and exchanged
as provided in this ARTICLE II.
(g) NO FURTHER OWNERSHIP RIGHTS IN GENERAL PARTNERSHIP INTEREST IN
LP. LP Merger General Partner Group Common Stock delivered in exchange for the
general partnership interest of LP in accordance with the terms hereof shall be
deemed to have been delivered in full satisfaction of all rights pertaining to
such general partnership interest in LP.
(h) NO FURTHER OWNERSHIP RIGHTS IN LIMITED PARTNERSHIP UNITS OF LP.
LP Merger Group Common Stock delivered upon the delivery of written notice of
surrender of LP Units in accordance with the terms hereof shall be deemed to
have been delivered in full satisfaction of all rights pertaining to such LP
Units. If, after the Effective Time of the LP Merger, written notice of
surrender of outstanding LP Units is given to Hambrecht & Quist Group, such LP
Units shall be canceled and exchanged as provided in this Article II.
2.4 SUPPLEMENTARY ACTION.
(a) If at any time after the Effective Time of the California Merger,
any further assignment or assurances in law or any other things necessary or
desirable to vest or perfect or
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confirm of record in the Surviving Subsidiary the title to any property or
rights of either Hambrecht & Quist California or Merger Sub, or otherwise to
carry out the provisions of this Agreement, the officers and directors of
Surviving Subsidiary are hereby authorized and empowered, in the name of and on
behalf of Hambrecht & Quist California and Merger Sub, to execute and deliver
any and all things necessary or proper to vest or to perfect or confirm title to
such property or rights in the Surviving Subsidiary, and otherwise to carry out
the purposes and provisions of this Agreement.
(b) If at any time after the Effective Time of the LP Merger, any
further assignment or assurances in law or any other things necessary or
desirable to vest or perfect or confirm of record in Hambrecht & Quist Group the
title to any property or rights of LP, or otherwise to carry out the provisions
of this Agreement, the officers and directors of Hambrecht & Quist Group are
hereby authorized and empowered, in the name of and on behalf of LP, to execute
and deliver any and all things necessary or proper to vest or to perfect or
confirm title to such property or rights in Hambrecht & Quist Group, and
otherwise to carry out the purposes and provisions of this Agreement.
ARTICLE III
ADDITIONAL AGREEMENTS
3.1 FAIRNESS HEARING AND PERMIT. The Parties shall prepare an Application
for Qualification of Securities by Permit under Section 25121 of the California
Corporate Securities Law of 1968, as amended (the "CCSL"), a related Notice of
Hearing and a written consent solicitation or other disclosure material (the
"Disclosure Document") to be supplied to the securityholders of Hambrecht &
Quist California and the LP Unitholders in connection with the transactions
contemplated hereby (collectively, the "Hearing Documents"). The Parties will
file the Hearing Documents as promptly as practicable with the California
Department of Corporations and request a hearing on the fairness of the Mergers
pursuant to Section 25142 of the CCSL. The Parties will thereafter endeavor in
good faith to obtain a finding of fairness and the issuance of a Permit (as
defined in the Section 25121 of the CCSL) to such effect by the California
Department of Corporations as result of such hearing, but they shall in no event
be required to alter the terms of the Mergers in order to obtain such finding
and issuance.
3.2 HAMBRECHT & QUIST CALIFORNIA SHAREHOLDERS' CONSENT. Hambrecht & Quist
California shall solicit the consent of its shareholders as promptly as
practicable after the date of issuance of a permit as described in SECTION 3.1
for the purpose of obtaining shareholder approval required in connection with
the transactions contemplated hereby, and shall use its best effort to obtain
such approval.
3.3 LP LIMITED PARTNERS' CONSENT. LP shall solicit the consent of its
limited partners as promptly as practicable after the date of issuance of a
permit as described in SECTION 3.1 for the
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purpose of obtaining limited partner approval required in connection with the
transactions contemplated hereby, and shall use its best effort to obtain such
approval.
3.4 HAMBRECHT & QUIST GROUP STOCKHOLDER'S CONSENT. Hambrecht & Quist Group
shall solicit the consent of its sole stockholder as promptly as practicable
after the date of issuance of a permit as described in SECTION 3.1 for the
purpose of obtaining stockholder approval required in connection with the
transactions contemplated hereby, and shall use its best effort to obtain such
approval.
3.5 TERMINATION OF SHAREHOLDER AGREEMENT. The board of directors of
Hambrecht & Quist California has agreed and hereby consents to permanently waive
as of the Effective Time of the California Merger all rights pursuant to Section
11 of the Shareholder Agreement (the "Shareholder Agreement") dated January 1,
1983, as amended, entered into among Hambrecht & Quist California and certain
holder of Hambrecht & Quist California common stock, and to release all Shares,
Shareholders and their Transferees (as defined in the Shareholder Agreement )
pursuant to Section 11 of the Shareholder Agreement and hereby votes to
terminate the Shareholder Agreement pursuant to Section 15 of the Shareholder.
In connection with the solicitation of the shareholders of Hambrecht & Quist
California of approval of the principal terms of the California Merger,
Hambrecht & Quist California shall solicit votes to terminate the Shareholder
Agreement pursuant to Section 15 thereof.
3.6 CONSENTS. Each of the Parties shall promptly apply for or otherwise
seek, and use its commercially reasonable efforts to obtain, all consents and
approvals required to be obtained by it for the consummation of the Mergers.
Hambrecht & Quist California shall use its best efforts to obtain all necessary
consents, waivers and approvals under any of Hambrecht & Quist California's
agreements, contracts, licenses or leases in connection with the California
Merger, except such consents and approvals as Hambrecht & Quist Group and
Hambrecht & Quist California agree Hambrecht & Quist California shall not seek
to obtain. LP shall use its best efforts to obtain all necessary consents,
waivers and approvals under any of LP's agreements, contracts, licenses or
leases in connection with the LP Merger, except such consents and approvals as
Hambrecht & Quist Group and LP agree LP shall not seek to obtain.
3.7 BEST EFFORTS. Each of the Parties shall use best efforts to effectuate
the transactions contemplated hereby and to fulfill and cause to be fulfilled
the conditions to closing under this Agreement.
3.8 QUALIFICATIONS: FRANCHISE TAX. Hambrecht & Quist Group shall qualify
to do business as a foreign corporation in the State of California and in
connection therewith irrevocably appoint an agent for service of process as
required under the provisions of Section 2105 of the CGCL and shall file any and
all documents with the California Franchise Tax Board necessary for the
assumption by Hambrecht & Quist Group of all of the tax liabilities of LP
3.9 LEGAL CONDITIONS TO THE MERGERS.
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Each of the Parties shall take all reasonable actions necessary to comply
promptly with all legal requirements that may be imposed on such party with
respect to the Mergers and will promptly cooperate with and furnish information
to the other Parties in connection with any such requirements imposed upon any
of the Parties or any other subsidiary of any of the Parties in connection with
the Mergers. Each of the Parties will take, and cause its subsidiaries to take,
all reasonable actions to obtain (and to cooperate with the other Parties in
obtaining) any consent, authorization, order or approval of, or exemption by,
any Governmental Entity (as defined in SECTION 4.1(a) below) required to be
obtained or made by such Party or any of its subsidiaries in connection with the
Mergers or the taking of any action contemplated thereby or by this Agreement,
and to defend such lawsuits or other legal proceedings challenging this
Agreement or the consummation of the transactions contemplated hereby as the
Parties deem advisable in good faith, to lift or rescind any injunction or
restraining order or other order adversely affecting the ability of the Parties
to consummate the transactions contemplated hereby as the Parties deem advisable
in good faith, and to effect all necessary registrations and filings and
submissions of information as the Parties deem advisable in good faith, required
by any Governmental Entity, and to fulfill all conditions to this Agreement.
ARTICLE IV
CONDITIONS PRECEDENT
4.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each Party to effect the Mergers shall be subject to
the satisfaction prior to the Closing of the following conditions:
(a) APPROVALS: HART-SCOTT-RODINO; FIRPTA. All authorizations,
consents, orders or approvals of, or declarations or filings with, or
expiration of waiting periods imposed by, any court, administrative agency,
commission, regulatory authority or other governmental or administrative body
or instrumentality, whether domestic or foreign (a "Governmental Entity")
necessary for the consummation of the transactions contemplated by this
Agreement shall have been filed, occurred or been obtained. Such filings and
consents include, but are not limited to, requirements under federal and
state securities laws, a Notification and Report Form under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 and any submissions
required thereunder and any filings required by the the Internal Revenue
Service under Treasury Reg. Section 1.897-2(h) ("FIRPTA"), relating to stock
that is a "U.S. Real Property Interest."
(b) ISSUANCE OF PERMIT. The California Department of Corporations
shall have issued a Permit under Section 25121 of the CCSL, covering the offer
and issuance of the Hambrecht & Quist Group Common Stock and the assumption of
exercisable securities following a hearing as to the fairness of the Mergers
conducted pursuant to Section 25142 of the CCSL.
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(c) HAMBRECHT & QUIST CALIFORNIA SHAREHOLDER APPROVAL. The principal
terms of the California Merger shall, pursuant to Section 1201 of the CGCL, have
been approved and adopted by the affirmative vote of a majority of outstanding
shares of California Common Stock outstanding.
(d) LIMITED PARTNERSHIP APPROVAL. The principal terms of the LP
Merger shall, pursuant to Section 15678.2 of the CRLPA, have been approved and
adopted by holders of a majority of LP Units.
(e) HAMBRECHT & QUIST GROUP STOCKHOLDER APPROVAL. The principal terms
of the LP Merger shall pursuant to Section 251 of the DGCL shall have been
approved and adopted by an affirmative vote of the sole stockholder of Hambrecht
& Quist Group.
(f) TAX-FREE TREATMENT. Each of Hambrecht & Quist California,
Hambrecht & Quist Group and LP shall have received a written opinion from Greene
Radovksy Maloney & Share in form and substance reasonably satisfactory to the
board of directors of Hambrecht & Quist Group to the effect that the California
Merger will constitute a tax-free reorganization within the meaning of Section
368 of the Code and, except with respect to cash paid in lieu of fractional
shares, the LP Merger will be tax-free under Section 351 of the Code. In
preparing the Hambrecht & Quist California, Hambrecht & Quist Group and LP tax
opinions, counsel may make reasonable assumptions related thereto and may rely
on (and to the extent reasonably required, the Parties, holders of California
Common Stock and LP limited partners shall make) reasonable representations
related thereto.
(g) EFFECTIVE REGISTRATION STATEMENT FOR INITIAL PUBLIC OFFERING
CONTEMPLATED. Both the board of directors of Hambrecht & Quist California and
Hambrecht & Quist Group respectively shall have determined that, in their
reasonable business judgment, a registration statement with respect to an
initial public offering of the Common Stock of Hambrecht & Quist Group is
reasonably certain to become effective with one week of such determination.
4.2 CONDITIONS OF OBLIGATIONS OF HAMBRECHT & QUIST GROUP AND MERGER SUB IN
CONNECTION WITH THE CALIFORNIA MERGER. The obligations of Hambrecht & Quist
Group and Merger Sub to effect the California Merger are subject to the
following condition, unless waived by Hambrecht & Quist Group and Merger Sub:
(a) PERFORMANCE OF OBLIGATIONS OF HAMBRECHT & QUIST CALIFORNIA.
Hambrecht & Quist California shall have performed in all material respects all
obligations and covenants required to be performed by it under this Agreement
and the Agreement of California Merger prior to the Closing Date.
4.3 CONDITIONS OF OBLIGATIONS OF HAMBRECHT & QUIST CALIFORNIA IN
CONNECTION WITH THE CALIFORNIA MERGER. The obligation of Hambrecht & Quist
California to effect the California Merger is subject to the following
condition, unless waived by Hambrecht & Quist California:
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(a) PERFORMANCE OF OBLIGATIONS OF HAMBRECHT & QUIST GROUP. Hambrecht
& Quist Group shall have performed in all material respects all obligations and
covenants required to be performed by it under this Agreement and the Agreement
of California Merger prior to the Closing Date.
4.4 CONDITIONS OF OBLIGATIONS OF LP. The obligation of LP to effect the LP
Merger is subject to the following condition, unless waived by LP:
(a) PERFORMANCE OF OBLIGATIONS OF HAMBRECHT & QUIST GROUP. Hambrecht
& Quist group shall have performed in all material respects all obligations and
covenants required to be performed by it under this Agreement, the Agreement of
LP Merger and the California Certificate of Merger prior to the Closing Date.
4.5 CONDITIONS OF OBLIGATIONS OF HAMBRECHT & QUIST GROUP WITH RESPECT TO
THE LP MERGER. The obligation of Hambrecht & Quist Group to effect the LP Merger
is subject to the following condition, unless waived by Hambrecht & Quist Group:
(a) PERFORMANCE OF OBLIGATIONS OF LP. LP shall have performed in all
material respects all obligations and covenants required to be performed by it
under this Agreement, the Agreement of LP Merger and the California Certificate
of Merger prior to the Closing Date..
ARTICLE V
TERMINATION
5.1 TERMINATION.
(a) This Agreement may be terminated at any time prior to the earlier
of (i) the California Effective Time and (ii) the LP Effective Time, whether
before or after approval of the Mergers by the security holders of Hambrecht &
Quist California and the limited partners of LP, by mutual agreement among
Hambrecht & Quist California as General Partner of LP and the Boards of
Directors of Hambrecht & Quist California and Hambrecht & Quist Group;
(b) Where action is taken to terminate this Agreement pursuant to
this SECTION 5.1, it shall be sufficient authorization for such action to be
authorized by the board of directors of the party taking such action, or in the
case of LP, Hambrecht & Quist California as general partner of LP
ARTICLE VI
GENERAL PROVISIONS
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6.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties in this Agreement or delivered pursuant to this Agreement shall
terminate at such time as the later of (i) the California Effective Time and
(ii) the LP Effective Time. Except for fraud, no securityholder of Hambrecht &
Quist California or any officer, director, or employee of Hambrecht & Quist
California or of Hambrecht & Quist Group or any limited partner of LP, shall
have any liability hereunder Hambrecht & Quist Group shall have no liability
hereunder except for its actual fraud, and only to the extent that the facts and
circumstances underlying such actual fraud were known to an executive officer or
member of the Hambrecht & Quist Group board of directors.
6.2 AMENDMENT. This Agreement may be amended by the Parties hereto at any
time before or after approval of the California Merger by the shareholders of
Hambrecht & Quist California or the LP Merger by the limited partners of LP;
provided, however, that following approval of the Merger by the shareholders of
Hambrecht & Quist California, no amendment shall be made which by law requires
the further approval of such shareholders without obtaining such further
approval and that following approval of the LP Merger by the limited partners of
LP, no amendment shall be made which by law requires the further approval of
such limited partners without obtaining such approval. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
Parties hereto.
6.3 EXTENSION; WAIVER. At any time prior to the earlier of (i) the
California Effective Time and (ii) the LP Effective Time, each of Hambrecht &
Quist Group, Hambrecht & Quist California and LP, to the extent legally allowed,
(a) may extend the time for the performance of any of the obligations or other
acts of the other, (b) may waive any inaccuracies in the representations and
warranties made to it contained herein or in any document delivered pursuant
hereto, and (c) may waive compliance with any of the agreements or conditions
for the benefit of it contained herein. Any agreement on the part of a Party
hereto to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party.
6.4 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given (a) on the same day if delivered personally,
(b) three (3) business days after being mailed by registered or certified mail
(return receipt requested), or (c) on the same day if sent by telecopy,
confirmation received, to the Parties at the following addresses and telecopy
numbers (or at such other address or number for a Party as shall be specified by
like notice):
(w) Hambrecht & Quist
One Bush Street
San Francisco, CA 94104
Attn: Daniel H. Case III
Telephone No: (415) 576-3300
Facsimile No: (415) 576-3320
With copy to:
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(v) Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, CA 94304
Attn: Francis S. Currie
Telephone No: (415) 493-9300 x5150
Facsimile No: (415) 493-6811
6.5 INTERPRETATION. When a reference is made in this Agreement to Sections
or Exhibits, such references shall be to a Section or Exhibit to this Agreement
unless otherwise indicated. The words "include," "includes" and "including" when
used herein shall be deemed in each case to be followed by the words "without
limitation."
6.6 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the Parties and delivered to each of the other Parties.
6.7 ENTIRE AGREEMENT. This Agreement and the documents and instruments and
other agreements among the Parties delivered pursuant hereto constitute the
entire agreement among the Parties with respect to the subject matter hereof and
supersede all prior agreements and understandings, both written and oral, among
the Parties with respect to the subject matter hereof and are not intended to
confer upon any other person any rights or remedies hereunder except as
otherwise expressly provided herein.
6.8 NO TRANSFER. This Agreement and the rights and obligations set forth
herein may not be transferred or assigned by operation of law or otherwise
without the consent of each Party] hereto. This Agreement is binding upon and
will inure to the benefit of the Parties hereto and their respective successors
and permitted assigns.
6.9 SEVERABILITY. If any provision of this Agreement, or the application
thereof, will for any reason and to any extent be invalid or unenforceable, the
remainder of this Agreement and application of such provision to other persons
or circumstances will be interpreted so as reasonably to effect the intent of
the Parties hereto. The Parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the extent possible, the economic, business and other
purposes of the void or unenforceable provision.
6.10 OTHER REMEDIES. Any and all remedies herein expressly conferred upon a
Party will be deemed cumulative with and not exclusive of any other remedy
conferred hereby or by law or equity on such Party; and the exercise of any one
remedy will not preclude the exercise of any other.
6.11 FURTHER ASSURANCES. Each Party agrees to cooperate fully with the
other Parties and to execute such further instruments, documents and agreements
and to give such further written assurances as may be reasonably requested by
any other Party to evidence and reflect the transactions
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described herein and contemplated hereby and to carry into effect the intents
and purposes of this Agreement.
6.12 ABSENCE OF THIRD-PARTY BENEFICIARY RIGHTS. No provision of this
Agreement is intended, or will be interpreted, to provide to or create for any
third-party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, stockholder, employee, partner or any Party hereto or any
other person or entity, and all provisions hereof will be personal solely
between the Parties to this Agreement.
6.13 MUTUAL DRAFTING. This Agreement is the joint product of Hambrecht &
Quist Group, Hambrecht & Quist California, LP, and each provision hereof has
been subject to the mutual consultation, negotiation and agreement of Hambrecht
& Quist Group, Hambrecht & Quist California and LP, and shall not be construed
for or against any Party hereto.
6.14 GOVERNING LAW. This Agreement shall be governed in all respects,
including validity, interpretation and effect, by the laws of the State of
California (without giving effect to its choice of law principles), except to
the extent that the substantive provision of the DGCL applies to the Mergers.
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IN WITNESS WHEREOF, Hambrecht & Quist Group, Hambrecht & Quist California,
Merger Sub, and LP have caused this Agreement to be signed, all as of the date
first written above.
HAMBRECHT & QUIST GROUP,
a California Corporation
By: /s/ Daniel H. Case III
__________________________
Daniel H. Case III, President
HAMBRECHT & QUIST GROUP, INC.
a Delaware corporation
By:/s/ Daniel H. Case III
__________________________
Daniel H. Case III, President
H & Q REORGANIZATION SUBSIDIARY
a California corporation
By:/s/ Daniel H. Case III
__________________________
Daniel H. Case III, President
HAMBRECHT & QUIST, L.P.
a California Limited Partnership
By: Hambrecht & Quist Group,
a California corporation, as General Partner
By:/s/ Daniel H. Case III
__________________________
Daniel H. Case III, President
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Exhibit 1.1(a)
AGREEMENT OF MERGER
Merging
H & Q REORGANIZATION SUBSIDIARY, INC, A CALIFORNIA CORPORATION
with and into
HAMBRECHT & QUIST GROUP., A CALIFORNIA CORPORATION
This AGREEMENT MERGER (the "Agreement"), is made and entered into as of
June 10, 1996 by and between Hambrecht & Quist Group, a California corporation
("Hambrecht & Quist California" or the "Company") and H & Q Reorganization
Subsidiary, Inc. a California corporation ("Merger Sub") (Hambrecht & Quist
California and Merger Sub, together, the "Constituent Corporations") and the
wholly owned subsidiary of Hambrecht & Quist Group, Inc., a Delaware corporation
("Parent") (each, a "Party" and collectively, the "Parties").
RECITALS
A. Parent, Hambrecht & Quist California, Hambrecht & Quist, L.P., a
California limited partnership, and Merger Sub have entered into that certain
Agreement and Plan of Reorganization dated June 10, 1996 (the "Reorganization
Agreement"), providing, among other things, for the execution and filing of
this Merger Agreement and the merger of Merger Sub with and into Hambrecht &
Quist California upon the terms set forth in the Reorganization Agreement and
this Merger Agreement (the "Merger").
B. The respective Boards of Directors of each of the Constituent
corporations deem it advisable and in the best interests of each of such
corporations and their respective stockholders that Merger Sub be merged with
and into Hambrecht & Quist California.
AGREEMENT
NOW, THEREFORE, in consideration of the covenants, promises and mutual
agreements contained in this Merger Agreement, the Constituent Corporations
hereby agree that Merger Sub shall be merged with and into Hambrecht & Quist
California in accordance with the Reorganization Agreement and the provisions
of the laws of the State of California, upon the terms and subject to the
conditions set forth as follows:
<PAGE>
ARTICLE I
THE MERGER
1.1 FILING. This Merger Agreement, together with the officers'
certificates of each of the Constituent Corporations required by the General
Corporation Law of the State of California (the "California Law", shall be filed
with the Secretary of State of the State of California at the time specified in
the Reorganization Agreement.
1.2 EFFECTIVENESS. The Merger shall become effective upon the filing of
this Merger Agreement with the Secretary of State of the State of California
(the "Effective Time").
1.3 MERGER. At the Effective Time, Merger Sub shall be merged into
Hambrecht & Quist California and the separate corporate existence of Merger
Sub shall thereupon cease. Hambrecht & Quist California will be the
Surviving Corporation in the merger and the separate corporate existence of
Hambrecht & Quist California shall continue unaffected and unimpaired by
the Merger.
1.4 FURTHER ACTION. If at any time after the Effective Time any further
action is necessary or desirable to carry out the purposes of this Merger
Agreement or to vest the Surviving Corporation with the full right, title
and possession to all assets, property, rights, privileges, immunities,
powers and franchises of either or both of the constituent corporations,
the officers and directors of the Surviving Corporation are fully
authorized (in the name of either or both of the constituent Corporations
or otherwise) to take all such action.
ARTICLE 2
CORPORATE GOVERNANCE MATTERS
The Articles of Incorporation of the Surviving Corporation shall be
amended and restated in full as of the Effective Time as set forth in
Exhibit A attached hereto.
ARTICLE 3
MANNER OF CONVERTING SHARES OF THE CONSTITUENT CORPORATIONS
3.1 EFFECT ON CAPITAL STOCK. As of the Effective Time of the Merger, by
virtue of the Merger and without any action on the part of any holder of
any securities of the Company:
(A) CAPITAL STOCK OF MERGER SUB. All issued and outstanding shares of
capital stock of Merger Sub shall continue to be issued and outstanding and
shall be converted into 10,000 shares of the common stock of the Surviving
Corporation (the "California Common Stock"). Each stock certificate
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of Merger Sub evidencing ownership of any such shares shall continue to evidence
ownership of such shares of California Capital Stock.
(b) CANCELLATION OF CALIFORNIA COMMON STOCK.
(i) All shares of California Common Stock that are owned
directly or indirectly by the Company shall be canceled and no common stock of
Parent or other consideration shall be delivered in exchange therefor.
(ii) Each holder of a certificate representing any shares of
California Common Stock after the Effective Time of the Merger, except
shares of California Common Stock issued upon conversion of shares of
Merger Sub, shall cease to have any rights with respect to such shares,
except the right either to (A) receive the California Merger Consideration
Per Share, (as defined in Section 3.1(c) below) multiplied by the number of
shares represented by such certificate, upon surrender of such
certificate, or (B) to exercise such holder's dissenters' rights as
provided in Section 3. 1 (f) hereof and the California Law.
(c) CONVERSION OF CALIFORNIA COMMON STOCK OR CAPITAL STOCK RIGHTS OF
HAMBRECHT & QUIST CALIFORNIA. Each share of California Common stock, except
canceled shares, Dissenting California Shares (as defined in Section
3.1(f) below) and shares of California Common Stock issued upon conversion
of shares of Merger Sub, but including shares issued upon the exercise of
any Hambrecht & Quist California Option (as defined in Section 3.1(d)
below) prior to the Effective Time of the Merger, that is issued and
outstanding immediately prior to the Effective Time of the Merger shall
automatically be canceled and extinguished and converted, without any
action on the part of the holder thereof, into the right to receive four
(4) shares of Common Stock of Parent ("Group Common Stock") (the "Merger
Consideration Per Share"). All shares of Group Common Stock received
pursuant to this Section 3.1(c) ("California Merger Group Common Stock")
shall be subject to restrictions on transfer of the "Underwriters' Market
Stand-Off" set forth in Exhibit B hereto and each certificate representing
any such share shall carry a legend describing the terms and conditions on
transfer as described in the Underwriters' Market Stand-Off Any reference
to California Merger Group Common Stock, including without limitation
references contained in Section 3.1(d) below, shall be deemed to refer to
Group Common Stock so restricted. The ratio pursuant to which each share
of California Common Stock including assumed convertible and exercisable
securities, will be exchanged for shares of Common Stock of Parent,
determined in accordance with the foregoing provisions, is hereinafter
referred to as the "Exchange Ratio."
(d) ASSUMPTION OF HAMBRECHT & QUIST CALIFORNIA OPTIONS.
(i) At the Effective Time of the Merger, each unexpired and
unexercised option to purchase shares of California Common Stock (a "Hambrecht
& Quist California Option") granted under the stock option plans and agreements
of Hambrecht & Quist California outstanding immediately prior to the Effective
Time of the Merger shall be assumed by Parent (an "Assumed Hambrecht & Quist
California Option") together with the stock option plans under which those
options are outstanding (the "Assumed Option Plans"). Each Hambrecht & Quist
California Option so assumed
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by Parent will continue to have, and be subject to, substantially the same
terms and conditions set forth in the documents governing such Hambrecht &
Quist California Option, including the Assumed Option Plans, immediately
prior to the Effective Time of the Merger, except that (A) such Assumed
Hambrecht & Quist California Option will be exercisable for that number of
whole shares of California Merger Group Common Stock (which shall be
subject to the restrictions on transfer) equal to the product of the number
of shares of California Common Stock that were purchasable under such
Assumed Hambrecht & Quist California Option immediately prior to the
Effective Time of the California Merger multiplied by the Exchange Ratio,
and (B) the per share exercise price for the shares of California Merger
Group Common Stock issuable upon exercise of such Assumed Hambrecht & Quist
California Option will be equal to the quotient obtained by dividing the
exercise price per share of California Common Stock (on an as converted to
Common Stock basis) at which such Assumed Hambrecht & Quist California
Option was exercisable immediately prior to the Effective Time of the
Merger by the Exchange Ratio, rounded up to the nearest whole cent.
Consistent with the terms of the Hambrecht & Quist California Options and
the documents governing such Hambrecht & Quist California Options,
including the Assumed Option Plans, the Merger will not terminate or
accelerate any Assumed Hambrecht & Quist California Option or any right of
exercise, vesting or repurchase relating thereto with respect to shares of
California Merger Group Common Stock acquired upon exercise of the Assumed
Hambrecht & Quist California Option. Holders of Assumed Hambrecht & Quist
California Options will not be entitled to acquire California Common Stock
following the Merger.
(ii) As soon as practicable after the Effective Time of the
Merger, Hambrecht & Quist Group shall issue to each holder of an Assumed
Hambrecht & Quist California Option a document evidencing the stock option
assumption by parent. The right to receive an Assumed Hambrecht & Quist
California Option may not be assigned or transferred, except as provided
under the Assumed Option Plan under which that option was granted. Any
attempted assignment contrary to this Section 3.1(d) shall be null and void.
(iii) It is the intention of the Parties that the
Hambrecht & Quist California Options assumed by Hambrecht & Quist Group
qualify following the Effective Time of the Merger as incentive stock
options as defined in Section 422 of me Internal Revenue Code of 1986, as
amended (the "Code") to the extent the Hambrecht & Quist California Options
qualified as incentive stock options prior to the Effective Time of the
Merger.
(e) CALIFORNIA COMMON STOCK SUBJECT TO REPURCHASE. ALL SHARES OF
California Merger Group Common Stock that are received in the Merger in
exchange for shares of California Common Stock that, under applicable stock
purchase, stock restriction or similar agreements with Hambrecht & Quist
California, are unvested or subject to a repurchase option or other
condition of forfeiture which by its terms does not terminate due to the
Merger ("Hambrecht & Quist California Restricted Stock") will also be
unvested or subject to the same repurchase option or other condition, as
the case may be, and all such repurchase options shall automatically inure
to Parent in the Merger and shall thereafter be exercisable by Parent upon
the same terms and conditions in effect for Hambrecht & Quist California
immediately prior to the Effective Time of the Merger, except that the
shares purchasable under any such repurchase option shall be shares of
Merger Group Common Stock and the price payable by Parent shall be equal to
the quotient determined by dividing the aggregate purchase price at which
the California Common Stock was repurchasable under each applicable
agreement by the Exchange Ratio and rounding the resulting aggregate price
payable by Hambrecht & Quist Group to the nearest whole cent. The
certificates evidencing such shares will be marked with appropriate legends.
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(f) DISSENTERS' RIGHTS. If, as of the Effective Time of the Merger,
holders of California Common Stock have properly exercised and not lost
dissenters' rights ("Dissenting California Shares") in connection with the
Merger under Chapter 13 of the California Law, such Dissenting California
Shares shall not be converted into California Merger Group Common Stock but
shall be converted into the right to receive such consideration as may be
determined to be due with respect to such Dissenting California Shares
pursuant to the California Law. Hambrecht & Quist California shall give
Parent prompt notice of any demand received by Hambrecht & Quist California
to require Hambrecht & Quist California to purchase shares of California
Common Stock, and Parent shall have the right to participate in all
negotiations and proceedings with respect to such demand. Each holder of
Dissenting California Shares (a "Dissenting California Security Holder")
who, pursuant to the provisions of the California Law, becomes entitled to
payment of the value of shares of California Common Stock shall receive
payment therefor (but only after the value therefor shall have been agreed
upon or finally determined pursuant to such provisions). In the event of
a legal obligation, after the Effective Time of the Merger, to deliver
shares of Merger Group Common Stock to any holder of shares of California
Common Stock who shall have failed to make an effective purchase demand or
shall have lost his status as a Dissenting California Security Holder,
Parent shall issue and deliver, upon surrender by such Dissenting
California Security Holder of his certificate or certificates representing
shares of California Common Stock, the shares of California Merger Group
Common Stock to which such Dissenting California Security Holder is then
entitled under this Section 3.1.
3.2 SURRENDER OF CERTIFICATES; PAYMENT OF MERGER CONSIDERATION.
(a) EXCHANGE AGENT. Prior to the Closing Date, Parent shall appoint a
third party to act as exchange agent (the "Exchange Agent") in the Mergers.
(b) HAMBRECHT & QUIST GROUP TO PROVIDE COMMON STOCK AND CASH.
Promptly after the earlier of (i) the Effective Date of this Merger and
(ii) the effective Date of the LP Merger (as defined in the Reorganization
Agreement) (but in no event later than thirty (30) business days
thereafter), Parent shall make available for exchange in accordance with
this Article 2, through such reasonable procedures as Parent may adopt,
the California Merger Group Common Stock issuable pursuant to Section 3.1
in exchange for outstanding shares of California Common Stock.
(c) EXCHANGE PROCEDURES FOR CALIFORNIA COMMON STOCK. Within thirty
(30) calendar days after the Effective Time of the Merger, the Exchange
Agent shall mail to each holder of record of a certificate or certificates
that immediately prior to the Effective Time of the Merger represented
outstanding shares of California Common Stock (the "California
Certificates") whose interests are being converted into California Merger
Group Common Stock pursuant to Section 3.1 hereof (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk
of loss and title to the California Certificates shall pass, only upon
delivery of the California Certificates to the Exchange Agent and shall be
in such form and have such other provisions as Hambrecht & Quist Group may
reasonably specify) and (ii) instructions for use in effecting the
surrender of the California Certificates in exchange for California Merger
Group Common Stock. Upon surrender of a California Certificate for
cancellation to the Exchange Agent or to such other agent or agents as may
be appointed by Parent, together with such
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letter of transmittal, duly executed and completed in accordance with the
instructions thereto, the holder of such California Certificate shall be
entitled to receive in exchange therefor the number of shares of California
Merger Group Common Stock to which the holder of such certificate is
entitled pursuant to Section 3.1 hereof. The California Certificate so
surrendered shall forthwith be canceled. In the event of a transfer of
ownership of California Common Stock that is not registered on the transfer
records of Hambrecht & Quist California, the appropriate number of shares
of California Merger Group Common Stock may be delivered to a transferee if
the California Certificate representing such California Common Stock is
presented to the Exchange Agent and accompanied by all documents required
to evidence and effect such transfer and to evidence that any applicable
stock transfer taxes have been paid. Until surrendered as contemplated by
this Section 3.2, each California Certificate shall be deemed at all times
after the Effective Time of the Merger to represent the right to receive
upon such surrender the number of shares of California Merger Group Common
Stock as provided by this Article 3 and the provisions of the California
Law but shall, subject to Section 3.1(f), have no other right; provided,
however, that customary and appropriate certifications and indemnities
allowing exchange against lost or destroyed certificates shall be provided;
and provided further that nothing in this Section 3.2(c) shall require
Parent to issue California Merger Group Common Stock to any holder of
California Common Stock who shall fail to surrender a certificate
representing such shares or the certification and indemnities relating to a
lost certificate. Notwithstanding the foregoing, neither the Exchange
Agent nor any Party hereto shall be liable to a holder of shares of
California Common Stock for any California Merger Group Common Stock
delivered to a public official pursuant to applicable abandoned property,
escheat and similar laws. Promptly following the date that is six (6)
months after the California Effective Date, the Exchange Agent shall return
to the Surviving Corporation all shares of California Merger Group Common
Stock in its possession relating to the transactions described in his
Agreement, and the Exchange Agent's duties shall terminate. Thereafter
each holder of a California Certificate may surrender such Certificate to
the Surviving Corporation and (subject to applicable abandoned property,
escheat and similar laws) receive in exchange therefor the shares of
California Merger Group Common Stock to which such holder is entitled
pursuant hereto.
(d) NO FURTHER OWNERSHIP RIGHTS IN CAPITAL STOCK OF HAMBRECHT & QUIST
CALIFORNIA. All California Merger Group Common Stock delivered upon the
surrender for exchange of shares of California Common Stock in accordance
with the terms hereof shall be deemed to have been delivered in full
satisfaction of all rights pertaining to such shares of California Common
Stock. There shall be no further registration of transfers on the stock
transfer books of the Surviving Corporation of the shares of California
Common Stock which were outstanding immediately prior to the Effective Time
of the California Merger. If, after the Effective Time of the Merger,
California Certificates are presented to the Surviving Corporation for any
reason, they shall be canceled and exchanged as provided in this Article 3.
ARTICLE 4
TERMINATION AND AMENDMENT
4.1 TERMINATION. Notwithstanding the approval of this Merger Agreement by
the sole stockholder of Merger Sub and the shareholders of Hambrecht &
Quist California, this Merger
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<PAGE>
Agreement shall terminate forthwith in the event that the Reorganization
Agreement shall be terminated as therein provided.
4.2 AMENDMENT. This Merger Agreement may be amended by the parties hereto
at any time before or after approval hereof by the shareholders of either
Merger Sub or Hambrecht & Quist California, but, after any such approval,
no amendment shall be made without the further approval of such
shareholders if such amendment would (i) have a material adverse effect on
the shareholders of either Merger Sub or Hambrecht & Quist California, (ii)
change any of the principal terms of the Merger Agreement, or (iii) change
any time of the Articles of Incorporation of the Surviving Corporation.
This Merger Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto.
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<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Merger Agreement as
of the date first written above.
Hambrecht & Quist Group, H & Q Reorganization Subsidiary, Inc.,
a California corporation a California corporation
By: _____________________ By: ________________________
Daniel H. Case III, Daniel H. Case III,
President and Chief Executive President and Chief Executive
Officer Officer
By: ______________________ By: _______________________
Steven N. Machtinger, Steven N. Machtinger,
Secretary Secretary
-8-
<PAGE>
EXHIBIT A
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
Hambrecht & Quist Group
ONE. The name of this corporation is Hambrecht & Quist California, Inc.
TWO. The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General
Corporation Law of California other than the banking business, the trust
company business or the practice of a profession permitted to be
incorporated by the California Corporations Code.
THREE. This corporation is authorized to issue only one class of
stock, designated "Common Stock" and the total number of shares which this
corporation is authorized to issue is ten thousand (10,000).
FOUR. (a) The liability of the directors of the corporation
for monetary damages shall be eliminated to the fullest extent permissible
under California law.
(b) The corporation is authorized to provide indemnification
of agents (as defined in Section 317 of the California Corporations Code)
through bylaw provisions, agreements with the agents, vote of shareholders
or disinterested directors, or otherwise, in excess of the indemnification
otherwise permitted by Section 317 of the limits set forth in Section 204
of the California Corporations Code with respect to actions for breach of
duty to the corporation or its shareholders. The corporation is further
authorized to provide insurance for agents as set forth in Section 317 of
the California Corporations Code, provided that, in cases where the
corporation owns all or a portion of the shares of the company issuing the
insurance policy, the company and/or the policy must meet one of the two
sets of conditions set forth in Section 317, as amended.
(c) Any repeal or modification of the foregoing provisions of this
Article Four by the shareholders of this corporation shall not adversely
affect any right or protection of an agent of this corporation existing at
the time of such repeal or modification.
<PAGE>
EXHIBIT B
UNDERWRITERS' MARKET STAND-OFF
In addition to other applicable restrictions, all shares of Common
Stock (i) issued by Hambrecht & Quist Group in connection with the Mergers
or (ii) issuable upon the exercise of options or other rights to acquire
such shares assumed by Hambrecht & Quist Group in connection with the
Mergers (together, the "Merger Shares") shall be issued subject to the
resale restrictions set forth in this Exhibit. All capitalized terms and
entity names used in this Exhibit and not otherwise defined shall have the
meanings ascribed to them in the Agreement and Plan of Reorganization dated
June 10, 1996 to which this Exhibit is attached.
1. EIGHTEEN MONTH LOCKUP. For a period of eighteen (18) months after the date
(the "Trade Date") of the initial public offering (the "Offering") of
Hambrecht & Quist Group Common Stock ("Common Stock"), no person holding
Merger Shares or having the right to obtain Merger Shares as described in
clause (ii) of the preceding paragraph (each such person, a "Holder")
shall, directly or indirectly, sell, offer, contract to sell, transfer the
economic risk of ownership in, make any short sale, pledge or otherwise
dispose of any Merger Shares or any securities convertible into or
exchangeable or exercisable for Merger Shares, without the prior written
consent of each of (i) Hambrecht & Quist Group, (ii) Hambrecht & Quist LLC
and (iii) Morgan Stanley & Co. Incorporated.
2. EXCEPTION FOR SHARES ACQUIRED AFTER OFFERING. The foregoing restrictions
shall not apply to securities of Hambrecht & Quist Group acquired after
the Trade Date except to the extent that such securities are acquired
pursuant to the exercise, conversion, or exchange of securities of
Hambrecht & Quist Group held immediately prior to the Trade Date.
3. SCHEDULED PARTIAL RELEASES. Notwithstanding the restrictions set forth in
Section 1, a portion of the Merger Shares held by each Holder shall be
released from such restrictions as follows:
(a) FIRST RELEASE. On the date six months following the Trade Date, a
number of Merger Shares equal to the greater of (i) 10,000 or (ii) five
percent (5%) of the outstanding Common Stock owned directly by such Holder
immediately prior to the record date relating to the votes of
securityholders with respect to the Mergers, (the "Owned Shares") shall be
permanently released from the restrictions of Section 1.
(b) SECOND RELEASE. On the date twelve months following the Trade Date, an
additional number of Merger Shares equal to the greater of (i) 10,000 or
(ii) five percent (5%) of the Owned Shares shall be permanently released
from the restrictions of Section 1.
(c) AGGREGATION WITH TRANSFEREES. In the event that a Holder transfers
Merger Shares to a permitted transferee pursuant to Section 4, below, the
number of Merger Shares to be released from the restrictions of Section 1
under this Section 3 shall be calculated without regard to such transfers
and the particular Merger Shares held or transferred by the transferring
Holder (the "Transfer Merger Shares") to be released shall be allocated
among the Holder and all such transferees (and transferees of
<PAGE>
such transferees, if any) of such Holder pro rata in proportion to the
number of Transfer Merger Shares held by each of them.
4. CERTAIN PERMITTED TRANSFERS. Notwithstanding the foregoing, (i) if the
Holder is an individual, he or she may transfer any shares of Merger Shares
or securities convertible into or exchangeable or exercisable for the Merger
Shares either during his or her lifetime or on death by will or intestacy to
his or her immediate family or to a trust the beneficiaries of which are
exclusively the Holder and/or a member or members of his or her immediate
family, (ii) if the Holder is a partnership, it may transfer any shares of
Merger Shares or securities convertible into or exchangeable or exercisable
for the Merger Shares to its constituent partners, retired partners or the
estates of constituent partners or retired partners (including partners which
are corporations and which may transfer such securities to their respective
shareholders) or (iii) if the Holder is a limited liability company, it may
transfer any shares of Merger Shares or securities convertible into or
exchangeable or exercisable for the Merger Shares to its members (including
members which are corporations and which may transfer such securities to
their respective shareholders); PROVIDED, HOWEVER, that prior to any such
transfer each transferee (including shareholders of corporate transferees to
whom such shares are subsequently transferred) shall execute an agreement,
satisfactory to Morgan Stanley & Co. Incorporated, pursuant to which each
transferee shall agree to receive and hold such shares of Merger Shares, or
securities convertible into or exchangeable or exercisable for the Merger
Shares, subject to the provisions hereof, and there shall be no further
transfer except in accordance with the provisions hereof. For the purposes of
this paragraph, "immediate family" shall mean spouse, lineal descendant,
father, mother, brother or sister of the transferor.
5. BINDING ON SUCCESSORS: STOP TRANSFER INSTRUCTIONS: LEGEND. The restrictions
contained herein shall be binding upon the Holder's heirs, legal
representatives, successors and assigns. Hambrecht & Quist Group shall
issue stop transfer instructions to its transfer agent against the transfer
of Merger Shares except in compliance with the terms of this Exhibit. Each
certificate evidencing Merger Shares shall be imprinted with a legend
substantially as follows:
THE SHARES REPRESENTED BY THIS CERTIFICATE, ARE SUBJECT TO A
LOCKUP PERIOD OF EIGHTEEN MONTHS FOLLOWING THE PUBLIC OFFERING OF
THE ISSUERS COMMON STOCK PURSUANT TO THE FIRST REGISTRATION
STATEMENT OF THE ISSUER FILED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AS SET FORTH IN EXHIBIT 2.1 (c) TO THAT CERTAIN AGREEMENT
AND PLAN OF REORGANIZATION DATED JUNE 10, 1996, A COPY OF WHICH
MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER SUCH LOCKUP
PERIOD IS BINDING ON TRANSFEREES OF THESE SHARES.
6. THIRD PARTY BENEFICIARIES. Hambrecht & Quist LLC, Morgan Stanley & Co.
Incorporated and Smith Barney Inc., as managing underwriters of the
Offering, are hereby expressly made third party beneficiaries entitled to
the benefits of this Underwriters' Market Stand-off.
-2-
<PAGE>
HAMBRECHT & QUIST GROUP
(A CALIFORNIA CORPORATION)
OFFICERS' CERTIFICATE OF APPROVAL OF
AGREEMENT OF MERGER
Daniel H. Case III and Steven N. Machtinger hereby certify that:
1. They are the President and Secretary, respectively, of Hambrecht &
Quist Group, a California corporation (the "Corporation").
2. The Agreement of Merger to which this Certificate is attached (the "Merger
Agreement") has been duly approved by the Board of Directors of the
Corporation.
3. Pursuant to Section 1201(b) of the California General Corporation Law,
no approval of the outstanding shares of the Corporation is required.
4. The required vote of the stockholders of Hambrecht & Quist Group, Inc., a
Delaware corporation, the parent of the Corporation was obtained.
<PAGE>
Each of the undersigned declares under penalty of perjury under the
laws of the State of California that the matters set forth in this
Certificate are true and correct of his own knowledge.
Executed at San Francisco, California on June _____, 1996.
______________________
Daniel H. Case III,
President
______________________
Steven N. Machtinger,
Secretary
<PAGE>
H & Q REORGANIZATION SUBSIDIARY, INC.
(A CALIFORNIA CORPORATION)
OFFICERS' CERTIFICATE OF APPROVAL OF
AGREEMENT OF MERGER
Daniel H. Case III and Steven N. Machtinger hereby certify that:
1. They are the President and Secretary, respectively, of H & Q
Reorganization Subsidiary, Inc., a California corporation (the
"Corporation").
2. The Agreement of Merger to which this Certificate is attached (the "Merger
Agreement") has been duly approved by the Board of Directors and
Shareholders of the Corporation.
3. The Corporation has one class of stock outstanding designated "Common
Stock", of which [1,000] shares were outstanding and entitled to vote on
the merger.
4. The principal terms of the Merger Agreement were approved by the
Corporation by a vote of a number of shares of each class which equaled
or exceeded the vote required. The vote required was greater than 50%
of the outstanding shares of Common Stock.
5. The required vote of the stockholders of Hambrecht & Quist Group, Inc., a
Delaware corporation, the parent of the Corporation was obtained.
<PAGE>
Each of the undersigned declares under penalty of perjury under the
laws of the State of California that the matters set forth in this
Certificate are true and correct of his own knowledge.
Executed at San Francisco, California on June , 1996.
----
________________________
Daniel H. Case III,
President
________________________
Steven N. Machtinger,
Secretary
<PAGE>
Exhibit 1.1(b)(1)
Agreement of Merger between LP and Hambrecht & Quist California
OFFICER'S CERTIFICATE
HAMBRECHT & QUIST GROUP, INC.
I, Daniel H. Case III, the President of Hambrecht & Quist Group, Inc.,
pursuant to Section 102(a)(1) of the Delaware General Corporation Law and in
connection with the Amended and Restated Certificate of Incorporation of
Hambrecht & Quist Group, Inc., attached hereto to be filed in connection with
the Agreement of Merger between this corporation and Hambrecht & Quist, L.P., a
California limited partnership, which will, among other things, change the name
of this corporation from "Hambrecht & Quist Group, Inc." to "Hambrecht & Quist
Group", I do hereby certify that Hambrecht & Quist Group, Inc. has total assets
in excess of 10 million dollars.
Executed this_________ day of ________________ ,1996 at San Francisco,
California.
By: ___________________________
---------------------------
Daniel H. Case III, President
Under penalty of perjury, this signature constitutes acknowledgement that
this instrument is the act and deed of Hambrecht & Quist Group, Inc., and that
the facts stated herein are true.
By: ___________________________
---------------------------
Daniel H. Case III, President
ATTEST:
________________________________
- --------------------------------
Steven N. Machtinger, Secretary
<PAGE>
CERTIFICATE OF THE SECRETARY
OF
HAMBRECHT & QUIST GROUP, INC.,
a Delaware Corporation.
I, Steven Machtinger, the Secretary of Hambrecht & Quist Group, Inc.,
hereby certify that the Agreement of Merger to which this certificate is
attached, after having been first duly signed on behalf of the corporation by
the President and Secretary of said corporation, was duly approved and adopted
by the written consent of stockholders holding a majority of the outstanding
stock entitled to vote thereon.
Executed on this _________________ day of July, 1996.
---------------------------
Steven N. Machtinger
Secretary
<PAGE>
AGREEMENT OF MERGER
Merging
HAMBRECHT & QUIST, L.P., A CALIFORNIA LIMITED PARTNERSHIP
with and into
HAMBRECHT & QUIST GROUP, INC., A DELAWARE CORPORATION
(PURSUANT TO SECTION 263 OF THE GENERAL CORPORATION LAW OF DELAWARE)
This AGREEMENT OF MERGER (the "Merger Agreement"), is made and entered into
as of June 10, 1996 by and between Hambrecht & Quist Group, Inc., a Delaware
corporation ("Hambrecht & Quist Group", the "Company" or the "Surviving
Corporation") and Hambrecht & Quist, L.P., a California limited partnership
("LP") (each, a "Party" together, the "Parties" or "Constituent Entities").
RECITALS
A. Hambrecht & Quist Group, Hambrecht & Quist Group, a California
corporation ("Hambrecht & Quist California"), LP, and H & Q Reorganization
Subsidiary, Inc., a California corporation, have entered into that certain
Agreement and Plan of Reorganization dated June 10, 1996 (the "Reorganization
Agreement"), providing, among other things, for the execution and filing of this
Merger Agreement and the merger of LP with and into Hambrecht & Quist Group upon
the terms set forth in the Reorganization Agreement and this Merger Agreement
(the "Merger").
B. The board of directors of Hambrecht & Quist Group deems it advisable
and in the best interests of its stockholders and Hambrecht & Quist California,
the General Partner of LP (the "General Partner"), deems it advisable and in the
best interests of LP and its partners that LP be merged with and into Hambrecht
& Quist Group.
AGREEMENT
NOW, THEREFORE, in consideration of the covenants, promises and mutual
agreements contained in this Merger Agreement, the Constituent Entities hereby
agree that LP shall be merged with and into Hambrecht & Quist Group in
accordance with the Reorganization Agreement and the provisions of the laws of
the State of Delaware and the laws of the State of California, upon the terms
and subject to the conditions set forth as follows:
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<PAGE>
ARTICLE I
THE MERGER
1.1 FILING. This Merger Agreement shall be filed with the Secretary
of State of the State of Delaware and a Certificate of Merger shall be filed
with the Secretary of State of the State of California at the time specified in
the Reorganization Agreement.
1.2 EFFECTIVENESS. The Merger shall become effective upon the filing
of this Merger Agreement with the Secretary of State of the State of Delaware
(the "Effective Time").
1.3 MERGER. At the Effective Time, LP shall be merged into Hambrecht
& Quist Group and the separate legal existence of LP shall thereupon cease.
Hambrecht & Quist Group will be the Surviving Corporation in the merger.
1.4 FURTHER ACTION. If at any time after the Effective Time any
further action is necessary or desirable to carry out the purposes of this
Merger Agreement or to vest the Surviving Corporation with the full right, title
and possession to all assets, property, rights, privileges, immunities, powers
and franchises of either or both of the Constituent Entities, the officers and
directors of the Surviving Corporation are fully authorized (in the name of
either or both of the Constituent Entities or otherwise) to take all such
action.
ARTICLE 2
CORPORATE GOVERNANCE MATTERS
The Certificate of Incorporation of the Surviving Corporation shall be
amended and restated in full as of the Effective Time as set forth in Exhibit A
attached hereto.
ARTICLE 3
MANNER OF CONVERTING SECURITIES OF THE CONSTITUENT ENTITIES
3.1 EFFECT ON PARTNERSHIP INTERESTS. As of the Effective Time of the
Merger, by virtue of the Merger and without any action on the part of any
partner, limited or general, of LP:
(a) CANCELLATION OF GENERAL PARTNERSHIP INTEREST: CONVERSION OF
GENERAL PARTNERSHIP. The General Partner shall cease to have any rights with
respect to its general partnership interest in LP except the right to receive
25,872 shares of Common Stock of the Company ("Group Common Stock") (the "LP
Merger General Partner Consideration Per Share"). All shares of Hambrecht &
Quist Group Common Stock received pursuant to this Section 3.1(a) ("LP Merger
General Partner Group Common Stock") shall be subject to the terms and
conditions on transfer of the "Underwriters' Market Stand-Off" set forth in
Exhibit B and each such share shall carry a legend describing the terms and
conditions on transfer as
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<PAGE>
described in the Underwriters' Market Stand-Off. Any reference herein to LP
Merger General Partner Group Common Stock shall be deemed to refer to Group
Common Stock so restricted.
(b) CANCELLATION OF LP UNITS. Each holder of a Class A limited
partnership Unit ("LP Unit") (as defined in that certain Agreement and Articles
of Limited Partnership by and among General Partner and the limited partners of
LP dated November 1, 1993, as amended), after the Effective Time of the Merger
shall cease to have any rights with respect to such LP Unit, except the right
either to receive the LP Merger Consideration Per Share, as defined in Section
3.1(c) below, plus any cash in lieu of fractional shares pursuant to Section
3.1(e) below, upon delivery of written notice of ownership and surrender of such
Units, or to exercise such holder's dissenters' rights as provided in Section
3.1(d) hereof and the California Revised Limited Partnership Act ("CRLPA").
(c) CONVERSION OF LP UNITS. Each LP Unit outstanding prior to the
Effective Time of the LP Merger except Dissenting LP Units (as defined in
Section 3.1(d) below) shall automatically be canceled and extinguished and
converted, without any action on the part of the holder thereof, into the right
to receive twenty four (24) shares of Group Common Stock (the "LP Merger
Consideration Per Share"). All shares of Group Common Stock received pursuant
to this Section 3.1(c) ("LP Merger Group Common Stock") shall be subject to
terms and conditions on transfer of the Underwriters' Market Stand-Off and each
such share shall carry a legend describing the terms and conditions on transfer
as described in the Underwriters' Market Stand-Off. Any reference herein to LP
Merger Group Common Stock shall be deemed to refer to Group Common Stock so
restricted. The ratio pursuant to which each LP Unit will be exchanged for
shares of Hambrecht & Quist Group, determined in accordance with the foregoing
provisions, is hereinafter referred to as the "LP Exchange Ratio."
(d) DISSENTERS' RIGHTS. If, as of the Effective Time of the Merger,
holders of LP Units have properly exercised and not lost dissenters' rights
("Dissenting LP Units") in connection with the LP Merger under Article 7.6 of me
CRLPA, such Dissenting LP Units shall not be converted into LP Merger Group
Common Stock but shall be converted into the right to receive such consideration
as may be determined to be due with respect to such Dissenting LP Units pursuant
to the CRLPA. LP shall give Hambrecht & Quist Group prompt notice of any demand
received by LP to require LP to purchase LP Units, and Hambrecht & Quist Group
shall have the right to participate in all negotiations and proceedings with
respect to such demand. Each holder of Dissenting LP Units (a "Dissenting LP
Unitholder") who, pursuant to the provisions of the CRLPA, becomes entitled to
payment of the value of LP Units shall receive payment therefor (but only after
the value therefor shall have been agreed upon or finally determined pursuant to
such provisions). In the event of a legal obligation, after the Effective Time
of the Merger, to deliver shares of LP Merger Group Common Stock to any holder
of LP Units who shall have failed to make an effective purchase demand or shall
have lost his status as a Dissenting LP Unitholder, Hambrecht & Quist Group
shall issue and deliver, upon delivery by such Dissenting LP Unitholder of a
written notice of the ownership and surrender of such LP Units, the shares of LP
Merger Group Common Stock to which such Dissenting LP Unitholder is then
entitled under this Section 3.1.
(e) FRACTIONAL SHARES. No fractional shares of LP Merger Group
Common Stock shall be issued, but in lieu thereof each holder of LP Units who
would otherwise be entitled to receive a fraction of a share of L.P Merger Group
Common Stock shall receive from Hambrecht & Quist Group an amount of cash equal
to the price at which shares of Group Common Stock are offered to the public
pursuant to Hambrecht & Quist Group's initial public offering multiplied by the
fraction of a share of LP Merger Group Common Stock to which such holder would
otherwise be entitled. The fractional interests of each
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<PAGE>
holder of LP Units shall be aggregated, so that no holder of LP Limited
Partnership Units shall receive cash in an amount greater than the value of one
(1) full share of LP Merger Group Common Stock.
3.2 EXCHANGE OF CERTIFICATES; EXCHANGE OF INTERESTS.
(a) EXCHANGE AGENT. Prior to the Closing Date, Hambrecht & Quist
Group shall appoint a third party to act as exchange agent (the "Exchange
Agent") in the Merger.
(b) HAMBRECHT & QUIST GROUP TO PROVIDE COMMON STOCK AND CASH.
Promptly after the earlier of (i) the Effective Date of the California Merger as
defined in the Reorganization Agreement and (ii) the Effective Date of the LP
Merger (but in no event later than thirty (30) business days thereafter),
Hambrecht & Quist Group shall make available for exchange in accordance with
this Article 3, through such reasonable procedures as Hambrecht & Quist Group
may adopt, the LP Merger Group Common Stock issuable pursuant to Section 3.1 in
exchange for LP Units, and the LP Merger General Partner Group Common Stock
issuable pursuant to Section 3.1 in exchange for the general partnership
interest in LP, and cash in an amount sufficient to satisfy any obligations with
respect to fractional shares pursuant to Section 3.1(e).
(c) EXCHANGE PROCEDURES FOR LP GENERAL PARTNER. Within thirty (30)
calendar days after the Effective Time of the LP Merger, the Exchange Agent
shall deliver to the General Partner, whose interest is being converted into LP
Merger General Partner Group Common Stock pursuant to Section 3.1 hereof
certificates representing the total number of LP Merger General Partner Group
Common Stock to which the holder of such general partnership interest is
entitled pursuant to Section 3.1 hereof. The general partnership interest shall
forthwith be canceled. Until the shares are delivered as contemplated by this
Section 3.2, the general partnership interest in LP shall be deemed at all times
after the Effective Time of the Merger to represent the right to receive the
number of shares of LP Merger General Partner Group Common Stock as provided by
this Article 3 and the provisions of the CRLPA but shall have no other right.
(d) EXCHANGE PROCEDURES FOR LP UNITS. Within thirty (30) calendar
days after the Effective Time of the Merger, the Exchange Agent shall mail to
each holder of record of LP Units immediately prior to the Effective Time of the
Merger whose interests are being converted into LP Merger Group Common Stock
pursuant to Section 3.1 hereof (i) a letter of transmittal and (ii) instructions
for use in effecting the surrender of the LP Units in exchange for LP Merger
Group Common Stock. Upon delivery of a written notice of ownership and
surrender of LP Units to the Exchange Agent or to such other agent or agents as
may be appointed by Hambrecht & Quist Group, together with such letter of
transmittal, duly executed and completed in accordance with the instructions
thereto, the holder of any such LP Units shall be entitled to receive in
exchange therefor the number of shares of LP Merger Group Common Stock, and cash
in lieu of any fractional LP Units, to which the holder of such LP Units is
entitled pursuant to Section 3.1 hereof The LP Unit so surrendered shall
forthwith be canceled. In the event of a transfer of ownership of an LP Unit
that is not registered on the transfer records of LP, the appropriate number of
shares of LP Merger Group Common Stock may be delivered to a transferee if
written notice of the ownership and surrender of the LP Unit is presented to the
Exchange Agent and accompanied by all documents required to evidence and effect
such transfer and to evidence that any applicable transfer taxes have been paid.
Until surrendered as contemplated by this Section 3.2, each LP Unit shall be
deemed at
-5-
<PAGE>
all times after the Effective Time of the Merger to represent the right to
receive upon written notice of such surrender the number of shares of LP Merger
Group Common Stock, and cash in lieu of any fractional LP Units, as provided by
this Article 3 and the provisions of the CRLPA but shall, subject to Section
3.1(d), have no other right, provided that nothing in this Section 3.2(d) shall
require Hambrecht & Quist Group to exchange LP Merger Group Common Stock to any
holder of LP Units who shall fail to deliver a written notice of the surrender
of such LP Units. Notwithstanding the foregoing, neither the Exchange Agent nor
any Party hereto shall be liable to a holder of shares of LP Units for any LP
Merger Group Common Stock delivered to a public official pursuant to applicable
abandoned property, escheat and similar laws. Promptly following the date that
is six (6) months after the Effective Time, the Exchange Agent shall return to
the Hambrecht & Quist Group all shares of LP Merger Group Common Stock in its
possession relating to the transactions described in this Agreement, and the
Exchange Agent's duties shall terminate. Thereafter, each holder of an LP Unit
may deliver written notice of the surrender of such Unit to Hambrecht & Quist
Group and (subject to applicable abandoned property, escheat and similar laws)
receive in exchange therefor the shares of LP Merger Group Common Stock to which
such holder is entitled pursuant hereto.
(e) NO FURTHER OWNERSHIP RIGHTS IN GENERAL PARTNERSHIP INTEREST IN
LP. LP Merger General Partner Group Common Stock delivered in exchange for the
general partnership interest of LP in accordance with the terms hereof shall be
deemed to have been delivered in full satisfaction of all rights pertaining to
such general partnership interest in LP.
(f) NO FURTHER OWNERSHIP RIGHTS IN LIMITED PARTNERSHIP UNITS OF LP.
LP Merger Group Common Stock delivered upon the delivery of written notice of
surrender of LP Units in accordance with the terms hereof shall be deemed to
have been delivered in full satisfaction of all rights pertaining to such LP
Units. If, after the Effective Time of the LP Merger, written notice of
surrender of outstanding LP Units is given to Hambrecht & Quist Group, such LP
Units shall be canceled and exchanged as provided in this Article 3.
ARTICLE 4
TERMINATION AND AMENDMENT
4.1 TERMINATION. Notwithstanding the approval of this Merger
Agreement by the limited partners of LP and stockholders of Hambrecht & Quist
Group, this Merger Agreement shall terminate forthwith in the event that the
Reorganization Agreement shall be terminated as therein provided.
4.2 AMENDMENT. This Merger Agreement may be amended by the parties
hereto at any time before or after approval hereof by the limited partners of LP
or the stockholders Hambrecht & Quist California, but, after any such approval,
no amendment shall be made without the further approval of such shareholders if
such amendment would (i) have a material adverse effect on the limited partners
of either LP or stockholders of Hambrecht & Quist Group, (ii) change any of the
principal terms of the Merger Agreement. This Merger Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Merger Agreement
as of the date first written above.
Hambrecht & Quist Group, H & Q Reorganization Subsidiary, Inc.,
a California corporation a California corporation
By: By:
--------------------------------- -----------------------------------
Daniel H. Case III Daniel H. Case, III
President and Chief Executive President and Chief Executive
Officer Officer
By: By:
--------------------------------- -----------------------------------
Steven N. Machtinger, Steven N. Machtinger,
Secretary Secretary
Under penalty of perjury, this signature constitutes the acknowledgment
that this instrument is the act and deed of Hambrecht & Quist Group, Inc., and
that the facts stated herein are true.
By:
----------------------------------
Daniel H. Case, III
President and Chief Executive
Officer
ATTEST:
- -----------------------------------
Steven N. Machtinger,
Secretary
-7-
<PAGE>
EXHIBIT A
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
HAMBRECHT & QUIST GROUP, INC.
ONE. The name of this corporation is Hambrecht & Quist Group.
TWO. The address of the corporation's registered office in the State
of Delaware is 1209 Orange Street, in the City of Wilmington, County of New
Castle, Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.
THREE. The purpose of the corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of Delaware.
FOUR. (a) CLASSES OF STOCK AUTHORIZED. The corporation is
authorized to issue two classes of stock to be designated, respectively, "Common
Stock" and "Preferred Stock." The total number of shares of Common Stock that
the corporation is authorized to issue is 100,000,000, with a par value of $0.01
per share. The total number of shares of Preferred Stock that the corporation
is authorized to issue is 5,000,000 with a par value of $0.01 per share. The
shares of Common Stock may be issued from time to time for such consideration as
the board of directors may determine.
(b) DESIGNATION OF FUTURE SERIES OF PREFERRED STOCK. The
Board of Directors is authorized, subject to any limitations prescribed by
the law of the State of Delaware, to provide in a resolution or resolutions
for the issuance of the shares of Preferred Stock in one or more series, and,
by filing a Certificate of Designation pursuant to the applicable law of the
State of Delaware, to establish from time to time the number of shares to be
included in each such series, to fix the designation, powers, preferences and
rights of the shares of each such series and any qualifications, limitations
or restrictions thereof, and to increase or decrease the number of shares of
any such series (but not below the number of shares of such series then
outstanding). The number of authorized shares of Preferred Stock may be
increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the
Stock of the Company entitled to a vote, unless a vote of any other holders
is required pursuant to a Certificate of Designation establishing a series of
Preferred Stock.
(c) VOTING RIGHTS OF COMMON STOCK. Each holder of shares
of Common Stock shall be entitled to one vote for each share of Common Stock
held of record on all matters on which the holders of Common Stock are entitled
to vote.
<PAGE>
FIVE. In furtherance and not in limitation of the powers conferred by
statute, the board of directors of the corporation is expressly authorized to
adopt, amend or repeal the Bylaws of the corporation.
SIX. Elections of directors need not be by written ballot unless the
Bylaws of the corporation shall so provide.
SEVEN. (a) LIMITATION OF DIRECTOR'S LIABILITY. To the fullest
extent permitted by the General Corporation Law of Delaware as the same exists
or as may hereafter be amended, a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director.
(b) INDEMNIFICATION OF CORPORATE AGENTS. The corporation
shall indemnify to the fullest extent permitted by law any person made or
threatened to be made a party to an action or proceeding, whether criminal,
civil, administrative or investigative, by reason of the fact that he, his
testator or intestate is or was a director, officer or employee of the
corporation or any predecessor of the corporation or serves or served at any
other enterprise as a director, officer or employee at the request of the
corporation or any predecessor to the corporation.
(c) REPEAL OR MODIFICATION. Neither any amendment or
repeal of this Article Seven, nor the adoption of any provision of this
corporation's Certificate of Incorporation inconsistent with this Article Seven,
shall eliminate or reduce the effect of this Article Seven, in respect of any
matter occurring, or any action or proceeding accruing or arising or that, but
for this Article Seven, would accrue or arise, prior to such amendment, repeal
or adoption of an inconsistent provision.
-2-
<PAGE>
EXHIBIT B
UNDERWRITERS' MARKET STAND-OFF
In addition to other applicable restrictions, all shares of Common
Stock (i) issued by Hambrecht & Quist Group in connection with the Mergers or
(ii) issuable upon the exercise of options or other rights to acquire such
shares assumed by Hambrecht & Quist Group in connection with the Mergers
(together, the "Merger Shares") shall be issued subject to the resale
restrictions set forth in this Exhibit. All capitalized terms and entity names
used in this Exhibit and not otherwise defined shall have the meanings ascribed
to them in the Agreement and Plan of Reorganization dated June 10, 1996 to which
this Exhibit is attached.
1. EIGHTEEN MONTH LOCKUP. For a period of eighteen (18) months after the
date (the "Trade Date") of the initial public offering (the "Offering") of
Hambrecht & Quist Group Common Stock ("Common Stock"), no person holding Merger
Shares or having the right to obtain Merger Shares as described in clause (ii)
of the preceding paragraph (each such person, a "Holder") shall, directly or
indirectly, sell, offer, contract to sell, transfer the economic risk of
ownership in, make any short sale, pledge or otherwise dispose of any Merger
Shares or any securities convertible into or exchangeable or exercisable for
Merger Shares, without the prior written consent of each of (i) Hambrecht &
Quist Group, (ii) Hambrecht & Quist LLC and (iii) Morgan Stanley & Co.
Incorporated.
2. EXCEPTION FOR SHARES ACQUIRED AFTER OFFERING. The foregoing restrictions
shall not apply to securities of Hambrecht & Quist Group acquired after the
Trade Date except to the extent that such securities are acquired pursuant to
the exercise, conversion, or exchange of securities of Hambrecht & Quist Group
held immediately prior to the Trade Date.
3. SCHEDULED PARTIAL RELEASES. Notwithstanding the restrictions set forth
in Section 1, a portion of the Merger Shares held by each Holder shall be
released from such restrictions as follows:
(a) FIRST RELEASE. On the date six months following the Trade Date, a
number of Merger Shares equal to the greater of (i) 10,000 or (ii) five percent
(5%) of the outstanding Common Stock owned directly by such Holder immediately
prior to the record date relating to the votes of securityholders with respect
to the Mergers, (the "Owned Shares") shall be permanently released from the
restrictions of Section 1.
(b) SECOND RELEASE. On the date twelve months following the Trade
Date, an additional number of Merger Shares equal to the greater of (i) 10,000
or (ii) five percent (5%) of the Owned Shares shall be permanently released from
the restrictions of Section 1.
(c) AGGREGATION WITH TRANSFEREES. In the event that a Holder transfers
Merger Shares to a permitted transferee pursuant to Section 4, below, the number
of Merger Shares to be released from the restrictions of Section 1 under this
Section 3 shall be calculated without regard to such transfers and the
particular Merger Shares held or transferred by the transferring Holder (the
"Transfer Merger Shares") to be released shall be allocated among the Holder and
all such transferees (and transferees of such
<PAGE>
transferees, if any) of such Holder pro rata in proportion to the number of
Transfer Merger Shares held by each of them.
4. CERTAIN PERMITTED TRANSFERS. Notwithstanding the foregoing, (i) if the
Holder is an individual, he or she may transfer any shares of Merger Shares or
securities convertible into or exchangeable or exercisable for the Merger Shares
either during his or her lifetime or on death by will or intestacy to his or her
immediate family or to a trust the beneficiaries of which are exclusively the
Holder and/or a member or members of his or her immediate family, (ii) if the
Holder is a partnership, it may transfer any shares of Merger Shares or
securities convertible into or exchangeable or exercisable for the Merger Shares
to is constituent partners, retired partners or the estates of constituent
partners or retired partners (including partners which are corporations and
which may transfer such securities to their respective shareholders) or (iii) if
the Holder is a limited liability company, it may transfer any shares of Merger
Shares or securities convertible into or exchangeable or exercisable for the
Merger Shares to its members (including members which are corporations and which
may transfer such securities to their respective shareholders); PROVIDED,
HOWEVER, that prior to any such transfer each transferee (including shareholders
of corporate transferees to whom such shares are subsequently transferred) shall
execute an agreement, satisfactory to Morgan Stanley & Co. Incorporated,
pursuant to which each transferee shall agree to receive and hold such shares of
Merger Shares, or securities convertible into or exchangeable or exercisable for
the Merger Shares, subject to the provisions hereof, and there shall be no
further transfer except in accordance with the provisions hereof, For the
purposes of this paragraph "immediate family" shall mean spouse, lineal
descendant, father, mother, brother or sister of the transferor.
5. BINDING ON SUCCESSORS: STOP TRANSFER INSTRUCTIONS: LEGEND. The
restrictions contained herein shall be binding upon the Holder's heirs, legal
representatives, successors and assigns. Hambrecht & Quist Group shall issue
stop transfer instructions to its transfer agent against the transfer of Merger
Shares except in compliance with the terms of this Exhibit. Each certificate
evidencing Merger Shares shall be imprinted with a legend substantially as
follows:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A LOCKUP PERIOD
OF EIGHTEEN MONTHS FOLLOWING THE PUBLIC OFFERING OF THE ISSUERS COMMON
STOCK PURSUANT TO THE FIRST REGISTRATION STATEMENT OF THE ISSUER FILED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AS SET FORTH IN EXHIBIT
2.1(c) TO THAT CERTAIN AGREEMENT AND PLAN OF REORGANIZATION DATED JUNE
10, 1996, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE
ISSUER. SUCH LOCKUP PERIOD IS BINDING ON TRANSFEREES OF THESE SHARES.
6. THIRD PARTY BENEFICIARIES. Hambrecht & Quist LLC, Morgan Stanley & Co.
Incorporated and Smith Barney Inc., as managing underwriters of the Offering,
are hereby expressly made third party beneficiaries entitled to the benefits of
this Underwriters' Market Stand-off.
-2-
<PAGE>
Exhibit 1.1(b)(2)
Form 9
State of California
Secretary of State
CERTIFICATE OF MERGER
[Preprinted Form Omitted]
Box 1: Hambrect & Quist Group, Inc.
Box 3: One Bush Street
San Francisco, CA 94104
Box 4: Deleware
Box 5: Hambrecht & Quist, L.P.
Box 7: CA
Box 8: July 1996
Box 9: Hambrecht & Quist, L.P. 50%
Box 12: Hambrect & Quist Group, Inc. Hambrecht & Quist, L.P.
1993-3 SUPPLEMENT
<PAGE>
Exhibit 1.4(a)
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
HAMBRECHT & QUIST GROUP
ONE. The name of this corporation is Hambrecht & Quist California,
Inc.
TWO. The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession permitted to be incorporated by the California
Corporations Code.
THREE. This corporation is authorized to issue only one class of stock,
designated "Common Stock," and the total number of shares which this corporation
is authorized to issue is ten thousand (10,000).
FOUR. (a) The liability of the directors of the corporation for
monetary damages shall be eliminated to the fullest extent permissible under
California law.
(b) The corporation is authorized to provide indemnification of
agents (as defined in Section 317 of the California Corporations Code) through
bylaw provisions, agreements with the agents, vote of shareholders or
disinterested directors, or otherwise, in excess of the indemnification
otherwise permitted by Section 317 of the limits set forth in Section 204 of the
California Corporations Code with respect to actions for breach of duty to the
corporation or its shareholders. The corporation is further authorized to
provide insurance for agents as set forth in Section 317 of the California
Corporations Code, provided that, in cases where the corporation owns all or a
portion of the shares of the company issuing the insurance policy, the company
and/or the policy must meet one of the two sets of conditions set forth in
Section 317, as amended.
(c) Any repeal or modification of the foregoing provisions of
this Article Four by the shareholders of this corporation shall not adversely
affect any right or protection of an agent of this corporation existing at the
time of such repeal or modification.
<PAGE>
Exhibit 1.4(b)
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
HAMBRECHT & QUIST GROUP, INC.
ONE. The name of this corporation is Hambrecht & Quist Group.
TWO. The address of the corporation's registered office in the State
of Delaware is 1209 Orange Street, in the City of Wilmington, County of New
Castle, Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.
THREE. The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOUR. (a) CLASSES OF STOCK AUTHORIZED. The corporation is authorized
to issue two classes of stock to be designated, respectively, "Common Stock" and
"Preferred Stock." The total number of shares of Common Stock that the
corporation is authorized to issue is 100,000,000, with a par value of $0.01 per
share. The total number of shares of Preferred Stock that the corporation is
authorized to issue is 5,000,000 with a par value of $0.01 per share. The
shares of Common Stock may be issued from time to time for such consideration as
the board of directors may determine.
(b) DESIGNATION OF FUTURE SERIES OF PREFERRED STOCK. The Board
of Directors is authorized, subject to any limitations prescribed by the law of
the State of Delaware), to provide in a resolution or resolutions for the
issuance of the shares of Preferred Stock in one or more series, and, by filing
a Certificate of Designation pursuant to the applicable law of the State of
Delaware, to establish from time to time the number of shares to be included in
each such series, to fix the designation, powers, preferences and rights of the
shares of each such series and any qualifications, limitations or restrictions
thereof, and to increase or decrease the number of shares of any such series
(but not below the number of shares of such series then outstanding). The
number of authorized shares of Preferred Stock may be increased or decreased
(but not below the number of shares thereof then outstanding) by the affirmative
vote of the holders of a majority of the Stock of the Company entitled to a
vote, unless a vote of any other holders is required pursuant to a Certificate
of Designation establishing a series of Preferred Stock.
(c) VOTING RIGHTS OF COMMON. Each holder of shares of Common
Stock shall be entitled to one vote for each share of Common Stock held of
record on all matters on which the holders of Common Stock are entitled to vote.
FIVE. In furtherance and not in limitation of the powers conferred by
statute, the board of directors of the corporation is expressly authorized to
adopt, amend or repeal the Bylaws of the corporation.
<PAGE>
SIX. Elections of directors need not be by written ballot unless the
Bylaws of the corporation shall so provide.
SEVEN. (a) LIMITATION OF DIRECTOR'S LIABILITY. To the fullest extent
permitted by the General Corporation Law of Delaware as the same exists or as
may hereafter be amended, a director of the corporation shall not be personally
liable to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director.
(b) INDEMNIFICATION OF CORPORATE AGENTS. The corporation shall
indemnify to the fullest extent permitted by law any person made or threatened
to be made a party to an action or proceeding, whether criminal, civil,
administrative or investigative, by reason of the fact that he, his testator or
intestate is or was a director, officer or employee of the corporation or any
predecessor of the corporation or serves or served at any other enterprise as a
director, officer or employee at the request of the corporation or any
predecessor to the corporation.
(c) REPEAL OR MODIFICATION. Neither any amendment or repeal of
this Article Seven, nor the adoption of any provision of this corporation's
Certificate of Incorporation inconsistent with this Article Seven, shall
eliminate or reduce the effect of this Article Seven, in respect of any matter
occurring, or any action or proceeding accruing or arising or that, but for this
Article Seven, would accrue or arise, prior to such amendment, repeal or
adoption of an inconsistent provision.
-2-
<PAGE>
EXHIBIT 2.1(c)
UNDERWRITERS' MARKET STAND-OFF
In addition to other applicable restrictions, all shares of Common Stock
(i) issued by Hambrecht & Quist Group in connection with the Mergers or (ii)
issuable upon the exercise of options or other rights to acquire such shares
assumed by Hambrecht & Quist Group in connection with the Mergers (together, the
"Merger Shares") shall be issued subject to the resale restrictions set forth in
this Exhibit. All capitalized terms and entity names used in this Exhibit and
not otherwise defined shall have the meanings ascribed to them in the Agreement
and Plan of Reorganization dated June 10, 1996 to which this Exhibit is
attached.
1. EIGHTEEN MONTH LOCKUP. For a period of eighteen (18) months after the date
(the "Trade Date") of the initial public offering (the "Offering") of Hambrecht
& Quist Group Common Stock ("Common Stock"), no person holding Merger Shares or
having the right to obtain Merger Shares as described in clause (ii) of the
preceding paragraph (each such person, a "Holder") shall, directly or
indirectly, sell, offer, contract to sell, transfer the economic risk of
ownership in, make any short sale, pledge or otherwise dispose of any Merger
Shares or any securities convertible into or exchangeable or exercisable for
Merger Shares, without the prior written consent of each of (i) Hambrecht &
Quist Group, (ii) Hambrecht & Quist LLC and (iii) Morgan Stanley & Co.
Incorporated.
2. EXCEPTION FOR SHARES ACQUIRED AFTER OFFERING. The foregoing restrictions
shall not apply to securities of Hambrecht & Quist Group acquired after the
Trade Date except to the extent that such securities are acquired pursuant to
the exercise, conversion, or exchange of securities of Hambrecht & Quist Group
held immediately prior to the Trade Date.
3. SCHEDULED PARTIAL RELEASES. Notwithstanding the restrictions set forth in
Section 1, a portion of the Merger Shares held by each Holder shall be released
from such restrictions as follows:
(a) FIRST RELEASE. On the date six months following the Trade Date, a
number of Merger Shares equal to the greater of (i) 10,000 or (ii) five percent
(5%) of the outstanding Common Stock owned directly by such Holder immediately
prior to the record date relating to the votes of securityholders with respect
to the Mergers, (the "Owned Shares") shall be permanently released from the
restrictions of Section 1.
(b) SECOND RELEASE. On the date twelve months following the Trade Date,
an additional number of Merger Shares equal to the greater of (i) 10,000 or (ii)
five percent (5%) of the Owned Shares shall be permanently released from the
restrictions of Section 1.
(c) AGGREGATION WITH TRANSFEREES. In the event that a Holder transfers
Merger Shares to a permitted transferee pursuant to Section 4, below, the number
of Merger Shares to be released from the restrictions of Section 1 under this
Section 3 shall be calculated without regard to such transfers and the
particular Merger Shares held or transferred by the transferring Holder (the
"Transfer Merger Shares") to be released shall be allocated among the Holder and
all such transferees (and transferees of
<PAGE>
such transferees, if any) of such Holder pro rata in proportion to the number of
Transfer Merger Shares held by each of them.
4. CERTAIN PERMITTED TRANSFERS. Notwithstanding the foregoing, (i) if the
Holder is an individual, he or she may transfer any shares of Merger Shares or
securities convertible into or exchangeable or exercisable for the Merger Shares
either during his or her lifetime or on death by will or intestacy to his or her
immediate family or to a trust the beneficiaries of which are exclusively the
Holder and/or a member or members of his or her immediate family, (ii) if the
Holder is a partnership, it may transfer any shares of Merger Shares or
securities convertible into or exchangeable or exercisable for the Merger Shares
to its constituent partners, retired partners or the estates of constituent
partners or retired partners (including partners which are corporations and
which may transfer such securities to their respective shareholders) or (iii) if
the Holder is a limited liability company, it may transfer any shares of Merger
Shares or securities convertible into or exchangeable or exercisable for the
Merger Shares to its members (including members which are corporations and which
may transfer such securities to their respective shareholders); PROVIDED,
HOWEVER, that prior to any such transfer each transferee (including shareholders
of corporate transferees to whom such shares are subsequently transferred) shall
execute an agreement, satisfactory to Morgan Stanley & Co. Incorporated,
pursuant to which each transferee shall agree to receive and hold such shares of
Merger Shares, or securities convertible into or exchangeable or exercisable for
the Merger Shares, subject to the provisions hereof, and there shall be no
further transfer except in accordance with the provisions hereof. For the
purposes of this paragraph, "immediate family" shall mean spouse, lineal
descendant, father, mother, brother or sister of the transferor.
5. BINDING ON SUCCESSORS: STOP TRANSFER INSTRUCTIONS: LEGEND. The
restrictions contained herein shall be binding upon the Holder's heirs, legal
representatives, successors and assigns. Hambrecht & (Quist Group shall issue
stop transfer instructions to its transfer agent against the transfer of Merger
Shares except in compliance with the terms of this Exhibit. Each certificate
evidencing Merger Shares shall be imprinted with a legend substantially as
follows:
TRUE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A LOCKUP PERIOD
OF EIGHTEEN MONTHS FOLLOWING THE PUBLIC OFFERING OF THE ISSUERS COMMON
STOCK PURSUANT TO THE FIRST REGISTRATION STATEMENT OF THE ISSUER FILED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AS SET FORTH IN EXHIBIT
2.1(c) TO THAT CERTAIN AGREEMENT AND PLAN OF REORGANIZATION DATED JUNE 10,
1996, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE
ISSUER. SUCH LOCKUP PERIOD IS BINDING ON TRANSFEREES OF THESE SHARES.
6. THIRD PARTY BENEFICIARIES. Hambrecht & Quist LLC, Morgan Stanley & Co.
Incorporated and Smith Barney Inc., as managing underwriters of the Offering,
are hereby expressly made third party beneficiaries entitled to the benefits of
this Underwriters' Market Stand-off.
<PAGE>
STATE OF DELAWARE PAGE 1
OFFICE OF THE SECRETARY OF STATE
------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY "HAMBRECHT & QUIST GROUP, INC." IS DULY INCORPORATED UNDER THE LAWS OF
THE STATE OF DELAWARE AND IS IN GOOD STANDING AND HAS A LEGAL CORPORATE
EXISTENCE SO FAR AS THE RECORDS OF THIS OFFICE SHOW, AS OF THE SIXTH DAY OF
JUNE, A.D. 1996.
AND I DO HEREBY FURTHER CERTIFY THAT THE FRANCHISE TAXES HAVE NOT BEEN
ASSESSED TO DATE.
[SEAL] /s/ Edward J. Freel
----------------------------------
EDWARD J. FREEL, SECRETARY OF STATE
AUTHENTICATION:
2631045 8300 7975943
DATE:
960165245 06-06-96
<PAGE>
STATE OF DELAWARE PAGE 1
OFFICE OF THE SECRETARY OF STATE
------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
INCORPORATION OF "HAMBRECHT & QUIST GROUP, INC.", FILED IN THIS OFFICE ON THE
SIXTH DAY OF JUNE, A.D. 1996, AT 9 O'CLOCK A.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS FOR RECORDING.
[SEAL] /s/ Edward J. Freel
----------------------------------
EDWARD J. FREEL, SECRETARY OF STATE
AUTHENTICATION:
2631045 8100 7975875
DATE:
960164833 06-06-96
<PAGE>
CERTIFICATE OF INCORPORATION
OF
HAMBRECHT & QUIST GROUP, INC.
ONE. The name of this corporation is Hambrecht & Quist Group,
Inc.
TWO. The address of the corporation's registered office in the
State of Delaware is 1209 Orange Street, in the City of Wilmington, County of
New Castle, Delaware 19801. The name of its registered agent at such address is
The Corporation Trust Company.
THREE. The purpose of the corporation is to engage in any lawful
act or activity for which corporations may be organized under the General
Corporation Law of Delaware.
FOUR. (a) CLASSES OF STOCK AUTHORIZED. The corporation is
authorized to issue two classes of stock to be designated, respectively, "Common
Stock" and "Preferred Stock." The total number of shares of Common Stock that
the corporation is authorized to issue is 100,000,000, with a par value of $0.01
per share. The total number of shares of Preferred Stock that the corporation
is authorized to issue is 5,000,000 with a par value of $0.01 per share. The
shares of Common Stock may be issued from time to time for such consideration as
the board of directors may determine.
(b) DESIGNATION OF FUTURE SERIES OF PREFERRED STOCK.
The Board of Directors is authorized, subject to any limitations prescribed by
the law of the State of Delaware, to provide in a resolution or resolutions for
the issuance of the shares of Preferred Stock in one or more series, and, by
filing a Certificate of Designation pursuant to the applicable law of the State
of Delaware, to establish from time to time the number of shares to be included
in each such series, to fix the designation, powers, preferences and rights of
the shares of each such series and any qualifications, limitations or
restrictions thereof, and to increase or decrease the number of shares of any
such series (but not below the number of shares of such series then
outstanding). The number of authorized shares of Preferred Stock may be
increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the Stock
of the Company entitled to a vote, unless a vote of any other holders is
required pursuant to a Certificate of Designation establishing a series of
Preferred Stock.
(c) VOTING RIGHTS OF COMMON STOCK. Each holder of
shares of Common Stock shall be entitled to one vote for each share of Common
Stock held of record on all matters on which the holders of Common Stock are
entitled to vote.
<PAGE>
FIVE. The name and mailing address of the incorporator are as
follows:
Francis S. Currie
c/o Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, CA 94304-1050
SIX. In furtherance and not in limitation of the powers
conferred by statute, the board of directors of the corporation is expressly
authorized to adopt, amend or repeal the Bylaws of the corporation.
SEVEN. Elections of directors need not be by written ballot
unless the Bylaws of the corporation shall so provide.
EIGHT. (a) LIMITATION OF DIRECTOR'S LIABILITY. To the fullest
extent permitted by the General Corporation Law of Delaware as the same exists
or as may hereafter be amended, a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director.
(b) INDEMNIFICATION OF CORPORATE AGENTS. The
Corporation shall indemnify to the fullest extent permitted by law any person
made or threatened to be made a party to an action or proceeding, whether
criminal, civil, administrative or investigative, by reason of the fact that
he, his testator or intestate is or was a director, officer or employee of the
corporation or any predecessor of the corporation or serves or served at any
other enterprise as a director, officer or employee at the request of the
corporation or any predecessor to the corporation.
(c) REPEAL OR MODIFICATION. Neither any amendment or
repeal of this Article Eight, nor the adoption of any provision of this
corporation's Certificate of Incorporation inconsistent with this Article Eight,
shall eliminate or reduce the effect of this Article Eight, in respect of any
matter occurring, or any action or proceeding accruing or arising or that, but
for this Article Eight, would accrue or arise, prior to such amendment, repeal
or adoption of an inconsistent provision.
THE UNDERSIGNED, for the purpose of forming a corporation under the laws
of the State of Delaware, does make this Certificate, hereby declaring and
certifying that the facts herein stated are true, and accordingly has hereunto
set his hand this 3rd day of June, 1996.
/s/ Francis S. Currie
--------------------------------------
Francis S. Currie, Incorporator
-2-
<PAGE>
BYLAWS
OF
HAMBRECHT & QUIST GROUP, INC.
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I - CORPORATE OFFICES. . . . . . . . . . . . . . . . . . . . . 1
1.1 REGISTERED OFFICE . . . . . . . . . . . . . . . . . . . . . . 1
1.2 OTHER OFFICES . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II - MEETINGS OF STOCKHOLDERS. . . . . . . . . . . . . . . . . 1
2.1 PLACE OF MEETINGS . . . . . . . . . . . . . . . . . . . . . . 1
2.2 ANNUAL MEETING. . . . . . . . . . . . . . . . . . . . . . . . 1
2.3 SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . . . . 2
2.4 NOTICE OF STOCKHOLDERS' MEETINGS. . . . . . . . . . . . . . . 2
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. . . . . . . . . 3
2.6 QUORUM. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.7 ADJOURNED MEETING; NOTICE . . . . . . . . . . . . . . . . . . 4
2.8 VOTING. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.9 WAIVER OF NOTICE. . . . . . . . . . . . . . . . . . . . . . . 5
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT
A MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING;
GIVING CONSENTS . . . . . . . . . . . . . . . . . . . . . . . 6
2.12 PROXIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE . . . . . . . . . . . . 7
ARTICLE III - DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . 8
3.1 POWERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.2 NUMBER OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . 9
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE
OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . 9
3.4 RESIGNATION AND VACANCIES . . . . . . . . . . . . . . . . . . 9
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE. . . . . . . . . . . 10
3.6 FIRST MEETINGS. . . . . . . . . . . . . . . . . . . . . . . . 11
3.7 REGULAR MEETINGS. . . . . . . . . . . . . . . . . . . . . . . 11
3.8 SPECIAL MEETINGS; NOTICE. . . . . . . . . . . . . . . . . . . 11
3.9 QUORUM. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.10 WAIVER OF NOTICE. . . . . . . . . . . . . . . . . . . . . . . 12
3.11 ADJOURNED MEETING; NOTICE . . . . . . . . . . . . . . . . . . 12
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING . . . . . . 12
3.13 FEES AND COMPENSATION OF DIRECTORS. . . . . . . . . . . . . . 13
3.14 APPROVAL OF LOANS TO OFFICERS . . . . . . . . . . . . . . . . 13
3.15 REMOVAL OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . 13
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TABLE OF CONTENTS
(continued)
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ARTICLE IV - COMMITTEES. . . . . . . . . . . . . . . . . . . . . . . . 14
4.1 COMMITTEES OF DIRECTORS . . . . . . . . . . . . . . . . . . . 14
4.2 COMMITTEE MINUTES . . . . . . . . . . . . . . . . . . . . . . 15
4.3 MEETINGS AND ACTION OF COMMITTEES . . . . . . . . . . . . . . 15
ARTICLE V - OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.1 OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.2 ELECTION OF OFFICERS. . . . . . . . . . . . . . . . . . . . . 16
5.3 SUBORDINATE OFFICERS. . . . . . . . . . . . . . . . . . . . . 16
5.4 REMOVAL AND RESIGNATION OF OFFICERS . . . . . . . . . . . . . 16
5.5 VACANCIES IN OFFICES. . . . . . . . . . . . . . . . . . . . . 16
5.6 CHAIRMAN OF THE BOARD . . . . . . . . . . . . . . . . . . . . 16
5.7 PRESIDENT . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.8 VICE PRESIDENT. . . . . . . . . . . . . . . . . . . . . . . . 17
5.9 SECRETARY . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.10 TREASURER . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.11 ASSISTANT SECRETARY . . . . . . . . . . . . . . . . . . . . . 18
5.12 ASSISTANT TREASURER . . . . . . . . . . . . . . . . . . . . . 19
5.13 AUTHORITY AND DUTIES OF OFFICERS. . . . . . . . . . . . . . . 19
ARTICLE VI - INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . 19
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS . . . . . . . . . . 19
6.2 INDEMNIFICATION OF OTHERS . . . . . . . . . . . . . . . . . . 19
6.3 INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE VII - RECORDS AND REPORTS. . . . . . . . . . . . . . . . . . . 20
7.1 MAINTENANCE AND INSPECTION OF RECORDS . . . . . . . . . . . . 20
7.2 INSPECTION BY DIRECTORS . . . . . . . . . . . . . . . . . . . 21
7.3 ANNUAL STATEMENT TO STOCKHOLDERS. . . . . . . . . . . . . . . 21
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. . . . . . . . 22
ARTICLE VIII - GENERAL MATTERS . . . . . . . . . . . . . . . . . . . . 22
8.1 CHECKS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS. . . . . . . 22
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES. . . . . . . . . . . . 22
8.4 SPECIAL DESIGNATION ON CERTIFICATES . . . . . . . . . . . . . 23
8.5 LOST CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . 24
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TABLE OF CONTENTS
(continued)
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8.6 CONSTRUCTION; DEFINITIONS . . . . . . . . . . . . . . . . . . 24
8.7 DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . . 24
8.8 FISCAL YEAR . . . . . . . . . . . . . . . . . . . . . . . . . 24
8.9 SEAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.10 TRANSFER OF STOCK . . . . . . . . . . . . . . . . . . . . . . 25
8.11 STOCK TRANSFER AGREEMENTS . . . . . . . . . . . . . . . . . . 25
8.12 REGISTERED STOCKHOLDERS . . . . . . . . . . . . . . . . . . . 25
ARTICLE IX - AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . 26
ARTICLE X - DISSOLUTION. . . . . . . . . . . . . . . . . . . . . . . . 26
ARTICLE XI - CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . 27
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES . . . . . . . . . 27
11.2 DUTIES OF CUSTODIAN . . . . . . . . . . . . . . . . . . . . . 27
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<PAGE>
BYLAWS
OF
HAMBRECHT & QUIST GROUP, INC.
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is CT CORPORATION SYSTEM.
1.2 OTHER OFFICES
The board of directors may at any time establish other offices at any place
or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place, within or outside the
State of Delaware, designated by the board of directors or by the written
consent of all of the persons entitled to vote at such meeting, such written
consent shall be filed with the Secretary of the Corporation. In the absence of
any such designation, stockholders' meetings shall be held at the registered
office of the corporation.
2.2 ANNUAL MEETING
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on any date and
time which may from time to time be designated. However, if such day falls on a
legal holiday, then the meeting shall be held at the same time and place on the
next
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succeeding full business day. At the meeting, directors shall be elected and
any other proper business may be transacted.
2.3 SPECIAL MEETING
(a) Special meetings of the shareholders, for any purpose or
purposes, may be called by the Board of Directors, the Chairman of the board of
Directors, the President, or the holders of shares entitled to cast not less
than ten percent (10%) of the votes at the meeting.
(b) Upon written request to the Chairman of the Board of
Directors, the President, any Vice President or the Secretary of the corporation
by any person or persons (other than the Board of Directors) entitled to call a
special meeting of the shareholders, such officer forthwith shall cause notice
to be given to the shareholders entitled to vote, that a meeting will be held at
a time requested by the person or persons calling the meeting, such time to be
not less than thirty-five (35) nor more than sixty (60) days after receipt of
such request. If such notice is not given within twenty (20) days after receipt
of such request, the person or persons calling the meeting may be given notice
thereof in the manner provided by law or in these Bylaws. Nothing contained in
this Section 7 shall be construed as limiting, fixing or affecting the time or
date when a meeting of shareholders called by action of the Board of Directors
may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
Except as otherwise may be required by law and subject to subsection 2.3(b)
above, written notice of each meeting of shareholders shall be given to each
shareholder entitled to vote at that meeting (see Section 2.8 below), by the
secretary, Assistant Secretary or other person charged with that duty, not less
than ten (10) (or, if sent by third class mail, thirty (30)) nor more than sixty
(60) days before such meeting.
Notice of any meeting of shareholders shall state the date, place and hour
of the meeting and,
(a) in the case of a special meeting, the general nature of the
business to be transacted, and no other business may be transaction at such
meeting;
(b) in the case of an annual meeting, the general nature of matters
which the Board of Directors, at the time the notice is given, intends to
present for action by the shareholders;
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(c) in the case of any meeting at which directors are to be elected,
the names of the nominees intended at the time of the notice to be presented by
management for election; and
(d) in the case of any meeting, if action is to be taken on any of the
following proposals, the general nature of such proposal:
(1) a proposal to approve a transaction within the provisions of
Delaware General Corporations law, Section 144 (relating to certain transactions
in which a director has an interest);
(2) a proposal to approve a transaction within the provisions of
Delaware General Corporation Law, Section 254 (relating to amending the
Certificate of Incorporation of the corporation);
(3) a proposal to approve a transaction within the provisions of
Delaware General Corporation Law, Sections 251 (relating to merger or
consolidation); and
(4) a proposal to approve a transaction within the provisions of
Delaware General Corporation Law, Section 275 (dissolution).
At a special meeting, notice of which has been given in accordance with
this Section, action may not be taken with respect to business, the general
nature of which has not been stated in such notice. At an annual meeting,
action may be taken with respect to business stated in the notice of such
meeting, given in accordance with this section, and, subject to subsection
2.4(d) above, with respect to any other business as may properly come before the
meeting.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Notice of any meeting of shareholders shall be given either personally
or by first-class mail, or, if the corporation has outstanding shares held of
record by 500 or more persons on the record date for such meeting, third-class
mail, or telegraphic or other written communication, addressed to the
shareholder at the address of that shareholder appearing on the books of the
corporation or given by the shareholder to the corporation for the purpose of
notice. If no such address appears on the corporation's books or is given,
notice shall be deemed to have been given if sent to that shareholder by first-
class mail or telegraphic or other written communication to the corporation's
principal
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executive office, or if published at least once in a newspaper of general
circulation in the county where that office is located. Notice shall be deemed
to have been given at the time when delivered personally or deposited in the
mail or sent by telegram or other means of written communication.
If any notice addressed to a shareholder at the address of that
shareholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the shareholder
at that address, all future notices shall be deemed to have been duly given
without further mailing if these shall be available to the shareholder on
written demand by the shareholder at the principal executive office of the
corporation for a period of one year from the date of the giving of the notice.
An affidavit of the secretary or an assistant secretary or of the transfer
agent of the corporation that the notice has been given shall, in the absence of
fraud, be prima facie evidence of the facts stated therein.
2.6 QUORUM
(a) At any meeting of the shareholders, a majority of the shares
entitled to vote, represented in person or by proxy, shall constitute a quorum.
If a quorum is present, the affirmative vote of the majority of shares
represented at the meeting and entitled to vote on any matter shall be the act
of the shareholder, unless the vote of a greater number of voting by classes is
required by law or by the Articles of Incorporation, and except as provided in
subsection (b) below.
(b) The shareholders present at a duly called or held meeting of the
shareholders at which a quorum is present may continue to do business until
adjournment, notwithstanding the withdrawal of enough shareholders to leave less
than a quorum, provided that any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.
(c) In the absence of a quorum, no business other than adjournment may
be transacted, except as described in subsection (b) above.
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2.7 ADJOURNED MEETING; NOTICE
Any meeting of shareholders may be adjourned from time to time, whether or
not a quorum is present, by the affirmative vote of a majority of shares
represented at such meeting either in person or by proxy and entitled to vote at
such meeting. When a meeting is adjourned to another time or place, unless
these bylaws otherwise require, notice need not be given of the adjourned
meeting if the time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting the corporation may transact any
business that might have been transacted at the original meeting. If the
adjournment is for more than forty-five (45) days, or if after the adjournment a
new record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
2.8 VOTING
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners
of stock and to voting trusts and other voting agreements).
Except as provided in the last paragraph of this Section 2.8, or as may be
otherwise provided in the certificate of incorporation, each stockholder shall
be entitled to one vote for each share of capital stock held by such
stockholder.
At a stockholders' meeting at which directors are to be elected, or at
elections held under special circumstances, a stockholder shall be entitled to
cumulate votes (i.e., cast for any candidate a number of votes greater than the
number of votes which such stockholder normally is entitled to cast). Each
holder of stock, or of any class or classes or of a series or series thereof,
who elects to cumulate votes shall be entitled to as many votes as equals the
number of votes which (absent this provision as to cumulative voting) he would
be entitled to cast for the election of directors with respect to his shares of
stock multiplied by the number of directors to be elected by him, and he may
cast all of such votes for a single director or may distribute them among the
number to be voted for, or for any two or more of them, as he may see fit
provided, however, no shareholder shall be entitled to so cumulate such
shareholder's votes unless the candidates for which such shareholder is voting
have been placed in nomination prior to
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the voting and a shareholder has given notice at the meeting, prior to the vote,
of an intention to cumulate votes.
2.9 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws. All waivers,
consents and approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise provided in the certificate of incorporation, any action
required by this chapter to be taken at any annual or special meeting of
stockholders of a corporation, or any action that may be taken at any annual or
special meeting of such stockholders, may be taken without a meeting, without
prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
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2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held.
(ii) The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
by the board of directors is necessary, shall be the day on which the first
written consent is expressed.
(iii) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
or the sixtieth (60th) day prior to date of such other action, whichever is
later.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
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2.12 PROXIES
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the corporation, but no such
proxy shall be voted or acted upon after eleven (11) months from its date,
unless the proxy provides for a longer period. A proxy shall be deemed signed
if the stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of Section
212(c) of the General Corporation Law of Delaware.
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
Stock of the corporation held by its subsidiary or subsidiaries are not
entitled to vote in any matter.
2.14 INSPECTORS OF ELECTION.
Before any meeting of shareholders, the Board of Directors may appoint any
persons, other than nominees for the office, to act as inspectors of election at
the meeting or its adjournment. If no inspectors of election are so appointed,
the chairman of the meeting may, and on the request of any stockholder or a
stockholder's proxy shall, appoint inspectors of election at the meeting. The
number of inspectors shall be either one (1) or three (3). If inspectors are
appointed at a meeting on the request of one or more shareholders or proxies,
the majority of shares
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<PAGE>
represented in person or proxy shall determine whether one (1) or three (3)
inspectors are to be appointed. If any person appointed as inspector fails to
appear or fails or refuses to act, the chairman of the meeting may, and upon the
request of any shareholder or a shareholder's proxy shall, appoint a person to
fill that vacancy.
These inspectors shall:
(a) Determine the number of shares outstanding and the voting power
of each, the shares represented at the meeting, the existence of a quorum, and
the authenticity, validity, and effect of proxies;
(b) Receive votes, ballots, or consents;
(c) Hear and determine all challenges and questions in any way
arising in connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election or
vote with fairness to all shareholders.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
The authorized number of directors shall be one (1). This number may be
changed by a duly adopted amendment to the certificate of incorporation or by an
amendment to this bylaw adopted by the vote or written consent of the holders of
a majority
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of the stock issued and outstanding and entitled to vote or by resolution of a
MAJORITY of the board of directors.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
(a) For so long as the Board of Directors consists of more than two
directors, the directors shall be divided into three classes, designated
Class I, Class II and Class III. Each class shall consist, as nearly as
possible of one-third (1/3) of the total number of directors constituting the
entire Board of Directors. At any time following the effectiveness of this
provision, but before the first annual meeting of the stockholders held after
the effectiveness of this provision, the Board of Directors may designate by
resolution the classification of existing directors. At the first annual
meeting following the effectiveness of this provision, the classes shall be
elected as follows: Class I directors shall be elected for a one-year term,
Class II directors for a two-year term and Class III directors for a
three-year term. At each succeeding annual meeting of stockholders,
successors to the class of directors whose term expires at the annual meeting
shall be elected for three-year terms. If the number of directors is
changed, any increase or decrease shall be apportioned among the classes so
as to maintain the number of directors in each class as nearly equal as
possible, and any additional directors of any class elected to fill a vacancy
resulting from an increase in such class shall hold office for a term that
shall coincide with the remaining term of that class, but in no case will a
decrease in the number of directors shorten the term of any incumbent
director. Notwithstanding the forgoing, this provision will become effective
only when the corporation becomes a listed corporation within the meaning of
Section 301.5 of the California Corporations Code, until such time, all
directors shall be elected at each annual meeting of stockholders to hold
office until the next annual meeting.
(b) A director shall hold office until the annual meeting for the year in
which his or her term expires and until his or her successor shall be elected
and shall qualify, subject, however, to prior death, resignation, retirement,
disqualification or removal from office. Except as otherwise required by law,
any vacancy on the Board of Directors that results from an increase in the
number of directors or any other vacancy occurring in the Board of
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Directors shall be filled by a majority of the directors then in office, even if
less than a quorum, or by a sole remaining director. Any director elected to
fill a vacancy not resulting from an increase in the number of directors shall
have the same remaining term as that of his or her predecessor.
(c) Directors need not be stockholders unless so required by the
certificate of incorporation or these bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to
fill a vacancy, shall hold office until his successor is elected and qualified
or until his earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
Any director may resign at any time upon written notice to the
corporation. When one or more directors so resigns and the resignation is
effective at a future date, a majority of the directors then in office,
including those who have so resigned, shall have power to fill such vacancy
or vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective, and each director so chosen shall hold
office as provided in this section in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
bylaws:
(a) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(b) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
certificate of incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee
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or guardian of a stockholder, or other fiduciary entrusted with like
responsibility for the person or estate of a stockholder, may call a special
meeting of stockholders in accordance with the provisions of the certificate of
incorporation or these bylaws, or may apply to the Court of Chancery for a
decree summarily ordering an election as provided in Section 211 of the General
Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 PLACE Of MEETINGS; MEETINGS BY TELEPHONE
The board of directors of the corporation may hold meetings, both regular
and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 FIRST MEETINGS
The first meeting of each newly elected board of directors shall be held at
such time and place as shall be fixed by the vote of the stockholders at the
annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the stockholders to fix the
time or place of such first meeting of the newly elected board of directors, or
in the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as herein-
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after provided for special meetings of the board of directors, or as shall be
specified in a written waiver signed by all of the directors.
3.7 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.
3.8 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two (2) directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.9 QUORUM
At all meetings of the board of directors, A MAJORITY of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of A MAJORITY of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors except as may be
otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
3.10 WAIVER OF NOTICE
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Whenever notice is required to he given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these bylaws.
3.11 ADJOURNED MEETING; NOTICE
If a quorum is not present at any meeting of the board of directors, then
the directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise restricted by the certificate of incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the board
of directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
3.13 FEES AND COMPENSATION OF DIRECTORS
Unless otherwise restricted by the certificate of incorporation or these
bylaws, the board of directors shall have the authority to fix the compensation
of directors.
3.14 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of direc-
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tors shall approve, including, without limitation, a pledge of shares of stock
of the corporation. Nothing in this section contained shall be deemed to deny,
limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.15 REMOVAL OF DIRECTORS
The Board of Directors may declare vacant the office of a director who has
been declared of unsound mind by an order of court or who has been convicted of
a felony.
The entire Board of Directors or any individual director may be removed
from office without cause by the affirmative vote of a majority of the
outstanding shares entitled to vote on such removal; provided, however, that
unless the entire Board is removed, no individual director may be removed when
the votes cast against such director's removal, or not consenting in writing to
such removal, would be sufficient to elect that director if voted cumulatively
at an election at which the same total number of votes cast were cast (or, if
such action is taken by written consent, all shares entitled to vote were voted)
and the entire number of directors authorized at the time of such director's
most recent election were then being elected.
Unless otherwise restricted by statute, by the certificate of incorporation
or by these bylaws, any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors.
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of such director's term of office.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution passed by a majority of the
whole board, designate one or more committees, with each committee to consist
of one or more of the directors of the corporation. The board may designate
one or more directors as alternate members of any committee, who may replace
any absent or disquali-
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fied member at any meeting of the committee. In the absence or disqualification
of a member of a committee, the member or members thereof present at any meeting
and not disqualified from voting, whether or not he or they constitute a quorum,
may unanimously appoint another member of the board of directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the board of directors or
in the bylaws of the corporation, shall have and may exercise all the powers and
authority of the board of directors in the management of the business and
affairs of the corporation, and may authorize the seal of the corporation to be
affixed to all papers that may require it; but no such committee shall have the
power or authority to (i) amend the certificate of incorporation (except that a
committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the board of directors
as provided in Section 151(a) of the General Corporation Law of Delaware, fix
any of the preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the corporation or the
conversion into, or the exchange of such shares for, shares of any other class
or classes or any other series of the same or any other class or classes of
stock of the corporation), (ii) adopt an agreement of merger or consolidation
under Sections 251 or 252 of the General Corporation Law of Delaware, (iii)
recommend to the stockholders the sale, lease or exchange of all or
substantially all of the corporation's property and assets, (iv) recommend to
the stockholders a dissolution of the corporation or a revocation of a
dissolution, or (v) amend the bylaws of the corporation; and, unless the board
resolution establishing the committee, the bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings and meetings by telephone), Section 3.7 (regular meetings),
Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10
(waiver of notice), Section 3.11 (adjournment and notice of adjournment), and
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Section 3.12 (action without a meeting), with such changes in the context of
those bylaws as are necessary to substitute the committee and its members for
the board of directors and its members; provided, however, that the time of
regular meetings of committees may also be called by resolution of the board of
directors and that notice of special meetings of committees shall also be given
to all alternate members, who shall have the right to attend all meetings of the
committee. The board of directors may adopt rules for the government of any
committee not inconsistent with the provisions of these bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a Chairman of the Board, a
President, one or more Vice Presidents, a Secretary, and a Chief Financial
Officer, and any such other officers with such titles and duties as the Board of
Directors may determine.
5.2 ELECTION OF OFFICERS
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, shall
be chosen by the board of directors, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or empower the president to appoint,
such other officers and agents as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors,
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by any officer upon whom such power of removal may be conferred by the board of
directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
Any vacancy occurring in any office of the corporation shall be filled by
the board of directors.
5.6 CHAIRMAN OF THE BOARD
The Chairman of the Board, if there be such an officer, shall, if present,
preside at all meetings of the Board of Directors and shall exercise and perform
such other powers and duties as may be assigned from time to time by the Board
of Directors or prescribed by these Bylaws. If no President is appointed, the
Chairman of the Board is the general manager and Chief Executive Officer of the
corporation, and shall exercise all powers of the President described in Section
42 below.
5.7 PRESIDENT
Subject to such powers, if any, as may be given by the Board of Directors
to the Chairman of the Board, if there be such an officer, the President shall
be the general manager and Chief Executive Officer of the corporation and shall
have general supervision and control over the business and affairs of the
corporation, subject to the control of the Board of Directors. The President
may sign and execute, in the name of the corporation, any instrument authorized
by the Board of Directors, except when the signing and execution thereof shall
have been expressly delegated by the Board of Directors or by these Bylaws to
some other officer or agent of the corporation. The President shall have all
the general powers and duties of management usually vested in the president of a
corporation, and shall have such other powers and duties as may be prescribed
from time to time by the Board of Directors or these Bylaws. The President
shall have discretion to prescribe the duties of other officers and employees of
the corporation in a manner not inconsistent with the provisions of these Bylaws
and the directions of the Board of Directors.
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5.8 VICE PRESIDENTS
In the absence or disability of the President, in the event of a vacancy
in the office of President, or in the event such officer refuses to act, the
Vice President shall perform all the duties of the President and, when so
acting, shall have all the powers of, and be subject to all the restrictions
on, the President. If at any such time the corporation has more than one
vice president, the duties and powers of the President shall pass to each
Vice President in order of such Vice President's rank as fixed by the Board
of Directors or, if the Vice Presidents are not so ranked, to the Vice
President designated by the Board of Directors. The Vice Presidents shall
have such other powers and perform such other duties as may be prescribed for
them from time to time by the Board of Directors or pursuant to Sections 35
and 36 of these Bylaws or otherwise pursuant to these Bylaws.
5.9 SECRETARY
The Secretary shall:
(a) Keep, or cause to be kept, minutes of all meetings of the
corporation's shareholders, Board of Directors, and committees of the Board of
Directors, if any. Such minutes shall be kept in written form.
(b) Keep, or cause to be kept, at the principal executive office
of the corporation, or at the office of its transfer agent or registrar, if any,
a record of a corporation's shareholders, showing the names and addresses of all
shareholders and the number of classes of shares held by each. Such records
shall be kept in written form or any other form capable of being converted into
written form.
(c) Keep, or cause to be kept, at the principal executive office
of the corporation, or if the principal office is not in California, at its
principal business office in California, an original or copy of these Bylaws, as
amended.
(d) Give, or cause to be given, notice of all meetings of
shareholders, directors and committees of the Board of Directors, as required by
law or by these Bylaws.
(e) Keep the seal of the corporation, if any, in safe custody.
(f) Exercise such powers and perform such duties as are usually
vested in the office of secretary of a corporation, and
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exercise such other powers and perform such other duties as may be prescribed
from time to time by the Board of Directors or these Bylaws.
If any Assistant Secretaries are appointed, the Assistant Secretary,
or one of the Assistant Secretaries in the order of their rank as fixed by the
Board of Directors or, if they are not so ranked, the Assistant Secretary
designated by the Board of Directors, in the absence or disability of the
Secretary or in the event of such officer's refusal to act or if a vacancy
exists in the office of Secretary, shall perform the duties and exercise the
powers of the Secretary and discharge such duties as may be assigned from time
to time pursuant to these Bylaws or by the Board of Directors.
5.10 CHIEF FINANCIAL OFFICER
The Chief Financial Officer shall:
(a) Be responsible for all functions and duties of the treasurer
of the corporation.
(b) keep and maintain, or cause to be kept and maintained,
adequate and correct books and records of account for the corporation.
(c) Receive or be responsible for receipt of all monies due
and payable to the corporation from any source whatsoever; have charge and
custody off, and be responsible for, all monies and other valuables of the
corporation and be responsible for deposit of all such monies in the name and
to the credit of the corporation with such depositories as may be designated
by the Board of Directors or a duly appointed and authorized committee of the
Board of Directors.
(d) Disburse or be responsible for the disbursement of the funds
of the corporation as may be ordered by the Board of Directors or a duly
appointed and authorized committee of the Board of Directors.
(e) Render to the Chief Executive Officer and the Board of
Directors a statement of the financial condition of the corporation if called
upon to do so.
(f) Exercise such powers and perform such duties as are usually
vested in the office of chief financial officer of a corporation, and exercise
such other powers and perform such other
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duties as may be prescribed by the Board of Directors or these Bylaws.
If any Assistant Financial Officer is appointed, the Assistant
Financial Officer, or one of the Assistant Financial Officers, if there are more
than one, in the order of their ranks as fixed by the Board of Directors or, if
they are not so ranked, the Assistant Financial Officers designated by the Board
of Directors, shall, in the absence or disability of the Chief Financial Officer
or in the event of such officer's refusal to act, perform the duties and
exercise the powers of the Chief Financial Officer, and shall have such powers
and discharge such duties as may be assigned from time to time pursuant to these
Bylaws or by the Board of Directors.
5.11 COMPENSATION The compensation of the officers shall be fixed from
time to time by the Board of Directors, and no officer shall be prevented from
receiving such compensation by reason of the fact that such officer is also a
director of the corporation.
5.12 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the stockholders.
ARTICLE VI
INDEMNITY
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware, indemnify each of its directors and
officers against expenses (including attorneys' fees), judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding, arising by reason of the fact that such person is or was an
agent of the corporation. For purposes of this Section 6.1, a "director" or
"officer" of the corporation includes any person (i) who is or was a director or
officer of the corporation, (ii) who is or was serving at the request of the
corporation as a director or officer
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of another corporation, partnership, joint venture, trust or other enterprise,
or (iii) who was a director or officer of a corporation which was a predecessor
corporation of the corporation or of another enterprise at the request of such
predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the extent and in the manner
permitted by the General Corporation Law of Delaware, to indemnify each of
its employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding, arising
by reason of the fact that such person is or was an agent of the corporation.
For purposes of this Section 6.2, an "employee" or "agent" of the
corporation (other than a director or officer) includes any person (i) who is
or was an employee or agent of the corporation, (ii) who is or was serving at
the request of the corporation as an employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, or (iii)
who was an employee or agent of a corporation which was a predecessor
corporation of the corporation or of another enterprise at the request of
such predecessor corporation.
6.3 INSURANCE
The corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the corporation would have the power to
indemnify him against such liability under the provisions of the General
Corporation Law of Delaware.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
shareholders listing their names
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and addresses and the number and class of shares held by each shareholder, a
copy of these bylaws as amended to date, accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
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7.3 ANNUAL STATEMENT TO STOCKHOLDERS
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the president, any vice president, the
treasurer, the secretary or assistant secretary of this corporation, or any
other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
ARTICLE VIII
GENERAL MATTERS
8.1 CHECKS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 BANK ACCOUNTS
The Board of Directors or its duly appointed and authorized committee from
time to time may authorize the opening and keeping of general and/or special
bank accounts with such banks, trust companies, or other depositories as may be
selected by the Board of Directors, its duly appointed and authorized committee
or by any officer or officers, agent or agents, of the corporation to whom such
power may be delegated from time to time by the Board of Directors. The Board
of Directors or its duly appointed and authorized committee may make such rules
and regulations with respect to said bank accounts, not inconsistent with the
provisions of these Bylaws, as are deemed advisable.
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8.3 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.4 LOANS
No loans shall be contracted on behalf of the corporation and no negotiable
paper shall be issued in its name, unless and except as authorized by the Board
of Directors or its duly appointed and authorized committee. When so authorized
by the Board of Directors or such committee, any officer or agent of the
corporation may effect loans and advances at any time for the corporation from
any bank, trust company, or other institution, or from any firm, corporation or
individual, and for such loans and advances may make, execute and deliver
promissory notes, bonds or other evidences of indebtedness of the corporation
and, when authorized as aforesaid, may mortgage, pledge, hypothecate or transfer
any and all stocks, securities and other property, real or personal, at any time
held by the corporation, and to that end endorse, assign and deliver the same as
security for the payment of any and all loans, advances, indebtedness, and
liabilities of the corporation. Such authorization may be general or confined
to specific instances.
8.5 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of a corporation shall be represented by certificates, provided
that the board of directors of the corporation may provide by resolution or
resolutions that some or all of any or all classes or series of its stock shall
be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the treasurer
or an assistant treasurer, or the secretary or an assistant secretary of such
corporation representing the number of shares registered in certificate form.
Any or all of the signatures on the certificate
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may be a facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate has
ceased to be such officer, transfer agent or registrar before such certificate
is issued, it may be issued by the corporation with the same effect as if he
were such officer, transfer agent or registrar at the date of issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.6 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.7 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and canceled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost,
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stolen or destroyed, and the corporation may require the owner of the lost,
stolen or destroyed certificate, or his legal representative, to give the
corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate or uncertificated shares.
8.8 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these bylaws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
8.9 DIVIDENDS
The directors of the corporation, subject to any restrictions contained in
the certificate of incorporation, may declare and pay dividends upon the shares
of its capital stock pursuant to the General Corporation Law of Delaware.
Dividends may be paid in cash, in property, or in shares of the corporation's
capital stock.
The directors of the corporation may set apart out of any of the funds of
the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not
be limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.10 FISCAL YEAR
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
8.11 SEAL
(NOTE: DEL. CODE ANN., TITLE 8, SECTION 122(3) (1981), PROVIDES FOR THE
ADOPTION OF A CORPORATE SEAL AS FOLLOWS:
EVERY CORPORATION CREATED UNDER THIS CHAPTER SHALL HAVE POWER TO HAVE
A CORPORATE SEAL, WHICH MAY BE ALTERED AT PLEASURE, AND USE THE SAME
BY CAUSING IT OR A FACSIMILE THEREOF, TO BE IMPRESSED OR AFFIXED OR IN
ANY OTHER MANNER REPRODUCED.
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PLEASE COMPLETE THIS Section ACCORDINGLY.]
8.12 TRANSFER OF STOCK
Upon surrender to the corporation or the transfer agent of the corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate, and record the transaction in its books.
8.13 STOCK TRANSFER AGREEMENTS
The corporation shall have power to enter into and perform any agreement
with any number of shareholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
8.14 REGISTERED STOCKHOLDERS
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote; provided, however, that the
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal bylaws.
ARTICLE X
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DISSOLUTION
If it should be deemed advisable in the judgment of the board of directors
of the corporation that the corporation should be dissolved, the board, after
the adoption of a resolution to that effect by a majority of the whole board at
any meeting called for that purpose, shall cause notice to be mailed to each
stockholder entitled to vote thereon of the adoption of the resolution and of a
meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with Section
103 of the General Corporation Law of Delaware. Upon such certificate's
becoming effective in accordance with Section 103 of the General Corporation Law
of Delaware, the corporation shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent in
writing, either in person or by duly authorized attorney, to a dissolution, no
meeting of directors or stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103 of the General
Corporation Law of Delaware. Upon such consent's becoming effective in
accordance with Section 103 of the General Corporation Law of Delaware, the
corporation shall be dissolved. If the consent is signed by an attorney, then
the original power of attorney or a photocopy thereof shall be attached to and
filed with the consent. The consent filed with the Secretary of State shall
have attached to it the affidavit of the secretary or some other officer of the
corporation stating that the consent has been signed by or on behalf of all the
stockholders entitled to vote on a dissolution; in addition, there shall be
attached to the consent a certification by the secretary or some other officer
of the corporation setting forth the names and residences of the directors and
officers of the corporation.
ARTICLE XI
CUSTODIAN
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11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
The Court of Chancery, upon application of any stockholder, may appoint one
or more persons to be custodians and, if the corporation is insolvent, to be
receivers, of and for the corporation when:
(a) at any meeting held for the election of directors the
stockholders are so divided that they have failed to elect successors to
directors whose terms have expired or would have expired upon qualification of
their successors; or
(b) the business of the corporation is suffering or is threatened
with irreparable injury because the directors are so divided respecting the
management of the affairs of the corporation that the required vote for action
by the board of directors cannot be obtained and the stockholders are unable to
terminate this division; or
(c) the corporation has abandoned its business and has failed within
a reasonable time to take steps to dissolve, liquidate or distribute its assets.
11.2 DUTIES OF CUSTODIAN
The custodian shall have all the powers and title of a receiver appointed
under Section 291 of the General Corporation Law of Delaware, but the authority
of the custodian shall be to continue the business of the corporation and not to
liquidate its affairs and distribute its assets, except when the Court of
Chancery otherwise orders and except in cases arising under Sections 226(a)(3)
or 352(a)(2) of the General Corporation Law of Delaware.
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CERTIFICATE OF ADOPTION OF BYLAWS
OF
HAMBRECHT & QUIST GROUP, INC.
ADOPTION BY INCORPORATOR
The undersigned person appointed in the Certificate of Incorporation to act
as the Incorporator of Hambrecht & Quist Group, Inc. hereby adopts the foregoing
bylaws, comprising twenty eight (28) pages, as the Bylaws of the corporation.
Executed this ______ day of ___________ 19 ____.
-------------------------------
Francis S. Currie, Incorporator
CERTIFICATE BY SECRETARY OF ADOPTION BY INCORPORATOR
The undersigned hereby certifies that he is the duly elected, qualified,
and acting Secretary of Hambrecht & Quist Group, Inc. and that the foregoing
Bylaws, comprising twenty seven (27) pages, were adopted as the Bylaws of the
corporation on ______________,19 ___, by the person appointed in the Certificate
of Incorporation to act as the Incorporator of the corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed
the corporate seal this _______ day of ______________ 19 ___.
-------------------------------
Steven N. Machtinger, Secretary
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(ALTERNATIVE)
CERTIFICATE OF ADOPTION OF BYLAWS
OF
HAMBRECHT & QUIST GROUP, INC.
CERTIFICATE BY SECRETARY OF ADOPTION BY SHAREHOLDERS' VOTE
The undersigned hereby certifies that he is the duly elected, qualified,
and acting Secretary of Hambrecht & Quist Group, Inc. and that the foregoing
Bylaws, comprising twenty seven (27) pages, were submitted to the shareholders
at their first meeting held on _______________, 19 ___, and recorded in the
minutes thereof and were ratified by the vote of shareholders entitled to
exercise the majority of the voting power of the corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed
the corporate seal this ______ day of _______________ 19 ___.
-------------------------------
Steven N. Machtinger, Secretary
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HAMBRECHT & QUIST GROUP, INC.
1996 EQUITY PLAN
SECTION 1. ESTABLISHMENT AND PURPOSE.
The purpose of the Plan is to offer the Employees, Directors and
Consultants an opportunity to acquire a proprietary interest in the success of
the Company and to increase such interest by purchasing Shares of the Company's
Common Stock. Options granted under the Plan may include NSOs as well as ISOs
intended to qualify under Section 422 of the Code. Contingent Equity Rights may
also be granted under the Plan.
SECTION 2. DEFINITIONS.
(a) "Applicable Laws" shall mean the legal requirements relating to the
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code and the applicable laws of any
foreign country or jurisdiction where Options or Rights are, or will be, granted
under the Plan.
(b) "Board" shall mean the Company's Board of Directors, as constituted
from time to time.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(d) "Committee" shall mean a committee of the Board, as described in
Section 3(a) hereof, or, if no such committee has been appointed, the Board.
(e) "Company" shall mean Hambrecht & Quist Group, Inc., a Delaware
corporation.
(f) "Consultant" shall mean any person, including an advisor, engaged by
the Company or a Subsidiary to render services and who is compensated for such
services. The term shall also include any Director, whether or not compensated
for his or her services as a Director.
(g) "Contingent Equity Right" shall mean the cash-denominated bonus amount
that is earned by an Employee over a given six-month bonus period and that is
paid in Restricted Stock pursuant to Section 9.
(h) "Director" shall mean a member of the Board.
(i) "Employee" shall mean any individual who is an employee (within the
meaning of Section 3401(c) of the Code and the regulations thereunder) of the
Company or a Subsidiary. Neither service as a Director nor payment of a
Director's fee by the Company shall be sufficient to constitute "employment" by
the Company.
<PAGE>
(j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(k) "Exercise Price" shall mean the amount for which one Share may be
purchased upon exercise of an Option, as specified by the Committee in the
applicable Stock Option Agreement.
(l) "Fair Market Value" shall mean, as of any date, the value of the Stock
determined as follows:
(i) If the Stock is listed on any established stock exchange or
a national market system, including without limitation the Nasdaq National
Market or the Nasdaq SmallCap Market of the Nasdaq Stock Market, its Fair Market
Value shall be the closing sales price for such stock (or the closing bid, if no
sales are reported) as quoted on such exchange or system for the last market
trading day prior to the date of determination, as reported in THE WALL STREET
JOURNAL or such other source as the Committee deems reliable.
(ii) If the Stock is regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be the
mean between the high bid and low asked prices for the Stock on the last market
trading day prior to the date of determination, as reported in THE WALL STREET
JOURNAL or such other source as the Committee deems reliable.
(iii) In the absence of an established market for the Stock, its
Fair Market Value shall be determined in good faith by the Committee.
(m) "ISO" shall mean an incentive stock option described in Section 422 of
the Code.
(n) "NSO" shall mean an Option not intended to qualify as an ISO.
(o) "Officer" shall mean a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(p) "Option" shall mean an ISO or NSO granted under the Plan.
(q) "Optionee" shall mean an individual who holds an Option.
(r) "Plan" shall mean this Hambrecht & Quist Group, Inc. 1996 Stock Plan.
(s) "Restricted Stock" shall mean shares of Common Stock granted under a
Contingent Equity Right and subject to a repurchase right of the Company as
specified in the Restricted Stock Agreement.
(t) "Restricted Stock Agreement" means a written agreement between the
Company and the Optionee evidencing the terms and restrictions applying to stock
granted under a Contingent Equity Right.
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(u) "Right" means a Contingent Equity Right.
(v) "Rule 16b-3" shall mean Rule 16b-3 of the Exchange Act or any
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(w) "Section 16(b)" shall mean Section 16(b) of the Exchange Act.
(x) "Service" shall mean service as an Employee, Consultant or Director of
the Company or a Subsidiary.
(y) "Share" shall mean a share of Stock, as adjusted in accordance with
Section 10 hereof.
(z) "Stock" shall mean the Common Stock of the Company.
(aa) "Stock Option Agreement" shall mean the agreement between the Company
and an Optionee which contains the terms, conditions and restrictions pertaining
to his or her Option.
(bb) "Subsidiary" shall mean any corporation, if the Company and/or one or
more other Subsidiaries own not less than 50 percent of the total combined
voting power of all classes of outstanding stock of such corporation. A
corporation that attains the status of a Subsidiary on a date after the adoption
of the Plan shall be considered a Subsidiary commencing as of such date.
(cc) "Test Rate" shall mean the lowest rate of interest which will not
result in the imputation of additional interest under the applicable provision
of the Code.
SECTION 3. ADMINISTRATION.
(a) Procedure.
(i) If permitted by Rule 16b-3, the Plan may be administered by
different bodies with respect to Directors, Officers who are not Directors, and
Employees who are neither Directors nor Officers.
(ii) With respect to Options and Rights granted to Employees and
Consultants who are also Officers or Directors subject to Section 16(b) of the
Exchange Act, the Plan shall be administered by (A) the Board, if the Board may
administer the Plan in a manner complying with the rules under Rule 16b-3
relating to the disinterested administration of employee benefit plan under
which Section 16(b) exempt discretionary grants and awards of equity securities
are to be made, or (B) a Committee designated by the Board to administer the
Plan, which Committee shall be constituted to comply with the rules under
Rule 16b-3 related to the disinterested administration of employee benefit plans
under which Section 16(b) exempt discretionary grants and awards of equity
securities are to be made. Once appointed, such Committee shall continue to
serve in its designated
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capacity until otherwise directed by the Board. From time to time the Board may
increase the size of the Committee and appoint additional members, remove
members (with or without cause) and substitute new members, fill vacancies
(however caused), and remove all member of the Committee and thereafter directly
administer the Plan, all to the extent permitted by the rules under Rule 16b-3
relating to the disinterested administration of employee benefit plans under
which Section 16(b) exempt discretionary grants and awards of equity securities
are to be made.
(iii) With respect to Options and Rights granted to Employees and
Consultants who are neither Directors nor Officers of the Company, the Plan
shall be administered by (A) the Board, or (B) a Committee designated by the
Board, which Committee shall be constituted to satisfy Applicable Laws. Once
appointed, such Committee shall serve in its designated capacity until otherwise
directed by the Board. The Board may increase the size of the Committee and
appoint additional members, remove members (with or without cause) and
substitute new members, fill vacancies (however caused), and remove all members
of the Committee and thereafter directly administer the Plan, all to the extent
permitted by Applicable Laws.
(b) Committee Procedures. The Board shall designate one of the members of
the Committee as chairman. The Committee may hold meetings at such times and
places as it shall determine. The acts of a majority of the Committee members
present at meetings at which a quorum exists, or acts reduced to or approved in
writing by a majority of all Committee members, shall be valid acts of the
Committee.
(c) Committee Responsibilities. Subject to the provisions of the Plan and
any directions of the Board, the Committee shall have full authority and
discretion to take the following actions:
(i) To interpret the Plan and to apply its provisions;
(ii) To adopt, amend or rescind rules, procedures and forms
relating to the Plan;
(iii) To authorize any person to execute, on behalf of the
Company, any instrument required to carry out the purposes of the Plan;
(iv) To determine when Options and Rights are to be granted under
the Plan;
(v) To select the Optionees and the Employees to whom Rights are
to be granted;
(vi) To determine the number of Shares to be made subject to each
Option and Right;
(vii) To prescribe the terms and conditions of each Option and
Right, including (without limitation) the Exercise Price, to determine whether
any Option is to be classified as an ISO or as a NSO, and to specify the
provisions of the Stock Option Agreement or Restricted Stock Agreement relating
to such Option or Right;
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(viii) To amend any outstanding Stock Option Agreement or
Restricted Stock Agreement, subject to applicable legal restrictions and to the
consent of the Optionee who entered into such agreement; and
(ix) To take any other actions deemed necessary or advisable for
the administration of the Plan.
All decisions, interpretations and other actions of the Committee shall be
final and binding on all Optionees and on all persons deriving their rights from
an Optionee. No member of the Committee shall be liable for any action that he
or she has taken or has failed to take in good faith with respect to the Plan or
any Option or Right.
SECTION 4. ELIGIBILITY.
(a) General Rule. Only Employees (including Officers and Directors of the
Company who are also Employees) shall be eligible for grants of ISOs and Rights;
all Employees, Consultants and Directors of the Company or a Subsidiary shall be
eligible for grants of NSOs.
(b) Ten-Percent Stockholders. An Employee who owns more than 10 percent
of the total combined voting power of all classes of outstanding stock of the
Company or any of its Subsidiaries shall not be eligible for the grant of an ISO
unless (i) the Exercise Price under such Option is at least 110 percent of the
Fair Market Value of a Share on the date of grant and (ii) such Option by its
terms is not exercisable after the expiration of five years from the date of
grant.
(c) Attribution Rules. For purposes of Subsection (b) above, in
determining stock ownership, an Employee shall be deemed to own the stock owned,
directly or indirectly, by or for his or her brothers, sisters, spouse,
ancestors and lineal descendants. Stock owned, directly or indirectly, by or
for a corporation, partnership, estate or trust shall be deemed to be owned
proportionately by or for its stockholders, partners or beneficiaries. Stock
with respect to which such Employee holds an option shall not be counted.
(d) Outstanding Stock. For purposes of Subsection (b) above, "outstanding
stock" shall include all stock actually issued and outstanding immediately after
the grant of the Option to the Optionee. "Outstanding stock" shall not include
reacquired shares or shares authorized for issuance under outstanding options
held by the Optionee or by any other person.
(e) Limitations. The following limitations shall apply to grants of
Options to Employees:
(i) No Employee shall be granted, in any fiscal year of the
Company, Options to purchase more than 500,000 Shares.
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(ii) In connection with his or her initial employment, an
Employee may be granted Options to purchase up to an additional 500,000 Shares
which shall not count against the limit set forth in subsection (i) above.
(iii) The foregoing limitations shall be adjusted proportionately
in connection with any change in the Company's capitalization as described in
Section 10.
(iv) If an Option is canceled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 10), the canceled Option will be counted against the limit
set forth in subsection (i) above. For this purpose, if the exercise price of
an Option is reduced, the transaction will be treated as a cancellation of the
Option and the grant of a new Option.
SECTION 5. STOCK SUBJECT TO PLAN.
(a) Basic Limitation. The aggregate number of Shares which may be issued
under the Plan shall not exceed 3,000,000 Shares, subject to adjustment pursuant
to Section 10 hereof. The number of Shares that may be issued upon exercise of
Options shall not exceed 1,000,000 Shares, subject to adjustment as above. The
number of Shares that may be issued upon exercise of Rights shall not exceed
2,000,000 Shares, subject to adjustment as above. The number of Shares which
are subject to Options and Rights outstanding at any time under the Plan shall
not exceed the number of Shares which then remain available for issuance upon
exercise of Options and Rights, respectively, under the Plan. The Company,
during the term of the Plan, shall at all times reserve and keep available
sufficient Shares to satisfy the requirements of the Plan.
(b) Additional Shares. In the event that any outstanding Option for any
reason expires is canceled or otherwise terminated, the Shares allocable to the
unexercised portion of such Option shall again be available for the purposes of
the Plan. In the event that Restricted Stock is forfeited to the Company, such
Shares shall again be available for grant under the Plan.
SECTION 6. TERMS AND CONDITIONS OF OPTIONS.
(a) Stock Option Agreement. Each grant of an Option under the Plan shall
be evidenced by a Stock Option Agreement between the Optionee and the Company.
Such Option shall be subject to all applicable terms and conditions which are
not inconsistent with the Plan and which the Committee deems appropriate for
inclusion in a Stock Option Agreement. The provisions of the various Stock
Option Agreements entered into under the Plan need not be identical.
(b) Number of Shares. Each Stock Option Agreement shall specify the
number of Shares that are subject to the Option and shall provide for the
adjustment of such number in accordance with Section 10 hereof. The Stock
Option Agreement shall also specify whether the Option is an ISO or a NSO.
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(c) Exercise Price. Each Stock Option Agreement shall specify the
Exercise Price. The Exercise Price shall not be less than 85 percent of the
Fair Market Value, in the case of an NSO, or 100 percent of the Fair Market
Value, in the case of an ISO, of a Share on the date of grant, except as
otherwise provided in Section 4(b). Subject to the preceding sentence, the
Exercise Price under any Option shall be determined by the Committee at its sole
discretion. The Exercise Price shall be payable in accordance with Section 7
hereof.
(d) Withholding Taxes. As a condition to the exercise of an Option, the
Optionee shall make such arrangements as the Committee may require for the
satisfaction of any Federal, state, local or foreign withholding tax obligations
that may arise in connection with such exercise. The Optionee shall also make
such arrangements as the Committee may require for the satisfaction of any
Federal, state, local or foreign withholding tax obligations that may arise in
connection with the disposition of Shares acquired by exercising an Option.
(e) Exercisability and Term. Each Option shall be exercisable at such
times and under such conditions as specified in the Stock Option Agreement.
Options held by an Officer, Director or Consultant may be subject to additional
or greater restrictions. The Stock Option Agreement shall also specify the term
of the Option. The term shall not exceed ten years from the date of grant,
except as otherwise provided in Section 4(b) hereof.
(f) Nontransferability. During an Optionee's lifetime, his or her
Option(s) shall be exercisable only by the Optionee and shall not be
transferable. In the event of an Optionee's death, his or her Option(s) shall
not be transferable other than by will or by the laws of descent and
distribution.
(g) Termination of Service (Except by Death). If an Optionee's Service
terminates for any reason other than the Optionee's death, then his or her
Option(s) shall expire on the earliest of the following occasions:
(i) The expiration date determined pursuant to Subsection (e)
above;
(ii) The date three months after the termination of the
Optionee's Service (other than upon a discharge for Cause (defined below) or
because the Optionee is disabled);
(iii) The time when the Optionee is notified (orally or in
writing) that he or she is being discharged for Cause; or
(iv) The date six months after the termination of the Optionee's
service because the Optionee is disabled.
"Cause" shall mean (i) gross negligence by the Optionee in the performance
of his or her duties; (ii) any act of fraud, misappropriation, dishonesty,
embezzlement or similar conduct against the Company; (iii) conviction of a
felony or any crime involving moral turpitude; or (iv) willful and
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continuing failure by the Optionee to comply with any policy of the Company
which is applicable to Employees of the Company.
The Optionee may exercise all or part of his or her Option(s) to the extent
exercisable on the date of termination at any time before the expiration of such
Option(s) under this subsection (g). The balance of such Option(s) shall lapse
when the Optionee's Service terminates. In the event that the Optionee dies
after the termination of the Optionee's Service but before the expiration of his
or her Option(s), all or part of such Option(s) may be exercised (prior to
expiration) to the extent exercisable on the date of termination by the
executors or administrators of the Optionee's estate or by any person who has
acquired such Option(s) directly from the Optionee by bequest or inheritance.
(h) Leave of Absence. For purposes of Subsection (g) above, Service shall
be deemed to continue while the Optionee is on military leave, sick leave, or
other bona fide leave of absence (as determined by the Committee). The
foregoing notwithstanding, in the case of an ISO granted under the Plan, Service
shall not be deemed to continue beyond the first 90 days of such leave, unless
the Optionee's reemployment rights are guaranteed by statute or by contract.
(i) Death of Optionee. If an Optionee dies while he or she is in Service,
then his or her Option(s) shall expire on the earlier of the following dates:
(i) The expiration date determined pursuant to Subsection (e)
above; or
(ii) The date six months after the Optionee's death.
All or part of the Optionee's Option(s) may be exercised at any time before
the expiration of such Option(s) under the preceding sentence by the executors
or administrators of the Optionee's estate or by any person who has acquired
such Option(s) directly from the Optionee by bequest or inheritance, but only to
the extent that such Option(s) had become exercisable before his or her death.
(j) No Rights as a Stockholder. An Optionee, or a transferee of an
Optionee, shall have no rights as a stockholder with respect to any Shares
covered by an Option until the date of the issuance of a stock certificate for
such Shares. No adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property), distributions or
other rights for which the record date is prior to the date when such stock
certificate is issued, except as provided in Section 10 hereof.
(k) Modification, Extension and Renewal of Options. Within the
limitations of the Plan, the Committee may modify, extend or renew outstanding
Options or may accept the cancellation of outstanding Options (to the extent not
previously exercised) for the granting of new Options in substitution therefor.
The foregoing notwithstanding, no modification of an Option shall, without the
consent of the Optionee, alter or impair his or her rights or obligations under
such Option.
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(l) Restrictions on Transfer of Shares. Subject to the limitations of
applicable state and federal securities law, any Shares issued upon exercise of
any Option shall, in addition to federal and state securities laws restrictions,
be subject to such special rights of repurchase, rights of first refusal and
other transfer restrictions as the Committee may determine. Such restrictions
shall be set forth in the applicable Stock Option Agreement and shall apply in
addition to any general transfer restrictions that may apply to all holders of
Shares and that may be permitted under applicable state and federal securities
law.
(m) Buyout Provisions. The Committee may at any time offer to buy out for
a payment in cash an Option previously granted, or authorize an Optionee to
elect to cash out an Option previously granted, in either case at such time and
based upon such terms and conditions as the Committee shall establish. Any such
buy-out offer or cash-out election made with respect to Options granted or held
by persons subject to Section 16 of the Exchange Act shall comply with the
applicable provisions of Rule 16b-3 of the Exchange Act.
(n) Rule16b-3. Options granted to individuals subject to Section 16 of
the Exchange Act must comply with the applicable provisions of Rule 16b-3 and
shall contain such additional conditions or restrictions as may be required
thereunder to qualify for the maximum exemption from Section 16 to the Exchange
Act with respect to Plan transactions.
SECTION 7. PAYMENT FOR SHARES.
(a) General Rule. The Committee shall determine the acceptable form of
consideration for exercising an Option, including the method of payment. In the
case of an ISO, the Committee shall determine the acceptable form of
consideration at the time of grant. Such consideration may consist entirely of
(i) cash; (ii) check; (iii) surrender of stock as described in Subsection (b)
below; (iv) promissory note as described in Subsection (c) below; (v) delivery
of a properly executed exercise notice together with such other documentation as
the Committee and the broker, if applicable, shall require to effect an exercise
of the Option and delivery to the Company of the sale or loan proceeds required
to pay the exercise price; (vii) any combination of the foregoing methods of
payment; or (viii) any other means by which the Committee, in its sole
discretion, determines both to provide legal consideration for the Shares and to
be consistent with the purposes of the Plan.
(b) Surrender of Stock. To the extent that this Subsection (b) is
applicable, payment may be made with Shares which have already been owned by the
Optionee for more than six months and which are surrendered to the Company in
good form for transfer. Such Shares shall be valued at their Fair Market Value
on the date when the new Shares are purchased under the Plan.
(c) Promissory Notes. To the extent that this Subsection (c) is
applicable, payment may be made with a limited-recourse promissory note executed
by the Optionee. Such note shall bear interest at a rate not less than the
applicable Test Rate. Subject to the preceding sentence, the Committee (at is
sole discretion) shall specify the term, interest rate, amortization
requirements (if any), and other provisions of such note. The Committee may
require that the Optionee pledge his or
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her Shares to the Company for the purpose of securing the payment of such note,
and the committee may require that the certificate(s) representing such Shares
be held in escrow in order to perfect the Company's security interest.
SECTION 8. LIMITATION ON ANNUAL ISO AWARDS.
To the extent that the aggregate Fair Market Value (determined as of the
date when an Option is granted) of the stock for which any ISO first becomes
exercisable in any calendar year under this Plan and under all other plans
maintained by the Company or its Subsidiaries exceeds $100,000, such excess
Shares shall be treated as having been granted subject to an NSO.
SECTION 9. CONTINGENT EQUITY RIGHTS.
(a) General. The Company's 1996 Bonus Plan provides that, if the amount
of an Employee's compensation for a given six-month period exceeds $100,000, 80%
of the amount of such Employee's bonus (the "Bonus Amount") for such six-month
period shall be paid in cash. The remaining 20% may, at the election of the
Employee and subject to the consent of the Committee, be paid either in cash,
subject to the terms of the 1996 Bonus Plan, or in the form of a Contingent
Equity Right granted under this Plan.
(b) Form of Payment. Each Contingent Equity Right shall be paid in the
form of Restricted Stock. The number of Shares shall be determined by dividing
the cash-denominated value of 20% of the Bonus Amount by 90% of the Fair Market
Value of a Share on the date of grant of the Right, rounded up to the nearest
whole Share. The payment of the Restricted Stock shall be evidenced by a Notice
of Award of Restricted Stock that, together with a Restricted Stock Agreement,
shall specify the applicable vesting restrictions, the amount of Restricted
Stock awarded, and such other terms and conditions as the Committee, in its sole
discretion, shall determine.
(c) Termination of Employment. In the event a Participant's status as an
Employee of the Company terminates for any or no reason, any unvested Restricted
Stock previously awarded to the Participant shall be forfeited to the Company
without consideration to the Participant.
(d) Rule 16b-3. Contingent Equity Rights granted to persons subject to
Section 16(b), and Shares granted to persons in connection with such Rights,
shall be subject to any restrictions applicable thereto in compliance with Rule
16b-3.
(e) Other Provisions. The Restricted Stock Agreement shall contain such
other terms, provisions and conditions not inconsistent with the Plan as may be
determined by the Committee in its sole discretion. In addition, the provisions
of Restricted Stock Agreements need not be the same with respect to each
purchaser.
(f) Rights as a Stockholder. Once Restricted Stock is granted to an
Employee pursuant to a Contingent Equity Right, such Employee shall have rights
equivalent to those of a stockholder and shall be a stockholder when the grant
is entered upon the records of the duly authorized transfer
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agent of the Company. No adjustment shall be made for a dividend or other right
for which the record date is prior to the date the Restricted Stock is granted,
except as provided in Section 10 of the Plan.
(g) Non-Transferability of Rights. Rights may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution.
SECTION 10. ADJUSTMENT OF SHARES.
(a) Changes in Capitalization. Subject to any required action by the
stockholders of the Company, the number of shares of Stock covered by each
outstanding Option and Right, and the number of shares of Stock which have been
authorized for issuance under the Plan but as to which no Options or Rights have
yet been granted or which have been returned to the Plan upon cancellation or
expiration of an Option or Right, as well as the price per share of Stock
covered by each such outstanding Option or Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Stock
resulting from a stock split, reverse stock split, stock dividend, combination
or reclassification of the Stock, or any other increase or decrease in the
number of issued shares of Stock effected without receipt of consideration by
the Company; provided, however, that conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Stock subject to an Option or Right.
(b) Dissolution or Liquidation. In the event of the proposed dissolution
or liquidation of the Company, the Committee shall notify each Optionee as soon
as practicable prior to the effective date of such proposed transaction. The
Committee in its discretion may provide for an Optionee to have the right to
exercise his or her Option until ten (10) days prior to such transaction as to
some or all of the Stock covered thereby, including Shares as to which the
Option would not otherwise be exercisable. In addition, the Committee may
provide that any Company repurchase option applicable to any Shares purchased
upon exercise of an Option or Right shall lapse as to some or all such Shares,
provided the proposed dissolution or liquidation takes place at the time and in
the manner contemplated. To the extent not previously exercised, Options and
Rights shall terminate immediately prior to the consummation of such proposed
action.
(c) Change of Control. In the event of a Change of Control (as defined
below) of the Company, outstanding Options may be assumed or equivalent options
substituted by the successor corporation or a parent or Subsidiary of the
successor corporation. In the event that the successor corporation refuses to
assume or substitute for an Option, such Option shall thereupon become vested to
the extent that it would otherwise have been vested twelve months after the date
of the Change of Control, assuming the continued employment or consulting
relationship of the Optionee
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with the Company. In such event, the Committee shall notify the Optionee that
such Option shall be exercisable for a period of fifteen (15) days from the date
of such notice, and such Option shall terminate upon the expiration of such
period.
In addition, in such event any shares granted under a Right shall
automatically become vested to such extent, assuming the continued employment of
the Employee with the Company.
For purposes of this Section 10(c), an Option shall be considered
assumed if, following the Change of Control, the option or right confers the
right to purchase or receive, for each Share of Optioned Stock subject to the
Option immediately prior to the Change of Control, the consideration (whether
stock, cash, or other securities or property) received in the Change of Control
by holders of Stock for each Share held on the effective date of the Change of
Control (and if holders were offered a choice of consideration, the type of
consideration chosen by the holders of a majority of the outstanding Shares);
provided, however, that if such consideration received in the Change of Control
is not solely common stock of the successor corporation or its parent
corporation, the Committee may, with the consent of the successor corporation,
provide for the consideration to be received upon the exercise of the Option,
for each Share of Optioned Stock subject to the Option, to be solely common
stock of the successor corporation or its parent corporation equal in fair
market value to the per share consideration received by holders of Stock in the
Change of Control.
For purposes of this Section 10(c), a "Change of Control" of the
Company shall be deemed to occur upon any of the following: (i) a merger or
other reorganization in which the stockholders of the Company immediately prior
to such transaction do not hold directly or indirectly at least 50% of the
voting power of the surviving entity or the parent corporation of the surviving
entity immediately following such merger or other reorganization; or (ii) the
sale of all or substantially all of the Company's assets.
SECTION 11. LEGAL REQUIREMENTS.
Shares shall not be issued under the Plan unless the issuance and delivery
of such Shares complies with (or is exempt from) all applicable requirements of
law, including (without limitation) the Securities Act of 1933, as amended, the
rules and regulations promulgated thereunder, state securities laws and
regulations, and the regulations of any stock exchange on which the Company's
securities may then be listed.
SECTION 12. NO EMPLOYMENT RIGHTS.
No provision of the Plan, nor any Option or Right granted under the Plan,
shall be construed to give any person any right to remain an Employee, Director,
Consultant or stockholder. The Company and its Subsidiaries reserve the right
to terminate any person's Service at any time, with or without cause.
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SECTION 13. DURATION AND AMENDMENTS.
(a) Term of the Plan. The Plan, as set forth herein, shall become
effective on the effective date of its adoption by the Board, subject to the
approval of the Company's stockholders. The Plan shall terminate automatically
ten years after its effective date, and may be terminated on any earlier date
pursuant to Subsection (b) below.
(b) Stockholder Approval. The Board may at any time amend, alter, suspend
or terminate the Plan. The Company shall obtain stockholder approval of any
Plan amendment to the extent necessary and desirable to comply with Rule 16b-3
or with Section 422 of the Code (or any successor rule or statute or other
applicable law, rule or regulation, including the requirements of any exchange
or quotation system on which the Stock is listed or quoted). Such stockholder
approval, if required, shall be obtained in such a manner and to such a degree
as is required by the applicable law, rule or regulation.
(c) Effect of Amendment or Termination. No Shares shall be issued or sold
under the Plan after the termination thereof, except upon exercise of an Option
or Right granted prior to such termination. The termination of the Plan, or any
amendment thereof, shall not affect any Shares previously granted or sold, or
any Option or Right previously granted under the Plan.
SECTION 14. USE OF PROCEEDS.
All cash proceeds received by the Company from the sale of Shares under the
Plan shall be used for general corporate purposes.
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HAMBRECHT & QUIST GROUP
A CALIFORNIA CORPORATION
1995 RESTRICTED STOCK PLAN
1995 STOCK OPTION PLAN
HAMBRECHT & QUIST, L.P.
A CALIFORNIA LIMITED PARTNERSHIP
1995 LIMITED PARTNERSHIP UNIT PLAN
CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH OR
APPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION. THIS MEMORANDUM
DOES NOT CONSTITUTE AN OFFER IN ANY JURISDICTION
IN WHICH AN OFFER IS NOT AUTHORIZED.
THE SHARES OF HAMBRECHT AND QUIST GROUP COMMON STOCK DESCRIBED HEREIN ARE
SUBJECT TO THE PROVISIONS OF A SHAREHOLDERS' AGREEMENT AND A STOCK PURCHASE
AGREEMENT CONTAINING CERTAIN REPRESENTATIONS, WARRANTIES, TERMS AND CONDITIONS,
INCLUDING SUBSTANTIAL RESTRICTIONS ON TRANSFER. ANY SALES OF OR INVESTMENTS IN
COMMON STOCK SHOULD BE MADE ONLY AFTER A COMPLETE AND THOROUGH REVIEW OF THIS
MEMORANDUM AND THE PROVISIONS OF THE STOCK PURCHASE AGREEMENT AND THE
SHAREHOLDERS' AGREEMENT. THE LIMITED PARTNERSHIP UNITS OF HAMBRECHT & QUIST,
L.P. ARE SUBJECT TO THE PROVISIONS OF THE LIMITED PARTNERSHIP AGREEMENT AND A
SUBSCRIPTION AGREEMENT CONTAINING CERTAIN REPRESENTATIONS, WARRANTIES, TERMS AND
CONDITIONS, INCLUDING SUBSTANTIAL RESTRICTIONS ON TRANSFER. ANY SALES OF OR
INVESTMENTS IN LIMITED PARTNERSHIP UNITS SHOULD BE MADE ONLY AFTER A COMPLETE
AND THOROUGH REVIEW OF THIS MEMORANDUM AND THE PROVISIONS OF THE LIMITED
PARTNERSHIP AGREEMENT AND THE SUBSCRIPTION AGREEMENT.
Securities under the Plans are offered, as set forth herein, to eligible
directors, officers and employees of and consultants to Hambrecht & Quist Group
and its affiliated companies, as determined by Hambrecht & Quist Group's Board
of Directors. For a description of the Securities being offered, see
"Description of Common Stock" and "Description of Limited Partnership Units" in
this Confidential Private Placement Memorandum.
JANUARY 1996
<PAGE>
THE SALE OR TRANSFER OF THE SHARES DESCRIBED HEREIN IS RESTRICTED BY THE
PROVISIONS OF A SHAREHOLDERS' AGREEMENT, AS THE SAME MAY BE AMENDED, AMONG THE
PARTIES NAMED THEREIN, A COPY OF WHICH MAY BE INSPECTED AT THE PRINCIPAL OFFICE
OF THE ISSUER OF SUCH SHARES, AND ALL OF THE PROVISIONS OF WHICH ARE HEREBY
INCORPORATED HEREIN BY REFERENCE, WHICH AGREEMENT ALSO PROVIDES THAT IN CERTAIN
EVENTS SPECIFIED THEREIN, THE SHARES OFFERED HEREBY MAY BE PURCHASED FROM THE
HOLDER BY SUCH ISSUER OR ANY ASSIGNEE.
THE SALE OR TRANSFER OF THE LIMITED PARTNERSHIP UNITS DESCRIBED HEREIN IS
RESTRICTED BY THE PROVISION'S OF THE LIMITED PARTNERSHIP AGREEMENT, AS THE SAME
MAY BE AMENDED, AMONG THE PARTIES NAMED THEREIN, A COPY OF WHICH MAY BE
INSPECTED AT THE PRINCIPAL OFFICE OF THE ISSUER OF SUCH UNITS, AND ALL OF THE
PROVISIONS OF WHICH ARE HEREBY INCORPORATED BY REFERENCE, WHICH AGREEMENT ALSO
PROVIDES THAT IN CERTAIN EVENTS SPECIFIED THEREIN, THE UNITS OFFERED HEREBY MAY
BE PURCHASED FROM THE HOLDER BY SUCH ISSUER OR ANY ASSIGNEE.
THE SECURITIES DESCRIBED HEREIN HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
THE SECURITIES ACT, AN APPLICABLE EXEMPTION OR AN OPINION OF COUNSEL
SATISFACTORY TO THE ISSUER THAT SUCH REGISTRATION IS NOT REQUIRED.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED IN THIS MEMORANDUM, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY HAMBRECHT & QUIST GROUP OR BY HAMBRECHT & QUIST, L.P.
<PAGE>
TABLE OF CONTENTS
PAGE
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
CHANGE IN CORPORATE STRUCTURE. . . . . . . . . . . . . . . . . . . . 1
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. Illiquid Securities. . . . . . . . . . . . . . . . . . . . . 1
2. Dependence on Key Personnel. . . . . . . . . . . . . . . . . 1
3. Securities Industry Risks. . . . . . . . . . . . . . . . . . 1
4. Underwriting and Trading Risks . . . . . . . . . . . . . . . 2
5. Long-Term Investments. . . . . . . . . . . . . . . . . . . . 2
6. Regulation . . . . . . . . . . . . . . . . . . . . . . . . . 2
7. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . 2
8. No Dividends . . . . . . . . . . . . . . . . . . . . . . . . 2
DESCRIPTION OF SHAREHOLDERS' AND LIMITED
PARTNERSHIP AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . 3
1. Right of First Refusal Option. . . . . . . . . . . . . . . . 3
2. Permitted Transfers. . . . . . . . . . . . . . . . . . . . . 3
3. Right of Repurchase. . . . . . . . . . . . . . . . . . . . . 4
4. Computation and Payment of Purchase Price. . . . . . . . . . 4
5. Option to Purchase Assets. . . . . . . . . . . . . . . . . . 4
6. Amendment or Termination of Agreements . . . . . . . . . . . 5
7. Investment Representations; Custody of Certificates. . . . . 5
8. Authority of Board of Directors. . . . . . . . . . . . . . . 5
USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
DESCRIPTION OF COMMON STOCK. . . . . . . . . . . . . . . . . . . . . 5
DESCRIPTION OF LIMITED PARTNERSHIP UNITS . . . . . . . . . . . . . . 6
DIVIDEND AND INVESTMENT POLICIES . . . . . . . . . . . . . . . . . . 6
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1. General. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2. Results of Operations. . . . . . . . . . . . . . . . . . . . 7
3. Investment Banking Activities. . . . . . . . . . . . . . . . 8
4. Brokerage Activities . . . . . . . . . . . . . . . . . . . . 8
5. Dealer and Market-Making Activities. . . . . . . . . . . . . 9
6. Research . . . . . . . . . . . . . . . . . . . . . . . . . . 9
7. Venture Capital Activities . . . . . . . . . . . . . . . . . 9
8. H & Q Asia Pacific, Ltd. . . . . . . . . . . . . . . . . . . 10
9. Investment Advisory Activities . . . . . . . . . . . . . . . 11
10. Regulation . . . . . . . . . . . . . . . . . . . . . . . . . 11
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TABLE OF CONTENTS, CONTINUED
11. Employees. . . . . . . . . . . . . . . . . . . . . . . . . . 13
12. Properties . . . . . . . . . . . . . . . . . . . . . . . . . 13
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1. Directors and Senior Executive Officers. . . . . . . . . . . 13
2. Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . 15
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . 16
PRINCIPAL UNIT HOLDERS . . . . . . . . . . . . . . . . . . . . . . . 17
CERTAIN TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . 17
LITIGATION AND CONTINGENT LIABILITIES. . . . . . . . . . . . . . . . 18
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . 20
EXHIBITS
Exhibit A - Description of the 1995 Stock Option Plan
Exhibit B - 1995 Stock Option Plan
Exhibit C - Description of the 1995 Restricted Stock Plan
Exhibit D - 1995 Restricted Stock Plan
Exhibit E - Shareholders' Agreement
Exhibit F - Description of the 1995 Limited Partnership Unit Plan
Exhibit G - 1995 Limited Partnership Unit Plan
Exhibit H - Limited Partnership Agreement
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INTRODUCTION
This Confidential Private Placement Memorandum (the "Memorandum") describes
Hambrecht & Quist Group ("H&Q Group") and Hambrecht & Quist, L.P. (H&Q LP) or,
together with their subsidiaries, the "Firm" and the options to purchase Common
Stock of H&Q Group to be issued under the 1995 Stock Option Plan (the "SOP"),
the Common Stock of H&Q Group to be issued under the 1995 Restricted Stock Plan
(the "RSP"), and the limited partnership units ("Units") of H&Q LP to be issued
under the 1995 Limited Partnership Unit Plan (the "LPUP") (collectively referred
to as the "Securities" and the "Plans"). Under the Plans, Securities are
offered and sold exclusively to directors, officers and employees of and
consultants to the Firm and its affiliated companies.
CHANGE IN CORPORATE STRUCTURE
On May 1, 1995, Hambrecht & Quist LLC ("H&Q LLC") was formed as a successor
to Hambrecht & Quist Incorporated ("H&Q Inc."), a wholly owned subsidiary of H&Q
Group, and the contribution of securities and cash from H&Q LP. For their
contributions, H&Q Group and H&Q LP became 70% and 30% owners of the new entity,
respectively. References to the surviving entity, H&Q LLC, should also be
considered references to the predecessor entity, H&Q Inc., if the context so
requires.
RISK FACTORS
Substantial risks are inherent in the operation of a securities
broker/dealer and in the investment in the Firm's Securities. Prospective
investors should consider, among other factors, the following:
1. ILLIQUID SECURITIES
The Firm's Securities are illiquid and are subject to the restrictions on
transfer and right of first refusal and repurchase options provided for in the
Shareholders' Agreement and the Limited Partnership Agreement. See "Description
of Shareholders' Agreement and Limited Partnership Agreement." Such restrictions
on transfer and options limit the time and price at which security holders may
transfer Securities. There is no established trading market for the Securities
and there can be no assurance that one will ever develop.
2. DEPENDENCE ON KEY PERSONNEL
The operation of the Firm is dependent on the continued services of certain
key personnel. The termination of any key employee's employment with the Firm
could have a material adverse effect on its operations.
3. SECURITIES INDUSTRY RISKS
Risks are inherent in the nature of the securities business. The
investment industry is affected by national and international economic
conditions, broad trends in business-and finance and changes in legislation or
regulation by governmental or other regulatory agencies. See "Business --
Results of Operations." The Firm's profits are heavily dependent on investment
banking, "over-the-counter" and listed securities sales and trading profits and
securities price levels.
The Firm is particularly dependent on the market's receptiveness to
securities offerings involving high growth companies in the technology,
biotechnology, medical products, health care services, and branded consumer
growth companies. Accordingly, revenues are subject to significant fluctuations
from year to year. See "Business -- Results of Operations." Reduced
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trading volume and lower securities prices can result in lower commission and
trading revenues and losses in trading inventory accounts and syndication
positions. Operating and overhead expenses generally do not decline immediately
or in direct response to reduced levels of business activity. In recent years,
there has been increasing incidence of litigation involving the securities
industry. See "Litigation".
4. UNDERWRITING AND TRADING RISKS
In connection with both the participation in securities underwriting and
the maintenance of trading positions in securities, the Firm is exposed to
substantial risk of loss from fluctuations in the market price of securities.
There can be no assurances that the Firm will not be exposed to future market
volatility given its capital commitment to market making activities. In
addition, as an underwriter, the Firm is subject to risk of substantial
liability, expense and adverse publicity resulting from claims against
underwriters that may be made under the federal and state securities laws.
5. LONG-TERM INVESTMENTS
The Firm has invested a significant portion of its total assets in venture
capital and similar long-term investments, which are illiquid and subject to a
high degree of risk. A decline in the value of these investments would result
in a decrease in the Net Book Value of the Firm and a reduction in the value of
the Firm's Securities as presently computed. Furthermore, due to their
illiquidity, long-term investments are not immediately available to satisfy the
regulatory capital needs of H&Q LLC.
6. REGULATION
H&Q LLC is registered as a broker-dealer with the Securities and Exchange
Commission (the "SEC") and the securities regulatory authorities of each state,
and is a member of the National Association of Securities Dealers and the New
York, American, Midwest and Pacific Stock Exchanges. The Firm's investment
advisory and venture capital activities are also subject to various securities
laws. Failure to comply with applicable laws or regulations could result in
censures, fines, suspensions or expulsions which could have a materially adverse
effect on the Firm's business and financial condition. See "Business --
Regulation."
7. LITIGATION
Litigation risks arise not only from the Firm's traditional investment
banking and securities brokerage activities, but also because the Firm's venture
capital funds have substantial investments in, and its officers and employees
may be directors of, a number of companies which may experience significant
fluctuations in operating results and stock prices. Securities suits frequently
purport to be brought for the benefit of large classes of investors and
typically seek substantial amounts in damages. The Firm has been named as a
defendant in a number of such suits. If the plaintiffs in such suits are
successful, the damage awards or settlement amounts payable by the Firm could be
substantial and could have a significant adverse effect on the Firm's financial
condition. See "Litigation and Contingent Liabilities."
8. NO DIVIDENDS
The Firm does not intend to pay dividends on, or make any other
distributions with respect to, its Common Stock. H&Q LP willl, however, use its
best efforts to distribute cash to limitedpartners to facilitate their payment
of current tax obligations; there can be no assurane, however, that such
distributions will be made. (See "Description of Limited Partnership Units").
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DESCRIPTION OF SHAREHOLDERS' AGREEMENT AND LIMITED
PARTNERSHIP AGREEMENT
Each person who acquires Securities through purchase under the RSP or the
LPUP, or pursuant to the exercise of an option issued under the SOP
("Securityholder"), will be required to enter into a Shareholders' Agreement or
in the case of limited partnership units, a Limited Partnership Agreement,
providing for (a) a right of first refusal option in favor of the Firm and its
other shareholders or limited partners in the event he of she desires to sell or
otherwise transfer Securities (except in limited circumstances), and (b) a right
of repurchase in favor of the Firm and its other shareholders or limited
partners upon termination of employment.
THE RESTRICTIONS IMPOSED BY THE SHAREHOLDERS' AGREEMENT AND LIMITED
PARTNERSHIP AGREEMENT HAVE A SUBSTANTIAL EFFECT ON THE ECONOMIC AND OTHER
CHARACTERISTICS OF AN INVESTMENT IN THE SECURITIES. THE FOLLOWING SUMMARY IS
NOT A COMPLETE DESCRIPTION OF EITHER OF THESE AGREEMENTS. A COPY OF THE FULL
TEXT OF THE AGREEMENTS IS ATTACHED TO THIS OFFERING CIRCULAR AS EXHIBITS E AND
H, RESPECTIVELY. ALL PROSPECTIVE PURCHASERS OF SECURITIES ARE URGED TO REVIEW
THE FULL AGREEMENTS CAREFULLY.
1. RIGHT OF FIRST REFUSAL OPTION
The Shareholder's Agreement and the Limited Partnership Agreement provide
that, except as described in "Permitted Transfers" below, no Securityholder may
transfer or encumber any Securities in any manner without first notifying the
Firm of the terms (including price) of the intended transfer or encumbrance.
Upon such notice, the Firm has the exclusive option for 60 days to purchase all
of the Securities proposed to be transferred at the the price stated in the
notice.
The Board has the right to waive or assign the right of first refusal
option. If such option is waived or expires unexercised (which could have
adverse tax consequences for the Securityholder), the Securityholder is entitled
to complete the proposed transfer on the terms described in the notice at any
time within 60 days.
No purported transfer of Securities in violation of the Shareholder's
Agreement or the Limited Partnership Agreement is valid or effective.
2. PERMITTED TRANSFERS
For the purpose of accommodating Securityholders' estate planning needs,
limited transfers of Securities may be made, provided that (a) each transferee
becomes a party to the applicable agreement, and (b) the Firm and its counsel
are satisfied that the restrictions imposed by the applicable agreement have
become legally binding on such transferee and such transfer complies with all
applicable laws and regulations and will not subject the Firm or any affiliated
entity to any additional regulatory requirements. The only transfers permitted
by this provision are (i) gifts by a Securityholder to one or more trustees for
the benefit of the transferor or his spouse or descendants, and (ii) transfers
by such a trustee or custodian back to the original transferor.
It should be noted that further transfers may not be made by trustees or
custodians to beneficial owners other than the original transferor.
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3. RIGHT OF REPURCHASE
Under the Shareholder's Agreement and the Limited Partnership Agreement,
the Firm has the right (for a period of 90 days from the date the Firm is
advised of such event having taken place), BUT NOT THE OBLIGATION, to repurchase
any or all Securities held by a Securityholder who has his employment with the
Firm or any affiliated entity terminated for any reason.
The purchase price of any Securities repurchased in connection with the
Firm exercising its right to repurchase is equal to the then fair market value
of the Securities as determined in good faith by the Board. One of the factors
considered in determining fair market value will be the Securities' Net Book
Value as of the end of the calendar quarter preceding the event giving rise to
the repurchase.
The right of repurchase is waived in the case of any employee who confirms
to the Firm in writing within ten days after resignation or termination, of
employment that he has not and does not intend to become employed by any other
broker-dealer or any investment adviser within the next two years, and who also
agrees that in the event he nevertheless does become so employed, he shall
immediately notify the Firm and offer to the Firm the right to repurchase his
Securities for a period of ninety days at Net Book Value as of the last business
day of the calendar quarter immediately preceding his resignation or termination
of employment. The Board has the right to assign or further waive the right of
repurchase.
The right of repurchase terminates upon an initial public offering of the
Securities.
4. COMPUTATION AND PAYMENT OF PURCHASE PRICE
The term "Net Book Value" of the Firm means the sum of H&Q Group's
consolidated shareholders' equity and H&Q LP's consolidated Member's Equity, as
determined by the Board in accordance with generally accepted accounting
principles, subject, however, to special procedures (to the extent they may
differ from generally accepted accounting principles) to determine the fair
value of investment entities, securities and exchange memberships.
The price of any Securities purchased under the right of first refusal
option or the right of repurchase will be paid to persons who are not officers,
directors or consultants to the Firm by check for the amount of the purchase
price. Subject to the additional limitations described below, for officers,
directors and consultants of the Firm, an amount up to 2% of the Firm's total
Net Book Value will be paid by check promptly after determination of the
purchase price; any amount in excess of 2% of the Firm's total Net Book Value
will be paid by delivery of one or more unsecured interest-bearing promissory
notes payable over a period of up to three years, as described more fully in the
Shareholder's Agreement and the Limited Partnership Agreement.
Aggregate payments to repurchase Securities from officers, directors or
consultants in any 12-month period may not exceed 20% of the Firm's total Net
Book Value unless the Board waives the 20% limit. If the 20% limit is enforced,
payments to all affected persons will be delayed until such time as payments can
be made without exceeding the limit. In no event may the Firm make any payment
to a former Securityholder who is an officer, director or conultant if the
payment would violate or subject the Firm or any affiliated entity or individual
to liability under any applicable law, rule or regulation. Interest will accrue
on all payments which are delayed as a result of the foregoing limitations.
5. OPTION TO PURCHASE ASSETS
If the amount of Common Stock being repurchased from a Shareholder
constitutes 2% or more of H&Q Group's outstanding Common Stock, the Shareholder
will have the option (subject to certain limitations) to purchase from H&Q Group
for cash, at the values used in computing the
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fair market value of the Common Stock being repurchased, a pro rata portion of
the Firm's securities and other assets held for investment. If the amount of
Units being repurchased from a limited partner constitutes 2% or more of H&Q
LP's outstanding Units, the limited partner will have the option (subject to
certain limitations) to purchase from H&Q LP for cash, at the values used in
computing the fair market value of the Units being purchased, a pro rata portion
of H&Q LP's securities and other assets held for investment.
6. AMENDMENT OR TERMINATION OF AGREEMENTS
The Shareholders' Agreement may be amended or terminated only with the
consent of the, Firm and Shareholders holding a majority of the Securities
outstanding on the effective date of the amendment. However, no amendment which
materially increases the restrictions imposed upon, or materially and adversely
alters the computation or payment of the purchase price of, any Securities will
be applicable to such shares until the holder has consented to the amendment.
By signing the Shareholder's Agreement, each Shareholder appoints each of the
officers of the Firm his attorney-in-fact to execute any amendment to the
Shareholder's Agreement for the sole purpose of adding or deleting Shareholders
or making other non-substantive changes. Similar provisions are found in the
Limited Partnership Agreement.
7. INVESTMENT REPRESENTATIONS; CUSTODY OF CERTIFICATES
The Shareholder's Agreement and the Limited Partnership Agreement contain
customary representations by each Securityholder that he is acquiring Securities
solely for his own account and not with a view to any sale or distribution
thereof. All certificates will bear restrictive legends describing the various
legal and contractual restrictions on the transfer of Securities, and the Firm's
transfer records will contain appropriate notations of such restrictions. The
Secretary of the Firm will hold certificates in escrow for Shares or Units
subject to vesting provisions or purchased with a promissory note.
8. AUTHORITY OF BOARD OF DIRECTORS
Although it is contemplated that each person who acquires Common Stock will
become a party to the Shareholders' Agreement, the Board is authorized to waive
this requirement in any case and to permit any person to acquire Common Stock at
any time, from H&Q Group or otherwise, without becoming subject to the
Shareholders' Agreement. The Board is also authorized to release any
shareholder or shares of Common Stock from coverage under the Shareholders'
Agreement, although such an action could have adverse tax consequences for the
shareholder.
USE OF PROCEEDS
All cash proceeds to H&Q Group from sales of Common Stock and to H&Q LP
from sales of Units under the Plans will be used by the Firm as general working
capital to support the Firm's operations. No part of the proceeds from the
Plans has been allocated for any particular purpose.
DESCRIPTION OF COMMON STOCK
H&Q Group is currently authorized to issue up to 10,000,000 shares of
Common Stock and is not authorized to issue any shares of preferred stock or
other capital stock. Holders of Common Stock are entitled to one vote per share
on all matters to be voted on by shareholders, except that holders are entitled
to cumulate their votes in the election of directors. Holders of Common Stock
are entitled to receive such dividends, if any, as may be declared from time to
time by the Board of Directors in its discretion from funds legally available
therefor. See "Dividend and Investment Policies." Upon any liquidation or
dissolution of H&Q Group, the assets of H&Q Group remaining after satisfaction
of all liabilities and obligations would be distributed ratably
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among the holders of Common Stock. The Common Stock has no preemptive or other
subscription rights, and there are no conversion rights or redemption or sinking
fund provisions with respect to such shares. All of the shares of Common Stock
are fully paid and non assessable and holders thereof are not liable to further
calls or assessments by the issuer. There were 3,645,839 shares of Common
Stock, and options covering 733,607 shares (which includes 362,005 options
issued outside of the 1985 Stock Option Plan and 152,000 options which the Firm
has agreed to issue pending qualification with the California Department of
Corporations) of Common Stock, outstanding as of September 30, 1995.
DESCRIPTION OF LIMITED PARTNERSHIP UNITS
Class A Units may only be issued to shareholders of H&Q Group, and Class B
Units may only be issued to holders of options to purchase the Common Stock of
H&Q Group, at a ratio of one Class A Unit for every fifty shares of Common Stock
of H&Q Group held, and one Class B Unit for every option to purchase fifty
shares of Common Stock of H&Q Group held. Class B Units are converted to Class
A Units upon the exercise of options to purchase the Common Stock of H&Q Group.
Class B Units for which the option to purchase H&Q Group Common Stock has lapsed
are repurchased by H&Q LP at the original purchase price for each Class B Unit.
Except with respect to the identity of the persons who may hold Class B Units,
and the conversion and purchase provisions specified above, Class A Units and
Class B Units are identical.
H&Q LP is currently authorized to issue up to 200,000 Class A Units and
50,000 Class B Units, and is not authorized to issue any other class of
partnership units. Holders of Class A and Class B Units are entitled to one
vote per Unit on all matters to be voted on by limited partners. The General
Partner must make reasonable efforts to make distributions as necessary to the
holders of Units to cover their federal and state income tax liabilities. Upon
any liquidation or dissolution of H&Q LP, the assets of H&Q LP remaining after
satisfaction of all liabilities and obligations would be distributed ratably
among the holders of Units. All of the outstanding Units are fully paid and non
assessable. There were 72,917 Class A Units and 14,672 Class B Units
outstanding as of September 30, 1995.
DIVIDEND AND INVESTMENT POLICIES
H&Q Group plans to retain all of its net income as working capital or for
investment in fixed assets or investment securities. Accordingly, H&Q Group
does not plan to pay any dividends on Common Stock for the foreseeable future.
A substantial part of the Firm's income and financial resources is expected to
be provided by H&Q LLC, which is subject to significant restrictions on its
ability to pay dividends to H&Q Group. See "Business-Regulation."
H&Q LP plans to make distributions as necessary to holders of Units to
cover estimated individual tax liabilities based on estimated K-1 income.
BUSINESS
1. GENERAL
The Firm, with its subsidiaries and affiliates, is a venture capital and
investment banking firm founded in 1968 which serves companies in the
technology, life sciences, consumer products, environmental and service
industries exhibiting substantial growth potential, and investors interested in
such companies. The Firm conducts its business nationally as well as
internationally (primarily in Europe and the Pacific Rim). It provides venture
capital, securities brokerage and investment banking services to individual,
corporate and institutional clients and makes markets in approximately 297 over-
the-counter securities. The Firm's broker-dealer subsidiary, H&Q LLC, is a
member of the New York, American, Pacific and Midwest Stock Exchanges as well as
the National Association of Securities Dealers, Inc. and Options Clearing
Corporation.
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H&Q Group operates primarily as a holding company with five operating
subsidiaries or associated entities: H&Q LLC (a 70%-owned subsidiary of H&Q
Group which conducts investment banking and securities broker-dealer
activities), Hambrecht & Quist Venture Partners (a venture capital management
partnership in which H&Q Group has a general partnership interest ("H&QVP")),
H&Q Asia Pacific, Ltd. (a 50% owned subsidiary), and Hambrecht & Quist Capital
Management, Inc. (a wholly-owned subsidiary of H&Q Group which is a registered
investment adviser)("HQCM").
H&Q LP, a sister company to H&Q Group, primarily operates as the managing
partner of the broker/dealer subsidiary with a 30% ownership interest and is
also the limited partner of H&Q Guaranty Finance, L.P. and a member of
OptionsLink LLC, 70% and 80% ownership interests, respectively.
The Firm is headquartered in San Francisco and also has offices located in
New York, Boston, La Jolla (California), Taipei, Hong Kong, Manila, Bangkok,
Kuala Lumpur, Jakarta, and Singapore. The Asia Pacific offices are involved
primarily in venture capital activities. The New York office carries out
investment banking, trading, research, and institutional, international and
retail sales activities. The Boston office provides investment banking, money
management, institutional and retail sales services.
The Firm's primary objective is to provide a full range of securities
services to high-quality emerging growth companies, as well as to investors in
such companies. Typically, these companies will have a high technology, health
care, or branded consumer orientation and will exhibit high growth potential
because of special characteristics in their product offering, market approach or
management capability. The Firm is one of the few investment banks seeking to
provide the continuum of support needed by such companies: during their start-up
years, with venture financing; through their high growth years, with private
placements and underwriting of initial public offerings; and through their years
of mature growth and expansion, with research coverage, market-making, follow-on
equity and debt placements and merger and acquisition capability.
Since 1968, the Firm has managed or co-managed over 560 public offerings
totaling more than $20.0 billion and has been a major investor in over 450
venture capital investments. In addition, the Firm participates in other
underwritings managed by the major investment banking firms of Wall Street.
2. RESULTS OF OPERATIONS
The Firm operates primarily as a venture capital company and a broker-
dealer. The Firm makes venture investments and earns fees and override
distributions from the management of venture investment partnerships. The
Firm's broker-dealer subsidiary, H&Q LLC, derives its revenues from the sale of
securities to institutional and individual investors, trading as a principal in
securities, underwriting activities, fees earned advising others on mergers and
acquisitions, issuing valuation opinions and from its private placement
activities. Other operating subsidiaries primarily earn revenues from
investment management activities.
COMBINED H&Q GROUP AND H&Q LP RESULTS FOR FISCAL 1995
Pretax operating income for fiscal 1995 was $40.9 million compared to $16.1
million for the previous year. Securities/investment gains were $33.2 million
versus $13.1 million in fiscal 1994. Net income for the year was $51.6 million
compared to $19.1 million for the previous year.
Total revenues increased to $185.6 million from $108.3 million. The
increase is primarily attributable to a $41.1 million, or 141%, increase in
underwriting revenue due to the heavy
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underwriting calendar in fiscal 1995. The Firm managed or co-managed 71
underwritings compared to 36 the previous year. Operating expense for the year
was $144 million compared to $91.9 million the previous year. This increase was
primarily due to compensation expense related to the increase in revenues, as
well as a 17% increase in personnel. The largest component of
securities/investment gains was the mark-up of the Firm's position in Bisys
(formerly Concord), accounting for $19.9 million and $5.3 million in fiscal 1995
and 1994.
YEARS ENDING SEPTEMBER 30, 1994 AND 1993
NET INCOME Net income for fiscal 1994 was $13.7 million compared
to $15.3 million in fiscal 1993. Operating profits dropped $10 million between
fiscal '93 and '94, but securities gains increased $7.7 million due mainly to
the gain in the aforementioned Concord Holding Corporation.
REVENUES The Firm's consolidated revenues were $108.3 million in
fiscal 1994 compared to $109 million in 1993.
EXPENSES The increase in operating expenses between fiscal 93 and 94
was directly attributable to the increased staffing and businesses added in the
year. Also, some key personnel had 50% of their salaries charged to operating
expense rather than directly to pools to provide for their administrative
capacities on a firmwide basis.
3. INVESTMENT BANKING ACTIVITIES
As an investment banking Firm, the Firm acts as an underwriter of
securities for technology, life sciences, services (including healthcare,
information, environmental and business services) and branded consumer product
companies in both initial public offerings and subsequent issues. Mergers and
acquisitions, private placements and other financial advisory services are also
provided.
In addition to the market risks and their economic effects described above,
there are other significant risks involved in the underwriting of securities,
especially initial public offerings. Such securities have demonstrated a much
higher than average price volatility. Also, many companies underwritten by the
Firm have a minimal operating history on which the pricing of such issues can be
based. If the securities underwritten cannot be sold in whole, or in part at
the public offering price, the Firm is exposed to potential losses which could
significantly impair its financial condition.
4. BROKERAGE ACTIVITIES
As a securities broker, H&Q LLC acts as agent for its customers in the
purchase and sale of securities traded on exchanges or in the over-the-counter
market. A major portion of its revenues is derived from commissions on such
transactions. The Firm's own personnel execute the majority of over-the-counter
agency and New York Stock Exchange securities transactions, and independent
floor brokers execute most orders on the American, Pacific and Midwest Stock
Exchanges which are not routed to the various exchanges' small order execution
systems.
The commission rate schedule for both exchange and over-the-counter
transactions is determined by management. Institutional sales are most often
executed at negotiated rates, whereas commissions on retail sales are generally
negotiated only on large transactions. There is pressure from institutional
buyers on commissions charged by brokerage firms.
The Firm has established approximately 30,000 brokerage accounts with
customers located throughout the United States, Europe and Asia of which a
significant percentage are financial institutions. Institutional investors
include mutual funds, banks, insurance companies, investment
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advisers, pension funds, foundations and endowment funds. A substantial
majority of the Firm's brokerage revenue has historically been derived from
institutional accounts. The Firm also derives a substantial portion of its
revenues from foreign sources, primarily in Western Europe and Japan.
The most significant portion of the Firm's brokerage business is in the
over-the-counter market. However, a wider variety of products has been made
available to customers, including listed stocks and bonds, listed options and
municipal bonds.
H&Q LLC self-clears its brokerage business through Lewco Securities
Corporation. Lewco is a joint venture with Schroeder Wertheim, Inc., and it
provides operations and computer services to the Firm.
5. DEALER AND MARKET-MAKING ACTIVITIES
H&Q LLC makes over-the-counter markets in approximately 297 securities.
When the Firm has been the managing or co-managing underwriter of a securities
offering, it generally makes a market in that security following completion of
the offering. The Firm's market-making activities are conducted with other
dealers in the "wholesale" market through the use of NASDAQ and a network of
direct lines and in the "retail" market in which, as dealer, the Firm buys from
and sells to its own customers.
So long as it holds securities in inventory, the Firm is exposed to all of
the customary risks of securities ownership, including the substantial risk of
fluctuations in market value. It is anticipated that the Firm's market-making
activities will continue in the future.
6. RESEARCH
An experienced institutional research team provides analytical coverage
spanning a number of industries with a focus primarily on life sciences,
technology, services and branded consumer products companies. In addition to
continual monitoring and publishing reports and investment studies on over 300
such companies, the research team publishes comprehensive investment studies on
emerging areas of electronic and life sciences technology. The research team
also assists in screening and/or evaluating financing for the Firm's venture
capital and corporate finance groups.
7. VENTURE CAPITAL ACTIVITIES
The Firm makes venture investments for itself and on the behalf of others.
At September 30, 1995 the Firm owned direct investments in emerging growth
companies and in venture investment companies totaling $58.8 million. In
addition, in August, 1992, the Firm began a program of making investments for
others for which it receives override rights but no management fee. As of
November 30, 1995, $35.7 million had been invested under this program.
The Firm's venture capital activities are carried out primarily by H&QVP.
H&QVP and other affiliated general partnerships presently manage five offshore
venture capital funds (Venture Associates (BVI) Limited, Anglo-Continental
Venture Investors (BVI) Limited, H&Q Ventures International C.V., Phoenix
Venture (BVI) Limited, and H&Q Taiwan Ventures), and four domestic venture
capital funds (H&Q Environmental Technology Fund, H&Q Ventures II, H&Q Ventures
III and H&Q Ventures IV). Through H&Q Asset Management Ltd., H&QVP is the
manager of London American Growth Fund, a publicly traded investment company.
H&QVP also provides investment advisory services (for a portion of the
portfolio) to Ivory & Sime Enterprise Capital, a publicly traded investment
company in the United Kingdom. The funds managed by H&QVP and its affiliates
have original committed capital in excess of $300 million. In addition, H&Q
Group, through other affiliates, manages one corporate partnership, Adobe
Ventures, a $40 million fund.
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As general partner or fund manager, H&QVP or one of its affiliates
generally receives cash management fees as well as a share of the net gain
("override"), if any, of each of the funds it manages. As a general partner of
the venture management partnerships, H&Q Group receives a portion of such
override units. The aggregate cash management fees generated by these venture
management activities are generally greater than or equal to the total expenses
of the venture capital group.
Management of H&QVP's venture capital is performed by William R. Hambrecht,
who serves as Managing Director of the group, with support from seven other
partners. H&QVP's venture capital staff includes approximately 11 other
individuals.
The Firm also serves as a minority general partner of H&Q LSV Managers, H&Q
LST Managers I, Northwest Venture Management Company, Wescot Management Company
and H&Q ETF Principals. These venture capital management partnerships include
other partners, and each partnership acts as general partner of one or more
venture capital funds with an investment focus on companies in a particular
industry. The Firm is also a limited partner of the general partner of LGM
Associates and Enterprise Management Partners, venture capital management
partnerships which include other individual partners located in Menlo Park and
Newport Beach, California, respectively.
8. H&Q ASIA PACIFIC, LTD.
H&Q Asia Pacific, Ltd. ("H&Q AP") was established in February 1990 as the
corporate successor to a business effort initiated by H&Q Group in 1985 with a
view toward creating one of the leading private equity investment firms of the
Asia Pacific region. Today H&QAP employs approximately 53 employees including
29 professionals who operate from headquarters in San Francisco and offices in
Bangkok, Manila, Singapore, Hong Kong, Kuala Lumpur, Jakarta, and Taipei. H&QAP
manages ten venture funds with over $300 million of capital. H&QAP's
professional employees own 50% of its equity with the balance being held by H&Q
Group. Dr. Ta-lin Hsu, a Managing Director of H&Q Group, is the Chairman of H&Q
AP.
Established in July 1986, H&Q Taiwan Co., Ltd. is a joint venture between
H&QAP (80%) and ORIX Capital (10%) and Baring Brothers (10%) and is the manager
of two fund companies, HanTech Venture Capital Corporation and HanMore Venture
Capital Investment Corporation. HanTech is a US$28 million venture capital
company formed in 1986. In 1990, US$7 million of HanTech's profits were
capitalized following realization of several of the fund's early investments.
Approximately US$10 million of HanTech's original capital was used to form H&Q
Taiwan Ventures, C.V., which co-invests with other funds managed by H&Q Group in
U.S.-based technology and healthcare companies. HanMore is a US$16 million fund
established in 1989 for investment in high technology companies in Taiwan and
the U.S. M.R. Lin is President of H&Q Taiwan.
H&Q Philippines, Inc. was established in 1988 and is the manager of H&Q
Philippine Ventures, Inc., a venture capital fund organized in 1988 with the
assistance of the Asian Development Bank (ADB). This fund has committed capital
of US$16 million from international institutions as well as from leading local
corporations. H&Q Philippines is also the Manager of H&Q Philippines Ventures
II, Inc., a US$16 million fund which closed in 1994. Eduardo David is the
President of H&Q Philippines.
H&Q Asia Pacific Venture Management Pte Ltd. (H&QAPVM) was established in
Singapore in 1988 to pursue venture capital investments in the countries of the
Association of Southeast Asian Nations (ASEAN). In November of 1988, ASEAN Fund
Limited, a US$150 million fund raised by Nomura Securities, selected our firm to
establish and manage a portfolio of investments in unlisted companies. With
approximately US$14 million allocated for this purpose,
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H&QAPVM began making investments in early 1989. H&QAPVM is also the manager of
H&Q Asia Ventures Ltd., a Singapore-based fund with capital of approximately
US$26 million. William Seymour is Managing Director of H&QAPVM.
In 1990, H&QAP teamed up with two prominent Thai institutions -- Bangkok
Bank Limited and Asia Securities Trading Co., Ltd. -- to form a joint venture
company in Thailand. Today, H&Q (Thailand) Ltd. provides consulting services to
H&Q BVI Limited, which is engaged primarily in the management of Siam Ventures
N.V., a US$20 million fund which seeks to provide expansion capital to unlisted
companies based in Thailand. Virapan Pulges is the Managing Director of H&Q
(Thailand), and William Chao is the Managing Director of H&Q BVI Limited.
In 1991, H&QAP was selected by the Overseas Private Investment Corporation
(OPIQ to manage the Asia Pacific Growth Fund, which is a US$75 million fund that
closed in 1992, The fund invests in rapidly growing companies in the ASEAN
countries, Taiwan and Micronesia. OPIC is a self-sustaining agency of the U.S.
government which provides political risk insurance and loan guarantees to U.S.
businesses.
In 1993, H&Q AP formed a joint venture with the Malaysia Technology
Development Corporation to form a venture management company in Kuala Lumpur.
MTDC-H&Q Venture Capital Management Sdn Bhd manages Malaysia Technology Venture
One Sdn Bhd a US$14 million fund. Additionally, in 1995, a second fund,
Malaysia Technology Ventures 11 Sdn Bhd was closed with committed capital of
US$25.8 million.
In 1994, H&Q AP teamed up with Aetna Investment Management (Bermuda)
Holding Limited and Bank of China Trust & Consultancy Company to raise and
manage the China Dynamic Growth Fund, L.P. This fund will focus on private
equity investments in China and currently has committed capital of US$76
million.
H & Q Asia Pacific (Hong Kong) Limited also provides advisory services for
the funds portfolio companies.
9. INVESTMENT ADVISORY ACTIVITIES
HQCM is an investment adviser registered under the Investment Advisers Act
of 1940 (the "Advisers Act"). Organized in October 1986, HQCM manages H&Q
Healthcare Investors, a registered investment company funded in a public
offering co-managed by H&Q LLC in April 1987 with total assets as of September
30, 1995 of approximately $120 million. In May 1992 HQCM completed the
successful offering of H&Q Life Sciences Investors, also a registered investment
company for which H&Q LLC was also co-manager. In addition, a rights offer by
that fund was successfully concluded in January, 1994. It had total assets as
of September 30, 1995 of approximately $ 100 million.
Atlantic Investment Advisers, Inc. is a registered investment adviser that
is a wholly-owned subsidiary of HQCM. H&Q Asset Management Ltd. ("HQAM") is a
London-based asset management company (wholly owned by H&Q Group) that manages
the investments of H&Q London Ventures (LAVT). H&Q Investment Advisers, Inc.
("HQIA") is a Boston-based investment adviser registered under the Investment
Advisers Act of 1940. HQIA manages the portfolios of individual investors.
11. REGULATION
The Firm is subject to regulation by governmental authorities, securities
exchanges and other self-regulatory organizations. These regulations are
primarily intended to benefit the Firm's customers rather than its shareholders
or employees.
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As a registered broker-dealer, H&Q LLC is subject to the Securities and
Exchange Commission (the "SEC") Uniform Net Capital Rule 15c3-1 (the "Rule") and
the capital rules of the New York Stock Exchange, Inc. (the "Exchange"), of
which H&Q LLC is a member. H&Q LLC has elected to compute its net capital
requirements under the "alternative" method, which requires net capital to be
the greater of $1,000,000 or 2% of the aggregate debit balances arising from
customers' transactions, as defined under the Rule. As of September 30, 1995,
the Firm's net capital exceeded required minimum net capital by approximately
$28.2 million. The Rule provides that equity capital may not be withdrawn or
cash dividends paid if the resulting net capital of a broker-dealer would be
less than the amounts required under the Rule. Accordingly, the payment of
dividends and advances to H&Q Group by H&Q LLC is limited to excess net capital
under the most restrictive of these requirements.
H&Q LLC is registered with the SEC as a broker-dealer under the Securities
Exchange Act of 1934 (the "Exchange Act"). The Exchange Act regulates
securities exchanges and many aspects of the business of a registered broker-
dealer, including the hypothecation of securities held for customers' accounts
and certain trading activities such as short-selling and stabilization.
Pursuant to the Exchange Act, the Board of Governors of the Federal Reserve
System has adopted regulations regarding margin requirements of broker-dealers.
H&Q LLC is also a member of the National Association of Securities Dealers,
Inc. (the "NASD"). The NASD has promulgated rules governing member Firms to
promote just and equitable principles of trade, including guidelines respecting
the amount of commissions or markup which a broker-dealer or underwriter may
charge for its services, requirements for the underwriting, sale and
distribution of securities, rules governing the administration of customers'
margin accounts, and the requirement that salesmen take qualifying examinations.
All persons employed as account executives, office managers and securities
traders are required to be registered with the NASD.
H&Q LLC is registered as a broker-dealer and is subject to regulation under
the securities or "blue sky" laws of most states. These laws impose certain
restrictions on the manner in which securities may be advertised and sold and
also require the registration or licensing of personnel and the filing of
reports.
The Firm is also subject to the various provisions of the Securities Act of
1933 (the "Securities Act") and to other provisions of the Exchange Act and
state laws which impose penalties and civil liabilities for fraud, manipulation
and unfairness in the conduct of securities transactions.
As registered investment advisers, HQCM, Atlantic Investment Advisers, Inc.
and HQIA are subject to regulation by the SEC under the Advisers Act and by the
California Department of Corporations and/or other state regulatory agencies.
HQAM is a member of and is subject to regulation by the Investment Management
Regulatory Organization Limited in London, England.
The venture capital funds managed by H&Q Group and its affiliates are
relying on exemptions from the Investment Company Act of 1940 and the Advisers
Act to avoid regulation under such acts. A failure to qualify for such
exemptions in the future could have a material adverse effect on the manner in
which the funds carry out their investment activities and on the compensation
received by the Firm from the funds.
Violations of federal or state laws or the regulatory provisions of the
agencies or authorities having jurisdiction over the Firm could subject it or
its employees to disciplinary proceedings or civil or criminal liability,
including revocations of licenses, censures, fines or temporary or permanent
suspension from the conduct of its business. Such proceedings could have
serious adverse effects upon all phases of the Firm's business.
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12. EMPLOYEES
As of September 30, 1995, the Firm had approximately 500 full-time
employees, of whom 221 were engaged in sales and sales support functions
(including brokerage, market making and operations), 90 were engaged in
investment banking, 54 were engaged in research, 48 were engaged in venture
capital and investment advisory activities, and 87 were engaged in management,
administration and general support functions.
13. PROPERTIES
The Firm's facilities (a total of approximately 160,000 square feet) are
leased. The leases for these offices have terms ranging from 1 to 10 years with
options. The annual rent for offices of the Firm in fiscal 1995 was $4.6
million (including subtenant income). The Firm's annual rent in fiscal 1996 is
projected to be $4.9 million.
MANAGEMENT
1. DIRECTORS AND SENIOR EXECUTIVE OFFICERS
As of September 30, 1995, the directors and senior executive officers of
H&Q Group and H&Q LLC are as follows:
<TABLE>
<CAPTION>
H&Q GROUP H&Q LLC
NAME AGE OFFICE(S) OFFICE(S)
---- --- --------- ---------
<S> <C> <C> <C>
William R. Hambrecht 60 Chairman of the Board Chairman of the Board
of Directors of Directors
Daniel H. Case III 38 President, President,
Chief Executive Officer Chief Executive Officer
and Director and Director
William R. Timken 60 Vice Chairman Vice Chairman
Paul L. Hallingby 49 Executive Vice President
Cristina M. Morgan 43 Senior Vice President
David M. McAuliffe 46 Senior Vice President
Bruce M. Lupatkin 39 Senior Vice President
Raymond J. Minehan 54 Vice President and Senior Vice President and
Chief Financial Officer Chief Financial Officer
Steven N. Machtinger 46 Vice President, General Counsel Senior Vice President,
and Secretary General Counsel
and Secretary
William E. Mayer 55 Director
Howard B. Hillman 61 Director
Edmund H. Shea, Jr. 66 Director
Lawrence J. Stupski 50 Director
</TABLE>
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William R. Hambrecht is Chairman of H&Q Group and its principal subsidiary,
H&Q LLC. He has continuously served as an officer, director or principal of
those entities or their predecessors since he and the late George Quist co-
founded Hambrecht & Quist in 1968. Mr. Hambrecht also serves on the Board of
Directors of Adobe Systems, Inc., Redbrick Systems, Inc., Castelle, Vanguard
Airlines, Inc. and several private companies. He holds a B. A. degree from
Princeton University.
William R. Timken has been a Director of the Firm since its incorporation
in 1983 and was made Vice Chairman in April of 1992. He was a founder and
managing general partner of Hambrecht & Quist (the predecessor partnership). He
heads the Firm's syndicate department.
Daniel H. Case III joined the firm in 1981 as an associate in the Corporate
Finance Department. He has also served as an associate in the Venture Capital
Group, both in San Francisco and London. Mr. Case rejoined Corporate Finance
and became its Managing Director and a Senior Vice President of the Firm in
December of 1987. In October of 1989 he was elected Executive Vice President.
In April of 1992 he was elected President and Co-Chief Executive Officer and
elected a Director of H&Q Group. He was elected Chief Executive Officer in
October 1994.
Paul L. Hallingby joined the Firm in 1983 as an institutional salesman. He
was named Managing Director of the Research Department in June of 1988, and was
elected Executive Vice President in October of 1990. In July 1992 he was named
Managing Director of Sales and Trading.
Cristina M. Morgan joined the firm in 1982 as an Associate Analyst in the
Research department. In 1985 she transferred to the position of Principal in
the Corporate Finance department. In 1990 Ms. Morgan was elected Managing
Director and Head of Technology Equities Group in Corporate Finance and in 1992
she was named Co-Head of Investment Banking.
David M. McAuliffe joined H&Q Group during July 1995 as Managing Director &
CoHead of Investment Banking. Prior to joining the Firm, David spent twenty
years in Investment Banking and Merchant Banking at Kidder Peabody & Co. At
Kidder Peabody & Co., David served as Executive Managing Director and Co-Head of
the Global Investment Banking Division. He also served on Kidder's Executive
Committee, Management Committee and Board of Directors. David currently serves
on H&Q Group's Operating Committee and Commitment Committee.
Bruce M. Lupatkin joined the Firm in 1984 as a Research Analyst. In 1990
Mr. Lupatkin was appointed Co-Head of Technology Strategy, and in 1991 was
promoted to Managing Director. In 1992 he was named Co-Head of Research and
also became a member of the Operating Committee. During October, 1994 Mr.
Lupatkin assumed the title of Director of Research and assumed responsibility
for management of the west coast Institutional Sales Group.
Raymond J. Minehan came to the Finn as Managing Director and Chief
Financial Officer in November of 1989. Prior to joining that, he had been with
Arthur Andersen & Co. in San Francisco since 1972, and had been a partner with
that firm since 1984.
Steven N. Machtinger joined the Firm in 1988 as Vice President and General
Counsel. In 1990, he was elected a Managing Director. Prior to joining the
Firm, he spent 5 years at Birr Wilson Securities as Executive Vice President and
General Counsel. He was an attorney with the Securities and Exchange Commission
from 1974 to 1983.
-14-
<PAGE>
William E. Mayer was elected to the Board of Directors in April of 1992.
In October, 1992 Mr. Mayer was appointed dean of the College of Business and
Management at the University of Maryland, College Park. He is the former
Chairman and Chief Executive Officer of CS First Boston Merchant Bank. Before
the establishment of CS First Boston Merchant Bank in 1990, he was President and
Chief Executive Officer of the First Boston Corporation.
Howard B. Hillman joined the Board of H&Q Group in July of 1989. He was an
Officer of Chemical Bank from 1960 to 1969, and has been a venture capitalist
since leaving Chemical Bank. Mr. Hillman became a Director of Auto-trol
Technology in 1973 and its President in April, 1985. He also currently serves
as Auto-trol's Chairman.
Edmund H. Shea, Jr. was elected a Director of 14&Q Group in November of
1986. He is a co-founder of J.F. Shea Co., Inc., a diversified civil
construction, land development and venture investments company, and has served
as its Executive Vice President in charge of Venture Capital since 1968. He
serves on the Board of Directors of ADAC Laboratories Inc., Vanguard Airlines,
Rexon, Inc., Zymed, Inc. and various subsidiaries of JR Shea Co., Inc. Mr. Shea
is also on the Advisory Committee of Bay Partners and Oak Investment Partners.
Lawrence J. Stupski was elected a Director of H&Q Group in October of 1984.
He is Vice Chairman of The Charles Schwab Corporation. Before assuming the
position of Vice Chairman, he was President and Chief Operating Officer for more
than a decade. Mr. Stupski's industry affiliations include serving on the Board
of Governors of the Pacific Stock Exchange from 1982 to 1985, Director for the
Chicago Board Options Exchange from 1990 to 1991, and serving on the Securities
and Exchange Commission Consumer Advisory Committee in 1994.
2. BENEFITS
The Firm has employed various incentive compensation plans in order to
attract, retain and motivate highly qualified individuals. In addition to
salaries, professionals (including officers) whose activities generate
commissions or fees are paid a substantial percentage of those commissions or
fees.
The Firm has established discretionary bonus pools for distribution to
personnel whose compensation is not based on commission income. Contributions
to these pools are based principally on revenue production and distributions are
made based on an overall appraisal of individual performance including
contributions to revenue production. Executive and administrative management
bonus pool contributions are based on Firm earnings and distributions are made
based on individual performance appraisals.
The Firm has adopted a Savings and Employee Stock Ownership Plan (the
"SESOP") in which all United States employees are eligible to participate after
six months of service. The SESOP is comprised of two major benefit plans: (1) a
salary deferral (or 401(k)) plan, in which the Firm matches every dollar
contributed by employees with a dollar's worth of its Common Stock up to a
certain amount (currently $3500.00 per year); and (2) a profit-sharing plan
which was instituted in 1976 for the predecessor partnership. Subsequent to the
adoption of the SESOP no contributions to the profit-sharing plan have been made
and none are anticipated (although the plan continues to allocate participant
forfeitures). Employees' units in their discretionary ESOP and profit-sharing
accounts begin vesting after three years of service, at 30%, and become fully
vested after 7 years of service with the Firm. The amount of the annual
matching contribution is discretionary except that it must be sufficient to
enable the Plan to match participant salary deferrals up to the annual maximum
amount. The Firm's ESOP contribution for Fiscal 1995 was $1,078,037.
The Firm established a Stock Option Plan (the 1985 Option Plan) as of
September 30, 1985. A total of 1,000,000 shares were authorized for granting of
options. As of September 30,
-15-
<PAGE>
1995 options for 219,602 shares had been granted and are exercisable at prices
ranging from $8.41 to $18.10 per share. Of the outstanding options at September
30, 1995, 196,802 have "vested" and are no longer subject to the Company's right
of first repurchase at the exercise price.
In addition to the options issued under the 1985 Option Plan, the Firm has
granted 362,005 options outside of the 1985 Option Plan. These options, of
which 220,298 have vested, have been granted to officers and directors of the
Firm and are exercisable at prices ranging from $8.41 to $21.60 per share.
Additionally, the Firm has agreed to issue options for 152,000 shares under
the 1995 Stock Option Plan, pending approval of the Plan by the shareholders of
H&Q Group and qualification with the California Department of Corporations.
Such options will be exercisable at $21.60 per share. The 1995 Stock Option
Plan authorizes a total of 500,000 shares pursuant to the exercise of options.
Effective October 1, 1992 the Finn established a Stock Appreciation Rights
(SAR) program for certain key executives. The SARs are granted as of each
October 1st, for a term of one year (to coincide with the Firm's fiscal year)
and vest over three years. The Firm awarded 307,500, 438,000, and 529,500 SARs
as of October 1, 1993, 1994, and 1995, respectively. The SARs will result in
additional compensation to the executives based on the increase, if any, in the
Firm's book value during the fiscal year following the date of award.
The Firm provides its employees with group life, medical and long-term
disability insurance and other benefits which are believed competitive with
similar programs offered by other employers in the securities industry.
PRINCIPAL SHAREHOLDERS
The following table shows the beneficial ownership (including any shares
which a person has the right to acquire within 60 days) of the Common Stock
(which is H&Q Group's only class of authorized and outstanding securities) as of
September 30, 1995 by (a) each person with beneficial ownership of more than 10%
of the outstanding Common Stock, (b) all other directors and senior executive
officers of H&Q Group and H&Q LLC, taken together.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES OWNED PERCENT OF
OF OWNER (INCLUDING VESTED OPTIONS) VOTABLE SHARES
-------- -------------------------- --------------
<S> <C> <C>
William R. Hambrecht 645,965 17.71%
One Bush St.
S.F., CA 94104
All other directors and senior 1,312,405
executive officers of H&Q (300,980 of which are vested options) 27.74%
Group and H&Q LLC
(13 persons)
</TABLE>
All shares owned by the SESOP have been allocated to participants. The
Trustees, William R. Hambrecht, Raymond J. Minehan and Steven N. Machtinger, are
required to vote shares that have been allocated to participants according to
the participants' directions.
-16-
<PAGE>
PRINCIPAL UNIT HOLDERS
The following table shows the beneficial ownership (including any Units
which a person has the right to acquire within 60 days) of Class A and Class B
Units of H&Q LP (taken together) as of September 30, 1995 by (a) each person
with beneficial ownership of more than 10% of the outstanding Class A and Class
B Units (taken together), (b) all other directors and senior executive officers
of H&Q Group and H&Q LLC, taken together.
<TABLE>
<CAPTION>
NAME AND ADDRESS PERCENT OF
OF OWNER NUMBER OF UNITS OWNED TOTAL UNITS
-------- --------------------- -----------
<S> <C> <C>
William R. Hambrecht 12,794 14.61%
One Bush St.
S.F., CA 94104
H&Q Group 12,596 14.38%
One Bush Street
S.F., CA 94104
Daniel H. Case III 9,220 10.53%
One Bush Street
S.F., CA 94104
All other directors and senior 23,038 22.42%
executive officers of H&Q
Group and H&Q LLC
(12 persons)
</TABLE>
CERTAIN TRANSACTIONS
H&Q Group has made numerous sales of Common Stock to directors, officers
and other employees since it incorporated on January 1, 1983. In each case, the
investor purchased the stock at the Net Book Value as of the date of issuance,
as determined by the Board, and executed the Shareholders' Agreement dated as of
January 1, 19839 if not already a party. A copy of the Shareholders' Agreement
is attached as Exhibit E to this Memorandum.
During fiscal year 1993 15,000 shares of stock at $11.22 were repurchased
from officers and directors; 229,720 shares were sold to officers and directors
at prices ranging from $8.16 to $11.22 per share; and 2,000 options to purchase
stock were granted at $11.22 per share and 41,042 options were granted at $11.22
per share outside the 1985 Stock Option Plan.
During fiscal year 1994, 2,500 shares of stock at $15.37 were repurchased
from officers and directors; 42,000 shares, were sold to officers and directors
at $15.37 per share; and 41,304 options were granted at $15.37 per share outside
the 1985 Stock Option Plan.
During fiscal year 1995, 3,700 shares of stock at $21.60 were repurchased
from officers and directors; 216,750 shares were sold to officers and directors
at prices ranging from $9.38 to $21.60 per share, of which 63,250 shares are
pending qualification with the California Department of Corporations; and 80,159
options to purchase shares of stock were granted at prices ranging from $18.38
to $21.60 per share, of which 74,159 were issued outside the 1985 Stock Option
Plan and 6,000 are pending qualification with the California Department of
Corporations.
-17-
<PAGE>
During fiscal year 1994, the initial offering year for H&Q LP, 27,704 Class
A Units and 11,401 Class B Units were sold to officers and directors of H&Q
Group and H&Q LLC at prices ranging from $15.37 to $47.50 per Unit. No Units
were repurchased from such officers or directors. In connection with the
exercise of H&Q Group stock options, 20 Class B Units were converted to Class A
Units.
During fiscal year 1995, 74 Class A Units and 1,348 Class B Units were
repurchased from officers and directors of H&Q Group and H&Q LLC at prices
ranging from $47.50 to $194.75 per Unit, and 2,355 Class A Units and 1,603 Class
B Units were sold to officers and directors at prices ranging from $15.37 to
$194.75 per Unit. In connection with the exercise of H&Q Group stock options,
2,313 Class B Units were converted to Class A Units.
Consistent with the Firm's policy of encouraging professional employees to
invest personally in companies with which the Firm has established a
relationship, directors, officers and other employees of the Firm often make
venture capital investments side-by-side with H&Q Group or venture capital funds
managed by the Firm. H&Q Group (or one of its wholly-owned subsidiaries) acts
as general partner of Hamquist, H&Q Investors and H&Q Nova 1983, each of which
is a venture capital limited partnership consisting of investors who are all
shareholders, employees or former employees of the Firm and who meet certain
suitability requirements regarding investment sophistication and financial net
worth. Employees of the Firm are also permitted to invest in partnerships which
are created for the purpose of making investments in specific venture companies.
Hamco Capital Corporation, a Small Business Investment Company that is wholly-
owned by William R. Hambrecht and his family, also regularly invests side-by-
side with the Firm's venture capital funds. Side-by-side investments are
generally made on the same terms as those applicable to other participants in
the same transaction.
Investments are also made from time to time by the above-described venture
capital funds as well as directly by directors, officers and other employees in
private placements for which H&Q LLC acts as placement agent and receives a
placement fee from the issuer. Such purchases, made directly or through special
purpose partnerships, are made on the same terms that pertain to investors
unaffiliated with the Firm.
The amount, if any, invested by any director, officer or other employee in
any side-by-side investment or venture capital fund is determined by that person
in light of the amount of investment offered to him and his personal financial
resources and investment objectives.
From time to time, directors, officers and other employees of the Firm may
buy or sell securities to or from H&Q LLC as principal or through H&Q LLC as
agent in its capacity as a registered securities broker-dealer. Such
transactions are generally executed on terms (i.e., commissions, mark-ups and
mark-downs) more favorable to the employee-customer than those available to
similarly-situated non-employee customers of the Firm.
LITIGATION AND CONTINGENT LIABILITIES
As is the case with many firms in the securities industry, H&Q LLC, the
Firm's wholly-owned brokerage subsidiary, is a defendant or co-defendant in a
number of lawsuits which seek substantial but unspecified damages. These suits
have arisen in the normal course of business and are incidental to the
securities and investment banking business. Most of the proceedings relate to
public underwriting of securities in which H&Q LLC participated as a manager,
co-manager or member of the underwriting syndicate. In these cases, it is
possible that H&Q LLC may be called upon under the terms of the underwriting
agreements to contribute to settlements or judgments.
-18-
<PAGE>
In class action suits of this type, the Firm has the greatest potential
exposure in litigation involving underwritings it managed or co-managed. H&Q
LLC has been included among the defendants in civil class actions filed in
connection with underwritings in which it acted as co-managing underwriter, as
follows:
<TABLE>
<CAPTION>
H&Q
Offering Underwriting Size of
Issuer Date Percentage 0ffering
-----------------------------------------------------------------------
<S> <C> <C> <C>
ComputerVision Corporation 8/92 25 $300,000,000
Dataware Technologies, Inc. 6/93 29 29,250,000
</TABLE>
The ComputerVision case was dismissed by the District Court but the plaintiffs
have appealed.
In addition to the above litigation, H&Q Group and affiliated entities are
among several defendants in a purported class action lawsuit brought by a
purchaser of $25,000 of MiniScribe Corporation debt securities. The district
court has declined to certify a similar claim as a class action. In addition,
H&Q Group is a defendant in two lawsuits relating to its venture capital
activities. One lawsuit was brought by a corporation which was a co-investor in
a company in which H&Q Group had a venture capital investment; it claims that an
offering in which H&Q Group and others participated was unfairly dilutive to its
investment. The other such lawsuit is a purported class action by a shareholder
of a company in which H&Q Group was a co-founder and substantial shareholder;
H&Q Group is a defendant based on allegations that it was a controlling person
and a participant in an alleged conspiracy to commit securities law violations.
In addition, the Firm has been advised that it has been named as a defendant in
a lawsuit recently filed in California State court relating to a merger in which
it served as a financial adviser to the acquired company. Finally, H&Q LLC was
named as one of approximately thirty-three broker-dealers who are defendants in
purported class action cases alleging anti-trust violations in connection with
NASDAQ market-making activities. Substantial damages are sought in each of
these lawsuits.
In addition to the above actions, the Firm is aware of approximately 33
pending lawsuits concerning underwritings in which H&Q LLC participated as a
member of the underwriting syndicate from March 1983 to May 1995. H&Q Group has
agreed to indemnify H&Q LLC against any expense or liability it may incur in
connection with such lawsuits. In such lawsuits, all members of the
underwriting syndicate are typically included as members of a defendant class
and/or are required by law or pursuant to the terms of the underwriting
agreement to bear a portion of any expenses or losses (including amounts paid in
settlement of the litigation) incurred by the underwriters as a group in
connection with the litigation (to the extent not covered by the indemnification
obligation of the issuer of the securities underwritten pursuant to the
underwriting agreement).
In addition to the securities litigation described above, the Firm and
certain current and former employees are the subject of a lawsuit filed by a
former employee alleging discrimination in employment based on race and
disability, and defamation.
H&Q Group's Articles of Incorporation and Bylaws allow indemnification of
the Firm's officers, directors and agents to the maximum extent permitted under
California law. Under these provisions, the Firm itself has been and will be
the subject of indemnification assertions by officers, directors or agents of
the Firm who are or may become defendants in the above-described or other
litigation.
The Firm is contesting the allegations and believes that it has meritorious
defenses in each of these lawsuits. Although the ultimate outcome of such
litigation cannot be ascertained at this time, it is the opinion of the Firm's
management that the resolution of these actions will not have a
-19-
<PAGE>
material adverse effect on the Firm's consolidated financial position or its
operations. An adverse resolution of any of these lawsuits would materially
affect the Firm's financial position.
Because of the Firm's investment banking, securities brokerage, money
management and venture capital activities, as well as the directorships in
client companies held by the Firm's officers and employees, there is a risk of
contingent or actual liabilities in the future from securities litigation. As
the number of suits in which the Firm is a party (or is an indemnifying party)
increases, the exposure and risk to the Firm's assets also increases. A large
judgment or settlement against an underwriter defendant class, or against the
Firm alone, would have an adverse effect on the Net Book Value of the Firm's
Stock. In addition, the amount of time which management and other employees are
required to devote in connection with the defense of such litigation could be
substantial and might detract materially from their attention to their other
responsibilities with the Firm.
FINANCIAL STATEMENTS
Following are unaudited consolidated financial statements of H&Q Group and
subsidiaries and of H&Q LP as of December 31, 1995 and audited consolidated
financial statements of H&Q Group and subsidiaries and of H&Q LP as of September
30, 1995. Audited consolidated financial statements of H&Q Group and
subsidiaries and of H&Q LP for prior years are available upon request from the
Legal Department.
-20-
<PAGE>
HAMBRECHT & QUIST GROUP
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995
<PAGE>
HAMBRECHT & QUIST, L.P.
UNAUDITED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995
<PAGE>
HAMBRECHT & QUIST GROUP
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1995
<PAGE>
HAMBRECHT & QUIST, L.P.
AUDITED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1995
<PAGE>
DESCRIPTION OF THE 1995 STOCK OPTION PLAN
- Exhibit A -
<PAGE>
DESCRIPTION OF THE 1995 STOCK OPTION PLAN
1. GENERAL
The 1995 Stock Option Plan (the "SOP") was established to enable the Firm
to attract and provide an incentive to directors, officers, key employees and
consultants by offering them an opportunity to acquire a proprietary interest in
the Firm. The SOP is administered by a Committee (the "Committee") made up of
members of the Board of Directors of H&Q Group (the "Board"). The SOP was
approved by the Board on January 8, 1996 and became effective on September 30,
1995. Approval of the shareholders of H&Q Group was received on January
25,1996. The SOP will terminate automatically on September 29, 2005 unless
sooner terminated by the Board. The full text of the SOP is contained in
Exhibit B, and the following description of the essential features of the SOP is
qualified in its entirety by reference to the full text of the SOP.
2. SHARES AUTHORIZED AND PURCHASE PRICE
The SOP authorizes issuance of ISOs and NSOs which grant options for the
sale of up to 500,000 shares of Common Stock. At this time the Firm is no
longer granting ISO stock options.
Options will be granted with option prices set at at least 85% of the Common
Stock's fair market value at the time of issuance as determined in good faith by
the Board.
3. ELIGIBILITY
ISOs may be granted only to employees of the Firm, while NSOs may be
granted to directors, officers, key employees and consultants. The issuance of
options to specific eligible individuals is authorized by the Committee, based
upon the recommendation of management.
4. SPECIAL RIGHT OF REPURCHASE
In the case of both ISOs and NSOs, one hundred percent (100%) of the shares
granted to an individual under the SOP are subject to a special right (but not
an obligation) of repurchase by the Company at the original exercise price,
which right is in addition to whatever similar rights are provided under the
Shareholders' Agreement. This repurchase right lapses at the rate of 20% per
year from the date of grant of the option until the special right of repurchase
completely terminates on the fifth anniversary of the date of grant. Options
held by an officer or director of or consultant to the Company may be subject to
additional or greater restrictions. The terms and conditions of this special
right of repurchase (essentially equivalent to a "vesting" provision) are set
forth in the specific Option Agreement between the optionee and the Firm.
5. EXERCISE OF OPTION AND TERMS OF SALE
The number of shares to be purchased and the purchase price, type of
consideration and other terms and conditions applicable to each purchase made
pursuant to the option are established by the terms of the Option Agreement
between the optionee and the Firm. The terms and conditions of the Stock
Purchase Agreement and Shareholders' Agreement which are utilized in connection
with sales under the SOP are described in the Memorandum under the heading
"Description of Shareholders' Agreement and Limited Partnership Agreement."
6. NO UNDERWRITERS OR DEALERS
Sales are made under the SOP without the use of any underwriters or
dealers, and no discount, commission or other compensation is allowed or paid to
any such persons in connection with sales of shares under the SOP.
<PAGE>
7. EXERCISE OF OPTION
When an optionee decides to exercise his option, he must submit (within
the term of the option) his exercise notice, full payment in whatever form
has been designated, and a signed Stock Purchase Agreement, which sets forth
the basic terms and conditions of the sale, including the number of shares,
purchase price and type of consideration to be paid at the time of purchase.
Execution of the Stock Purchase Agreement constitutes effective execution of
the Shareholders' Agreement, unless a different arrangement is made in a
particular instance by the Board.
8. LIMITATIONS ON TRANSFERABILITY OF COMMON STOCK
Shares of Common Stock purchased under the SOP are generally subject to the
following restrictions on transfer:
(a) SHAREHOLDERS' AGREEMENT. Each purchaser under the SOP will become
subject to the Shareholders' Agreement, which contains a right of repurchase
(this is in addition to the special right of repurchase specified in tile
Option Agreement, described above) and a right of first refusal option as
described in the Memorandum under "Description of Shareholders' Agreement and
Limited Partnership Agreement." All certificates for shares of Common Stock
will bear a legend stating that they are subject to the foregoing restrictions.
(b) ABSENCE OF PUBLIC MARKET. The shares of Common Stock sold under the
SOP are not traded on any exchange or in any other public market, and the
Firm does not presently anticipate taking any steps to cause such a public
market to exist. Consequently, purchasers should not expect to find a public
market for any shares of Common Stock. The sale of the shares of Common
Stock is being made in reliance on an exemption from registration provided by
the Securities Act of 1933 and all shares being acquired under the SOP are to
be acquired for investment for the purchaser's own account, not as nominee or
agent, and not with a view to the sale or distribution of any shares.
(c) THE SOP. In the event the Option is exercised prior to the expiration
of the Film's special right of repurchase, the certificates will bear a
legend reflecting the Firm's special right of repurchase at the original
exercise price.
<PAGE>
HAMBRECHT & QUIST GROUP
1995 STOCK OPTION PLAN
NONSTATUTORY STOCK OPTION AGREEMENT
THIS AGREEMENT, entered into as of _________________________,
_________ between Hambrecht & Quist Group, a California corporation (the
"Company"), and __________________ _______________________ (the "Optionee"),
WITNESSETH:
WHEREAS, the Company's Board of Directors has established the Hambrecht
& Quist Group 1995 Stock Option Plan in order to provide the employees,
directors of and Consultants to the Company and its Subsidiaries with an
opportunity to acquire Common Stock of the Company; and
WHEREAS, the Committee has determined that it would be in the best
interests of the Company and its shareholders to grant the nonstatutory stock
option described in this Agreement to the Optionee as an inducement to enter
into or remain in the service of the Company and as an incentive for
extraordinary efforts during such service:
NOW, THEREFORE, it is agreed as follows:
SECTION 1. DEFINITIONS.
(a) "AGREEMENT" shall mean this Nonstatutory Stock Option Agreement.
(b) "BOARD" shall mean the Board of Directors of the Company, as
constituted from time to time.
(c) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" shall mean the Committee of the Board described in
Section 3 of the Plan or, if none has been appointed, the full Board.
(e) "CONSULTANT" shall mean any individual who is a consultant to the
Company or a Subsidiary.
(f) "DATE OF GRANT" shall mean the date on which the Committee resolved
to grant this Option, which is the date as of which this Agreement is entered
into.
(g) "EMPLOYEE" shall mean any individual who is an employee (within the
meaning of Section 3401(c) of the Code and the regulations thereunder) of the
Company or of a Subsidiary.
(h) "EXERCISE PRICE" shall mean the amount for which one Share may be
purchased upon exercise of this option, as specified in Section 2(a) hereof.
(i) "NONSTATUTORY OPTION" shall mean a stock option not intended to be
an "Incentive Stock Option" within the meaning of Section 422 of the Code.
<PAGE>
(j) "OPTION" shall mean the nonstatutory stock option granted under
this Agreement.
(k) "PARTIAL EXERCISE" shall mean an exercise with respect to less than
all of the remaining Shares subject to this Option.
(l) "PLAN" shall mean the Hambrecht & Quist Group 1995 Stock Option
Plan, as in effect on the Date of Grant.
(m) "PURCHASE PRICE" shall mean the Exercise Price multiplied by the
number of Shares with respect to which this Option is being exercised.
(n) "RESTRICTED SHARES" shall mean a Share which is subject to the
Company's right of repurchase under Section 8 hereof.
(o) "RIGHT OF FIRST REFUSAL" shall mean the Company's right of first
refusal described in Section 9 hereof.
(p) "SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
(q) "SERVICE" shall mean service as an Employee, Consultant or as a
director of the Company or a Subsidiary.
(r) "SHARE" shall mean one share of Stock, as adjusted in accordance
with Section 14 hereof (if applicable).
(s) "SHAREHOLDERS' AGREEMENT" shall mean the Shareholders' Agreement
dated as of January 1, 1983, as amended, among all of the Company's
shareholders, or any successor agreement thereto.
(t) "STOCK" shall mean the Common Stock of the Company.
(u) "SUBSIDIARY" shall mean any corporation, if the Company and/or one
or more other Subsidiaries own not less than 50% of the total combined voting
power of all classes of outstanding stock of such corporation.
(v) "TEST RATE" shall mean the lowest rate of interest which will not
result in the imputation of additional interest under the applicable provision
of the Code.
(w) "TRANSFEREE" shall mean any person to whom the Optionee has
directly or indirectly transferred any Share acquired under this Agreement.
SECTION 2. GRANT OF OPTION.
(a) OPTION. On the terms and conditions stated below, the Company
hereby grants to the Optionee the Option to purchase _________________ (______)
Shares for the sum of_________________ ($________ per Share), which is agreed to
be 100% of the fair market value thereof on the Date of Grant.
(b) STOCK OPTION PLAN. This Option is granted pursuant to the Plan, a
copy of which the Optionee acknowledges having received and read.
2
<PAGE>
(c) TAX TREATMENT. This Option is a nonstatutory stock option and is
not intended to qualify as an Incentive Stock Option.
SECTION 3. NO TRANSFER OR ASSIGNMENT OF OPTION.
Except as otherwise provided in this Agreement, this Option and the
rights and privileges conferred hereby shall not be transferred, assigned,
pledged or hypothecated in any way (whether by operation of law or otherwise)
and shall not be subject to sale under execution, attachment or similar process.
Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose
of this Option, or of any right or privilege conferred hereby, contrary to the
provisions hereof, or upon any attempted sale under any execution, attachment or
similar process upon the rights and privileges conferred hereby, this Option and
the rights and privileges conferred hereby shall immediately become null and
void.
SECTION 4. RIGHT TO EXERCISE.
(a) EXERCISABILITY. Subject to Subsection (b) below, this Option shall
be exercisable in its entirety at any time prior to its expiration. No Partial
Exercise of this Option may be made for a number of Shares other than 100 Shares
or a multiple thereof (without regard to adjustments).
(b) SHAREHOLDERS' AGREEMENT. No part of this Option shall be
exercisable unless the Optionee or his representative has delivered, or delivers
contemporaneously with his notice of exercise, an executed signature page to the
Shareholders' Agreement, to which he and his Shares shall become subject.
SECTION 5. EXERCISE PROCEDURES.
(a) NOTICE OF EXERCISE. The Optionee or the Optionee's representative
may exercise this Option by giving written notice to the Secretary of the
Company pursuant to Section 15(d) hereof. The notice shall specify the election
to exercise this Option and the number of Shares for which it is being
exercised. The notice may also request a form of payment other than cash under
Sections 6(b) or (c) hereof. The notice, along with a signature page to the
Shareholders' Agreement and any other documentation required thereunder, shall
be signed by the person or persons exercising this Option. In the event that
this Option is being exercised by the representative of the Optionee, the notice
shall be accompanied by proof satisfactory to the Company of the
representative's right to exercise this Option. The Optionee or the Optionee's
representative shall deliver to the Secretary of the Company, at the time of
giving the notice, payment in a form which conforms to Section 6 hereof for the
full amount of the Purchase Price. A copy of the Shareholders' Agreement, as
amended, will be delivered to the Optionee promptly after receipt of notice.
3
<PAGE>
(b) ISSUANCE OF SHARES. After receiving a proper notice of exercise
and accompanying documentation, the Company shall cause to be issued a
Certificate or certificates for the Shares as to which this Option has been
exercised, registered in the name of the person exercising this Option (or in
the names of such person and his or her spouse as community property or as joint
tenants with right of survivorship). The certificate or certificates of
Restricted Shares will be held by the Secretary of the Company pursuant to the
terms of the Escrow Agreement signed as part of the Shareholders' Agreement.
Shares that are not Restricted Shares and that are not security for a promissory
note for the purchase price of the Shares shall be issued to the Optionee and
shall not be subject to the Escrow Agreement.
SECTION 6. PAYMENT FOR STOCK
(a) PAYMENT IN CASH. The entire Purchase Price may be paid in U.S.
Dollars.
(b) SURRENDER OF STOCK. With the Committee's express consent and at
its sole discretion, all or part of the Purchase Price may be paid by the
surrender of Shares in good form for transfer. Such Shares must have been owned
for more than 6 months by the Optionee or the Optionee's representative and must
have a fair market value (as determined by the Committee) on the date of
exercise of this Option which, together with any amount paid in a form other
than Shares, is equal to the Purchase Price.
(c) PROMISSORY NOTE. With the Committee's express consent and at its
sole discretion, and if the Optionee still qualifies as an Employee or director
of or Consultant to the Company or a Subsidiary at the time of exercise, all or
part of the Purchase Price may be paid with a limitedrecourse promissory note
executed by the Optionee. The terms of such note shall be one of the following:
(i) BONUS NOTE. If the Optionee is a salaried employee, the
term of such note shall be 60 months, and such note shall be
payable in full at the Company's option immediately upon
termination of Service of the Optionee. Such note shall bear
interest at a fixed rate equal to the Test Rate and shall be
deducted from the Optionee's wages each pay period. Such note
shall be repaid in full by way of payroll deductions from future
bonuses until the principal is fully repaid, and shall be secured
by a pledge of the Shares so acquired.
(ii) COMMISSION NOTE. If the Optionee is an employee paid by
commissions, the term of such note shall be 60 months, and such
note shall be payable in full at the Company's option immediately
upon termination of Service of the Optionee. Such note shall bear
interest at a fixed rate equal to the Test Rate and shall be
deducted from the Optionee's wages each pay period. Such note
shall be repaid in full by way of payroll deductions at a
percentage of the net monthly commission (before withholdings) in
excess of $10,000 earned by the Optionee for any month until the
Note has been fully repaid. Should the net gross commissions for
any month be less than
4
<PAGE>
$10,000, the amount by which the net commissions for that month is
less than $10,000 shall be carried forward to the following months
for the purpose of determining amounts then due until the shortage
is fully offset by future amounts in excess of $10,000. Such note
shall be secured by a pledge of the Shares so acquired.
(d) CASHLESS EXERCISE. With the Committee's express consent and at its
sole discretion, by delivery of a properly executed exercise notice together
with such other documentation as the Committee and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company of
the sale or loan proceeds required to pay the exercise price.
SECTION 7. TERM AND EXPIRATION.
(a) BASIC TERM. This Option shall in any event expire on
____________,____.
(b) TERMINATION OF SERVICE (EXCEPT BY DEATH). If the Optionee's
Service terminates for any reason other than death, then this Option shall
expire on the earliest of the following occasions:
(i) The expiration date determined pursuant to Subsection (a)
above;
(ii) The date three months after the termination of the
Optionee's Service (other than a discharge for Cause or
because the Optionee is disabled);
(iii) The time when the Optionee is notified (orally or in
writing) that he or she is being discharged for Cause; or
(iv) The date six months after the termination of the Optionee's
service as an Employee because the Optionee is disabled.
For purposes of this Agreement, "Cause" shall mean (i) gross negligence by the
Employee in the performance of his or her duties; (ii) any act of fraud,
misappropriation, dishonesty, embezzlement or similar conduct against the
Company; (iii) conviction of a felony or any crime involving moral turpitude; or
(iv) willful and continuing failure by the Employee to comply with any policy of
the Company which is applicable to Employees of the Company.
The Optionee may exercise all or part of this Option at any time before its
expiration under this Section 7(b). The balance of this Option shall lapse when
the Optionee's Service terminates. In the event that the Optionee dies after
the termination of Service but before the expiration of this Option, all or part
of this Option may be exercised (prior to expiration) by the executors or
administrators of the Optionee's estate or by any person who has acquired this
Option directly from the Optionee by bequest or inheritance.
(c) DEATH OF OPTIONEE. If the Optionee dies in Service, then this
Option shall expire on the earlier of the following dates:
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<PAGE>
(i) The expiration date determined pursuant to Subsection (a)
above; or
(ii) The date six months after the Optionee's death.
All or part of this Option may be exercised at any time before its expiration
under the preceding sentence by the executors or administrators of the
Optionee's estate or by any person who has acquired this Option directly from
the Optionee by bequest or inheritance.
(d) LEAVE OF ABSENCE. For purposes of this Section 7, the Employee
relationship shall be deemed to continue while the Optionee is on military
leave, sick leave or other bona fide leave of absence (to be determined in the
sole discretion of the Committee).
SECTION 8. THE COMPANY'S RIGHT OF REPURCHASE.
(a) BASIC REPURCHASE RIGHT. All Shares purchased pursuant to this
Agreement shall be subject to the terms and conditions of the Shareholders'
Agreement. Except to the extent otherwise provided in Subsection (d), Shares
purchased pursuant to this Agreement shall also be subject to a special right
(but not an obligation) of repurchase by the Company which is in addition to
whatever similar rights are provided under the Shareholders' Agreement. Shares
subject to this special right of repurchase are referred to as "Restricted
Shares." The per share repurchase price of the Restricted Shares shall be equal
to the Exercise Price. The Optionee shall not transfer, assign, encumber, or
otherwise dispose of any Restricted Shares.
(b) CONDITION PRECEDENT TO EXERCISE. The Company's special right of
repurchase shall be exercisable only during the 60day period next following the
later of (i) the date when the Optionee's Service terminates for any reason,
with or without cause, or (ii) the date when the Optionee purchases the
Restricted Shares. The determination of whether or when the Optionee's Service
has terminated shall be made by the Committee in its sole and absolute
discretion.
(c) EXERCISE OF REPURCHASE RIGHT. The Company's right of repurchase
shall be exercisable only by written notice delivered to the Optionee prior to
the expiration of the 60day period specified in Subsection (b) above. The
notice shall indicate the number of Restricted Shares to be repurchased and the
date on which the repurchase is to be effected. Such date shall not be more
than 30 days after the date of the notice. The certificate(s) representing the
Restricted Shares to be repurchased shall, if in the possession or under the
control of the Optionee, prior to the close of business on the date specified
for the repurchase, be delivered to the Secretary of the Company. Each
certificate shall be properly endorsed for transfer. The Company shall,
concurrently with the receipt of such certificate(s), pay to the Optionee an
amount equal to the Exercise Price multiplied by the number of the Restricted
Shares to be repurchased. Payment shall be made, first, by the
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<PAGE>
discharge of any outstanding indebtedness (principal plus accrued but unpaid
interest) under any promissory note used by the Optionee to pay for the
Restricted Shares under Section 6(c) hereof and, second, in cash or cash
equivalents. The Company's right of repurchase shall terminate with respect to
any Restricted Shares for which it has not been timely exercised pursuant to
this Section (c).
(d) PHASE-OUT OF REPURCHASE RIGHT. On and after each date specified in
the following schedule, the Company's special right of repurchase under this
Agreement shall terminate and shall not be exercisable with respect to that
number of Shares purchased pursuant to this Agreement which does not exceed the
percentage set forth opposite such date multiplied by the total number of Shares
subject to this Option.
<TABLE>
<CAPTION>
Anniversary Percentage of Shares
of Date of No Longer Subject
Grant to Repurchase
----- -------------
<S> <C>
Date of Grant . . . . . . . . . . . . . 0%
First . . . . . . . . . . . . . . . . . 20%
Second. . . . . . . . . . . . . . . . . 40%
Third . . . . . . . . . . . . . . . . . 60%
Fourth. . . . . . . . . . . . . . . . . 80%
Fifth . . . . . . . . . . . . . . . . . 100%
</TABLE>
The termination and phaseout of the Company's special repurchase right will have
no effect on any rights the Company may have (as to repurchase or otherwise)
under the Shareholders' Agreement, which will continue in full force and effect.
(e) ESTABLISHMENT OF ESCROW. In conformance with the terms of the
Shareholders' Agreement and in order to facilitate the exercise of the Company's
special right of repurchase, the Optionee shall, concurrently with the exercise
of this Option, execute joint escrow instructions prescribed by the Committee.
The Optionee shall also deliver to and deposit with the designated escrow agent
the certificate(s) for any Restricted Shares. As long as the Company retains
any special right of repurchase, or as long as the Shares are security for a
promissory note for the purchase price of the Shares, the Optionee shall deliver
to such escrow agent, promptly upon receipt, any additional securities or other
property (including money paid other than as a cash dividend) distributed with
respect to any Restricted Shares, except as provided in any such security
agreement. Any certificate(s) delivered into escrow shall be accompanied by an
assignment of stock powers properly endorsed by the Optionee.
(f) CANCELLATION OF SHARES. If the Company makes available, at the
time and place and in the amount and form provided in this Agreement, the
consideration for the Restricted Shares to be repurchased in accordance with the
provisions of this Agreement, then after such time, the person from whom such
Restricted Shares are to be repurchased shall no longer have any rights as a
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<PAGE>
holder of such Restricted Shares (other than the right to receive payment of
such consideration in accordance with this Agreement). Such Restricted Shares
shall be deemed to have been repurchased in accordance with the applicable
provisions hereof, whether or not the certificates) therefor have been delivered
as required by this Agreement.
(g) ADDITIONAL SHARES OR SUBSTITUTED SECURITIES. In the event of any
stock dividend, stock split, adjustment in conversion ratio, recapitalization or
similar transaction affecting the Company's outstanding securities without
receipt of consideration, any new, substituted or additional securities or other
property (including money paid other than as a cash dividend) which are by
reason of such transaction distributed with respect to any Restricted Shares or
into which such Restricted Shares thereby become convertible shall immediately
be subject to the Company's special right of repurchase. Appropriate
adjustments to reflect the distribution of such securities or property shall be
made to the number and/or class of the Restricted Shares. Appropriate
adjustments shall also, after each such transaction, be made to the price per
share to be paid upon the exercise of the special right of repurchase in order
to reflect any change in the Company's outstanding securities effected without
receipt of consideration therefor; provided, however, that the aggregate
purchase price payable for the Restricted Shares shall remain the same.
(h) BINDING EFFECT. The Company's special right of repurchase shall
inure to the benefit of its successors and assigns and shall be binding upon any
representative, executor, administrator, heir or legatee of the Optionee.
(i) TAX CONSEQUENCES. The Optionee understands that the exercise of
the Option to purchase Restricted Shares may subject the Optionee to federal and
state income tax liability. The Optionee has reviewed with the Optionee's own
tax advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by this Agreement. The Optionee is
relying solely on such advisors and not any statements or representations of the
Company or any of its agents. The Optionee understands that the Optionee (and
not the Company) shall be responsible for the Optionee's own tax liability that
may arise as a result of the transactions contemplated by this Agreement. The
Optionee understands that Section 83 of the Code taxes as ordinary income the
difference between the purchase price for the Shares and the fair market value
of the Shares as of the date any restrictions on the Shares lapse. In this
context, "restriction" includes the right of the Company to buy back the Shares
pursuant to the Company's special right of repurchase. The Optionee understands
that the Optionee may elect to be taxed at the time the Shares are purchased
rather than when and as the repurchase option expires by filing an election
under Section 83(b) of the Code with the IRS within thirty days from the date of
purchase.
THE OPTIONEE ACKNOWLEDGES THAT IT IS THE OPTIONEE'S SOLE RESPONSIBILITY
AND NOT THE COMPANY'S TO TIMELY FILE THE ELECTION
8
<PAGE>
UNDER SECTION 83(b), EVEN IF THE OPTIONEE REQUESTS THE COMPANY OR ITS
REPRESENTATIVES TO MAKE THIS FILING ON THE OPTIONEE'S BEHALF.
SECTION 9. THE COMPANY'S RIGHT OF FIRST REFUSAL.
In the event that the Optionee or a Transferee proposes to sell, pledge
or otherwise transfer to any person any Shares acquired under this Agreement, or
any interest in such Shares, the Company shall have the Right of First Refusal
set forth in Section 4 of the Shareholders' Agreement.
SECTION 10. LEGALITY OF INITIAL ISSUANCE.
No Shares shall be issued upon the exercise of this Option unless and
until the Company has determined that:
(a) It and the Optionee have taken any actions required to
register the Shares under the Securities Act or to perfect
an exemption from the registration requirements thereof;
(b) Any applicable listing requirement of any stock exchange on
which Stock is listed has been satisfied; and
(c) Any other applicable provision of state, federal or foreign
law has been satisfied.
SECTION 11. NO REGISTRATION RIGHTS.
The Company may, but shall not be obligated to, register or qualify the
sale of Shares under the Securities Act or any other applicable law. The
Company shall not be obligated to take any affirmative action in order to cause
the sale of Shares under this Agreement to comply with any law.
SECTION 12. RESTRICTIVE LEGENDS.
Optionee understands and agrees that the Company shall cause the legend
set forth below or legends substantially equivalent thereto, in addition to the
legends set forth in the Shareholders' Agreement, to be placed upon any
certificate(s) evidencing ownership of the Shares together with any other
legends that may be required by the Company or by state or federal securities
laws:
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY,,
OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR,
WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF
9
<PAGE>
CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE
COMMISSIONER'S RULES.
Optionee understand that transfer of the Shares may be restricted by
Section 260.141.11 of the Rules of the California Corporations Commissioner, a
copy of which is attached as Exhibit A.
SECTION 13. RESTRICTIONS ON TRANSFER OF SHARES.
(a) RESTRICTIONS. Regardless of whether the offering and sale of
Shares under the Plan have been registered under the Securities Act or have been
registered or qualified under the securities laws of any state, the Company may
impose restrictions upon the sale, pledge, or other transfer of such Shares
(including the placement of appropriate legends on stock certificates) if, in
the judgment of the Company and its counsel, such restrictions are necessary or
desirable in order to achieve compliance with the provisions of the Securities
Act, the securities laws of any state or any other law.
(b) INVESTMENT INTENT AT GRANT. The Optionee represents and agrees
that the Shares to be acquired upon exercising this Option will be acquired for
investment, and not with a view to the sale or distribution thereof.
(c) INVESTMENT INTENT AT EXERCISE. In the event that the sale of
Shares under the Plan is not registered under the Securities Act but an
exemption is available which requires an investment representation or other
representation, the Optionee shall represent and agree at the time of exercise
that the Shares being acquired upon exercising this Option are being acquired
for investment, and not with a view to the sale or distribution thereof, and
shall make such other representations as are set forth in the Shareholders'
Agreement or which are deemed necessary or appropriate by the Company and its
counsel.
(d) LEGEND. All certificates evidencing Shares acquired under this
Agreement in an unregistered transaction shall bear the restrictive legends set
forth in Section 10 of the Shareholders' Agreement (and such other restrictive
legends as are required or deemed advisable under the provisions of any
applicable law).
(e) REMOVAL OF LEGENDS. If, in the opinion of the Company and its
counsel, any legend placed on a stock certificate representing Shares sold under
this Agreement is no longer required, the holder of such certificate shall be
entitled to exchange such certificate for a certificate representing the same
number of Shares but lacking such legend.
(f) ADMINISTRATION. Any determination by the Company and its counsel
in connection with any of the matters set forth in this Section 13 shall be
conclusive and binding on the Optionee and all other persons.
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<PAGE>
SECTION 14. SHARES AND ADJUSTMENTS.
(a) ADJUSTMENT. In the event that the outstanding Shares are hereafter
increased or decreased or changed into or exchanged for a different number or
kind of shares or other securities of the Company or of another corporation, by
reason of a reorganization, merger, consolidation, recapitalization,
reclassification, stock split, reverse stock split, combination of shares or
declaration of stock dividends, the total number and/or kind of Shares for the
purchase of which Options may be granted under the Plan, and the number and/or
kind of Shares as to which Options (or portions thereof) are outstanding, shall
be adjusted proportionately by the Committee. Notwithstanding the foregoing,
the 100share minimum for partial exercise under Section 4(a) hereof shall not
change as a result of any such adjustment unless the outstanding Shares are
exchanged for or changed into other securities of the Company or another
corporation. Any such adjustment of an outstanding Option shall be made without
a change in the total Exercise Price applicable to the unexercised portion of
such Option and with a corresponding adjustment in the Exercise Price per Share.
Any such adjustment under this Section 14 shall be subject to the provisions of
the Company's Articles of Incorporation, as amended, and applicable law.
(b) ADMINISTRATION. All such adjustments shall be made by the
Committee, whose determination shall be conclusive and binding on all persons.
SECTION 15. MISCELLANEOUS PROVISIONS.
(a) WITHHOLDING TAXES. In the event that the Company determines that
it is required to withhold Federal, state, local or foreign taxes as a result of
the exercise of this Option, the Optionee, as a condition to the exercise of
this Option, shall make arrangements satisfactory to the Company to enable it to
satisfy all withholding requirements. The Optionee shall also make arrangements
satisfactory to the Company to enable it to satisfy any withholding requirements
that may arise in connection with the disposition of Shares purchased by
exercising this Option.
(b) RIGHTS AS A SHAREHOLDER. Neither the Optionee nor the Optionee's
representative shall have any rights as a shareholder with respect to any Shares
subject to this Option until such Shares have been issued in the name of the
Optionee or the Optionee's representative.
(c) NO EMPLOYMENT RIGHTS. Nothing in this Agreement shall be construed
as giving the Optionee the right to be retained as an Employee, director or
Consultant. The Company reserves the right to terminate the Optionee's Service
at any time, with or without cause.
(d) NOTICE. Any notice required by the terms of this Agreement shall
be given in writing and shall be deemed effective upon personal delivery or upon
deposit with the United States Postal Service, by registered or certified mail
with postage and fees prepaid and addressed to the party entitled to such notice
at the address shown below such party's signature on this Agreement, or at
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<PAGE>
such other address as such party may designate by 10 days' advance written
notice to the other party to this Agreement.
(e) ENTIRE AGREEMENT. This Agreement, the Plan and the Shareholders'
Agreement constitute the entire contract between the parties hereto with regard
to the subject matter hereof.
(f) CHOICE OF LAW. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of California, as such laws are
applied to contracts entered into and performed in such State.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
on its behalf by its officer duly authorized to act on behalf of the Committee,
and the Optionee has personally executed this Agreement.
HAMBRECHT & QUIST GROUP
By:
-------------------------------
Its:
---------------------------
One Bush Street
San Francisco, California 94104
OPTIONEE:
--------------------------------------
Optionee's Address:
--------------------------------------
--------------------------------------
--------------------------------------
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<PAGE>
HAMBRECHT & QUIST
GROUP SAVINGS AND
EMPLOYEE STOCK OWNERSHIP PLAN
PLAN AND TRUST AGREEMENT
AS AMENDED AND RESTATED
EFFECTIVE OCTOBER 1, 1994
<PAGE>
TABLE OF CONTENTS
1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2 ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.1 Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.2 Ineligible Employees. . . . . . . . . . . . . . . . . . . . . . . 9
2.3 Ineligible or Former Participants . . . . . . . . . . . . . . . . 9
3 PARTICIPANT CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . 10
3.1 401(k) Contribution Election. . . . . . . . . . . . . . . . . . . 10
3.2 After-Tax Contribution Election . . . . . . . . . . . . . . . . . 10
3.3 Changing a Contribution Election. . . . . . . . . . . . . . . . . 10
3.4 Revoking and Resuming a Contribution Election . . . . . . . . . . 10
3.5 Contribution Percentage Limits. . . . . . . . . . . . . . . . . . 11
3.6 Refunds When Contribution Dollar Limit Exceeded . . . . . . . . . 11
3.7 Timing, Posting and Tax Considerations. . . . . . . . . . . . . . 12
4 ROLLOVERS AND TRANSFERS FROM AND TO OTHER QUALIFIED PLANS . . . . . . . 13
4.1 Rollovers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.2 Transfers From and To Other Qualified Plans . . . . . . . . . . . 13
5 EMPLOYER CONTRIBUTIONS. . . . . . . . . . . . . . . . . . . . . . . . . 14
5.1 401(k) Match Contributions. . . . . . . . . . . . . . . . . . . . 14
5.2 Profit Sharing Contributions. . . . . . . . . . . . . . . . . . . 14
5.3 ESOP Allocation Contributions . . . . . . . . . . . . . . . . . . 15
6 ACCOUNTING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.1 Individual Participant Accounting . . . . . . . . . . . . . . . . 16
6.2 Sweep Account is Transaction Account. . . . . . . . . . . . . . . 16
6.3 Trade Date Accounting and Investment Cycle. . . . . . . . . . . . 16
6.4 Accounting for Investment Funds . . . . . . . . . . . . . . . . . 16
6.5 Payment of Fees and Expenses. . . . . . . . . . . . . . . . . . . 16
6.6 Accounting for Participant Loans. . . . . . . . . . . . . . . . . 17
6.7 Error Correction. . . . . . . . . . . . . . . . . . . . . . . . . 17
6.8 Participant Statements. . . . . . . . . . . . . . . . . . . . . . 18
6.9 Special Accounting During Conversion Period . . . . . . . . . . . 18
6.10 Accounts for QDRO Beneficiaries . . . . . . . . . . . . . . . . . 18
7 INVESTMENT FUNDS AND ELECTIONS. . . . . . . . . . . . . . . . . . . . . 19
7.1 Investment Funds. . . . . . . . . . . . . . . . . . . . . . . . . 19
7.2 Investment Fund Elections . . . . . . . . . . . . . . . . . . . . 19
7.3 Responsibility for Investment Choice. . . . . . . . . . . . . . . 20
7.4 Default if No Election. . . . . . . . . . . . . . . . . . . . . . 20
7.5 Timing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7.6 Investment Fund Election Change Fees. . . . . . . . . . . . . . . 20
- --------------------------------------------------------------------------------
7/12/95
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8 VESTING & FORFEITURES . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.1 Fully Vested Contribution Accounts. . . . . . . . . . . . . . . . 21
8.2 Full Vesting upon Certain Events. . . . . . . . . . . . . . . . . 21
8.3 Vesting Schedule. . . . . . . . . . . . . . . . . . . . . . . . . 21
8.4 Forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.5 Rehired Employees . . . . . . . . . . . . . . . . . . . . . . . . 22
9 PARTICIPANT LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
9.1 Participant Loans Permitted . . . . . . . . . . . . . . . . . . . 23
9.2 Loan Application, Note and Security . . . . . . . . . . . . . . . 23
9.3 Spousal Consents . . . . . . . . . . . . . . . . . . . . . . . . 23
9.4 Loan Approval . . . . . . . . . . . . . . . . . . . . . . . . . . 23
9.5 Loan Funding Limits, Account Sources and Funding Order. . . . . . 23
9.6 Maximum Number of Loans . . . . . . . . . . . . . . . . . . . . . 24
9.7 Source and Timing of Loan Funding . . . . . . . . . . . . . . . . 24
9.8 Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . 24
9.9 Loan Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
9.10 Loan Payment Hierarchy. . . . . . . . . . . . . . . . . . . . . . 25
9.11 Repayment Suspension. . . . . . . . . . . . . . . . . . . . . . . 25
9.12 Loan Default. . . . . . . . . . . . . . . . . . . . . . . . . . . 25
9.13 Call Feature. . . . . . . . . . . . . . . . . . . . . . . . . . . 25
10 IN-SERVICE WITHDRAWAL . . . . . . . . . . . . . . . . . . . . . . . . . 26
10.1 InService Withdrawals Permitted . . . . . . . . . . . . . . . . . 26
10.2 InService Withdrawal Application and Notice . . . . . . . . . . . 26
10.3 Spousal Consent . . . . . . . . . . . . . . . . . . . . . . . . . 26
10.4 InService Withdrawal Approval . . . . . . . . . . . . . . . . . . 26
10.5 Minimum Amount, Payment Form and Medium . . . . . . . . . . . . . 26
10.6 Source and Timing of InService Withdrawal Funding . . . . . . . . 27
10.7 Hardship Withdrawals. . . . . . . . . . . . . . . . . . . . . . . 27
10.8 AfterTax Account Withdrawals. . . . . . . . . . . . . . . . . . . 29
10.9 Rollover Account Withdrawals. . . . . . . . . . . . . . . . . . . 29
11 DISTRIBUTIONS ONCE EMPLOYMENT ENDS OR AS REQUIRED BY LAW. . . . . . . . 30
11.1 Benefit Information, Notices and Election . . . . . . . . . . . . 30
11.2 Spousal Consent . . . . . . . . . . . . . . . . . . . . . . . . . 30
11.3 Payment Form and Medium . . . . . . . . . . . . . . . . . . . . . 30
11.4 Distribution of Small Amounts . . . . . . . . . . . . . . . . . . 31
11.5 Source and Timing of Distribution Funding . . . . . . . . . . . . 31
11.6 Deemed Distribution . . . . . . . . . . . . . . . . . . . . . . . 31
11.7 Latest Commencement Permitted . . . . . . . . . . . . . . . . . . 32
11.8 Incidental Benefit Rule . . . . . . . . . . . . . . . . . . . . . 32
11.9 Payment to Beneficiary. . . . . . . . . . . . . . . . . . . . . . 32
11.10 Beneficiary Designation . . . . . . . . . . . . . . . . . . . . . 33
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12 ADP AND ACP TESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
12.1 Contribution Limitation Definitions . . . . . . . . . . . . . . . 34
12.2 ADP and ACP Tests . . . . . . . . . . . . . . . . . . . . . . . . 37
12.3 Correction of ADP and ACP Tests . . . . . . . . . . . . . . . . . 37
12.4 Multiple Use Test . . . . . . . . . . . . . . . . . . . . . . . . 38
12.5 Correction of Multiple Use Test . . . . . . . . . . . . . . . . . 39
12.6 Adjustment for Investment Gain or Loss. . . . . . . . . . . . . . 39
12.7 Testing Responsibilities and Required Records . . . . . . . . . . 39
12.8 Separate Testing. . . . . . . . . . . . . . . . . . . . . . . . . 39
13 MAXIMUM CONTRIBUTION AND BENEFIT LIMITATIONS. . . . . . . . . . . . . . 40
13.1 "Annual Addition" Defined . . . . . . . . . . . . . . . . . . . . 40
13.2 Maximum Annual Addition . . . . . . . . . . . . . . . . . . . . . 40
13.3 Avoiding an Excess Annual Addition. . . . . . . . . . . . . . . . 40
13.4 Correcting an Excess Annual Addition. . . . . . . . . . . . . . . 40
13.5 Correcting a Multiple Plan Excess . . . . . . . . . . . . . . . . 41
13.6 "Defined Benefit Fraction" Defined. . . . . . . . . . . . . . . . 41
13.7 "Defined Contribution Fraction" Defined . . . . . . . . . . . . . 41
13.8 Combined Plan Limits and Correction . . . . . . . . . . . . . . . 42
14 TOP HEAVY RULES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
14.1 Top Heavy Definition. . . . . . . . . . . . . . . . . . . . . . . 43
14.2 Special Contributions . . . . . . . . . . . . . . . . . . . . . . 44
14.3 Special Vesting . . . . . . . . . . . . . . . . . . . . . . . . . 45
14.4 Adjustment to Combined Limits for Different Plans . . . . . . . . 45
15 PLAN ADMINISTRATION. . . . . . . . . . . . . . . . . . . . . . . . . . 46
15.1 Plan Delineates Authority and Responsibility. . . . . . . . . . . 46
15.2 Fiduciary Standards . . . . . . . . . . . . . . . . . . . . . . . 46
15.3 Company is ERISA Plan Administrator . . . . . . . . . . . . . . . 46
15.4 Administrator Duties. . . . . . . . . . . . . . . . . . . . . . . 47
15.5 Advisors May be Retained. . . . . . . . . . . . . . . . . . . . . 47
15.6 Delegation of Administrator Duties. . . . . . . . . . . . . . . . 48
15.7 Committee Operating Rules . . . . . . . . . . . . . . . . . . . . 48
16 MANAGEMENT OF INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . 49
16.1 Trust Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 49
16.2 Investment Funds. . . . . . . . . . . . . . . . . . . . . . . . . 49
16.3 Authority to Hold Cash. . . . . . . . . . . . . . . . . . . . . . 50
16.4 Trustee to Act Upon Instructions. . . . . . . . . . . . . . . . . 50
16.5 Administrator Has Right to Vote Registered
Investment Company Shares . . . . . . . . . . . . . . . . . . . . 50
16.6 Custom Fund Investment Management . . . . . . . . . . . . . . . . 50
16.7 Authority to Segregate Assets . . . . . . . . . . . . . . . . . . 51
16.8 Investment in Company Stock . . . . . . . . . . . . . . . . . . . 51
16.9 Participants Have Right to Vote and Tender Company Stock . . . . 51
16.10 Registration and Disclosure for Company Stock . . . . . . . . . . 52
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17 TRUST ADMINISTRATION. . . . . . . . . . . . . . . . . . . . . . . . . . 53
17.1 Trustee to Construe Trust . . . . . . . . . . . . . . . . . . . . 53
17.2 Trustee To Act As Owner of Trust Assets . . . . . . . . . . . . . 53
17.3 United States Indicia of Ownership. . . . . . . . . . . . . . . . 53
17.4 Tax Withholding and Payment . . . . . . . . . . . . . . . . . . . 54
17.5 Trust Accounting. . . . . . . . . . . . . . . . . . . . . . . . . 54
17.6 Valuation of Certain Assets . . . . . . . . . . . . . . . . . . . 54
17.7 Legal Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . 55
17.8 Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . 55
17.9 Trustee Duties and Limitations. . . . . . . . . . . . . . . . . . 55
18 RIGHTS, PROTECTION, CONSTRUCTION AND JURISDICTION . . . . . . . . . . . 56
18.1 Plan Does Not Affect Employment Rights. . . . . . . . . . . . . . 56
18.2 Limited Return of Contributions . . . . . . . . . . . . . . . . . 56
18.3 Assignment and Alienation . . . . . . . . . . . . . . . . . . . . 56
18.4 Facility of Payment . . . . . . . . . . . . . . . . . . . . . . . 57
18.5 Reallocation of Lost Participant's Accounts . . . . . . . . . . . 57
18.6 Put Options . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
18.7 Claims Procedure. . . . . . . . . . . . . . . . . . . . . . . . . 57
18.8 Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . 58
18.9 Jurisdiction and Severability . . . . . . . . . . . . . . . . . . 58
18.10 Indemnification by Employer . . . . . . . . . . . . . . . . . . . 59
19 AMENDMENT, MERGER, DIVESTITURES AND TERMINATION . . . . . . . . . . . . 60
19.1 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
19.2 Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
19.3 Divestitures. . . . . . . . . . . . . . . . . . . . . . . . . . . 60
19.4 Plan Termination. . . . . . . . . . . . . . . . . . . . . . . . . 61
19.5 Amendment and Termination Procedures. . . . . . . . . . . . . . . 61
19.6 Termination of Employer's Participation . . . . . . . . . . . . . 62
19.7 Replacement of the Trustee. . . . . . . . . . . . . . . . . . . . 62
19.8 Final Settlement and Accounting of Trustee. . . . . . . . . . . . 62
APPENDIX A INVESTMENT FUNDS . . . . . . . . . . . . . . . . . . . . . . . . 64
APPENDIX B PAYMENT OF PLAN FEES AND EXPENSES. . . . . . . . . . . . . . . . 65
APPENDIX C LOAN INTEREST RATE . . . . . . . . . . . . . . . . . . . . . . . 66
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1 DEFINITIONS
When capitalized, the words and phrases below have the following meanings
unless different meanings are clearly required by the context:
1.1 "Account". The records maintained for purposes of accounting for a
Participant's interest in the Plan. "Account" may refer to one or all
of the following accounts which have been created on behalf of a
Participant to hold specific types of Contributions under the Plan:
(a) "401(k) Account". An account created to hold 401(k)
Contributions.
(b) "AfterTax Account". An account created to hold AfterTax
Contributions.
(c) "Rollover Account". An account created to hold Rollover
Contributions.
(d) "401(k) Match Account". An account created to hold 401(k) Match
Contributions.
(e) "Profit Sharing Account". An account created to hold Profit
Sharing Contributions.
(f) "ESOP Allocation Account". An account created to hold ESOP
Allocation Contributions.
A Participant's 401(k) Account, AfterTax Account, Rollover Account and
Profit Sharing Account constitute his or her accounts held under the
profit sharing plan and a Participant's 401(k) Match Account and ESOP
Allocation Account constitute his or her accounts held under the stock
bonus employee stock ownership plan.
1.2 "ACP" or "Average Contribution Percentage". The percentage calculated
in accordance with Section 12.1.
1.3 "Administrator". The Company, which may delegate all or a portion of
the duties of the Administrator under the Plan to a Committee in
accordance with Section 15.6.
1.4 "ADP" or "Average Deferral Percentage".The percentage calculated in
accordance with Section 12.1.
1.5 "Beneficiary". The person or persons who is to receive benefits after
the death of the Participant pursuant to the "Beneficiary Designation"
paragraph in Section 11, or as a result of a QDRO.
1.6 "Break in Service". The fifth anniversary (or sixth anniversary if
absence from employment was due to a Parental Leave) of the date on
which a Participant's employment ends.
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1.7 "Code". The Internal Revenue Code of 1986, as amended. Reference to
any specific Code section shall include such section, any valid
regulation promulgated thereunder, and any comparable provision of any
future legislation amending, supplementing or superseding such
section,
1.8 "Committee". If applicable, the committee which has been appointed by
the Company to administer the Plan in accordance with Section 15.6.
1.9 "Company". Hambrecht & Quist Group or any successor by merger,
purchase or otherwise.
1.10 "Company Stock". Shares of common stock of the Company, its
predecessor(s) or its successors or assigns, or any corporation with
or into which said corporation may be merged, consolidated or
reorganized, or to which a majority of its assets may be sold.
1.11 "Compensation". The sum of a Participant's Taxable Income and salary
reductions, if any, pursuant to Code sections 125, 402(e)(3), 402(h),
403(b), 414(h)(2) or 457.
For purposes of determining benefits under this Plan, Compensation is
limited to $150,000, (as adjusted for the cost of living pursuant to
Code sections 401(a)(17) and 415(d)) per Plan Year. For purposes of
the preceding sentence, in the case of an HCE who is a 5% Owner or one
of the 10 most highly compensated Employees, (i) such HCE and such
HCE's family group (as defined below) shall be treated as a single
employee and the Compensation of each family group member shall be
aggregated with the Compensation of such HCE, and (ii) the limitation
on Compensation shall be allocated among such HCE and his or her
family group members in proportion to each individual's Compensation
before the application of this sentence. For purposes of this
Section, the term "family group" shall mean an Employee's spouse and
lineal descendants who have not attained age 19 before the close of
the year in question.
For purposes of determining HCEs and key employees, Compensation for
the entire Plan Year shall be used. For purposes of determining ADP
and ACP, Compensation shall be limited to amounts paid to an Eligible
Employee while a Participant.
1.12 "Contribution". An amount contributed to the Plan by the Employer or
an Eligible Employee, and allocated by contribution type to
Participants' Accounts, as described in Section 1.1. Specific types of
contribution include:
(a) "401(k) Contribution". An amount contributed by an eligible
Participant in conjunction with his or her Code section 401(k)
salary deferral election which shall be treated as made by the
Employer on an eligible Participant's behalf.
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(b) "After-Tax Contribution". An amount contributed by an eligible
Participant on an after-tax basis.
(c) "Rollover Contribution". An amount contributed by an Eligible
Employee which originated from another employer's or an
Employer's qualified plan.
(d) "401(k) Match Contribution". An amount contributed by the
Employer on an eligible Participant's behalf based upon the
amount contributed by the eligible Participant.
(e) "Profit Sharing Contribution". An amount contributed by the
Employer on an eligible Participant's behalf and allocated on a
pay based formula.
(f) "ESOP Allocation Contribution". An amount contributed by the
Employer on an eligible Participant's behalf and allocated on a
pay based formula.
401(k) Contributions, After-Tax Contributions, Rollover Contributions
and Profit Sharing Contributions constitute contributions under the
profit sharing plan and 401(k) Match Contributions and ESOP Allocation
Contributions constitute contributions under the stock bonus employee
stock ownership plan.
1.13 "Contribution Dollar Limit". The annual limit placed on each
Participant's 401 (k)Contributions, which shall be $7,000 per calendar
year (as adjusted for the cost of living pursuant to Code sections
402(g)(5) and 415(d)). For purposes of this Section, a Participant's
401(k) Contributions shall include (i) any employer contribution made
under any qualified cash or deferred arrangement as defined in Code
section 401(k) to the extent not includible in gross income for the
taxable year under Code section 402(e)(3) or 402(h)(1)(B) (determined
without regard to Code section 402(g)), and (ii) any employer
contribution to purchase an annuity contract under Code section 403(b)
under a salary reduction agreement (within the meaning of Code section
3121(a)(5)(D)).
1.14 "Conversion Period". The period of converting the prior accounting
system of the Plan and Trust, if such Plan and Trust were in existence
prior to the Effective Date, or the prior accounting system of any
plan and trust which is merged into this Plan and Trust subsequent to
the Effective Date, to the accounting system described in Section 6.
1.15 "Direct Rollover". An Eligible Rollover Distribution that is paid
directly to an Eligible Retirement Plan for the benefit of a
Distributee.
1.16 "Disability". A Participant's total and permanent, mental or physical
disability resulting in termination of employment as evidenced by
presentation of medical evidence satisfactory to the Administrator.
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1.17 "Distributee". An Employee or former Employee, the surviving spouse
of an Employee or former Employee and a spouse or former spouse of an
Employee or former Employee determined to be an alternate payee under
a QDRO.
1.18 "Effective Date". The date upon which the provisions of this document
become effective. This date is October 1, 1994, unless stated
otherwise. In general, the provisions of this document only apply to
Participants who are Employees on or after the Effective Date.
However, investment and distribution provisions apply to all
Participants with Account balances to be invested or distributed after
the Effective Date.
1.19 "Eligible Employee". A salaried Employee of an Employer, except any
Employee:
(a) whose compensation and conditions of employment are covered by a
collective bargaining agreement to which an Employer is a party
unless the agreement calls for the Employee's participation in
the Plan; or
(b) who is treated as an Employee because he or she is a Leased
Employee.
1.20 "Eligible Retirement Plan". An individual retirement account
described in Code section 408(a), an individual retirement annuity
described in Code section 408(b), an annuity plan described in Code
section 403(a), or a qualified trust described in Code section 401(a),
that accepts a Distributee's Eligible Rollover Distribution, except
that with regard to an Eligible Rollover Distribution to a surviving
spouse, an Eligible Retirement Plan is an individual retirement
account or individual retirement annuity.
1.21 "Eligible Rollover Distribution". A distribution of all or any
portion of the balance to the credit of a Distributee, excluding a
distribution that is one of a series of substantially equal periodic
payments (not less frequently than annually) made for the life (or
life expectancy) of a Distributee or the joint lives (or joint life
expectancies) of a Distributee and the Distributee's designated
Beneficiary, or for a specified period of ten years or more; a
distribution to the extent such distribution is required under Code
section 401(a)(9); and the portion of a distribution that is not
includible in gross income (determined without regard to the exclusion
for net unrealized appreciation with respect to Employer securities).
1.22 "Employee". An individual who is:
(a) directly employed by any Related Company and for whom any income
for such employment is subject to withholding of income or social
security taxes, or
(b) a Leased Employee.
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1.23 "Employer". The Company and any Subsidiary or other Related Company
of either the Company or a Subsidiary which adopts one or both of the
two separate plans of which this Plan is composed with the approval of
the Company. As of the Effective Date each Employer has adopted both
plans.
1.24 "ERISA". The Employee Retirement Income Security Act of 1974, as
amended. Reference to any specific section shall include such
section, any valid regulation promulgated thereunder, and any
comparable provision of any future legislation amending, supplementing
or superseding such section.
1.25 "Fiscal Year". The annual accounting period of the Company which ends
on each September 30.
1.26 "Forfeiture Account". An account holding amounts forfeited by
Participants who have terminated employment with all Related
Companies, invested in interest bearing deposits of the Trustee and
shares of the Company Stock Fund, pending disposition as provided in
this Plan and Trust and as directed by the Administrator.
1.27 "HCE" or "Highly Compensated Employee". An Employee described as a
Highly Compensated Employee in Section 12.
1.28 "Ineligible". The Plan status of an individual during the period in
which he or she is (1) an Employee of a Related Company which is not
then an Employer, (2) an Employee, but not an Eligible Employee, or
(3) not an Employee.
1.29 "Investment Fund" or "Fund". An investment fund as described in
Section 16.2. The Investment Funds authorized by the Administrator to
be offered under the Plan as of the Effective Date are set forth in
Appendix A.
1.30 "Leased Employee". An individual who is deemed to be an employee of
any Related Company as provided in Code section 414(n) or (o).
1.31 "Leave of Absence". A period during which an individual is deemed to
be an Employee, but is absent from active employment, provided that
the absence:
(a) was authorized by a Related Company; or
(b) was due to military service in the United States armed forces and
the individual returns to active employment within the period
during which he or she retains employment rights under federal
law.
1.32 "Loan Account". The record maintained for purposes of accounting for
a Participant's loan and payments of principal and interest thereon.
1.33 "NHCE" or "Non-Highly Compensated Employee". An Employee described as
a Non-Highly Compensated Employee in Section 12.
1.34 "Normal Retirement Date". The date of a Participant's 65th birthday.
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1.35 "Owner". A person with an ownership interest in the capital, profits,
outstanding stock or voting power of a Related Company within the
meaning of Code section 318 or 416 (which exclude indirect ownership
through a qualified plan).
1.36 "Parental Leave". The period of absence from work by reason of
pregnancy, the birth of an Employee's child, the placement of a child
with the Employee in connection with the child's adoption, or caring
for such child immediately after birth or placement as described in
Code section 410(a)(5)(E).
1.37 "Participant". An Eligible Employee who begins to participate in the
Plan after completing the eligibility requirements. An Eligible
Employee who makes a Rollover Contribution prior to completing the
eligibility requirements as described in Section 2.1 shall also be
considered a Participant, except that he or she shall not be
considered a Participant for purposes of provisions related to
Contributions, other than a Rollover Contribution, until he or she
completes the eligibility requirements as described in Section 2.1. A
Participant's participation continues until his or her employment with
all Related Companies ends and his or her Account is distributed or
forfeited.
1.38 "Pay". All cash compensation paid to an Eligible Employee by an
Employer while a Participant during the current period. Pay excludes
reimbursements or other expense allowances, cash and noncash fringe
benefits, moving expenses, deferred compensation and welfare benefits.
Pay is neither increased by any salary credit or decreased by any
salary reduction pursuant to Code sections 125 or 402(e)(3). Pay is
limited to $150,000 (as adjusted for the cost of living pursuant to
Code sections 401 (a)(17) and 415(d)) per Plan Year.
For purposes of the Contributions described in Sections 5.2 and 5.3,
the limitations as described in the second paragraph of Section 1.11
shall also apply.
1.39 "Period of Employment". The period beginning on the date an Employee
first performs an hour of service and ending on the date his or her
employment ends, Employment ends on the date the Employee quits,
retires, is discharged, dies "Period of Employment". The period
beginning on the date an Employee first or (if earlier) the first
anniversary of his or her absence for any other reason. The period of
absence starting with the date an Employee's employment temporarily
ends and ending on the date he or she is subsequently reemployed is
(1) included in his or her Period of Employment if the period of
absence does not exceed one year, and (2) excluded if such period
exceeds one year.
Period of Employment includes the period prior to a Break in Service.
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An Employee's service with a predecessor or acquired company shall
only be counted in the determination of his or her Period of
Employment for eligibility and/or vesting purposes if (1) the Company
directs that credit for such service be granted, or (2) a qualified
plan of the predecessor or acquired company is subsequently maintained
by any Employer or Related Company.
1.40 "Plan". The Hambrecht & Quist Group Savings and Employee Stock
Ownership Plan set forth in this document, as from time to time
amended, The Plan consists of two separate plans, a qualified profit
sharing plan, as described in code section 401(a), which includes a
qualified cash or deferred arrangement, as described in (Code section
401(k), and a qualified stock bonus plan, as described in Code section
401 (a) and designated as an employee stock ownership plan under Code
section 4975(e).
1.41 "Plan Year". The annual accounting period of the Plan and Trust which
ends on each September 30.
1.42 "QDRO". A domestic relations order which the Administrator has
determined to be a qualified domestic relations order within the
meaning of Code section 414(p).
1.43 "Related Company". With respect to any Employer, that Employer and
any corporation, trade or business which is, together with that
Employer, a member of the same controlled group of corporations, a
trade or business under common control, or an affiliated service group
within the meaning of Code sections 414(b), (c), (m) or (o) and except
that for purposes of Section 13 "within the meaning of Code sections
414(b), (c), (m) or (o), as modified by Code section 415 (h)" shall be
substituted for the preceding reference to "within the meaning of Code
section 414(b), (c), (m) or (o)".
1.44 "Settlement Date". For each Trade Date, the Trustee's next business
day.
1.45 "Spousal Consent". The written consent given by a spouse to a
Participant's Beneficiary designation. The spouse's consent must
acknowledge the effect on the spouse of the Participant's designation,
and be duly witnessed by a notary public. Spousal Consent shall be
valid only with respect to the spouse who signs the Spousal Consent
and only for the particular choice made by the Participant which
requires Spousal Consent. A Participant may revoke (without Spousal
Consent) a prior designation that required Spousal Consent at any time
before payments begin, Spousal Consent also means a determination by
the Administrator that there is no spouse, the spouse cannot be
located, or such other circumstances as may be established by
applicable law.
1.46 "Subsidiary". A company which is 50% or more owned, directly or
indirectly, by the Company.
1.47 "Sweep Account". The subsidiary Account for each Participant through
which all transactions are processed, which is invested in interest
bearing deposits of the Trustee.
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1.48 "Sweep Date". The cut off date and time for receiving instructions
for transactions to be processed on the next Trade Date.
1.49 "Taxable Income". Compensation in the amount reported by the Employer
or a Related Company as "Wages, tips, other compensation" on Form W2,
or any successor method of reporting under Code section 6041(d).
1.50 "Trade Date". Each day the Investment Funds are valued, which is
normally every day the assets of such Funds are traded.
1.51 "Trust". The legal entity created by those provisions of this
document which relate to the Trustee. The Trust is part of the Plan
and holds the Plan assets which are comprised of the aggregate of
Participants' Accounts, any unallocated funds invested in deposit or
money market type assets pending allocation to Participants' Accounts
or disbursement to pay Plan fees and expenses and the Forfeiture
Account.
The Trust consists of two separate trusts, one established for the
qualified profit sharing plan and one established for the qualified
stock bonus employee stock ownership plan.
1.52 "Trustee". Wells Fargo Bank, National Association.
1.53 "Year of Vesting Service". A 12 month Period of Employment.
Years of Vesting Service shall include service credited prior to
January 1, 1983 and October 1, 1984, the original effective dates of
the two plans.
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<PAGE>
2 ELIGIBILITY
2.1 Eligibility
All Participants as of October 1, 1994 shall continue their
eligibility to participate. Each other Eligible Employee shall become
a Participant on the later of October 1, 1994 or, on the first January
1 , April 1 , July 1 or October 1 after the date he or she completes a
six month Period of Employment. The eligibility period begins on the
date an Employee's Period of Employment commences.
2.2 Ineligible Employees
If an Employee completes the above eligibility requirements, but is
Ineligible at the time participation would otherwise begin (if he or
she were not Ineligible), he or she shall become a Participant on the
first subsequent date on which he or she is an Eligible Employee.
2.3 Ineligible or Former Participants
A Participant may not make or share in Plan Contributions, nor
generally be eligible for a new Plan loan, during the period he or she
is Ineligible, but he or she shall continue to participate for all
other purposes. An Ineligible Participant or former Participant shall
automatically become an active Participant on the date he or she again
becomes an Eligible Employee.
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3 PARTICIPANT CONTRIBUTIONS
3.1 401(k) Contribution Election
Upon becoming a Participant, an Eligible Employee may elect to reduce
his or her Pay by an amount which does not exceed the Contribution
Dollar Limit, within the limits described in the Contribution
Percentage Limits paragraph of this Section 3, and have such amount
contributed to the Plan by the Employer as a 401(k) Contribution. The
election shall be made as a whole percentage of Pay in such manner and
with such advance notice as prescribed by the Administrator. In no
event shall an Employee's 401(k) Contributions under the Plan and
comparable contributions to all other plans, contracts or arrangements
of all Related Companies exceed the Contribution Dollar Limit for the
Employee's taxable year beginning in the Plan Year.
3.2 After Tax Contribution Election
Upon becoming a Participant an Eligible Employee may elect to make
After Tax Contributions to the Plan in an amount which does not exceed
the limits described in the Contribution Percentage Limits paragraph
of this Section 3. The election shall be made as a whole percentage of
Pay in such manner and with such advance notice as prescribed by the
Administrator.
3.3 Changing a Contribution Election
A Participant who is an Eligible Employee may change his or her 401(k)
and/or AfterTax Contribution election as of any January 1, April 1,
July 1 or October 1 in such manner and with such advance notice as
prescribed by the Administrator, and such election shall be effective
with the first payroll paid after such date. Participants'
Contribution election percentages shall automatically apply to Pay
increases or decreases.
3.4 Revoking and Resuming a Contribution Election
A Participant may revoke his or her Contribution election at any time
in such manner and with such advance notice as prescribed by the
Administrator, and such revocation shall be effective with the fist
payroll paid after such date.
A Participant who is an Eligible Employee may resume Contributions by
making a new Contribution election at the same time in which a
Participant may change his or her election in such manner and with
such advance notice as prescribed by the Administrator, and such
election shall be effective with the first payroll paid after such
date.
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<PAGE>
3.5 Contribution Percentage Limits
The Administrator may establish and change from time to time, in
writing, without the necessity of amending this Plan and Trust, the
separate minimum, if applicable, and maximum 401(k) and After Tax
Contribution percentages, and/or a maximum combined 401(k) and
After Tax Contribution percentage, prospectively or retrospectively
(for the current Plan Year), for all Participants. In addition, the
Administrator may establish any lower percentage limits for Highly
Compensated Employees as it deems necessary to satisfy the tests
described in Section 12. As of the Effective Date, the maximum
Contribution percentages are:
<TABLE>
<CAPTION>
HIGHLY
CONTRIBUTION COMPENSATED ALL OTHER
TYPE EMPLOYEES PARTICIPANTS
---- --------- ------------
<S> <C> <C>
401(k) 10% 1O%
AfterTax 10% 10%
Sum of Both 20% 20%
</TABLE>
Irrespective of the limits that may be established by the
Administrator in accordance with this paragraph, in no event shall the
contributions made by or on behalf of a Participant for a Plan Year
exceed the maximum allowable under Code section 415.
3.6 Refunds When Contribution Dollar Limit Exceeded
A Participant who makes 401(k) Contributions for a calendar year to
this Plan and comparable contributions to any other qualified defined
contribution plan in excess of the Contribution Dollar Limit may
notify the Administrator in writing by the following March 1 (or as
late as April 14 if allowed by the Administrator) that an excess has
occurred. In this event, the amount of the excess specified by the
Participant, adjusted for investment gain or loss, shall be refunded
to him or her by April 15 and shall not be included as an Annual
Addition under Code section 415 for the year contributed. Refunds
shall not include investment gain or loss for the period between the
end of the applicable calendar year and the date of distribution.
Excess amounts shall first be taken from unmatched 401(k)
Contributions and then from matched 401(k) Contributions. Any 401(k)
Match Contributions attributable to refunded excess 401(k)
Contributions as described in this Section shall be forfeited and used
as described in Section 8.4 or to reduce Contributions made by an
Employer to the stock bonus employee stock ownership plan as soon as
administratively feasible.
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<PAGE>
3.7 Timing, Posting and Tax Considerations
Participants' Contributions, other than Rollover Contributions, may
only be made through payroll deduction. Such amounts shall be paid to
the Trustee in cash and posted to each Participant's Account(s) as
soon as such amounts can reasonably be separated from the Employer's
general assets and balanced against the specific amount made on behalf
of each Participant. In no event, however, shall such amounts be paid
to the Trustee more than 90 days after the date amounts are deducted
from a Participant's Pay. 401(k) Contributions shall be treated as
Contributions made by an Employer in determining tax deductions under
Code section 404(a).
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4 ROLLOVERS AND TRANSFERS FROM AND TO OTHER QUALIFIED PLANS
4.1 Rollovers
The Administrator may authorize the Trustee to accept a rollover
contribution, within the meaning of Code section 402(c) or
408(d)(3)(A)(ii), in cash, into the profit sharing plan, directly from
an Eligible Employee or as a Direct Rollover from another qualified
plan on behalf of the Eligible Employee, even if he or she is not yet
a Participant. The Employee shall be responsible for furnishing
satisfactory evidence, in such manner as prescribed by the
Administrator, that the amount is eligible for rollover treatment. A
rollover contribution received directly from an Eligible Employee must
be paid to the Trustee in cash within 60 days after the date received
by the Eligible Employee from a qualified plan or conduit individual
retirement account. Contributions described in this paragraph shall
be posted to the applicable Employee's Rollover Account as of the date
received by the Trustee.
If it is later determined that an amount contributed pursuant to the
above paragraph did not in fact qualify as a rollover contribution
under Code section 402(c) or 408(d)(3)(A)(ii), the balance credited to
the Employee's Rollover Account shall immediately be (1) segregated
from all other Plan assets, (2) treated as a nonqualified trust
established by and for the benefit of the Employee, and (3)
distributed to the Employee. Any such nonqualifying rollover shall be
deemed never to have been a part of the Plan.
4.2 Transfers From and To Other Qualified Plans
The Administrator may instruct the Trustee to receive assets in cash
or in kind directly from another qualified plan or transfer assets
directly to another qualified plan; provided that a transfer should
not be directed if:
(a) any amounts are not exempted by Code section 401(a)(11)(B) from
the annuity requirements of Code section 417 unless, in the event
of a receipt of assets, the Plan complies with such requirements
or, in the event of a transfer of assets, the receiving Plan
complies with such requirements; or
(b) any amounts include benefits protected by Code section 411(d)(6)
which would not be preserved under applicable Plan provisions, in
the event of a receipt of assets or, under the applicable
provisions of the receiving plan, in the event of a transfer of
assets.
The Trustee may refuse the receipt of any transfer if:
(a) the Trustee finds the in kind assets unacceptable; or
(b) instructions for posting amounts to Participants' Accounts are
incomplete.
Such amounts shall be posted to the appropriate Accounts of
Participants as of the date received by the Trustee.
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<PAGE>
5 EMPLOYER CONTRIBUTIONS
5.1 401(k) Match Contributions
(a) Frequency and Eligibility. For each Plan Year, the Employer
shall make 401(k) Match Contributions, as described in the
following Allocation Method paragraph, on behalf of each
Participant who contributed during the period and was an Employee
on the last day of the period.
Such Contributions shall also be made on behalf of each
Participant who contributed during the period but who ceased
being an Employee during the period by reason of his or her
Disability or death.
(b) Allocation Method. The 401(k) Match Contributions for each
period shall total 100% of each eligible Participant's 401(k)
Contributions. Notwithstanding, the maximum 401(k) Match
Contribution made on behalf of a Participant shall not exceed
$4,000 for such period.
(c) Timing, Medium and Posting. The Employer shall make each
period's 401(k) Match Contribution in cash as soon as
administratively feasible, and for purposes of deducting such
Contribution, not later than the Employer's federal tax filing
date, including extensions. The Trustee shall post such amount
to each Participant's 401(k) Match Account once the total
Contribution received has been balanced against the specific
amount to be credited to each Participant's 401(k) Match Account.
5.2 Profit Sharing Contributions
(a) Frequency and Eligibility. For each Plan Year, the Employer may
make a Profit Sharing Contribution on behalf of each Participant
who was an Employee on the last day of the period.
If such Contributions are made, such Contributions shall also be
made on behalf of each Participant who was an Eligible Employee
at any time during the period but who ceased being an Employee
during the period by reason of his or her Disability or death.
(b) Allocation Method. The Profit Sharing Contribution (including
any Forfeiture Account amounts applied as Profit Sharing
Contributions in accordance with Section 8.4) for each period,
shall be in an amount determined by the Employer and allocated
among eligible Participants in direct proportion to their Pay.
Notwithstanding, the maximum Profit Sharing Contribution made on
behalf of a Participant shall not exceed $15,000 for or such
period.
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<PAGE>
(c) Timing, Medium and Posting. The Employer shall make each
period's Profit Sharing Contribution in cash as soon as
administratively feasible, and for purposes of deducting such
Contribution, not later than the Employer's federal tax filing
date, including extensions. The Trustee shall post such amount
to each Participant's Profit Sharing Account once the total
Contribution received has been balanced against the specific
amount to be credited to each Participant's Profit Sharing
Account.
5.3 ESOP Allocation Contributions
(a) Frequency and Eligibility. For each Plan Year, the Employer may
make an ESOP Allocation Contribution on behalf of each
Participant who was an Employee on the last day of the period.
(b) Allocation Method. The ESOP Allocation Contribution (including
any Forfeiture Account amounts applied as ESOP Allocation
Contributions in accordance with Section 8.4) for each period,
shall be in an amount determined by the Employer and allocated
among eligible Participants in direct proportion to their Pay.
(c) Timing, Medium and Posting. The Employer shall make each
period's ESOP Allocation Contribution in cash as soon as
administratively feasible, and for purposes of deducting such
Contribution, not later than the Employer's federal tax filing
date, including extensions. The Trustee shall post such amount
to each Participant's ESOP Allocation Account once the total
Contribution received has been balanced against the specific
amount to be credited to each Participant's ESOP Allocation
Account.
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<PAGE>
6 ACCOUNTING
----------
6.1 Individual Participant Accounting
The Administrator shall maintain an individual set of Accounts for
each Participant in order to reflect transactions both by type of
Contribution and investment medium. Financial transactions shall be
accounted for at the individual Account level by posting each
transaction to the appropriate Account of each affected Participant.
Participant Account values shall be maintained in shares for the
Investment Funds and in dollars for the Sweep and Loan Accounts. At
any point in time, the Account value shall be determined using the
most recent Trade Date values provided by the Trustee.
6.2 Sweep Account is Transaction Account
All transactions related to amounts being contributed to or
distributed from the Trust shall be posted to each affected
Participant's Sweep Account. Any amount held in the Sweep Account
shall be credited with interest up until the date on which it is
removed from the Sweep Account.
6.3 Trade Date Accounting and Investment Cycle
Participant Account values shall be determined as of each Trade Date.
For any transaction to be processed as of a Trade Date, the Trustee
must receive instructions for the transaction by the Sweep Date. Such
instructions shall apply to amounts held in the Account on that Sweep
Date. Financial transactions of the Investment Funds shall be posted to
Participants' Accounts as of the Trade Date, based upon the Trade Date
values provided by the Trustee, and settled on the Settlement Date.
6.4 Accounting for Investment Funds
Investments in each Investment Fund shall be maintained in shares.
The Trustee is responsible for determining the share values of each
Investment Fund as of each Trade Date. To the extent an Investment
Fund is comprised of collective investment funds of the Trustee, or
any other fiduciary to the Plan, the share values shall be determined
in accordance with the rules governing such collective investment
funds, which are incorporated herein by reference. All other share
values shall be determined by the Trustee. The share value of each
Investment Fund shall be based on the fair market value of its
underlying assets.
6.5 Payment of Fees and Expenses
Except to the extent Plan fees and expenses related to Account
maintenance, transaction and Investment Fund management and
maintenance, as set forth below, are paid by the Employer directly, or
indirectly, through the Forfeiture
16
<PAGE>
Account as directed by the Administrator, such fees and expenses shall
be paid as set forth below. The Employer may pay a lower portion of
the fees and expenses allocable to the Accounts of Participants who are
no longer Employees or who are not Beneficiaries, unless doing so
would result in discrimination.
(a) Account Maintenance: Account maintenance fees and expenses, may
include but are not limited to, administrative, Trustee,
government annual report preparation, audit, legal,
nondiscrimination testing and fees for any other special
services. Account maintenance fees shall be charged to
Participants on a per Participant basis provided that no fee
shall reduce a Participant's Account balance below zero.
(b) Transaction: Transaction fees and expenses, may include but are
not limited to Investment Fund election change and loan fees.
Transaction fees shall be charged to the Participant's Account
involved in the transaction provided that no fee shall reduce a
Participant's Account balance below zero.
(c) Investment Fund Management and Maintenance: Management and
maintenance fees and expenses related to the Investment Funds
shall be charged at the Investment Fund level and reflected in
the net gain or loss of each Fund.
As of the Effective Date, a breakdown of which Plan fees and expenses
shall generally be borne by the Trust (and charged to individual
Participants' Accounts or charged at the Investment Fund level and
reflected in the net gain or loss of each Fund) and those that shall
be paid by the Employer is set forth in Appendix B and may be changed
from time to time by the Administrator, in writing, without the
necessity of amending this Plan and Trust.
The Trustee shall have the authority to pay any such fees and
expenses, which remain unpaid by the Employer for 60 days, from the
Trust.
6.6 Accounting for Participant Loans
Participant loans shall be held in a separate Loan Account of the
Participant and accounted for in dollars as an earmarked asset of the
borrowing Participant's Account.
6.7 Error Correction
The Administrator may correct any errors or omissions in the
administration of the Plan by restoring any Participant's Account
balance with the amount that would be credited to the Account had no
error or omission been made. Funds necessary for any such restoration
shall be provided through payment made by the Employer, or by the
Trustee to the extent the error or omission is
17
<PAGE>
attributable to actions or inactions of the Trustee, or if the
restoration involves an Account holding amounts contributed by an
Employer, the Administrator may direct the Trustee to use amounts from
the Forfeiture Account.
6.8 Participant Statements
The Administrator shall provide Participants with statements of their
Accounts as soon after the end of each quarter of the Plan Year as
administratively feasible.
6.9 Special Accounting During Conversion Period
The Administrator and Trustee may use any reasonable accounting
methods in performing their respective duties during any Conversion
Period. This includes, but is not limited to, the method for
allocating net investment gains or losses and the extent, if any, to
which contributions received by and distributions paid from the Trust
during this period share in such allocation.
6.10 Accounts for QDRO Beneficiaries
A separate Account shall be established for an alternate payee
entitled to any portion of a Participant's Account under a QDRO as of
the date and in accordance with the directions specified in the QDRO.
In addition, a separate Account may be established during the period
of time the Administrator, a court of competent jurisdiction or other
appropriate person is determining whether a domestic relations order
qualifies as a QDRO. Such a separate Account shall be valued and
accounted for in the same manner as any other Account.
(a) Distributions Pursuant to QDROs. If a QDRO so provides, the
portion of a Participant's Account payable to an alternate payee
may be distributed, in a form as permissible under Section 11, to
the alternate payee at the time specified in the QDRO, regardless
of whether the Participant is entitled to a distribution from the
Plan at such time.
(b) Participant Loans. Except to the extent required by law, an
alternate payee, on whose behalf a separate Account has been
established, shall not be entitled to borrow from such Account.
If a QDRO specifies that the alternate payee is entitled to any
portion of the Account of a Participant who has an outstanding
loan balance, all outstanding loans shall generally continue to
be held in the Participant's Account and shall not be divided
between the Participant's and alternate payee's Accounts.
(c) Investment Direction. Where a separate Account has been
established on behalf of an alternate payee and has not yet been
distributed, the alternate payee may direct the investment of
such Account in the same manner as if he or she were a
Participant.
18
<PAGE>
7 INVESTMENT FUNDS AND ELECTION
-----------------------------
7.1 Investment Funds
Except for Participants' Sweep and Loan Accounts, the Trust shall be
maintained in various Investment Funds. The Administrator shall
select the Investment Funds offered to Participants and may change the
number or composition of the Investment Funds, subject to the terms
and conditions agreed to with the Trustee. As of the Effective Date,
a list of the Investment Funds offered under the Plan is set forth in
Appendix A, and may be changed from time to time by the Administrator,
in writing, and as agreed to by the Trustee, without the necessity of
amending this Plan and Trust.
7.2 Investment Fund Elections
Each Participant shall direct the investment of all of his or her
Contribution Accounts except for these Accounts:
401(k) Match Account
ESOP Allocation Account
which shall be entirely invested in the Investment Fund specified by
the Administrator, which Investment Fund as of the Effective Date is
set forth in Appendix A. However, a Participant who has attained age 55
may, beginning in the Plan Year following the Plan Year in which he or
she attained age 55, direct the investment of the balances in his or
her 401(k) Match Account and ESOP Allocation Accounts annually on a
date as mutually agreed upon by the Administrator and the Trustee which
date is in compliance with Code section 401(a)(28) and after a
determination of the fair market value of the Company Stock for the
Company's preceding Fiscal Year. To the extent administratively
feasible this date shall be the same date for all affected
Participants. The share value for the Company Stock Fund shall be
based on such fair market value of the Company Stock.
Future amounts allocated to his or her 401(k) Match Account and ESOP
Allocation Account shall continue to be entirely invested in the
Investment Fund specified by the Administrator, until otherwise
directed by the Participant.
A Participant shall make his or her investment election in any
combination of one or any number of the Investment Funds offered in
accordance with the procedures established by the Administrator and
Trustee. However, during any Conversion Period, Trust assets may be
held in any investment vehicle permitted by the Plan, as directed by
the Administrator, irrespective of Participant investment elections.
The Administrator may set a maximum percentage of the total election
that a Participant may direct into any specific Investment Fund, which
maximum, if
19
<PAGE>
any, as of the Effective Date is set forth in Appendix A, and may be
changed from time to time by the Administrator, in writing, without
the necessity of amending this Plan and Trust.
7.3 Responsibility for Investment Choice
Each Participant shall be solely responsible for the selection of his
or her Investment Fund choices. No fiduciary with respect to the Plan
is empowered to advise a Participant as to the manner in which his or
her Accounts are to be invested, and the fact that an Investment Fund
is offered shall not be construed to be a recommendation for
investment.
7.4 Default if No Election
The Administrator shall specify an Investment Fund for the investment
of that portion of a Participant's Account which is not yet held in an
Investment Fund and for which no valid investment election is on file.
The Investment Fund specified as of the Effective Date is set forth in
Appendix A, and may be changed from time to time by the Administrator,
in writing, without the necessity of amending this Plan and Trust.
7.5 Timing
A Participant shall make his or her initial investment election upon
becoming a Participant and may change his or her investment election
at any time in accordance with the procedures established by the
Administrator and Trustee. Investment elections received by the
Trustee by the Sweep Date shall be effective on the following Trade
Date.
7.6 Investment Fund Election Change Fees
A reasonable processing fee may be charged directly to a Participant's
Account for Investment Fund election changes in excess of a specified
number per year as determined by the Administrator.
20
<PAGE>
8 VESTING & FORFEITURES
---------------------
8.1 Fully Vested Contribution Accounts
A Participant shall be fully vested in these Accounts at all times:
401(k) Account
After-Tax Account
Rollover Account
401(k) Match Account
8.2 Full Vesting upon Certain Events
A Participant's entire Account shall become fully vested once he or
she has attained his or her Normal Retirement Date as an Employee or
upon his or her terminating employment with all Related Companies due
to his or her Disability or death.
8.3 Vesting Schedule
In addition to the vesting provided above, a Participant's Profit
Sharing Account and ESOP Allocation Account shall become vested in
accordance with the following schedule:
Years of Vesting Vested
Service Percentage
-------- -----------
Less than 3 0%
3 but less than 4 30%
4 but less than 5 40%
5 but less than 6 60%
6 but less than 7 80%
7 or more 100%
If this vesting schedule is changed, the vested percentage for each
Participant shall not be less than his or her vested percentage
determined as of the last day prior to this change, and for any
Participant with at least three Years of Vesting Service when the
schedule is changed, vesting shall be determined using the more
favorable vesting schedule.
8.4 Forfeitures
A Participant's non-vested Account balance shall be forfeited as of
the Settlement Date following the Sweep Date on which the
Administrator has reported to the Trustee that the Participant's
employment has terminated with all Related Companies. Forfeitures
from all Employer Contribution Accounts shall be transferred to and
maintained in a single Forfeiture Account, which shall be invested in
interest bearing deposits of the Trustee and with regard to a
Participant's non-vested Account balance attributable to his or her
ESOP Allocation Account, shares of the Company Stock Fund Fund, until
such time as such shares of the Company Stock Fund are liquidated as
described below. Within the single Forfeiture Account, forfeited
amounts and earnings thereon
21
<PAGE>
attributable to the profit sharing plan are accounted for separately
from forfeited amounts and earnings thereon attributable to the stock
bonus employee stock ownership plan.
The portion of the Forfeiture Account invested in shares of the
Company Stock Fund attributable to non-vested amounts from
Participants' ESOP Allocation Accounts shall be liquidated on a date
as mutually agreed upon by the Administrator and the Trustee, This
date shall be in the Plan Year following the Plan Year in which the
forfeiture occurred, and after a determination of the fair market
value of the Company Stock for the Company's preceding Fiscal Year.
The share value for the Company Stock Fund shall be based on such fair
market value of the Company Stock. The proceeds shall be reinvested
in interest bearing deposits of the Trustee and continue to be held in
the Forfeiture Account.
Forfeiture Account amounts attributable to the profit sharing plan
shall be utilized to restore Profit Sharing Accounts, to pay profit
sharing plan fees and expenses or may increase the amount allocated as
Profit Sharing Contributions as directed by the Administrator.
Forfeiture Account amounts attributable to the stock bonus employee
stock ownership plan shall be utilized to restore ESOP Allocation
Accounts, to pay stock bonus employee stock ownership plan fees and
expenses or may increase the amount allocated as ESOP Allocation
Contributions as directed by the Administrator.
8.5 Rehired Employees
(a) Service. If a former Employee is rehired, all Periods of
Employment credited when his or her employment last terminated
shall be counted in determining his or her vested interest.
(b) Account Restoration. If a former Employee is rehired before he
or she has a Break in Service, the amount forfeited from his or
her Profit Sharing Account when his or her employment last
terminated shall be restored to his or her Account and shall
include the interest which would have been credited had such
forfeiture been invested in the Sweep Account from the date
forfeited until the date the restoration amount is restored and
the number of shares of the Company Stock Fund forfeited from his
or her ESOP Allocation Account when his or her employment last
terminated shall be restored to his or her Account. The amount or
number of shares of the Company Stock Fund, as applicable, shall
come from the Forfeiture Account to the extent possible, and any
additional amount, or an amount representing the value of the
shares of the Company Stock Fund, as applicable, needed shall be
contributed by the Employer. The vested interest in his or her
restored Account shall then be equal to:
V% times (AB + D) - D
where:
V% = current vested percentage
AB = current account balance
D = amount previously distributed
22
<PAGE>
9 PARTICIPANT LOANS
-----------------
9.1 Participant Loans Permitted
Loans to Participants are permitted pursuant to the terms and
conditions set forth in this Section.
9.2 Loan Application, Note and Security
A Participant shall apply for any loan in such manner and with such
advance notice as prescribed by the Administrator. All loans shall be
evidenced by a promissory note, secured only by the portion of the
Participant's Account from which the loan is made, and the Plan shall
have a lien on this portion of his or her Account.
9.3 Spousal Consent
A Participant is not required to obtain Spousal Consent in order to
take out a loan under the Plan.
9.4 Loan Approval
The Administrator, or the Trustee, if otherwise authorized by the
Administrator and agreed to by the Trustee, is responsible for
determining that a loan request conforms to the requirements described
in this Section and granting such request.
9.5 Loan Funding Limits, Account Sources and Funding Order
The loan amount must meet all of the following limits as determined as
of the Sweep Date the loan is processed and shall be funded from the
Participant's Accounts as follows:
(a) Plan Minimum Limit. The minimum amount for any loan is $1,000.
(b) Plan Maximum Limit, Account Sources and Funding Order. Subject
to the legal limit described in (c) below, the maximum a
Participant may borrow, including the outstanding balance of
existing Plan loans, is 100% of the following of the
Participant's Accounts which are fully vested in the priority
order as follows:
401(k) Account
Profit Sharing Account
Rollover Account
After-Tax Account
23
<PAGE>
(c) Legal Maximum Limit. The maximum a Participant may borrow,
including the outstanding balance of existing Plan loans, is 50%
of his or her vested Account balance, not to exceed $50,000.
However, the $50,000 maximum is reduced by the Participant's
highest outstanding loan balance during the 12 month period
ending on the day before the Sweep Date as of which the loan is
made. For purposes of this paragraph, the qualified plans of all
Related Companies shall be treated as though they are part of
this Plan to the extent it would decrease the maximum loan
amount.
9.6 Maximum Number of Loans
A Participant may have a maximum of three loans outstanding at any
given time.
9.7 Source and Timing of Loan Funding
A loan to a Participant shall be made solely from the assets of his or
her own Account. The available assets shall be determined first by
Account type and then within each Account used for funding a loan,
amounts shall first be taken from the Sweep Account and then taken by
Investment Fund in direct proportion to the market value of the
Participant's interest in each Investment Fund as of the Trade Date on
which the loan is processed.
The loan shall be funded on the Settlement Date following the Trade
Date as of which the loan is processed. The Trustee shall make
payment to the Participant as soon thereafter as administratively
feasible.
9.8 Interest Rate
The interest rate charged on Participant loans shall be a fixed
reasonable rate of interest, determined from time to time by the
Administrator, which provides the Plan with a return commensurate with
the prevailing interest rate charged by persons in the business of
lending money for loans which would be made under similar
circumstances. As of the Effective Date, the interest rate is
determined as set forth in Appendix C, and may be changed from time to
time by the Administrator, in writing, without the necessity of
amending this Plan and Trust.
9.9 Loan Payment
Substantially level amortization shall be required of each loan with
payments made at least monthly, generally through payroll deduction.
Loans may be prepaid in full at any time. The Participant may choose
the loan repayment period, not to exceed 5 years.
24
<PAGE>
9.10 Loan Payment Hierarchy
Loan principal payments shall be credited to the Participant's
Accounts in the inverse of the order used to fund the loan. Loan
interest shall be credited to the Participant's Accounts in direct
proportion to the principal payment. Loan payments are credited to
the Investment Funds based upon the Participant's current investment
election for new Contributions.
9.11 Repayment Suspension
The Administrator may agree to a suspension of loan payments for up to
six months for a Participant who is on a Leave of Absence without pay.
During the suspension period interest shall continue to accrue on the
outstanding loan balance. At the expiration of the suspension period
all outstanding loan payments and accrued interest thereon shall be
due unless otherwise agreed upon by the Administrator.
9.12 Loan Default
A loan is treated as a default if scheduled loan payments are more
than 90 days late. A Participant shall then have 30 days from the
time he or she receives written notice of the default and a demand for
past due amounts to cure the default before it becomes final.
In the event of default, the Administrator may direct the Trustee to
report the outstanding principal balance of the loan and accrued
interest thereon as a taxable distribution. As soon as a Plan
withdrawal or distribution to such Participant would otherwise be
permitted, the Administrator may instruct the Trustee to execute upon
its security interest in the Participant's Account by distributing the
note to the Participant.
9.13 Call Feature
The Administrator shall have the right to call any Participant loan
once a Participant's employment with all Related Companies has
terminated or if the Plan is terminated.
25
<PAGE>
10 IN-SERVICE WITHDRAWALS
----------------------
10.1 In-Service Withdrawals Permitted
In-service withdrawals to a Participant who is an Employee are
permitted pursuant to the terms and conditions set forth in this
Section and as required by law as set forth in Section 11.
10.2 In-Service Withdrawal Application and Notice
A Participant shall apply for any in-service withdrawal in such manner
and with such advance notice as prescribed by the Administrator. The
Participant shall be provided the notice prescribed by Code section
402(f).
If an in-service withdrawal is one to which Code sections 401(a)(11)
and 417 do not apply, such in-service withdrawal may commence less
than 30 days after the aforementioned notice is provided, if:
(a) the Participant is clearly informed that he or she has the right
to a period of at least 30 days after receipt of such notice to
consider his or her option to elect or not elect a Direct
Rollover for all or a portion, if any, of his or her in-service
withdrawal which shall constitute an Eligible Rollover
Distribution; and
(b) the Participant after receiving such notice, affirmatively elects
a Direct Rollover for all or a portion, if any, of his or her in-
service withdrawal which shall constitute an Eligible Rollover
Distribution or alternatively elects to have all or a portion made
payable directly to him or her, thereby not electing a Direct
Rollover for all or a portion thereof.
10.3 Spousal Consent
A Participant is not required to obtain Spousal Consent in order to
make an in-service withdrawal under the Plan.
10.4 In-Service Withdrawal Approval
The Administrator, or the Trustee, if otherwise authorized by the
Administrator and agreed to by the Trustee, is responsible for
determining that an in-service withdrawal request conforms to the
requirements described in this Section and granting such request.
10.5 Minimum Amount, Payment Form and Medium
The minimum amount for any type of withdrawal is $500.
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<PAGE>
The form of payment for an in-service withdrawal shall be a single
lump sum and payment shall be made in cash. With regard to the
portion of a withdrawal representing an Eligible Rollover
Distribution, a Participant may elect a Direct Rollover for all or a
portion of such amount.
10.6 Source and Timing of In-Service Withdrawal Funding
An in-service withdrawal to a Participant shall be made solely from
the assets of his or her own Account and shall be based on the Account
values as of the Trade Date the in-service withdrawal is processed.
The available assets shall be determined first by Account type and
then within each Account used for funding an in-service withdrawal,
amounts shall first be taken from the Sweep Account and then taken by
Investment Fund in direct proportion to the market value of the
Participant's interest in each Investment Fund (which excludes his or
her Loan Account balance) as of the Trade Date on which the in-service
withdrawal is processed.
The in-service withdrawal shall be funded on the Settlement Date
following the Trade Date as of which the in-service withdrawal is
processed. The Trustee shall make payment as soon thereafter as
administratively feasible.
10.7 Hardship Withdrawals
(a) Requirements. A Participant who is an Employee may request the
withdrawal of up to the amount necessary to satisfy a financial
need including amounts necessary to pay any federal, state or
local income taxes or penalties reasonably anticipated to result
from the withdrawal. Only requests for withdrawals (1) on
account of a Participant's "Deemed Financial Need", and (2) which
are "Deemed Necessary" to satisfy the financial need shall be
approved.
(b) "Deemed Financial Need". An immediate and heavy financial need
relating to:
(1) the payment of unreimbursable medical expenses described
under Code section 213(d) incurred (or to be incurred) by
the Employee, his or her spouse or dependents;
(2) the purchase (excluding mortgage payments) of the Employee's
principal residence:
(3) the payment of unreimbursable tuition and related
educational fees (which effective January 1, 1995, include
room and board) for up to the next 12 months of post-
secondary education for the Employee, his or her spouse or
dependents;
27
<PAGE>
(4) the payment of amounts necessary for the Employee to prevent
losing his or her principal residence through eviction or
foreclosure on the mortgage; or
(5) any other circumstance specifically permitted under Code
section 401(k)(2)(B)(i)(IV).
(c) "Deemed Necessary". A withdrawal is "deemed necessary" to
satisfy the financial need only if the withdrawal amount does not
exceed the financial need and all of these conditions are met:
(1) the Employee has obtained all possible withdrawals (other
than hardship withdrawals) and nontaxable loans available
from this Plan and all other plans maintained by Related
Companies;
(2) the Administrator shall suspend the Employee from making any
contributions to this Plan and all other qualified and
nonqualified plans of deferred compensation and all stock
option or stock purchase plans maintained by Related
Companies for 12 months from the date the withdrawal payment
is made; and
(3) the Administrator shall reduce the Contribution Dollar Limit
for the Employee with regard to this Plan and all other
plans maintained by Related Companies, for the calendar year
next following the calendar year of the withdrawal by the
amount of the Employee's 401(k) Contributions for the
calendar year of the withdrawal.
(d) Account Sources and Funding Order. All available amounts must
first be withdrawn from a Participant's After-Tax Account. The
remaining withdrawal amount shall come from the following of the
Participant's fully vested Accounts, in the priority order as
follows:
Rollover Account
Profit Sharing Account
401(k) Account
The amount that may be withdrawn from a Participant's 401(k)
Account shall not include any earnings credited to his or her
401(k) Account after December 31, 1988.
(e) Suspension from Further Contributions. Upon making a Hardship
withdrawal, a Participant may not make additional 401(k) or
After-Tax Contributions (or additional contributions to all other
qualified and nonqualified plans of deferred compensation and all
stock option or stock purchase plans maintained by Related
Companies) for a period of 12 months from the date the withdrawal
payment is made.
28
<PAGE>
(f) Permitted Frequency. There is no restriction on the number of
Hardship withdrawals permitted to a Participant.
10.8 After-Tax Account Withdrawals
(a) Requirements. A Participant who is an Employee may withdraw from
the Accounts listed in paragraph (b) below.
(b) Account Sources and Funding Order. The withdrawal amount shall
come from a Participant's After-Tax Account.
(c) Permitted Frequency. The maximum number of After-Tax Account
withdrawals permitted to a Participant in any six-month period is
one.
(d) Suspension from Further Contributions. An After-Tax Account
withdrawal shall not affect a Participant's ability to make or be
eligible to receive further Contributions.
10.9 Rollover Account Withdrawals
(a) Requirements. A Participant who is an Employee may withdraw from
the Accounts listed in paragraph (b) below.
(b) Account Sources and Funding Order. The withdrawal amount shall
come from a Participant's Rollover Account.
(c) Permitted Frequency. The maximum number of Rollover Account
withdrawals permitted to a Participant in any six-month period is
one.
(d) Suspension from Further Contributions. A Rollover Account
withdrawal shall not affect a Participant's ability to make or be
eligible to receive further Contributions.
29
<PAGE>
11 DISTRIBUTIONS ONCE EMPLOYMENT ENDS OR AS REQUIRED BY LAW
--------------------------------------------------------
11.1 Benefit Information, Notices and Election
A Participant, or his or her Beneficiary in the case of his or her
death, shall be provided with information regarding all optional times
and forms of distribution available, to include the notices prescribed
by Code section 402(f) and Code section 411(a)(11). Subject to the
other requirements of this Section, a Participant, or his or her
Beneficiary in the case of his or her death, may elect, in such manner
and with such advance notice as prescribed by the Administrator, to
have his or her vested Account balance paid to him or her beginning
upon any Settlement Date following the Participant's termination of
employment with all Related Companies or, if earlier, at the time
required by law as set forth in Section 11.7.
If a distribution is one to which Code sections 401(a)(11) and 417 do
not apply, such distribution may commence less than 30 days after the
aforementioned notices are provided, if:
(a) the Participant is clearly informed that he or she has the right
to a period of at least 30 days after receipt of such notices to
consider the decision as to whether to elect a distribution and
if so to elect a particular form of distribution and to elect or
not elect a Direct Rollover for all or a portion, if any, of his
or her distribution which shall constitute an Eligible Rollover
Distribution; and
(b) the Participant after receiving such notices, affirmatively
elects a distribution and a Direct Rollover for all or a portion,
if any, of his or her distribution which shall constitute an
Eligible Rollover Distribution or alternatively elects to have
all or a portion made payable directly to him or her, thereby not
electing a Direct Rollover for all or a portion thereof.
11.2 Spousal Consent
A Participant is not required to obtain Spousal Consent in order to
receive a distribution under the Plan.
11.3 Payment Form and Medium
A Participant shall be paid in the form of a single lump sum.
Distributions shall be made in cash, except to the extent a
distribution consists of a loan call as described in Section 9.
Alternatively, a Participant may elect that payment be made in the
form of whole shares of Company Stock and cash in lieu of fractional
shares to the extent invested in the Company Stock Fund. With regard
to the portion of a distribution representing an Eligible Rollover
Distribution, a Distributee may elect a Direct Rollover for all or a
portion of such amount.
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<PAGE>
11.4 Distribution of Small Amounts
If, after a Participant's employment with all Related Companies ends,
the Participant's vested Account balance is $3,500 or less, and if at
the time of any prior in-service withdrawal or distribution the
Participant's vested Account balance did not exceed $3,500, the
Participant's benefit shall be paid as a single lump sum as soon as
administratively feasible in accordance with procedures prescribed by
the Administrator.
11.5 Source and Timing of Distribution Funding
(a) Source of Distribution Funding. A distribution to a Participant
shall be made solely from the assets of his or her own Accounts
and shall be based on the Account values as of the Trade Date the
distribution is processed. The available assets shall be
determined first by Account type and then within each Account
used for funding a distribution, amounts shall first be taken
from the Sweep Account and then taken by Investment Fund in
direct proportion to the market value of the Participant's
interest in each Investment Fund as of the Trade Date on which
the distribution is processed.
(b) Timing of Distribution Funding. The distribution shall be funded
on the Settlement Date following the Trade Date as of which the
distribution is processed. The Trustee shall make payment as
soon thereafter as administratively feasible.
The portion of a Participant's distribution attributable to his
or her Account balance invested in the Company Stock Fund shall
be processed on a date as mutually agreed upon by the
Administrator and the Trustee. This date shall be in the Plan
Year following the Plan Year in which the Participant elected to
have his or her vested Account balance paid to him or her after
his or her termination of employment with all Related Companies
or payment commenced as required by law as set forth in Section
11.7, and after a determination of the fair market value of such
Company Stock for the Company's preceding Fiscal Year. To the
extent administratively feasible this date shall be the same date
for all affected Participants. The sale price shall be equal to
such fair market value.
Notwithstanding the preceding paragraph, no distribution shall be
delayed to the extent a distribution must be made to comply with
Code section 401(a)(9).
11.6 Deemed Distribution
For purposes of Section 8.4, if at the time a Participant's employment
with all Related Companies has terminated, the Participant's vested
Account balance
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<PAGE>
attributable to Accounts subject to vesting as described in Section 8,
is zero, his or her vested Account balance shall be deemed distributed
as of the Settlement Date following the Sweep Date on which the
Administrator has reported to the Trustee that the Participant's
employment with all Related Companies has terminated.
11.7 Latest Commencement Permitted
In addition to any other Plan requirements and unless a Participant
elects otherwise, his or her benefit payments shall begin not later
than 60 days after the end of the Plan Year in which he or she attains
his or her Normal Retirement Date or retires, whichever is later.
However, if the amount of the payment or the location of the
Participant (after a reasonable search) cannot be ascertained by that
deadline, payment shall be made no later than 60 days after the
earliest date on which such amount or location is ascertained but in
no event later than as described below. A Participant's failure to
elect in such manner as prescribed by the Administrator to have his or
her vested Account balance paid to him or her, shall be deemed an
election by the Participant to defer his or her distribution.
Benefit payments shall begin by the April 1 immediately following the
end of the calendar year in which the Participant attains age 70 1/2,
whether or not he or she is an Employee.
If benefit payments cannot begin at the time required because the
location of the Participant cannot be ascertained (after a reasonable
search), the Administrator may, at any time thereafter, treat such
person's Account as forfeited subject to the provisions of Section
18.5.
11.8 Incidental Benefit Rule
The Participant's payment election must be consistent with the
requirement that, if the Participant's spouse is not his or her sole
primary Beneficiary, the minimum annual distribution for each calendar
year, beginning with the year in which he or she attains age 70 1/2,
shall not be less than the quotient obtained by dividing (a) the
Participant's vested Account balance as of the last Trade Date of the
preceding year by (b) the applicable divisor as determined under the
incidental benefit requirements of Code section 401(a)(9).
11.9 Payment to Beneficiary
Payment to a Beneficiary must be completed by the end of the calendar
year that contains the fifth anniversary of the Participant's death,
except that:
(a) If the Participant dies after the April 1 immediately following
the end of the calendar year in which he or she attains age
70 1/2, payment to his or her Beneficiary must be made at least as
rapidly as provided in the Participant's distribution election;
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<PAGE>
(b) If the surviving spouse is the Beneficiary, payments need not
begin until the end of the calendar year in which the Participant
would have attained age 70 1/2 and must be completed within the
spouse's life or life expectancy; and
(c) If the Participant and the surviving spouse who is the
Beneficiary die (1) before the April 1 immediately following the
end of the calendar year in which the Participant would have
attained age 70 1/2 and (2) before payments have begun to the
spouse, the spouse shall be treated as the Participant in
applying these rules.
11.10 Beneficiary Designation
Each Participant may complete a beneficiary designation form
indicating the Beneficiary who is to receive the Participant's
remaining Plan interest at the time of his or her death. The
designation may be changed at any time. However, a Participant's
spouse shall be the sole primary Beneficiary unless the designation
includes Spousal Consent for another Beneficiary. If no proper
designation is in effect at the time of a Participant's death or if
the Beneficiary does not survive the Participant, the Beneficiary shall
be, in the order listed, the:
(a) Participant's surviving spouse,
(b) Participant's children, in equal shares, (or if a child does not
survive the Participant, and that child leaves issue, the issue
shall be entitled to that child's share, by right of
representation) or
(c) Participant's estate.
33
<PAGE>
12 ADP AND ACP TESTS
-----------------
12.1 Contribution Limitation Definitions
The following definitions are applicable to this Section 12 (where a
definition is contained in both Sections 1 and 12, for purposes of
Section 12 the Section 12 definition shall be controlling):
(a) "ACP" or "Average Contribution Percentage". The
Average Percentage calculated using Contributions allocated to
Participants as of a date within the Plan Year.
(b) "ACP Test". The determination of whether the ACP
is in compliance with the Basic or Alternative Limitation for a
Plan Year (as defined in Section 12.2).
(c) "ADP" or "Average Deferral Percentage". The
Average Percentage calculated using Deferrals allocated to
Participants as of a date within the Plan Year.
(d) "ADP Test". The determination of whether the ADP is in
compliance with the
Basic or Alternative Limitation for a Plan Year (as defined in
Section 12.2).
(e) "Average Percentage". The average of the
calculated percentages for Participants within the specified
group. The calculated percentage refers to either the
"Deferrals" or "Contributions" (as defined in this Section) made
on each Participant's behalf for the Plan Year, divided by his or
her Compensation for the portion of the Plan Year in which he or
she was an Eligible Employee while a Participant. (401(k)
Contributions to this Plan or comparable contributions to plans
of Related Companies which shall be refunded solely because they
exceed the Contribution Dollar Limit are included in the
percentage for the HCE Group but not for the NHCE Group.)
(f) "Contributions" shall include 401(k) Match
Contributions and After-Tax Contributions. In addition,
Contributions may include 401(k) Contributions, but only to the
extent that (1) the Employer elects to use them, (2) they are not
used or counted in the ADP Test and (3) they otherwise satisfy
the requirements as prescribed under Code section 401(m)
permitting treatment as Contributions for purposes of the ACP
Test.
(g) "Deferrals" shall include 401(k) Contributions.
In addition, Deferrals may include 401(k) Match Contributions,
but only to the extent that (1) the Employer elects to use them,
(2) they are not used or counted in the ACP Test, (3) they are
fully vested when made, not withdrawable
34
<PAGE>
by an Employee before he or she attains age 59 1/2 and
(4) they otherwise satisfy the requirements as prescribed
under Code section 401(k) permitting treatment as Deferrals
for purposes of the ADP Test.
(h) "Family Member". An Employee who is, at any time
during the Plan Year or Lookback Year, a spouse, lineal ascendant
or descendant, or spouse of a lineal ascendant or descendant of
(1) an active or former Employee who at any time during the Plan
Year or Lookback Year is a more than 5% Owner (within the meaning
of Code section 414(q)(3)), or (2) an HCE who is among the 10
Employees with the highest Compensation for such Year.
(i) "HCE" or "Highly Compensated Employee", With
respect to each Employer and its Related Companies, an Employee
during the Plan Year or Lookback Year who (in accordance with
Code section 414(q)(3),
(1) Was a more than 5% Owner at any time during the Lookback Year
or Plan Year;
(2) Received Compensation during the
Lookback Year (or in the Plan Year if among the 100
Employees with the highest Compensation for such Year) in
excess of (i) $75,000 (as adjusted for such Year pursuant
to Code sections 414(q)(1) and 415(d)), or (ii) $50,000
(as adjusted for such Year pursuant to Code sections
414(q)(1) and 415(d)) in the case of a member of the
"top-paid group" (within the meaning of Code section
414(q)(4)) for such Year), provided, however, that if the
conditions of Code section 414(q)(12)(B)(ii) are met, the
Company may elect for any Plan Year to apply clause (i)
by substituting $50,000 for $75,000 and not to apply
clause (ii);
(3) Was an officer of a Related Company and received
Compensation during the Lookback Year (or in the Plan
Year if among the 100 Employees with the highest
Compensation for such Year) that is greater than 50% of
the dollar limitation in effect under Code section
415(b)(1)(A) and (d) for such Year (or if no officer has
Compensation in excess of the threshold, the officer with
the highest Compensation), provided that the number of
officers shall be limited to 50 Employees (or, if less,
the greater of three Employees or 10% of the Employees);
or
(4) Was a Family Member at any time during the
Lookback Year or Plan Year, in which case the Deferrals,
Contributions and Compensation of the HCE and his or her
Family Members shall be aggregated and they shall be
treated as a single HCE.
35
<PAGE>
A former Employee shall be treated as an HCE if (1) such
former Employee was an HCE when he separated from
service, or (2) such former Employee was an HCE in
service at any time after attaining age 55.
The determination of who is an HCE, including the
determinations of thenumber and identity of Employees in
the top-paid group, the top 100 Employees and the number
of Employees treated as officers shall be made in
accordance with Code section 414(q).
(j) "HCE Group" and "NHCE Group". With respect to each Employer
and its Related Companies, the respective group of HCEs and NHCEs
who are eligible to have amounts contributed on their behalf for
the Plan Year, including Employees who would be eligible but for
their election not to participate or to contribute, or because
their Pay is greater than zero but does not exceed a stated minimum.
(1) If the Reined Companies maintain two or more
plans which are subject to the ADP or ACP Test and are
considered as one plan for purposes of Code sections
401(a)(4) or 410(b), all such plans shall be aggregated
and treated as one plan for purposes of meeting the ADP
and ACP Tests, provided that the plans may only be
aggregated if they have the same Plan Year.
(2) If an HCE, who is one of the top 10 paid
Employees or a more than 5% Owner has any Family Members,
the Deferrals, Contributions and Compensation of such HCE
and his or her Family Members shall be combined and
treated as a single HCE. Such amounts for all other
Family Members shall be removed from the NHCE Group
percentage calculation and be combined with the HCE's.
(3) If an HCE is covered by more than one cash or
deferred arrangement, or more than one arrangement
permitting employee and matching contributions,
maintained by the Related Companies, all such plans shall
be aggregated and treated as one plan (other than those
plans that may not be permissively aggregated) for
purposes of calculating the separate percentage for the
HCE which is used in the determination of the Average
Percentage.
(k) "Lookback Year". Pursuant to Code section
414(q), the Company elects as the Lookback Year the 12 months
ending immediately prior to the start of the Plan Year.
(1) "Multiple Use Test". The test described in Section 12.4 which
a Man must meet where the Alternative Limitation (described
in Section 12.2(b)) is used to meet both the ADP and ACP Tests.
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<PAGE>
(m) "NHCE" or "Non-Highly Compensated Employee". An Employee who is not
an HCE.
12.2 ADP and ACP Tests
For each Plan Year, the ADP and ACP for the HCE Group must
meet either the Basic or Alternative Limitation when compared
to the respective ADP and ACP for the NHCE Group, defined as follows:
(a) Basic Limitation. The HCE Group Average Percentage may
not exceed 1.25 times the NHCE Group Average
Percentage.
(b) Alternative Limitation. The HCE Group Average
Percentage is limited by reference to the NHCE Group Average
Percentage as follows:
<TABLE>
<CAPTION>
IF THE NHCE GROUP THEN THE MAXIMUM HCE
AVERAGE PERCENTAGE IS: GROUP AVERAGE PERCENTAGE IS:
---------------------- ---------------------------
<S> <C>
Less than 2% 2 times NHCE Group Average %
2% to 8% NHCE Group Average % plus 2%
More than 8% NA - Basic Limitation applies
</TABLE>
12.3 Correction of ADP and ACP Tests
If the ADP or ACP Tests are not met, the Administrator shall
determine, no later than the end of the next Plan Year, a maximum
percentage to be used in place of the calculated percentage for all
HCEs that would reduce the ADP and/or ACP for the HCE group by a
sufficient amount to meet the ADP and ACP Tests. ADP and/or ACP
corrections shall be made in accordance with the leveling method as
described below.
(a) ADP Correction. The HCE with the highest Deferral
percentage shall have his or her Deferral percentage reduced to
the lesser of the extent required to meet the ADP Test or to
cause his or her Deferral percentage to equal that of the HCE
with the next highest Deferral percentage. The process shall
be repeated until the ADP Test is met.
To the extent an HCE's Deferrals were determined to be reduced
as described in the paragraph above, 401(k) Contributions
shall, by the end of the next Plan Year be refunded to the HCE
in an amount equal to the actual Deferrals minus the product of
the maximum percentage and the HCE's Compensation, except that
such amount to be refunded shall be reduced by 401(k)
Contributions previously refunded because they exceeded the
Contribution Dollar Limit. The excess amounts shall first be
taken from unmatched 401(k) Contributions and then from matched
401(k) Contribution. Any 401(k) Match Contributions
attributable to refunded excess 401(k) Contributions as
described in
37
<PAGE>
this Section shall be forfeited and used as described in
Section 8.4 or to reduce Contributions made by an Employer to
the stock bonus employee stock ownership plan as soon as
administratively feasible.
(b) ACP Correction. The HCE with the highest Contribution
percentage shall have his or her Contribution percentage
reduced to the lesser of the extent required to meet the ACP
Test or to cause his or her Contribution percentage to equal
that of the HCE with the next highest Contribution percentage.
The process shall be repeated until the ACP Test is met.
To the extent an HCE's Contributions were determined to be
reduced as described in the paragraph above, Contributions
shall, by the end of the next Plan Year, be refunded to the HCE
in an amount equal to the actual Contributions minus the
product of the maximum percentage and the HCE's Compensation.
The excess amounts shall first be taken from After-Tax
Contributions and then from 401(k) Match Contributions.
(c) Investment Fund Sources. Once the amount of excess
Deferrals and/or Contributions is determined and with regard to
excess Contributions, allocated by type of Contribution,
amounts shall first be taken from the Sweep Account and then
taken by investment Fund in direct proportion to the market
value of the Participant's interest in each Investment Fund
(which excludes his or her Loan Account balance) as of the
Trade Date on which the correction is processed.
(d) Family Member Correction. To the extent any reduction
is necessary with respect to an HCE and his or her Family
Members that have been combined and treated for testing
purposes as a single Employee, the excess Deferrals and
Contributions from the ADP and/or ACP Test shall be prorated
among each such Participant in direct proportion to his or her
Deferrals or Contributions included in each Test.
12.4 Multiple Use Test
If the Alternative Limitation (defined in Section 12.2) is used to
meet both the ADP and ACP Tests, the ADP and ACP for the HCE Group
must also comply with the requirements of Code section 401(m)(9).
Such Code section requires that the sum of the ADP and ACP for the
HCE Group (as determined after any corrections needed to meet the
ADP and ACP Tests have been made) not exceed the sum (which produces
the most favorable result) of:
(a) the Basic Limitation (defined in Section 12.2) applied
to either the ADP or ACP for the NHCE Group, and
(b) the Alternative Limitation applied to the other NHCE
Group percentage.
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<PAGE>
12.5 Correction of Multiple Use Test
If the multiple use limit is exceeded, the Administrator shall
determine a maximum percentage to be used in place of the calculated
percentage for all HCEs that would reduce either or both the ADP or
ACP for the HCE Group by a sufficient amount to meet the multiple
use limit. Any excess shall be handled in the same manner that the
distribution of excess Deferrals or Contributions are handled.
12.6 Adjustment for Investment Gain or Loss
Any excess Deferrals or Contributions to be refunded to a
Participant in accordance with Section 12.3 or 12.5 shall be
adjusted for investment gain or loss. Refunds shall not include
investment gain or loss for the period between the end of the
applicable Plan Year and the date of distribution.
12.7 Testing Responsibilities and Required Records
The Administrator shall be responsible for ensuring that the Plan
meets the ADP Test, the ACP Test and the Multiple Use Test, and that
the Contribution Dollar Limit is not exceeded. In carrying out its
responsibilities, the Administrator shall have sole discretion to
limit or reduce Deferrals or Contributions at any time. The
Administrator shall maintain records which are sufficient to
demonstrate that the ADP Test, the ACP Test and the Multiple Use
Test have been met for each plan Year for at least as long as the
Employer's corresponding tax year is open to audit,
12.8 Separate Testing
(a) Multiple Employers: The determination of HCEs, NHCEs,
and the performance of the ADP Test, the ACP Test and Multiple
Use Test, and any corrective action resulting therefrom, shall
be made separately with regard to the Employees of each
Employer (and its Related Companies) that is not a Related
Company with the other Employer(s).
(b) Collective Bargaining Units: The performance of the ADP
Test, and if applicable, the ACP Test and Multiple Use Test,
and any corrective action resulting therefrom, shall be applied
separately to Employees who are eligible to participate in the
Plan as a result of a collective bargaining agreement.
In addition, separate testing may be applied, at the discretion of the
Administrator and to the extent permitted under Treasury regulations, to
any group of Employees for whom separate testing is permissible.
39
<PAGE>
13 MAXIMUM CONTRIBUTION AND BENEFIT LIMITATIONS
13.1 "Annual Addition" Defined
The sum of all amounts allocated to the Participant's Account for a
Plan Year. Amounts include contributions (except for rollovers or
transfers from another qualified plan), forfeitures and, if the
Participant is a Key Employee (pursuant to Section 14) for the
applicable or any prior Plan Year, medical benefits provided
pursuant to Code section 419A(d)(1). For purposes of this Section
13.1, "Account" also includes a Participant's account in all other
defined contribution plans currently or previously maintained by any
Related Company. The Plan Year refers to the year to which the
allocation pertains, regardless of when it was allocated. The Plan
Year shall be the Code section 415 limitation year.
13.2 Maximum Annual Addition
The Annual Addition to a Participant's accounts under this Plan and
any other defined contribution plan maintained by any Related
Company for any Plan Year shall not exceed the lesser of (1) 25% of
his or her Taxable Income or (2) the greater of $30,000 or
one-quarter of the dollar limitation in effect under Code section
415(b)(1)(A), except that for Plan Years commencing after December
31, 1994, "(2) $30,000 (as adjusted for the cost of living pursuant
to Code section 415 (d)) "shall be substituted for the preceding
reference to"(2) the greater of $30,000 or one-quarter of the dollar
limitation in effect under Code section 415(b)(1)(A)".
13.3 Avoiding an Excess Annual Addition
If, at any time during a Plan Year, the allocation of any additional
Contributions would produce an excess Annual Addition for such year,
Contributions to be made for the remainder of the Plan Year shall be
limited to the amount needed for each affected Participant to
receive the maximum Annual Addition.
13.4 Correcting an Excess Annual Addition
Upon the discovery of an excess Annual Addition to a Participant's
Account (resulting from forfeitures, allocations, reasonable error
in determining Participant compensation or the amount of elective
contributions, or other facts and circumstances acceptable to the
Internal Revenue Service) the excess amount (adjusted to reflect
investment gains) shall first be returned to the Participant to the
extent of his or her After-Tax Contributions, and then to the extent
of his or her 401(k) Contributions (however to the extent 401(k)
Contributions were matched, the applicable 401(k) Match
Contributions shall be forfeited in proportion to the returned
matched 401(k) Contributions) and the remaining excess, if any,
shall be forfeited by the Participant first from Profit Sharing
Contributions, then from 401(k) Match Contributions and then
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from ESOP Allocation Contributions. Forfeited amounts from the
profit sharing plan and forfeited amounts from the stock bonus
employee stock ownership plan shall be used as described in Section
8.4 or to reduce Contributions made by an Employer to the profit
sharing plan or stock bonus employee stock ownership plan,
respectively, as soon as administratively feasible.
13.5 Correcting a Multiple Plan Excess
If a Participant, whose Account is credited with an excess Annual
Addition, received allocations to more than one defined contribution
plan, the excess shall be corrected by reducing the Annual Addition
to this Plan only after all possible reductions have been made to
the other defined contribution plans. Excess amounts within this
Plan are corrected in the order as described in Section 13.4.
13.6 "Defined Benefit Fraction" Defined
The fraction, for any Plan Year, when the numerator is the
"projected annual benefit" and the denominator is the greater of
125% of the "protected current accrued benefit" or the normal limit
which is the lesser of (1) 125% of the maximum dollar limitation
provided under Code section 415(b)(1)(A) for the Plan Year or (2)
140% of the amount which may be taken into account under Code
section 415(b)(1)(B) for the Plan Year, where a Participant's:
(a) "projected annual benefit" is the annual benefit
provided by the Plan determined pursuant to Code section
415(e)(2)(A), and
(b) "protected current accrued benefit" in a defined
benefit plan in existence (1) on July 1, 1982, shall be the
accrued annual benefit provided for under Public Law 97-248,
section 235(g)(4), as amended, or (2) on May 6, 1 986, shall be
the accrued annual benefit provided for under Public Law
99-514, section 1106(i)(3).
13.7 "Defined Contribution Fraction" Defined
The fraction where the numerator is the sum of the Participant's
Annual Addition for each Plan Year to date and the denominator is
the sum of the "annual amounts" for each year in which the
Participant has performed service with a Related Company. The
"annual amount" for any Plan Year is the lesser of (1) 125% of the
Code section 415(c)(1)(A) dollar limitation (determined without
regard to subsection (c)(6)) in effect for the Plan Year and (2)
140% of the Code section 415(c)(1)(B) amount in effect for the Plan
Year, where:
(a) each Annual Addition is determined pursuant to the Code
section 415(c) rules in effect for such Plan Year, and
(b) the numerator is adjusted pursuant to Public Law
97-248, section 235(g)(3), as amended, or Public Law 99-514,
section 1106(i)(4).
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<PAGE>
13.8 Combined Plan Limits and Correction
If a Participant has also participated in a defined benefit plan
maintained by a Related Company, the sum of the Defined Benefit
Fraction and the Defined Contribution Fraction for any Plan Year may
not exceed 1.0. If the combined fraction exceeds 1.0 for any Plan
Year, the Participant's benefit under any defined benefit plan to
the extent it has not been distributed or used to purchase an
annuity contract) shall be limited so that the combined fraction
does not exceed 1.0 before any defined contribution limits shall be
enforced.
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14 TOP HEAVY RULES
---------------
14.1 Top Heavy Definitions
When capitalized, the following words and phrases have the following
meanings when used in this Section:
(a) "Aggregation Group". The group consisting of each
qualified plan of an Employer (and its Related Companies) (1)
in which a Key Employee is a participant or was a participant
during the determination period (regardless of whether such
plan has terminated), or (2) which enables another plan in the
group to meet the requirements of Code sections 401(a)(4) or
410(b). The Employer may also treat any other qualified plan
as part of the group if the group would continue to meet the
requirements of Code sections 401(a)(4) and 410(b) with such
plan being taken into account.
(b) "Determination Date", The last Trade Date of the
preceding Plan Year or, in the case of the Plan's first year,
the last Trade Date of the first Plan Year.
(c) "Key Employee". A current or former Employee (or his
or her Beneficiary) who at any time during the five year period
ending on the Determination Date was:
(1) an officer of a Related Company whose
Compensation (i) exceeds 50% of the amount in effect under
Code section 415(b)(1)(A) and (ii) places him within the
following highest paid group of officers:
<TABLE>
<CAPTION>
NUMBER OF EMPLOYEES NUMBER OF
NOT EXCLUDED UNDER CODE HIGHEST PAID
SECTION 414(Q)(8) OFFICERS INCLUDED
----------------- ------------------
<S> <C>
Less than 30 3
30 to 500 10 % of the number of
Employees not excluded
under Code section
414(q)(8)
More than 500 50
</TABLE>
(2) a more than 5% Owner,
(3) a more than 1% Owner whose Compensation exceeds $150,000,
or
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(4) a more than 0.5% Owner who is among the 10 Employees owning the
largest interest in a Related Company and whose Compensation
exceeds the amount in effect under Code section 415(c)1)(A).
(d) "Plan Benefit". The sum as of the Determination Date
of (1) an Employee's Account, (2) the present value of his or
her other accrued benefits provided by all qualified plans
within the Aggregation Group, and (3) the aggregate
distributions made within the five year period ending on such
date. Plan Benefits shall exclude rollover contributions and
plan to plan transfers made after December 31, 1983 which are
both employee initiated and from a plan maintained by a
non-related employer.
(e) "Top Heavy". The Plan's status when the Plan Benefits
of Key Employees account for more than 60% of the Plan Benefits
of all Employees who have performed services at any time during
the five year period ending on the Determination Date. The
Plan Benefits of Employees who were, but are no longer, Key
Employees (because they have not been an officer or Owner
during the five year period), are excluded in the determination.
14.2 Special Contributions
(a) Minimum Contribution Requirement. For each Plan Year
in which the Plan is Top Heavy, the Employer shall not allow
any contributions (other than a Rollover Contribution) to be
made by or on behalf of any Key Employee unless the Employer
makes a contribution (other than contributions made by an
Employer in accordance with a Participant's salary deferral
election or contributions made by an Employer based upon the
amount contributed by a Participant) on behalf of all
Participants who were Eligible Employees as of the last day of
the Plan Year in an amount equal to at least 3% of each such
Participant's Taxable Income. The Administrator shall remove
any such contributions (including applicable investment gain or
loss) credited to a Key Employee's Account in violation of the
foregoing rule and return them to the Employer or Employee to
the extent permitted by the Limited Return of Contributions
paragraph of Section 18.
(b) Overriding Minimum Benefit. Notwithstanding,
contributions shall be permitted on behalf of Key Employees if
the Employer also maintains a defined benefit plan which
automatically provides a benefit which satisfies the Code
section 416(c)(1) minimum benefit requirements, including the
adjustment provided in Code section 416(h)(2)(A), if
applicable. If this Plan is part of an aggregation group in
which a Key Employee is receiving a benefit and no minimum is
provided in any other plan, a minimum contribution of at least
3% of Taxable Income
44
<PAGE>
shall be provided to the Participants specified in the
preceding paragraph. In addition, the Employer may offset a
defined benefit minimum by contributions (other than
contributions made by an Employer in accordance with a
Participant's salary deferral election or contributions made by
an Employer based upon the amount contributed by a Participant)
made to this Plan.
14.3 Special Vesting
If the Plan becomes Top Heavy after the Effective Date, vesting for
all Employees shall thereafter be accelerated to the extent the
following vesting schedule produces a greater vested percentage for
the Employee than the normal vesting schedule at any relevant time:
<TABLE>
<CAPTION>
YEARS OF VESTING VESTED
SERVICE PERCENTAGE
-------- ----------
<S> <C>
Less than 2 0%
2 but less than 3 20%
3 but less than 4 40%
4 but less than 5 60%
5 but less than 6 80%
6 or more 100%
</TABLE>
14.4 Adjustment to Combined Limits for Different Plans
For each Plan Year in which the Plan is Top Heavy, 100% shall be
substituted for 125% in determining the Defined Benefit Fraction and
the Defined Contribution Fraction.
45
<PAGE>
15 PLAN ADMINISTRATION
-------------------
15.1 Plan Delineates Authority and Responsibility
Plan fiduciaries include the Company, the Administrator, the
Committee and/or the Trustee, as applicable, whose specific duties
are delineated in this Plan and Trust. In addition, Plan
fiduciaries also include any other person to whom fiduciary duties
or responsibility is delegated with respect to the Plan, Any person
or group may serve in more than one fiduciary capacity with respect
to the Plan. To the extent permitted under ERISA section 405, no
fiduciary shall be liable for a breach by another fiduciary.
15.2 Fiduciary Standards
Each fiduciary shall:
(a) discharge his or her duties in accordance with this
Plan and Trust to the extent they are consistent with ERISA;
(b) use that degree of care, skill, prudence and diligence
that a prudent person acting in a like capacity and familiar
with such matters would use in the conduct of an enterprise of
a like character and with like aims;
(c) act with the exclusive purpose of providing benefits to
Participants and their Beneficiaries, and defraying reasonable
expenses of administering the Plan;
(d) diversify Plan investments, to the extent such
fiduciary is responsible for directing the investment of Plan
assets, so as to minimize the risk of large losses, unless
under the circumstances it is clearly prudent not to do so; and
(e) treat similarly situated Participants and Beneficiaries
in a uniform and nondiscriminatory manner,
15.3 Company is ERISA Plan Administrator
The Company is the plan administrator, within the meaning of ERISA
section 3(16), which is responsible for compliance with all
reporting and disclosure requirements, except those that are
explicitly the responsibility of the Trustee under applicable law.
The Administrator and/or Committee shall have any necessary
authority to carry out such functions through the actions of the
Administrator, duly appointed officers of the Company, and/or the
Committee.
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<PAGE>
15.4 Administrator Duties
The Administrator shall have the discretionary authority to construe
this Plan and Trust, other than the provisions which relate to the
Trustee, and to do all things necessary or convenient to effect the
intent and purposes thereof, whether or not such powers are
specifically set forth in this Plan and Trust. Actions taken in good
faith by the Administrator shall be conclusive and binding on all
interested parties, and shall be given the maximum possible
deference allowed by law. In addition to the duties listed
elsewhere in this Plan and Trust, the Administrator's authority
shall include, but not be limited to, the discretionary authority to:
(a) determine who is eligible to participate, if a
contribution qualifies as a rollover contribution, the
allocation of Contributions, and the eligibility for loans,
withdrawals and distributions;
(b) provide each Participant with a summary plan
description no later than 90 days after he or she has become a
Participant (or such other period permitted under ERISA section
104(b)(1)), as well as informing each Participant of any
material modification to the Plan in a timely manner;
(c) make a copy of the following documents available to
Participants during normal work hours: this Plan and Trust
(including subsequent amendments), all annual and interim
reports of the Trustee related to the entire Plan, the latest
annual report and the summary plan description;
(d) determine the fact of a Participant's death and of any
Beneficiary's right to receive the deceased Participant's
interest based upon such proof and evidence as it deems
necessary;
(e) establish and review at least annually a funding policy
bearing in mind both the short-run and long-run needs and goals
of the Plan. To the extent Participants may direct their own
investments, the funding policy shall focus on which Investment
Funds are available for Participants to use; and
(f) adjudicate claims pursuant to the claims procedure
described in Section 18.
15.5 Advisors May be Retained
The Administrator may retain such agents and advisors (including
attorneys accountants, actuaries, consultants record keepers,
investment counsel and administrative assistants) as it considers
necessary to assist it in the performance of its duties. The
Administrator shall also comply with the bonding requirements of
ERISA section 412.
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<PAGE>
15.6 Delegation of Administrator Duties
The Company, as Administrator of the Plan, has appointed a Committee
to administer the Plan on its behalf. The Company shall provide the
Trustee with the names and specimen signatures of any persons
authorized to serve as Committee members and act as or on its
behalf. Any Committee member appointed by the Company shall serve
at the pleasure of the Company, but may resign by written notice to
the Company. Committee members shall serve without compensation
from the Plan for such services. Except to the extent that the
Company otherwise provides, any delegation of duties to a Committee
shall carry with it the full discretionary authority of the
Administrator to complete such duties.
15.7 Committee Operating Rules
(a) Actions of Majority. Any act delegated by the Company
to the Committee may be done by a majority of its members. The
majority may be expressed by a vote at a meeting or in writing
without a meeting, and a majority action shall be equivalent to
an action of all Committee members.
(b) Meetings. The Committee shall hold meetings upon such
notice, place and times as A determines necessary to conduct
its functions properly.
(c) Reliance by Trustee. The Committee may authorize one
or more of its members to execute documents on As behalf and
may authorize one or more of its members or other individuals
who are not members to give written direction to the Trustee in
the performance of its duties. The Committee shall provide
such authorization in writing to the Trustee with the name and
specimen signatures of any person authorized to act on its
behalf. The Trustee shall accept such direction and rely upon
it until notified in writing that the Committee has revoked the
authorization to give such direction. The Trustee shall not be
deemed to be on notice of any change in the membership of the
Committee, parties authorized to direct the Trustee in the
performance of its duties, or the duties delegated to and by
the Committee until notified in writing.
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<PAGE>
16 MANAGEMENT OF INVESTMENTS
-------------------------
16.1 Trust Agreement
All Plan assets shall be held by the Trustee in trust, in accordance
with those provisions of this Plan and Trust which relate to the
Trustee, for use in providing Plan benefits and paying Plan fees and
expenses not paid directly by the Employer. Plan Benefits shall be
drawn solely from the Trust and paid by the Trustee as directed by
the Administrator. Notwithstanding, the Administrator may appoint,
with the approval of the Trustee, another trustee to hold and
administer Plan assets which do not meet the requirements of Section
16.2.
Assets held in the profit sharing plan accounts and related trust as
described in this document are not available to pay benefits or fees
and expenses under the stock bonus employee stock ownership plan and
assets held in the stock bonus employee stock ownership plan
accounts and related trust as described in this document are not
available to pay benefits or fees and expenses under the profit
sharing plan.
16.2 Investment Funds
The Administrator is hereby granted authority to direct the Trustee
to invest Trust assets in one or more Investment Funds. The number
and composition of Investment Funds may be changed from time to
time, without the necessity of amending this Plan and Trust. The
Trustee may establish reasonable limits on the number of Investment
Funds as well as the acceptable assets for any such Investment Fund.
Each of the Investment Funds may be comprised of any of the
following:
(a) shares of a registered investment company, whether or
not the Trustee or any of its affiliates is an advisor to, or
other service provider to, such company:
(b) collective investment funds maintained by the Trustee,
or any other fiduciary to the Plan, which are available for
investment by trusts which are qualified under Code sections
401(a) and 501(a);
(c) individual equity and fixed income securities which are
readily tradeable on the open market;
(d) guaranteed investment contracts issued by a bank or
insurance company;
(e) interest bearing deposits of the Trustee; and
(f) Company Stock.
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<PAGE>
Any Investment Fund assets invested in a collective investment fund,
shall be subject to all the provisions of the instruments
establishing and governing such fund. These instruments, including
any subsequent amendments, are incorporated herein by reference.
16.3 Authority to Hold Cash
The Trustee shall have the authority to cause the investment manager
of each Investment Fund to maintain sufficient deposit or money
market type assets in each Investment Fund to handle the Fund's
liquidity and disbursement needs. Each Participant's and
Beneficiary's Sweep Account, which is used to hold assets pending
investment or disbursement, shall consist of interest bearing
deposits of the Trustee.
16.4 Trustee to Act Upon Instructions
The Trustee shall carry out instructions to invest assets in the
Investment Funds as soon as practicable after such instructions
are received from the Administrator, Participants, or Beneficiaries.
Such instructions shall remain in effect until changed by the
Administrator, Participants or Beneficiaries.
16.5 Administrator Has Right to Vote Registered Investment Company
Shares
The Administrator shall be entitled to vote proxies or exercise any
shareholder rights relating to shares held on behalf of the Plan in
a registered investment company. Notwithstanding, the authority to
vote proxies and exercise shareholder rights related to such shares
held in a Custom Fund is vested as provided otherwise in Section 16.
16.6 Custom Fund Investment Management
The Administrator may designate, with the consent of the Trustee, an
investment manager for any Investment Fund established by the
Trustee solely for Participants of this Plan (a "Custom Fund"). The
investment manager may be the Administrator, Trustee or an
investment manager pursuant to ERISA section 3(38). The
Administrator shall advise trustee in writing of the appointment of
an investment manager and shall cause the investment manager to
acknowledge to the Trustee in writing that the investment manager is
a fiduciary to the Plan.
A Custom Fund shall be subject in the following:
(a) Guidelines. Written guidelines, acceptable to
the Trustee, shall be established for a Custom Fund. If a
Custom Fund consists solely of collective investment funds or
share registered investment company (and sufficient deposit or
money market type assets to handle the Fund's liquidity and
disbursement needs, its underlying instruments shall constitute
the guidelines.
50
<PAGE>
(b) Authority of Investment Manager. The
investment manager of a Custom Fund shall have the authority to
vote or execute proxies, exercise shareholder rights, manage,
acquire, and dispose of Trust assets. Notwithstanding, the
authority to vote proxies and exercise shareholder rights
related to shares of Company Stock held in a Custom Fund is
vested as provided otherwise in Section 16.
(c) Custody and Trade Settlement. Unless otherwise agreed
to by the Trustee, the Trustee shall maintain custody of all
Custom Fund assets and be responsible for the settlement of all
Custom Fund trades. For purposes of this section, shares of a
collective investment fund, shares of a registered investment
company and guaranteed investment contracts issued by a bank or
insurance company, shall be regarded as the Custom Fund assets
instead of the underlying assets of such instruments.
(d) Limited Liability of Co-Fiduciaries. Neither the
Administrator nor the Trustee shall be obligated to invest or
otherwise manage any Custom Fund assets for which the Trustee
or Administrator is not the investment manager nor shall the
Administrator or Trustee be liable for acts or omissions with
regard to the investment of such assets except to the extent
required by ERISA.
16.7 Authority to Segregate Assets
The Company may direct the Trustee to split an investment Fund into
two or more funds in the event any assets in the Fund are illiquid
or the value is not readily determinable. In the event of such
segregation, the Company shall give instructions to the Trustee on
what value to use for the split-off assets, and the Trustee shall
not be responsible for confirming such value.
16.8 Investment in Company Stock
The Company Stock Fund shall be comprised of Company Stock and
sufficient deposit or money market type assets to handle the Fund's
liquidity and disbursement needs. The Fund may be as large as
necessary to constitute the total investment of Participants' and
Beneficiaries' 401(k) Match Accounts and ESOP Allocation Accounts,
except to the extent amounts in such Accounts are otherwise invested
pursuant to Section 7.2.
16.9 Participants Have Right to Vote and Tender Company Stock
Each Participant or Beneficiary shall be entitled to instruct the
Trustee as to the voting or tendering of any full or partial shares
of Company Stock held on his or her behalf in the Company Stock Fund
Prior to such voting or tendering of Company Stock, each Participant
or Beneficiary shall receive a copy of the proxy solicitation or
other material relating to such vote or tender decision and
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<PAGE>
a form for the Participant or Beneficiary to complete which
confidentially instructs the Trustee to vote or tender such shares
in the manner indicated by the Participant or Beneficiary. Upon
receipt of such instructions, the Trustee shall act with respect to
such shares as instructed. The Administrator shall instruct the
Trustee with respect to how to vote or tender any shares for which
instructions are not received from Participants or Beneficiaries.
16.10 Registration and Disclosure for Company Stock
The Administrator shall be responsible for determining the
applicability (and, if applicable, complying with) the requirements
of the Securities Act of 1933, as amended, the California Corporate
Securities Law of 1968, as amended, and any other applicable blue
sky law. The Administrator shall also specify what restrictive
legend or transfer restriction, if any, is required to be set forth
on the certificates for the securities and the procedure to be
followed by the Trustee to effectuate a resale of such securities.
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<PAGE>
17 TRUST ADMINISTRATION
--------------------
17.1 Trustee to Construe Trust
The Trustee shall have the discretionary authority to construe those
provisions of this Plan and Trust which relate to the Trustee and to
do all things necessary or convenient to the administration of the
Trust, whether or not such powers are specifically set forth in this
Plan and Trust. Actions taken in good faith by the Trustee Shall be
conclusive and binding on all interested parties, and shall be given
the maximum possible deference allowed by law.
17.2 Trustee To Act As Owner of Trust Assets
Subject to the specific conditions and limitations set forth in this
Plan and Trust, the Trustee shall have all the power, authority,
rights and privileges of an absolute owner of the Trust assets and,
not in limitation but in amplification of the foregoing, may:
(a) receive, hold, manage, invest and reinvest set tender exchange,
dispose of, encumber, hypothecate, pledge, mortgage, lease, grant
options respecting, repair, alter, insure, or distribute any and
all property in the Trust;
(b) borrow money, participate in reorganizations, pay calls and
assessments, vote or execute proxies, exercise subscription or
conversion privileges, exercise options and register any
securities in the Trust in the name of the nominee, in federal
book entry form or in any other form as shall permit title
thereto to pass by delivery;
(c) renew, extend the due date, compromise, arbitrate, adjust,
settle, enforce or foreclose, by judicial proceedings or
otherwise, or defend against the same, any obligations or claims
in favor of or against the Trust; and
(d) lend, through a collective investment fund, any securities held
in such collective investment fund to brokers, dealers or other
borrowers and to permit such securities to be transferred into
the name and custody and be voted by the borrower or others.
17.3 United States Indicia of Ownership
The Trustee shall not maintain the indicia of ownership of any Trust
assets outside the jurisdiction of the United States, except as
authorized by ERISA section 404(b).
- --------------------------------------------------------------------------------
07/12/95
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<PAGE>
17.4 Tax Withholding and Payment
(a) Withholding. The Trustee shall calculate and withhold federal
(and, if applicable, state) income taxes with regard to any
Eligible Rollover Distribution that is not paid as a Direct
Rollover in accordance with the Participant's withholding
election or as required by law if no election is made or the
election is less than the amount required by law. With regard to
any taxable distribution that is not an Eligible Rollover
Distribution, the Trustee shall calculate and withhold federal
(and, if applicable, state) income taxes in accordance with the
Participant's withholding election or as required by law if no
election is made.
(b) Taxes Due From Investment Funds. The Trustee shall pay from the
Investment Fund any taxes or assessments imposed by any taxing or
governmental authority on such Fund or its income, including
related interest and penalties.
17.5 Trust Accounting
(a) Annual Report. Within 60 days (or other reasonable period)
following the close of the Plan Year, the Trustee shall provide
the Administrator with an annual accounting of Trust assets and
information to assist the Administrator in meeting ERISA's annual
reporting and audit requirements.
(b) Periodic Reports. The Trustee shall maintain records and provide
sufficient reporting to allow the Administrator to properly
monitor the Trust's assets and activity.
(c) Administrator Approval. Approval of any Trustee accounting shall
automatically occur 90 days after such accounting has been
received by the Administrator, unless the Administrator files a
written objection with the Trustee within such time period. Such
approval shall be final as to all matters and transactions rated
or shown therein and binding upon the Administrator.
17.6 Valuation of Certain Assets
If the Trustee determines the Trust holds any asset which is not
readily tradeable and listed on a national securities exchange
registered under the Securities Exchange Act of 1934, as amended, the
Trustee may engage a qualified independent appraiser to determine the
fair market value of such property, and the appraisal fees shall be
paid from the Investment Fund containing the asset.
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07/12/95
54
<PAGE>
17.7 Legal Counsel
The Trustee may consult with legal counsel of its choice, including
counsel for the Employer or counsel of the Trustee, upon any question
or matter arising under this Plan and Trust. When relied upon by the
Trustee, the opinion of such counsel shall be evidence that the
Trustee has acted in good faith.
17.8 Fees and Expenses
The Trustee's fees for its services as Trustee shall be such as may be
mutually agreed upon by the Company and the Trustee. Trustee fees and
all reasonable expenses of counsel and advisors retained by the
Trustee shall be paid in accordance with Section 6.
17.9 Trustee Duties and Limitations
The Trustee's duties, unless otherwise agreed to by the Trustee, shall
be confined to construing the terms of the Plan and Trust as they
relate to the Trustee, receiving funds on behalf of and making
payments from the Trust, safeguarding and valuing Trust assets,
investing and reinvesting Trust assets in the Investment Funds as
directed by the Administrator, Participants or Beneficiaries and those
duties as described in this Section 17.
The Trustee shall have no duty or authority to ascertain whether
Contributions are in compliance with the Plan, to enforce collection
or to compute or verify the accuracy or adequacy of any amount to be
paid to it by the Employer. The Trustee shall not be liable for the
proper application of any part of the Trust with respect to any
disbursement made at the direction of the Administrator.
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07/12/95
55
<PAGE>
18 RIGHTS, PROTECTION, CONSTRUCTION AND JURISDICTION
-------------------------------------------------
18.1 Plan Does Not Affect Employment Rights
The Plan does not provide any employment rights to any Employee. The
Employer expressly reserves the right to discharge an Employee at any
time, with or without cause, without regard to the effect such
discharge would have upon the Employee's interest in the Plan.
18.2 Limited Return of Contributions
Except as provided in this paragraph, (1) Plan assets shall not revert
to the Employer nor be diverted for any purpose other than the
exclusive benefit of Participants or their Beneficiaries; and (2) a
Participant's vested interest shall not be subject to divestment. As
provided in ERISA section 403(c)(2), the actual amount of a
Contribution made by the Employer (or the current value of the
Contribution if a net loss has occurred) may revert to the Employer
if:
(a) such Contribution is made by reason of a mistake of fact;
(b) initial qualification of the Plan under Code section 401(a) is
not received and a request for such qualification is made within
the time prescribed under Code section 401(b) (the existence of
and Contributions under the Plan are hereby conditioned upon such
qualification); or
(c) such Contribution is not deductible under Code section 404 (such
Contributions are hereby conditioned upon such deductibility) in
the taxable year of the Employer for which the Contribution is
made.
The reversion to the Employer must be made (if at all) within one year
of the mistaken payment of the Contribution, the date of denial of
qualification, or the date of disallowance of deduction, as the case
may be. A Participant shall have no rights under the Plan with
respect to any such reversion.
18.3 Assignment and Alienation
As provided by Code section 401(a)(13) and to the extent not otherwise
required by law, no benefit provided by the Plan may be anticipated,
assigned or alienated, except:
(a) to create, assign or recognize a right to any benefit with
respect to a Participant pursuant to a QDRO, or
(b) to use a Participant's vested Account balance as security for a
loan from the Plan which is permitted pursuant to Code section
4975.
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18.4 Facility of Payment
If a Plan benefit is due to be paid to a minor or if the Administrator
reasonably believes that any payee is legally incapable of giving a
valid receipt and discharge for any payment due him or her, the
Administrator shall have the payment of the benefit, or any part
thereof, made to the person (or persons or institution) whom it
reasonably believes is caring for or supporting the payee, unless it
has received due notice of claim therefor from a duly appointed
guardian or conservator of the payee. Any payment shall to the extent
thereof, be a complete discharge of any liability under the Plan to
the payee.
18.5 Reallocation of Lost Participant's Accounts
If the Administrator cannot locate a person entitled to payment of a
Plan benefit after a reasonable search, the Administrator may at any
time thereafter treat such person's Account as forfeited and use such
amount as described in Section 8.4 or to reduce Contributions made by
an Employer to the profit sharing plan or stock bonus employee stock
ownership plan, respectively, as soon as administratively feasible.
If such person subsequently presents the Administrator with a valid
claim for the benefit, such person shall be paid the amount treated as
forfeited, plus the interest that would have been earned in the Sweep
Account to the date of determination. The Administrator shall pay the
amount through an additional amount contributed by the Employer or
direct the Trustee to pay the amount from the Forfeiture Account.
18.6 Put Options
In the event that a Participant receives a distribution of Company
Stock as provided in Section 11 that is not readily tradeable on an
established market at the time of receipt, he or she shall have the
option to sell the Company Stock to the Company at any time during two
option periods by written notice to the Company. The first option
period shall commence at the time the Company Stock is distributed and
shall extend for 60 days thereafter. The sale price shall be equal to
the fair market value of such Company Stock for the Company's
preceding Fiscal Year. The sale price shall be paid within 30 days
after the option is exercised. The second option period shall
commence immediately after the one year anniversary of the date the
Company Stock was distributed (subject to any applicable regulations)
and shall extend for sixty days thereafter. The sale price shall be
equal to the fair market value of such Company Stock for the Company's
preceding Fiscal Year. The sale price shall be paid within 30 days
after the option is exercised.
18.7 Claims Procedure
(a) Right to Make Claim. An interested party who disagrees with the
Administrator's determination of his or her right to Plan
benefits must submit a written claim and exhaust this claim
procedure before legal recourse of any type is sought. The claim
must include the important
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issues the interested party believes support the claim. The
Administrator, pursuant to the authority provided in this Plan,
shall either approve or deny the claim.
(b) Process for Denying a Claim. The Administrator's partial or
complete denial of an initial claim must include an
understandable, written response covering (1) the specific
reasons why the claim is being denied (with reference to the
pertinent Plan provisions) and (2) the steps necessary to perfect
the claim and obtain a final review.
(c) Appeal of Denial and Final Review. The interested party may make
a written appeal of the Administrator's initial decision, and the
Administrator shall respond in the same manner and form as
prescribed for denying a claim initially.
(d) Time Frame. The initial claim, its review, appeal and final
review shall be made in a timely fashion, subject to the
following time table:
Days to Respond
Action From Last Action
------ ----------------
Administrator determines benefit NA
Interested party files initial request 60 days
Administrator's initial decision 90 days
Interested party requests final review 60 days
Administrator's final decision 60 days
However, the Administrator may take up to twice the maximum
response time for its initial and final review if it provides an
explanation within the normal period of why an extension is
needed and when its decision shall be forthcoming.
18.8 Construction
Headings are included for reading convenience. The text shall control
if any ambiguity or inconsistency exists between the headings and the
text. The singular and plural shall be interchanged wherever
appropriate. References to Participant shall include Beneficiary when
appropriate and even if not otherwise already expressly stated.
References to Plan shall mean the profit sharing plan and the stock
bonus employee stock ownership plan wherever appropriate. References
to Trust shall mean the profit sharing plan trust and the stock bonus
employee stock ownership plan trust wherever appropriate.
18.9 Jurisdiction and Severability
The Plan and Trust shall be construed, regulated and administered
under ERISA and other applicable federal laws and, where not otherwise
preempted, by the
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laws of the State of California. If any provision of this Plan and
Trust shall become invalid or unenforceable, that fact shall not
affect the validity or enforceability of any other provision of this
Plan and Trust. All provisions of this Plan and Trust shall be so
construed as to render them valid and enforceable in accordance with
their intent.
18.10 Indemnification by Employer
The Employers hereby agree to indemnify all Plan fiduciaries against
any and all liabilities resulting from any action or inaction,
(including a Plan termination in which the Company fails to apply for
a favorable determination from the Internal Revenue Service with
respect to the qualification of the Plan upon its termination), in
relation to the Plan or Trust (1) including (without limitation)
expenses reasonably incurred in the defense of any claim relating to
the Plan or its assets, and amounts paid in any settlement relating to
the, Plan or its assets but (2) excluding liability resulting from
actions or inactions made in bad faith, or resulting from the
negligence or willful misconduct of the Trustee. The Company shall
have the right, but not the obligation, to conduct the defense of any
action to which this Section applies. The Plan fiduciaries are not
entitled to indemnity from the Plan assets relating to any such
action.
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19 AMENDMENT, MERGER, DIVESTITURES AND TERMINATION
----------------------------------------------
19.1 Amendment
The Company reserves the right to amend this Plan and Trust at any
time, to any extent and in any manner it may deem necessary or
appropriate. The Company (and not the Trustee) shall be responsible
for adopting any amendments necessary to maintain the qualified status
of this Plan and Trust under Code sections 401(a) and 501(a). If the
Committee is acting as the Administrator in accordance with Section
15.6, it shall have the authority to adopt Plan and Trust amendments
which have no substantial adverse financial impact upon any Employer
or the Plan. All interested parties shall be bound by any amendment,
provided that no amendment shall:
(a) become effective unless it has been adopted in accordance with
the procedures set forth in Section 19.5;
(b) except to the extent permissible under ERISA and the Code, make
it possible for any portion of the Trust assets to revert to an
Employer or to be used for, or diverted to, any purpose other
than for the exclusive benefit of Participants and Beneficiaries
entitled to Plan benefits and to defray reasonable expenses of
administering the Plan;
(c) decrease the rights of any Employee to benefits accrued
(including the elimination of optional forms of benefits) to the
date on which the amendment is adopted, or if later, the date
upon which the amendment becomes effective, except to the extent
permitted under ERISA and the Code; nor
(d) permit an Employee to be paid the balance of his or her 401(k)
Account unless the payment would otherwise be permitted under
Code section 401(k).
19.2 Merger
This Plan and Trust may not be merged or consolidated with, nor may
its assets or liabilities be transferred to, another plan unless each
Participant and Beneficiary would, if the resulting plan were then
terminated, receive a benefit just after the merger, consolidation or
transfer which is at least equal to the benefit which would be
received if either plan had terminated just before such event.
19.3 Divestitures
In the event of a sale by an Employer which is a corporation of: (1)
substantially all of the Employer's assets used in a trade or business
to an unrelated corporation, or (2) a sale of such Employer's interest
in a subsidiary
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to an unrelated entity or individual, lump sum distributions shall be
permitted from the Plan, except as provided below, to Participants
with respect to Employees who continue employment with the corporation
acquiring such assets or who continue employment with such subsidiary,
as applicable.
Notwithstanding, distributions shall not be permitted if the purchaser
agrees, in connection with the sale, to be substituted as the Company
as the sponsor of the Plan or to accept a transfer of the assets and
liabilities representing the Participants' benefits into a plan of the
purchaser or a plan to be established by the purchaser.
19.4 Plan Termination
The Company may, at any time and for any reason, terminate the Plan in
accordance with the procedures set forth in Section 19.5, or
completely discontinue contributions. Upon either of these events, or
in the event of a partial termination of the Plan within the meaning
of Code section 411(d)(3), the Accounts of each affected employee who
has not yet incurred a Break in Service shall be fully vested. If no
successor plan is established or maintained, lump sum distributions
shall be made in accordance with the terms of the Plan as in effect at
the time of the Plan's termination or as thereafter amended provided
that a post-termination amendment shall not be effective to the extent
that it violates Section 19.1 unless it is required in order to
maintain the qualified status of the Plan upon its termination. The
Trustee's and Employer's authority shall continue beyond the Plan's
termination date until all Trust assets have been liquidated and
distributed.
19.5 Amendment and Termination Procedures
The following procedural requirements shall govern the adoption of any
amendment or termination (a "Change") of this Plan and Trust:
(a) The Company may adopt any change by action of its board of
directors in accordance with its normal procedures.
(b) The Committee, if acting as Administrator in accordance with
Section 15.6, may adopt any amendment within the scope of its
authority provided under Section 19.1 and in the manner specified
in Section 15.7(a).
(c) Any Change must be (1) set forth in writing, and (2) signed and
dated by an executive officer of the Company or, in the case of
an amendment adopted by the Committee, at least one of its
members.
(d) If the effective date of any Change is not specified in the
document setting forth the Change, it shall be effective as of
the date it is signed by the last person whose signature is
required under clause (2) above,
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except to the extent that another effective date is necessary to
maintain the qualified status of this Plan and Trust under Code
sections 401(a) and 501(a).
(e) No Change shall become effective until it is accepted and signed
by the Trustee (which acceptance shall not unreasonably be
withheld).
19.6 Termination of Employer's Participation
Any Employer may, at any time and for any reason, terminate its Plan
participation by action of its board of directors in accordance with
its normal procedures. Written notice of such action shall be signed
and dated by an executive officer of the Employer and delivered to the
Company. If the effective date of such action is not specified, it
shall be effective on, or as soon as reasonably practicable after, the
date of delivery. Upon the Employer's request, the Company may
instruct the Trustee and Administrator to spin off all affected
Accounts and underlying assets into a separate qualified plan under
which the Employer shall assume the powers and duties of the Company.
Alternatively, the Company may treat the event as a partial
termination described above or continue to maintain the Accounts under
the Plan.
19.7 Replacement of the Trustee
The Trustee may resign as Trustee under this Plan and Trust or may be
removed by the Company at any time upon at least 90 days written
notice (or less if agreed to by both parties). In such event, the
Company shall appoint a successor trustee by the end of the notice
period. The successor trustee shall then succeed to all the powers
and duties of the Trustee under this Plan and Trust. If no successor
trustee has been named by the end of the notice period, the Company's
chief executive officer shall become the trustee, or if he or she
declines, the Trustee may petition the court for the appointment of a
successor trustee.
19.8 Final Settlement and Accounting of Trustee
(a) Final Settlement. As soon as administratively feasible after its
resignation or removal as Trustee, the Trustee shall transfer to
the successor trustee all property currently held by the Trust.
However, the Trustee is authorized to reserve such sum of money
as it may deem advisable for payment of its accounts and expenses
in connection with the settlement of its accounts or other fees
or expenses payable by the Trust. Any balance remaining after
payment of such fees and expenses shall be paid to the successor
trustee.
(b) Final Accounting. The Trustee shall provide a final accounting
to the Administrator within 90 days of the date Trust assets are
transferred to the successor trustee.
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(c) Administrator Approval. Approval of the final accounting shall
automatically occur 90 days after such accounting has been
received by the Administrator, unless the Administrator files a
written objection with the Trustee within such time period. Such
approval shall be final as to all matters and transactions stated
or shown therein and binding upon the Administrator.
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APPENDIX A - INVESTMENT FUNDS
I. Investment Funds Available
As of the Effective Date, the Investment Funds offered under the Plan to
which a Participant or Beneficiary may direct investment include this set
of daily valued funds:
CATEGORY FUNDS
-------- -----
MONEY MARKET U.S. Government Money Market
------------
INCOME Income Accumulation
------ U.S. Treasury Allocation
BALANCED Asset Allocation
--------
EQUITY Equity Value
------ Neuberger & Berman Guardian Trust
Templeton Foreign
COMBINATION H&Q Life Sciences Investors
-----------
Investment in the Company Stock Fund is restricted to investment of a
Participant's or Beneficiary's 401(k) Match Account and ESOP Allocation
Account as directed by the Administrator.
II. Default Investment Fund
As of the Effective Date, the default Investment Fund is the U.S.
Government Money Market Fund.
III. Contribution Accounts For Which Investment is Restricted
A Participant or Beneficiary may direct the investment of his or her entire
Account except for the following Contribution Accounts, and except as
otherwise provided in Section 7, which shall be invested as of the
Effective Date as follows:
401(k) Match Account Company Stock Fund
ESOP Allocation Account Company Stock Fund
IV. Maximum Percentage Restrictions Applicable to Certain Investment Funds
As of the Effective Date, there are no maximum percentage restrictions
applicable to any Investment Fund designated as an Investment Fund to which
a Participant or Beneficiary may direct investment.
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APPENDIX B - PAYMENT OF PLAN FEES AND EXPENSES
As of the Effective Date, payment of Plan fees and expenses shall be as follows:
1) Investment Management and Special Custom Fund Fees: These are paid by
Participants in that management fees reduce the investment return reported
and credited to Participants, except that the Employer shall pay the fees
related to the Company Stock Fund and the H&Q Life Sciences Investors Fund.
These are paid by the Employer on a quarterly basis.
2) Recordkeeping Fees: These are paid by the Employer on a quarterly basis.
3) Loan Fees: A $3.50 per month fee is assessed and billed/collected quarterly
from the Account of each Participant who has an outstanding loan balance.
4) Investment Fund Election Changes: For each Investment Fund election change
by a Participant, in excess of 4 changes per year, a $10 fee shall be
assessed and billed/collected quarterly from the Participant's Account.
5) Additional Fees Paid by Employer: All other Plan related fees and expenses
shall be paid by the Employer. To the extent that the Administrator later
elects that any such fees shall be borne by Participants, estimates of the
fees shall be determined and reconciled, at least annually, and the fees
shall be assessed monthly and billed/collected from Accounts quarterly.
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APPENDIX C - LOAN INTEREST RATE
As of the Effective Date, the interest rate charged on Participant loans shall
be equal to the Trustee's prime rate, plus 1%.
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LINE OF CREDIT AGREEMENT
This Agreement is made as of October 29, 1993 between HAMBRECHT & QUIST
GROUP, a California corporation ("Borrower"), and THE BANK OF CALIFORNIA,
NATIONAL ASSOCIATION ("Bank").
ARTICLE ONE - DEFINITIONS
The following definitions shall be applicable to both the singular and
plural forms of the defined terms:
1.1 "Advance" means an extension of credit under this Agreement.
1.2 "Advance Request" means the form of Advance request attached hereto as
EXHIBIT A, to be completed, executed and delivered by Borrower
to Bank each time Borrower requests an Advance under the Line of Credit.
1.3 "Affiliate" means any Person which directly or indirectly controls,
is controlled by, or is under common control with, Borrower. "Control,"
"controlled by" and "under common control with" means direct or indirect
possession of the power to direct or cause the direction of management or
policies (whether through ownership of voting securities, by contract or
otherwise); provided that control shall be conclusively presumed when any Person
or affiliated group directly or indirectly owns five percent or more of the
securities having ordinary voting power for the election of directors of a
corporation.
1.4 "Agreement" means this Line of Credit Agreement as it may be amended
from time to time.
1.5 "Closing Date" means the date of this Agreement.
1.6 "Customer" means a client of Borrower to whom Borrower makes an
advance under Borrower's "Restricted Stock Loan Program", which advance Borrower
requests Bank to finance under the Line of Credit.
1.7 "Customer Advance" means an advance by Borrower to a Customer under
Borrower's "Restricted Stock Loan Program" secured by the Customer's pledge of
various marketable certificated securities owned by the Customer. Each Customer
Advance shall be on a full recourse basis, without restriction on Borrower's
right or ability to seek recourse against all of the assets or properties of the
Customer in the event of a default under the applicable Customer Note.
1.8 "Customer Note" means the promissory note executed by a Customer in
favor of Borrower to evidence a Customer Advance, in form and substance
satisfactory to Bank.
<PAGE>
1.9 "Customer Pledge Agreement" means the pledge agreement or related
security document executed by Customer in favor of Borrower, pursuant to which
the Customer pledges the Pledged Securities as security for the applicable
Customer Note, in form and substance satisfactory to Bank.
1.10 "Event of Default" means any event described in Article 7.
1.11 "GAAP" means generally accepted accounting principles and practices
consistently applied.
1.12 "Lien" means any voluntary or involuntary security interest, mortgage,
pledge, claim, charge, encumbrance, title retention agreement, or third party
interest, covering all or any part of the property of Borrower or any other
Person.
1.13 "Line of Credit" means the credit accommodation being provided
Borrower as more fully described in Article 2.
1.14 "Line of Credit Note" means the promissory note in form and substance
satisfactory to Bank executed by Borrower to evidence the Line of Credit.
1.15 "Loan Documents" means, individually and collectively, this Agreement,
the Line of Credit Note, each Advance Request, any rate option agreement,
guaranty, security or pledge agreement, deed of trust, and all other contracts,
instruments, addenda and documents executed in connection with the extension of
credit which is the subject of this Agreement.
1.16 "Maximum Advance Rate" means with respect to each Advance an amount
equal to the lesser of (a) TWO MILLION FIVE HUNDRED THOUSAND AND NO/100 DOLLARS
($2,500,000), or (b) forty percent (40%) of the fair market value of the Pledged
Securities securing the Customer Note pledged to Bank in connection with the
Advance, as determined by Bank referenced to outside sources.
1.17 "Person" means any individual or entity.
1.18 "Pledged Securities" means the certificated securities pledged by a
Customer to Borrower to secure the Customer's obligations to Borrower in
connection with a Customer Advance.
1.19 "Related Person" means any Affiliate of Borrower, or any officer,
employee, director or shareholder of Borrower or any Affiliate, or a relative of
any of them.
1.20 "Tangible Net Worth", unless otherwise defined in an addendum to this
Agreement, means the net book value of (a) all Borrower's assets, exclusive of
intangibles, and loans to
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and notes and receivables from Related Persons, minus (b) all Borrower's
liabilities determined in accordance with GAAP.
1.21 "Termination Date" means the earlier of (a) August 1, 1994; or (b) the
date Bank may terminate making advances pursuant to the rights of Bank under
Article 7.
ARTICLE TWO - LINE OF CREDIT
2.1 ADVANCES AND LINE OF CREDIT NOTE. Subject to the terms and
conditions of this Agreement, from time to time prior to the Termination Date,
upon request by Borrower, Bank will make Advances to Borrower which, in the
aggregate, shall not exceed at any time the principal amount of FIVE MILLION AND
N0/100 DOLLARS ($5,000,000.00); provided, however, that no single Advance shall
exceed the Maximum Advance Rate applicable thereto. The Line of Credit shall be
evidenced by the Line of Credit Note. Borrower may borrow, repay and reborrow
under the Line of Credit, as Borrower may elect, subject to all limitations,
terms and conditions of this Agreement and the Loan Documents. Borrower shall
pay to Bank all sums outstanding under the Line of Credit, and due under this
Agreement no later than the Termination Date.
2.2 REQUESTS FOR ADVANCES. Advances shall be used solely to
finance Customer Advances by Borrower. Each Advance shall be requested in
writing in the form of an Advance Request, accompanied by a statement of purpose
under Regulation U (as defined in Section 5.1 below) executed by the applicable
Customer, in form and substance satisfactory to Bank, and such other documents
or information as Bank may reasonably require. Borrower assumes all risks
regarding the validity, authenticity and due authorization of any request
purporting to be made by or on behalf of Borrower. Borrower promises to repay
any sums, with interest, that are advanced by Bank pursuant to any request which
Bank in good faith believes to be authorized, or when the proceeds of any
Advance are deposited to the account of Borrower with Bank, regardless of
whether any Person other than Borrower may have authority to draw against such
account.
2.3 ADVANCES AND PAYMENTS.
(a) Each Advance shall be made by a deposit to Borrower's account no.
N/A at Bank's San Francisco Main Office, unless Borrower shall otherwise
direct Bank in writing.
(b) The obligation of Bank to make any Advance to Borrower, the
proceeds of which are, at Borrower's request, to be wire transferred to Borrower
or any other Person, shall be subject to all applicable laws and regulations,
and the policy of the Board of Governors of the Federal Reserve System on
Reduction
3
<PAGE>
of Payments System Risk in effect from time to time ("Applicable Law and
Policy"). Borrower acknowledges that, as a result of Applicable Law and Policy,
the transmission of the proceeds of any Advance which Borrower has requested to
be wire-transferred may be significantly delayed.
(c) Principal, interest, and all other sums owed Bank under any Loan
Document shall be evidenced by entries in records maintained by Bank for such
purpose. Each payment on and any other credits with respect to principal,
interest and all other sums outstanding under any Loan Document shall be
evidenced by entries in such records. Bank's records shall be conclusive
evidence thereof.
(d) Borrower hereby expressly authorizes Bank to debit Borrower's
account no. N/A for the amount of each payment of principal and interest and
all other sums owed Bank under any Loan Document. Borrower shall have
sufficient collected balances in said account in order that each such payment
shall be available when due.
(e) Without limiting any other rights or remedies that may be
available to Bank hereunder or under any other Loan Documents or applicable law,
Bank hereby reserves the right to decline making any Advance to Borrower if any
litigation or administrative or regulatory proceeding affecting Borrower or
Hambrecht & Quist Incorporated, a California corporation ("H & Q Inc.") has been
initiated where the granting of the relief requested would have a material
adverse effect on the financial condition or business of Borrower or H & Q Inc.
2.4 INTEREST.
(a) Interest on the outstanding principal balance of the Line of
Credit shall accrue daily from the date of the first Advance until the
Termination Date at a fluctuating rate per annum at all times equal to the rate
Bank announces to be in effect from time to time as its prime rate (the "Prime
Rate") plus one percent (1.0%). The Prime Rate is a rate set by Bank based upon
various factors including general economic and market conditions, and is used as
a reference point for pricing certain loans. Bank may price its loans at, above
or below the Prime Rate. Interest shall be payable on the first day of each
consecutive month, beginning on the first such date after the first Advance and
continuing through the Termination Date, on which date all accrued interest and
principal remaining unpaid shall be due and payable in full.
(b) The unpaid principal balance and all payments of interest on the
Line of Credit shall bear interest from their respective maturities, whether
scheduled or accelerated, at a fluctuating rate per annum at all times equal to
the Prime Rate
4
<PAGE>
plus five percent (5%), until paid in full, whether before or after judgment.
(c) Interest and fees shall be calculated for actual days elapsed on
the basis of a 360-day year, which results in higher interest payments than if a
365-day year were used. Each change in the rate of interest shall become
effective on the date each Prime Rate change is announced within the Bank. In no
event shall Borrower be obligated to pay interest at a rate in excess of the
highest rate permitted by applicable law from time to time in effect.
2.5 PRINCIPAL PAYMENTS. All unpaid principal shall be due and
payable on the Termination Date. Notwithstanding the foregoing, however, if at
any time Bank determines that the outstanding principal balance of any Advance
exceeds fifty percent (50%) of the fair market value of the Pledged Securities
securing the Customer Note pledged by Borrower to Bank in connection with such
Advance, as determined by Bank reference to outside sources, then Borrower shall
immediately upon Bank's demand make principal repayments of the Advance,
together with all accrued interest thereon, in an amount sufficient to establish
a forty percent (40%) or lower Advance-to-value ratio.
2.6 FEES. Borrower has paid or shall pay to Bank no later than
the Closing Date a non-refundable fee of $12,500.00 for this Line of Credit.
2.7 COLLATERAL. Borrower shall ensure Bank is granted
concurrently with, and as a condition to, making any Advance, a security
interest of first priority in the Customer Note, which shall be freely
negotiable by Borrower, Borrower's right, title and interest in the Customer
Pledge Agreement, which shall be freely assignable by Borrower, and in such
other collateral as might be required by Bank under a pledge agreement, deed of
trust, or other security agreement, as appropriate, in form and substance
satisfactory to Bank. Prior to or concurrently with Bank making an Advance,
Bank shall take possession of the applicable Customer Note pledged to it as
security for Borrower's obligations and any Pledged Securities that are covered
by the applicable Customer Pledge Agreement assigned to Bank. Each such Customer
Note shall be endorsed in blank and each such Pledged Security shall be endorsed
in blank or have stock powers attached, accompanied by a fully executed copy of
the applicable Customer Pledge Agreement.
ARTICLE THREE - REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants that as of the Closing Date and the date of
each Advance under the Line of Credit:
5
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3.1 DUE ORGANIZATION. Borrower is duly organized and validly
existing in good standing under the laws of the jurisdiction of its
organization, and is duly qualified to conduct business in each jurisdiction in
which its business is conducted.
3.2 AUTHORIZATION, VALIDITY AND ENFORCEABILITY. The execution,
delivery and performance of all Loan Documents executed by Borrower are within
Borrower's powers, have been duly authorized, and are not in conflict with
Borrower's articles of incorporation or by-laws, or the terms of any charter or
other organizational document of Borrower; and all such Loan Documents
constitute valid and binding obligations of Borrower, enforceable in accordance
with their terms.
3.3 COMPLIANCE WITH APPLICABLE LAWS. Borrower has complied with
all licensing, permit and fictitious name requirements necessary to lawfully
conduct the business in which it is engaged and with all laws and regulations
applicable to any sales, leases or the furnishing of services by Borrower,
including without limitation those requiring consumer or other disclosures.
3.4 LICENSES, TRADEMARKS. Borrower has all patents, licenses,
trademarks, trademark rights, trade names, trade name rights, copyrights,
permits and franchises required in order for Borrower to conduct its business
and operate its properties as now or proposed to be conducted without conflict
with the rights of others.
3.5 NO CONFLICT. The execution, delivery, and performance by
Borrower of all Loan Documents are not in conflict with any law, rule,
regulation, order or directive, or any indenture, agreement, or undertaking to
which Borrower is a party or by which Borrower may be bound or affected.
3.6 NO LITIGATION, CLAIMS OR PROCEEDINGS. There is no
litigation, tax claim, proceeding or dispute pending, or, to the knowledge of
Borrower, threatened against or affecting Borrower or its property, except as
disclosed in writing to Bank prior to the Closing Date.
3.7 CORRECTNESS OF FINANCIAL STATEMENTS. Borrower's financial
statements which have been delivered to Bank fairly and accurately reflect
Borrower's financial condition as of July 31, 1993; and, since that date, there
has been no material adverse change in Borrower's financial condition or
business.
3.8 NO SUBSIDIARIES. Borrower is not a majority owner of or in
a control relationship with any other business entity except for H & Q Inc.,
Hambrecht & Quist Capital Management, a California corporation, Hambrecht &
Quist Guaranty Finance, a
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California general partnership, and such other business entities disclosed in
writing to Bank prior to the Closing Date.
3.9 NO EVENT OF DEFAULT. No Event of Default has occurred and is
continuing.
ARTICLE FOUR - CONDITIONS PRECEDENT
4.1 REQUIRED DELIVERY. The obligation of Bank to make the first
Advance under the Line of Credit is subject to the condition that, on or before
the date of such Advance, there shall have been delivered to Bank, in form and
substance satisfactory to Bank, and duly executed as required by Bank:
(a) This Agreement and the Line of Credit Note;
(b) Any and all Loan Documents Bank may require to evidence any
security interest or Lien granted to Bank in connection with the Line of Credit;
(c) Financing statement(s) and other security interest perfection
documentation in form and substance satisfactory to Bank, duly filed under the
Uniform Commercial Code in all jurisdictions as may be necessary, or in Bank's
opinion, desirable to perfect Bank's security interests created under any
security or pledge agreement; and all filings, recordings, and other actions
that are necessary or advisable, in the opinion of Bank, in order to establish,
perfect, preserve and protect Bank's security interests and Liens as legal,
valid and enforceable security interests and Liens in such collateral shall have
been effected; and all property or documents of title, in cases in which
possession is required for the perfection of Bank's security interest, including
without limitation any applicable Customer Note(s), endorsed in blank, and any
applicable Pledged Securities, endorsed in blank or with stock powers attached.
(d) Evidence that the security interest and Liens in favor of Bank
are perfected, valid, enforceable, and prior to the rights and interests of
others as required by Bank;
(e) Certified copies of Requests for Information from the appropriate
governmental or regulatory authorities listing the financing statements referred
to in paragraph (c) above and all other effective financing statements which
name Borrower as debtor, together with copies of all such other financing
statements, none of which shall cover the collateral purported to be covered by
the security or pledge agreement(s) referred to in paragraph (b) above except as
Bank may expressly allow;
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(f) Such authorization documents as Bank may require;
(g) Evidence that any insurance required by this Agreement is in
effect;
(h) Payment in full of any fees or other charges due by the Closing
Date under the terms of any Loan Documents; and
(i) Such other documents, instruments or agreements as Bank may
require to evidence the Line of Credit.
ARTICLE FIVE - AFFIRMATIVE COVENANTS
During the term of this Agreement and until its performance of all
obligations to Bank, Borrower will, unless Bank otherwise consents in writing:
5.1 USE OF PROCEEDS. Use the proceeds of the Line of Credit
only to finance a Customer Advance specified in an Advance Request; and not
directly or indirectly to purchase or carry any margin stock, as defined from
time to time by the Board of Governors of the Federal Reserve System in Federal
Regulation U ("Regulation U").
5.2 FINANCIAL COVENANTS.
(a) TANGIBLE NET WORTH. Maintain a Tangible Net Worth of
not less than $30,000,000.00;
(b) MINIMUM NET CAPITAL. Cause H & Q, Inc. to maintain a
minimum net capital position, as measured under SEC Uniform Net Capital Rule
15c3-1 and under the capital maintenance rules of the New York Stock Exchange,
of at least $10,000,000.00 at all times.
(c) PROFITABILITY. Maintain profitable operations on an
annual fiscal year basis.
5.3 ADDITIONAL FINANCIAL COVENANTS. Comply with the terms of
all financial covenants contained in any addendum to this Agreement.
5.4 NOTICE TO BANK. Promptly give written notice to Bank of:
(a) Any litigation or administrative or regulatory proceeding
affecting Borrower or H & Q, Inc. where the granting of the relief requested
would have a material adverse effect on Borrower's or H & Q, Inc.'s financial
condition or business;
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(b) Any substantial dispute which may exist between Borrower and any
governmental or regulatory authority;
(c) Any discovery or determination by Borrower, based on its daily
tracking of the value of Pledged Securities, that the fair market value of
Pledged Securities securing a Customer Note at any time is less than two and
one-half times the outstanding principal balance of the Advance in connection
with which such Customer Note was pledged to Bank;
(d) Any Event of Default;
(e) Any change in the location of any of Borrower's places of
business or of the establishment of any new, or the discontinuance of any
existing, place of business;
(f) Any other matter which has resulted or might result in a material
adverse change in Borrower's financial condition or business.
5.5 FINANCIAL STATEMENTS. Deliver to Bank in form and detail
satisfactory to Bank the following financial information, which Borrower
warrants shall be accurate and complete in all material respects:
(a) INTERIM FINANCIAL STATEMENTS. As soon as available
but no later than thirty (30) days after the end of each month, Borrower's
balance sheet as of the end of such period, and Borrower's income statement for
such period and for that portion of Borrower's financial reporting year ending
with such period, prepared and attested by a responsible financial officer of
Borrower as being complete and correct and fairly presenting Borrower's
financial condition and the results of Borrower's operations;
(b) YEAR-END FINANCIAL STATEMENTS. As soon as available
but no later than ninety (90) days after the end of each financial reporting
year, a complete copy of Borrower's audit report, which shall include balance
sheet, income statement, statement of changes in equity and statement of cash
flows for such year, prepared and certified by an independent certified public
accountant selected by Borrower and satisfactory to Bank (the "Accountant").
The Accountant's certification shall not be qualified or limited due to a
restricted or limited examination by the Accountant of any material portion of
Borrower's records or otherwise. The certification shall include, or be
accompanied by, a statement from the Accountant that during the examination
there was observed no Event of Default, or a statement of the Event of Default,
if any is found. Borrower shall not change its financial reporting year end
from the current September 30 without Bank's prior written consent;
9
<PAGE>
(c) PLEDGED SHARE REPORT. Not later than ten (10) days
after the end of each month, a written report listing all Pledged Securities and
their value as of the end of such month, prepared and attested by a responsible
financial officer of Borrower;
(d) GOVERNMENT REQUIRED REPORTS. Promptly after sending,
making available, or filing, copies of all reports, proxy statements, and
financial statements that Borrower sends or makes available to its stockholders
and all registration statements and reports that Borrower files with the
Securities and Exchange Commission, or any other governmental or regulatory
authority;
(e) OTHER FINANCIAL INFORMATION. Such other statements,
lists of property and accounts, budgets, forecasts, reports, or other financial
information as Bank may from time to time request.
5.6 LITIGATION REPORTS. Not later than thirty (30) days after
the end of each quarter, Borrower shall deliver to Bank in form and detail
satisfactory to Bank a report describing all litigation to which Borrower or any
of its Affiliates is a party, which Borrower warrants shall be accurate and
complete in all material respects.
5.7 EXISTENCE. Maintain and preserve Borrower's existence,
present form of business, and all rights, privileges and franchises necessary or
desirable in the normal course of its business; and keep all Borrower's property
in good working order and condition, ordinary wear and tear excepted.
5.8 INSURANCE. Maintain and keep in force insurance with
companies acceptable to Bank and in such amounts and types as is usual in the
business carried on by Borrower, or as Bank may reasonably request. Such
insurance policies must be in form and substance satisfactory to Bank.
5.9 ACCOUNTING RECORDS. Maintain adequate books, accounts and
records, and prepare all financial statements in accordance with GAAP, and in
compliance with the regulations of any governmental or regulatory authority
having jurisdiction over Borrower or Borrower's business; and permit employees
or agents of Bank at such reasonable times as Bank may request to inspect
Borrower's properties, and to examine, audit, and make copies and memoranda of
Borrower's books, accounts and records.
5.10 COMPLIANCE WITH LAWS. Comply with all laws, rules,
regulations, orders and directives of any governmental or regulatory authority
having jurisdiction over Borrower or Borrower's business, and with all material
agreements to which Borrower is a party.
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5.11 TAXES AND OTHER LIABILITIES. Pay all Borrower's obligations
when due; pay all taxes and other governmental or regulatory assessments before
delinquency or before any penalty attaches thereto, except as may be contested
in good faith by the appropriate procedures and for which Borrower shall
maintain appropriate reserves; and timely file all required tax returns.
ARTICLE SIX - NEGATIVE COVENANTS
During the term of this Agreement and until the performance of all
obligations to Bank, Borrower will not, without Bank's prior written consent:
6.1 INDEBTEDNESS. Be indebted for borrowed money, the deferred
purchase price of property, or leases which would be capitalized in accordance
with GAAP; or become liable as a surety, guarantor, accommodation party or
otherwise for or upon the obligation of any other Person, except:
(a) The acquisition of supplies or inventory on normal trade credit;
(b) The endorsement of negotiable instruments for deposit or
collection in the ordinary course of Borrower's business;
(c) The indebtedness of Borrower under the Agreement; and
(d) Any indebtedness approved by Bank prior to the Closing Date.
6.2 LIENS. Create, incur, assume or permit to exist any Lien, or
grant any other Person a negative pledge, on any of Borrower's property, except:
(a) Involuntary Liens which, in the aggregate, would not have a
material adverse effect on Borrower's financial condition or business;
(b) Liens for current taxes or other governmental or regulatory
assessments which are not delinquent, or which are contested in good faith by
the appropriate procedures and for which appropriate reserves are maintained;
(c) Liens in favor of Bank; and
(d) Liens which have been approved by Bank prior
to the Closing Date.
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6.3 DIVIDENDS. If Borrower is a corporation, pay any dividends
except those payable solely in Borrower's capital stock; or purchase, redeem or
otherwise acquire for value or make any other distribution with respect to any
of Borrower's capital stock.
6.4 CHANGES/MERGERS. Change its name; liquidate or dissolve,
or enter into any consolidation, merger, partnership, joint venture
or other combination; issue, redeem, purchase, retire or otherwise
acquire any shares of any class of capital stock of Borrower, or
grant or issue any warrant, right or option pertaining thereto or
other security convertible into any of the foregoing; reorganize,
reclassify or recapitalize its capital stock; prepay any
subordinated debt, debt for borrowed money, or debt secured by any
permitted Lien, or enter into or modify any agreement as a result of
which the terms of payment of any such debt are waived or modified.
6.4 SALES OF ASSETS. Sell, transfer, lease or otherwise dispose
of any of Borrower's assets except for fair consideration and in the ordinary
course of its business; or enter into any sale or leaseback agreement covering
any of Borrower's fixed or capital assets.
6.6 ACQUISITIONS. Acquire or purchase all or substantially all
the assets or business of any other Person or any controlling interests therein.
6.7 TRANSACTIONS WITH RELATED PERSONS. Directly or indirectly
enter into any transaction with or for the benefit of a Related Person on terms
more favorable to the Related Person than would have been obtainable in an
"arms' length" dealing.
6.8 OTHER BUSINESS. Conduct any business other than the
business Borrower conducts as of the Closing Date.
ARTICLE SEVEN - EVENTS OF DEFAULT
7.1 EVENTS OF DEFAULT. The occurrence of any of the following
shall (1) terminate any obligation of Bank to make or continue the Line of
Credit; and shall, at Bank's option, (2) make all sums of interest, principal
and any other amounts owing under any Loan Documents immediately due and payable
without notice of default, presentment or demand for payment, protest or notice
of nonpayment or dishonor or any other notices or demands; and (3) give Bank the
right to exercise any other right or remedy provided by contract or applicable
law:
(a) Borrower shall fail to make any payment of principal or interest
when due under this Agreement or to pay any fees or other charges when due, or
Borrower or any other Person
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<PAGE>
shall fail to provide Bank with, or to perform any obligation under any Loan
Document;
(b) Any representation or warranty made, or financial statement,
certificate or other document provided, by Borrower or any Person who guaranties
all or any portion of Borrower's obligations to Bank (each a "Guarantor") shall
prove to have been false or misleading;
(c) Borrower, any of its Affiliates or any Guarantor shall fail to
pay its debts generally as they become due or shall file any petition or action
for relief under any bankruptcy, insolvency, reorganization, moratorium,
creditor composition law, or any other law for the relief of or relating to
debtors; an involuntary petition shall be filed under any bankruptcy law against
Borrower, any of its Affiliates or any Guarantor, or a custodian, receiver,
trustee, assignee for the benefit of creditors, or other similar official, shall
be appointed to take possession, custody or control of the properties of
Borrower, any of its Affiliates or any Guarantor; or the death, incapacity,
dissolution or termination of the business of Borrower, any of its Affiliates or
any Guarantor;
(d) Borrower, any of its Affiliates or any Guarantor shall fail to
perform under any other agreement involving the borrowing of money, the purchase
of property, the advance of credit or any other monetary liability of any kind
to any Person; or any guaranty of Borrower's obligations to Bank shall be
revoked or terminated;
(e) Any governmental or regulatory authority shall take any action,
any defined benefit pension plan maintained by Borrower, any of its Affiliates
or any Guarantor shall have any unfunded liabilities, or any other event shall
occur, any of which, in the judgment of Bank, might have a material adverse
effect on the financial condition or business of Borrower, any of its Affiliates
or any Guarantor;
(f) Any sale, transfer or other disposition of all or a substantial
or material part of the assets of Borrower, any of its Affiliates or any
Guarantor, including without limitation to any trust or similar entity, shall
occur;
(g) Any Person shall fail to perform its obligations under the terms
of any promissory note, contract or other obligation that is held by Bank as
collateral for the obligations evidenced by the Loan Documents; or Bank shall
not have a perfected security interest in, or shall deem itself insecure with
respect to the value of, any collateral being held for the obligations evidenced
by the Loan Documents;
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(h) Any judgment(s) shall be entered against Borrower, any of its
Affiliates or any Guarantor, or any involuntary lien(s) of any kind or character
shall attach to any assets or property of Borrower, any of its Affiliates or any
Guarantor, any of which, in the judgment of Bank, might have a material adverse
effect on the financial condition or business of Borrower, any of its Affiliates
or any Guarantor;
(i) Without Bank's prior written consent: if Borrower is a
corporation, Borrower's shareholders of record as of the Closing Date shall
cease to own a majority of the voting interest in Borrower; or any change shall
occur in the executive management or managing partner(s) of Borrower; or any
change shall occur in the corporate or legal structure of Borrower or any of its
Affiliates.
(j) Borrower shall fail to perform any of its duties or obligations
under any Loan Document not specifically referenced in this Article 7.
ARTICLE EIGHT - GENERAL PROVISIONS
8.1 NOTICES. Any notice given by any party under any Loan
Document shall be in writing and personally delivered, sent by United States
mail, postage prepaid, or sent by telex or other authenticated message, charges
prepaid and addressed as follows:
To Borrower: Hambrecht & Quist Group
One Bush Street
San Francisco, California 94104
Attn: Raymond J. Minehan
Chief Financial officer
FAX: (415) 576-3638
To Bank: The Bank of California, N.A.
400 California Street
San Francisco, CA 94104
Attn: Steven M. Crane
Vice President
FAX: (415) 765-2144
Each party may change the address to which notices, requests and other
communications are to be sent by giving written notice of such change to each
other party.
8.2 DISPUTE RESOLUTION.
(a) MANDATORY ARBITRATION. Any controversy or claim
between or among the parties including but not limited to those arising out of
or relating to this Agreement or any related
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agreements or instruments ("Subject Documents"), including any claim based on or
arising from an alleged tort, shall be determined by arbitration in accordance
with Title 9 of the U.S. Code and the Commercial Arbitration Rules of the
American Arbitration Association ("AAA"). All statutes of limitations which
would otherwise be applicable shall apply to any arbitration proceeding under
this subparagraph (a). Judgment upon the award rendered may be entered in any
court having jurisdiction. This subparagraph (a) shall apply only if, at the
time of the proposed submission to AAA, none of the obligations to Bank
described in or covered by any of the Subject Documents are secured by real
property collateral or, if so secured, all parties consent to such submission.
(b) JUDICIAL REFERENCE. If the controversy or claim is
not submitted to arbitration as provided and limited in subparagraph (a), but
becomes the subject of a judicial action, any party may elect to have all
decisions of fact and law determined by a reference in accordance with
applicable state law. If such an election is made, the parties shall designate
to the court a referee or referees selected under the auspices of the AAA in the
same manner as arbitrators are selected in AAA-sponsored proceedings. The
referee, or presiding referee of the panel, shall be an active attorney or
retired judge. Judgment upon the award rendered shall be entered in the court
in which such proceeding was commenced.
(c) PROVISIONAL REMEDIES, SELF HELP, AND FORECLOSURE. No
provision of, or the exercise of any rights under, subparagraph (a), shall limit
the right of any party to exercise self help remedies such as setoff, to
foreclose against any real or personal property collateral, or to obtain
provisional or ancillary remedies such as injunctive relief or the appointment
of a receiver from a court having jurisdiction before, during or after the
pendency of any arbitration. At Bank's option, foreclosure under a deed of trust
or mortgage may be accomplished either by exercise of power of sale under the
deed of trust or mortgage, or by judicial foreclosure. The institution and
maintenance of an action for judicial relief or pursuit of provisional or
ancillary remedies or exercise of self help remedies shall not constitute a
waiver of the right of any party, including the plaintiff, to submit the
controversy or claim to arbitration.
To the extent any provision of this dispute resolution clause is different
than the terms of this Agreement, the terms of this dispute resolution clause
shall prevail.
8.3 BINDING EFFECT. The Loan Documents shall be binding upon and
inure to the benefit of Borrower and Bank and their successors and assigns;
provided, however, that Borrower may not assign or transfer Borrower's rights or
obligations under
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any Loan Document without Bank's prior written consent. Bank reserves the right
to sell, assign, transfer, negotiate or grant participations in all or any part
of, or any interest in, Bank's rights and obligations under the Loan Documents.
In that connection, Bank may disclose all documents and information which Bank
now or hereafter may have relating to the Line of Credit, Borrower, or any
Guarantor or their business.
8.4 NO WAIVER. Any waiver, consent or approval by Bank of any Event of
Default or breach of any provision, condition, or covenant of any Loan
Document must be in writing and shall be effective only to the extent set
forth in writing. No waiver of any breach or default shall be deemed a
waiver of any later breach or default of the same or any other provision of
any Loan Document. No failure or delay on the part of Bank in exercising any
power, right, or privilege under any Loan Document shall operate as a waiver
thereof, and no single or partial exercise of any such power, right, or
privilege shall preclude any further exercise thereof or the exercise of any
other power, right or privilege.
8.5 RIGHTS CUMULATIVE. All rights and remedies existing under
the Loan Documents are cumulative to, and not exclusive of, any other rights or
remedies available under contract or applicable law.
8.6 UNENFORCEABLE PROVISIONS. Any provision of any Loan
Document executed by Borrower which is prohibited or unenforceable in any
jurisdiction, shall be so only as to such jurisdiction and only to the extent of
such prohibition or unenforceability, but all the remaining provisions of any
such Loan Document shall remain valid and enforceable.
8.7 GOVERNING LAW. Except as may be otherwise expressly stated
therein, the Loan Documents shall be governed by and construed in accordance
with, the laws of the State of California.
8.8 ACCOUNTING TERMS. Except as otherwise provided in this
Agreement, accounting terms and financial covenants and information shall be
determined and prepared in accordance with GAAP as in effect on the date of this
Agreement.
8.9 INDEMNIFICATION. Borrower shall indemnify Bank against, and
hold Bank harmless from, all claims, actions, losses, and expenses, including
attorneys' fees and costs incurred by Bank, arising from any contention that
Borrower has failed to comply with any law, rule, regulation, order or directive
applicable to Borrower's sales or leases to or performance of services for
Borrower's customers, including without limitation those sales, leases, and
services requiring consumer or other disclosures. This indemnification shall
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survive the repayment of all principal, interest and fees payable in connection
with the Line of Credit.
8.10 REIMBURSEMENT. Borrower shall reimburse Bank for all costs
and expenses, including without limitation reasonable attorneys' fees expended
or incurred by Bank in any arbitration judicial reference, legal action or
otherwise in connection with (a) the negotiation, preparation, amendment and
enforcement of the Loan Documents, including without limitation during any
workout, attempted workout, and/or in connection with the rendering of legal
advice as to Bank's rights, remedies and obligations under the Loan Documents,
(b) collecting any sum which becomes due Bank under any Loan Document, (c) any
proceeding for declaratory relief, any counterclaim to any proceeding, or any
appeal, or (d) the protection, preservation or enforcement of any rights of
bank.
8.11 EXECUTION IN COUNTERPARTS. This Agreement may be executed
in any number of counterparts which, when taken together, shall constitute but
one agreement.
8.12 ENTIRE AGREEMENT. The Loan Documents are intended by the
parties as the final expression of their agreement and therefore contain the
entire agreement between the parties and supersede all prior understandings or
agreements concerning the subject matter hereof. This Agreement may be amended
only in a writing signed by Borrower and Bank.
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8.13 JOINT AND SEVERAL. Should more than one Person sign this
Agreement as Borrower, the obligations of each signer shall be joint and
several.
IN WITNESS WHEREOF, Borrower and Bank have executed this Agreement as of
the date set forth in the preamble.
BORROWER: HAMBRECHT & QUIST GROUP,
a California corporation
By: /s/ Raymond J. Minehan
------------------------
Its: CFO
BANK: THE BANK OF CALIFORNIA, N.A.
By: /s/ Steven M. Crane
-------------------------
Its: Vice President
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FIRST AMENDED AND RESTATED LINE OF CREDIT AGREEMENT
---------------------------------------------------
This Agreement is made as of March 21, 1996, between HAMBRECHT & QUIST
GROUP, a California corporation ("Borrower"), and THE BANK OF CALIFORNIA, N. A.
("Bank").
RECITALS
--------
A. Borrower currently is indebted to Bank pursuant to that certain
Line of Credit Agreement dated October 29, 1993, as amended August 8, 1994,
September 8, 1994, October 31, 1994, November 14, 1994, May 3, 1995, July 21,
1995, December 8, 1995, January 26, 1996, February 8, 1996, and February 28,
1996 (the "Prior Credit Agreement").
B. The purpose of this Agreement is to amend and restate the Prior
Credit Agreement in its entirety.
AGREEMENT
---------
NOW, THEREFORE, Borrower and Bank agree as follows:
ARTICLE ONE - DEFINITIONS
-------------------------
The following definitions shall be applicable to both the singular and
plural forms of the defined terms:
1.1 "ADVANCE" means an extension of credit under this Agreement.
1.2 "ADVANCE REQUEST" means the form of Advance request attached
hereto as EXHIBIT A, to be completed, executed and delivered by Borrower to Bank
each time Borrower requests an Advance under the Line of Credit.
1.3 "AFFILIATE" means any Person which directly or indirectly
controls, is controlled by, or is under common control with, Borrower.
"Control," "controlled by" and "under common control with" means direct or
indirect possession of the power to direct or cause the direction of management
or policies (whether through ownership of voting securities, by contract or
otherwise); provided that control shall be conclusively presumed when any Person
or affiliated group directly or indirectly owns five percent or more of the
securities having ordinary voting power for the election of directors of a
corporation.
1.4 "AGREEMENT" means this First Amended and Restated Line of Credit
Agreement as it may be amended from time to time.
1.5 "BISYS SHARES" means the 293,508 shares of common stock of The
Bisys Group, Inc. owned by Borrower, which shares
1.
<PAGE>
have been pledged to Bank to support Advance(s) under the Prior Credit
Agreement.
1.6 "CLOSING DATE" means the date of this Agreement.
1.7 "CUSTOMER" means a client of Borrower to whom Borrower makes an
advance under Borrowers "Restricted Stock Loan Program", which advance Borrower
requests Bank to finance under the Line of Credit.
1.8 "CUSTOMER ADVANCE" means an advance by Borrower to a Customer under
Borrowers "Restricted Stock Loan Program" secured by the Customer's pledge of
various marketable certificated securities owned by the Customer. Each Customer
Advance shall be on a full recourse basis, without restriction on Borrower's
right or ability to seek recourse against all of the assets or properties of the
Customer in the event of a default under the applicable Customer Note.
1.9 "CUSTOMER NOTE" means the promissory note executed by a Customer in
favor of Borrower to evidence a Customer Advance, in form and substance
satisfactory to Bank.
1.10 "CUSTOMER PLEDGE AGREEMENT" means the pledge agreement or related
security document executed by Customer in favor of Borrower, pursuant to which
the Customer pledges the Pledged Securities as security for the applicable
Customer Note, in form and substance satisfactory to Bank.
1.11 "EVENT OF DEFAULT" means any event described in Article 7.
1.12 "GAAP" means generally accepted accounting principles and practices
consistently applied.
1.13 "LIEN" means any voluntary or involuntary security interest, mortgage,
pledge, claim, charge, encumbrance, title retention agreement, or third party
interest, covering all or any part of the property of Borrower or any other
Person.
1.14 "LINE OF CREDIT" means the credit accommodation being provided
Borrower as more fully described in Article 2.
1.15 "LINE OF CREDIT NOTE" means the promissory note in form and substance
satisfactory to Bank executed by Borrower to evidence the Line of Credit.
1.16 "LOAN DOCUMENTS" means, individually and collectively, this Agreement,
the Line of Credit Note, each Advance Request, any rate option agreement,
guaranty, security or pledge agreement, deed of trust, and all other contracts,
instruments, addenda and documents executed in connection with the extension of
credit which is the subject of this Agreement.
2.
<PAGE>
1.17 "MAXIMUM ADVANCE RATE" means with respect to each Advance an amount
equal to the lesser of: (a) TWO MILLION FIVE HUNDRED THOUSAND AND N0/100 DOLLARS
($2,500,000.00), (b) with respect to any Advance not used to finance Stock
Option Advances by Borrower, fifty percent (50%) of the fair market value of the
Pledged Securities securing the Customer Note pledged to Bank in connection with
the Advance, as determined by Bank referenced to outside sources, or (c) with
respect to an Advance used to finance Stock Option Advances by Borrower, forty
percent (40%) of the fair market value of the Pledged Stock Options securing the
Customer Note pledged to Bank in connection with the Advance, as determined by
Bank reference to outside sources; provided, however, that the "Maximum Advance
Rate" with respect to Advances supported by a pledge of the Bisys Shares means,
in the aggregate, an amount equal to the lesser of: (a) THREE MILLION AND N0/100
DOLLARS ($3,000,000.00), or (b) fifty percent (50%) of the fair market value of
the Bisys Shares, as determined by Bank referenced to outside sources.
1.18 "PERSON" means any individual or entity.
1.19 "PLEDGED SECURITIES" means the certificated securities pledged by a
Customer to Borrower to secure the Customer's obligations to Borrower in
connection with a Customer Advance.
1.20 "PLEDGED STOCK OPTIONS" means the stock options pledged by a Customer
to Borrower to secure the Customer's obligations to Borrower in connection with
a Stock Option Advance. Where appropriate, the term "Pledged Securities" shall
be deemed to include "Pledged Stock Options."
1.21 "RELATED PERSON" means any Affiliate of Borrower, or any officer,
employee, director or shareholder of Borrower or any Affiliate, or a relative of
any of them.
1.22 "STOCK OPTION ADVANCE" means a Customer Advance that is secured by
vested stock options (as opposed to marketable certificated securities) owned by
the Customer, which options are convertible into marketable certificated
securities.
1.23 "TANGIBLE NET WORTH", unless otherwise defined in an addendum to this
Agreement, means the net book value of (a) all Borrower's assets, exclusive of
intangibles, and loans to and notes and receivables from Related Persons, minus
(b) all Borrower's liabilities determined in accordance with GAAP.
1.24 "TERMINATION DATE" means the earlier of (a) January 31, 1997; or (b)
the date Bank may terminate making advances pursuant to the rights of Bank under
Article 7.
3.
<PAGE>
ARTICLE TWO - LINE OF CREDIT
-----------------------------
2.1 LINE OF CREDIT: RESTRICTIONS ON AMOUNTS OF ADVANCES. Subject to the
terms and conditions of this Agreement, from time to time prior to the
Termination Date, upon request by Borrower, Bank will make Advances to Borrower
which, in the aggregate, shall not exceed at any time the principal amount of
TWELVE MILLION AND NO/100 DOLLARS ($12,000,000.00); provided, however, that: (a)
no single Advance (or aggregate Advances supported by a pledge of the Bisys
Shares) shall exceed the Maximum Advance Rate applicable thereto; (b) the
aggregate principal amount of Advances used to finance Stock Option Advances
shall at no time exceed TWO MILLION AND NO/100 DOLLARS ($2,000,000,00); and (c)
the aggregate principal amount of Advances supported by Pledged Securities or
Pledged Stock Options of a single issuer shall at no time exceed THREE MILLION
AND N0/100 DOLLARS ($3,000,000.00).
2.2 LINE OF CREDIT NOTE; PRIOR FACILITY. The Line of Credit shall be
evidenced by the Line of Credit Note. Borrower may borrow, repay and reborrow
under the Line of Credit, as Borrower may elect, subject to all limitations,
terms and conditions of this Agreement and the Loan Documents. Borrower shall
pay to Bank all sums outstanding under the Line of Credit and due under this
Agreement no later than the Termination Date. The Line of Credit replaces the
line of credit extended to Borrower pursuant to the Prior Credit Agreement and
all indebtedness of Borrower thereunder shall constitute indebtedness of
Borrower to Bank under the Line of Credit.
2.3 REQUESTS FOR ADVANCES. Advances shall he used solely to finance
Customer Advances by Borrower. Each Advance shall be requested in writing in
the form of an Advance Request, accompanied by a statement of purpose under
Regulation U (as defined in Section 5.1 below) executed by the applicable
customer, in form and substance satisfactory to Bank, and such other documents
or information as Bank may reasonably require. Borrower assumes all risks
regarding the validity, authenticity and due authorization of any request
purporting to be made by or on behalf of Borrower. Borrower promises to repay
any sums, with interest, that are advanced by Bank pursuant to any request which
Bank in good faith believes to be authorized, or when the proceeds of any
Advance are deposited to the account of Borrower with Bank, regardless of
whether any Person other than Borrower may have authority to draw against such
account.
2.4 ADVANCES AND PAYMENTS.
(a) Each Advance shall be made by a deposit to Borrower's account no.
001-032562 at Bank's San Francisco Main office, unless Borrower shall otherwise
direct Bank in writing.
(b) The obligation of Bank to make any Advance to Borrower, the
proceeds of which are, at Borrower's request, to be
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wire transferred to Borrower or any other Person, shall be subject to all
applicable laws and regulations, and the policy of the Board of Governors of the
Federal Reserve System on Reduction of Payments System Risk in effect from time
to time ("Applicable Law and Policy"). Borrower acknowledges that, as a result
of Applicable Law and Policy, the transmission of the proceeds of any Advance
which Borrower has requested to be wire-transferred may be significantly
delayed.
(c) Principal, interest, and all other sums owed Bank under any Loan
Document shall be evidenced by entries in records maintained by Bank for such
purpose, Each payment on and any other credits with respect to principal,
interest and all other sums outstanding under any Loan Document shall be
evidenced by entries in such records. Bank's records shall be conclusive
evidence thereof.
(d) Borrower hereby expressly authorizes Bank to debit Borrower's
account no. 001-032562 for the amount of each payment of principal and, at
Borrower's election, interest and all other sums owed Bank under any Loan
Document. Borrower shall have sufficient collected balances in said account in
order that each such payment shall be available when due.
(e) Without limiting any other rights or remedies that may be
available to Bank hereunder or under any other Loan Documents or applicable law,
Bank hereby reserves the right to decline making any Advance to Borrower if any
litigation or administrative or regulatory proceeding affecting Borrower or
Hambrecht & Quist LLC, a California limited liability company ("H & Q LLC") has
been initiated where the granting of the relief requested would have a material
adverse effect on the financial condition or business of Borrower or H & Q LLC.
2.5 INTEREST.
(a) Interest on the outstanding principal balance of the Line of
Credit shall accrue daily from the date of the first Advance until the
Termination Date at a fluctuating rate per annum at all times equal to the rate
Bank announces to be in effect from time to time as its prime rate (the "Prime
Rate") plus three quarters of one percent (0.75%), unless Borrower elects to
have all or a portion of principal accrue at a fixed rate of interest based on
the Eurodollar Rate, as defined in and pursuant to the terms and conditions of
the Eurodollar Rate Option Agreement between Bank and Borrower of even date
herewith, as may be amended, supplemented or replaced from time to time
("Eurodollar Rate Option Agreement"). The Prime Rate is a rate set by Bank
based upon various factors including general economic and market conditions, and
is used as a reference point for pricing certain loans. Bank may price its
loans at, above or below the Prime Rate. Interest shall be payable on the first
day of each consecutive month, beginning on the first such date after the first
Advance and continuing through the Termination Date, on
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which date all accrued interest and principal remaining unpaid shall be due and
payable in full.
(b) The unpaid principal balance and all payments of interest on the
Line of Credit shall bear interest from their respective maturities, whether
scheduled or accelerated, at a fluctuating rate per annum at all times equal to
the Prime Rate plus five percent (5%), until paid in full, whether before or
after judgment.
(c) Interest and fees shall be calculated for actual days elapsed on
the basis of a 360-day year, which results in higher interest payments than if a
365-day year were used. Each change in the rate of interest shall become
effective on the date each Prime Rate change is announced within the Bank. In
no event shall Borrower be obligated to pay interest at a rate in excess of the
highest rate permitted by applicable law from time to time in effect.
2.6 PREPAYMENT. If any portion of the principal balance of the Line of
Credit bears interest at a fixed rate and Bank, for any reason, including
acceleration or foreclosure, receives all or any portion of such principal prior
to its scheduled payment date, then, in consideration thereof, Borrower shall
pay to Bank on demand a prepayment fee as liquidated damages as described in the
Eurodollar Rate Option Agreement, since such prepayment may result in Bank
incurring additional costs, expenses or liabilities.
2.7 PRINCIPAL PAYMENTS. All unpaid principal shall be due and payable on
the Termination Date, except as provided below:
(a) With regard to any Advance neither secured by a pledge of the
Bisys Shares nor used to finance Stock Option Advances, if at any time Bank
determines that the outstanding principal balance of such Advance exceeds fifty
percent (50%) of the fair market value of the Pledged Securities securing the
Customer Note pledged by Borrower to Bank in connection with such Advance, as
determined by Bank reference to outside sources, then Borrower shall immediately
upon Bank's demand make principal repayments of the Advance, together with all
accrued interest thereon, in an amount sufficient to establish a fifty percent
(50%) or lower Advance-to-value ratio;
(b) With regard to Advances secured by a pledge of the Bisys Shares,
to the extent that the Bank determines that the outstanding aggregate principal
balance of such Advances exceeds fifty percent (50%) of the fair market value of
the Bisys Shares, as determined by Bank reference to outside sources, then
Borrower shall immediately upon Bank's demand make principal repayments of such
Advances, together with all accrued interest thereon, in an amount sufficient to
establish a fifty percent (50%) or lower Advance-to-value ratio;
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(c) With regard to any Advance used to finance Stock Option Advances
by Borrower, to the extent that Bank determines that the outstanding principal
balance of any such Advance exceeds fifty percent (50%) of the fair market value
of the applicable Pledged Stock Options, Borrower shall immediately upon Bank's
demand make principal payments of the applicable Advance in an amount sufficient
to establish a forty percent (40%) or lower Advance-to-value ratio.
2.8 FEES. Borrower has paid or shall pay to Bank no later than the Closing
Date a non-refundable fee of $30,000.00 for this Line of Credit.
2.9 COLLATERAL. Borrower shall ensure Bank is granted concurrently with,
and as a condition to, making any Advance, a security interest of first priority
in the Customer Note, which shall be freely negotiable by Borrower, Borrower's
right, title and interest in the Customer Pledge Agreement, which shall be
freely assignable by Borrower and in such other collateral as might be required
by Bank under a pledge agreement, deed of trust, or other security agreement, as
appropriate, in form and substance satisfactory to Bank; provided, however, that
Bank and Borrower acknowledge that the Bisys Shares are owned directly by
Borrower and any Advance supported thereby shall be secured by a first priority
security interest in the Bisys Shares rather than by a pledge of a Customer Note
or Customer Pledge Agreement since such documents are not applicable to the
Advance. Prior to or concurrently with Bank making an Advance, Bank shall take
possession of the applicable Customer Note pledged to it as security for
Borrower's obligations and any Pledged Securities that are covered by the
applicable Customer Pledge Agreement assigned to Bank. Each such Customer Note
shall be endorsed in blank and each such Pledged Security shall be endorsed in
blank or have stock powers attached, accompanied by a fully executed copy of the
applicable Customer Pledge Agreement. Prior to, and as a condition to, making
any Advance that is used to finance a Stock Option Advance, Bank may require, in
addition to the documentation described above, such financing statements and
such acknowledgements of Bank's security interest (including confirmation that
Borrower and/or Bank are registered as pledgee or owner with respect to the
Pledged Stock Options) as Bank may require to perfect the security interests in
the Pledged Stock Options.
ARTICLE THREE - REPRESENTATIONS AND WARRANTIES
-----------------------------------------------
Borrower represents and warrants that as of the Closing Date and the date of
each Advance under-the Line of Credit:
3.1 DUE ORGANIZATION. Borrower is duly organized and validly existing in
good standing under the laws of the Jurisdiction of its organization, and is
duly qualified to conduct business in each jurisdiction in which its business is
conducted.
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3.2 AUTHORIZATION, VALIDITY AND ENFORCEABILITY. The execution, delivery
and performance of all Loan Documents executed by Borrower are within Borrower's
powers, have been duly authorized, and are not in conflict with Borrower's
articles of incorporation or by-laws, or the terms of any charter or other
organizational document of Borrower; and all such Loan Documents constitute
valid and binding obligations of Borrower, enforceable in accordance with their
terms.
3.3 COMPLIANCE WITH APPLICABLE LAWS. Borrower has complied with
licensing, permit and fictitious name requirements necessary to lawfully conduct
the business in which it is engaged and with all laws and regulations applicable
to any sales, leases or the furnishing of services by Borrower, including
without limitation those requiring consumer or other disclosures.
3.4 LICENSES, TRADEMARKS. Borrower has all patents, licenses, trademarks,
trademark rights, trade names, trade name rights, copyrights, permits and
franchises required in order for Borrower to conduct its business and operate
its properties as now or proposed to be conducted without conflict with the
rights of others.
3.5 NO CONFLICT. The execution, delivery, and performance by Borrower of
all Loan Documents are not in conflict with any law, rule, regulation, order or
directive, or any indenture, agreement, or undertaking to which Borrower is a
party or by which Borrower may be bound or affected.
3.6 NO LITIGATION, CLAIMS OR PROCEEDINGS. There is no litigation, tax
claim, proceeding or dispute pending, or, to the knowledge of Borrower,
threatened against or affecting Borrower or its property, except as disclosed in
writing to Bank prior to the Closing Date.
3.7 CORRECTNESS OF FINANCIAL STATEMENTS. Borrower's financial statements
which have been delivered to Bank fairly and accurately reflect Borrower's
financial condition as of July 31, 1993; and, since that date, there has been no
material adverse change in Borrower's financial condition or business.
3.8 NO SUBSIDIARIES. Borrower is not a majority owner of or in a control
relationship with any other business entity except for H & Q LLC, Hambrecht &
Quist Capital Management, a California corporation, Hambrecht & Quist Guaranty
Finance, a California general partnership, and such other business entities
disclosed in writing to Bank prior to the Closing Date.
3.9 NO EVENT OF DEFAULT. No Event of Default has occurred and is continuing.
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ARTICLE FOUR - CONDITIONS PRECEDENT
-----------------------------------
4.1 REQUIRED DELIVERY. The obligation of Bank to make the first Advance
under the Line of Credit is subject to the condition that, on or before the date
of such Advance, there shall have been delivered to Bank, in form and substance
satisfactory to Bank, and duly executed as required by Bank:
(a) This Agreement and the Line of Credit Note;
(b) Any and all Loan Documents Bank may require to evidence any
security interest or Lien granted to Bank in connection with the Line of Credit;
(c) Financing statements and other security interest perfection
documentation in form and substance satisfactory to Bank, duly filed under the
Uniform Commercial Code in all jurisdictions as may be necessary, or in Bank's
opinion, desirable to perfect Bank's security interests created under any
security or pledge agreement; and all filings, recordings, and other actions
that are necessary or advisable, in the opinion of Bank, in order to establish,
perfect, preserve and protect Bank's security interests and Liens as legal,
valid and enforceable security interests and Liens in such collateral shall have
been effected; and all property or documents of title, in cases in which
possession is required for the perfection of Bank's security interest, including
without limitation any applicable Customer Note(s), endorsed in blank, and any
applicable Pledged Securities, endorsed in blank or with stock powers attached.
(d) Evidence that the security interest and Liens in favor of Bank
are perfected, valid, enforceable, and prior to the rights and interests of
others as required by Bank;
(e) Certified copies of Requests for Information from the appropriate
governmental or regulatory authorities listing the financing statements referred
to in paragraph (c) above and all other effective financing statements which
name Borrower as debtor, together with copies of all such other financing
statements, none of which shall cover the collateral purported to be covered by
the security or pledge agreements referred to in paragraph (b) above except as
Bank may expressly allow;
(f) Such authorization documents as Bank may require;
(g) Evidence that any insurance required by this Agreement is in
effect;
(h) Payment in full of any fees or other charges due by the Closing
Date under the terms of any Loan Documents; and
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(i) Such other documents, instruments or agreements as Bank may
require to evidence the Line of Credit.
ARTICLE FIVE - AFFIRMATIVE COVENANTS
------------------------------------
During the term of this Agreement and until its performance of all
obligations to Bank, Borrower will, unless Bank otherwise consents in writing:
5.1 USE OF PROCEEDS. Use the proceeds of the Line of Credit only to
finance a Customer Advance specified in an Advance Request; and not directly or
indirectly to purchase or carry any margin stock, as defined from time to time
by the Board of Governors of the Federal Reserve System in Federal Regulation U
("Regulation U").
5.2 FINANCIAL COVENANTS.
(a) TANGIBLE NET WORTH. Maintain a Tangible Net Worth of not less
than $75,000,000.00;
(b) MINIMUM NET CAPITAL. Cause H & Q LLC to maintain a minimum net
capital position, as measured under SEC Uniform Net Capital Rule 15c3-1 and
under the capital maintenance rules of the New York Stock Exchange, of at least
$25,000,000,00 at all times.
(c) PROFITABILITY. Maintain profitable operations on an annual
fiscal year basis.
5.3 ADDITIONAL FINANCIAL COVENANTS. Comply with the terms of all
financial covenants contained in any addendum to this Agreement.
5.4 NOTICE TO BANK. Promptly give written notice to Bank of:
(a) Any litigation or administrative or regulatory proceeding
affecting Borrower or H & Q LLC where the granting of the relief requested would
have a material adverse effect on Borrower's or H Q LLC's financial condition or
business;
(b) Any substantial dispute which may exist between Borrower and any
governmental or regulatory authority;
(c) Any discovery or determination by Borrower, based on its daily
tracking of the value of Pledged Securities, that the fair market value of
Pledged Securities securing a Customer Note at any time is less than two and
one-half times the outstanding principal balance of the Advance in connection
with which such Customer Note was pledged to Bank;
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(d) Any Event of Default;
(e) Any change in the location of any of Borrower's places of
business or of the establishment of any new, or the discontinuance of any
existing, place of business;
(f) Any other matter which has resulted or might result in a material
adverse change in Borrower's financial condition or business.
5.5 FINANCIAL STATEMENTS. Deliver to Bank in form and detail satisfactory
to Bank the following financial information, which Borrower warrants shall be
accurate and complete in all material respects:
(a) INTERIM FINANCIAL STATEMENTS. As soon as available but no later
than thirty (30) days after the end of each month, Borrower's balance sheet as
of the end of such period, and Borrower's income statement for such period and
for that portion of Borrower's financial reporting year ending with such period,
prepared and attested by a responsible financial officer of Borrower as being
complete and correct and fairly presenting Borrower's financial condition and
the results of Borrower's operations;
(b) YEAR-END FINANCIAL-STATEMENTS. As soon as available but no later
than ninety (90) days after the end of each financial reporting year, a complete
copy of Borrower's audit report, which shall include balance sheet, income
statement, statement of changes in equity and statement of cash flows for such
year, prepared and certified by an independent certified public accountant
selected by Borrower and satisfactory to Bank (the "Accountant"). The
Accountant's certification shall not be qualified or limited due to a restricted
or limited examination by the Accountant of any material portion of Borrower's
records or otherwise. The certification shall include, or be accompanied by, a
statement from the Accountant that during the examination there was observed no
Event of Default, or a statement of the Event of Default, if any is found.
Borrower shall not change its financial reporting year end from the current
September 30 without Bank's prior written consent;
(c) PLEDGED SHARE REPORT. Not later than ten (10) days after the end
of each month, a written report listing all Pledged Securities and Bisys Shares
and their value as of the end of such month, prepared and attested by a
responsible financial officer of Borrower;
(d) GOVERNMENT REQUIRED REPORTS. Promptly after sending, making
available, or filing, copies of all reports, proxy statements, and financial
statements that Borrower sends or makes available to its stockholders and all
registration statements and reports that Borrower files with the Securities
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and Exchange Commission, or any other governmental or regulatory authority;
(e) OTHER FINANCIAL INFORMATION. Such other statements, lists of
property and accounts, budgets, forecasts, reports, or other financial
information as Bank may from time to time request.
5.6 LITIGATION REPORTS. Not later than thirty (30) days after the end of
each quarter, Borrower shall deliver to Bank in form and detail satisfactory to
Bank a report describing all litigation to which Borrower or any of its
Affiliates is a party, which Borrower warrants shall be accurate and complete in
all material respects.
5.7 EXISTENCE. Maintain and preserve Borrower's existence, present form
of business, and all rights, privileges and franchises necessary or desirable in
the normal course of its business; and keep all Borrower's property in good
working order and condition, ordinary wear and tear excepted.
5.8 INSURANCE. Maintain and keep in force insurance with companies
acceptable to Bank and in such amounts and types as is usual in the business
carried on by Borrower, or as Bank may reasonably request. Such insurance
policies must be in form and substance satisfactory to Bank.
5.9 ACCOUNTING RECORDS. Maintain adequate books, accounts and records,
and prepare all financial statements in accordance with GAAP, and in compliance
with the regulations of any governmental or regulatory authority having
jurisdiction over Borrower or Borrower's business; and permit employees or
agents of Bank at such reasonable times as Bank may request to inspect
Borrower's properties, and to examine, audit, and make copies and memoranda of
Borrower's books, accounts and records.
5.10 COMPLIANCE WITH LAWS. Comply with all laws, rules, regulations,
orders and directives of any governmental or regulatory authority having
jurisdiction over Borrower or Borrower's business, and with all material
agreements to which Borrower is a party.
5.11 TAXES AND OTHER LIABILITIES. Pay all Borrower's obligations when due;
pay all taxes and other governmental or regulatory assessments before
delinquency or before any penalty attaches thereto, except as may be contested
in good faith by the appropriate procedures and for which Borrower shall
maintain appropriate reserves; and timely file all required tax returns.
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ARTICLE SIX - NEGATIVE COVENANTS
--------------------------------
During the term of this Agreement and until the performance of all
obligations to Bank, Borrower will not, without Bank's prior written consent:
6.1 INDEBTEDNESS. Be indebted for borrowed money, the deferred purchase
price of property, or leases which would be capitalized in accordance with GAAP;
or become liable as a surety, guarantor, accommodation party or otherwise for or
upon the obligation of any other Person, except:
(a) The acquisition of supplies or inventory on normal trade credit;
(b) The endorsement of negotiable instruments for deposit or
collection in the ordinary course of Borrower's business;
(c) The indebtedness of Borrower under the Agreement; and
(d) Any indebtedness approved by Bank prior to the Closing Date.
6.2 LIENS. Create, incur, assume or permit to exist any Lien, or grant
any other Person a negative pledge, on any of Borrower's property, except;
(a) Involuntary Liens which, in the aggregate, would not have a
material adverse effect on Borrower's financial condition or business;
(b) Liens for current taxes or other governmental or regulatory
assessments which are not delinquent, or which are contested in good faith by
the appropriate procedures and for which appropriate reserves are maintained;
(c) Liens in favor of Bank; and
(d) Liens which have been approved by Bank prior to the Closing Date.
6.3 DIVIDENDS. If Borrower is a corporation, pay any dividends except
those payable solely in Borrower's capital stock; or purchase, redeem or
otherwise acquire for value or make any other distribution with respect to any
of Borrower's capital stock.
6.4 CHANGES/MERGERS. Change its name; liquidate or dissolve, or enter
into any consolidation, merger, partnership, joint venture or other combination;
issue, redeem, purchase, retire or otherwise acquire any shares of any class of
capital stock of Borrower, or grant or issue any warrant, right or option
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pertaining thereto or other security convertible into any of the foregoing;
reorganize, reclassify or recapitalize its capital stock; prepay any
subordinated debt, debt for borrowed money, or debt secured by any permitted
Lien, or enter into or modify any agreement as a result of which the terms of
payment of any such debt are waived or modified.
6.5 SALES OF ASSETS. Sell, transfer, lease or otherwise dispose of any of
Borrower's assets except for fair consideration and in the ordinary course of
its business; or enter into any sale or leaseback agreement covering any of
Borrower's fixed or capital assets.
6.6 ACQUISITIONS. Acquire or purchase all or substantially all the assets
or business of any other Person or any controlling interests therein.
6.7 TRANSACTIONS WITH RELATED PERSONS. Directly or indirectly enter into
any transaction with or for the benefit of a Related Person on terms more
favorable to the Related Person than would have been obtainable in an "arms'
length" dealing.
6.8 OTHER BUSINESS. Conduct any business other than the business Borrower
conducts as of the Closing Date.
ARTICLE SEVEN - EVENTS OF DEFAULT
---------------------------------
7.1 EVENTS OF DEFAULT. The occurrence of any of the following shall (1)
terminate any obligation of Bank to make or continue the Line of Credit; and
shall, at Bank's option, (2) make all sums of interest, principal and any other
amounts owing under any Loan Documents immediately due and payable without
notice of default, presentment or demand for payment, protest or notice of
nonpayment or dishonor or any other notices or demands; and (3) give Bank the
right to exercise any other right or remedy provided by contract or applicable
law:
(a) Borrower shall fail to make any payment of principal or interest
when due under this Agreement or to pay any fees or other charges when due, or
Borrower or any other Person shall fail to provide Bank with, or to perform any
obligation under, any Loan Document;
(b) Any representation or warranty made, or financial statement
certificate or other document provided, by Borrower or any Person who guaranties
all or any portion of Borrower's obligations to Bank (each a "Guarantor") shall
prove to have been false or misleading;
(c) Borrower, any of its Affiliates or any Guarantor shall fail to
pay its debts generally as they become due or shall file any petition or action
for relief under any bankruptcy, insolvency, reorganization, moratorium,
creditor
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composition law, or any other law for the relief of or relating to debtors; an
involuntary petition shall be filed under any bankruptcy law against Borrower,
any of its Affiliates or any Guarantor, or a custodian, receiver, trustee,
assignee for the benefit of creditors, or other similar official, shall be
appointed to take possession, custody or control of the properties of Borrower,
any of its Affiliates or any Guarantor; or the death, incapacity, dissolution or
termination of the business of Borrower, any of its Affiliates or any Guarantor;
(d) Borrower, any of its Affiliates or any Guarantor shall fail to
perform under any other agreement involving the borrowing of money, the purchase
of property, the advance of credit or any other monetary liability of any kind
to any Person; or any guaranty of Borrower's obligations to Bank shall be
revoked or terminated;
(e) Any governmental or regulatory authority shall take any action,
any defined benefit pension plan maintained by Borrower, any of its Affiliates
or any Guarantor shall have any unfunded liabilities, or any other event shall
occur, any of which, in the judgment of Bank, might have a material adverse
effect on the financial condition or business of Borrower, any of its Affiliates
or any Guarantor;
(f) Any sale, transfer or other disposition of all or a substantial
or material part of the assets of Borrower any of its Affiliates or any
Guarantor, including without limitation to any trust or similar entity, shall
occur;
(g) Any Person shall fail to perform its obligations under the terms
of any promissory note, contract or other obligation that is held by Bank as
collateral for the obligations evidenced by the Loan Documents; or Bank shall
not have a perfected security interest in, or shall deem itself insecure with
respect to the value of, any collateral being held for the obligations evidenced
by the Loan Documents;
(h) Any judgments shall be entered against Borrower, any of its
Affiliates or any Guarantor, or any involuntary lien(s) of any kind or character
shall attach to any assets or property of Borrower, any of its Affiliates or any
Guarantor, any of which, in the judgment of Bank, might have a material adverse
effect on the financial condition or business of Borrower, any of its Affiliates
or any Guarantor;
(i) Without Bank's prior written consent: if Borrower is a
corporation, Borrower's shareholders of record as of the Closing Date shall
cease to own a majority of the voting interest in Borrower; or any change shall
occur in the executive management or managing partner(s) of Borrower; or any
change shall occur in the corporate or legal structure of Borrower or any of its
Affiliates.
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(j) Borrower shall fail to perform any of its duties or obligations
under any Loan Document not specifically referenced in this Article 7.
ARTICLE EIGHT - GENERAL PROVISIONS
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8.1 NOTICES. Any notice given by any party under any Loan Document shall
be in writing and personally delivered, sent by United States mail, postage
prepaid, or sent by telex or other authenticated message, charges prepaid and
addressed as follows:
TO BORROWER: Hambrecht & Quist Group
One Bush Street
San Francisco, California 94104
Attn: Raymond J. Minehan
Chief Financial Officer
FAX: (415) 576-3638
TO BANK: The Bank of California, N.A.
400 California Street
San Francisco, CA 94104
Attn: William E. Hinch
Vice President
FAX: (415) 765-2801
Each party may change the address to which notices, requests and other
communications are to be sent by giving written notice of such change to each
other party.
8.2 DISPUTE RESOLUTION.
(a) MANDATORY MEDIATION/ARBITRATION. Any controversy or claim
between or among the parties, their agents, employees and affiliates, including
but not limited to those arising out of or relating to this Agreement or any
related agreements or instruments ("Subject Documents"), including without
limitation any claim based on or arising from an alleged tort, shall, at the
option of any party, and at that party's expense, be submitted to mediation,
using either the American Arbitration Association ("AAA") or Judicial
Arbitration and Mediation Services, Inc. ("JAMS"). If mediation is not used, or
if it is used and it fails to resolve the dispute within 30 days from the date
AAA or JAMS is engaged, then the dispute shall be determined by arbitration in
accordance with the rules of either JAMS or AAA (at the option of the party
initiating the arbitration) and Title 9 of the U. S. Code, notwithstanding any
other choice of law provision in the Subject Documents. All statutes of
limitations or any waivers contained herein which would otherwise be applicable
shall apply to any arbitration proceeding under this subparagraph (a). The
parties agree that related arbitration proceedings may be consolidated. The
arbitrator shall prepare written reasons for the award, Judgment
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upon the award rendered may be entered in any court having jurisdiction. This
subparagraph (a) shall apply only if, at the time of the proposed submission to
AAA or JAMS, none of the obligations to Bank described in or covered by any of
the Subject Documents are secured by real property collateral or, if so secured,
all parties consent to such submission.
(b) JURY WAIVER/JUDICIAL REFERENCE. If the controversy or claim is
not submitted to arbitration as provided and limited in subparagraph (a), but
becomes the subject of a judicial action, each party hereby waives its
respective right to trial by jury of the controversy or claim. In addition, any
party may elect to have all decisions of fact and law determined by a referee
appointed by the court in accordance with applicable state reference procedures.
The party requesting the reference procedure shall ask AAA or JAMS to provide a
panel of retired judges and the court shall select the referee from the
designated panel. The referee shall prepare written findings of fact and
conclusions of law. Judgment upon the award rendered shall be entered in the
court in which such proceeding was commenced.
(c) PROVISIONAL REMEDIES, SELF HELP, AND FORECLOSURE. No provision
of, or the exercise of any rights under, subparagraph (a) shall limit the right
of any party to exercise self help remedies such as setoff, to foreclose against
any real or personal property collateral, or to obtain provisional or ancillary
remedies such as injunctive relief or the appointment of a receiver from a court
having jurisdiction before, during or after the pendency of any mediation or
arbitration. At Bank's option, foreclosure under a deed of trust or mortgage
may be accomplished either by exercise of power of sale under the deed of trust
or mortgage, or by judicial foreclosure. The institution and maintenance of an
action for judicial relief or pursuit of provisional or ancillary remedies or
exercise of self help remedies shall not constitute a waiver of the right of any
party, including the plaintiff, to submit the controversy or claim to mediation
or arbitration.
To the extent any provision of the dispute resolution clause is different
than the terms of this Agreement, the terms of this dispute resolution clause
shall prevail.
8.3 BINDING EFFECT. The Loan Documents shall be binding upon and inure to
the benefit of Borrower and Bank and their successors and assigns; provided,
however, that Borrower may not assign or transfer Borrower's rights or
obligations under any Loan Document without Bank's prior written consent. Bank
reserves the right to sell, assign, transfer, negotiate or grant participations
in all or any part of, or any interest in, Bank's rights and obligations under
the Loan Documents. In that connection, Bank may disclose all documents and
information which Bank now or hereafter may have relating to the Line of Credit,
Borrower, or any Guarantor or their business.
17.
<PAGE>
8.4 NO WAIVER. Any waiver, consent or approval by Bank of any Event of
Default or breach of any provision, condition, or covenant of any Loan Document
must be in writing and shall be effective only to the extent set forth in
writing. No waiver of any breach or default shall be deemed a waiver of any
later breach or default of the same or any other provision of any Loan Document.
No failure or delay on the part of Bank in exercising any power, right, or
privilege under any Loan Document shall operate as a waiver thereof, and no
single or partial exercise of any such power, right, or privilege shall preclude
any further exercise thereof or the exercise of any other power, right or
privilege.
8.5 RIGHTS CUMULATIVE. All rights and remedies existing under the Loan
Documents are cumulative to, and not exclusive of, any other rights or remedies
available under contract or applicable law.
8.6 UNENFORCEABLE PROVISIONS. Any provision of any Loan Document executed
by Borrower which is prohibited or unenforceable in any jurisdiction, shall be
so only as to such jurisdiction and only to the extent of such prohibition or
unenforceability, but all the remaining provisions of any such Loan Document
shall remain valid and enforceable.
8.7 GOVERNING LAW. Except as may be otherwise expressly stated therein,
the Loan Documents shall be governed by and construed in accordance with, the
laws of the State of California.
8.8 ACCOUNTING TERMS. Except as otherwise provided in this Agreement,
accounting terms and financial covenants and information shall be determined and
prepared in accordance with GAAP as in effect on the date of this Agreement.
8.9 INDEMNIFICATION. Borrower shall pay and protect, defend and indemnify
Bank and Bank's employees, officers, directors, shareholders, affiliates,
correspondents, agents and representatives (other than Bank, collectively
"Agents") against, and hold Bank and each such Agent harmless from, all claims,
actions, proceedings, liabilities, damages, losses, expenses (including, without
limitation, attorneys' fees and costs) and other amounts incurred by Bank and
each such Agent, arising from (i) the matters contemplated by this Agreement or
any Loan Document or (ii) any contention that Borrower has failed to comply with
any law, rule, regulation, order or directive applicable to Borrower's sales,
leases or performance of services to Borrower's customers, including without
limitation those sales, leases and services requiring consumer or other
disclosures; PROVIDED, HOWEVER, that this indemnification shall not apply to any
of the foregoing incurred solely as the result of Bank's or any Agent's gross
negligence or willful misconduct. This indemnification shall survive the
payment and satisfaction of all of Borrower's obligations and liabilities to
Bank.
18.
<PAGE>
8.10 REIMBURSEMENT. Borrower shall reimburse Bank for all costs and
expenses, including without limitation reasonable attorneys' fees and
disbursements (and fees and disbursements of Bank's in-house counsel) expended
or incurred by Bank in any arbitration, mediation, judicial reference, legal
action or otherwise in connection with (a) the negotiation, preparation,
amendment, interpretation and enforcement of the Loan Documents, including
without limitation during any workout, attempted workout, and/or in connection
with the rendering of legal advice as to Bank's rights, remedies and obligations
under the Loan Documents, (b) collecting any sum which becomes due Bank under
any Loan Document, (c) any proceeding for declaratory relief, any counterclaim
to any proceeding, or any appeal, or (d) the protection, preservation or
enforcement of any rights of Bank. For the purposes of this section, attorneys'
fees shall include, without limitation, fees incurred in connection with the
following: (1) contempt proceedings; (2) discovery; (3) any motion, proceeding
or other activity of any kind in connection with a bankruptcy proceeding or case
arising out of or relating to any petition under Title 11 of the United States
Code, as the same shall be in effect from time to time, or any similar law; (4)
garnishment, levy, and debtor and third party examinations and (5) postjudgment
motions and proceedings of any kind, including without limitation any activity
taken to collect or enforce any judgment.
8.11 EXECUTION IN COUNTERPARTS. This Agreement may be executed in any
number of counterparts which, when taken together, shall constitute but one
agreement.
8.12 ENTIRE AGREEMENT. The Loan Documents are intended by the parties as
the final expression of their agreement and therefore contain the entire
agreement between the parties and supersede all prior understandings or
agreements concerning the subject matter hereof. This Agreement may be amended
only in a writing signed by Borrower and Bank.
19.
<PAGE>
8.13 JOINT AND SEVERAL. Should more than one Person sign this Agreement as
Borrower, the obligations of each signer shall be joint and several.
IN WITNESS WHEREOF, Borrower and Bank have executed this Agreement as of
the date set forth in the preamble.
BORROWER: HAMBRECHT & QUIST GROUP,
a California corporation
By: /s/ P.J. ALLEN
-----------------------------------
Its: VP FINANCE
------------------------------
BANK: THE BANK OF CALIFORNIA, N.A.
By: /s/ WILLIAM E. HINCH
-----------------------------------
Its: Vice President
------------------------------
20.
<PAGE>
ADVANCE REQUEST MATRIX, ASSIGNMENT AS COLLATERAL
AND ADDENDUM TO SECURITY AGREEMENT
----------------------------------
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5) (6) (7)
<S> <C> <C> <C> <C> <C> <C>
Date Description of Pledged
Amount Issuer Pledged Securities (including
of Name Date and of Date of Securities certificate nos.,
Advance of Amount of Pledged Pledge Acquired by applicable restric-
Request Customer of Note Securities Agreement Customer tions and values)
- --------- ------- --------- ---------- ---------- ----------- ----------------------
</TABLE>
SEE ATTACHMENT
The undersigned hereby assigns and grants to The Bank of California, N.A.
("Bank") a security interest in all of the undersigned's right, title and
interest in and to the following: (a) 293,508 shares of common stock of The
Bisys Group, Inc., and (b) all promissory notes and pledge agreements shown on
the Attachment to this Addendum, as well as the pledged securities listed
thereon, and agrees that all of same shall constitute "Collateral" under the
Security Agreement executed by Borrower in favor of Bank dated October 29, 1993,
as amended or restated from time to time ("Security Agreement"). The
undersigned acknowledges and agrees that, as a condition to Bank's making
Advances under the credit facility for which this grant of security interest has
been given, the undersigned shall deliver all original promissory notes endorsed
in blank and all original pledged securities endorsed in blank or with stock
powers attached. This Advance Request Matrix, Assignment as Collateral and
Addendum to Security Agreement shall be attached to the Security Agreement and
constitutes a valid and binding part thereof.
Dated: HAMBRECHT & QUIST GROUP,
------------------------ a California corporation
By
------------------------
Its
-----------------------
<PAGE>
EXHIBIT A
BANKCAL
THE BANK OF CALIFORNIA
March 21, 1996
Hambrecht & Quist Group
One Bush Street
San Francisco, California 94104
Attn: Raymond J. Minehan,
Chief Financial Officer
RE: EURODOLLAR RATE OPTION AGREEMENT
--------------------------------
Dear Mr. Minehan:
As of this date, you, Hambrecht & Quist Group, have with The Bank of
California, N.A, ("Bank") a credit facility in the maximum principal amount of
$12,000,0000, as such amount may change in accordance with its terms ("Credit
Facility"), the terms and conditions of which are governed by a promissory note
and/or loan agreement and various other documents ("Loan Documents). In
conjunction with your current Credit Facility, Bank is pleased to offer you a
chance to participate in a special commercial pricing program.
1. AVAILABILITY AND MATURITY
Bank usually extends financing based on a fluctuating rate that
changes with the rate Bank announces to be in effect from time to time as its
prime rate ("Prime Rate"). The Prime Rate is a rate set by Bank based on
various factors, including general economic and market conditions, and is used
as a reference point in pricing certain loans. Bank may price its loans at,
above or below the Prime Rate.
In contrast, Bank's "Eurodollar Rate" is a fixed rate (more fully
defined below) Bank offers from time to time which, if you accept this proposal,
will apply to all or such portion of the principal amount outstanding under the
Credit Facility ("Covered Amount") and for such time periods as you and Bank
shall mutually agree. Pricing tied to the Eurodollar Rate is available for
periods of 1, 2, 3, 6, 9 or 12 months (each a "Period") , provided, however,
that no Period shall have a maturity date subsequent to the scheduled maturity
date for the Credit
<PAGE>
Hambrecht & Quist Group
March 21, 1995
Page 2
Facility. This pricing may be applied to increments of $1,000,000 or more
outstanding under the Credit Facility.
Bank's "Eurodollar Rate" is, for each Period, a rate comprised of (a)
the rate of interest at which Dollar deposits for such period and in such amount
would be offered to Bank in the Eurodollar Market at a time selected by Bank two
(2) Banking Days, as defined below, prior to the commencement of the relevant
Period, adjusted for the then maximum reserve, capital adequacy, deposit
insurance, and similar requirements that under any circumstance could be
applicable to Bank pursuant to applicable law or regulation, and other amounts
associated with Bank's costs and desired return; plus (b) a margin equal to
2.50%. The Eurodollar Market is the market in which the buying and selling of
United States Dollar deposits booked outside the United States of America occurs
among the international banking community. Bank's Eurodollar Rate is available
and may be accepted only at the time quoted by Bank for the applicable Period
beginning two (2) Banking Days hence. Due to changes in legal, regulatory,
economic or market conditions, Bank may at any time determine that pricing based
on the Eurodollar Rate is not available, and thus, may be unable to offer such a
rate.
2. QUOTE, EURODOLLAR RATE, AND PAYMENTS
For a quote of Bank's Eurodollar Rate which would apply to the
specified Covered Amount and Period, you may call Bank's San Francisco office
between 8:00 a.m. and 11:00 a.m. Pacific time on any day on which such office
and Bank's San Francisco main office are open for business to the public (each a
"Banking Day"). As the Eurodollar Rate is established two (2) Banking Days
prior to the first day of the requested Period, you must call at least two (2)
Banking Days prior to such date. If you accept the Eurodollar Rate when
offered, that rate will apply to such Covered Amount for the applicable Period.
Interest shall be calculated for actual days elapsed on the basis of a three
hundred and sixty (360) day year.
During any Period, you agree to pay interest on the Covered
Amount at the Eurodollar Rate on the first day of each consecutive month
beginning the first such date after the commencement of the Period, until the
last day of the Period whether scheduled or accelerated ("Maturity Date").
During each Period, you must maintain under your Credit Facility a principal
balance which is not a Covered Amount under any of your rate option agreements
with Bank sufficient to cover each scheduled instalment of principal coming due
during such Period under the Credit Facility. Should you have any obligation
under any other Loan Document to repay any portion of the Credit Facility
("Obligation")
<PAGE>
Hambrecht & Quist Group
March 21, 1995
Page 3
that would conflict with your obligation under the preceding sentence
("Maintenance Obligation"), you shall nevertheless comply with the obligation
and not with the Maintenance Obligation, and you shall not be deemed in default
hereunder. Nonetheless, payment of the obligation shall be deemed to be a
"Prepayment", as defined below, to the extent it repays a portion of a Covered
Amount under this or any of your other rate option agreements you may have with
Bank.
If, prior to a Maturity Date and while the Credit Facility is
still available, you and Bank have not agreed that a new rate tied to the
Eurodollar Rate shall apply to a Covered Amount, then, if the term of your
Credit Facility extends beyond such Maturity Date, Bank's Prime Rate plus the
applicable margin under the terms of your Credit Facility shall be automatically
applicable to such Covered Amount.
Bank's records of the date, Covered Amount, Period Eurodollar
Rate, Maturity Date, and all payments of principal and interest and all other
payments and amounts due under this letter agreement shall be conclusive and
binding on you, absent obvious error.
3. PREPAYMENT LIMITATION
Do not sign this letter agreement before you read it. This
letter agreement provides for payment of liquidated damages if you wish to repay
the loan (Covered Amount) prior to the date provided for repayment under the
Credit Facility.
Bank establishes the Eurodollar Rate with the understanding it
will apply to the Covered Amount for the entire scheduled Period. If for any
reason, including, without limitation, acceleration, foreclosure or prepayment,
Bank receives all or any portion of a Covered Amount (each a "Prepayment") prior
to the scheduled Maturity Date, then in consideration thereof you shall pay to
Bank on demand:
a. The amount, if any, by which the additional interest which
would have been payable on the Prepayment exceeds the interest which
Bank would receive had it placed an amount equal to the Prepayment, in
United States Dollars, on deposit in the Eurodollar Market (or, at
Bank's sole discretion, invested such amount in a domestic certificate
of deposit issued by an institution rated at least "investment grade"
or "Al" by Moody's or any successor rating agency) for a period equal
to the period of time remaining until the maturity of the applicable
Period. Should the scheduled maturity fall
<PAGE>
Hambrecht & Quist Group
March 21, 1995
Page 4
between two periods for which rates are quoted or available to Bank,
then Bank, in its sole discretion, shall interpolate this rate; and
b. Any other out of pocket costs to Bank associated with
funding or maintaining the Covered Amount.
Bank shall provide you a statement of the amount payable on account of each
Prepayment, which statement shall be a conclusive and binding determination of
the amount owed by you for such Prepayment, absent obvious error. All
Prepayments, subject to this Section 3, shall be applied on the most remote
instalment or installments of principal then unpaid on the Credit Facility being
prepaid.
You acknowledge that any Prepayment may result in Bank incurring
additional costs, expenses or liabilities. Therefore, you agree to pay the
above-described liquidated damages and agree that said amount is a reasonable
estimate of the costs, expenses and liabilities of Bank associated with each
Prepayment.
4. SPECIAL FUNDING PROVISIONS
If at any time Bank determines that:
a. United States Dollar deposits in principal amounts
similar to the Covered Amount bearing interest at the Eurodollar
Rate and for periods equal to the relevant Period are not
available in the Eurodollar Market;
b. The Eurodollar Rate does not cover the cost to Bank of
making, funding or maintaining the Covered Amount at the
Eurodollar Rate during any Period;
c. Any change in financial, political or economic
conditions or currency exchange rates makes it impractical for
Bank to make, fund or maintain the Covered Amount at the
Eurodollar Rate during any Period; or
d. Any change in applicable law or regulation or in the
interpretation thereof (whether or not having the force of law)
makes it unlawful or impractical for Bank to make, fund or
maintain the Covered Amount at the Eurodollar Rate, then Bank
shall promptly give notice thereof to you and as of the date
stated in such notice, the Eurodollar Rate option shall
terminate, and Bank's Prime Rate plus the applicable margin under
the terms of
<PAGE>
Hambrecht & Quist Group
March 21, 1995
Page 5
your Credit Facility shall be automatically applicable to the
relevant Covered Amount through the end of the relevant Period.
5. RESERVES, DEPOSIT INSURANCE, CAPITAL ADEQUACY
You shall additionally compensate Bank upon demand for all
costs incurred, or losses suffered, including without limitation lost profits,
by reason of:
a. any and all increases in reserve, deposit insurance,
capital adequacy or similar requirements against (or against any
class of or change in or in the amount of) the assets or
liabilities of Bank, deposits with or for the account of Bank, or
loans by Bank, imposed by any governmental or regulatory
authority (whether or not having the force of law) in connection
with a Covered Amount bearing interest at the Eurodollar Rate; or
b. compliance by Bank with any direction, requirement or
request from any governmental or regulatory authority (whether or
not having the force of law) in connection with a Covered Amount
bearing interest at the Eurodollar Rate to the extent any such
costs have not been previously blended or adjusted into the
Eurodollar Rate.
Bank shall provide you with a written statement of the amount and basis of its
request for compensation under this Section, which statement shall be a
conclusive and binding determination of the amount owed by you, absent obvious
error.
6. TAXES
a. It at any time any taxes, fees or other charges of any
nature are imposed by any governmental or regulatory authority on any
aspect of the transactions referred to in this letter agreement
including without limitation all stamp or documentation duties
(collectively, "Taxes"), you shall pay such Taxes directly, or
compensate Bank for such payment, as set forth below, except for such
Taxes as are imposed on Bank's net income.
b. In the event you are prohibited by operation of law from
making payments or reimbursements to Bank without making such
deductions or paying, or causing to be paid, any and all Taxes, you
shall pay to Bank upon
<PAGE>
Hambrecht & Quist Group
March 21, 1995
Page 6
demand such additional amounts as may be necessary in order to
reimburse Bank for Taxes paid by Bank on your behalf such that the
aggregate net amounts received by Bank shall equal the amounts which
would have been received if such deduction or withholding had not been
required.
c. You shall confirm that all applicable Taxes shall have been
paid to appropriate taxing authorities or agencies by sending official
tax receipts or notarized copies of such receipts to Bank within
thirty (30) days after payment of any Taxes. Should Bank receive
notice of any such liability for Taxes, Bank will promptly so inform
you.
7. GENERAL PROVISIONS
a. To the extent interest rates, prepayment provisions and
times for payment of interest established under this letter agreement
are different than the terms of the note evidencing the Credit
Facility, the terms of this letter agreement shall prevail. All other
provisions of the Loan Documents remain in full force and effect.
b. This letter agreement shall be governed by the laws of the
State of California.
c. This letter agreement, and all confirmations provided
hereunder, evidence the entire agreement of the parties on the matters
covered herein, and supersede all prior understandings and agreements.
If you would like to participate in Bank's Eurodollar Rate option
program, please execute the enclosed duplicate original of this letter and
return it to Bank, on or before March _, 1996, at which time the option granted
in this letter will otherwise expire.
<PAGE>
Hambrecht & Quist Group
March 21, 1995
Page 7
The Bank is pleased to serve you.
Very truly yours,
THE BANK OF CALIFORNIA, N.A.
By: /s/ WILLIAM E. HINCH
-----------------------------------
Its: VICE PRESIDENT
------------------------------
ACCEPTED AND AGREED:
HAMBRECHT & QUIST GROUP,
a California corporation
BY: /s/ P.J. ALLEN
-------------------------
Its: VP-FINANCE
--------------------
Dated: 3/25, 1996
<PAGE>
LINE OF CREDIT NOTE
$12,000,000.00 March 21, 1996
(Subject to Advance
Rate Limitations)
Each signer of this Note ("Borrower") promises to pay to the order of
The Bank of California, National Association ("Bank") at its office at 400
California Street, San Francisco, California, 94104 or at such other place as
Bank may designate in writing, in lawful money of the United States of America,
the principal sum of TWELVE MILLION AND N0/100 DOLLARS ($12,000,000.00), or so
much thereof as may be advanced and outstanding, with interest on each Advance
from the date it is disbursed until maturity, whether scheduled or accelerated,
at a fluctuating rate per annum at all times equal to the rate Bank announces to
be in effect from time to time as its prime rate (the "Prime Rate") plus three
quarters of one percent (0.75%), unless Borrower elects to have all or a portion
of principal accrue hereunder at a fixed rate based on the Eurodollar Rate, as
defined in and pursuant to the terms and conditions of the Eurodollar Rate
Option Agreement between Borrower and Bank of even date herewith, as amended,
supplemented or replaced from time to time. The Prime Rate is a rate set by
Bank based upon various factors including general economic and market
conditions, and is used as a reference point for pricing certain loans. Bank may
price its loans at, above, or below the Prime Rate.
This Note is the Line of Credit Note defined in that certain First
Amended and Restated Line of Credit Agreement between Bank and Borrower dated
March 21, 1996, as amended or restated from time to time ("Credit Agreement"),
and is governed by the terms thereof. Each capitalized term not otherwise
defined in this Note shall have the meaning set forth in the Credit Agreement.
This Note replaces and supersedes the Line of Credit Note in the maximum
principal amount of $9,500,000.00 dated February 8, 1996, previously executed by
Borrower to the order of Bank.
During the term of this Note, Borrower may borrow, repay and reborrow
as Borrower may elect, subject to all limitations, terms and conditions
contained herein and in the Credit Agreement (specifically including, but
without limitation, all restrictions on the amount of Advances contained in the
Credit Agreement), provided however, that in any event the outstanding principal
balance of this Note shall at no time exceed the maximum principal amount stated
above.
Interest shall be payable on the first (1st) day of each consecutive
month beginning the first such date after the first Advance, and continuing
through the Termination Date, on
1
<PAGE>
which date all accrued interest and principal remaining unpaid shall be due and
payable in full. Notwithstanding the foregoing, if at any time Bank determines
that the outstanding principal balance of an Advance hereunder exceeds fifty
percent (50%) of the fair market value of the Pledged Securities or Pledged
Stock Options securing the Principal Note pledged to Bank in connection with the
Advance (or the Bisys Shares with respect to Advances secured thereby), as
determined by Bank reference to outside sources, then Borrower, immediately upon
Bank's written demand, shall make principal repayments of the Advance, together
with all accrued interest thereon, in amounts sufficient to establish (i) a
forty percent (40%) or lower Advance-to-value ratio with respect to Advances
used to finance Stock Option Advances, or (ii) a fifty percent (50%) or lower
Advance-to-value ratio with respect to all other Advances,
The unpaid principal balance and all payments of interest on this Note
shall bear interest from their respective maturities, whether scheduled or
accelerated, at a fluctuating rate per annum at all times equal to the Prime
Rate plus 5%, until paid in full, whether before or after judgment.
Interest and fees shall be calculated for actual days elapsed on the
basis of a 360-day year, which results in higher interest payments than if a
365-day year were used. Each change in the rate of interest shall become
effective on the date each Prime Rate change is announced within the Bank. In
no event shall Borrower be obligated to pay interest at a rate in excess of the
highest rate permitted by applicable law from time to time in effect.
Each Advance shall be requested and made as provided in the Credit
Agreement. Borrower assumes all risks regarding the validity, authenticity and
due authorization of any request purporting to be made by or on behalf of
Borrower. Borrower promises to repay any sums, with interest, that are advanced
by Bank pursuant to any request which Bank in good faith believes to be
authorized, or when the proceeds of any Advance are deposited to the account of
Borrower with Bank, regardless of whether any individual or entity ("Person")
other than Borrower may have authority to draw against such account.
The occurrence of any Event of Default as defined in the Credit
Agreement shall (1) terminate any obligation of Bank to make or continue the
Line of Credit; and shall, at Bank's option, (2) make all sums of interest,
principal and any other amounts owing under any Loan Documents immediately due
and payable without notice of default, presentment or demand for payment,
protest or notice of nonpayment or dishonor or any other notices or demands; and
(3) give Bank the right to exercise any other right or remedy provided by
contract or applicable law.
2
<PAGE>
Borrower shall reimburse Bank for costs and expenses, including
without limitation reasonable attorneys' fees, as set forth in the Agreement.
Each Borrower is jointly and severally liable for the obligations
evidenced by this Note, and all references to "Borrower" shall be to "each" or
"any" Borrower as the context requires.
This Note shall be governed by, and construed in accordance with, the
laws of the State of California.
HAMBRECHT & QUIST GROUP,
a California corporation
By: /s/ PJ Allen
---------------------------
Its: VP- Finance
----------------------
3
<PAGE>
The Bank of California
CONTINUING GUARANTY
1. INDEBTEDNESS GUARANTEED. For valuable consideration, the sufficiency of
which is acknowledged, the undersigned ("Guarantor") unconditionally
guarantees and promises to pay to The Bank of California, N.A. ("Bank") on
demand, in lawful money of the United States of America, all indebtedness of
Hambrecht & Quist Group, a California corporation ("Borrower") to Bank.
"Indebtedness" is used herein in its most comprehensive sense and includes
all debts, obligations and liabilities of Borrower or any one or more of them
to Bank currently existing or now or hereafter made, incurred or created
whether voluntary or involuntary and however arising or evidenced, whether
direct or acquired by assignment or succession, whether due or not due,
absolute or contingent, liquidated or unliquidated, determined or
undetermined, and whether Borrower may be liable individually or jointly with
others or whether recovery upon such debt may be or become barred by any
statute of limitation or otherwise unenforceable. This is a continuing
guaranty relating to any indebtedness, including that arising under
successive transactions which shall either continue increase or otherwise
modify the indebtedness or from time to time renew it after it has been
satisfied. This guaranty ("Guaranty") may be revoked only by Bank's actual
receipt of written notice from Guarantor. Where Bank has a contractual
commitment to extend credit, such revocation shall not be effective with
respect to indebtedness created under such commitment. This Guaranty shall
continue to be effective or be reinstated if at any time any payment of any
indebtedness is rescinded or must otherwise be returned by Bank upon the
insolvency, bankruptcy or reorganization of Borrower, Guarantor or otherwise,
all as though such payment had not been made. Guarantor has derived or
expects to derive material financial advantages or other benefits
commensurate in value to the obligations and liabilities being undertaken by
Guarantor under the terms of this Guaranty.
2. GUARANTOR'S LIABILITY. The liability of Guarantor under this Guaranty
shall not exceed at any time an amount equal to the sum of (a) TWELVE MILLION
AND NO/100 DOLLARS ($12,000,000.00), (b) all interest, fees and charges
constituting indebtedness upon or with respect to such amount, (c)
Guarantor's obligations to pay attorneys' fees and all other costs and
expenses which may be incurred by Bank in the protection, preservation or
enforcement of any rights of Bank under this Guaranty, and (d) Guarantor's
obligations to reimburse and indemnify Bank hereunder. Bank may permit the
indebtedness to exceed Guarantor's liability under this Guaranty, and
Guarantor's liability hereunder shall not be affected even if the
Indebtedness exceeds any limitations otherwise applicable thereto. Any
payment by Guarantor to Bank hereunder shall not reduce its maximum
obligation hereunder unless Guarantor has given bank actual written notice
that such payment shall have such effect at or prior to the time of such
payment. The foregoing limitation of liability applies only to Guarantor's
obligations under this Guaranty; unless otherwise specifically agreed in
writing, every other guaranty heretofore, now, or hereafter given by
Guarantor to Bank with respect to the Indebtedness shall be deemed
independent of this Guaranty and every other such guaranty, so that as each
such guaranty is enforced or collected upon in a manner that reduces the
liability of Guarantor thereunder, the liability of all guarantors on all
other guaranties shall remain intact.
3. NATURE OF GUARANTOR'S LIABILITY. Guarantor's obligations and liabilities
under this Guaranty are independent of Borrower's obligations and liabilities
under any documents evidencing indebtedness ("Loan Documents"), and a
separate action or actions may be brought and prosecuted against Guaranty
whether action is brought against Borrower or any other guarantor or Person,
whether or not any foreclosure has been or is going to be initiated with
respect to any security for the Indebtedness, or whether Borrower or any
other guarantor or Person are joined in any such action or actions. Recovery
realized from any other guarantor of the Indebtedness, or recovery from any
source other than a payment by Guarantor, shall be first credited upon this
portion of the Indebtedness which exceeds the maximum liability of Guarantor
hereunder. As used in this Guaranty, "Person" means any individual or
entity, and may include Bank where the construction so allows.
4. GUARANTOR'S AUTHORIZATION. Guarantor authorizes Bank, without notice,
demand or consent of any kind, and without affecting Guarantor's liability
under this Guaranty, from time to time, to (a) renew, compromise, extend,
accelerate or otherwise change any of the terms of the indebtedness or any
part, thereof, including changing the rate of interest thereon or the time
for payment thereof, (b) accept partial payments on the indebtedness, (c)
extend credit to Borrower on an unsecured basis or take security or other
support for the obligations evidenced by this Guaranty or the indebtedness,
and exchange, enforce, waive or release any such security or other support or
any part thereof, (d) accept new or additional documents, instruments or
agreements relative to the Indebtedness, (e) apply any security or other
support and direct the order or manner of sale or other disposition of such
property as Bank, in its sole discretion, may determine, and (f) release or
substitute any Person liable on the indebtedness, any other guarantor of the
indebtedness, or any other Person providing support for the indebtedness to
Bank, this Guaranty, or any other guaranty.
5. WAIVERS. (a) Guarantor waives any and all rights or defenses arising by
reason of (1) the absence, impairment or loss of any right of reimbursement,
contribution or subrogation, or any other right or remedy of Guarantor
against Borrower or any other guarantor or Person, or with respect to any
security interest or other support for the Indebtedness, (ii) any disability
or other defense of Borrower, or the partial or complete cessation from any
cause of this liability of Borrower for the Indebtedness for any reason other
than payment in full and final satisfaction, (iii) the application by
Borrower of the proceeds of any indebtedness for purposes other than the
purposes represented by Borrower to Bank or intended or understood by Bank,
(iv) any act or omission by Bank which directly or indirectly results in or
aids the discharge of Borrower or any of the indebtedness by operation of law
or otherwise, (v) the statute of limitations in any action under this
Guaranty or in any action for the collection of any indebtedness, (vi) the
omission of any demand, presentment, protest or notice of any kind, including
without limitation notice of the existence, creation, incurring,
modification, substitution or renewal of any new or additional indebtedness or
of any action or non-action on the part of Borrower, Bank or any other Person
in connection with any indebtedness, or (vii) any exchange, release, loss,
damage, impairment or non-perfection of any security or support for the
Indebtedness, or any release, amendment waiver of or consent to depart from
the terms of any security agreement, other support or any other guaranty, for
all or any of the Indebtedness.
(b) Guarantor waives all rights to require Bank to (i) seek payment of the
indebtedness from Borrower, any other guarantor or Person, or from any
collateral securing the indebtedness before enforcing Guarantor's obligations
under this Guaranty, (ii) apply any payments from any source in any
particular manner, including without limitation to apply any payments to any
portion of the indebtedness guaranteed by this Guaranty before applying them
to anything else, (iii) give notice to the terms, time and place of any
public or private sale of personal property security for the indebtedness or
comply with any other provisions of Section 9504 of the Uniform Commercial
Code or its equivalent, from time to time in effect in the state governing
such security interest, (iv) give notice of any judicial or nonjudicial sale
or foreclosure of any real property securing any portion of the Indebtedness,
or (v) enforce any remedy which Bank now has or hereafter may have against
Borrower, any other guarantor or Person. Guarantor also waives any benefit
of, and any right to participate in or direct the application of, any now
existing or hereafter acquired security or support for the indebtedness.
(c) Guarantor acknowledges that Guarantor is entitled to reimbursement from
Borrower to the extent Guarantor pays the Indebtedness. Nonetheless, until
all of the Indebtedness has been paid in full, including without limitation
any portion thereof which exceeds the liability of Guarantor under this
Guaranty, Guarantor hereby waives any and all rights of reimbursement under
any legal doctrine including without limitation subrogation, indemnity, or
contribution arising from the existence or performance of this Guaranty which
Guarantor now or hereafter may have against Borrower or any Person, or their
respective properties, directly or contingently liable for the Indebtedness,
or any direct or contingent security for the Indebtedness.
(d) Guarantor waives notice of acceptance of this Guaranty. Without limiting
the generality of the waivers contained in this Guaranty, Guarantor waives
all rights, defenses, and other benefits under the following statutes,
judicial decisions applying these statutes, and further waives all equivalent
legal rules in any form in all applicable jurisdictions: California Civil
Code sections 2787-2855. Guarantor acknowledges that Bank is relying on all
of the waivers contained throughout this Guaranty in creating and continuing
the indebtedness, and that these waivers are a material part of the
consideration to Bank for creating and continuing the indebtedness.
(e) Guarantor waives all rights and defenses arising out of an election of
remedies by the creditor, even though that election of remedies, such as a
nonjudicial foreclosure with respect to security for a guaranteed obligation,
has destroyed the Guarantor's rights of subrogation and reimbursement against
the principal by the operation of Section 580d of the California Code of
Civil Procedure or otherwise by the operation of any other law of California
or by the operation of any similar law of any other jurisdiction. In the
preceding sentence the word "creditor" means Bank, and the word "principal"
means Borrower or any person or entity directly or indirectly responsible in
any manner for the indebtedness.
6. SECURITY INTEREST. Guarantor hereby grants to Bank a security interest in
all moneys, securities and other property of Guarantor now or hereafter in
the possession of, or on deposit with, Bank, whether certificated or
uncertificated, or held in a general, special, deposit, or safekeeping
account, or otherwise and the proceeds thereof. Every such security interest
may be exercised without demand upon or notice to Guarantor, except as may be
required by law. No security interest shall be deemed waived by any act or
failure to act by Bank.
Page 1
<PAGE>
7. SUBORDINATION. All obligations and liabilities of whatsoever kind
("Third Party Indebtedness") of Borrower to Guarantor now existing or
hereafter incurred we hereby subordinated to all indebtedness, and until all
Indebtedness has been satisfied in full, no payment shall be made by Borrower
or accepted by Guarantor on any Third Party Indebtedness without Bank's prior
written consent. Should Guarantor receive any payment or distribution of any
kind in conflict with the provisions of this subordination clause, Guarantor
shall hold such funds or property as trustee for Bank, and shall pay or
transfer to Bank all such funds or property promptly upon receipt on account
of the indebtedness, but without reducing or affecting the liability of
Guarantor under the other provisions of this Guaranty.
8. DILIGENT INQUIRIES. Guarantor assumes the responsibility for being and
keeping informed of the financial condition of Borrower and any other
guarantor or Person liable on, or with respect to, any of the indebtedness,
and of all other circumstances bearing upon the risk of nonpayment of the
indebtedness, and confirms that Bank shall have no duty to advise Guarantor
of any such information.
9. AUTHORIZATION OF BORROWER. Where Borrower is a corporation, partnership
or other business entity, Bank shall have no duty to inquire into the powers
of Borrowers or its officers, directors, partners, trustees, members or
agents, acting or purporting to act on Borrower's behalf, and any
indebtedness made or created in reliance upon the exercise of such powers
shall be covered by this Guaranty. Bank's books and records showing the
account between bank and Borrower shall be admissible in any proceeding or
action to enforce this Guaranty and shall be conclusive and binding upon
Guarantor absent obvious error.
10. MARRIED PERSONS. Any married person who signs this Guaranty agrees that
recourse for all obligations created under this Guaranty may be against his
or her separate and community property.
11. NOTICES. Any notice given by any party under this Guaranty shall be in
writing and personally delivered, sent by United States mail, postage
prepaid, or sent by telex or other authenticated message, charges prepaid and
addressed as follows:
TO GUARANTOR: TO BANK:
The Bank of California, N.A.
Hambrecht & Quist, L. P., San Francisco Regional Office
a California limited partnership 400 California Street
One Bush Street San Francisco, CA 94104
San Francisco, CA 94104 Attn: William E. Hinch
Attn: Vice President
FAX No. FAX No. (415) 765-2001
Guarantor and Bank may change the place to which notices, requests, and
other communications are to be sent by giving written notice of such change
to the other.
12. BINDING EFFECT. This Guaranty shall be binding upon Guarantor, its
permitted successors, representatives and assigns, and shall inure to the
benefit of Bank and its successors and assigns; provided, however, that
Guarantor may not assign or transfer its obligations under this Guaranty
without the prior written consent of Bank. Bank reserves the right to sell,
assign, or transfer its rights and powers under this Guaranty in whole or in
part without notice to Guarantor. In that connection, Bank may disclose all
document and information which Bank now or hereafter may have relating to
this Guaranty, Guarantor or Guarantor's operations or finances. Guarantor
waives any duty of confidentiality Bank may have with respect to information
concerning Guarantor and Guarantor's operations and finances.
13. NO WAIVER. Any waiver, consent or approval of any kind by Bank must be
in writing and shall be effective only to the extent set forth in such
writing. No failure or delay on the part of Bank in exercising any power,
right or privilege hereunder shall operate as a waiver thereof, and no single
or partial exercise of any such power, right or privilege shall preclude any
further exercise thereof, or the exercise of any other power, right or
privilege. All rights and remedies existing under this Guaranty are
cumulative to, and not exclusive of, any other rights or remedies under
contact or applicable law. Guarantor waives all rights and defenses arising
from Bank's performance or failure to perform any duty, right or remedy
available to it, or Bank's taking, or failing to take any action permitted
hereunder.
14. GOVERNING LAW. Except as may be otherwise provided herein, this Guaranty
shall be governed by and construed in accordance with the laws in the State
of California.
15. INDEMNIFICATION. Guarantor shall pay and protect, defend and indemnify
Bank and Bank's employees, officers, directors, shareholders, affiliates,
correspondents, agents and representatives (other than Bank, collectively
"Agents") against, and hold Bank and each Agent harmless from, all claims,
actions, proceedings, liabilities, damages, losses, expenses (including
without limitation attorneys' fees and costs) and other amounts incurred by
Bank and each Agent from (a) the matters contemplated by this Guaranty or by
any Loan Document or (b) any contention that Guarantor has failed to comply
with any law, rule, regulation, order or directive applicable to Guarantor's
business; provided, however, that this indemnification shall not apply to any
of the foregoing incurred solely as the result of Bank's or any Agent's gross
negligence or willful misconduct. This indemnification shall survive the
payment and satisfaction of all indebtedness.
16. REIMBURSEMENT. Guarantor shall reimburse Bank for all costs and expenses,
including without limitation reasonable attorneys' fees and disbursements
(and fees and disbursements of Bank's in-house counsel) expensed or incurred
by Bank in any arbitration, mediation, judicial reference, legal action or
otherwise in connection with (a) the negotiation, preparation, amendment,
interpretation and enforcement of this Guaranty, (b) any workout or attempted
workout (c) the rendering of legal advice as to Bank's rights, remedies and
obligations hereunder, (d) collecting any sum which becomes due Bank
hereunder, (e) any proceeding for declaratory relief, counterclaim to any
proceeding, appeal, contempt proceeding, discovery, or post-judgement motion
or proceeding of any kind, including without limitation any action taken to
collect or enforce any judgement, (f) the protection, preservation or
enforcement of any rights of Bank, (g) any motion, proceeding or other
activity in connection with a case under Title 11 of the United States Code
or any similar law, or (h) garnishment, levy, and third party examinations.
17. MULTIPLE BORROWER/GUARANTOR. When there is more than one Borrower, or
when this Guaranty is executed by more than one Guarantor, the words
"Borrower" and "Guarantor", respectively, mean all and any one or more of
them. All words used herein in the singular shall be deemed to have been
used in the plural where the context and construction so require.
18. JOINT AND SEVERAL. Should more than one Person sign this Guaranty as
Guarantor, their obligations hereunder shall be joint and several.
19. DISPUTE RESOLUTION. (a) MANDATORY MEDIATION/ARBITRATION. Any controversy
or claim between or among the parties, their agents, employees and
affiliates, including but not limited to those arising out of or relating to
this Guaranty or any related agreements or instruments ("Subject Documents"),
including without limitation any claim based on or arising from an alleged
tort, shall, at the option of any party, and at that party's expense, be
submitted to mediation, using either the American Arbitration Association
("AAA") or Judicial Arbitration and Mediation Services, Inc. ("JAMS"). If
mediation is not used, or if it is used and it fails to resolve the dispute
within 30 days from the date AAA or JAMS is engaged, than the dispute shall
be determined by arbitration in accordance with the rules of either JAMS or
AAA (at the option of the party initiating the arbitration) and Title 9 of
the U.S. Code, notwithstanding any other choice of law provision in the
Subject Documents. All statutes of limitations, or any waivers contained
herein, which would otherwise be applicable shall apply to any arbitration
proceeding under this subparagraph (a). The parties agree that related
arbitration proceedings may be consolidated. The arbitrator shall prepare
written reasons for the award. Judgement upon the award rendered may be
entered in any court having jurisdiction. This subparagraph (a) shall apply
only if, at the time of the proposed submission to AAA or JAMS, none of the
obligations to Bank described in or covered by any of the Subject Documents
are secured by real property collateral or, if so secured, all parties
consent to such submission.
(b) JURY WAIVER/JUDICIAL REFERENCE. If the controversy or claim is not
submitted to arbitration as provided and limited in subparagraph (a), but
becomes the subject of a judicial action, each party hereby waives its
respective right to trial by jury of the controversy or claim. In addition,
any party may elect to have all decisions of fact and law determined by a
referee appointed by the court in accordance with applicable state reference
procedures. The party requesting the reference procedure shall ask AAA or
JAMS to provide a panel of retired judges and the court shall select the
referee from the designated panel. The referee shall prepare written
findings of fact and conclusions of law. Judgement upon the award rendered
shall be entered in the court in which such proceeding was commenced.
Page 2
<PAGE>
(c) PROVISIONAL REMEDIES, SELF HELP, AND FORECLOSURE. No provision of, or
the exercise of any rights under, subparagraph (a) shall limit the right of
any party to exercise self help remedies such as setoff, to foreclose against
any real or personal property collateral, or to obtain provisional or
ancillary remedies such as injunctive relief or the appointment of a receiver
from a court having jurisdiction before, during or after the pendency of any
mediation or arbitration. At Bank's option, foreclosure under a deed of
trust or mortgage may be accomplished either by exercise of power of sale
under the deed of trust or mortgage, or by judicial foreclosure. The
institution and maintenance of an action for judicial relief or pursuit of
provisional or ancillary remedies or exercise of self help remedies shall
not constitute a waiver of the right of any party, including the plaintiff,
to submit the controversy or claim to mediation or arbitration.
To the extent any provision of this dispute resolution clause is different
from the terms of this Guaranty or other Loan Documents, the terms of this
dispute resolution clause shall prevail.
20. INTEGRATION; SEVERABILITY; AMENDMENTS. This Guaranty is intended by
Guarantor and Bank as the final expression of Guarantor's obligations any
liabilities to Bank described herein, and supersedes, all prior
understandings or agreements concerning the subject matter hereof. Any
provision of this Guaranty which is prohibited or unenforceable in any
jurisdiction shall be so only as to such jurisdiction and only to the extent
of such prohibition or unenforceability, but all the remaining provisions
of this Guaranty shall remain valid and enforceable. This Guaranty may be
amended only by a writing signed by Guarantor and Bank.
All terms and conditions set forth on the Financial Statements
addendum/addenda attached to this Guaranty are incorporated by this reference.
IN WITNESS WHEREOF, Guarantor has executed this Guaranty as of March 21,
1996, and Guarantor acknowledges receiving a copy of this Guaranty.
Hambrecht & Quist, L.P.
a California limited partnership
By: Hambrecht & Quist Group,
a California corporation, General Partner
By: /s/ [ Name Unreadable]
-----------------------------
Title: /s/ VP Finance
--------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
If the Guarantor(s) signature cannot be witnessed by the account officer, the
Guarantor(s) must have his or her signature notarized or must obtain a
signature guaranty of the document from his or her bank.
This is a replacement of that certain Continuing Guaranty dated February 8,
1996, executed by Hambrecht & Quist, L. P., a California limited partnership
("Guarantor").
Page 3
<PAGE>
THE BANK OF CALIFORNIA
ADDENDUM TO CONTINUING GUARANTY
FINANCIAL STATEMENTS
THIS ADDENDUM is attached to and made a part of that certain Continuing
Guaranty ("Guaranty") executed by Hambrecht & Quist, L.P., a California
limited partnership ("Guarantor") and dated effective as of March 21, 1996 in
favor of THE BANK OF CALIFORNIA, N.A. ("Bank"). The following provisions are
hereby incorporated into the Guaranty:
So long as Guarantor is obligated to Bank under the Guaranty, Guarantor
shall provide Bank the following financial information, which Guarantor
warrants shall be accurate and complete in all material respects and
prepared in accordance with generally accepted accounting principles and
practices, consistently applied:
YEAR-END FINANCIAL STATEMENTS
As soon as available, but no later than 90 days after and as of the end of
each financial reporting year, a financial statement of Guarantor prepared
and attested by a responsible financial officer of Guarantor as being
complete and correct and fairly presenting Guarantor's financial condition
and the results of Guarantor's operations to include balance sheet, income
statement, and statement of cash flows. Guarantor shall not change its
financial reporting year end from the current September 30th without Bank's
prior written consent.
OTHER FINANCIAL INFORMATION. Such other statements, lists of property and
accounts, budgets, forecasts, reports or other financial information as
Bank may from time to time request.
Page 1
<PAGE>
HAMBRECHT & QUIST
INTER-OFFICE MEMORANDUM
TO: Daniel H. Case III
FROM: Steven N. Machtinger
SUBJECT: AGREEMENT
DATE: June 17, 1996
According to resolutions approved by the Board of Directors on March 21, 1996,
the terms of your Agreement dated April 13, 1992 (approved by the directors on
June 22, 1992) were superseded, except for Section 5 thereof, which remains in
full force and effect.
Section 5 thereof reads in full as follows:
" TERMINATION AND CHANGE OF CONTROL PROVISIONS. Case's employment or employment
capacity may be terminated at any time, either by H&Q or by Case himself. If
Case's employment or employment capacity is terminated by H&Q for any reason
other than "just cause" (i.e., fraud or gross negligence as admitted by Case or
determined by a third party), then H&Q shall pay Case the greater of $400,000 or
25% of the total compensation he has received in the twenty-four month period
immediately preceding such termination or change in capacity. If Case
voluntarily resigns, he shall not be entitled to any severance payments;
provided, however, that if he resigns within six months of a change in control
of H&Q, then he shall be paid the amount described in the preceding sentence.
In the event that (i) Case's employment or employment capacity is terminated
without just cause (as defined above) or (H) Case reigns within six months of a
change in control of H&Q, the following provisions shall apply:
(a)
.50% of Case's previously-granted but not yet vested options shall
immediately become vested; and
(b)
Case shall have two years from the date of such termination or resignation
to exercise his vested options and may exercise such vested options on a net
exercise basis (i.e., H&Q would issue to Case shares of H&Q stock having a total
net book value equal to the total spread between the exercise price and the
current net book value of the shares at the time of the exercise);
(c)
for a period of two years from the date of such termination or resignation,
unless and until he becomes employed by another full-service investment banking
firm, Case shall have the right to co-invest in H&Q venture capital
opportunities on the same basis as executive officers of H&Q."
<PAGE>
Please confirm where indicated below that the foregoing accurately describes
your entire agreement with Hambrecht & Quist pertaining to your employment.
Accepted and agreed to:
- ---------------------------------
Steven N. Machtinger
-----------------------------
Daniel H. Case III
Date:
-----------------------
<PAGE>
OPERATING AGREEMENT
OF
HAMBRECHT & QUIST L.L.C.,
A LIMITED LIABILITY COMPANY
<PAGE>
OPERATING AGREEMENT
OF
HAMBRECHT & QUIST L.L.C.,
A LIMITED LIABILITY COMPANY
TABLE OF CONTENTS
-----------------
PAGE
----
ONE FORMATION OF LIMITED LIABILITY COMPANY . . . . . . . . . . . . . 1
1.1 Formation; Registered Office and Registered
Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Name and Principal Place of Business. . . . . . . . . . . . 1
1.3 Term of Company . . . . . . . . . . . . . . . . . . . . . . 1
1.4 Definitions . . . . . . . . . . . . . . . . . . . . . . . . 2
1.5 Purpose of Company. . . . . . . . . . . . . . . . . . . . . 7
TWO FINANCING OF THE COMPANY . . . . . . . . . . . . . . . . . . . . 7
2.1 Capitalization and Issuance of Units;
Contemplated Merger . . . . . . . . . . . . . . . . . . . . 7
2.2 Interest. . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.3 Time for Return of Contributions. . . . . . . . . . . . . . 8
2.4 Loans by the Members. . . . . . . . . . . . . . . . . . . . 9
2.5 Allocation of Net Profits and Net Losses and
Distributions of Cash Flow . . . . . . . . . . . . . . . . 9
2.6 Tax Allocations; Code Section 704(c). . . . . . . . . . . . 10
2.7 Overriding Allocation Provisions. . . . . . . . . . . . . . 10
2.8 Saving Clause . . . . . . . . . . . . . . . . . . . . . . . 12
THREE MANAGEMENT OF THE COMPANY. . . . . . . . . . . . . . . . . . . . 12
3.1 General Powers of the Members . . . . . . . . . . . . . . . 12
3.2 Manner of Exercising Management Power . . . . . . . . . . . 12
3.3 Liability and Indemnification of the
Members . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.4 Liability of the Members. . . . . . . . . . . . . . . . . . 14
FOUR BOOKS OF ACCOUNT, FINANCIAL STATEMENTS
AND FISCAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . 14
4.1 Books of Account and Capital Accounts . . . . . . . . . . . 14
4.2 Reports and Financial Statements. . . . . . . . . . . . . . 15
4.3 Bank Accounts Funds and Assets. . . . . . . . . . . . . . . 15
4.4 Company Elections . . . . . . . . . . . . . . . . . . . . . 15
4.5 Working Capital and Reserves. . . . . . . . . . . . . . . . 16
4.6 New York Stock Exchange Approval. . . . . . . . . . . . . . 16
4.7 Rule 326 Compliance . . . . . . . . . . . . . . . . . . . . 16
SIX RIGHT OF MEMBER TO RECEIVE PROPERTY
OTHER THAN CASH. . . . . . . . . . . . . . . . . . . . . . . . . 17
<PAGE>
TABLE OF CONTENTS
(continued)
PAGE
----
SEVEN WITHDRAWAL, REMOVAL, DISSOLUTION, OR BANKRUPTCY
OF A MEMBER. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.1 Withdrawal of a Member. . . . . . . . . . . . . . . . . . . 17
7.2 Removal of a Member . . . . . . . . . . . . . . . . . . . . 17
7.3 Continuation of the Company . . . . . . . . . . . . . . . . 17
7.4 Interest of a Member Upon Dissolution
Withdrawal or Bankruptcy. . . . . . . . . . . . . . . . . . 17
7.5 Election to Continue the Company. . . . . . . . . . . . . . 17
7.6 Definition of Bankruptcy. . . . . . . . . . . . . . . . . . 17
EIGHT STOCK EXCHANGE SEATS . . . . . . . . . . . . . . . . . . . . . . 17
8.1 Member Agreement. . . . . . . . . . . . . . . . . . . . . . 18
8.2 Compliance. . . . . . . . . . . . . . . . . . . . . . . . . 18
8.3 Cessation of Membership . . . . . . . . . . . . . . . . . . 18
8.4 Value of Membership . . . . . . . . . . . . . . . . . . . . 19
NINE TERMINATION AND DISSOLUTION. . . . . . . . . . . . . . . . . . . 20
9.1 Liquidation and Distribution. . . . . . . . . . . . . . . . 20
9.2 Dissolution . . . . . . . . . . . . . . . . . . . . . . . . 20
TEN NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ELEVEN DISPUTES AND ARBITRATION . . . . . . . . . . . . . . . . . . . . 21
TWELVE CAPTIONS - PRONOUNS. . . . . . . . . . . . . . . . . . . . . . . 22
THIRTEEN BINDING EFFECT AND EXHIBITS. . . . . . . . . . . . . . . . . . . 22
FOURTEEN AMENDMENT OF THE AGREEMENT . . . . . . . . . . . . . . . . . . . 22
FIFTEEN ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . 22
SIXTEEN APPLICABLE LAW . . . . . . . . . . . . . . . . . . . . . . . . . 22
SEVENTEEN SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . 23
EIGHTEEN LITIGATION AND TAX CONSEQUENCES. . . . . . . . . . . . . . . . . 23
NINETEEN COUNTERPARTS AND EXECUTION . . . . . . . . . . . . . . . . . . . 23
TWENTY CONVEYANCES. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ii
<PAGE>
OPERATING AGREEMENT OF
HAMBRECHT & QUIST L.L.C.,
A LIMITED LIABILITY COMPANY
THIS OPERATING AGREEMENT is made as of March 6, 1995, by and among
Hambrecht & Quist, L.P., a California limited partnership ("LP" or a "Member")
and Hambrecht & Quist Incorporated, a California corporation ("H&Q Inc." or a
"Member" and, collectively with LP, the "Members").
ONE
FORMATION OF LIMITED LIABILITY COMPANY
1.1 FORMATION; REGISTERED OFFICE AND REGISTERED AGENT. The parties hereto
have come together for the purpose, among other things, of forming Hambrecht &
Quist L.L.C. (the "Company") under the laws of the State of Delaware and
entering into this Operating Agreement to define the rights and obligations of
the Members with respect to the Company. In order to complete the organization
of the Company, filing of the Certificate of Formation (the "Certificate") shall
be made by any person authorized by the Members pursuant to the Act. The
Company's initial registered office within the State of Delaware shall be at the
office of its registered agent at The Prentice-Hall Corporation System, Inc., 32
Loockerman Square, Suite L-100, Dover, Delaware 19901, and the name of its
initial registered agent at such address shall be The Prentice-Hall Corporation
System, Inc. The registered office and registered agent may be changed by the
Members from time to time by filing the address of the new registered office
and/or the name of the new registered agent with the Delaware Secretary of State
pursuant to the Act.
1.2 NAME AND PRINCIPAL PLACE OF BUSINESS. The name of the Company is
Hambrecht & Quist L.L.C., and its office and principal place of business shall
be located at One Bush Street, 18th Floor, San Francisco, California 94104 or
such other place or places as the Members may from time to time determine.
1.3 TERM OF COMPANY. The Company shall commence upon the filing of the
Company's Certificate with the Delaware Secretary of State and shall terminate
on the earlier of:
(a) September 30, 2064;
(b) The date on which the Company's business is wound up and all of
its property and other assets have been sold or otherwise disposed of;
<PAGE>
(c) The date on which the Members elect to terminate and dissolve the
Company;
(d) The date on which the Company is dissolved by operation of law or
judicial decree; or
(e) Except as otherwise provided in Article Seven, the date on which
any Member withdraws, files a certificate of dissolution, or becomes Bankrupt.
The term of this Company may be extended only by the written consent of all the
Members.
1.4 DEFINITIONS. The following terms used in this Agreement shall have
the following respective meanings:
"Act" shall mean the Delaware Limited Liability Company Act, as it may
be amended from time-to-time.
"Adjusted Capital Account Deficit" means, with respect to any Member,
the deficit balance, if any, in such Member's Capital Account as of the end of
the relevant Fiscal Year, after giving effect to the following adjustments;
(a) Credit to such Capital Account any amounts which such Member
is deemed to be obligated to restore pursuant to the penultimate sentences of
Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Regulations; and
(b) Debit to such Capital Account the items described in
Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-
1(b)(2)(ii)(d)(6) of the Regulations.
The foregoing definition of Adjusted Capital Account Deficit is intended to
comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations
and shall be interpreted consistently therewith.
"Affiliate" shall mean (i) any Person directly or indirectly
controlling, controlled by or under common control with another Person, (ii) any
Person owning or controlling 10% or more of the outstanding voting securities or
beneficial interests of such other Person, (iii) any officer, director, trustee,
general partner, family member, or limited liability company member, of or for
such Person (or such Person's benefit), and (iv) if such other Person is an
officer, director, trustee, member or partner of another entity, then the entity
for which that Person acts in any such capacity.
"Bankrupt" and "Bankruptcy" shall have the meanings set forth in
Section 7.6.
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"Beneficial Owner" shall mean any direct or indirect owner of a
beneficial interest in a Member.
"Capital Accounts" shall mean the capital accounts of the Members
maintained pursuant to Section 4.1.
"Capital Contribution" shall mean the total actual investment and
contribution to the capital of the Company in cash and the fair market value of
other property by a Member. Capital Contribution does not include any profits
or gains, in excess of a Member's actual contributions, that are allocated to a
Member's Capital Account.
"Cash Flow" shall mean the excess of the net cash receipts, including
the release or reduction of any cash reserves or working capital reserves, over
the cash expenditures of the Company.
"Certificate" shall have the meaning set forth in Section 1.1.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Company" shall have the meaning set forth in Section 1.1 hereof.
"Conversion Date" shall mean the later of (i) date on which the stock
of Concord Holding Group held by LP is exchanged for stock of BISYS Group, Inc.
or (ii) the date after the day on which H&Q Inc. is merged with and into the
Company.
"Depreciation" shall mean, for each Fiscal Year, an amount equal to
the depreciation, amortization, or other cost recovery deduction allowable with
respect to an asset for such Fiscal Year, except that if the Gross Asset Value
of an asset differs from its adjusted basis for federal income tax purposes at
the beginning of such Fiscal Year, Depreciation shall be an amount which bears
the same ratio to such beginning Gross Asset Value as the federal income tax
depreciation, amortization or other cost recovery deduction for such Fiscal Year
bears to such beginning adjusted tax basis; provided, however, that if the
adjusted basis for federal income tax purposes of an asset at the beginning of
such Fiscal Year is zero, Depreciation shall be determined with reference to
such beginning Gross Asset Value using any reasonable method selected by the
Members.
"Fiscal Year" means the annual tax reporting period of the Company,
ending on September 30 of each calendar year.
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"Gross Asset Value" shall mean, with respect to any asset, the asset's
adjusted basis for federal income tax purposes, except as follows:
(i) The initial Gross Asset Value of any asset contributed by a
Member to the Company shall be the gross fair market value of such asset, as set
forth herein;
(ii) The Gross Asset Values of all Company assets shall be
adjusted to equal their respective gross fair market values, as determined by
the Members, as of the following times: (A) the acquisition of an additional
interest in the Company by any new or existing Member in exchange for more than
a DE MINIMIS Capital Contribution; (B) the distribution by the Company to a
Member of more than a DE MINIMIS amount of Company property as consideration for
an interest in the Company; and (C) the liquidation of the Company within the
meaning of Regulations Section 1.704-1(b)(2)(ii)(g); provided, however, that the
adjustments pursuant to clauses (A) and (B) above shall be made only if the
Members reasonably determine that such adjustments are necessary or appropriate
to reflect the relative economic interests of the Members in the Company;
(iii) The Gross Asset Value of any Company asset distributed to
any Member shall be adjusted to equal the gross fair market value of such asset
on the date of distribution as determined by the Members; and
(iv) The Gross Asset Value of Company assets shall be increased
(or decreased) to reflect any adjustments to the adjusted basis of such assets
pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent
that such adjustments are taken into account in determining Capital Accounts
pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) and this Agreement;
provided, however, that Gross Asset Values shall not be adjusted pursuant to
this subsection (iv) to the extent the Members determine that an adjustment
pursuant to subsection (ii) hereof is necessary or appropriate in connection
with a transaction that would otherwise result in an adjustment pursuant to this
subsection (iv).
If the Gross Asset Value of an asset has been determined or adjusted pursuant to
subsection (i), (ii), or (iv) above, such Gross Asset Value shall thereafter be
adjusted by the Depreciation taken into account with respect to such asset for
purposes of computing Profits and Losses.
"Group" shall mean Hambrecht & Quist Group.
"Member Nonrecourse Debt" shall have the meaning set forth in Section
1.704 of the Regulations.
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"Member Nonrecourse Debt Minimum Gain" means an amount, with respect
to each Member Nonrecourse Debt, equal to the Company Minimum Gain that would
result if such Member Nonrecourse Debt were treated as a Nonrecourse Liability,
determined in accordance with Section 1.704 of the Regulations.
"Minimum Gain" shall mean that amount of gain which would be
recognized for federal income tax purposes if, as of the close of the Fiscal
Year with respect to which the calculation is being made, the Company's assets
were sold for an amount equal to the total principal amount of all nonrecourse
indebtedness of the Company then secured by such assets. It is the intention of
the Members that the concept of Minimum Gain, as used in this Agreement, have
the same meaning as it does in Section 1.704 of the Regulations.
"Operating Committee" shall have the meaning set forth in Section 3.2.
"Person" means any individual, corporation, partnership, limited
liability company, association, firm, joint stock company, trust, unincorporated
association or other entity, including any governmental entity.
"Profits" and "Losses" shall mean, for each Fiscal Year, an amount
equal to the Company's taxable income or loss for such year or period,
determined in accordance with Code Section 703(a) (for this purpose, all items
of income, gain, loss, or deduction required to be stated separately pursuant to
Code Section 703(a)(1) shall be included in taxable income or loss), with the
following adjustments:
(i) Any income of the Company that is exempt from federal income
tax and not otherwise taken into account in computing Profits and Losses shall
be added to such taxable income or loss;
(ii) Any expenditures of the Company described in Code Section
705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to
Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account
in computing Profits or Losses shall be subtracted from such taxable income or
loss;
(iii) In the event the Gross Asset Value of any Company asset is
adjusted pursuant to subsection (ii) or (iii) of the definition of Gross Asset
Value, the amount of such adjustment shall be taken into account as gain or loss
from the disposition of such asset for purposes of computing Profits or Losses;
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(iv) Gain or loss resulting from any disposition of Company
property with respect to which gain or loss is recognized for federal income tax
purposes shall be computed by reference to the Gross Asset Value of the property
disposed of, notwithstanding that the adjusted tax basis of such property
differs from its Gross Asset Value;
(v) In lieu of the depreciation, amortization, and other cost
recovery deductions taken into account in computing such taxable income or loss,
there shall be taken into account Depreciation for such fiscal year or other
period;
(vi) To the extent an adjustment to the adjusted tax basis of
any Company asset pursuant to Code Section 734(b) or Code Section 743(b) is
required pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(4) to be taken
into account in determining Capital Accounts as a result of a distribution other
than in liquidation of a Member's interest in the Company, the amount of such
adjustment shall be treated as an item of gain (if the adjustment increases the
basis of the asset) or loss (if the adjustment decreases the basis of the asset)
from the disposition of the asset and shall be taken into account for purposes
of computing Profits or Losses;
(vii) Any items which are specially allocated pursuant to
Section 2.7 hereof shall not be taken into account in computing Profits or
Losses.
"Regular Tax Payment" shall mean the product of (i) the Tax Rate
multiplied by (ii) the amount of taxable income (calculated according to federal
income tax standards and excluding any income allocated to the Member solely on
account of Section 704(c) of the Code) allocated to the Member by the Company
for a Fiscal Year.
"Regulations" shall mean the Income Tax Regulations, including
Temporary Regulations, promulgated under the Code, as such Regulations may be
amended from time to time (including corresponding provisions of succeeding
regulations).
"Regulatory Restrictions" shall mean every rule, requirement or
restriction to which the Company is bound to adhere or by which its assets or
business is regulated, whether promulgated by a governmental authority or a
self-regulatory organization.
"Section 704(c) Income Amount" shall mean the amount, if any, of
income allocable to a Member solely on account of Section 704(c) of the Code for
the current Fiscal Year.
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"Section 704(c) Tax Payment" shall mean the product of (i) the Section
704(c) Tax Rate multiplied by (ii) the Section 704(c) Income Amount.
"Section 704(c) Tax Rate" shall mean the combined highest marginal
federal, state and local ordinary income and/or capital gain (as appropriate)
tax rate applicable to any Member (or, if the Member is a pass-through entity,
the Member's Beneficial Owners, as appropriate) who receives for the Fiscal Year
an allocation of income solely on account of Section 704(c) of the Code,
calculated by taking into account the deduction from federal income tax
allowable for state income tax (as if the state and local income taxes were in
all cases completely deductible at the highest marginal federal income tax
rates).
"Stock Exchange Member" shall have the meaning set forth in Section
8.1 hereof.
"Target Final Balances" shall have the meaning set forth in Section
2.8 hereof.
"Tax Rate" shall mean the combined highest marginal federal, state and
local ordinary income and/or capital gain (as appropriate) tax rate applicable
to any Member (or, if the Member is a pass-through entity, the Member's
Beneficial Owners, as appropriate), calculated by taking into account the
deduction from federal income tax allowable for state income tax (as if the
state and local income taxes were in all cases completely deductible at the
highest marginal federal income tax rates).
"Units" shall mean the units of interest into which ownership of the
Company is divided.
1.5 PURPOSE OF COMPANY. The purpose of the Company is to acquire, own,
manage and operate the business of a broker/dealer in securities and to engage
in such incidental or ancillary activities as the Members deem necessary or
advisable.
TWO
FINANCING OF THE COMPANY
2.1 CAPITALIZATION AND ISSUANCE OF UNITS; CONTEMPLATED MERGER.
(a) INITIAL CAPITALIZATION. The parties intend that the Company be
capitalized in three distinct stages, as set forth in this subsection (a) and in
subsections (b) and (c) which follow. As the first of such stages, and
contemporaneously with the execution of this Agreement, H&Q Inc. shall
contribute Six Hundred Dollars ($600) and LP shall contribute Four Hundred
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Dollars ($400) to the Company's capital. Upon such contribution the Company
shall issue six (6) Units to H&Q Inc. and four (4) Units to LP.
(b) MERGER. On April 1, 1995, or as soon thereafter as the Members
determine it is practical, H&Q Inc. shall be merged with and into the Company.
In connection with the merger, the Company shall succeed to all assets and
liabilities of H&Q Inc. and shall issue to Group, the corporate parent of H&Q
Inc., a number of Units equal to the number of shares of H&Q Inc. owned by
Group. The Members hereby grant all necessary consents to such merger of H&Q
Inc. with and into the Company. Upon such merger, Group shall execute a copy of
this Agreement and, upon such execution, and notwithstanding any provision of
this Agreement to the contrary, shall become a Member of the Company, shall own
the Units previously owned by H&Q Inc. and shall succeed to all rights, powers,
obligations and duties of H&Q Inc. hereunder. Contemporaneously with the
merger, LP will contribute cash or other assets with a fair market value
sufficient to bring its Capital Account to at least the lesser of (i) one
percent (l%) of all Members' Capital Accounts or (ii) Five Hundred Thousand
Dollars ($500,000.00).
(c) UPON CONVERSION DATE. When and if the Conversion Date shall
occur, LP shall, as soon as is practical, contribute all its stock in BISYS
Group, Inc. to the Company's capital. Upon LP's contribution of the stock of
BISYS Group, Inc., LP shall be entitled to a distribution equal to any
contribution made by it pursuant to subsection (b) above.
(d) FINANCIAL DOCUMENTATION. At the time any additional Capital
Contribution referred to in subsections (b) and (c) is made by the Members, the
Capital Accounts of the Members shall be revalued pursuant to Regulations
Section 1.704-1(b)(2)(iv)(f) according to an independent appraisal commissioned
by the Members. After such appraisal, the Members shall be issued a number of
Units sufficient to bring the number of Units owned by the Members into the same
relative proportions as their Capital Accounts. All matters pertaining to such
appraisal shall be determined by the Members. At the times Members make Capital
Contributions referred to in subsection (a), (b), and (c) above, the Company
shall prepare an opening balance sheet for the Company, any other financial
schedules necessary to reflect the Members' opening or revalued Capital Accounts
and any differences between the fair market value of the contributed assets and
their federal income tax bases.
2.2 INTEREST. No interest shall be paid by the Company to the Members on
any Capital Contribution.
2.3 TIME FOR RETURN OF CONTRIBUTIONS. Without the consent of all Members,
no Member shall be entitled to a return of the
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Capital Contributions made by it until the full and complete winding up and
liquidation of the business and affairs of the Company. No Member shall bring
or maintain any action for the partition of the Company.
2.4 LOANS BY THE MEMBERS. The Members shall not be required to make loans
to the Company. If the Members deem it necessary or helpful to the conduct of
the Company's business, a Member may loan funds to the Company upon such terms
and conditions as may be agreed between the Members.
2.5 ALLOCATION OF NET PROFITS AND NET LOSSES AND DISTRIBUTIONS OF CASH
FLOW.
(a) ALLOCATIONS. Except as otherwise provided in Section 2.7 or in
Section 9.1(b), all allocations of Net Profit and Net Loss shall be made in
accordance with the respective number of Units owned by each Member, as such
numbers may exist from time to time.
(b) DISTRIBUTIONS. Except as otherwise required by Section 9.1,
distributions of Cash Flow for each Fiscal Year shall be made in the following
order:
(i) To each Member, an amount, if any, of such Member's Section
704(c) Tax Payment;
(ii) To each Member, the amount, if any, of such Member's
Regular Tax Payment;
(iii) To each Member, an amount, if any, which when combined
together with all amounts distributed pursuant to (i) above, is sufficient to
bring the aggregate distributions under subsection (i) above and this subsection
(iii) for all Fiscal Years of the Company into the relationship of the Members'
respective number of Units owned, as it may exist from time to time; and
(iv) To the Members, in accordance with the respective number of
Units owned by each.
(c) SPECIAL DISTRIBUTIONS. If at any time or from time to time any
Member requires funds to redeem or liquidate all or any portion of one or more
Beneficial Owner's interest in such Member, such Member shall inform the Member
in writing of its requirement for funds and of the amount of such requirement
and the Member shall distribute such amount to such Member; provided, however,
that no distribution which would violate or would cause the Company to violate
any Regulatory Restrictions shall be made.
(d) COMPLIANCE WITH REGULATORY RESTRICTIONS. Notwithstanding any
provision of this Agreement to the contrary,
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no distribution of Cash Flow shall be made if such distribution would violate,
or would cause the Company to violate, any Regulatory Restriction.
2.6 TAX ALLOCATIONS; CODE SECTION 704(C). In accordance with Code Section
704(c) and the Regulations thereunder, income, gain, loss and deduction with
respect to any property contributed to the capital of the Company shall, solely
for tax purposes, be allocated among the Members so as to take account of any
variation between the adjusted basis of such property to the Company for federal
income tax purposes and its initial Gross Asset Value. In the event the Gross
Asset Value of any Company asset is adjusted pursuant to subsection (ii) of the
definition of Gross Asset Value, subsequent allocations of income, gain, loss
and deduction with respect to such asset shall take account of any variation
between the adjusted basis of such asset for federal income tax purposes and its
Gross Asset Value in the same manner as under Code Section 704(c) and the
Regulations thereunder. Any elections or other decisions relating to such
allocations shall be made by the Members in any manner that reasonably reflects
the purpose and intention of this Agreement. Allocations pursuant to this
Section 2.6 are solely for purposes of federal, state, and local taxes and shall
not affect, or in any way be taken into account in computing, any Member's
Capital Account or share of Profits, Losses, other items, or distributions
pursuant to any provision of this Agreement.
2.7 OVERRIDING ALLOCATION PROVISIONS. Notwithstanding anything contained
herein to the contrary, the following allocations shall be made in the order set
forth below:
(a) MINIMUM GAIN CHARGEBACK. Except as otherwise provided in Section
1.704 of the Regulations, notwithstanding any other provision of this Agreement,
if there is a net decrease in Company Minimum Gain during any Fiscal Year, the
Members shall be specially allocated items of Company income and gain for such
Fiscal Year (and, if necessary, subsequent Fiscal Years) in an amount equal to
such Member's share of the net decrease in Company Minimum Gain, determined in
accordance with Section 1.704 of the Regulations. Allocations pursuant to the
previous sentence shall be made in proportion to the respective amounts required
to be allocated to each Member pursuant thereto. The items to be so allocated
shall be determined in accordance with Section 1.704 of the Regulations. This
Subsection 2.7(a) is intended to comply with the minimum gain chargeback
requirement in Section 1.704 of the Regulations and shall be interpreted
consistently therewith.
(b) MEMBER MINIMUM GAIN CHARGEBACK. Except as otherwise provided in
Section 1.704 of the Regulations, if there is a net decrease in Member
Nonrecourse Debt Minimum Gain attributable to a Member Nonrecourse Debt during
any Company
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Fiscal Year, each Member who has a share of the Member Nonrecourse Debt Minimum
Gain attributable to such Member Nonrecourse Debt, determined in accordance with
Section 1.704 of the Regulations, shall be specially allocated items of Company
income and gain for such Fiscal Year (and, if necessary, subsequent Fiscal
Years) in an amount equal to such Member's share of the net decrease in Member
Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt,
determined in accordance with Section 1.704 of the Regulations. Allocations
pursuant to the previous sentence shall be made in proportion to the respective
amounts required to be allocated to each Member pursuant thereto. The items to
be so allocated shall be determined in accordance with Section 1.704 of the
Regulations. This Subsection 2.7(b) is intended to comply with the minimum gain
chargeback requirement in Section 1.704 of the Regulations and shall be
interpreted consistently therewith.
(c) QUALIFIED INCOME OFFSET. Notwithstanding any other provision of
this Agreement, in the event any Member unexpectedly receives any adjustments,
allocations, or distributions described in Section 1.704-1 of the Regulations,
items of Company income and gain shall be specially allocated to each such
Member in an amount and manner sufficient to eliminate, to the extent required
by the Regulations, the Adjusted Capital Account Deficit of such Member as
quickly as possible, provided that an allocation pursuant to this Subsection
2.7(c) shall be made only if and to the extent that such Member would have an
Adjusted Capital Account Deficit after all other allocations provided for this
Section 2.7 have been tentatively made as if this Subsection 2.7(c) were not in
this Agreement. This qualified income offset is intended to comply with
Treasury Regulation Sections 1.704-1(b)(2)(ii)(d) and shall be interpreted
consistently therewith.
(d) NET LOSS LIMITATION. No Member shall be allocated Net Losses to
the extent that the allocation would cause the Member to have an Adjusted
Capital Account Deficit.
(c) INCOME AND DEDUCTIONS ATTRIBUTABLE TO DEBT AS TO WHICH A MEMBER
OR RELATED PARTY BEARS A RISK OF LOSS. If a Member (or any person related to
such Member pursuant to Section 1.752-4(b) of the Regulations) bears the
economic risk of loss with respect to any debt of the Company, income and
deductions attributable to such debt for any taxable period shall be allocated
to such Member on a basis consistent with the Code and the Regulations.
(d) SECTION 754 ADJUSTMENTS. To the extent an adjustment to the
adjusted tax basis of any Company asset is required by the Company's election
under Section 754 of the Code, such adjustment shall be made pursuant to all
applicable Treasury Regulations.
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2.8 SAVING CLAUSE. The tax allocation provisions of this Agreement are
intended to produce final Capital Account balances that are at levels ("Target
Final Balances") which permit liquidating distributions that are made in
accordance with such final Capital Account balances to be equal to the
distributions that would occur under Section 2.5 if said liquidating proceeds
were distributed pursuant to said Section 2.5. To the extent that the tax
allocation provisions of this Agreement would not produce the Target Final
Balances, the Members agree that they shall take such actions as are necessary
to amend such provisions to produce such Target Final Balances. By means of
such amendments, allocations of income and deductions shall be made
prospectively as necessary to provide such Target Final Balances (and, to the
extent allowable such prospective allocations would not reach such result, the
prior tax returns of the Company shall be amended to reallocate Company income
and deductions to produce such Target Final Balances).
THREE
MANAGEMENT OF THE COMPANY
3.1 GENERAL POWERS OF THE MEMBERS. The Company shall be a member managed
limited liability company. Subject to the terms and conditions contained
herein, Members shall possess, enjoy and may exercise all of the rights and
powers of a member in a member managed limited liability company as more
particularly provided from time to time by the Act.
3.2 MANNER OF EXERCISING MANAGEMENT POWER. Through an Operating Committee
composed of at least three individuals to be appointed by agreement of all the
Members, officers of the Company elected by the Operating Committee shall have
power and control over the day-to-day management of the business of the Company
and, except as otherwise specifically provided in this Agreement or by the
Members, all day-to-day management matters in connection with the Company shall
be decided by the Operating Committee or its designated officers. Powers,
duties or decisions allocated to the Members hereunder shall, unless otherwise
determined by the Members, be exercised by the Operating Committee or its
designated officers. Members of the Operating Committee shall serve at the
pleasure of the Members and may be dismissed by either Member with or without
cause at any time or from time to time. In addition to the Operating
Committee's authority, each Member shall independently have full power and
authority to make management decisions in the ordinary course of the Company's
business; decisions not in the ordinary course of the Company's business shall
be made by the Operating Committee or both Members acting together. Management
power shall not be divided between the Members based on their relative
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number of Units or Capital Accounts or on any other similar basis. Without
limiting the generality of the foregoing, the Members acting directly or through
the Operating Committee and officers shall have the power and authority on
behalf of the Company to:
(a) Employ such persons, firms or corporations as, in their absolute
discretion and judgment, they shall deem advisable for the proper operation and
management of the Company, including corporate affiliates or persons affiliated
with a Member, such employment to be undertaken upon such terms and for such
compensation as are reasonable and customary in the industry;
(b) Acquire, own, manage and operate the business of the Company;
(c) Invest Company funds in interest-bearing accounts, commercial
paper, government securities, certificates of deposit or similar investments;
(d) Determine the amount and timing of any distribution of cash or
other property; provided, however, that the Members shall be required annually
to distribute sufficient Cash Flow to equal the amounts referred to in Section
2.5(b)(i), (ii) and (iii) unless and to the extent that, such distribution would
violate, or cause the Company to violate, any Regulatory Restriction; and
(e) Execute promissory notes and all other documents, agreements, or
certifications.
In addition, H&Q Inc. (and after H&Q Inc.'s merger with and into the
Company Group) shall exercise all rights and powers permitted to the "tax
matters partner" within the meaning of Section 6230(a)(7) of the Code.
3.3 LIABILITY AND INDEMNIFICATION OF THE MEMBERS. Except in the case of
willful misconduct, neither the Member nor any member of the Operating Committee
shall be liable, responsible or accountable in damages or otherwise to the
Company or any of the Members for any acts or omissions performed or omitted by
any of them which may cause or result in loss or damage to the Company or any
Member.
The Members and the members of the Operating Committee, whether or not
serving in such capacity, shall be indemnified by the Company against all
liabilities, costs and expenses reasonably incurred by or imposed upon any such
Person in connection with or arising out of any action, suit or proceeding in
which any of them may be involved or to which they may be made parties by reason
of their being or having been a Member or a member of the Operating Committee,
except in the case where such
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person is guilty of willful misconduct. The indemnification authorized by this
Section 3.3 shall include the payment of reasonable attorneys, fees and other
expenses (not limited to taxable costs) incurred in settling or defending any
claims or threatened action, including any disputes with the Internal Revenue
Service or other taxing authorities, or finally adjudicated legal proceedings.
The Members shall have the power to advance such fees and expenses to any person
claiming indemnity hereunder upon the written agreement of such person to repay
all such amounts if such person is ultimately determined not to be entitled to
indemnification under this Section 3.3. The Members shall have the power, but
not the obligation, to exculpate, hold harmless, and indemnify any other agent,
partner or employee of the Company or of a Member on the same basis as set forth
in this Section 3.3.
3.4 LIABILITY OF THE MEMBERS. The liability of the Members shall be
limited to their Capital Contributions and the Members shall not have any other
liability to contribute money to or in respect of the liabilities or obligations
of the Company, nor shall any Member be personally liable for any debt,
obligation or liability of the Company.
FOUR
BOOKS OF ACCOUNT,
FINANCIAL STATEMENTS AND FISCAL MATTERS
4.1 BOOKS OF ACCOUNT AND CAPITAL ACCOUNTS. The Members shall keep
adequate books of account and records of the Company wherein shall be recorded
and reflected all of the contributions to the capital of the Company and all of
the expenses and transactions of the Company. Such books of account and records
shall include the following:
(a) A current list of the full name and last known address of each
Member set forth in alphabetical order together with the contribution and the
share in profits and losses of each Member;
(b) A copy of the Certificate and all certificates of amendment,
together with executed copies of any powers of attorney pursuant to which any
certificate has been executed;
(c) Copies of the Company's federal, state and local income tax or
information returns and reports;
(d) Copies of the original of this Agreement and all amendments;
(e) Financial statements of the Company; and
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(f) The Company's books and records for at least the current and
immediately prior five (5) fiscal years.
Such books of account shall be kept at the principal place of business of the
Company, and each Member and its authorized representative shall have at all
times, during reasonable business hours, free access to and the right to inspect
and copy such books of account and records. The Members shall keep the
Company's books and records on the accrual method of accounting for income tax
purposes. The Company's financial reporting accounting year and tax reporting
year shall be the annual period ending September 30 of each year.
A separate Capital Account shall be maintained for each Member in
accordance with Section 1.704-1(b)(2)(iv) of the Treasury Regulations. Except
as otherwise provided in Section 2.1, the Members shall have the power, but not
the obligation, to restate the Members' Capital Accounts in the manner and upon
an event specified in Treasury Regulations Section 1.704-2(iv)(f).
4.2 REPORTS AND FINANCIAL STATEMENTS. The Members shall provide each
Member with the following reports and financial statements:
(a) REPORTS. Within ninety (90) days after the end of, each Fiscal
Year, (i) a balance sheet as of the end of such Fiscal Year together with
statements of income and of changes in financial position for such year, a
statement of Cash Flow distributions and each Member's Capital Account balance
together with an auditor's report prepared by the Company's independent public
accountants, and (ii) a report of the activities of the Company for such year.
(b) TAX INFORMATION. By January 31 of each year, all information
regarding the Company necessary for the preparation of the Members' federal,
state and local income tax returns.
4.3 BANK ACCOUNTS FUNDS AND ASSETS. The funds of the Company shall be
deposited in its name in such bank or banks as the members shall deem
appropriate. Such funds shall be withdrawn only by the Company or its duly
authorized agents.
4.4 COMPANY ELECTIONS. Upon the transfer of an interest in the Company
(including a purchase of such interest by the Company) or the distribution of an
asset of the Company to a Member, the Company shall elect, pursuant to Section
754 of the Code, to adjust the basis of Company property as allowed by Sections
734(b) and 743(b) thereof. The election will be filed with the Company
information income tax return for the first taxable year to which the election
applies. In addition to the
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above, the Members may make any other tax elections (federal or state) which
they deem appropriate.
4.5 WORKING CAPITAL AND RESERVES. The Members shall cause the Company to
maintain working capital and reasonable reserves in such amounts as they, in
their absolute discretion, deem appropriate.
4.6 NEW YORK STOCK EXCHANGE APPROVAL. Notwithstanding any provision of
this Agreement to the contrary, without the prior approval of the New York Stock
Exchange, the capital contribution of any Member may not be withdrawn on less
than six months, written notice of withdrawal given no sooner than six months
after such contribution was first made. No withdrawal of capital may be made by
any Member to the extent such withdrawal of capital would cause the Company to
be in violation of any applicable Rule of the New York Stock Exchange, or of any
other exchange of which the Company may be a member, or of the Securities and
Exchange Commission, respecting net capital, including without limitation Rule
325 or successor thereto of the New York Stock Exchange and Rule l5c3-1(e) or
successor thereto under the Securities Exchange Act of 1934, as amended.
4.7 RULE 326 COMPLIANCE. Notwithstanding anything to the contrary herein
contained, in the event of the termination of the Company on the expiration of
the term of this Agreement, or any extension or renewal thereof, each Member
agrees that withdrawal, of capital on any such termination which would cause the
Company's aggregate indebtedness to exceed the percentages specified in Rules
326(a) and 326(b) of the Rules of the Board of Directors of the New York Stock
Exchange, Inc. during the six months immediately preceding the date of the
termination, may be postponed for a period of up to six (6) months of the stated
date of termination, as the Members may deem necessary to ensure compliance with
said rules; and any such capital so retained by the Company after the date of
termination shall continue to be subject to all debts and obligations of the
Company.
FIVE
SALES, TRANSFER OR
ASSIGNMENT OF MEMBER'S INTERESTS
Except as otherwise specifically provided in Section 2.1 hereof, no
Member shall have the right or power to sell, exchange, transfer, or assign by
operation of law or otherwise all or any portion of its interest in the Company
to any Person other than the other Member. Any attempted transfer in violation
of this Article V shall be void ab initio.
16
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SIX
RIGHT OF MEMBER TO
RECEIVE PROPERTY OTHER THAN CASH
No right is given to either Member to demand and receive property
other than cash in return for its Capital Contribution. Members may, however,
in their absolute discretion, make a distribution of property other than cash to
any or all of the Members.
SEVEN
WITHDRAWAL, REMOVAL, DISSOLUTION,
OR BANKRUPTCY OF A MEMBER
7.1 WITHDRAWAL OF A MEMBER. A Member shall have the unilateral right to
withdraw from the Company at any time upon thirty (30) days written notice to
the other Member.
7.2 REMOVAL OF A MEMBER. The Members shall have no right to remove a
Member.
7.3 CONTINUATION OF THE COMPANY. Upon the withdrawal, dissolution or
Bankruptcy of a Member, the Company shall terminate and be liquidated pursuant
to the provisions of Article Nine, unless, within thirty (30) days of such
event, the Members elect to continue the Company in accordance with Section 7.5.
7.4 INTEREST OF A MEMBER UPON DISSOLUTION WITHDRAWAL OR BANKRUPTCY. In
the event of a Member's dissolution or withdrawal of a Member under Section 7.1
or in the event a Member shall be Bankrupt, the Member's interest in the Company
shall be converted into that of a Member with no rights regarding management of
the Company.
7.5 ELECTION TO CONTINUE THE COMPANY. Upon the withdrawal or bankruptcy
of a Member, the Company may be continued upon the consent of not less than a
majority in interest of the remaining Members.
7.6 DEFINITION OF BANKRUPTCY. For the purpose of this Article Seven, a
Member of the Company shall be deemed to be bankrupt if such Member is a debtor
under Chapter 7 of the federal bankruptcy law.
17
<PAGE>
EIGHT
STOCK EXCHANGE SEATS
8.1 MEMBER AGREEMENT. The Company will enter an agreement with each
partner or employee of the Company or a Member who now or hereafter holds a
membership in any stock exchange (the "Stock Exchange Member") to the effect
that such Stock Exchange Member agrees, for himself or herself and his or her
heirs and personal representatives in respect to each said membership, that to
the extent permitted by the constitution, by-laws, and rules of the exchange
concerned, said membership and the proceeds thereof shall be assets of the
Company. Said agreement shall include language substantially in the form set
forth in Section 8.3 below (reference to the New York Stock Exchange in Section
8.3 shall be deemed to then apply to any other applicable exchange when the
membership is of another exchange, if such agreement is required by such other
exchange, and the language may be modified to comply with the requirements of
that exchange).
8.2 COMPLIANCE. All business of the Company governed by the by-laws,
rules, and regulations of any stock exchange shall be conducted strictly in
accordance therewith.
8.3 CESSATION OF MEMBERSHIP. The Agreement with the Stock Exchange Member
also will provide:
(a) In the event the Company ceases to be a member firm of the New
York Stock Exchange, or
(b) Upon receipt by a Stock Exchange Member of the New York Stock
Exchange, or his or her personal representative, of written notice that the
Company will, on a stated date, cease to be a member firm of the New York Stock
Exchange, or
(c) In the event of the dissolution of the Company, or
(d) Upon the effectiveness of notice of withdrawal of the Stock
Exchange Member from the Company if the Stock Exchange Member is a Member, or
(e) Upon resignation of the Stock Exchange Member as an employee of
the Company or withdrawal as limited partner of a Member,
(i) The Stock Exchange Member or his or her personal
representative shall have the unqualified right, during a period of thirty (30)
days thereafter (except that in the case of the death or incapacity of the Stock
Exchange Member, such thirty (30) day period shall be deemed to expire ten (10)
days after the appointment of his or her personal representative) to
18
<PAGE>
elect, by giving written notice thereof to the Company, to retain said
membership in the New York Stock Exchange upon payment to the Company of the
amount necessary to purchase another membership, together with such transfer and
other fees as may then be required by the New York Stock Exchange to be paid in
connection with the purchase of a membership. Within forty-five (45) days of
the date the Company receives notice in writing that the Stock Exchange Member,
or his or her personal representative, elects not to retain such membership, or
upon the expiration of the Stock Exchange Member's thirty (30) day option period
without such notice of election to retain or notice of election not to retain
having been given to the Company, the Company shall have the absolute right to
order the Stock Exchange Member, or his or her personal representative to:
(1) sell said membership and pay the proceeds over to the
Company, or
(2) transfer said membership for a nominal consideration to
a person designated by the Company and satisfactory to the Board of Governors of
the New York Stock Exchange.
If the Company fails to elect options (1) or (2) hereinabove within the
forty-five (45) day period, the Stock Exchange Member or his or her legal
representative shall sell the membership with the proceeds paid over to the
Company.
Any controversies arising in connection with this Article Eight shall be
arbitrated in accordance with Article XI of the New York Stock Exchange
Constitution.
8.4 VALUE OF MEMBERSHIP. The Agreement with the Stock Exchange Member
will also provide that the value of exchange memberships shall be based on the
price of the last consummated sale of an equivalent exchange membership during
the ninety (90) days preceding the triggering events set forth in Section 8.3
hereinabove. In the event that there is no sale during such period, the average
between the last recorded bid and asked price thereof before the end of the
period shall be deemed the price of the last consummated sale during the period.
NINE
TERMINATION AND DISSOLUTION
9.1 LIQUIDATION AND DISTRIBUTION.
(a) Upon the termination of the Company in accordance with Section
1.3, the Members or, if there is no Member a special liquidator appointed by any
court or competent jurisdiction, as
19
<PAGE>
the case may be, shall cause the assets of the Company to be liquidated, but in
an orderly and businesslike manner so as not no involve undue sacrifice.
(b) The Members or liquidator shall apply the proceeds from the sale,
exchange or other disposition of Company assets first to satisfy all Company
liabilities other than those owed to Members, then to satisfy all Company
liabilities to Members, and finally, to the Members in accordance with the
respective positive Capital Account balances of each. The Members or liquidator
shall distribute any assets that they, in their absolute discretion, determine
to distribute, in kind as if sold for fair market value.
9.2 DISSOLUTION. Following the distribution of Company assets pursuant to
Section 9.1, the Members or liquidator of the Company, as the case may be, shall
cause the Company to file a certificate of cancellation.
TEN
NOTICES
All notices, requests and other communications provided for herein shall be
in writing and, unless otherwise specified, shall be forwarded by registered or
certified mail, postage and charges prepaid, hand delivery, overnight delivery
service, or facsimile transmission addressed as follows:
If to a Member, to the addresses specified in Exhibit A until the Company
has received written notice of any change in such address.
With a copy to:
Richard L. Greene, Esq.
Greene, Radovsky, Maloney & Share
Spear Street Tower, Suite 4200
One Market
San Francisco, CA 94105
Facsimile: (510) 777-4961
Any such notice shall be conclusively deemed to be received as of the date so
delivered, if delivered personally or via facsimile, or if delivered by mail,
three business days after the notice is deposited in the United States mail.
20
<PAGE>
ELEVEN
DISPUTES AND ARBITRATION
Any dispute or controversy arising under, out of, or in connection with or
in relation to this Agreement, and any amendments hereof, or the breach thereof,
or in connection with the dissolution of the Company, shall be determined and
settled by a single arbitrator in an arbitration to be held in San Francisco,
California, in accordance with the Commercial Arbitration Rules then effective
of the American Arbitration Association and the Members hereby waive any right
to litigate any such dispute or controversy. In rendering a decision, the
arbitrator shall determine the rights and obligations of the parties according
to the substantive and procedural laws of California, Delaware, and/or the
United States, as appropriate, and the terms and provisions of this Agreement.
The arbitrator's award shall be based on the evidence introduced at the hearing,
including all logical or reasonable inferences therefrom. The arbitrator may
make any determination, and/or grant any remedy or relief that is just and
equitable; provided, however, in no event may the arbitrator award punitive
damages. The award must be based on, and accompanied by, a written statement of
decision explaining the factual and legal basis for the award as to each of the
principal controverted issues. The award shall be conclusive and binding and
may thereafter be confirmed as a judgment by the Superior Court of the State of
California, subject to challenge on (i) the grounds set forth in California Code
of Civil Procedure Section 1286.2, or (ii) based on the arbitrator's incorrect
application of the substantive law of California, Delaware, and/or the United
States as appropriate.
TWELVE
CAPTIONS - PRONOUNS
Any titles or captions of Articles contained in this Agreement are for
convenience only and shall not be deemed part of the text of this Agreement.
All pronouns and any variations thereof shall be deemed to refer to the
masculine, feminine, neuter, singular or plural, as the identification of the
person or persons, firm or firms, corporation or corporations may require.
THIRTEEN
BINDING EFFECT AND EXHIBITS
Except as otherwise herein provided, this Agreement shall be binding upon
and inure to the benefit of the parties hereto,
21
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their heirs, executors, administrators, successors and all persons hereafter
having or holding an interest in this Company, whether as assignees, substituted
limited partners, or otherwise. All exhibits hereto are by this reference
incorporated herein.
FOURTEEN
AMENDMENT OF THE AGREEMENT
Except as provided in this Article Fourteen, this Agreement may be amended
by the consent of the Members.
FIFTEEN
ENTIRE AGREEMENT
This Agreement contains the entire understanding and agreement among the
parties hereto respecting the within subject matter and there are no
representations, agreements, arrangements or understandings, oral or written,
among the parties hereto relating to the subject matter of this Agreement which
are not fully expressed herein.
SIXTEEN
APPLICABLE LAW
This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware and, unless expressly or by necessary implication
contravened by any provision hereof, the provisions of the Act shall apply.
SEVENTEEN
SEVERABILITY
If any term or provision of this Agreement or the performance thereof shall
to any extent be invalid or unenforceable, such invalidity or unenforceability
shall not affect or render invalid or unenforceable any other provision of this
Agreement, and this Agreement shall be valid and enforced to the fullest extent
permitted by law.
22
<PAGE>
EIGHTEEN
LITIGATION AND TAX CONSEQUENCES
The Members shall prosecute and defend such actions at law or in equity as
may be necessary to enforce or protect the interests of the Company. The
Company shall respond to any final decree or decision first out of any insurance
proceeds available therefor and next out of the assets of the Company. Should
there be any controversy with the Internal Revenue Service or any other taxing
authority involving the Company or one or more Members, the outcome of which may
adversely affect the Company, either directly or indirectly, the Company may
incur expenses as the Members deem necessary and advisable in the interest of
the Company to oppose such proposed deficiency, including, without being limited
thereto, attorneys' and accounting fees.
NINETEEN
COUNTERPARTS AND EXECUTION
This Agreement may be executed in multiple counterparts, each of which
shall be deemed an original agreement, and all of which shall constitute one
agreement, by each of the parties hereto on the dates respectively indicated in
the signatures of the parties, notwithstanding that all of the parties are not
signatories to the original or the same counterpart, to be effective as of the
day and year first set forth above.
23
<PAGE>
TWENTY
CONVEYANCES
Any contract of the Company or any deed, bill of sale, mortgage, lease,
contract of sale, or other commitment of the Company purporting to convey or
encumber the interest of the Company in all or in any portion of any real or
personal property at any time held in its name may be signed by either Member,
acting alone on behalf of the Company, and no other signature shall be required.
IN WITNESS WHEREOF, the parties have executed and delivered this document
effective as of the day and year first set forth above.
MEMBER:
-------
HAMBRECHT & QUIST, L.P.
By: Hambrecht & Quist Group
Its: General Partner
By: /s/ [Signature Unreadable]
-------------------------------------
Title: CFO
----------------------------------
MEMBER:
-------
HAMBRECHT & QUIST INCORPORATED
By: /s/ [Signature Unreadable]
------------------------------------------
Title: SVP & Secretary
---------------------------------------
24
<PAGE>
EXHIBIT A
---------
NAMES AND ADDRESSES
- -------------------
Hambrecht & Quist, L.P.
One Bush Street, 18th Floor
San Francisco, CA 94104
Fax:
Hambrecht & Quist Incorporated
One Bush Street, 18th Floor
San Francisco, CA 94104
Fax:
25
<PAGE>
HAMBRECHT & QUIST
EXECUTIVE OFFICER BONUS PLAN
(As adopted and effective July 19, 1996)
1. PURPOSE
-------
The purpose of this Plan is to attract, retain, motivate and reward highly
qualified employees who are important to the Company's success and to provide
incentives relating directly to the financial performance and long-term growth
of the Company.
2. COVERED INDIVIDUALS
-------------------
The individuals entitled to bonus payments hereunder shall include the
executive offices of the Company, as determined by the Committee.
3 . THE COMMITTEE
-------------
The Committee shall consist of at least two outside directors of the
Company. The initial members of the Committee are William E. Mayer, Chairman,
Lawrence J. Stupski and Edmund H. Shea, Jr. The Committee shall have the sole
discretion and authority to administer and interpret the Plan
4. AMOUNT OF BONUS
---------------
Annual or semi-annual bonus payments are made in cash and/or common stock
of the Company, as determined by the Committee. In general any stock grants
hereunder will be subject to vesting over a three-year period. Promptly after
the beginning of the fiscal year, the Committee will establish the financial
performance criteria for the fiscal year determine the executives eligible to
participate, determine executive allocations for the fiscal year, and the
frequency in which the executive bonuses will be paid when attained. The
criteria established by the Committee will include a consolidated after-tax net
profits target of the Company, or such other criteria that the Committee may
agree upon.
5. PAYMENT OF BONUS
----------------
The payment of a given period's bonus will require that lie executive
officer be on the Company's payroll as of March 31st and September 30th of the
applicable bonus period. The Committee may make exceptions to this requirement
in the case of retirement, death or disability, as determined by the Committee
in Is sole discretion. No bonus shall be paid unless and until the Committee
determines that the performance goals of Ns Plan are satisfied.
<PAGE>
6. NONASSIGNABILITY
----------------
No Bonus or any other benefit under the Plan shall be assignable or
tranferable by the participant during the participants lifetime.
7. NO RIGHT TO CONTINUED EMPLOYMENT
--------------------------------
Nothing in this Plan shall confer upon any employee any right to continue
in the employ of the Company or shall interfere with or restrict in anyway the
right of the Company to discharge an employee
<PAGE>
at any time for any reason whatsoever, with or without good cause.
8. AMENDMENT AND TERMINATION
-------------------------
The company reserves the right to amend this Plan at any time with respect
to future services of covered individuals. Plan amendments will require
stockholder approval only to the extent required by applicable law.
<PAGE>
MASTER AGREEMENT
MASTER AGREEMENT made as of December 23, 1991, by and among WERTHEIM
SCHRODER & CO. INCORPORATED, a Delaware corporation ("Wertheim Schroder"),
HAMBRECHT & QUIST INCORPORATED, a California corporation ("Hambrecht"), WSCI
LIMITED PARTNERSHIP, a Delaware limited partnership ("WSCI"), and LEWCO
SECURITIES CORP., a Delaware corporation ("Lewco").
W I T N E S S E T H:
WHEREAS, Wertheim Schroder and Hambrecht are registered broker-dealers
engaged in the securities brokerage and related business;
WHEREAS, WSCI is registered as a broker-dealer with the Securities and
Exchange Commission and has applied for membership in the National Association
of Securities Dealers, Inc.; and
WHEREAS, Lewco is a registered broker-dealer engaged in the business of
clearing securities transactions for its owners, Wertheim Schroder and
Hambrecht; and
WHEREAS, Wertheim Schroder, Hambrecht, Moseley Securities Corp., a Delaware
corporation ("Moseley"), and Lewco were parties to a Clearing and Other Services
Agreement (the "Clearing Agreement") dated October 3, 1986, and a Master
Agreement (the "Original Agreement") dated October 3, 1986;
WHEREAS, pursuant to the Clearing Agreement, Lewco acts as clearing agent
and performs other services for Wertheim Schroder and Hambrecht upon the terms
and
<PAGE>
conditions provided for therein, Moseley having terminated its clearing
arrangements with Lewco and sold all the shares of capital stock of Lewco which
it owned to Lewco pursuant to an Agreement dated March 4, 1988, by and among
Wertheim Schroder, Hambrecht, Lewco and Moseley; and
WHEREAS, Wertheim Schroder desires to increase its ownership interest in
Lewco by purchasing 768 shares of Non-Voting Common Stock, par value $1.00 per
share ("Non-Voting Common Stock"), of Lewco and Wertheim Schroder desires to
lend $2,800,000 to Lewco and Lewco desires to borrow $2,800,000 from Wertheim
Schroder; and
WHEREAS, Hambrecht desires to reduce its ownership interest in Lewco by
selling 600 shares of Non-Voting Common Stock of Lewco to Lewco and Hambrecht
desires to lend $600,000 to Lewco and Lewco desires to borrow such sum from
Hambrecht; and
WHEREAS, WSCI desires to acquire an interest in Lewco and have Lewco clear
certain of its securities transactions and to perform certain other related
services for WSCI; and
WHEREAS, Wertheim Schroder, Hambrecht, WSCI and Lewco desire to enter into
a new clearing agreement to provide for the participation of WSCI therein; and
WHEREAS, Wertheim Schroder, Hambrecht, WSCI and Lewco wish to enter into
this Agreement to implement the aforesaid transactions, to provide the general
framework for clearance operations, to contain certain undertakings and
covenants with respect thereto, and to have as exhibits the forms of various
agreements to implement such mutual clearance operations:
-2-
<PAGE>
NOW, THEREFORE, in consideration of the premises and mutual covenants of the
parties herein contained, it is agreed as follows:
1. DEFINITIONS.
a. NET BOOK VALUE. Net Book Value of shares of capital stock of
Lewco shall be determined as provided in the Certificate of Incorporation of
Lewco.
b. VALUATION DATE. For purposes of this Agreement, the term
Valuation Date shall mean the close of business on November 30, 1991.
2. PURCHASE OF SHARES AND LOAN BY WERTHEIM SCHRODER.
a. On the date hereof or as soon thereafter as the requirements
specified in Section 14. hereof are met (the "Closing Date"), Wertheim Schroder
agrees to purchase, and Lewco agrees to sell, 768 shares of Non-Voting Common
Stock, at a purchase price equal to the greater of $1.00 per share or the Net
Book Value thereof, on the Valuation Date. The purchase price of such shares
shall be payable in cash to Lewco on the Closing Date. Upon payment in full of
such purchase price, Lewco shall issue a certificate or certificates to Wertheim
Schroder representing 768 shares of Non-Voting Common Stock and such shares
shall be duly and validly authorized and issued, fully paid and non-assessable.
Wertheim Schroder agrees that it will execute an amendment to the Pledge
Agreement dated December 22, 1987 (the "Pledge Agreement"), by and among
Wertheim Schroder, Hambrecht, Moseley and Lewco to the effect that such shares
shall be subject to the Pledge Agreement.
b. On the Closing Date, Wertheim Schroder shall lend $2,800,000 in
cash to Lewco pursuant to the terms and conditions of a Cash Subordination
Agreement, substantially in the form attached hereto as Exhibit A.
-3-
<PAGE>
3. SALE OF SHARES BY HAMBRECHT. Hambrecht shall sell to Lewco on the
Closing Date 600 shares of Non-Voting Common Stock for an aggregate purchase
price (the "Purchase Price") equal to the Net Book Value of such shares on the
Valuation Date. The Purchase Price shall be payable by delivery of a Cash
Subordination Agreement on the Closing Date to Hambrecht, substantially in the
form attached hereto as Exhibit B, in principal amount of $600,000; provided
that in the event (i) the Purchase Price is less than $600,000, Hambrecht shall
remit the difference between $600,000 and the Purchase Price to Lewco by check,
subject to collection, on or prior to the Closing Date (ii) the Purchase Price
is greater than $600,000, Lewco shall remit the difference between the Purchase
Price and $600,000 to Hambrecht by check, subject to collection, on or prior to
the Closing Date. On the Closing Date, Hambrecht shall deliver to Lewco
certificates representing the shares of Lewco sold by it pursuant to this
Agreement along with duly executed stock powers endorsed in blank.
4. PURCHASE OF SHARES BY WSCI. On the Closing Date, WSCI agrees to
purchase and Lewco agrees to sell, 10 shares of Voting Common Stock, par value
$1.00 per share ("Voting Common Stock"), of Lewco, at a purchase price equal to
the greater of $1.00 per share or the Net Book Value thereof, on the Valuation
Date. The purchase price of such shares shall be payable in cash to Lewco on
the Closing Date. Upon payment in full of such purchase price, Lewco shall
issue a certificate or certificates to WSCI representing 10 shares of Voting
Common Stock and such shares shall be duly and validly authorized and issued,
fully paid and non-assessable. WSCI agrees that it will execute an amendment to
the Pledge Agreement to the effect that such shares shall be subject to the
Pledge Agreement.
-4-
<PAGE>
5. LEWCO'S QUALIFICATION AS A BROKER-DEALER; EXCHANGE MEMBERSHIP.
(a) Lewco represents that it:
(i) is registered as a broker-dealer with the Securities and
Exchange Commission and is duly licensed and in good standing as a
broker-dealer under all applicable laws and regulations; and
(ii) is a member of the National Association of Securities
Dealers, Inc., the New York Stock Exchange, Inc., the American Stock
Exchange, Inc., such other exchanges as are listed on Schedule I
hereto and agrees to become a member of such other securities
exchanges as the parties to this Agreement may, from time to time,
agree in order to carry out the transactions contemplated in the
Clearing Agreement described in Section 8 hereof;
(iii) is a member of National Securities Clearing Corporation,
and agrees to become a member of such other clearing entities and
depositories as the parties to this Agreement may, from time to time,
agree in order to carry out the transactions contemplated in the
Clearing Agreement described in Section 8 hereof; and
(iv) is in compliance, with (A) the capital and financial
reporting requirements of every securities exchange or association of
which it is a member, (B) the capital requirements of the Securities
and Exchange Commission, and (C) the capital
-5-
<PAGE>
requirements of every state in which it is licensed as a brokerdealer.
(b) The parties to this Agreement agree that Lewco shall pay, in
addition to annual dues and other annual charges and fees, special or
extraordinary dues, assessments, charges or other fees imposed on Lewco by any
securities exchange of which Lewco is a member; PROVIDED, HOWEVER, that if
Wertheim Schroder or Hambrecht (and not the other) is a member of a securities
exchange ("Member") and Lewco has become a member of such exchange at the
request of the Member, any such special or extraordinary dues, assessments,
charges or fees shall be reimbursed to Lewco by the Member requesting the
membership in such exchange.
6. NON-COMPETITION WITH LEWCO.
During the term of the Clearing Agreement, Wertheim Schroder,
Hambrecht and WSCI shall not engage in business activities similar to the
activities to be performed by Lewco pursuant to the Clearing Agreement;
PROVIDED, HOWEVER, that any party may conduct transactions for other brokers and
dealers upon the consent of all other parties to this Agreement.
7. OWNERSHIP OF SYSTEM.
(a) Hambrecht, WSCI and Lewco acknowledge Wertheim Schroder's
ownership of the proprietary rights to the accounting and brokerage information
system software, including, but not limited to, report formats, program
specifications, master file structures, data base conversion procedures, input
formats
-6-
<PAGE>
and documentation as set forth in that Certain Data Processing Services
Agreement, dated as of January 1, 1974, by and between Wertheim Schroder and
Monchik-Weber Associates, Inc., currently used by Lewco (such system as it has
been modified to date is hereinafter referred to as the "System") and agree that
Hambrecht, WSCI and Lewco will not obtain any proprietary rights in the System
other than the license granted to Hambrecht pursuant to the Original Agreement
and the license granted to WSCI hereunder. If at any time Wertheim Schroder
shall receive any consideration in connection with the sale of the System or any
rights to the use thereof, Hambrecht, WSCI and Lewco shall not be entitled to
participate in such consideration except as stated in paragraph (c) below.
(b) Wertheim Schroder hereby acknowledges that it has granted to
Hambrecht, and grants to WSCI as of the Closing Date, a royalty-free license to
use the System for clearing securities transactions for so long as Hambrecht and
WSCI, respectively, shall continue to clear securities transactions through
Lewco. In addition, in the case of Hambrecht, if Hambrecht ceases clearing
through Lewco and, in the case of WSCI, if WSCI continues to clear through Lewco
through December 23, 1994, and subsequently ceases clearing through Lewco, or,
in the case of Hambrecht, if Wertheim Schroder becomes a Terminating Party (as
hereinafter defined) and, in the case of WSCI, if prior to December 23, 1994,
Wertheim Schroder becomes a Terminating Party, then such party or parties shall
be granted by Wertheim Schroder a non-exclusive, nontransferrable, perpetual,
irrevocable, royalty-free right and license to use the System as the System
exists on the date clearing by such party through Lewco ceases or the date
Wertheim Schroder becomes a Terminating Party, as the case may be, for clearing
-7-
<PAGE>
their respective securities transactions whether or not the services of Lewco
are involved.
(c) Lewco has and shall continue to account for the cost of any major
modifications or improvements of the System. If Wertheim Schroder enters into
any sale of, or other arrangement for the use of the System, the cost of such
modification or improvement allocable to Wertheim Schroder, Hambrecht and WSCI
shall be appropriately recognized as determined by the Board of Directors of
Lewco; provided that no such allocation shall be made to WSCI unless such party
has been clearing through Lewco for a period of three years.
(d) The rights and obligations of Wertheim Schroder, Hambrecht, WSCI
and Lewco set forth in this Section 7 shall inure to their respective affiliates
and successors.
8. CLEARING AGREEMENT. In order to authorize Lewco to act as the
clearing agent on an omnibus basis for Wertheim Schroder and Hambrecht, and to
act as the clearing agent for WSCI, and to render related services, Wertheim
Schroder, Hambrecht, WSCI and Lewco agree to execute and deliver the Clearing
Agreement in the form attached as Exhibit C hereto on the date hereof.
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<PAGE>
9. TERMINATION OF CLEARING AGREEMENT: RIGHT TO PURCHASE SECURITIES FROM
OTHER PARTY OR TO DISSOLVE LEWCO IN CERTAIN EVENTS.
(a) Wertheim Schroder, Hambrecht and WSCI agree that if any of
Wertheim Schroder, Hambrecht or WSCI gives notice (such party giving notice is
sometimes hereinafter referred to as the "Terminating Party") to the other
parties (the "Non-Terminating Parties") and Lewco of its desire to terminate at
the end of any month the Clearing Agreement pursuant to Paragraph 3 thereof
(i) the Terminating Party shall continue clearing transactions
through Lewco for at least three months after such notice is given;
(ii) the Terminating Party shall pay Lewco the monthly Minimum
Payments provided in paragraph 4(e) of the Clearing Agreement for the
period subsequent to termination of clearing for a period of six
months after it has ceased to clear transactions through Lewco;
(iii) with respect to the six-month period subsequent to
termination of clearing by a Terminating Party for which the
Terminating Party is required to make monthly Minimum Payments
pursuant to clause (ii) of this paragraph (a):
A. If Lewco's total operating income from the date of
termination of clearing by the Terminating Party to the end of
such six-month period exceeds Lewco's expenses for such period,
Lewco shall pay to the Terminating Party in
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cash an amount equal to 50% of such excess promptly after the end
of such period; PROVIDED, HOWEVER, that Lewco shall not be
required to make any payment to the extent the aggregate amount
payable by Lewco to the Terminating Party pursuant to this clause
(iii) would exceed the payments made by the Terminating Party
pursuant to clause (ii);
B. If Lewco's total operating income from the date of
termination of clearing by the Terminating Party to the end of
such six-month period is less than Lewco's total expenses for
such period, the Terminating Party shall not be required to pay
to Lewco any portion of such deficiency; and
(iv) the Non-Terminating Parties shall, during the period with
respect to which the Terminating Party is required to make monthly
Minimum Payments pursuant to clause (ii) of this paragraph (a), unless
Lewco is sooner dissolved, conduct the business of Lewco in the
ordinary course, using diligent efforts to maintain its facilities,
organization and staff intact to the extent practicable, consistent,
however, with appropriate reductions in light of the termination of
clearing by the Terminating Party.
(b) For purposes of the foregoing clause (iii) of paragraph (a),
the total operating income and total expenses of Lewco for any period shall
be computed in accordance with generally accepted accounting principles, but
shall not include any
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<PAGE>
loss or expense attributable to any individual operational error occurring
subsequent to the termination of clearing by the Terminating Party in excess of
the first $100,000 of each such error, and a copy of such computation shall be
forwarded to the parties hereto as soon as practicable after the end of such
period. If the Terminating Party notifies the Non-Terminating Parties and Lewco
prior to 45 days after the conclusion of the final month in which minimum
Monthly Payments were made in accordance with clause (ii) of paragraph (a) above
that it disputes the amount of Lewco's total operating income or total expenses
used in determining the amount of any payment made to the Terminating Party
pursuant to clause (iii) of such paragraph (a), Lewco's total operating income
and total expenses for the period in question shall be determined by a firm of
independent' public accountants mutually agreed upon by Lewco, the Terminating
Party and the Non-Terminating Parties. The determination by such independent
public accountants shall be conclusive and binding on the parties. The expenses
of any such determination shall be borne by the Terminating Party.
(c) Wertheim Schroder, Hambrecht and WSCI agree that if the
Terminating Party:
(i) has given notice of its desire to terminate the Clearing
Agreement at the end of any month pursuant to Paragraph 3 of the
Clearing Agreement;
(ii) if other than WSCI, ceases to be a member organization of
the New York Stock Exchange, Inc.;
(iii) ceases to be a registered broker-dealer under the
Securities Exchange Act of 1934;
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(iv) is required under any applicable rules or regulations of the
New York Stock Exchange, Inc. to divest itself of its interest in
Lewco; or
(v) has a receiver or trustee appointed for it, becomes
insolvent, is liquidated pursuant to the Securities Investor
Protection Act of 1970 or otherwise, goes into bankruptcy, makes an
assignment for the benefit of creditors, is reorganized pursuant to
bankruptcy laws, or has its assets and liabilities marshalled,
then the Non-Terminating Parties shall have the right, but not the obligation,
(x) until the later of six months following the receipt by them of the notice
referred to in clause (i) above or the end of the third month following the
termination of clearing or (y) for a period of six months following receipt of
actual knowledge by it of the events described in clauses (ii) through (v)
above, to elect by written notice to the Terminating Party to purchase from the
Terminating Party all, but not a part of, the Terminating Party's equity
securities in Lewco at Net Book Value (determined as of the end of the month
during which such notice is given). If more than one Non-Terminating Party
wishes to purchase the Terminating Party's equity securities in Lewco, then they
shall each purchase that number of shares of Voting Common Stock and Non-Voting
Common Stock in Lewco as their respective ownership bears to the total number of
shares of Voting Common Stock and Non-Voting Common Stock held by both Non-
Terminating Parties or such other proportion as they shall mutually agree. The
date of closing of any such purchase shall be a date to be determined by the
Non-Terminating Parties, but shall not be later than the end of the third month
following
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<PAGE>
the termination of clearing for a Terminating Party in the case of a notice of
termination of clearing in accordance with the Clearing Agreement, or the end of
the sixth month following the month during which the Non-Terminating Parties
received actual notice of an event giving rise to such right to purchase under
clauses (ii) through (v) of this paragraph (c) above.
Upon the happening of any of the events described in subsections (ii)
through (v) above, the Terminating Party shall promptly notify the other parties
to this Agreement of the occurrence thereof.
(d) Upon termination of clearing through Lewco, the Non-Terminating
parties shall immediately be entitled to vote all shares of Lewco Voting Common
Stock owned by the Terminating Party in proportion to their respective interests
in Lewco Voting Common Stock, pursuant to the form of irrevocable proxy attached
hereto as Exhibit D, the representatives of the Terminating Party on the Board
of Directors of Lewco, if any, shall be removed immediately as directors, and
the Non-Terminating Parties shall thereafter have full control over the
management of Lewco.
(e) (i) If the Non-Terminating Parties do not elect to purchase the
securities of the Terminating Party in Lewco during the applicable option period
provided in paragraph (c) above, or (ii) if Wertheim Schroder, Hambrecht and
WSCI unanimously agree to terminate the Clearing Agreement then Wertheim
Schroder, Hambrecht and WSCI agree to take such action as may be required under
applicable law promptly to effect the dissolution of Lewco. It is understood
that no payment to any party as shareholders shall be. made in connection with
any such dissolution unless all long-term obligations of Lewco, such as leases
and contracts of more than one year,
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shall have been provided for, and unless lease obligations of Lewco with respect
to which any of Wertheim Schroder, Hambrecht or WSCI is directly or contingently
liable shall either be satisfied or specifically assumed by one of such parties
or by a third party.
(f) Wertheim Schroder, Hambrecht and WSCI agree to vote their
respective shares in Lewco and carry out all necessary actions to effect the
dissolution of Lewco contemplated by paragraph (e) of this Section 9.
(g) The parties to this Agreement agree that until (i) Lewco is
dissolved or (ii) the expiration of six months following the termination of
clearing for a Terminating Party in the case of a notice of termination given in
accordance with the Clearing Agreement or (iii) the expiration of nine months
after the receipt of actual notice of any of the events described in clauses
(ii) through (v) of paragraph (c) of this Section 9, whichever date first
occurs, the Non-Terminating Parties shall continue to have the right to clear
through Lewco pursuant to all the terms of the Clearing Agreement.
(h) Whenever Wertheim Schroder, Hambrecht or WSCI shall be entitled
to purchase the Terminating Party's equity securities in Lewco upon exercise of
the right arising pursuant to the provisions of paragraph (a) of this Section 9,
they may designate such other person or persons as purchasers of all, or any
part of, such securities as may be satisfactory to the other Non-Terminating
Party and any of the various securities exchanges, boards of trade, commodities
exchanges, clearing corporations or associations and/or other similar
institutions with which Lewco shall have membership privileges or other
privileges whose approval of a holder of such
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<PAGE>
securities may be required; provided that all of the equity securities are
purchased by the Non-Terminating Parties and/or such other person or persons.
(i) In order to effectuate the provisions of this Section 9, Lewco
agrees to make the Non-Terminating Parties or such person or persons as the Non-
Terminating Parties shall designate, the designated person or persons under the
provisions of Section 2 of Article VI of Lewco's Certificate of Incorporation.
10. FAILURE TO AGREE AS TO BUSINESS DECISIONS. In the event that at
any time the Board of Directors of Lewco is unable to agree on a course of
action or business decision which in its view or in the view of any director is
fundamental to the management, operation or future actions of Lewco, and such
failure to agree continues for a period of 90 days, Wertheim Schroder or
Hambrecht may request dissolution of Lewco by notice to the other parties
hereto. In such event the other parties agree that they will vote their shares
and carry out all necessary actions to effect such dissolution.
11. BOARD OF DIRECTORS.
(a) Effective immediately following the Closing Date, the Board of
Directors of Lewco shall consist of six persons, two persons to be nominees of
Hambrecht and four persons to be nominees of Wertheim Schroder. Action by the
Board shall require the affirmative vote or written consent of at least a
majority of a quorum (which shall consist of four directors). No chairman of
any meeting of shareholders or directors of Lewco shall have a vote in addition
to his vote as a shareholder or director.
(b) Should a vacancy for any reason occur, other than pursuant to
Section 9(d) hereof, in the elected Board of Directors, Wertheim Schroder on the
one
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hand and Hambrecht on the other, agree that, prior to any other action of the
Board, they shall cause the directors nominated by them to elect a substitute
director who shall be designated by the same party which nominated the absent
director.
(c) Lewco shall not perform clearance or other services for any
securities firms other than firms for which it performs such services on the
date hereof and WSCI without the prior approval of the Board of Directors of
Lewco.
(d) All provisions of this Section 11 shall be subject to paragraph
(d) of Section 9 of this Agreement.
12. AUDITS. Subject to the provisions of Paragraph 10 and Exhibit A
of the Clearing Agreement pertaining to the confidentiality of information,
Wertheim Schroder, Hambrecht and WSCI (D shall have access to ALL books of
accounts kept by Lewco and (ii) shall have the right to examine and inspect any
properties and operations of Lewco.
13. RESTRICTIONS ON TRANSFER AND ENCUMBRANCE OF STOCK; ASSIGNMENT OF
AGREEMENT.
(a) In the event of any transfer, assignment or sale of capital stock
of Lewco by Wertheim Schroder, Hambrecht or WSCI, all of the rights and
obligations of the parties under this Agreement shall survive such sale, except
as such rights and obligations may relate directly to the ownership of such
securities of Lewco, or as otherwise provided herein.
(b) Wertheim Schroder, Hambrecht and WSCI shall not transfer, assign,
sell, mortgage, pledge or otherwise encumber any of their respective shares of
the capital stock of Lewco without the written consent of the other parties.
The consent
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by Wertheim Schroder and Lewco is hereby given to the sale of shares by
Hambrecht discussed in Section 3 hereof.
(c) The Certificates representing all shares of Lewco's capital stock
shall be stamped or endorsed with a legend substantially in the following form:
The shares represented by the within certificate are held subject to
the provisions of a Master Agreement, dated December 23, 1991, among
Wertheim Schroder & Co. Incorporated, WSCI Limited Partnership,
Hambrecht & Quist Incorporated and Lewco Securities Corp. and may not
be sold, assigned or transferred except in accordance with the terms
of said Agreement.
(d) This Agreement shall not be assignable by any of the parties
without the written consent of the other parties, except as otherwise
specifically provided elsewhere in this Agreement.
14. REGULATORY APPROVALS. This Agreement and the consummation of the
transactions contemplated hereby are subject to, and each of the parties hereto
shall take every reasonable step to cooperate with the other parties hereto in
obtaining, all required consents and approvals of, the New York Stock Exchange,
Inc., the American Stock Exchange, Inc., and any other stock exchange, any
governmental authority or agency having jurisdiction.
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<PAGE>
15. AUTHORIZATION; FURTHER ASSURANCES.
(a) Each of the parties represents to the other parties that it has
taken all corporate action necessary to authorize its execution, delivery and
performance of this Agreement, including the Exhibits, and that its execution,
delivery and performance of this Agreement and the Exhibits will not conflict
with, or result in a breach of, any of the terms of its certificate of
incorporation, by-laws or any agreement or instrument to which it is a party or
by which it is bound. Each of the parties hereto agrees to execute and deliver
such instruments and take such other actions as to the other parties may
reasonably require in order to carry out the transactions contemplated by this
Agreement.
(b) Hambrecht represents that it is the legal, record and beneficial
owner of, and has good and marketable title to, the shares being sold by it
pursuant to Section 3 hereof subject only to the Stock Pledge Agreement dated
December 27, 1987, by and among Lewco, as pledgee, Wertheim Schroder, Hambrecht
and Moseley.
16. ARBITRATION. Except as provided in Section 10 hereof, any
disputes hereunder shall be submitted to arbitration pursuant to the
Constitution and Rules of the New York Stock Exchange.
17. NOTICES. All notices, requests, demands and other communications
which are required to be or may be given under this Agreement shall be in
writing and shall be deemed to have been given if delivered or mailed by first
class mail, postage prepaid,
(a) if to Wertheim Schroder, to:
Wertheim Schroder & Co. Incorporated
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787 Seventh Avenue
New York, New York 10019
Attention of the President
(b) if to Hambrecht, to:
Hambrecht & Quist Incorporated
235 Montgomery Street
San Francisco, California 94104
Attention of the President
(c) if to WSCI, to:
WSCI Limited Partnership
787 Seventh Avenue
New York, New York 10019
Attention of the General Partner
(d) if to Lewco, to:
Lewco Securities Corp.
2 Broadway
New York, New York 10004
Attention of the President
18. PRIOR AGREEMENT SUPERSEDED. As between Wertheim Schroder,
Hambrecht and Lewco, the Agreement restates and supersedes the Original
Agreement, provided that the provisions of Section 5(b) thereof relating to the
transfer of assets and liabilities of Hambrecht from Broadcourt Clearing Corp.
to Lewco shall survive and are incorporated by reference as though fully set
forth herein.
19. GOVERNING LAW. This Agreement shall be construed in accordance
with and governed by the laws of the State of New York.
20. DURATION. This Agreement and all rights and obligations
hereunder shall terminate on September 30, 1996 or at such time as Lewco is
dissolved or when
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Wertheim Schroder, Hambrecht and WSCI no longer own any securities in Lewco,
whichever shall first occur.
21. SECTION HEADINGS. The section headings contained in this
Agreement are for reference purposes only and shall not affect the meaning or
interpretation of this Agreement.
22. COUNTERPARTS. This Agreement may be executed in any number of
counterparts all of which taken together will constitute one and the same
instrument and any parties hereto may execute this Agreement by signing any such
counterpart.
23. SEVERABILITY. If any provision hereof shall be determined to be
invalid or unenforceable in any respect, such determination shall not affect
such provision in any other respect or any other provision hereof, which shall
remain in full force and effect.
24. MISCELLANEOUS. This Agreement may be modified only by a writing
signed by all parties to this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the day and year first above written.
WERTHEIM SCHRODER & CO. INCORPORATED
By: /s/ Patrick J. Borruso
--------------------------------
Patrick J. Borruso, Secretary
HAMBRECHT & QUIST INCORPORATED
By: /s/ Raymond J. Minehan
--------------------------------
Raymond J. Minehan, Chief Financial
Officer
WSCI LIMITED PARTNERSHIP
By: Wertheim Schroder Co. Incorporated
By: /s/ Patrick J. Borruso
--------------------------------
Patrick J. Borruso, Secretary
LEWCO SECURITIES CORP.
By: /s/ J. Philip Smith
--------------------------------
J. Philip Smith, President
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SCHEDULE I
Boston Stock Exchange
Chicago Board Options Exchange
Midwest Stock Exchange, Inc.
Pacific Stock Exchange, Inc.
Philadelphia Stock Exchange, Inc.
NY Futures Exchange
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EXHIBIT A
CODE OF ETHICS AND PROCEDURES
It is a fundamental operating policy of Lewco Securities Corp. that its
business be conducted at all times in accordance with the highest ethical
standards governing commercial relationships. In furtherance of this policy,
all officers and all employees of Lewco are hereby directed to become familiar
with and follow scrupulously the procedures and courses of conduct hereinafter
set forth:
1. FAIRNESS AND COMPLIANCE WITH APPLICABLE LAWS.
Each officer and employee of Lewco shall, so far as the duty devolves upon him,
at all times diligently and honestly administer and carry out the business of
Lewco fairly and impartially and without discrimination in favor of or against
any customer. In so doing, no officer or employee shall knowingly violate, or
permit to be violated, any applicable law, rule or regulation of the United
States, the several states thereof, governmental agencies, securities exchanges
or the National Association of Securities Dealers, Inc.
2. ACCESS TO INFORMATION. Information pertaining to the activities and
business of Lewco and its customers is strictly confidential. Lewco's fiduciary
obligation to each of its customers to maintain the confidentiality of
information with respect to any such customer is of the highest magnitude.
Access to such information must be limited to such officers and employees as
have legitimate commercial reasons therefor. In particular, Lewco must not be
permitted to be utilized, inadvertently or otherwise,
<PAGE>
as a conduit for information with respect to one customer to any other customer
or third party.
In order to maximize the likelihood that necessary confidentiality will be
maintained, the following operational procedures are hereby adopted:
(a) Communications between Lewco employees and employees of Hambrecht &
Quist Incorporated, WSCI Limited Partnership or Wertheim Schroder & Co.
Incorporated shall be effected in the manner and solely through the specific
individuals or classes thereof as shall be specified from time to time by senior
officers of Lewco.
(b) Physical access by Hambrecht, WSCI or Wertheim Schroder officers and
employees to Lewco's premises shall be strictly prohibited except in the case of
such person as shall be specified from time to time by senior officers of Lewco
for the purposes contained in such specification.
(c) Information with regard to any Lewco customer may not be disclosed to
a third party without the consent of such customers.
3. UTILIZATION OF INFORMATION. From time to time officers and employees
of Lewco may properly obtain access to information from a customer which is
capable of being utilized to effect personal gain, e.g. material inside
information with regard to matters such as the prospective release of a buy/sell
recommendation or status of an underwriting or other securities transaction
which has the potential ability to affect the market price of a security.
Anyone possessed of such information is prohibited, as required by law, from
trading or in any way profiting thereon or
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<PAGE>
recommending trading on the basis thereof or divulging such information to any
person other than authorized Lewco officers or employees.
4. CONFLICTS OF INTEREST. It is essential that each officer and employee
of Lewco be constantly alert to actual or potential conflicts of interest which
might arise, particularly in instances where the interest of two or more Lewco
customers have diverged or become antagonistic. Once identified, an appropriate
determination must be made as to what procedures will be followed to eliminate
or minimize the conflict. Accordingly, each Lewco officer and employee is
hereby directed to disclose to his immediate supervisor the existence of any
actual or potential conflict of interest of which he becomes aware. Such
supervisory officers shall report all such conflicts of interest to the chief
operating officer of the firm.
3
<PAGE>
AMENDMENT NO. 1 TO MASTER AGREEMENT
AMENDMENT NO. 1 TO MASTER AGREEMENT made as of December 13, 1993, by and
among WERTHEIM SCHRODER & CO. INCORPORATED, a Delaware corporation ("Wertheim
Schroder"), HAMBRECHT & QUIST INCORPORATED, a California corporation
("Hambrecht"), WSCI LIMITED PARTNERSHIP, a Delaware limited partnership
("WSCI"), ONE WALL STREET PARTNERS, L.P., a Delaware limited partnership ("One
Wall") and LEWCO SECURITIES CORP., a Delaware corporation ("Lewco").
W I T N E S S E T H:
WHEREAS, Wertheim Schroder, Hambrecht and WSCI are registered
brokerdealers; and
WHEREAS, One Wall has applied for registration as a broker-dealer with
the Securities and Exchange Commission and for membership in the National
Association of Securities Dealers, Inc.; and
WHEREAS, Lewco is a registered broker-dealer engaged in the business of
clearing securities transactions for its owners, Wertheim Schroder, Hambrecht
and WSCI; and
<PAGE>
WHEREAS, Wertheim Schroder, Hambrecht, WSCI, and Lewco are parties to a
Clearing and Other Services Agreement (the "Clearing Agreement") dated December
23, 1991, and a Master Agreement (the "Master Agreement") dated December 23,
1991;
WHEREAS, pursuant to the Clearing Agreement, Lewco acts as clearing agent
and performs other services for Wertheim Schroder, Hambrecht and WSCI upon the
terms and conditions provided for therein; and
WHEREAS, One Wall desires to acquire an interest in Lewco and have
Lewco clear certain of its securities transactions and to perform certain
other related services for One Wall; and
WHEREAS, Wertheim Schroder, Hambrecht, WSCI, One Wall and Lewco desire to
enter into an amendment to the Clearing Agreement to provide for the
participation of One Wall therein; and
WHEREAS, Wertheim Schroder, Hambrecht, WSCI and Lewco wish to enter
into this Amendment Agreement to include One Wall as a party to the Master
Agreement and to implement the aforesaid transactions:
NOW, THEREFORE, in consideration of the premises and mutual covenants of
the parties herein contained, it is agreed as follows:
1. The Master Agreement is hereby amended to add a new Section 4A which
shall read in its entirety as follows:
"4A. PURCHASE OF SHARES BY ONE WALL. On the date hereof or as
soon as the requirements specified in Section 14 hereof are met (the "Closing
Date"), One Wall agrees to purchase and Lewco agrees to sell, 10 shares of
Voting Common Stock, par value $1.00 per share ('Voting Common Stock"), of
Lewco, at a purchase price equal to
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the greater of $1.00 per share or the Net Book Value thereof calculated as of
the close of business on October 31, 1993. The purchase price of such shares
shall be payable in cash to Lewco on the Closing Date. Upon payment in full of
such purchase price, Lewco shall issue a certificate or certificates to One Wall
representing 10 shares of Voting Common Stock and such shares shall be duly and
validly authorized and issued, fully paid and non-assessable. One Wall agrees
that it will enter into a pledge agreement in substantially the same form as the
Pledge Agreement dated December 22, 1987 by and among Wertheim Schroder,
Hambrecht, Moseley and Lewco (the "Pledge Agreement"), with Lewco to the effect
that such shares shall be subject to such pledge agreement."
2. Subparagraph 5(a) of the Master Agreement is amended hereby to read in
its entirety as follows:
"5. LEWCO QUALIFICATION AS A BROKER-DEALER; EXCHANGE MEMBERSHIP
(a) Lewco represents that it:
(i) is registered as a broker-dealer with the
Securities and Exchange Commission and is duly licensed and
in good standing as a broker-dealer under all applicable
laws and regulations; and
(ii) is a member of the National Association of
Securities Dealers, Inc., the New York Stock Exchange,
Inc., the American Stock Exchange, Inc., such other
exchanges as are listed on Schedule I hereto and agrees to
become a member of such other securities exchanges as the
parties to this Agreement may, from time to time, agree in
order to carry out the transactions
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contemplated in the Clearing Agreement described in Section
8 hereof;
(iii) is a member of National Securities Clearing
Corporation, and agrees to become a member of such other
clearing entities and depositories as the parties to this
Agreement may, from time to time, agree in order to carry
out the transactions contemplated in the Clearing Agreement
described in Section 8 hereof; and
(iv) is in compliance, with (A) the capital and
financial reporting requirements of every securities
exchange or association of which it is a member, (B) the
capital requirements of the Securities and Exchange
Commission, and (C) the capital requirements of every state
in which it is licensed as a brokerdealer."
3. Paragraph 6 of the Master Agreement is amended hereby to read in its
entirety as follows:
"6. NON-COMPETITION WITH LEWCO.
During the term of the Clearing Agreement, Wertheim
Schroder, Hambrecht, WSCI and One Wall shall not engage in business activities
similar to the activities to be performed by Lewco pursuant to the Clearing
Agreement; provided, however, that any party may conduct transactions for other
brokers and dealers upon the consent of all other parties to this Agreement."
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<PAGE>
4. Paragraph 7 of the Master Agreement is amended to read in its entirety as
follows:
"7. OWNERSHIP OF SYSTEM.
(a) Hambrecht, WSCI, Lewco and One Wall acknowledge
Wertheim Schroder's ownership of the proprietary rights to the accounting and
brokerage information system software, including, but not limited to, report
formats, program specifications, master file structures, data base conversion
procedures, input formats and documentation as set forth in that Certain Data
Processing Services Agreement, dated as of January 1, 1974, by and between
Wertheim Schroder and Monchik-Weber Associates, Inc., currently used by Lewco
(such system as it has been modified to date is hereinafter referred to as the
"System") and agree that Hambrecht, WSCI, Lewco and One Wall will not obtain any
proprietary rights in the System other than the license granted to Hambrecht
pursuant to a Master Agreement dated October 3, 1986 between Wertheim Schroder,
Hambrecht, Moseley and Lewco, the license granted to WSCI pursuant to the Master
Agreement, and the license granted to One Wall hereunder. If at any time
Wertheim Schroder shall receive any consideration in connection with the sale of
the System or any rights to the use thereof, Hambrecht, WSCI and One Wall shall
not be entitled to participate in such consideration except as stated in
paragraph (c) below.
(b) Wertheim Schroder hereby acknowledges that it has
granted to Hambrecht and WSCI, and grants to One Wall as of the Closing Date, a
royalty-free license to use the System for clearing securities transactions for
so long as One Wall, Hambrecht and WSCI, respectively, shall continue to clear
securities transactions
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through Lewco. In addition, in the case of Hambrecht, if Hambrecht ceases
clearing through Lewco and, in the case of WSCI, if WSCI continues to clear
through Lewco through December 23, 1994, and subsequently ceases clearing
through Lewco, and in the case of One Wall, if One Wall continues to clear
through Lewco through November ___, 1997 and subsequently ceases clearing
through Lewco or, in the case of Hambrecht, if Wertheim Schroder becomes a
Terminating Party (as hereinafter defined) and, in the case of WSCI, if prior to
December 23, 1994, Wertheim Schroder becomes a Terminating Party, or in the case
of One Wall, if prior to November ___, 1997, Wertheim Schroder becomes a
Terminating Party, then such party or parties shall be granted by Wertheim
Schroder a non-exclusive, non-transferrable, perpetual, irrevocable, royalty-
free right and license to use the System as the System exists on the date
clearing by such party through Lewco ceases or the date Wertheim Schroder
becomes a Terminating Party, as the case may be, for clearing their respective
securities transactions whether or not the services of Lewco are involved.
(c) Lewco has and shall continue to account for the cost
of any major modifications or improvements of the System. If Wertheim Schroder
enters into any sale of, or other arrangement for the use of, the System, the
cost of such modification or improvement allocable to Wertheim Schroder,
Hambrecht, WSCI and One Wall shall be appropriately recognized as determined by
the Board of Directors of Lewco; provided that no such allocation shall be made
to WSCI or One Wall unless such party has been clearing through Lewco for a
period of three years.
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<PAGE>
(d) The rights and obligations of Wertheim Schroder,
Hambrecht, WSCI and Lewco and One Wall set forth in this Section 7 shall inure
to their respective affiliates and successors."
5. Section 8 of the Master Agreement is amended to read in its entirety as
follows:
"8. CLEARING AGREEMENT. In order to authorize Lewco to act as
the clearing agent on an omnibus basis for Wertheim Schroder and Hambrecht, and
to act as the clearing agent for WSCI and One Wall, and to render related
services, Wertheim Schroder, Hambrecht, WSCI, One Wall and Lewco agree to
execute and deliver the Clearing Agreement, as amended, in the form attached as
Exhibit C hereto on the date hereof."
6. Subparagraph 9(a) of the Master Agreement is amended to read in its
entirety as follows:
"(a) Wertheim Schroder, Hambrecht, WSCI and One Wall
agree that if any of Wertheim Schroder, Hambrecht, WSCI or One Wall gives notice
(such party giving notice is sometimes hereinafter referred to as the
"Terminating Party") to the other parties (the "Non-Terminating Parties") and
Lewco of its desire to terminate at the end of any month the Clearing Agreement
pursuant to Paragraph 3 thereof
(i) the Terminating Party shall continue clearing
transactions through Lewco for at least three months after
such notice is given;
(ii) the Terminating Party shall pay Lewco the
monthly Minimum Payments provided in paragraph 4(e) of the
Clearing Agreement for the period subsequent to termination
of clearing for
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<PAGE>
a period of six months after it has ceased to clear
transactions through Lewco;
(iii) with respect to the six-month period
subsequent to termination of clearing by a Terminating
Party for which the Terminating Party is required to make
monthly Minimum Payments pursuant to clause (ii) of this
paragraph (a):
A. If Lewco's total operating income from
the date of termination of clearing by the
Terminating Party to the end of such six-month
period exceeds Lewco's expenses for such period,
Lewco shall pay to the Terminating Party in cash an
amount equal to 50% of such excess promptly after
the end of such period; PROVIDED, HOWEVER, that
Lewco shall not be required to make any payment to
the extent the aggregate amount payable by Lewco to
the Terminating Party pursuant to this clause (iii)
would exceed the payments made by the Terminating
Party pursuant to clause (ii);
B. If Lewco's total operating income from
the date of termination of clearing by the
Terminating Party to the end of such six-month
period is less than Lewco's total expenses for such
period, the Terminating Party shall not be required
to pay to Lewco any portion of such deficiency; and
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<PAGE>
(iv) the Non-Terminating Parties shall, during the
period with respect to which the Terminating Party is
required to make monthly Minimum Payments pursuant to
clause (ii) of this paragraph (a), unless Lewco is sooner
dissolved, conduct the business of Lewco in the ordinary
course, using diligent efforts to maintain its facilities,
organization and staff intact to the extent practicable,
consistent, however, with appropriate reductions in light
of the termination of clearing by the Terminating Party."
7. Subparagraph 9(c) of the Master Agreement is amended to read in its
entirety as follows:
"(c) Wertheim Schroder, Hambrecht, WSCI and One Wall agree that
if the Terminating Party:
(i) has given notice of its desire to terminate the
Clearing Agreement at the end of any month pursuant to Paragraph 3
of the Clearing Agreement;
(ii) if other than WSCI or One Wall, ceases to be a
member organization of the New York Stock Exchange, Inc.;
(iii) ceases to be a registered broker-dealer under the
Securities Exchange Act of 1934;
(iv) is required under any applicable rules or
regulations of the New York Stock Exchange, Inc. to divest itself
of its interest in Lewco; or
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<PAGE>
(v) has a receiver or trustee appointed for it, becomes
insolvent, is liquidated pursuant to the Securities Investor
Protection Act of 1970 or otherwise, goes into bankruptcy, makes
an assignment for the benefit of creditors, is reorganized
pursuant to bankruptcy laws, or has its assets and liabilities
marshalled, then the Non-Terminating Parties shall have the right,
but not the obligation, (x) until the later of six months
following the receipt by them of the notice referred to in clause
(i) above or the end of the third month following the termination
of clearing or (y) for a period of six months following receipt of
actual knowledge by it of the events described in clauses (ii)
through (v) above, to elect by written notice to the Terminating
Party to purchase from the Terminating Party all, but not a part
of, the Terminating Party's equity securities in Lewco at Net Book
Value (determined as of the end of the month during which such
notice is given). If more than one Non-Terminating Party wishes
to purchase the Terminating Party's equity securities in Lewco,
then they shall each purchase that number of shares of Voting
Common Stock and Non-Voting Common Stock in Lewco as their
respective ownership bears to the total number of shares of Voting
Common Stock and Non-Voting Common Stock held by both
NonTerminating Parties or such other proportion as they shall
mutually agree. The date of closing of any such purchase shall be
a date to be determined by the NonTerminating Parties, but shah
not be later than the end of the third month following the
termination of clearing for a Terminating Party in the case of a
notice of termination of clearing in accordance with the Clearing
Agreement, or the end of the sixth month following the month
during which the Non-Terminating Parties received
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<PAGE>
actual notice of an event giving rise to such right to purchase under clauses
(ii) through (v) of this paragraph (c) above.
Upon the happening of any of the events described in subsections
(ii) through (v) above, the Terminating Party shall promptly notify the other
parties to this Agreement of the occurrence thereof."
8. Subparagraph 9(e) of the Master Agreement is amended to read in its
entirety as follows:
"(e) (i) If the Non-Terminating Parties do not elect to purchase
the securities of the Terminating Party in Lewco during the applicable option
period provided in paragraph (c) above, or (ii) if Wertheim Schroder, Hambrecht,
WSCI and One Wall unanimously agree to terminate the Clearing Agreement then
Wertheim Schroder, Hambrecht, WSCI and One Wall agree to take such action as may
be required under applicable law promptly to effect the dissolution of Lewco.
It is understood that no payment to any party as shareholders shall be made in
connection with any such dissolution unless all long-term obligations of Lewco,
such as leases and contracts of more than one year, shall have been provided
for, and unless lease obligations of Lewco with respect to which any of Wertheim
Schroder, Hambrecht, WSCI or One Wall is directly or contingently liable shall
either be satisfied or specifically assumed by one of such parties or by a third
party."
9. Subparagraph 9(f) of the Master Agreement is amended to read in its
entirety as follows:
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<PAGE>
"(f) Wertheim Schroder, Hambrecht, WSCI and One Wall agree to vote
their respective shares in Lewco and carry out all necessary actions to effect
the dissolution of Lewco contemplated by paragraph (e) of this Section 9."
10. Subparagraph 9(h) of the Master Agreement is amended to read in its
entirety as follows:
"(h) Whenever Wertheim Schroder, Hambrecht, WSCI or One Wall shall
be entitled to purchase the Terminating Party's equity securities in Lewco upon
exercise of the right arising pursuant to the provisions of paragraph (a) of
this Section 9, they may designate such other person or persons as purchasers of
all, or any part of, such securities as may be satisfactory to the other Non-
Terminating Party and any of the various securities exchanges, boards of trade,
commodities exchanges, clearing corporations or associations and/or other
similar institutions with which Lewco shall have membership privileges or other
privileges whose approval of a holder of such securities may be required;
provided that all of the equity securities are purchased by the Non-Terminating
Parties and/or such other person or persons."
11. Subparagraph 11(c) of the Master Agreement is hereby amended to read in
its entirety as follows:
"(c) Lewco shall not perform clearance or other services for any
securities firms other than firms for which it performs such services on the
date hereof, including One Wall, without the prior approval of the Board of
Directors of Lewco."
12. Section 12 of the Master Agreement is hereby amended to read in its
entirety as follows:
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<PAGE>
"12. AUDITS. Subject to the provisions of Section 10 and
Exhibit A of the Clearing Agreement pertaining to the confidentiality of
information, Wertheim Schroder, Hambrecht, WSCI and One Wall(i) shall have
access to all books of accounts kept by Lewco and (ii) shall have the right to
examine and inspect any properties and operations of Lewco."
13. Subparagraph 13(a) of the Master Agreement is hereby amended to read in
its entirety as follows:
"(a) In the event of any transfer, assignment or sale of capital
stock of Lewco by Wertheim Schroder, Hambrecht, WSCI or One Wall, all of the
rights and obligations of the parties under this Agreement shall survive such
sale, except as such rights and obligations may relate directly to the ownership
of such securities of Lewco, or as otherwise provided herein."
14. The first sentence of Subparagraph 13(b) of the Master Agreement is
hereby amended to read as follows:
"(b) Wertheim Schroder, Hambrecht, WSCI and One Wall shall not
transfer, assign, sell, mortgage, pledge or otherwise encumber any of their
respective shares of the capital stock of Lewco without the written consent of
the other parties."
15. Subparagraph 13(c) of the Master Agreement is hereby amended to read in
its entirety as follows:
"(c) The Certificates representing all shares of Lewco's capital
stock shall be stamped or endorsed with a legend substantially in the following
form:
The shares represented by the within certificate are held subject
to the provisions of a Master Agreement, dated December 23, 1991,
as amended
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<PAGE>
among Wertheim Schroder & Co. Incorporated, WSCI Limited
Partnership, One Wall Street Partners, L.P., Hambrecht & Quist
Incorporated and Lewco Securities Corp. and may not be sold,
assigned or transferred except in accordance with the terms of
said Agreement."
16. Paragraph 17 of the Master Agreement is hereby amended to add a new
subparagraph 17(e) which shall read as follows:
"(e) if to "One Wall", to:
One Wall Street Partners, L. P.
787 Seventh Avenue
New York, New York 10019
Attention of the General Partner"
17. Paragraph 20 of the Master Agreement is amended to read in its entirety
as follows:
"1. DURATION. This Agreement and all rights and obligations
hereunder shall terminate on September 30, 1996 or at such time as Lewco is
dissolved or when Wertheim Schroder, Hambrecht, WSCI and One Wall no longer own
any securities in Lewco, whichever shall first occur."
18. Exhibit D of the Master Agreement is hereby amended to read in its
entirety as follows. All references to the Master Agreement in the Proxy
previously executed by Wertheim Schroder, WSCI and Hambrecht shall be
deemed to mean the Master Agreement as amended by this Agreement.
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<PAGE>
"EXHIBIT D
FORM OF PROXY
The undersigned hereby appoints as its proxies _______________ and
________, with full power of substitution, to exercise, at any annual or special
meeting of stockholders of Lewco Securities Corp. (the "Corporation") and with
respect to any measure submitted for consent of the stockholders of the
Corporation without a meeting, any and all voting rights which the undersigned
possesses by virtue of its ownership of Common Stock, par value $1.00 per share,
of the Corporation ("Common Stock"). This appointment of proxies shall take
effect immediately upon the termination of the clearing of transactions through
the Corporation under the Clearing and Other Services Agreement, dated December
, 1991, as amended, among the Corporation, the undersigned and
___________________ (the "Parties") by the undersigned as Terminating Party, as
such term is defined in the Master Agreement, dated December 1991, as amended,
among the Parties (the "Master Agreement").
This appointment of proxies is executed in connection with the Master
Agreement, is coupled with an interest, and is irrevocable for a period of fifty
years from the date hereof.
IN WITNESS WHEREOF, the undersigned has caused this appointment to be
signed in its name by its authorized officer as of this _______ day of _______,
1993.
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<PAGE>
[NAME]
By: _____________________________
Name: ___________________________
Title: __________________________"
19. The Master Agreement is hereby amended to add a new Section 25 which
shall read in its entirety as follows:
"25. DEFINITIONS. From and after the date hereof, each
reference in the Master Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import shall mean and be a reference to the Master
Agreement, as amended hereby."
20. COUNTERPARTS. This Amendment Agreement may be executed in any number of
counterparts all of which taken together will constitute one and the same
instrument and any parties hereto may execute this Agreement by signing
any such counterpart.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the day and year first above written.
WERTHEIM SCHRODER & CO. INCORPORATED
By: /s/ Patrick J. Borruso
------------------------------
HAMBRECHT & QUIST INCORPORATED
By: /s/ Raymond J. Minehan
------------------------------
WSCI LIMITED PARTNERSHIP
By: Wertheim Schroder & Co. Incorporated
By: /s/ Patrick J. Borruso
-----------------------
ONE WALL STREET PARTNERS, L.P.
By: Wertheim Schroder & Co. Incorporated
By: /s/ Patrick J. Borruso
-----------------------
LEWCO SECURITIES CORP.
By: /s/ J. Philip Smith
------------------------------
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<PAGE>
AMENDMENT NO. 2 TO MASTER AGREEMENT
AMENDMENT NO. 2 TO MASTER AGREEMENT made as of the 5th of July, 1995, by
and among SCHRODER WERTHEIM & CO. INCORPORATED, a Delaware corporation formerly
known as Wertheim Schroder & Co. Incorporated ("Schroder Wertheim"), HAMBRECHT &
QUIST LLC, a Delaware limited liability company ("Hambrecht LLC"), WSCI LIMITED
PARTNERSHIP, a Delaware limited partnership ("WSCI"), ONE WALL STREET PARTNERS,
L.P., a Delaware limited partnership ("One Wall") and LEWCO SECURITIES CORP., a
Delaware corporation ("Lewco").
W I T N E S S E T H:
WHEREAS, Schroder Wertheim, Hambrecht LLC, WSCI and One Wall are registered
broker-dealers; and
WHEREAS, Lewco is a registered broker-dealer engaged in the business of
clearing securities transactions for its owners, Schroder Wertheim, Hambrecht
LLC, One Wall and WSCI; and
WHEREAS, Schroder Wertheim, Hambrecht & Quist Incorporated, a California
corporation ("Hambrecht"), WSCI, One Wall and Lewco are parties to a Clearing
and Other Services Agreement (the "Clearing Agreement") dated December 23, 1991,
as amended, and a Master Agreement (the "Master Agreement") dated December 23,
1991, as amended; and
WHEREAS, pursuant to the Clearing Agreement, Lewco acts as clearing agent
and performs other services for Schroder Wertheim, Hambrecht LLC, One Wall and
WSCI upon the terms. and conditions provided for therein; and
<PAGE>
WHEREAS, Hambrecht merged with and into Hambrecht LLC, which succeeded by
operation of law to all the rights and obligations of Hambrecht, and Wertheim
Schroder & Co. Incorporated changed its name to Schroder Wertheim & Co.
Incorporated; and
WHEREAS, Schroder Wertheim, Hambrecht LLC, WSCI, One Wall and Lewco wish to
enter into this Amendment Agreement and an amendment to the Clearing Agreement
and related Agreements-to reflect the aforesaid changes;
NOW, THEREFORE, in consideration of the premises and mutual covenants of
the parties herein contained, it is agreed as follows:
1. Hambrecht LLC represents and warrants to the other parties hereto that it
is a limited liability company duly organized and validly existing under
the laws of the State of Delaware and that it has succeeded to all the
assets, liabilities, rights and obligations of Hambrecht pursuant to an
Agreement and Plan of Merger effective as of May 1, 1995 and has all
requisite power and authority to perform its obligations hereunder and has
duly authorized, executed and delivered this Agreement.
2. Without limiting the foregoing, Hambrecht LLC hereby assumes all the rights
and all the obligations of Hambrecht under the Master Agreement and all
agreements entered into in connection therewith whether now existing or
hereafter arising, and adopts and ratifies the Proxy executed in connection
therewith. All references to Hambrecht in the Master Agreement and such
other agreements shall be deemed to mean Hambrecht LLC.
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<PAGE>
3. Schroder Wertheim hereby represents that it is the entity formerly known as
Wertheim Schroder & Co. Incorporated and that its name was changed as of
July 5, 1995.
4. All references to Wertheim Schroder in the Master Agreement and all
agreements entered into in connection therewith shall hereafter be changed
to and be a reference to Schroder Wertheim.
5. All references to the Master Agreement in the Proxy previously executed by
Schroder Wertheim, WSCI, One Wall and Hambrecht shall be deemed to mean the
Master Agreement as amended by this Agreement.
6. Section 25 of the Master Agreement is hereby amended to read in its
entirety as follows:
25. DEFINITIONS. From and after the date hereof, each reference
in the Master Agreement to "this Agreement", "hereunder",
"hereof', "herein" or words of like import shall mean and be a
reference to the Master Agreement, as amended from time to time.
7. COUNTERPARTS. This Amendment Agreement may be executed in any number of
counterparts all of which taken together will constitute one and the same
instrument and any parties hereto may execute this Agreement by signing any
such counterpart.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the day and year first above written.
SCHRODER WERTHEIM & CO. INCORPORATED
By: /s/ Patrick J. Borruso
--------------------------------
HAMBRECHT & QUIST LLC
By: /s/ Raymond J. Minehan
--------------------------------
WSCI LIMITED PARTNERSHIP
By:Schroder Wertheim & Co. Incorporated
By: /s/ Patrick J. Borruso
--------------------------------
ONE WALL STREET PARTNERS, L.P.
By: Schroder Wertheim & Co.
Incorporated
By: /s/ Patrick J. Borruso
--------------------------------
LEWCO SECURITIES CORP.
By: /s/ J. Philip Smith
--------------------------------
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<PAGE>
CLEARING AND OTHER SERVICES AGREEMENT
CLEARING AND OTHER SERVICES AGREEMENT made December 23, 1991, by and among
HAMBRECHT & QUIST INCORPORATED, a California corporation ("Hambrecht"), WERTHEIM
SCHRODER & CO. INCORPORATED, a Delaware corporation ("Wertheim Schroder"), WSCI
LIMITED PARTNERSHIP, a Delaware limited partnership ("WSCI") (collectively
hereinafter sometimes referred to as the "Participants"), and LEWCO SECURITIES
CORP., a Delaware corporation ("Lewco").
W I T N E S S E T H
WHEREAS, Hambrecht and Wertheim Schroder are engaged in the securities
brokerage and related businesses; and
WHEREAS, Lewco is a registered broker-dealer engaged in the business of
clearing securities transactions for its owners; and
WHEREAS, Hambrecht, Wertheim Schroder, Moseley Securities Corporation, a
Delaware corporation ("Moseley"), and Lewco were parties to a clearing and Other
Services Agreement (the "Prior Agreement"), dated October 3, 1986; and
WHEREAS, pursuant to the Prior Agreement, Lewco acts as clearing agent for
Hambrecht's and Wertheim Schroder's securities transactions and the transactions
of their securities customers on an omnibus basis and performs certain other
related services for Hambrecht and Wertheim Schroder, Moseley having terminated
its clearing arrangements with Lewco and sold all of its shares of capital stock
of Lewco which it owned to Lewco pursuant to an Agreement dated March 4, 1988,
by and among Hambrecht, Wertheim Schroder, Lewco and Moseley; and
<PAGE>
WHEREAS, Hambrecht and Wertheim Schroder desire Lewco to continue to act as
such clearing agent and to continue to perform such related services; and
WHEREAS, the Participants and Lewco are parties to a Master Agreement dated
as of December 23, 1991 (the "Master Agreement"), pursuant to which, among other
items, WSCI has agreed to subscribe to certain shares of Lewco and agreed to
take certain other actions, including execution of this Agreement; and
WHEREAS, WSCI desires Lewco to act as clearing agent for its securities
transactions and to perform certain other related services; and
WHEREAS, Hambrecht, Wertheim Schroder and Lewco desire Lewco to act as such
clearing agent and perform such other related services for WSCI; and
WHEREAS, Hambrecht, Wertheim Schroder, WSCI and Lewco wish to enter into
this Agreement to reflect the aforesaid transactions.
NOW, THEREFORE, in consideration of the premises and mutual covenants of
the parties herein contained, it is agreed as follows:
1. LEWCO TO ACT AS CLEARING AGENT. During the term of this Agreement,
Lewco shall act as the clearing agent, and shall perform or provide for the
performance of all services customarily performed by a clearing broker,
including, but not limited to, settlement of trades, and cage and custodial
services for the Participants in respect of all transactions for their own
accounts and, if applicable, the accounts of their present and future securities
customers. Lewco will engage only in those business activities contemplated in
this Agreement and such activities shall be performed exclusively for the
Participants; provided, however, that this paragraph does not preclude
Hambrecht, WSCI or Wertheim Schroder from entering into clearing arrangements
with other broker-dealers provided that the forms of such clearing arrangements
am approved
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<PAGE>
by Lewco and the other Participants. It is expressly understood and agreed to
by the pinks hereto that until WSCI notifies Lewco to the contrary, WSCI shall
only clear short sale transactions through Lewco and shall clear all other
transactions through Wertheim Schroder.
Hambrecht and Wertheim Schroder each agree to continue to open omnibus
accounts with Lewco in respect of their customers' accounts and the Participants
each agree to continue to open, or to open, one or more accounts for their
respective principal and other transactions (the "Accounts"). All transactions
which the Participants direct to Lewco will be cleared through the Accounts.
2. OTHER SERVICES.
(a) Except as otherwise provided in Paragraph I of this
Agreement, Lewco will continue to perform, or perform, as the case may be, as
agent for the Participants or provide for the performance of such functions as
the Participants may mutually agree, including functions relating to the
following areas: new accounts, purchase and sales, data processing, margin,
dividend (insofar as it relates to the accounts of the customers of the
Participants, if applicable, and the Participants' own accounts) and proxy.
(b) Lewco will continue to act, or act, as the case may be, as
disbursing agent for Hambrecht, WSCI and Wertheim Schroder and will continue to
receive as agent, if applicable, funds from their respective customers.
(c) To the extent practicable, all borrowings secured by the
securities of the customers of Hambrecht or Wertheim Schroder will be made by
Hambrecht or Wertheim Schroder, respectively, and, to the extent practicable,
all borrowings secured by the securities of Hambrecht, WSCI or Wertheim
Schroder, will be made by Hambrecht, WSCI or Wertheim Schroder, respectively.
Lewco, as custodian of such securities, in order to facilitate such
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<PAGE>
borrowings, will identify for Hambrecht, WSCI and Wertheim Schroder the
securities which are available for their respective borrowing purposes, will
make deliveries and substitutions on behalf of the Participants and will receive
and disburse funds on such borrowers' behalf.
(d) To the extent practicable, all loans of fully paid
securities of (i) the customers of Hambrecht or Wertheim Schroder who consent to
such loans will be made by Hambrecht or Wertheim Schroder, respectively, and
(ii) Hambrecht, WSCI or Wertheim Schroder, will be made by Hambrecht, WSCI or
Wertheim Schroder, respectively. Lewco, as custodian of such securities, in
order to facilitate such loans, will identify for Hambrecht, WSCI and Wertheim
Schroder the securities which are available for their respective loan purposes,
will make deliveries and substitutions on behalf of the Participants and will
receive funds on their behalf.
(e) Lewco shall have the right to loan securities (i) which are
not fully paid of the customers of Hambrecht or Wertheim Schroder or (ii) which
are fully paid or which are not fully paid of Hambrecht, WSCI or Wertheim
Schroder, but loans of such securities shall be transactions by and for the
account of Lewco.
(f) Lewco also agrees to perform for the Participants the
special services referred to in Paragraph 5 of this Agreement to the extent that
it is practicable for Lewco to perform such services.
3. TERM OF AGREEMENT. This Agreement shall be effective as of the
Closing Date (as defined in the Master Agreement) and shall continue through
September 30, 1992 and thereafter for annual terms on a year-to-year basis
unless terminated (i) at any time by mutual written agreement of all the parties
to this Agreement or (ii) at the end of any month by any Participants, who shall
give at least three months notice prior to cessation of clearing transactions
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<PAGE>
through Lewco. In the event the Agreement is terminated in accordance with the
aforementioned clause (ii), the terminating party shall pay to Lewco for a
period of at least nine months subsequent to the date of notice of termination
of clearing services the monthly Minimum Payments hereinafter specified;
provided that, in any case, the terminating party shall pay to Lewco amounts
payable pursuant to the Schedule of Charges hereinafter specified for any period
in which it continues clearing transactions through Lewco and the monthly
Minimum Payments hereinafter specified for a period of six months after the date
of termination of clearing services. Termination of this Agreement, however
caused, shall not release any of the parties to this Agreement from any
liability or responsibility to the other parties with respect to transactions
prior to the effective date of such termination, irrespective of whether claims
relative to such transactions shall have been made before or after such
termination.
4. CHARGES, ETC.
(a) Hambrecht, WSCI and Wertheim Schroder agree that the
schedule of Lewco's charges shall be as set forth on the Statement of Charges
attached hereto as Schedule I.
Such charges shall be payable monthly, promptly after the end of the
month during which the services are performed. The Participants agree to review,
and if necessary adjust, the schedule of Lewco's charges at the end of each
quarterly period during the term hereof. The term "quarterly period" shall mean
the three months contained in each calendar quarter. Each such adjustment of
the schedule of Lewco's charges shall be evidenced by a writing initialed by the
Participants and Lewco and filed with the minutes of proceedings of the Board of
Directors of Lewco. The schedule of Lewco's charges in effect on the date a
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<PAGE>
Participant ceases clearing transactions through Lewco shall not be reduced for
at least six months thereafter.
The aggregate of payments made by a Participant with respect to a
quarterly period pursuant to the then current schedule of Lewco's charges, such
charges being adjusted pursuant to Sections 4(c) and (d) hereof, or the monthly
Minimum Payments (defined below), such payments being adjusted pursuant to
Section 4(d) hereof, made by a Participant for such quarterly period is herein
referred to as "Aggregate Quarterly Payments."
(b) Each Participant agrees to make monthly minimum payments
hereunder ("monthly Minimum Payments") to Lewco with respect to each month in
which the Participant is clearing transactions through Lewco in all cases, for
each quarterly period or portion thereof in which the Participant is clearing
transactions through Lewco, an amount equal to 85% of the monthly average of
the Aggregate Quarterly Payments made by such Participant with respect to the
two immediately preceding quarterly periods; provided, however, that in no event
shall the monthly Minimum Payment be less than $500,000 for Wertheim Schroder,
$225,000 for Hambrecht and $1,000 for WSCI.
(c) If the amount payable by a Participant with respect to any
month pursuant to Lewco's schedule of charges exceeds the Participant's monthly
Minimum Payment with respect to that month, die amount payable pursuant to the
schedule of charges shall be reduced by 50% of such excess.
(d) At the end of each month and each annual term of this
Agreement, Lewco's total operating expenses for such period, net of any income
(other than payments made pursuant to the Schedule of Charges for each month and
Aggregate Quarterly Payments made
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<PAGE>
for each year), realized by Lewco, shall be computed in accordance with
generally accepted accounting principles. If such total operating expenses are:
(A) equal to the payments made by the Participants pursuant to the
Schedule of Charges for such month or the Aggregate Quarterly Payments made
by the Participants for such annual term, no adjusting transactions shall
be made;
(B) greater than the payments made by the Participants pursuant to
the Schedule of Charges for such month or the Aggregate Quarterly Payments
made by the Participants for such annual term, then Hambrecht, WSCI and
Wertheim Schroder shall pay such difference in cash to Lewco in proportion
to their respective monthly payments for such month or Aggregate Quarterly
Payments for such annual term, as the case may be; or
(C) less than the payments made by the Participants pursuant to the
Schedule of Charges for such month or the Aggregate Quarterly Payments made
by the Participants for such annual term, then Lewco shall refund to
Hambrecht, WSCI and Wertheim Schroder such excess in proportion to their
respective monthly payments for such month or Aggregate Quarterly Payments
for such annual term as the case may be.
(e) Each Participant agrees in the event that such Participant
terminates this Agreement in accordance with subparagraph (ii) of Paragraph 3
hereof to make monthly Minimum Payments to Lewco with respect to each month
during the period of six months after the Participant has ceased to clear
transactions through Lewco at a monthly rate equal to 70% of the monthly average
of the total payments payable by such Participant pursuant to Lewco's schedule
of charges with respect to the six calendar months ending with the date of
cessation of clearing. With respect to this six-month period subsequent to
termination of clearing:
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<PAGE>
(i) If Lewco's total operating income from the date of termination of
clearing by the Participant to the end of such six-month period exceeds
Lewco's expenses for such period, Lewco shall pay to the Participant in
cash an amount equal to 50% of such excess; PROVIDED, HOWEVER, that Lewco
shall not be required to make any payment if and to the extent the
aggregate amount paid by Lewco to the Participant pursuant to this
subparagraph (e)(i), after giving effect to such payment, would exceed the
total minimum Monthly Payments made by the Participant subsequent to the
termination of clearing and prior to the date of such payment;
(ii) If Lewco's total operating income from the date of termination of
clearing by the Participant to the end of such six-month period is less
than Lewco's total expenses for such period, the Participant shall not be
required to pay to Lewco any portion of such deficiency.
5. COMPENSATION FOR SPECIAL SERVICES. Lewco will bill the
Participants, at Lewco's actual cost or at another mutually agreed upon rue, for
the special services requested by a Participant including, but not limited to,
mailing of advertising and research materials. cancellation and rebooking
services, and performance of special data processing projects which are not
related to the processing of trades or custody of securities and records.
Hambrecht, WSCI and Wertheim Schroder agree to pay for such services within
thirty (30) days of the receipt of a statement from Lewco setting forth the
amount of such costs.
6. TRANSACTIONS BETWEEN LEWCO AND THE PARTICIPANTS.
(a) Lewco will prepare a Daily Settlement Sheet for each account
of a Participant with Lewco for each business day reflecting the transactions in
such account.
-8-
<PAGE>
Before the hour as may be agreed to from time to time by the parties
("Settlement Time") on each business day, each Participant having a balance due
to Lewco (except, to the extent permitted by rules and regulations of the
Securities and Exchange Commission or of the Board of Governors of the Federal
Reserve System, such Participant who has in writing authorized Lewco to debit
its account with Lewco in an amount as is due to Lewco) shall pay to Lewco in
New York Clearing House or equivalent funds the full amount shown to be due on
the Daily Settlement Sheet. Immediately after the Settlement Time each
Participant having a balance due from Lewco (except such Participant who has in
writing authorized Lewco to credit its account with Lewco in an amount as is due
from Lewco) shall receive a check for the amount due.
(b) Subject to the provisions of subparagraph (e) of this
Paragraph 6, each Participant agrees that any net debit balance appearing in its
Daily Settlement Account shall bear interest computed daily at the average rate
of interest the Participants pay for borrowed funds ham banks or such other rate
as the parties shall mutually agree to.
(c) Lewco agrees that any net credit balance appearing in the
Daily Settlement Account of the Participants shall bear the same rate of
interest as set forth in subparagraph (b) of this Paragraph 6.
(d) Hambrecht, WSCI and Wertheim Schroder shall, upon receipt of
the Daily Settlement Sheet, instruct Lewco whether to secure loans in respect of
any net debit balance on such Daily Settlement Sheet, as agent for the
respective Participant.
(e) The parties to this Agreement may agree, from time to time,
that certain debit items and/or credit items shall not be included in computing
such net debit or credit balance upon which interest is to be charged pursuant
to subparagraphs (b) and (c) of this Paragraph 6.
-9-
<PAGE>
(f) The Participants agree that Lewco, in its discretion, may
advance through a broker-dealer special omnibus account to Hambrecht or Wertheim
Schroder, as the case may be, any excess funds held by it from time to time.
Such advances to Hambrecht or Wertheim Schroder, as the case may be, shall be
secured by securities of such Participant or their respective customers as
appropriate, and shall bear interest at the rate set forth in subparagraph (b)
of this Paragraph 6.
7. BROKER-DEALER SPECIAL OMNIBUS ACCOUNT AGREEMENT. Hambrecht and
Wertheim Schroder have executed and delivered a Broker-Dealer Special Omnibus
Account Agreement in the for-in previously requested by Lewco.
8. DISCLOSURE OF RECORDS. The Participants agree that Lewco may
make available to representatives of the New York Stock Exchange, Inc. (or any
other securities exchange of which the parties to this Agreement are members),
the National Association of Securities Dealers, Inc., the Securities and
Exchange Commission or other governmental agencies of the United Sums, the
several states and the City of New York, such records as are in Lewco's
possession that relate to the Participants' accounts and transactions.
9. CONFIDENTIALITY OF INFORMATION. The parties to this Agreement in
order to protect the confidentiality of information concerning the Participants
and their respective customers and to avoid regulatory violations, agree to
follow the code of ethics and procedures set forth in Exhibit A hereto, which
may be amended or supplemented by Lewco from time to time.
-10-
<PAGE>
10. COMPLIANCE WITH VARIOUS LAWS AND REGULATIONS: INDEMNIFICATION.
(a) Hambrecht, WSCI and Wertheim Schroder agree to retain full
responsibility for all transactions processed for such party through Lewco, or
with respect to which Lewco provides services pursuant to this Agreement for
such party. All errors, misunderstandings or controversies, except those
specifically or otherwise covered in this Agreement, between a securities
customer and a Participant or any employee of a Participant, which shall arise
solely out of acts or omissions of such Participant or any of its employees.
shall be the sole and exclusive responsibility and liability of such
Participant. All transactions will be in compliance with all applicable laws,
rules and regulations of the United States, the several states, governmental
agencies, securities exchanges, and the National Association of Securities
Dealers, Inc., and in this connection each shall diligently supervise the
activities of their respective officers, employees and representatives with
respect to such transactions. Hambrecht, WSCI and Wertheim Schroder each agree
to indemnify Lewco and each other (and all directors, partners and controlling
persons thereof) against, and hold Lewco and each other (and all directors,
partners and controlling persons thereof) harmless from, any claims, losses,
expenses (including, without limitation, legal fees), or Liabilities incurred by
Lewco or the other Participant arising out of, or connected with, or in any way
related to, any failure or alleged failure so to comply on the part of
Hambrecht, WSCI or Wertheim Schroder, as the case may be, or any claims, losses,
expenses (including, without limitation, legal fees) or liabilities, founded in
common law fraud, tort, contract, or otherwise, based on any wrongful act or
failure to act or alleged wrongful act of failure to act of Hambrecht, WSCI or
Wertheim Schroder, irrespective of whether Lewco or such other Participant
possessed actual or constructive knowledge of such failure so to comply or such
wrongful act.
-11-
<PAGE>
(b) Subject to the provisions of subparagraph (d) of this
Paragraph 10, Lewco agrees to indemnify the Participants (and their directors,
partners and controlling persons) against, and hold them harmless from, any
claims, losses, expenses (including, without Limitation, legal fees), or
liabilities incurred by them arising out of, or connected with, or in any way
related to, any wrongful act or failure to act or alleged wrongful act or
failure to act by Lewco in the performance of its duties under this Agreement or
otherwise up to an aggregate amount of $100,000 for each such wrongful act or
failure to act.
(c) In the event that Lewco's liability under the provision of
subparagraph (b) of this Paragraph 10 exceeds $100,000 with respect to any
wrongful act or failure to act by Lewco, liabilities exceeding this amount will
be borne solely by the Participant which originated the transaction or
transactions which gave rise to Lewco's obligations under such subparagraph (b)
and such originating Participant shall indemnify the other Participants and
Lewco against and hold them harmless from any claims, losses, expenses
(including, without limitation, legal fees) or abilities in excess of $100,000
arising out of or connected with, or in any way related to, any such wrongful
act or failure to act, irrespective of whether such other Participants possessed
actual or constructive knowledge of such wrongful act or failure to act.
(d) In the event that it is impracticable to determine which
Participant originated the transaction or transactions which gave rise to
Lewco's obligations under subparagraph (b) of this Paragraph 10, then Lewco's
liability pursuant to such subparagraph (b) shall not be limited.
(e) Each Participant agrees that it shall not, without having
obtained the prior written consent of Lewco, agree to place any advertisement in
any newspaper, publication, periodical or any other media if such advertisement
in any manner makes reference
-12-
<PAGE>
to Lewco and to the clearing arrangements and/or any of the services embodied in
this Agreement. If a Participant in any way attempts to hold itself out as,
advertise or in any way represent that it is the agent of Lewco, such
Participant shall be liable for any loss, liability, damage, cost or expense
(including, but not limited to, fees and expenses of legal counsel) sustained or
incurred by Lewco as a result of such a representation of agency or apparent
authority to act as an agent of Lewco or agency by estoppel.
(f) The provisions of this Paragraph 10 shall survive
termination of this Agreement.
11. SUPPORTING DOCUMENTATION. Lewco agrees that in connection with
the transactions contemplated in this Agreement, it shall provide the
Participants with such supporting documentation as they may reasonably request
in connection with their evaluation of any computations by Lewco under this
Agreement, and audited financial statements promptly following their becoming
available.
12. PRIOR AGREEMENT SUPERCEDED. As between Hambrecht, Wertheim
Schroder and Lewco, this Agreement restates and supersedes the Prior Agreement.
As between Hambrecht, Wertheim Schroder, Lewco and Moseley, this Agreement shall
not modify any rights of Hambrecht Wertheim Schroder and Lewco against Moseley.
This Agreement incorporates and is deemed a modification of Be Clearing and
Other Services Agreement, dated October 22, 1984, by and among Wertheim
Schroder, Lewco and Moseley, for purposes of the Assignment and License, dated
as of October 30, 1984, by and between Lewco and Wertheim Schroder.
13. STATEMENTS. Lewco will furnish the Participants with copies of
all statements, bills and other notices which it mails to their respective
customers.
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<PAGE>
14. GOVERNING LAW. This Agreement shall be construed in accordance
with and governed by the laws of the State of New York.
15. ARBITRATION. It is understood and agreed that any controversy
arising among the parties to this Agreement in connection with this Agreement,
which cannot be adjusted to their mutual satisfaction, shall be submitted to
arbitration and determined under the rules of the Arbitration Committee of the
New York Stock Exchange.
16. CUSTOMER COMPLAINTS. The parties to this Agreement agree to give
each other prompt written notice of any customer grievance or complaint, threat
of action, or commencement of litigation arising out of this Agreement of which
any such party has knowledge.
17. RULES OF CLEARING CORPORATIONS. The parties to this Agreement
agree that no provision of this Agreement is in conflict with or shall be
interpreted as requiring violation by any party of any rule or by-laws of any
clearing corporation of which Lewco now is or may become a member. The parties
to this Agreement agree that the books and records of Hambrecht, WSCI and
Wertheim Schroder shall be open at all reasonable times to reasonable inspection
by duly authorized representatives of any clearing corporation of which Lewco
now is or may become a member.
18. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Agreement by signing
any such counterpart.
19. SEVERABILITY. If any provision hereof shall be determined to be
invalid or unenforceable in any respect, such determination shall not affect
such provision in any other respect or any other provision hereof, which shall
remain in full force and effect.
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<PAGE>
20. EFFECTIVENESS. This Agreement shall be effective as of the
Closing Date.
21. MISCELLANEOUS. This Agreement may be modified only by a writing
signed by all
parties to this Agreement as of the day and year first above written.
HAMBRECHT & QUIST INCORPORATED
By: /s/ Raymond J. Minehan
-------------------------------------
Raymond J. Minehan, Chief Financial
Officer
WERTHEIM SCHRODER & CO.
INCORPORATED
By: /s/ Patrick J. Borruso
-------------------------------------
Patrick J. Borruso, Secretary
LEWCO SECURITIES CORP.
By: /s/ J. Philip Smith
-------------------------------------
J. Philip Smith, President
WSCI LIMITED PARTNERSHIP
By: Wertheim Schroder & Co.
Incorporated,
as General Partner
By: /s/ Patrick J. Borruso
-------------------------------------
Patrick J. Borruso, Secretary
-15-
<PAGE>
SCHEDULE I
LEWCO SECURITIES CORP.
STATEMENT OF CHARGES UNDER
CLEARING AND OTHER SERVICES AGREEMENT
1. Pursuant to Section 4(a) of the Clearing and Other Services
Agreement made December 23, 1991, by and among HAMBRECHT & QUIST INCORPORATED, a
California corporation ("Hambrecht"), WSCI LIMITED PARTNERSHIP, a Delaware
limited partnership ("WSCI"), WERTHEIM SCHRODER & CO. INCORPORATED, a Delaware
corporation ("Wertheim Schroder"), and LEWCO SECURITIES CORP., a Delaware
corporation ("Lewco"), Hambrecht, WSCI, Wertheim Schroder and Lewco agree to the
following schedule of charges to be effective for the period commencing from the
Closing Date until adjusted in accordance with such Section.
4. Charges, etc.
-------------
(a) Classification Gross Billing Rate
-------------- ------------------
(1) Commissions on agency trades, 2% of commissions
excluding options and bonds
(2) Agency trades, excluding bonds $12 per trade
(3) Agency bond trades $25 per trade
(4) Principal stock trades $12 per trade
(5) Principal bond trades $25 per trade
(6) Mutual Fund trades $15 per trade
(7) Principal option traders $10 per trade
(8) Flip trades $ 6 per trade
(9) Wireable government bond trades $10 per trade
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<PAGE>
(10) Computer generated money market trades $ 3 per trade
(11) Manual money market trades $ 5 per trade
(12) Outside Option trades $ 7 per trade
(13) Outside regular trades $12 per trade
(14) Charge per account statement $ 1 per month
(15) Charge per stock record position $75 per month
(16) Charge per transfer on trades $ 5 per trade
2. This Statement of Charges shall be field with the Minutes of the
Meeting of the Board of Directors of Lewco.
ACCEPTED AND AGREED:
HAMBRECHT & QUIST INCORPORATED
By: /s/ Raymond J. Minehan
-------------------------------------
Raymond J. Minehan, Chief Financial
Officer
WERTHEIM SCHRODER & CO.
INCORPORATED
By: /s/ Patrick J. Borruso
-------------------------------------
Patrick J. Borruso, Secretary
WSCI LIMITED PARTNERSHIP
By: Wertheim Schroder & Co.
Incorporated,
as General Partner
By: /s/ Patrick J. Borruso
-------------------------------------
Patrick J. Borruso, Secretary
LEWCO SECURITIES CORP.
By: /s/ J. Philip Smith
-------------------------------------
J. Philip Smith, President
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<PAGE>
EXHIBIT A
CODE OF ETHICS AND PROCEDURES
-------------------------------
It is a fundamental operating policy of Lewco Securities Corp, that
its business be conducted at all times in accordance with the highest ethical
standards governing commercial relationships. In furtherance of this policy,
all officers and all employees of Lewco are hereby directed to become familiar
with and follow scrupulously the procedures and courses of conduct hereinafter
set forth:
1. FAIRNESS AND COMPLIANCE WITH APPLICABLE LAWS.
Each officer and employee of Lewco shall, so far as the duty devolves upon him,
at all times diligently and honestly administer and carry out the business of
Lewco fairly and impartially and without discrimination in favor of or against
any customer. In so doing, no officer or employee shall knowingly violate, or
permit to be violated, any applicable law, rule or regulation of the United
States, the several states thereof, governmental agencies, securities exchanges
or the National Association of Securities Dealers, Inc.
2. ACCESS TO INFORMATION. Information pertaining to the activities
and business of Lewco and its customers is strictly confidential. Lewco's
fiduciary obligation to each of its customers to maintain the confidentiality of
information with respect to any such customer is of the highest magnitude.
Access to such information must be limited to such officers and employees as
have legitimate commercial reasons therefor. In particular, Lewco must not be
permitted to be utilized, inadvertently or otherwise.
<PAGE>
as a conduit for information with respect to one customer to any other
customer or third party.
In order to maximize the likelihood that necessary confidentiality
will be maintained, the following operational procedures are hereby adopted:
(a) Communications between Lewco employees and employees of Hambrecht
& Quist Incorporated, WSCI Limited Partnership or Wertheim Schroder & Co.
Incorporated shall be effected in the manner and solely through the specific
individuals or classes thereof as shall be specified from time to time by senior
officers of Lewco.
(b) Physical access by Hambrecht, WSCI or Wertheim Schroder officers
and employees to Lewco's premises shall be strictly prohibited except in the
case of such person as shall be specified from time to time by senior officers
of Lewco for the purposes contained in such specification.
(c) Information with regard to any Lewco customer may not be
disclosed to a third party without the consent of such customers.
3. UTILIZATION OF INFORMATION. From time to time officers and
employees of Lewco may properly obtain access to information from a customer
which is capable of being utilized to effect personal gain, e.g. material inside
information with regard to matters such as the prospective release of a buy/sell
recommendation or status of an underwriting or other securities transaction
which has the potential ability to affect the market price of a security.
Anyone possessed of such information is prohibited, as required by law, from
trading or in any way profiting thereon or
2
<PAGE>
recommending trading on the basis thereof or divulging such information to any
person other than authorized Lewco officers or employees.
4. CONFLICTS OF INTEREST. It is essential that each officer and
employee of Lewco be constantly alert to actual or potential conflicts of
interest which might arise, particularly in instances where the interest of two
or more Lewco customers have diverged or become antagonistic. Once identified,
an appropriate determination must be made as to what procedures will be followed
to eliminate or minimize the conflict. Accordingly, each Lewco officer and
employee is hereby directed to disclose to his immediate supervisor the
existence of any actual or potential conflict of interest of which he becomes
aware. Such supervisory officers shall report all such conflicts of interest to
the chief operating officer of the firm.
3
<PAGE>
CLEARING AND OTHER SERVICES AGREEMENT
AMENDMENT NO. 1 DATED SEPTEMBER 15, 1993 TO THE CLEARING AND OTHER SERVICES
AGREEMENT MADE DECEMBER 23, 1991, BY AND AMONG HAMBRECHT & QUEST INCORPORATED A
CALIFORNIA CORPORATION ("HAMBRECHT"), WERTHEIM SCHRODER & CO. INCORPORATED, A
DELAWARE CORPORATION ("WERTHEIM SCHRODER"), WSCI LIMITED PARTNERSHIP, A DELAWARE
LIMITED PARTNERSHIP ("WSCI"), AND LEWCO SECURITIES CORP, A DELAWARE CORPORATION
("LEWCO").
PARAGRAPH 4(b) IS AMENDED TO READ AS FOLLOWS:
EACH PARTICIPANT AGREES TO MAKE MINIMUM PAYMENTS HEREUNDER ("MONTHLY
MINIMUM PAYMENTS") TO LEWCO WITH RESPECT TO EACH MONTH IN WHICH THE PARTICIPANT
IS CLEARING TRANSACTIONS THROUGH LEWCO IN ALL CASES, IN AN AMOUNT EQUAL TO
$650,833 FOR WERTHEIM SCHRODER, $225,000 FOR HAMBRECHT AND $1,000 FOR WSCI FOR
THE PERIOD APRIL 1, 1993 TO AND INCLUDING SEPTEMBER 30, 1993. COMMENCING ON
OCTOBER 1, 1993 THE MONTHLY MINIMUM PAYMENT SHALL BE $950,000 FOR WERTHEIM
SCHRODER, $225,000 FOR HAMBRECHT AND $1,000 FOR WSCI.
HAMBRECHT & QUIST INCORPORATED
BY: /s/ Raymond J. Minehan
----------------------------------
WSCI LIMITED PARTNERSHIP
BY: /s/ Patrick J. Borruso
----------------------------------
WERTHEIM SCHRODER & CO., INCORPORATED
BY: /s/ Patrick J. Borruso
----------------------------------
LEWCO SECURITIES CORP.
BY: /s/ J. Philip Smith
----------------------------------
<PAGE>
LEWCO SECURITIES CORP.
SCHEDULE I
AMENDMENT NO. 1 TO SCHEDULE I - STATEMENT OF CHARGES UNDER
CLEARING AND OTHER SERVICES AGREEMENT
1. Pursuant to Section 4(a) of the Clearing and Other Services Agreement made
December 23, 1991 the following schedule of charges will be effective beginning
October 1, 1993.
<TABLE>
<CAPTION>
CLASSIFICATION BILLING RATE
-------------- -------------
<S> <C> <C>
(1) Commissions on Equity Agency Trades 1% of Commissions
(2) Agency trades - equities $15 per trade
(3) Agency trades - bonds $25 per trade
(4) Agency trades - options $12 per trade
(5) Mutual funds - customer agency $25 per trade
(6) Mutual funds - customer principal $25 per trade
(7) Mutual funds - firm principal $25 per trade
(8) Flip trades $ 5 per trade
(9) Principal stock - trades customer principal $15 per trade
(10) Principal stock trades -
firm principal $ 8 per trade
(11) Option trades - customer principal $10 per trade
(12) Option trades - firm principal $ 7 per trade
(13) Corporate bonds - customer principal $20 per trade
(14) Corporate bonds - firm principal $17 per trade
(15) Municipal bonds - customer principal $25 per trade
(16) Municipal bonds - firm principal $25 per trade
(17) Government bonds - customer principal $20 per trade
(18) Government bonds - firm principal $17 per trade
(19) Unit trusts - customer principal $25 per trade
(20) Unit trusts - firm principal $25 per trade
<PAGE>
(21) Wireable government bonds $ 7 per trade
(22) Computer cash funds $ 1 per trade
(23) Manual cash funds $ 3 per trade
(24) Outside trades - regular $12 per trade
(25) Outside trades - options $ 7 per trade
(26) Transfers on agency trades $10 per trade
(27) Original statements $ 1
(29) Total positions $.50
</TABLE>
2. This Statement of Charges shall be filed with the Minutes of the Meeting of
the Board of Directors of Lewco held on September 15, 1993.
HAMBRECHT & QUIST INCORPORATED
By:
----------------------------------
WSCI LIMITED PARTNERSHIP
By: /s/ Patrick J. Borruso
----------------------------------
WERTHEIM SCHRODER & CO., INCORPORATED
By: /s/ Patrick J. Borruso
----------------------------------
LEWCO SECURITIES CORP.
By: /s/ J. M
----------------------------------
<PAGE>
AMENDMENT NO. 2 TO CLEARING AND OTHER SERVICES AGREEMENT
AMENDMENT NO. 2 TO CLEARING AND OTHER SERVICES AGREEMENT made December
13, 1993, by and among HAMBRECHT & QUIST INCORPORATED, a California corporation
("Hambrecht"), WERTHEIM SCHRODER & CO. INCORPORATED, a Delaware corporation
("Wertheim Schroder"), WSCI LIMITED PARTNERSHIP, a Delaware limited partnership
("WSCI"), ONE WALL STREET PARTNERS, L.P., a Delaware limited partnership ("One
Wall") (collectively hereinafter sometimes referred to as the "Participants"),
and LEWCO SECURITIES CORP., a Delaware corporation ("Lewco").
W I T N E S S E T H:
WHEREAS, Hambrecht and Wertheim Schroder are engaged in the securities
brokerage and related businesses; and
WHEREAS, Lewco is a registered broker-dealer engaged in the business
of clearing securities transactions for its owners; and
WHEREAS, Hambrecht, Wertheim Schroder, WSCI, and Lewco are parties to
a Clearing and Other Services Agreement (the "Clearing Agreement"), dated
December 23, 1991; and
WHEREAS, pursuant to the Clearing Agreement, Lewco acts as clearing
agent for Hambrecht's, Wertheim Schroder's and WSCI's securities transactions
and the transactions of Hambrecht's and Wertheim Schroder's securities customers
on an
<PAGE>
omnibus basis and performs certain other related services for Hambrecht,
Wertheim Schroder and WSCI; and
WHEREAS, the Participants and Lewco are parties to a Master Agreement
dated as of December 23, 1991, as amended (the "Master Agreement"); and
WHEREAS, One Wall desires Lewco to act as clearing agent for its
securities transactions and to perform certain other related services; and
WHEREAS, Hambrecht, Wertheim Schroder, WSCI and Lewco desire Lewco to
act as such clearing agent and perform such other related services for One Wall;
and
WHEREAS, Hambrecht, Wertheim Schroder, WSCI, and Lewco wish to enter
into this Amendment Agreement to reflect the aforesaid transactions and to
include One Wall as a party to the Clearing Agreement.
NOW, THEREFORE, in consideration of the premises and mutual covenants
of the parties herein contained, it is agreed as follows:
1. The first paragraph of Paragraph 1 of the Clearing Agreement is amended to
read in its entirety as follows:
"l. LEWCO TO ACT AS CLEARING AGENT. During the term of this Agreement,
Lewco shall act as the clearing agent and shall perform or provide for the
performance of all services customarily performed by a clearing broker,
including, but not limited to, settlement of trades, and cage and custodial
services for the Participants in respect of all transactions for their own
accounts and, if applicable, the accounts of their present and future securities
customers. Lewco will engage only in those business activities contemplated in
this Agreement and such activities shall be performed exclusively for
-2-
<PAGE>
the Participants; provided, however, that this paragraph does not preclude the
Participants from entering into clearing arrangements with other broker-dealers
provided that the forms of such clearing arrangements are approved by Lewco and
the Participants. It is expressly understood and agreed to by the parties
hereto that until WSCI or One Wall notifies Lewco to the contrary, WSCI and One
Wall shall only clear short sale transactions through Lewco and shall clear all
other transactions through Wertheim Schroder."
2. Subparagraph 2(b) of the Clearing Agreement is hereby amended to read as
follows:
"(b) Lewco will continue to act, or act, as the case may be, as disbursing
agent for the Participants and will continue to receive as agent, if applicable,
funds from their respective customers.
3. Subparagraph 2(c) of the Clearing Agreement is hereby amended to read as
follows:
"(c) To the extent practicable, all borrowings secured by the securities of
the customers of Hambrecht or Wertheim Schroder will be made by Hambrecht or
Wertheim Schroder, respectively, and, to the extent practicable, all borrowings
secured by the securities of Hambrecht, WSCI, One Wall or Wertheim Schroder,
will be made by Hambrecht, WSCI, One Wall or Wertheim Schroder, respectively.
Lewco, as custodian of such securities, in order to facilitate such borrowings,
will identify for Hambrecht, WSCI, One Wall and Wertheim Schroder the securities
which are available
-3-
<PAGE>
for their respective borrowing purposes, will make deliveries and substitutions
on behalf of the Participants and will receive and disburse funds on such
borrowers' behalf."
4. Subparagraph 2(d) of the Clearing Agreement is hereby amended to read as
follows:
"(d) To the extent practicable, all loans of fully paid securities of (i)
the customers of Hambrecht or Wertheim Schroder who consent to such loans will
be made by Hambrecht or Wertheim Schroder, respectively, and (ii) Hambrecht,
WSCI, One Wall or Wertheim Schroder, will be made by Hambrecht, WSCI, One Wall
or Wertheim Schroder, respectively. Lewco, as custodian of such securities, in
order to facilitate such loans, will identify for Hambrecht, WSCI, One Wall and
Wertheim Schroder the securities which are available for their respective loan
purposes, will make deliveries and substitutions on behalf of the Participants
and will receive funds on their behalf."
5. Subparagraph 2(e) of the Clearing Agreement is hereby amended to read as
follows:
"(e) Lewco shall have the right to loan securities (i) which are not fully
paid of the customers of Hambrecht or Wertheim Schroder or (ii) which are fully
paid or which are not fully paid of Hambrecht, WSCI, One Wall or Wertheim
Schroder, but loans of such securities shall be transactions by and for the
account of Lewco."
6. The first sentence of Subparagraph 4(a) of the Clearing Agreement is
amended to read as follows:
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<PAGE>
"4. CHARGES, ETC.
(a) The Participants agree that the schedule of Lewco's charges
shall be as set forth on the Statement of Charges attached hereto as Schedule
I."
7. Subparagraph 4(b) of the Clearing Agreement is amended to read as follows:
"(b) Each Participant agrees to make monthly minimum payments
hereunder ("monthly Minimum Payments") to Lewco with respect to each month in
which the Participant is clearing transactions through Lewco in all cases, in an
amount, commencing on October 1, 1993, equal to $950,000 for Wertheim Schroder,
$225,000 for Hambrecht, $1,000 for WSCI and $1,000 for One Wall", provided,
however, that no payment shall be due from One Wall until such time as One Wall
is approved as a member of the NASD."
8. Subparagraph 4(d) (B) and (C) of the Clearing Agreement are amended to read
as follows:
"(B) greater than the payments made by the Participants pursuant to
the Schedule of Charges for such month or the Aggregate Quarterly Payments
made by the Participants for such annual term, then Hambrecht, WSCI, One
Wall and Wertheim Schroder shall pay such difference in cash to Lewco in
proportion to their respective monthly payments for such month or Aggregate
Quarterly Payments for such annual term, as the case may be; or
(C) less than the payments made by the Participants pursuant to the
Schedule of Charges for such month or the Aggregate Quarterly Payments made
by the Participants for such annual term, then Lewco shall refund to
Hambrecht,
-5-
<PAGE>
WSCI, One Wall and Wertheim Schroder such excess in proportion to their
respective monthly payments for such month or Aggregate Quarterly Payments
for such annual term as the case may be."
9. The second sentence of Paragraph 5 of the Clearing Agreement is amended to
read in its entirety as follows:
"The Participants agree to pay for such services within thirty (30)
days of the receipt of a statement from Lewco setting forth the amount of such
costs."
10. Subparagraph 6(d) of the Clearing Agreement is hereby amended to read as
follows:
"(d) The Participants shall, upon receipt of the Daily Settlement
Sheet, instruct Lewco whether to secure loans in respect of any net debit
balance on such Daily Settlement Sheet, as agent for the respective
Participant."
11. Subparagraph 10(a) of the Clearing Agreement is hereby amended to read as
follows:
"(a) Hambrecht, WSCI, One Wall and Wertheim Schroder agree to retain
full responsibility for all transactions processed for such party through Lewco,
or with respect to which Lewco provides services pursuant to this Agreement for
such party. All errors, misunderstandings or controversies, except those
specifically or otherwise covered in this Agreement, between a securities
customer and a Participant or any employee of a Participant, which shall arise
solely out of acts or omissions of such
-6-
<PAGE>
Participant or any of its employees, shall be the sole and exclusive
responsibility and liability of such Participant. All transactions will be in
compliance with all applicable laws, rules and regulations of the United States,
the several states, governmental agencies, securities exchanges, and the
National Association of Securities Dealers, Inc., and in this connection each
shall diligently supervise the activities of their respective officers,
employees and representatives with respect to such transactions. Hambrecht,
WSCI, One Wall and Wertheim Schroder each agree to indemnify Lewco and each
other (and all directors, partners and controlling persons thereof) against, and
hold Lewco and each other (and all directors, partners and controlling persons
thereof) harmless from, any claims, losses, expenses (including, without
limitation, legal fees), or liabilities incurred by Lewco or the other
Participant arising out of, or connected with, or in any way related to, any
failure or alleged failure so to comply on the part of Hambrecht, WSCI, One Wall
or Wertheim Schroder, as the case may be, or any claims, losses, expenses
(including, without limitation, legal fees) or liabilities, founded in common
law fraud, tort, contract, or otherwise, based on any wrongful act or failure to
act or alleged wrongful act of failure to act of Hambrecht, WSCI, One Wall or
Wertheim Schroder, irrespective of whether Lewco or such other Participant
possessed actual or constructive knowledge of such failure so to comply or such
wrongful act."
12. Paragraph 17 of the Clearing Agreement is hereby amended to read in its
entirety as follows:
"17. RULES OF CLEARING CORPORATIONS. The parties to this Agreement agree
that no provision of this Agreement is in conflict with or shall be interpreted
as requiring
-7-
<PAGE>
violation by any party of any rule or by-laws of any clearing corporation of
which Lewco now is or may become a member. The parties to this Agreement agree
that the books and records of the Participants shall be open at all reasonable
times to reasonable inspection by duly authorized representatives of any
clearing corporation of which Lewco now is or may become a member."
13. The Clearing Agreement is hereby amended to add a new Section 22, which
shall read in its entirety as follows:
"22. DEFINITIONS.
(a) From and after the date hereof, One Wall shall be a party to, and
shall have the rights and duties of a party to, the Clearing Agreement, as if it
had executed the Clearing Agreement.
(b) From and after the date hereof, the term "Participant" as used in the
Agreement and as used herein shall include One Wall.
(c) From and after the date hereof, each reference in the Clearing
Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like
import shall mean and be a reference to the Clearing Agreement, as amended
hereby."
14. Schedule I of the Clearing Agreement is hereby amended to read in its
entirety as follows:
-8-
<PAGE>
"SCHEDULE I
-----------
LEWCO SECURITIES CORP.
STATEMENT OF CHARGES UNDER
CLEARING AND OTHER SERVICES AGREEMENT
1. Pursuant to Subparagraph 4(a) of the Clearing and Other Services
Agreement made December 23, 1991, as amended, by and among HAMBRECHT & QUIST
INCORPORATED, a California corporation ("Hambrecht"), WSCI LIMITED PARTNERSHIP,
a Delaware limited partnership ("WSCI"), WERTHEIM SCHRODER & CO. INCORPORATED,
a Delaware corporation ("Wertheim Schroder"), ONE WALL STREET PARTNERS, L.P., a
Delaware limited partnership ("One Wall"), and LEWCO SECURITIES CORP., a
Delaware corporation ("Lewco"), Hambrecht, WSCI, One Wall, Wertheim Schroder and
Lewco agree to the following schedule of charges to be effective for the period
commencing from the Closing Date until adjusted in accordance with such Section.
-9-
<PAGE>
4. CHARGES
Classification Billing Rate
-------------- ------------
(1) Commissions on Equity Agency Trades 1% of Commissions
(2) Agency trades - equities $15 per trade
(3) Agency trades - bonds $25 per trade
(4) Agency trades - options $12 per trade
(5) Mutual funds - customer agency $25 per trade
(6) Mutual funds - customer principal $25 per trade
(7) Mutual funds - firm principal $25 per trade
(8) Flip trades $5 per trade
(9) Principal stock trades -
customer principal $15 per trade
(10) Principal stock trades -
firm principal $8 per trade
(11) Option trades - customer principal $10 per trade
(12) Option trades - firm principal $7 per trade
(13) Corporate bonds - customer principal $20 per trade
(14) Corporate bonds - firm principal $17 per trade
(15) Municipal bonds - customer principal $25 per trade
(16) Municipal bonds - firm principal $25 per trade
(17) Government bonds - customer principal $17 per trade
(18) Government bonds - firm principal $17 per trade
(19) Unit trusts - customer principal $25 per trade
-10-
<PAGE>
(20) Unit trusts - firm principal $25 per trade
(21) Wireable government bonds $7 per trade
(22) Computer cash funds $1 per trade
(23) Manual cash funds $3 per trade
(24) Outside trades - regular $12 per trade
(25) Outside trades - options $7 per trade
(26) Transfers on agency trades $10 per trade
(27) Original statements $1
(28) Total positions $.50
-11-
<PAGE>
2. This Statement of Charges shall be field with the Minutes of the
Meeting of the Board of Directors of Lewco.
ACCEPTED AND AGREED:
HAMBRECHT & QUIST INCORPORATED
By:
------------------------------------
WERTHEIM SCHRODER & CO.
INCORPORATED
By:
------------------------------------
WSCI LIMITED PARTNERSHIP
By: Wertheim Schroder & Co.
Incorporated, as General Partner
By:
------------------------------------
ONE WALL STREET PARTNERS, L.P.
By: Wertheim Schroder & Co.
Incorporated, as General Partner
By:
------------------------------------
LEWCO SECURITIES CORP.
By:
------------------------------------
-12-
<PAGE>
15. COUNTERPARTS. This Amendment Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Agreement by
signing any such counterpart.
HAMBRECHT & QUIST INCORPORATED
By: /s/ Raymond J. Minehan
------------------------------------
WERTHEIM SCHRODER & CO.
INCORPORATED
By: /s/ Patrick J. Borruso
------------------------------------
WSCI LIMITED PARTNERSHIP
By: Wertheim Schroder & Co.
Incorporated, as General Partner
By: /s/ Patrick J. Borruso
------------------------------------
ONE WALL STREET PARTNERS, L.P.
By: Wertheim Schroder & Co.
Incorporated,
as General Partner
By: /s/ Patrick J. Borruso
------------------------------------
LEWCO SECURITIES CORP.
By: /s/ J. Philip Smith
------------------------------------
-13-
<PAGE>
AMENDMENT NO. 3 TO CLEARING AND OTHER SERVICES AGREEMENT
AMENDMENT NO. 3 TO CLEARING AND OTHER SERVICES AGREEMENT made as of July 5,
1995, by and among HAMBRECHT & QUIST LLC, a Delaware limited liability company
("Hambrecht LLC"), SCHRODER WERTHEIM & CO. INCORPORATED, a Delaware corporation
formerly known as Wertheim Schroder & Co. Incorporated ("Schroder Wertheim"),
WSCI LIMITED PARTNERSHIP, a Delaware limited partnership ("WSCI"), ONE WALL
STREET PARTNERS, L.P., a Delaware limited partnership ("One Wall") (collectively
hereinafter sometimes referred to as the "Participants"), and LEWCO SECURITIES
CORP., a Delaware corporation ("Lewco").
W I T N E S S E T H:
WHEREAS, Hambrecht LLC and Schroder Wertheim are engaged in the securities
brokerage and related businesses; and
WHEREAS, Lewco is a registered broker-dealer engaged in the business of
clearing securities transactions for its owners; and
WHEREAS, Hambrecht & Quist Incorporated, a California corporation
("Hambrecht"), Schroder Wertheim, WSCI, One Wall (collectively, the
"Participants") and Lewco are parties to a Clearing and Other Services Agreement
(the "Clearing Agreement"), dated December 23, 1991, as amended; and
WHEREAS, pursuant to the Clearing Agreement, Lewco acts as clearing agent
for Hambrecht LLC's, Schroder Wertheim's, One Wall's and WSCI's securities
transactions and the transactions of Hambrecht's and Schroder Wertheim's
securities
<PAGE>
customers on an omnibus basis and performs certain other related services for
Hambrecht LLC, Schroder Wertheim and WSCI; and
WHEREAS, the Participants and Lewco are parties to a Master Agreement dated
as of December 23, 1991, as amended (the "Master Agreement"); and
WHEREAS, Hambrecht merged with and into Hambrecht LLC, which succeeded by
operation of law to all the rights and obligations of Hambrecht, and Wertheim
Schroder & Co. Incorporated changed its name to Schroder Wertheim & Co.
Incorporated; and
WHEREAS, Schroder Wertheim, Hambrecht, WSCI, One Wall and Lewco wish to
enter into this amendment to the Clearing Agreement to reflect the aforesaid
changes;
NOW, THEREFORE, in consideration of the premises and mutual covenants of
the parties herein contained, it is agreed as follows:
1. Hambrecht LLC represents and warrants to the other parties hereto that it
is a limited liability company duly organized and validly existing under
the laws of the State of Delaware and that it has succeeded to all the
assets, liabilities, rights and obligations of Hambrecht pursuant to an
Agreement and Plan of Merger effective as of May 1, 1995 and has all
requisite power and authority to perform its obligations hereunder and has
duly authorized, executed and delivered this Agreement.
2. Without limiting the foregoing, Hambrecht LLC hereby assumes all the rights
and all the obligations of Hambrecht under the Clearing Agreement whether
now existing or hereafter arising and all references to Hambrecht in the
Clearing Agreement shall be deemed to mean Hambrecht LLC.
-2-
<PAGE>
3. Schroder Wertheim hereby represents that it is the entity formerly known as
Wertheim Schroder & Co. Incorporated and that its name was changed as of
July 5, 1995.
4. All references to Wertheim Schroder in the Clearing Agreement shall
hereafter be changed to and be a reference to Schroder Wertheim.
5. All references to the Clearing Agreement previously executed by Schroder
Wertheim, WSCI, One Wall and Hambrecht shall be deemed to mean the Clearing
Agreement as amended by this Agreement.
6. Section 22 of the Clearing Agreement is hereby amended to read in its
entirety as follows:
22. DEFINITIONS.
(a) From and after the date hereof, the term "Participant" as
used in the Agreement and as used herein shall include Hambrecht LLC
in lieu of Hambrecht.
(b) From and after the date hereof, each reference in the
Clearing Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import shall mean and be a reference to the
Clearing Agreement, as amended from time to time.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the day and year first above written.
SCHRODER WERTHEIM & CO. INCORPORATED
By: /s/ Patrick J. Borruso
------------------------------------
HAMBRECHT & QUIST LLC
By: /s/ Raymond J. Minehan
------------------------------------
WSCI LIMITED PARTNERSHIP
By: Schroder Wertheim & Co. Incorporated
By: /s/ Patrick J. Borruso
------------------------------------
ONE WALL STREET PARTNERS, L.P.
By: Schroder Wertheim & Co. Incorporated
By: /s/ Patrick J. Borruso
------------------------------------
LEWCO SECURITIES CORP.
By: /s/ J. Philip Smith
------------------------------------
-4-
<PAGE>
AMENDMENT NO. 4 TO CLEARING AND OTHER SERVICES AGREEMENT
AMENDMENT NO. 4 dated October 1, 1995 TO CLEARING AND OTHER SERVICES
AGREEMENT made December 15, 1993, by and among HAMBRECHT & QUIST LLC, a Delaware
limited liability company ("Hambrecht LLC"), SCHRODER WERTHEIM & CO.
INCORPORATED, a Delaware corporation ("Schroder Wertheim"), WSCI LIMITED
PARTNERSHIP, a Delaware limited partnership ("WSCI"), ONE WALL STREET PARTNERS,
L.P, a Delaware limited partnership ("One Wall") (collectively hereinafter
sometimes referred to as the "Participants"), and LEWCO SECURITIES CORP., a
Delaware corporation ("Lewco").
Subparagraph 4 (c) of the Clearing and Other Services Agreement is amended
to read as follows:
"(c) If the amount payable by a Participant with respect to any month
pursuant to Lewco's schedule of charges exceeds the Participant's monthly
minimum payment with respect to that month, the amount payable pursuant to
the schedule of charges shall be reduced by 50% of such excess, except that
for the months of October, November and December, 1995, no reduction shall
occur."
<PAGE>
LEWCO SECURITIES CORP.
HARBORSIDE FINANCIAL CENTER
34 EXCHANGE PLACE
JERSEY CITY, NJ 07311-3988
November 29, 1995
Paragraph 6 (b) of the Clearing and Other Services Agreement by and among
Schroder Wertheim & Co. Incorporated, Hambrecht & Quist LLC, WSCI Limited
Partnership and One Wall Street Partners, L.P. states that:
"Subject to the provisions of Subparagraph (e) of this
Paragraph 6, each Participant agrees that any net debit
balance appearing in its Daily Settlement Account shall
bear interest computed daily at the average rate of
interest the Participants pay for borrowed funds from
banks or such other rate as the parties shall mutually
agree to."
The parties referred to in Paragraph 6(b) of the Clearing and Other
Services Agreement hereby agree that effective December 1, 1995 and until
subsequently changed by such parties, the net debit balance appearing in each
Participant's Daily Settlement Account will bear interest computed daily at the
weighted average rate of interest the Participants and Lewco pay for borrowed
funds from banks and the aggregate rate of interest paid to borrowers of
securities as computed by Loanet and identified as the House Loan Rebate Rate.
SCHRODER WERTHEIM & CO. INCORPORATED
By: /s/ Patrick J. Borruso
------------------------------------
HAMBRECHT & QUIST LLC
By: /s/ Raymond J. Minehan
------------------------------------
WSCI LIMITED PARTNERSHIP
By: Schroder Wertheim & Co. Incorporated
By: /s/ Patrick J. Borruso
------------------------------------
ONE WALL STREET PARTNERS, L.P.
By: Schroder, Wertheim & Co.
Incorporated
By: /s/ Patrick J. Borruso
------------------------------------
LEWCO SECURITIES CORP.
By: /s/ J. Philip Smith
------------------------------------
<PAGE>
April 1, 1996
Hambrecht & Quist Group
1 Bush Street
San Francisco, CA 94104
Attention: Daniel H. Case, III
Dear Dan:
This letter sets forth the terms of the understanding between Hambrecht &
Quist Group, a California corporation ("Group") and H&Q Asia Pacific, Ltd., a
British Virgin Islands limited liability company ("AP"), regarding the
recapitalization of AP and the restructuring of its relationship with Group.
1. EQUITY INTERESTS. AP will be recapitalized such that at the date
of this letter, the Class A Common Stock owned by Group will constitute 15%
of AP's outstanding shares, and the Common Stock owned by the other AP
shareholders will be increased to 85% of AP's outstanding shares. The
Capitalization of AP will be $1 million, of which $150,000 has been paid by
Group and $850,000 will be [lent by H&Q, added to Part 2 of the H&Q Debt, as
defined in Paragraph 4 below, and repaid as set forth in Paragraph 4.] AP will
be managed for the benefit of all of its shareholders as a profit-earning
management company, and Group, as owner of 15% of AP's outstanding shares will
be entitled to receive 15% of these profits (or retained earnings) in the form
of dividends (or capital disbursements).
Class A Stock will (i) continue to have a liquidation preference equal to
its capital contribution of $150,000, and (ii) be required to approve amendments
to AP's articles and by-laws, fundamental corporate transactions (e.g.,
mergers), and issuances of shares (other than through share issuances to the
public in a public offering) which would cause Group's 15% equity interest in AP
to be diluted. Group's 15% interest would be proportionately diluted (i) in the
event of stock issuances in public offerings which either value Group's 15%
interest at $7.5 million or value AP post-offering at $50 million or more, or
(ii) in the event Group and the other AP shareholders jointly agree to admit an
outside third party. AP would maintain its right to acquire Group's equity
interest in AP for "fair value" in the event that a single person or entity or
affiliated entities acquires more than 50% of the voting securities of Group.
2. INCOME AND MANAGEMENT FEES. All income and management fees (other
than that related to Carried Interest, as described in Paragraph 3 below) (the
"Income") which remains after payment of AP's expenses (the "Expenses") (which
Expenses include AP's overhead salaries and bonus of professional employees)
will be retained by AP and will be available first, to pay Part 2 of the H&Q
Debt (as defined in Paragraph 4 below) and thereafter as working capital or for
<PAGE>
distribution to AP's shareholders. AP will undertake to ensure that for ongoing
operations, the sum of its salaries and cash bonus payments (excluding Carried
Interest) does not exceed 50% of Income. Costs of employment for personnel at
new offices such as Indonesia and India will be excluded from this computation
until local country funds have closed.
3. CARRIED INTEREST. The Carried Interest which AP receives for existing
funds for which it presently acts as general partner or fund manager or advisor
(the "Existing Funds"), or for funds for which AP may in the future act as
general partner or fund manager or advisor ("Future Funds"), will be applied as
follows:
(a) The first 20% of the Carried Interest paid to AP by the Existing
Funds (the "Non DCI Carry") will be used to repay Part 2 of the H&Q Debt (as
defined in Paragraph 4 below) until all of such Part 2 of the H&Q Debt is
repaid. In the event that the Income of AP is not sufficient to pay its
Expenses, an additional part of the Carried Interest paid to AP by the Existing
Funds will be used by AP to cover such shortfall. The remaining Carried
Interest from the Existing Funds, and the Carried Interest from Future Funds is
hereinafter referred to as the Distributable Carried Interest (the "DCI") and
will be applied as set forth in Paragraph 3(b) below.
(b) Group will receive (either directly, through AP, or through a
combination of direct or through AP) the portions of the DCI with respect to
Existing Funds and Future Funds as set forth in the table below, in
consideration of the contribution set forth in such table. The remainder of the
DCI will be available to the other shareholders and employees of AP:
<TABLE>
<CAPTION>
Group
Shares of
Fund DCI Group Value Added
- ---------------------------- ---------------- -------------------------------
<S> <C> <C>
Existing Funds(1) 35% Past contributions
Additional Asia Pacific 25% Group and/or its
Growth Fund II, L.P. affiliates will invest
("APGF II") and Asia Pacific $5 million as a limited
Growth Fund III, L.P. ("APGF partner in APGF III
III")
Asia Pacific Growth Fund IV, 20% Group and/or its affiliates
L.P. and other Asia Pacific will invest at least $5
Growth Funds organized prior to million and up to 5% of APGF
the seventh anniversary of APGF IV etc. as a Special Limited
III's initial closing Partner (2).
("APGF IV etc.")
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Group
Shares of
Fund DCI Group Value Added
- ---------------------------- ---------------- -------------------------------
<S> <C> <C>
Additional Asia Pacific 15% Group and/or its affiliates
Growth Funds organized will invest at least 5% and
after the seventh anniversary up to 10% of each Additional
of APGF III's initial APGF as a Special Limited
closing ("Additional APGF") Partner (2).
PT Dharma Kapitalindo ("PTDK") 20% Group and/or its affiliates
and other country funds will invest at least 2.5%,
organized prior to the seventh and may invest up to 5% in
anniversary of APGF III's initial each new country fund as a
closing Special Limited Partner (2).
Other country funds organized 15% Group and/or its affiliates
after the seventh anniversary of will invest at least 2.5%,
APGF III's initial closing and may invest up to 10%
in each new country fund as a
Special Limited Partner (2).
</TABLE>
- -------------------
(1) Consists of Hanmore Venture Capital Investment Corporation ("Hanmore"); H&Q
Philippine Ventures, Inc. ("PVI"); H&Q Philippine Ventures II, Inc.
("PVII"); The ASEAN Fund Ltd. ("AFL"); Siam Ventures, N.V. ("Siam"); H&Q
Asia Ventures, Ltd. ("HAVEN"); Asia Pacific Growth Fund, L.P. ("APGF I");
China Dynamic Growth Fund. L.P. ("CDGF"); and Malaysian Technology Ventures
II Sdn. Bhd ("MTVII").
(2) Group, as a Special Limited Partner, will invest the minimum indicated
amount, free of carried interest charges but NOT free of management fees.
4. REPAYMENT OF H&Q DEBT. As of the date of this letter, AP's debt to
Group is $_______, including the $850,000 referred to in Paragraph 1 above (the
"H&Q Debt"). Of such H&Q Debt, $1 million ("Part 1") will be restructured as an
interest free term loan, due on January 1, 1999, to be repaid from AP's share of
investment banking fees as provided in Paragraph 5 below. Part 1 will
immediately be reduced by $200,000 as of the date hereof in recognition of the
investment banking business introduced by AP to Group prior to December 31,
1995, of which $150,000 is a result of the Oak Technology transaction. If
Part 1 has not been fully repaid by the due date, the unpaid balance will be
added to Part 2, as defined below. The remaining $_________ of the H&Q Debt
("Part 2") will be restructured as an interest-bearing term loan, due on
January 1, 2003, to be repaid (i) by the application of the Non DCI Carry (as
defined in Paragraph 3(a), above), and (ii) by any Income remaining after
payment of Expenses.
5. Investment banking fees earned by Group will be shared with AP
according to the following table:
<PAGE>
<TABLE>
<CAPTION>
Nature of transaction AP share of fees
- ------------------------------------- ------------------------------------
<S> <C>
Completed U.S. underwriting AP will receive 5% of the fees
transactions by Group with Asian- recieved by Group before expenses in
based companies which were initiated the form of cash, and 5% in the
by AP employees. form of a credit to Part 1 of the
Debt. The second 5% will cease when
Part 1 of the Debt is retired.
Completed U.S. underwriting AP will recieve 2.5% of the fees
transactions by Group with Asian- received by Group before
based companies which were not expenses in the form of cash,
initiated by AP employees. and 2.5% in the form of a
credit to Part 1 of the Debt.
The second 2.5% will cease when
Part 1 of the Debt is retired.
Completed U.S. underwriting AP will receive 2.5% of the fees
transactions by Group with US- received by Group before expenses
based companies which were in the form of cash, and 2.5%
initiated by AP employees. in the form of a credit
to Part 1 of the Debt. The
second 2.5% will cease when Part
1 of the Debt is retired.
</TABLE>
All fee based transactions (e.g., M&A or private placements) will be
negotiated in good faith.
6. CHARTER. Charter will include management of private equity funds in
the Asia Pacific Region, which will include from Japan, Korea, Taiwan and the
Philippines to the East, India and Pakistan to the West, Indonesia and
Australia to the South and Mongolia and China to the North. AP's Charter will
also include the small capitalization public money management business, if funds
are sourced in Asia. AP will not, without the written consent of Group, engage,
invest in or receive fees from any other investment banking, financial advisory,
M&A or securities brokerage firm other than Group.
7. OTHER ISSUES. Group will pay all direct and out-of-pocket expenses
incurred by Paul Denning in his capacity as a fund raiser for APGF II and
APGF III. Effective the date of this letter, AP will be vested with full
check-signing authority over its bank accounts, subject to Group approvals on
all Carried Interest and discretionary bonus payments in excess of $25,000,
and all payments over $100,000.
8. This letter is subject to the execution by AP and Group of
documentation satisfactory to AP and Group to complete the transactions
contemplated by this letter. It is intended that such documentation be
completed, and that the agreements evidenced by this letter become effective
upon the closings of APGF II and APGF III with combined capital commitments of
at least $120 million.
<PAGE>
To evidence your agreement to the terms set forth in this letter, please
execute a copy of this letter in the space provided below.
Very truly yours,
H&Q Asia Pacific, Ltd.
By:
---------------------
Authorized Signatory
Accepted and Approved:
Hambrecht & Quist Group
By:
--------------------------
Authorized Signature
Dated:
--------------------------
<PAGE>
HAMBRECHT & QUIST GROUP, INC.
Subsidiaries
Company: Hambrecht & Quist Group
Business: Investment banking
Percentage of H & Q Ownership: 100%
Date Organized: December 1, 1982
Place of Organization: California
Company: Hambrecht & Quist LLC
Business: Investment banking, securities brokerage
Percentage of Group Ownership: 70%
Date Organized: March 8, 1995*
Place of Organization: Delaware
*date limited liability company formed
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
Registration Statement filed by Hambrecht & Quist Group, Inc. dated June 20,
1996.
ARTHUR ANDERSEN LLP
San Francisco, California
June 20, 1996
