<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 MARCH 31, 1998
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)
DELAWARE 94-3246636
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) No.)
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 ______
24,480,505 shares of Common Stock were issued and outstanding as of May 12,
1998.
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- --------------------------------------------------------------------------------
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HAMBRECHT & QUIST GROUP
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 AND MARCH 31, 1998
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................. $ 42,637,732 $ 11,163,581
Receivables:
Customers (net of allowance of $1,050,000 at September 30, 1997 and
March 31, 1998)................................................... 183,796,833 223,921,046
Lewco Securities Corp............................................... 157,570,375 68,722,071
Syndicate managers.................................................. 15,494,668 9,305,324
Related parties..................................................... 17,397,164 13,901,840
Notes............................................................... 18,489,300 21,436,105
Lease............................................................... 3,467,628 1,988,174
Income taxes........................................................ 531,955 2,652,977
Other............................................................... 11,288,008 16,692,504
Marketable trading securities, at market value........................ 32,617,567 52,035,610
Long-term investments, at estimated fair value........................ 117,199,728 140,526,462
Deferred income taxes................................................. 56,734,654 62,410,069
Furniture, equipment and leasehold improvements, net of accumulated
depreciation and amortization....................................... 18,782,846 19,234,892
Leased assets, net of accumulated depreciation........................ 2,272,172 796,449
Exchange memberships, at cost (market value--$1,925,000 and
$2,734,900, respectively)........................................... 656,000 656,000
------------- ------------
Total assets...................................................... $678,936,630 $645,443,104
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Payables:
Customers........................................................... $186,445,656 $107,682,074
Compensation and benefits........................................... 116,673,510 122,225,451
Syndicate settlements............................................... 21,355,653 19,264,328
Income taxes payable................................................ 6,563,552 377,620
Trade accounts payable.............................................. 2,829,377 4,156,195
Accrued expenses and other.......................................... 33,220,760 42,234,737
Securities sold, not yet purchased, at market value................... 11,770,127 16,721,981
Debt obligations...................................................... 2,700,000 --
------------- ------------
Total liabilities................................................. 381,558,635 312,662,386
------------- ------------
Commitments and contingencies
Stockholders' equity:
Common stock (par value $0.01 and 100,000,000 shares authorized,
23,790,337 and 24,211,519 issued and outstanding as of September
30, 1997 and March 31, 1998, respectively)........................ 237,903 242,115
Additional paid-in capital.......................................... 136,271,533 150,005,430
Stock notes receivable from employees............................... (5,620,260) (4,049,284)
Retained earnings................................................... 167,230,812 189,846,575
Net unrealized losses on investments available for sale............. (303,117) (3,123,184)
Cumulative translation loss......................................... -- (140,934)
Treasury stock, at cost (21,615 shares outstanding as of September
30, 1997 and none outstanding as of March 31, 1998)............... (438,876) --
------------- ------------
Total stockholders' equity........................................ 297,377,995 332,780,718
------------- ------------
Total liabilities and stockholders' equity........................ $678,936,630 $645,443,104
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
HAMBRECHT & QUIST GROUP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
---------------------------- ------------------------------
1997 1998 1997 1998
------------- ------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Principal transactions.......................... $ 26,700,101 $ 26,481,480 $ 55,566,675 $ 52,597,257
Agency commissions.............................. 11,622,532 14,556,436 21,529,231 26,951,651
Investment banking.............................. 17,954,380 24,024,398 48,058,748 46,911,863
Corporate finance fees.......................... 14,521,448 19,756,720 25,276,959 37,310,974
Interest and dividends.......................... 4,839,901 6,394,019 9,810,447 12,734,821
Net investment gains (losses)................... (4,763,281) 9,115,050 358,801 9,777,712
Other........................................... 3,778,476 7,068,137 8,951,281 12,733,660
------------- ------------- -------------- --------------
Total revenues................................ 74,653,557 107,396,240 169,552,142 199,017,938
------------- ------------- -------------- --------------
EXPENSES:
Compensation and benefits....................... 39,272,693 53,698,120 86,586,547 99,508,969
Brokerage and clearance......................... 3,676,223 5,656,428 7,322,160 10,682,872
Occupancy and equipment......................... 4,107,566 4,979,084 7,395,763 9,778,105
Communications.................................. 3,893,783 3,982,635 7,060,695 7,732,434
Interest........................................ 1,508,428 913,376 2,735,277 2,037,408
Other........................................... 8,822,739 10,155,888 16,934,354 29,601,372
------------- ------------- -------------- --------------
Total expenses................................ 61,281,432 79,385,531 128,034,796 159,341,160
------------- ------------- -------------- --------------
Income before income tax provision............ 13,372,125 28,010,709 41,517,346 39,676,778
INCOME TAX PROVISION.............................. 5,883,733 12,044,605 18,267,630 17,061,015
------------- ------------- -------------- --------------
Net income.................................... $ 7,488,392 $ 15,966,104 $ 23,249,716 $ 22,615,763
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
EARNINGS PER SHARE:
Basic........................................... $ 0.32 $ 0.66 $ 1.00 $ 0.93
Diluted......................................... $ 0.29 $ 0.60 $ 0.92 $ 0.85
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic........................................... 23,339,577 24,221,147 23,275,000 24,191,223
Diluted......................................... 25,418,606 26,479,657 25,347,248 26,499,839
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
HAMBRECHT & QUIST GROUP
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 1997 AND THE SIX MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL CUMULATIVE
COMMON COMMON PAID-IN STOCK NOTES RETAINED UNREALIZED TRANSLATION
SHARES STOCK CAPITAL RECEIVABLE EARNINGS LOSSES, NET LOSS
----------- --------- ------------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
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 20,063,292 (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 common
shares................... 9,908
----------- --------- ------------- ------------- ------------- ----------- -----------
BALANCE,
SEPTEMBER 30, 1997......... 23,790,337 237,903 136,271,533 (5,620,260) 167,230,812 (303,117)
Sales of common stock...... 446,879 4,469 14,062,084
Forfeitures of common
stock.................... (25,697) (257) (551,778)
Reductions of stock notes.. 1,570,976
Net income................. 22,615,763
Change in net unrealized
losses................... (2,820,067)
Translation loss........... (140,934)
Issuance of 21,815 common
shares................... 223,591
----------- --------- ------------- ------------- ------------- ----------- -----------
BALANCE,
MARCH 31, 1998............. 24,211,519 $ 242,115 $ 150,005,430 $ (4,049,284) $ 189,846,575 $(3,123,184) $(140,934)
----------- --------- ------------- ------------- ------------- ----------- -----------
----------- --------- ------------- ------------- ------------- ----------- -----------
<CAPTION>
TREASURY
STOCK, AT
COST TOTAL
---------- -------------
<S> <C> <C>
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 common
shares................... (438,876) (428,968)
---------- -------------
BALANCE,
SEPTEMBER 30, 1997......... (438,876) 297,377,995
Sales of common stock...... 14,066,553
Forfeitures of common
stock.................... (552,035)
Reductions of stock notes.. 1,570,976
Net income................. 22,615,763
Change in net unrealized
losses................... (2,820,067)
Translation loss........... (140,934)
Issuance of 21,815 common
shares................... 438,876 662,467
---------- -------------
BALANCE,
MARCH 31, 1998............. $ -- $ 332,780,718
---------- -------------
---------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
HAMBRECHT & QUIST GROUP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES.............................................. $ 29,444,545 $ (11,375,347)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of long-term investments.............................................. (40,067,604) (50,180,258)
Proceeds from sales/distributions of long-term investments...................... 12,814,376 30,773,848
Purchases of furniture, equipment and leasehold improvements.................... (6,476,098) (4,898,055)
Increases in notes receivable................................................... (7,600,000) (8,945,000)
Repayments of notes receivable.................................................. 5,083,821 5,998,195
Other, net...................................................................... (1,185,342) 6,918,112
-------------- --------------
Net cash and cash equivalents used in investing activities.................... (37,430,847) (20,333,158)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt obligations.................................................. 6,719,227 8,000,000
Repayments of debt obligations.................................................. (6,857,000) (10,700,000)
Proceeds from sales of common stock............................................. 5,058,482 2,682,978
Other, net...................................................................... (428,968) 251,376
-------------- --------------
Net cash and cash equivalents provided by financing activities................ 4,491,741 234,354
-------------- --------------
DECREASE IN CASH AND CASH EQUIVALENTS............................................. (3,494,561) (31,474,151)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................................. 50,031,534 42,637,732
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................ $ 46,536,973 $ 11,163,581
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION:
The condensed consolidated financial statements include Hambrecht & Quist
Group and its subsidiaries ("H&Q" or the "Company"). 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 1997 Consolidated Financial Statements and related notes
thereto incorporated by reference into the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1997. Any capitalized terms used but not
defined have the same meaning given to them in the 1997 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 March 31, 1998 and the results of
operations and cash flows for the three month and six month periods ended March
31, 1997 and 1998.
Certain amounts in the fiscal 1997 financial statements have been
reclassified to conform to the fiscal 1998 presentation.
2. MERGER OF GUARANTY FINANCE AND TRANSITION CAPITAL:
Effective January 26, 1998, Transition Capital was merged into Guaranty
Finance. The merger was accounted for as a reorganization of entities under
common control. Under such reorganization accounting the historical basis of the
assets and liabilities of Transition Capital and Guaranty Finance were combined.
H&Q retained its 87.5 percent interest in Guaranty Finance.
3. EARNINGS PER SHARE:
In March 1997, the FASB issued Statement of Financial Accounting Standards
No. 128, Earnings per Share (SFAS 128). The Company adopted SFAS 128 on October
1, 1997. 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
6
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(UNAUDITED)
3. EARNINGS PER SHARE: (CONTINUED)
previously reported by the Company. The Company's basic and diluted earnings per
share for the three month and six month periods ended March 31, 1997 and 1998
are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE PER SHARE
NET INCOME SHARES AMOUNT
------------- ------------ -----------
<S> <C> <C> <C>
FOR THE THREE MONTHS ENDED--
March 31, 1997:
Basic earnings per share........................... $ 7,488,392 23,339,577 $ 0.32
Options outstanding................................ -- 2,079,029
------------- ------------
Diluted earnings per share......................... $ 7,488,392 25,418,606 $ 0.29
------------- ------------
------------- ------------
March 31, 1998:
Basic earnings per share........................... $ 15,966,104 24,221,147 $ 0.66
Options outstanding................................ -- 2,258,510
------------- ------------
Diluted earnings per share......................... $ 15,966,104 26,479,657 $ 0.60
------------- ------------
------------- ------------
FOR THE SIX MONTHS ENDED--
March 31, 1997:
Basic earnings per share........................... $ 23,249,716 23,275,000 $ 1.00
Options outstanding................................ -- 2,072,248
------------- ------------
Diluted earnings per share......................... $ 23,249,716 25,347,248 $ 0.92
------------- ------------
------------- ------------
March 31, 1998:
Basic earnings per share........................... $ 22,615,763 24,191,223 $ 0.93
Options outstanding................................ -- 2,308,616
------------- ------------
Diluted earnings per share......................... $ 22,615,763 26,499,839 $ 0.85
------------- ------------
------------- ------------
</TABLE>
4. RECEIVABLES FROM RELATED PARTIES:
At September 30, 1997 and March 31, 1998 receivables from related parties
consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1998
------------- -------------
<S> <C> <C>
Notes receivable from affiliates and employees..................................... $ 2,696,455 $ 1,708,581
Asset management fees and profit participations.................................... 5,989,569 8,211,647
Affiliate and other advances....................................................... 8,711,140 3,981,612
------------- -------------
$ 17,397,164 $ 13,901,840
------------- -------------
------------- -------------
</TABLE>
7
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(UNAUDITED)
4. RECEIVABLES FROM RELATED PARTIES: (CONTINUED)
Notes receivable from affiliates and employees as of September 30, 1997 and
March 31, 1998 include notes receivable from Asia Pacific of $1,757,670 and
$1,161,933, respectively.
Asset management fees and profit participations at September 30, 1997 and
March 31, 1998, include profit participations receivable of $5,527,057 and
$7,793,008, respectively from venture and investment partnerships managed by
Venture Partners. Included in other revenues are management fees and profit
participation distributions from venture capital funds of $1,872,177 and
$3,848,492 for the three month periods ended March 31, 1997 and 1998,
respectively and $5,131,501 and $5,459,678 for the six month periods ended March
31, 1997 and 1998, 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 March 31, 1998, $951,984 relates to
advances to affiliates, directors and employees for purchases of investments
made on their behalf.
5. MARKETABLE TRADING SECURITIES AND SECURITIES SOLD, NOT YET PURCHASED:
At September 30, 1997 and March 31, 1998, marketable trading securities and
securities sold, not yet purchased, consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1998
------------- -------------
<S> <C> <C>
Marketable trading securities--
Equity securities............................................ $ 10,367,207 $ 21,738,018
Convertible bonds............................................ 2,086,750 5,569,230
Options...................................................... 26,840 114,685
U.S. government securities................................... 20,136,770 24,613,677
------------- -------------
$ 32,617,567 $ 52,035,610
------------- -------------
------------- -------------
Securities sold, not yet purchased--
Equity securities............................................ $ 11,359,430 $ 16,599,092
Options...................................................... 410,697 122,889
------------- -------------
$ 11,770,127 $ 16,721,981
------------- -------------
------------- -------------
</TABLE>
8
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(UNAUDITED)
6. LONG-TERM INVESTMENTS:
At September 30, 1997 and March 31, 1998, the Company's long-term
investments, at estimated fair value, consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
Marketable equity securities available for sale by Guaranty Finance.............. $ 14,023,208 $ 8,500,070
World Access Inc................................................................. -- 26,882,251
Marketable equity securities--other.............................................. 37,661,637 32,670,495
-------------- --------------
Total marketable investments................................................. 51,684,845 68,052,816
-------------- --------------
Nonmarketable securities and investment partnership interests.................... 39,568,602 47,167,744
Venture Partners and affiliated venture capital funds............................ 15,756,670 14,989,831
Venture capital funds managed by others.......................................... 8,079,332 8,205,792
Lewco Securities................................................................. 2,110,279 2,110,279
-------------- --------------
Total nonmarketable investments.............................................. 65,514,883 72,473,646
-------------- --------------
Total long-term investments.................................................. $ 117,199,728 $ 140,526,462
-------------- --------------
-------------- --------------
</TABLE>
In March 1998, the Company purchased a large block of World Access Inc.
(WAXS) common stock in a private transaction. The Company hedged the position
through a series of options transactions that are recorded as a component of the
investment. This position collateralizes a $26.7 million line of credit, also
obtained in March 1998 from a financial institution. No amounts have been drawn
on this line of credit as of March 31, 1998.
The cost of the Company's long-term investments at September 30, 1997 and
March 31, 1998, was $119,412,383 and $148,751,351, respectively.
Following is an analysis of the net investment gains for the three month and
six month periods ended March 31, 1997 and 1998:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
--------------------------- ----------------------------
1997 1998 1997 1998
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Realized gains........................................ $ 1,824,707 $ 4,714,632 $ 5,749,256 $ 12,567,017
Change in unrealized gains and (losses), net.......... (6,587,988) 4,400,418 (5,390,455) (2,789,305)
------------- ------------ ------------- -------------
Net investment gains and (losses) from long-term
investments......................................... $ (4,763,281) $ 9,115,050 $ 358,801 $ 9,777,712
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
</TABLE>
9
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(UNAUDITED)
6. LONG-TERM INVESTMENTS: (CONTINUED)
The cost and estimated fair values of investments in marketable equity
securities available for sale by Guaranty Finance at September 30, 1997 and
March 31, 1998 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1998
------------- -------------
<S> <C> <C>
Cost........................................................... $ 14,369,649 $ 12,069,445
Gross unrealized gains......................................... 1,975,968 518,252
Gross unrealized losses........................................ (2,322,409) (4,087,627)
------------- -------------
Estimated fair value........................................... $ 14,023,208 $ 8,500,070
------------- -------------
------------- -------------
</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 six month periods ended March 31, 1997 and 1998
are as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
--------------------------- ----------------------------
1997 1998 1997 1998
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Gross proceeds.................... $ -- $ 537,663 $ 263,546 $ 5,289,066
Gross realized gains.............. -- 302,606 72,831 1,222,664
Gross realized losses............. -- -- -- --
</TABLE>
7. EMPLOYEE BENEFIT PLANS:
SAVINGS AND EMPLOYEE STOCK OWNERSHIP TRUST
In November 1997, the Company issued 58,498 shares of common stock valued at
$1,943,760 to the ESOP in satisfaction of compensation and benefits payable.
As of March 31, 1998, the ESOP owned approximately 7.1 percent of the H&Q
common stock outstanding.
1996 EQUITY PLAN
In February 1998, the 1996 Plan was amended to increase the number of shares
of the Company's common stock reserved for issuance under either the
Compensation Plan or option plans by 2,000,000 shares to a total of 5,000,000
shares. Additionally, the 1996 Plan was amended to provide for automatic annual
increases of shares issuable under either the Compensation Plan or option plans
equal to the lesser of (i) 3.0 percent of the total number of common stock of
the Company then outstanding and (ii) 750,000 shares.
BONUS AND DEFERRED SALES COMPENSATION PLAN
The Company paid semiannual bonuses in April 1998. Under the Compensation
Plan, 203,737 shares valued at $7,078,729 were issued to executives and
professionals effective April 15, 1998. All such amounts were included in
compensation and benefits payable as of March 31, 1998.
10
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(UNAUDITED)
7. 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, 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
Granted..................................................... 638,000 $ 13.75 - $43.25
Exercised................................................... (199,212) $ 2.88 - $19.88
Canceled.................................................... (126,201) $ 4.60 - $32.75
----------
Outstanding at March 31, 1998................................. 5,879,743 $ 2.10 - $43.25
----------
----------
</TABLE>
Of the outstanding options at March 31, 1998, options to purchase 1,698,470
shares had vested.
STOCK APPRECIATION RIGHTS
The remaining SARs liability of $3,315,862 will be paid on January 15, 1999.
Such amount is accrued as compensation and benefits payable at March 31, 1998.
8. NET CAPITAL REQUIREMENTS:
At September 30, 1997 and March 31, 1998, H&Q LLC's regulatory net capital
of $67,030,028 and $87,212,909, respectively, was 27 percent and 34 percent,
respectively, of aggregate debit items and its net capital in excess of the
minimum required was $62,087,429 and $82,076,808, respectively.
At September 30, 1997 and March 31, 1998, RvR Securities and H&Q EM were in
compliance with all applicable regulatory capital adequacy requirements.
9. SIGNIFICANT EVENT:
In December 1997, H&Q and other broker dealer defendants entered into a
settlement agreement with the plaintiffs in the Nasdaq market-makers antitrust
class action litigation. The Company recorded an $8,000,000 charge for its
unaccrued portion of settlement costs in the quarter ended December 31, 1997.
This charge is included in other expense in the six month period ended March 31,
1998. All payments of settlement amounts are due on or before September 30,
1998.
10. 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 $6,045,026 at
11
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
March 31, 1998. Also, in connection with H&Q LLC's option trading activities,
the Company has issued a letter of credit totaling $5,500,000 at March 31, 1998
with 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, as a venture capital investor 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 lead 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
defendants in litigation that may result in the normal course of business.
Although the ultimate outcome of indemnification assertions outstanding as of
March 31, 1998, 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.
12
<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 FUTURE GROWTH, THE COMPANY'S PRINCIPAL
INVESTMENT ACTIVITIES, ITS PLANS TO ADDRESS THE YEAR 2000 SOFTWARE ISSUE 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 (THE "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 overall
securities market and the sectors of the securities market represented by
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 and in the component sources of the
Company's revenues due to these 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.
EFFECTS OF COMPETITION
The securities business is intensely competitive. Certain of the Company's
competitors have greater capital, financial and other resources than the
Company. During 1997 and 1998, the securities business experienced
consolidation, including the acquisition of certain 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 persists. The Company has experienced losses of research, investment
banking, venture capital 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, the Company has experienced significant growth
in the scope of its business activities and the number of its employees. Average
employee headcount was 845 in the three month period ended March 31, 1998
compared to 746 in the three month period ended March 31, 1997.
13
<PAGE>
The scope of the Company's business activities has increased to include new
business activities, increased emphasis on building existing operations, such as
the Company's international operations, and a significantly higher level of
principal investment activities, as more fully described below in "Effects of
Principal Investment Activities." 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 INVESTMENT BANKING AND OTHER CORPORATE FINANCE ACTIVITIES
Two significant components of the Company's revenues are investment banking
fees earned from underwriting activities and corporate finance fees earned from
merger and acquisition and other advisory services provided to companies in
H&Q's areas of industry focus. The number of such available underwriting or
advisory transactions is affected by many factors including, but not limited to,
the conditions impacting the securities market (see Overview--Effects of Market
Conditions) and the Company's ability to sucessfully compete for available
underwriting and advisory assignments (see Overview--Effects of Competition).
The Company's level of underwriting and corporate finance fee revenues earned is
affected by both the number and size of transactions completed. Substantial
fluctuations can occur and have occurred in the amount of such fees earned from
quarter to quarter and from year to year. Accordingly, fees earned for any
period should not be considered representative of any other period. In periods
of reduced investment banking and other corporate finance activity,
profitability has been and is likely to be adversely affected.
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. The Company purchased $40.1 million and
$50.2 million in principal investments during the six months ended March 31,
1997 and 1998, respectively. Included in the 1998 purchases is a $26.9 million
investment in the common stock of World Access Inc. acquired by the Company in a
private transaction. The World Access Inc. position has been hedged through a
series of options transactions. 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 historical levels 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, 1997 and March 31, 1998, the Company's
long-term investments totaled $117.2 million and $140.5 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
14
<PAGE>
and losses for the period. For the three month periods ended March 31, 1997 and
1998, the Company recorded a net investment loss of $4.8 million and a net
investment gain of $9.1 million, respectively. Principal investing activities,
which have been from time to time 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.
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, certain date-sensitive
systems may recognize the year 2000 as 1900, or not at all. This inability to
recognize or properly treat the year 2000 may result in a systems failure or
cause systems to process critical financial and operational information
incorrectly.
Based on ongoing assessments, the Company has determined that it will be
required to modify or replace portions of its software so that its computer
systems will properly utilize dates beyond December 31, 1999. In addition, the
Company has also determined that Lewco Securities Corp. ("Lewco"), its clearing
broker, will be required to modify or replace significant portions of the
software used by Lewco in connection with maintaining customer information for
the Company. The Company anticipates that its most significant exposure to the
year 2000 issue is through the clearing activities performed for it by Lewco.
While the Company holds an ownership position in Lewco and will be responsible
for a percentage of the costs incurred by Lewco to address the issue, the
Company does not control the management of the year 2000 problem by Lewco and is
dependent on Lewco's ability to adequately address the issue. The Company
presently believes that with modifications to existing software and conversions
to new software by both it and Lewco, the adverse effects of the year 2000 issue
can be mitigated. However, if such modifications and conversions are not made,
or are not completed in a timely manner, the year 2000 issue could have a
material impact on the operations and financial condition of the Company.
The Company and Lewco expect to complete year 2000 programming changes by
September 1998 and testing by early 1999. The Company does not expect to incur
material costs or devote material amounts of time to addressing the year 2000
issue with respect to its internal systems. With respect to Lewco's efforts, the
Company does not expect to devote material amounts of its labor resources, but
does expect to incur certain expenses as a result of its ownership interest in
Lewco. The Company's remaining portion of the expenses incurred to address this
issue as budgeted by Lewco is expected to be approximately $1.0 million in
calendar 1998, which will be funded through operating cash flows. During the
quarter ended March 31, 1998, the Company incurred approximately $250,000 of
expenses as a result of Lewco's efforts to address this issue. The estimated
costs of and time frame related to this project are based on estimates of the
Company's and Lewco's management and there can be no assurance that actual costs
will not differ materially from the current expectations or that the proposed
time frame can be maintained. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, and similar uncertainties.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,
1998
REVENUES. Total revenues for the period increased 44% from $74.7 million
for the three months ended March 31, 1997 to $107.4 million for the three months
ended March 31, 1998.
Principal transactions revenue decreased 1% from $26.7 million to $26.5
million.
15
<PAGE>
Agency commissions increased 25% from $11.6 million to $14.5 million. This
increase was primarily due to increased listed equity trades executed by the
Company's institutional sales force.
Investment banking revenue increased 34% from $18.0 million to $24.0
million, and decreased as a percentage of revenues from 24% to 22%. The Company
managed or co-managed 19 public offerings during the three month period ended
March 31, 1997, compared to 22 during the three month period ended March 31,
1998.
Corporate finance fees increased 36% from $14.5 million to $19.8 million due
primarily to the completion of a higher level of merger and acquisition
transactions during the three month period ended March 31, 1998.
Interest and dividend revenue increased 32% from $4.8 million to $6.4
million. The increase related primarily to interest earned on higher average
customer margin loans outstanding.
Net investment gains or losses for the three month period changed from a
loss of $4.8 million to a gain of $9.1 million.
Other revenues increased 87% from $3.8 million to $7.1 million. The increase
related primarily to an increase in accrued profit participation distributions
from venture funds managed by the Company.
EXPENSES. Total expenses for the period increased 30% from $61.3 million
for the three months ended March 31, 1997 to $79.4 million for the three months
ended March 31, 1998.
Compensation and benefits expense increased 37% from $39.3 million to $53.7
million. The increase was due primarily to higher incentive compensation
expenses accrued on higher revenues. Compensation and benefits expense as a
percentage of total revenues was 53% and 50%, respectively, for the three months
ended March 31, 1997 and 1998.
Brokerage and clearance expense increased 54% from $3.7 million to $5.7
million. The percentage increase was primarily attributable to higher charges
from Lewco, which include H&Q's allocation of year 2000 systems programming
changes, and higher floor brokerage charges related to increased agency
commissions.
Occupancy and equipment expense increased 21% from $4.1 million to $5.0
million as a result of higher rent expense and depreciation expense. Such
increased expenses result from the increase in headcount and the related
increased office space and computer and telecommunications equipment
procurements.
Communications expense increased 2% from $3.9 million to $4.0 million.
Interest expense decreased 39% from $1.5 million to $913,000. This decrease
related primarily to lower average customer credit balances and lower average
bank borrowings outstanding during the three month period ended March 31, 1998.
Other expenses increased 15% from $8.8 million to $10.2 million. This
increase was due primarily to increased travel and entertainment expenses.
INCOME TAX PROVISION. The Company's effective income tax rate was 44% for
the three month period ended March 31, 1997 and decreased to 43% for the three
month period ended March 31, 1998.
SIX MONTHS ENDED MARCH 31, 1997 COMPARED TO SIX MONTHS ENDED MARCH 31, 1998
REVENUES. Total revenues for the period increased 17% from $170.0 million
for the six months ended March 31, 1997 to $199.0 million for the six months
ended March 31, 1998.
Principal transactions revenue decreased 5% from $55.6 million to $52.6
million due primarily to lower trading margins.
16
<PAGE>
Agency commissions increased 25% from $21.5 million to $27.0 million. This
increase was primarily due to increased listed equity trades executed by the
Company's institutional sales force.
Investment banking revenue decreased 2% from $48.1 million to $46.9 million,
and decreased as a percentage of revenues from 28% to 24%. The Company managed
or co-managed 30 public offerings during the six month period ended March 31,
1997, compared to 43 during the six month period ended March 31, 1998.
Corporate finance fees increased 48% from $25.3 million to $37.3 million due
primarily to the completion of a higher level of merger and acquisition
transactions during the six month period ended March 31, 1998.
Interest and dividend revenue increased 30% from $9.8 million to $12.7
million. The increase related primarily to interest earned on higher average
customer margin loans outstanding.
Net investment gains for the three month period increased 2,624% from
$359,000 to $9.8 million.
Other revenues increased 42% from $9.0 million to $12.7 million. The
increase related primarily to increases in asset management fees and accrued
profit participation distributions from venture funds managed by the Company.
EXPENSES. Total expenses for the period increased 24% from $128.0 million
for the six months ended March 31, 1997 to $159.3 million for the six months
ended March 31, 1998.
Compensation and benefits expense increased 15% from $86.6 million to $99.5
million. The increase was due primarily to higher incentive compensation
expenses accrued on higher revenues. Compensation and benefits expense as a
percentage of total revenues was 51% and 50%, respectively, for the six month
periods ended March 31, 1997 and 1998.
Brokerage and clearance expense increased 46% from $7.3 million to $10.7
million. The percentage increase was primarily attributable to higher charges
from Lewco, which include H&Q's allocation of year 2000 systems programming
changes, and higher floor brokerage charges related to increased agency
commissions.
Occupancy and equipment expense increased 32% from $7.4 million to $9.8
million as a result of higher rent expense and depreciation expense. Such
increased expenses resulted from the increase in headcount and the related
increased office space and computer and telecommunications equipment
procurements.
Communications expense increased 10% from $7.1 million to $7.7 million. This
increase was due primarily to increases in quotes and information services
expenses resulting from the increase in headcount.
Interest expense decreased 26% from $2.7 million to $2.0 million. This
decrease related primarily to lower average customer credit balances and lower
average bank borrowings outstanding during the six month period ended March 31,
1998.
Other expenses increased 75% from $16.9 million to $29.6 million. This
increase was primarily due to a charge in December 1997 of $8.0 million for the
Company's unaccrued portion of its settlement of the Nasdaq market-makers'
antitrust litigation.
INCOME TAX PROVISION. The Company's effective income tax rate was 44% for
the six month period ended March 31, 1997 and decreased to 43% for the six month
period ended March 31, 1998.
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
17
<PAGE>
stock to employee stockholders and the public through its initial public
offering. As of March 31, 1998, H&Q LLC had liquid assets consisting primarily
of cash and cash equivalents of $11.2 million and receivables of $68.7 million
from Lewco. As of March 31, 1998, Guaranty Finance had a bank line of credit of
$25.0 million with no balance outstanding. 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 April
30, 1999, H&Q also has a $26.7 million line of credit with a financial
institution collateralized by the Company's investment in World Access Inc.
The Company's consolidated balance sheet reflects the Company's relatively
unleveraged financial position. The ratio of assets to equity as of March 31,
1998 was approximately 1.9:1. The Company's assets include 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 March 31, 1998, securities
held for trading purposes include United States Treasury securities totaling
$10.5 million with maturities ranging from twenty days to five 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 March 31, 1998, H&Q LLC was required
to maintain minimum regulatory net capital in accordance with SEC rules of
approximately $5.1 million and had total regulatory net capital of approximately
$87.2 million, or approximately $82.1 million in excess of its requirement.
Other broker-dealer subsidiaries were in compliance with all applicable
regulatory capital adequacy requirements at March 31, 1998.
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.
18
<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, 1997. Following is a summary of recent material developments in
such proceedings and a summary of one new matter.
LUMISYS, INC. SECURITIES LITIGATION
On March 30, 1998, the defendants' motion to dismiss the complaint in the
federal court was granted with leave to amend. WENGER, ET AL. V. LUMISYS, INC.,
ET AL., No. C-97 20609 EAI.
SS&C TECHNOLOGIES, INC. SECURITIES LITIGATION
On March 30, 1998, the defendants' motions to dismiss were denied. FEINER ET
AL. V. SS&C TECHNOLOGIES, INC., ET AL., Civil Action No. 397CV00656 (SBA).
SCHADE V. HAMBRECHT & QUIST GROUP
On May 4, 1998, H&Q filed a demurrer to the complaint. EDWARD V. SCHADE V.
HAMBRECHT & QUIST GROUP, Orange County Superior Court, Case No. 787495.
STORM TECHNOLOGY, INC. SECURITIES LITIGATION
On March 13, 1998, the underwriters moved to dismiss the consolidated
complaints in the federal court. GOLDBERG V. STORM TECHNOLOGY, INC. ET AL., Nos.
C97-21101 and C98-20186. On March 24, 1998, the defendants' demurrer in the
state court case was sustained without leave to amend except as to one issue, as
to which the demurrer was sustained with leave to amend. An amended complaint
was subsequently filed that did not name H&Q as a defendant. GOLDBERG V. STORM
TECHNOLOGY, INC. ET AL., Santa Clara Superior Court, No. CV764797.
CYBERMEDIA, INC. SECURITIES LITIGATION
Beginning in March 1998, several substantially identical class action
lawsuits suits were filed against H&Q, one of its research analysts and others
in state and federal courts in Los Angeles on behalf of persons who purchased
the common stock of CyberMedia, Inc. between March 31, 1997 and March 12, 1998.
Three such actions of which H&Q is aware are BROWN V. CYBERMEDIA, INC., ET AL.,
Superior Court of California, Case No. BC187898; STOCKWELL V. CYBERMEDIA, INC.,
ET AL., Superior Court of California, No. BC189020; and BARKER V. CYBERMEDIA,
INC., ET AL., U.S.D.C., Central District of California, no. SACV98-401AHS (ANX).
The complaints allege that CyberMedia, certain of its officers and directors and
others engaged in a conspiracy to inflate the price of CyberMedia stock during
the class period. The state court complaints allege that the defendants violated
California Corporations Code Sections 25400/25500; California Civil Code
Sections 1709-1710; and California Business & Professions Code Section 17200.
The federal court action alleges violations of Rule 10b-5 under the Securities
Exchange Act of 1934. None of the defendants have responded to the complaints.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company's Annual Meeting of Stockholders was held on February 24,
1998.
(b) Not applicable.
19
<PAGE>
(c) At the Annual Meeting of Stockholders, the following matters were voted
upon: (i) the election of two persons to Class II of the Board of
Directors of the Company, (ii) the proposal to amend and restate the
Company's 1996 Equity Plan and (iii) the ratification of the appointment
of Arthur Andersen LLP, as independent public accountants for the Company
for the fiscal year ending September 30, 1998.
The results of the voting on matters presented at the Annual Meeting of
Stockholders were as follows:
1. ELECTION OF CLASS II DIRECTORS
<TABLE>
<CAPTION>
WITHHOLD
NAME OF NOMINEE FOR AUTHORITY
- --------------------------------------------------------------------- ------------ -----------
<S> <C> <C>
Daniel H. Case III................................................... 19,863,386 40,800
William J. Perry..................................................... 19,810,254 93,932
</TABLE>
2. AMENDMENT AND RESTATEMENT OF 1996 EQUITY PLAN
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTES
------------ ---------- --------- ----------
<S> <C> <C> <C> <C>
Proposal to amend and restate the Company's 1996 Equity Plan.... 16,170,299 2,024,690 24,194 1,685,003
</TABLE>
3. RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
------------ ---------- ---------
<S> <C> <C> <C>
Ratification of the appointment of Arthur Andersen LLP as the Company's
independent public accountants............................................. 19,822,498 72,010 9,678
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ---------------------------------------------------------------------------------------------------
<C> <S>
10.26 Credit Agreement between Hambrecht & Quist California and Swiss Bank Corporation, dated March 4,
1998.
27.1 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.
<TABLE>
<S> <C> <C>
HAMBRECHT & QUIST GROUP,
a Delaware Corporation
By: /s/ PATRICK J. ALLEN
-----------------------------------------
Patrick J. Allen
DATE: May 13, 1998 CHIEF FINANCIAL OFFICER
(On behalf of the Registrant and as Principal
financial and accounting officer)
</TABLE>
21
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- ------------------------------------------------------------------------------------------------
<C> <S> <C>
10.26 Credit Agreement between Hambrecht & Quist California and Swiss Bank Corporation, dated March 4,
1998.
27.1 Financial Data Schedule
</TABLE>
22
<PAGE>
CREDIT AGREEMENT
CREDIT AGREEMENT (this "AGREEMENT") dated as of March 4, 1998, between
HAMBRECHT & QUIST CALIFORNIA (the "BORROWER") and SWISS BANK CORPORATION, NEW
YORK BRANCH ("SBC").
W I T N E S S E T H :
WHEREAS, subject to and upon the terms and conditions set forth herein, SBC
is willing to make available to the Borrower the credit facility provided for
herein;
NOW, THEREFORE, IT IS AGREED:
1. THE FACILITY. Subject to and upon the terms and conditions set forth
herein, SBC may in its discretion make advances (the "ADVANCES") to the Borrower
as follows:
(a) At any time and from time to time prior to October 5, 1998, Advances
(the "TRANCHE A ADVANCES") in an aggregate principal amount not exceeding at
any time U.S. $9,339,210 (Nine Million Three Hundred Thirty-Nine Thousand
Two Hundred Ten U.S. Dollars);
(b) At any time and from time to time prior to October 19, 1998,
Advances (the "TRANCHE B ADVANCES") in an aggregate principal amount not
exceeding at any time U.S. $7,471,368 (Seven Million Four Hundred
Seventy-One Thousand Three Hundred Sixty-Eight U.S. Dollars); and
(c) At any time and from time to time prior to November 2, 1998,
Advances (the "TRANCHE C ADVANCES") in an aggregate principal amount not
exceeding at any time U.S. $9,897,824 (Nine Million Eight Hundred
Ninety-Seven Thousand Eight Hundred Twenty-Four U.S. Dollars).
It is understood that the aggregate principal amount of Advances outstanding
shall at no time exceed U.S. $26,708,402 (Twenty-Six Million Seven Hundred Eight
Thousand Four Hundred Two U.S. Dollars) (as such amount may decrease from time
to time as the tranches (each, a "TRANCHE") described in clauses (a) - (c) above
expire or are canceled, the "FACILITY"), and that, subject to the provisions of
Section 2 hereof, the Advances shall be secured by a pledge of certain shares
(the "Shares") of World Access, Inc. (the "ISSUER") owned by the Borrower,
described in a Representation Letter Regarding Underlying Shares delivered to
SBC dated February 25, 1998 (the "REPRESENTATION LETTER") and pledged to SBC
pursuant to that certain ISDA Credit Support Annex to the Schedule to the ISDA
Master Agreement dated as of February 26, 1998 (the "SECURITY AGREEMENT")
executed between the Borrower and SBC. Within the limits of the Facility and
otherwise as provided herein, including the parameters of each Tranche, the
Borrower may borrow, repay and reborrow.
2. ALLOCATION OF COLLATERAL. (a) The 500,000 Shares subject to that
certain put option and call option transaction entered into between Swiss Bank
Corporation, London Branch and the Borrower on March 3, 1998 (and having an
expiration date of October 5, 1998), and delivered by the Borrower to Swiss Bank
Corporation pursuant to the Security Agreement, shall primarily serve as
collateral security for the Tranche A Advances.
(b) The 400,000 Shares subject to that certain put option and call option
transaction entered into between Swiss Bank Corporation, London Branch and the
Borrower on March 3, 1998 (and having an expiration date of October 19, 1998),
and delivered by the Borrower to Swiss Bank Corporation pursuant to the Security
Agreement, shall primarily serve as collateral security for the Tranche B
Advances.
(c) The 529,907 Shares subject to that certain put option and call option
transaction entered into between Swiss Bank Corporation, London Branch and the
Borrower on March 3, 1998 (and having an expiration date of November 2, 1998),
and delivered by the Borrower to Swiss Bank Corporation pursuant to the Security
Agreement, shall primarily serve as collateral security for the Tranche C
Advances.
1
<PAGE>
All substitutions and withdrawals of collateral will be subject to the
Bank's approval and Regulation U of the Board of Governors of the Federal
Reserve System ("REG U").
Only after payment in full of all obligations of the Borrower with respect
to the Advances for which any Shares primarily serve as collateral security
shall any proceeds of such Shares be applied toward any other obligations of the
Borrower.
All Shares identified in clauses (a)-(c) above and, in addition, any other
Shares deposited with Swiss Bank Corporation shall constitute Posted Collateral
within the meaning of the Security Agreement and collateral security for the
Borrower's obligations hereunder. This Agreement is the Credit Agreement
referred to in the Security Agreement.
3. PURPOSE. The Borrower shall use the Advances for purposes other than
buying or carrying margin stock (within the meaning of Reg U). The Borrower
agrees to indemnify SBC and hold SBC harmless from and against any and all
liabilities, losses, damages, costs and expenses of any kind (including, without
limitation, the reasonable fees and disbursements of counsel for SBC in
connection with any investigative, administrative or judicial proceeding,
whether or not SBC shall be designated a party thereto) which may be incurred by
SBC relating to or arising out of any actual or proposed use of Advances
hereunder; PROVIDED, HOWEVER, that the Borrower shall not be required to
indemnify SBC for any such liabilities, losses, damages, costs or expenses
incurred by SBC as a result of SBC's gross negligence or willful misconduct.
4. AVAILABILITY. Advances of durations of 3, 6, 9 or 12 months shall be
available to the Borrower hereunder; provided, however (and notwithstanding the
provisions of Sections 1 and 7 hereof), that if on the expiry date with respect
to any Tranche, as set forth or described in clauses (a)-(c) of Section 1 hereof
(its "EXPIRY DATE"), any amount shall be owing by SBC to the Borrower under the
put option transaction relating to the Shares serving primarily as security for
such Tranche, as identified or described in Section 2 hereof (a "PUT"), SBC
shall if requested by the Borrower make an Advance to the Borrower on the Expiry
Date not exceeding such amount and having an Interest Period beginning on such
Expiry Date and ending on the settlement date for such Put.
For the purposes of this Agreement, it is understood that, except as
provided in the foregoing paragraph, (i) the duration of each Advance shall be
referred to as an "INTEREST PERIOD"; (ii) the Borrower is required to repay each
Advance on the last day of the Interest Period for such Advance; (iii) each
Advance shall be in the amount of U.S. $50,000 or a greater integral multiple of
U.S. $10,000; and (iv) no Advance shall have an Interest Period which extends
beyond its Tranche's Expiry Date .
5. INTEREST. Interest shall be payable in respect of the outstanding
principal amount of each Advance at the maturity thereof and, in the case of any
Advance in excess of three months, every three months after the beginning
thereof. Advances shall bear interest at a rate per annum (fixed for the
duration of each Advance) equal to 0.50% in excess of, at the Borrower's option
(a) SBC's reserve-adjusted Eurodollar Rate or (b) LIBOR.
Any amount not paid by the Borrower when due hereunder shall, to the fullest
extent permitted by applicable law, bear interest, payable on demand, at a rate
per annum equal to 3% per annum in excess of the Base Rate.
"EURODOLLAR RATE" shall mean the rate so designated by SBC and determined in
accordance with the practice of SBC from time to time. "LIBOR" shall mean, for
any Interest Period, the offered rate for deposits in U.S. dollars for a period
equal to such Interest Period which appears on the Reuters Screen LIBO page as
of 11:00 a.m. (London time) two Business Days before the beginning of such
Interest Period (or, if at least two such rates appear, the arithmetic mean of
such rates). "BUSINESS DAY" shall mean any day on which dealings in Dollar
deposits are carried on in the London interbank market and other than a
Saturday, Sunday or other day on which banks in New York City are authorized or
required to close.
2
<PAGE>
"BASE RATE" shall mean the higher from time to time of (i) SBC's Prime Rate
and (ii) 0.50% in excess of the rate payable by SBC from time to time for
overnight Federal funds, the Base Rate to change when and as such other rates
shall change. "PRIME RATE" shall mean the rate so designated by SBC and
determined in accordance with the practice of SBC from time to time.
6. INCREASED COSTS. If at any time SBC shall have determined (which
determination shall, absent manifest error, be final, conclusive and binding on
all parties hereto) that as a result of any change in any applicable law or
governmental rule, regulation or order (including any applicable law or
governmental rule, regulation or order respecting capital adequacy), or any
interpretation thereof, including the enactment of any law or governmental rule,
regulation or order (whether or not having the force of law), the cost to SBC of
maintaining this Agreement or making, funding or maintaining any Advance shall
be materially increased or the yield to SBC on such Advance shall be materially
diminished, then SBC shall promptly notify the Borrower thereof, showing in
reasonable detail the basis for the calculation of such increased costs or
diminished yield, and the Borrower shall pay to SBC an amount sufficient to
indemnify SBC thereagainst.
7. NOTICE OF INTENTION TO BORROW. The Borrower shall give SBC prior notice
(a "NOTICE OF BORROWING") by telephone or telex (to be subsequently confirmed in
writing) or in writing (effective upon receipt) of its intention to borrow an
Advance, specifying the date, amount and tenor of the proposed Advance, such
notice to be received not later than 12:00 Noon (New York time) on a date no
later than (a) in the case of an Advance bearing interest at a rate calculated
by reference to the Eurodollar Rate, one Business Day prior to the date of the
proposed Advance and (b) in the case of an Advance bearing interest at a rate
calculated by reference to LIBOR, three Business Days prior to the date of the
proposed Advance.
8. PAYMENTS. All payments made hereunder or under the Note (as hereinafter
defined) shall be made to SBC in lawful and freely transferable money of the
United States of America in immediately available funds and shall be made
without deductions for any present or future taxes, withholdings, deductions or
any other charges (the "TAXES") imposed or required by any political or taxing
authority, it being understood that the net amount received by SBC after payment
of the Taxes by the Borrower shall not be less than the payment provided for
hereunder. All payments shall be made to Account No. 101-YR-196126 at the office
of SBC in New York City, or other such office or account of SBC as SBC shall
from time to time designate. Interest payments shall be calculated for the
actual number of days elapsed on the basis of a 360-day year.
9. FUNDING COSTS. If for any reason an Advance is prepaid, as a result of
acceleration or otherwise, or if the Borrower fails for any reason to borrow in
accordance with a Notice of Borrowing, the Borrower shall pay to SBC, on demand,
an additional amount as shall be required to compensate SBC for any loss
(including, without limitation, loss of margin) connected with its reemployment
of the amount so prepaid or of those funds acquired by SBC to fund the Advance
proposed in such Notice of Borrowing, as the case may be.
10. CONDITIONS PRECEDENT. The making of Advances by SBC to the Borrower
hereunder is subject, without limitation, to the satisfaction of the following
conditions:
(a) SBC shall have received (i) a duly executed note (the "NOTE") in the
form of EXHIBIT A hereto, (ii) a duly executed Put Payout Agreement (the
"PUT PAYOUT AGREEMENT") in the form of EXHIBIT B hereto, and (iii) a duly
executed Form or Forms U-1 ("FORMS U-1") issued by the Board of Governors of
the Federal Reserve System.
(b) The Borrower shall have executed and delivered to SBC such financing
statements on Form UCC-1 as SBC may request in connection with the
transaction evidenced hereby.
(c) All legal matters and proceedings in connection with the transaction
contemplated by this Agreement shall be satisfactory in form and substance
to SBC and its counsel, and SBC shall have
3
<PAGE>
received such documents and evidence of proceedings in connection with the
transaction as it shall reasonably request.
(d) There shall exist no Event of Default (as hereinafter defined) and
no condition, event or act which, with the giving of notice or lapse of time
or both, would constitute an Event of Default, and all representations and
warranties made by the Borrower herein shall be true and correct with the
same effect as if those representations and warranties had been made on and
as of the date of the proposed Advance.
11. REPRESENTATIONS AND WARRANTIES. The Borrower makes the following
representations and warranties, all of which shall survive the execution and
delivery of this Agreement:
(a) The Borrower is a corporation duly organized, validly existing and
in good standing under the laws of the State of California, and has all
corporate powers and all material governmental licenses, authorizations,
consents and approvals required to carry on its business as now conducted.
(b) The Borrower has the corporate power to execute, this Agreement, the
Security Agreement, the Put Payout Agreement, the Forms U-1, the Note, the
Representation Letter and each Supplement (the "OPERATIVE DOCUMENTS"), to
deliver the Operative Documents and to perform its obligations under the
Operative Documents and has taken all necessary corporate action to
authorize such execution, delivery and performance.
(c) Such execution, delivery and performance do not violate or conflict
with the Borrower's charter, by-laws or other constitutive documents, any
law applicable to the Borrower, any order or judgment of any court or other
agency of government applicable to the Borrower or any of its assets or any
contractual restriction binding on or affecting the Borrower or any of its
assets.
(d) All governmental and other consents that are required to have been
obtained by the Borrower with respect to the Operative Documents have been
obtained and are in full force and effect and all conditions of any such
consents have been complied with.
(e) The Borrower's obligations under the Operative Documents constitute
its legal, valid and binding obligations, enforceable in accordance with
their respective terms .
(f) There is not pending or, to the Borrower's knowledge, threatened
against it any action, suit or other proceeding at law or in equity or
before any court, tribunal, governmental body, agency or official or any
arbitrator that is likely to have a material adverse effect on the business,
operations, prospects or condition (financial or otherwise) of the Borrower
or to affect the legality, validity or enforceability against the Borrower
of any of the Operative Documents or its ability to perform its obligations
under the Operative Documents.
(g) All information furnished by or on behalf of the Borrower pursuant
to Section 12(a) hereof and in the Representation Letter is, as of the date
of such information, true, accurate and complete in every material respect .
(h) No proceeds of any Advance will be used in any manner which would
violate of cause SBC to be in violation of Regulations G, T, U, or X of the
Board of Governors of the Federal Reserve System.
(i) The address of the principal place of business of the Borrower is
set forth following its signature hereto.
(j) There exists no restriction on the Borrower's ability to pledge the
Shares in favor of SBC and no internal sales restrictions of the Issuer or
any other contractual agreement binding on the Issuer or the Borrower that
restricts SBC's right to sell the Shares upon any foreclosure thereupon,
other than the Registration Rights Agreement, dated as of February , 1998,
between the Issuer and GST USA, Inc.
4
<PAGE>
12. COVENANTS. The Borrower covenants and agrees that, until all
obligations incurred by the Borrower under the Operative Documents are paid in
full and so long as this Agreement is in effect, the Borrower will:
(a) Provide to SBC, with reasonable promptness, any public information
relating to the financial condition of the Borrower as SBC may from time to
time reasonably request.
(b) Promptly give written notice to SBC of any condition, event or act
which, with or without the giving of notice or the lapse of time, or both,
would constitute an Event of Default.
(c) Promptly execute and deliver at the Borrower's expense all further
instruments and documents (including any financing statements under the
Uniform Commercial Code as enacted in any applicable jurisdiction), and take
all further action, that may be necessary or that SBC may request in order
to perfect or protect any security interest granted or purported to be
granted under any Operative Document or to enable SBC to exercise and
enforce its rights and remedies thereunder.
(d) Promptly (and in any event within two weeks) inform SBC in writing
of any change of the address of its principal place of business from the
address set forth following its signature hereto.
(e) Not amend or modify any agreement affecting the Shares, or enter
into any agreement that would restrict the transferability of the Shares.
13. EVENTS OF DEFAULT. If any of the following events ("EVENTS OF
DEFAULT") shall occur and be continuing:
(a) The Borrower shall fail to pay when due any amount payable under any
Operative Document;
(b) The Borrower shall fail to perform or observe any term or covenant
contained in any Operative Document or an Event of Default as defined
therein shall occur under the ISDA Master Agreement dated as of February 26,
1998 between the Borrower and SBC (such agreement, together with any
confirmation thereunder, the "MASTER AGREEMENT"), or any representation or
warranty made by the Borrower in this Agreement or the Master Agreement or
in any certificate or other document or statement furnished at any time
hereunder or thereunder or in connection herewith or therewith shall prove
to have been incorrect or untrue in any material respect on the date as of
which made;
(c) A default or event of default shall occur in respect of notes, other
loans or similar evidences of indebtedness of the Borrower, the effect of
which is to cause, or to permit the holder of such indebtedness to cause,
such indebtedness to become due prior to its stated maturity, or any such
indebtedness shall not be paid within any applicable grace period after the
due date thereof;
(d) One or more judgments or decrees shall be entered against the
Borrower involving in the aggregate for the Borrower a liability (not paid
or fully covered by insurance) of $10,000,000 or more, and such judgments or
decrees shall not have been vacated, discharged or stayed or bonded pending
appeal within 30 days after the entry thereof;
(e) The Borrower shall make an assignment for the benefit of creditors
or a composition with creditors, shall generally fail to pay its debts as
they become due, shall file (or take any action for the purpose of filing) a
petition commencing a voluntary case concerning the Borrower under any
reorganization or bankruptcy laws, or an involuntary case under such laws
shall be commenced against the Borrower; or
(f) The Borrower shall fail to comply with any of the provisions of the
Security Agreement or the Security Agreement shall cease to be in full force
and effect;then, and in any such event, SBC may by notice to the Borrower
take the following actions: (i) terminate the Facility, whereupon the same
shall terminate forthwith, (ii) declare the Advances and all interest
accrued and unpaid thereon, and all other sums due under any Operative
Document, to be immediately due and payable without
5
<PAGE>
presentment, demand, protest or further notice of any kind, all of which are
hereby expressly waived by the Borrower, and/or (iii) exercise such rights
and remedies under this Agreement, the Security Agreement or under the
Uniform Commercial Code or other applicable law which it deems appropriate
under the circumstances to enforce such documents.
The Borrower agrees to provide or procure at the Borrower's expense such
documents and assistance as SBC may deem necessary or desirable in order to
effect a sale of any Shares following an Event of Default hereunder. The
Borrower hereby irrevocably appoints SBC as the Borrower's attorney-in-fact,
with effect upon the occurrence of an Event of Default, to execute and deliver
in the name of the Borrower any document necessary or desirable in connection
with such sale.
14. ASSIGNMENT. SBC shall have the right at any time (a) to transfer or
assign any of its rights or obligations hereunder or under the Note to any
office or subsidiary of SBC or to make any Advance provided hereunder through
any such office or subsidiary, and (b) to assign and pledge all or any portion
of its rights hereunder or under the Note to any Federal Reserve Bank.
15. SUCCESSORS AND ASSIGNS. This Agreement shall be binding on and inure
to the benefit of the parties hereto and their respective permitted successors
and assigns; provided that the Borrower shall not be permitted to assign any of
its rights and obligations hereunder without the prior written consent of SBC.
16. GOVERNING LAW AND JURISDICTION; WAIVER OF JURY TRIAL. THIS AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
NEW YORK.
The Borrower hereby irrevocably submits to the jurisdiction of any court of
the State of New York or of the United States for the Southern District of New
York with respect to any action or legal proceeding arising out of or relating
to this Agreement or the Note. The Borrower hereby irrevocably agrees and
consents that any such action or legal proceeding may also be brought before the
courts of the jurisdiction of the Borrower's principal residence if SBC so
elects.
THE BORROWER HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY.
17. EXPENSES. The Borrower agrees to reimburse SBC for any out-of-pocket
expenses, including reasonable fees and disbursements of legal counsel, incurred
in connection with (a) the enforcement of any Operative Document or the Master
Agreement, the Note or any other document submitted hereunder or in connection
herewith, or (b) the preservation of SBC's rights hereunder or thereunder.
6
<PAGE>
IN WITNESS WHEREOF, the Borrower and SBC have executed and delivered this
Agreement as of the date first above written.
<TABLE>
<S> <C> <C>
SWISS BANK CORPORATION,
NEW YORK BRANCH
By:
-----------------------------------------
Title:
By:
-----------------------------------------
Title:
HAMBRECHT & QUIST CALIFORNIA
By: /s/ PATRICK J. ALLEN
-----------------------------------------
Title: Chief Financial Officer
Address: One Bush Street
San Francisco, CA 94104
</TABLE>
7
<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> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 11,164
<RECEIVABLES> 358,620
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 52,036
<PP&E> 19,235
<TOTAL-ASSETS> 645,443
<SHORT-TERM> 0
<PAYABLES> 295,940
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 16,722
<LONG-TERM> 0
0
0
<COMMON> 146,198
<OTHER-SE> 186,582
<TOTAL-LIABILITY-AND-EQUITY> 645,443
<TRADING-REVENUE> 52,597
<INTEREST-DIVIDENDS> 12,735
<COMMISSIONS> 26,952
<INVESTMENT-BANKING-REVENUES> 46,912
<FEE-REVENUE> 45,596
<INTEREST-EXPENSE> 2,037
<COMPENSATION> 99,509
<INCOME-PRETAX> 39,677
<INCOME-PRE-EXTRAORDINARY> 39,677
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,616
<EPS-PRIMARY> 0.66
<EPS-DILUTED> 0.60
</TABLE>
