<PAGE>
UNITED STATES
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, 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 No.)
of incorporation or organization)
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 _____
24,611,621 shares of Common Stock were issued and outstanding as of
July 31, 1998.
<PAGE>
HAMBRECHT & QUIST GROUP
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements..................................................3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................14
PART II OTHER INFORMATION
Item 1. Legal Proceedings.....................................................20
Item 2. Changes in Securities and Use of Proceeds.............................21
Item 6. Exhibits and Reports on Form 8-K......................................21
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HAMBRECHT & QUIST GROUP
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 AND JUNE 30, 1998
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1998
-------------- --------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Cash and cash equivalents .................................................................... $ 42,637,732 $ 38,693,278
Receivables:
Customers (net of allowance of $1,050,000 at September 30, 1997 and June 30, 1998) ......... 183,796,833 277,447,389
Lewco Securities Corp. ..................................................................... 157,570,375 --
Syndicate managers ......................................................................... 15,494,668 18,455,462
Related parties ............................................................................ 17,397,164 17,594,998
Notes ...................................................................................... 18,489,300 18,459,312
Lease ...................................................................................... 3,467,628 2,433,679
Income taxes ............................................................................... 531,955 4,456,501
Other ...................................................................................... 11,288,008 10,725,194
Marketable trading securities, at market value ............................................... 32,617,567 45,600,259
Long-term investments, at estimated fair value ............................................... 117,199,728 145,068,310
Deferred income taxes ........................................................................ 56,734,654 75,536,100
Furniture, equipment and leasehold improvements, net of accumulated depreciation and
amortization ............................................................................... 18,782,846 17,675,701
Leased assets, net of accumulated depreciation ............................................... 2,272,172 498,754
Exchange memberships, at cost (market value-- $1,925,000 and $2,062,000, respectively) ....... 656,000 656,000
============= =============
Total assets ....................................................................... $ 678,936,630 $ 673,300,937
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Payables:
Customers .................................................................................. $ 186,445,656 $ 87,544,811
Compensation and benefits .................................................................. 116,673,510 111,233,064
Lewco Securities Corp. ..................................................................... -- 33,970,976
Syndicate settlements ...................................................................... 21,355,653 11,723,270
Income taxes payable ....................................................................... 6,563,552 --
Trade accounts payable ..................................................................... 2,829,377 10,374,347
Accrued expenses and other ................................................................. 33,220,760 43,662,824
Securities sold, not yet purchased, at market value .......................................... 11,770,127 18,289,514
Debt obligations ............................................................................. 2,700,000 --
------------- -------------
Total liabilities .................................................................. 381,558,635 316,798,806
------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock (par value $0.01 and 100,000,000 shares authorized, 23,790,337
and 24,562,065 issued and outstanding as of September 30, 1997 and June 30,
1998, respectively) ...................................................................... 237,903 245,620
Additional paid-in capital ................................................................. 136,271,533 159,596,216
Stock notes receivable from employees ...................................................... (5,620,260) (3,284,475)
Retained earnings .......................................................................... 167,230,812 203,758,964
Net unrealized losses on investments available for sale .................................... (303,117) (3,578,696)
Cumulative translation loss ................................................................ -- (235,498)
Treasury stock, at cost (21,615 shares outstanding as of September 30, 1997 and none
outstanding as of June 30, 1998) ......................................................... (438,876) --
------------- -------------
Total stockholders' equity ......................................................... 297,377,995 356,502,131
------------- -------------
Total liabilities and stockholders' equity ......................................... $ 678,936,630 $ 673,300,937
============= =============
</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,
-------------------------------- --------------------------------
1997 1998 1997 1998
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
REVENUES:
Principal transactions .................... $ 32,139,560 $ 27,123,478 $ 90,364,128 $ 82,193,004
Commissions ............................... 9,238,511 12,808,123 28,109,849 37,287,505
Investment banking ........................ 12,074,122 28,225,102 60,132,870 75,136,965
Corporate finance fees .................... 9,572,275 20,000,124 34,849,234 57,311,098
Interest and dividends .................... 5,964,199 6,797,761 15,774,646 19,532,582
Net investment gains ...................... 9,705,104 1,576,572 10,063,905 11,354,284
Other ..................................... 3,605,783 6,257,610 12,557,064 18,991,270
------------ ------------ ------------ ------------
Total revenues .......................... 82,299,554 102,788,770 251,851,696 301,806,708
------------ ------------ ------------ ------------
EXPENSES:
Compensation and benefits ................. 42,461,762 51,606,410 129,048,309 151,115,379
Brokerage and clearance ................... 5,154,672 6,280,631 12,476,832 16,963,503
Occupancy and equipment ................... 4,678,536 5,622,929 12,074,299 15,401,034
Communications ............................ 3,802,359 3,803,579 10,863,054 11,536,013
Interest .................................. 447,105 975,955 3,182,382 3,013,363
Other ..................................... 7,515,077 10,098,697 24,449,431 39,700,069
------------ ------------ ------------ ------------
Total expenses .......................... 64,059,511 78,388,201 192,094,307 237,729,361
------------ ------------ ------------ ------------
Income before income tax provision ...... 18,240,043 24,400,569 59,757,389 64,077,347
INCOME TAX PROVISION ........................ 8,025,621 10,488,180 26,293,251 27,549,195
============ ============ ============ ============
Net income .............................. $ 10,214,422 $ 13,912,389 $ 33,464,138 $ 36,528,152
============ ============ ============ ============
EARNINGS PER SHARE:
Basic ..................................... $0.43 $0.57 $1.43 $1.50
Diluted ................................... $0.40 $0.52 $1.31 $1.37
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ..................................... 23,741,299 24,534,385 23,458,365 24,424,145
Diluted ................................... 25,763,635 26,653,279 25,464,725 26,613,378
</TABLE>
The accompanying notes are an integral part of these statements.
-4-
<PAGE>
HAMBRECHT & QUIST GROUP
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 1997 AND NINE MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL
COMMON COMMON STOCK PAID-IN STOCK NOTES RETAINED UNREALIZED
SHARES CAPITAL RECEIVABLE EARNINGS LOSSES, NET
----------- -------------- -------------- -------------- -------------- --------------
<S> <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 20,083,292 (289,035) -- --
Forfeitures of common stock .... (37,837) (378) (455,382) -- -- --
Reductions of stock notes ...... -- -- -- 8,209,370 -- --
Net income ..................... -- -- -- -- 43,174,198 --
Change in net unrealized losses -- -- -- -- -- 362,107
Purchase of 21,615 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 .......... 829,866 8,298 24,264,299 -- -- --
Forfeitures of common stock .... (58,138) (581) (1,163,207) -- -- --
Reductions of stock notes ...... -- -- -- 2,335,785 -- --
Net income ..................... -- -- -- -- 36,528,152 --
Change in net unrealized losses -- -- -- -- -- 3,275,579)
Change in translation loss ..... -- -- -- -- -- --
Issuance of 21,615 common shares -- -- 223,591 -- -- --
------------- ------------- ------------- ------------- ------------- -------------
BALANCE, JUNE 30, 1998 ......... 24,562,065 $ 245,620 $ 159,596,216 $ (3,284,475) $ 203,758,964 $ (3,578,696)
============= ============= ============= ============= ============= =============
<CAPTION>
CUMULATIVE TREASURY
TRANSLATION STOCK, AT
LOSS COST TOTAL
------------ ----------- --------------
<S> <C> <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 .......... -- -- 24,272,597
Forfeitures of common stock .... -- -- (1,163,788)
Reductions of stock notes ...... -- -- 2,335,785
Net income ..................... -- -- 36,528,152
Change in net unrealized losses -- -- (3,275,579)
Change in translation loss ..... (235,498) -- (235,498)
Issuance of 21,615 common shares -- 438,876 662,467
---------- ------------- -------------
BALANCE, JUNE 30, 1998 ......... $ (235,498) $ -- $ 356,502,131
========== ============= =============
</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, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
------------ -------------
UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES ........................................ $ 26,581,167 $ 16,611,208
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of long-term investments ........................................ (56,873,229) (61,113,378)
Proceeds from sales/distributions of long-term investments ................ 28,679,773 38,242,551
Purchases of furniture, equipment and leasehold improvements .............. (9,259,483) (5,978,778)
Increases in notes receivable ............................................. (12,175,375) (11,345,000)
Repayments of notes receivable ............................................ 5,170,420 11,374,988
Other, net ................................................................ (1,389,026) 6,636,623
------------ ------------
Net cash and cash equivalents used in investing activities ........ (45,846,920) (22,182,994)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt obligations ............................................ 11,059,227 9,500,000
Repayments of debt obligations ............................................ (14,683,048) (12,200,000)
Proceeds from sales of common stock ....................................... 5,620,546 4,514,832
Other, net ................................................................ (428,968) (187,500)
------------ ------------
Net cash and cash equivalents provided by financing activities .... 1,567,757 1,627,332
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS ....................................... (17,697,996) (3,944,454)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............................ 50,031,534 42,637,732
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................................. $ 32,333,538 $ 38,693,278
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
-6-
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 1998 and the results of operations
and cash flows for the three month and nine month periods ended June 30, 1997
and 1998.
Certain amounts in the fiscal 1997 financial statements have been
reclassified to conform to the fiscal 1998 presentation.
2. ORGANIZATION CHANGES:
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 bases of the
assets and liabilities of Transition Capital and Guaranty Finance were combined.
H&Q retained its 87.5 percent interest in Guaranty Finance.
Effective May 28, 1998, H&Q discontinued the operations of RvR and its net
assets were distributed to its parent, H&Q California. Such distribution was
accounted for at the historical carrying bases of the net assets transferred.
-7-
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
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 previously reported
by the Company. The Company's basic and diluted earnings per share for the three
month and nine month periods ended June 30, 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 --
June 30, 1997:
Basic earnings per share ........ $10,214,422 23,741,299 $0.43
Options outstanding ............. -- 2,022,336
----------- -----------
Diluted earnings per share ...... $10,214,422 25,763,635 $0.40
=========== ===========
June 30, 1998:
Basic earnings per share ........ $13,912,389 24,534,385 $0.57
Options outstanding ............. -- 2,118,894
----------- -----------
Diluted earnings per share ...... $13,912,389 26,653,279 $0.52
=========== ===========
FOR THE NINE MONTHS ENDED -
June 30, 1997:
Basic earnings per share ........ $33,464,138 23,458,365 $1.43
Options outstanding ............. -- 2,006,360
----------- -----------
Diluted earnings per share ...... $33,464,138 25,464,725 $1.31
=========== ===========
June 30, 1998:
Basic earnings per share ........ $36,528,152 24,424,145 $1.50
Options outstanding ............. -- 2,189,233
----------- -----------
Diluted earnings per share ...... $36,528,152 26,613,378 $1.37
=========== ===========
</TABLE>
-8-
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
4. RECEIVABLES FROM RELATED PARTIES:
At September 30, 1997 and June 30, 1998 receivables from related parties
consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1998
----------- ------------
<S> <C> <C>
Notes receivable from affiliates and employees .. $ 2,696,455 $ 1,845,897
Asset management fees and profit participations . 5,989,569 9,239,859
Affiliate and other advances .................... 8,711,140 6,509,242
=========== ===========
$17,397,164 $17,594,998
=========== ===========
</TABLE>
Notes receivable from affiliates and employees as of September 30, 1997 and
June 30, 1998 include notes receivable from Asia Pacific of $1,757,670 and
$812,897, respectively.
Asset management fees and profit participations at September 30, 1997 and
June 30, 1998, include profit participations receivable of $5,527,057 and
$8,911,515, 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 $2,169,906 and
$1,937,789 for the three month periods ended June 30, 1997 and 1998,
respectively and $7,301,407 and $7,397,467 for the nine month periods ended June
30, 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 June 30, 1998, $5,069,789 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 June 30, 1998, marketable trading securities and
securities sold, not yet purchased, consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1998
------------ ------------
<S> <C> <C>
Marketable trading securities-
Equity securities .............. $10,367,207 $22,252,544
Convertible bonds .............. 2,086,750 10,508,447
Options ........................ 26,840 8,750
U.S. government securities ... 20,136,770 12,830,518
=========== ===========
$32,617,567 $45,600,259
=========== ===========
Securities sold, not yet purchased-
Equity securities .............. $11,359,430 $17,148,937
Convertible bonds .............. -- 581,164
Options ........................ 410,697 559,413
=========== ===========
$11,770,127 $18,289,514
=========== ===========
</TABLE>
-9-
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
6. LONG-TERM INVESTMENTS:
At September 30, 1997 and June 30, 1998, the Company's long-term investments,
at estimated fair value, consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1998
------------- -------------
<S> <C> <C>
Marketable equity securities available for sale by Guaranty
Finance ................................................... $ 14,023,208 $ 8,896,843
World Access Inc. ........................................... -- 26,882,251
Marketable equity securities - other ........................ 37,661,637 31,867,735
------------ ------------
Total marketable investments ...................... 51,684,845 67,646,829
------------ ------------
Nonmarketable securities and investment partnership interests 39,568,602 51,030,139
Venture Partners and affiliated venture capital funds ....... 15,756,670 15,503,598
Venture capital funds managed by others ..................... 8,079,332 8,777,465
Lewco Securities ............................................ 2,110,279 2,110,279
------------ ------------
Total nonmarketable investments ................... 65,514,883 77,421,481
------------ ------------
Total long-term investments ....................... $117,199,728 $145,068,310
============ ============
</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 June 30, 1998.
The cost of the Company's long-term investments at September 30, 1997 and
June 30, 1998, was $119,412,383 and $156,259,192, respectively.
Following is an analysis of the net investment gains for the three month and
nine month periods ended June 30, 1997 and 1998:
<TABLE>
<CAPTION>
FOR THE THREE MONTH ENDED FOR THE NINE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1997 1998 1997 1998
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Realized gains ............... $ 12,332,315 $ 4,021,167 $ 18,081,571 $ 16,588,996
Change in unrealized gains and
(losses), net .............. (2,627,211) (2,444,595) (8,017,666) (5,234,712)
============ ============ ============ ============
Net investment gains ......... $ 9,705,104 $ 1,576,572 $ 10,063,905 $ 11,354,284
============ ============ ============ ============
</TABLE>
-10-
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 June
30, 1998 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1998
------------ -------------
<S> <C> <C>
Cost .................. $ 14,369,649 $ 12,986,801
Gross unrealized gains 1,975,968 1,067,282
Gross unrealized losses (2,322,409) (5,157,240)
============ ============
Estimated fair value .. $ 14,023,208 $ 8,896,843
============ ============
</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, 1997 and 1998
are as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Gross proceeds ...... $ 978,772 $ 661,530 $1,242,308 $5,950,596
Gross realized gains 108,125 474,745 180,956 1,697,409
Gross realized losses 917 -- 917 --
</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 June 30, 1998, the ESOP owned approximately 6.3 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 the Compensation Plan
and the 1996 Plan 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 the Compensation Plan and the 1996 Plan as of
January 1 of each year equal to the lesser of (i) 3.0 percent of the total
number of shares 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, 200,285 shares valued at $7,024,033 were issued to executives and
professionals effective April 15, 1998. All such amounts were included in
compensation and benefits expense as of March 31, 1998.
-11-
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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
Exercise ...................... (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 ....................... 666,000 $13.75 - $43.25
Exercised ..................... (376,914) $ 2.10 - $19.88
Canceled ...................... (273,867) $ 4.60 - $32.75
----------
Outstanding at June 30, 1998 .... 5,582,375 $ 2.10 - $43.25
==========
</TABLE>
Of the outstanding options at June 30, 1998, 2,115,440 options to purchase
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 June 30,
1998.
8. NET CAPITAL REQUIREMENTS:
At September 30, 1997 and June 30, 1998, H&Q LLC's regulatory net capital of
$67,030,028 and $64,877,775, respectively, was 27 percent of aggregate debit
items at both September 30, 1997 and June 30, 1998, and its net capital in
excess of the minimum required was $62,087,429 and $60,099,457, respectively.
At June 30, 1998, HQEM was 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 nine month period ended June 30,
1998. All remaining payments of settlement amounts are due on or before
September 30, 1998.
10. COMMITMENTS AND CONTINGENCIES:
Lewco conducts a stock borrow/stock loan 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 $8,268,256 at June 30,
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HAMBRECHT & QUIST GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES (Continued):
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 June 30, 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 a material 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
June 30, 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.
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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 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.
Effective May 28, 1998, the Company discontinued the operations of RvR
Securities Corp. and its net assets were distributed to its parent, H&Q
California. Such distribution was accounted for at the historical carrying bases
of the net assets transferred.
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 has 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 its business activities and the number of its employees. Average employee
headcount was 839 in the three month period ended June 30, 1998 compared to 782
in the three month period ended June 30, 1997.
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The scope of the Company's business activities has increased to include new
business activities, increased emphasis on building existing 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 successfully 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 $56.9 million and $61.1 million in principal investments during the
nine months ended June 30, 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 June 30, 1998, the Company's
long-term investments totaled $117.2 million and $145.1 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 three month periods ended June 30, 1997 and 1998,
the Company recorded net investment gains of $9.7 million and $1.6 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
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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 YEAR 2000
The Company utilizes software and related information 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. Additionally, the Company relies on certain
noninformation technology systems such as communications and building operations
systems that could also be affected by the date change. The failure of these
noninformation technology systems could interrupt or shutdown business
operations for some period of time.
Based on ongoing assessments and testing, 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. The
Company has also determined that Lewco, its clearing broker, will be required to
modify or replace significant portions of the software used by Lewco in
connection with processing Company and customer trading activity and maintaining
Company and customer information. 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 and could lead to enforcement actions by regulatory
agencies.
The year 2000 plan followed by the Company contains five phases: phase one
is the identification and prioritization of all in-house and third party
information technology and noninformation technology systems; phase two is
contingency planning; phase three is testing all critical information technology
and noninformation technology systems for year 2000 compliance; phase four is
the implementation of solutions, including all necessary repair work,
modifications, and replacements to system software and hardware; and phase five
is the execution of the contingency plan for those areas where repair work
fails. The Company is currently completing phases one and two and expects to
complete phase three by November 1998. The Company expects to complete phase
four by June 1999, leaving six months to execute the contingency plan actions
described in phase five.
For all phases, the Company has budgeted an incremental $2.0 million for
programming changes and testing of internally developed systems and software
licensed from third parties. Most of the $2.0 million budgeted will be incurred
and expensed in the Company's 1999 fiscal year beginning October 1, 1998.
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. To date, the Company's
portion of expenses incurred is approximately $1.0 million. The Company's
remaining portion of the expenses incurred to address this issue as budgeted by
Lewco is expected to be approximately $1.3 million in calendar 1998 and $250,000
in calendar 1999, which amounts will be funded through operating cash flows.
During the quarter ended June 30, 1998, the Company incurred approximately
$312,500 of expenses as a result of Lewco's efforts to address this issue.
The estimated costs of and time frames related to these projects 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 frames can be maintained. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost
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of personnel trained in this area, the ability to locate and correct all
relevant computer code, the ability to formulate and implement contingency
plans, if required, and similar uncertainties.
In addition to Lewco, the Company relies on various third party systems or
services to conduct its business, including Nasdaq, Inc., New York Stock
Exchange, Inc. and regional and national telecommunications and market data
services providers. The failure of any of these entities to satisfactorily
address the year 2000 issue could have a material adverse affect on the
Company's operations and financial condition. The Company is presently
monitoring the progress of these and other entities' year 2000 compliance.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
REVENUES. Total revenues for the period increased 25% from $82.3 million
for the three months ended June 30, 1997 to $102.8 million for the three months
ended June 30, 1998.
Principal transactions revenue decreased 16% from $32.1 million to $27.1
million due primarily to narrower margins in the OTC business.
Commissions increased 39% from $9.2 million to $12.8 million. This increase
was primarily due to an increase in NYSE listed transactions.
Investment banking revenue increased 134% from $12.1 million to $28.2
million, and increased as a percentage of revenues from 15% to 27%. The Company
managed or co-managed 32 public offerings during the three month period ended
June 30, 1998, compared to 14 during the three month period ended June 30, 1997.
Corporate finance fees increased 109% from $9.6 million to $20.0 million
due primarily to the completion of a higher level of merger and acquisition
transactions during the three month period ended June 30, 1998.
Interest and dividend revenue increased 14% from $6.0 million to $6.8
million. The increase related primarily to interest earned on higher average
customer margin loans outstanding.
Net investment gains for the three month period decreased 84% from $9.7
million to $1.6 million. For the three months ended June 30, 1997, realized
gains of $12.3 million were offset by a change in unrealized loss of $2.6
million. For the three months ended June 30, 1998, realized gains of $4.0
million were offset by a change in unrealized loss of $2.4 million.
Other revenues increased 74% from $3.6 million to $6.3 million. The
increase related primarily to increases in accrued profit participation
distributions, account transaction fees and gains on sales of assets.
EXPENSES. Total expenses for the period increased 22% from $64.1 million
for the three months ended June 30, 1997 to $78.4 million for the three months
ended June 30, 1998.
Compensation and benefits expense increased 22% from $42.5 million to $51.6
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 52% and 50%, respectively, for the three months
ended June 30, 1997 and 1998.
Brokerage and clearance expense increased 22% from $5.2 million to $6.3
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 commissions.
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Occupancy and equipment expense increased 20% from $4.7 million to $5.6
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. Additionally, in April 1998, the Company approved a plan to
replace all of its employees' personal computers and related infrastructure. It
is anticipated that the new computer equipment will be installed firmwide by
December 1998. During the three month period ended June 30, 1997, the Company
incurred additional depreciation expense of approximately $500,000 as a result
of a change in depreciation estimated for the existing computers and related
infrastructure.
Communications expense was $3.8 million during both periods.
Interest expense increased 118% from $447,000 to $976,000.
Other expenses increased 34% from $7.5 million to $10.1 million. This
increase was due primarily to increased travel and entertainment expenses,
losses in error and professional services fees.
INCOME TAX PROVISION. The Company's effective income tax rate was 44% for
the three month period ended June 30, 1997 and decreased to 43% for the three
month period ended June 30, 1998.
NINE MONTHS ENDED JUNE 30, 1997 COMPARED TO NINE MONTHS ENDED JUNE 30, 1998
REVENUES. Total revenues for the period increased 20% from $251.9 million
for the nine months ended June 30, 1997 to $301.8 million for the nine months
ended June 30, 1998.
Principal transactions revenue decreased 9% from $90.4 million to $82.2
million due primarily to narrower margins in the OTC business.
Commissions increased 33% from $28.1 million to $37.3 million. This
increase was primarily due to an increase in NYSE listed transactions.
Investment banking revenue increased 25% from $60.1 million to $75.1
million, and increased as a percentage of revenues from 24% to 25%. The Company
managed or co-managed 75 public offerings during the nine month period ended
June 30, 1998, compared to 63 during the nine month period ended June 30, 1997.
Corporate finance fees increased 64% from $34.8 million to $57.3 million
due primarily to the completion of a higher level of merger and acquisition
transactions during the nine month period ended June 30, 1998.
Interest and dividend revenue increased 24% from $15.8 million to $19.5
million. The increase related primarily to interest earned on higher average
customer margin loans outstanding.
Net investment gains for the nine month period increased 13% from $10.1
million to $11.4 million. For the nine months ended June 30, 1997, realized
gains of $18.1 million were offset by a change in unrealized loss of $8.0
million. For the nine months ended June 30, 1998, realized gains of $16.6
million were offset by a change in unrealized loss of $5.2 million.
Other revenues increased 51% from $12.6 million to $19.0 million. The
increase related primarily to increases in accrued profit participation
distributions, account transaction fees and gains on sales of assets.
EXPENSES. Total expenses for the period increased 24% from $192.1 million
for the nine months ended June 30, 1997 to $237.7 million for the nine months
ended June 30, 1998.
Compensation and benefits expense increased 17% from $129.0 million to
$151.1 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 nine month
periods ended June 30, 1997 and 1998.
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Brokerage and clearance expense increased 36% from $12.5 million to $17.0
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 commissions.
Occupancy and equipment expense increased 28% from $12.1 million to $15.4
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. Additionally, in April 1998, the Company approved a plan to
replace all of its employees' personal computers and related infrastructure. It
is anticipated that the new computer equipment will be installed firmwide by
December 1998. During the three month period ended June 30, 1997, the Company
incurred additional depreciation expense of approximately $500,000 as a result
of a change in depreciation estimated for the existing computers and related
infrastructure.
Communications expense increased 6% from $10.9 million to $11.5 million.
This increase was due primarily to increases in quotes and information services
expenses resulting from the increase in headcount.
Interest expense decreased 5% from $3.2 million to $3.0 million.
Other expenses increased 62% from $24.5 million to $39.7 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 nine month period ended June 30, 1997 and decreased to 43% for the nine
month period ended June 30, 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 stock to employee
stockholders and the public through its initial public offering. As of June 30,
1998, H&Q LLC had liquid assets consisting primarily of cash and cash
equivalents of $38.7 million and amounts on deposit with Lewco of $147.0
million. Such amounts on deposit with Lewco are a component of the June 30, 1998
payable to Lewco of $34.0 million. As of June 30, 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 June 30,
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 June 30, 1998, securities held
for trading purposes include government securities mutual funds totaling $12.8
million. 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, 1998, H&Q LLC was required
to maintain minimum regulatory net capital in accordance with SEC rules of
approximately $4.8 million and had total regulatory net capital of approximately
$64.9 million, or approximately $60.1 million in excess of its requirement.
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HQEM was in compliance with all applicable regulatory capital adequacy
requirements at June 30, 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.
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 two new matters.
NASDAQ MARKET-MAKERS ANTITRUST LITIGATION
On August 6, 1998, the Second Circuit Court of Appeals affirmed the
district court's approval of the DOJ settlement.
INDIVIDUAL, INC. SECURITIES LITIGATION
On May 27, 1998, the defendants' motions to dismiss were granted.
INDIVIDUAL, INC. SECURITIES LITIGATION, U. S. D. C., District of Massachusetts,
Master File No. 96-12272-DPW. On June 19, 1998, the plaintiffs filed a Notice of
Appeal to the United States Court of Appeals for the First Circuit, No. 98-1730.
LUMISYS, INC. SECURITIES LITIGATION
On May 27, 1998, the plaintiffs filed a First Amended Complaint in the
federal court. WENGER, ET AL. V. LUMISYS, INC., ET AL., No. C-97 20609 EAI. The
defendants filed a motion to dismiss on July 6, 1998.
In the state court, an amended complaint was filed, and on May 26, 1998,
the court again sustained the defendants' demurrers, with leave to amend. On
July 8, 1998, the plaintiffs filed a Second Amended Complaint. WENGER, ET AL. V.
LUMISYS, INC., ET AL., Santa Clara County Superior Court, Case No. CV767369.
OMEGA RESEARCH, INC. SECURITIES LITIGATION
On June 1, 1998, the plaintiffs filed an amended complaint. On July 1,
1998, the defendants filed a motion to dismiss. RHODES V. CRUZ, ET AL., Civ. No.
98-0174.
SS&C TECHNOLOGIES, INC. SECURITIES LITIGATION
On May 20, 1998, the defendants answered the Consolidated Amended Class
Action Complaint. FEINER, ET AL. V. SS&C TECHNOLOGIES, INC., ET AL., Civil
Action No. 397CV00656(JBA). On May 29, 1998, the lead plaintiffs moved for class
certification.
ASPEC TECHNOLOGY, INC. SECURITIES LITIGATION
Beginning in June 1998, several shareholder class action lawsuits were
filed against Aspec Technology, Inc. and others in Santa Clara County Superior
Court in California. At least two such actions name H&Q as a defendant. NEUMAN
V. ASPEC TECHNOLOGY, INC. ET AL., No. CV775089 and JONAS V. ASPEC TECHNOLOGY,
INC., ET AL., No. CV775037. The complaints allege that the defendants violated
California state laws by making false and misleading statements in course of
Aspec's April 27, 1998 IPO, of which H&Q was the lead manager, and thereafter.
The defendants have not yet responded to the complaints.
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EVOLVING SYSTEMS, INC. SECURITIES LITIGATION
Beginning in June 1998, several shareholder class action lawsuits were
filed against Evolving Systems, Inc. and others in the federal district court in
Denver, Colorado. The complaints allege that the defendants violated the federal
securities laws by, among other things, misrepresenting material facts in the
course of the company's May 11, 1998 IPO and thereafter. H&Q was a co-manager of
the IPO. H&Q is aware of two such lawsuits in which it has been named as a
defendant. PAN AMERICAN EXPORT TRADING, INC. V. EVOLVING SYSTEMS, INC., ET AL.,
Civil Action No. 98-WY-1343 and SMITH V. EVOLVING SYSTEMS, INC., ET AL., Civil
Action No. 98-WY-1376. The defendants have not yet responded to the complaints.
STORM TECHNOLOGY, INC. SECURITIES LITIGATION
On May 1, 1998, the plaintiffs in the state case filed a Second Amended
Consolidated Complaint that did not name the underwriters as defendants.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On May 15, 1998, the Registrant issued a warrant to purchase 1,394 shares
of common stock at $35.875 per share to one holder. The issuance did not involve
any underwriter, underwriting discount or commission, or any public offering,
and the Registrant believes that the transaction was exempt from the
registration requirements of the Securities Act of 1933 by virtue of Section
4(2) thereof. The warrant holder represented its intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate legends were affixed to the
warrant.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
27 Financial Data Schedule.
b) Reports on Form 8-K
None.
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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
By: /s/ Patrick J. Allen
---------------------------------------
Patrick J. Allen
Chief Financial Officer
(On behalf of the Registrant and as Principal
Financial and Accounting officer)
Date: August 13, 1998
-22-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
27 Financial Data Schedule.
</TABLE>
-23-
<TABLE> <S> <C>
<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-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 38,693
<RECEIVABLES> 338,847
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 45,600
<PP&E> 17,676
<TOTAL-ASSETS> 673,301
<SHORT-TERM> 0
<PAYABLES> 298,509
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 18,290
<LONG-TERM> 0
0
0
<COMMON> 156,557
<OTHER-SE> 199,945
<TOTAL-LIABILITY-AND-EQUITY> 673,301
<TRADING-REVENUE> 82,193
<INTEREST-DIVIDENDS> 19,533
<COMMISSIONS> 37,288
<INVESTMENT-BANKING-REVENUES> 75,137
<FEE-REVENUE> 68,989
<INTEREST-EXPENSE> 3,013
<COMPENSATION> 151,115
<INCOME-PRETAX> 64,077
<INCOME-PRE-EXTRAORDINARY> 64,077
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,528
<EPS-PRIMARY> 1.50 <F1>
<EPS-DILUTED> 1.37 <F1>
<FN>
<F1> Reflects basic and diluted EPS, respectively, prepared in accordance with
SFAS No. 128.
</FN>
</TABLE>
