<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 5, 1996
REGISTRATION NO. 333-6431
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
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. / /
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 AUGUST 5, 1996
PROSPECTUS
3,500,000 SHARES
[LOGO]
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
$15.00 and $17.00 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 Rules 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 Common Stock has been approved for listing on
the New York Stock Exchange under the symbol HMQ, subject to official notice of
issuance. Upon the completion of this offering, the current directors and
executive officers of the Company will exercise voting control over
approximately 41% of the Company's outstanding Common Stock. See "Principal
Stockholders."
--------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
-------------
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 $800,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
525,000 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 LLC
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. THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS."
THE COMPANY
Hambrecht & Quist is a major bracket investment bank focused on emerging
growth companies and growth-oriented investors. 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 industry-oriented research
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 branded consumer industry and companies providing
business information, outsourcing and healthcare services.
Hambrecht & Quist is generally considered by the securities industry to be
one of the approximately 15 major bracket investment banks based on H&Q's
significant level of participation in equity underwritings as manager or a
co-manager and in syndicates for public equity offerings managed by other
investment banks. "Major bracket" firms are smaller than the five "bulge
bracket" investment banks. The Company is one of the smallest major bracket
firms based on measures such as revenues, assets, dollar amounts of underwritten
debt and equity, number of employees and trading volume. However, the Company
believes that based on the number of managed or co-managed public equity
offerings, H&Q is a leading underwriter of equity securities for emerging growth
companies in its industry areas of focus. As a result of the high proportion of
venture capital invested in emerging growth companies located in California and
Massachusetts, the Company's underwriting clients have been concentrated in
these states. Approximately 47% of the companies for which H&Q served as manager
or co-manager of a securities offering between January 1995 and June 1996 were
based in California, and approximately 11% of these companies were based in
Massachusetts.
H&Q organizes its research and investment banking professionals into
industry teams. Each team, together with H&Q's venture capital professionals,
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 increasing 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 expanded its underwriting capability by increasing its corporate
finance and syndicate personnel and increased its advisory services in mergers,
acquisitions, strategic partnerships, private placements and asset-based and
mezzanine financing. At June 30, 1996, H&Q made a market in over 300 Nasdaq
stocks and was one of the top three market makers in approximately 74% of the
Nasdaq equity securities issued by companies for which H&Q served as manager or
co-manager in an initial public offering completed between 1991 and 1996. H&Q
also has recently increased its number of retail brokers from 41 to 62 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. 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.
H&Q is a leading underwriter of public offerings of equity securities for
emerging growth companies in its industry areas of focus, based on the number of
transactions completed since January 1991 in which H&Q served as a managing or
co-managing underwriter. The number of public equity offerings managed or
co-managed by the Company has increased from 43 in 1991 to 90 in 1995 and 69 in
the first six months of calendar 1996, with H&Q
3
<PAGE>
serving as lead manager in 41%, 57% and 43% of these transactions, respectively.
While the distribution of offerings among industries has varied over time,
during 1995 and the first six months of calendar 1996, the Company managed or
co-managed 96 public equity offerings in the technology industry, 35 in the
healthcare industry, 21 in the services industry and 7 in the branded consumer
industry, with H&Q serving as lead manager in 51% of these transactions. Since
1968, Hambrecht & Quist has managed or co-managed over 650 public offerings for
over 440 growth companies in the technology, healthcare, business information
and outsourcing services, healthcare services, branded consumer and related
industries, serving as lead manager in more than 260 of these offerings. The
Company's underwriting clients have included pioneers in emerging industries,
such as Adobe, Apple, Genentech and Netscape.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............ 3,500,000 shares
Common Stock to be outstanding after the 22,169,064 shares(1)
offering.....................................
Use of proceeds................................ General corporate purposes
Proposed New York Stock Exchange symbol........ HMQ
</TABLE>
- ------------------------------
(1) Based on shares outstanding at June 30, 1996. Excludes 5,697,520 shares of
Common Stock issuable upon exercise of stock options outstanding at June 30,
1996 at a weighted average exercise price of $7.15 per share and 3,000,000
shares of Common Stock reserved at June 30, 1996 for future issuance under
the Company's 1996 Equity Plan. See "Management -- Compensation Plans" and
Note 8 of Condensed Notes to Combined Financial Statements -- June 30, 1996.
4
<PAGE>
SUMMARY COMBINED FINANCIAL INFORMATION(1)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE
FISCAL YEAR ENDED SEPTEMBER 30, 30,
----------------------------------------------------- ------------------------
<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 $ 36,316 $ 75,354
Agency commissions............... 11,135 12,557 14,221 14,242 24,603 15,911 29,094
Investment banking............... 23,176 51,517 42,960 29,234 70,360 39,400 130,522
Corporate finance fees........... 7,409 8,371 9,993 18,561 20,709 14,530 31,947
Net investment gains............. 7,026 8,193 3,524 10,270 33,852 18,542 19,087
Other............................ 9,620 11,418 9,804 10,612 17,074 11,988 26,358
--------- --------- --------- --------- --------- ----------- -----------
Total revenues................... 81,846 125,494 110,547 119,330 220,023 136,687 312,362
--------- --------- --------- --------- --------- ----------- -----------
Expenses:
Compensation and benefits........ 37,424 58,044 54,917 60,175 105,370 68,750 159,738
Brokerage and clearance.......... 5,611 6,184 6,892 7,367 10,441 6,678 10,017
Occupancy and equipment.......... 6,003 6,040 6,045 6,679 7,803 5,511 7,146
Communications................... 3,461 4,135 4,377 6,244 7,394 5,533 7,310
Interest......................... 303 1,141 1,464 987 1,266 727 1,041
Other(3)......................... 44,382 32,226 10,256 11,315 15,131 10,790 19,717
--------- --------- --------- --------- --------- ----------- -----------
Total expenses................... 97,184 107,770 83,951 92,767 147,405 97,989 204,969
--------- --------- --------- --------- --------- ----------- -----------
Minority interest(4)............... 453 794 352 526 719 454 874
--------- --------- --------- --------- --------- ----------- -----------
Income (loss) before income tax
provision......................... (15,791) 16,930 26,244 26,037 71,899 38,244 106,519
Income tax provision (credit)...... (5,878) 7,200 10,940 10,119 22,461 11,810 36,493
--------- --------- --------- --------- --------- ----------- -----------
Net income (loss).................. $ (9,913) $ 9,730 $ 15,304 $ 15,918 $ 49,438 $ 26,434 $ 70,026
--------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- ----------- -----------
Pro forma net income per
share(5)..........................
Pro forma weighted average shares
outstanding(5)....................
<CAPTION>
JUNE 30, 1996
-------------------------------
AS
PRO ADJUSTED
ACTUAL FORMA(2) (2)(6)
--------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED BALANCE SHEET DATA:
Total assets....................... $ 486,736 $ 463,708 $ 514,988
Debt obligations................... 11,252 11,252 11,252
Stockholders' equity............... 170,394 155,725 207,005
Book value per common share
outstanding....................... $ 8.34 $ 9.34
<CAPTION>
FISCAL YEAR NINE MONTHS
ENDED SEPTEMBER ENDED
30, JUNE 30,
--------------- -------------
<S> <C> <C>
1995 1996
--------------- -------------
PRO FORMA(2)
COMBINED STATEMENT OF OPERATIONS
DATA:
Revenues:
Principal transactions........... $ 53,425 $ 75,354
Agency commissions............... 24,603 29,094
Investment banking............... 70,360 130,522
Corporate finance fees........... 20,709 31,947
Net investment gains............. 26,439 15,383
Other............................ 16,809 26,159
------- -------------
Total revenues................... 212,345 308,459
------- -------------
Expenses:
Compensation and benefits........ 105,370 159,738
Brokerage and clearance.......... 10,441 10,017
Occupancy and equipment.......... 7,803 7,146
Communications................... 7,394 7,310
Interest......................... 1,266 1,041
Other(3)......................... 15,131 19,717
------- -------------
Total expenses................... 147,405 204,969
------- -------------
Minority interest(4)............... 300 364
------- -------------
Income (loss) before income tax
provision......................... 64,640 103,126
Income tax provision (credit)...... 28,442 45,374
------- -------------
Net income (loss).................. $ 36,198 $ 57,752
------- -------------
------- -------------
Pro forma net income per
share(5).......................... $ 1.83 $ 2.78
------- -------------
------- -------------
Pro forma weighted average shares
outstanding(5).................... 19,827 20,769
------- -------------
------- -------------
<S> <C> <C>
COMBINED BALANCE SHEET DATA:
Total assets.......................
Debt obligations...................
Stockholders' equity...............
Book value per common share
outstanding.......................
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FISCAL YEAR ENDED SEPTEMBER 30, JUNE 30,
----------------------------------------------------- ------------
1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total employees(7)............... 291 327 350 426 498 617
Return on average equity......... -- 34% 37% 28% 58% 62%(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>
<S> <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) Represents the pro rata interest of owners other than the Company in the
earnings of Hambrecht & Quist Guaranty Finance.
(5) See Note 8 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 $16.00 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."
5
<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.
RISK OF REDUCED REVENUES DURING PERIODS OF DECLINING PRICES OR REDUCED ACTIVITY
IN MARKET FOR EMERGING GROWTH COMPANY SECURITIES
The Company's revenues are likely to be lower during periods of declining
prices or inactivity in the market for growth company securities due to the
Company's focus on serving growth companies and their investors. The Company's
business is particularly dependent on the market for equity offerings by
companies in the technology, healthcare, business information and outsourcing
services, healthcare services and branded consumer 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. This concentration produces higher
volatility in the number and size of corporate financing transactions conducted
by emerging growth companies as compared to companies in other industries, and
higher volatility in the volume of after-market trading of growth company
securities.
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 the first nine
months of fiscal 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. In recent weeks, the market for equity securities in general, and for
companies in the industries on which the Company focuses in particular, has
experienced a significant decline. For example, from its all-time high on May
20, 1996 through July 23, 1996 the Hambrecht & Quist Technology Index declined
by 22.5%. As a result of this market decline, many pending securities offerings
have been delayed or canceled, including several offerings which the Company was
managing or co-managing. Certain offerings completed in July and August 1996
have been effected at lower valuations and smaller total dollar sizes than the
price ranges indicated in the preliminary prospectuses for these offerings.
There can be no assurance that this trend will not continue. 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.
SEPTEMBER 1996 QUARTERLY REVENUES AND NET INCOME EXPECTED TO BE SUBSTANTIALLY
LOWER DUE TO RECENT MARKET DECLINE
The recent market decline and the resulting reduction in the Company's
business will cause the Company's revenues and net income in the quarter ending
September 30, 1996 to be substantially lower than its revenues and net income in
each of the first three quarters of fiscal 1996. Further, as a result of general
seasonal trends for quarters ending on September 30, the Company's fourth
quarter results are particularly dependent on revenues for the month of
September to offset typically lower revenues during the August vacation period.
Because of the volatility and uncertainties caused by present market conditions,
the Company's revenues for the month of September 1996 and the fourth quarter of
fiscal 1996 are particularly difficult to predict, and such revenues could be
even lower than present expectations if market conditions deteriorate. There can
be no assurance that this market decline, or the related adverse effect on the
Company's operating results, will not continue or worsen.
6
<PAGE>
RISKS OF REVENUE DECLINES DUE TO ECONOMIC, POLITICAL AND MARKET CONDITIONS
Reductions in public offering and merger and acquisition activities due to
changing economic, political or market conditions could cause the Company's
revenues to decline materially. The amount and profitability of these activities
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.
RISKS OF LOWERED REVENUES DUE TO DECLINING MARKET VOLUME, PRICE OR LIQUIDITY
The Company's revenues may decrease if market volume, prices or liquidity
declines. 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 result in a reduced volume of underwriting transactions, which
would cause a reduction in revenue from corporate finance fees, as well as the
recognition of losses from declines in the market value of securities held in
trading, investment and underwriting positions. Sudden sharp declines in market
values of securities can result in illiquid markets and the failure of issuers
and counterparties to perform their obligations, as well as increases in
customer claims. In such markets, the Company may incur losses in its principal
trading and market-making activities.
RISK OF LOSSES DUE TO FRAUD OR MISTAKES OF CUSTOMERS OR EMPLOYEES
The Company is exposed to the risk of significant losses as a result of
customer fraud, employee errors, misconduct and fraud (including unauthorized
transactions by traders) and failures in connection with the processing of
securities transactions. There can be no assurance that the Company's risk
management procedures and internal controls will prevent such losses from
occuring.
DEPENDENCE ON CASH INFLOWS TO MUTUAL FUNDS
A slow-down or reversal of cash inflows to mutual funds could lead to lower
underwriting and brokerage revenues for the Company, since mutual funds purchase
a significant portion of the securities offered to the public by emerging growth
companies. The demand for new equity offerings during calendar 1995 and the
first six months of calendar 1996 was driven in part by institutional investors,
particularly large mutual funds, seeking to invest cash received from the
public. From January 1996 through May 1996, the mutual fund industry received an
aggregate net cash inflow of approximately $124 billion. The financial press has
reported that the net aggregate amount invested in certain mutual funds focused
on technology and other growth industries declined during June and July 1996.
The financial press has also reported that such funds experienced significant
declines in net asset values due to the recent market decline. The public may
withdraw additional cash from these and other mutual funds as a result of the
decline in the market generally or as a result of a decline in mutual fund net
asset values. To the extent that the decline in cash inflows into mutual funds
and the decline in net asset values of these funds reduce demand by fund
managers for new equity offerings by emerging growth companies, the Company's
business and results of operations could be materially adversely affected.
RISK OF REVENUE DECLINES DUE TO FOCUS ON RELATIVELY FEW INDUSTRIES
Because the Company focuses on relatively few industries, a general decline
in the market for securities of companies within any such industry, particularly
technology or healthcare, could lead to substantially lower revenues for the
Company. 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 the securities of biotechnology and healthcare services
companies. Technology and healthcare underwriting transactions continue to play
a large role in the Company's investment banking and research activities. This
industry concentration exposes the Company to the risk of substantial declines
in revenue in the event of downturns in underwriting activities in these
industries.
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RISKS OF LOSSES DUE TO REGIONAL CONCENTRATION OF EMERGING GROWTH COMPANIES
Because many of the companies within the industries served by the Company
are located in California and Massachusetts, a natural disaster or significant
economic downturn in California or Massachusetts could substantially reduce the
Company's revenues. Approximately 47% of the companies for which H&Q served as
manager or co-manager of a securities offering between January 1995 and June
1996 had principal offices located in California, and approximately 11% of these
companies had principal offices located in Massachusetts. As a result, a natural
disaster in one of these states, particularly in California, could adversely
affect the companies in that state, which in turn could reduce the Company's
underwriting and brokerage business relating to those companies. In addition, a
regional economic downturn in one of these states could have an adverse effect
on emerging growth companies in that state due to the interdependence of
companies in the technology and healthcare industries. For example, a
significant downturn in computer sales could not only affect California computer
manufacturers but also adversely affect orders for semiconductors produced by
California companies, which in turn could adversely affect purchases of
semiconductor manufacturing equipment produced in California. Any adverse effect
on emerging growth industries concentrated in California, Massachusetts, or, to
a lesser extent, in other states in which emerging growth technology, healthcare
or service companies are also concentrated could also reduce the Company's
underwriting and brokerage business relating to those companies.
RISK OF REDUCED BROKERAGE REVENUES DUE TO DECLINE IN TRADING OF GROWTH COMPANY
SECURITIES
The Company's revenues from brokerage transactions are generally
substantially lower when the level of public offering and trading activities of
securities of emerging growth companies declines. H&Q derives a significant
portion of its revenues from brokerage transactions related to the securities of
growth companies. In the past, revenues from such brokerage transactions have
declined when underwriting activities in these industry sectors declined, the
volume of trading on the Nasdaq Stock Market ("Nasdaq") or New York Stock
Exchange ("NYSE") declined, or industry sectors or individual companies reported
results below investors' expectations. See "Business--Investment Banking" and
"--Sales, Trading and Syndicate."
SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING RESULTS DUE TO LEVEL OF BUSINESS
ACTIVITY AND TIMING OF TRANSACTION
The Company's revenues and operating results may fluctuate from quarter to
quarter and from year to year due to a combination of factors. These factors
include 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 securities
commence 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 nine months 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. 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 its 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.
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COMPETITION FOR PROFESSIONAL EMPLOYEES. 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 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."
LIMITATIONS OF EMPLOYEE RETENTION MECHANISMS. 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."
RISK OF REDUCED REVENUES DUE TO INABILITY TO RECRUIT QUALIFIED
PERSONNEL. The Company expects further growth in the number of its personnel,
even if the current market decline continues. 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. Many of the Company's
competitors have greater capital, financial and other resources than the
Company. The Company competes for venture capital and other principal investment
opportunities in the United States through wholly owned subsidiaries and
internationally through entities in which it holds minority interests. The
Company competes worldwide for growth-oriented institutional investor clients
and for United States underwritings of equity offerings by emerging growth
companies in H&Q's areas of focus. During fiscal 1995, less than 5% of the
Company's revenues was derived from international corporate finance and
brokerage services.
RISK OF LOST MARKET SHARE DUE TO COMPETITION FROM NEW MARKET ENTRANTS. 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
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skilled individuals. As a result of increasing competition, revenues from
individual underwriting transactions have been increasingly allocated among a
greater number of co-managers, a trend which has resulted in reduced revenues
for certain transactions.
RISK OF LOWER REVENUES DUE TO COMPETITION ASSOCIATED WITH ELECTRONIC
SECURITIES 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
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. See "Business--Legal Proceedings" and "Regulation."
POTENTIAL LIMITS ON OPERATIONS DUE TO NET CAPITAL REQUIREMENTS. 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."
COMPLIANCE WITH VENTURE CAPITAL REGULATIONS. 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.
RISK OF PENALTIES DUE TO NONCOMPLIANCE. 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 varying 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 Company recently agreed to a censure and a $40,000 fine by the
NYSE relating to
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certain loans to brokerage customers in fiscal 1994 against pledges of
restricted securities. The imposition of any future penalties or orders on H&Q
LLC could have a material adverse effect on the Company's operating results and
financial condition. See "Regulation."
RISKS ASSOCIATED WITH CHANGING REGULATORY ENVIRONMENT. 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.
NASDAQ ANTITRUST LITIGATION. Much of the Company's underwriting and
market-making business involves securities traded on Nasdaq. Nasdaq's operations
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. This scrutiny has included allegations of collusion among Nasdaq
market-makers. H&Q LLC and 23 other Nasdaq market-makers recently entered into a
Stipulation and Order with the Department of Justice in which they agreed not to
engage in any collusive activities relating to prices, quotes or spreads in
Nasdaq-traded securities. See "Business--Legal Proceedings--Nasdaq Antitrust
Litigation."
POTENTIAL ADVERSE EFFECTS OF PROPOSED CHANGES IN NASDAQ OPERATIONS. It has
been reported in the media that the SEC has submitted to the NASD a draft of a
disciplinary case the SEC may file against the NASD, as well as a report setting
out the SEC's findings in detail. The SEC's case reportedly concerns the NASD's
enforcement oversight of Nasdaq. According to these media reports, NASD
officials have proposed a number of changes to Nasdaq's operations, which
proposals 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 NASD officials, if effected, could adversely affect the
Company's operating results.
RISK OF CHANGES IN OTHER BUSINESS REGULATIONS. 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 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.
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. At June 30, 1996 the Company's principal
investments represented $25.4 million invested in non-marketable securities,
venture capital funds and investment partnerships and $58.4 million invested in
marketable securities. 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 at June 30, 1996 valued at $48.8 million, 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.
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RISK OF LOSSES DUE TO ILLIQUIDITY OF INVESTMENTS. 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.
RISK OF LOSS OF CAPITAL INVESTED IN PRINCIPAL TRANSACTIONS. 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.
VOLATILITY OF PRINCIPAL INVESTMENTS; ADJUSTMENTS TO CARRYING VALUE. 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, which at June 30, 1996
aggregated $58.4 million, 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. For example, the Company's principal
investment in The BISYS Group, Inc. ("BISYS") generated a pretax investment gain
of $14.7 million for the nine months ended June 30, 1996, but would have
generated a pretax investment loss of $4.2 million between July 1, 1996 and July
24, 1996 if interim financial statements had been prepared for such period. If a
significant mark-down of a material asset were to occur in the future, 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--June 30, 1996.
RISK OF LOSSES FROM UNDERWRITING AND TRADING
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."
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RISK OF LOSSES FROM 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.
HEIGHTENED RISK OF LOSSES DUE TO INCREASING FREQUENCY OF SECURITIES
LITIGATION. 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.
CLAIMS AGAINST UNDERWRITERS. 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 involved in certain
of such transactions 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.
DIVERSION OF MANAGEMENT ATTENTION. 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
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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.
UNCERTAIN LEGAL ENVIRONMENT. The laws relating to securities class actions
are currently in a state of flux. The eventual impact of the 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.
LITIGATION RISKS RELATED TO PRINCIPAL INVESTMENT ACTIVITIES. 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.
RISKS ASSOCIATED WITH OTHER DISPUTES. 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."
RISKS ASSOCIATED WITH 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."
RISK OF SYSTEMS FAILURE
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 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.
14
<PAGE>
DEPENDENCE ON 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. On a pro forma basis, the Company's
cash at June 30, 1996 would have been reduced prior to the completion of this
offering by approximately $9.3 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 ("Tax Distribution"). 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 $5.0 million in
cash, an additional cash amount for the Tax Distribution estimated to be
approximately $2.0 million (of which approximately $800,000 is accrued at June
30, 1996) and a distribution of securities with a book value at June 30, 1996 of
approximately $20.6 million. These distributions will not only reduce the
Company's total assets and stockholders' equity 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."
RISKS OF POTENTIAL CONFLICTS OF INTEREST
Executive officers, directors and employees of the Company from time to time
invest, or receive a profit interest, in investments in private or public
companies or investment funds in which the Company, or an affiliate of the
Company, is an investor or for which the Company carries out investment banking
assignments, publishes research or acts as a market-maker. In addition, the
Company has in the past organized and may in the future organize businesses,
such as Hambrecht & Quist Guaranty Finance or Hambrecht & Quist Transition
Capital, in which employees of H&Q acquire minority interests. There are certain
risks that, as a result of such investment or profits interest, a director,
officer or employee may take actions which would conflict with the best
interests of Hambrecht & Quist. See "Business--Venture Capital and Principal
Investment Activities," and "Certain Transactions."
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 beneficially own approximately 41.0% of the
outstanding Common Stock. Accordingly, these stockholders, if they were to act
as a group, may 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
15
<PAGE>
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 and
Bylaws, 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."
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. Assuming no exercise of stock options after
June 30, 1996, and assuming transferability of shares which may be subject to
vesting or other contractual restrictions, immediately after the completion of
this offering there will be 22,169,064 shares of Common Stock outstanding, 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 18,669,064
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
2,014,000 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 1,472,000 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."
NO SPECIFIC USE OF PROCEEDS
The Company has not designated any specific use for the net proceeds from
the sale by the Company of Common Stock offered hereby. Rather, the Company
intends to use the net proceeds primarily for general corporate purposes,
including working capital and potential principal investments. Accordingly,
management will have significant flexibility in applying the net proceeds of
this offering. See "Use of Proceeds."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Common Stock in this offering will experience immediate
dilution in net tangible book value of $6.66 per share, based on an assumed
initial public offering price of $16.00 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."
16
<PAGE>
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements, which 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,
expand its client base and investment banking activities in the branded consumer
industry 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, or
elsewhere in this Prospectus.
17
<PAGE>
THE COMPANY
Hambrecht & Quist Group, 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, a Delaware corporation, and its
predecessors, affiliates and subsidiaries. Hambrecht & Quist and H&Q are
registered trademarks of the Company.
Following the Restructuring, the Company will operate primarily as a holding
company and will indirectly 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.
The Company's other principal operating subsidiaries or affiliated entities,
which will be directly or indirectly 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, a California
Limited Partnership ("Venture Partners"), a venture capital fund management
partnership in which the Company has a controlling general partnership interest;
Hambrecht & Quist Guaranty Finance, LLC (together with its predecessor,
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 adviser specializing in growth companies, De Santis
Capital Management, L.P., 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.
18
<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, 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) $5.0 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, of which
approximately $800,000 was accrued at June 30, 1996), and (iii) certain
securities with a book value as of June 30, 1996 of approximately $18.5 million,
including the securities to be distributed to LP from Guaranty Finance. 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 519,107 shares
of BISYS with a book value on June 30, 1996 of approximately $13.6 million and
other securities currently owned by LP, and other investments with a book value
on such date of approximately $4.9 million being distributed to LP by Guaranty
Finance. Guaranty Finance will also distribute to its minority equity holders
securities with a book value, as of June 30, 1996, of approximately $2.1
million. Immediately following the LP and Guaranty Finance distributions, LP
will be merged with and into the Company, and Group California will merge with a
subsidiary of the Company and become a wholly owned subsidiary of the Company
(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 24 shares of Company
Common Stock for each LP equity ownership unit and four shares of Company Common
Stock for each share of Group California Common Stock. 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."
In June 1996, Group California created a trust ("Group Trust") for the
benefit of certain current and former employees and transferred its limited
partnership interest in LP to the Group Trust. Prior to the effectiveness of the
Mergers, Group California will purchase Mr. Case's interest in Guaranty Finance
at its fair market value. 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 foregoing his share of a cash 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 Mr. Case and the Company, and to
align more directly Mr. 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 the 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. See "Certain Transactions."
19
<PAGE>
The financial statements included elsewhere in this Prospectus include the
combined operations of Group California and LP. The entities are presented on a
combined basis without revaluation, as the entities have been operating under
common ownership and common management and, in fiscal 1996, will restructure
their operations to result in one surviving holding company. Such restructuring
of Group California and LP will be accounted for at the respective entities'
carrying values. See Note 1 of Notes to Combined Financial Statements--September
30, 1995.
20
<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
$16.00 per share and after deducting underwriting discounts and commissions and
estimated offering expenses, are estimated to be approximately $51,280,000
($59,092,000 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.
21
<PAGE>
CAPITALIZATION
The following table sets forth the Company's combined capitalization as of
June 30, 1996 (i) on an actual basis, giving effect to the issuance of four
shares of the Company's Common Stock for each share of Group California Common
Stock in the Restructuring, (ii) on a pro forma basis giving effect to all of
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 $16.00 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--June
30, 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>
JUNE 30, 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, 16,081,168 shares 23,990 187 222
issued and outstanding, actual; par value $0.01, 100,000,000 shares
authorized, pro forma and as adjusted; 18,669,064 shares issued and
outstanding pro forma; 22,169,064 shares issued and outstanding as
adjusted..................................................................
Additional paid-in capital................................................... 44,814 96,059
Retained earnings............................................................ 104,469 110,724 110,724
---------- ---------- -----------
Total stockholders' equity................................................. 128,459 155,725 207,005
---------- ---------- -----------
Hambrecht & Quist, L.P. partners' capital.................................... 41,935 -- --
---------- ---------- -----------
Total long-term debt, stockholders' equity and partners' capital......... $ 170,394 $ 155,725 $ 207,005
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
- ------------------------
(1) Excludes 5,697,520 shares of Common Stock issuable upon exercise of options
outstanding as of June 30, 1996 at a weighted average exercise price of
$7.15 per share and 3,000,000 shares of Common Stock reserved for issuance
at June 30, 1996 under the Company's 1996 Equity Plan. See "Management--
Compensation Plans" and Note 8 of Condensed Notes to Combined Financial
Statements--June 30, 1996.
22
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1996 was
approximately $155,725,000 or approximately $8.34 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 3,500,000 shares of Common Stock offered hereby
(at an assumed initial public offering price of $16.00 per share, after
deducting estimated underwriting discounts and commissions and offering
expenses), the pro forma net tangible book value of the Company as of June 30,
1996 would have been approximately $207,005,000, or approximately $9.34 per
share. This represents an immediate increase of $1.00 per share to existing
stockholders and an immediate dilution of $6.66 per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<CAPTION>
Assumed initial public offering price per share(1)................ $ 16.00
<S> <C> <C>
Pro forma net tangible book value per share as of June 30,
1996........................................................... $ 8.34
Increase per share attributable to new investors................ 1.00
---------
Pro forma net tangible book value per share after the offering.... 9.34
---------
Dilution per share to new investors............................... $ 6.66
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 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>
SHARES
PURCHASED TOTAL CONSIDERATION
------------------------- --------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................. 18,669,064 84.2% $ 45,001,021 44.6% $ 2.41
New investors(1).................................. 3,500,000 15.8 56,000,000 55.4 16.00
------------ ----- -------------- -----
Total........................................... 22,169,064 100.0% $ 101,001,021 100.0%
------------ ----- -------------- -----
------------ ----- -------------- -----
</TABLE>
- ------------------------
(1) Before deducting estimated underwriting discounts and commissions and
offering expenses.
The foregoing computations exclude 5,697,520 shares of Common Stock issuable
upon exercise of options outstanding as of June 30, 1996, at a weighted average
exercise price of $7.15 per share and 3,000,000 shares of Common Stock reserved
as of June 30, 1996 for issuance under the Company's 1996 Equity Plan. To the
extent that any outstanding options are exercised, there will be further
dilution to new investors. See "Management-- Compensation Plans" and Note 8 of
Condensed Notes to Combined Financial Statements--June 30, 1996.
23
<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 for 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 nine months ended
June 30, 1995 and 1996, and the combined balance sheet data as of June 30, 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
nine-month period ended June 30, 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 June 30, 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 nine months ended June 30, 1996
present the results for the Company as if the Restructuring had occurred on
October 1, 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.
24
<PAGE>
SELECTED COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
FISCAL YEAR
NINE MONTHS ENDED ENDED SEPTEMBER
FISCAL YEAR ENDED SEPTEMBER 30, JUNE 30, 30,
----------------------------------------------------- -------------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1991 1992 1993 1994 1995 1995 1996 1995
--------- --------- --------- --------- --------- --------- --------- ---------------
<CAPTION>
PRO FORMA(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF OPERATIONS DATA:
Revenues:
Principal transactions...... $ 23,480 $ 33,438 $ 30,045 $ 36,411 $ 53,425 $ 36,316 $ 75,354 $ 53,425
Agency commissions.......... 11,135 12,557 14,221 14,242 24,603 15,911 29,094 24,603
Investment banking.......... 23,176 51,517 42,960 29,234 70,360 39,400 130,522 70,360
Corporate finance fees...... 7,409 8,371 9,993 18,561 20,709 14,530 31,947 20,709
Net investment gains........ 7,026 8,193 3,524 10,270 33,852 18,542 19,087 26,439
Other....................... 9,620 11,418 9,804 10,612 17,074 11,988 26,358 16,809
--------- --------- --------- --------- --------- --------- --------- -------
Total revenues.............. 81,846 125,494 110,547 119,330 220,023 136,687 312,362 212,345
--------- --------- --------- --------- --------- --------- --------- -------
Expenses:
Compensation and benefits... 37,424 58,044 54,917 60,175 105,370 68,750 159,738 105,370
Brokerage and clearance..... 5,611 6,184 6,892 7,367 10,441 6,678 10,017 10,441
Occupancy and equipment..... 6,003 6,040 6,045 6,679 7,803 5,511 7,146 7,803
Communications.............. 3,461 4,135 4,377 6,244 7,394 5,533 7,310 7,394
Interest.................... 303 1,141 1,464 987 1,266 727 1,041 1,266
Other(2).................... 44,382 33,226 10,256 11,315 15,131 10,790 19,717 15,131
--------- --------- --------- --------- --------- --------- --------- -------
Total expenses.............. 97,184 107,770 83,951 92,767 147,405 97,989 204,969 147,405
--------- --------- --------- --------- --------- --------- --------- -------
Minority interest(3).......... 453 794 352 526 719 454 874 300
--------- --------- --------- --------- --------- --------- --------- -------
Income (loss) before income
tax provision................ (15,791) 16,930 26,244 26,037 71,899 38,244 106,519 64,640
Income tax provision
(credit)..................... (5,878) 7,200 10,940 10,119 22,461 11,810 36,493 28,442
--------- --------- --------- --------- --------- --------- --------- -------
Net income (loss)............. $ (9,913) $ 9,730 $ 15,304 $ 15,918 $ 49,438 $ 26,434 $ 70,026 $ 36,198
--------- --------- --------- --------- --------- --------- --------- -------
--------- --------- --------- --------- --------- --------- --------- -------
Pro forma net income per
share(4)..................... $ 1.83
-------
-------
Pro forma weighted average
shares outstanding(4)........ 19,827
-------
-------
<CAPTION>
NINE MONTHS
ENDED
JUNE 30,
-------------
<S> <C>
1996
-------------
<S> <C>
COMBINED STATEMENT OF OPERATIONS
Revenues:
Principal transactions...... $ 75,354
Agency commissions.......... 29,094
Investment banking.......... 130,522
Corporate finance fees...... 31,947
Net investment gains........ 15,383
Other....................... 26,159
-------------
Total revenues.............. 308,459
-------------
Expenses:
Compensation and benefits... 159,738
Brokerage and clearance..... 10,017
Occupancy and equipment..... 7,146
Communications.............. 7,310
Interest.................... 1,041
Other(2).................... 19,717
-------------
Total expenses.............. 204,969
-------------
Minority interest(3).......... 364
-------------
Income (loss) before income
tax provision................ 103,126
Income tax provision
(credit)..................... 45,374
-------------
Net income (loss)............. $ 57,752
-------------
-------------
Pro forma net income per
share(4)..................... $ 2.78
-------------
-------------
Pro forma weighted average
shares outstanding(4)........ 20,769
-------------
-------------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED JUNE 30, 1996
FISCAL YEAR ENDED SEPTEMBER 30, JUNE 30, ------------------------
----------------------------------------------------- ------------
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 $ 486,736 $ 486,736 $ 463,708
Debt obligations.............. 1,702 31,942 16,913 12,684 13,771 11,252 11,252 11,252
Stockholders' equity.......... 23,985 33,219 50,290 63,591 105,462 170,394 170,394 155,725
Book value per common share
outstanding.................. $ 8.34
OPERATING DATA:
Total employees(6)............ 291 327 350 426 498 617
Return on average equity...... -- 34% 37% 28% 58% 62%(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>
AS
ADJUSTED(1)(5)
-------------
<S> <C>
COMBINED BALANCE SHEET DATA:
Total assets.................. $ 514,988
Debt obligations.............. 11,252
Stockholders' equity.......... 207,005
Book value per common share
outstanding.................. $ 9.34
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) Represents the pro rata interest of owners other than the Company in the
earnings of Hambrecht & Quist Guaranty Finance.
(4) See Note 8 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 $16.00 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.
25
<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 -- June 30, 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
EFFECTS 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 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 nine months ended June
30, 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 nine
months of fiscal 1996 and also contributed to improved valuations of the
Company's principal investments.
The Company's results of operations for the nine months ended June 30, 1996
were achieved during extremely favorable market conditions, which deteriorated
significantly beginning in May 1996. In recent weeks, the market for equity
securities in general, and for companies in the industries on which the Company
focuses in particular, has experienced a significant decline. For example, from
its all-time high on May 20, 1996 through July 23, 1996 the Hambrecht & Quist
Technology Index declined by 22.5%. As a result of this market decline, many
pending securities offerings have been delayed or canceled, including several
offerings which the Company was managing or co-managing. Certain offerings
completed in July and August 1996 have been effected at lower valuations and
smaller total dollar sizes than the price ranges indicated in the preliminary
prospectuses for these offerings.
The recent market decline and the resulting reduction in the Company's
business will cause the Company's revenues and net income in the quarter ending
September 30, 1996 to be substantially lower than its revenues and net income in
each of the first three quarters of fiscal 1996. Further, as a result of general
seasonal trends for quarters ending on September 30, the Company's fourth
quarter results are particularly dependent on revenues for the month of
September to offset typically lower revenues during the August vacation period.
Because of the volatility and uncertainties caused by present market conditions,
the Company's revenues for the month of September 1996 and the fourth quarter of
fiscal 1996 are particularly difficult to predict, and such revenues could be
even lower than present expectations if market conditions deteriorate. There can
be no assurance that this market decline, or the related adverse effect on the
Company's operating results, will not continue or worsen.
26
<PAGE>
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 $5.0 million in cash, an additional cash amount for the Tax
Distribution estimated to be approximately $2.0 million and assets whose book
value at June 30, 1996 was approximately $18.5 million to a liquidating trust
for the benefit of LP's partners, (ii) Guaranty Finance will distribute assets
whose book value at June 30, 1996 was approximately $2.1 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 the Company, Group California will
become a wholly owned subsidiary of the Company, and the Company 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 the
Company's Common Stock. See "Restructuring."
In addition to the Restructuring, prior to the completion of this offering,
LP will have paid to its partners approximately $800,000, which had been accrued
as of June 30, 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
$23.0 million and $14.7 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 $14.7 million for the nine months ended
June 30, 1996. During the nine months ended June 30, 1996, the Company sold
approximately 44% of its BISYS holdings. The purpose of selling the BISYS shares
during the period was to reduce the size of the Company's holdings as
restrictions on the resale of
27
<PAGE>
such shares expired. Included in BISYS net investment gains of $14.7 million
were realized gains on sales of BISYS shares of $17.1 million. Approximately
two-thirds of the Company's remaining 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 is owned by Schroder Wertheim & Co. (approximately 80%), the Company
(approximately 20%) and two other minority owners. The volume of transactions
which Lewco processes for these stockholders is generally proportional to their
ownership interests. The Company reimburses a proportionate share of Lewco's
expenses, net of certain revenues, based on the volume of the Company's
transactions which Lewco processes. Two of the Company's employees serve on
Lewco's six-member Board of Directors. As a result of its relationship with
Lewco, the Company benefits from the economies of scale provided by a large,
externally managed clearing organization. The consent of Lewco's other
stockholders is required for the Company to enter into clearing arrangements
with other broker-dealers. The master agreement relating to Lewco's clearing
arrangements terminates on September 30, 1996, although the Company anticipates
it will be renewed.
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 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 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."
28
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
total revenues:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED SEPTEMBER
FISCAL YEAR ENDED SEPTEMBER 30, NINE MONTHS ENDED JUNE 30, 1995
30, ---------------
---------------------------------- ----------------------
1993 1994 1995 1995 1996 PRO FORMA(1)
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF OPERATIONS DATA:
Revenues:
Principal transactions................. 27.2% 30.5% 24.3% 26.6% 24.1% 25.2%
Agency commissions..................... 12.9 11.9 11.2 11.6 9.3 11.6
Investment banking..................... 38.9 24.5 32.0 28.8 41.8 33.1
Corporate finance fees................. 9.0 15.6 9.4 10.6 10.2 9.8
Net investment gains................... 3.2 8.6 15.4 13.6 6.1 12.5
Other.................................. 8.8 8.9 7.7 8.8 8.5 7.8
----- ----- ----- ----- ----- -----
Total revenues......................... 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- -----
Expenses:
Compensation and
benefits.............................. 49.7 50.4 47.9 50.3 51.1 49.6
Brokerage and clearance................ 6.2 6.2 4.7 4.9 3.2 4.9
Occupancy and
equipment............................. 5.4 5.6 3.5 4.0 2.3 3.7
Communications......................... 4.0 5.2 3.4 4.0 2.3 3.5
Interest............................... 1.3 0.9 0.6 0.5 0.3 0.6
Other.................................. 9.3 9.5 6.9 8.0 6.4 7.2
----- ----- ----- ----- ----- -----
Total expenses......................... 75.9 77.8 67.0 71.7 65.6 69.5
----- ----- ----- ----- ----- -----
Minority interest........................ 0.3 0.4 0.3 0.3 0.3 0.1
----- ----- ----- ----- ----- -----
Income before income tax provision....... 23.8 21.8 32.7 28.0 34.1 30.4
Income tax provision..................... 10.0 8.5 10.2 8.7 11.7 13.4
----- ----- ----- ----- ----- -----
Net income............................... 13.8% 13.3% 22.5% 19.3% 22.4% 17.0%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
<CAPTION>
NINE MONTHS
ENDED JUNE
30, 1996
-------------
<S> <C>
COMBINED STATEMENT OF OPERATIONS DATA:
Revenues:
Principal transactions................. 24.5%
Agency commissions..................... 9.4
Investment banking..................... 42.3
Corporate finance fees................. 10.3
Net investment gains................... 5.0
Other.................................. 8.5
-----
Total revenues......................... 100.0
-----
Expenses:
Compensation and
benefits.............................. 51.8
Brokerage and clearance................ 3.2
Occupancy and
equipment............................. 2.3
Communications......................... 2.4
Interest............................... 0.3
Other.................................. 6.5
-----
Total expenses......................... 66.5
-----
Minority interest........................ 0.1
-----
Income before income tax provision....... 33.4
Income tax provision..................... 14.7
-----
Net income............................... 18.7%
-----
-----
</TABLE>
- ------------------------
(1) Gives effect to the Restructuring and the Tax Distribution. See
"Restructuring" and "--Overview."
NINE MONTHS ENDED JUNE 30, 1996 AND 1995
REVENUES. Total revenues increased 129% from $136.7 million in the 1995
fiscal period to $312.4 million in the 1996 fiscal period.
Principal transactions revenue increased 108% from $36.3 million in the 1995
fiscal period to $75.4 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 83% from $15.9 million in the 1995 fiscal
period to $29.1 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.
Investment banking revenue increased 231% from $39.4 million in the 1995
fiscal period to $130.5 million in the 1996 fiscal period, and increased as a
percentage of revenues from 28.8% to 41.8%. The Company managed or co-managed 39
public offerings during the 1995 fiscal period compared to 114 during the 1996
fiscal period.
Corporate finance fees increased 120% from $14.5 million in the 1995 fiscal
period to $31.9 million in the 1996 fiscal period. This increase was due to the
completion of several large advisory assignments during the 1996 fiscal period.
29
<PAGE>
Net investment gains for the period increased 3% from $18.5 million in the
1995 fiscal period to $19.1 million in the 1996 fiscal period. The net gains
related primarily to the Company's investment in BISYS, which accounted for
$13.1 million of total investment gains in the 1995 fiscal period and $14.7
million in the 1996 fiscal period.
Other revenue increased by 120% from $12.0 million in the 1995 fiscal period
to $26.4 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 109% from $98.0 million in the 1995
fiscal period to $205.0 million for the 1996 fiscal period.
Compensation and benefits expense increased 132% from $68.8 million in the
1995 fiscal period to $159.7 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 50.3% to 51.1%; 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 443 in the 1995 fiscal period
compared to 557 in the 1996 fiscal period.
Brokerage and clearance expense increased 50% from $6.7 million in the 1995
fiscal period to $10.0 million in the 1996 fiscal period. As a percentage of
total revenues, brokerage and clearance expense decreased from 4.9% in the 1995
fiscal period to 3.2% in the 1996 fiscal period. The percentage decline was due
primarily to efficiencies experienced by Lewco.
Occupancy and equipment expense increased 30% from $5.5 million in the 1995
fiscal period to $7.1 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 32% from $5.5 million in the 1995 fiscal
period to $7.3 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 43% from approximately $700,000 in the 1995
fiscal period to approximately $1.0 million in the 1996 fiscal period. This
increase related primarily to fluctuations in bank financing levels during the
two periods.
Other expense increased 83% from $10.8 million in the 1995 fiscal period to
$19.7 million in the 1996 fiscal period. Of this increase, $3.3 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 30.9% in
the 1995 fiscal period and increased to 34.3% 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
nine months ended June 30, 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.
30
<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 revenue 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.
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, $1.5 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.
31
<PAGE>
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.
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 June 30, 1996, H&Q LLC had liquid assets consisting
primarily of cash and cash equivalents of $29.3 million and receivables of $60.3
million from Lewco, its clearing affiliate. The cash
32
<PAGE>
equivalents primarily consisted of United States Treasury bills with maturities
of 90 days or less. As of June 30, 1996, the Company had a bank line of credit
in the amount of $12.0 million, with a balance of $9.3 million outstanding and
Guaranty Finance had a bank line of credit of $15.0 million with a balance
outstanding of $2.0 million. While the Company has not required additional bank
financing during the past several years, it has in place a $20.0 million line of
credit agreement with a commercial bank. The Company's capital as of June 30,
1996 will be reduced prior to the completion of this offering by the
distribution in connection with the Tax Distribution and the Restructuring. See
"Restructuring" and "Overview."
The Company's balance sheet reflects the Company's relatively unleveraged
financial position. The ratio of assets to equity as of June 30, 1996 was
approximately 2.9:1. Upon the completion of this offering, this ratio will
decline to approximately 2.5:1. 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 June 30, 1996, H&Q LLC was required to maintain minimum regulatory net
capital in accordance with SEC rules of approximately $4.1 million and had total
regulatory net capital of approximately $40.2 million, or approximately $36.1
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
$1.5 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.
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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. For example, from January 1991 through July 23, 1996, the
H&Q Technology Index increased by 20.6% compounded annually, while the S&P 500
increased by 12.2% compounded annually. This general trend has been interrupted
from time to time by significant market declines. Recently, the H&Q Technology
Index declined by 22.5% from its all-time high on May 20, 1996 through July 23,
1996, while the S&P 500 decreased by 6.9% over the same period. During the last
five years there has also been a greatly increased inflow of funds for
investment in growth companies, which 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 and growth-oriented investors. 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 is considered generally by the securities industry to be
one of the approximately 15 major bracket investment banks based on H&Q's
significant level of participation in equity underwritings as manager or a
co-manager and in syndicates for public equity offerings managed by other
investment banks. "Major bracket" firms are smaller than the five "bulge
bracket" investment banks. The Company is one of the smallest major bracket
firms based on measures such as revenues, assets, dollar amounts of underwritten
debt and equity, number of employees and trading volume. However, the Company
believes that based on the number of managed or co-managed public equity
offerings, H&Q is a leading underwriter of equity securities for emerging growth
companies in its industry areas of focus. As a result of the high proportion of
venture capital invested in emerging growth companies located in California and
Massachusetts, the Company's underwriting
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<PAGE>
clients have been concentrated in these states. Approximately 47% of the
companies for which H&Q served as a manager or co-manager of a securities
offering between January 1995 and June 1996 were based in California, and
approximately 11% of these companies were based in Massachusetts.
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 expanded its underwriting capability by increasing
its corporate finance and syndicate personnel; increased advisory services in
mergers, acquisitions, strategic partnerships and private placements; and begun
providing asset-based and mezzanine financing. At June 30, 1996, H&Q made a
market in over 300 Nasdaq stocks. During the quarter ended June 30, 1996, based
on publicly reported trading volume data, H&Q was one of the top three
market-makers in approximately 74% of the Nasdaq equity securities issued by
companies for which H&Q served as manager or co-manager in an initial public
offering completed between January 1991 through June 1996. H&Q has also hired
additional retail brokers 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 branded consumer
industry and companies providing business information, outsourcing and
healthcare services.
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 and investment banking professionals into
industry teams. Each team, together with Hambrecht & Quist's venture capital
professionals, 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 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 underwriter of public offerings of
securities for emerging growth companies in its areas of focus. Hambrecht &
Quist has managed or co-managed more than 650 public offerings of equity
securities for more than 440 growth companies, serving as lead manager in more
than 260 of these offerings.
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. For example, H&Q was an early participant in
the personal computer, biotechnology, desktop publishing and Internet/World
Wide Web industries. H&Q supported entrepreneurial companies in these
industries with venture capital financing and research coverage early in
the industry's development. As these companies grew, H&Q managed or
co-managed their public stock offerings, including offerings by Apple,
Genentech, Adobe and Netscape, each a pioneer in its respective industry.
H&Q believes that its focus on the early identification of emerging trends
and industries provides it with a key competitive advantage.
35
<PAGE>
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 by the financial press
as leading conferences in their industries. The Company believes its
Branded Consumer, plaNET.wall.street (Internet Symposium) 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 relationships with many
institutional venture capital investors managing large venture capital
funds. In some cases, H&Q participates directly in the growth of
entrepreneurial companies by providing venture capital, singly or alongside
other venture capital investors, or otherwise investing as a principal in
their early years. As these entrepreneurial companies grow, the Company
sustains these relationships 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 AN EXPANDED RANGE OF SERVICES TO CORPORATE CLIENTS. In recent years,
the Company has 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. From January 1995 through June 1996, H&Q
increased its corporate finance personnel from 64 to 110 persons. The
Company has also added asset-based and mezzanine financing to its principal
investment activities. During this period, H&Q has increased its syndicate
personnel from seven to twelve persons, 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 January
1995, the Company has increased the number of brokers in its Executive
Financial Services group from 41 to 62 persons, in domestic and
international institutional sales from 31 to 34 persons and in coverage and
position trading from 36 to 58 persons. During this period, the Company
also has increased the amount of capital available for both Nasdaq and
NYSE-listed securities trading operations. 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, which in the 18
months ended June 30, 1996 represented less than 10% of underwriting
revenues and less than 5% of total revenues, the Company has recently made
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
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European growth companies. H&Q also has a minority investment in Asia
Pacific, which has extensive operations providing venture capital to Asian
growth companies, both as principal and as a manager of Asian venture
capital funds.
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." The fourth group of words underneath the small
rectangular box containing the word "Communications" is "Telecommunications
Equipment/WAN." The fifth group of words underneath the small rectangular box
containing the word "Communications" is "Wireless."
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 "Internet Content." The third group of words underneath the small
rectangular box containing the words "Distribution" 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 "DRMS & 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
"Enterprise Applications." The fourth group of words underneath the small
rectangular box containing the words "Enterprise Software/Internet" is
"Productivity 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 word
"Special Situations" 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 "Special
Situations" is "Imaging." The second group of words underneath the small
rectangular box containing the words "Special Situations" is "Services."
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 "Contract Research Organizations." The second group of
words underneath the small rectangular box containing the words "Healthcare
Services" is "Health Maintenance Organizations." 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 logo comprised of a black triangle containing the words
"INFORMATION SERVICES" and a white band containing the words "FINANCIAL
HEALTHCARE BUSINESS" overlaid on the triangle. Under the logo is a horizontal
line from which connect four short vertical lines connecting to four small
rectangular boxes. 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 logo comprised of a small black circle containing the text "H&Q"
and a concentric white band surrounding the small black circle and containing
the words "BRANDED CONSUMER." Under the logo 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 logo is "Food and Beverage."
The second group of words beneath the logo is "Specialty Apparel." The third
group of words beneath the logo is "Sports & Leisure." The fourth group of words
underneath the logo is "Services."
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In order to achieve this depth and specialization, the Company typically
recruits or trains analysts with significant industry and technical 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 work closely with its investment banking and
venture capital professionals 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 principal investments 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 has sponsored the following investment conferences:
<TABLE>
<CAPTION>
HAMBRECHT & QUIST CONFERENCE DATE LOCATION
- ------------------------------------------------ ------------- --------------
<S> <C> <C>
plaNET.wall.street (Internet Symposium) 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. Since 1993, Hambrecht & Quist has sponsored an
annual conference focused on emerging branded consumer product companies. 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.
To facilitate the analysis of long-term trends, the Company has developed
the H&Q Technology Index, the H&Q Growth Index and nine sector indices,
including the H&Q Branded Consumer Growth Index and the H&Q Internet Index.
These indices serve as a tool for comparing certain industry groups with one
another, with the 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 investment bank dedicated to raising equity capital
for, and providing financial advice to, emerging growth companies within its
areas of focus. The securities industry refers to a firm as a "major bracket"
investment bank if that firm receives a significant proportion of the
underwriting syndicate allocations when participating in public offerings
managed by other investment banks. The major bracket firms are smaller than the
"bulge bracket" investment banks, which are generally considered to be CS First
Boston Corporation, Goldman Sachs and Co., Lehman Brothers Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Morgan Stanley & Co.
Incorporated and Salomon Brothers, Inc. The securities industry today generally
classifies as major bracket firms Alex. Brown & Sons Incorporated, Bear, Stearns
& Co. Inc., Dean Witter Reynolds Inc., Donaldson Lufkin & Jenrette Securities
Corporation ("DLJ"), Hambrecht & Quist LLC, J.P. Morgan Securities Inc., Lazard
Freres, Montgomery Securities, Oppenheimer & Co., Inc., Paine Webber
Incorporated, Prudential Securities Incorporated, Robertson, Stephens & Company
LLC, Schroder Wertheim & Co. Incorporated and Smith Barney Inc.
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 managed or co-managed by H&Q since 1991 among the different
industries which the Company serves.
HAMBRECHT & QUIST'S MANAGED OR CO-MANAGED PUBLIC EQUITY OFFERINGS
JANUARY 1991 THROUGH JUNE 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 51% of the pie chart. The
second largest segment represents "Healthcare" which accounts for 33% 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 in its industry areas of focus, based on the number of
transactions completed since January 1991 in which H&Q served as a managing or
co-managing underwriter. Between January 1991 and June 1996, the Company lead
managed 170 offerings and co-managed 165 offerings of equity and convertible
debt securities by over 250 companies that raised an aggregate of over $17.9
billion. Of this amount, approximately $10.2 billion was raised during the
period from
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January 1995 through June 1996. During this period, H&Q served as managing or
co-managing underwriter in initial public offerings by approximately 22% of the
companies in which H&Q had invested venture capital and which effected initial
public offerings during this period.
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 believes that, based on the number of transactions
completed since January 1991 in which H&Q served as a managing or co-managing
underwriter, it has established a strong record underwriting software,
communications, biotechnology, computer hardware, semiconductor, Internet,
business information and outsourcing services and healthcare services companies.
The Company is also seeking to develop a strong position as a managing
underwriter of securities offerings by branded consumer companies.
The following tables indicate H&Q's relative ranking, based on number of
transactions completed as a manager or co-manager during the period from January
1991 through June 1996 and the 18 months from January 1995 through June 1996,
among underwriters of all public equity offerings, underwriters of equity
securities offered by technology companies, and underwriters of equity
securities offered by healthcare companies. This information is derived from
data provided by Securities Data Corp., and reflects H&Q's judgment, based on
the industry groupings used by H&Q's research organization, concerning the
classification of companies as technology, healthcare and other industries based
on H&Q's review of the company descriptions provided by Securities Data Corp.
H&Q uses different definitions of the technology and healthcare industries than
the definitions used by Securities Data Corp.
UNDERWRITERS OF PUBLIC EQUITY OFFERINGS--ALL INDUSTRIES
RANKED BY NUMBER OF TRANSACTIONS MANAGED OR CO-MANAGED
<TABLE>
<CAPTION>
JANUARY 1995 THROUGH JUNE 1996
JANUARY 1991 THROUGH JUNE 1996 -------------------------------------------------------
- -------------------------------------------------------
AGGREGATE AGGREGATE
AGGREGATE AMOUNT AGGREGATE AMOUNT
NUMBER OF ($ NUMBER OF ($
TRANSACTIONS MILLIONS) TRANSACTIONS MILLIONS)
--------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Smith Barney............. 473 $ 43,925 Smith Barney............. 208 $ 23,507
Montgomery Securities.... 468 26,704 Montgomery Securities.... 195 13,927
Alex. Brown.............. 462 30,126 Alex. Brown.............. 191 15,873
Goldman Sachs............ 445 77,892 HAMBRECHT & QUIST........ 159 8,494
Merrill Lynch............ 442 77,936 Goldman Sachs............ 158 31,020
Lehman Brothers.......... 414 46,735 DLJ...................... 153 20,988
DLJ...................... 391 44,855 Morgan Stanley........... 151 27,564
Morgan Stanley........... 375 60,516 Robertson, Stephens...... 150 8,402
Robertson, Stephens...... 326 15,857 Merrill Lynch............ 149 30,543
HAMBRECHT & QUIST........ 324 14,508 Lehman Brothers.......... 120 15,270
CS First Boston.......... 319 49,803 Cowen.................... 116 6,779
Paine Webber............. 298 21,188 Paine Webber............. 101 8,623
Salomon Brothers......... 290 41,970 Salomon Brothers......... 97 13,991
Bear Stearns............. 211 25,664 CS First Boston.......... 93 19,672
Cowen.................... 198 10,397 Needham.................. 79 3,402
</TABLE>
40
<PAGE>
UNDERWRITERS OF PUBLIC EQUITY OFFERINGS--TECHNOLOGY INDUSTRY
RANKED BY NUMBER OF TRANSACTIONS MANAGED OR CO-MANAGED
<TABLE>
<CAPTION>
JANUARY 1995 THROUGH JUNE 1996
JANUARY 1991 THROUGH JUNE 1996 -------------------------------------------------------
- -------------------------------------------------------
AGGREGATE AGGREGATE
AGGREGATE AMOUNT AGGREGATE AMOUNT
NUMBER OF ($ NUMBER OF ($
TRANSACTIONS MILLIONS) TRANSACTIONS MILLIONS)
--------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
HAMBRECHT & QUIST........ 187 $ 9,007 HAMBRECHT & QUIST........ 105 $ 5,605
Alex. Brown.............. 165 9,203 Robertson, Stephens...... 87 4,621
Robertson, Stephens...... 164 8,077 Alex. Brown.............. 82 5,403
Montgomery Securities.... 135 6,622 Cowen.................... 72 4,149
Cowen.................... 118 5,980 Montgomery Securities.... 60 3,608
Lehman Brothers.......... 112 9,396 Needham.................. 55 2,490
Morgan Stanley........... 86 10,696 Morgan Stanley........... 48 6,952
DLJ...................... 79 7,067 Goldman Sachs............ 38 6,773
Goldman Sachs............ 77 11,860 Lehman Brothers.......... 37 3,717
Smith Barney............. 54 3,111 DLJ...................... 29 2,433
Merrill Lynch............ 52 11,014 Merrill Lynch............ 25 6,056
Paine Webber............. 47 2,630 Paine Webber............. 24 1,445
Bear Stearns............. 44 6,319 Smith Barney............. 16 996
CS First Boston.......... 31 6,303 CS First Boston.......... 14 4,302
Salomon Brothers......... 42 4,682 Salomon Brothers......... 14 1,654
</TABLE>
UNDERWRITERS OF PUBLIC EQUITY OFFERINGS--HEALTHCARE INDUSTRY
RANKED BY NUMBER OF TRANSACTIONS MANAGED OR CO-MANAGED
<TABLE>
<CAPTION>
JANUARY 1995 THROUGH JUNE 1996
JANUARY 1991 THROUGH JUNE 1996 -------------------------------------------------------
- -------------------------------------------------------
AGGREGATE AGGREGATE
AGGREGATE AMOUNT AGGREGATE AMOUNT
NUMBER OF ($ NUMBER OF ($
TRANSACTIONS MILLIONS) TRANSACTIONS MILLIONS)
--------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Smith Barney............. 148 $ 10,114 Smith Barney............. 60 $ 5,244
Alex. Brown.............. 134 8,882 Alex. Brown.............. 50 3,818
HAMBRECHT & QUIST........ 117 4,622 Montgomery Securities.... 44 2,726
Montgomery Securities.... 107 4,916 HAMBRECHT & QUIST........ 43 2,184
Robertson, Stephens...... 99 5,065 Cowen.................... 40 1,922
Lehman Brothers.......... 90 7,233 Robertson, Stephens...... 38 2,545
Cowen.................... 73 3,247 Lehman Brothers.......... 31 2,026
Paine Webber............. 68 3,632 DLJ...................... 21 2,852
Merrill Lynch............ 66 8,804 Merrill Lynch............ 21 1,903
DLJ...................... 56 4,771 Morgan Stanley........... 17 1,823
Morgan Stanley........... 54 6,135 Paine Webber............. 16 1,048
CS First Boston.......... 47 4,638 Goldman Sachs............ 14 1,176
Goldman Sachs............ 43 5,956 Needham.................. 14 590
Bear Stearns............. 42 2,711 CS First Boston.......... 13 1,353
Salomon Brothers......... 19 2,063 Salomon Brothers......... 12 1,128
</TABLE>
The average size of public offerings managed or co-managed by the Company
during the period from January 1995 through June 1996 was approximately $58.7
million, compared to an average transaction size during the period of $137.6
million for the bulge bracket investment banks and $87.9 million for all major
bracket investment banks. The Company believes that the number of transactions
completed is a meaningful measure of H&Q's ranking relative to others as an
underwriter of emerging growth company securities in the Company's area of focus
because public offerings by emerging growth companies tend to be smaller than
those of more mature companies. Measured by average transaction size, H&Q's
ranking out of fifteen firms for all offerings, technology company offerings and
healthcare offerings would have been during the period was fourteenth,
thirteenth and fourteenth,
41
<PAGE>
respectively. The Company was the lead underwriter in approximately 50% of its
total equity underwriting transactions from January 1995 through June 1996,
compared to a 50% average for bulge bracket firms and 36% average for major
bracket firms during such period.
As a result of the high proportion of venture capital invested in emerging
growth companies in California and Massachusetts, H&Q's underwriting clients
have to date been concentrated in these states. Approximately 47% of the
companies for which H&Q served as manager or co-manager of a securities offering
between January 1995 and June 1996 had principal offices located in California,
and approximately 11% of these companies had principal offices located in
Massachusetts. During this period the Company managed or co-managed four to
seven public offerings for companies in each of Florida, Maryland, New Jersey,
Pennsylvania, Texas, Virginia and Washington (a total of 32 offerings), one to
three public offerings for companies in each of 11 other states (a total of 21
offerings) and 14 offerings for companies outside the United States. For the 20
states outside California and Massachusetts represented, H&Q managed or
co-managed an average of approximately three offerings per state, and in four of
those states only one offering was completed. By comparison, among the 1,081
venture capital investments in 1995 reported by the National Venture Capital
Association, 437 investments were made in California, 131 in Massachusetts, and
more than 25 in each of Colorado, Illinois, Minnesota, New Jersey, New York,
Pennsylvania, Texas and Washington (a total of 282 investments) and the
remainder were made in other states.
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 manager or co-manager in follow-on offerings for
companies that H&Q believes have attractive investment characteristics, whether
or not H&Q participated as a manager 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 more
than 100 transactions since January 1991 in which it has been retained or added
as manager or co-manager of follow-on offerings, in contrast to the
approximately 20 transactions in which competitors replaced the Company in these
roles.
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 manager or co-manager. Italicized data
indicates the number of transactions in which the Company served as lead
manager.
HAMBRECHT & QUIST'S MANAGED OR CO-MANAGED PUBLIC EQUITY OFFERINGS BY INDUSTRY
JANUARY 1991 THROUGH JUNE 1996
<TABLE>
<CAPTION>
NUMBER OF TRANSACTIONS COMPLETED
(NUMBER OF LEAD MANAGED TRANSACTIONS)
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
INDUSTRY 1991 1992 1993 1994
- --------------------------------------- ---------- ------- ------- -------
Technology............................. 15 (7) 13 (8) 22 (10) 19 (14)
Healthcare............................. 21 (9) 19 (5) 20 (11) 11 (4)
Services............................... 6 (2) 6 (5) 3 (3) 4 (3)
Branded Consumer....................... -- (-) 1 (-) 2 (-) 3 (2)
-- --- - --- - --- - ---
Total.............................. 42 (18) 39 (18) 47 (24) 37 (23)
-- --- - --- - --- - ---
-- --- - --- - --- - ---
<CAPTION>
<S> <C> <C> <C> <C>
SIX MONTHS ENDED
JUNE 30,
INDUSTRY 1995 1996
- --------------------------------------- ------- -----------
Technology............................. 59 (32) 37 (19)
Healthcare............................. 16 (11) 19 (6)
Services............................... 9 (5) 12 (5)
Branded Consumer....................... 6 (3) 1 (-)
- --- - ---
Total.............................. 90 (51) 69 (30)
- --- - ---
- --- - ---
</TABLE>
H&Q has recently 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 excluded from the
data above) involving an aggregate of $877.1 million in securities. During all
periods, underwriting revenues from convertible debt securities transactions
have comprised less than 5% of the Company's total revenues, and the Company's
convertible debt underwriting activities are small both in number of
transactions and dollars raised compared to major bracket firms overall, many of
which serve more mature industries. The Company has rarely underwritten public
offerings of non-convertible debt. To the extent that interest rates and other
market
42
<PAGE>
conditions are 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.
RvR Securities offers equity underwriting services to companies with smaller
capitalizations than H&Q LLC's typical underwriting clients. Since December
1993, RvR Securities has completed five underwriting transactions. These
transactions were all initial public offerings, ranging in size from $4.2
million to $14.4 million. The issuers were three technology companies, a branded
consumer company and a passenger airline company. Two of these companies
subsequently became underwriting clients of H&Q LLC. With respect to each of the
five companies, RvR Securities and/or H&Q LLC acted as a market-maker. RvR
Securities does not currently engage in any market-making activities. While RvR
Securities' revenues to date have not been material to the Company, 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.
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.
While revenues from international underwriting activities have grown as a
percentage of the Company's total revenues, during the 18-month period ended
June 30, 1996, these revenues comprised less than 10% of the Company's
underwriting revenues and less than 5% of the Company's total revenues.
In the 18-month period from January 1995 through June 1996, the Company
managed or co-managed 16 equity offerings for non-U.S. companies, raising a
total of $999.4 million. These transactions included six initial public
offerings and two follow-on public offerings on Nasdaq for European growth
companies, and three initial public offerings and two follow-on public offerings
on Nasdaq for Israeli growth companies. This level of underwriting activity for
non-U.S. companies represents a significant increase from the seven equity
offerings, raising a total of $215.0 million, in which the Company served as a
manager or co-manager during the four-year period from January 1991 through
December 1994.
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 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. 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.
43
<PAGE>
The Company's strategy in Asian markets has been to focus initially on
venture capital investments in promising growth companies through H&Q's minority
investment in Asia Pacific. H&Q believes that this strategy will enable the
Company to develop and maintain relationships with growth companies in the
region.
The following table lists companies for which Hambrecht & Quist managed or
co-managed public offerings of equity or convertible debt securities completed
during the period from the beginning of fiscal 1996 (October 1, 1995) through
June 30, 1996:
HAMBRECHT & QUIST'S RECENT UNDERWRITING CLIENTS
OCTOBER 1995 THROUGH JUNE 1996
ACT Networks
Advent Software
Affiliated Computer Services
Alpha-Beta Technology
AMISYS Managed Care Systems
Applied Microsystems
Arbor Software
Arris Pharmaceuticals
ASE Test
Biochem Pharma
Biofield
Boston Beer
BroadVision
Centocor
Central Garden & Pet
Check Point Software
Citrix Systems
CompuCom Systems
Computervision
CSG Systems International
CyberCash
Data Translation
Dendrite International
Digital Generation Systems
Dura Pharmaceuticals
Edify
Elantec
Endo Vascular Technologies
ESS Technology
Farallon Communications
Forte Software
FPA Medical Management
GelTex Pharmaceuticals
Gemstar International Group
Genset
Gensym
GeoWorks
Gilead Sciences
GT Interactive Software
Guilford Pharmaceuticals
Gynecare
HCIA
Home Health Corp. of America
Houghten Pharmaceuticals
HPR
i2 Technologies
Incyte Pharmaceuticals
Individual
Infonautics
Innotech
Integrated Systems
Intevac
Iomega
Isocor
JDA Software
Jones Medical Industries
Lernout & Hauspie
Logic Works
Lumisys
Lycos
M.A.I.D.
Macronix International
Meridian Data
MetaTools
Metra Biosystems
Microware Systems
Oacis Healthcare Holdings
Optical Sensors
OrthoLogic
PC DOCS Group International
Photon Dynamics
Pixar
PLATINUM technology
Prism Solutions
Profit Recovery Group
Red Brick Systems
Renaissance Solutions
SangStat Medical
Saville Systems
Sawtek
Seattle Filmworks
Sequana Therapeutics
Siebel Systems
Sierra Semiconductor
Silicon Storage Technology
Silicon Valley Research
Sipex
Solectron
Sonus Pharmaceuticals
SpectraLink
SS&C Technologies
Starbucks
Tecnomatix Technologies
Telxon
Triple P
Verilink
Verity
Vincam Group
VocalTec
Xilinx
44
<PAGE>
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 June 1996, the Company provided M&A services in over 100
assignments representing approximately $8.7 billion of completed transactions.
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 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
JANUARY 1991 THROUGH JUNE 1996
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
----------------------------------------------------- ENDED JUNE
1991 1992 1993 1994 1995 30, 1996
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Number of Completed Assignments........... 11 8 11 24 30 19
Aggregate Transaction Value $ 289 $ 174 $ 377 $ 2,028 $ 3,723 $ 2,119
(in millions)............................
</TABLE>
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. Acting as placement agent generally
entails advising the issuer regarding the structure and other aspects of the
financing, assisting in the preparation of appropriate disclosure documents and
soliciting prospective qualified investors. The private placement/structured
finance group places equity and fixed income securities with institutional
investors, private capital funds, strategic corporate investors and
sophisticated, high net worth individuals. Since 1991, the group has completed
over 35 private placement transactions, raising over $700 million for growth
companies, with 19 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 and
seeks to serve as one of the top market-makers for the equity securities of
emerging growth companies for which H&Q has served as a managing or co-managing
underwriter. 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.
45
<PAGE>
INSTITUTIONAL SALES AND TRADING
At June 30, 1996, H&Q had 32 institutional sales professionals covering
growth-oriented investors in many countries, primarily in North America, Western
Europe and Japan. H&Q's focus on growth industries enables its sales and trading
organization to develop an in-depth understanding of these sectors and companies
and to better serve its investor clients. The Company's institutional sales
activities are conducted from its offices in San Francisco, New York, Boston,
San Diego and London.
At June 30, 1996, H&Q had 17 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 securities.
At June 30, 1996, H&Q made a market in over 300 Nasdaq stocks. During the
quarter ended June 30, 1996, based on publicly reported trading volume data, H&Q
was one of the top three market makers in approximately 74% of the Nasdaq equity
securities issued by companies for which H&Q served as manager or co-manager in
an initial public offering completed between January 1991 through June 1996. H&Q
believes that this statistic is more meaningful than other potential measures of
Nasdaq market-making activities, such as the total number of Nasdaq stocks in
which a securities firm makes a market, because H&Q believes that the volume of
market-making activity is an important measure of after-market liquidity for the
securities of underwriting clients. Additionally, at June 30, 1996 H&Q had 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 trading activities
are conducted from its offices in San Francisco, New York and Boston. Hambrecht
& Quist clears its trading transactions through Lewco.
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 June
30, 1996, the EFS group included 75 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
46
<PAGE>
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 June
30, 1996, the Syndicate department was comprised of 12 employees, including two
senior managers who have an aggregate of over 50 years of experience in the
securities industry.
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 $600.0 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 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 nine
months ended June 30, 1996, approximately $15.4 million, $14.0 million and $14.0
million, respectively, was invested in such partnerships, of which $2.1 million,
$2.6 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 complementary
asset-management organizations, including De Santis Capital Management, L.P., a
registered investment adviser.
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 June 30, 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 11 funds with a combined
total of approximately $445.0 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 $198.0 million in committed
capital, are generally available for investment only in one specific country,
and four of these funds, totaling $246.1 million in committed capital, may be
invested in companies located in any one of a number of countries in a specified
region.
47
<PAGE>
Hambrecht & Quist holds 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. Capital Management manages two publicly traded
closed-end mutual funds: H&Q Healthcare Investors (NYSE:HQH) and H&Q Life
Sciences Investors (NYSE:HQL). At June 30, 1996, these funds had combined net
assets of approximately $276.0 million, of which approximately 32% was comprised
of venture capital and other investments subject to resale restrictions. Capital
Management is compensated solely on the basis of manage-
ment 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 June 30, 1996, this fund had invested an
aggregate of approximately $26.0 million in 13 companies.
TI VENTURES L.P. In June 1996, Hambrecht & Quist formed a limited
partnership with Texas Instruments Incorporated ("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 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 June
30, 1996, Guaranty Finance had provided a total of $79.4 million of financing to
37 client companies in 59 transactions. Guaranty Finance's current portfolio of
financings aggregated approximately $18.9 million at June 30, 1996. After the
Restructuring, Hambrecht & Quist Group will own 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 who devotes significant
time to Guaranty Finance.
HAMBRECHT & QUIST TRANSITION CAPITAL. The Company recently formed
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 through June 30, 1996. After the
Restructuring, Hambrecht & Quist Group will own 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 who devotes significant
time to Transition Capital.
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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. Many of the Company's
competitors have greater capital, financial and other resources than the
Company. The Company competes worldwide for growth-oriented institutional
investor clients and for United States underwritings of equity offerings by
emerging growth companies in H&Q's areas of focus. During calendar 1995, less
than 5% of the Company's revenues was derived from international corporate
finance and brokerage services. The Company competes for venture capital and
other principal investment opportunities in the United States through wholly
owned subsidiaries and internationally through entities in which it holds
minority interests. In addition to competition from domestic and foreign 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 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.
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EMPLOYEES
At June 30, 1996, the Company had a total of 617 employees, of whom 60 were
engaged in research, 110 in investment banking, 277 in sales, trading and
syndicate, 37 in venture capital, principal investment and money management
activities and 133 in accounting, administration and operations. Of these
employees, 320 were classified as professionals and 297 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 in San Francisco, California
occupy approximately 132,000 square feet under leases which terminate December
31, 1998, subject to two 5-year extension options for the majority of the space.
The Company also leases approximately 33,000 square feet in New York, New York,
under a lease expiring in 2007; approximately 24,000 square feet in Boston,
Massachusetts, under a lease expiring in 1998, subject to an option to extend
the term; and approximately 2,000 square feet in 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 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
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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 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 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. On February 6, 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'
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securities class action suit filed in the Superior Court of California, County
of Santa Clara (STRAUSZ ET AL. V. GESCHKE ET AL., Case No. CV755730). 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 defendants each filed a
demurrer on the ground that the allegations were not actionable under state law.
In July 1996, the Court sustained the demurrer of H&Q and its two defendant
employees as to all causes of action and provided the plaintiffs leave to amend.
COMPUTERVISION SECURITIES LITIGATION. In August 1992, H&Q LLC acted as one
of four co-managers of an underwriting of $600 million of debt and equity
securities 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 (IN RE COMPUTERVISION CORPORATION SECURITIES
LITIGATION, MDL Docket No. 964). The operative complaint alleges claims against
H&Q, the other managing underwriters, Computervision and 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. In January 1995, the
plaintiffs served a motion for leave to file a further amended complaint. In
February 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 in April 1995, plaintiffs subsequently withdrew the
sole surviving allegation. In September 1995, the Court denied plaintiffs'
motion for leave to amend the complaint, dismissed plaintiffs' case and entered
judgment for all defendants. Plaintiffs appealed these rulings to the First
Circuit Court of Appeals, which on July 31, 1996 affirmed the judgment of the
District Court.
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 (IN RE: DATAWARE TECHNOLOGIES, INC. SECURITIES LITIGATION, Civ. No.
94-12250-DPW).
The parties have reached a settlement in this action and reported to the
court the fact that a settlement has been reached. H&Q LLC has been fully
indemnified by Dataware in connection with the settlement. The parties executed
a formal settlement agreement on August 2, 1996, and on that date the Court
preliminarily approved the proposed settlement, subject to notice to the class
and a full settlement hearing in October 1996.
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 (HOCHMAN
ET AL. V. HSU ET AL., Case No. CV758510). On June 20, 1996, certain of Oak's
officers and directors and H&Q LLC were named as defendants in another
shareholders' securities class action suit filed in the Superior Court of
California, County of Santa Clara (GALLO ET AL. V. TSANG ET AL., Case No.
CV758799). H&Q LLC acted as the lead manager of Oak's February 1995 initial
public offering and May 1995 follow-on equity offering. The complaints allege,
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/or Oak's officers and
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directors. The lawsuits seek unspecified damages based on alleged violations of
California law. Defendants have not yet filed any pleading responding to any of
the complaints and no discovery has occurred in any case. It is unknown at this
time whether these actions will be consolidated.
On July 3, 1996, certain of Oak's officers and directors and H&Q LLC were
named as defendants in two shareholder securities class action suits filed in
the Superior Court of California, County of Santa Clara (ROSSINI ET AL. V. TSANG
ET AL., Case No. CV759148; FENTON ET AL. V. TSANG ET AL., Case No. CV759145).
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 33
broker-dealer defendants, including H&Q LLC (94 Civ. 3996 (RWS), M.D.L. No.
1023). 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
in August, 1995 which is identical in substance to the dismissed pleading and
lists over 1,000 securities that plaintiffs allege were the subject of the
alleged conspiracy. H&Q LLC thereafter filed its answer, and discovery is
proceeding. Plaintiffs made, and defendants opposed, a motion for class
certification. Oral argument occurred on June 21, 1996, and the parties are
awaiting the Court's decision.
In December 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, a motion to remand the
case to state court has been denied and this action has been consolidated with
the class action pending in New York.
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"). On July 16, 1996, H&Q LLC entered into a
Stipulation and Order resolving a civil complaint filed by the DOJ, alleging
that H&Q LLC and 23 other Nasdaq market makers violated Section 1 of the Sherman
Act in connection with certain market making practices (UNITED STATES OF AMERICA
V. ALEX. BROWN & SONS ET AL., Civ. No. 96-CV-5313). The complaint alleged that
the defendants and other market makers engaged in activities that had the effect
of artificially inflating the quoted "inside spread" -- i.e., the difference
between the best buying price and the best selling price -- of certain Nasdaq
stocks. In entering into the Stipulation and Order, the parties agreed that the
defendants would not agree with other market-makers to set prices, quotes or
spreads in Nasdaq securities, or harass, intimidate or refuse to trade with
other market-makers for reducing their spread in any Nasdaq security or by
reason of the quantity of a Nasdaq security they are willing to trade at its
quoted price. In addition, the defendants each agreed to (i) designate an
antitrust compliance officer to instruct traders and others concerning the
requirements of the proposed order, (ii) listen to audio tapes of a portion of a
firm's trading activity on Nasdaq created under the order and (iii) allow
representatives of the DOJ, without pre-arrangement, to appear at a defendant's
offices to listen in on trader conversations the firm is taping as they are
occurring. The agreement also requires the defendants to pass on complaints of
possible violations or taped conversations to the DOJ, and to allow the DOJ to
bring civil or criminal contempt charges for willful violations of the order.
The Stipulation and Order are subject to approval by the United States District
Court for the Southern District of New York following a public hearing, and if
that Court approves the Stipulation and Order, the complaint will be dismissed
with prejudice.
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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 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 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. This scrutiny has
included allegations of collusion among Nasdaq market-makers. H&Q LLC and 23
other Nasdaq market-makers recently entered into a Stipulation and Order with
the Department of Justice in which they agreed not to engage in any collusive
activities relating to prices, quotes or spreads in Nasdaq-traded securities.
It has been reported in the media that the SEC has submitted to the NASD a
draft of a disciplinary case the SEC may file against the NASD, as well as a
report setting out the SEC's findings in detail. The SEC's case reportedly
concerns the NASD's enforcement oversight of Nasdaq. According to these media
reports, NASD officials have proposed a number of changes to Nasdaq's
operations, which proposals 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 NASD 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-
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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 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.
H&Q LLC recently agreed to a censure and a $40,000 fine by the NYSE's
Enforcement Division relating to allegations that H&Q LLC, in certain loans to
customers against pledges of restricted or control securities in fiscal 1994,
violated NYSE requirements for net capital and customer reserve account
calculations, custody and control of customer securities, margin maintenance and
supervision. The settlement is subject to approval by an NYSE Hearing Panel,
review by the NYSE Board of Directors if requested by a Board member, and review
by the SEC on its own motion. The Company expects the settlement to become final
and to have no material adverse effect on the business or financial condition of
the Company or H&Q LLC.
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
Societe du Nouveau Marche, Societe de Bourse Francaise and La Commission
d'Operation de Bourse, and has applied 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
56
<PAGE>
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.
57
<PAGE>
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 to maintain regulatory net capital, computed in accordance with the
SEC's regulations as supplemented by NYSE Rule 325, 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") represent 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 125% of its net capital minimum dollar amount
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
150% of its net capital minimum dollar amount 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 120% of its net capital minimum dollar amount 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.
58
<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 June 30, 1996, H&Q LLC
was required to maintain minimum "net capital," in accordance with SEC rules, of
approximately $4.1 million and had total net capital of approximately $40.2
million, or approximately $36.1 million in excess of the amount required. RvR
Securities also computes its minimum net capital requirement under the
alternative method. As of June 30, 1996, RvR Securities was required to maintain
minimum net capital of $250,000. Its total net capital on that date was $1.5
million, consisting primarily of equity capital and a $1.0 million subordinated
loan from H&Q Group. Lewco also computes its minimum net capital requirement
under the alternative method. As of June 30, 1996, Lewco was required to
maintain minimum net capital of $1.5 million. Lewco's total net capital on that
date was $8.5 million.
59
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
June 30, 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..................
55 Chief Financial Officer of the Company and H&Q LLC; Managing Director
of H&Q LLC
Raymond J. Minehan.................
47 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)............
</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, 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 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, Red Brick 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 1989, he was elected
Executive Vice President and in October 1991, he was elected to the Board of
Directors of the Company. In April 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.
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
60
<PAGE>
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, he 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 and
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 has 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 a Managing Director in 1990. Mr. Machtinger
was an attorney with the SEC 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 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. Mr. Hillman holds an A.B. in
Economics from Princeton and an M.B.A. from Harvard Business School.
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.
61
<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 1986.
He is a co-founder of J.F. Shea Co., 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, 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.
BOARD COMMITTEES
The Audit Committee consists of Messrs. Hillman and Mayer. Among other
functions, the Audit Committee makes recommendations to the Board regarding the
selection of independent auditors, reviews the results and scope of the audit
and other services provided by the Company's independent auditors, reviews the
Company's balance sheet, statement of operations and cash flows and reviews and
evaluates the Company's internal control functions.
The Compensation Committee consists of Messrs. Mayer and Shea. The
Compensation Committee administers the Company's 1996 Equity Plan and makes
recommendations to the Board concerning salaries and incentive compensation for
employees and consultants of the Company.
DIRECTOR COMPENSATION
The Company does not currently pay fees to its directors for attendance at
meetings. From time to time, the Company has sold Common Stock to its directors
and granted its directors options to purchase Common Stock of the Company. See
"Certain Transactions."
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 $100,000 for the fiscal
year ended September 30, 1995 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
FISCAL 1995 ANNUAL COMPENSATION ------------------------------
--------------------------------------------- SECURITIES
OTHER ANNUAL RESTRICTED STOCK UNDERLYING ALL OTHER
COMPENSATION AWARDS OPTIONS/ COMPENSATION
NAME AND PRINCIPAL POSITION SALARY ($) 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>
62
<PAGE>
- ------------------------
(1) Includes bonuses earned in fiscal 1995 and paid in fiscal 1996; excludes
bonuses earned in fiscal 1994 which were paid in fiscal 1995.
(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% ($)
- ---------------------------------------------- ----------- --------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
William R. Hambrecht.......................... -- -- -- -- -- --
Daniel H. Case III............................ -- -- -- -- -- --
William R. Timken............................. 40,000 2.7% 4.975 9/30/95 9,950 19,900
Paul L. Hallingby............................. 140,000 9.4% 4.975 9/30/95 34,825 69,650
Cristina M. Morgan............................ 80,000 5.4% 4.975 9/30/95 19,900 39,800
</TABLE>
63
<PAGE>
- ------------------------
(1) SARs are awarded for a term of one fiscal year. At the end of the fiscal
year the grantee is allocated an amount equal to the number of SARs granted
multiplied by the increase in the net book value per share (if any) of the
Company's stock during such period. This amount vests and is paid out over a
three year period with one third paid out in the first, second and third
years after the grant date if the grantee remains an employee of the
Company. See "Management--Compensation Plans."
(2) Potential Realizable Value is based on certain assumed rates of appreciation
pursuant to rules prescribed by the SEC.
AGGREGATED OPTION EXERCISES DURING FISCAL 1995 AND FISCAL YEAR-END OPTION VALUES
The following table sets forth for each of the Named Executive Officers
certain information concerning options exercised during fiscal 1995 and the
number of shares subject to both exercisable and unexercisable stock options as
of September 30, 1995, giving effect to the Restructuring. Also reported are
values for "in-the-money" options that represent the positive spread between the
respective exercise prices of outstanding options and the fair market value of
the Company's Common Stock as of September 30, 1995:
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
NUMBER OF OPTIONS AT AT SEPTEMBER 30,
SHARES VALUE SEPTEMBER 30, 1995 (#) 1995 (1)($)
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 ($6.52 per share) and the exercise price of the option, which the
Company's Board of Directors determined to be the fair market value at the
date of grant.
AGGREGATED SAR PAYOUTS FOR FISCAL 1995
The following table sets forth for each of the Named Executive Officers
certain information concerning SAR payouts during fiscal 1995, the number of
securities underlying SARs outstanding at September 30, 1995 and the unrealized
value of unvested SARs at September 30, 1995.
<TABLE>
<CAPTION>
SAR PAYOUTS IN SECURITIES UNDERLYING UNREALIZED VALUE OF
FISCAL 1995 SARS AT SEPTEMBER 30, 1995 SARS AT SEPTEMBER 30, 1995
($)(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
aggregating the unvested and unpaid value of SARs granted in fiscal 1993,
1994 and 1995.
64
<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 Mr. Case's employment without cause, or if Mr. Case resigns within
six months after a change in control of H&Q, then (i) H&Q shall pay Mr. Case the
greater of $400,000 or 25% of his aggregate compensation received 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, Mr. 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 PLAN. The Company's current
intention is to pay semi-annual bonuses under the 1996 Bonus and Deferred
Compensation Plan ("1996 Compensation Plan") to its research, investment
banking, trading and administrative professionals and to its other executive
officers. 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. Management currently expects that
approximately 2,000,000 shares will be issued under the 1996 Equity Plan as
contingent equity rights resulting from bonuses received under the 1996
Compensation Plan.
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. Management presently intends to allocate approximately 1,000,000
shares for issuance upon the exercise of options and 2,000,000 shares for
issuance in connection with contingent equity rights resulting from bonuses
received under the 1996 Compensation 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 the
compensation committee. 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 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.
65
<PAGE>
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. Except in the case of a termination for "cause," 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 after such optionee's death or disability, but in no event later than
the expiration of the option term. Unexercised options terminate upon a
termination for "cause." 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 June 30, 1996, 4,153,640
shares were subject to outstanding options under the 1995 Option Plan. Following
the Restructuring, 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 June 30, 1996, 1,867,980 shares had been sold under the
1995 Stock Plan. Following the Restructuring, 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 June 30, 1996, options to purchase 432,800 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
35,008 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. Following the Restructuring, no further sales will be
made under the Unit Plan.
66
<PAGE>
OPTION GRANTS OUTSIDE OF PLANS. From time to time Group California has
granted options outside of its plans to certain officers and directors with the
exercise price in each case equal to Group California's net book value per
share, which approximated its fair market value, on the date of grant. At June
30, 1996, such options covered a total of 1,111,080 shares of the Company's
Common Stock.
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
adoption of the SESOP, no contributions to the profit-sharing plan have been
made, and none are anticipated in the future (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 seven 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 of
Incorporation 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. However, as a matter of policy the Company will
generally not indemnify employees for service on boards of directors of publicly
traded companies after the first meeting of shareholders following such a
company's initial public offering. 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.
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<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 for this delay, the Board determined to
pay Mr. Case a bonus of $1,951,979 (the "Make-Up Bonus") which on a pre-tax
basis equalled the difference in the fair value of the Company's Common Stock
subject to such options 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 options covering 1,238,828 shares of
Common Stock, with a weighted average exercise price of approximately $2.838 per
share; (iii) Mr. Case paid the exercise price of such options by delivering
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;
and (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 at the rate of 6% 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 a portion of 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 70% 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 of
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 foregoing his share of a cash distribution that Group California received
from Guaranty Finance in 1992. During fiscal 1993, 1994 and 1995 and the nine
months ended June 30, 1996, Mr. Case received $86,300, $51,653, $241,189 and
$206,273, respectively, from Guaranty Finance as compensation for consulting
services, distribution on capital and profit sharing. Of such aggregate of
$585,415 paid to Mr. Case since October 1, 1992, the portions relating to
consulting services, profit sharing and distributions on capital were $86,250,
$166,689 and $332,477, respectively.
Guaranty Finance has repurchased all outstanding options to purchase
additional equity in Guaranty Finance and will (a) distribute certain
non-operating assets to its equity holders, including Mr. Case and LP, and (b)
accrue and pay out deferred profit-sharing obligations representing
approximately 10% of all net investment gains (the "Distribution"). Mr. Case
received $500,000 for his interest in the repurchased Guaranty Finance options.
In July 1996, Mr. Case applied this $500,000 toward the prepayment of notes
payable to the Company. Mr. Case's proportionate share of the Distribution had a
book value as of June 30, 1996 of approximately $1.3 million, of which
approximately $250,000 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 $1,734,588 plus Mr. Case's
68
<PAGE>
proportionate part of the proceeds from the sales, after May 31, 1996 and prior
to the Restructuring, of any additional assets which otherwise would have been
distributed as part of the Distribution. The $1,734,588 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 direct 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>
NINE MONTHS
ENDED JUNE
30, 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 $ 86,980 285,687 $ 409,411 128,796 $ 303,325 1,917,086
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 96,280 $ 163,645 90,480 $ 253,175 272,240
Bruce M. Lupatkin..................... -- -- 24,544 $ 29,767 60,000 $ 143,250 66,784
William E. Mayer...................... 20,000 $ 56,100 12,000 $ 13,710 22,400 $ 99,500 50,400
Edmund H. Shea, Jr.................... 6,664 $ 18,693 56,719 $ 37,529 -- -- 49,600
Patrick J. Allen...................... -- -- -- -- -- -- 37,520
Howard B. Hillman..................... 20,000 $ 56,100 9,120 $ 7,046 -- -- --
Steven N. Machtinger.................. 16,000 $ 42,070 15,840 $ 10,144 44,480 $ 122,100 46,561
David M. McAuliffe.................... -- -- -- -- 186,400 $1,078,225 13,281
Raymond J. Minehan.................... 16,000 $ 42,070 18,720 $ 11,989 60,000 $ 157,050 33,121
<CAPTION>
AGGREGATE
PURCHASE
NAME PRICE
- -------------------------------------- ---------
<S> <C>
Daniel H. Case III.................... $8,868,977
William R. Hambrecht.................. --
William R. Timken..................... --
Cristina M. Morgan.................... $ 642,086
Paul L. Hallingby..................... $1,585,894
Bruce M. Lupatkin..................... $ 477,323
William E. Mayer...................... $ 172,480
Edmund H. Shea, Jr.................... $ 151,236
Patrick J. Allen...................... $ 271,930
Howard B. Hillman..................... --
Steven N. Machtinger.................. $ 212,730
David M. McAuliffe.................... $ 174,386
Raymond J. Minehan.................... $ 164,941
</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
Common Stock of the Company 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 nine months ended June 30, 1996:
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<PAGE>
VENTURE INVESTMENTS BY OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
JUNE 30,
NAME FISCAL 1993 FISCAL 1994 FISCAL 1995 1996
- ------------------------------------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
William R. Hambrecht (1)(2)..................... $ 1,111,625 $ 1,455,106 $ 749,354 $ 900,562
Daniel H. Case III (3).......................... 234,449 152,145 238,196 272,218
William R. Timken (2)........................... 697,026 860,202 720,023 429,134
Paul L. Hallingby............................... 27,379 32,000 30,000 70,503
Cristina M. Morgan.............................. 111,173 88,075 71,215 151,522
David M. McAuliffe.............................. -- -- -- 15,000
Bruce M. Lupatkin............................... 45,565 31,792 21,000 60,492
Raymond J. Minehan.............................. -- -- 2,500 8,000
Steven N. Machtinger............................ 6,982 11,899 11,500 19,000
Patrick J. Allen................................ -- -- 7,000 4,500
William E. Mayer................................ 535,461 255,411 240,079 203,002
Howard B. Hillman............................... 567,935 524,313 598,113 460,499
Edmund H. Shea, Jr. (2)(4)...................... 6,076,133 8,189,895 3,190,322 5,645,774
</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 in venture funds managed by Asia Pacific.
(3) Includes investments made by Stacey Case, Mr. Case's wife.
(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 such
professionals' specific contributions 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 of the
Company 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 Company and the borrower's rights to receive
compensation from the Company. "Type A"
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<PAGE>
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>
AGGREGATE BALANCE
HIGHEST BALANCE HIGHEST BALANCE DURING HIGHEST BALANCE DURING OUTSTANDING AS OF
DURING FISCAL 1993 FISCAL 1994 FISCAL 1995 JUNE 30, 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............... $ -- $ -- $ -- $ 61,480 $ -- $ 49,184 $ -- $ 24,592
Daniel H. Case III(1).............. -- 84,100 -- 220,980 648,523 341,860 3,926,286 302,206
William R. Timken.................. 182,368 -- 72,368 -- -- -- -- --
Paul L. Hallingby(1)............... 162,610 -- 161,205 -- 499,963 -- 1,544,888 --
Cristina M. Morgan................. -- 84,100 -- 182,555 143,250 210,805 396,451 174,883
David M. McAuliffe................. -- -- -- -- -- 216,000 254,344 208,519
Bruce M. Lupatkin.................. -- 84,100 -- 67,280 359,250 50,460 584,999 16,820
Raymond J. Minehan................. 102,828 -- 92,328 -- 242,130 -- 308,470 --
Steven N. Machtinger............... 100,328 -- 79,828 -- 139,515 18,950 274,585 14,970
Patrick J. Allen................... -- -- -- -- 108,000 43,200 207,957 44,781
William E. Mayer................... -- -- -- -- -- -- 32,800 --
</TABLE>
- ------------------------
(1) Mr. Case's and Mr. Hallingby's indebtedness is repayable in installments of
20% of their respective 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.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of June 30, 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 5% 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).................................................. 2,893,457 15.5% 13.1%
Daniel H. Case III (3).................................................... 2,000,777 10.7% 9.0%
William R. Timken (4)..................................................... 1,564,686 8.4% 7.0%
Paul L. Hallingby (5)..................................................... 639,587 3.4% 2.9%
Cristina M. Morgan (6).................................................... 404,959 2.2% 1.8%
William E. Mayer (7)...................................................... 112,800 * *
Howard B. Hillman (8)..................................................... 80,320 * *
Edmund H. Shea, Jr. (9)................................................... 524,583 2.8% 2.4%
Savings and Employee Stock Ownership Plan (10)............................ 1,918,198 10.3% 8.7%
All executive officers and directors as a group (13 persons) (11)......... 9,081,327 48.6% 41.0%
</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 June 30, 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 care of Hambrecht & Quist, One Bush Street, San Francisco,
California 94104.
(2) Includes 27,601 shares held in trust by SESOP and in the Group Trust.
(3) Includes 18,185 shares held in trust by SESOP and in the Group Trust.
(4) Includes options to purchase 32,000 shares exercisable within 60 days of
June 30, 1996 and 27,086 shares held in trust by SESOP and in the Group
Trust.
(5) Includes options to purchase 16,000 shares exercisable within 60 days of
June 30, 1996 and 27,587 shares held in trust by SESOP and in the Group
Trust.
(6) Includes options to purchase 16,000 shares exercisable within 60 days of
June 30, 1996 and 26,233 shares held in trust by SESOP and in the Group
Trust.
(7) Includes options to purchase 8,000 shares exercisable within 60 days of June
30, 1996.
(8) Includes options to purchase 51,200 shares exercisable within 60 days of
June 30, 1996.
(9) Includes options to purchase 1,600 shares exercisable within 60 days of June
30, 1996.
(10) Represents shares held by 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 230,184 shares held by
Group Trust.
(11) Includes options to purchase 136,800 shares exercisable within 60 days of
June 30, 1996 and 175,031 shares held in trust by SESOP and in the Group
Trust.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Prior to the completion 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 June 30, 1996, there were 18,669,064 shares of Common Stock
outstanding (after giving effect to the Restructuring) held of record by
approximately 266 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. After the
completion of this offering, the officers and directors of the Company will
beneficially own, in the aggregate, approximately 41.0% 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.
The Company's Bylaws permit the Board of Directors to establish by
resolution the authorized number of directors, and the Company currently has six
directors authorized. The Company's Bylaws also provide 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. Hillman
and Timken; the Class II directors are Messrs. Case and Shea; and the Class III
directors are Messrs. Hambrecht and Mayer. At each annual meeting of
stockholders beginning with the 1997 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
73
<PAGE>
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 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 10% or more 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 the completion of this offering, the Company will have outstanding
22,169,064 shares of Common Stock (assuming no exercise of options after June
30, 1996). Of these shares, the 3,500,000 shares sold in the offering will be
freely tradeable without restriction, except that any shares purchased by
"affiliates" of the Company, as that term is defined under the Securities Act of
1933, as amended (the "Securities Act"), may generally only be sold in
compliance with the volume limitations and other restrictions provided in Rule
144 promulgated under the Securities Act. In reliance upon "no-action" letters
issued by the SEC relating to transactions under Section 3(a)(10) of the
Securities Act, the 18,669,064 shares issued in the Restructuring will also be
freely tradeable without restriction under the Securities Act due to the
issuance of a permit qualifying the shares following a public hearing conducted
before the California Commissioner of Corporations on the fairness of the terms
and conditions of the Restructuring, except that any shares held by affiliates
may generally only be sold in compliance with the volume limitations and other
restrictions provided in Rule 144.
The 18,669,064 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, however, 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 2,014,000 shares), and 12 months
after the Effective Date each stockholder may sell an 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 1,472,000
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, certain stockholders
are subject to vesting provisions, and certain stockholders (including the SESOP
and the Group Trust) are subject to other contractual restrictions on transfer.
At June 30, 1996, options to purchase 5,697,520 shares of Common Stock were
outstanding, and an additional 3,000,000 shares of Common Stock were reserved
for issuance under the Company's 1996 Equity Plan. 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
74
<PAGE>
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.
75
<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....................................................................... 3,500,000
----------
----------
</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 525,000
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
76
<PAGE>
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 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 Rules of the NASD, when an NASD member such as H&Q 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 Rules.
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, H&Q 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 Rules 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 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 SEC, 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 document filed as an exhibit to the
Registration Statement is qualified by reference to such exhibit as filed. 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
SEC in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
SEC'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 SEC. The SEC maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of the
SEC's World Wide Web site is
http://www.sec.gov.
77
<PAGE>
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Selected Pro Forma Financial Data (unaudited)......................................... F-2
Pro Forma Combined Balance Sheet as of June 30, 1996 (unaudited)...................... F-3
Pro Forma Combined Statements of Operations for the nine months ended June 30, 1996
and the year ended September 30, 1995 (unaudited).................................... F-4
Notes to Pro Forma Combined Financial Statements--June 30, 1996 (unaudited)........... F-6
Combined Balance Sheets as of September 30, 1995 and June 30, 1996 (unaudited)........ F-8
Combined Statements of Operations for the nine months ended June 30, 1995 and 1996
(unaudited).......................................................................... F-9
Combined Statements of Cash Flows for the nine months ended June 30, 1995 and 1996
(unaudited).......................................................................... F-10
Condensed Notes to Combined Financial Statements--June 30, 1996 (unaudited)........... F-11
Report of Independent Public Accountants.............................................. F-16
Combined Balance Sheets as of September 30, 1994 and 1995............................. F-17
Combined Statements of Operations for the years ended September 30, 1993, 1994 and
1995................................................................................. F-18
Combined Statements of Changes of Shareholders' Equity and Partners' Capital for the
years ended September 30, 1993, 1994 and 1995........................................ F-19
Combined Statements of Cash Flows for the years ended September 30, 1993, 1994 and
1995................................................................................. F-20
Notes to Combined Financial Statements--September 30, 1995............................ F-22
</TABLE>
F-1
<PAGE>
SELECTED PRO FORMA FINANCIAL DATA
The following Pro Forma Combined Balance Sheet as of June 30, 1996 presents
the Restructuring (see "Restructuring") as if it occurred on June 30, 1996. The
following Pro Forma Combined Statements of Operations for the nine months ended
June 30, 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 historical combined financial statements include the combined operations
of H&Q and LP. The entities are presented on a combined basis without
revaluation, as the entities have been operating under common ownership and
common management and, in fiscal 1996, the entities will restructure their
operations to result in one surviving holding company. Such Restructuring of H&Q
and LP will be accounted for at the respective entities' carrying values since
each individual party to the Restructuring, as a shareholder and a partner, owns
the same pro rata interest of H&Q and LP, respectively, and will be
restructuring their interests based on non-cash exchanges of common stock and
partnership interests for shares of the holding company's stock.
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 June 30, 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."
The distributions reflected in the pro forma financial statements primarily
result from the desire to retain the tax efficiencies achieved to date with
respect to portfolio investments held by non-taxable entities. Most of the
security distributions relate to the distribution of remaining holdings of BISYS
common stock, which securities have generated net investment gains for the
Company of $14.7 million and $19.9 million for the nine months ended June 30,
1996 and the year ended September 30, 1995, respectively.
F-2
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS COMBINED
---------- ------------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............................................. $ 29,331 $ (2,400)(1) $ 19,983
(2,024)(2)
(4,090)(4)
(834)(6)
Receivables:
Customers........................................................... 192,740 192,740
Lewco Securities Corp............................................... 60,337 60,337
Syndicate managers.................................................. 21,369 21,369
Related parties..................................................... 9,103 9,103
Lease............................................................... 4,131 4,131
Other............................................................... 12,617 12,617
Marketable trading securities, at market value........................ 30,344 30,344
Long-term investments, at estimated fair value........................ 85,942 707(2) 66,007
(20,642)(3)
Deferred income taxes................................................. 27,495 6,255(5) 33,750
Furniture, equipment and leasehold improvements, net.................. 10,095 10,095
Leased assets, net.................................................... 2,576 2,576
Exchange memberships, at cost......................................... 656 656
---------- ------- ----------
Total assets...................................................... $ 486,736 $ (23,028) $ 463,708
---------- ------- ----------
---------- ------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY AND PARTNERS' CAPITAL
Payables:
Customers........................................................... $ 136,310 $ 136,310
Compensation and benefits........................................... 89,117 $ (4,090)(4) 85,027
Syndicate settlements............................................... 32,102 32,102
Income taxes payable................................................ 14,418 14,418
Trade accounts payable.............................................. 2,075 2,075
Accrued expenses and other.......................................... 17,058 17,058
Securities sold, not yet purchased, at market value................... 8,801 8,801
Debt obligations...................................................... 11,252 11,252
Payable to partners of Hambrecht & Quist, L.P......................... 834 (834)(6) --
---------- ------- ----------
Total liabilities................................................. 311,967 (4,924) 307,043
---------- ------- ----------
Minority interest in Hambrecht & Quist Guaranty Finance, L.P.......... 4,375 (1,317)(2) 940
(2,118)(3)
---------- ------- ----------
Shareholders' equity and partners' capital:
Preferred stock..................................................... -- --
Common stock, less notes receivable................................. 23,990 (23,803)(5) 187
Additional paid-in capital.......................................... 44,814(5) 44,814
Retained earnings................................................... 104,469 6,255(5) 110,724
---------- ------- ----------
Total shareholders' equity........................................ 128,459 27,266 155,725
Hambrecht & Quist, L.P. partners' capital........................... 41,935 (2,400)(1)
(18,524)(3)
(21,011)(5)
---------- ------- ----------
Total shareholders' equity and partners' capital.................. 170,394 (14,669) 155,725
---------- ------- ----------
Total liabilities and shareholders' equity and partners'
capital.......................................................... $ 486,736 $ (23,028) $ 463,708
---------- ------- ----------
---------- ------- ----------
</TABLE>
See Notes to Pro Forma Combined Financial Statements.
F-3
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS COMBINED
---------- --------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Principal transactions................................................ $ 75,354 $ 75,354
Agency commissions.................................................... 29,094 29,094
Investment banking.................................................... 130,522 130,522
Corporate finance fees................................................ 31,947 31,947
Net investment gains from long-term investments....................... 19,087 $ (3,704)(3) 15,383
Other................................................................. 26,358 (108)(1) 26,159
(91)(2)
---------- ------- -----------
Total revenues...................................................... 312,362 (3,903) 308,459
---------- ------- -----------
Expenses:
Compensation and benefits............................................. 159,738 159,738
Brokerage and clearance............................................... 10,017 10,017
Occupancy and equipment............................................... 7,146 7,146
Communications........................................................ 7,310 7,310
Interest.............................................................. 1,041 1,041
Other................................................................. 19,717 19,717
---------- ------- -----------
Total expenses...................................................... 204,969 -- 204,969
---------- ------- -----------
Minority interest in income of subsidiary............................... 874 (510)(2) 364
---------- ------- -----------
Income before income tax provision.................................... 106,519 (3,393) 103,126
Income tax provision.................................................... 36,493 8,881(7) 45,374
---------- ------- -----------
Net income............................................................ $ 70,026 $ (12,274) $ 57,752
---------- ------- -----------
---------- ------- -----------
Pro forma weighted average shares outstanding (8)....................... 20,769
Pro forma earnings per share (8)........................................ $ 2.78
</TABLE>
See Notes to Pro Forma Combined Financial Statements.
F-4
<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 (144)(1) 16,809
(121)(2)
---------- ------- -----------
Total revenues...................................................... 220,023 (7,678) 212,345
---------- ------- -----------
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 -- 147,405
---------- ------- -----------
Minority interest in income of subsidiary............................... 719 (419)(2) 300
---------- ------- -----------
Income before income tax provision.................................... 71,899 (7,259) 64,640
Income tax provision.................................................... 22,461 5,981(7) 28,442
---------- ------- -----------
Net income............................................................ $ 49,438 $ (13,240) $ 36,198
---------- ------- -----------
---------- ------- -----------
Pro forma weighted average shares outstanding (8)....................... 19,827
Pro forma earnings per share (8)........................................ 1.83
</TABLE>
See Notes to Pro Forma Combined Financial Statements.
F-5
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
JUNE 30, 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
(1) Immediately prior to the Offering, LP will make a pro rata cash
distribution of $5,000 to a liquidating trust benefiting the partners of LP.
From the proceeds of the distribution, the partners of LP will repay
approximately $2,600 in notes receivable currently recorded as a reduction to
partners' capital. The net reductions to cash and cash equivalents and
shareholders' equity and partners' capital will be $2,400.
Interest income earned at approximately 6 percent during the period ended
June 30, 1996 and the year ended September 30, 1995, has been reduced by $108
and $144, respectively, to reflect the reduction in interest-earning cash
equivalents.
(2) Immediately prior to the Offering, H&Q will purchase an additional 17.5
percent of Guaranty Finance from other members (including 15 percent from H&Q's
CEO) for $2,024 cash. Such transaction will be accounted for as a purchase of
minority interest. The amount paid represents the fair value of the 17.5 percent
pro rata interest, which exceeds the pro rata carrying value of Guaranty Finance
by $707. As a result of this transaction, cash and cash equivalents will be
reduced by the amount of the $2,024 cash payment, minority interest liability
will be reduced by the $1,317 carrying value of the 17.5 percent interest
purchased and long-term investments carried at cost by Guaranty Finance will be
increased by the $707 difference between the amount paid and the carrying value.
Interest income earned at approximately 6 percent during the period ended
June 30, 1996 and the year ended September 30, 1995, has been reduced by $91 and
$121, respectively, to reflect the reduction in interest-earning cash
equivalents.
Minority interest expense recorded for the 30 percent minority interest in
Guaranty Finance's net income for the period ended June 30, 1996 and the year
ended September 30, 1995, has been reduced by $510 and $419, respectively, to
reflect the purchase of an additional 17.5 percent interest in Guaranty Finance.
(3) Immediately prior to the Offering, Guaranty Finance and LP will make pro
rata distributions of securities totaling $20,642 to their partners.
Guaranty Finance will distribute securities with a carrying and fair value
of $7,061. As the 70 percent limited partner of Guaranty Finance, LP will
receive $4,943 of securities and the 30 percent general partner of Guaranty
Finance will receive $2,118 of securities.
LP will distribute 519,107 shares of BISYS and other securities with a fair
value and carrying value of $13,581 to a liquidating trust benefiting the
partners of LP along with the $4,943 of securities distributed to LP by Guaranty
Finance.
Long-term investments will be reduced by the amount of the securities
distributed by Guaranty Finance and LP as follows:
<TABLE>
<S> <C>
Securities distributed by Guaranty Finance:
To Guaranty Finance's general partner.................... $ 2,118
To LP and then distributed to LP partners................ 4,943
Securities distributed by LP............................... 13,581
---------
$ 20,642
---------
---------
</TABLE>
Minority interest liability will be reduced by the $2,118 of securities
distributed to Guaranty Finance's minority interestholder. Shareholders' equity
and partners' capital will be reduced by $18,524 of securities distributed by
LP, including the $4,943 distributed to LP by Guaranty Finance.
F-6
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
Net investment gains related to the securities distributed and recorded
during the period ended June 30, 1996 and the year ended September 30, 1995 have
been reduced by $3,704 and $7,413, respectively.
(4) In June 1996, H&Q distributed its limited partner interest in LP to a
liquidating trust benefiting certain current and former employees. In July 1996,
H&Q will distribute cash of $4,090 to the recipients of the LP limited partner
interest. Cash and cash equivalents and the recorded compensation payable for
the distribution will be reduced by $4,090.
(5) Prior to the Offering, all shares of H&Q will be exchanged for four
shares of Group Delaware, and H&Q will become a subsidiary of Group Delaware.
Also, LP will be merged into Group Delaware and the LP partners will receive
Group Delaware shares in exchange for their limited partnership interests. Both
the transfer of H&Q shares for Group Delaware shares and the merger of LP into
Group Delaware will be accounted for at the respective entities' carrying values
since each individual party to the Restructuring, as a shareholder and a
partner, owns the same pro rata interest of H&Q and LP, respectively, and will
be restructuring their interests based on non-cash exchanges of common stock and
partnership interests for shares of Group Delaware stock. The pro forma
adjustments resulting from the transfer and the merger are as follows:
<TABLE>
<S> <C>
Common stock, less notes receivable............................... $ (23,803)
Additonal paid-in capital......................................... 44,814
Hambrecht & Quist, L.P. partners' capital......................... (21,011)
---------
$ --
---------
---------
</TABLE>
Also, as a result of the merger of LP into H&Q, deferred income tax assets will
increase by approximately $6,255 for the tax effect of LP's previously
unrecorded temporary differences. As a partnership, LP was not subject to taxes
that result in temporary differences. The related income tax benefit of $6,255
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 including the merger.
(6) Immediately prior to the Offering, the $834 liability to partners of LP
will be paid in cash. Cash and cash equivalents and the liability to partners
will be reduced by $834. An additional cash payment will be made to partners of
LP equal to 50 percent of LP's net profits from July 1, 1996 to the date of the
merger of LP into H&Q.
(7) 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.
(8) 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 and LP merger.
F-7
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
COMBINED BALANCE SHEETS
AS OF SEPTEMBER 30, 1995, AND JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, JUNE 30,
1995 1996 1996(A)
-------------- -------------- -------------
<S> <C> <C> <C>
(UNAUDITED) (PRO FORMA)
<CAPTION>
(IN
THOUSANDS)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 34,754,568 $ 29,330,982 $ 19,983
Receivables:
Customers................................................. 100,435,213 192,740,427 192,740
Lewco Securities Corp..................................... 41,990,309 60,336,730 60,337
Syndicate managers........................................ 9,538,902 21,369,191 21,369
Related parties........................................... 3,340,955 9,102,834 9,103
Lease..................................................... 3,255,635 4,130,773 4,131
Other..................................................... 3,274,378 12,616,266 12,617
Marketable trading securities, at market value.............. 26,224,167 30,343,943 30,344
Long-term investments, at estimated fair value.............. 70,822,157 85,942,718 66,007
Deferred income taxes....................................... 10,627,856 27,495,034 33,750
Furniture, equipment and leasehold improvements, net of
accumulated depreciation and amortization.................. 6,009,696 10,094,740 10,095
Leased assets, net of accumulated depreciation.............. 8,700,289 2,576,154 2,576
Exchange memberships, at cost............................... 656,000 656,000 656
-------------- -------------- -------------
Total assets............................................ $ 319,630,125 $ 486,735,792 $ 463,708
-------------- -------------- -------------
-------------- -------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY AND PARTNERS' CAPITAL
Payables:
Customers................................................. $ 71,654,381 $ 136,310,364 $ 136,310
Compensation and benefits................................. 46,227,242 89,116,709 85,027
Syndicate settlements..................................... 25,409,777 32,101,991 32,102
Income taxes payable...................................... 6,368,059 14,418,469 14,418
Trade accounts payable.................................... 944,775 2,074,472 2,075
Customer lease deposits................................... 478,603 -- --
Accrued expenses and other................................ 9,848,303 17,058,007 17,058
Securities sold, not yet purchased, at market value......... 25,218,036 8,801,200 8,801
Debt obligations............................................ 13,770,737 11,251,500 11,252
Payable to partners of Hambrecht & Quist, L.P............... 10,445,367 834,119 --
-------------- -------------- -------------
Total liabilities....................................... 210,365,280 311,966,831 307,043
-------------- -------------- -------------
Minority interest in Hambrecht & Quist Guaranty Finance,
L.P........................................................ 3,802,762 4,375,247 940
-------------- -------------- -------------
Commitments and contingencies
Shareholders' equity and partners' capital:
Preferred stock........................................... --
Common stock, less notes receivable....................... 17,752,871 23,990,205 187
Additional paid-in capital................................ 44,814
Retained earnings......................................... 72,205,112 104,468,856 110,724
-------------- -------------- -------------
Total shareholders' equity.............................. 89,957,983 128,459,061 155,725
Hambrecht & Quist, L.P. partners' capital................. 15,504,100 41,934,653
-------------- -------------- -------------
Total shareholders' equity and partners' capital........ 105,462,083 170,393,714 155,725
-------------- -------------- -------------
Total liabilities and shareholders' equity and partners'
capital................................................ $ 319,630,125 $ 486,735,792 $ 463,708
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>
- ------------------------
(a) Refer to the Pro Forma Combined Financial Statements and the notes thereto,
contained elsewhere in this Prospectus.
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
--------------- --------------
(UNAUDITED)
<S> <C> <C>
REVENUES:
Principal transactions...................................................... $ 36,315,833 $ 75,354,041
Agency commissions.......................................................... 15,910,962 29,094,102
Investment banking.......................................................... 39,400,246 130,521,396
Corporate finance fees...................................................... 14,529,947 31,946,871
Net investment gains from long-term investments............................. 18,541,835 19,087,264
Other....................................................................... 11,988,004 26,358,141
--------------- --------------
Total revenues.......................................................... 136,686,827 312,361,815
--------------- --------------
EXPENSES:
Compensation and benefits................................................... 68,750,392 159,738,075
Brokerage and clearance..................................................... 6,678,314 10,017,157
Occupancy and equipment..................................................... 5,510,580 7,145,896
Communications.............................................................. 5,533,161 7,309,838
Interest.................................................................... 726,594 1,041,166
Other....................................................................... 10,789,510 19,716,814
--------------- --------------
Total expenses.......................................................... 97,988,551 204,968,946
--------------- --------------
Income before minority interest and income tax provision................ 38,698,276 107,392,869
MINORITY INTEREST IN INCOME OF SUBSIDIARY..................................... 454,154 873,742
--------------- --------------
Income before income tax provision...................................... 38,244,122 106,519,127
--------------- --------------
INCOME TAX PROVISION.......................................................... 11,810,392 36,493,611
--------------- --------------
Net income.............................................................. $ 26,433,730 $ 70,025,516
--------------- --------------
--------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-9
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
------------- --------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES............................................ $ (1,175,314) $ 10,974,359
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of long-term investments............................................ (7,662,263) (21,830,927)
Proceeds from sales/distributions of long-term investments.................... 10,758,032 25,797,630
Purchases of furniture, equipment and leasehold improvements.................. (2,230,530) (6,057,367)
Purchases of leased assets.................................................... (4,283,650) --
Proceeds from sales of leased assets.......................................... 627,357 7,725,273
Increase in lease receivables................................................. (966,781) (875,138)
------------- --------------
Net cash and cash equivalents provided by (used in) investing
activities............................................................... (3,757,835) 4,759,471
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt obligations................................................ 6,341,982 14,879,539
Repayments of debt obligations................................................ (4,600,514) (17,398,776)
Proceeds from sales of common stock and partners' capital contributions....... 3,623,921 10,178,871
Repurchases of common stock and partners' capital withdrawals................. (1,228,337) (4,031,157)
Partners' capital distributions............................................... (995,971) (24,485,893)
Distributions to minority interestholder...................................... (210,000) (300,000)
------------- --------------
Net cash and cash equivalents provided by (used in) financing
activities............................................................... 2,931,081 (21,157,416)
------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................ (2,002,068) (5,423,586)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................ 6,782,335 34,754,568
------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...................................... $ 4,780,267 $ 29,330,982
------------- --------------
------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-10
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
CONDENSED NOTES TO COMBINED FINANCIAL STATEMENTS
JUNE 30, 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 and the proforma combined financial
statements and 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 June 30, 1996, and the combined results of operations and cash flows
for the nine months ended June 30, 1995 and 1996.
NOTE 2 -- RECEIVABLES FROM RELATED PARTIES
Receivables from related parties include receivables of $2,912,333 and
$1,398,799 at September 30, 1995, and June 30, 1996, respectively, from Asia
Pacific. On April 1, 1996, H&Q entered into an agreement (the Recapitalization)
with Asia Pacific to reduce H&Q's ownership of Asia Pacific from 50 percent to
15 percent. Such reduction in ownership will be accomplished through the
issuance of shares to individual shareholders of Asia Pacific in consideration
of $850,000. H&Q will lend the $850,000 required for such share purchases. Also,
as part of the Recapitalization, H&Q's receivables from Asia Pacific will be
restructured into interest- and noninterest-bearing term notes receivable.
Also included in receivables from related parties at June 30, 1996, are
receivables of $6,781,883 for profit participation distributions and $922,152
for advances made to employees.
NOTE 3 -- MARKETABLE TRADING SECURITIES AND SECURITIES SOLD, NOT YET PURCHASED
At September 30, 1995, and June 30, 1996, marketable trading securities and
securities sold, not yet purchased, consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1995 1996
------------- -------------
<S> <C> <C>
Marketable trading securities--
Equity securities.................................................... $21,385,307 $ 19,253,193
Convertible bonds.................................................... 3,941,812 9,655,170
Options.............................................................. 897,048 1,435,580
------------- -------------
$26,224,167 $ 30,343,943
------------- -------------
------------- -------------
Securities sold, not yet purchased--
Equity securities.................................................... $24,532,549 $ 8,496,991
Options.............................................................. 685,487 304,209
------------- -------------
$25,218,036 $ 8,801,200
------------- -------------
------------- -------------
</TABLE>
F-11
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
CONDENSED NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
NOTE 4 -- LONG-TERM INVESTMENTS
At September 30, 1995, and June 30, 1996, the Company's long-term
investments at estimated fair value consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1995 1996
------------- -------------
<S> <C> <C>
Marketable equity securities available for sale by Guaranty Finance.... $10,120,625 $ 15,831,087
Marketable equity securities--other.................................... 10,182,058 21,296,481
BISYS Group, Inc. common stock--unrestricted........................... 6,000,000 --
------------- -------------
Total marketable investments....................................... 26,302,683 37,127,568
------------- -------------
BISYS Group, Inc. common stock--restricted............................. 21,481,390 21,260,040
Nonmarketable securities and investment partnership interests.......... 14,906,421 19,844,154
Affiliated venture capital funds....................................... 4,790,144 4,694,917
Venture capital funds managed by others................................ 1,231,240 905,761
Lewco Securities--
Equity ownership..................................................... 1,810,279 1,810,278
Subordinated note receivable......................................... 300,000 300,000
------------- -------------
Total nonmarketable investments.................................... 44,519,474 48,815,150
------------- -------------
Total long-term investments........................................ $70,822,157 $ 85,942,718
------------- -------------
------------- -------------
</TABLE>
The cost of the Company's long-term investments at September 30, 1995, and
June 30, 1996, was $32,432,684 and $50,926,831, respectively.
Following is an analysis of the net investment gains for the periods ended
June 30, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Realized gains......................................................... $ 1,994,000 $ 22,942,603
Change in unrealized gains and losses, net............................. 16,547,835 (3,855,339)
------------- -------------
Net investment gains from long-term investments.................... $ 18,541,835 $ 19,087,264
------------- -------------
------------- -------------
</TABLE>
At June 30, 1996, both H&Q and H&Q LLC own restricted shares of BISYS Group
Inc. (BISYS) common stock (which represents approximately 3.3 percent of the
total BISYS common stock outstanding at June 30, 1996). BISYS is a publicly
traded company subject to the Securities Act of 1933 which requires the public
filing of quarterly and annual financial statements on Form 10-Q and Form 10-K,
respectively. H&Q owns shares with a carrying value of $7,678,903 and H&Q LLC
owns shares with a carrying value of $13,581,137. Included in net investment
gains are realized and unrealized gains on BISYS holdings of $13,140,497 and
$14,687,227 at June 30, 1995 and 1996, respectively.
The cost and estimated fair values of investments in marketable equity
securities available for sale by Guaranty Finance at September 30, 1995 and June
30, 1996 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1995 1996
------------- -------------
<S> <C> <C>
Cost...................................................................... $ 7,239,834 $ 12,864,732
Gross unrealized gains.................................................... 3,497,951 4,110,129
Gross unrealized losses................................................... (617,160) (1,143,774)
------------- -------------
Estimated fair value...................................................... $10,120,625 $ 15,831,087
------------- -------------
------------- -------------
</TABLE>
Gross proceeds and gross realized gains from sales of investments of
marketable equity securities available for sale by Guaranty Finance for the
period ended June 30, 1996 total $3,499,294 and $1,558,405, respectively. There
were no realized losses during the period.
F-12
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
CONDENSED NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
NOTE 5 -- LEASED ASSETS
On May 1, 1996, Guaranty Finance sold its leased land and building with a
net book value of $4,296,990 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.
NOTE 6 -- RELATED-PARTY TRANSACTIONS
INVESTMENT TRANSACTIONS
Included in other revenues are asset management fees that include management
fees from closed-end mutual funds and venture capital funds, and profit
participation distributions from venture capital funds of $4,812,738 and
$12,443,646 for the periods ended June 30, 1995 and 1996, respectively.
EMPLOYEE NOTES RECEIVABLE
As of September 30, 1995, and June 30, 1996, H&Q's notes receivable from
employees for their stock purchases were $7,659,714 and $10,464,219,
respectively, and LP's notes receivable from partners for their capital
contributions were $2,232,013 and $8,307,513, respectively.
GUARANTY FINANCE OPTION BUY-OUT
Included in compensation and benefits expense for the period ended June 30,
1996 were payments totaling $2,015,000 made by Guaranty Finance to the general
partner and certain employees of Guaranty Finance and an employee of H & Q. Such
payments were made to cancel 1,000 options outstanding to purchase Guaranty
Finance limited partner partnership units held by such optionholders. The option
buy-out price was based on the estimated fair market value of the options.
NOTE 7 -- STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
During the period ended June 30, 1996, 2,080,348 shares of H&Q common stock
were issued to employees at either the employees' option exercise price or fair
market value in exchange for cash and notes receivable (see Note 6) totaling
$11,379,384. Also during the period ended June 30, 1996, 608,368 shares were
repurchased from terminated employees at fair market value for $3,610,813.
Also during the period, LP partners' capital contributions and withdrawals
totaled $11,223,568 and $420,344, respectively. Included in the LP partners'
capital contributions of $11,223,568 are contributions by H&Q of LP limited
partner units to a liquidating trust benefiting certain current and former
employees. Such LP limited partner units were valued at $3,692,129. Partners'
capital distributions of $14,874,645 were accrued as partners' capital
distribution payable and as a deduction to partners' capital. Approximately
$21,023,733 in partners' capital distributions were made during the nine months
ended June 30, 1996.
NOTE 8 -- EMPLOYEE BENEFIT PLANS
STOCK OPTION PLANS
During the period ended June 30, 1996, the Company amended the 1995 stock
plan to provide for the granting of 4,972,000 options to purchase Company stock.
F-13
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
CONDENSED NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
NOTE 8 -- 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, 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............................................................. 4,530,320 $6.52 - $13.75
Exercised........................................................... (1,609,628) $2.10 - $ 4.74
Canceled............................................................ (157,600) $2.62 - $ 5.54
-----------
Outstanding at June 30, 1996.......................................... 5,697,520 $2.04 - $13.75
-----------
-----------
</TABLE>
During the nine months ended June 30, 1996, 625,988 options were granted at
an exercise price below fair market value on the date of grant, resulting in a
$1,165,903 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 nine months ended June
30, 1995 and 1996, compensation expense recorded for SARs awards was $2,715,216
and $6,120,078, respectively.
The total SARs liability at June 30, 1996, included in compensation and
benefits payable, will be paid out as follows:
<TABLE>
<S> <C>
Fiscal 1997............................................ $4,266,633
Fiscal 1998............................................ 3,878,588
Fiscal 1999............................................ 2,632,826
----------
Total.............................................. $10,778,047
----------
----------
</TABLE>
NOTE 9 -- NET CAPITAL REQUIREMENTS
At September 30, 1995, and June 30, 1996, H&Q LLC's regulatory net capital
of $30,286,118 and $40,205,520, respectively, was 28 percent and 20 percent,
respectively, of aggregate debit items, and its net capital in excess of the
minimum required was $28,191,905 and $36,095,837, respectively.
NOTE 10 -- CONTINGENCIES
Lewco Securities Corp. (Lewco) 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 $4,285,536 at June 30, 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 codefendant 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, comanager or member of the
underwriting syndicate. These cases involve claims under federal and state
F-14
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
CONDENSED NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
NOTE 10 -- CONTINGENCIES (CONTINUED)
securities laws and seek compensatory and other monetary damages. It is possible
that H&Q 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 financial statements taken as a whole.
H&Q has indemnified certain of its officers, directors and agents, and
certain of its affiliates, as permitted under California law. Under these
provisions, H&Q 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
June 30, 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
financial statements taken as a whole.
F-15
<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-16
<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-17
<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-18
<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 GROUP
--------------------------------------------------------------
NUMBER OF
COMMON COMMON NOTES RETAINED SUBTOTAL
SHARES STOCK RECEIVABLE EARNINGS H&Q GROUP
---------- ----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1992....... 11,817,908 $ 9,817,433 $(1,153,443) $24,555,009 $33,218,999
<S> <C> <C> <C> <C> <C>
Sales of common stock........... 1,467,408 3,721,365 (1,677,273) -- 2,044,092
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 (295,093) -- 3,047,803
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)
Net income...................... -- -- -- 13,723,899 13,723,899
Partners' capital distributions
payable........................ -- -- -- -- --
---------- ----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1994....... 12,475,188 13,078,867 (966,315) 50,929,131 63,041,683
Adoption of SFAS 115 by Guaranty
Finance........................ -- -- -- -- --
Sales of common stock or
partners' capital additions.... 2,963,892 14,406,194 (7,935,534) -- 6,470,660
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)
Net income...................... -- -- -- 23,672,741 23,672,741
Partners' capital
distributions.................. -- -- -- -- --
Partners' capital distributions
payable........................ -- -- -- -- --
Net change in unrealized
investment gains of Guaranty
Finance........................ -- -- -- -- --
---------- ----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1995....... 14,609,188 $25,412,585 $(7,659,714) $72,205,112 $89,957,983
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
<CAPTION>
HAMBRECHT & QUIST, L.P.
-------------------------------------------------------------------
UNREALIZED
PARTNERS' NOTES DISTRIBUTIONS GAINS, NET SUBTOTAL H&Q COMBINED
CAPITAL RECEIVABLE PAYABLE (NOTE 2) LP TOTAL
----------- ----------- -------------- ---------- ------------ ------------
BALANCE, SEPTEMBER 30, 1992....... $ 33,218,999
<S> <C> <C> <C> <C> <C> <C>
Sales of common stock........... 2,044,092
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 $ (69,526) $ -- $ -- $ 1,252,798 4,300,601
Reductions of notes received for
purchases of common stock...... -- -- -- -- -- 970,670
Repurchases of common stock or
partners' capital
withdrawals.................... (217,137) -- -- -- (217,137) (5,207,687)
Net income...................... 2,193,294 -- -- -- 2,193,294 15,917,193
Partners' capital distributions
payable........................ -- -- (2,679,918) -- (2,679,918) (2,679,918)
----------- ----------- -------------- ---------- ------------ ------------
BALANCE, SEPTEMBER 30, 1994....... 3,298,481 (69,526) (2,679,918) -- 549,037 63,590,720
Adoption of SFAS 115 by Guaranty
Finance........................ -- -- -- 2,134,458 2,134,458 2,134,458
Sales of common stock or
partners' capital additions.... 2,557,915 (2,162,487) -- -- 395,428 6,866,088
Reductions of notes received for
purchases of common stock...... -- -- -- -- -- 1,242,135
Repurchases of common stock or
partners' capital
withdrawals.................... (1,241,100) -- -- -- (1,241,100) (5,710,336)
Net income...................... 25,765,510 -- -- -- 25,765,510 49,438,251
Partners' capital
distributions.................. (4,186,804) -- 4,186,804 -- -- --
Partners' capital distributions
payable........................ -- -- (11,952,253) -- (11,952,253) (11,952,253)
Net change in unrealized
investment gains of Guaranty
Finance........................ -- -- -- (146,980 ) (146,980) (146,980)
----------- ----------- -------------- ---------- ------------ ------------
BALANCE, SEPTEMBER 30, 1995....... $26,194,002 $(2,232,013) $ (10,445,367) $1,987,478 $ 15,504,100 $105,462,083
----------- ----------- -------------- ---------- ------------ ------------
----------- ----------- -------------- ---------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-19
<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-20
<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 long-term investments, net, were reclassified from/(to)
marketable securities.............................................. -- (656,084) 4,286,573
H&Q common stock sales and LP partners' capital contributions were
made with notes receivable from employees.......................... 1,677,273 364,619 10,098,021
H&Q common stock was issued to employees in exchange for reductions
in compensation and benefits payable............................... -- 1,355,290 3,055,280
Reductions to LP 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 Guaranty
Finance were recorded as increases in equity and minority
interest........................................................... -- -- 2,880,791
Subordinated notes payable were issued by RvR Securities 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-21
<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, Hambrecht & Quist or the Company),
and Hambrecht & Quist L.P., a California limited partnership (LP). The entities
are presented on a combined basis without revaluation, as the entities have been
operating under common ownership and common management and, in fiscal 1996, H&Q
and LP will make distributions and restructure their operations, which will
result in one surviving holding company, Hambrecht & Quist Group, a Delaware
corporation (Group Delaware).
PRIOR TO RESTRUCTURING
H&Q is owned primarily by its key employees. As of September 30, 1995,
approximately 13.70 percent of H&Q 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'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 operates primarily as a holding company with the following 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 Securities), 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 (Capital Management), is a wholly owned registered
investment adviser. Capital Management 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
(Venture Partners), is a wholly owned venture capital fund management
partnership.
Other affiliates of the Company are not consolidated and are accounted for
on an equity basis, which approximates fair value. H&Q owns a 50.0 percent
interest in Hambrecht & Quist Asia Pacific, Ltd., a British Virgin Islands
limited liability company (Asia Pacific). Asia Pacific 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 proportionately by both owners
based on the volume of transactions processed on their behalf. These costs are
reported as expenses in the combined statement of operations. Other less
significant affiliated investment and venture capital partnerships are recorded
in long-term investments at their estimated fair value (see Note 2).
LP operates primarily as a holding partnership for certain current and prior
operating affiliates of H&Q. H&Q is the 1 percent general partner of LP, and the
same shareholders of H&Q are the limited partners. As of September 30, 1995, H&Q
also owns a 14.76 percent limited partnership interest. Similar to H&Q, all
partnership unit sales and repurchases have been recorded at the partnership's
formula value, as defined in the Hambrecht & Quist Limited Partnership
Agreement.
F-22
<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)
LP owns the remaining 30 percent interest of H&Q LLC and a 70 percent
limited partner interest in Hambrecht & Quist Guaranty Finance, L.P., a
California limited partnership (Guaranty Finance). Guaranty Finance is
consolidated in the combined financial statements. 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 and an independent
third party and is reported as minority interest in the combined financial
statements. 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 emerging technology,
biotechnology and healthcare companies. 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 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.
Guaranty Finance will distribute securities on a pro rata basis to its
partners. Such distribution will be accounted for as a reduction of Guaranty
Finance's partners' capital at the securities' carrying values. Guaranty Finance
will merge into Hambrecht & Quist Guaranty Finance, LLC (H&Q GF LLC), a new
Delaware limited liability company. H&Q will purchase an additional 17.5 percent
of H&Q GF LLC from other members (including 15 percent from H&Q's CEO). Such
purchase will be accounted for as a purchase of minority interest.
H&Q will distribute its limited partnership interest in LP primarily to a
liquidating trust benefiting certain current and former employees. Such planned
distribution has been recorded as compensation expense in the accompanying
financial statements at the estimated fair value of the limited partnership
interest distributed. H&Q LLC will distribute cash and securities to LP,
resulting in a reduction in LP's ownership in H&Q LLC. LP will distribute cash
and securities to a liquidating trust benefiting the partners of LP. Such
distributions by H&Q LLC and LP will be accounted for as reductions to members'
equity and partners' capital, respectively, at the securities' carrying values.
All shares of H&Q will be exchanged for four shares of Group Delaware, a new
Delaware holding company, and H&Q will become a subsidiary of 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. LP will be merged
into Group Delaware and the partners of LP who do not perfect their statutory
dissenters' rights under the California Corporations Code will receive shares of
the Company's common stock. Both the transfer of H&Q shares for Group Delaware
shares and the merger of LP into Group Delaware will be accounted for at the
respective entities' carrying values since each individual party to the
Restructuring, as a shareholder and a partner, owns the same pro rata interest
of H&Q and LP, respectively, and will be restructuring their interests based on
non-cash exchanges of common stock and partnership interests for shares of Group
Delaware stock.
Group Delaware will transfer H&Q LLC and H&Q GF LLC to H&Q.
POST-TRANSACTIONS STRUCTURE
As a consequence of the foregoing and other Transactions, Group Delaware
will consolidate H&Q LLC and H&Q GF LLC. Its ownership of and accounting for
other subsidiaries and affiliates will be the same as H&Q and will be unaffected
by the Transactions listed above. LP will cease to exist.
F-23
<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
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.
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
equity and debt securities (which include restricted securities of publicly
traded companies, securities of private companies and investment partnership and
other venture capital interests).
H&Q 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 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 Guaranty
Finance. Guaranty Finance primarily owns marketable equity securities available
for sale. Effective October 1, 1994, Guaranty Finance adopted Statement of
Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain
Investments in Debt and Equity Securities." As required by SFAS 115, Guaranty
Finance 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. LP's
recorded portion of the unrealized net holding gain was $2,134,458 and is
recorded in LP's partners' capital. At September 30, 1995, Guaranty Finance's
unrealized net holding gain was $2,880,791. LP's recorded
F-24
<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)
portion of the unrealized net holding gain was $1,987,478 and is recorded in
LP's partners' capital. The minority interest holder's recorded portion of the
unrealized net holding gain was $893,313 and is recorded in Minority Interest in
Guaranty Finance. Prior to October 1, 1994, Guaranty Finance 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.
LEASE RECEIVABLES AND LEASED ASSETS
Guaranty Finance 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 LP. Pursuant to applicable federal and state income
tax regulations, all income or loss of LP is reportable by each partner directly
to the taxing authority.
PARTNERS' CAPITAL DISTRIBUTIONS PAYABLE
In accordance with the terms of the LP partnership agreement, an accrual has
been made for distributions to 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
F-25
<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)
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.
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 Asia Pacific (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-26
<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 available for sale by Guaranty Finance....... $ 4,921,645 $ 10,120,625
Marketable equity securities--other....................................... 5,318,434 10,182,058
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
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 $32,432,684, 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 and H&Q LLC own shares of BISYS Group, Inc. (BISYS) common stock
(which represents approximately 6.1 percent of the total BISYS common stock
outstanding at September 30, 1995). BISYS is a publicly traded company subject
to the Securities Act of 1933 which requires the public filing of quarterly and
annual financial statements on Form 10-Q and Form 10-K, respectively. As of
September 30, 1995, H&Q 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 investments in BISYS
common stock of $2,190,000, $5,457,500 and $19,948,390 for 1993, 1994 and 1995,
respectively.
The cost and estimated fair values of investments in marketable equity
securities available for sale by Guaranty Finance at September 31, 1995 are as
follows:
<TABLE>
<CAPTION>
1995
-------------
<S> <C>
Cost..................................................................................... $ 7,239,834
Gross unrealized gains................................................................... 3,497,951
Gross unrealized losses.................................................................. (617,160)
-------------
Estimated fair value..................................................................... $ 10,120,625
-------------
-------------
</TABLE>
F-27
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
NOTE 6 -- LONG-TERM INVESTMENTS (CONTINUED)
Gross proceeds, gross realized gains, and gross realized losses from sales
of investments in marketable equity securities available for sale by Guaranty
Finance for the year ended September 30, 1995 total $2,926,358, $1,943,374 and
$73,373, 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.
NOTE 8 -- LEASING ACTIVITIES
Guaranty Finance negotiates lease lines, purchases equipment, property and
leasehold improvements for lease to customers under the lines and administers
them. Guaranty Finance 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. Guaranty Finance'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>
F-28
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
NOTE 8 -- LEASING ACTIVITIES (CONTINUED)
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>
Guaranty Finance'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.
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); 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); 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) (Guaranty Finance); interest
at prime plus 0.50 percent (9.25 percent at September 30, 1995); collateralized
in full by Guaranty Finance's assets, except for cash and marketable securities;
due December 10, 1995 -- 3,515,000
Notes payable--
Bank note payable (H&Q); 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); 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 (Guaranty Finance); 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>
F-29
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
NOTE 9 -- DEBT OBLIGATIONS (CONTINUED)
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>
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--
Bonus accruals................................................ $ 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-30
<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
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. Venture Partners 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 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.
Guaranty Finance provides lease financing to companies in which H&Q, its
subsidiaries and its affiliates have equity investments.
OPERATING ADVANCES
H&Q pays operating expenses on behalf of certain affiliates, primarily Asia
Pacific (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 LP partners represent amounts due from partners, including
H&Q, for their capital contributions to LP. Such amounts are recorded as a
reduction of partners' capital. Receivables from LP partners were $69,526 and
$2,232,013 at September 30, 1994 and 1995, respectively.
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.
F-31
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
NOTE 11 -- RELATED-PARTY TRANSACTIONS (CONTINUED)
The interest on this note is paid quarterly at the prime rate, with the
principal balance due December 31, 1999. 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.
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 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-32
<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'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-33
<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 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 Securities is also subject to the Rule.
RvR Securities has also elected to compute its net capital requirement under the
alternative method. RvR Securities' minimum net capital requirement is $250,000.
At September 30, 1994 and 1995, RvR Securities 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.
F-34
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
NOTE 14 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 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 financial statements taken as a whole.
H&Q has indemnified certain of its officers, directors, agents and certain
of its affiliates as permitted under California law. Under these provisions, H&Q
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 financial
statements taken as a whole.
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
F-35
<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)
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.
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-36
<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.................................. 6
The Company................................... 18
Restructuring................................. 19
Use of Proceeds............................... 21
Dividend Policy............................... 21
Capitalization................................ 22
Dilution...................................... 23
Selected Combined Financial Data.............. 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 26
Business...................................... 34
Regulation.................................... 55
Net Capital Requirements...................... 58
Management.................................... 60
Certain Transactions.......................... 68
Principal Stockholders........................ 72
Description of Capital Stock.................. 73
Shares Eligible for Future Sale............... 74
Underwriting.................................. 76
Legal Matters................................. 77
Experts....................................... 77
Additional Information........................ 77
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.
3,500,000 SHARES
[LOGO]
COMMON STOCK
--------------
PROSPECTUS
--------------
HAMBRECHT & QUIST LLC
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........................................................................... 8,500
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............................................................................. 77,813
------------
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 Bylaws (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 June 30, 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:
(1) Group California sold a total of 5,730,012 shares of its Common Stock to
consultants, employees and directors of the Registrant and its subsidiaries
in a series of transactions, for aggregate consideration of $23,296,064 in
the form of cash and promissory notes.
(2) Group California granted options to purchase a total of 4,325,640 shares of
Common Stock to employees and directors of the Registrant and its
subsidiaries in a series of transactions under stock plans.
(3) Group California granted options to purchase 1,410,532 shares of Common
Stock to officers outside of stock plans.
(4) LP sold limited partnership units to each person holding stock or options of
the Company under a unit plan, with one LP unit issued for each 50 shares of
outstanding stock or stock subject to outstanding options.
(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 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-1
<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 Group,
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 -- Form of Registrant's Bylaws to be effective upon the closing of this offering.
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 Equity 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 between The Equitable Life Assurance Society of the United States and Hambrecht & Quist L.L.C.
dated January 27, 1988, as amended.+
10.06 -- Assignment of Lease from Apple Computer, Inc. to Hambrecht & Quist L.L.C. dated March 27, 1996.+
10.07 -- Lease between Hambrecht & Quist L.L.C. and Rowes Wharf Associates dated June 22, 1987, as amended.+
10.08 -- Lease, Riders, and Addenda between 230 Park Avenue Associates and Hambrecht & Quist L.L.C. 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 1996 Bonus and Deferred Sales Compensation 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.+
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- -------------------------------------------------------------------------------------------------------
10.18 -- Letter Agreement between Hambrecht & Quist Group and H&Q Asia Pacific, Ltd., dated April 1, 1996.+
<C> <C> <S>
10.19 -- Form of Indemnification Agreement.+
10.20 -- Lease between The Equitable Life Assurance Society of the United States and Hambrecht & Quist LLC dated
November 9, 1988, as amended.
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.+
</TABLE>
- ------------------------
+ Previously filed.
* 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.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment Number 2 to 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 2nd day of August 1996.
HAMBRECHT & QUIST GROUP, INC.,
a Delaware corporation
By: /s/_DANIEL H. CASE III____________
Daniel H. Case III,
President and Chief Executive
Officer
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 August 2, 1996
/s/DANIEL H. CASE III President, Chief Executive Officer and
(Daniel H. Case III) Director (Principal Executive Officer) August 2, 1996
/s/WILLIAM R. TIMKEN*
(William R. Timken) Vice Chairman of the Board of Directors August 2, 1996
Vice President and Chief Financial
/s/RAYMOND J. MINEHAN* Officer (Principal Financial and August 2, 1996
(Raymond J. Minehan) Accounting Officer)
/s/WILLIAM E. MAYER*
(William E. Mayer) Director August 2, 1996
/s/HOWARD B. HILLMAN*
(Howard B. Hillman) Director August 2, 1996
/s/EDMUND H. SHEA, JR.*
(Edmund H. Shea, Jr.) Director August 2, 1996
/s/LAWRENCE J. STUPSKI*
(Lawrence J. Stupski) Director August 2, 1996
* By: /s/DANIEL H. CASE III
Daniel H. Case III
Attorney-in-fact
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- -------------------------------------------------------------------------------------------------------
<C> <C> <S>
23.01 -- Consent of Independent Public Accountants.
</TABLE>
<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.
ARTHUR ANDERSEN LLP
San Francisco, California
August 3, 1996
