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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF
THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-11855
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HAMBRECHT & QUIST GROUP
(Exact name of Registrant as specified in its charter)
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<S> <C>
DELAWARE 94-3246636
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
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ONE BUSH STREET
SAN FRANCISCO, CA 94104
(Address of principal executive offices, including zip code)
(415) 439-3000
Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act: None
Securities registered pursuant to Section 12(b) of the Act:
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<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
- -------------------------------------- --------------------------------------
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Common Stock, par value $0.01 per New York Stock Exchange
share Pacific Exchange
</TABLE>
--------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of voting stock held by nonaffiliates of the
Registrant was approximately $503,892,690 as of December 22, 1997, based upon
the last sale price as reported on the New York Stock Exchange on such date.
Number of shares of common stock issued and outstanding as of December 22,
1997: 24,067,731.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be filed with the Securities
and Exchange Commission no later than 120 days after the Registrant's fiscal
year ended September 30, 1997 and to be delivered to stockholders in connection
with the Annual Meeting of Stockholders to be held February 24, 1997 and the
1997 Annual Report to Stockholders are incorporated by reference into Parts II
and III of this Form 10-K.
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ITEM 1. BUSINESS
GENERAL
Hambrecht & Quist Group, a Delaware corporation, was formed in June 1996 as
a holding company for all of the operations of Hambrecht & Quist. The Company is
the successor to the businesses conducted by Hambrecht & Quist Group, a
California corporation established in 1983 and renamed Hambrecht & Quist
California in August 1996 ("H&Q California"), and Hambrecht & Quist, L.P., a
California limited partnership established in 1993 ("LP"). In 1983, H&Q
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.
The Company operates primarily as a holding company and indirectly owns all
of the subsidiaries and equity interests in affiliated entities that previously
were owned by either H&Q California or LP. Hambrecht & Quist L.L.C. ("H&Q LLC"),
the Company's 100% beneficially owned subsidiary, is the Company's principal
investment banking subsidiary and securities broker-dealer.
The Company's other principal operating subsidiaries or affiliated entities,
which are 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 Euromarkets, S.A., formerly Hambrecht & Quist Saint
Dominique, a broker-dealer registered in France that provides investment banking
services to European companies.
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 Tamir Fishman &
Co. Ltd., an investment bank, venture capital and financial consulting company
focused on Israeli growth companies. The Company also has a 20% interest in
Lewco Securities Corp. ("Lewco"), which acts as a clearing broker and depository
for Schroder & Co. and the Company.
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 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
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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. 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 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, often working 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.
For information regarding certain risks that face the Company and its
business, see "Factors Affecting the Company's Business, Operating Results and
Financial Condition."
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
[Graphic consisting of four organization charts ("Technology," "Healthcare,"
"Services" and "Branded Consumer") illustrating the division of the Company's
research effort.
The "Technology" organization chart reflects a division into six categories each
with specific subcategories. These categories are (with the subcategories listed
in parenthesis): "Communications" ("Internet Access," "Internetworking/LAN,"
"Mobile," "Telecommunications Equipment/WAN" and "Wireless"), "Distributed
Systems" ("Consumer Software & Digital Media," "Internet Content,"
"Distribution" and "PC Peripherals"), "Enterprise Software/Internet" ("DBMS &
Tools," "Systems Management," Enterprise Applications," "Productivity
Applications", "Desktop Software" and "Web Software"), "Technical Systems"
("Design Automation," "Embedded Control" and "Technical Software"),
"Semiconductor/Capital Equipment" ("Analog," "Digital," "Fabless" and
"Equipment") and "Special Situations" ("Imaging" and "Services").
The "Healthcare" organization chart reflects a division into four categories,
two of which have specific subcategories. These categories are (with the
subcategories listed in parenthesis): "Biotechnology," "Emerging
Pharmaceuticals/Drug Delivery," "Medical Devices" ("Cardiovascular,"
"Orthopedics," "Urology" and "Women's Health") and "Healthcare Services"
("Contract Research Organizations," "Health Maintenance Organizations,"
"Physician Network Management" and "Subacute").
The "Services" organization chart reflects a division into four categories, one
of which has specific subcategories. These categories are (with the
subcategories listed in parenthesis): "Financial Services" ("Internet" and
"Transaction Processors"), "Healthcare Information Services," "Business
Services" and "Special Situations."
The "Branded Consumer" organization chart reflects a division into four
categories which are "Food and Beverage," "Specialty Apparel," "Sports &
Leisure" and "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 analytical 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 individual publicly traded companies and
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. In
fiscal 1997, H&Q sponsored the following investment conferences:
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HAMBRECHT & QUIST CONFERENCE DATE LOCATION
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plaNET.wall.street (Internet Symposium) October 1996 New York
Healthcare Conference January 1997 San Francisco
plaNET.wall.street Enterprise Conference March 1997 San Francisco
Technology Conference April 1997 San Francisco
Annual Private Equity CFO Conference June 1997 San Francisco
Branded Consumer Growth Company
Conference June 1997 Napa, CA
European Growth Company Conference June 1997 London
H&Q--Tamir Fishman Communication
and Internet Conference September 1997 Tel Aviv
</TABLE>
More than 800 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
25th annual session in 1997, was the first annual investment conference focusing
exclusively on emerging growth companies in the technology sector. For 15 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 follow-up conferences in 1996 and
1997.
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
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.
DOMESTIC UNDERWRITING
H&Q is a leading underwriter of public offerings of equity securities for
emerging growth companies in its industry areas of focus. During fiscal 1997,
the Company lead managed 32 offerings and co-managed 62 offerings of equity and
convertible debt securities by 85 companies that raised an aggregate of over
$7.6 billion.
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 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.
As a result of the high proportion of venture capital invested in emerging
growth companies in California, H&Q's underwriting clients have to date been
concentrated in this state. Approximately 44% of the companies for which H&Q
served as manager or co-manager of a securities offering during fiscal 1997 had
principal offices located in California. See "Factors Affecting the Company's
Business, Operating Results and Financial Condition--Risks of Losses Due to
Regional Concentration of Emerging Growth Companies."
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 following table sets forth the distribution among industries of public
equity offerings completed during fiscal 1997 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:
<TABLE>
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NUMBER OF TRANSACTIONS COMPLETED
(NUMBER OF LEAD MANAGED
INDUSTRY TRANSACTIONS)
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Technology............................................... 49 (14)
Healthcare............................................... 22 (7)
Services................................................. 15 (9)
Branded Consumer......................................... 8 (2)
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Total:................................................. 94 (32)
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In recent years, H&Q has increased its expertise in providing offerings of
convertible debt securities. During fiscal 1997, Hambrecht & Quist completed 13
convertible debt transactions involving an aggregate of $2.0 billion in
securities. During fiscal 1997, underwriting revenues from convertible debt
securities transactions comprised less than 5% of the Company's total revenues.
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.
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 and 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 fiscal 1997, these revenues
comprised less than 10% of the Company's underwriting revenues and less than 5%
of the Company's total revenues.
During fiscal 1997, the Company managed or co-managed 11 offerings for
companies with primary operations outside the U.S., raising a total of
approximately $919 million. These transactions included three initial public
offerings and three follow-on public offerings for European growth companies,
and two follow-on public offerings on Nasdaq and one convertible debt
transaction for Israeli growth companies. This level of underwriting activity
for non-U.S. companies represents a decrease from the 15 equity offerings
raising a total of $1.1 billion, in which the Company served as a manager or
co-manager during fiscal 1996.
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 on the EASDAQ market, which was launched in October 1996, as
well as the other emerging stock markets of Europe. 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 1997, Hambrecht & Quist acquired from a French financial institution the
50% of Hambrecht & Quist Euromarkets, S.A. ("H&Q Euromarkets"), formerly known
as Hambrecht & Quist Saint Dominique, that Hambrecht & Quist did not already
own. H&Q Euromarkets is an underwriter and market-maker on the EASDAQ market, as
well as for le Nouveau Marche, a Paris-based stock market for emerging growth
companies that was launched in February 1996. During the fiscal year ended
September 30, 1997, H&Q Euromarkets completed one public offering on le Nouveau
Marche and six public offerings on the EASDAQ market.
In the United Kingdom, H&Q holds a minority equity position in Beeson
Gregory Holdings Limited, a London-based brokerage firm and financial advisor
specializing in growth companies. In addition, the Company has a London office
with institutional sales and corporate finance functions.
In Israel, H&Q holds a minority interest position in Tamir Fishman & Co.
Ltd., a Tel Aviv-based investment bank, venture capital and financial consulting
company focused on Israeli growth companies.
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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.
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. Since H&Q
expanded its specialized M&A practice in 1995, it has announced or completed
more than 132 transactions with an aggregate value of $16.4 billion. During
fiscal 1997, H&Q handled a record volume of M&A transactions providing M&A
services in over 53 assignments representing nearly $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 provide industry
understanding and strategic advice as well as traditional execution skills.
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. During fiscal 1997, the group
completed 17 private placement transactions, raising over $278 million for
growth companies. 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.
INSTITUTIONAL SALES AND TRADING
At September 30, 1997, H&Q had 34 institutional sales professionals covering
growth-oriented investors in many countries, primarily in North America, Western
Europe and Japan. H&Q's focus on
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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 September 30, 1997, H&Q had 49 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 September 30, 1997, H&Q made a market in nearly 400 Nasdaq
stocks. Additionally, at September 30, 1997, H&Q had 29 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, Boston
and Newport Beach
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
September 30, 1997, the Executive Financial Services group included 83 EFS
brokers functioning in 65 partner teams.
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. At September 30, 1997, the
Venture Services group was comprised of five employees.
SYNDICATE
The Company participates in public offerings of securities either by acting
as manager or co-manager of an underwriting syndicate, or by acting as a member
of an underwriting syndicate managed by other investment banks. In both cases,
the Company risks its capital through its participation in a commitment to
purchase securities from an issuer and to resell them to the public. The
Company's syndicate activities include managing the marketing and book-building
process of underwritten transactions the Company is managing, participating in
discussions leading to the offering price of securities and the supervision of
initial market-making for lead-managed deals. The Syndicate department is also
responsible for developing
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and maintaining relationships with the syndicate departments of other investment
banks. At September 30, 1997, the Syndicate department was comprised of ten
employees.
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. 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.
As of September 30, 1997, assets under management by the venture capital group
amounted to over $300 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
monitoring the partnership's investment. In fiscal 1997, approximately $71.3
million was invested in such partnerships, of which $18.6 million 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
The following listing summarizes the Company's active and specialty funds as
of September 30, 1997:
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 September 30, 1997, Asia Pacific's operations
were among the largest of venture capital firms in the region, managing 13 funds
with a combined total of approximately $630 million in committed capital.
Hambrecht & Quist holds a minority interest in Asia Pacific's management
entities, with the majority interest held by Asia Pacific's management teams.
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 September 30, 1997, these funds had combined
net assets of approximately $339.7 million, of which approximately 15% was
comprised of venture capital and other investments subject to resale
restrictions. Capital Management is compensated solely on the basis of
management fees as a percentage of assets under management. Capital Management
is wholly owned by H&Q.
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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 committed
approximately $40 million in capital. The Company receives an annual management
fee based on the amount of capital committed and participates in any profits of
the partnership. Certain of the Company's venture capital professionals share in
the profit participation.
ADOBE VENTURES II, L.P. In March 1997, Hambrecht & Quist formed a second
limited partnership with Adobe that invests in companies, products or
technologies strategic to Adobe's interests. Adobe has committed $40 million in
capital. The Company receives an annual management fee based on the amount of
capital committed and participates in any profits of the partnership. Certain of
the Company's venture capital professionals share in the profit participation.
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 million of capital to the partnership. The
Company will receive an annual management fee based on the amount of capital
committed and will participate in any profits of the partnership. Certain of the
Company's venture capital professionals share in the profit participation.
H&Q SERV*IS PARTNERS, L.P. In February, 1997, Hambrecht & Quist formed a
limited partnership with Johnson & Johnson ("J&J") that invests in companies,
products or technologies strategic to J&J's interests. J&J committed
approximately $15,000,000 in capital and the Company has committed $2,500,000 in
capital. The Company receives an annual management fee based on the amount of
capital committed and participates in any profits of the partnership. Certain of
the Company's venture capital professionals share in the profit participation.
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. Guaranty
Finance's current portfolio of financings aggregated approximately $24.5 million
at September 30, 1997. H&Q California owns 87.5% of Guaranty Finance, with the
balance owned by Guaranty Finance's senior management and employees.
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HAMBRECHT & QUIST TRANSITION CAPITAL. The Company formed Transition Capital
to provide bridge loans and mezzanine financings for emerging growth companies.
Transition Capital's investments consist of secured and unsecured debt with
equity participation. The term of the loans are typically 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 current portfolio of
financings aggregated approximately $18.6 million at September 30, 1997. H&Q
California owns 87.5% of Transition Capital, with the balance owned by
Transition Capital's senior management and employees.
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 "Factors Affecting the Company's
Business, Operating Results and Financial Condition--Risks Associated with
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. 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 entered 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 securities business has also
recently been experiencing consolidation, including the acquisition of several
of the Company's competitors by large commercial banks, providing competitors of
the Company with increased financial and other resources. 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
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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.
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, may have lower costs or provide fewer services and offer
their customers more attractive pricing or other terms than the Company offers.
The Company also anticipates competition from underwriters who attempt to effect
public offerings for emerging growth companies through new means of
distribution, including using electronic media such as the Internet. In
addition, disintermediation may result as issuers attempt to sell their
securities directly to purchasers, including sales using electronic media such
as the Internet. To the extent that issuers and purchasers of securities
transact business without the assistance of financial intermediaries such as the
Company, the Company's operating results could be adversely affected.
The principal competitive factors influencing the Company's business are its
professional staff, industry expertise, client relationships and its mix of
market and product capabilities.
EMPLOYEES
At September 30, 1997, the Company had a total of 823 employees, of whom 94
were engaged in research, 140 in investment banking, 354 in sales, trading and
syndicate, 51 in venture capital, principal investment and money management
activities and 184 in accounting, administration and operations. None of the
Company's employees are subject to a collective bargaining agreement. The
Company believes that its relations with its employees are good.
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 industry self-regulatory organizations ("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 Securities and Exchange Commission (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 National Association of Securities Dealers, Inc.
("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 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 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
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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, 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. In July 1996, H&Q
LLC and 23 other Nasdaq market-makers 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.
In 1996, the SEC filed and simultaneously settled a disciplinary case
against the NASD and filed a report setting out the SEC's findings in detail.
The SEC's case concerned the NASD's enforcement oversight of Nasdaq, and the
settlement calls for a number of changes to Nasdaq's operations. In addition,
the SEC adopted new order-execution rules, including rules applicable to
dealers' handling of customer limit orders on Nasdaq. The application of these
rules was phased in during 1997. Further changes relating to the operations of
Nasdaq have been proposed and filed with the SEC. The Company is unable to
predict the outcome of any of the changes or proposed changes to Nasdaq, certain
of which could adversely affect the Company's operating results. Although the
SEC's investigation of Nasdaq trading practices has been settled with respect to
the NASD, it remains open with respect to possible enforcement action against
others, potentially including Nasdaq marker-makers such as the Company, or their
employees.
H&Q LLC, Capital Management and one other subsidiary, Atlantic 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 of 1940, as amended (the
"Advisers Act"), and the SEC's regulations thereunder, as well as state
securities laws and regulations. Such requirements relate to, among other
things, limitations on the ability of investment advisers to charge
performance-based or non-refundable fees to clients, record-keeping and
reporting requirements, disclosure requirements, limitations on principal
transactions between an adviser or its affiliates and advisory clients, as well
as general anti-fraud prohibitions. The state securities law requirements
applicable to registered investment advisers are in certain 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.
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Violations of federal or state laws or regulations or rules of SROs could
subject the Company, its subsidiaries and/or its employees to disciplinary
proceedings or civil or criminal liability, including revocation of licenses,
censures, fines or temporary suspension or permanent bar from the conduct of
their business. Any such proceeding could have a material adverse effect upon
the Company's business.
In addition to being regulated in the United States, the Company's business
is subject to regulation by various foreign governments and regulatory bodies.
H&Q LLC is registered with and subject to regulation by the Ontario Securities
Commission, the Securities and Futures Authority of the United Kingdom pursuant
to the United Kingdom Financial Services Act of 1986, and the Ministry of
Finance, Tokyo, Japan. Foreign regulation governs all aspects of the investment
business, including regulatory capital, sales and trading practices, use and
safekeeping of customer funds and securities, record-keeping, margin practices
and procedures, registration standards for individuals, periodic reporting and
settlement procedures. In addition, Hambrecht & Quist Asset Management Ltd., a
subsidiary of the Company, is a member of and is subject to regulation by the
Investment Management Regulatory Organization Limited in the United Kingdom,
which regulates all aspects of its investment advisory business. The Company
recently formed and acquired an interest in H&Q Saint Dominique, a
broker-dealer, located in Paris, France. It is subject to regulation by the
Societe du Nouveau Marche, Societe de Bourse Francaise and La Commission
d'Operation de Bourse, and is an approved person of the NYSE.
In connection with the Company's venture capital activities, H&Q, its
affiliates and the venture capital funds which they manage are relying on
exemptions from registration under the Advisers Act, the Investment Company Act
of 1940, as amended, state securities laws and the laws of various foreign
countries. Failure to meet the requirements of any such exemptions could have a
material adverse effect on the manner in which the Company, its affiliates and
the venture capital funds carry out their investment activities and on the
compensation received by the Company and its affiliates from the venture capital
funds.
Additional legislation and regulations, including those relating to the
activities of broker-dealers and investment advisers, changes in rules
promulgated by the SEC or other United States or foreign governmental regulatory
authorities and SROs or changes in the interpretation or enforcement of existing
laws and rules may adversely affect the manner of operation and profitability of
the Company. H&Q's businesses may be materially affected not only by regulations
applicable to it as a financial market intermediary, but also by regulations of
general application. For example, the volume of H&Q's underwriting, merger and
acquisition, or venture capital activities in any year could be affected by,
among other things, existing and proposed tax legislation, antitrust policy and
other governmental regulations and policies (including the interest rate
policies of the Federal Reserve Board) and changes in interpretation or
enforcement of existing laws and rules that affect the business and financial
communities.
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
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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.
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 September 30, 1997, H&Q
LLC was required to maintain minimum net capital, in accordance with SEC rules,
of approximately $4.9 million and had total net capital of approximately $67.0
million, or approximately $62.1 million in excess of the amount required. RvR
Securities also computes its minimum net capital requirement under the
alternative method. As of September 30, 1997, RvR Securities was required to
maintain minimum net capital of $250,000. Its total net capital on that date was
$685,514, consisting primarily of equity capital. Lewco also computes its
minimum net capital requirement under the alternative method. As of September
30, 1997, Lewco was required to maintain
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minimum net capital of $2.4 million. Lewco's total net capital on that date was
$14.3 million. H&Q Euromarkets is also subject to the net capital requirements
of its applicable regulatory agency and as of September 30, 1997, was in
compliance with all applicable regulatory capital adequacy requirements.
FACTORS AFFECTING THE COMPANY'S BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION
The statements in this Form 10-K that relate to future plans, events or
performance are forward-looking statements that involve risks and uncertainties.
Actual results might differ materially due to a variety of important factors,
including those factors discussed below. In addition, the Company cautions
readers that the following important factors, among others, have affected, and
in the future could materially affect, the Company's business, operating results
and financial condition.
For information concerning risks associated with significant competition and
with potential losses from litigation and potential liability under securities
laws see "--Competition" and "Item 3--Legal Proceedings."
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 Company's revenues in large part are dependent on the number and size of
underwritten transactions by companies in the Company's targeted industries, and
the after-market trading for such companies. During certain periods, relatively
few public offerings for companies in these industries have been 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. Any historical or future
market decline has and may result in many pending securities offerings being
delayed or canceled. During periods of market decline, offerings are typically
effected at lower valuations and smaller total dollar sizes. Any future market
decline will have an adverse effect on the Company's operating results.
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.
RISK OF REDUCED REVENUES 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
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activities, which would result in lower revenues from the Company's investment
banking, trading and sales activities.
RISK OF REDUCED REVENUES DUE TO DECLINING MARKET VOLUME, PRICE OR LIQUIDITY
The Company's revenues may decrease in the event of a decline in market
volume, prices or liquidity. The securities business is 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
occurring.
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. Any decline in the stock market could result in a significant decline
in net asset values of mutual funds focused on technology and other growth
industries. Declines in the market generally or declines in mutual fund net
asset values in particular could result in withdrawals of cash from such mutual
funds. 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 REDUCED REVENUES 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.
RISKS OF LOSSES DUE TO REGIONAL CONCENTRATION OF EMERGING GROWTH COMPANIES
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.
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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 either of these states could substantially reduce the
Company's revenues. Approximately 44% of the companies for which H&Q served as
manager or co-manager of a public offering during fiscal 1997 had principal
offices located in California. Any adverse effect on emerging growth industries
concentrated in California, 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 REVENUES DUE TO DECLINE IN TRADING OF GROWTH COMPANY
SECURITIES
The Company's revenues from brokerage transactions are generally
substantially lower when trading activities of securities of emerging growth
companies declines or when the stock market declines generally. 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 the volume of trading on Nasdaq or NYSE
declined, or industry sectors or individual companies reported results below
investors' expectations. See "--Investment Banking" and "--Sales, Trading and
Syndicate."
SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING RESULTS DUE TO LEVEL OF
BUSINESS ACTIVITY AND TIMING OF TRANSACTIONS
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. Despite the variability of professional incentive compensation, the
Company could experience losses if the Company's revenues decline 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.
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.
COMPETITION FOR PROFESSIONAL EMPLOYEES. From time to time, Hambrecht &
Quist has experienced losses of research, investment banking and sales and
trading professionals. The level of competition for key personnel has increased
recently, particularly due to the market entry efforts of certain international
and domestic 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
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broad range of contacts in an industry, could materially and adversely affect
the Company's operating results.
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
"--Competition."
INABILITY TO RECRUIT QUALIFIED PERSONNEL. The Company expects further
growth in the number of its personnel. 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.
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 SEC, state securities
regulators and other governmental regulatory authorities. The business of the
Company also is regulated in the United States by industry SROs, including the
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, Israel,
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 "Legal Proceedings" and
"--Regulation."
POTENTIAL LIMITS ON OPERATIONS DUE TO NET CAPITAL REQUIREMENTS. As a
registered broker-dealer and member of the NYSE, 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, 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 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.
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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 has been subject to proceedings and sanctions by such
entities in the past and expects to be subject to such proceedings in the
future. 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. In July 1996, H&Q LLC and 23 other Nasdaq market-makers 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 "Legal Proceedings--Nasdaq Antitrust
Litigation."
POTENTIAL ADVERSE EFFECTS OF CHANGES IN NASDAQ OPERATIONS. In 1996, the SEC
filed and simultaneously settled a disciplinary case against the NASD and filed
a report setting out the SEC's findings in detail. The SEC's case concerned the
NASD's enforcement oversight of Nasdaq, and the settlement calls for a number of
changes to Nasdaq's operations. In addition, the SEC adopted new order-execution
rules, including rules applicable to dealers' handling of customer limit orders
on Nasdaq. The application of these rules was phased in during 1997. Further
changes relating to the operations of Nasdaq have been proposed and filed with
the SEC. The Company is unable to predict the outcome of any of the changes or
proposed changes to Nasdaq, certain of which could adversely affect the
Company's operating results. Although the SEC's investigation of Nasdaq trading
practices has been settled with respect to the NASD, it remains open with
respect to possible enforcement action against others, potentially including
Nasdaq marker-makers such as the Company, or their employees.
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 September 30, 1997, the Company's
principal investments represented $65.5 million invested in non-marketable
securities, venture
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capital funds and investment partnerships and $36.6 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 September 30, 1997 were valued at $65.5 million, and the report
of the Company's independent public accountants on the Company's consolidated
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.
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 September 30,
1997 aggregated $36.6 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. 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--Overview" and Notes 2 and 7 of Notes to Consolidated Financial
Statements--September 30, 1997.
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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.
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 it will be required to implement new and
enhanced communications and information systems and train 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 "--Accounting,
Administration and Operations" and "Management's Discussion and Analysis of
Financial Condition and Results of 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. In addition, the Company utilizes software and related
technology that will be affected by the date change in the year 2000. Both the
Company and Lewco will be required to modify their software. Any failure by the
Company or Lewco to adequately address the date change could have a material
adverse effect on the Company's financial condition and operations.
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. There can be no assurance that
adequate financing to support the Company's businesses
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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."
RISK 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 Guaranty Finance or Transition Capital, in which employees of H&Q
acquire minority interests. There is a risk 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 "--Venture
Capital and Principal Investment Activities" and "Certain Relationships and
Related Transactions" incorporated by reference to Item 13 of this report on
Form 10-K.
CONTROL OF THE COMPANY; ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS
As of November 30, 1997, the Company's current executive officers and
directors beneficially owned approximately 37% of the outstanding common stock.
Accordingly, these stockholders, if they were to act as a group, may be able to
influence the election of all of the Company's directors, increase the
authorized capital and otherwise control the policies of the Company. The
Company's Board of Directors has the authority to issue up to 5,000,000 shares
of Preferred Stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
stockholders. The rights of the holders of common stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of shares of Preferred Stock,
while potentially providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. In addition, the Company is subject to the provisions of
Section 203 of the Delaware General Corporation Law, which will prohibit the
Company from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. The application of Section 203
also could have the effect of delaying or preventing a change of control of the
Company. Certain provisions of the Company's Certificate of Incorporation 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.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of common stock in the public market
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. As of September 30, 1997, there were 23,768,722 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"). Of
such outstanding shares, holders of 18,669,064 shares were subject to lockup
restrictions imposed by all of H&Q LLC, Morgan Stanley & Co. Incorporated and
the Company (the "Underwriters") in connection with the Company's initial public
offering effected in August 1996 (the "Lockup"). Under the terms of the Lockup,
a portion of each holder's share ownership equal to the greater of up to (i)
10,000 shares or (ii) 5% of the holder's share ownership prior to the initial
public offering, were released from the Lockup on each of the six- and
twelve-month anniversaries of the initial
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public offering. The Lockup expires as to the balance of each holder's shares on
February 9, 1998 and on such date, all remaining shares will be freely
tradeable. In addition, any shares subject to the Lockup may be released by the
Underwriters at any time with or without notice to the public.
ITEM 2. PROPERTIES
The Company's principal executive offices in San Francisco, California
occupy approximately 159,000 square feet under leases which terminate December
31, 1998, subject to two 5-year extension options for the majority of the space.
In addition, the Company occupies approximately 23,000 square feet in a second
facility in San Francisco under a sublease which terminates on June 30, 2000 and
a successor lease which expires on December 31, 2003. The Company also leases
approximately 49,000 square feet in New York, New York, under a lease expiring
in 2007; approximately 26,000 square feet in Boston, Massachusetts, under a
lease expiring in 1998, subject to an option to extend the term; approximately
2,000 square feet in San Diego, California, under a lease expiring in 1999; and
approximately 8,800 square feet in Newport Beach, California, under a sublease
expiring on September 30, 2000. 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.
ITEM 3. 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 15 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. 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
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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.
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. 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 and other litigation
against securities firms 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.
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 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. 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, is currently subject to litigation and
may be subject to additional 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 investor, 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.
INDIVIDUAL, INC. SECURITIES LITIGATION. On November 13, 1996, a securities
class action lawsuit was filed in the United States District Court for the
District of Massachusetts against H&Q LLC and others by
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purchasers of the common stock of Individual, Inc., a provider of personalized
information services (Case Number 96-12272 DPW). The complaint alleged, among
other things, that the prospectus for the company's March 1996 initial public
offering contained misstatements, or failed to make required statements,
relating to the company's relationship with its founder and then chief executive
officer, whose employment with the company terminated in August 1996. H&Q LLC
was a co-manager of the offering. The defendants include the company, certain of
its current and former directors and officers, and the underwriters. On February
28, 1997, the plaintiffs filed an Amended Consolidated Complaint. On April 15,
1997, the defendants moved to dismiss the complaint. Oral argument has occurred,
and the matter is under submission.
OAK TECHNOLOGY SECURITIES LITIGATION. The Company is a defendant in
litigation pending in state and federal courts relating to Oak Technology, Inc.,
a manufacturer of semiconductor chips. Several proposed shareholder class action
lawsuits were consolidated in an amended complaint filed on August 14, 1996 in
the state Superior Court in Santa Clara County, California (IN RE OAK TECHNOLOGY
SECURITIES LITIGATION, No. CV758510). The consolidated complaint alleges, in
general, that the Company and others violated the California securities law by
issuing false and misleading statements relating to Oak Technology's financial
situation during the period from July 27, 1995 through May 22, 1996. H&Q LLC was
the lead underwriter of the initial public offering and a follow-on offering of
Oak Technology securities in 1995, and made a market and issued research reports
with respect to Oak Technology's securities. The other defendants include Oak
Technology, certain of its officers and directors and others. On September 13,
1996, the defendants demurred to the consolidated complaint in its entirety. On
December 6, 1996, the demurrers were sustained with leave to amend. Plaintiffs
filed a second amended complaint on September 22, 1997, which names H&Q, among
others, as a defendant and asserts causes of action for violations of California
Corporations Code Section Section 25400, 25400, Civil Code Section Section 1709
and 1710, and aiding and abetting breaches of fiduciary duty and abuses of
control by certain other defendants. H&Q and other defendants demurred to this
complaint. On December 3, 1997, the demurrers were sustained as to all causes of
action except the claim under California Corporations Code Section 25400.
In federal court, several cases based on the same general facts were filed,
and have been consolidated into one action. IN RE OAK TECHNOLOGY SECURITIES
LITIGATION, No. C-96-20552-SW (Northern District of California). Defendants
moved to dismiss the action, and the motion was granted by order dated August 1,
1997. A second amended complaint was filed on September 4, 1997 and the
defendants moved to dismiss it. A hearing has been held and the matter is under
submission.
NASDAQ MARKET-MAKERS 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 Action"). The 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 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 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 Nasdaq, or received less for securities sold, than they would have
but for the alleged conspiracy. The consolidated amended complaint sought
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 and others thereafter filed
answers, and discovery is
25
<PAGE>
proceeding. Plaintiffs made, and defendants opposed, a motion for class
certification. On November 26, 1996, the motion was granted.
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 was removed to federal court and transferred to the
federal judge hearing the Consolidated Action, and the action was consolidated
with the Consolidated Action.
In addition, allegations of collusion among the market-makers became the
subject of investigations by the NASD, the SEC and the Antitrust Division of the
Department of Justice ("DOJ"). On July 16, 1996, H&Q LLC and 23 other Nasdaq
market makers entered into a Stipulation and Order resolving a civil complaint
filed by the DOJ, alleging that they 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, pursuant to the order, to (i) designate
an antitrust compliance officer to instruct traders and others concerning the
requirements of the proposed order, (ii) create and listen to audio tapes of the
portion of a firm's trading activity on Nasdaq 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 of the proposed order or taped conversations to the DOJ, and to allow
the DOJ to bring civil or criminal contempt charges for willful violations of
the order.
On April 23, 1997, the Court approved the DOJ settlement by granting the
DOJ's motion for entry of the Stipulation and Order and the termination of the
action. That approval has been appealed to the United States Court of Appeals
for the Second Circuit by the plaintiffs in the Consolidated Action, acting as
intervenors. The SEC investigation is continuing, and the Company has received
requests from the SEC for information and documents with respect to its Nasdaq
market making activities. In the Consolidated Action, the Court on April 14,
1997, granted the plaintiffs' motion to permit institutional investors to be
part of the plaintiffs' class.
Six defendants other than H&Q have reached settlement agreements with the
plaintiffs in the total amount of approximately $98.9 million. These agreements
have received preliminary approval by the Court.
PRISM SOLUTIONS, INC. SECURITIES LITIGATION
On March 5, 1997, a purported shareholder class action lawsuit was filed in
California State Court in Santa Clara County against Prism Solutions, Inc. and
certain of its officers and directors, as well as against the underwriters of
its March 14, 1996 initial public offering, including H&Q, which was a
co-manager of the offering (ADLER, ET AL. V. PRISM SOLUTIONS, INC., ET AL.,
Santa Clara Superior Court Case No. CV 764547). The complaint alleges, among
other things, that the offering prospectus failed to disclose that Prism's on-
going growth was in jeopardy and likely to slow due to several factors,
including increasing competition, particularly from low-end competitors, and
that the underwriters each supported Prism's stock by issuing fraudulent
research reports. The defendants filed demurrers to the complaint, and on June
26, 1997, the Court sustained the demurrers, with leave to amend in certain
respects. Plaintiff subsequently filed an amended complaint that did not name
H&Q as a defendant.
26
<PAGE>
SS&C TECHNOLOGIES, INC. SECURITIES LITIGATION
Litigation has been filed against the Company and others relating to SS&C
Technologies, Inc., which went public on May 31, 1996, in an offering that was
co-managed by H&Q. The litigation has been consolidated in an amended class
action complaint filed in the federal court in Connecticut. FEINER ET AL. V.
SS&C TECHNOLOGIES, INC., ET AL., Civil Action No. 397CV00656 (SBA). The
complaint purports to assert claims under Sections 11, 12(2) and 15 of the
Securities Act of 1933. It alleges, among other things, that the initial
offering price was unreasonable and unfair, and was based solely, primarily, or
significantly upon the ability of the underwriters to sell the stock, rather on
than the fundamentals of the issuer or market conditions or the demand for
similar securities of comparable companies.
The defendants have moved to dismiss the complaint, oral argument has been
held and the matter is under submission.
STORM TECHNOLOGY, INC. SECURITIES LITIGATION
On March 14, 1997, a purported class action suit was filed in the California
Superior Court in Santa Clara County against Storm Technology, Inc., two of its
officers or directors, a shareholder, and H&Q related to the September 30, 1996
Storm Technology, Inc. initial public offering, which was co-managed by H&Q.
GOLDBERG V. STORM TECHNOLOGY, INC., ET AL., Santa Clara Superior Court, No.
CV764797. The suit alleges, among other things, that the prospectus and H&Q's
research reports were false and misleading, and purports to state claims under
Sections 25400, 2550, 1507 and 25401 of the California Corporations Code and
California Business and Professions Code Sections 17200, ET SEQ., as well as
Sections 11 and 12 of the Securities Act of 1933. The defendants demurred and
the demurrers were sustained, with leave to amend. An amended complaint was
filed on October 16, 1997. Defendants have demurred. A hearing on the
defendants' demurrers is scheduled for January 20, 1997. On December 12, 1997,
two class action complaints similar to the state court complaint were filed in
the United States District Court for the Northern District of California
(GOLDBERG V. STORM TECHNOLOGY, INC., ET AL., No. C97-21101, alleging violations
of the Securities Act of 1933 ("Securities Act"), and GOLDBERG V. STORM
TECHNOLOGY, INC. ET AL., No. C97-04516, alleging violations of the Securities
Exchange Act of 1934 ("Exchange Act")). The defendants have not responded to the
complaints.
LUMISYS, INC. SECURITIES LITIGATION
On July 9, 1997, a purported class action complaint was filed in the
California Superior Court in Santa Clara County against H&Q and others relating
to an initial public offering by Lumisys, Inc. in November 1995 that was
lead-managed by H&Q. WENGER, ET AL., V. LUMISYS, INC., ET AL., Case No.
CV767369. The complaint alleges violations of California state law on the basis
of false statements allegedly made by the defendants during the alleged class
period of November 15, 1995 through July 11, 1996. On July 10, 1997, a similar
complaint was filed in the federal district court in San Jose alleging
violations of the Exchange Act. WENGER, ET AL. V. LUMISYS, INC., ET AL., No.
C-97 20609 EAI. The defendants demurred to the complaint in the state court
case; on December 16, 1997, the Court sustained the demurrers, in most respects
with leave to amend. In the federal court case, the defendants moved to dismiss
the complaint; oral argument is scheduled to occur on January 16, 1998.
ORTHOLOGIC CORP. SECURITIES LITIGATION
On May 30, 1997, a Consolidated and Amended Class Action Complaint for
Violations of Federal Securities Laws and Arizona State Securities and Consumer
Laws was filed against H&Q and others on behalf of persons who purchased
OrthoLogic Corporation stock between January 18, 1996 and June 18, 1996. CHAN,
ET AL. V. ORTHOLOGIC CORPORATION, ET AL., No. CIV-96-1514-PHX-RCB, U.S.D.C., D.
Ariz. The complaint alleges violations of Sections 10(b) and 20(a) of the
Exchange Act and Rule 10b-5 thereunder, Sections 11, 12(a)(2) and 15 of the
Securities Act and various Arizona state laws. The complaint alleges
27
<PAGE>
that statements made in the prospectus for an April 1996 OrthoLogic Corporation
secondary stock offering co-managed by H&Q and in securities analysts' research
reports were false and misleading. Motions to dismiss the complaint have been
filed by all defendants and are scheduled to be heard on January 5, 1998.
SCHADE V. HAMBRECHT & QUIST GROUP
On December 2, 1997, separate but similar lawsuits were filed by the same
plaintiff against H&Q and two other investment banks in California Superior
Court in Orange County. The plaintiff alleges that these investment banks have
engaged in unlawful business practices in violation of California Business &
Professions Code Section Section 17200 ET SEQ. and purports to sue on behalf of
the general public. In each case the plaintiff seeks injunctive relief and
substantial but unspecified damages. The case against H&Q is entitled EDWARD A.
SCHADE V. HAMBRECHT & QUIST GROUP, Case No. 787495. The cases allege that the
allocation of shares of initial public offerings to the personal brokerage
accounts of corporate executives has improperly influenced such corporate
executives' decisions with regard to the selection of investment banks to
provide investment banking services to their companies. None of the defendants
have responded to the complaints.
In addition, H&Q and other investment banks have been requested to provide
information to the Enforcement Department of NASD Regulation, Inc. as part of an
investigation into the underwriting and distribution of certain initial public
offerings underwritten by H&Q and others. It has also been reported that the SEC
is conducting a similar inquiry.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
28
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of November 30,
1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- --------------------------------------------------
<S> <C> <C>
William R. Hambrecht*......... 62 Chairman of the Company and H&Q LLC; Director
Daniel H. Case III*........... 40 President and Chief Executive Officer of the
Company and H&Q LLC; Director
William R. Timken............. 62 Vice Chairman of the Company and H&Q LLC; Director
Paul L. Hallingby............. 51 Executive Vice President and Director of
Institutional Equity, H&Q LLC
Cristina M. Morgan............ 45 Managing Director and Co-Director of Investment
Banking, H&Q LLC
David M. McAuliffe............ 48 Managing Director and Co-Director of Investment
Banking, H&Q LLC, and Chief Administrative Officer
of the Company
Bruce M. Lupatkin............. 41 Managing Director and Director of Research, H&Q
LLC
Steven N. Machtinger.......... 48 General Counsel and Secretary of the Company and
H&Q LLC; Managing Director of H&Q LLC
Patrick J. Allen.............. 35 Chief Financial Officer of the Company and H&Q
LLC; Managing Director of H&Q LLC
</TABLE>
- ------------------------
* Effective January 1, 1998, Mr. Hambrecht is retiring as Chairman and a
director of the Company and as Chairman of H&Q LLC and, as of that date, Mr.
Case will become Chairman of both companies and is resigning as President of
both companies.
William R. Hambrecht, Chairman of Hambrecht & Quist Group and its principal
subsidiary, H&Q LLC, announced his retirement from the Company effective January
1, 1998. 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 Board of Directors of Adobe Systems Incorporated, a print and electronic
media software company. 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 Inc., a global
interactive entertainment software company, AMB Property Corporation, a real
estate company, the National Science and Technology Medal Foundation 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
29
<PAGE>
responsible for the activities of the Company's Syndicate Department. Mr. Timken
is a past member of the Board of Governors of the Pacific Stock Exchange and the
Board of Governors of the National Association of Securities Dealers, Inc. Mr.
Timken holds a B.A. degree in Economics from Colby College.
Paul L. "Barney" Hallingby joined the Company in 1983 as an institutional
salesman. He was named Managing Director of the Research Department in June 1988
and was elected Executive Vice President in October 1990. In July 1992, he
became Managing Director of Sales and Trading, and in October 1994, 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 Director of Investment Banking. Since July 1995, she has
been 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. In September 1996, Mr. McAuliffe was named
Chief Administrative Officer of the Company. 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-Head
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. 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.
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. Since October 1, 1996, Mr. Allen has served as the Company's Chief
Financial Officer. In October 1996, Mr. Allen was named a Managing Director of
H&Q LLC. 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, California from 1984 to 1988. He holds a B.S. in Business
Administration from California Polytechnic University in San Luis Obispo.
30
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal market for trading of the Company's common stock is the New
York Stock Exchange. The Company's Common Stock is also listed on the Pacific
Exchange. Its stock symbol is HQ. The effective date of the Company's initial
public offering was August 9, 1996. Set forth below are the high and low sale
prices of the Company's common stock for each full quarterly period since its
initial public offering.
<TABLE>
<CAPTION>
HIGH SALE PRICE LOW SALE PRICE
--------------- ---------------
<S> <C> <C>
FISCAL 1997
Fourth Quarter Ended 9/30/97.................................. $ 35.75 $ 26.00
Third Quarter Ended 6/30/97................................... $ 35.50 $ 15.00
Second Quarter Ended 3/31/97.................................. $ 27.00 $ 16.63
First Quarter Ended 12/31/97.................................. $ 27.00 $ 18.50
FISCAL 1996
Fourth Quarter Ended 9/30/96.................................. $ 19.50 $ 16.25
</TABLE>
According to records of the Company's transfer agent, the Company had
approximately 305 stockholders of record as of December 4, 1997. Because may
shares are held by brokers and other institutions on behalf of stockholders, the
Company is unable to estimate the total number of stockholders represented by
these record holders.
The Company's policy has been to reinvest earnings to fund future growth.
Accordingly, the Company has not paid dividends and does not anticipate
declaring dividends on its common stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
Information required by item 6 is incorporated by reference from the
information set forth under the heading "Selected Financial Data" in the
Company's 1997 Annual Report to Stockholders (the "Annual Report") filed as
Exhibit 13.01 to this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information required by item 7 is incorporated by reference from the
information set forth under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Annual Report filed as
Exhibit 13.01 to this Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is not required to include the disclosure required by item 7A.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is set forth in Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
31
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors required by Item 10 is incorporated by
reference from the information set forth under the headings "Proposal No.
1--Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's definitive proxy statement for its annual meeting
of stockholders to be held on February 24, 1998. Information regarding executive
officers found under the caption "Executive Officers of the Registrant" in Part
I hereof is also incorporated by reference into this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
information set forth under the heading "Executive Compensation" in the
Company's definitive proxy statement for its annual meeting of stockholders to
be held on February 24, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the
information set forth under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement
for its annual meeting of stockholders to be held on February 24, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the
information set forth under the heading "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for its annual meeting
of stockholders to be held on February 24, 1998.
32
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are incorporated by reference from the financial
statements contained in the Annual Report filed as Exhibit 13.01 to this Form
10-K:
1. Financial Statements
Report of Independent Public Accountants
Consolidated Financial Statements as of September 30, 1996, and 1997
and for the years
ended September 30, 1995, 1996 and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All schedules are omitted because they are not required or the
information is shown in the financial statements or notes thereto.
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- -------- ----------------------------------------------------------------------------------------------------
<C> <S>
3.01(1) Registrant's Amended and Restated Certificate of Incorporation.
3.02 Registrant's Bylaws, as amended.
4.01(1) Form of Specimen Certificate for Registrant's common stock
10.01(3) Registrant's 1996 Equity Plan, as amended and restated on March 24, 1997*.
10.02(1) Registrant's 1995 Restricted Stock Plan, 1995 Stock Option Plan, and Hambrecht & Quist, L.P. 1995
Limited Partnership Unit Plan*.
10.03(1) Form of Registrant's 1995 Stock Option Plan Nonstatutory Stock Option Agreement*.
10.04(1) Registrant's Savings and Employee Stock Ownership Plan, effective as of October 1, 1994*.
10.05(1) Lease between The Equitable Life Assurance Society of the United States and Hambrecht & Quist L.L.C.
(formerly Hambrecht & Quist Incorporated) dated January 27, 1988, as amended.
10.06(1) Assignment of Lease from Apple Computer, Inc. to Hambrecht & Quist L.L.C. dated March 27, 1996.
10.07(1) Lease between Hambrecht & Quist L.L.C. (formerly Hambrecht & Quist Incorporated) and Rowes Wharf
Associates dated June 22, 1987, as amended.
10.08(1) Lease, Riders, and Addenda between 230 Park Avenue Associates and Hambrecht & Quist L.L.C. (formerly
Hambrecht & Quist Incorporated) dated December 1, 1995.
10.09(1) Line of Credit Agreement between The Bank of California, N.A. and Registrant, dated October 29,
1993.
10.10(1) Amended and Restated Line of Credit Agreement between The Bank of California, N.A., and Registrant,
dated March 21, 1996.
10.11(1) Line of Credit Note between The Bank of California, N.A., and Registrant, dated March 21, 1996.
10.12(1) Continuing Guaranty by Registrant in favor of The Bank of California, N.A., dated March 21, 1996.
10.13(1) Employment Agreement between Registrant and Daniel H. Case III, dated June 17, 1996*.
10.14(1) Hambrecht & Quist L.L.C.'s Operating Agreement, dated March 6, 1995.
10.15(3) Registrant's 1996 Bonus and Deferred Sales Compensation Plan, as amended and restated on March 24,
1997*.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- -------- ----------------------------------------------------------------------------------------------------
<C> <S>
10.16(1) Master Agreement between Hambrecht & Quist L.L.C. (formerly Hambrecht & Quist Incorporated),
Wertheim Schroder & Co. Incorporated, WSCI Limited Partnership and Lewco Securities Corp., dated
December 23, 1991, as amended on December 13, 1993 by Amendment No. 1 and July 5, 1995 by
Amendment No. 2.
10.17(1) Clearing and Other Services Agreement between Hambrecht & Quist L.L.C. (formerly Hambrecht & Quist
Incorporated), Wertheim Schroder & Co. Incorporated, WSCI Limited Partnership and Lewco Securities
Corp., dated December 23, 1991, as amended.
10.18(1) Letter Agreement between Registrant and H&Q Asia Pacific, Ltd., dated April 1, 1996.
10.19(1) Form of Registrant's Indemnification Agreement.
10.20(1) Lease between The Equitable Life Assurance Society of the United States and Hambrecht & Quist
L.L.C.(formerly Hambrecht & Quist Incorporated) dated November 9, 1988, as amended.
10.21(2) Amendment No. 3 to Master Agreement between Hambrecht & Quist L.L.C. (formerly Hambrecht & Quist
Incorporated), Wertheim Schroder & Co. Incorporated, WSCI Limited Partnership and Lewco Securities
Corp., effective September 30, 1996.
10.22(3) Consulting Agreement between Hambrecht & Quist L.L.C. and William J. Perry, dated April 1, 1997.
10.23 Sublease between Chevron Real Estate Management Company and Hambrecht & Quist California, dated May
21, 1997.
10.24 Lease between Pacific Resources Development Inc. and Hambrecht & Quist California, dated June 5,
1997.
10.25 Amendment Nos. 6, 7 and 8 to Lease between Hambrecht & Quist L.L.C. (formerly Hambrecht & Quist
Incorporated) and Rowes Wharf Associates dated June 22, 1987, as amended.
13.01 Certain information from Registrant's Annual Report to Stockholders for the year ended September 30,
1997 which is incorporated by reference in this Form 10-K.
21.01(2) List of Subsidiaries of the Registrant.
23.01 Consent of Independent Public Accountants.
27.01 Financial Data Schedule
</TABLE>
- ------------------------
* Indicates management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the corresponding exhibit to the Registrant's
S-1 Registration Statement in the form declared effective on August 8, 1996,
File No. 333-6431.
(2) Incorporated by reference to Registrant's Form 10-K filed for the fiscal
year ended September 30, 1996.
(3) Incorporated by reference to Registrant's Form 10-Q filed for the fiscal
quarter ended March 31, 1997.
(b) Reports on Form 8-K
None.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 23rd day of
December, 1997.
<TABLE>
<S> <C> <C>
HAMBRECHT & QUIST GROUP
By: /s/ DANIEL H. CASE III
-----------------------------------------
Daniel H. Case III
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, report
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 Chairman of the Board of December 23, 1997
- ------------------------------ Directors
(William R. Hambrecht)
President, Chief Executive December 23, 1997
/s/ DANIEL H. CASE III Officer and Director
- ------------------------------ (Principal Executive
(Daniel H. Case III) Officer)
/s/ WILLIAM R. TIMKEN Vice Chairman of the Board December 23, 1997
- ------------------------------ of Directors
(William R. Timken)
/s/ PATRICK J. ALLEN Chief Financial Officer December 23, 1997
- ------------------------------ (Principal Financial and
(Patrick J. Allen) Accounting Officer)
/s/ HOWARD B. HILLMAN Director December 23, 1997
- ------------------------------
(Howard B. Hillman)
/s/ WILLIAM E. MAYER Director December 23, 1997
- ------------------------------
(William E. Mayer)
/s/ WILLIAM J. PERRY Director December 23, 1997
- ------------------------------
(William J. Perry)
/s/ EDMUND H. SHEA, JR. Director December 23, 1997
- ------------------------------
(Edmund H. Shea, Jr.)
</TABLE>
35
<PAGE>
BYLAWS
OF
HAMBRECHT & QUIST GROUP
AS AMENDED AND RESTATED MARCH 24, 1997
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I CORPORATE OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 REGISTERED OFFICE. . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 OTHER OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II MEETINGS OF STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . . 1
2.1 PLACE OF MEETINGS. . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.2 ANNUAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.3 SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.4 NOTICE OF STOCKHOLDERS' MEETINGS;. . . . . . . . . . . . . . . . . . 2
2.5 MANNER OF GIVING NOTICE. . . . . . . . . . . . . . . . . . . . . . . 3
2.6 QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.7 ADJOURNED MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.8 VOTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.9 WAIVER OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING . . . . . . 5
2.11 RECORD DATE FOR STOCKHOLDER NOTICE . . . . . . . . . . . . . . . . 5
2.12 PROXIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE . . . . . . . . . . . . . . . 6
2.14 INSPECTORS OF ELECTION. . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE III DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.1 POWERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.2 NUMBER OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . 7
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS . . . . . . 7
3.4 RESIGNATION AND VACANCIES . . . . . . . . . . . . . . . . . . . . . 8
3.5 PLACE OF MEETINGS. . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.6 FIRST MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.7 REGULAR MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.8 SPECIAL MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.9 QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
3.10 WAIVER OF NOTICE. . . . . . . . . . . . . . . . . . . . . . . . . .10
3.11 ADJOURNED MEETING . . . . . . . . . . . . . . . . . . . . . . . . .10
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING . . . . . . . . .10
3.13 FEES AND COMPENSATION OF DIRECTORS . . . . . . . . . . . . . . . .10
3.14 APPROVAL OF LOANS TO OFFICERS . . . . . . . . . . . . . . . . . . .10
3.15 REMOVAL OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . .11
ARTICLE IV COMMITTEES. . . . . . . . . . . . . . . . . . . . . . . . . . . .11
4.1 COMMITTEES OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . .11
4.2 COMMITTEE MINUTES. . . . . . . . . . . . . . . . . . . . . . . . . .12
4.3 MEETINGS AND ACTION OF COMMITTEES. . . . . . . . . . . . . . . . . .12
ARTICLE V OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
5.1 OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
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5.2 ELECTION OF OFFICERS . . . . . . . . . . . . . . . . . . . . . . . .12
5.3 SUBORDINATE OFFICERS . . . . . . . . . . . . . . . . . . . . . . . .12
5.4 REMOVAL AND RESIGNATION OF OFFICERS . . . . . . . . . . . . . . . .13
5.5 VACANCIES IN OFFICES . . . . . . . . . . . . . . . . . . . . . . . .13
5.6 CHAIRMAN OF THE BOARD. . . . . . . . . . . . . . . . . . . . . . . .13
5.7 PRESIDENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
5.8 VICE PRESIDENTS . . . . . . . . . . . . . . . . . . . . . . . . . .13
5.9 SECRETARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
5.10 CHIEF FINANCIAL OFFICER . . . . . . . . . . . . . . . . . . . . . .14
5.11 COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . . . . . .15
5.12 AUTHORITY AND DUTIES OF OFFICERS. . . . . . . . . . . . . . . . . .15
ARTICLE VI INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS. . . . . . . . . . . . . .15
6.2 INDEMNIFICATION OF OTHERS . . . . . . . . . . . . . . . . . . . . .16
6.3 INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
ARTICLE VII RECORDS AND REPORTS. . . . . . . . . . . . . . . . . . . . . . .16
7.1 MAINTENANCE AND INSPECTION OF RECORDS. . . . . . . . . . . . . . . .16
7.2 INSPECTION BY DIRECTORS. . . . . . . . . . . . . . . . . . . . . . .17
7.3 ANNUAL STATEMENT TO STOCKHOLDERS . . . . . . . . . . . . . . . . . .17
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS . . . . . . . . . . .17
ARTICLE VIII GENERAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . .17
8.1 CHECKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
8.2 BANK ACCOUNTS. . . . . . . . . . . . . . . . . . . . . . . . . . . .17
8.3 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS . . . . . . . . . .18
8.4 LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
8.5 STOCK CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . .18
8.6 SPECIAL DESIGNATION ON CERTIFICATES . . . . . . . . . . . . . . . .19
8.7 LOST CERTIFICATES. . . . . . . . . . . . . . . . . . . . . . . . . .19
8.8 CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
8.9 DIVIDENDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
8.10 FISCAL YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
8.11 SEAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
8.12 TRANSFER OF STOCK . . . . . . . . . . . . . . . . . . . . . . . . .20
8.13 STOCK TRANSFER AGREEMENTS . . . . . . . . . . . . . . . . . . . . .20
8.14 REGISTERED STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . .20
ARTICLE IX AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . .20
ARTICLE X DISSOLUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . .21
ARTICLE XI CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES . . . . . . . . . . . .21
11.2 DUTIES OF CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . .22
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<PAGE>
BYLAWS
OF
HAMBRECHT & QUIST GROUP
AS AMENDED AND RESTATED MARCH 24, 1997
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is CT CORPORATION SYSTEM.
1.2 OTHER OFFICES
The board of directors may at any time establish other offices at any place
or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place, within or outside the
State of Delaware, designated by the board of directors or by the written
consent of all of the persons entitled to vote at such meeting, such written
consent shall be filed with the Secretary of the Corporation. In the absence of
any such designation, stockholders' meetings shall be held at the registered
office of the corporation.
2.2 ANNUAL MEETING
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. However, if such day falls on a
legal holiday, then the meeting shall be held at the same time and place on the
next succeeding full business day. At the meeting, directors shall be elected
and any other proper business may be transacted.
2.3 SPECIAL MEETING
(a) Special meetings of the stockholders, for any purpose or
purposes, may be called by the Board of Directors, the Chairman of the board of
Directors, the President, or the holders of shares entitled to cast not less
than ten percent (10%) of the votes at the meeting.
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(b) Upon written request to the Chairman of the Board of Directors,
the President, any Vice President or the Secretary of the corporation by any
person or persons (other than the Board of Directors) entitled to call a special
meeting of the stockholders, such officer forthwith shall cause notice to be
given to the stockholders entitled to vote, that a meeting will be held at a
time requested by the person or persons calling the meeting, such time to be not
less than thirty-five (35) nor more than sixty (60) days after receipt of such
request. If such notice is not given within twenty (20) days after receipt of
such request, the person or persons calling the meeting may be given notice
thereof in the manner provided by law or in these Bylaws. Nothing contained in
this Section 2.3 shall be construed as limiting, fixing or affecting the time or
date when a meeting of stockholders called by action of the Board of Directors
may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
Except as otherwise may be required by law and subject to subsection 2.3(b)
above, written notice of each meeting of stockholders shall be given to each
stockholder entitled to vote at that meeting (see Section 2.8 below), by the
secretary, Assistant Secretary or other person charged with that duty, not less
than ten (10) (or, if sent by third class mail, thirty (30)) nor more than
sixty (60) days before such meeting.
Notice of any meeting of stockholders shall state the date, place and hour
of the meeting and,
(a) in the case of a special meeting, the general nature of the
business to be transacted, and no other business may be transaction at such
meeting;
(b) in the case of an annual meeting, the general nature of matters
which the Board of Directors, at the time the notice is given, intends to
present for action by the stockholders;
(c) in the case of any meeting at which directors are to be elected,
the names of the nominees intended at the time of the notice to be presented by
management for election; and
(d) in the case of any meeting, if action is to be taken on any of
the following proposals, the general nature of such proposal:
(1) a proposal to approve a transaction within the provisions of
Delaware General Corporations law, Section 144 (relating to certain transactions
in which a director has an interest);
(2) a proposal to approve a transaction within the provisions of
Delaware General Corporation Law, Section 254 (relating to amending the
Certificate of Incorporation of the corporation);
(3) a proposal to approve a transaction within the provisions of
Delaware General Corporation Law, Sections 251 (relating to merger or
consolidation); and
(4) a proposal to approve a transaction within the provisions of
Delaware General Corporation Law, Section 275 (dissolution).
At a special meeting, notice of which has been given in accordance with
this
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<PAGE>
Section, action may not be taken with respect to business, the general nature of
which has not been stated in such notice. At an annual meeting, action may be
taken with respect to business stated in the notice of such meeting, given in
accordance with this section, and, subject to subsection 2.4(d) above, with
respect to any other business as may properly come before the meeting.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Notice of any meeting of stockholders shall be given either personally or
by first-class mail, or, if the corporation has outstanding shares held of
record by 500 or more persons on the record date for such meeting, third-class
mail, or telegraphic or other written communication, addressed to the
stockholder at the address of that stockholder appearing on the books of the
corporation or given by the stockholder to the corporation for the purpose of
notice. If no such address appears on the corporation's books or is given,
notice shall be deemed to have been given if sent to that stockholder by
first-class mail or telegraphic or other written communication to the
corporation's principal executive office, or if published at least once in a
newspaper of general circulation in the county where that office is located.
Notice shall be deemed to have been given at the time when delivered personally
or deposited in the mail or sent by telegram or other means of written
communication.
If any notice addressed to a stockholder at the address of that stockholder
appearing on the books of the corporation is returned to the corporation by the
United States Postal Service marked to indicate that the United States Postal
Service is unable to deliver the notice to the stockholder at that address, all
future notices shall be deemed to have been duly given without further mailing
if these shall be available to the stockholder on written demand by the
stockholder at the principal executive office of the corporation for a period of
one year from the date of the giving of the notice.
An affidavit of the secretary or an assistant secretary or of the transfer
agent of the corporation that the notice has been given shall, in the absence of
fraud, be prima facie evidence of the facts stated therein.
2.6 QUORUM
(a) At any meeting of the stockholders, a majority of the shares
entitled to vote, represented in person or by proxy, shall constitute a quorum.
If a quorum is present, the affirmative vote of the majority of shares
represented at the meeting and entitled to vote on any matter shall be the act
of the stockholders, unless the vote of a greater number of voting by classes is
required by law or by the Certificate of Incorporation, and except as provided
in subsection (b) below.
(b) The stockholders present at a duly called or held meeting of the
stockholders at which a quorum is present may continue to do business until
adjournment, notwithstanding the withdrawal of enough stockholders to leave less
than a quorum, provided that any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.
(c) In the absence of a quorum, no business other than adjournment
may be transacted, except as described in subsection (b) above.
2.7 ADJOURNED MEETING; NOTICE
Any meeting of stockholders may be adjourned from time to time, whether or
not a
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<PAGE>
quorum is present, by the affirmative vote of a majority of shares represented
at such meeting either in person or by proxy and entitled to vote at such
meeting. When a meeting is adjourned to another time or place, unless these
Bylaws otherwise require, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment
is taken. At the adjourned meeting the corporation may transact any business
that might have been transacted at the original meeting. If the adjournment is
for more than forty-five (45) days, or if after the adjournment a new record
date is fixed for the adjourned meeting, a notice of the adjourned meeting shall
be given to each stockholder of record entitled to vote at the meeting.
2.8 VOTING
(a) The stockholders entitled to vote at any meeting of stockholders
shall be determined in accordance with the provisions of Section 2.11 of these
Bylaws, subject to the provisions of Sections 217 and 218 of the General
Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors
and joint owners of stock and to voting trusts and other voting agreements).
Except as provided in this Section 2.8, or as may be otherwise provided in
the certificate of incorporation, each stockholder shall be entitled to one vote
for each share of capital stock held by such stockholder.
(b) Until such time as the corporation becomes a "listed corporation"
within the meaning of Section 301.5 of the California Corporations Code, at a
stockholders' meeting at which directors are to be elected, or at elections held
under special circumstances, a stockholder shall be entitled to cumulate votes
(i.e., cast for any candidate a number of votes greater than the number of votes
which such stockholder normally is entitled to cast). Each holder of stock, or
of any class or classes or of a series or series thereof, who elects to cumulate
votes shall be entitled to as many votes as equals the number of votes which
(absent this provision as to cumulative voting) he would be entitled to cast for
the election of directors with respect to his shares of stock multiplied by the
number of directors to be elected by him, and he may cast all of such votes for
a single director or may distribute them among the number to be voted for, or
for any two or more of them, as he may see fit; provided, however, no
stockholder shall be entitled to so cumulate such stockholder's votes unless the
candidates for which such stockholder is voting have been placed in nomination
prior to the voting and a stockholder has given notice at the meeting, prior to
the vote, of an intention to cumulate votes.
(c) At such time as the corporation becomes a listed corporation
within the meaning of Section 301.5 of the California Corporations Code and
thereafter, stockholders shall not be entitled to cumulate votes.
2.9 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these Bylaws. All waivers,
consents and approvals shall be
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<PAGE>
filed with the corporate records or made a part of the minutes of the meeting.
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise provided in the certificate of incorporation, any action
required by this chapter to be taken at any annual or special meeting of
stockholders of a corporation, or any action that may be taken at any annual or
special meeting of such stockholders, may be taken without a meeting, without
prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held.
(ii) The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting, when no prior
action by the board of directors is necessary, shall be the day on which the
first written consent is expressed.
(iii) The record date for determining stockholders for any
other purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
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<PAGE>
2.12 PROXIES
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the corporation, but no such
proxy shall be voted or acted upon after eleven (11) months from its date,
unless the proxy provides for a longer period. A proxy shall be deemed signed
if the stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of
Section 212(c) of the General Corporation Law of Delaware.
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
Stock of the corporation held by its subsidiary or subsidiaries are not
entitled to vote in any matter.
2.14 INSPECTORS OF ELECTION
Before any meeting of stockholders, the Board of Directors may appoint any
persons, other than nominees for the office, to act as inspectors of election at
the meeting or its adjournment. If no inspectors of election are so appointed,
the chairman of the meeting may, and on the request of any stockholder or a
stockholder's proxy shall, appoint inspectors of election at the meeting. The
number of inspectors shall be either one (1) or three (3). If inspectors are
appointed at a meeting on the request of one or more stockholders or proxies,
the majority of shares represented in person or proxy shall determine whether
one (1) or three (3)inspectors are to be appointed. If any person appointed as
inspector fails to appear or fails or refuses to act, the chairman of the
meeting may, and upon the request of any stockholder or a stockholder's proxy
shall, appoint a person to fill that vacancy.
These inspectors shall:
(a) Determine the number of shares outstanding and the voting power
of each, the shares represented at the meeting, the existence of a quorum, and
the authenticity, validity, and effect of proxies;
(b) Receive votes, ballots, or consents;
(c) Hear and determine all challenges and questions in any way
arising in connection with the right to vote;
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<PAGE>
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election or
vote with fairness to all stockholders.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation or these Bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
The authorized number of directors shall be seven (7). This number may be
changed by a duly adopted amendment to the certificate of incorporation or by an
amendment to this bylaw adopted by the vote or written consent of the holders of
a majority of the stock issued and outstanding and entitled to vote or by
resolution of a majority of the board of directors.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
(a) For so long as the Board of Directors consists of more than two
directors, the directors shall be divided into three classes, designated
Class I, Class II and Class III. Each class shall consist, as nearly as
possible, of one-third (1/3) of the total number of directors constituting the
entire Board of Directors. At any time following the effectiveness of this
provision, but before the first annual meeting of the stockholders held after
the effectiveness of this provision, the Board of Directors may designate by
resolution the classification of existing directors, with the initial terms of
such directors as follows: Class I directors will serve until the first annual
meeting of the stockholders held after the effectiveness of this provision,
Class II directors will serve until the second annual meeting of the
stockholders held after the effectiveness of this provision and Class III
directors will serve until the third annual meeting of the stockholders held
after the effectiveness of this provision. At the first annual meeting of the
stockholders held after the effectiveness of this provision and at each
succeeding annual meeting of stockholders, successors to the class of directors
whose term expires at such annual meeting shall be elected for three-year terms.
If the number of directors is changed, any increase or decrease shall be
apportioned among the classes so as to maintain the number of directors
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in each class as nearly equal as possible, and any additional directors of any
class elected to fill a vacancy resulting from an increase in such class shall
hold office for a term that shall coincide with the remaining term of that
class, but in no case will a decrease in the number of directors shorten the
term of any incumbent director. Notwithstanding the foregoing, this provision
will become effective only when the corporation becomes a "listed corporation"
within the meaning of Section 301.5 of the California Corporations Code, until
such time, all directors shall be elected at each annual meeting of stockholders
to hold office until the next annual meeting.
(b) A director shall hold office until the annual meeting for the
year in which his or her term expires and until his or her successor shall be
elected and shall qualify, subject, however, to prior death, resignation,
retirement, disqualification or removal from office. Except as otherwise
required by law, any vacancy on the Board of Directors that results from an
increase in the number of directors or any other vacancy occurring in the Board
of Directors shall be filled by a majority of the directors then in office, even
if less than a quorum, or by a sole remaining director. Any director elected to
fill a vacancy not resulting from an increase in the number of directors shall
have the same remaining term as that of his or her predecessor.
(c) Directors need not be stockholders unless so required by the
certificate of incorporation or these Bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to
fill a vacancy, shall hold office until his successor is elected and qualified
or until his earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
Any director may resign at any time upon written notice to the corporation.
When one or more directors so resigns and the resignation is effective at a
future date, a majority of the directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become
effective, and each director so chosen shall hold office as provided in this
section in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
Bylaws:
(a) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(b) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
certificate of incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these Bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election
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as provided in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
The board of directors of the corporation may hold meetings, both regular
and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
Bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 FIRST MEETINGS
The first meeting of each newly elected board of directors shall be held at
such time and place as shall be fixed by the vote of the stockholders at the
annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the stockholders to fix the
time or place of such first meeting of the newly elected board of directors, or
in the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
board of directors, or as shall be specified in a written waiver signed by all
of the directors.
3.7 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.
3.8 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two (2) directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of
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the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.9 QUORUM
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
3.10 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these Bylaws.
3.11 ADJOURNED MEETING; NOTICE
If a quorum is not present at any meeting of the board of directors, then
the directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise restricted by the certificate of incorporation or these
Bylaws, any action required or permitted to be taken at any meeting of the board
of directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
3.13 FEES AND COMPENSATION OF DIRECTORS
Unless otherwise restricted by the certificate of incorporation or these
Bylaws, the board of directors shall have the authority to fix the compensation
of directors.
3.14 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to
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benefit the corporation. The loan, guaranty or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.15 REMOVAL OF DIRECTORS
The Board of Directors may declare vacant the office of a director who has
been declared of unsound mind by an order of court or who has been convicted of
a felony.
The entire Board of Directors or any individual director may be removed
from office without cause by the affirmative vote of a majority of the
outstanding shares entitled to vote on such removal; provided, however, that
unless the entire Board is removed, no individual director may be removed when
the votes cast against such director's removal, or not consenting in writing to
such removal, would be sufficient to elect that director if voted cumulatively
at an election at which the same total number of votes cast were cast (or, if
such action is taken by written consent, all shares entitled to vote were voted)
and the entire number of directors authorized at the time of such director's
most recent election were then being elected.
Unless otherwise restricted by statute, by the certificate of incorporation
or by these Bylaws, any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors.
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of such director's term of office.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution passed by a majority of the whole
board, designate one or more committees, with each committee to consist of one
or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors or in the bylaws of the corporation, shall have and may
exercise all the powers and authority of the board of directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers that may require it; but no
such committee shall have the power or authority to (i) amend the certificate of
incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the board of directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix any of the preferences or rights of such shares
relating to dividends, redemption,
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dissolution, any distribution of assets of the corporation or the conversion
into, or the exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of stock of the
corporation), (ii) adopt an agreement of merger or consolidation under
Sections 251 or 252 of the General Corporation Law of Delaware, (iii) recommend
to the stockholders the sale, lease or exchange of all or substantially all of
the corporation's property and assets, (iv) recommend to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or (v) amend
the bylaws of the corporation; and, unless the board resolution establishing the
committee, the bylaws or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend, to
authorize the issuance of stock, or to adopt a certificate of ownership and
merger pursuant to Section 253 of the General Corporation Law of Delaware.
4.2 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these Bylaws, Section 3.5
(place of meetings and meetings by telephone), Section 3.7 (regular meetings),
Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10
(waiver of notice), Section 3.11 (adjournment and notice of adjournment), and
Section 3.12 (action without a meeting), with such changes in the context of
those bylaws as are necessary to substitute the committee and its members for
the board of directors and its members; provided, however, that the time of
regular meetings of committees may also be called by resolution of the board of
directors and that notice of special meetings of committees shall also be given
to all alternate members, who shall have the right to attend all meetings of the
committee. The board of directors may adopt rules for the government of any
committee not inconsistent with the provisions of these Bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a Chairman of the Board, a
President, one or more Vice Presidents, a Secretary, and a Chief Financial
Officer, and any such other officers with such titles and duties as the Board of
Directors may determine.
5.2 ELECTION OF OFFICERS
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Sections 5.3 or 5.5 of these Bylaws, shall
be chosen by the Board of Directors, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or empower the president to appoint,
such
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other officers and agents as the business of the corporation may require, each
of whom shall hold office for such period, have such authority, and perform such
duties as are provided in these Bylaws or as the board of directors may from
time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
Any vacancy occurring in any office of the corporation shall be filled by
the Board of Directors.
5.6 CHAIRMAN OF THE BOARD
The Chairman of the Board, if there be such an officer, shall, if present,
preside at all meetings of the Board of Directors and shall exercise and perform
such other powers and duties as may be assigned from time to time by the Board
of Directors or prescribed by these Bylaws. If no President is appointed, the
Chairman of the Board is the general manager and Chief Executive Officer of the
corporation, and shall exercise all powers of the President described in
Section 5.7 below.
5.7 PRESIDENT
Subject to such powers, if any, as may be given by the Board of Directors
to the Chairman of the Board, if there be such an officer, the President shall
be the general manager and Chief Executive Officer of the corporation and shall
have general supervision and control over the business and affairs of the
corporation, subject to the control of the Board of Directors. The President
may sign and execute, in the name of the corporation, any instrument authorized
by the Board of Directors, except when the signing and execution thereof shall
have been expressly delegated by the Board of Directors or by these Bylaws to
some other officer or agent of the corporation. The President shall have all
the general powers and duties of management usually vested in the president of a
corporation, and shall have such other powers and duties as may be prescribed
from time to time by the Board of Directors or these Bylaws. The President
shall have discretion to prescribe the duties of other officers and employees of
the corporation in a manner not inconsistent with the provisions of these Bylaws
and the directions of the Board of Directors.
5.8 VICE PRESIDENTS
In the absence or disability of the President, in the event of a vacancy in
the office of President, or in the event such officer refuses to act, the Vice
President shall perform all the duties of the President and, when so acting,
shall have all the powers of, and be subject to all the restrictions on, the
President. If at any such time the corporation has more than
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one vice president, the duties and powers of the President shall pass to each
Vice President in order of such Vice President's rank as fixed by the Board of
Directors or, if the Vice Presidents are not so ranked, to the Vice President
designated by the Board of Directors. The Vice Presidents shall have such other
powers and perform such other duties as may be prescribed for them from time to
time by the Board of Directors, the President or pursuant to these Bylaws.
5.9 SECRETARY
The Secretary shall:
(a) Keep, or cause to be kept, minutes of all meetings of the
corporation's stockholders, Board of Directors, and committees of the Board of
Directors, if any. Such minutes shall be kept in written form.
(b) Keep, or cause to be kept, at the principal executive office of
the corporation, or at the office of its transfer agent or registrar, if any, a
record of a corporation's stockholders, showing the names and addresses of all
stockholders and the number of classes of shares held by each. Such records
shall be kept in written form or any other form capable of being converted into
written form.
(c) Keep, or cause to be kept, at the principal executive office of
the corporation, or if the principal office is not in California, at its
principal business office in California, an original or copy of these Bylaws, as
amended.
(d) Give, or cause to be given, notice of all meetings of
stockholders, directors and committees of the Board of Directors, as required by
law or by these Bylaws.
(e) Keep the seal of the corporation, if any, in safe custody.
(f) Exercise such powers and perform such duties as are usually
vested in the office of secretary of a corporation, and exercise such other
powers and perform such other duties as may be prescribed from time to time by
the Board of Directors or these Bylaws.
If any Assistant Secretaries are appointed, the Assistant Secretary,
or one of the Assistant Secretaries in the order of their rank as fixed by the
Board of Directors or, if they are not so ranked, the Assistant Secretary
designated by the Board of Directors, in the absence or disability of the
Secretary or in the event of such officer's refusal to act or if a vacancy
exists in the office of Secretary, shall perform the duties and exercise the
powers of the Secretary and discharge such duties as may be assigned from time
to time pursuant to these Bylaws or by the Board of Directors.
5.10 CHIEF FINANCIAL OFFICER
The Chief Financial Officer shall:
(a) Be responsible for all functions and duties of the treasurer of
the corporation.
(b) keep and maintain, or cause to be kept and maintained, adequate
and correct books and records of account for the corporation.
(c) Receive or be responsible for receipt of all monies due and
payable
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to the corporation from any source whatsoever; have charge and custody of, and
be responsible for, all monies and other valuables of the corporation and be
responsible for deposit of all such monies in the name and to the credit of the
corporation with such depositories as may be designated by the Board of
Directors or a duly appointed and authorized committee of the Board of
Directors.
(d) Disburse or be responsible for the disbursement of the funds of
the corporation as may be ordered by the Board of Directors or a duly appointed
and authorized committee of the Board of Directors.
(e) Render to the Chief Executive Officer and the Board of Directors
a statement of the financial condition of the corporation if called upon to do
so.
(f) Exercise such powers and perform such duties as are usually
vested in the office of chief financial officer of a corporation, and exercise
such other powers and perform such other duties as may be prescribed by the
Board of Directors or these Bylaws.
If any Assistant Financial Officer is appointed, the Assistant
Financial Officer, or one of the Assistant Financial Officers, if there are more
than one, in the order of their ranks as fixed by the Board of Directors or, if
they are not so ranked, the Assistant Financial Officers designated by the Board
of Directors, shall, in the absence or disability of the Chief Financial Officer
or in the event of such officer's refusal to act, perform the duties and
exercise the powers of the Chief Financial Officer, and shall have such powers
and discharge such duties as may be assigned from time to time pursuant to these
Bylaws or by the Board of Directors.
5.11 COMPENSATION
The compensation of the officers shall be fixed from time to time by the
Board of Directors, and no officer shall be prevented from receiving such
compensation by reason of the fact that such officer is also a director of the
corporation.
5.12 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the stockholders.
ARTICLE VI
INDEMNITY
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware, indemnify each of its directors and
officers against expenses (including attorneys' fees), judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding, arising by reason of the fact that such person is or was an
agent of the corporation. For purposes of this Section 6.1, a "director" or
"officer" of the corporation includes any person (i) who is or was a director or
officer of the corporation, (ii) who is or was serving at the request of the
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corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the extent and in the manner
permitted by the General Corporation Law of Delaware, to indemnify each of its
employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the corporation (other
than a director or officer) includes any person (i) who is or was an employee or
agent of the corporation, (ii) who is or was serving at the request of the
corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was an employee or agent of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.3 INSURANCE
The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of the General Corporation Law of Delaware.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these Bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
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The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the president, any vice president, the
treasurer, the secretary or assistant secretary of this corporation, or any
other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
ARTICLE VIII
GENERAL MATTERS
8.1 CHECKS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 BANK ACCOUNTS
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The Board of Directors or its duly appointed and authorized committee from
time to time may authorize the opening and keeping of general and/or special
bank accounts with such banks, trust companies, or other depositories as may be
selected by the Board of Directors, its duly appointed and authorized committee
or by any officer or officers, agent or agents, of the corporation to whom such
power may be delegated from time to time by the Board of Directors. The Board
of Directors or its duly appointed and authorized committee may make such rules
and regulations with respect to said bank accounts, not inconsistent with the
provisions of these Bylaws, as are deemed advisable.
8.3 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
The board of directors, except as otherwise provided in these Bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.4 LOANS
No loans shall be contracted on behalf of the corporation and no negotiable
paper shall be issued in its name, unless and except as authorized by the Board
of Directors or its duly appointed and authorized committee. When so authorized
by the Board of Directors or such committee, any officer or agent of the
corporation may effect loans and advances at any time for the corporation from
any bank, trust company, or other institution, or from any firm, corporation or
individual, and for such loans and advances may make, execute and deliver
promissory notes, bonds or other evidences of indebtedness of the corporation
and, when authorized as aforesaid, may mortgage, pledge, hypothecate or transfer
any and all stocks, securities and other property, real or personal, at any time
held by the corporation, and to that end endorse, assign and deliver the same as
security for the payment of any and all loans, advances, indebtedness, and
liabilities of the corporation. Such authorization may be general or confined
to specific instances.
8.5 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of a corporation shall be represented by certificates, provided
that the board of directors of the corporation may provide by resolution or
resolutions that some or all of any or all classes or series of its stock shall
be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the treasurer
or an assistant treasurer, or the secretary or an assistant secretary of such
corporation representing the number of shares registered in certificate form.
Any or all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate has ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer, transfer agent or
registrar at the date of issue.
The corporation may issue the whole or any part of its shares as partly
paid and
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subject to call for the remainder of the consideration to be paid therefor.
Upon the face or back of each stock certificate issued to represent any such
partly paid shares, upon the books and records of the corporation in the case of
uncertificated partly paid shares, the total amount of the consideration to be
paid therefor and the amount paid thereon shall be stated. Upon the declaration
of any dividend on fully paid shares, the corporation shall declare a dividend
upon partly paid shares of the same class, but only upon the basis of the
percentage of the consideration actually paid thereon.
8.6 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.7 LOST CERTIFICATES
Except as provided in this Section 8.7, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and canceled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.
8.8 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the delaware general corporation law shall
govern the construction of these bylaws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
8.9 DIVIDENDS
The directors of the corporation, subject to any restrictions contained in
the certificate of incorporation, may declare and pay dividends upon the shares
of its capital stock pursuant to the General Corporation Law of Delaware.
Dividends may be paid in cash, in property, or in shares of the corporation's
capital stock.
The directors of the corporation may set apart out of any of the funds of
the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing
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dividends, repairing or maintaining any property of the corporation, and meeting
contingencies.
8.10 FISCAL YEAR
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
8.11 SEAL
This Corporation shall have a corporate seal, which shall have the name of
the corporation inscribed thereon and shall otherwise be in such form as may be
approved from time to time by the Board of Directors.
8.12 TRANSFER OF STOCK
Upon surrender to the corporation or the transfer agent of the corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate, and record the transaction in its books.
8.13 STOCK TRANSFER AGREEMENTS
The corporation shall have power to enter into and perform any agreement
with any number of stockholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
8.14 REGISTERED STOCKHOLDERS
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote; provided, however, that the
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal bylaws.
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ARTICLE X
DISSOLUTION
If it should be deemed advisable in the judgment of the board of directors
of the corporation that the corporation should be dissolved, the board, after
the adoption of a resolution to that effect by a majority of the whole board at
any meeting called for that purpose, shall cause notice to be mailed to each
stockholder entitled to vote thereon of the adoption of the resolution and of a
meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with
Section 103 of the General Corporation Law of Delaware. Upon such certificate's
becoming effective in accordance with Section 103 of the General Corporation Law
of Delaware, the corporation shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent in
writing, either in person or by duly authorized attorney, to a dissolution, no
meeting of directors or stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103 of the General
Corporation Law of Delaware. Upon such consent's becoming effective in
accordance with Section 103 of the General Corporation Law of Delaware, the
corporation shall be dissolved. If the consent is signed by an attorney, then
the original power of attorney or a photocopy thereof shall be attached to and
filed with the consent. The consent filed with the Secretary of State shall
have attached to it the affidavit of the secretary or some other officer of the
corporation stating that the consent has been signed by or on behalf of all the
stockholders entitled to vote on a dissolution; in addition, there shall be
attached to the consent a certification by the secretary or some other officer
of the corporation setting forth the names and residences of the directors and
officers of the corporation.
ARTICLE XI
CUSTODIAN
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
The Court of Chancery, upon application of any stockholder, may appoint one
or more persons to be custodians and, if the corporation is insolvent, to be
receivers, of and for the corporation when:
(a) at any meeting held for the election of directors the
stockholders are so divided that they have failed to elect successors to
directors whose terms have expired or would have expired upon qualification of
their successors; or
(b) the business of the corporation is suffering or is threatened
with irreparable injury because the directors are so divided respecting the
management of the
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affairs of the corporation that the required vote for action by the board of
directors cannot be obtained and the stockholders are unable to terminate this
division; or
(c) the corporation has abandoned its business and has failed within
a reasonable time to take steps to dissolve, liquidate or distribute its assets.
11.2 DUTIES OF CUSTODIAN
The custodian shall have all the powers and title of a receiver appointed
under Section 291 of the General Corporation Law of Delaware, but the authority
of the custodian shall be to continue the business of the corporation and not to
liquidate its affairs and distribute its assets, except when the Court of
Chancery otherwise orders and except in cases arising under Sections 226(a)(3)
or 352(a)(2) of the General Corporation Law of Delaware.
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SUBLEASE
THIS SUBLEASE ("Sublease") dated as of May 21, 1997, is made by and between
Chevron U.S.A. Inc., a Pennsylvania corporation, by its Chevron Real Estate
Management Company division ("Sublandlord"), and Hambrecht & Quist California, a
California corporation ("Subtenant").
RECITALS
THIS SUBLEASE is entered on the basis of the following facts, intentions
and understandings:
A. Chevron Corporation, a Delaware corporation ("Chevron") and
Sublandlord entered into that certain Office Lease Agreement (the "Master
Lease") dated January 1, 1994, pursuant to which Chevron leased to Sublandlord
certain premises (the "Master Premises") in that certain building commonly known
as 225 Bush Street, in the City and County of San Francisco, California (herein
called the "Building"), said Master Premises being more particularly described
in said Master Lease.
B. Pacific Resources Development Inc., a California corporation ("Master
Landlord") is the successor to all of Chevron's rignt, title and interest in the
Master Lease pursuant to an Assignment of Leases dated effective October 4,
1994, entered into between Chevron and Master Landlord. The Master Lease has
been amended by that certain First Amendment to Lease made effective April 1,
1995, that certain Second Amendment to Lease made effective April 1, 1995, that
certain Third Amendment to Lease made effective January 1, 1996, that certain
Fourth Amendment to Lease made effective April 1, 1996, that certain Fifth
Amendment to Lease made effective October 14, 1996, and that certain Sixth
Amendment to Lease made effective January 27, 1997. A copy of the Master Lease,
including all amendments to the Master Lease, is attached to this Sublease as
Exhibit "A" and incorporated herein by this reference.
C. Subtenant desires to sublease from Sublandlord the Subleased Premises
as defined hereinbelow, upon the terms and conditions hereinafter set forth.
D. Unless otherwise defined herein, defined terms shall have the meanings
given them in the Master Lease and any amendments thereto.
NOW, THEREFORE in consideration of the mutual covenants and conditions
contained in this Sublease, Sublandlord and Subtenant agree as follows:
1. RECITALS. The Recitals are incorporated herein as true and correct
statements of fact.
2. SUBLEASE. Sublandlord subleases to Subtenant on the terms and conditions
in this Sublease those certain premises being the fourth (4th) floor of the
Building (the "Subleased Premises"). The Subleased Premises are comprised of
22,675 square feet of Net Rentable Area as depicted on Exhibit "B" attached
hereto and made a part hereof. The Net Rentable Area of the Building is 483,937
square feet, and the Subtenant's pro-rata percentage of the Net Rentable Area of
the Building is 4.69%.
3. TERM OF SUBLEASE. The term of this Sublease (the "Sublease Term") shall
have a "Commencement Date" beginning on July 1, 1997. Unless sooner terminated
pursuant to the provisions of this Sublease, the Sublease Term shall end at
midnight on June 30, 2000 (the "Termination Date").
4. RENT; ADDITIONAL RENT: PAYMENT
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(a) RENT. "Rent" means all amounts Subtenant is obligated, or becomes
obligated, to pay to Sublandlord under this Sublease, including, without
limitation, Base Rent and Additional Rent.
(b) BASE RENT: ADDITIONAL RENT. Subject to any other applicable
provisions of this Sublease, the Rent reserved by Sublandlord and payable by
Subtenant in consideration of and under the terms of this Sublease for each
month of the Sublease Term hereof (prorated on a daily basis for any period less
than an entire month) shall be and consist of:
(i) a base rent (the "Base Rent") of Forty-Two Thousand Five
Hundred Fifteen and 63/100 Dollars ($42,515.63), calculated by multiplying the
Base Rate by the total number of square feet of Net Rentable Area of the
Subleased Premises, and dividing the resulting sum by twelve (12) months; plus
(ii) such other sums of money as shall become due and payable by
Subtenant as Additional Rent (as defined below) hereunder, which Additional Rent
shall be payable as hereinafter provided.
(c) BASE RATE. "Base Rate" means the sum of $22.50 per square foot of Net
Rentable Area of the Subleased Premises per annum during the period from the
Commencement Date until the Expiration Date.
(d) ADDITIONAL RENT. "Additional Rent" means all sums, other than Base
Rent, which Subtenant is or becomes obligated to pay to Sublandlord under this
Sublease, including, but not limited to Additional Operating Expenses (as
defined below).
(e) ADDITIONAL OPERATING EXPENSES. "Additional Operating Expenses" shall
be computed separately for each square foot of Net Rentable Area in the
Subleased Premises for each calendar year or portion thereof commencing January
1, 1998 through the end of the Sublease Term of this Sublease and, for each such
calendar year or portion thereof, shall mean an amount (but not less than zero)
per square foot of Net Rentable Area in the Subleased Premises equal to [(i) -
(ii)] x (iii), where:
(i) is the Arithmetic Average of the Operating Expenses (as defined
below) per square foot of Net Rentable Area in the Building incurred during such
calendar year; and
(ii) is the applicable Master Landlord's Expense Stop (as defined in
Section 4(g) of this Sublease) as to each such square foot of Net Rentable Area
in the Subleased Premises for such calendar year; and
(iii) is a fraction having the number of days in such calendar year
as its denominator and having the number of days of such calendar year which are
included in the applicable leased period of time as its numerator.
(f) OPERATING EXPENSES - ARITHMETIC AVERAGE. The "Arithmetic Average" of
the Operating Expenses per square foot of Net Rentable Area in the Building for
a calendar year shall be determined by dividing the total amount of Operating
Expenses incurred during such calendar year by a sum equal to ninety-five
percent (95%) of the total number of square feet of Net Rentable Area in the
Building.
(g) MASTER LANDLORD'S EXPENSE STOP. The "Master Landlord's Expense Stop"
for all of the Subleased Premises as of the Commencement Date means, for any
full calendar year during the Sublease Term, the quotient obtained by dividing
the total Operating Expenses, grossed up in
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accordance with Section 4(j) of this Sublease, for the calendar year 1997 by the
total number of square feet of Net Rentable Area in the Building, as shown in
Master Landlord's statements for 1997 Operating Expenses (except that for any
period before 1997 Operating Expenses are finally determined, they may be
estimated in good faith by Master Landlord).
(h) OPERATING EXPENSES. Subject to the provisions of Section 4(i) of this
Sublease, "Operating Expenses" means all direct expenses, costs, and
disbursements that Master Landlord shall pay or become obligated to pay with
respect to the operation, maintenance and management of the Subleased Premises,
Building and the Land, except those costs which are the exclusive responsibility
of the Subtenant or any other tenant of the Building under this Sublease or
other applicable leases, including, without limitation, the following:
(i) an amount (the "Management Fee Allocation") equal to the lesser
of: (A) the then current Management Fee Allocation, if any; or (B) one and
75/100 percent (1.75%) of: the Base Rent and Additional Rent (exclusive of the
Management Fee Allocation) of the Building as then currently leased, plus the
remainder of the Building, up to a ninety-five percent (95%) occupancy level of
the Building, at the then current fair market Base Rate per square foot of Net
Rentable Area in the Subleased Premises;
(ii) wages, salaries, and fees of all personnel or entities engaged
in the operation, maintenance, or security of the Building, including but not
limited to taxes, insurance, and benefits relating thereto; provided, however,
that if during the Sublease Term such personnel or entities are also working on
other projects being operated by Master Landlord, their wages, salaries,
benefits, fees, and related expenses shall be allocated by Master Landlord in
good faith among all of such projects, and only that portion of such expenses
allocable to the Building shall be included as an Operating Expense;
(iii) all supplies and materials used in the operation and
maintenance of the Building;
(iv) costs of all maintenance and service agreements for the
Building, including without limitation, alarm service, Janitorial Cleaning
Services, security services, window cleaning' elevator maintenance, landscaping,
and maintenance and operation of the parking facilities;
(v) costs of all insurance relating to the Building, including,
without limitation, the cost of casualty (excluding earthquake) and liability
insurance applicable to the Building and Master Landlord's personal property
used in connection therewith, and the cost of insurance against such perils and
occurrences as are commonly insured against by prudent landlords;
(vi) all taxes, assessments, and other governmental charges, whether
federal, state, county, or municipal and whether assessed by taxing districts or
authorities presently taxing the Building or the Land or by others, subsequently
created or otherwise, and any other taxes and assessments attributable to the
Building and the Land or their operation (collectively called herein "Property
Taxes"); provided, however, Property Taxes shall not include any increase in
such taxes resulting from a change of ownership of the Building or the Land
pursuant to Article XIIIA of the California Constitution and laws, regulations
or rules implementing said Article or from any change in the real property tax
rate or the method of determining assessed value of any such Building or Land
occurring after the date of this Sublease from the real property tax rate or the
assessed value of such Building and Land determined under Article XIIIA of the
California Constitution and laws, regulations or rules implementing the same, as
in effect on the date of this Sublease; and provided further, Property Taxes
shall not include net income (measured by the income of Master Landlord from all
sources or from sources other than solely rent), franchise, documentary
transfer, inheritance or capital stock taxes of Master Landlord, unless levied
or
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assessed against Master Landlord in whole or in part in lieu of, as a substitute
for, or as an addition to any Property Taxes;
(vii) costs of repairs and general maintenance (excluding repairs
and general maintenance paid by proceeds of insurance or by Subtenant or other
third parties, and alterations attributable solely to tenants of the Building);
(viii) amortization of the cost of capital investment items that are
installed primarily to reduce operating costs for the benefit of the Buildings'
tenants, with all such costs, including interest cost, being amortized over the
reasonable life of the capital investment items, and with the reasonable life
and amortization schedules being determined by Master Landlord according to
generally accepted accounting principles, but in no event to extend beyond the
reasonable life of the Building; provided, however, in no event shall such
amortization cost be included in Operating Expenses in excess of the amount of
savings in Operating Expenses realized on account of such capital improvement;
and
(ix) costs of all utilities for the Building, including, but not
limited to, the cost of water, electricity, gas, fuel oil, heating, lighting,
air conditioning, and ventilation for the Building.
(i) ITEMS EXCLUDED FROM "OPERATING EXPENSES". The term "Operating
Expenses" does not include any of the following:
(i) depreciation and amortization, except to the extent provided
in Section 4(h)(viii) of this Sublease;
(ii) costs incurred in renovating or otherwise improving or
decorating or redecorating space for tenants or other occupants in the Building
or vacant space in the Building;
(iii) any compensation paid to clerks, attendants, or other persons
in commercial concessions operated by Master Landlord;
(iv) leasing commissions, attorneys' fees, and other costs or
expenses incurred in connection with negotiations or disputes with tenants or
prospective tenants of the Building;
(v) costs incurred by Master Landlord for alterations, additions,
and replacements that are considered capital expenditures under generally
accepted accounting principles, consistently applied, except to the extent
provided in Section 4(h)(viii) of this Sublease;
(vi) interest, principal, points and fees on any debt, amortization
payments on debts secured by any mortgage or mortgages or other debt instrument
encumbering the Building, and any rental payments under any ground lease or
other underlying leases or lease;
(vii) advertising and promotional expenses, if any;
(viii) costs of repairs or other work occasioned by fire, windstorm,
or other casualty, that are reimbursed to Master Landlord by insurers, and costs
reimbursed to Master Landlord by governmental authorities in connection with
their exercise of the power of eminent domain;
(ix) specific costs specially billed to and paid by specific
tenants, such as abovestandard janitor service, or other services, such as
heating, ventilation or air conditioning in excess of those ordinarily supplied
to occupants of the Building;
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(x) Costs incurred in connection with upgrading the Building to
comply with handicap, life, fire and safety codes and applicable laws,
including, but not limited to the Americans With Disabilities Act;
(xi) Any other expenses which, in accordance with generally
accepted accounting principles, consistently applied, would not normally be
treated as Operating Expenses by a landlord of comparable first-class office
(xii) Costs arising from the negligence or fault of Master Landlord
or its agents, or any vendors, contractors, or providers of materials or
services selected, hired or engaged by Master Landlord or its agents including,
without limitation, the selection of building materials;
(xiii) Notwithstanding any contrary provision of this Sublease,
including, without limitation, any provision relating to capital expenditures,
costs arising from the presence of hazardous materials or substances (as defined
by Applicable Laws identified in Section 13 4 of the Master Lease) in or about
the Building including, without limitation, hazardous substances in the ground,
water or soil, not placed in the Subleased Premises or the Building by
Subtenant;
(xiv) Costs arising from Master Landlord's charitable or political
contributions;
(xv) Costs for sculpture, paintings or other objects of art;
(xvi) Master Landlord's general corporate overhead and general
administrative expenses;
(xvii) Overhead and profit increment paid to Master Landlord for goods
and/or services in the Building to the extent the same exceeds the costs of such
goods and/or services rendered by unaffiliated third parties on a competitive
basis;
(xviii)Costs associated with operation of the business of the
corporate, partnership or other entity which constitutes Master Landlord as the
same are distinguished from the costs of operation of the Building, including
corporate and partnership accounting and legal matters, costs of defending any
lawsuits with any mortgagee (except as the actions of Subtenant may be an
issue), costs of selling, syndicating, financing, mortgaging or hypothecating
any of Master Landlord's interest in the Building, costs of any disputes between
Master Landlord and its employees not engaged in the Buildings' operation, or
disputes between Master Landlord and any management company hired by Master
Landlord to manage the Building; and
(xix) costs of seismic alterations, improvements and repairs
undertaken pursuant to Section 13.4(d) of the Master Lease.
If Operating Expenses for the Building exceed by more than two percent (2%)
the average operating costs for other comparable first-class office buildings in
San Francisco's central business district as indicated in the most recent BOMA
Experience Exchange Report, then the operating costs shall be reduced to the
average operating costs for such comparable first-class office buildings, plus
two percent (2%).
(j) ADJUSTMENT. If the Net Rentable Area of the Building is not at least
ninety-five percent (95%) occupied during any Fiscal Year of the Sublease Term,
an adjustment shall be made in computing the Operating Expenses for that Fiscal
Year so that the Operating Expenses shall be increased for that Fiscal Year to
the amount that, in Master Landlord's reasonable good faith judgment, would have
been incurred had ninety-five percent (95%) of the total Net Rentable Area
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of the Building been occupied during that Fiscal Year. All Operating Expenses
shall be computed according to generally accepted accounting principles,
consistently applied.
(k) FISCAL YEAR. "Fiscal Year" means a period of twelve consecutive
calendar months, commencing on January 1, and ending on December 31, or such
other twelve-month period as Master Landlord may specify from time to time.
(l) OBLIGATION TO PAY ADDITIONAL OPERATING EXPENSES. As Additional Rent,
Subtenant shall pay to Sublandlord an amount (if any) equal to the sum of the
Additional Operating Expenses for each square foot of Net Rentable Area included
in the Subleased Premises during any calendar year or portion thereof commencing
with calendar year 1998 during the Sublease Term. For any partial year, the
Additional Rent, if any, payable by Subtenant under this Section for each square
foot of Net Rentable Area in the Subleased Premises during such portion of a
calendar year shall be calculated on a proportionate per-day basis as described
in Sections 4(e), (f) and (g) of this Sublease.
(m) PAYMENT OF ESTIMATED ADDITIONAL RENT.
(i) ESTIMATE OF ADDITIONAL RENT. At least fifteen (15) days
before the first day of each calendar year during the Sublease Term after
calendar year 1997, Sublandlord shall notify Subtenant of Sublandlord's
reasonable estimate of the amount, if any, of Additional Rent which will become
due by Subtenant under Section 4(1) of this Sublease during the next calendar
year or part thereof.
(ii) MONTHLY INSTALLMENTS. The amount of Additional Rent, if any,
thus estimated by Sublandlord to become due for any such period shall be divided
into equal monthly installments during such period (reduced proportionately for
any partial month) and shall be paid by Subtenant in such equal monthly
installments in advance on the first day of each month during such period.
(iii) EFFECT OF DELAYED NOTICE. If Sublandlord fails to give notice
to Subtenant of Sublandlord's estimate of the amount of Additional Rent to
become due by Subtenant during any period at least fifteen (15) days prior to
commencement of such period as required in Section 4(m)(i), Subtenant shall not
be required to commence paying monthly installments of estimated Additional Rent
for such period until the first day of the first calendar month which ensues at
least fifteen (15) days after notice of such estimate is given by Sublandlord to
Subtenant, in which event the first monthly installment of estimated Additional
Rent to be paid by Subtenant after receipt of such notice shall include all
monthly installments of estimated Additional Rent for such period which would
have become due through such installment payment date if Sublandlord had timely
given notice of estimated Additional Rent for such period as provided for in
Section 4(m)(i) above.
(n) CORRECTION OF ESTIMATED PAYMENTS.
(i) YEAR-END STATEMENT. Within one hundred fifty (150) days, or
reasonably thereafter, after the end of each calendar year during which any
estimated Additional Rent has accrued under Section 4(m) of this Sublease,
Sublandlord shall provide to Subtenant a statement for such calendar year
setting forth, in reasonable detail, the Operating Expenses incurred during such
calendar year and the amount, if any, of Additional Rent due by Subtenant under
Section 4(1) of this Sublease for such calendar year or any portion thereof.
Each time Sublandlord provides Subtenant with an actual statement of Operating
Expenses for the previous calendar year pursuant to this Section 4(n) or an
estimated statement of Operating Expenses for the ensuing calendar year pursuant
to Section 4(m)(i) of this Sublease, such statement shall be itemized on a line
item by line item basis, showing the applicable expense for the applicable year
and the year prior to the applicable year.
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(ii) CORRECTION OF UNDERPAYMENTS. If the actual Additional Rent,
if any, due by Subtenant under Section 4(1) of this Sublease for such calendar
year, or portion thereof, is greater than the estimated Additional Rent paid by
Subtenant under Section 4(m) of this Sublease during such calendar year, or
portion thereof, then within thirty (30) days after receipt of such statement
Subtenant shall pay to Sublandlord the amount of such excess.
(iii) CORRECTION OF OVERPAYMENTS. If the actual Additional Rent, if
any, due by Subtenant under Section 4(1) of this Sublease for such calendar
year, or portion thereof, is less than the estimated Additional Rent paid by
Subtenant under Section 4(m) of this Sublease during such calendar year, or
portion thereof, then Sublandlord shall allow a credit in the amount of such
overpayment against the aggregate payment of Base Rent and estimated Additional
Rent otherwise becoming due under Section 4(b) and Section 4(m) of this Sublease
on the next ensuing monthly payment(s) of Rent date or dates, if any, after
delivery of such statement to Subtenant; provided that if the Sublease Term has
ended or shall end prior to utilization of such entire overpayment as a credit
against Rent hereunder, Sublandlord shall promptly refund such overpayment (to
the extent not credited against Rent otherwise becoming due hereunder) to
Subtenant.
(o) PAYMENT OF RENT. Subtenant shall pay to Sublandlord all Rent
addressed as follows:
c/o Chevron Real Estate Management Company
P.O. Box 297864
Houston, Texas 77297
or elsewhere, as Sublandlord may from time to time designate to Subtenant in
writing, in legal tender for the payment of public and private debts, without
counterclaims, set-off, or deduction except as set forth in this Sublease, in
the following manner:
(i) the Base Rent monthly in advance, without written demand, in
equal monthly installments (except as may be adjusted or modified under this
Sublease) on the first day of each full calendar month during the Sublease Term
and for any other period of occupancy; and
(ii) the Additional Rent, within thirty (30) days after notice
thereof by Sublandlord's invoice or statement for the same, as elsewhere
provided for and authorized herein, and at such other times as this Sublease
provides for the payment of the same.
5. SUBTENANT IMPROVEMENTS. Subtenant accepts the Subleased Premises and all
improvements therein "AS IS", "WHERE IS" and "WITH ALL FAULTS", and Sublandlord
shall not be obligated to make or cause to be made any initial improvements or
alterations to the Subleased Premises as a condition of Subtenant's occupancy of
the Subleased Premises. Sublandlord makes no representations or warranties
regarding the condition of the Subleased Premises or compliance of the Subleased
Premises with applicable statutes, rules and regulations of the City and County
of San Francisco, the State of California, the federal government or any other
governmental entity.
6. LIABILITY. Subtenant shall indemnify, defend and hold harmless the
Sublandlord, Master Landlord, and the Affiliates and Master Landlord and its and
their agents and employees (the "indemnitees") from and against any and all
claims, actions, damages, liability and expense in connection with the loss of
life, personal injury, and/or damage to property arising from or out of (i) any
occurrence in, upon or at the Subleased Premises; or (ii) any occurrence
elsewhere in the Building or on the Land to the extent occasioned by the
negligence or willful misconduct claimed to have been caused by Subtenant or its
agents, employees or contractors; or (iii) any occurrence occasioned by the
violation of any law, regulation or ordinance by Subtenant or its agents,
employees, or contractors, except in all cases to the extent such loss of life,
personal injury, and/or
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damage to property is caused by the gross negligence or willful misconduct of
the indemnitees. In case the indemnitees shall be made a party to any litigation
covered by the foregoing indemnity, then Subtenant shall protect and hold
harmless the indemnitees and pay all costs, penalties, charges, damages,
expenses and reasonable attorneys' fees incurred or paid by the indemnitees
commencing with the first notice that any claim or demand has been made or may
be made, and shall not be limited in any way by any limitation on the amount or
type of damages, compensation, or benefits payable under applicable workers'
compensation acts, disability benefit acts, or other employee benefit acts. The
provisions of this Section shall survive the termination of this Sublease with
respect to any event occurring before such termination.
7. OTHER PROVISIONS OF SUBLEASE. All of the terms and conditions of the
Master Lease are incorporated into and made a part of this Sublease as if
Sublandlord were the Landlord, and Subtenant the Tenant, and the Subleased
Premises the Premises, except for the following: Sections 1.1 (b), 1.1(e), the
definitions of "Net Rentable Area of Basement Storage Space" and "Utility Space"
in 1.2(a), 1.3, 2.1, 3.1, 3.4, 4.1(d), 5.1-5.12, 6.3, 7.1(b), 7.2(b), 7.5, 7.6,
ll.l(a), the last sentence of 11.2, 13.4(b), 14.1(c), 14.2, 14.5, those portions
of 17.2 which relate to the Building, 18.1-18.4, 19.2, 22.1-22.2, 26.1, 27.2,
27.16(b), Exhibit A, Exhibit F. and all amendments to the Master Lease.
Subtenant assumes and agrees to perform the Tenant's obligations under the
Master Lease as described in the preceding sentence during the Sublease Term to
the extent that these obligations are applicable to the Subleased Premises, and
subleases the Subleased Premises subject to the terms and conditions of the
Master Lease. Subtenant will not commit or suffer any act or omission that will
violate any of the provisions of the Master Lease. Sublandlord shall use its
commercially reasonable efforts (which shall not be deemed to require
Sublandlord to commence any legal action against any party or pay any sums of
money to any party) to cause the Master Landlord under the Master Lease to
perform for the benefit of Subtenant those obligations under the Master Lease
which are applicable to this Sublease. If the Master Lease applicable to the
Subleased Premises terminates, at the option of the Master Landlord, this
Sublease will terminate and the parties will be relieved of any further
liability or obligation under this Sublease. However, if the Master Lease
applicable to the Subleased Premises terminates as a result of a default or
breach by Sublandlord or Subtenant under this Sublease or the Master Lease, the
defaulting party will be liable to the nondefaulting party for the damage
suffered as a result of the termination. In no event shall Sublandlord agree
with Master Landlord to terminate or materially amend the Master Lease
applicable to the Subleased Premises without Subtenant's consent, which consent
may be withheld in Subtenant's sole and absolute discretion. However, the
provisions of the preceding sentence shall not be deemed to restrict the
exercise of any right of the Sublandlord under the Master Lease to terminate the
Master Lease applicable to the Subleased Premises, if the exercise of such right
to terminate does not require the consent of the Master Landlord (such rights
shall include, but not be limited to Sections 15 and 16 of the Master Lease).
8. BROKERS. Sublandlord and Subtenant warrant, respectively, to each other,
that each has had no contact with any real estate brokerage firm or agent or
other person who can claim a right to a commission or finder's fee in connection
with the negotiation of this Sublease and that no real estate commissions or
finder's fees are payable in connection herewith, except as to Grubb & Ellis
Company ("Sublandlord's Broker"), whose address is 255 California Street, Suite
1400, San Francisco, CA 94111, and Stein Kingsley Stein ("Subtenant's Broker"),
whose address is 235 Montgomery Street, San Francisco, California 94104.
Sublandlord shall pay a commission to Sublandlord's Broker pursuant to a
separate written agreement with Sublandlord's Broker. The obligations of each
party as to payment of commissions related to this Sublease are also subject to
that certain letter agreement dated effective May 21, 1997 executed by
Sublandlord, Subtenant, Sublandlord's Broker and Subtenant's Broker. Each party
shall indemnify, defend and hold harmless the other party from and against all
expenses, claims, damages (including reasonable attorneys' fees and costs) for
any commission, finder's fee, or other compensation alleged to be owing on
account of the indemnifying party's dealings with any real estate broker or
agent other than the Sublandlord's Broker or the Subtenant's Broker.
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9. PARKING. The Subtenant shall not have the right to use any of the parking
spaces in the Building.
10. RIGHT OF ENTRY
(a) GENERAL. Sublandlord reserves the right to enter the Subleased
Premises during ordinary business hours on reasonable advance written notice to
Subtenant to inspect the Subleased Premises or to ascertain the performance by
Subtenant of the terms and conditions of this Sublease. In an emergency, no
notice will be required for entry.
(b) ACCESS TO UTILITY. The Subleased Premises includes access to the
utility closet located in the Subleased Premises, if such access is required in
relation to Subtenant's telephone service. The configuration of the systems in
the Building providing telephone service to the Sublandlord require that
Sublandlord have access to the utility closet on each floor of the Building,
including the Subleased Premises. Accordingly, Subtenant shall allow Sublandlord
to access the utility closet located in the Subleased Premises. Sublandlord
shall provide Subtenant with reasonable prior oral notice that Sublandlord
desires access to said utility closet, which access shall be during Normal
Business Hours.
11. NOTICES. Any notice, election, report or other correspondence required or
permitted under this Sublease shall be given in writing and shall be either
personally delivered by a reputable commercial courier service which provides
for receipt upon delivery or sent by certified or registered United States Mail
with any necessary postage and charges prepaid, and addressed as follows:
If to Sublandlord: CHEVRON U.S.A. INC.
c/o Chevron Real Estate Management Company
P.O. Box 4619
Houston, Texas 77210
Attn: Leasing Manager
Telephone No. (713)754-2988
If to Subtenant: HAMBRECHT & QUIST
One Bush Street
San Francisco, CA 94120
Attn: Logan Burke
Telephone No. (415) 576-3300
Any notice or other correspondence given hereunder shall be deemed given
only when received by the party to whom such notice is directed. If such
correspondence is sent by certified or registered United States Mail, and if
such correspondence is returned without receipt thereof having been acknowledged
by the addressee's signature, then it shall be deemed to have been received on
the date a United States mailman first attempted delivery of the document in
question. Any party hereto may change its address for receiving notice at any
time by giving written notice of the change to the other party to this Sublease.
12. SPECIAL SERVICES. If Subtenant requires heating and ventilating and air
conditioning for the Subleased Premises during any time outside of Normal
Business Hours, Sublandlord shall furnish it only at Subtenant's written request
prior to 2:00 p.m. on Business Days or prior to 2:00 p.m. of the preceding
Business Day before any weekend or Holiday, and Subtenant will bear the entire
charge therefor, on an hourly basis at the then prevailing rate established for
the Building by the Master Landlord. If the service requested by Subtenant is
not a continuation of service furnished during Normal Business Hours, Subtenant
shall pay for such service at such rate for a period of
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two (2) hours preceding the commencement of services. Nothing in this Section
shall be deemed a covenant of Sublandlord to provide heating, ventilation or air
conditioning for any portion of the Subleased Premises not serviced by such
amenities as of the Commencement Date.
13. VERDICTS INTEREST. Conflicts of interest relating to this Sublease are
strictly prohibited. Except as otherwise expressly provided herein, neither
Subtenant nor any partner, employee or agent of Subtenant, shall give to or
receive from any director, employee or agent of Sublandlord any gift,
entertainment or other favor of significant value, or any commission, fee or
rebate outside the normal course of business. Likewise, neither Subtenant nor
any partner, employee or agent of Subtenant shall enter into any business
relationship with any director, employee or agent of Sublandlord, without prior
written notification thereof to Sublandlord. Subtenant shall promptly notify
Sublandlord of any violation of this subsection and any consideration received
as a result of such violation shall be paid over or credited to Sublandlord. Any
representative(s) authorized by Sublandlord may audit any and all records of
Subtenant for the sole purpose of determining whether there has been compliance
with this subsection.
14. SIGNAGE. No sign, placard, picture, name, advertisement, or notice visible
from the exterior of the Subleased Premises shall be inscribed, painted,
affixed, or otherwise displayed by Subtenant on any part of the Building without
the prior written consent of Sublandlord, which consent may be withheld in
Sublandlord's sole and absolute discretion.
15. ASSIGNMENT OR SUBLEASING BY SUBTENANT; LICENSEES. Notwithstanding the
incorporation of Section 17.1 and 17.2 of the Master Lease into this Sublease
pursuant to Section 7 of this Sublease, Subtenant acknowledges that it is aware
that its rights to assign or sublet the Subleased Premises are subject to the
conditions and restrictions placed upon Sublandlord pursuant to said provisions
of the Master Lease. In addition, the Subleased Premises may be occupied only by
the Subtenant and the following licensees of Subtenant: (1) Paul Pelosi; (2)
Burrill & Company; (3) Doyle & Boissiere; (4) Fletcher Asset Management; and (5)
George Stathakis. The foregoing licensees of Subtenant shall not be deemed to be
sub-subtenants of Subtenant.
16. ALTERATIONS. Subtenant shall not, without Sublandlord's prior written
consent, which consent shall not be unreasonably withheld, make any alterations
to the Subleased Premises. However, Sublandlord's prior written consent shall
not be required for any alterations to the Subleased Premises which do not
affect the Building structure, safety or systems and which cost less than Ten
Thousand Dollars ($10,000.00). Further, in the event that Subtenant desires to
make any alterations to the Subleased Premises which do not affect the Building
structure, safety or systems and which cost less than Ten Thousand Dollars
($10,000.00) per occurrence, such alterations shall not be made without first
providing fifteen (15) days' prior notice to the Master Landlord and Sublandlord
that it intends to make such alterations and which also describes with
particularity the nature of the alterations to be made.
17. ENTIRE AGREEMENT. This Sublease sets forth all the agreements between
Sublandlord and Subtenant concerning the Subleased Premises, and there are no
other agreements either oral or written other than as set forth in this
Sublease.
18. TIME OF ESSENCE. Time is of the essence in this Sublease and each of its
provisions.
19. GOVERNING LAW. This Sublease will be governed by and construed in
accordance with California law.
20. CONSENT OF MASTER LANDLORD. To the extent incorporated in this Sublease,
wherever the Master Lease requires Sublandlord to obtain Master Landlord's
consent prior to taking certain action, this Sublease shall require that
Subtenant also obtain Master Landlord's consent prior to taking any such action.
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IN WITNESS WHEREOF, the parties have executed this Sublease as of the date first
above written.
"Sublandlord" CHEVRON U.S.A. INC., a Pennsylvania corporation, by its
Chevron Real Estate Management Company division
By: /s/ S. R. Hopkins
-----------------------------------------------
Printed: S. R. Hopkins
------------------------------------------
Title: Vice President
--------------------------------------------
"Subtenant" HAMBRECHT & QUIST CALIFORNIA
a California corporation
By: /s/ J. Logan Burke
-----------------------------------------------
Print : J. Logan Burke, Jr.
------------------------------------------
Title: Vice President
--------------------------------------------
Exhibits Attached: Exhibit "A" - Master Lease and Amendments
Exhibit "B" - Subleased Premises
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Exhibit "A"
OFFICE LEASE AGREEMENT
THIS OFFICE LEASE AGREEMENT (this "Lease") dated as of January 1, 1994, is
made between CHEVRON CORPORATION, a Delaware corporation ("Landlord"), and
CHEVRON U.S.A. INC., a Pennsylvania corporation, by its Chevron Real Estate
Management Company division ("Tenant").
CERTAIN DEFINITIONS
Additional Leasehold Improvements - as defined in Section 3.2.
Additional Operating Expenses - as defined in Section 5.5(a).
Additional Rent - as defined in Section 5.4.
Affiliate - as defined in Section 1.2(a).
Applicable Laws - as defined in Section 13.4(b).
Arithmetic Average - as defined in Section 5.5(b).
Base Rate - as defined in Section 5.3.
Base Rent - as defined in Section 5.2(a).
Building - as defined in Section 1.1(c).
Building Contractor - as defined in Article II, Section 1 of EXHIBIT C.
Building Standard Leasehold Improvements - as defined in Section 3.3.
Business Days - as defined in Section 27.3.
Claims - as defined in Section 18.3.
Commencement Date - as defined in Section 2.1(a).
Eligibility Period - as defined in Section 5.14.
Event of Default - as defined in Section 23.1.
Expiration Date - as defined in Section 2.1(a).
Fair Market Rental Rate - as defined in paragraph (f) of EXHIBIT F
(exclusively for use in said paragraph (f)).
Fiscal Year - as defined in Section 5.7(d).
Force Majeure - as defined in Section 27.6.
Holidays - as defined in Section 27.3.
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Interest Rate - as defined in Section 5.13.
Janitorial Cleaning Services - the services provided in EXHIBIT G.
Land - as defined in Section 1.1(c).
Landlord - as defined in the introductory paragraph.
Landlord's Contribution - as defined in Article III, Section 1 of EXHIBIT C.
Landlord's Expense Stop - as defined in Section 5.6.
Lease - as defined In the introductory paragraph and Section 27.18.
Leasehold Improvements - as defined in Section 3.2.
Management Fee Allocation - as defined in Section 5.7(a)(i).
Net Rentable Area - as defined in Section 1.2(a).
Net Rentable Area of Basement Storage Space - as defined in Section 1.2(a).
Non-Building Standard Leasehold Improvements - as defined in Section 3.3.
Non-Reserved Spaces - as defined in Section 22.1(b).
Normal Business Hours - as defined in Section 27.3.
Normal Office Equipment - as defined in Section 7.2(a).
Operating Expenses - as defined in Section 5.7(a).
Original Term - as defined in Section 2.1(e).
Outside Date - as defined in paragraph (f) of EXHIBIT F.
Parking Rent - as defined in Section 22.2(a).
Person - as defined in Section 27.3.
Premises - as defined in Section 1.1(b).
Records Floor - as defined in Section 2.1(d).
Rent - as defined in Section 5.1.
Renewal Term - as defined in Section 2.1(e).
Reserved Spaces - as defined in Section 22.1(a).
Review Period - as defined in Section 5.11(b).
Secured Storage Areas - as defined in Section 1.3.
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Service Areas - as defined in Section 1.2(b)(ii).
Tenant - as defined in the introductory paragraph.
Tenant Contractor - as defined in Article II, Section 1 of EXHIBIT C.
Tenant Space Plan - as defined in Article I, Section 1 of EXHIBIT C.
Tenant Work - as defined in the second introductory paragraph of EXHIBIT C.
Tenant Working Drawings - as defined in Article I, Section 3 of EXHIBIT C.
Term - as defined in Section 2.1(a).
Utility Space - as defined in Section 1.2(a).
ARTICLE 1
PREMISES
SECTION 1.1 DEMISE.
(a) LEASE. Landlord hereby leases to Tenant, and Tenant hereby leases
from Landlord for the Term (as defined below) and subject to the provisions
hereof, to each of which Landlord and Tenant mutually agree, the Premises (as
defined below).
(b) PREMISES. The "Premises" consist of: (i) the square footage of
Net Rentable Area of office space (as defined below) located on Floors 1, 2, 4,
8, 9, 10, 11, 12, 13, 15, 16, 17, 18, Records and 22 of the Building (as defined
below); (ii) the square footage of Net Rentable Area of Basement Storage Space
(as defined below) located on the Basement Floor of the Building and (iii) the
square footage of Utility Space (as defined below) located on the Basement Floor
and Mezzanine Floor of the Building, all as-more particularly identified on the
description and floor plans attached as EXHIBIT A to this Lease.
(c) BUILDING. The "Building" is the office building located at 225
Bush Street, in the City and County of San Francisco, California, and situated
on certain land (the "Land") that is more particularly described in EXHIBIT B to
this Lease. It is specifically understood and agreed that the Building shall
include the garage located in the basement thereof.
(d) ACCESS TO BUILDING. Tenant shall be granted access to the
Building and the Premises twenty-four (24) hours per day, seven (7) days per
week, every day of the year.
(e) ACCESS TO UTILITY CLOSETS. The configuration of the systems in the
Building providing telephone service to the Tenant require that Tenant have
access to the utility closet on each floor of the Building. Tenant is hereby
granted access to all such utility closets for the sole purpose of performing
activities related to Tenant's telephone service. However, for those utility
closets located on a floor not occupied in whole or in part by Tenant, Tenant
shall provide Landlord with reasonable prior oral notice that Tenant desires
access to such utility closet. Prior to entering into any lease of space in the
Building to a third party other than to an affiliate of Tenant, Landlord shall
obtain written approval from such tenant that such tenancy shall be subject to
Tenant's access requirements granted under this Section 1.1(e).
SECTION 1.2 NET RENTABLE AREA.
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(a) GENERAL DEFINITIONS. "Net Rentable Area" is the unit of
measurement for space leased or held for lease to tenants for general business
or storage purposes or utilized for such purposes by Landlord or Affiliates of
Landlord, excluding all Net Rentable Area of Basement Storage Space. "Net
Rentable Area of Basement Storage Space" is the unit of measurement for space
leased or held for lease to tenants for storage purposes or utilized for such
purposes by Landlord or Affiliates of Landlord in the Basement of the Building,
excluding parking areas. "Utility Space" refers to the space used for telephone
and computer equipment storage purposes by Landlord or Affiliates of Landlord in
Basement Floor Room B-58 and Mezzanine Floor Room M-1 of the Building. As used
herein, a company is an "Affiliate" of either Landlord or Tenant if such company
directly or indirectly controls, is controlled by or is under common control
with Landlord or Tenant, as the case may be.
(b) SINGLE OCCUPANCY FLOOR. In the case of a single occupancy floor, the
Net Rentable Area is:
(i) all floor area, measured from the inside finished surface of the
dominant portion of the permanent outer building walls of the Building;
(ii) less the areas ("Service Areas") used for Building stairs, fire
towers, elevator shafts, flues, vent stacks, pipe shafts, and vertical ducts
(which Service Areas shall be measured from the outside walls enclosing such
Service Areas);
(iii) plus any such Service Areas that are for the specific use of the
particular occupant such as special stairs or special elevators.
(c) COLUMNS. No deductions from Net Rentable Area shall be made, for
columns or projections necessary to the Building.
(d) BUILDING TOTAL. The parties agree that the current Net Rentable
Area of the Building is Five Hundred One Thousand Six Hundred Eighty-Six
(501,686) square feet.
SECTION 1.3 LANDLORD'S RIGHT OF ENTRY.
Landlord shall have the right to enter upon the Premises in a reasonable
manner at any time (i) during Normal Business Hours after Landlord gives one
day's prior oral or written notice to Tenant, (ii) in any emergency, in which
event no prior notice need be given to Tenant; or (iii) as otherwise expressly
set forth herein. One or more representatives of Tenant shall be entitled to
accompany Landlord upon any such entry, except in the event of those emergencies
where it is impracticable to contact Tenant to arrange for accompaniment of
Landlord by the Tenant's representative(s). The vaults of Tenant on floors 2,
10, 17, 18 and 19 of the Premises are designated as "Secured Storage Areas".
Notwithstanding any other provision of this Lease, Landlord shall not have the
right to enter upon or access such Secured Storage Areas except in the event of
an emergency. Further, Landlord shall not have the right to possess keys or
combinations to any of the vaults and safes of Tenant located in the Premises.
For the purposes of this Lease, the term "emergency" shall be defined as any
situation or occurrence which Landlord reasonably believes involves imminent
threat or danger of bodily harm to any person or damage to the Building or to
the property of Landlord or of any tenant of the Building or any third party.
During any such entry under this Lease, Landlord shall use its best efforts to
minimize the disruption to Tenant's operations or activities caused thereby.
ARTICLE 2
TERM
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SECTION 2.1 TERM.
(a) COMMENCEMENT AND TERMINATION. The term of this Lease (the "Term")
shall begin as of January 1, 1994 (the "Commencement Date") and, unless sooner
terminated or renewed pursuant to the provisions hereof, or as otherwise
provided herein, shall end as to each leased floor of the Premises at midnight
on the date indicated for such floor on EXHIBIT A to this Lease (the "Expiration
Date").
(b) BASEMENT STORAGE SPACE. The Expiration Date of the Term for the
Basement Storage Space is December 31, 1994. In the event that Tenant is in
possession of the Basement Storage Space on the Expiration Date, then the
tenancy shall continue as to the Basement Storage Space on a month-to-month
basis until either party terminates the month-to-month tenancy by serving on the
other at least thirty (30) days' notice of the intention to terminate.
(c) UTILITY SPACE. The Expiration Date of the Term for the Utility
Space shall coincide with the Expiration Date, as may be renewed, of the last
floor of office space leased to Tenant under Section 2.1(a).
(d) RECORDS FLOOR. The "Records Floor" is that floor of the Building
located between office floors 18 and 19. The Expiration Date of the Term for the
Records Floor is June 30, 1995. In the event that Tenant is in possession of the
Records Floor on the Expiration Date, then the tenancy shall continue as to the
Records Floor on a month-to-month basis until either party terminates the
month-to-month tenancy by serving on the other at least thirty (30) days' notice
of the intention to terminate.
(e) SURRENDER OPTION. In the event of the expiration of the Initial Term
or any Renewal Term as to any floor of the Premises, in lieu of surrendering
such floor of the Premises to Landlord on the Expiration Date, Tenant shall have
the option of surrendering to the Landlord any other floor of the Premises then
being leased by Tenant. Such option shall be exercised no less than six (6)
months prior to the Expiration Date of the Initial Term or of a Renewal Term of
greater than one (1) year in duration, or no less than three (3) months prior to
the Expiration Date of a Renewal Term of less than one (1) year in duration. The
floor being retained by the Tenant shall have a Term with an Expiration Date and
Renewal Options, if any, identical to the floor surrendered. Further, the
provisions of this Section 2.1(e) shall only apply where the floor being
retained and the floor being surrendered have a Net Rentable Area which does not
differ by more than One Thousand (1,000) square feet.
(f) CERTAIN DEFINITIONS. As used in this Lease, the period between the
Commencement Date and the Expiration Date is sometimes referred to as the
"Original" Term, and that portion, if any, of the Term resulting from the
exercise of any renewal option granted pursuant to the terms and conditions of
EXHIBIT F attached hereto and incorporated by reference herein as if fully set
forth, is sometimes referred to as the "Renewal" Term.
SECTION 2.2 QUIET ENJOYMENT.
Provided Tenant performs all of Tenant's obligations under this Lease,
including the payment of Rent (as defined below), Tenant shall, during the Term,
peaceably and quietly enjoy the Premises without disturbance from Landlord or
any other persons acting by, through or under Landlord; subject, however, to the
terms of this Lease and to any ordinances to which the Lease is subject. This
covenant and all other covenants of Landlord in this Lease shall be binding upon
Landlord and its successors only with respect to breaches occurring during its
and their respective ownership of Landlord's interest hereunder.
SECTION 2.3 TENANT'S TERMINATION RIGHTS.
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(a) GENERAL. Notwithstanding anything in either Article 15 or Article 16
hereof to the contrary, if Tenant is notified or becomes aware of any of the
following: (a) damage or destruction of the Building or Premises or any
substantial part thereof so as to interfere materially with Tenant's use of the
Premises and/or the Building; (b) a taking by eminent domain or exercise of
other governmental authority of the Premises and/or the Building or any
substantial part thereof so as to interfere materially with Tenant's use of the
Premises and/or the Building; (c) the inability of Landlord to provide services
to the Premises and/or the Building so as to interfere materially with Tenant's
use of the Premises and/or the Building; or (d) any discovery of hazardous
substances in, on or about the Building not placed in, on or about the Building
by Tenant, except as noted in the study by Ecology and Environment, Inc. dated
November 29, 1993, that may, considering the nature and amount of the substances
involved, substantially interfere with Tenant's use of the Premises (or, in the
prudent business judgment of Tenant and taking into account the standards,
guidances and recommendations included in the definition of "Applicable Laws"
with respect to hazardous substances in Section 13.4(b), could present a health
risk to any occupants of the Premises), Tenant cannot be given reasonable use
of, and access to, a fully repaired, restored, safe and healthful Premises and
Building (except for minor "punch-list" items which will be repaired promptly
thereafter), and the utilities and services pertaining to the Building and
Premises to be provided hereunder by Landlord, all suitable for the efficient
conduct of Tenant's business therefrom, then Tenant may elect to terminate the
Lease upon ten (10) days' written notice sent to Landlord at any time within a
period of ninety (90) days following Tenant's notification or awareness that it
is extremely unlikely that Tenant will be given the reasonable use of, and
access to, a fully repaired, restored, safe and healthful Premises within six
(6) months of the damage, destruction, taking or other interference.
(b) EVENTS DURING LAST YEAR OF TERM FOR EACH FLOOR. In the event of (a)
damage or destruction of the Building and/or Premises or any substantial part
thereof so as to interfere materially with Tenant's use of any floor of the
Premises during the last year of the Term as to such floor; (b) the taking by
eminent domain or exercise of other governmental authority of the Premises or
any substantial part thereof so as to interfere materially with Tenant's use of
any floor of the Premises during the last year of the Term as to such floor; (c)
the inability of Landlord to provide services to the Premises and/or the
Building so as to interfere materially with Tenants use of any floor of the
Premises during the last year of the Term as to such floor; (d) any discovery of
hazardous substances in, on or about the Building not placed in, on or about the
Building by Tenant, except as noted in the study by Ecology and Environment,
Inc. dated November 29, 1993, that may, considering the nature and amount of the
substances involved, substantially interfere with Tenant's use of any floor of
the Premises during the last year of the Term as to such floor (or, in the
prudent business judgment of Tenant and taking into account the standards,
guidances and recommendations included in the definition of "Applicable Laws"
with respect to hazardous substances in Section 13.4(b), could present a health
risk to any occupants of any floor of the Premises during the last year of the
Term as to such floor), should Tenant be prevented from using, and not use, such
floor of the Premises for thirty (30) consecutive days due to the occurrence of
(a), (b), (c) or (d) above, Tenant may elect to terminate the Lease as to such
floor of the Premises upon ten (10) days' written notice sent to Landlord within
a period of sixty (60) days following the occurrence of (a), (b), (c) or (d)
above.
ARTICLE 3
LEASEHOLD IMPROVEMENTS
SECTION 3.1 ORIGINAL TENANT IMPROVEMENTS.
The Premises already contain leasehold improvements from Tenant's prior
occupancy which Tenant may use in connection with its use of the Premises.
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SECTION 3.2 CERTAIN DEFINITIONS.
The original leasehold improvements referred to in Section 3.1 and any
additional leasehold improvements or alterations under this Lease (the
"Additional Leasehold Improvements") are herein collectively called the
"Leasehold Improvements".
SECTION 3.3 STANDARDS FOR ADDITIONAL LEASEHOLD IMPROVEMENTS.
All Additional Leasehold Improvements shall be at least comparable in
nature and quality to leasehold improvements then installed on such floor of the
Building or of a higher nature and quality, except as Landlord shall otherwise
approve in writing and shall, in Landlord's reasonable judgment, be compatible
with the overall plan of the Building. The original Leasehold Improvements
referred to in Section 3.1 and all Additional Leasehold Improvements shall be
deemed "Building Standard Leasehold Improvements," except for such element or
elements of Additional Leasehold Improvements that Landlord specifies in writing
to Tenant at the time Landlord approves the plans and specifications therefor
pursuant to EXHIBIT C shall be deemed "Non-Building Standard Leasehold
Improvements" because they differ substantially in nature or quality from the
leasehold improvements then installed in the Building (including the Premises).
SECTION 3.4 OCCUPANCY.
Landlord and Tenant acknowledge that Tenant is currently in occupancy of
the Premises on the effective date of this Lease.
SECTION 3.5 LIMITATION OF LIABILITY.
Landlord shall have no liability arising from, in connection with, or with
respect to any review made or approval given by Landlord with respect to the
plans and specifications, or changes thereto, or approval of a contractor, as
required or provided for herein, or for any approval of same waived or withheld
by Landlord, and no approval given by Landlord shall diminish Tenant's
obligations as provided herein.
ARTICLE 4
ACCEPTANCE OF THE
PREMISES AND BUILDING BY TENANT
SECTION 4.1 POSSESSION.
Taking possession of the Premises by Tenant as Tenant is doing on the
effective date hereof shall be conclusive evidence that Tenant:
(a) accepts the Premises as suitable for the purposes for which they are
leased, to the best of the Tenant's knowledge;
(b) accepts the Building and every part and appurtenance thereof AS IS,
where is, and with all faults, to the extent such faults are known to Tenant;
(c) waives any claims against Landlord in respect of defects in the
Premises and its appurtenances, their habitability or suitability for any
permitted purpose, to the extent such defects are known to Tenant; and
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(d) acknowledges receipt of any and all notifications from Landlord
required by law relative to the condition of the Premises, the Building, and the
Land upon which the Building is located, including but not limited to: (i)
California Health and Safety Code Section 25359.7 relative to releases (as
defined in Health and Safety Code Sections 25320 and 25321) of hazardous
substances located on or beneath the Premises; (ii) California Health and Safety
Code Sections 25915 through 25924, inclusive, relative to asbestos containing
construction materials in the Building of which the Premises are part; and (iii)
California Health and Safety Code Sections 25249.5 through 25249.13, inclusive,
relative to discharge or release of chemicals known to the State of California
to cause cancer or reproductive toxicity in drinking water supplied to the
Premises.
SECTION 4.2 LIMITATION OF LIABILITY.
Landlord shall not be liable, except to the extent of Landlord's negligence
or willful misconduct, to Tenant or any of its agents, employees, licensees, or
servants, for any injury or damage to person or property due to the condition or
design of or any defect in the Building or its mechanical systems and equipment
that may now or hereafter exist or occur.
ARTICLE 5
RENT
SECTION 5.1 RENT.
"Rent" means all amounts Tenant is obligated, or becomes obligated, to pay
to Landlord under this Lease, including, without limitation, Base Rent, (as
defined below), Parking Rent (an defined in Section 22.2) and Additional Rent
(as defined below).
SECTION 5.2 BASE RENT; ADDITIONAL RENT.
Subject to any other applicable provisions of this Lease, the Rent reserved
by Landlord and payable by Tenant in consideration of and under the terms of
this Lease for each year of the Term hereof (prorated on a daily basis for any
period less than an entire year) shall be and consist of:
(a) an annual base rent (sometimes herein called "Base Rent") computed by
multiplying the applicable Base Rate for each floor of the Premises (specified
in EXHIBIT A, or if applicable, as determined under the provisions of EXHIBIT F
hereto) times the number of square feet of Net Rentable Area and Net Rentable
Area of Basement Storage Space contained within such floor of the Premises from
time to time; plus
(b) the Parking Rent, as defined under Section 22.2; plus
(c) such other sums of money as shall become due and payable by Tenant as
Additional Rent (as defined below) hereunder, which Additional Rent shall be
payable as hereinafter provided.
SECTION 5.3 BASE RATE.
"Base Rate" means the amount per square foot of Net Rentable Area and Net
Rentable Area of Basement Storage Space for each floor in the Premises per annum
during the period from the Commencement Date until the Expiration Date, as more
particularly described on EXHIBIT A.
SECTION 5.4 ADDITIONAL RENT.
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"Additional Rent" means all sums, other than Base Rent and Parking Rent,
which Tenant is or becomes obligated to pay to Landlord under this Lease,
including, but not limited to Additional Operating Expenses (as defined below).
SECTION 5.5 ADDITIONAL OPERATING EXPENSES.
(a) DEFINITION. "Additional Operating Expenses" shall be computed
separately for each square foot of Net Rentable Area in the Premises for each
calendar year or portion thereof which ensues after January 1, 1995 and prior to
the end of the Term of this Lease and, for each such calendar year or portion
thereof, shall mean an amount (but not less than zero) per square foot of Net
Rentable Area in the Premises equal to [(i) - (ii)] x (iii), where:
(i) is the Arithmetic Average of the Operating Expenses (as defined
below) per square foot of Net Rentable Area in the Building incurred during such
calendar year; and
(ii) is the applicable Landlord's Expense Stop (as defined in Section
5.6) as to each such square foot of Net Rentable Area in the Premises for such
calendar year; and
(iii) is a fraction having the number of days in such calendar year as
its denominator and having the number of days of such calendar year which are
included in the applicable leased period of time as its numerator.
(b) OPERATING EXPENSES - ARITHMETIC AVERAGE. The "Arithmetic Average"
of the Operating Expenses per square foot of Net Rentable Area in the Building
for a calendar year shall be determined by dividing the total amount of
Operating Expenses incurred during such calendar year by a sum equal to
ninety-five percent (95%) of the total number of square feet of Net Rentable
Area in the Building.
SECTION 5.6 LANDLORD'S EXPENSE STOP.
The "Landlord's Expense Stop" for all of the Premises as of the
Commencement Date means, for any full calendar year during the Term, the
quotient obtained by dividing the total Operating Expenses, grossed up in
accordance with Section 5.7(c), for the calendar year 1994 by the total number
of square feet of Net Rentable Area in the Building, as shown in Landlord's
statements for 1994 Operating Expenses (except that for any period before 1994
Operating Expenses are finally determined, they may be estimated in good faith
by Landlord). The Landlord's Expense Stop shall be recalculated for any portion
of the Premises for which the Original Term has been renewed in accordance with
the terms and conditions of EXHIBIT F.
SECTION 5.7 OPERATING EXPENSES.
(a) DEFINITION. Subject to the provisions of subsection (b) hereof,
"Operating Expenses" means all direct expenses, costs, and disbursements that
Landlord shall pay or become obligated to pay with respect to the operation,
maintenance and management of the Premises, Building and the Land, except those
costs which are the exclusive responsibility of the Tenant or any other tenant
of the Building under this Lease or other applicable leases, including, without
limitation, the following:
(i) an amount (the "Management Fee Allocation") equal to the lesser
of: (A) the then current Management Fee Allocation, if any; or (B) one and
75/100 percent (1.75%) of: the Base Rent and Additional Rent (exclusive of the
Management Fee Allocation) of the Building as then currently leased, plus the
remainder of the Building, up to a ninety-five percent (95%) occupancy level of
the Building, at the then current fair market Base Rate per square foot of Net
Rentable Area in the Premises;
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(ii) wages, salaries, and fees of all personnel or entities engaged in
the operation, maintenance, or security of the Building, including but not
limited to taxes, insurance, and benefits relating thereto; provided, however,
that if during the Term such personnel or entities are also working on other
projects being operated by Landlord, their wages, salaries, benefits, fees, and
related expenses shall be allocated by Landlord in good faith among all of such
projects, and only that portion of such expenses allocable to the Building shall
be included as an Operating Expense;
(iii) all supplies and materials used in the operation and maintenance
of the Building;
(iv) costs of all maintenance and service agreements for the Building,
including without limitation, alarm service, Janitorial Cleaning Services,
security services, window cleaning, elevator maintenance, landscaping, and
maintenance and operation of the parking facilities;
(v) costs of all insurance relating to the Building, including,
without limitation, the cost of casualty (excluding earthquake) and liability
insurance applicable to the Building and Landlord's personal property used in
connection therewith, and the cost of insurance against such perils and
occurrences as are commonly insured against by prudent landlords;
(vi) all taxes, assessments, and other governmental charges, whether
federal, state, county, or municipal and whether assessed by taxing districts or
authorities presently taxing the Building or the Land or by others, subsequently
created or otherwise, and any other taxes and assessments attributable to the
Building and the Land or their operation (collectively called herein "Property
Taxes"); provided, however, Property Taxes shall not include net income
(measured by the income of Landlord from all sources or from sources other than
solely rent), franchise, documentary transfer, inheritance or capital stock
taxes of Landlord, unless levied or assessed against Landlord in whole or in
part in lieu of, as a substitute for, or as an addition to any Property Taxes;
and provided further, that Property Taxes shall not include any increase in such
taxes resulting from a change of ownership of the Building or the Land pursuant
to Article XIIIA of the California Constitution and laws, regulations or rules
implementing said Article or from any change in the real property tax rate or
the method of determining assessed value of any such Building or Land occurring
after the date of this Lease from the real property tax rate or the assessed
value of such Building and Land determined under Article XIIIA of the California
Constitution and laws, regulations or rules implementing the same, as in effect
on the date of this Lease;
(vii) costs of repairs and general maintenance (excluding repairs and
general maintenance paid by proceeds of insurance or by Tenant or other third
parties, and alterations attributable solely to tenants of the Building);
(viii) amortization of the cost of capital investment items that are
installed primarily to reduce operating costs for the benefit of the Buildings'
tenants, with all such costs, including interest cost, being amortized over the
reasonable life of the capital investment items, and with the reasonable life
and amortization schedules being determined by Landlord according to generally
accepted accounting principles, but in no event to extend beyond the reasonable
life of the Building; provided, however, in no event shall such amortization
cost be included in Operating Expenses in excess of the amount of savings in
Operating Expenses realized on account of such capital improvement; and
(ix) costs of all utilities for the Building, including, but not
limited to, the cost of water, electricity, gas, fuel oil, heating, lighting,
air conditioning, and ventilation for the Building.
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(b) EXCLUDED ITEMS. The term "Operating Expenses" does not include any
of the following:
(i) depreciation and amortization, except to the extent provided in
Section 5.7(a)(viii);
(ii) costs incurred in renovating or otherwise improving or decorating
or redecorating space for tenants or other occupants in the Building or vacant
space in the Building;
(iii) any compensation paid to clerks, attendants, or other persons in
commercial concessions operated by Landlord;
(iv) leasing commissions, attorneys' fees, and other costs or expenses
incurred in connection with negotiations or disputes with tenants or prospective
tenants of the Building;
(v) costs incurred by Landlord for alterations, additions, and
replacements that are considered capital expenditures under generally accepted
accounting principles, consistently applied, except to the extent provided in
Section 5.7(a)(viii);
(vi) interest, principal, points and fees on any debt, amortization
payments on debts secured by any mortgage or mortgages or other debt instrument
encumbering the Building, and any rental payments under any ground lease or
other underlying leases or lease;
(vii) advertising and promotional expenses, if any;
(viii) costs of repairs or other work occasioned by fire, windstorm,
or other casualty, that are reimbursed to Landlord by insurers, and costs
reimbursed to Landlord by governmental authorities in connection with their
exercise of the power of eminent domain;
(ix) specific costs specially billed to and paid by specific tenants,
such as above-standard janitor service, or other services in excess of those
ordinarily supplied to occupants of the Building;
(x) Costs incurred in connection with upgrading the Building to comply
with handicap, life, fire and safety codes and applicable laws, including, but
not limited to the Americans With Disabilities Act;
(xi) Any other expenses which, in accordance with generally accepted
accounting principles, consistently applied, would not normally be treated as
Operating Expenses by a landlord of comparable first-class office buildings;
(xii) Costs arising from the negligence or fault of Landlord or its
agents, or any vendors, contractors, or providers of materials or services
selected, hired or engaged by Landlord or its agents including, without
limitation, the selection of building materials;
(xiii) Notwithstanding any contrary provision of this Lease,
including, without limitation, any provision relating to capital expenditures,
costs arising from the presence of hazardous materials or substances (as defined
by Applicable Laws identified in Section 13.4 hereof) in or about the Buildings
including, without limitation, hazardous substances in the ground, water or
soil, not placed in the Premises or the Building by Tenant;
(xiv) Costs arising from Landlord's charitable or political
contributions;
(xv) Costs for sculpture, paintings or other objects of art;
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(xvi) Landlord's general corporate overhead and general administrative
expenses;
(xvii) Overhead and profit increment paid to Landlord for goods and/or
services in the Building to the extent the same exceeds the costs of such goods
and/or services rendered by unaffiliated third parties on a competitive basis;
(xviii) Costs associated with operation of the business of the
corporate, partnership or other entity which constitutes Landlord as the same
are distinguished from the costs of operation of the Building, including
corporate and partnership accounting and legal matters, costs of defending any
lawsuits with any mortgagee (except as the actions of Tenant may be an issue),
costs of selling, syndicating, financing, mortgaging or hypothecating any of
Landlord's interest in the Building, costs of any disputes between Landlord and
its employees not engaged in the Buildings' operation, or disputes between
Landlord and any management company hired by Landlord to manage the Building;
and
(xix) costs of seismic alterations, improvements and repairs
undertaken pursuant to Section 13.4(d).
If Operating Expenses for the Building exceed by more than two percent (2%)
the average operating costs for other comparable first-class office buildings in
San Francisco's central business district as indicated in the most recent BOMA
Experience Exchange Report, then the operating costs shall be reduced to the
average operating costs for such comparable first-class office buildings, plus
two percent (2%).
(c) ADJUSTMENT. If the Net Rentable Area of the Building is not at
least ninety-five percent (95%) occupied during any Fiscal Year of the Term, an
adjustment shall be made in computing the Operating Expenses for that Fiscal
Year so that the Operating Expenses shall be increased for that Fiscal Year to
the amount that, in Landlord's reasonable good faith judgment, would have been
incurred had ninety-five percent (95%) of the total Net Rentable Area of the
Building been occupied during that Fiscal Year. All Operating Expenses shall be
computed according to generally accepted accounting principles, consistently
applied.
(d) FISCAL YEAR. "Fiscal Year" means a period of twelve consecutive
calendar months, commencing on January 1, and ending on December 31, or such
other twelve-month period as Landlord may specify from time to time.
SECTION 5.8 OBLIGATION TO PAY ADDITIONAL OPERATING EXPENSES.
As Additional Rent, Tenant shall pay to Landlord an amount (if any) equal
to the sum of the Additional Operating Expenses for each square foot of Net
Rentable Area included in the Premises during any calendar year or portion
thereof after calendar year 1994 during the Term of this Lease. For any partial
year, the Additional Rent, if any, payable by Tenant under this Section for each
square foot of Net Rentable Area in the Premises during such portion of a
calendar year shall be calculated on a proportionate per-day basis as described
in Sections 5.5 and 5.6 above.
SECTION 5.9 PAYMENT OF ESTIMATED ADDITIONAL RENT.
(a) ESTIMATE OF ADDITIONAL RENT. At least fifteen (15) days before the
first day of each calendar year during the Term of this Lease after calendar
year 1994, Landlord shall notify Tenant of Landlords good faith estimate of the
amount, if any, of Additional Rent which will become due by Tenant under Section
5.8 during the next calendar year or part thereof.
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(b) MONTHLY INSTALLMENTS. The amount of Additional Rent, if any, thus
estimated by Landlord to become due for any such period shall be divided into
equal monthly installments during such period (reduced proportionately for any
partial month) and shall be paid by Tenant in such equal monthly installments in
advance on the first day of each month during such period; provided that if
Additional Rent is estimated to accrue under Section 5.8 during a portion only
of such period (as, for example, a portion of a calendar year during which the
Term hereof ends), the entire amount of such estimated Additional Rent shall be
payable in equal monthly installments during the portion of such period during
which it is estimated to accrue.
(c) EFFECT OF DELAYED NOTICE. If Landlord fails to give notice to
Tenant of Landlord's estimate of the amount of Additional Rent to become due by
Tenant during any period at least fifteen (15) days prior to commencement of
such period as required in Section 5.9(a), Tenant shall not be required to
commence paying monthly installments of estimated Additional Rent for such
period until the first day of the first calendar month which ensues at least
fifteen (15) days after notice of such estimate in given by Landlord to Tenant,
in which event the first monthly installment of estimated Additional Rent to be
paid by Tenant after receipt of such notice shall include all monthly
installments of estimated Additional Rent for such period which would have
become due through such installment payment date if Landlord had timely given
notice of estimated Additional Rent for such period as provided for in Section
5.9(a) above.
SECTION 5.10 CORRECTION OF ESTIMATED PAYMENTS.
(a) YEAR-END STATEMENT. Within one hundred fifty (150) days, or
reasonably thereafter, after the end of each calendar year during which any
estimated Additional Rent has accrued under Section 5.9 above, Landlord shall
provide to Tenant a statement for such calendar year setting forth, in
reasonable detail, the Operating Expenses incurred during such calendar year and
the amount, if any, of Additional Rent due by Tenant under Section 5.8 for such
calendar year or any portion thereof. Each time Landlord provides Tenant with an
actual statement of Operating Expenses for the previous calendar year pursuant
to this Section 5.10(a) or an estimated statement of Operating Expenses for the
ensuing calendar year pursuant to Section 5.9(a), such statement shall be
itemized on a line item by line item basis, showing the applicable expense for
the applicable year and the year prior to the applicable year.
(b) CORRECTION OF UNDERPAYMENTS. If the actual Additional Rent, if any,
due by Tenant under Section 5.8 for such calendar year, or portion thereof, is
greater than the estimated Additional Rent paid by Tenant under Section 5.9
during such calendar year, or portion thereof, then within thirty (30) days
after receipt of such statement Tenant shall pay to Landlord the amount of such
excess.
(c) CORRECTION OF OVERPAYMENTS. If the actual Additional Rent, if any,
due by Tenant under Section 5.8 for such calendar year, or portion thereof, is
less than the estimated Additional Rent paid by Tenant under Section 5.9 during
such calendar year, or portion thereof, then Landlord shall allow a credit in
the amount of such overpayment against the aggregate payment of Base Rent and
estimated Additional Rent otherwise becoming due under Section 5.2 and Section
5.9 on the next ensuing monthly payment(s) of Rent date or dates, if any, after
delivery of such statement to Tenant; provided that if the Term of this Lease
has ended or shall end prior to utilization of such entire overpayment as a
credit against Rent hereunder, Landlord shall promptly refund such overpayment
(to the extent not credited against Rent otherwise becoming due hereunder) to
Tenant.
SECTION 5.11 TENANT'S RIGHT TO AUDIT RECORDS.
(a) Provided Tenant is not in default under the terms of this Lease,
Tenant may once per calendar year, at its own expense (except as otherwise
provided below), at all reasonable times
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audit and copy or reproduce Landlord's books and records relating to Additional
Rent under this Lease for the sole purpose of determining compliance with the
terms of this Lease and whether generally accepted accounting principles have
been followed and consistently applied. This audit must take place during
reasonable business hours in an office located in the Building and only after
three (3) days' prior written notice to Landlord of the date and time the audit
will commence. In the event Tenant's audit results in an adjustment in favor of
Tenant of Additional Rent under this Lease payable during the calendar year
under audit of three percent (3%) or more, then Landlord shall reimburse Tenant
for the cost of such audit, in addition to any amount owing by Landlord to
Tenant under Section 5.10 hereof.
(b) Notwithstanding any sections of the Lease to the contrary, in the
event of any dispute regarding the amount due as Tenant's share of Operating
Expenses and/or the amount due as Additional Rent pursuant to Section 5.8,
Tenant shall have the right, after reasonable notice and at reasonable times at
a maximum rate permitted under state or federal law, if the aforesaid rate
exceeds such maximum (such rate is referred to herein as the "Interest Rate").
SECTION 5.12 PAYMENT OF RENT.
Tenant shall pay to Landlord all Rent at Landlord's offices in San
Francisco, California, or elsewhere, as Landlord may from time to time
designate to Tenant in writing, in legal tender for the payment of public and
private debts, without counterclaims, set-off, or deduction except as set forth
in this Lease, in the following matter:
(a) the Base Rent and Parking Rent, monthly in advance, without written
demand, in equal monthly installments (except as may be adjusted or modified
under this Lease) on the first day of each full calendar month during the Term
and for any other period of occupancy: and
(b) the Additional Rent, within thirty (30) days after notice thereof by
Landlord's invoice or statement for the same, as elsewhere provided for and
authorized herein, and at such other times as this Lease provides for the
payment of the same.
SECTION 5.13 FAILURE TO PAY; INTEREST.
All past-due Rent shall bear interest commencing with the sixth day after
the due date, until paid, at the lesser of (i) the rate of interest per annum
equal to the interest rate then being quoted by Bank of America National Trust
and Savings Association (or its successor) as its "reference rate" for
commercial loans to its most creditworthy borrowers, plus two (2) points, or
(ii) the maximum rate permitted under state or federal law, if the aforesaid
rate exceeds such maximum (such rate is referred to herein as the "Interest
Rate").
SECTION 5.14 ABATEMENT OF RENT WHEN TENANT IS PREVENTED FROM USING PREMISES.
Notwithstanding any of Tenant's other rights to abatement of rent as set
forth in this Lease, if Tenant is prevented from using, and does not use, the
Premises or any portion thereof, for five (5) consecutive Business Days or ten
(10) days in any twelve (12) month period (the "Eligibility Period") as a result
of any damage or destruction to the Premises or any repair, maintenance or
alteration performed by Landlord after the Commencement Date, which
substantially interferes with Tenant's use of the Premises, or any failure to
provide services or access to the Premises or because of an eminent domain
proceeding or because of the presence (other than because of the act of Tenant)
of hazardous substances in, on or about the Building or the Premises which
could, in Tenant's prudent business judgment and taking into account the
standards, guidances and recommendations included in the definition of
Applicable Laws described in Section 13.4 with respect to hazardous substances,
pose a health risk to occupants of the Premises, then Tenant's
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Rent shall be abated or reduced, as the case may be, after expiration of the
Eligibility Period for such time that Tenant continues to be so prevented from
using, and does not use, the Premises or a portion thereof, in the proportion
that the Net Rentable Area of the portion of the Premises that Tenant is
prevented from using, and does not use, bears to the total Net Rentable Area of
the Premises. However, in the event that Tenant is prevented from conducting,
and does not conduct, its business in any portion of the Premises for a period
of time in excess of the Eligibility Period, and the remaining portion of the
Premises is not sufficient to allow Tenant to effectively conduct its business
therein, and if Tenant does not conduct its business from such remaining
portion, then for such time after expiration of the Eligibility Period during
which Tenant is so prevented from effectively conducting its business therein,
the Rent for the entire Premises shall be abated; provided, however, if Tenant
reoccupies and conducts its business from any portion of the Premises during
such period, the Rent allocable to such reoccupied portion, based on the
proportion that the Net Rentable Area of such reoccupied portion of the Premises
bears to the total Net Rentable Area of the Premises, shall be payable by Tenant
from the date such business operations commence. If Tenant's right to abatement
occurs because of an eminent domain taking and/or because of damage or
destruction to the Premises or Tenant's property, Tenant's abatement period
shall continue until Tenant has been given sufficient time, and sufficient
access to the Premises, to rebuild the portion of the Premises it is required to
rebuild, to install its property, furniture, fixtures, and equipment and to move
in over a weekend. To the extent Tenant is entitled to abatement without regard
to the Eligibility Period, because of an event covered by Article 15, then the
Eligibility Period shall not be applicable.
ARTICLE 6
SERVICES BY LANDLORD
SECTION 6.1 STANDARD SERVICES.
While Tenant is occupying the Premises and is not in default under this
Lease, Landlord shall furnish the Premises with:
(a) passenger elevator service in common with other tenants for access to
and from the Premises as is customarily provided to tenants in first-class
office buildings in downtown San Francisco, California, provided that Landlord
may reasonably limit the number of elevators to be operated before or after
Normal Business Hours (as defined in Section 27.3 hereof) and on Holidays (as
defined in section 27.3 hereof);
(b) the Janitorial Cleaning Services described on EXHIBIT G;
(c) replacement, as necessary, of all lamps and ballasts in the light
fixtures now exiting or hereafter installed with Landlord 'a approval within the
Premises (except for any light fixtures which Landlord designates as
Non-Building Standard pursuant to Section 3.3);
(d) window washing, at least three (3) times per year; and
(e) the services provided for in Sections 7.1 and 7.2 below.
SECTION 6.2 ADDITIONAL SERVICES.
If Tenant requires services that Landlord is not specifically required to
furnish under this Lease and Landlord elects to provide such services to Tenant,
Tenant will pay to Landlord, as Additional Rent, upon demand, the cost of
providing such services.
SECTION 6.3 JANITORIAL SERVICES OPTION.
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Effective at any time during the Term, Tenant shall have the option to have
Janitorial Cleaning Services for any or all of the Net Rentable Area then
occupied by Tenant under the Lease performed by Tenant or portion contracting
directly with Tenant, in lieu of having such services provided by the Landlord
under the Lease. Such option may be exercised and shall take effect upon written
notice to the Landlord and may also be rescinded, either temporarily or for the
duration of the Term, at any time upon notice to Landlord. In the event of the
exercise of such option, an amount per square foot of Rentable Area under the
Lease per year for which the option has been exercised shall be deducted from
the Rent payable to Landlord under the Lease on a monthly basis, such amount to
consist of the average janitorial costs for other comparable first-class office
buildings in San Francisco's central business district as indicated in the most
recent BOMA Experience Exchange Report, but not less than One and 60/100 Dollars
($1.60) per square foot of Rentable Area per year. Amounts deductible for any
partial month shall be prorated. Tenant and Landlord shall cooperate to amend
the Lease or execute any other document to evidence or effectuate the provisions
of this Section.
ARTICLE 7
UTILITIES
SECTION 7.1 STANDARD SERVICES.
(a) THE SERVICES. While Tenant is occupying the Premises and is not in
default under this Lease, Landlord shall furnish the Premises the following
services:
(i) hot and cold potable water at those points of supply provided
periodically for normal lavatory use by tenants in the Building and such other
locations as are now provided in the Premises;
(ii) heating, ventilating and air conditioning in season during Normal
Business Hours for those portions of the Building serviced by such amenities as
of the Commencement Date and at such temperatures and in such amounts as result
in a comfortable air temperature within the Premises;
(iii) electric lighting for public areas and special service areas of
the Building; and
(iv) such other services as Landlord has provided to Tenant
customarily in the past. It is specifically understood and agreed between
Landlord and Tenant that the majority of the Building is not presently
air-conditioned, but that the Landlord shall pay for operation, maintenance and
repair of any air conditioning servicing the Premises existing on the
Commencement Date or installed thereafter as part of Tenant's Leasehold
Improvements. However, none of the provisions of this Section 7 shall be deemed
to obligate Landlord to provide air conditioning to such portion of the Premises
not provided with air conditioning as of the Commencement Date.
(b) SPECIAL SERVICES. With respect to heating and ventilating and air
conditioning, if Tenant requires such services during any season outside the
hours and days specified above, Landlord shall furnish it only at Tenant's
written request prior to 2:00 p.m. on Business Days or prior to 2:00 p.m. of the
preceding Business Day before any weekend or Holiday, and Tenant will bear the
entire charge therefor.
SECTION 7.2 LIGHTING AND ELECTRICAL POWER.
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(a) STANDARD SERVICES. While Tenant is occupying the Premises and is not
in default under this Lease, Landlord will furnish the Premises twenty-four (24)
hours per day, every day of the year, with sufficient power for lighting and for
typewriters, voicewriters, calculating machines, word processors,
microcomputers, duplicating machines and other normal office machines of low
electrical consumption ("Normal Office Equipment"), exclusive of electricity for
(i) special lighting fixtures hereafter installed in the Premises by Tenant
which are designated by Landlord as Non-Building Standard pursuant to Section
3.3 or (ii) any item that consumes more than 0.5 kilowatts per square foot of
Net Rentable Area of the Premises per hour at rated capacity or requires a
voltage other than 120 volts single phase, all of which power shall be supplied
by Landlord and paid for by Tenant as Additional Rent.
(b) SPECIAL ELECTRICITY SERVICES. If Tenant's requirements for electricity
exceed those described above, Landlord, at Tenant's expense, will make
reasonable efforts to supply such service through the then-existing feeders
servicing the Building and will bill Tenant periodically for such additional
service. Such additional consumption shall be determined, at Landlord's
election, either (i) by a survey performed by a reputable consultant selected by
Landlord and paid for by Tenant, or (ii) by a separate meter in the Premises to
be installed, maintained, and read by Landlord at Tenant's sole expense.
(c) LIMIT ON LIABILITY. Landlord will not be liable in any way to
Tenant for any failure or defect in the supply or character of electric energy
or any other utility service furnished to the Premises because of any
requirement, act, or omission of the public utility serving the Building with
electricity or any other utility service, or the limitation, curtailment,
rationing or restrictions on the use of water, electricity, gas or any form of
energy serving the Premises or the Building, whether such results from mandatory
governmental restrictions or voluntary compliance with governmental guidelines.
(d) PRIOR APPROVAL. Except for installation of Normal Office
Equipment, all installations of electrical fixtures, appliances, and equipment
within the Premises will be subject to Landlords prior written approval.
(e) RULES AND REGULATIONS. Landlords obligation to furnish electrical
and other utility services as described in this Article 7 will be subject to the
rules and regulations of the supplier of such electricity or other utility
services and the rules and regulations of any municipal or other governmental
authority regulating the business of providing electricity and other utility
services.
(f) ELECTRICAL LOAD. At all times Tenants use of electrical Current
will never exceed the pro-rata capacity of existing feeders to the Building or
the risers or wiring installations, the capacities of which have been disclosed
by Landlord to Tenant prior to the date hereof.
SECTION 7.3 LIMITATION OF LIABILITY.
Failure to furnish, or any stoppage of, the services provided for in
Article 6 above and this Article 7 arising from causes wholly beyond the
reasonable control of Landlord will neither make Landlord liable in any respect
for damages to any person, property, or business, nor be construed as an
eviction of Tenant, nor relieve Tenant of any of its obligations under this
Lease. Landlord shall use reasonable efforts to cause any such services to be
restored. In addition, if any of the services described in Article 6 above or
this Article 7 or any of the machinery or equipment in the Building should cease
to function properly, break down or be intentionally turned off for testing or
maintenance purposes, Tenant shall have no claim for abatement or reduction of
Rent or damages, nor shall Tenant be relieved of its obligations under this
Lease, nor shall such condition be construed as an eviction of Tenant; provided,
however, if (i) any of the above-described conditions occur, (ii) such condition
prohibits Tenant from using all or a portion of the Premises for their
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intended commercial or professional purposes, and (iii) such condition exists
for seven (7) consecutive days after Tenant provides written notice of the
condition to Landlord, then the Rent shall abate as to that portion of the
Premises that are rendered untenantable for the intended commercial or
professional purposes, as reasonably determined by Landlord. The abatement shall
commence upon the expiration of the seven (7) day period and continue for so
long as the condition exists; provided, however, that if the condition continues
for three (3) months, Tenant shall have the right to terminate this Lease upon
thirty (30) days' written notice to Landlord (which notice may only be given
after the expiration of the three (3) month period), in which event Tenant will
be relieved of all obligations arising after such date hereunder. In
consideration of the terms of this Section 7.3, Tenant waives all rights Tenant
may have at law or in equity, including any rights Tenant may have arising from
implied warranties of suitability, to abate Rent or terminate this Lease on
account of interruption of such services arising from causes wholly beyond the
reasonable control of Landlord other than as provided by this Section 7.3.
SECTION 7.4 METERS.
Landlord may require, at its option but at Landlord's expense, installation
of a meter or meters to monitor Tenant's use of electricity or any chilled water
for cooling purposes.
SECTION 7.5 GRAPHICS.
Tenant shall provide all graphics desired by Tenant in the Premises at
Tenant's expense. All letters and numerals on partially leased floors which are
able to be seen from a general common area of a floor shall be of a size, form
and color approved by Landlord (such approval not to be unreasonably withheld).
SECTION 7.6 BUILDING SECURITY SYSTEMS.
(a) SECURITY SYSTEMS OPTION. Notwithstanding Sections 11.1, 13.4(b)
and 27.13 of this Lease, Tenant shall be entitled, at its sole cost, to install
its own security systems for the Premises, which shall be located within the
Premises, so long as such security systems comply with all applicable laws,
including but not limited to fire and safety laws. Such security systems may
include card reader access for entry to all or portions of the Premises and may
also include installation of additional doors, barriers and other reasonably
necessary appurtenances. However, in the event of installation by Tenant of
security systems which restrict access to the Premises, Tenant shall provide
Landlord with access cards or other means of access to all portions of the
Premises.
(b) LOBBY AND GARAGE SECURITY GUARDS OPTION. In the event that
Landlord sells or conveys the Building during the Term to a third party, Tenant
shall have the option to provide lobby and/or garage security guards for the
Building at the sole cost and expense of Tenant effective at any time after the
closing of such sale or conveyance. The level and extent of such lobby and/or
garage security guard services shall be at the sole discretion of Tenant, and
may include badge checking and registration of all visitors to the Building.
Such option may be exercised by written notice to the Landlord and shall take
effect on the date specified in such notice. Such option may also be rescinded,
either temporarily or for the duration of the Term, at any time upon written
notice to Landlord.
(c) BUILDING SECURITY OPTION. In the event that Landlord sells or
conveys the Building during the Term to a third party, Tenant shall have the
option to maintain the level of security services for the Building then being
provided by the Landlord, at Tenant's sole cost and expense, in lieu of having
security services provided by the Landlord under the Lease, effective at any
time after the closing of such sale or conveyance. Such services may be
performed by Tenant or parties contracting directly with Tenant. Such option may
be exercised by written notice to the
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Landlord and shall take effect on the date specified in such notice. Such option
may also be rescinded, either temporarily or for the duration of the Term, at
any time upon notice to Landlord.
ARTICLE 8
USE AND MAINTENANCE
The Premises shall be used only for general office purposes or any other
business consistent with the character of the Building as reasonably determined
by Landlord and the uses permitted by Landlord of other above-ground floor
office tenants of the Building and for no other purpose. Tenant shall at all
times use and maintain the Premises in a clean, careful, safe, lawful, and
proper manner. The Premises may be occupied by Tenant, the Affiliates of Tenant,
and its and their agents, employees and contractors.
ARTICLE 9
LAWS, ORDINANCES, AND REQUIREMENTS OF PUBLIC AUTHORITIES
SECTION 9.1 COMPLIANCE.
Tenant shall, at its sole expense, comply with all laws, orders,
ordinances, and regulations of federal, state, county, and municipal authorities
and with any directive of any public officer or officers which shall, with
respect to the use of the Premises or to any abatement of nuisance, impose any
violation, order or duty upon Landlord or Tenant arising from Tenants use of the
Premises or from conditions which have been created by or at the insistence of
Tenant or required by reason of a breach of any of Tenants obligations
hereunder.
SECTION 9.2 EXCEPTIONS.
The foregoing obligations of Tenant under this Article 9 shall not apply to
any laws, orders, ordinances, regulations, or directives that must be complied
with by Landlord in order for Landlord to lease space in the Building for
general office purposes.
SECTION 9.3 NOTICE.
If Tenant receives written notice of the violation of any law, order,
ordinance, or regulation referred to in this Article 9, it shall promptly notify
Landlord thereof.
ARTICLE 10
OBSERVANCE OF RULES AND REGULATIONS
SECTION 10.1 RULES AND REGULATIONS.
Tenant and its servants, employees, agents, visitors, and licensees shall
observe faithfully and comply with the Rules and Regulations attached hereto as
EXHIBIT E.
SECTION 10.2 AMENDMENTS AND ENFORCEMENT.
Landlord shall at all times have the right to make reasonable changes in
and additions to the Rules and Regulations and to reasonably enforce the Rules
and Regulations, provided that any changes in existing rules or any new rules or
the enforcement of the rules do not interfere with the lawful conduct of
Tenant's business in the Premises as permitted by this Lease.
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ARTICLE 11
ALTERATIONS
SECTION 11.1 LIMITED RIGHT TO MAKE ALTERATIONS.
(a) WRITTEN CONSENT. Tenant shall not, without Landlord's prior written
consent, which consent shall not be unreasonably withheld, make any alterations
to the Premises. However, Landlord 'a prior written consent shall not be
required for any alterations to the Premises which do not affect the Building
structure, safety or systems and which coat less than Fifty Thousand Dollars
($50,000.00).
(b) APPROVAL OF PLANS. Should Tenant desire to make any alterations for
which prior written consent of the Landlord is required, Tenant agrees to submit
all plans and specifications for same to Landlord for Landlord's written
approval before such work is begun, which approval shall not be unreasonably
withheld or unduly delayed.
(c) CONDITIONS FOR COMMENCING CONSTRUCTION. Upon Tenant's receipt of
Landlord's written approval for those alterations for which prior written
consent of the Landlord is required, Tenant may proceed with the construction of
the approved alterations, but only so long as the alterations are constructed in
substantial compliance with the approved plans and specifications and with the
provisions of Sections 3.3, 3.5 and of this Article 11 and EXHIBIT C.
(d) CONTRACTORS. Except is provided in Section 13.4(b) hereof, all
alterations shell be made at Tenant's expense, either by Tenant's contractors
that have been approved by Landlord (which approval shall not be unreasonably
withheld or unduly delayed), or by Landlord's contractors on terms reasonably
satisfactory to Tenant, including in the latter case a reasonable fee payable by
Tenant to Landlord of up to seven percent (7%) of the actual cost of performing
such work to cover Landlord's overhead, as Tenant and Landlord shall mutually
agree in each case.
(e) STANDARDS FOR CONSTRUCTION. All work in connection with such
alterations shall:
(i) be performed in such a manner as to maintain harmonious labor
relations;
(ii) not alter the exterior appearance of the Building, nor be visible
from the exterior of the Premises;
(iii) not adversely affect the structure or safety of the Building;
(iv) comply with all building, safety, fire, and other codes and
governmental and insurance requirements;
(v) be pursuant to a valid building permit issued by the City and
County of San Francisco obtained at the sole cost and expense of Tenant prior to
commencement of any alterations;
(vi) not result in any usage in excess of Building Standard Leasehold
improvements of water, electricity, gas, heating, ventilating (either during or
after such work) unless prior written arrangements satisfactory to Landlord are
made with respect thereto; and
(vii) be completed promptly and in a good and workmanlike manner.
SECTION 11.2 OWNERSHIP OF LEASEHOLD IMPROVEMENTS.
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All Leasehold Improvements, alterations, and other physical additions made
or installed by or for Tenant in or to the Premises either before or after the
commencement of the Term of this Lease shall be and remain Landlord's property,
except Tenant's furniture, furnishings, personal property, and movable trade
fixtures, and shall not be removed. Tenant shall remove, at Tenant's expense,
all of its furniture, furnishings, personal property, and movable trade fixtures
by the Expiration Date or the date of any earlier termination hereof, and shall
promptly reimburse Landlord for the cost of repairing all damage done to the
Premises or the Building by such removal. All furniture, furnishings, personal
property, and movable trade fixtures remaining in the Premises after expiration
or termination of this Lease may, at Landlord's election, (i) be removed by
Landlord at Tenant's expense and Tenant agrees to reimburse Landlord for the
costs of such removal or (ii) become the property of Landlord without
compensation to Tenant. Notwithstanding the foregoing, the "Standard" service
mark presently located in the executive boardroom on the eighteenth floor of the
Building is the personal property of Tenant, and option (ii) in the preceding
sentence shall not apply to such service mark.
ARTICLE 12
LIENS
SECTION 12.1 OBLIGATION TO KEEP FREE OF LIENS.
Tenant shall keep the Premises free from any liens arising from any work
performed, materials furnished, or obligations incurred by or at the request of
Tenant. All persons either contracting with Tenant or furnishing or rendering
labor and materials to Tenant shall be notified in writing by Tenant that they
must look only to Tenant for payment for any labor and materials. Nothing
contained in this Lease shall be construed as Landlord's consent to any
contractor, subcontractor, laborer, or materialman for the performance of any
labor or the furnishing of any materials for any specific improvement,
alteration, or repair of, or to, the Premises, nor as giving Tenant any right to
contract for, or permit the performance of, any services or the furnishing of
any materials that would result in any liens against the Premises.
SECTION 12.2 DISPOSITION OF LIENS.
If any lien is filed against the Premises or Tenant's leasehold interest
therein, Tenant shall discharge it within ten (10) days after Tenant learns that
the lien has been filed. If Tenant fails to discharge any lien within such
period, then, in addition to any other right or remedy of Landlord, Landlord
may, at its election, discharge the lien by either paying the amount claimed to
be due or obtaining the discharge by deposit with a court or a title company or
by bonding. Tenant shall pay on demand any amount paid by Landlord for the
discharge or satisfaction of any lien, and all reasonable attorneys' fees and
other legal expenses of Landlord incurred in defending any such action or in
obtaining the discharge of such lien, together with all necessary disbursements
in connection therewith.
SECTION 12.3 RIGHT TO CONTEST.
Notwithstanding the foregoing, Tenant may contest the amount or validity of
any such lien, provided that Tenant first posts bond with the appropriate court
in an amount sufficient to indemnify against or to release the lien or
encumbrance, all as required by the law of the State of California, or Tenant
first posts with Landlord an indemnity bond satisfactory to Landlord in all
respects.
ARTICLE 13
ORDINARY REPAIRS
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SECTION 13.1 MAINTENANCE OF PREMISES.
Except as may be specifically provided in this Lease, Tenant shall have no
obligation to maintain or repair the Premises. However, Tenant shall exercise
ordinary care in its usage of the Premises under this Lease. Tenant shall not be
responsible for the costs necessary to repair damage caused by casualty covered
by Landlord's program of insurance for the Building.
SECTION 13.2 SURRENDER OF PREMISES.
Tenant shall, at the end of the Term hereof, surrender to Landlord the
Premises and all alterations, additions, and improvements thereto in the same
condition as when received, ordinary wear and tear excepted.
SECTION 13.3 LANDLORD'S OPTION.
If Tenant fails to make any such repairs promptly, Landlord may, at its
option, make the repairs, and Tenant shall pay Landlord on demand Landlord's
actual costs in making the repairs, plus a reasonable fee of up to ten percent
(10%) of the actual cost of performing such work to cover Landlord's overhead.
SECTION 13.4 LANDLORD'S OBLIGATIONS.
(a) Landlord shall at all times during the Term hereof and at Landlord's
sole cost and expense, keep the Building and every part thereof in good
condition and repair, including making replacements when necessary.
(b) Landlord shall operate, maintain and repair the Building in a
first-class manner and in full compliance with all governmental regulations,
ordinances and laws from time to time in effect including, but not limited to,
laws pertaining to hazardous substances ("Applicable Laws"); and in the case of
hazardous substances, the term "Applicable Laws" will be deemed to include any
standards, guidances or other recommendations issued by nationally recognized
authoritative governmental units or other bodies such as the United States
Environmental Protection Agency, the United States or any relevant state
Occupational Safety and Health Administration, the National Institute of Health,
or the American Congress of Industrial Hygienists) in order to make the Building
and the Premises suitable for business offices. Landlord will be fully
responsible for making all alterations and repairs to the Building and the
Premises at its cost, which shall not be included as Operating Expenses,
resulting from or necessitated by the failure by Landlord and/or Landlord's
contractors to comply with the Applicable Laws, or from Landlord's and/or
Landlord 'e contractor 'e utilization of hazardous substances in violation of
Applicable Laws or which could, in the prudent business judgment of Tenant,
taking into account the standards, guidances and recommendations included in the
definition of Applicable Laws contained herein with respect to hazardous
substances, pose a health risk to occupants of the Premises. During the term of
this Lease, Landlord shall be responsible for removal or encapsulation of any
materials that contain asbestos as necessary to comply with requirements of the
Environmental Protection Agency or any regulatory agency having jurisdiction.
Otherwise, Landlord shall maintain, repair and operate the Building and, subject
to Tenant's repair obligations set forth in this Lease, the Premises, in
excellent condition and repair, shall maintain a safe and healthful environment
in the Building and shall operate, and provide security to, the Building in a
manner comparable to other first-class institutional grade office buildings in
the vicinity of the Building in downtown San Francisco, the cost of which shall
be included in Operating Expenses to the extent provided in Section 5.7.
(c) Landlord has no obligation and has made no promise to alter, remodel,
improve, repair, decorate, or paint the Premises, or any part thereof, except as
specifically set forth in this
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Lease. No representations respecting the condition of the Premises or the
Building have been made by Landlord to Tenant, except as specifically set forth
in this Lease. Except as otherwise provided in this Lease, Tenant hereby waives
any and all rights it may have under California Civil Code Section 1941 and any
and all rights it may have to make repairs at the expense of Landlord or in lieu
thereof to vacate the Premises as provided in California Civil Code Section 1942
or any other law, statute, or ordinance now or hereafter in effect.
(d) SEISMIC ALTERATIONS. IMPROVEMENTS AND REPAIRS. In the event that in
its sole discretion Landlord decides to alter, improve or repair the Building or
the Premises or any part thereof in connection with any voluntary plan or
program of Landlord not required by Applicable Laws to enhance the ability of
the Building or the Premises to withstand and survive any seismic event which in
the reasonable opinion of Landlord might affect the life or safety of Landlord
or Tenant or any other occupant of the Building or the Premises, Landlord shall
have the right at any time during the Term to make such extraordinary
life-safety alterations, improvements or repairs at the sole cost and expense of
Landlord without thereby creating any actual or constructive eviction or
incurring any liability to Tenant therefor and without any abatement of Rent or
claims of damages arising from alleged disruption of Tenants business, except as
provided below in this Section 13.4(d). In the event that Landlord plans to
undertake any such extraordinary life-safety alterations, improvements or
repairs, Landlord shall provide Tenant with reasonable notice thereof Which
shall be at least ninety (90) days), including complete information on the work
to be done and the expected start and completion dates. If Landlord reasonably
concludes that Tenant must vacate a portion or portions of the Premises to
permit Landlord to efficiently accomplish such work, or if Tenant informs
Landlord that it reasonably concludes it cannot conduct its business operations
effectively from the portion or portions of the Premises on which such work is
to be done while it is occurring, then Tenant shall vacate such portion(s) of
the Premises for such period of time that may be necessary for Landlord to
complete the work in question (which period shall not be longer than six (6)
months as to any portion of the Premises). In the event that Tenant is required
by Landlord to vacate a portion or portions of the Premises as aforesaid, there
shall be no actual or constructive eviction or abatement of Rent or any other
liability of Landlord to Tenant of any kind, including but not limited to claims
of damages arising from alleged interruptions of Tenants business, except as
follows: At Tenant's option, Landlord shall:
(1) furnish Tenant without additional cost or charge to Tenant with
office space elsewhere in the Building, or in other first-class office buildings
in the vicinity of the Building in downtown Ban Francisco which in the sole
judgment of Landlord, reasonably exercised, is comparable to the portion or
portions of the Premises Tenant vacates; under this option, Rent shall not abate
under this Lease and Tenant shall occupy such space pursuant to the terms and
conditions hereof for the duration of the work in question; or
(2) abate all Rent under this Lease attributable or allocable to the
portion or portions of the Premises Tenant vacates from the date Tenant vacates
such space to the date Tenant reoccupies such space, in which case Tenant shall
be responsible for finding satisfactory replacement space at Tenant's expense
for the duration of the work in question; and
(3) in either case (1) or (2) above, Landlord shall pay all of
Tenant's reasonable costs of relocating from the vacated portion of the Premises
to the relocation space and then from the relocation space back to the Premises
on completion of the work in question.
SECTION 13.5 TENANT'S RIGHT TO MAKE REPAIRS .
Notwithstanding any provision set forth elsewhere in this Lease to the
contrary, if Tenant provides written notice (or oral notice subsequently
confirmed in writing in the event of an emergency such as damage or destruction
to or of a structural component, or any electrical, plumbing, life safety, HVAC,
mechanical or other system of or in the Building or the Premises
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(including but not limited to damage to the roof, or exterior windows or doors))
to Landlord of an event or circumstance which requires the action of Landlord
with respect to repair and/or maintenance, and Landlord fails to provide such
action within a reasonable period of time, given the circumstances, after the
receipt of such notice, but in any event not later than twenty-one (21) days
after receipt of such notice, then Tenant may proceed to take the required
action upon delivery of an additional ten (10) Business Days' written notice to
Landlord specifying that Tenant is taking such required action, and if such
action was required under the terms of the Lease to be taken by Landlord, then
Tenant shall be entitled to prompt reimbursement by Landlord of Tenant's
reasonable costs and expenses in taking such action plus interest thereon at the
Interest Rate. In the event Tenant takes such action, and such work will affect
the Building's life-safety system, HVAC and/or elevator systems or the
structural integrity of the Building, Tenant shall use only those contractors
used by Landlord in the Building for work on such systems unless such
contractors are unwilling or unable to perform, or timely perform, such work, in
which event Tenant may utilize the services of any other qualified contractor
which normally and regularly performs similar work in comparable first-class
office buildings in the vicinity of the Building in downtown San Francisco.
Further, if Landlord does not deliver a detailed written objection to Tenant
within thirty (30) days after receipt of an invoice by Tenant of its costs of
taking action which Tenant claims should have been taken by Landlord, and if
such invoice from Tenant sets forth a reasonably particularized breakdown of its
costs and expenses in connection with taking such action on behalf of Landlord,
then Tenant shall be entitled to deduct from Rent payable by Tenant under the
Lease, the amount set forth in such invoice. If, however, Landlord delivers to
Tenant within thirty (30) days after receipt of Tenant's invoice, a written
objection to the payment of such invoice, setting forth with reasonable
particularity Landlords reasons for its claim that such action did not have to
be taken by Landlord pursuant to the terms of the Lease or that the charges are
excessive (in which case Landlord shall pay the amount it contends would not
have been excessive), then Tenant shall not be entitled to such deduction from
Rent, but as Tenants sole remedy, Tenant may proceed to claim n default by
Landlord and pursue such remedies as are available to Tenant at law or in
equity.
ARTICLE 14
INSURANCE
SECTION 14 .1 TENANT'S INSURANCE OBLIGATIONS.
(a) COVERAGE. Tenant shall, during the Term and at its sole expense,
obtain and keep in force, with Tenant and Landlord named as insureds therein
(except with respect to Worker's Compensation coverage) as their respective
interests may appear, the following insurance:
(i) fire and lightning insurance, with endorsements for extended
coverage, vandalism, and malicious mischief, upon property of every description
and kind owned by Tenant and located in the Building or for which Tenant is
legally liable or installed by, or on behalf of, Tenant including, without
limitation, office contents, furniture, fittings, installations, fixtures, and
any other personal property, Non-Building Standard Leasehold Improvements and
alterations, in an amount not less than ninety percent (90%) of the full
replacement cost thereof; and, during construction of any additional Leasehold
Improvements or alterations to the Premises, similar insurance on a builders'
risk form covering such additional Leasehold Improvements or alterations to the
Premises;
(ii) commercial general liability coverage, including personal injury,
bodily injury, broad form property damage, operations hazard, owner's protective
coverage, contractual liability, and products and completed operations
liability, in limits not less than $2,000,000 for each occurrence (combined
single limit);
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(iii) worker's compensation and employer's liability insurance, with a
waiver of subrogation endorsement, in form and amount reasonably satisfactory to
Landlord; and
(iv) any other type and coverage of insurance as Landlord may
reasonably require from time to time in each case.
(b) STANDARDS OF COVERAGE. All policies shall be taken out with insurers
that are acceptable to Landlord and in form reasonably satisfactory from time to
time to Landlord. Tenant agrees that certificates of insurance on Landlord's
standard form, or, if required by Landlord, certified copies of each such
insurance policy, will be delivered to Landlord as soon as practicable after the
placing of the required insurance, but not later than the Commencement Date. All
policies shall contain an undertaking by the insurers to notify Landlord in
writing not less than fifteen (15) days before any change, reduction in
coverage, cancellation, or termination thereof. Landlord and Tenant shall review
the limits for the insurance policies required by this Section 14.1 annually,
and policy limits shall be increased to proper and reasonable limits as
circumstances warrant, provided, however, policy limits shall in no event be
reduced below those above stated.
(c) RIGHT TO SELF-INSURE. If and so long as the Tenant maintains a net
worth of at least one billion dollars ($1,000,000,000.00) as calculated under
generally accepted accounting principles, with all real property valued at the
lower of cost or market, then Tenant shall have the right, at its election, to
maintain all such insurance required under Section 14.1 under a program of
self-insurance or self-administered claims in lieu of purchasing such insurance.
SECTION 14.2 LANDLORD'S INSURANCE OBLIGATIONS.
(a) COVERAGE. During the Term, Landlord shall insure the Building and the
Building Standard Leasehold Improvements (excluding any property which Tenant Is
obligated to insure under section 14.1 hereof) against damage by fire and
standard extended coverage perils and public liability insurance in such amounts
and with such deductibles consistent with the practice of other owners of
first-class office buildings in the central business district of San Francisco,
California.
(b) OPTIONAL COVERAGE. Landlord may, but shall not be obligated to, take
out and carry any other types and coverages of insurance as it or Landlords
mortgagees, if any, may deem advisable; provided, however, that Landlord shall
carry such policies of general liability insurance with such limits as are
customarily carried by landlords of comparable first-class office buildings in
the central business district of San Francisco, California.
(c) WAIVER OF RIGHT TO PROCEEDS. Notwithstanding any contribution by
Tenant to the cost of insurance premiums, as provided herein, Tenant
acknowledges that it has no right to receive any proceeds from any insurance
policies carried by Landlord.
(d) EXCEPTION TO COVERAGE. Landlord will not have to carry insurance of
any kind on any Non-Building Standard Leasehold Improvements, Tenant's furniture
or furnishings, or any of Tenant's fixtures, equipment, Improvements, or
appurtenances under this Lease; and Landlord shall not be obligated to repair
any damage thereto or replace the same.
(e) RIGHT TO SELF-INSURE. If and so long as the Landlord maintains a
net worth of at least one billion dollars ($1,000,000,000.00) as calculated
under generally accepted accounting principles, with all real property valued at
the lower of cost or market, then Landlord shall have the right, at its
election, to maintain all such insurance required under Section 14.2 under a
program of self-insurance or self-administered claims in lieu of purchasing such
insurance.
SECTION 14.3 INCREASED RISKS.
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(a) TENANT'S OBLIGATIONS. Tenant shall not do or permit to be done in
or about the Premises, nor bring or keep or permit to be brought to the Premises
or kept therein, anything that is prohibited by any insurance policy carried by
Landlord (provided Tenant shall have been furnished copies of such policies and
any changes to such policies in accordance with Section 26.1 of this Lease) or
by Tenant, periodically in force covering the Building, the Leasehold
Improvements, or the Premises, or which will in any way increase the existing
premiums for any such policy.
(b) DEFAULT AND REMEDIES. If Tenant fails to remedy the condition
giving rise to any such increase or threatened increase in premiums, or such
cancellation or reduction, or threatened cancellation or reduction of coverage,
within two (2) Business Days after notice thereof, the failure shall constitute
an Event of Default hereunder, and Landlord may do any one or more of the
following without any notice or demand:
(i) send notice to Tenant as provided in Section 23.1(b) of this
Lease;
(ii) enter upon the Premises and attempt to remedy such condition, in
which event Landlord shall not be liable for any damage or injury caused to any
property of Tenant or of others located on the Premises resulting from such
entry, and Tenant shall promptly pay to Landlord as Additional Rent the cost to
Landlord of remedying or attempting to remedy such condition; or
(iii) in the case of an increase or threatened increase in insurance
premiums, Tenant, at Landlord's election, shall pay any actual increase in
premiums as Additional Rent within ten (10) days after being billed therefor by
Landlord.
(c) DETERMINATION OF LIABILITY. In determining whether increased
premiums are a result of Tenant's use of the Premises, a schedule issued by the
organization computing the insurance rate on the Building or the Leasehold
Improvements showing the various components of such rate shall be conclusive
evidence of the several items and charges which make up such rate.
(d) COMPLIANCE WITH INSURANCE REQUIREMENTS. Tenant shall promptly
comply with all reasonable requirements of the insurance authority or any
present or future insurer relating to the Premises or the Building.
SECTION 14.4 WAIVER OF SUBROGATION.
(a) ENDORSEMENTS IN POLICIES. All policies of fire, extended coverage
or similar casualty insurance, which either party obtains for the Premises shall
include a clause or endorsement denying the insurer any rights of subrogation to
any claims, rights or recovery, or causes of action against the other party to
the extent such claims, rights of recovery, or causes of action have been waived
by the insured before the occurrence of injury or loss.
(b) WAIVER. Anything in this Lease to the contrary notwithstanding,
Landlord and Tenant waive all claims, rights of recovery, and causes of action
that either of them, or any party claiming by, through, or under either of them,
may now or hereafter have by subrogation or otherwise against the other (or its
officers, directors, shareholders, partners, agents, or employees) for any
injury, loss, or damage that may occur to the Building, the Premises, the
Leasehold Improvements, or any of their contents, by reason of fire, casualty,
or any other cause or hazard, expressly including the negligence or willful
misconduct of Landlord, Tenant, or their respective officers, directors,
shareholders, partners, agents, or employees, covered (or required to be
covered) by the insurance policies or self-insurance program required by Section
14.1 or 14.2, or that could be insured against by such policies, including
deductibles, regardless of whether either party obtains, or fails to obtain, the
agreed insurance coverages.
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SECTION 14.5 INSURANCE OBLIGATIONS, ALLOCATION OF RISKS AND MINIMIZING
DUPLICATION OF INSURANCE COVERAGE.
Notwithstanding Article 18 and Sections 14.1 through 14.4 to the contrary,
because Landlord has the right to maintain insurance on the Building and require
Tenant to partially compensate Landlord for such insurance as part of Tenant's
share of Operating Expenses and because of the existence of waivers of
subrogation set forth in Section 14.4, Landlord hereby indemnifies and holds
Tenant harmless from any loss, cost, liability, damage or expense (including,
but not limited to penalties, fines and actual reasonable attorneys' fees and
costs I to any property outside of the Premises to the extent such loss, costs,
liability, damage or expenses are covered by such insurance, even if resulting
from the negligent acts, omissions, or willful misconduct of Tenant or those of
its agents, contractors, servants, employees or licensees. Similarly, Tenant
hereby indemnifies and holds Landlord harmless from any loss, cost, liability,
damage or expense (including, but not limited to penalties, fines and actual
reasonable attorneys' fees and costs) to any property within the Premises, to
the extent such loss, costs, liability, damage or expenses are covered by such
insurance, (or would be covered but for Tenants election to self-insure) even if
resulting from the negligent acts, omissions or willful misconduct of Landlord
or those of its agents, contractors, servants, employees or licensees. In the
event the Premises and/or the Building are damaged or destroyed and such damage
or destruction is covered by insurance obtained by Landlord and not covered by
insurance obtained by Tenant, Landlord shall use the proceeds of its insurance
to repair the damage or destruction to the Premises including Non-Standard
Improvements and/or the Building, subject to any rights either Landlord or
Tenant may have to terminate the Lease in the event such damage or destruction
occurs.
ARTICLE 15
DAMAGE BY FIRE OR OTHER CAUSE
SECTION 15.1 REPAIR OF DAMAGE TO BUILDING STANDARD LEASEHOLD
IMPROVEMENTS.
Subject to Sections 15.2, 15.3, and 15.4 hereof, if the Premises or the
Building Standard Leasehold Improvements are damaged by fire or other casualty
against which Landlord is required to be insured by a policy of insurance under
Section 14.2, Landlord shall, to the extent of the original Building Standard
Leasehold Improvements, have the damage repaired with reasonable speed at the
expense of Landlord, subject to delays that may arise by reason of adjustment of
loss under insurance policies and for other-delays beyond Landlord's reasonable
control.
SECTION 15.2 RIGHT OF TERMINATION - DAMAGE TO PREMISES.
If the Premises or any portions of the Building necessary for the use and
operation of the Premises in the manner previously enjoyed by Tenant are damaged
or destroyed by any cause whatsoever, and if the Premises cannot be rebuilt or
made fit for Tenant's purposes within one hundred eighty (180) days of the
damage or destruction, Landlord or Tenant may, at its option, terminate this
Lease by giving notice of termination within ninety (90) days after the
occurrence of the damage, and thereupon, Rent and any other payments for which
Tenant is liable under this Lease shall be apportioned and paid to the date of
the damage, and Tenant shall immediately vacate the Premises to Landlord;
provided, however, that those provisions of this Lease that are designated to
cover matters of termination and the period thereafter shall survive the
termination hereof.
SECTION 15.3 RIGHT OF TERMINATION - DAMAGE TO BUILDING.
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If the Building, or any material part thereof, is damaged or destroyed by
any cause whatsoever to the extent that the damage or destruction to the
Building cannot be repaired or restored within one hundred eighty (180) days
after the occurrence of damage or destruction, Landlord or Tenant may, at its
option, terminate this Lease by giving notice of termination within ninety (90)
days after the occurrence of the damage, requiring Tenant to vacate the Premises
within one hundred eighty (180) days after delivery of notice of termination,
and thereupon, Rent and any other payments shall be apportioned and paid to the
date on which possession is relinquished, and Tenant shall vacate the Premises
according to such notice of termination; provided, however, that those
provisions of this Lease that are designated to cover matters of termination and
the period thereafter shall survive the termination hereof.
SECTION 15.4 RIGHT TO TERMINATE - LAST TWO YEARS OF TERM.
If the Building or any floor of the Premises is substantially damaged or
destroyed by any cause whatsoever at any time during the last two (2) years of
the Term as to such floor, Landlord or Tenant may terminate this Lease as to
such floor by giving notice of termination within ninety (90) days after the
occurrence of the damage or destruction requiring Tenant to vacate the floor of
the Premises within one hundred eighty (180) days after delivery of notice of
termination, and thereupon Rent and any other payments shall be apportioned and
paid to the date on which possession is relinquished, and Tenant shall vacate
the floor of the Premises according to such notice of termination; provided,
however, that those provisions of this Lease that are designated to cover
matters of termination shall survive the termination hereof.
SECTION 15.5 LIMITATION OF LIABILITY.
No damages, compensation, or claim (including, without limitation, any
claim for consequential or incidental damages) shall be payable by Landlord for
inconvenience, loss of business, or annoyance arising from any repair or
restoration of any portion of the Premises, the Building Standard Leasehold
Improvements, or the Building. Landlord shall use reasonable efforts to have
repairs made promptly so as not unnecessarily to interfere with Tenant's
occupancy.
SECTION 15.6 REPAIR OF NON-BUILDING STANDARD LEASEHOLD IMPROVEMENTS.
If the Non-Building Standard Leasehold Improvements are damaged or
destroyed by fire or other casualty against which Tenant is required to be
insured under Section 14.1, Tenant shall immediately notify Landlord, and unless
Landlord or Tenant elects to terminate this Lease under Section 15.2, 15.3, or
15.4, Tenant shall, to the extent of the proceeds from Tenant's insurance
available to Tenant, have the damage repaired with reasonable speed at the
expense of Tenant, subject to delays which may arise by reason of adjustment of
loss under insurance policies and for other delays beyond Tenant's reasonable
control.
SECTION 15.7 EXPRESS AGREEMENT.
The provisions of this Article shall be considered an express agreement
governing any case of damage or destruction of the Building, the Building
Standard Leasehold Improvements, the Non-Building Standard Leasehold
Improvements, or the Premises by fire or other casualty.
SECTION 15.8 ABATEMENT OF RENT.
Tenant shall promptly notify Landlord if the Premises or the Building
Standard Leasehold Improvements are damaged by any cause whatsoever. If the
Building, Premises, or Building Standard Leasehold Improvements shall be damaged
by fire or other casualty so as to render any portion of the Premises
untenantable, and Tenant does not use or occupy such portion of the
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Premises, the Base Rent and Additional Operating Expenses hereunder shall abate
as to that portion of the Premises rendered untenantable by such damage until
the earlier of such time as (i) Landlord reasonably determines that such damaged
portion of the Premises has been made tenantable, (ii) Tenant again occupies or
uses the damaged portion of the Premises, or (iii) if Tenant is responsible for
any repairs, the date reasonably determined by Landlord as being a sufficient
time to complete such repairs.
ARTICLE 16
CONDEMNATION
SECTION 16.1 TAKING OF BUILDING.
If a material part of the Building shall be taken or condemned for any
public purpose, for the entire Term or longer, this Lease shall terminate on the
date of such taking.
SECTION 16.2 TAKING OF PREMISES.
If all or a material portion of the Premises shall be taken or condemned
permanently for any public purpose, this Lease shall automatically terminate on
the date of such taking.
SECTION 16 .3 PROCEEDS OF CONDEMNATION.
All proceeds from any taking or condemnation under Section 16.1 or 16.2
shall belong to and be paid to Landlord. Tenant shall have the right to claim
and receive directly from the entity exercising the power of eminent domain the
portion of any award determined to be owing for the taking of improvements
installed in the portion of the Premises so taken by Tenant at Tenant's sole
cost and expense based on the unamortized costs actually paid by Tenant for such
improvements, for the taking of Tenant's movable furniture, equipment, trade
fixtures and personal property, for loss of goodwill, for interference with or
interruption of Tenant's business, or for removal and relocation expenses.
SECTION 16.4 TEMPORARY TAKING.
In the event all or a material portion of the Premises shall be taken or
condemned for any public purpose for a period less than the entire Term of this
Lease, then this Lease shall remain in full force and effect, Tenant shall
remain obligated to continue to pay to Landlord the Rent reserved hereunder, and
Tenant shall be entitled to the entire award from the taking or condemning
authority attributable to such temporary taking.
ARTICLE 17
ASSIGNMENT, SUBLETTING AND TRANSFER
SECTION 17.1 ASSIGNMENT OR SUBLETTING BY TENANT.
(a) NOTICE. Tenant shall not, without Landlord's prior written consent,
which consent shall not be unreasonably withheld, sublet the Premises or any
part thereof, or assign this Lease.
(b) EFFECT OF ASSIGNMENT OF SUBLEASE. No assignment or subletting by
Tenant shall relieve Tenant of Tenant's obligations under this Lease.
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(c) EFFECT OF NONCOMPLIANCE. Any attempted assignment or sublease by
Tenant in violation of the terms and provisions of this Section 17.1 shall be
void. Any subletting or assignment approved by Landlord as required shall not
constitute approval of any subsequent subletting or assignment.
(d) Notwithstanding the foregoing, at any time during the Term, Tenant may
assign this Lease free of the restrictions and conditions specified in Sections
17.1(a) to an assignee provided that the assignee satisfies one or more of the
following conditions:
(i) the assignee is an Affiliate of Tenant; or
(ii) has acquired substantially all of Tenant's assets.
SECTION 17.2 TRANSFER BY LANDLORD.
(a) RIGHT TO ASSIGN. Landlord may sell, transfer, assign, or convey all or
any part of the Building and any and all of its rights under this Lease.
(b) EFFECT OF TRANSFER. If Landlord sells, transfers, assigns, or conveys
all or any part of the Building or assigns any or all of its rights under tints
Lease, Landlord shall be released from any obligations hereunder attributable to
periods of time after such assignment, no further liability or obligation shall
thereafter accrue against Landlord hereunder, and Tenant agrees to look solely
to Landlord's successor in interest for performance of such obligations.
ARTICLE 18
INDEMNIFICATION
SECTION 18.1 INDEMNITY BY TENANT.
Tenant shall indemnify Landlord and save it harmless from and against any
and all claims, actions, damages, liability and expense in connection with the
loss of life, personal injury, and/or damage to property arising from or out of
(i) any occurrence in, upon or at the Premises, however caused; or (ii) any
occurrence elsewhere in the Building or on the Land occasioned wholly or in part
by any negligence or willful misconduct claimed to have been caused by Tenant or
its agents, clients, invitees, concessionaires, contractors, servants, vendors,
materialmen or suppliers, or (iii) any occurrence occasioned by the violation of
any law, regulation or ordinance by Tenant or its agents, clients, invitees,
concessionaires, contractors, servants, vendors, materialmen or suppliers,
except to the extent in all cases that such loss of life, personal injury,
and/or damage to property was caused by the negligence or willful misconduct of
Landlord or its agents, clients, invitees, concessionaires, contractors,
servants, employees, vendors, materialmen or suppliers. In case Landlord shall
be made a party to any litigation covered by the foregoing indemnity, then
Tenant shall protect and hold Landlord harmless and pay all costs, penalties,
charges, damages, expenses and reasonable attorneys' fees incurred or paid by
Landlord.
SECTION 18.2 SCOPE OF INDEMNITIES.
Tenant's foregoing indemnity obligation shall include reasonable attorneys'
fees, investigation costs, and all other reasonable costs and expenses incurred
by Landlord from the first notice that any claim or demand has been made or may
be made, and shall not be limited in any way by any limitation on the amount or
type of damages, compensation, or benefits payable under applicable workers'
compensation acts, disability benefit acts, or other employee benefit acts.
SECTION 18.3 LANDLORD'S INDEMNITY.
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Notwithstanding any provisions of Section 18.1 or elsewhere in this Lease
to the contrary, Tenant is not required to indemnity and hold Landlord harmless
from any loss, cost, liability, damage or expense, including, but not limited
to, penalties, fines, attorneys' fees or costs (collectively "Claims"), to any
person, property or entity to the extent that such Claims arise from the
negligence or willful misconduct of Landlord or its agents, clients, invitees,
concessionaires, contractors, servants, employees, vendors, materialmen,
suppliers, or licensees, in connection with Landlords activities in the Building
and Landlord hereby so indemnifies and holds Tenant harmless from any such
Claims, including Claims arising from the presence in the Building and/or the
Premises of hazardous substances, except to the extent such hazardous substances
were placed in or on the Premises and/or the Building by Tenant (Landlord's
indemnity hereunder will survive the expiration of the term of, or any
termination of, this Lease). Provided, further, to the extent any damage or
repair obligation is covered by insurance obtained by Landlord as part of
Operating Expenses, but is not covered by insurance obtained by Tenant, then
Tenant shall be relieved of its indemnity obligation up to the amount of the
insurance proceeds which Landlord is entitled to receive. Tenants agreement to
indemnify and hold Landlord harmless pursuant to the provisions of this Lease
and the exclusion from Tenants indemnity and Landlords agreement to indemnify
and hold Tenant harmless pursuant to this Section 18.3 are not intended to and
shall not relieve any insurance caroler of its obligations under policies
required to be carried by Landlord or Tenant, respectively, pursuant to the
Lease to the extent that such policies cover the results of such negligence or
willful misconduct. If either party breaches this agreement by its failure to
carry required insurance, such failure shall automatically be deemed to be a
covenant and agreement by Landlord or Tenant, respectively, to self-insure to
the full extent of such required coverage, with full waiver of subrogation.
SECTION 18.4 SURVIVAL OF INDEMNITY.
The provisions of this Article 18 shall survive the termination of this
Lease with respect to any damage, injury, or death occurring before such
termination.
ARTICLE 19
SURRENDER OF THE PREMISES
SECTION 19.1 PEACEFUL SURRENDER.
Upon the expiration or other termination of this Lease for any cause
whatsoever, Tenant shall peacefully vacate the Premises in as good order and
condition as the same were at the beginning of the Term or may thereafter have
been improved by Landlord or Tenant, reasonable use and wear thereof and repairs
that are Landlord's obligation under Article 15 hereof only excepted.
SECTION 19.2 HOLDOVER RENT.
Should Tenant continue to hold the Premises or any portion of the Premises
after the termination of this Lease as to such Premises or portion thereof,
whether the termination occurs by lapse of time or otherwise, such holding over
shall, unless otherwise agreed to by Landlord in writing, constitute and be
construed as a tenancy at will at a daily Base Rent equal to one-thirtieth
(1/30th) of an amount equal to one hundred twenty-five percent (125%) of the
monthly Base Rent hereunder for the Premises or portion thereof, plus all
Additional Rent that would have been due hereunder for the period involved if
such period had been included in the Term, and subject to all of the other terms
set forth herein except any right to renew this Lease.
SECTION 19.3 INDEMNITY.
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Tenant shall be liable to Landlord for all damage that Landlord suffers
because of any holding over by Tenant, and Tenant shall indemnify Landlord
against (i) all claims made by any other tenant or prospective tenant against
Landlord resulting from delay by Landlord in delivering possession of the
Premises to such other tenant or prospective tenant and (ii) all other losses,
coats, and expenses, including (without limitation) attorneys' fees, incurred by
reason of such holding over.
ARTICLE 20
ESTOPPEL CERTIFICATES
SECTION 20.1 TENANT'S OBLIGATION.
Tenant agrees to furnish periodically, when requested by Landlord or the
holder of any deed of trust or mortgage covering the Building, the Land, or any
interest of Landlord therein, a certificate signed by Tenant certifying (l) that
this Lease is in full force and effect and unmodified (or if there have been
modifications, that the same is in full force and effect as modified and stating
the modifications, if any); (ii) that the Term of this Lease has commenced and
the full Rent is then accruing hereunder; (ill) that Tenant has accepted
possession of the Premises and that except as stated in the certificate, any
improvements required by the terms of this Lease to be made by Landlord have
been completed to the satisfaction of Tenant; (iv) that except as stated in the
certificate, no Rent under this Lease has been paid more than thirty (30) days
in advance of its due date; (v) that the address for notices to be sent to
Tenant is as set forth in this Lease (or has been changed by notice duly given
and is as set forth in the certificate); (vi) that except as stated in the
certificate, Tenant, as of the date of such certificate, has no charge, lien, or
claim of offset under this Lease or otherwise against Rent or other charges due
or to become due hereunder; (vii) that except as stated in the certificate, to
the knowledge of Tenant, Landlord is not then in default under this Lease; and
(viii) such other matters as may reasonably be requested by Landlord or the
holder of any such deed of trust or mortgage.
SECTION 20.2 LANDLORD'S OBLIGATION.
Landlord agrees to provide Tenant with an Estoppel Certificate signed by
Landlord, containing the same types of information, and within the same periods
of time, as are set forth in Section 20.1, except such changes as are reasonably
necessary to reflect that the Estoppel Certificate is being granted and signed
by Landlord to Tenant, rather than from Tenant to Landlord or to a lender.
SECTION 20.3 RELIANCE.
Any such certificate may be relied upon by any prospective purchaser,
mortgagee or beneficiary under any deed of trust on the Building or the Land or
any part thereof, or subtenant under or assignee of this Lease.
ARTICLE 21
SUBORDINATION
SECTION 21.1 SUBORDINATION.
Subject to the limitation set forth in the next sentence, this Lease shall
be subject and subordinate at all times to the lien of all mortgages and deeds
of trust securing any amount or amounts whatsoever which may now exist or
hereafter be placed on or against the Building or on
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or against Landlord's interest or estate therein, all without the necessity of
having further instruments executed by Tenant to effect such subordination.
Notwithstanding the foregoing, in the event of a foreclosure of any such
mortgage or deed of trues or of any other action or proceeding for the
enforcement thereof, or of any sale thereunder, this Lease shall not be
terminated or extinguished, nor shall the rights and possession of Tenant
hereunder be disturbed, if no Event of Default then exists under this Lease, and
Tenant shall attorn to the person who acquires Landlord's interest hereunder
through any such mortgage or deed of trust. Tenant agrees to execute,
acknowledge and deliver upon demand such further instruments evidencing such
subordination of this Lease to the lien of all such mortgages and deeds of trust
as may reasonably be required by Landlord, but Tenant's covenant to subordinate
this Lease to mortgages or deeds of trust hereafter executed is conditioned upon
each such senior mortgage or deed of trust, or a separate subordination
agreement, containing the commitments specified in the preceding sentence.
SECTION 21.2 RIGHTS OF MORTGAGEE.
(a) RIGHT OF SUBORDINATION. Notwithstanding the provisions of Section
21.1 hereof, any mortgagee shall have the right at any time to subordinate any
deeds of trust, mortgages, or other security instruments to this Lease on such
terms and subject to such conditions as the mortgagee may consider appropriate
in its discretion.
(b) ATTORNMENT. At any time, before or after the institution of any
proceedings for the foreclosure of any such deeds of trust, mortgages, or other
security instruments, or the sale of the Building under any deeds of trust,
mortgages, or other security instruments, Tenant shall attorn to such purchaser
upon any sale or the grantee under any deed in lieu of foreclosure and recognize
such purchaser or grantee as Landlord under this Lease. The agreement of Tenant
to attorn contained in the preceding sentence shall survive any such foreclosure
sale, trustee's sale, or conveyance in lieu thereof. Tenant shall upon demand by
Landlord or its mortgagee at any time, before or after any such foreclosure
sale, trustee's sale, or conveyance in lieu thereof, execute, acknowledge, and
deliver to Landlord's mortgagee any written instruments and certificates
evidencing such attornment as Landlord's mortgagee may reasonably require, and
Tenant hereby irrevocably appoints Landlord's mortgagee as Tenant's agent and
attorney-in-fact for the purpose of executing, acknowledging, and delivering any
such instruments and certificates. Landlords mortgagee shall not exercise this
power of attorney, however, unless Tenant fails to execute, acknowledge, and
deliver such instruments or certificates within five (5) days after being
requested by Landlord's mortgagee to do so.
ARTICLE 22
PARKING
SECTION 22.1 RESERVED AND NON-RESERVED SPACES.
At the beginning of the Original Term hereof, Landlord shall lease to
Tenant a total of fifty (50) parking spaces in the garage of the Building as
follows:
(a) RESERVED SPACES. Twenty-six (26) standard size reserved parking
spaces shall be leased to Tenant at a rental rate of Two Hundred Eighty-Five
Dollars ($285.00) per month per space (the "Reserved Spaces"). At least five (5)
of the Reserved Spaces shall be of a size suitable for limousine parking. The
location of the Reserved Spaces are depicted in EXHIBIT A. Landlord reserves the
right, in its sole reasonable discretion, to change the location within the
garage of any or all of the Reserved Spaces. The Original Term for the Reserved
Spaces shall have an Expiration Date of December 31, 1995. Tenant shall have and
is hereby given the options to renew and extend the Term of this Lease as to the
Reserved Spaces for one (1) six (6) month period ending June 30, 1996, and one
(1) successive six (6) month period ending December 31, 1996 to follow
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consecutively upon the expiration of the Original Term of this Lease as to such
Reserved Spaces. An option may be exercised by Tenants giving Landlord written
notice of its irrevocable exercise of the same not less than nine (9) months
prior to the expiration date of the then prevailing Term or Renewal Term of this
Lease as to the Reserved Spaces which are subject to the particular option.
Subject to the provisions of this Section, Tenant may renew this Lease and
extend the Term hereof under each option as to all, but not some, of the
Reserved Spaces that are, on the date of the exercise of the option, subject to
this Lease. The renewal and extension of this Lease under each renewal option
shall be on and under the same covenants, agreements, terms, provisions, and
conditions as are contained herein for the Original Term as to such Reserved
Spaces except that the monthly rental rate per space may be adjusted by
Landlord. However, in no event shall the monthly rental rate per Reserved Space
exceed the charge then being made in the Russ Building Garage in San Francisco,
California (or if that garage is not being operated, in comparable facilities in
the immediate vicinity of the Building). The exercise of each of Tenant's
options to extend the Term of this Lease as to the Reserved Spaces is contingent
upon the concurrent exercise of Tenant's options to renew the Term of the Lease
as to Floors 16, 17 and 18 pursuant to EXHIBIT F. However, in the event that
Tenant exercises a renewal option as to at least one, but not all three, of
Floors 16, 17 and 18, then Tenant may exercise its corresponding renewal option
as to the Reserved Spaces only for a proportionate number of spaces, based upon
the rentable square footage of Floors 16, 17 and 18 being renewed divided by the
rentable square footage of Floors 16, 17 and 18 as of the Commencement Date.
(b) NON-RESERVED SPACES. Twenty-four (24) standard size non-reserved
parking spaces shall be leased to Tenant at a rental rate of Two Hundred
Eight-Five Dollars ($285.00) per month per space (the "Non-Reserved Spaces").
The Original Term for the Non-Reserved Spaces shall continue for so long as this
Lease is in effect. Notwithstanding the foregoing, the number of Non-Reserved
Spaces leased by Tenant shall increase or decrease by one (1) space for every
twelve thousand (12,000) square foot increment of Net Rentable Area leased by
Tenant above or below the number of square feet of Net Rentable Area leased by
Tenant as of the Commencement Date. Such increase or decrease in Non-Reserved
Spaces shall automatically take place on the thirtieth (30th) day following the
date for which the 12,000 square foot incremental change in the square footage
of Net Rentable Area leased by Tenant becomes effective. The monthly rental rate
per Non-Reserved Space may be adjusted by Landlord effective July 1, 1995 and
every July 1 thereafter. However, in no event shall the monthly rental rate per
Non-Reserved Space exceed the charge then being made in the Russ Building Garage
in San Francisco, California (or if that garage is not being operated, in
comparable facilities in the immediate vicinity of the Building).
SECTION 22.2 PAYMENT; PARKING RULES; RISK ALLOCATION.
(a) The rent payable to Landlord for the Reserved Spaces and Non-Reserved
Spaces shall collectively be referred to as "Parking Rent". The Parking Rent
shall be payable monthly in accordance with Section 5.12(a). Tenant agrees to
comply with all reasonable rules and regulations now or hereafter established by
Landlord (or its agent or designee) relating to the use of parking facilities.
Upon the termination of this Lease, Tenants rights to such parking spaces as are
then being leased to Tenant hereunder shall terminate.
(b) Tenant shall use the parking spaces at its own risk and releases
Landlord from any and all claims for personal injury and property damage, costs,
loss, liability, expense and causes of action of every kind and character
arising out of or relating to Tenant's use of the parking spaces.
ARTICLE 23
DEFAULT AND REMEDIES
SECTION 23.1 EVENTS OF DEFAULT.
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The occurrence of any one or more of the following events shall constitute
an "Event of Default" under this Lease:
(a) NONPAYMENT OF RENT. Failure to pay any installment of Rent due
and payable hereunder, upon the date when payment is due, such failure
continuing for a period of ten (10) Business Days after written notice of such
failure (which notice shall be in addition to, and not in lieu of, the notice
requirements of California Code of Civil Procedure Section 1161);
(b) OTHER OBLIGATIONS. Failure to perform any obligation, agreement or
covenant under this Lease, other than Tenant's obligation to pay Rent, such
failure continuing for thirty (30) calendar days after written notice of such
failure (which notice shall be in addition to, and not in lieu of, the notice
requirements of California Code of Civil Procedure Section 1161) or such longer
period as is reasonably necessary to remedy such default, provided that Tenant
shall continuously and diligently pursue such remedy at all times until such
default is cured;
(c) ABANDONMENT. Tenant "abandons" the Premises, as such term is defined
under applicable laws; or
(d) BANKRUPTCY. if any petition is filed by or against Tenant under any
section or chapter of the present or any future federal Bankruptcy Code or under
any similar law or statute of the United States or any state thereof (and with
respect to any petition filed against Tenant, such petition is not dismissed
within sixty (60) days after the filing thereof) or Tenant shall be adjudged
bankrupt or insolvent in proceedings filed under any section or chapter of the
present or any future federal Bankruptcy Code or under any similar law or
statute of the United States or any state thereof.
SECTION 23.2 REMEDIES.
If an Event of Default occurs at any time thereafter while Tenant remains
in default, Landlord may do any one or more of the following without notice or
demand:
(a) terminate this Lease, and consider Tenant's Event of Default as an
anticipatory repudiation of this Lease; and Tenant immediately shall become
liable for damages equal to the total of:
(i) the costs of recovering the Premises;
(ii) the unpaid Rent earned as of the date of termination, plus
interest thereon at a rate per annum from the date due until paid equal to the
maximum rate of interest allowed by state or federal law;
(iii) the worth at the time of award of the amount by which the unpaid
Rent which would have been earned after termination until the time of award
exceeds the amount of such rental loss that the Tenant proves could have been
reasonably avoided, plus interest thereon at a rate per annum from the date due
until paid equal to the maximum rate of interest allowed by state or federal
law;
(iv) the worth at the time of award of the amount by which the unpaid
Rent that Landlord would have received under the Lease for the remainder of the
Term after the time of award exceeds the amount of such rental loss for the
remainder of the Term that the Tenant proves could be reasonably avoided,
discounted at the discount rate of the Federal Reserve Bank of San Francisco at
the time of award plus one percent (1%); and
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(v) any other amount necessary to compensate the Landlord for all the
detriment proximately caused by the Tenants failure to perform its obligations
under the Lease or which in the ordinary course of things would be likely to
result therefrom;
(b) maintain this Lease in full force and effect and recover the Rent and
other monetary charges as they become due, without terminating Tenant's right to
possession irrespective of whether Tenant shall have abandoned the Premises. In
the event Landlord elects not to terminate the Lease, Landlord shall have the
right to re-let the Premises at such Rent and upon such conditions and for such
a Term, and to do all acts necessary to maintain or preserve the Premises as
Landlord deems reasonable and necessary without being deemed to have elected to
terminate the Lease. Notwithstanding that Landlord fails to elect to terminate
the Lease and default continues, Landlord at any time during the Term of this
Lease may elect to terminate this Lease by virtue of such previous default of
Tenant; and/or
(c) do whatever Tenant is obligated to do under this Lease and enter the
Premises without being liable to prosecution or any claim for damages therefor,
to accomplish this purpose; Tenant shall reimburse Landlord immediately upon
demand for any expenses that Landlord incurs in thus effecting compliance with
this Lease on Tenant's behalf, and Landlord shall not be liable for any damages
suffered by Tenant from such action.
SECTION 23.3 NO IMPLIED ACTS.
No act or thing done by Landlord or its agents during the Term shall
constitute an acceptance of an attempted surrender of the Premises, and no
agreement to accept a surrender of the Premises shall be valid unless made in
writing and signed by Landlord. No reentry or taking possession of the Premises
by Landlord shall constitute an election by Landlord to terminate this Lease,
unless a written notice of such intention is given to Tenant. Notwithstanding
any reletting, reentry or taking possession, Landlord may at any time thereafter
terminate this Lease for a previous default. Landlord's acceptance of Rent
following an Event of Default hereunder shall not be construed as a waiver of
such Event of Default. No waiver by Landlord of any breach of this Lease shall
constitute a waiver of any other violation or breach of any of the terms hereof.
Forbearance by Landlord to enforce one or more of the remedies herein provided
upon a breach hereof shall not constitute a waiver of any other breach of the
Lease.
SECTION 23.4 NO WAIVER.
No provision of this Lease shall be deemed to have been waived by Landlord
unless the waiver is in writing and signed by Landlord. Nor shall any custom or
practice which may arise between the parties in the administration of the terms
of this Lease be construed to waive or lessen Landlord's right to insist upon
strict performance of the terms of this Lease. The rights granted to Landlord in
this Lease shall be cumulative of every other right or remedy that Landlord may
otherwise have at law or in equity or by statute and the exercise of one or more
rights or remedies shall not prejudice or impair the concurrent or subsequent
exercise of other rights or remedies.
ARTICLE 24
DISPUTE RESOLUTION
SECTION 24.1 APPLICABLE MATTERS.
All disputes between the parties arising out of or related to this Lease
shall be settled according to the provisions of this Article 24, except that the
provisions of this Article 24 shall not apply to any dispute or alleged breach
of the Lease which, if judicially resolved in the Landlord's favor, would
entitle Landlord to recover possession of the Premises from the Tenant.
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SECTION 24.2 MEETING; MEDIATION.
When a dispute arises between the parties, a meeting shall be held promptly
between the parties, attended by individuals with decision-making authority
regarding the dispute, and they will attempt in good faith to negotiate a
resolution. If within ten (10) days after the meeting the dispute is not
resolved, the party initiating the dispute will submit the dispute to a mutually
acceptable third-party mediator who is acquainted with dispute resolution
methods. Landlord and Tenant will participate in good faith in the mediation. If
the dispute is not resolved by mediation, the dispute shall be resolved by
binding arbitration in accordance with the arbitration procedures set forth in
this Section.
SECTION 24.3 ARBITRATION OF DISPUTES.
The arbitration shall be conducted under the administration and rules of
the American Arbitration Association ("AAA") for the arbitration of commercial
disputes. Judgment on the award rendered may be entered in any court having
jurisdiction. If three arbitrators are used, a decision of any two of them shall
be binding. All proceedings shall be conducted in San Francisco, California. The
provisions of Sections 1282.6, 1283 and 1283.05 of the California Code of Civil
Procedure, as may be amended, shall apply to the arbitration. Attorneys' fees
may be awarded to the prevailing or most prevailing party at the discretion of
the arbitrator. Neither party shall be entitled to seek or recover punitive
damages under the arbitration proceedings. In the event of a conflict between
the arbitration provisions of Article 24 and those in EXHIBIT F, the provisions
of EXHIBIT F shall prevail.
SECTION 24.4 COSTS.
All costs of the mediation and arbitration, including costs for the use of
facilities during the hearings, shall be borne equally by the parties.
NOTICE: BY INITIALLING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE
ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES. PROVISION
DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING
UP ANY RIGHTS YOU MIGHT POSSESS TO RAVE THE DISPUTE LITIGATED IN A COURT OR JURY
TRIAL. BY INITIALLING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS
TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED IN THE
"ARBITRATION OF DISPUTES. PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION
AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE
AUTHORITY OF TEE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS
ARBITRATION PROVISION IS VOLUNTARY.
WE HAVE READ AND UNDERSTAND THE FORGOING AND AGREE TO SUBMIT DISPUTES ARISING
OUT OF THE HATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES. PROVISION TO
NEUTRAL ARBITRATION.
LANDLORD: ________ TENANT: ___________
ARTICLE 25
ATTORNEYS' FEES AND LEGAL EXPENSES
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In any dispute between Landlord and Tenant not resolved by mediation or
arbitration, the prevailing party shall be entitled to recover from the other
party its costs and expenses as a result of the dispute, including reasonable
attorneys' fees in connection therewith.
ARTICLE 26
NOTICES
SECTION 26.1 METHOD OF GIVING NOTICE.
Any notice or document required to be delivered hereunder shall be
considered delivered, whether actually received or not, forty-eight (48) hours
after the notice or document is deposited in the United States mall, postage
prepaid, registered or certified mall, return receipt requested, addressed to
the parties hereto at the respective addresses specified below:
If to Landlord - Chevron Corporation
c/o Law Department
P. 0. Box 7141
San Francisco, California 94120-7141
Attention: Manager, Corporate Unit
If to Tenant - Chevron U.S.A. Inc.
c/o Chevron Real Estate Management Company
P.O. Box 7137
San Francisco, California 94120-7137
Attention: Manager, Building Asset Services
provided, however, that in lieu of notice by United States registered or
certified mail, a party may give notice by (i) personal delivery, effective upon
receipt, or (11) expedited delivery service (by a reputable provider thereof)
with proof of delivery, effective twenty-four (24) hours after the notice or
document is delivered to the delivery service.
SECTION 26.2 CHANGE OF ADDRESS.
Either party may change its address for purposes of notice under this
Article 26 to any address within the continental United States of America upon
thirty (30) days' advance written notice to the other party.
ARTICLE 27
MISCELLANEOUS
SECTION 27.1 BASIS FOR COSTS.
Where this Lease requires Tenant to reimburse Landlord for the cost of any
item, such cost will be the reasonable and actual Costs to Landlord of providing
such item, without profit to or overhead charge by Landlord. Landlord will keep
in an office in the Building a schedule of such charges (which Landlord may
periodically change) for Tenant's examination. Failure to pay any such cost
shall be considered as a failure to pay Rent, and as a result, Landlord shall be
entitled to all applicable rights and remedies.
SECTION 27.2 NO BROKER.
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Tenant represents and warrants that it has had no dealings with any broker
or agent in connection with the negotiation or execution of this Lease, and
Tenant shall indemnify and hold Landlord harmless from any costs, expenses or
liability for commissions or other compensation or charges claimed by any broker
or agent hired by Tenant with respect to this Lease. Landlord represents and
warrants that it has had no dealings with any broker or agent in connection with
the negotiation or execution of this Lease, and Landlord shall indemnify and
hold Tenant harmless from any costs, expenses or liability for commissions or
other compensation or charges claimed by any broker or agent hired by Landlord
with respect to this Lease.
SECTION 27.3 CERTAIN DEFINITIONS.
As used herein, the terms "Business Days" means Monday through Friday
(except for Holidays); "Normal Business Hours" means 7:00 a.m. to 6:00 p.m. on
Business Days and 8:00 a.m. to 1:00 p.m. on Saturdays (except for Holidays);
"Holidays". means those Holidays designated by Landlord set forth on EXHIBIT D
hereto; and "person" means any individual, corporation, partnership, joint
venture or other entity.
SECTION 27.4 INDEPENDENT COVENANTS.
Every agreement contained in this Lease is, and shall be construed as, a
separate and independent agreement. If any term of this Lease or the application
thereof to any person or circumstances shall be invalid and unenforceable, the
remainder of this Lease, or the application of the term to other persons or
circumstances, shall not be affected.
SECTION 27.5 NO MERGER.
There shall be no merger of this Lease or of the leasehold estate hereby
created with the fee estate in the Premises or any part thereof if the same
person acquires or holds, directly or indirectly, this Lease or the leasehold
estate hereby created or any interest in this Lease or in the leasehold estate
as well as the fee estate in the Premises or any interest in such fee estate. In
the event of a voluntary or other surrender of this Lease, or a mutual
cancellation hereof, Landlord may, at its option, terminate all subleases, or
treat such surrender or cancellation as an assignment of any of the subleases.
SECTION 27.6 FORCE MAJEURE.
Whenever a period of time is herein prescribed for action to be taken by
Landlord or Tenant, the affected party shall not be liable or responsible for,
and there shall be excluded from the computation for any such period of time,
any delays due to strikes, riots, acts of Cod, shortages of labor or materials,
war, governmental laws, regulations, or restrictions or any other cause of any
kind whatsoever that is beyond the reasonable control of the affected party,
including, but not limited to, earthquakes ("Force Majeure").
SECTION 27.7 RULES OF CONSTRUCTION.
(a) The captions of the articles, sections, and subsections of this Lease
are for convenience only and shall not enlarge or limit the scope or meaning of
the various and several articles hereof. Words of any gender used in this Lease
shall be deemed to include any other gender, and words in the singular number
shall be held to include the plural, unless the context otherwise requires. No
consideration shall be given to the fact or presumption that one party had a
greater or lesser hand in the drafting of this Lease.
(b) NO WAIVER. The failure of Landlord or Tenant to insist in any
instance on the strict keeping, observance or performance of any covenant or
agreement contained in the Lease, or
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the exercise of any election contained in the Lease shall not be construed as a
waiver or relinquishment for the future of such covenant or agreement, but the
same shall continue and remain in full force and effect.
(c) All references in this Lease to "notice" shall mean written notice
given in compliance with Article 26 hereof. All references in this Lease to
"months" or "months" shall be deemed to include the actual number of days in
such actual month or months.
SECTION 27.8 NO ORAL PROMISES OR REPRESENTATIONS.
Neither Landlord nor Landlord's agents or brokers, if any, have made any
representations or promises with respect to the Premises or the Building except
as herein expressly set forth, and all reliance with respect to any
representations or promises is based solely on those contained herein. No
rights, easements, or licenses are acquired by Tenant under this Lease by
implication or otherwise except as expressly set forth in this Lease.
SECTION 27.9 ENTIRE AGREEMENT.
This Lease sets forth the entire agreement between the parties and cancels
all prior negotiations, arrangements, agreements and understandings, if any,
between Landlord and Tenant regarding the subject matter of this Lease. No
amendment or modification of this Lease shall be binding or valid unless
expressed in writing and executed by both parties hereto.
SECTION 27.10 NO OFFER.
The submission of this Lease to Tenant shall not be construed as an offer,
nor shall Tenant have any rights with respect thereto unless Landlord executes a
copy of this Lease and delivers the same to Tenant.
SECTION 27.11 GOVERNING LAW.
This Lease shall be governed by and construed under the laws of the State
of California. Any action brought to enforce or interpret this Lease shall be
brought in the court of appropriate jurisdiction in the City and County of San
Francisco, California.
SECTION 27.12 ADJACENT BUILDINGS.
Any elimination or shutting off of light, air, or view by any structure
that may be erected on lands adjacent to the Building shall in no way affect
this Lease or impose any liability on Landlord.
SECTION 27.13 KEYS.
Tenant currently possesses keys to all lockable room or corridor doors
within the Premises. Additional keys will be furnished at a reasonable charge by
Landlord on an order signed by Tenant or Tenant's authorized representative. All
keys shall remain the property of Landlord. No additional locks shall be allowed
on any room or corridor door of the Premises without Landlord's permission, and
Tenant shall not make or permit to be made any duplicate keys, except those
furnished by Landlord. Upon termination of this Lease, Tenant shall surrender to
Landlord all keys to the Premises and give to Landlord the explanation of the
combination of all locks for safes, safe cabinets, and vault doors, if any, in
the Premises.
SECTION 27.14 TIME OF ESSENCE.
Time is of the essence for all purposes of this Lease.
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SECTION 27.15 RECORDATION.
Tenant shall not cause this Lease or any memorandum or evidence thereof to
be filed of public record. Landlord shall have the right (but not the
obligation) to cause this Lease or a memorandum or evidence thereof to be filed
of public record, and upon request by Landlord, Tenant shall promptly execute,
acknowledge, and deliver to Landlord such a memorandum or other evidence of thin
Lease. Tenant agrees to a release in form satisfactory to Landlord upon the
expiration or earlier termination of this Lease.
SECTION 27.16 RECORDS AND AUDITS.
(a) Tenant shall maintain true and correct sets of records in connection
with this Lease and all transactions related thereto and shall retain all such
records for at least twenty-four (24) months after termination of this Lease.
(b) Conflicts of interest relating to this Lease are strictly prohibited.
Except as otherwise expressly provided herein, neither Landlord nor any partner,
employee or agent of Landlord, shall give to or receive from any director,
employee or agent of Tenant any gift, entertainment or other favor of
significant value, or any commission, fee or rebate outside the normal course of
business. Likewise, neither Landlord nor any partner, employee or agent of
Landlord shall enter Into any business relationship with any director, employee
or agent of Tenant, without prior written notification thereof to Tenant.
Landlord shall promptly notify Tenant of any violation of this subsection and
any consideration received as a result of such violation shall be paid over or
credited to Tenant. Any representative(s) authorized by Tenant may audit any
and all records of Landlord for the sole purpose of determining whether there
has been compliance with this subsection.
SECTION 27.17 SUCCESSORS AND ASSIGNS.
Subject to the restrictions on Tenant's rights to assign its interest in
this Lease as provided in Article 17, this Lease shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns.
SECTION 27.18 EXHIBITS.
The exhibits attached to this Lease are by this reference incorporated
fully herein. The term "this Lease" shall be considered to include any and all
such exhibits. In the event of any conflict or inconsistency, however, the terms
and provisions of the main body of this Lease shall prevail over the terms and
provisions of any Exhibit, unless otherwise specifically provided in this Lease.
EXECUTED as of the date first written above.
LANDLORD: CHEVRON CORPORATION
a Delaware corporation
By: /s/ illegible
Its: Secretary
TENANT: CHEVRON U.S.A. INC .,
a Pennsylvania corporation,
by its Chevron Real Estate
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Management Company division
By: /s/ David S. Mitchell
Its: Vice President
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EXHIBIT A
PREMISES
Floor Net Rentable Area Base Rate Expiration Date
----- ----------------- --------- ---------------
22 17,347 $14.00 6/30/00
Rec 8,301 $10.50 6/30/95
18 22,714 $17.25 12/31/95
17 22,761 $17.25 12/31/95
16 22,742 $17.25 12/31/95
15 22,091 $16.75 6/30/00
13 22,834 $16.75 6/30/96
12 22,840 $16.75 6/30/97
11 22,807 $16.75 6/30/98
10 22,493 $16.75 6/30/95
9 22,841 $16.75 6/30/99
8 22,112 $16.75 6/30/99
4 22,675 $16.75 6/30/00
2 31,473 $14.00 6/30/00
1 500 $30.00 6/30/00
M(1) 865 n/a *
B(1) 1,024 n/a *
B(2) 7,014 $10.50 12/31/94
(1) Utility Space -- excluded from Net Rentable Area
(2) Basement Storage Space
* See Section 2.1(c)
<PAGE>
FIRST AMENDMENT TO LEASE
This First Amendment to Lease ("Amendment") is entered into effective April
1, 1995 by and between PACIFIC RESOURCES DEVELOPMENT INC., a California
corporation ("Landlord") and CHEVRON U.S.A. INC., a Pennsylvania corporation, by
its Chevron Real Estate Management Company division ("Tenant").
RECITALS
A. Chevron Corporation, a Delaware corporation ("Chevron") and Tenant entered
into an Office Lease Agreement dated as of January 1, 1994 (the "Lease") of
certain premises located in the building commonly known as 225 Bush Street, City
and County of San Francisco, California (the "Building").
B. Landlord is the successor to all of Chevron's right, title and interest in
the Lease pursuant to an Assignment of Leases dated effective October 4, 1994
entered into between Chevron and Landlord.
C. Exhibit F of the Lease sets forth Tenant's renewal options for certain
portions of the premises leased by Tenant under the Lease. Tenant has options to
renew the term of the lease for the Tenth Floor premises comprised of 22,493
square feet of net rentable area (the "10th Floor"), the initial term for which
is to expire on June 30, 1995.
D. In lieu of the renewal provisions for the 10th Floor as set forth in
Exhibit F of the Lease, Landlord and Tenant have agreed upon new renewal terms.
Accordingly, Landlord and Tenant desire to amend the Lease as to the 10th Floor
upon the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the foregoing, the parties hereto agree
as follows:
The Lease is hereby amended as follows:
1. DEFINITIONS. The terms used herein and not otherwise defined shall
have the meaning for such terms as set forth in the Lease.
2. TERM. Notwithstanding any other provision of the Lease, the Term
of the Lease for the 10th Floor as set forth in Exhibit A of the Lease is hereby
extended one (1) year (the 'First Extension Period"). The Term of the Lease
applicable to the 10th Floor shall now expire on June 30, 1996, unless sooner
terminated or further extended in accordance with the terms of the Lease, as
amended by this Amendment.
3. RENT. Tenant shall pay Landlord as Base Rent for the 10th Floor
pursuant to Section 5.2(a) of the Lease during the First Extension Period at a
Base Rate of Sixteen Dollars and 75/100 ($16.75) per rentable square foot per
annum which is calculated to be the sum of Three Hundred Seventy-Six Thousand
Seven Hundred Fifty-Seven Dollars and 75/100 Dollars ($376,757.75) per annum.
Rent shall be paid at the time and in the manner set forth in Section 5.12 of
the Lease.
4. LANDLORD'S EXPENSE STOP For purposes of recalculation of the
Landlord's Expense Stop as defined in Section 5.6 of the Lease, the base year
applicable to the 10th Floor for the First Extension Period and the Second
Extension Period (as defined below), if the extension option for such Second
Extension Period is exercised, shall be the calendar year commencing January 1,
1995 and ending December 31, 1995.
<PAGE>
5. EXHIBIT F. The terms of Exhibit F of the Lease, including but not
limited to the renewal option set forth in Exhibit F(6) providing Tenant with
options to renew the Lease for one (l) three (3) year period ending June 30,
1998, and one successive three (3) year period ending June 30, 2001, shall not
apply to the 10th Floor.
6. RIGHT OF FIRST REFUSAL. If at any time prior to the expiration of
the Term of the Lease for the 10th Floor, including the First Extension Period
and Second Extension Period, if the extension option for such Second Extension
Period is exercised, Landlord shall receive a bona fide third party offer to
lease all of the 10th Floor then being leased by Tenant, which offer Landlord
shall desire to accept, Landlord shall transmit a memorandum of said offer to
Tenant. The memorandum shall be executed by Landlord and contain a declaration
attesting to the truth and correctness of the contents of the memorandum.
Landlord shall provide Tenant with the identity of the third party, unless the
third party does not give permission to disclose its identity, in which event
the Landlord shall provide Tenant with a description of the business which the
third party is engaged in. The memorandum shall set forth in detail the terms of
the offer, including a description of the space (the "First Refusal Space"), the
rent (including any abatement and escalations thereof), the term (which shall
commence no earlier than July 1, 1996), condition of the space (i.e., as is,
building standard construction, tenant improvement allowances), and any other
material terms of the offer (collectively, the "Economic Terms"). Within ten
(10) days of receiving Landlord's memorandum, Tenant shall elect, by written
notice to Landlord, to accept or reject the First Refusal Space upon the
Economic Terms. Tenant's failure to make the election shall be deemed a
rejection of the First Refusal Space. Upon Tenants acceptance of the First
Refusal Space, the parties shall execute an amendment incorporating the First
Refusal Space into the Lease pursuant to all of the Economic Terms. Tenant's
privilege to lease the First Refusal Space as set forth above is expressly
conditioned upon Tenant not being in default at the time the First Refusal Space
is offered for lease, and not being in default between the time the First
Refusal Space is accepted for lease and the delivery of the First Refusal Space.
Further, Tenant may not lease the First Refusal Space if Tenant has previously
assigned all or any portion of the Lease or interest in the Lease relating to
the 10th Floor other than to an affiliate of Tenant, or sublet all or any
portion of the 10th Floor other than to an affiliate of Tenant. If Tenant is
prohibited from accepting or Tenant rejects the offer to lease the First Refusal
Space as set forth above, Landlord may lease the First Refusal Space with a
commencement date on or after July 1, 1996 to any third party upon terms which
are not more favorable to said party than the Economic Terms, notwithstanding
any exercise by Tenant of its option to extend the Term for the Second Extension
Period. Landlord shall provide Tenant with at least ninety (90) days prior
written notice of termination in all instances in which Landlord leases the
First Refusal Space to a third party, except that no such notice shall be
required if Tenant has not timely exercised its option to renew the Term for the
Second Extension Period. Any such notice of termination to Tenant shall be
accompanied by a memorandum executed by Landlord and the third party confirming
that a lease has been executed by the Landlord and the third party which
contains the Economic Terms.
7. EXTENSION OPTION.
(a) Landlord grants to Tenant one (1) option to renew the Term of the
Lease applicable to the 10th Floor for a period of one (1) year after the
expiration of the First Extension Period (the "Second Extension Period"),
subject to the terms of Section 6 hereof. Tenant's privilege to exercise this
option is expressly conditioned upon Tenant not being in default at the time the
option is exercised and not being in default between the time the option is
exercised and the commencement of the Second Extension Period.
(b) Provided Tenant is not in default, and subject to Section 6 hereof,
Tenant shall have the right to exercise the option upon tendering written notice
(the "Extension Notice") to Landlord no earlier than nine (9) months nor later
than six (6) months prior to the expiration of the First Extension Period. All
terms and conditions of this Lease shall continue during the Second
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Extension Period, provided that during the Second Extension Period, the Base
Rent shall be the greater of the following: (a) the Base Rent payable in the
last full month immediately preceding Landlord's receipt of the Extension Notice
(the "Rent Determination Date") or (b) the Fair Market Rent as of the Rent
Determination Date.
(c) As used in this Lease, Fair Market Rent shall be deemed to mean the
base amount of rental that would typically be paid by a tenant under a base-year
lease for premises of a similar type, design, and quality in the same or similar
quality geographic area in which the Premises are situated under market leasing
conditions existing at that time and taking into account the presence, if any,
of other escalation provisions provided in this Lease, with the exception of the
effect of the calendar year 1995 base year.
(d) If Landlord and Tenant cannot agree on the Fair Market Rent within
fifteen (15) days after the Rent Determination Date, the Base Rent payable
during the Extension Period shall be conclusively determined as follows:
(i) Within ten (10) days after the expiration of the fifteen (15) day
period, each party, at its cost and by giving notice to the other party, shall
appoint a real estate appraiser with at least five (5) years' full-time
commercial appraisal experience in the downtown San Francisco area, to appraise
and determine the then Fair Market Rent as described in this Section.
(ii) If one party does not appoint an appraiser within the time period
in 7(d)(i) above, the appraiser appointed by the other party shall be the sole
appraiser and shall determine the Fair Market Rent.
(iii) If neither party appoints an appraiser within the time period
set forth in 7(d)(i), the Base Rent during the Extension Period shall be the
Base Rent payable in the last full month immediately preceding the Rent
Determination Date.
(iv) If the two (2) appraisers are so appointed by the parties, they
shall meet promptly and attempt to appraise and determine the Fair Market Rent.
If they are unable to agree within ten (10) days after the second appraiser has
been appointed, they shall attempt to select a third appraiser who meets the
qualifications stated in 7(d)(i) within ten (10) days after the last day the two
appraisers are given to determine the Fair Market Rent. If they are unable to
agree on a third appraiser, either of the parties to this Lease, by giving ten
(10) days' notice to the other party, can apply to the presiding judge of the
Superior Court for the county in which the Premises are located for the
selection of a third appraiser who meets the qualifications stated in 7(d)(i).
Each of the parties shall bear one-half (1/2) of the cost of appointing the
third appraiser and of the third appraiser's fees. The third appraiser, however
selected, shall be a person who has not previously acted in any capacity for
either party.
(v) Within ten (10) days after the selection of the third appraiser, a
majority of the appraisers shall appraise and determine the Fair Market Rent. If
a majority of the appraisers are unable to so set the Fair Market Rent within
the required period of time, the appraisals of the three appraisers shall be
added together and their total divided by three. The resulting quotient shall be
the Fair Market Rent.
(vi) If, however, the low appraisal or the high appraisal are more
than ten percent (10%) lower or higher than the middle appraisal, the low
appraisal or the high appraisal shall be disregarded. If only one appraisal is
disregarded, the remaining two appraisals shall be added together and their
total divided by two. The resulting quotient shall be the Fair Market Rent. If
two appraisals are disregarded, the remaining appraisal shall be the Fair Market
Rent.
-3-
<PAGE>
8. ASSIGNMENT. The rights granted to Tenant pursuant to this Amendment
are personal to Tenant and may not be assigned without the prior written consent
of Landlord, which consent may be withheld in Landlord's sole and absolute
discretion.
9. EFFECT OF AMENDMENT. Except as specifically amended hereby, all of
the terms and conditions of the Lease shall be and remain in full force and
effect.
10. INCORPORATION OF RECITALS. The Recitals set forth above in this
Amendment are hereby incorporated into the Lease by this reference.
[THIS SPACE LEFT BLANK INTENTIONALLY]
IN WITNESS WHEREOF, the parties have executed this Amendment to be
effective as of the date and year hereinabove first written.
Landlord: PACIFIC RESOURCES DEVELOPMENT INC.,
a California corporation
By: /s/ Kevin Wu
Name: Kevin Wu
Its: Managing Director
May 4, 1995
Tenant: CHEVRON U.S.A. INC., a Pennsylvania
corporation, by its Chevron Real
Estate Management Company division
By: /s/ David S. Mitchell
Name: David S. Mitchell
Its: Vice President
May 11, 1995
-4-
<PAGE>
SECOND AMENDMENT TO LEASE
This Second Amendment to Lease ("Amendment") is entered into effective
April 1, 1995 by and between PACIFIC RESOURCES DEVELOPMENT INC., a California
corporation ("Landlord") and CHEVRON U.S.A. INC., a Pennsylvania corporation, by
its Chevron Real Estate Management Company division ("Tenant").
RECITALS
A. Chevron Corporation, a Delaware corporation ("Chevron") and Tenant entered
into an Office Lease Agreement dated as of January 1, 1994 (the "Lease") of
certain premises located in the building commonly known as 225 Bush Street, City
and County of San Francisco, California (the "Building").
B. Landlord is the successor to all of Chevron's right, title and interest in
the Lease pursuant to an Assignment of Leases dated effective October 4, 1994
entered into between Chevron and Landlord.
C. Landlord and Tenant entered into a First Amendment to Lease effective April
1, 1995.
D. Landlord and Tenant desire to further amend the Lease in certain respects,
subject to the terms and conditions of this Amendment.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained in this Amendment, the Landlord and Tenant agree as follows:
1. BUILDING SECURITY SYSTEMS. Section 7.6 of the Lease is hereby
deleted in its entirety and replaced with the following:
"SECTION 7.6 BUILDING SECURITY SYSTEMS.
(a) SECURITY SYSTEMS OPTION.
(i) Notwithstanding Sections 11.1, 13.4(b) and 27.13 of this Lease,
Tenant shall have the option, at its sole cost, to install its own
security systems for all or portions of the Premises, which shall be
located within the Premises, so long as such security systems comply
with all applicable laws, including but not limited to fire and safety
laws. However, in the event that any governmental authority requires
alterations to the Premises or the Building as a condition to
approving the installation of such security systems, or in connection
with the installation of such security systems, and such alterations
are unrelated to those required for the actual installation of the
components of the security system, then the costs of such alterations
shall be paid fifty percent (50%) by Landlord and fifty percent (50~)
by Tenant as such sums accrue, up to a maximum total of such costs of
$80,000.00 (i.e., $40,000.00 payable by Landlord and $40,000.00
payable by Tenant). All such costs above $80,000.00 shall be the sole
responsibility of Landlord.
(ii) The option shall be exercised by Tenant providing Landlord
with notice of its exercise of the same not less than thirty (30) days
prior to the date of completion of installation of such security
systems in the Premises. The notice shall indicate the type of
security system to be installed and the floors of the Premises on
which the security systems are to be installed, and projected date of
completion of installation of the security systems. In the event of
exercise of such option, Tenant shall use its best reasonable efforts
to install such security systems in the Premises
<PAGE>
no later than November 1, 1995. Landlord shall prepare and file all
applications for all permits required by governmental authorities for
the installation of the security systems and shall pay, at its sole
cost, all filing fees and any other expenses related to such permits.
Landlord shall review with Tenant all such permit applications and any
other documents to be filed with such governmental authorities prior
to filing, and Tenant shall have the right of reasonable approval of
all such permit applications and documents.
(iii) Notwithstanding any other provision of this Lease, in the
event that such security systems are installed on less than the entire
Premises, Tenant may provide security guards, at Tenant's sole cost
and expense, for all or any portion of the Premises on which the
security systems have not been installed, except that, as to floors
16, 17 and 18 of the Building only, in the event that as of November
1, 1995 Tenant is still physically occupying all or any part of floors
16, 17 and/or 18, and Tenant has elected to have security guards on
any or all of floors 16, 17 and/or 18 in lieu of such security
systems, then the costs of such security guards incurred through
December 31, 1995 for floors 16, 17 and/or 18 shall be paid fifty
percent (50%) by Landlord and fifty percent (501) by Tenant as such
sums accrue, after which time the costs of the security guards, if
any, for floors 16, 17 and 18 shall be the sole responsibility of
Tenant. Landlord's maximum liability to Tenant to pay the cost of any
such security guards shall in no event exceed the sum of $15,000. In
addition, any such security guards may be removed or reinstated,
either temporarily or for the duration of the Term, at any time upon
written notice to Landlord.
(iv) Upon completion of installation of the security systems in
the Premises, Tenant shall provide Landlord with "as built" drawings
of the security system. Such security systems may include card reader
access for entry to all or portions of the Premises and may also
include installation of additional doors, barriers and other
reasonably necessary appurtenances. However, in the event of
installation by Tenant of security systems which restrict access to
the Premises, Tenant shall provide Landlord with access cards or other
means of access to all portions of the Premises. On or before twenty
(20) days prior to the expiration or earlier termination of this Lease
(or as soon thereafter as possible in the event of an unscheduled
termination of this Lease due to Tenant's default hereunder) as to
each floor of the Premises for which such security systems have been
installed, Tenant shall elect by notice to Landlord for each such
floor of the Premises to either: (A) remove such security systems at
Tenant's sole cost and expense, notwithstanding Section 11.2 of the
Lease, and repair any damage to the Premises caused by such removal;
or (B) leave such security systems in place, in which event they shall
immediately become the property of Landlord without compensation to
Tenant, and, where applicable, disconnect such portion of the security
system from the remainder of the security system. If option (B) above
is elected by Tenant, and such security systems consist of card
readers, then, notwithstanding the provisions of option (B), Tenant
shall remove such card readers at Tenant's sole cost and expense, and
repair any damage to the Premises caused by such removal. In the event
of the total or partial removal of such security systems by Tenant as
to any floor of the Premises, such removal activities shall be
completed prior to or on the expiration or earlier termination of this
Lease as to such floor (or as soon thereafter as possible in the event
of an unscheduled termination of this Lease due to Tenant's default
hereunder).
(b) LOBBY AND GARAGE SECURITY GUARDS OPTION. Tenant shall have the option
to provide lobby and/or garage security guards for the Building at the sole cost
and expense of Tenant effective at any time. The level and extent of such lobby
and/or garage security guard services shall
-2-
<PAGE>
be at the sole discretion of Tenant, except that such services shall not consist
of badge or identification checking of individuals entering the lobbies of the
Building during Normal Business Hours. Such option may be exercised by written
notice to the Landlord and shall take effect on the date specified in such
notice. Such option may also be rescinded, either temporarily or for the
duration of the Term, at any time upon written notice to Landlord.
(c) BUILDING SECURITY OPTION. Tenant shall have the option to maintain
the level of security services for the Building then being provided by the
Landlord, at Tenants sole cost and expense, in lieu of having security services
provided by the Landlord under the Lease, effective at any time, except that
such services shall not consist of badge or identification checking of
individuals entering the lobbies of the Building during Normal Business Hours.
Such services may be performed by Tenant or parties contracting directly with
Tenant. Such option may be exercised by written notice to the Landlord and shall
take effect on the date specified in such notice. Such option may also be
rescinded, either temporarily or for the duration of the Term, at any time upon
notice to Landlord."
2. EFFECT OF AMENDMENT. Except as specifically amended hereby,
all of the terms and conditions of the Lease shall be and remain in full force
and effect.
3. INCORPORATION OF RECITALS. The Recitals set forth above in this
Amendment are hereby incorporated into the Lease by this reference.
IN WITNESS WHEREOF, the parties have executed this Amendment to be
effective as of the date and year hereinabove first written.
Landlord: PACIFIC RESOURCES DEVELOP MENT INC.,
a California corporation
By: /s/ Kevin Wu
Name: Kevin Wu
Its: Managing Director
Tenant: CHEVRON U.S.A. INC., a Pennsylvania
corporation, by its Chevron Real
Estate Management Company division
By: /s/ David S. Mitchell
Name: David S. Mitchell
Its: Vice President
-3-
<PAGE>
THIRD AMENDMENT TO LEASE
This Third Amendment to Lease ("Amendment") is entered into effective
January 1, 1996 by and between PACIFIC RESOURCES DEVELOPMENT INC., a California
corporation ("Landlord") and CHEVRON U.S.A. INC., a Pennsylvania corporation, by
its Chevron Real estate Management Company division ("Tenant").
RECITALS
A. Chevron Corporation, a Delaware corporation ("Chevron") and Tenant entered
into an Office Lease Agreement dated as of January 1, 1994 (the "Lease") of
certain premises located in the building commonly known as 225 Bush Street, City
and County of San Francisco, California (the "Building").
B. Landlord is the successor to all of Chevron's right, title and interest in
the Lease pursuant to an Assignment of Leases dated effective October 4, 1994
entered into between Chevron and Landlord.
C. Landlord and Tenant entered into a First Amendment to Lease effective April
1, 1995 and a Second Amendment to Lease effective April, 1995.
D. Landlord and Tenant desire to further amend the Lease in certain respects,
subject to the terms and conditions of this Amendment.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained in this Amendment, the Landlord and Tenant agree as follows:
1. PARKING. Sections 22.1 and 22.2 of the Lease are hereby deleted in
their entirety and replaced with the following:
SECTION 22.1 RESERVED PARKING SPACES.
Landlord shall lease to Tenant a total of twenty (20) standard size
reserved parking spaces in the garage of the Building (the "Reserved
Spaces") at a rental rate of Two Hundred Fifty Dollars ($250.00) per month
per space. The location of the Reserved Spaces are depicted in EXHIBIT H
to this Lease. Landlord reserves the right, in its sole reasonable
discretion, to change the location within the garage of any or all of the
Reserved Spaces. The original term for the reserved Spaces shall be for one
(1) year, with a commencement date of January 1, 1996 and an expiration
date of December 31, 1996 (the "Original Parking Term"). So long as this
Lease is in effect, Tenant shall have and is hereby given the option to
extend the Original Parking Term on a year-to-year basis for up to twenty
(20) of the Reserved Spaces by Tenant's giving Landlord written notice of
its irrevocable exercise of the same not less than thirty (30) days prior
to the expiration date of the Original Parking Term or the then prevailing
extension of the Original Parking Term. Notwithstanding the foregoing,
Tenant may only extend the Original Parking Term each year as to not more
than the number of the Reserved Spaces that are subject to this Lease on
the date of the Exercise by Tenant of each said option. Each one year
extension of the Original Parking Term shall be on and under the same
covenants, agreements, terms, provisions, and conditions as are contained
herein for the Original Parking Term except that the monthly rental rate
per space applicable during each one year extension of the Original Parking
Term may be adjusted by Landlord. However, in no event shall the monthly
rental rate per Reserved Space exceed the charge then being made in the
Russ Building Garage in San Francisco, California (or if that garage is not
being operated, in comparable facilities in the immediate vicinity of the
Building).
<PAGE>
SECTION 22.2 PAYMENT, PARKING RULES, RISK ALLOCATION.
(a) The rent payable to Landlord for the Reserved Spaces shall
collectively be referred to as "Parking Rent." The Parking Rent shall be
payable monthly in accordance with Section 5.12 (a). Tenant agrees to
comply with all reasonable rules and regulations now or hereafter
established by Landlord (or its agent or designee) relating to the use of
parking facilities. Upon the termination of this Lease, Tenant's rights to
such parking spaces as are then being leased to Tenant hereunder shall
terminate.
(b) Tenant shall use the parking spaces at its own risk and releases
Landlord form any and all claims for personal injury and property damage,
costs, loss, liability, expense and causes of action of every kind and
character arising out of or relating to Tenant's use of the parking spaces.
2. EXHIBIT H. Attachment A to this Amendment is hereby
added to the Lease as "EXHIBIT H.
3. EFFECT OF AMENDMENT. Except as specifically amended hereby,
all of the terms and conditions of the lease shall be and remain in full force
and effect.
4. INCORPORATION OF RECITALS. The Recitals set forth above in this
Amendment are hereby incorporated into the Lease by this reference.
IN WITNESS WHEREOF, the parties have executed this Amendment to be
effective as of the date and year hereinabove first written.
Landlord: PACIFIC RESOURCES DEVELOPMENT INC.,
a California corporation
By: /s/ Kevin Wu
Name: Kevin Wu
Its: Managing Director
Tenant: CHEVRON U.S.A. INC., a Pennsylvania
corporation, by its Chevron Real
Estate Management Company division
By: /s/ R. M. Nielsen
Name: R. M. Nielsen
Its: Facilities Manager
-2-
<PAGE>
FOURTH AMENDMENT TO LEASE
This Fourth Amendment to Lease ("Amendment") is entered into effective
April 1, 1996 by and between PACIFIC RESOURCES DEVELOPMENT INC., a California
corporation ("Landlord") and CHEVRON U.S.A. INC., a Pennsylvania corporation, by
its Chevron Real Estate Management Company division ("Tenant").
RECITALS
A. Chevron Corporation, a Delaware corporation ("Chevron") and Tenant entered
into an Office Lease Agreement dated as of January 1, 1994 (the "Lease") of
certain premises located in the building commonly known as 225 Bush Street, City
and County of San Francisco, California (the "Building").
B. Landlord is the successor to all of Chevron's right, title and interest in
the Lease pursuant to an Assignment of Leases dated effective October 4, 1994
entered into between Chevron and Landlord.
C. Landlord and Tenant entered into a First Amendment to Lease effective April
1, 1995 and a Second Amendment to Lease effective April 1, 1995, and a Third
Amendment to Lease effective January 1, 1996.
D. Landlord and Tenant desire to further amend the Lease in order to extend
the Expiration Date of the Term for the Thirteenth Floor of the Building and to
eliminate the renewal options as to the Thirteenth Floor of the Building.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained in this Amendment, the Landlord and Tenant agree as follows:
1. EXHIBIT A. Exhibit A of the Lease is hereby amended by deleting
"6/30/96" as the "Expiration Date" for Floor 13 of the Premises, and replacing
it with "6/30/97" .
2. EXHIBIT F. Exhibit F of the Lease is hereby amended by deleting
Paragraph (a)(9) of Exhibit F in its entirety.
3. EFFECT OF AMENDMENT. Except as specifically amended hereby, all of
the terms and conditions of the Lease shall be and remain unchanged and in full
force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment to be
effective as of the date and year hereinabove first written.
Landlord: PACIFIC RESOURCES DEVELOPMENT INC.,
a California corporation
By: /s/ Kevin Wu
Name: Kevin Wu
Its: Managing Director
Tenant: CHEVRON U.S.A. INC., a Pennsylvania
corporation, by its Chevron Real
Estate Management Company division
<PAGE>
By: /s/ illegible
Name: illegible
Its: Vice President
-2-
<PAGE>
FIFTH AMENDMENT TO LEASE
This Fifth Amendment to Lease ("Amendment") is entered into effective
October 14, 1996 by and between PACIFIC RESOURCES DEVELOPMENT INC., a California
corporation ("Landlord") and CHEVRON U.S.A. INC., a Pennsylvania corporation, by
its Chevron Real Estate Management Company division ("Tenant").
RECITALS
A. Chevron Corporation, a Delaware corporation ("Chevron") and Tenant entered
into an Office Lease Agreement dated as of January 1, 1994 (the "Lease") of
certain premises located in the building commonly known as 225 Bush Street, City
and County of San Francisco, California (the "Building").
B. Landlord is the successor to all of Chevron's right, title and interest in
the Lease pursuant to an Assignment of Leases dated effective October 4, 1994
entered into between Chevron and Landlord.
C. Landlord and Tenant entered into a First Amendment to Lease effective April
1, 1995 and a Second Amendment to Lease effective April 1, 1995, a Third
Amendment to Lease effective January I, 1996 and a Fourth Amendment to Lease
effective April 1, 1996.
D. Landlord and Tenant desire to further amend the Lease in order to extend
the Expiration Date of the Term for the Eighth and Ninth Floor of the Building,
to modify the Base Rate as to such floors, and to eliminate the Renewal Options
as to such floors.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained in this Amendment, the Landlord and Tenant agree as follows:
1. EXHIBIT A, FLOOR 8. Exhibit A of the Lease is hereby amended by
providing that the "Expiration Date" for Floor 8 of the Premises shall be
"12/31/99" instead of "6/30/99", and the "Base Rate" for Floor 8 of the Premises
shall be $16.75 through 6/30/99, and $18.00 from 7/1/99 through 12/31/99.
2. EXHIBIT A, FLOOR 9. Exhibit A of the Lease is hereby amended by
providing that the "Expiration Date" for Floor 9 of the Premises shall be
"12/31/99" instead of "6/30/99", and the "Base Rate" for Floor 9 of the Premises
shall be $16.75 through 6/30/99, and $18.00 from 7/1/99 through 12/21/99
3. EXHIBIT F. Exhibit F of the Lease is hereby amended by deleting
Paragraphs (a)(4) and (a)(5) in their entirety.
4. EFFECT OF AMENDMENT. Except as specifically amended hereby, all of
the terms and conditions of the Lease, as previously amended, shall be and
remain unchanged and in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment to be
effective as of the date and year hereinabove first written.
Landlord: PACIFIC RESOURCES DEVELOPMENT INC.,
a California corporation
By: /s/ Kevin Wu
Printed: KEVIN WU
Title: Managing Director
Tenant: CHEVRON U.S.A. INC., a Pennsylvania
corporation, by its Chevron Real
<PAGE>
Estate Management Company division
By: /s/ William R. Morrison
Printed: William R. Morrison
Title: Vice President
-2-
<PAGE>
SIXTH AMENDMENT TO LEASE
This Sixth Amendment to Lease ("Amendment") is entered into effective
January 27, 1997 by and between PACIFIC RESOURCES DEVELOPMENT INC., a California
corporation ("Landlord") and CHEVRON U.S.A. INC., a Pennsylvania corporation, by
its Chevron Real Estate Management Company division ("Tenant").
RECITALS
A. Chevron Corporation, a Delaware corporation ("Chevron") and Tenant entered
into an Office Lease Agreement dated as of January 1, 1994 (the "Lease") of
certain premises located in the building commonly known as 225 Bush Street, City
and County of San Francisco, California (the "Building").
B. Landlord is the successor to all of Chevron's right, title and interest in
the Lease pursuant to an Assignment of Leases dated effective October 4, 1994
entered into between Chevron and Landlord.
C. Landlord and Tenant entered into a First Amendment to Lease effective April
1, 1995, a Second Amendment to Lease effective April 1, 1995, a Third Amendment
to Lease effective January 1, 1996, a Fourth Amendment to Lease effective April
1, 1996 and a Fifth Amendment to Lease effective October 14, 1996.
D. Landlord and Tenant desire to funkier amend the Lease in order to extend
the Expiration Date of the Term for the Twelfth and Thirteenth Floors of the
Building, and to modify the Base Rate as to such floors, and to eliminate the
Renewal Options as to the Twelfth Floor.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained in this Amendment, the Landlord and Tenant agree as follows:
l. EXHIBIT A, FLOOR 12. Exhibit A of the Lease is hereby amended by
providing that the "Expiration Date" for Floor 12 of the Premises shall be
"6/30/99" instead of "6/30/97", and the "Base Rate" for Floor 12 of the Premises
shall continue to be $16.75 through 6/30/97, but shall be $19.00 for the period
from 7/1/97 through 6/30/99.
2. EXHIBIT A, FLOOR 13. Exhibit A of the Lease is hereby amended by
providing that the "Expiration Date" for Floor 13 of the Premises, as previously
amended by the Fourth Amendment to Lease, shall be "6/30/99" instead of
"6/30/97", and the "Base Rate" for Floor 13 of the Premises shall continue to be
$16.75 through 6/30/97, but shall be $19.00 from 7/1/97 through 6/30/99.
3. EXHIBIT F. Exhibit F of the Lease is hereby amended by deleting
Paragraph (a)(8) in its entirety.
4. EFFECT OF AMENDMENT. Except as specifically amended hereby, all of
the terms and conditions of the Lease, as previously amended, shall be and
remain unchanged and in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment to be
effective as of the date and year hereinabove first written.
Landlord: PACIFIC RESOURCES DEVELOPMENT INC.,
a California corporation
<PAGE>
By: /s/ Kevin Wu
Name: Kevin Wu
Its: Managing Director
Tenant: CHEVRON U.S.A. INC., a Pennsylvania
corporation, by its Chevron Real
Estate Management Company division
By: /s/ J. Westmoreland
Name: J. Westmoreland
Its: President
-2-
<PAGE>
STANDARD OFFICE LEASE
This Lease is made as of the 5th day of June, 1997 by and between PACIFIC
RESOURCES DEVELOPMENT INC., a California corporation ("Landlord"), and HAMBRECHT
& QUIST, a corporation ("TENANT"), who agree as follows:
BASIC LEASE INFORMATION
The following is the Basic Lease Information of this Lease. Other sections
of this Lease explain and define the Basic Lease Information in more detail and
are to be read in conjunction herewith. In the event of any conflict between
the Basic Lease Information and the other sections of this Lease, the Lease
shall control.
LANDLORD: Pacific Resources Development Inc.
NOTICE ADDRESS: 225 Bush Street
San Francisco, California 94104
TENANT: Hambrecht & Quist California
NOTICE ADDRESS: One Bush Street
San Francisco, CA 94104
PREMISES: Floor: 4th Suite No.: 400
NET RENTABLE AREA
OF PREMISES: 22,675 square feet
BUILDING: 225 Bush Street
San Francisco, CA 94104
BASE RENT (PER SQUARE
FOOT PER ANNUM): $24.00
BASE RENT (PER MONTH): $ 45,350.00
ANTICIPATED
EXECUTION DATE: May, 1997
ANTICIPATED TARGET
COMMENCEMENT July 1, 2000
DATE:
TERMINATION DATE: December 31, 2003
LENGTH OF TERM: Three years and six months
TENANT'S PERCENTAGE
SHARE: 4.686%; such share is a fraction, the numerator of
which is the net rentable area of the Premises
(22,675 sq. ft.) and the denominator of which is
the net rentable office area of the Building
(483,937 sq. ft.).
<PAGE>
BASE YEAR: January 1, 1997 to December 31, 1997
SECURITY DEPOSIT: $ 0.00
BROKERS: Landlord's: Grubb & Ellis
Tenants Stein Kingsley Stein
TENANT'S MINIMUM
INSURANCE
REQUIREMENT: $1,000,000
PERMITTED USES: General Office Use
OTHER SPECIAL
PROVISIONS: See Addendum
-2-
<PAGE>
RECITALS
A. Landlord is the owner of certain real property (the "REAL PROPERTY")
at 225 Bush Street, in the City and County of San Francisco and the Building (as
later defined) located on it. The Real Property and the Building are
collectively referred to herein as the "Property."
B. Landlord desires to lease to Tenant, and Tenant desires to lease from
Landlord the Premises (as later defined) for the term and subject to the terms,
covenants, agreements, and conditions in this Lease.
For good and valuable consideration the receipt and adequacy of which are
acknowledged, the parties agree as follows:
SECTION 1. DEFINITIONS As used in this Lease, the following terms
are defined in Section 1.
ALTERATIONS is defined in Section 9(a).
ANTICIPATED TARGET COMMENCEMENT DATE means the date specified in the Basic
Lease Information.
ANTICIPATED TERMINATION DATE means the date specified in the Basic Lease
Information.
BASE OPERATING EXPENSES means the Operating Expenses paid or incurred by
Landlord in the Base Year.
BASE PROPERTY TAXES means the amount of Property Taxes for the calendar year
ending December 31, 1997.
BASE RENT means the Base Rent as set forth in the Basic Lease Information.
BASE YEAR means the 12 calendar month period specified in the Basic Lease
Information as the Base Year.
BUILDING means the building constructed on the Real Property located at 225
Bush Street, San Francisco, California, any property interest in the area of the
Building, and all other improvements on, or appurtenances to, the Real Property
or the streets abutting the Real Property. The Building includes, but is not
limited to, an office building with 22 stories, a basement within which a
parking garage is located and two mezzanines.
COMMENCEMENT DATE means July 1, 2000.
DEPOSIT is defined in Section 35.
ESCALATION RENT is defined in Section 4(a).
EVENT OF DEFAULT is defined in Section 19.
IMPOSITIONS is defined in Section 8.
LANDLORD is defimed in the preamble.
LEASE is defimed in the preamble.
-3-
<PAGE>
LEGAL REQUIREMENTS is defined in Section 15.
OPERATING EXPENSES means (a) all reasonable costs of management, operation,
and maintenance of the Building actually incurred by Landlord, including without
limitation: wages, salaries, and payroll burden of employees from the position
of Building Manager and below; commercially reasonable property mar nagement
fees and other related compensation; janitorial, maintenance, security, and
other services; Building office rent or rental value; power, water, waste
disposal, and other utilities; materials and supplies; maintenance and repairs;
license costs; commercially reasonable insurance premiums and the deductible
portion of any insured loss under Landlord's insurance in an amount not to
exceed $10,000 in any one year; and depreciation on personal property; and (b)
the cost of any capital improvements made to the Building by Landlord afler the
Base Year that (i) are made in the reasonable expectation of reducing other
Operating Expenses during the term of this Lease, (ii) are required for the
health and safety of tenants, or (iii) are required under any governmental law
or regulation that was not applicable to the Building as of January 1, 1997,
this cost to be amortized over a reasonable period determined by Landlord,
together with interest on the unamortized balance at the rate of ten percent
(10%) per annum, or a higher rate equal to that paid by Landlord on funds
borrowed for the purpose of constructing or installing those capital
improvements. Operating Expenses shall not include: Property Taxes; depreciation
on the Building other than depreciation on exterior window draperies, if any,
provided by Landlord, and carpeting in multi-tenant floor public corridors and
common areas; costs of tenants' improvements; real estate brokers' commissions;
interest; costs incurred m connection with the repair of damage to the Building,
to the extent Landlord is reimbursed by insurance proceeds; and capital items
other than those referred to in clause (b). Actual Operating Expenses for both
the Base Year and each subsequent year will be adjusted to equal Landlord's
reasonable estimate of Operating Expenses had the total rentable area of the
Building been occupied.
PREMISES means the portion of the Building located on the floor or floors
specified Basic Lease Information which is outlined in red on the floor plan or
plans attached to this Lease as Exhibit A.
PROPERTY is defined in Recital A of this Lease.
PROPERTY TAXES means all real properly taxes (and any tax levied wholly or
partly in lieu of real property taxes) levied against the Properly, and all real
estate tax consultant expenses and attorneys' fees reasonably incurred for the
purpose of maintaining an equitable assessed valuation of the Property.
REAL PROPERTY is defined in Recital A of this Lease.
TENANT is defined in the preamble.
TENANT'S PERCENTAGE SHARE means the percentage figure specified as Tenant's
Percentage Share in the Basic Lease Information. Tenant's Percentage Share has
been obtained by dividing the net rentable area of the Premises, as specified in
the Basic Lease Information, by the total net rentable area of the Building,
which is 483,937 square feet, and multiplying that quotient by one hundred
(100). In the event the rentable area of the Premises is increased or decreased
by the addition to or deletion from the Premises of any office space, Tenant's
percentage share shall be appropriately adjusted. For the purposes of Section 4,
Tenant's Percentage Share shall be based on the number of days during the
calendar year in which this change occurs.
TERM is defined in Section 3 of this Lease.
TERMINATION DATE means the Termination Date in the Basic Lease Information.
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SECTION 2. PREMISES. Landlord leases to Tenant, and Tenant leases from
Landlord the Premises for the term and subject to the terms, covenants,
agreements, and conditions later set forth, to each of which Landlord and Tenant
mutually agree. All of the windows and outside walls of the Premises and any
space in the Premises used for shafts, stacks, pipes, conduits, ducts.
electrical equipment or other utilities or Building facilities are reserved
solely to Landlord and Landlord shall have rights of access through the Premises
for the purpose of operating, maintaining and repairing the same, provided that
any such entry shall be performed in a manner reasonably intended to minimize
any inconvenience to Tenant.
SECTION 3. TERM; CONDITION OF PREMISES. The Term of this Lease shall
commence on the Commencement Date and, unless sooner terminated as later
provided, shall end on the Termination Date.
SECTION 4. RENTAL.
(a) Tenant shall pay to Landlord throughout the Term as rental for the
Premises the Base Rent, provided that the rental payable during each year
subsequent to the Base Year shall be the Base Rent, increased by Tenant's
Percentage Share of the total dollar increase, if any, in Operating Expenses
paid or incurred by Landlord in that year over the Base Operating Expenses, and
also increased by Tenant's Percentage Share of the total dollar increase, if
any, in Property Taxes paid by Landlord in that year over the Base Properly
Taxes. The increased rental due pursuant to this Section 4(a) is the Escalation
Rent.
(b) Rental shall be paid to Landlord, in advance, on or before the first
day of the Term of this Lease and on or before the first day of each successive
calendar month during the Term of this Lease. In the event the Term of this
Lease commences on a day other than the first day of a calendar month or ends on
a day other than the last day of a calendar month, the monthly rental for the
first and last fractional months of the Term of this Lease shall be
appropriately prorated.
(c) All sums of money due to Landlord under this Lease, not specifically
characterized as rental, shall constitute additional rent and shall be due
within thirty (30) days after receipt by Tenant of a billing. If any sum is not
paid when due, it shall be collectible as additional rent with the next
installment of rental falling due. Nothing contained in this Lease shall be
deemed to suspend or delay the payment of any sum of money at the time it
becomes due and payable under this Lease, or to limit any other remedy of
Landlord.
(d) Tenant acknowledges that late payment of rent and other sums due under
this Lease will cause Landlord to incur costs not contemplated by this Lease,
the exact amount of which will be difficult to ascertain. These costs include,
but are not limited to, processing and accounting charges and late charges which
may be imposed on Landlord by the terms of any trust deed covering the Premises.
Accordingly, if any installment of rent or any other sums due from Tenant are
not received (i) within three (3) calendar days after delivery of written notice
from Landlord of Landlord's failure to receive such rent or other sums, or (ii)
in the event Landlord has already delivered such late payment notice once in any
one continuous twelve (12) month period, when due, Tenant shall pay to Landlord
a late charge equal to five percent. (5%) of the overdue amount. The parties
agree that the late charge represents a fair and reasonable estimate of the
costs Landlord will incur because of late payment. Acceptance of the late charge
by Landlord shall not constitute a waiver of Tenant's default for the overdue
amount, nor prevent Landlord from exercising the other rights and remedies
granted under this Lease.
___ [Initials of Landlord] ______ [Initials of Tenant]
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(e) In addition to the imposition of any late charge, any amount due to
Landlord, if not paid within f ive (5) days following the due date, will bear
interest from the due date until paid at the rate of ten percent (10%) per year
or, if a higher rate is legally permissible, at the highest rate legally
permitted. However, interest shall not be payable on late charges incurred by
Tenant nor on any amounts on which late charges are paid by Tenant to the extent
this interest would cause the total interest to be in excess of that legally
permitted. Payment of interest shall not excuse or cure any default by Tenant.
(f) All payments due shall be paid to Landlord, without deduction or
offset, in lawful money of the United States of America at Landlord's address
for notices under this Lease or to another person or at another place i n the
continental U.S. as Landlord may designate by written notice to Tenant.
(g) No security or guaranty which may now or hereafter be furnished to
Landlord for the payment of rent due hereunder or for the performance by Tenant
of the other terms of this Lease shall in any way be a bar or defense to any of
Landlord's remedies set forth in Sections 20, 21 or 22 hereof
SECTION 5. ESCALATION RENT. Escalation Rent shall be paid monthly on an
estimated basis, with subsequent annual reconciliation, in accordance with the
following procedures:
(a) No later than ninety (90) days prior to the end of the Base Year and
no later than ninety (90) days prior to the end of each subsequent year, or as
soon after that time as reasonably practicable, Landlord shall give Tenant
notice of Landlord's reasonable estimate of any Escalation Rent due under
Section 4(a) for the ensuing year. On or before the first day of each month
during the ensuing year, Tenant shall pay to Landlord one-twelfth (1/12th) of
the estimated Escalation Rent. If Landlord fails to give notice as required in
this Section, Tenant shall continue to pay on the basis of the prior year's
estimate until the month after that notice is given. If at any time it appears
to Landlord that the Escalation Rent for the current year will vary from the
estimate by more than f five percent (5%), Landlord shall, by notice to Tenant
setting forth in reasonable detail the basis for such adjustment, revise the
estimate for that year, and subsequent payments by Tenant for that year shall be
based on the revised estimate.
(b) Within ninety (90) days after the close of each year following the
Base Year, or as soon after the ninety (90) day period as reasonably
practicable, Landlord shall deliver to Tenant a statement of the actual
Escalation Rent for that year showing Operating Expenses and Property Taxes on
the basis of which the actual Escalation Rent was determined. At Tenant's
request, Landlord shall provide Tenant reasonable supporting detail underlying
the calculations of Operating Expenses and Property Taxes. If Landlord's
statement discloses that Tenant owes an amount that is less than the estimated
payments for that year previously made by Tenant, Landlord shall credit the
excess first against any sums then owed by Tenant, and then against the next
payments of rental due and, with respect to the final calendar year of the Term,
promptly refund such sums to Tenant. If Landlord's statement discloses that
Tenant owes an amount that is more than the estimated payments for that year
previously made by Tenant, Tenant shall pay the deficiency to Landlord within
thirty (30) days after delivery of the statement.
(c) The amount of Escalation Rent for any fractional year in the Term
shall be appropriately prorated. The proration of Escalation Rent for the
applicable year in which termination occurs shall be calculated on the basis of
a fraction of the Operating Expenses for that entire year and the proration of
Property Taxes for the year in which termination occurs shall be calculated on
the basis of a fraction of the Property Taxes for that entire year, but shall
exclude any Property Taxes attributable to any increase in the assessed
valuation of the Building occurring after
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termination. The termination of this Lease shall not affect the obligations of
the parties pursuant to Section 5(b) to be performed afler the termination.
SECTION 6. USE. The Premises shall be used for general office purposes
and other uses reasonably ancillary thereto, but no other. Tenant shall not do
or permit to be done on the Premises, nor bring or keep or permit to be brought
or kept in the Premises, anything (a) which is prohibited by or in conflict with
any law, ordinance, or governmental rule or, (b) which is prohibited by the
standard form of fire insurance policy or, (c) which will increase the existing
rate of or affect fire or other insurance on the Building or its contents or
cause a cancellation of any insurance policy covering the Building or any part
of it or its contents. Tenant shall not use or store in the Premises any
hazardous or toxic substances, with the sole exception of reasonably necessary
substances that are kept in reasonably necessary quantities for normal office
operations, provided that their use and storage are in accordance with
applicable laws. Tenant shall not do or permit anything to be done on the
Premises that will unreasonably obstruct or interfere with the rights of other
tenants of the Building, or injure or annoy them, or use or allow the Premises
to be used for any unlawful purposes, nor shall Tenant cause, maintain, or
permit any nuisance or waste on or about the Premises.
SECTION 7. SERVICES.
(a) Landlord shall maintain the public and common areas of the Building,
including lobbies, stairs, elevators, corridors, rest rooms, all exterior
landscaping, windows, the mechanical, plumbing, and electrical equipment serving
the Building, and the structure itself, in reasonably good order and condition
so as to meet the reasonable needs of Tenant, except for damage, excluding
normal wear and tear, caused by the Tenant. Damage by Tenant shall be repaired
by Landlord at Tenant's expense. The standard of maintenance shall be equal to
that of other office buildings of a similar class in the downtown San Francisco
area.
(b) Landlord shall furnish (i) electricity for lighting and the operation
of normal office machines, including personal computers, facsimile machines,
laser printers and photocopiers, (ii) heating and ventilation, to the extent
reasonably required for the comfortable occupancy by Tenant in Tenant's use of
the Premises during the period from 7:00 a.m. to 6:00 p.m. on weekdays ("NORMAL
Business HOURS"), except holidays, or a shorter period as may be prescribed by
applicable policies or regulations adopted by any utility or governmental
agency, (iii) elevator service; provided that, Landlord may reasonably limit the
number of elevators to be operated before or after Normal Business Hours, (iv)
lighting replacement, for building standard lights, (v) rest room supplies, (vi)
window washing at least two (2) times a year, (vii) potable hot and cold water
for the rest rooms and kitchen areas, and (viii) daily janitor services during
the times and in the manner that these services are customarily furnished in
comparable office buildings in the downtown San Francisco area; provided,
however, that Landlord shall not be required to provide janitorial services for
portions of the Premises used for preparing or consuming food or beverages or
for similar purposes other than sweeping and refuse collection
(c) During times other than Normal Business Hours, Landlord shall furnish
the Premises with water, electricity and, upon twenty-four (24) hours' notice
from Tenant, reasonable heat and ventilation. Any such additional or different
utilities or services, including without limitation maintenance, repair,
janitorial and cleaning services that Landlord may agree to provide at Tenant's
request shall be at Tenant's sole expense. Tenant shall pay for heat and
ventilation furnished at Tenant's request during times other than Normal
Business Hours on an hourly basis at the then prevailing rate established for
the Building by Landlord. If the service requested by Tenant is not a
continuation of service furnished during Normal Business Hours, Tenant shall pay
for such service at such rate for a period of two (2) hours preceding the
commencement of services.
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(d) If the temperature otherwise maintained in any portion of the Premises
by the heating, ventilating and air conditioning, if any, systems ("HVAC"), of
the Building is affected as a result of (a) any lights, machines or equipment
used by Tenant in the Premises, or (b) the occupancy of the Premises by more
than one person per 115 square feet of rentable area, Landlord shall have the
right to install any machinery or equipment that Landlord reasonably deems
necessary to restore temperature balance. Tenant shall pay the cost of
purchasing, installing, maintaining and operating any such equipment and
mod)fications. Landlord may establish reasonable measures to conserve energy and
water, including but not limited to, automatic light shut off after hours and
efficient lighting forms, so long as these measures do not unreasonably
interfere with Tenant's use of the Premises.
(e) Tenant shall advise Landlord prior to execution of this Lease and
within five (5) days afler written request therefor of the nature and quantity
of all of Tenant's lights, equipment and machines using electricity in the
Premises and shall permit Landlord or its authorized agents to make periodic
inspections of all facilities using electricity located within the Premises.
(f) If Landlord reasonably determines that Tenant's use of electricity,
water or any other utility exceeds the building standard use of such utility,
Landlord has the right to measure the amount of such excess use by any
reasonable means (including the installation at Tenant's expense of a
separate meter or other measuring device) and charge Tenant for the actual
cost thereof. In accordance with Title 24 of the California Administrative
Code, Building Standard electrical usage has been determined by Landlord to
be: two (2) watts per square foot for lighting, and one ( 1 ) watt per square
foot for all other electrical usage in the Premises, which may be subject to
change from time to time based upon revisions to the California
Administrative Code, and is based on the use during Normal Business Hours of
typewriters, desk-top personal computers and other generally used office
equipment generating comparable amounts of heat and using comparable amounts
of electricity. If Landlord in its sole discretion permits Tenant to use in
the Premises lighting in excess of two (2) watts per square foot or equipment
or machinery using electricity in excess of one (1) watt per square foot,
Tenant shall pay all the costs reasonably associated with such excess usage.
In addition, Landlord may impose a reasonable charge for the use of any
additional or unusual janitorial services required by Tenant because of the
quality or type of Tenant's Improvements in the Premises, the carelessness of
Tenant or the nature of Tenant's business (including hours of operation). All
sums payable hereunder by Tenant for additional services or for excess
utility usage shall be payable within 30 days of receipt of a written invoice
from Landlord, provided that Landlord may require Tenant to pay monthly for
the estimated cost of Tenant's additional services or excess utility usage if
such usage occurs on a continual basis, and such estimated amounts shall be
payable in advance on the first day of each month.
(g) Landlord shall not be in default under this Lease, nor be liable for
any damages resulting from, nor except as otherwise herein provided shall the
required rental be abated because of (i) the installation, use, or interruption
of use of any equipment in connection with furnishing the previously listed
services, (ii) failure to furnish or delay in furnishing these services, when
failure or delay is caused by accident or conditions beyond the reasonable
control of Landlord or by necessary repairs or improvements to the Premises or
to the Building, or (iii) the limitation, curtailment, rationing, or
restrictions on use of water, electricity, gas, or any other form of energy
serving the Premises or the Building. Landlord shall use reasonable efforts to
diligently remedy interruptions in the furnishing of these services. In the
event any governmental authority having jurisdiction over the Building
promulgates or revises any law, ordinance or regulation or building, or other
code or imposes mandatory or voluntary controls or guidelines on Landlord or the
Building relating to the use or conservation of energy or utilities or the
reduction of automobile or other emissions (collectively, "Controls") or in the
event Landlord is required or elects to make alterations to the Building in
order to comply with such mandatory or voluntary Controls, Landlord may, in its
sole discretion, comply with such Controls or make such alterations to the
Building related thereto. Such compliance and the making of such alterations
shall not constitute an eviction
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of Tenant, constructive or otherwise, or impose upon Landlord any liability
whatsoever, including, but not limited to, liability for consequential damages
or loss of business by Tenant.
(h) Landlord shall not be obligated to provide or maintain any security
patrol or security system. However, if Landlord elects to provide such patrol or
system, Tenant shall comply with any such system implemented by Landlord, and
the cost thereof shall be included in Operating Expenses.
(i) Notwithstanding anything to the contrary contained in this Lease, if
at any time during the Term, if services to the Premises are interrupted such
that Tenant is reasonably prevented from using all or any portion of the
Premises, or Tenant is able to reasonably conduct its operations in all or any
portion of the Premises only at a significantly reduced level or under
materially adverse conditions ("Adverse Conditions") for any reason other than
the fault or neglect of Tenant, for a period of five (5) consecutive days
("Eligibility Period"), Base Rent and Escalation Rent shall abate commencing on
the date immediately following the Eligibility Period and continuing for the
time period and to the extent that Tenant's use of the Premises is adversely
affected. Further, if Adverse Conditions continue for ninety (90) consecutive
days, Tenant, at its option, may elect to terminate this Lease by giving written
notice to Landlord; provided that, if Landlord restores services to the Premises
within ten (10) days after receipt of Tenant's termination notice, Tenant's
exercise of its termination right shall be void. This shall not apply in the
event of any damage or destruction or condemnation of the Premises or the
Building, which damage or destruction or condemnation shall be governed by
Sections 12 and 25, respectively.
SECTION 8. IMPOSITIONS. In addition to the monthly rental and other
charges to be paid by Tenant under this Lease, Tenant shall pay Landlord for all
of the following items (collectively, "IMPOSITIONS"): (i) taxes, other than
local, state, and federal personal or corporate income taxes measured by the net
income of Landlord; (ii) assessments, including without limitation, all
assessments for public improvements, services, or benefits, irrespective of when
commenced or completed; (iii) excises; (iv) levies; (v) business taxes; (vi)
license, permit, inspection, and other authorization fees; (vii) transit
development fees; (viii) assessments or charges for housing funds; (ix) service
payments in lieu of taxes and; (x) any other fees or charges that are levied,
assessed, confirrned, or imposed by a public authority; provided, however, that
Impositions shall not include amounts otherwise included in Operating Expenses
or Property Taxes. Tenant is obligated to pay only to the extent that the
Impositions are (a) on, measured by, or reasonably attributable to, the cost or
value of Tenant's equipment, furniture, fixtures, and other personal property
located in the Premises, or the cost or value of any above Building standard
leasehold improvements made to the Premises by or for Tenant, regardless of
whether title to the improvements shall be in Tenant or Landlord; (b) based on
or measured by the monthly rental or other charges payable under this Lease,
including without limitation, any gross receipts tax levied by a municipality,
the State of California, the Federal Government, or any other governmental body
with respect to the receipt of the rental; (c) based on the possession, leasing,
operation, management, maintenance, alteration, repair, use, or occupancy by
Tenant of the Premises or any portion of the Premises; or (d) on this
transaction or any document to which Tenant is a party creating or transferring
an interest or an estate in the Premises. If it is unlawful for Tenant to
reimburse Landlord for the Impositions, but lawful to increase the monthly
rental to take into account Landlord's payment of the Impositions, the monthly
rental payable to Landlord shall be revised to net Landlord the same net return
without reimbursement of the impositions as would have been received by Landlord
with reimbursement of the Impositions.
SECTION 9. ALTERATIONS.
(a) Tenant shall not make or allow any alterations, additions, or
improvements to the Premises or any part of the Premises (collectively,
"ALTERATIONS"), without Landlord's prior written consent, which shall not be
unreasonably withheld. The installation of furnishings, fixtures,
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equipment, or decorative improvements, none of which shall unreasonably affect
Building systems or the structure of the Building, and the repainting or
recarpeting of the Premises, shall not constitute Alterations. All Alterations
shall be made by Landlord for Tenant's account, including increased COSTS if
any, in accordance with the procedures set forth in this Section. All
Alterations shall immediately become Landlord's property and, at the end of the
Term, shall remain on the Premises without compensation to Tenant, unless
Landlord elects by notice to Tenant concurrently with Landlord' s approval of
the s same to have Tenant remove any Alterations that are peculiar to Tenant's
use of the Premises and are not normally required or used by other tenants. In
this event, Tenant shall bear the cost of restoring the Premises to their
condition prior to the installment of the Alterations. When plans and
specifications for any Alterations are approved by Landlord pursuant to Section
9(b), Landlord shall advise Tenant on request whether proposed Alterations would
entitle Landlord to require their removal and restoration of the Premises at the
end of the Term. Landlord may post and record an appropriate notice of
nonresponsibility with respect to any Alteration and Tenant shall maintain any
such notices posted by Landlord in or on the Premises. Notwithstanding the
foregoing to the contrary, provided that Hambrecht & Quist is Tenant hereunder,
Tenant may elect to directly contract for Alterations to be made to the
Premises, otherwise subject to compliance with all provisions of this Lease,
upon at least twenty (20) days' prior written notice to Landlord, and subject to
all other reasonable requirements Landlord may impose upon the making of such
Alterations, including without limitation the prior approval of any contractor
proposed by Tenant to make the Alterations.
(b) Plans and specifications for Alterations shall be prepared at Tenant's
expense by Landlord's architect, or by Tenant's architect if Tenant so requests
and Landlord consents, which consent shall be at Landlord's sole discretion, and
by engineers approved by Landlord, where the nature of the Alterations requires
mechanical or electrical engineering services. Any architect retained by Tenant
shall be instructed to follow standard construction administration procedures
and use standard specifications and details reasonably promulgated by Landlord
for the Building. The plans and specifications shall be subject to approval by
Landlord and Tenant, and shall not be unreasonably withheld or delayed by either
party. Plans and specifications that have neither been approved nor disapproved
by Landlord within thirty (30) days afler submittal by Tenant shall be deemed to
have been approved. Landlord does not warrant the cost of the Alterations, the
timeliness of performance, nor the quality of the contractor's work, but
Landlord shall use reasonable best efforts to secure performance of the
construction contract for Tenant's benefit. Notwithstanding the foregoing to the
contrary, provided that Hambrecht & Quist is Tenant hereunder, Landlord shall
not unreasonably withhold its consent to Tenant's designation of architects or
engineers
(c) In the event Tenant instructs Landlord or the contractor to proceed
with any changes to the Alterations without a prior determination of increased
costs resulting from those changes and without approval of the increases by
Tenant, or in the event Tenant is responsible for increased costs attributable
to a delay or acceleration in the time for construction, the amount of any
increased costs shall be reasonably determined by Landlord on completion of the
Alterations, subject only to Landlord's reasonable efforts in causing the
contractor to furnish Tenant appropriate back-up information concerning
increased costs, if any.
(d) The cost of the Alterations to be paid by Tenant shall include a
reasonable charge for the administration, by Landlord or an agent (not to exceed
five percent (5%) of the cost of the Alterat ions ), of the construction or
installation of the Alterations, the amount of which shall bear a reasonable
relationship to the scope of the Alterations and the costs of performing the
administration.
(e) Tenant shall pay to Landlord all amounts payable by Tenant pursuant to
this Section within thirty (30) days after billing by Landlord. Billing may be
in advance of or during the progress of the Alterations to enable Landlord to
pay the contractor, architect, or engineer without
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advancing Landlord's own funds. At Tenant's request, Landlord shall, to the
extent practicable, furnish a cow of each bill to Tenant for Tenant's approval
at least ten ( 10) days prior to the due date of the bill. Tenant may contest
any payment to a contractor for Alterations and Landlord shall withhold this
payment, provided that the provisions of Section 10 are satisfied and Tenant
indemnifies and defends Landlord against all claims and liability arising out of
the contested payment. In the event that this Lease is assigned or all or any
part of the Premises is sublet (pursuant to all applicable requirements set
forth herein) and such assignee or sublessee wishes to make any Alterations to
the Premises, Landlord may, at Landlord's option and prior to commencement of
Alterations, require such assignee or sublessee to deposit with Landlord the
estimated cost of Alterations, or a lesser portion as specified by Landlord for
the cost as incurred. Any surplus funds shall be returned to such as s ignee or
subles see when the Alterations have been paid for in full.
(f) Landlord may delegate some or all authority and responsibilities under
this Section to a manager.
SECTION 10. LIENS Tenant shall keep the Premises and the Building
free any liens arising out of any work performed, materials furnished, or
obligations incurred by or at the request of Tenant. Landlord may have posted
on the Premises any notices that may be provided by law or that Landlord may
deem proper for the protection of Landlord, the Premises, and the Building
from those liens. If any such liens are filed, Landlord may, upon thirty (30)
days' written notice to Tenant, without waiving its rights based on such
breach by Tenant and without releasing Tenant from any obligations hereunder,
pay and satisfy the same and in such event the sums so paid by Landlord shall
be due and payable by Tenant immediately without notice or demand, with
interest from the date paid by Landlord through the date Tenant pays
Landlord, at the interest rate otherwise payable hereunder pursuant to
Section 4(e). Notwithstanding, Tenant may contest any lien for which Tenant
is responsible under this Section, provided that Tenant shall have caused the
lien to be bonded against to the reasonable satisfaction of Landlord.
SECTION 11. REPAIRS. Tenant accepts the Premises as being in the
condition in which Landlord is obligated to deliver the Premises, subject to the
tenant improvements, if any, that Landlord has agreed to make, and casualty
damage. At all times during the term of this Lease and at Tenant's sole cost,
Tenant shall keep the Premises (specifically excluding any structural portions
of the Building therein) in good condition and repair; ordinary wear and tear
and damage to the Premises by fire, earthquake, or act of God or the elements
are excepted. Tenant waives all rights to make repairs at the expense of
Landlord or instead to vacate the Premises, and Tenant further waives the
provisions of Civil Code Sections 1941 and 1942 with respect to Landlord's
obligations under this Lease. At the end of the term of this Lease, Tenant shall
surrender to Landlord the Premises and all Alterations that are to remain in the
Premises in the same condition as when received; ordinary wear and tear and
damage by fire, earthquake, or act of God or the elements are excepted. Landlord
has no obligation and has made no promise to alter, remodel, improve, repair,
decorate, or paint the Premises or any part of them, except as specifically set
forth in this Lease. Landlord has made no representations respecting the
condition of the Premises or the Building, except as specifically set forth in
this Lease.
SECTION 12. DAMAGE OR DESTRUCTION.
(a) In the event the Premises or any portion of the Building necessary for
Tenant's occupancy are damaged by fire, earthquake, act of God, the elements, or
other casualty, within sixty (60) days after that event, Landlord shall notify
Tenant of the estimated time, in Landlord's reasonable judgment, required for
repair or restoration. If the estimated time is one hundred and eighty (180)
days or less after the commencement of the physical work and one (1) year or
less after the casualty event, Landlord shall proceed promptly and diligently to
adjust the loss with applicable insurers, to secure all required governmental
permits and approvals, and to repair or
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restore the Premises or the portion of the Building necessary for Tenant's
occupancy. This Lease shall remain in full force, except that for the time
unusable, Tenant shall receive a rental abatement for that part of the Premises
rendered unusable in the conduct of Tenant's business.
(b) If the estimated time for repair or restoration is in excess of one
hundred and eighty (180) days after the commencement of the physical work or one
(1) year after the casualty event, Tenant may elect to terminate this Lease as
of the date of the casualty event by giving notice to Landlord within fiReen
(15) days following receipt of Landlord's notice of the estimated time for
repair. If the estimated time is more than one hundred and eighty (180) days
after commencement of the physical work or one (1) year after the casualty
event, but Tenant has not elected to terminate this Lease, Landlord may elect,
on notice to Tenant within twenty (20) days after the period for Tenant's
election to terminate has expired. to repair or restore the Premises or the
portion of the Building necessary for Tenant's occupancy. In that event, this
Lease shall continue in full force, but the rent shall be abated. If Landlord
does not elect to repair or restore, this Lease shall terminate as of the date
of the casualty event. However, if Landlord has not commenced the physical
repair or restoration of the Premises or the portion of the Building necessary
for Tenant's occupancy within one (1) year from the casualty event, Tenant may
elect to terminate this Lease by notice to Landlord given at any time following
the expiration of one (1) year from the casualty event, but prior to the
commencement of the physical repair or restoration work.
(c) If the Premises or the Building are to be repaired or restored under
this Section, Landlord shall repair or restore at Landlord's cost the Building
itself and all improvements in the Premises, including but not limited to, any
tenant improvements constructed pursuant to this Lease or otherwise installed
within the Premises as of the date of this Lease, but excluding Alterations made
by or for Tenant subsequent to completion of those tenant improvements. Tenant
shall pay the cost of repairing or restoring any Alterations made by or for
Tenant and shall be responsible for carrying casualty insurance as Tenant deems
appropriate for those Alterations.
(d) In the event of any damage to or destruction of the Premises or the
Building, Landlord and Tenant acknowledge that their respective rights and
obligations are to be governed exclusively by this Lease.
(e) In the event the Premises are to be repaired or restored and Tenant
requires temporary offices as a result of a casualty event affecting the
Premises, Landlord shall use best efforts to locate offices for Tenant within
the Building. Tenant acknowledges that Landlord makes no commitment as to the
availability of any offices or as to their cost.
SECTION 13. SUBROGATION. Landlord and Tenant shall each obtain from
their respective insurers under all policies of fire, theft, public liability,
worker's compensation, and other insurance maintained during the term of this
Lease covering the Building, or any portion of it, or operations in it, a waiver
of all rights of subrogation that the insurer of one party might have against
the other party. Landlord and Tenant shall each indemnify the other against any
loss or expense, including reasonable attorney fees, resulting from the failure
to obtain this waiver.
SECTION 14. INDEMNIFICATION. Tenant waives all claims against
Landlord for damage to any property or injury or death of any person on the
Premises arising at any time and from any cause other than the gross negligence
or willful misconduct of Landlord or Landlord's employees, agents, or
contractors. Tenant shall hold Landlord harmless from and defend Landlord
against all claims, liability, damage, or loss arising out of any injury or
death of any person or damage to or destruction of property attributable to the
use of the Premises by Tenant, except that caused by the gross negligence or
willful misconduct of Landlord or Landlord's agents, contractors, or employees.
Tenant shall also hold Landlord harmless from any liability, cost, or expense
arising from Tenant's use or storage in the Premises of any hazardous or toxic
substance. Landlord shall hold Tenant harmless from and defend Tenant against
all claims, liability, damage,
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or loss arising out of any injury or death to any person or damage to or
destruction of property attributable to the use of the Building (but not the
Premises) by Landlord, except that caused by Tenant or Tenant's agents,
contractors, or employees. Landlord shall also hold Tenant harmless from any
liability, cost or expense arising out of the release, deposit or presence of
hazardous or toxic substances which are in the Premises or the Building not
attributable to Tenant's or its assignees', sublessees', licensees', invitees',
employees', guests', agents' or contractors' use or occupation of the Premises
and the Building. These indemnity obligations shall include reasonable attorney
fees, investigation costs, and all other reasonable costs incurred by the
indemnified party from the first notice that any claim or demand is to be made
or may be made. The indemnified party shall promptly give notice to the
indemnifying party of any claim or demand. The provisions of this Section shall
survive the termination of this Lease for any event occurring prior to the
temination. The provisions of this Section to indemnify and hold a party
harmless are limited to the amount of loss that is not paid to s u ch party out
of insurance proceeds, if any.
SECTION 15. COMPLIANCE WITH LEGAL REQUIREMENTS. At Tenant's sole
cost, Tenant shall promptly comply with all laws and governmental rules now or
later in force, including but not limited to, the American with Disabilities
Act, as may be amended from time to time; with the requirements of any board of
fire underwriters or other similar body now or in the future constituted; and
with any direction or occupancy certificate issued by public officers (the
"LEGAL REQUIREMENTS"), insofar as they relate to the condition, use, or
occupancy of the Premises. Excluded are (a) structural changes or changes to the
electrical, mechanical, or plumbing systems of the Building, all to the extent
not necessitated by Tenant's acts or by improvements made for Tenant; (b)
alterations or improvements to the Building as a whole or to the Premises of
tenants generally that are not by law the tenants' responsibility with which to
comply; and (c) work necessitated by defects in the construction of the
Building. Tenant shall immediately furnish Landlord with any notices received
from any insurance company or governmental agency or inspection bureau regarding
any unsafe or unlawful conditions within the Premises. Landlord shall comply in
a timely manner with all Legal Requirements that are not Tenant's responsibility
under this Section to the extent noncompliance would adversely affect Tenant's
use or occupancy of the Premises. Tenant agrees that Tenant shall not
discriminate against or segregate any person or group of persons on account of
race, sex, CREED, color, marital status, sexual preference, national origin, or
ancestry, in the occupancy, use, sublease, tenure, or enjoyment of the Premises.
The provisions of this Section 15 are for the benefit of Landlord only and are
not nor shall they be construed to be for the benefit of any tenant or occupant
of the Building.
SECTION 16. ASSIGNMENT AND SUBLETTING.
(a) Except as otherwise expressly permitted by this Lease, Tenant shall
not, without the prior written consent of Landlord, which shall not be
unreasonably withheld or delayed, voluntarily or involuntarily, assign or
hypothecate this Lease or any interest in this Lease, sublet the Premises or any
part of them, or license the use of the Premises by any party other than Tenant.
Any of the previous acts without consent shall be void and shall, at the option
of Landlord, constitute a noncurable default under this Lease. In connection
with each consent requested by Tenant, Tenant shall submit to Landlord the terms
of the proposed transaction, the identity of the parties to the transaction, the
proposed documentation for the transaction, and all other information reasonably
requested by Landlord concerning the proposed transaction and the parties
involved. Tenant agrees that any instrument by which Tenant assigns or sublets
all or any portion of the Premises shall expressly provide that the subtenant or
assignee may not further assign or sublet the assigned or sublet space without
Landlord's prior written consent as provided herein, and that the assignee or
subtenant will assume and comply with all of the provisions of this Lease and
that Landlord may enforce the Lease provisions directly against such assignee or
subtenant. For purposes of this Section 16, the following events shall be deemed
an assignment or sublease, as appropriate: (i) the issuance of equity interests
(whether stock, partnership interests or otherwise) in Tenant or any subtenant
or assignee, or any entity controlling any of them, to any person or
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group of related persons, in a single transaction or a series of related or
unrelated transactions, such that, following such issuance, such person or group
shall have Control (as defined below) of Tenant; or (ii) a transfer of Control
of Tenant or any subtenant or assignee, or any entity controlling any of them,
in a single transaction or a series of related or unrelated transactions
(including without limitation, by consolidation, merger, acquisition or
reorganization), except that the transfer of outstanding capital stock or other
listed equity interests by persons or parties other than "insiders" within the
meaning of the Securities Exchange Act of 1934, as amended, through the
"over-the-counter" market or any recognized national or interantional securities
exchange, shall not be included in determining whether Control has been
transferred. "Control" shall mean direct or indirect ownership of fifty percent
(50%) or more of all of the voting stock of such corporation or fifly percent
(50%) or more of all the legal and equitable interest in any other business
entity. However, Tenant may, without resulting in a default under this Lease and
without notice to Landlord, license the use of the Premises by (i) any entity of
which Tenant, any of Tenant's subsidiaries, or Tenant's parent is a limited
partner, general partner, joint venturer, or shareholder; (ii) any other limited
partner, general partner, joint venturer or shareholder in that entity; (iii)
any consultant, contractor, accountant, or counsel of Tenant; or (iv) any of the
directors, officers, employees, contractors, accountants, or counsel of any of
the foregoing. The license or other permitted use does not in any way create in
the licensee or any other party rights to possess or remain in the Premises
beyond the termination of the Lease.
(b) Without limiting other instances in which Landlord may reasonably
withhold consent to an assignment or subletting, Landlord and Tenant acknowledge
that it shall be reasonable for Landlord to withhold consent in the following
instances:
(i) if at the time consent is requested or at any time prior to the
granting of consent, an Event of Default has occurred under this Lease or if
Tenant is in monetary default under this Lease or would be in monetary default
under this Lease but for the pendency of any grace or cure period under Section
19, if any;
(ii) if the proposed assignee or sublessee is a governmental agency;
(iii) if, in Landlord's reasonable judgment, use of the Premises by
the proposed assignee or sublessee would not be comparable to the of fice use by
other tenants in the Building, would entail alterations that would materially
lessen the value of the leasehold improvements in the Premises (unless Tenant
provides adequate security to ensure that the Premises will be restored to their
prior condition pursuant to Section 9(a)), would result in more than a
reasonable number of occupants per floor, or would require substantially
increased services by Landlord;
(iv) if Landlord reasonably determines that circumstances warrant a
consideration of the financial worth of a proposed assignee or sublessee, and
the financial worth, in Landlord's reasonable judgment, does not meet the credit
standards applied by Landlord for other tenants under leases with comparable
terms; and
(v) if, in Landlord's reasonable judgment, the character, reputation,
or business of the proposed assignee or sublessee is not consistent with the
quality of the other tenancies in the Building.
(c) If at any time during the Term, Tenant desires to sublet all or any
part of the Premises, Tenant shall notify Landlord of the terms of the proposed
subletting and the space proposed to be sublet. Landlord shall have the option,
exercisable by notice given to Tenant within thirty (30) days afler Tenant's
notice is given, or within five (5) days afler Tenant's notice is given if
Tenant submits terms that have already been negotiated with a specific proposed
sublessee, if the proposed subletting is for all or any part of the Premises for
a sublet term ending within the last year of the Term, to terminate this Lease
with respect to all or that portion of the Premises
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proposed to be sublet. If Landlord does not exercise this option, Tenant shall
be free to sublet the space to any third parry or to the specific proposed
sublessee, at the same rental and on substantially the same terms in the notice
given to Landlord, subject to obtaining Landlord's prior consent as provided
previously.
(d) No sublessee shall have a right to further sublet without Landlord's
prior consent, which Tenant acknowledges may be withheld in Landlord's absolute
discretion (provided, however, that Landlord shall not unreasonably withhold its
consent to a proposed sub-sublease by the direct sublessee of the Tenant named
herein), and any assignment by a sublessee of the sublease shall be subject to
Landlord's prior consent in the same manner as if Tenant were entering into a
new sublease. No sublease, once consented to by Landlord, shall be mod)fied or
terminated by Tenant without Landlord's prior consent, which shall not be
unreasonably withheld.
(e) In the case of an assignment, one-half (1/2) of any sums or other
economic consideration received by Tenant as a result of the assignment
(excluding any consideration reasonably attributed to asses other than this
Lease) shall be paid to Landlord afler first deducting the unamortized cost of
leasehold improvements paid for by Tenant, and the cost of any real estate
commissions, reasonable attorney fees, or other third party professional
services paid by Tenant in connection with the assignment.
(f) In the case of a subletting, one-half ( 1/2) of any sums or economic
consideration received by Tenant as a result of the subletting shall be paid to
Landlord afler fimt deducting (i) the rental due under this Lease, prorated to
reflect only rental allocable to the sublet portion of the Premises, (ii) the
cost of leasehold improvements made to the sublet portion of the Premises at
Tenant's cost, amortized over the term of this Lease, except for leasehold
improvements made for the specific benefit of the sublessee, which shall be
amortized over the term of the sublease, and (iii) the cost of any real estate
commissions, reasonable attorney fees, or other third party professional
services paid by Tenant in connection with the subletting.
(g) Regardless of Landlord's consent, no subletting or assignment shall
release or alter Tenant's obligation or primary liability to pay the rental and
perform all other obligations under this Lease. The acceptance of rental by
Landlord from any other person shall not be deemed a waiver by Landlord of any
provision of this Lease. Consent to one assignment or subletting shall not be
deemed consent to any subsequent assignment or subletting. In the event of
default by any assignee or successor of Tenant in the performance of any of the
semis of this Lease, afler notice of default to Tenant pursuant to Section 19
and the expiration of any applicable cure period, Landlord may proceed directly
against Tenant without the necessity of exhausting remedies against the assignee
or successor. Landlord may consent to subsequent assignments or subletting of
this Lease or amendments or mod)fications to this Lease with assignees of
Tenant, without notifying Tenant, or any successor of Tenant, and without
obtaining consent. This action shall not relieve Tenant of liability under this
Lease provided, however, that Tenant shall not be liable for any increase in
Tenant's obligations under this Lease because of any amendment or mod)fication
to this Lease, unless Tenant has consented to it in writing. Further, no
permitted subletting by Tenant shall be effective until there has been delivered
to Landlord a counterpart of the sublease in which the subtenant agrees to be
and remain jointly and severally liable with Tenant for the payment of rent
pertaining to the sublet space and for the performance of all of the terms and
provisions of this Lease; provided, however, that the subtenant shall be liable
to Landlord for rent only in the amount set forth in the sublease. No permitted
assignment shall be effective unless and until there has been delivered to
Landlord a counterpart of the assignment in which the assignee assumes all of
Tenant's obligations under this Lease arising on or after the date of the
assignment. The failure or refusal of a subtenant or assignee to execute any
such instrument shall not release or discharge the subtenant or assignee from
its liability as set forth above.
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(h) If Tenant assigns this Lease, sublets the Premises, or requests the
consent of Landlord to any assignment, subletting, hypothecation, or other
action requiring Landlord's consent under this Lease, Tenant shall pay
Landlord's reasonable attorney fees incurred in connection with the action., not
to exceed $2,500.
(i) Sections 16(a), 16(b), 16(c), 16(e) and 16(f) shall not apply
to any license or sharing of space by Tenant within the Premises to the
following persons or entities and their respective employees and affiliates: (i)
Paul Pelosi; (ii) Burrill & Company; (iii) Doyle & Boisseire; (iv) Fletcher
Asset Management; and (v) George Stathakis; provided that such sharing or
licensing of space conforms to the following: the licensed or shared area is, in
the aggregate, less than forty-nine percent (49%) of the rentable area of the
Premises (within which the foregoing licenses may expand or contract as Tenant
deems appropriate); Tenant continues to occupy at least fifty-one percent (51%)
of the rentable area of the Premises; and the rent or other compensation paid by
such licensees to Tenant for the use of the Premises shall in no event be in
excess of the applicable pro rata share (based on the square footage of the
Premises used or occupied by such Licensee) of the Rent and the Escalation Rent
payable by Tenant hereunder. All other provisions of Section 16 not specifically
excluded under this Section 16 shall be applicable to any licensing or sharing
of the Premises. The rights of Tenant under this Section 16(i) is personal to
Hambrecht & Quist.
(j) Notwithstanding anything contained in this Section 16 to the contrary,
as long as no Event of Default then exists with respect to the payment when due
of rent, Tenant shall have the right, subject to the terms and conditions
hereinafter set forth, without the consent of Landlord but upon at least thirty
(30) days prior written notice to Landlord, to do the following:
(i) Assign its interest in this Lease to (i) any corporation which
is a successor to Tenant either by merger or consolidation, (ii) a purchaser of
all or subsequently all of Tenant's assets (provided such purchaser shall have
also assumed substantially all of Tenant's liabilities), or (iii) a corporation,
partnership or other entity which shall control, be under the control of, or be
under common control with, Tenant (the term "control" as used herein shall be
deemed to mean ownership, directly or indirectly, of more than fifty percent
(50%) of the outstanding voting stock of a corporation, or other majority equity
and control interest if Tenant is not a corporation) (any such entity being a
"Permitted Transferee"); or
(ii) Sublease all or any portion of the Premises to a Permitted
Transferee upon the condition that the Permitted Transferee shall occupy and use
the Premises in a manner consistent with the terms and conditions of this Lease.
Tenant shall, within ten (10) business days after execution thereof,
deliver the following to Landlord:
(iii) A duplicate original instrument of assignment in form and
substance reasonably satisfactory to Landlord, duly executed by Tenant and the
assignee in which the assignee shall expressly agree to assume, observe,
perform, and be bound by all of the terms, covenants and conditions of this
Lease on Tenant's part to be observed and performed; or
(iv) A duplicate original sublease in form and substance reasonably
satisfactory to Landlord, duly executed by Tenant and the subtenant.
SECTION 17. RULES Tenant shall comply with the rules attached to and
incorporated in this Lease as Exhibit B, and afler notice, with all reasonable
modifications and additions to these rules, from time to time promulgated in
writing by Landlord. Landlord shall not be responsible to Tenant for the
nonperformance of any of these rules by any other tenant or occupant of the
Building, but Landlord shall take reasonable steps to enforce any rules, the
nonperformance of which by other tenants materially and adversely affects Tenant
in the use of the However, if any
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rule conflicts with any term, covenant, or condition of this Lease, this Lease
shall prevail. In addition, no rule, or any subsequent amendment to it adopted
by Landlord shall alter, reduce, or adversely affect any of Tenant's rights or
enlarge Tenant's obligations under this Lease.
SECTION 18. ENTRY BY LANDLORD. Landlord may enter the Premises at
reasonable hours and, except in the event of an emergency, on reasonable prior
notice, to (a) inspect the Premises; (b) exhibit the Premises to prospective
purchasers, lenders, or tenants; (c) determine whether Tenant is complying with
all obligations under this Lease; (d) supply janitorial service and any other
services to be provided by Landlord under this Lease; (e) post notices of
nonresponsibility; and (f) make repairs or perform maintenance required of
Landlord by this Lease, make repairs to any adjoining space or utility services,
or make repairs, alterations, or improvements to any other portion of the
Building. However, all this work shall be done as promptly as reasonably
possible and cause as little interference to Tenant as reasonably possible.
Subject to Landlord's undertakings in the previous sentence, Tenant waives any
damage claims for inconvenience to or interference with Tenant's business or
loss of occupancy or quiet enjoyment of the Premises caused by Landlord's entry.
At all times Landlord shall have a key with which to unlock the doors on the
Premises, excluding Tenant's vaults, safes, and similar areas designated as
secure areas in writing by Tenant in advance. In an emergency, Landlord shall
have the right to use any means that Landlord deems proper to open Tenant's
doors and enter the Premises. Entry to the Premises by Landlord in an emergency
shall not be construed as a forcible or unlawful entry, a detainer, or an actual
or constructive eviction of Tenant.
SECTION 19. EVENTS OF DEFAULT The following events shall constitute
events of default under this Lease (each, an "Event of Default"):
(a) a default by Tenant in the payment when due of any rent or other sum
payable under this Lease, provided, however, that Landlord agrees to provide
Tenant once during the Term a written courtesy notice of Tenant's failure to pay
rent when due hereunder, by which Tenant shall have three (3) days after receipt
of such notice to pay such overdue rent before delivery of any statutorily
required notice is given by Landlord seeking forfeiture of the Lease;
(b) a default by Tenant in the performance of any of the terms, covenants,
agreements, or conditions in this Lease, other than a default by Tenant in the
payment when due of any rent or other sum payable under this Lease, and the
continuation of the default beyond thirty (30) days after notice by Landlord or,
if the default is curable and would require more than thirty (30) days to
remedy, beyond the time reasonably necessary for cure;
(c) the bankruptcy or insolvency of Tenant, a transfer by Tenant in fraud
of creditors, an assignment by Tenant for the benefit of creditors, or the
commencement of proceedings of any kind by or against Tenant under the Federal
Bankruptcy Act or under any other insolvency, bankruptcy, or reorganization act,
unless Tenant is discharged from voluntary proceedings within ninety (90) days;
(d) the appointment of a receiver for a substantial part of Tenant's
assets;
(e) the abandonment of the Premises; and
(f) the levy upon this Lease or any estate of Tenant under this Lease by
attachment or execution and the failure to have the attachment or execution
vacated within thirty (30) days.
SECTION 20. TERMINATION UPON DEFAULT On occurrence of any Event of
Default by Tenant, Landlord may, in addition to any other rights and remedies
given here or by law, terminate this Lease and exercise remedies relating to it
without further notice or demand in accordance with the following provisions:
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(a) So long as the Event of Default remains uncured, Landlord shall have
the right to give notice of termination to Tenant, and on the date specified in
this notice, this Lease shall terminate.
(b) If this Lease is terminated, Landlord may, by judicial process,
reenter the Premises, remove all persons and property, and repossess and enjoy
the Premises, all without prejudice to other remedies that Landlord may have
because of Tenant's default or the termination.
(c) If this Lease is terminated, Landlord have all of the rights and
remedies of a landlord provided by Civil Code Section 1951.2, in addition to any
other rights and remedies Landlord may have. The damages which Landlord may
recover shall include, without limitation, (i) the worth at the time of award of
the unpaid rent which had been earned at the time of termination; (ii) the worth
at the tune of award of the amount by which the unpaid rent which would have
been earned after termination until the time of the award exceeds the amount of
the rental loss that Tenant proves could have been reasonably avoided; (iii) the
worth at the time of award computed by discounting the amount at the discount
rate of the Federal Reserve Bank of San Francisco at the time of award plus one
percent (1%) of the amount by which the unpaid rent for the balance of the term
after the time of award exceeds the amount of rental loss that Tenant proves
could be reasonably avoided; (iv) all reasonable legal expenses and other
related costs incurred by Landlord following Tenant's default; (v) all
reasonable costs incurred by Landlord in restoring the Premises to good order
and condition to relet the Premises; and (vi) all reasonable costs, including
without limitation, any brokerage commissions incurred by Landlord in reletting
the Premises.
SECTION 21. CONTINUATION AFTER DEFAULT. If Tenant breaches this Lease
and abandons the Premises, this Lease shall continue in effect for so long as
Landlord does not terminate Tenant's right to possession, and Landlord may
enforce all rights and remedies under this Lease, including the right to recover
the rental as it becomes due under this Lease. Acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a receiver
upon initiative of Landlord to protect Landlord's interest under this Lease
shall not constitute a termination of Tenant's right to possession.
SECTION 22 OTHER RELIEF. The remedies provided in this Lease are in
addition to any other remedies available to Landlord at law, in equity, by
statute, or otherwise.
SECTION 23. RIGHT OF LANDLORD TO CURE DEFAULTS. Agreements and
provisions to be performed by Tenant under this Lease shall be at Tenant's sole
cost and without abatement of rental, except as specifically provided in this
Lease. If Tenant (a) fails to pay any sum of money, other than rental, required
under this Lease, or (b) fails to perform any other act under this Lease, and
this failure continues for thirty (30) days after notice of the failure by
Landlord, or a longer period as may be allowed under this Lease, Landlord may,
without waiving or releasing Tenant from any obligations of Tenant, make payment
or perform other acts required by this Lease on Tenant's behalf. All sums paid
by Landlord and all necessary incidental costs shall be payable to Landlord on
demand and shall constitute additional rental under this Lease.
SECTION 24. ATTORNEY FEES. If, as a result of a breach or default
under this Lease, Landlord or Tenant uses an attorney to secure compliance with
Lease provisions, to recover damages, to terminate this Lease, or to evict
Tenant, as applicable, the non-prevailing party shall reimburse the prevailing
party, on demand, for all reasonable attorney fees and expenses incurred by the
prevailing party, and if such prevailing parry shall recover judgment in
connection therewith, such fees and expenses shall be included in and as a part
of such judgment. As used herein, the term "prevailing party" shall mean that
party who substantially prevails on its claim, regardless of whether such claim
is prosecuted to judgment. If any action or proceeding between Landlord and
Tenant to enforce the provisions of this Lease (including an action or
proceeding
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between Landlord and the trustee or debtor in possession while Tenant is a
debtor in a proceeding under any bankruptcy law) proceeds to trial, Landlord and
Tenant hereby waive their respective rights to a jury in such trial.
SECTION 25. EMINENT DOMAIN.
(a) If all or any part of the Premises shall be either taken or condemned
for any public or quasi-public use or purpose, or transferred by agreement in
connection with any public or quasi-public use or purpose with or without any
condemnation action or proceeding being instituted (either such event herein
called a "TAKING"), and if such Taking is permanent the Term shall automatically
terminate with respect to the part of the Premises so Taken as of the date when
the possession of such part is required. If all or any portion of the Premises
is subject to a temporary Taking, this Lease shall remain in full force and
effect and Tenant shall continue to perform all terms, conditions and covenants
of this Lease. If a portion of the Premises or Building is taken so as to
require, in Landlord's reasonable judgment, a substantial alteration or
reconstruction of the remaining portions, Landlord, at its sole election, may
terminate this Lease as of the date when possession of the part so Taken is
required. Without obligation to Tenant, Landlord may agree to transfer to any
condemnor all or any portion of the Building sought by such condemnor, free from
this Lease and the rights of Tenant hereunder, without first requiring that any
action or proceeding be instituted or, if instituted, pursued to a judgment.
(b) Landlord shall be entitled to the entire award made to it for any
Taking, provided, however, that: (a) Landlord shall have no interest in any
award made to Tenant specifically for its relocation expenses, the Taking of
personal property or fixtures belonging to Tenant, or the interruption of or a
damage to Tenants business, if any such award is made separately to Tenant and
not as a part of an award or damages recoverable by Landlord, and (b) Tenant
shall be entitled to receive the entire award made in connection with any
temporary Taking allocable to the period prior to the expiration of the Term
(c) Landlord and Tenant hereby waive the provisions of California Code of
Civil Procedure Section 1265.130 to the extent that such provisions are
inconsistent with this Lease.
SECTION 26 INSURANCE.
(a) Tenant, at is expense, shall maintain in full force during the term a
policy or policies of commercial general insurance insuring against all
liability of Tenant and its representatives and visitors for personal or bodily
injury or property damage arising out of or incurred in connection with Tenant's
use or occupancy of the Premises or the Building. Such policy or policies shall
further insure the indemnification obligations of Tenant under this Lease.
(b) Tenant shall at all times maintain in effect insurance with respect to
its alterations, trade fixtures and other personal property at the Premises
providing coverage against fire, extended coverage perils and vandalism and
malicious mischief, to the extent of at least eighty percent (80%) of the full
replacement cost thereof. Tenant may carry such insurance under a blanket
policy, provided that such policy provides equivalent coverage to a separate
policy. During the Term the proceeds from any such policies of insurance shall
be used for the repair or replacement of such property so insured. Landlord
shall have no interest in such insurance and shall sign all documents reasonably
necessary or proper in connection with the settlement of any claim or loss by
Tenant.
(c) Each policy of insurance required under this Lease shall h in an
amount specified in the Basic Lease Information and in a form, and with an
insurer reasonably acceptable to Landlord, and shall require at least thirty
(30) days' (or, in case of nonpayment of premium, ten (10) days') written notice
to Landlord and any baneficiary of any deed of trust covering the Building prior
to any termination or material alteration of the policy and shall provide that
no act or omission of
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Tenant shall affect or limit the obligations of the insurer with respect to any
other insured. Each policy of liability insurance shall name Landlord and its
property manager and any baneficiary of any deed of trust covering the Building
as additional insureds and provide that it is primary to, and not contributing
with, any policy carried by Landlord covering the same loss. Tenant shall
provide to Landlord prior to the Commencement Date and upon request thereafter
evidence that the insurance required to be carried by Tenant pursuant to this
Section is in full force and effect and the premiums therefor have been paid.
Not more frequently than once every two (2) years, Tenant shall increase the
amounts of insurance as reasonably recommended by Landlord's lender or insurance
broker if, in the reasonable opinion of either of them, the amount of insurance
then required under this Lease is not adequate. Any limits set forth in the
Lease on the amount or type of coverage required by Tenant's insurance shall not
limit the liability of Tenant under this Lease.
(d) In the event that, as a result of changed circumstances from time to
time, comparable landlords and/or tenants in the area in which the Building is
located are typically carrying kinds or amounts of insurance that exceed the
requirements of this Lease, Tenant shall, within thirty (30) days following
written demand by Landlord, obtain and thereafter maintain in effect such
additional insurance, which shall, to the extent reasonably applicable, conform
to, and be governed by, the existing insurance provisions of this Lease.
(e) Landlord shall at all times maintain in effect casualty and commercial
general liability insurance with respect to the Building and other improvements
located on the Property (excluding any items to be insured by Tenant pursuant to
Section 26(b)) and commercial general liability insurance regarding the
operations thereon in amounts and with coverage Landlord deems commercially
practicable or typically carried by comparably situated landlords of comparable
buildings in downtown San Francisco.
SECTION 27. SUBORDINATION. This Lease shall be subordinate to any
ground lease, mortgage, deed of trust, or any other hypothecation for security
now or later placed upon the Building and to any advances made on the security
of it or Landlord's interest in it, and to all renewals, mod)fications,
consolidations, replacements, and extensions of it. However, if any mortgagee,
trustee, or ground lessor elects to have this Lease prior to the lien of its
mortgage or deed of trust or prior to its ground lease, and gives notice of that
to Tenant, this Lease shall be deemed prior to the mortgage, deed of trust, or
ground lease, whether this Lease is dated prior or subsequent to the date of the
mortgage, deed of trust, or ground lease, or the date of recording of it. In the
event any mortgage or deed of trust to which this Lease is subordinate is
foreclosed or a deed in lieu of foreclosure is given to the mortgagee or
baneficiary, Tenant shall attorn to the purchaser at the foreclosure sale or to
the grantee under the deed in lieu of foreclosure, provided such parties agree
to recognize Tenant's interest in this Lease. In the event of termination of any
ground lease to which this Lease is subordinate, Tenant shall attorn to the
ground lessor. Tenant agrees to execute any documents, in form and substance
reasonably acceptable to Tenant, required to effectuate the subordination, to
make this Lease prior to the lien of any mortgage or deed of trust or ground
lease, or to evidence the attornment. At Tenant's request, Landlord shall use
its reasonable efforts to obtain, from time to time, a nondisturbance agreement
from any existing holder of a deed of trust covering the Building and from any
future holdes of deeds of trust covering the Building, in a form and substance,
satisfactory to such holders.
SECTION 28. NO MERGER. The surrender of this Lease by Tenant, or a
mutual cancellation of it, shall not work a merger and shall, at the option of
Landlord, terminate all or any existing subleases or subtenancies or operate as
an assignment to Landlord of all subleases or subtenancies.
SECTION 29. SALE. In the event that Landlord or any successor owner
of the Building sells or conveys the Building, all liabilities and
obligations of Landlord or the successor owner under this Lease accruing
after the sale or conveyance terminates, shall be binding on the new
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owner, and Tenant shall release Landlord from all liability under this Lease
accruing after the date of such transfer. Tenant agrees to attorn to the new
owner.
SECTION 30. ESTOPPEL CERTIFICATE. At any time with at least fifteen
(15) days' prior notice by Landlord, Tenant shall execute, acknowledge, and
deliver to Landlord a certificate certifying: (a) that this Lease is unmodified
and in full force or, if there have been mod)fications, that this Lease is in
full force, as mod)fied, together with the date and nature of each mod)fication,
(b) the amount of the Base Rent, most recent Escalation Rent, if any, and the
date to which the rent has been paid, (c) that no notice has been received by
Tenant of any default that has not been cured, except defaults specified in the
certificate, (d) that no default of Landlord is claimed by Tenant, except
defaults specified in the certificate, and (e) other matters as may be
reasonably requested by Landlord. Any certificate may be relied on by
prospective purchasers, current or prospective mortgagees, or current or
prospective baneficiaries under any deed of trust on the Building.
SECTION 31. LIGHT, AIR, OR VIEW RIGHTS. Any diminution or shutting off
of light, air, or view by any structure that may be erected on lands adjacent to
the Building shall not affect this Lease or impose any liability on Landlord.
SECTION 32. RELOCATION. [Intentionally Omitted]
SECTION 33. BROKERS. Tenant and Landlord agree that, except as
indicated in the Basic Lease Information, no broker or finder has been involved
in the transaction described in this Lease and Landlord and Tenant agree that in
the event any broker, salesperson or other person makes any claim for any
commission or finder's fee based upon the lease of the Premises to Tenant or any
other items or interests contemplated by this Lease, the party through whom said
broker, salesperson or other person makes is claim shall indemnify and hold
harmless the other party from said claim and all liabilities, costs and expenses
relating thereto, including reasonable attorneys' fees, which may be incurred by
such other party in connection with such claim. Landlord shall pay Grubb & Ellis
("Landlord's Broker'), the assignee of Stubbs, Collenette & Associates, Inc., a
commission in connection with this Lease in the manner and upon the satisfaction
of the terms and conditions set forth in that Exclusive Leasing Agreement dated
as of October 4, 1994, a amended and assigned to Landlord's Broker, executed by
Landlord and Stubbs, Collenette & Associates, Inc.
SECTION 34. HOLDING OVER.
(a) If, without objection by Landlord, Tenant holds possession of the
Premises after expiration of the term of this Lease, Tenant shall become a
tenant from month-to-month on the terms specified in this Lease, except those
pertaining to term, option to extend, and option to acquire the Building, if
any, but at a monthly rental equivalent to one hundred and fifty percent (150%)
of the then prevailing monthly rental paid by Tenant at the expiration of the
term of this Lease, payable in advance on or before the first day of each month.
Each party shall give the other notice of intention to terminate the tenancy at
least one (1) month prior to the date of termination of a monthly tenancy.
(b) If, over Landlord's objection, Tenant holds possession of the Premises
after expiration of the term of this Lease or expiration of the holdover
tenancy, Tenant shall be deemed to be a tenant-at-sufferance and, without
limiting the liability of Tenant for unauthorized occupancy of the Premises,
Tenant shall indemnify Landlord and any replacement tenant for the Premises for
any damages or loss suffered by either Landlord or the replacement tenant
resulting from Tenant's failure to vacate the Premises in a timely manner.
SECTION 35. SECURITY DEPOSIT. [Intentionally Omitted]
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SECTION 36. WAIVER. The waiver by either Landlord or Tenant of any
agreement, condition, or provision contained in this Lease shall not be deemed
to be a waiver of any subsequent breach of the agreement, condition, or
provision or any other agreement, condition, or provision contained in the
Lease, nor shall any custom or practice that may arise between the parties in
the administration of the terms of this Lease be construed to waive or to lessen
the right of Landlord or Tenant to the performance by Tenant or Landlord,
respectively, in strict accordance with these terms The subsequent acceptance of
rental under this Lease by Landlord shall not be deemed to be a waiver of any
preceding breach by Tenant of any agreement, condition, or provision of this
Lease, other than the failure of Tenant to pay the particular accepted rental,
regardless of knowledge of the preceding breach at the time of the rental
acceptance.
SECTION 37. NOTICES AND CONSENTS. All notices, consents, demands, and
other communications from one parry to the other that are given pursuant to the
terms of this Lease shall be in writing and shall be deemed to have been fully
given when delivered, including delivery by commercial delivery services or
facsimile transmission, or if deposited in the United States mail, certified or
registered, postage prepaid, when received or refused. ALL notices, consents,
demands, and other communications shall be addressed as follows: to Tenant at
the address specified in the Basic Lease Infomration, or to another place or
person as Tenant may designate in a notice to Landlord, or delivered to Tenant
at the Premises; to Landlord at the address specified in the Basic Lease
Information, or to another place as Landlord may designate in a notice to
Tenant.
SECTION 38 ENTIRE AGREEMENT. There are no oral agreements
between Landlord and Tenant affecting this Lease, and this Lease supersedes
and cancels all previous negotiations, arrangements, brochures, agreements,
and understandings between Landlord and Tenant or displayed by Landlord to
Tenant with respect to the subject matter of this Lease. There are no
representations between Landlord and Tenant other than those contained in
this Lease. All implied warranties, including implied warranties of
merchantability and fitness, are excluded.
SECTION 39. AUTHORITY. If either of the parties signs this Lease as
a corporation, each person executing this Lease on behalf of the party warrants
that the party is a duly formed validly existing corporation, that the party is
qualifi ied to do business in California, and any other jurisdiction in which it
conducts business, that the party has the right and authority to enter into this
Lease, and that each person signing on behalf of the corporation is authorized
to do so. If either of the parties signs this Lease as a partnership, each
person executing this Lease on behalf of the party warrants that the party is a
partnership, that the partnership has the right and authority to enter into this
Lease, and that each person signing on behalf of the partnership is authorized
to sign.
SECTION 40 PLURAL AND SINGULAR. The words Landlord and Tenant as
used in this Lease shall include the plural as well as the singular.
SECTION 41. JOINT AND SEVERAL OBLIGATIONS. If there is more than one
Tenant, the obligations imposed on Tenant shall be joint and several.
SECTION 42 TIME OF THE ESSENCE. Time is of the essence in this
Lease and all of its provisions.
SECTION 43. EXAMINATION OF LEASE. Submission of this instrument for
examination or signature by Tenant does not constitute a reservation of or
option for lease, and it is not effective as a lease or otherwise until
execution and delivery by both Landlord and Tenant.
SECTION 44. HEIRS, SUCCESSORS, AND ASSIGNS. The agreements,
conditions, and provisions contained in this Lease shall, subject to the
provisions for assignment, apply to and bind the heirs, executors,
administrators, successors, and assigns of the parties to it.
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SECTION 45. NAME OF BUILDING. Tenant shall not, without the consent
of Landlord, use the name of the Building for any purpose other than as the
address of the business to be conducted by Tenant in the Premises.
SECTION 46. ILLEGALITY OR UNENFORCEABILITY OF PORTION OF LEASE.
If any provision of this Lease is determined to be illegal or
unenforceable, this determination shall not affect any other provision of this
Lease, and all other provisions shall remain in full force and effect.
SECTION 47. GOVERNING LAW. This Lease shall be governed by and
construed pursuant to law of the State of California.
SECTION 48 OBLIGATIONS INDEPENDENT. The obligations of each party
hereunder are independent and do not constitute conditions to the effectiveness
of the other party's obligations. The nonperformance by either party of any of
its obligations shall not excuse any nonperformance by the other party except to
the extent that it makes such other party's performance impossible or
impracticable.
SECTION 49. EXHIBITS. The exhibits and addendum, if any, specified
in the Office Lease Index set forth at the beginning of this Lease are attached
to this Lease and by this reference made a part of it.
The parties have executed this Lease as of the date first set forth above.
Landlord: Tenant:
PACIFIC RESOURCES HAMBRECHT & QUIST CALIFORNIA,
DEVELOPMENT INC., a California a California corporation
Corporation
By: : /s/ Kevin Wu By: /s/ J. Logan Burke
Name: Kevin Wu Name: J. Logan Burke
Its: Managing Director Its: Vice President
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Atlantic Avenue Building South
50 Rowes Wharf
Boston, Massachusetts 02110
("the Building")
SIXTH AMENDMENT
January 30, 1997
LANDLORD: Rowes Wharf Associates
TENANT: Hambrecht & Quist L.L.C., a Delaware limited liability company
EXISTING
PREMISES: An area on the fourth (4th) floor of the Building consisting of
23,833 square feet of Total Rentable Area, substantially as shown
on Lease Plan, Exhibit 2a, dated January 30, 1997, a copy of
which is attached hereto
STORAGE
PREMISES: An area on Lower Level One of the Building, containing
approximately 245 square feet of Total Rentable Area and an area
on the fourth (4th) floor of the Building containing 200 square
feet of Total Rentable Area, substantially as shown on Lease
Plan, Exhibit 2b, Sixth Amendment, Sheets 1 and 2, dated January
30, 1997, copies of which are attached hereto
ORIGINAL LEASE
LEASE EXECUTION
DATA DATE: June 22, 1987
TERMINATION
DATE: March 31, 1998
PREVIOUS
LEASE
AMENDMENTS: First Amendment dated September 4, 1987
Second Amendment dated May 26, 1988
Third Amendment dated March 25, 1993
Fourth Amendment dated September 3, 1993
Fifth Amendment dated as of February 6, 1996
EXTENDED
TERMINATION
DATE: March 31, 2008
<PAGE>
WHEREAS, Tenant desires (i) to extend the term of the Lease, (ii) to
acquire an option to further extend the term of the Lease; and (iii) to acquire
a right of first offer in respect-of the RFO Premises (as hereinafter defined);
and
WHEREAS, Landlord is willing (i) to extend the term of the Lease, (ii) to
grant Tenant an option to further extend the term of the Lease, and (iii) to
grant Tenant a right of first offer in respect of the RFO Premises, all subject
to and in accordance with the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of ten dollars ($10.00) and other good and
valuable consideration, the receipt, sufficiency and delivery of which are
hereby acknowledged, the above-described lease, as previously amended ("the
Lease"), is hereby further amended as follows:
1. EXTENSION OF TERM OF LEASE
A. The term of the Lease is hereby extended for an additional period
commencing on April 1, 1998 and terminating on March 31, 2008. Said additional
term shall be upon the terms set-forth on Exhibit 1, Sixth Amendment, Sheets 1,
2 and 3, dated January 30, 1997, a copy of which is attached hereto and
incorporated herein by reference, and upon all of the other terms and conditions
of the Lease, except as hereinafter set forth
2. LANDLORD'S EXISTING PREMISES CONTRIBUTION
A. The parties acknowledge that Tenant intends to perform certain
renovations ("Tenant's Work") to the Existing Premises. All such Tenant's
Work shall be performed in accordance with the terms and provisions of the
Lease, including, without limitation, Articles 12 and 13 thereof.
B. Landlord shall, in the manner hereinafter set forth, provide to
Tenant up to Six Hundred Thousand and 00/100 Dollars ($600,000.00)
("Landlord's Existing Premises Contribution") towards the Qualifying Costs,
as hereinafter defined, incurred by Tenant in connection with the performance
of Tenant's Work.
C. "Qualifying Costs" shall be defined as the costs of: (i)
leasehold improvements installed by Tenant in the Existing Premises, (ii)
design and engineering costs in connection with the Existing Premises, (iii)
installing cabling and telecommunications/computer wiring in the Existing
Premises, and (iv) the fees paid by Tenant to its advisers and consultants
engaged in connection with this Sixth Amendment.
D. Landlord's Existing Premises Contribution shall be paid as
follows. Landlord shall pay-the cost of the work shown on each requisition (as
hereinafter defined) submitted by Tenant to Landlord within thirty (30) days of
submission thereof by Tenant to Landlord. Notwithstanding anything to the
contrary herein contained, Landlord shall not have any obligation to pay any
portion of Landlord's Existing Premises Contribution during such time as Tenant
is in default of its obligations under this Lease; provided, however, that if
Landlord withholds such payment based upon any default by Tenant in its
obligations under the Lease, Landlord shall be required to make such payment if,
and at such time as, Tenant cures all such defaults and is in compliance with
its obligations under the Lease.
E. For the purposes hereof, a "requisition" shall be defined as
follows: (i) if Tenant is not required to obtain a building permit in order
to perform the leasehold improvements ("Minor Improvements") for which Tenant
seeks reimbursement or payment, then a requisition shall mean invoices or
receipts from Tenant's contractors, vendors, or service providers, as the
case may be, showing in reasonable detail the Qualifying Costs; (ii) if
Tenant is required to obtain a
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<PAGE>
building permit in order to perform the leasehold improvements ("Permit
Improvements") for which Tenant seeks reimbursement or payment, then a
requisition shall mean such written documentation (including, without
limitation, invoices from Tenant's contractor, written lien waivers and such
other documentation as Landlord's mortgagee may reasonably request) showing in
reasonable detail the Qualifying Costs, accompanied by reasonably appropriate
documentation from Tenant, Tenant's architect, or Tenant's contractor, whichever
is appropriate in the circumstances, that the work performed to date has been
performed in accordance with applicable laws and in accordance with Tenant's
approved plans, and that the amount of the requisition question does not exceed
the amount of the work covered by such requisition. Each requisition, whether it
relates to Minor Improvements or Permit Improvements, shall be accompanied by
evidence reasonably satisfactory to Landlord that all work covered by previous
requisitions has been fully paid by Tenant. Landlord shall have the right, upon
reasonable advance notice to Tenant, to inspect Tenant's books and records
relating to each requisition in order to verify the amount thereof. Tenant shall
submit requisition(s) no more often than monthly.
F. Notwithstanding anything to the contrary herein contained:
(i) Landlord shall have no obligation to advance funds on account of
Landlord's Existing Premises Contribution unless and until Landlord has received
the requisition in question, together with the certifications required by
Subparagraph E hereof.
(ii} Except with respect to work and/or materials previously paid for
by Tenant, as evidenced by paid invoices and written lien waivers provided to
Landlord, Landlord shall have the right to have Landlord's Existing Premises
Contribution paid to both Tenant and Tenant's contractor(s) and vendor(s)
jointly.
(iii) Prior to April 1, 1998, Tenant shall not be entitled to any
portion of Landlord's Existing Premises Contribution in excess of $100,000.
(iv) Tenant shall not be entitled to any portion of Landlord's
Existing Premises Contribution, and Landlord shall have no obligation to pay
Landlord's Existing Premises Contribution in respect of any requisition
submitted after December 31, 1999.
(v) Tenant shall have no right to any unused portion of Landlord's
Existing Premises Contribution.
3. TENANT'S OPTION TO EXTEND TERM OF LEASE
A. On the conditions, which conditions Landlord may waive, at its
election, by written notice to Tenant at any time, that (a) both as of the
time of option exercise and as of the commencement of the hereinafter
described additional term, Tenant is not in default (beyond applicable
periods of grace, if any) of its covenants and obligations under the Lease,
and (b) as of the commencement of the hereinafter described additional term,
Hambrecht & Quist L.L.C., itself and/or Affiliated Entities, as defined in
Paragraph A of Article 16-18* of the Lease, are then occupying not less than
seventy-five percent (75%) of the premises then demised to Tenant, Tenant
shall have the option to extend the term of this Lease for one (1) additional
five (5) year term, such additional term commencing on April 1, 2008 and
expiring on March 31, 2013. Tenant may exercise such option to extend by
giving Landlord written notice on or before December 31, 2006. Upon the
timely giving of such notice, the term of this Lease shall be deemed extended
upon all of the terms and conditions of this Lease, except that Landlord
shall have no obligation to construct or renovate the premises and that the
Yearly Rent and Operating Costs in the Base Year during such additional term
shall be as hereinafter set forth. If Tenant fails to give timely notice, as
aforesaid, Tenant shall have no further right to extend the term of this
Lease, time being of the essence of this Paragraph 2.
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<PAGE>
B. The Yearly Rent during the additional term shall be based upon
(taking into account the amount of Operating Costs in the Base Year as set forth
in Subparagraph B of Paragraph 3 of the Rider to the Lease) the Fair Market
Rental Value, as defined in Paragraph 3 of the Rider to the Lease, as of the
commencement of the additional term, of the premises then demised to Tenant.
C. Tenant shall have no further option to extend the term of the
Lease other than the one (1) additional five (5) year term herein provided.
D. Notwithstanding the fact that upon Tenant's exercise of the
herein option to extend the term of the Lease such extension shall be
self-executing, as aforesaid, the parties shall promptly execute a lease
amendment reflecting such additional term after Tenant exercises the herein
option, except that the Yearly Rent payable in respect of such additional term
and the Operating Costs in the Base Year during such additional term, may not be
set forth in said amendment. Subsequently, after such Yearly Rent and Operating
Costs in the Base Year are determined, the parties shall execute a written
agreement confirming the same. The execution of such lease amendment shall not
be deemed to waive any of the conditions to Tenant's exercise of its rights
under this Paragraph 2, unless otherwise specifically provided in such lease
amendment.
4. TENANT'S EXPANSION OPTION
On the conditions (which conditions Landlord may waive, at its election, by
written notice to Tenant at any time) that Tenant is not in default of its
covenants and obligations under the Lease and that Hambrecht & Quist L.L.C.,
itself and/or Affiliated Entities, as defined in Paragraph A of Article 16-18*
of the Lease, is then occupying not less than ninety-five percent (95%) of the
premises then demised to Tenant, both at the time of Expansion Exercise Notice
(as hereinafter defined), and as of the "Term Commencement Date" in respect of
the "Expansion Area" (as hereinafter defined), Tenant shall have the following
right to lease the Expansion Area.
A. DEFINITION OF EXPANSION AREA
For the purposes hereof, the "Expansion Area" shall be defined as a portion
of the fourth (4th) floor of the Building, containing 2,088 square feet of Total
Rentable Area, substantially as shown on Lease Plan, Exhibit 2c, Sixth
Amendment, a copy of which is attached hereto and incorporated herein by this
reference.
B. EXERCISE OF RIGHTS TO EXPANSION AREA
Tenant may exercise its option to lease the Expansion Area by giving
written notice ("Expansion Exercise Notice") to Landlord on or before June 30,
1998. If Tenant fails timely to give such notice, Tenant shall have no further
right to lease the Expansion Area, time being of the essence of this Paragraph
4. Upon the timely giving of such notice, Landlord shall lease and demise to
Tenant, and Tenant shall hire and take from Landlord, the Expansion Area,
without the need for further act or deed by either party, for the term and upon
all of the same terms and conditions of this Lease, except as hereinafter set
forth.
C. LEASE PROVISIONS APPLYING TO EXPANSION AREA
The leasing to Tenant of the Expansion Area shall be upon all the
same terms and conditions of the Lease applicable to the Existing Premises
except as follows:
(1) TERM COMMENCEMENT DATE
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The Term Commencement Date in respect of the Expansion Area,
shall be the later of: (i) July 1, 1999, and (ii) the date that Landlord
delivers the Expansion Area to Tenant.
(2) YEARLY RENT
The Yearly Rent payable in respect of the Expansion Area shall be
based upon same Yearly Rent rental rate as is applicable, from time to time, to
the Existing Premises.
(3) CONDITION OF EXPANSION AREA
The Expansion Area shall be delivered by Landlord and accepted by
Tenant broom clean, and otherwise, "as-is", in its then (i.e. as of the Term
Commencement Date in respect of the Expansion Area), state of construction,
finish and decoration, without any obligation on the part of Landlord to prepare
or construct the Expansion Area for Tenant's occupancy. In implementation of the
foregoing, Landlord shall have no obligation under Article 4, Ex. 3-37*, or
Exhibit 3 of the Lease in respect of such Expansion Area.
(4) LANDLORD'S CONTRIBUTION IN RESPECT OF EXPANSION AREA
Landlord shall contribute up to Fifty-Two Thousand Two Hundred
($52,200.00) Dollars ("Landlord's Expansion Area Contribution") toward
Qualifying Costs with respect to the Expansion Area. The same conditions as are
applicable to the payment of Landlord's Existing Premises Contribution (i.e. as
set forth in Subparagraph F of Paragraph 2 of this Amendment shall be applicable
to Landlord's Expansion Area Contribution, except that: (i) clause (iii) of said
Subparagraph F shall not apply to Landlord's Existing Premises Contribution, and
(ii) the last day that Tenant shall have the right to submit a requisition to
Landlord for payment of Landlord's Expansion Area Contribution shall be the date
nine (9) months after the Term Commencement Date in respect of the Expansion
Area.
(5) PARKING
Tenant shall not be entitled to any additional parking passes by
reason of its demise of the Expansion Area. Without limiting the foregoing,
Paragraph 1 of the Rider to the Lease and Paragraph 3 of the First Amendment
shall have no applicability to the RFO Premises.
D. The parties hereby acknowledge that Tenant has advised Landlord
that if Landlord is able to relocate the tenant ("Delphi") which presently
occupies the Expansion Area to other premises in the Complex, Tenant will lease
the Expansion Area. Therefore, if Landlord is able, on or before May 15, 1997,
to obtain Delphi's agreement to promptly relocate from the Expansion Area to
other premises in the Complex, Landlord shall give Tenant written notice
("Availability Notice"). In such event, Tenant shall lease the Expansion Area
from Landlord on all of the terms and conditions set forth in this Paragraph 4,
except that the Term Commencement Date in respect of the Expansion Area shall be
the later of: (x) the Specified Commencement Date in respect of the Expansion
Area, as set forth in the Availability Notice, or (y) the date that Landlord
delivers the Expansion Area to Tenant. If Landlord does not give to Tenant an
Availability Notice on or before May 15, 1997, then the provisions of this
Subparagraph D shall have no force or effect. Landlord shall have no liability
or obligation to Tenant if Landlord is unable, prior to May 15, 1997, to obtain
Delphi's agreement to relocate from the Expansion Area.
E. Notwithstanding the fact that Tenant's exercise of the above
described expansion option shall be self-executing, as aforesaid, the parties
hereby agree promptly to execute a lease amendment reflecting the addition of
the Expansion Area. The execution of such lease amendment shall not be deemed
to waive any of the conditions to Tenant's exercise of the herein expansion
options, unless otherwise specifically provided in such lease amendment.
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5. TENANT'S RIGHT OF FIRST OFFER
A. On the conditions (which conditions Landlord may waive, at its
election, by written notice to Tenant at any time) that Tenant is not in default
of its covenants and obligations under the Lease and that Hambrecht & Quist
L.L.C., itself and/or Affiliated Entities, as defined in Paragraph A of Article
16-18* of the Lease, are then occupying not less than ninety-five percent (95%)
of the premises then demised to Tenant, both at the time of Tenant's RFO
Exercise Notice (as hereinafter defined), and as of the "Term Commencement Date"
in respect of the "RFO Premises" (as hereinafter defined), Tenant shall have the
following right to lease the RFO Premises.
B. DEFINITION OF RFO PREMISES
"RFO Premises" shall be defined as a portion of the fourth (4th) floor of
the Building, containing 2,916 square feet of Total Rentable Area, substantially
as shown on Lease Plan, Exhibit 2d, Sixth Amendment. Notwithstanding the
foregoing, if Tenant elects to lease the RFO Premises, then Tenant, at Tenant's
election, shall have also have the right to lease the common corridors and lobby
area which constitutes the balance of the floor of the Building. Tenant must
exercise such election by so advising Landlord in Tenant's RFO Exercise Notice.
C. EXERCISE OF OPTION TO LEASE RFO PREMISES
Landlord shall give Tenant written notice ("Landlord's Notice") at the time that
Landlord determines, in its sole judgment, that the RFO Premises will become
available for lease to Tenant. Landlord's Notice shall set forth the Specified
Commencement Date in respect of the RFO Premises. Tenant shall have the right,
exercisable upon written notice ("Tenant's RFO Premises Exercise Notice") given
to Landlord within twenty (20) days after the receipt of Landlord's Notice, to
lease the RFO Premises, time being of the essence thereof. If Tenant fails
timely to give Tenant's RFO Premises Exercise Notice, Tenant shall have no
further right to lease the RFO Premises pursuant to this Paragraph 5, unless and
until the RFO Premises again becomes available for Tenant's occupancy after the
occupancy of the next tenant to lease the RFO Premises. Upon the timely giving
of such notice, Landlord shall lease and demise to Tenant and Tenant shall hire
and take from Landlord, the RFO Premises, upon all of the same terms and
conditions of the Lease except as hereinafter set forth. For the purposes of
this Paragraph 5, the RFO Premises shall be deemed to be "available for lease to
Tenant" if Landlord, in its sole judgment, determines that (a) the then current
tenant or occupant of the RFO Premises will vacate the RFO Premises, and (b)
Landlord intends to offer such area for lease. In no event shall Tenant have any
right to lease the RFO Premises if the RFO Premises become available for lease
to Tenant after the Outside Date, as hereinafter defined. For the purposes
hereof, the "Outside Date" shall be defined as March 31, 2007, unless Tenant
timely and properly exercises its extension option pursuant to Paragraph 3 of
this Fifth Amendment, in which event the Outside Date shall be defined as March
31, 2012.
D. LEASE PROVISIONS APPLYING RFO PREMISES
The leasing to Tenant of the RFO Premises shall be upon all of the same
terms and conditions of the Lease, except as follows:
(1) TERM COMMENCEMENT DATE
The Term Commencement Date in respect of the RFO Premises shall
be the later of: (x) the Specified Commencement Date in respect of the RFO
Premises, or (y) the date that Landlord delivers the RFO Premises to Tenant.
-6-
<PAGE>
(2) RENT COMMENCEMENT DATE
The Rent Commencement Date in respect of the RFO Premises shall
be the Term Commencement Date in respect of the RFO Premises.
(3) YEARLY RENT
The Yearly Rent rental rate in respect of the RFO Premises shall
be based upon (taking into account the amount of Operating Costs in the Base
Year as set forth in Exhibit 1, Sixth Amendment, Sheet 2, dated January 30,
1997) the Fair Market Rental Value, as defined in Paragraph 3 of the Rider to
Lease, of such RFO Premises as of the Term Commencement Date in respect of such
RFO Premises.
(4) CONDITION OF RFO PREMISES
Tenant shall take the RFO Premises "broom-clean", and in all
other respects, "as-is" in its then (i.e. as of the date of premises delivery)
state of construction, finish, and decoration, without any obligation on the
part of Landlord to construct or prepare the RFO Premises for Tenant's
occupancy.
(5) LANDLORD CONTRIBUTION
There is no Landlord Contribution in respect of the RFO Premises.
Without limiting the foregoing, Paragraphs 2 and 4.C.(4) hereof shall not apply
to the RFO Premises.
(6) PARKING
Tenant shall not have the right to any additional parking passes
by reason of its demise of the RFO Premises. Without limiting the foregoing,
Paragraph 1 of the Rider to the Lease and Paragraph 3 of the First Amendment
shall have no applicability to any RFO Premises.
E. EXECUTION OF LEASE AMENDMENTS
Notwithstanding the fact that Tenant's exercise of the
above-described option to lease the RFO Premises shall be self-executing, as
aforesaid, the parties hereby agree promptly to execute a Lease amendment
reflecting the addition of the RFO Premises, except that the Yearly Rent payable
in respect of the RFO Premises and Operating Costs in the Base Year in respect
of the RFO Premises may not be set forth in such amendment. At -the time that
such Yearly Rent and Operating Costs in the Base Year are determined, the
parties shall execute a written agreement confirming the same. The execution of
such Lease amendment shall not be deemed to waive any of the conditions to
Tenant's exercise of the herein option to lease the RFO Premises, unless
otherwise specifically provided in such Lease amendment.
6. BROKERS
Tenant represents that Tenant has not dealt with any real estate brokers,
salespersons, or finders in connection with this Sixth Amendment other than
Spaulding & Slye, and no other persons initiated or participated in the
negotiation of this Sixth Amendment. Tenant agrees to indemnify, defend and hold
Landlord and its officers, partners, employees and/or agents harmless from and
against any claims made by any broker or finder with whom Tenant may have dealt,
for a commission or fee in connection with this Sixth Amendment other than
Spaulding & Slye. Landlord agrees to indemnify, defend and hold Tenant and its
officers, partners, employees and/or agents, harmless from and against any
claims made by any broker or finder based on an agreement with Landlord for a
commission or fee in connection with this Sixth Amendment, except as
-7-
<PAGE>
hereinafter provided. Landlord agrees to pay $47,666 toward any commission or
fee due and owing to Spaulding & Slye in connection with this Sixth Amendment
and Tenant agrees to pay any commission due in excess of such amount and any
commissions which may be due hereafter in connection with any expansion of the
premises demised under the Lease or any further extension of the term thereof.
7. INAPPLICABLE PROVISIONS
The following provisions shall have no applicability to, nor any
force or effect in respect of, the additional term set forth herein or any
RFO Premises: Lease Article 4, Section 6-6*, Ex. 3-37* and Exhibit 3, First
Amendment Sections 1.C.-E., and 2. and Fifth Amendment Sections 5, 6 and 8.
8. REVISED EXHIBIT 1
As of April 1, 1998, Revised Exhibit 1, First Amendment, Sheets 1, 2,
3, 4, and 5, dated September 4, 1987 and Exhibit 1, Fifth Amendment Additional
Premises Version, Sheets 1, 2 and 3, dated as of February 6, 1996 shall be
deleted in their entirety and Exhibit 1, Sixth Amendment, Sheets 1, 2 and 3,
dated January 30, 1997, shall be substituted in their place.
9 YEARLY RENT FOR STORAGE PREMISES
Notwithstanding anything to the contrary contained in the Second and
Fourth Amendments of the Lease, for the period commencing on April 1, 1998 and
ending on March 31, 2008, the Yearly Rent for the Storage Premises shall be
payable at the rate set forth in Exhibit 1, Sixth Amendment, Sheet 2, dated
January 30, 1997.
10. As herein amended, the Lease is ratified, confirmed and approved in
all respects.
11. In the event that any of the provisions of the Lease are inconsistent
with this Sixth Amendment or the state of facts contemplated hereby, the
provisions of this Sixth Amendment shall control.
WHEREFORE, the parties have hereunto set their hands and seals as of the
date first written above.
LANDLORD: TENANT:
ROWES WHARF ASSOCIATES HAMBRECHT & QUIST L.L.C.
By: Rowes Wharf Limited Partnership,
General Partner
By: RWLP Corp., General Partner By: /s/ Paul V. Wessling
(Name) (Title)
Hereunto Duly Authorized
By: /s/ illegible
(Name) (Title)
Hereunto Duly Authorized
Date Signed: 2/26/97 Date Signed: 2/04/97
-8-
<PAGE>
Atlantic Avenue Building South
50 Rowes Wharf
Boston, Massachusetts 02110
("the Building")
SEVENTH AMENDMENT
June 10, 1997
LANDLORD: Rowes Wharf Associates
TENANT: Hambrecht & Quist L.L.C.
EXISTING
PREMISES: An area on the fourth (4th) floor of Building,
containing 23,833 square feet of Total Rentable
Area, substantially as shown on Lease Plan,
Exhibit 2a, dated January 30, 1997
ORIGINAL LEASE
LEASE EXECUTION
DATA DATE: June 22, 1987
TERMINATION
DATE: March 31, 2008
PREVIOUS
LEASE
AMENDMENTS: First Amendment dated September 4, 1987
Second Amendment dated May 26, 1988
Third Amendment dated March 25, 1993
Fourth Amendment dated September 3, 1993
Fifth Amendment dated as of February 6, 1996
Sixth Amendment dated January 30, 1997
SEVENTH
AMENDMENT
ADDITIONAL
PREMISES: An area on the fourth (4th) floor of the
Building, containing 2,088 square feet of
Total Rentable Area, substantially as shown
on Lease Plan, Exhibit 2c, Sixth Amendment, a
copy of which is attached hereto and
incorporated by reference herein
<PAGE>
WHEREAS, Landlord has given Tenant the Availability Notice, as that term is
defined in Subparagraph D of Paragraph 4 of the Sixth Amendment, so that Tenant
is required to lease the Seventh Amendment Additional Premises from Landlord;
NOW THEREFORE, the above-described lease, as previously amended ("the
Lease"), is hereby further amended as follows:
1. DEMISE OF THE SEVENTH AMENDMENT ADDITIONAL PREMISES
Landlord hereby demises and leases to Tenant and Tenant hereby hires and
takes from Landlord, the Seventh Amendment Additional Premises. Said demise of
the Seventh Amendment Additional Premises shall be for a term commencing as of
the Term Commencement Date in respect of the Seventh Amendment Additional
Premises, as hereinafter defined, and terminating as of March 31, 2008 and shall
be upon the terms set forth on Exhibit 1, Seventh Amendment Additional Premises
Version, dated June 10, 1997, a copy of which is attached hereto and
incorporated by reference herein, and upon all of the other terms and conditions
of the Lease applicable to the Existing Premises (including, without limitation,
Tenant's extension option pursuant to Paragraph 3 of the Sixth Amendment),
except as follows:
A. The Term Commencement Date in respect of the Seventh Amendment
Additional Premises is the day after the date that the current tenant of the
Seventh Amendment Additional Premises, Delphi Management, Inc. ("Delphi")
vacates the Seventh Amendment Additional Premised. The Term Commencement Date
of the Seventh Amendment Additional Premises is presently estimated to occur on
or about December 1, 1997.
B. The Rent Commencement Date in respect of the Seventh Amendment
Additional Premises shall be the Term (commencement Date in respect of the
Seventh Amendment Additional Premises. Without limiting the foregoing, Article
6-6* of the Lease and Subparagraph D of Paragraph 1 of the First Amendment shall
have no applicability to nor any force or effect in respect of the Seventh
Amendment Additional Premises.
C. Commencing as of the Term Commencement Date in respect of the Seventh
Amendment Additional Premises, Tenant shall pay Operating Expense Excess in
respect of the Seventh Amendment Additional Premises on a monthly estimated
basis based upon the most recent Operating Cost data available to Landlord.
D. Tenant shall not be entitled to any additional parking passes by
reason of its demise of the Seventh Amendment Additional Premises. Without
limiting the foregoing, Paragraph 1 of the Rider to the Lease and Paragraph 3 of
the First Amendment shall have no applicability to the Seventh Amendment
Additional Premises.
E. In the event that any of the provisions of the Lease are inconsistent
with this Amendment or the state of facts contemplated hereby, the provisions of
this Amendment shall control.
2. EXHIBIT 1, SEVENTH AMENDMENT ADDITIONAL PREMISES VERSION
As of the Term Commencement Date in respect of the Seventh Amendment
Additional Premises, Exhibit 1, Seventh Amendment Additional Premises Version,
Sheets 1, 2 and 3, dated June 10, 1997, shall apply to the Seventh Amendment
Additional Premises.
3. CONDITION OF SEVENTH AMENDMENT ADDITIONAL PREMISES
A. Notwithstanding anything to the contrary herein or in the Lease
contained, Tenant shall take the Seventh Amendment Additional Premises "broom
clean", "as-is", in the condition in
-2-
<PAGE>
which the Seventh Amendment Additional Premises are in as of the Term
Commencement Date in respect of the Seventh Amendment Additional Premises,
without any obligation on the part of Landlord to prepare or construct the
Seventh Amendment Additional Premises for Tenant's occupancy.
B. Landlord shall contribute up to Fifty-Two Thousand Two Hundred and
00/100 ($52,200.00) Dollars ("Landlord's Contribution") toward Qualifying Costs,
as defined in Paragraph 2C of the Sixth Amendment, with respect to the Seventh
Amendment Additional Premises. Landlord shall pay Landlord's Contribution to
Tenant in accordance with Paragraph 4C(4) of the Sixth Amendment.
4. As hereby amended, the Lease is ratified, confirmed and approved in
all respects.
EXECUTED under seal as of the date first above-written.
LANDLORD: TENANT:
ROWES WHARF ASSOCIATES HAMBRECHT & QUIST L.L.C.
By: Rowes Wharf Limited Partnership, By: /s/ Paul Wessling
General Partner Hereunto Duly Authorized
Managing Director - Boston
By: RWLP Corp.,
General Partner
By:
-----------------------
Douglas S. Mitchell
Senior Vice President
Date Signed: Date Signed: June 11, 1997
------------------
-3-
<PAGE>
Atlantic Avenue Building South
50 Rowes Wharf
Boston, Massachusetts 02110
("the Building")
EIGHTH AMENDMENT
November 13, 1997
LANDLORD: Rowes Wharf Associates
TENANT: Hambrecht & Quist L.L.C.
EXISTING
PREMISES: The entire fourth (4th) floor of the Building
containing 25,921 square feet of Total Rentable Area
substantially as shown on Lease Plan Exhibit 2b, Sixth
Amendment, dated January 30, 1997
ORIGINAL LEASE
LEASE EXECUTION
DATA DATE: June 22, 1987
TERMINATION
DATE: March 31, 2008
PREVIOUS
LEASE
AMENDMENTS: First Amendment dated September 4, 1987
Second Amendment dated May 26, 1988
Third Amendment dated March 25, 1993
Fourth Amendment dated September 3, 1993
Fifth Amendment dated as of February 6, 1996
Sixth Amendment dated January 30, 1997
Seventh Amendment dated June 10, 1997
WHEREAS, Tenant desires to use the existing doors and glass walls located
in the Seventh Amendment Additional Premises;
WHEREAS, Landlord has obtained consent of current tenant of the Seventh
Amendment Additional Premises, Delphi Management, Inc. ("Delphi"), to leave the
existing doors and glass walls in the Seventh Amendment Additional Premises;
WHEREAS, in consideration of Tenant's right to use said doors and glass
walls, Tenant has agreed to a reduction in Landlord's Contribution with respect
to the Seventh Amendment Additional Premises;
NOW THEREFORE, the above-described lease, as previously amended (the
"Lease"), is hereby further amended as follows:
1
<PAGE>
1. EXISTING DOORS AND GLASS WALLS
Landlord agrees that the existing doors and glass walls presently
located in the Seventh Amendment Additional Premises will remain in the premises
for Tenant's use during the term of the Lease.
2. LANDLORD'S CONTRIBUTION
Tenant agrees that Landlord's Contribution toward Qualifying Costs,
as defined in Paragraph 2C of the Sixth Amendment with respect to the Seventh
Amendment Additional Premises shall be reduced from Fifty-Two Thousand Two
Hundred and 00/100 ($52,200.00) Dollars to Forty-Two Thousand Two Hundred and
00/100 ($42,200.00) Dollars.
3. As hereby amended, the Lease is ratified, confirmed and approved in
all respects.
EXECUTED under seal as of the date first above-written.
LANDLORD: TENANT:
ROWES WHARF ASSOCIATES HAMBRECHT & QUIST L.L.C.
By: Rowes Wharf Limited Partnership,
General Partner
By: RWLP Corp.,
General Partner
By: By:
---------------------- ------------------------
Douglas S. Mitchell, (Name) (Title)
Senior Vice President Hereunto Duly Authorized
Date Signed: Date Signed:
------------------ ---------------
2
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE, OUTSTANDING SHARES AND OPERATING DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Principal transactions............................... $ 30,045 $ 36,411 $ 53,425 $ 100,628 $ 117,808
Agency commissions................................... 14,221 14,242 24,603 37,682 43,716
Investment banking................................... 42,960 29,234 70,360 154,272 90,471
Corporate finance fees............................... 9,993 18,561 20,709 37,962 54,237
Interest and dividends............................... 2,793 2,952 3,974 14,707 22,629
Net investment gains................................. 3,524 10,270 33,852 24,434 229
Other................................................ 7,011 7,660 13,916 23,017 17,142
--------- --------- --------- ---------- ----------
Total revenues....................................... 110,547 119,330 220,839 392,702 346,232
--------- --------- --------- ---------- ----------
Expenses:
Compensation and benefits............................ 54,917 60,175 105,370 198,613 178,873
Brokerage and clearance.............................. 6,892 7,367 10,441 13,629 17,258
Occupancy and equipment.............................. 6,045 6,679 7,803 10,677 17,183
Communications....................................... 4,377 6,244 7,394 9,614 14,762
Interest............................................. 1,464 987 2,083 4,314 4,454
Other................................................ 10,608 11,841 15,849 28,788 36,605
--------- --------- --------- ---------- ----------
Total expenses....................................... 84,303 93,293 148,940 265,635 269,135
--------- --------- --------- ---------- ----------
Income before income tax provision....................... 26,244 26,037 71,899 127,067 77,097
Income tax provision..................................... 10,940 10,119 22,461 38,466 33,923
--------- --------- --------- ---------- ----------
Net income............................................... $ 15,304 $ 15,918 $ 49,438 $ 88,601 $ 43,174
--------- --------- --------- ---------- ----------
--------- --------- --------- ---------- ----------
Earnings per share....................................... $ 1.68
----------
----------
Weighted average shares outstanding...................... 25,682,887
----------
----------
PRO FORMA INFORMATION:
Net income before income tax adjustment................ $ 88,601
Income tax adjustment(1)............................... (17,443)
----------
Pro forma net income................................... $ 71,158
----------
----------
Pro forma earnings per share(2)........................ $ 3.27
----------
----------
Pro forma weighted average shares outstanding.......... 21,734,143
----------
----------
CONSOLIDATED BALANCE SHEET DATA:
Total assets........................................... $ 131,878 $ 155,160 $ 319,630 $ 537,917 $ 678,937
Debt obligations....................................... 16,913 12,684 13,771 8,365 2,700
Stockholders' equity and partners' capital............. 50,290 63,591 105,462 226,711 297,378
Book value per common share outstanding(3)............. $ 3.94 $ 4.43 $ 6.31 $ 9.99 $ 12.51
OPERATING DATA:
Total employees(4)..................................... 350 426 498 685 823
Return on average stockholders' equity and partners'
capital.............................................. 37% 28% 58% 60% 16%
Compensation and benefits expense as a percentage of
total revenues....................................... 50% 50% 48% 51% 52%
Non-compensation and benefits expense as a percentage
of total revenues.................................... 26% 28% 19% 16% 26%
</TABLE>
- ------------------------------
(1) Includes taxes on LP earnings as if LP's earnings were subject to an
effective tax rate of 44 percent.
(2) Pro forma earnings per common share is determined by dividing pro forma net
income by the weighted average number of common shares, including common
share equivalents, outstanding during the year. Pro forma earnings per
common share are not shown prior to 1996 because the amounts would not be
meaningful.
(3) Includes equivalent shares related to LP units outstanding at September 30,
1994 and 1995. Shown at end of period.
(4) Shown at end of period.
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE STATEMENTS IN THIS ANNUAL REPORT THAT RELATE TO FUTURE PLANS, EVENTS, OR
PERFORMANCE ARE FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS INCLUDE, BUT ARE NOT
LIMITED TO, THOSE RELATING TO THE EFFECTS OF FUTURE GROWTH, INTERNATIONAL
EXPANSION PLANS, THE COMPANY'S PRINCIPAL INVESTMENT ACTIVITIES AND ITS CURRENT
EQUITY CAPITAL LEVELS. ACTUAL RESULTS MIGHT DIFFER MATERIALLY DUE TO A VARIETY
OF IMPORTANT FACTORS. THESE FACTORS INVOLVE RISKS AND UNCERTAINTIES RELATING TO,
AMONG OTHER THINGS, GENERAL ECONOMIC AND MARKET CONDITIONS, COMPETITIVE
CONDITIONS WITHIN THE SECURITIES INDUSTRY, CHANGES IN INTEREST RATES, STOCK
MARKET PRICES AND MUTUAL FUND CASH INFLOWS OR OUTFLOWS, CHANGES IN THE
TECHNOLOGY AND HEALTHCARE INDUSTRIES AND OTHER INDUSTRIES IN WHICH THE COMPANY
IS ACTIVE, CHANGES IN DEMAND FOR INVESTMENT BANKING AND SECURITIES BROKERAGE
SERVICES, THE COMPANY'S ABILITY TO RECRUIT AND RETAIN KEY EMPLOYEES, CHANGES IN
SECURITIES AND BANKING LAWS AND REGULATIONS, TRADING AND PRINCIPAL INVESTMENT
ACTIVITIES, LITIGATION AND OTHER FACTORS DISCUSSED BELOW IN "OVERVIEW." THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
1997 FILED WITH THE SECURITIES AND EXCHANGE COMMISSION CONTAINS ADDITIONAL
INFORMATION ABOUT THESE AND OTHER RISKS AND UNCERTAINTIES.
OVERVIEW
Hambrecht & Quist Group ("H&Q" or the "Company") is a holding company for
Hambrecht & Quist California ("H&Q California"), whose primary subsidiary,
Hambrecht & Quist L.L.C. ("H&Q LLC"), is an investment banking firm and
securities broker-dealer. H&Q California's other subsidiaries and affiliates are
engaged in investment banking, venture capital fund management, investment
advisory and lease and other asset-based financing activities.
EFFECTS OF 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. The securities market is affected by
general economic and market conditions, including fluctuations in interest
rates, the volume of securities trading, 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 and have occurred in
the Company's operating results due to these factors and other factors. In
periods of reduced market activity, profitability has been and is likely to be
adversely affected. Accordingly, net earnings for any period should not be
considered representative of any other period.
For example, the Company's record results of operations for fiscal 1996 were
achieved during consistently favorable economic and market conditions for equity
offerings by companies in the industries and of the size on which the Company
focuses. By contrast, during the Company's second and third fiscal quarters of
1997, the economic and market conditions were not as favorable for such equity
offerings, particularly for equity offerings of emerging growth technology
companies. As a result, during fiscal 1997, the Company managed or co-managed 94
public offerings compared to 134 in fiscal 1996. Investment banking revenue
decreased 41% from $154.3 million in 1996 compared to $90.5 million in 1997, and
decreased as a percentage of revenues from 39% to 26%.
EFFECTS OF COMPETITION
The securities business is intensely competitive. Many of the Company's
competitors have greater capital, financial and other resources than the
Company. The securities business has also recently been experiencing
consolidation, including the acquisition of several of the Company's competitors
by large commercial banks, providing competitors of the Company with increased
financial and other resources. In addition, the level of competition for key
personnel has been increasing. The Company has experienced losses of research,
investment banking and sales and trading professionals from time to time and
there can
2
<PAGE>
be no assurance that losses of key personnel due to competition or other factors
will not occur in the future.
EFFECTS OF COMPANY FACTORS AND GROWTH STRATEGIES
Over the past several years, and increasingly in the past year, the Company
has experienced significant growth in the scope of its business activities and
the number of its employees. Average employee headcount was 580 in fiscal 1996,
compared to 759 in fiscal 1997.
The scope of the Company's business activities has increased and is expected
to continue to increase to include a significantly higher level of principal
investment activities, as more fully described below in "Effects of Principal
Investment Activities", new business activities and increased emphasis on
building existing operations, such as the Executive Financial Services group and
the Company's international operations. Growth in the Company's international
operations during 1997 included the establishment of a strategic relationship in
Israel and the acquisition from a French financial institution of the 50% of
Hambrecht & Quist Euromarkets, S.A. ("H&Q Euromarkets"), formerly Hambrecht &
Quist Saint Dominique, that the Company did not already own. The Company plans
to expand its European operations through H&Q Euromarkets and H&Q LLC's London
office. There can be no assurance that the Company will be successful in further
increasing the scope of its business activities, including its international
operations, or that any action taken to develop such operations will not have an
adverse effect on the Company's existing operations.
The number of employees has increased significantly from both the increased
scope of business activities and the growth of existing operations. This
employee growth has increased fixed expenses associated with compensation and
benefits costs, occupancy and equipment costs and communications costs. Such
fixed expenses are expected to continue to grow in the future. Any failure to
effectively manage the Company's growth through the investment in management
personnel, financial and management systems and controls, and facilities could
have an adverse affect on the Company's operations.
EFFECTS OF PRINCIPAL INVESTMENT ACTIVITIES
The Company makes principal investments for strategic purposes and financial
returns. As part of the Company's principal investment activities, it purchases
equity and debt securities or makes commitments to purchase such securities from
public and private companies. Such investments may involve substantial amounts
of capital and significant exposure to any one company or business, as well as
to market, credit and liquidity risks. This level of investment activity has
increased compared to prior periods. For example, during 1997, the Company
purchased $87.4 million in principal investments compared to $32.7 million
during 1996. The Company expects to continue its principal investment activities
in subsequent periods through direct investments in public and private
companies, investments in funds managed by the Company or by investment
management entities in which the Company has an interest, investments in other
special situation funds managed by outside fund managers and investments in
joint ventures. However, there can be no assurance that the level and quality of
potential investment opportunities made available to the Company will be
sufficient to support such increased level of principal investing or that any
future or historical investments will achieve a level of financial performance
consistent with the Company's objectives.
The Company accounts for its marketable investments in public companies at
prevailing market prices, less discounts for illiquid or restricted holdings.
The Company accounts for its nonmarketable investments in private companies at
estimated fair value as determined by management of the Company. Such marketable
and nonmarketable investments are presented in the Company's balance sheets as
long-term investments. At September 30, 1996 and September 30, 1997, the
Company's long-term investments totaled $69.9 million and $102.1 million,
respectively. Net investment gains are included in the Company's statements of
operations and include net realized gains and losses and the net change in
unrealized gains
3
<PAGE>
and losses for the period. For 1996 and 1997, net investment gains totaled $24.4
million and $228,000, respectively.
Principal investing activities, which have historically been a significant
contributor to the Company's revenues and earnings, are not predictable and do
not necessarily correlate with general market conditions. These results, which
in any reporting period may be influenced by a limited number of investments and
transactions, can vary widely from year to year and quarter to quarter. For
example, in 1997 the Company's quarterly net investment gains or losses varied
significantly as follows: $5.1 million gain in quarter one, $4.8 million loss in
quarter two, $9.7 million gain in quarter three and $9.8 million loss in quarter
four.
MATTERS RELATED TO THE COMPANY'S INFORMATION SYSTEMS
The Company utilizes software and related technologies that will be affected
by the date change in the year 2000. The year 2000 issue exists because many
computer systems and applications currently use two-digit date fields to
designate a year. When the century date change occurs, date-sensitive systems
will recognize the year 2000 as 1900, or not at all. This inability to recognize
or properly treat the year 2000 may cause systems to process critical financial
and operational information incorrectly.
The Company expects to be affected by the date change both directly in its
operating units as well as indirectly through Lewco Securities Corp. ("Lewco"),
the Company's clearing broker. The Company will be required to modify
insignificant portions of the software used directly by its operating units.
However, Lewco is currently addressing the year 2000 date change by making
significant programming modifications to its systems. The Company will incur
expenditures over the next few years and expects to absorb its relative share of
the costs incurred by Lewco as they occur. Any failure by the Company or Lewco
to adequately address the date change could have a material adverse effect on
the Company's financial condition and operations.
RESTRUCTURING(1)
H&Q California succeeded in January 1983 to the business of Hambrecht &
Quist, a partnership formed in 1968. Between January 1983 and November 1993, H&Q
California conducted, either directly or through subsidiaries or affiliates, all
of the Company's activities. Hambrecht & Quist, L.P. ("LP") was formed in
November 1993 for the purpose of owning and managing investments in certain
operating affiliates.
On August 8, 1996, the Company effected a series of restructuring
transactions (the "Restructuring"), pursuant to which, among other things, (i)
LP transferred cash and assets totaling $31.0 million to a liquidating trust for
the benefit of LP's partners, (ii) Hambrecht & Quist Guaranty Finance, LLC
("Guaranty Finance") distributed assets whose book value was approximately $2.5
million to its equity owners other than LP, (iii) LP and H&Q California entered
into separate merger transactions, pursuant to which LP was merged into the
Company and H&Q California became a wholly owned subsidiary of the Company, and
(iv) the equity holders of H&Q California and LP became owners of shares of the
Company's common stock.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED SEPTEMBER 30, 1997 AND 1996
REVENUES. Total revenues decreased 12% from $392.7 million in 1996 to
$346.2 million in 1997.
- ------------------------
(1) Refer to Note 1 of Notes to the Consolidated Financial Statements for a
detailed description of the Company's organizational structure, including
the effects of the restructuring transactions completed in August 1996.
4
<PAGE>
Principal transactions revenue increased 17% from $100.6 million to $117.8
million. This increase was due to an increase in Nasdaq market activity and the
expansion of the Company's equity sales and trading capabilities.
Agency commissions increased 16% from $37.7 million to $43.7 million. This
increase was primarily due to the expansion of the Company's listed
institutional equity business.
Investment banking revenue decreased 41% from $154.3 million to $90.5
million, and decreased as a percentage of revenues from 39% to 26%. The Company
managed or co-managed 134 public offerings during 1996 compared to 94 during
1997.
Corporate finance fees increased 43% from $38.0 million to $54.2 million.
The increase results primarily from an increased number and size of advisory
assignments.
Interest and dividend revenues increased 54% from $14.7 million to $22.6
million. The increase related primarily to interest earned on higher average
customer margin loans outstanding, higher average notes receivable outstanding
and higher average investments in cash equivalents outstanding during the
period.
Net investment gains decreased 99% from $24.4 million to $228,000. Net
investment gains include realized and unrealized gains on the Company's
investment in The BISYS Group, Inc. ("BISYS") of $15.1 million for 1996 and $1.5
million for 1997. Net investment gains in 1997 include net investment losses of
$18.1 million ($14.0 million of which was recorded during the Company's fourth
fiscal quarter) related to two investee companies in the airline industry. The
Company recorded a realized loss of $9.9 million on its investment in Air South
Airlines, Inc. ("Air South"), a regional airline that filed for bankruptcy in
August 1997. The Company recorded an unrealized loss of $8.2 million on its
investment in another regional airline.
Other revenues decreased 26% from $23.0 million to $17.1 million. The
decrease was due primarily to a decrease in profit participation distributions
from venture funds managed by the Company and the recognition by Guaranty
Finance of a $3.3 million gain on the sale of a building in 1996.
EXPENSES. Total expenses increased 1% from $265.6 million in 1996 to $269.1
million in 1997.
Compensation and benefits expense decreased 10% from $198.6 million to
$178.9 million. The decrease was due primarily to lower bonus expenses accrued
as a result of lower revenues. Compensation and benefits expense as a percentage
of total revenues was 51% in 1996 and 52% in 1997.
Brokerage and clearance expense increased 27% from $13.6 million to $17.3
million. The percentage increase generally corresponds with increases in
principal transactions revenue and agency commissions.
Occupancy and equipment expense increased 61% from $10.7 million to $17.2
million as a result of increases in depreciation expense related to computer and
telecommunication equipment upgrades and procurements for new employees and
increases in rent expense for additional office space leased.
Communications expense increased 54% from $9.6 million to $14.8 million.
This increase was due to increases in telecommunications expenses and quotes and
information services expenses resulting from the hiring of additional employees.
Interest expense increased 3% from $4.3 million to $4.5 million. This
increase related primarily to higher average customer payables outstanding
during 1997.
Other expenses increased 27% from $28.8 million to $36.6 million. This
increase was due to increases in professional services fees, travel,
entertainment and conference expenses and bad debt expense. In the fourth fiscal
quarter, the Company recorded a $1.8 million loss related to letters of credit
issued to two of Air South's creditors.
5
<PAGE>
INCOME TAX PROVISION. The Company's effective income tax rate was 30.3% in
1996 and increased to 44% in 1997. The Company's effective income tax rate in
1996 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
Company's higher effective tax rate in 1997 resulted from the effects of the
Restructuring. Subsequent to the Restructuring, all Company income became
subject to corporate federal and state income tax. The pro forma income tax
adjustment in 1996 was determined assuming that all of the Company's combined
operations had been subject to corporate federal and state income tax.
FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND 1995
REVENUES. Total revenues increased 78% from $220.8 million in 1995 to
$392.7 million in 1996.
Principal transactions revenue increased 88% from $53.4 million to $100.6
million. This increase was due to a significant increase in underwriting
activity, resulting in substantial after-market trading; an increase in Nasdaq
market activity overall; and the Company's expansion of its equity sales and
trading capabilities.
Agency commissions increased 53% from $24.6 million to $37.7 million. This
increase was due to the expansion of the Company's institutional listed equity
business and an increase in both the number and average production of retail
brokers in its Executive Financial Services group.
Investment banking revenue increased 119% from $70.4 million to $154.3
million, and increased as a percentage of revenues from 32% to 39%. The Company
managed or co-managed 71 public offerings during 1995 compared to 134 during
1996.
Corporate finance fees increased 83% from $20.7 million to $38.0 million.
This increase was due to the completion of several large advisory assignments
during 1996.
Interest and dividend revenues increased 270% from $4.0 million to $14.7
million. The increase related primarily to interest earned on higher average
customer margin loans outstanding and higher average investments in cash
equivalents outstanding during the period.
Net investment gains for the year decreased 28% from $33.9 million to $24.4
million. The net gains related primarily to the Company's investment in BISYS,
which accounted for $19.9 million of total investment gains in 1995 and $15.1
million in 1996.
Other revenues increased 65% from $13.9 million to $23.0 million. The
increase was due primarily to an increase in asset management fees and profit
participation distributions from venture funds managed by the Company.
EXPENSES. Total expenses increased 78% from $148.9 million in 1995 to
$265.6 million in 1996.
Compensation and benefits expense increased 88% from $105.4 million to
$198.6 million. The increase was due primarily to increased sales, trading and
incentive compensation. Compensation and benefits expense as a percentage of
total revenues increased from 48% to 51.
Brokerage and clearance expense increased 31% from $10.4 million to $13.6
million. The percentage increase generally corresponds with increases in
principal transaction revenue and agency commissions.
Occupancy and equipment expense increased 37% from $7.8 million to $10.7
million as a result of expenditures to repair office facilities in San Francisco
and New York and an increase in depreciation expense due to upgrades of office
facilities and acquisitions of computer and telecommunications equipment.
Communications expense increased 30% from $7.4 million to $9.6 million. This
increase was due to increases in telecommunications and market data expenses
resulting from the hiring of additional employees in 1996.
6
<PAGE>
Interest expense increased 107% from $2.1 million to $4.3 million. This
increase related primarily to increases in average bank financing levels during
the two periods.
Other expenses increased 82% from $15.9 million to $28.8 million. This
increase was due to higher levels of business activity resulting in increased
professional services fees, travel, entertainment and conference expenses and
miscellaneous expenses.
INCOME TAX PROVISION. The Company's effective income tax rate was 31.2% in
1995 and decreased slightly to 30.3% in 1996. 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 pro forma income tax adjustment in 1996 has been
determined assuming that all of the Company's combined operations had been
subject to corporate federal and state income tax.
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 capital raised from the sale of its common stock to employee
stockholders and the public through its initial public offering. As of September
30, 1997, H&Q LLC had liquid assets consisting primarily of cash and cash
equivalents of $42.6 million and receivables of $157.6 million from Lewco. The
cash equivalents consisted primarily of United States Treasury bills with
maturities of 90 days or less. As of September 30, 1997, the Company had a bank
line of credit in the amount of $15.0 million, with a balance of $1.1 million
outstanding, and Guaranty Finance and Hambrecht & Quist Transition Capital, LLC
had bank lines of credit of $11.0 million and $10.0 million, respectively with
$700,000 and $900,000 outstanding, respectively. Also, the Company has available
an additional $20.0 million line of credit with a commercial bank expiring April
30, 1998. The Company borrowed $10.0 million against this line of credit for a
four day period in September 1997.
The Company's consolidated balance sheet reflects the Company's relatively
unleveraged financial position. The ratio of assets to equity as of September
30, 1997 was approximately 2.3:1. 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. A
substantial portion 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. As of
September 30, 1997, securities held for trading purposes include United States
Treasury securities totaling $20.1 million with maturities ranging from 2 days
to 11 months. 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, as a broker-dealer, is registered with the SEC and is a member of
the NASD and the NYSE. As such, H&Q LLC is subject to the capital requirements
of these regulatory entities. H&Q LLC's regulatory net capital has historically
exceeded these minimum requirements. As of September 30, 1997, H&Q LLC was
required to maintain minimum regulatory net capital in accordance with SEC rules
of approximately $4.9 million and had total regulatory net capital of
approximately $67.0 million, or approximately $62.1 million in excess of its
requirement.
Other broker-dealer subsidiaries were in compliance with all applicable
regulatory capital adequacy requirements at September 30, 1997.
The Company believes that its current level of equity capital, combined with
funds anticipated to be generated from operations, will be adequate to fund its
operations for the foreseeable future.
7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Hambrecht & Quist Group:
We have audited the accompanying consolidated balance sheets of Hambrecht &
Quist Group (a Delaware corporation)and Subsidiaries as of September 30, 1996
and 1997, and the related consolidated statements of operations, changes in
stockholders' equity and partners' capital and cash flows for the years ended
September 30, 1995, 1996 and 1997. 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Hambrecht &
Quist Group and Subsidiaries as of September 30, 1996 and 1997, and the results
of their operations and their cash flows for the years ended September 30, 1995,
1996 and 1997, in conformity with generally accepted accounting principles.
As discussed in Notes 2 and 7 to the consolidated financial statements,
long-term investments include nonmarketable investments amounting to $37,934,994
and $65,514,884 (17 and 22 percent of total stockholders' equity and partners'
capital) as of September 30, 1996 and 1997, 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,
November 12, 1997
8
<PAGE>
HAMBRECHT & QUIST GROUP
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents........................................................ $ 50,031,534 $ 42,637,732
Receivables:
Customers (net of allowance of $900,000 and $1,050,000, respectively).......... 168,416,287 183,796,833
Lewco Securities Corp.......................................................... 80,532,188 157,570,375
Syndicate managers............................................................. 12,742,898 15,494,668
Related parties................................................................ 17,929,657 17,397,164
Notes.......................................................................... 10,500,000 18,489,300
Lease.......................................................................... 4,335,668 3,467,628
Income taxes................................................................... 806,062 531,955
Other.......................................................................... 1,484,820 11,288,008
Marketable trading securities, at market value................................... 66,738,999 47,705,357
Long-term investments, at estimated fair value................................... 69,931,210 102,111,938
Deferred income taxes............................................................ 37,595,489 56,734,654
Furniture, equipment and leasehold improvements, net of accumulated depreciation
and amortization............................................................... 13,167,152 18,782,846
Leased assets, net of accumulated depreciation................................... 3,049,051 2,272,172
Exchange memberships, at cost (market value--$1,325,000 and $1,925,000,
respectively).................................................................. 656,000 656,000
-------------- --------------
Total assets................................................................. $ 537,917,015 $ 678,936,630
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Payables:
Customers...................................................................... $ 142,489,752 $ 186,445,656
Compensation and benefits...................................................... 101,941,165 116,673,510
Syndicate settlements.......................................................... 18,530,743 21,355,653
Income taxes payable........................................................... -- 6,563,552
Trade accounts payable......................................................... 2,483,361 2,829,377
Accrued expenses and other..................................................... 21,339,770 33,220,760
Securities sold, not yet purchased, at market value.............................. 16,055,953 11,770,127
Debt obligations................................................................. 8,364,822 2,700,000
-------------- --------------
Total liabilities............................................................ 311,205,566 381,558,635
-------------- --------------
Commitments and contingencies
Stockholders' equity:
Common stock (par value $0.01 and 100,000,000 shares authorized, 22,693,930 and
23,790,337 issued and outstanding as of September 30, 1996 and 1997,
respectively)................................................................ 226,939 237,903
Additional paid-in capital..................................................... 116,643,623 136,271,533
Stock notes receivable from employees.......................................... (13,550,503) (5,620,260)
Retained earnings.............................................................. 124,056,614 167,230,812
Net unrealized losses on long-term investments available for sale.............. (665,224) (303,117)
Treasury stock, at cost, 21,615 shares......................................... -- (438,876)
-------------- --------------
Total stockholders' equity................................................... 226,711,449 297,377,995
-------------- --------------
Total liabilities and stockholders' equity................................... $ 537,917,015 $ 678,936,630
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
9
<PAGE>
HAMBRECHT & QUIST GROUP
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
REVENUES:
Principal transactions........................................ $ 53,424,647 $ 100,627,733 $ 117,807,614
Agency commissions............................................ 24,602,992 37,682,010 43,716,190
Investment banking............................................ 70,359,967 154,271,774 90,470,621
Corporate finance fees........................................ 20,709,345 37,962,437 54,237,209
Interest and dividends........................................ 3,974,440 14,707,327 22,629,092
Net investment gains.......................................... 33,852,073 24,434,401 228,979
Other......................................................... 13,916,077 23,016,922 17,142,186
-------------- -------------- --------------
Total revenues.............................................. 220,839,541 392,702,604 346,231,891
-------------- -------------- --------------
EXPENSES:
Compensation and benefits..................................... 105,370,141 198,613,070 178,872,709
Brokerage and clearance....................................... 10,441,253 13,628,832 17,258,305
Occupancy and equipment....................................... 7,802,859 10,677,161 17,183,241
Communications................................................ 7,394,101 9,614,368 14,762,047
Interest...................................................... 2,082,917 4,314,085 4,453,983
Other......................................................... 15,848,872 28,787,669 36,604,823
-------------- -------------- --------------
Total expenses.............................................. 148,940,143 265,635,185 269,135,108
-------------- -------------- --------------
Income before income tax provision.......................... 71,899,398 127,067,419 77,096,783
INCOME TAX PROVISION............................................ 22,461,147 38,466,246 33,922,585
-------------- -------------- --------------
Net income.................................................. $ 49,438,251 $ 88,601,173 $ 43,174,198
-------------- -------------- --------------
-------------- -------------- --------------
EARNINGS PER SHARE.............................................. $ 1.68
--------------
--------------
WEIGHTED AVERAGE SHARES OUTSTANDING............................. 25,682,887
--------------
--------------
PRO FORMA INFORMATION (UNAUDITED):
Net income before income tax adjustment....................... $ 88,601,173
Income tax adjustment......................................... (17,443,418)
--------------
Pro forma net income........................................ $ 71,157,755
--------------
--------------
Pro forma earnings per share.................................. $ 3.27
--------------
--------------
Pro forma weighted average shares outstanding................. 21,734,143
--------------
--------------
</TABLE>
The accompanying notes are an integral part of these statements.
10
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
HAMBRECHT & QUIST GROUP
-------------------------------------------------------------------------------
NUMBER OF ADDITIONAL
COMMON COMMON PAID-IN STOCK NOTES RETAINED UNREALIZED
SHARES STOCK CAPITAL RECEIVABLE EARNINGS LOSSES, NET
----------- ----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1994.......... 12,475,188 $13,078,867 $ $ (966,315) $ 50,929,131 $
Sales of common stock or partners'
capital additions................ 2,963,892 14,406,194 (7,935,534) --
Reductions of stock notes.......... -- -- 1,242,135 --
Repurchases of common stock or
partners' capital withdrawals.... (829,892) (2,072,476) -- (2,396,760)
Net income......................... -- -- -- 23,672,741
Partners' capital distributions
payable.......................... -- -- -- --
Partners' capital distributions.... -- -- -- --
Change in net unrealized gains..... -- -- -- --
----------- ----------- ------------ ------------ ------------ -----------
BALANCE, SEPTEMBER 30, 1995.......... 14,609,188 25,412,585 (7,659,714) 72,205,112
Sales of common stock or partners'
capital additions................ 2,080,348 11,994,895 (7,831,585) --
Reductions of stock and capital
notes............................ -- -- 8,981,733 --
Repurchases of common stock or
partners' capital withdrawals.... (608,368) (2,201,212) -- (1,409,601)
Distribution of LP interest to
Group Trust...................... -- -- -- 4,493,971
Transfer of LP notes receivable to
H&Q.............................. -- -- (8,227,753) --
Net income through August 7, 1996.. -- -- -- 33,688,550
Partners' capital distributions
payable.......................... -- -- -- --
Partners' capital distributions.... -- -- --
Change in net unrealized gains..... -- -- -- --
----------- ----------- ------------ ------------ ------------ -----------
Balance, August 7, 1996............ 16,081,168 35,206,268 (14,737,319) 108,978,032
Distribution of cash and securities
to LP Trust...................... -- -- -- --
Merger between H&Q and LP.......... 2,587,762 (35,019,579) 56,366,873 -- -- (557,280)
Purchase of additional interest in
Guaranty Finance................. -- -- -- -- -- (136,410)
----------- ----------- ------------ ------------ ------------ -----------
Balance, August 8, 1996............ 18,668,930 186,689 56,366,873 (14,737,319) 108,978,032 (693,690)
Sale of common stock in initial
public offering plus net
underwriting revenue of
$425,000......................... 4,025,000 40,250 60,276,750 -- -- --
Reductions of stock notes.......... -- -- -- 1,186,816 -- --
Net income from August 8 to
September 30, 1996............... -- -- -- -- 15,078,582 --
Change in net unrealized losses.... -- -- -- -- -- 28,466
----------- ----------- ------------ ------------ ------------ -----------
BALANCE, SEPTEMBER 30, 1996.......... 22,693,930 226,939 116,643,623 (13,550,503) 124,056,614 (665,224)
Sales of common stock.............. 1,134,244 11,342 20,083,292 (289,035) -- --
Forfeitures of common stock........ (37,837) (378) (455,382) -- -- --
Reductions of stock notes.......... -- -- -- 8,209,370 -- --
Net income......................... -- -- -- -- 43,174,198 --
Change in net unrealized losses.... -- -- -- -- -- 362,107
Purchase of 21,615 shares of common
stock............................ -- -- -- 9,908 -- --
----------- ----------- ------------ ------------ ------------ -----------
BALANCE, SEPTEMBER 30, 1997.......... 23,790,337 $ 237,903 $136,271,533 $ (5,620,260) $167,230,812 $(303,117)
----------- ----------- ------------ ------------ ------------ -----------
----------- ----------- ------------ ------------ ------------ -----------
<CAPTION>
HAMBRECHT & QUIST, L.P.
-----------------------------------------------------
TREASURY CAPITAL
STOCK, AT SUBTOTAL H&Q PARTNERS' NOTES DISTRIBUTIONS UNREALIZED
COST GROUP CAPITAL RECEIVABLE PAYABLE GAINS, NET
------------- ------------ ------------ ----------- ------------- -----------
<S> <C> <C>
BALANCE, SEPTEMBER 30, 1994.......... $ $ 63,041,683 $ 3,298,481 $ (69,526) $(2,679,918) $ --
Sales of common stock or partners'
capital additions................ 6,470,660 2,557,915 (2,162,487) -- --
Reductions of stock notes.......... 1,242,135 -- -- -- --
Repurchases of common stock or
partners' capital withdrawals.... (4,469,236) (1,241,100) -- -- --
Net income......................... 23,672,741 25,765,510 -- -- --
Partners' capital distributions
payable.......................... -- -- -- (11,952,253) --
Partners' capital distributions.... -- (4,186,804) -- 4,186,804 --
Change in net unrealized gains..... -- -- -- -- 1,987,478
------------- ------------ ------------ ----------- ------------- -----------
BALANCE, SEPTEMBER 30, 1995.......... 89,957,983 26,194,002 (2,232,013) (10,445,367) 1,987,478
Sales of common stock or partners'
capital additions................ 4,163,310 7,595,591 (7,333,171) -- --
Reductions of stock and capital
notes............................ 8,981,733 -- 1,337,431 -- --
Repurchases of common stock or
partners' capital withdrawals.... (3,610,813) (420,344) -- -- --
Distribution of LP interest to
Group Trust...................... 4,493,971 -- -- -- --
Transfer of LP notes receivable to
H&Q.............................. (8,227,753) -- 8,227,753 -- --
Net income through August 7, 1996.. 33,688,550 39,834,040 -- -- --
Partners' capital distributions
payable.......................... -- -- -- (14,034,971) --
Partners' capital distributions.... -- -- (24,480,338) -- 24,480,338 --
Change in net unrealized gains..... -- -- -- -- 1,101,224
------------- ------------ ------------ ----------- ------------- -----------
Balance, August 7, 1996............ 129,446,981 48,722,951 -- -- 3,088,702
Distribution of cash and securities
to LP Trust...................... -- (27,375,657) -- -- (3,645,982)
Merger between H&Q and LP.......... 20,790,014 (21,347,294) -- -- 557,280
Purchase of additional interest in
Guaranty Finance................. (136,410) -- -- -- --
------------- ------------ ------------ ----------- ------------- -----------
Balance, August 8, 1996............ 150,100,585 -- -- -- --
Sale of common stock in initial
public offering plus net
underwriting revenue of
$425,000......................... 60,317,000
Reductions of stock notes.......... 1,186,816
Net income from August 8 to
September 30, 1996............... 15,078,582
Change in net unrealized losses.... 28,466
------------- ------------ ------------ ----------- ------------- -----------
BALANCE, SEPTEMBER 30, 1996.......... 226,711,449 -- -- -- --
Sales of common stock.............. 19,805,599
Forfeitures of common stock........ (455,760)
Reductions of stock notes.......... 8,209,370
Net income......................... 43,174,198
Change in net unrealized losses.... 362,107
Purchase of 21,615 shares of common
stock............................ (438,876) (428,968)
------------- ------------ ------------ ----------- ------------- -----------
BALANCE, SEPTEMBER 30, 1997.......... $ (438,876) $297,377,995 $ -- $ -- $ -- $ --
------------- ------------ ------------ ----------- ------------- -----------
------------- ------------ ------------ ----------- ------------- -----------
<CAPTION>
SUBTOTAL H&Q
LP TOTAL
------------ ------------
BALANCE, SEPTEMBER 30, 1994.......... $ 549,037 $ 63,590,720
Sales of common stock or partners'
capital additions................ 395,428 6,866,088
Reductions of stock notes.......... -- 1,242,135
Repurchases of common stock or
partners' capital withdrawals.... (1,241,100) (5,710,336)
Net income......................... 25,765,510 49,438,251
Partners' capital distributions
payable.......................... (11,952,253) (11,952,253)
Partners' capital distributions.... -- --
Change in net unrealized gains..... 1,987,478 1,987,478
------------ ------------
BALANCE, SEPTEMBER 30, 1995.......... 15,504,100 105,462,083
Sales of common stock or partners'
capital additions................ 262,420 4,425,730
Reductions of stock and capital
notes............................ 1,337,431 10,319,164
Repurchases of common stock or
partners' capital withdrawals.... (420,344) (4,031,157)
Distribution of LP interest to
Group Trust...................... -- 4,493,971
Transfer of LP notes receivable to
H&Q.............................. 8,227,753 --
Net income through August 7, 1996.. 39,834,040 73,522,590
Partners' capital distributions
payable.......................... (14,034,971) (14,034,971)
Partners' capital distributions.... -- --
Change in net unrealized gains..... 1,101,224 1,101,224
------------ ------------
Balance, August 7, 1996............ 51,811,653 181,258,634
Distribution of cash and securities
to LP Trust...................... (31,021,639) (31,021,639)
Merger between H&Q and LP.......... (20,790,014) --
Purchase of additional interest in
Guaranty Finance................. -- (136,410)
------------ ------------
Balance, August 8, 1996............ -- 150,100,585
Sale of common stock in initial
public offering plus net
underwriting revenue of
$425,000......................... 60,317,000
Reductions of stock notes.......... 1,186,816
Net income from August 8 to
September 30, 1996............... 15,078,582
Change in net unrealized losses.... 28,466
------------ ------------
BALANCE, SEPTEMBER 30, 1996.......... -- 226,711,449
Sales of common stock.............. 19,805,599
Forfeitures of common stock........ (455,760)
Reductions of stock notes.......... 8,209,370
Net income......................... 43,174,198
Change in net unrealized losses.... 362,107
Purchase of 21,615 shares of common
stock............................ (428,968)
------------ ------------
BALANCE, SEPTEMBER 30, 1997.......... $ -- $297,377,995
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
11
<PAGE>
HAMBRECHT & QUIST GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................... $ 49,438,251 $ 88,601,173 $ 43,174,198
-------------- -------------- --------------
Adjustments to reconcile net income to net cash and cash
equivalents provided by operating activities--
Depreciation and amortization................................ 5,664,070 6,724,686 9,524,109
Net investment gains......................................... (33,852,073) (24,434,401) (228,979)
Net gains on sales of leased assets.......................... (407,436) (3,394,352) --
Deferred tax benefit......................................... (1,206,194) (26,967,633) (19,139,165)
Minority interest in income of subsidiaries.................. 718,651 685,105 388,934
Changes in operating assets and liabilities--
Customers, net............................................. (10,030,060) 2,854,297 28,575,358
Lewco Securities Corp...................................... (24,750,289) (38,541,879) (77,038,187)
Syndicate managers......................................... (9,117,244) (3,203,996) (2,751,770)
Income taxes receivable, net............................... 6,144,139 (4,439,132) 8,509,311
Related parties and other receivables...................... (1,906,869) (13,520,519) (12,152,411)
Marketable trading securities, net......................... 1,262,314 (49,676,915) 11,670,441
Compensation and benefits payable.......................... 27,533,054 63,139,509 34,695,044
Syndicate settlements...................................... 23,674,156 (6,879,034) 2,824,910
Trade accounts payable..................................... (1,122,673) 1,538,586 346,016
Customer lease deposits.................................... (2,191,760) (478,603) --
Accrued expenses and other payables........................ 5,625,230 11,689,535 11,440,326
Other, net................................................. (150,606) (765,853) 57,084
-------------- -------------- --------------
Total adjustments........................................ (14,113,590) (85,670,599) (3,278,979)
-------------- -------------- --------------
Net cash and cash equivalents provided by operating
activities............................................. 35,324,661 2,930,574 39,895,219
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of long-term investments............................. (10,690,049) (32,727,770) (87,351,958)
Proceeds from sales/distributions of long-term investments..... 15,843,334 36,222,554 61,778,580
Purchases of furniture, equipment and leasehold improvements... (3,060,061) (11,138,680) (12,904,169)
Increases in notes receivable.................................. -- (10,500,000) (13,337,311)
Payments of notes receivable................................... -- -- 5,348,011
Increases in lease receivables................................. (1,505,482) (2,154,995) --
Payments of lease receivables.................................. 1,568,911 1,074,964 868,038
Purchases of leased assets..................................... (6,504,911) (809,910) (1,521,281)
Proceeds from sales of leased assets........................... 638,002 7,711,456 --
Purchase of additional 17.5 percent of Guaranty Finance........ -- (1,374,922) --
-------------- -------------- --------------
Net cash and cash equivalents used in investing
activities............................................. (3,710,256) (13,697,303) (47,120,090)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt obligations................................. 19,738,066 19,732,057 21,459,227
</TABLE>
12
<PAGE>
HAMBRECHT & QUIST GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Repayments of debt obligations................................. (18,650,861) (25,137,973) (27,124,048)
Proceeds from sales of common stock and partners' capital
contributions................................................ 5,467,763 68,992,106 5,924,858
Repurchases of common stock and partners' capital
withdrawals.................................................. (5,710,336) (4,031,157) --
Partners' capital distributions................................ (4,186,804) (33,836,338) --
Distributions to minority member of Guaranty Finance........... (300,000) (300,000) --
Investment by minority members in Transition Capital........... -- 625,000 --
Purchases of treasury stock.................................... -- -- (428,968)
-------------- -------------- --------------
Net cash and cash equivalents provided by
(used in) financing activities......................... (3,642,172) 26,043,695 (168,931)
-------------- -------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................. 27,972,233 15,276,966 (7,393,802)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................... 6,782,335 34,754,568 50,031,534
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR......................... $ 34,754,568 $ 50,031,534 $ 42,637,732
-------------- -------------- --------------
-------------- -------------- --------------
SCHEDULE OF SUPPLEMENTAL INFORMATION:
Taxes paid to taxing authorities............................... $ 14,841,855 $ 67,051,664 $ 40,009,539
Interest paid.................................................. 4,617,047 4,314,084 4,453,983
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
H&Q California long-term investments, net, were reclassified
from H&Q LLC marketable securities........................... 4,286,573 -- 3,077,375
H&Q California received marketable long-term investments as
repayment for profit participations receivable............... -- -- 2,881,718
H&Q common stock sales and LP partners' capital contributions
were made with stock and capital notes receivable from
employees.................................................... 10,098,021 15,164,756 289,035
H&Q common stock was issued to employees in exchange for
reductions in compensation and benefits and taxes payable.... 3,055,280 7,256,604 22,090,111
H&Q common stock was forfeited by employees resulting in
decreases in compensation and benefits expense............... -- -- 455,760
Reductions to LP's partners' capital were made via accruals of
distributions payable to partners............................ 11,952,253 -- --
Net unrealized gains (losses) on subsidiaries' long-term
investments were recorded as increases (decreases) in equity
and minority interest (included in other payables)........... 2,880,791 (3,641,069) 413,867
</TABLE>
13
<PAGE>
HAMBRECHT & QUIST GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
H&Q California's limited partnership interest in LP was
distributed to certain current and former employees in
exchange for reductions in compensation and benefits
payable...................................................... -- 4,493,971 --
The Restructuring resulted in the following non cash reductions
to long-term investments and stockholders' equity and
partners' capital:
Distribution of securities by LP to the LP Trust............. -- 21,665,639 --
Distribution of securities by Guaranty Finance to minority
member..................................................... -- 2,485,968 --
</TABLE>
The accompanying notes are an integral part of these statements.
14
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. ORGANIZATION, NATURE OF OPERATIONS AND RESTRUCTURING:
ORGANIZATION
The financial statements include the consolidated operations of Hambrecht &
Quist Group, a Delaware corporation (H&Q, Hambrecht & Quist or the Company). H&Q
was formed in fiscal 1996 to be the sole parent of Hambrecht & Quist California,
a California corporation (H&Q California) (formerly known as Hambrecht & Quist
Group) and to succeed to the assets of Hambrecht & Quist, L.P., a California
limited partnership (LP). The historical consolidated financial statements
include the combined operations of H&Q California and LP (see Note 2).
On August 8, 1996, through separate mergers (collectively, the Mergers), a
newly formed subsidiary of H&Q merged with H&Q California, and LP merged with
H&Q. All of the shareholders of H&Q California exchanged each of their common
shares for four shares of H&Q common stock. All of the former partners of LP
exchanged each of their partnership units for 24 shares of H&Q common stock.
Subsequently, the assets and liabilities of LP were contributed by H&Q to H&Q
California. The Mergers were accounted for at the respective stockholders' and
partners' carrying values, which represent the entities' carrying values. The
individuals' carrying values were used because each individual party to the
Mergers was a promoter of H&Q and its initial public offering (under Securities
and Exchange Commission accounting guidelines). No minority interest resulted
from the Mergers. All references to historical number of shares and per-share
amounts have been restated to reflect the effect of the four-for-one exchange of
shares.
Subsequent to the Mergers, on August 9, 1996, H&Q issued 4,025,000 new
shares in an initial public offering (the Offering). The net proceeds of the
Offering were $60,317,000.
NATURE OF OPERATIONS
H&Q consolidates its wholly owned subsidiary, H&Q California and its
subsidiaries. Hambrecht & Quist California owns the following wholly owned
subsidiaries. Hambrecht & Quist L.L.C., a Delaware limited liability company
(H&Q LLC), is an investment banking subsidiary and securities broker-dealer that
primarily services companies and investors involved in the technology,
healthcare, services and branded consumer industries. RvR Securities Corp., a
California corporation (RvR Securities), is a registered broker-dealer serving
companies with smaller capitalizations than H&Q LLC's typical underwriting
clients. Hambrecht & Quist Euromarkets (H&Q EM), formerly Hambrecht & Quist
Saint Dominique, is a broker-dealer registered in France providing investment
banking services to European companies. Hambrecht & Quist Capital Management
Incorporated, a California corporation (Capital Management), is a 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 venture capital fund management partnership.
H&Q California also owns 87.5 percent and is the managing member of
Hambrecht & Quist Guaranty Finance, LLC (Guaranty Finance) and Hambrecht & Quist
Transition Capital, LLC (Transition Capital), both California limited liability
companies. The remaining 12.5 percent minority interests are owned by each
respective entities' employees and are included in accrued expenses and other
payables in the consolidated 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 growth technology, biotechnology and healthcare
companies. Transition
15
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
1. ORGANIZATION, NATURE OF OPERATIONS AND RESTRUCTURING: (CONTINUED)
Capital provides bridge loans and mezzanine financings to emerging growth
companies in the same industries as Guaranty Finance's financings.
Other affiliates of the Company are not consolidated and are accounted for
on an equity basis, which approximates fair value. H&Q owns a 15 percent
interest in Hambrecht & Quist Asia Pacific, Ltd., a British Virgin Islands
company (Asia Pacific) (see Note 4) and has profit participation interests of 25
to 35 percent in investment funds managed by Asia Pacific. Asia Pacific provides
financial advisory and fund management services in the Asia Pacific region. H&Q
LLC owns approximately 20 percent of Lewco Securities Corporation, a Delaware
corporation (Lewco) (see Notes 7 and 12). Lewco is a clearing broker and
depository for H&Q LLC and Schroder & Co., which owns approximately 80 percent,
with two other minority owners. All expenses, net of certain revenues, are
reimbursed by both owners based on the volume of transactions processed on their
behalf. These costs are reported as expenses in the consolidated statements of
operations. Other less significant investment and venture capital partnerships
are recorded in long-term investments at their estimated fair value (see Note
2).
Prior to its merger with H&Q, LP operated primarily as a holding partnership
for certain current and prior operating affiliates of H&Q California. Such
ownership of operating affiliates included a 30 percent ownership of H&Q LLC and
a 70 percent ownership of Guaranty Finance. Such ownership interests were
transferred to H&Q as part of the Mergers. H&Q California owned the remaining 70
percent of H&Q LLC. An entity controlled by the CEO of the Company and a third
party owned the remaining 30 percent of Guaranty Finance. H&Q California was the
one percent general partner of LP, and the same employee shareholders of H&Q
California were the limited partners. As of September 30, 1995, H&Q California
also owned a limited partnership interest in LP.
RESTRUCTURING
Prior to the Mergers, H&Q California and LP significantly restructured their
operations through a series of transactions and distributions (the
Restructuring) designed to simplify the Company's structure. The following
transactions were completed as part of the Restructuring.
H&Q California distributed its limited partnership interest in LP to a
liquidating trust (the Group Trust) benefiting certain current and former
employees. The result of the distribution was a charge to compensation expense
and an addition to stockholders' equity of $4,493,971, which represented the
value of the limited partnership interest. Previously, such limited partnership
value was eliminated in consolidation due to intercompany ownership.
LP distributed cash and securities totaling $31,021,639 to a liquidating
trust (the LP Trust) benefiting the partners of LP. The cash and securities
distributed totaled $9,356,000 and $21,665,639, respectively. The securities
distributed included securities held by LP and securities distributed to LP by
H&Q LLC and Guaranty Finance. H&Q LLC's securities distribution included its
remaining holdings of The BISYS Group, Inc. (BISYS) (see Note 7). Guaranty
Finance also distributed $2,485,968 of securities to its minority member. All
securities were distributed at their estimated fair value.
H&Q California purchased an additional 17.5 percent interest in Guaranty
Finance for $1,374,922 from the minority member. Such purchase resulted in no
remaining ownership of Guaranty Finance by the Company's CEO. The purchase was
accounted for as a purchase of minority interest and resulted in the recording
of an immaterial amount of goodwill.
16
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION AND COMBINATION
All significant intercompany accounts and transactions have been eliminated
in consolidation and combination. The 1995 and 1996 historical financial
statements and footnote disclosures represent the combined financial position
and results of operations and changes in shareholders' equity and partners'
capital and cash flows for H&Q California and LP.
USE OF ESTIMATES
The preparation of these financial statements requires 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 the valuation of long-term investments, as discussed below.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, demand deposits with banks,
money market accounts and U.S. Treasury bills. Included in cash and cash
equivalents are U.S. Treasury bills and other U.S. government securities
totaling $36,306,195 and $29,949,090 at September 30, 1996 and 1997,
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 marketable trading securities and securities sold, not yet purchased are
included in principal transactions revenue.
LONG-TERM INVESTMENTS
Long-term investments include marketable equity securities and nonmarketable
securities (which include restricted securities of publicly traded companies,
securities of private companies and investment partnership and other venture
capital interests).
H&Q 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 which are restricted in their
disposition because they are in excess of average weekly 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
17
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
financial position and operating results of the investee entities. Warrants and
other rights to purchase 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 as net investment
gains.
Also included in long-term investments are investments owned by Guaranty
Finance and Transition Capital. Guaranty Finance and Transition Capital
primarily own marketable equity securities. Under Statement of Financial
Accounting Standards No. 115 (SFAS 115), Accounting for Certain Investments in
Debt and Equity Securities, entities such as Guaranty Finance and Transition
Capital must carry their available-for-sale securities at fair value and report
unrealized gains and losses in stockholders' equity. At September 30, 1996 and
1997, the combined unrealized loss for Guaranty Finance and Transition Capital
was $760,279 and $346,419, respectively and H&Q's recorded portion was $665,224
and $303,117, respectively.
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 expense as incurred.
LEASE RECEIVABLES AND LEASED ASSETS
Guaranty Finance leases 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 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 AND PRO FORMA INCOME TAX ADJUSTMENT
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes.
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 income 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. As part of the Mergers (see Note 1), LP merged into the
Company and ceased existence. For financial reporting purposes, the 1996
consolidated statement of operations includes a pro forma income tax adjustment
of $17,443,418 representing taxes on LP's income as if LP's earnings were
subject to income taxes at an effective tax rate of 44 percent.
18
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
COMMON STOCK AND PARTNERS' CAPITAL TRANSACTIONS
Since the Offering in 1996, common stock issuances have been to employees,
directors and the Savings and Employee Stock Ownership Trust (SESOT)(see Note
13). The issuances to the SESOT are more fully described in Note 13. Issuances
to employees and directors include awards to new employees, awards to employees
under the 1996 Bonus and Deferred Compensation Plan (Compensation Plan)(see Note
13) and exercises by employees or directors of stock options. Awards to new
employees and awards under the Compensation Plan are recorded as compensation
and benefits expense.
Prior to the Offering, all of H&Q's common stock transactions were recorded
pursuant to the terms of the Hambrecht & Quist Shareholders' Agreement (the
Agreement) which required all stock issuances and repurchases and all stock
option grants to be recorded using fair market value, as determined by the
Company's Board of Directors (the Board). The Board approved a formula value
approximating fair market value, which resulted in transactions being recorded
at premiums over the Company's net book value, as determined under generally
accepted accounting principles. Under the Agreement, all selling shareholders
were required to first offer their shares to the Company before seeking an
independent buyer. The Company repurchased all selling shareholders' shares
subject to the terms of the Agreement, which was terminated in connection with
the Offering.
All LP partnership unit sales and repurchases were recorded at the
partnership's fair market value, as defined in the Hambrecht & Quist Limited
Partnership Agreement, using a formula value similar to H&Q's.
TREASURY STOCK TRANSACTIONS
The Company's treasury stock is comprised of common stock purchased on the
open market and common stock repurchased in connection with unpaid employee
stock notes receivable (see Note 12). Open market purchases of common stock are
recorded at the Company's cost. Stock note repurchases of common stock are
recorded at the carrying value of the unpaid employee stock note.
During 1997, the Company's treasury stock transactions were as follows:
<TABLE>
<CAPTION>
SHARES COST
--------- ----------
<S> <C> <C>
Open market purchases................................................... 20,000 $ 428,968
Employee stock notes receivable repurchases............................. 1,615 9,908
--------- ----------
21,615 $ 438,876
--------- ----------
--------- ----------
</TABLE>
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 instruments.
19
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
EARNINGS PER SHARE
Earnings per share for 1997 is determined by dividing net income by the
weighted-average number of common shares, including common share equivalents,
outstanding during the year. Common share equivalents consist of stock options
outstanding (see Note 13). 1996 pro forma earnings per share is determined using
pro forma net income (see above). 1995 pro forma earnings per share are not
presented as they would not be meaningful.
In March 1997, Statement of Financial Accounting Standards No. 128, Earnings
per Share (SFAS 128) was issued. The Company will be required to adopt SFAS 128
in its 1998 fiscal year. SFAS 128 replaces primary and fully diluted earnings
per share with basic and diluted earnings per share calculations. Basic earnings
per share is computed by dividing net income by weighted average shares
outstanding. Diluted earnings per share is computed by dividing net income by
weighted average shares outstanding including the dilutive effects of stock
options. Diluted earnings per share calculations result in the same earnings per
share as currently reported by the Company. The Company's pro forma basic and
diluted earnings per share are as follows (the 1996 amounts are calculated using
pro forma net income as discussed above):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Basic Earnings per Share..................................................... $ 3.60 $ 1.83
Diluted Earnings per Share................................................... $ 3.27 $ 1.68
</TABLE>
STOCK OPTION PLANS
The Company uses the intrinsic value method to account for its stock option
plans (in accordance with the provisions of Accounting Principles Board Opinion
No. 25). Under this method, compensation expense is recognized for awards of
options to purchase shares of common stock to employees under compensatory plans
only if the fair market value of the stock at the option grant date (or other
measurement date, if later) is greater than the amount the employee must pay to
acquire the stock. Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123) permits companies to continue
using the intrinsic value method or to adopt a fair value based method to
account for stock option plans. The fair value based method results in
recognizing as expense over the vesting period the fair value of all stock-based
awards on the date of grant. The Company has elected to continue to use the
intrinsic value method and the pro forma disclosures required by SFAS 123 are
included in Note 13.
RECLASSIFICATIONS
Certain amounts in the 1995 and 1996 financial statements have been
reclassified to conform to the 1997 presentation.
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 consolidated financial statements.
20
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
4. RECEIVABLES FROM RELATED PARTIES:
At September 30, 1996 and 1997 receivables from related parties consisted of
the following:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Notes receivable from affiliates and employees................. $ 3,001,858 $ 2,696,455
Asset management fees and profit participations................ 10,349,674 5,989,569
Affiliate and other advances................................... 4,578,125 8,711,140
------------- -------------
$ 17,929,657 $ 17,397,164
------------- -------------
------------- -------------
</TABLE>
Notes receivable from related parties as of September 30, 1996 and 1997
include notes receivable from Asia Pacific of $1,792,740 and $1,757,670,
respectively. Interest income recorded in 1995, 1996 and 1997 on all notes
receivable from affiliates and employees was $736,194, $835,261 and $1,034,896,
respectively.
Asset management fees and profit participations receivable of $10,349,674
and $5,989,569 at September 30, 1996 and 1997, respectively, include profit
participations receivable of $9,831,883 and $5,527,057, respectively from
venture and investment partnerships managed by Venture Partners (see Notes 1 and
12). Included in other revenues are management fees and profit participation
distributions from venture capital funds of $7,653,320, $13,685,248 and
$8,735,436 for 1995, 1996 and 1997, respectively. Also included in other
revenues are management fees earned by Capital Management of $2,397,204,
$3,669,463, and $3,617,583 for 1995, 1996 and 1997, respectively.
Affiliate and other advances include temporary advances made to affiliates
for operating expenses and to affiliates, directors and employees for purchases
of investments. Of the amount outstanding at September 30, 1997, $6,098,945
relates to advances to affiliates, directors and employees for purchases of
investments made on their behalf.
5. NOTES RECEIVABLE:
Notes receivable include advances made by Guaranty Finance and Transition
Capital in exchange for notes receivable. The notes bear interest at rates
between 5 to 12 percent and are secured by certain of the borrowers' tangible
and intangible assets. Principal payments are due on the notes receivable as
follows:
<TABLE>
<S> <C>
1998........................................................... $9,084,559
1999........................................................... 7,114,392
2000........................................................... 2,290,349
----------
$18,489,300
----------
----------
</TABLE>
21
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
6. MARKETABLE TRADING SECURITIES AND SECURITIES SOLD, NOT YET PURCHASED:
At September 30, 1996 and 1997, marketable trading securities and securities
sold, not yet purchased, consisted of the following:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Marketable trading securities--
Equity securities............................................ $ 20,510,871 $ 25,454,997
Convertible bonds............................................ 6,537,960 2,086,750
Options...................................................... 119,042 26,840
U.S. government securities................................... 39,571,126 20,136,770
------------- -------------
$ 66,738,999 $ 47,705,357
------------- -------------
------------- -------------
Securities sold, not yet purchased--
Equity securities............................................ $ 14,313,068 $ 11,359,430
Convertible bonds............................................ 1,403,500 --
Options...................................................... 339,385 410,697
------------- -------------
$ 16,055,953 $ 11,770,127
------------- -------------
------------- -------------
</TABLE>
7. LONG-TERM INVESTMENTS:
At September 30, 1996 and 1997, the Company's long-term investments, at
estimated fair value, consisted of the following:
<TABLE>
<CAPTION>
1996 1997
------------- --------------
<S> <C> <C>
Marketable equity securities available for sale by Guaranty
Finance and Transition Capital.............................. $ 9,078,811 $ 14,023,208
Marketable equity securities--other........................... 15,266,887 21,194,925
The BISYS Group, Inc. common stock--unrestricted.............. 7,650,518 1,378,922
------------- --------------
Total marketable investments................................ 31,996,216 36,597,055
------------- --------------
Nonmarketable securities and investment partnership
interests................................................... 24,383,763 39,568,602
Venture Partners and affiliated venture capital funds......... 9,527,910 15,756,670
Venture capital funds managed by others....................... 1,913,042 8,079,332
Lewco Securities.............................................. 2,110,279 2,110,279
------------- --------------
Total nonmarketable investments............................. 37,934,994 65,514,883
------------- --------------
Total long-term investments................................. $ 69,931,210 $ 102,111,938
------------- --------------
------------- --------------
</TABLE>
The cost of the Company's long-term investments at September 30, 1996 and
1997, was $52,489,136 and $104,324,593, respectively.
22
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
7. LONG-TERM INVESTMENTS: (CONTINUED)
Following is an analysis of the net investment gains for the years ended
September 30, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- --------------
<S> <C> <C> <C>
Realized gains................................. $ 3,346,270 $ 24,045,279 $ 20,527,924
Change in unrealized gains and losses, net..... 30,505,803 389,122 (20,298,945)
------------- ------------- --------------
Net investment gains from long-term
investments................................ $ 33,852,073 $ 24,434,401 $ 228,979
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
Included in net investment gains are realized and unrealized gains on the
Company's investment in BISYS of $19,948,390, $15,093,727 and $1,465,206 for
1995, 1996 and 1997, respectively. As part of the Restructuring in 1996 (see
Note 1), H&Q LLC distributed shares of BISYS valued at $14,267,556 to LP and
recorded realized gains of $6,589,963 on the distribution.
Included in net investment gains in 1997 are net investment losses of
$18,126,682 related to two investee companies in the airline industry. In 1997,
the Company recorded a realized loss of $9,878,854 on its investment in Air
South Airlines, Inc. (Air South) and an unrealized loss of $8,247,828 on its
investment in another regional airline. Air South filed for bankruptcy in August
1997. The Company also recorded a loss, included in other expense, of $1,802,176
related to letters of credit issued to two of Air South's creditors.
The cost and estimated fair values of investments in marketable equity
securities available for sale by Guaranty Finance and Transition Capital at
September 30, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Cost............................................................ $ 9,839,090 $ 14,369,649
Gross unrealized gains.......................................... 500,588 1,975,968
Gross unrealized losses......................................... (1,260,867) (2,322,409)
------------- -------------
Estimated fair value.......................................... $ 9,078,811 $ 14,023,208
------------- -------------
------------- -------------
</TABLE>
Gross proceeds, gross realized gains and gross realized losses from sales of
investments in marketable equity securities available for sale by Guaranty
Finance and Transition Capital for the years ended September 30, 1995, 1996 and
1997 are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Gross proceeds...................................... $ 2,926,358 $ 4,531,113 $ 2,882,175
Gross realized gains................................ 1,943,374 2,587,095 446,302
Gross realized losses............................... (73,373) (301,244) --
</TABLE>
23
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
8. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
The following summarizes the Company's furniture, equipment and leasehold
improvements as of September 30, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
Furniture and equipment....................................... $ 22,840,641 $ 31,672,647
Leasehold improvements........................................ 8,479,586 12,489,222
Less--Accumulated depreciation and amortization............... (18,153,075) (25,379,023)
-------------- --------------
$ 13,167,152 $ 18,782,846
-------------- --------------
-------------- --------------
</TABLE>
For the years ended September 30, 1995, 1996 and 1997, occupancy and
equipment expense included depreciation and amortization expense on furniture,
equipment and leasehold improvements of $2,358,337, $3,873,463 and $7,342,719,
respectively.
9. LEASING ACTIVITIES:
At September 30, 1996 and 1997, lease receivables consist of direct
financing capital leases with remaining terms ranging from 1 to 5 years of
$4,335,668 and $3,467,628, respectively. At September 30, 1996 and 1997, 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, 1997,
are as follows:
<TABLE>
<CAPTION>
DIRECT
FINANCING NONCANCELABLE
LEASE OPERATING
RECEIVABLES LEASES
------------ -------------
<S> <C> <C>
1998............................................................. $ 2,282,714 $ 1,827,404
1999............................................................. 982,652 963,226
2000 and thereafter.............................................. 675,635 301,951
------------ -------------
Total minimum lease payments................................... 3,941,001 $ 3,092,581
-------------
-------------
Less--Unearned income.......................................... (473,373)
------------
$ 3,467,628
------------
------------
</TABLE>
At September 30, 1996 and 1997, leased assets subject to noncancelable
operating leases consist of equipment of $9,477,525 and $10,997,813,
respectively, less accumulated depreciation of $6,428,474 and $8,725,641,
respectively.
The Company's depreciation expense on leased assets was $3,305,733,
$2,851,223 and $2,298,160 for the years ended September 30, 1995, 1996 and 1997,
respectively.
24
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
10. DEBT OBLIGATIONS:
Debt obligations consist of the following:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Lines of credit--
$15,000,000 bank line of credit (H&Q California); interest on individual advances at
prime plus 0.75 percent (9.25 percent at September 30, 1997) or at LIBOR plus 2.5
percent (8.25 percent at September 30, 1997) fixed for the term of the advance;
collateralized in full by marketable securities and certain customer receivables;
average balance outstanding in 1996 and 1997 was $6,363,493 and $5,115,091,
respectively; expires March 30, 1998.............................................. $ 8,364,822 $ 1,100,000
$20,000,000 bank line of credit (H&Q California); interest on overnight advances at
prime (8.5 percent at September 30, 1997); unsecured; no amounts drawn in 1996 and
$10,000,000 drawn for four days in 1997; expires April 30, 1998..................... -- --
$11,000,000 bank line of credit (Guaranty Finance); interest at prime plus 1.25
percent (9.75 percent at September 30, 1997); collateralized in full by Guaranty
Finance's assets, except for cash and marketable securities; average balance
outstanding in 1996 and 1997 was $1,332,711 and $785,833, respectively; expires
January 29, 1998.................................................................... -- 700,000
$10,000,000 bank line of credit (Transition Capital); interest at prime plus 1.75
percent (10.25 percent at September 30, 1997); collateralized in full by Transition
Capital's assets, except for cash and marketable securities; average balance
outstanding in 1997 was $283,333; expires February 10, 1998......................... -- 900,000
------------ ------------
$ 8,364,822 $ 2,700,000
------------ ------------
------------ ------------
</TABLE>
The average prime rate for 1996 and 1997 was 8.39 percent.
Interest expense on debt obligations was $960,353, $1,135,501 and $617,563
during fiscal 1995, 1996 and 1997, respectively.
25
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
11. INCOME TAXES:
The income tax provision consisted of the following components for the years
ended September 30, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
STATE AND
FEDERAL CITY TOTAL
-------------- ------------- --------------
<S> <C> <C> <C>
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
-------------- ------------- --------------
-------------- ------------- --------------
1996--
Current..................................... $ 44,972,093 $20,461,786 $ 65,433,879
Deferred.................................... (23,048,950) (3,918,683) (26,967,633)
-------------- ------------- --------------
Total..................................... $ 21,923,143 $16,543,103 $ 38,466,246
-------------- ------------- --------------
-------------- ------------- --------------
1997--
Current..................................... $ 36,907,127 $16,154,623 $ 53,061,750
Deferred.................................... (12,885,782) (6,253,383) (19,139,165)
-------------- ------------- --------------
Total..................................... $ 24,021,345 $ 9,901,240 $ 33,922,585
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
The net deferred income tax asset as of September 30, 1996 and 1997, is
composed of the following:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Deferred income tax assets--
Compensation and benefits accruals........................... $ 32,950,925 $ 36,440,726
Net unrealized losses on long-term investments............... -- 4,237,582
Contingent liability accruals................................ 3,342,271 6,288,318
Depreciation and amortization................................ 3,627,304 3,255,848
Other........................................................ 2,493,477 6,512,180
------------- -------------
42,413,977 56,734,654
Deferred income tax liabilities--
Net unrealized gains on long-term investments................ (4,818,488) --
------------- -------------
Net deferred income tax asset.............................. $ 37,595,489 $ 56,734,654
------------- -------------
------------- -------------
</TABLE>
There was no valuation allowance against deferred tax assets at September
30, 1996 and 1997.
26
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
11. 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>
1995 1996 1997
------------------------ ------------------------- ------------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------------- --------- -------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Tax expense computed at statutory rate... $ 25,164,789 35.0% $ 44,473,597 35.0% $ 26,983,873 35.0%
State and local tax provision, net of
federal income tax benefit............. 5,244,299 7.3 10,753,017 8.5 6,202,866 8.0
Nondeductible expenses................... 155,164 0.2 765,470 0.6 677,372 0.9
LP income not subject to tax (Note 2).... (8,103,105) (11.3) (17,443,418) (13.7) -- --
Other, net............................... -- -- (82,420) (0.1) 58,474 0.1
------------- --------- -------------- --------- ------------- ---------
$ 22,461,147 31.2% $ 38,466,246 30.3% $ 33,922,585 44.0%
------------- --------- -------------- --------- ------------- ---------
------------- --------- -------------- --------- ------------- ---------
</TABLE>
12. RELATED-PARTY TRANSACTIONS:
INVESTMENT TRANSACTIONS
The Company makes investments in private companies directly, through
investment partnerships 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
(see Note 4).
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
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).
STOCK NOTES RECEIVABLE
In connection with sales of the Company's common stock, the Company received
stock notes receivable from employees, which, at September 30, 1996 and 1997,
had principal balances of $13,550,503 and $5,620,260, respectively, and are
treated as a reduction of stockholders' equity. These notes bear interest at
rates ranging from 6.0 percent to 7.5 percent and have maturity dates ranging
from 1997 through 2000.
27
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
12. RELATED-PARTY TRANSACTIONS: (CONTINUED)
During the fiscal year ended September 30, 1997, the Company repurchased
1,615 shares of stock from departed employees. Under the terms of the stock note
agreements, such repurchases of shares are done in exchange for the respective
departing employee's outstanding stock notes receivable balance. The repurchased
shares are held as treasury stock for later reissuance by the Company (see Note
1). Such transactions totaling $9,908 were recorded as reductions to stock notes
receivable and increases to treasury stock.
Capital notes receivable 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. In 1996, capital notes receivables
from LP partners of $8,227,753 were transferred to H&Q California and are
reflected in the stock notes receivable amounts described above.
LEWCO SECURITIES CORP.
H&Q LLC is a co-owner of Lewco (see Note 1), a securities clearing firm that
is a registered broker-dealer and member of each major stock exchange. H&Q LLC
holds a subordinated note for $300,000 issued by Lewco. The interest on this
note is paid quarterly at the prime rate, with the principal balance due
December 31, 1999. The subordinated note receivable and H&Q LLC's investment in
Lewco are carried in long-term investments (see Note 7). 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 the interest-bearing amounts receivable from Lewco is
earned at a fluctuating rate (5.38 percent and 4.80 percent at September 30,
1996 and 1997, respectively).
13. EMPLOYEE BENEFIT PLANS:
SAVINGS AND EMPLOYEE STOCK OWNERSHIP TRUST
Under the SESOT (see Note 2), 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 may match employees' 401(k) contributions to the
PSP 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 1995, 1996 and 1997, the Company recorded
compensation expense of $1,246,645, $1,590,000 and $1,943,760, respectively, to
the ESOP under the matching provision. Subsequent to September 30, 1997, the
Company issued 58,498 shares of common stock to the ESOP in satisfaction of its
compensation and benefits payable. No discretionary contributions were made to
the PSP in 1995, 1996 or 1997.
As of September 30, 1997, the ESOP owned approximately 7.63 percent of the
H&Q common stock outstanding.
28
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
13. EMPLOYEE BENEFIT PLANS: (CONTINUED)
BONUS AND DEFERRED SALES COMPENSATION PLAN
The Company may pay semiannual bonuses to its executives and other
professional employees under the Compensation Plan (see Note 2). The
Compensation Committee of the Board (the Committee), in its sole discretion, may
offer such employees the ability to elect to receive a percentage (the
Percentage) of such bonus or commission in H&Q common stock, valued at not less
than 90 percent of the fair market value on the date of grant. Unless otherwise
determined by the Committee, the stock vests ratably over three years following
the date of grant. Determinations with respect to executive officers are made by
the Board instead of the Committee. At the date of the bonus payment, the
employee may choose to decline any offered common stock, and instead receive
cash payments equal to the Percentage over three years following the date of
grant. If their employment terminates within the three year vesting period, the
employee forfeits their unvested common stock or future cash payments. The 1996
Equity Plan (1996 Plan) allows for up to 2,000,000 shares of the Company's
common stock to be issued in connection with the Compensation Plan.
The Company paid semiannual bonuses in October 1997. Under the Compensation
Plan, 184,297 shares valued at $6,703,803 were issued to executives and
professionals effective October 15, 1997. All such amounts were included in
compensation and benefits payable as of September 30, 1997.
STOCK OPTION PLANS
The Company has three stock option plans, the 1985 Option Plan (1985 Plan),
1995 Option Plan (1995 Plan) and the 1996 Plan. Additionally, the Company has
granted stock options outside the 1985, 1995 and 1996 plans.
The Company's 1985 Plan, which provided for the granting of options to
purchase 4,000,000 shares of the Company's common stock, expired September 30,
1994, except as to the options then outstanding. As of September 30, 1997,
306,000 options remain outstanding under the 1985 Plan. The Company's 1995 Plan
provided for the granting of incentive options and nonqualified options to
purchase 4,972,000 shares of the Company's common stock to officers, employees
and directors at a price not less than 85 percent of fair market value at the
date the option was granted, subject to certain limitations regarding incentive
stock options. Due to the creation of the 1996 Plan, no further options will be
granted under the 1995 Plan. As of September 30, 1997, 3,877,676 options
remained outstanding under the 1995 Plan. The 1996 Plan provides for the
granting of incentive and nonqualified options to purchase up to 1,000,000
shares of the Company's common stock to Company employees, directors and
consultants. As of September 30, 1997, 291,600 options have been granted under
the 1996 Plan. Outside the 1985, 1995 and 1996 plans, 1,091,880 options have
been granted to certain officers and directors. Such options were granted with
an exercise price equal to fair market value (see Note 2) at the date of grant.
Options become exercisable as determined at the date of grant by the
Committee or the Board, in the case of executive officers. Generally, options
become exercisable over a five year period from the date of grant and expire
seven years after the date of grant.
29
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
13. 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 September 30, 1996............................ 5,697,520 $ 2.04 - $13.75
Granted.................................................... 301,600 $16.13 - $31.06
Exercised.................................................. (205,038) $ 2.04 - $11.25
Canceled................................................... (226,926) $ 5.54 - $19.88
-----------
Outstanding at September 30, 1997............................ 5,567,156 $ 2.10 - $31.06
-----------
-----------
</TABLE>
Of the outstanding options at September 30, 1997, 1,412,481 had vested.
Subsequent to September 30, 1997, the Company issued 629,500 stock options at a
weighted average exercise price of $32.75 which was equal to fair market value
at the respective dates of grant.
The Company applies the intrinsic value method in accounting for its stock
options plans. In 1996, 625,988 options were granted at an exercise price below
fair market value on the date of grant, and resulted in a $1,165,903 charge to
compensation expense. Other grants of options did not result in compensation
expense in 1996 or 1997. Had the Company used the fair value based method
proscribed by SFAS 123 (see Note 2), the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Net income
As reported.................................................. $ 71,157,755 $ 43,174,198
Pro forma.................................................... 66,070,945 41,354,111
Earnings per share
As reported.................................................. $3.27 $1.68
Pro forma.................................................... $3.04 $1.61
</TABLE>
The fair value of each option grant in 1997 is estimated on the date of
grant using the Black-Scholes option-pricing model. The fair value of each
option grant in 1996 is estimated using the minimum value method. The weighted
average assumptions used for options, respectively are as follows: expected
volatility of 58.0 percent in 1997 (not applicable in 1996); risk-free interest
rates of 6.17 and 5.86 percent in 1996 and 1997, respectively; and the expected
life of 5.95 years for all seven year grants and 2.80 years for all three year
grants.
30
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
13. EMPLOYEE BENEFIT PLANS: (CONTINUED)
STOCK APPRECIATION RIGHTS
In fiscal 1995 and 1996 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 book value 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 $4,210,216 and $9,461,954
for 1995 and 1996, respectively.
The following summarizes SARs outstanding as of September 30, 1997:
<TABLE>
<CAPTION>
SARS AWARDS
----------------------
1995 1996
---------- ----------
<S> <C> <C>
Initial grant....................................................... 1,794,000 2,959,520
Canceled............................................................ (417,960) (469,959)
---------- ----------
SARs remaining.................................................... 1,376,040 2,489,561
---------- ----------
---------- ----------
SARs issuance price................................................. $4.98 $7.49
</TABLE>
The total SARs liability at September 30, 1997, included in compensation and
benefits payable, will be paid out as follows:
<TABLE>
<S> <C>
1998.................................... $ 3,373,241
1999.................................... 2,219,694
------------
$ 5,592,935
------------
------------
</TABLE>
14. 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
two 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, 1996 and 1997, H&Q LLC's regulatory net
capital of $49,975,660 and $67,030,028, respectively, was 22 percent and 27
percent, respectively, of aggregate debit items and its net capital in excess of
the minimum required was $45,489,559 and $62,087,429, respectively.
RvR Securities and H&Q EM are subject to net capital requirements of their
respective regulatory agencies. At September 30, 1996 and 1997 the Company and
its subsidiaries were in compliance with all applicable regulatory capital
adequacy requirements.
31
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
15. COMMITMENTS AND CONTINGENCIES:
Aggregate annual rentals for office space under noncancelable operating
leases are as follows:
<TABLE>
<S> <C>
1998.................................... $ 6,597,097
1999.................................... 3,636,713
2000.................................... 2,091,071
2001.................................... 2,128,775
2002.................................... 2,132,774
Thereafter.............................. 7,749,445
-------------
$ 24,335,875
-------------
-------------
</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, 1995, 1996 and 1997, was $4,297,622, $4,716,591 and $6,427,289,
respectively.
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 $5,184,326 and
$7,375,203 at September 30, 1996 and 1997, respectively. Also, in connection
with H&Q LLC's option trading activities, the Company has issued a letter of
credit totaling $5,500,000 at September 30, 1997 benefiting the Options Clearing
Corporation.
The Company has other contingent liabilities, including contractual
commitments arising in the normal course of business, the resolution of which,
in management's opinion, will not have an adverse effect on the Company's
financial position.
As is the case with many firms in the securities industry, the Company is a
defendant or co-defendant in a number of actions. These civil actions and
arbitrations have arisen in the normal course of the Company's business and are
incidental to its activities as a broker-dealer in securities, as an
underwriter, as a corporate financial advisor and as an employer. The Company is
also involved, from time to time, in proceedings with, and investigations by,
governmental agencies and self regulatory organizations. Some of the actions
have been brought on behalf of various classes of claimants and seek damages of
material or indeterminate amounts. Most of the Company's current 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 the Company's 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 applicable state 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
32
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
15. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
defendants in litigation that may result in the normal course of business.
Although the ultimate outcome of indemnification assertions outstanding as of
September 30, 1997, 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.
16. 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 market 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.
In the normal course of business, H&Q LLC's customer and correspondent
clearance activities involve the execution, settlement and financing of various
customer securities transactions. These activities may expose H&Q LLC to
off-balance-sheet credit risk in the event that the customer is unable to
fulfill its contracted obligations. H&Q LLC's customer securities activities are
transacted on either a cash or margin basis. In margin transactions, H&Q LLC
extends credit to the customer, subject to various regulatory and internal
margin requirements, collateralized by cash and securities in the customer's
account. H&Q LLC monitors collateral and required margin levels daily and,
pursuant to such guidelines, requests customers to deposit additional collateral
or reduce securities positions when necessary. H&Q LLC is also exposed to credit
risk when its margin accounts or a margin account is collateralized by a
concentration of a particular security and when that security decreases in
value.
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
33
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
16. FINANCIAL INSTRUMENTS WITH MARKET RISK AND CONCENTRATIONS OF CREDIT RISK:
(CONTINUED)
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, 1997, the Company did not have significant
concentrations of credit risk with any single counterparty or with any single
security.
17. 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.
18. QUARTERLY DATA (UNAUDITED):
The following table sets forth selected highlights for each of the fiscal
quarters during the years ended September 30, 1996 and 1997 (dollars in
thousands, except per share data):
<TABLE>
<CAPTION>
INCOME EARNINGS PRO FORMA PRO FORMA
BEFORE PER NET EARNINGS
TOTAL INCOME NET SHARE INCOME PER SHARE
REVENUES TAXES INCOME (1) (2) (1)(2)
-------- -------- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
1996:
First quarter......................... $108,414 $ 40,302 $26,622 $22,569 $1.11
Second quarter........................ 97,528 31,631 20,960 17,713 $0.86
Third quarter......................... 108,654 34,585 22,444 19,368 $0.94
Fourth quarter........................ 78,106 20,549 18,575 11,508 $0.47
-------- -------- ------- ---------
Total year.......................... $392,702 $127,067 $88,601 $71,158 $3.27
-------- -------- ------- ---------
-------- -------- ------- ---------
1997:
First quarter......................... $ 94,900 $ 28,145 $15,761 $0.62
Second quarter........................ 74,653 13,373 7,489 $0.29
Third quarter......................... 82,299 18,239 10,214 $0.40
Fourth quarter........................ 94,380 17,340 9,710 $0.37
-------- -------- -------
Total year.......................... $346,232 $ 77,097 $43,174 $1.68
-------- -------- -------
-------- -------- -------
</TABLE>
- ------------------------
(1) The sum of the quarters' pro forma earnings per share and earnings per share
do not always equal the total year amounts due to the effect of averaging
the number of shares of common stock and common stock equivalents throughout
the year.
(2) Pro forma net income and pro forma earnings per share include taxes on LP
earnings as if LP's earnings were subject to taxes at an effective tax rate
of 44 percent (see Note 2).
34
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated November 12, 1997 included in this Form 10-K, into the
Company's previously filed Form S-8 Registration Statement No. 333-13799.
ARTHUR ANDERSEN LLP
San Francisco, California
December 19, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S ANNUAL
REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 42,638
<RECEIVABLES> 408,036
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 47,705
<PP&E> 18,783
<TOTAL-ASSETS> 678,937
<SHORT-TERM> 2,700
<PAYABLES> 367,089
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 11,770
<LONG-TERM> 0
0
0
<COMMON> 130,889
<OTHER-SE> 166,489
<TOTAL-LIABILITY-AND-EQUITY> 678,937
<TRADING-REVENUE> 117,808
<INTEREST-DIVIDENDS> 22,629
<COMMISSIONS> 43,716
<INVESTMENT-BANKING-REVENUES> 90,471
<FEE-REVENUE> 67,319
<INTEREST-EXPENSE> 4,454
<COMPENSATION> 178,873
<INCOME-PRETAX> 77,097
<INCOME-PRE-EXTRAORDINARY> 77,097
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,174
<EPS-PRIMARY> 1.68
<EPS-DILUTED> 1.66
</TABLE>
