<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM 10-Q
---------------
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-11855
------------------------
HAMBRECHT & QUIST GROUP
(Exact name of Registrant as specified in its charter)
------------------------
<TABLE>
<S> <C>
Delaware 94-3246636
(I.R.S. Employer Identification
(State or other jurisdiction No.)
of incorporation or organization)
</TABLE>
ONE BUSH STREET
SAN FRANCISCO, CALIFORNIA 94104
(Address of principal executive offices, including zip code)
(415) 439-3000
(Registrant's telephone number, including area code)
------------------------
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 ____
23,756,792 shares of Common Stock were issued and outstanding as of July 25,
1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
HAMBRECHT & QUIST GROUP
INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements............................................................................ 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results 13
of Operations.................................................................................
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................................................... 19
Item 6. Exhibits and Reports on Form 8-K................................................................ 19
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HAMBRECHT & QUIST GROUP
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1996 AND JUNE 30, 1997
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 50,031,534 $ 32,333,538
Receivables:
Customers (net of allowance of $900,000 and $1,200,000,
respectively)........................................... 168,416,287 208,225,782
Lewco Securities Corp..................................... 80,532,188 26,164,921
Syndicate managers........................................ 12,742,898 7,060,676
Related parties........................................... 17,929,657 14,097,028
Notes..................................................... 10,500,000 17,504,955
Lease..................................................... 4,335,668 4,277,875
Income taxes.............................................. 806,062 5,601,634
Other..................................................... 1,484,820 5,433,318
Marketable trading securities, at market value.............. 66,738,999 37,350,400
Long-term investments, at estimated fair value.............. 69,931,210 114,710,553
Deferred income taxes....................................... 37,595,489 49,770,955
Furniture, equipment and leasehold improvements, net of
accumulated depreciation and amortization................. 13,167,152 17,634,698
Leased assets, net of accumulated depreciation.............. 3,049,051 2,757,433
Exchange memberships, at cost (market value--$1,325,000 and
$1,690,000, respectively)................................. 656,000 656,000
------------- ------------
Total assets............................................ $ 537,917,015 $543,579,766
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Payables:
Customers................................................. $ 142,489,752 $107,578,182
Compensation and benefits................................. 100,351,165 89,625,336
Syndicate settlements..................................... 18,530,743 8,438,091
Trade accounts payable.................................... 2,483,361 3,306,537
Accrued expenses and other................................ 22,929,770 30,054,512
Securities sold, not yet purchased, at market value......... 16,055,953 12,733,177
Debt obligations............................................ 8,364,822 4,741,000
------------- ------------
Total liabilities....................................... 311,205,566 256,476,835
------------- ------------
Commitments and contingencies
Stockholders' equity:
Common stock (par value $0.01 and 100,000,000 shares
authorized as of September 30, 1996 and June 30, 1997;
22,693,930 and 23,758,244 issued and outstanding as of
September 30, 1996 and June 30, 1997, respectively)..... 226,939 237,581
Additional paid-in capital................................ 116,643,623 135,247,640
Notes receivable from employees for purchases of common
stock................................................... (13,550,503) (5,590,683)
Retained earnings......................................... 124,056,614 157,520,755
Net unrealized gains (losses) on Guaranty Finance's
long-term investments................................... (665,224) 116,606
Treasury stock, at cost, 20,000 shares.................... -- (428,968)
------------- ------------
Total stockholders' equity.............................. 226,711,449 287,102,931
------------- ------------
Total liabilities and stockholders' equity.............. $ 537,917,015 $543,579,766
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
HAMBRECHT & QUIST GROUP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ------------------------------
1996 1997 1996 1997
-------------- ------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Principal transactions......................... $ 31,356,849 $ 31,085,021 $ 75,354,041 $ 86,651,696
Agency commissions............................. 11,729,302 10,293,050 29,094,102 31,822,281
Investment banking............................. 46,468,148 12,074,122 130,521,396 60,132,870
Corporate finance fees......................... 5,690,904 9,572,275 31,946,871 34,849,234
Interest and dividends......................... 4,048,965 5,964,199 10,711,212 15,774,646
Net investment gains........................... 3,778,782 9,705,104 19,087,264 10,063,905
Other.......................................... 5,581,507 3,605,783 17,881,342 12,557,064
-------------- ------------- -------------- --------------
Total revenues............................... 108,654,457 82,299,554 314,596,228 251,851,696
-------------- ------------- -------------- --------------
EXPENSES:
Compensation and benefits...................... 55,859,162 42,461,762 159,738,075 129,048,309
Brokerage and clearance........................ 3,898,996 5,154,672 10,017,157 12,476,832
Occupancy and equipment........................ 2,552,676 4,678,536 7,145,896 12,074,299
Communications................................. 2,782,047 3,802,359 7,309,838 10,863,054
Interest....................................... 1,072,359 447,105 3,275,579 3,182,382
Other.......................................... 7,903,165 7,515,077 20,590,556 24,449,428
-------------- ------------- -------------- --------------
Total expenses............................... 74,068,405 64,059,511 208,077,101 192,094,304
-------------- ------------- -------------- --------------
Income before income tax provision........... 34,586,052 18,240,043 106,519,127 59,757,392
INCOME TAX PROVISION............................. 12,141,779 8,025,621 36,493,611 26,293,251
-------------- ------------- -------------- --------------
Net income................................... $ 22,444,273 $ 10,214,422 $ 70,025,516 $ 33,464,141
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------
EARNINGS PER SHARE............................... $ 0.40 $ 1.31
------------- --------------
------------- --------------
WEIGHTED AVERAGE SHARES OUTSTANDING.............. 25,763,635 25,464,725
------------- --------------
------------- --------------
PRO FORMA INFORMATION:
Net income before income tax adjustment........ $ 22,444,273 $ 70,025,516
Income tax adjustment.......................... (3,076,084) (10,374,804)
-------------- --------------
Pro forma net income........................... $ 19,368,189 $ 59,650,712
-------------- --------------
-------------- --------------
Pro forma earnings per share................... $ 0.94 $ 2.87
-------------- --------------
-------------- --------------
Pro forma weighted average shares
outstanding.................................. 20,562,854 20,781,014
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND
PARTNERS' CAPITAL
FOR THE YEAR ENDED SEPTEMBER 30, 1996 AND THE NINE MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
HAMBRECHT & QUIST GROUP
-------------------------------------------------------------------------------------------------------
NUMBER OF ADDITIONAL TREASURY
COMMON COMMON PAID-IN NOTES RETAINED UNREALIZED STOCK, AT SUBTOTAL H&Q
SHARES STOCK CAPITAL RECEIVABLE EARNINGS GAINS, NET COST GROUP
---------- ----------- ------------ ------------ ------------ ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER
30, 1995.......... 14,609,188 $25,412,585 $ $( 7,659,714) $ 72,205,112 $ $ $ 89,957,983
Sales of common
stock or
partners'
capital
additions....... 2,080,348 11,994,895 (7,831,585) -- 4,163,310
Reductions of
notes received
for purchases of
common stock.... -- -- 8,981,733 -- 8,981,733
Repurchases of
common stock or
partners'
capital
withdrawals..... (608,368) (2,201,212) -- (1,409,601) (3,610,813)
Distribution of LP
interest to
Group Trust..... -- -- -- 4,493,971 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 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) 108,978,032 129,446,981
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) 20,790,014
Purchase of
additional
interest in
Guaranty
Finance......... -- -- -- -- -- (136,410) (136,410)
---------- ----------- ------------ ------------ ------------ ---------- --------- ------------
Balance, August 8,
1996............ 18,668,930 186,689 56,366,873 (14,737,319) 108,978,032 (693,690) 150,100,585
Sale of common
stock in initial
public offering
plus net
underwriting
revenue of
$425,000........ 4,025,000 40,250 60,276,750 -- -- -- 60,317,000
Reductions of
notes received
for purchases of
common stock.... -- -- -- 1,186,816 -- -- 1,186,816
Net income from
August 8 to
September 30,
1996............ -- -- -- -- 15,078,582 -- 15,078,582
Change in net
unrealized
losses.......... -- -- -- -- -- 28,466 28,466
---------- ----------- ------------ ------------ ------------ ---------- --------- ------------
BALANCE, SEPTEMBER
30, 1996.......... 22,693,930 226,939 116,643,623 (13,550,503) 124,056,614 (665,224) 226,711,449
Sales of common
stock........... 1,079,668 10,796 18,897,662 (289,035) -- -- 18,619,423
Forfeitures of
common stock.... (15,354) (154) (293,645) -- -- -- (293,799)
Reductions of
notes received
for purchases of
common stock.... -- -- -- 8,248,855 -- -- 8,248,855
Net income........ -- -- -- -- 33,464,141 -- 33,464,141
Change in net
unrealized
gains........... -- -- -- -- -- 781,830 781,830
Purchase of 20,000
shares of common
stock........... -- -- -- -- -- -- (428,968) (428,968)
---------- ----------- ------------ ------------ ------------ ---------- --------- ------------
BALANCE, JUNE 30,
1997.............. 23,758,244 $ 237,581 $135,247,640 $ (5,590,683) $157,520,755 $ 116,606 $(428,968) $287,102,931
---------- ----------- ------------ ------------ ------------ ---------- --------- ------------
---------- ----------- ------------ ------------ ------------ ---------- --------- ------------
<CAPTION>
HAMBRECHT & QUIST, L.P.
--------------------------------------------------------------------
PARTNERS' NOTES DISTRIBUTIONS UNREALIZED SUBTOTAL H&Q
CAPITAL RECEIVABLE PAYABLE GAINS, NET LP TOTAL
------------ ----------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER
30, 1995.......... $ 26,194,002 $(2,232,013) $(10,445,367) $ 1,987,478 $ 15,504,100 $105,462,083
Sales of common
stock or
partners'
capital
additions....... 7,595,591 (7,333,171) -- -- 262,420 4,425,730
Reductions of
notes received
for purchases of
common stock.... -- 1,337,431 -- -- 1,337,431 10,319,164
Repurchases of
common stock or
partners'
capital
withdrawals..... (420,344) -- -- -- (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 -- -- 8,227,753 --
Net income through
August 7,
1996............ 39,834,040 -- -- -- 39,834,040 73,522,590
Partners' capital
distributions
payable......... -- -- (14,034,971) -- (14,034,971) (14,034,971)
Partners' capital
distributions... (24,480,338) -- 24,480,338 -- -- --
Change in net
unrealized
gains........... -- -- -- 1,101,224 1,101,224 1,101,224
------------ ----------- ------------- ----------- ------------ ------------
Balance, August 7,
1996............ 48,722,951 -- -- 3,088,702 51,811,653 181,258,634
Distribution of
cash and
securities to LP
Trust........... (27,375,657) -- -- (3,645,982) (31,021,639) (31,021,639)
Merger between H&Q
and LP.......... (21,347,294) -- -- 557,280 (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
notes received
for purchases of
common stock.... 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........... 18,619,423
Forfeitures of
common stock.... (293,799)
Reductions of
notes received
for purchases of
common stock.... 8,248,855
Net income........ 33,464,141
Change in net
unrealized
gains........... 781,830
Purchase of 20,000
shares of common
stock........... (428,968)
------------ ----------- ------------- ----------- ------------ ------------
BALANCE, JUNE 30,
1997.............. $ -- $ -- $ -- $ -- $ -- $287,102,931
------------ ----------- ------------- ----------- ------------ ------------
------------ ----------- ------------- ----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
HAMBRECHT & QUIST GROUP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES.......................................................... $ 16,899,692 $ 26,581,167
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of long-term investments.......................................................... (21,830,927) (56,873,229)
Proceeds from sales/distributions of long-term investments.................................. 25,797,630 28,679,773
Purchases of furniture, equipment and leasehold improvements................................ (6,057,367) (9,259,483)
Increases in notes receivable............................................................... -- (12,175,375)
Repayments of notes receivable.............................................................. -- 5,170,420
(Increases) decreases in lease receivables, net............................................. (875,138) 57,791
Purchases of leased assets.................................................................. -- (1,446,817)
Proceeds from sales of leased assets........................................................ 7,725,273 --
-------------- --------------
Net cash and cash equivalents provided by (used in) investing activities...................... 4,759,471 (45,846,920)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt obligations.............................................................. 14,879,539 11,059,227
Repayments of debt obligations.............................................................. (17,398,776) (14,683,048)
Proceeds from sales of common stock and partners' capital contributions..................... 4,253,538 5,620,546
Repurchases of common stock and partners' capital withdrawals............................... (4,031,157) --
Partners' capital distributions............................................................. (24,485,893) --
Purchases of treasury stock................................................................. -- (428,968)
Distributions to minority interestholder.................................................... (300,000) --
-------------- --------------
Net cash and cash equivalents provided by (used in) financing activities...................... (27,082,749) 1,567,757
-------------- --------------
DECREASE IN CASH AND CASH EQUIVALENTS......................................................... (5,423,586) (17,697,996)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.............................................. 34,754,568 50,031,534
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................................................... $ 29,330,982 $ 32,333,538
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION:
The condensed consolidated financial statements include Hambrecht & Quist
Group and its subsidiaries ("H&Q" or the "Company"). H&Q was formed in August
1996 to be the sole parent of Hambrecht & Quist California, a California
corporation (formerly known as Hambrecht & Quist Group) ("H&Q California") and
to succeed to the assets of Hambrecht & Quist, L.P., a California limited
partnership ("LP"). The historical condensed consolidated financial statements
include the combined operations of H&Q California and LP. Refer to Note 1 of the
consolidated financial statements as of and for the year ended September 30,
1996 ("1996 Consolidated Financial Statements") for a detailed description of
the Company's organizational structure, including the effects of the
restructuring transactions (the "Restructuring") completed in August 1996. Such
1996 Consolidated Financial Statements are included in the Annual Report on Form
10-K filed by the Company under the Securities Exchange Act of 1934.
The information contained in the following notes to the consolidated
financial statements is condensed from that which would appear in the annual
consolidated financial statements; accordingly, the accompanying condensed
financial statements should be read in conjunction with the 1996 Consolidated
Financial Statements and related notes thereto. Any capitalized terms used but
not defined have the same meaning given to them in the 1996 Consolidated
Financial Statements.
The preparation of financial statements requires the use of certain
estimates by management in determining the entity's assets, liabilities,
revenues and expenses. Accounting measurements at interim dates inherently
involve greater reliance on estimates than at year-end. Actual results could
differ from those estimates. The results of operations for the interim periods
presented are not necessarily indicative of the results to be expected for the
entire year.
The condensed consolidated financial statements included herein are
unaudited; however, they include all adjustments of a normal recurring nature
which, in the opinion of management, are necessary to present fairly the
financial position of the Company at June 30, 1997, the results of operations
for the three month and nine month periods ended June 30, 1996 and 1997 and the
cash flows for the nine month periods ended June 30, 1996 and 1997.
2. PRO FORMA INCOME TAX ADJUSTMENT AND PRO FORMA EARNINGS PER SHARE:
PRO FORMA INCOME TAX ADJUSTMENT
For the three month and nine month periods ended June 30, 1996, no provision
was 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 was reportable by each partner directly to the taxing authority.
As part of the Restructuring (see Note 1), LP merged into the Company and ceased
to exist. For financial reporting purposes, the 1996 condensed consolidated
statements of operations for the three month and nine month periods ended June
30, 1996 include pro forma income tax adjustments of $3,076,084 and $10,374,804,
respectively, representing taxes on LP's income as if LP's earnings were subject
to income taxes at an effective tax rate of 44 percent.
PRO FORMA EARNINGS PER SHARE
Pro forma earnings per share for the 1996 periods is determined by dividing
pro forma net income by the weighted-average number of common shares, including
common share equivalents, outstanding during the period.
3. BASIC AND DILUTED EARNINGS PER SHARE:
In March 1997, the FASB issued Statement of Financial Accounting Standards
No. 128, Earnings per Share (SFAS 128). The Company will be required to adopt
SFAS 128 in its 1998 fiscal year. SFAS 128 replaces primary and fully diluted
7
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
3. BASIC AND DILUTED EARNINGS PER SHARE: (CONTINUED)
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 for the periods presented are as follows (the 1996
amounts are calculated using pro forma net income as discussed in Note 2):
<TABLE>
<CAPTION>
BASIC DILUTED
EARNINGS EARNINGS
PER SHARE PER SHARE
----------- -----------
<S> <C> <C>
For The Three Months Ended--
June 30, 1997.................................................................... $ 0.43 $ 0.40
June 30, 1996.................................................................... $ 1.04 $ 0.94
For The Nine Months Ended--
June 30, 1997.................................................................... $ 1.43 $ 1.31
June 30, 1996.................................................................... $ 3.15 $ 2.87
</TABLE>
4. RECEIVABLES FROM RELATED PARTIES:
Notes receivable from related parties and employees were $3,001,858 and
$2,827,474 at September 30, 1996 and June 30, 1997, respectively. Such amounts
include notes receivable from Asia Pacific of $1,792,740 and $1,757,670,
respectively.
Asset management fees and profit participations receivable of $10,349,674
and $6,920,188 at September 30, 1996 and June 30, 1997, respectively, include
profit participations receivable of $9,831,883 and $5,944,191, respectively from
venture and investment partnerships managed by Venture Partners.
Related party and employee advances were $4,578,125 and $4,349,366 at
September 30, 1996 and June 30, 1997, respectively. Such amounts include
temporary advances made to related parties for operating expenses and purchases
of
8
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
4. RECEIVABLES FROM RELATED PARTIES: (CONTINUED)
investments. Of the amount outstanding at June 30, 1997, $3,263,190 relates to
advances to affiliates, directors and employees for purchases of investments
made on their behalf. Such amounts are repaid within 30 days.
5. MARKETABLE TRADING SECURITIES AND SECURITIES SOLD, NOT YET PURCHASED:
At September 30, 1996 and June 30, 1997, marketable trading securities and
securities sold, not yet purchased, consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- -----------
<S> <C> <C>
Marketable trading
securities--
Equity securities........... $20,510,871 $19,275,032
Convertible bonds........... 6,537,960 --
Options..................... 119,042 258,234
U.S. government
securities................ 39,571,126 17,817,134
------------- -----------
$66,738,999 $37,350,400
------------- -----------
------------- -----------
Securities sold, not yet
purchased--
Equity securities........... $14,313,068 $ 9,527,687
Convertible bonds........... 1,403,500 --
Options..................... 339,385 3,205,490
------------- -----------
$16,055,953 $12,733,177
------------- -----------
------------- -----------
</TABLE>
9
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
6. LONG-TERM INVESTMENTS:
At September 30, 1996 and June 30, 1997, the Company's long-term
investments, at estimated fair value, consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- ------------
<S> <C> <C>
Marketable equity securities available for sale by Guaranty Finance
and Transition Capital.............................................. $ 9,078,811 $ 14,169,813
Marketable equity securities--other................................... 15,266,887 27,143,670
The BISYS Group, Inc. common stock.................................... 7,650,518 5,829,648
------------- ------------
Total marketable investments...................................... 31,996,216 47,143,131
------------- ------------
Nonmarketable securities and investment partnership interests......... 24,383,763 41,057,814
Venture Partners and affiliated venture capital funds................. 9,527,910 15,964,809
Venture capital funds managed by others............................... 1,913,042 8,434,520
Lewco Securities...................................................... 2,110,279 2,110,279
------------- ------------
Total nonmarketable investments................................... 37,934,994 67,567,422
------------- ------------
Total long-term investments....................................... $69,931,210 $114,710,553
------------- ------------
------------- ------------
</TABLE>
The cost of the Company's long-term investments at September 30, 1996 and
June 30, 1997, was $52,489,136 and $104,162,245, respectively.
Following is an analysis of the net investment gains and losses for the
three month and nine month periods ended June 30, 1996 and 1997:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ----------------------------
1996 1997 1996 1997
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Realized gains........................................ $ 9,644,569 $ 12,332,315 $ 22,942,603 $ 18,081,571
Change in unrealized gains and losses, net............ (5,865,787) (2,627,211) (3,855,339) (8,017,666)
------------ ------------- ------------- -------------
Net investment gains and losses from long-term
investments....................................... $ 3,778,782 $ 9,705,104 $ 19,087,264 $ 10,063,905
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</TABLE>
Included in net investment gains and losses are net realized and unrealized
gains on BISYS holdings of $1,466,709 and $2,019,584 for the three month periods
ended June 30, 1996 and 1997, respectively and $14,687,227 and $2,353,871 for
the nine month periods ended June 30, 1996 and 1997, respectively.
10
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
6. LONG-TERM INVESTMENTS: (CONTINUED)
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 June 30, 1997 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- -------------
<S> <C> <C>
Cost............................................................ $ 9,839,090 $ 14,036,571
Gross unrealized gains.......................................... 500,588 1,738,367
Gross unrealized losses......................................... (1,260,867) (1,605,125)
------------- -------------
Estimated fair value............................................ $ 9,078,811 $ 14,169,813
------------- -------------
------------- -------------
</TABLE>
Gross proceeds, gross realized gains and gross realized losses from sales of
investments in marketable equity securities available for sale by Guaranty
Finance for the three month and nine month periods ended June 30, 1996 and 1997
are as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Gross proceeds.................................... $ 467,534 $ 978,772 $ 3,499,294 $ 1,242,308
Gross realized gains.............................. 147,227 108,125 1,558,405 180,956
Gross realized losses............................. -- 917 -- 917
</TABLE>
7. RELATED-PARTY TRANSACTIONS:
Included in other revenues are management fees and profit participation
distributions from venture capital funds of $3,292,851 and $2,169,907 for the
three month periods ended June 30, 1996 and 1997, respectively and $12,443,646
and $7,301,407 for the nine month periods ended June 30, 1996 and 1997,
respectively.
8. EMPLOYEE BENEFIT PLANS:
SAVINGS AND EMPLOYEE STOCK OWNERSHIP TRUST
In December 1996, the Company issued 66,977 shares of common stock valued at
$1,414,889 to the ESOP in satisfaction of compensation and benefits payable.
As of June 30, 1997, the ESOP owned approximately 7.85 percent of the H&Q
common stock outstanding.
BONUS AND DEFERRED SALES COMPENSATION PLAN
The Company paid semiannual bonuses in October 1996 and April 1997. Under
the Compensation Plan, 385,422 shares valued at $7,339,761 were issued to
executives and professionals effective October 1, 1996 and 335,916 shares valued
at $5,542,614 were issued to executives and professionals effective April 1,
1997. The October amounts were included in compensation and benefits payable as
of September 30, 1996.
11
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
8. EMPLOYEE BENEFIT PLANS: (CONTINUED)
STOCK OPTION PLANS
Details of stock options are as follows:
<TABLE>
<CAPTION>
NUMBER
OF SHARES EXERCISE PRICE
----------- -----------------
<S> <C> <C>
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..................................................... 266,600 $ 16.13 - $24.00
Exercised................................................... (164,988) $ 2.04 - $11.25
Canceled.................................................... (186,030) $ 5.54 - $11.25
-----------
Outstanding at June 30, 1997.................................. 5,613,102 $ 2.10 - $24.00
-----------
-----------
</TABLE>
Of the outstanding options at June 30, 1997, 1,566,713 had vested.
STOCK APPRECIATION RIGHTS
Compensation expense recorded for SARs awards was $1,395,078 and $9,461,954
for the three month and nine month periods ended June 30, 1996, respectively. No
SARs were awarded for the 1997 fiscal year. A 1997 payment of $3,840,900 was
made on January 15, 1997.
The total SARs liability at June 30, 1997, included in compensation and
benefits payable, will be paid out as follows:
<TABLE>
<CAPTION>
<S> <C>
1998............................................................................ $ 3,396,809
1999............................................................................ 3,620,338
------------
$ 7,017,147
------------
------------
</TABLE>
9. STOCK REPURCHASE PROGRAM:
In January 1997, the Board of Directors approved the Stock Repurchase
Program under which the Company is authorized to purchase up to 2,000,000 shares
of the Company's common stock in the open market. The shares acquired under the
Stock Repurchase Program will be used in part to satisfy the Company's
obligations under the Compensation Plan and various stock option plans. In March
1997, the Company purchased 20,000 shares of the Company's common stock and is
holding such shares as treasury stock at June 30, 1997.
12
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
10. NET CAPITAL REQUIREMENTS:
At September 30, 1996 and June 30, 1997, H&Q LLC's regulatory net capital of
$49,975,660 and $61,218,327, respectively, was 22 percent and 29 percent,
respectively, of aggregate debit items and its net capital in excess of the
minimum required was $45,489,559 and $56,966,423, respectively.
11. COMMITMENTS AND CONTINGENCIES:
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
$5,996,488 at September 30, 1996 and June 30, 1997, respectively.
The Company has contingent liabilities, including contractual commitments
arising in the normal course of business, the resolution of which, in
management's opinion, will not have an adverse effect on the Company's financial
position.
As is the case with many firms in the securities industry, the Company is a
defendant or co-defendant in a number of lawsuits that seek substantial and
usually unspecified damages. These suits have arisen in the normal course of the
Company's business and are incidental to the securities and investment banking
business. Most of the proceedings relate to public underwritings of securities
in which H&Q LLC participated as a manager, co-manager or member of the
underwriting syndicate. These cases involve claims under federal and state
securities laws and seek compensatory and other monetary damages. It is possible
that H&Q and/or H&Q LLC may be called upon as a member of a class of defendants
or under the terms of the underwriting, indemnification or other agreements to
contribute to settlements or judgments arising out of these cases. The Company
is contesting the complaints in all cases and believes that there are
meritorious defenses in each of these lawsuits. Although the ultimate outcome of
such litigation cannot be ascertained at this time, it is the opinion of the
Company's management, based on discussions with counsel, that the resolution of
these actions and others will not have a material adverse effect on the
Company's financial statements taken as a whole.
H&Q has indemnified certain of its officers, directors and agents, and
certain of its affiliates, as permitted under applicable law. Under these
provisions, H&Q itself is and will be subject to indemnification assertions by
officers, directors, agents or certain of its affiliates who are or may become
defendants in litigation that may result in the normal course of business.
Although the ultimate outcome of indemnification assertions outstanding as of
June 30, 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.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE STATEMENTS IN THIS QUARTERLY 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, 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,
COMPETITIVE CONDITIONS WITHIN THE SECURITIES INDUSTRY, 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" AND IN THE COMPANY'S 1996 ANNUAL
REPORT ON FORM 10-K (THE "FORM 10-K").
THE FOLLOWING ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
HAMBRECHT & QUIST GROUP AND SUBSIDIARIES SHOULD BE READ IN CONJUNCTION WITH
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, THE RELATED NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND THE MANAGEMENT'S DISCUSSION
AND ANALYSIS SECTION INCLUDED ELSEWHERE HEREIN AND IN THE COMPANY'S FORM
10-K AND FORM 10-Q'S FOR THE COMPANY'S FIRST AND SECOND FISCAL QUARTERS.
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 results of operations for the nine months ended
June 30, 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 second and third quarters
of fiscal 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 the nine month period ended June 30,
1997, the Company managed or co-managed 63 public offerings compared to 113 for
the same period ended June 30, 1996. Investment banking revenue decreased 54%
from $130.5 million for the nine month period ended June 30, 1996 compared to
$60.1 million for the nine month period ended June 30, 1997, and decreased as a
percentage of revenues from 41% to 24%.
14
<PAGE>
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 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 557 in the nine
month period ended June 30, 1996, compared to 748 in the nine month period ended
June 30, 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 the second fiscal quarter of 1997 included the establishment
of a strategic relationship in Israel. Additionally, during the quarter ended
June 30, 1997, the Company agreed in principle to acquire from a French
financial institution the 50% of Hambrecht & Quist Saint Dominique that it does
not already own. 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 the nine months ended
June 30, 1997, the Company purchased $56.9 million in principal investments
compared to $21.8 million during the nine months ended June 30, 1996. The
Company expects to continue its principal investment activities in subsequent
quarters 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
15
<PAGE>
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 June 30,
1997, the Company's long-term investments totaled $69.9 million and $114.7
million, respectively. Net investment gains are included in the Company's
statement of operations and include net realized gains and losses and the net
change in unrealized gains and losses for the period. For the nine month periods
ended June 30, 1996 and 1997, net investment gains totaled $19.1 million and
$10.1 million, 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, the Company reported net investment gains of $5.1 million and $9.7
million in the first and third fiscal quarters of 1997 and a net investment loss
of $4.8 million in the second fiscal quarter of 1997.
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
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30,
1997
REVENUES. Total revenues for the period decreased 24% from $108.6 million
for the three months ended June 30, 1996 to $82.3 million for the three months
ended June 30, 1997.
Principal transactions revenue decreased 1% from $31.4 million to $31.1
million.
Agency commissions decreased 12% from $11.7 million to $10.3 million. The
Company processed fewer agency transactions during the three month period ended
June 30, 1997 compared to the same three month period ended June 30, 1996.
Investment banking revenue decreased 74% from $46.5 million to $12.1
million, and decreased as a percentage of revenues from 43% to 15%. The Company
managed or co-managed 39 public offerings during the three month period ended
June 30, 1996, compared to 14 during the three month period ended June 30, 1997.
Corporate finance fees increased 68% from $5.7 million to $9.6 million.
Interest and dividend revenue increased 47% from $4.0 million to $6.0
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.
- ------------------------
(1) Refer to Note 1 of Notes to the 1996 Annual Consolidated Financial
Statements, as included in the Companys Form 10-K, for a detailed
description of the Companys organizational structure, including the effects
of the restructuring transactions completed in August 1996.
16
<PAGE>
Net investment gains for the three month period increased 157% from $3.8
million to $9.7 million. Net investment gains included realized and unrealized
gains on the Company's investment in BISYS of $1.5 million for the three months
ended June 30, 1996 and $2.0 million for the three months ended June 30, 1997.
Additionally, approximately 40% of the net investment gains for the three months
ended June 30, 1997 was attributable to an investment in one company.
Other revenues decreased 35% from $5.6 million to $3.6 million. The decrease
was due primarily to the recognition by Guaranty Finance of a $3.3 million gain
on the sale of a building in the 1996 period.
EXPENSES. Total expenses for the period decreased 14% from $74.1 million
for the three months ended June 30, 1996 to $64.1 million for the three months
ended June 30, 1997.
Compensation and benefits expense decreased 24% from $55.9 million to $42.5
million. The decrease was due primarily to lower bonus expenses accrued on lower
revenues. Compensation and benefits expense as a percentage of total revenues
increased from 51% to 52%.
Brokerage and clearance expense increased 32% from $3.9 million to $5.2
million. The percentage increase was primarily attributable to higher
transaction processing charges from Lewco Securities Corp. and the settlement of
clearance charges related to prior periods.
Occupancy and equipment expense increased 83% from $2.6 million to $4.7
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.
Communications expense increased 37% from $2.8 million to $3.8 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 decreased 58% from $1.1 million to $447,000. This decrease
related primarily to lower average borrowings outstanding during the three month
period ended June 30, 1997.
Other expenses decreased 5% from $7.9 million to $7.5 million. This decrease
was primarily attributable to lower professional services fees.
INCOME TAX PROVISION. The Company's effective income tax rate was 35% for
the three month period ended June 30, 1996 and increased to 44% for the three
month period ended June 30, 1997. The Company's effective income tax rate in the
1996 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 Company's higher effective tax rate in the 1997 fiscal period 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 for the 1996 fiscal period was determined assuming that
all of the Company's combined operations had been subject to corporate federal
and state income tax.
17
<PAGE>
NINE MONTHS ENDED JUNE 30, 1996 COMPARED TO NINE MONTHS ENDED JUNE 30, 1997
REVENUES. Total revenues for the period decreased 20% from $314.6 million
for the nine months ended June 30, 1996 to $251.9 million for the nine months
ended June 30, 1997.
Principal transactions revenue increased 15% from $75.4 million to $86.7
million. This increase was due to an increase in Nasdaq market activity during
the Company's first two fiscal quarters and the expansion of the Company's
equity sales and trading capabilities.
Agency commissions increased 9% from $29.1 million to $31.8 million. This
increase was due to the expansion of the Company's listed equity business
primarily during the Company's first two fiscal quarters.
Investment banking revenue decreased 54% from $130.5 million to $60.1
million, and decreased as a percentage of revenues from 41% to 24%. The Company
managed or co-managed 113 public offerings during the nine month period ended
June 30, 1996, compared to 63 during the nine month period ended June 30, 1997.
Corporate finance fees increased 9% from $31.9 million to $34.8 million.
Interest and dividend revenues increased 47% from $10.7 million to $15.8
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 nine month period decreased 47% from $19.1
million to $10.1 million. Net investment gains included realized and unrealized
gains on the Company's investment in BISYS of $14.7 million for the nine months
ended June 30, 1996 and $2.4 million for the nine months ended June 30, 1997.
Other revenues decreased 30% from $17.9 million to $12.6 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 the 1996 period.
EXPENSES. Total expenses for the period decreased 8% from $208.1 million
for the nine months ended June 30, 1996 to $192.1 million for the nine months
ended June 30, 1997.
Compensation and benefits expense decreased 19% from $159.7 million to
$129.0 million. The decrease was due primarily to lower bonus expenses accrued
on lower revenues. Compensation and benefits expense as a percentage of total
revenues was 51% for both fiscal periods.
Brokerage and clearance expense increased 25% from $10.0 million to $12.5
million. The percentage increase generally corresponds with increases in
principal transaction revenue and agency commissions.
Occupancy and equipment expense increased 69% from $7.1 million to $12.1
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 49% from $7.3 million to $10.9 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 decreased 3% from $3.3 million to $3.2 million. This
decrease related primarily to lower average borrowings outstanding during the
nine month period ended June 30, 1997.
Other expenses increased 19% from $20.6 million to $24.4 million. This
increase was due to increases in professional services fees, travel,
entertainment and conference expenses.
INCOME TAX PROVISION. The Company's effective income tax rate was 34% for
the nine month period ended June 30, 1996 and increased to 44% for the nine
month period ended June 30, 1997. The Company's effective income tax rate in the
1996 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 Company's higher effective tax rate in
18
<PAGE>
the 1997 fiscal period 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 for the 1996
fiscal period was 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 June 30,
1997, H&Q LLC had liquid assets consisting primarily of cash and cash
equivalents of $19.9 million and receivables of $26.2 million from Lewco
Securities Corp. ("Lewco"), its clearing affiliate. The cash equivalents
consisted primarily of United States Treasury bills with maturities of 90 days
or less. As of June 30, 1997, the Company had a bank line of credit in the
amount of $15.0 million, with a balance of $1.9 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 $2.3 million and
$500,000 outstanding, respectively. While the Company has not required
additional bank financing during the past several years, it has available an
additional $20.0 million line of credit with a commercial bank expiring February
28, 1998.
The Company's consolidated balance sheet reflects the Company's relatively
unleveraged financial position. The ratio of assets to equity as of June 30,
1997 was approximately 1.9:1. 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 June
30, 1997, securities held for trading purposes include United States Treasury
securities totaling $17.8 million with maturities ranging from 92 days to 14
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 June 30, 1997, H&Q LLC was required
to maintain minimum regulatory net capital in accordance with SEC rules of
approximately $4.3 million and had total regulatory net capital of approximately
$61.3 million, or approximately $57.0 million in excess of its requirement.
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.
19
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Certain significant legal proceedings and matters have been previously
disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1996 and the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1997. Following is a summary of recent material
developments in such proceedings and summaries of certain new matters.
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 Securities Exchange Act of 1934 (the "Exchange Act"). WENGER,
ET AL. V. LUMISYS, INC., ET AL., No. C-97 20609 EAI. The defendants have not yet
responded to the complaint in either court.
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 of 1933 and various Arizona state laws. The complaint alleges
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. H&Q has not yet responded to the complaint.
NASDAQ MARKET-MAKERS ANTITRUST LITIGATION
On June 30, 1997, a motion was filed in the class action litigation
requesting that the Court approve proposed settlements between the plaintiffs
and three co-defendants in the aggregate amount of approximately $53.9 million.
The proposed settlements were opposed in certain respects by other defendants
including the Company, and the Court has not ruled. Additional defendants have
been added to the litigation, bringing the total number of defendants to
thirty-seven. The litigation and the SEC investigation are continuing.
PRISM SOLUTIONS, INC. SECURITIES LITIGATION
On June 26, 1997, the court sustained the defendants' demurrers, with leave
to amend in certain respects.
SS&C TECHNOLOGIES, INC. SECURITIES LITIGATION
The litigation was consolidated in an amended complaint filed in the federal
court in Connecticut on July 8, 1997. FEINER ET AL. V. SS&C TECHNOLOGIES, INC.,
ET AL., Civil Action No. 397CV00656 (SBA).
STORM TECHNOLOGY, INC. SECURITIES LITIGATION
On July 24, 1997, the defendants' demurrers were sustained, with leave to
amend in certain respects.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- ------------------------------------------------------------------------------------
<S> <C>
27 Financial Data Schedule.
</TABLE>
b) Reports on Form 8-K
None.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HAMBRECHT & QUIST GROUP,
a Delaware Corporation
/s/ PATRICK J. ALLEN
--------------------------------------
Patrick J. Allen
CHIEF FINANCIAL OFFICER
(On behalf of the Registrant and as
Principal Financial and Accounting
officer)
Date: July 29, 1997
21
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NO.
- ------------- ------------------------------------------------------------------------------------------------- -----------
<S> <C> <C>
27 Financial Data Schedule..........................................................................
</TABLE>
<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 Quarterly
Report on Form 10-Q and is qualified in its entirety by reference to such
consolidated financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 32,334
<RECEIVABLES> 288,366
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 37,350
<PP&E> 17,635
<TOTAL-ASSETS> 543,580
<SHORT-TERM> 4,741
<PAYABLES> 239,008
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 12,733
<LONG-TERM> 0
0
0
<COMMON> 129,895
<OTHER-SE> 157,208
<TOTAL-LIABILITY-AND-EQUITY> 543,580
<TRADING-REVENUE> 86,652
<INTEREST-DIVIDENDS> 15,775
<COMMISSIONS> 31,822
<INVESTMENT-BANKING-REVENUES> 60,133
<FEE-REVENUE> 44,871
<INTEREST-EXPENSE> 3,182
<COMPENSATION> 129,048
<INCOME-PRETAX> 59,757
<INCOME-PRE-EXTRAORDINARY> 59,757
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,464
<EPS-PRIMARY> 1.31
<EPS-DILUTED> 1.31
</TABLE>
