<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 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
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HAMBRECHT & QUIST GROUP
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3246636
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
One Bush Street
San Francisco, CA 94104
(Address of principal executive offices, including zip code)
(415) 439-3000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act: None
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
Common Stock, par value $0.01 per share New York Stock Exchange
Pacific Exchange
----------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant was approximately $443,502,139 as of December 21, 1998, based upon
the last sale price as reported on the New York Stock Exchange on such date.
Number of shares of common stock issued and outstanding as of December 21,
1998: 24,051,939.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be filed with the Securities
and Exchange Commission no later than 120 days after the Registrant's fiscal
year ended September 30, 1998 and to be delivered to stockholders in connection
with the Annual Meeting of Stockholders to be held February 24, 1999 and the
1998 Annual Report to Stockholders are incorporated by reference into Parts II
and III of this Form 10-K.
<PAGE>
ITEM 1. BUSINESS
GENERAL
Hambrecht & Quist Group, a Delaware corporation, was formed in June 1996 as
a holding company for all of the operations of Hambrecht & Quist. The Company is
the sole parent of Hambrecht & Quist Group, a California corporation established
in 1983 and renamed Hambrecht & Quist California in August 1996 ("H&Q
California"), and is the successor to the business conducted by Hambrecht &
Quist, L.P., a California limited partnership established in 1993 ("LP"). In
1983, H&Q California succeeded to the business of Hambrecht & Quist, a
California partnership formed in 1968. Unless the context otherwise requires,
"Hambrecht & Quist," "H&Q" and the "Company" refer to Hambrecht & Quist Group, a
Delaware corporation, and its predecessors, affiliates and subsidiaries.
Hambrecht & Quist and H&Q are registered trademarks of the Company.
The Company operates primarily as a holding company and indirectly owns all
of the subsidiaries and equity interests in affiliated entities that previously
were owned by either H&Q California or LP. Hambrecht & Quist L.L.C. ("H&Q LLC"),
the Company's 100% beneficially owned subsidiary, is the Company's principal
investment banking subsidiary and securities broker-dealer.
The Company's other principal operating subsidiaries or affiliated
entities, which are directly or indirectly wholly owned except as indicated, are
as follows: Hambrecht & Quist Capital Management Incorporated ("Capital
Management"), a registered investment adviser to two publicly traded closed-end
mutual funds; Hambrecht & Quist Venture Partners, a California limited
partnership ("Venture Partners"), a venture capital fund management partnership
in which the Company has a controlling general partnership interest; and
Hambrecht & Quist Guaranty Finance, LLC ("Guaranty Finance"), an 87.5%-owned
subsidiary of the Company engaged in asset-based, bridge loan and mezzanine
financing. In January 1998, Hambrecht & Quist Transition Capital, LLC
("Transition Capital"), formerly an 87.5% owned subsidiary of the Company, was
merged into Guaranty Finance.
In addition, the Company's international activities are carried out in part
through Hambrecht & Quist Euromarkets, S.A., formerly Hambrecht & Quist Saint
Dominique, a broker-dealer registered in France that provides investment banking
services to European companies.
The Company also maintains minority, non-controlling investments in H&Q
Asia Pacific, Ltd. ("Asia Pacific"), which provides financial advisory and fund
management services in the Asia Pacific region, Beeson Gregory Holdings Limited,
a London-based brokerage firm and financial adviser specializing in growth
companies, and Tamir Fishman & Co. Ltd., an investment bank, venture capital and
financial consulting company focused on Israeli growth companies. The Company
also has a 20% interest in Lewco Securities Corp. ("Lewco"), which acts as a
clearing broker and depository for Schroder & Co. and the Company.
In July 1998, the Company established a strategic relationship with H&Q
Venture Associates, L.L.C. which manages or administers many of the Company's
early stage venture capital investments.
HAMBRECHT & QUIST
Hambrecht & Quist is a major bracket investment bank focused on emerging
growth companies and growth-oriented investors. The Company's core strength has
been the early identification and sponsorship of leading growth companies in its
chosen areas of focus through analysis of industry and technology trends. The
Company leverages its industry expertise by providing growth companies and
growth investors with a full range of investment banking and brokerage services,
and by investing its own capital in emerging growth and later-stage companies.
Hambrecht & Quist was formed in 1968 to focus on the needs of emerging
growth companies and their investors. It has grown its business by expanding the
range of services it provides to growth companies and investors, by servicing
the needs of larger size companies, and by developing expertise in new
industries and markets. H&Q, from its inception, combined equity underwriting
and brokerage services for emerging growth companies with venture capital
investing. From its early concentration on the technology and healthcare
industries, Hambrecht & Quist has broadened its focus to encompass the branded
consumer sector and companies providing business information, outsourcing and
healthcare services.
H&Q was founded with and maintains a commitment to working closely with
entrepreneurial companies and investors interested in such companies. H&Q
believes that it has developed a strong internal culture that emphasizes a
long-term investment outlook. H&Q believes that its focus on rapidly growing
entrepreneurial companies and growth-oriented investors and its tradition of
principal investing, along with its broad internal distribution of equity
ownership, have combined to sustain this culture.
H&Q organizes its research and investment banking professionals into
industry teams. Each team, often working with Hambrecht & Quist's venture
capital and private equity professionals, endeavors to develop and maintain an
in-depth understanding of the secular and cyclical trends driving that
particular industry sector. In addition, each team of professionals maintains
close relationships not only with private and public growth companies, but also
with venture capital and key institutional investors, technical experts,
professional services providers and other key industry participants. Through
these relationships, H&Q gains the opportunity to participate actively in the
growth of promising entrepreneurial companies.
Hambrecht & Quist believes that its industry focus and long-term
orientation, together with the depth of its resources committed to the growth
company sector, have made H&Q a leading underwriter of public offerings of
securities for emerging growth companies in its areas of focus.
For information regarding certain risks that face the Company and its
business, see "Factors Affecting the Company's Business, Operating Results and
Financial Condition."
RESEARCH FOCUS
H&Q believes that industry specialization is crucial to meeting the
demands of its clients for sophisticated and informed investment and strategic
advice. The Company's approach is to serve its clients through an in-depth
understanding of sharply defined industry segments and the leading participants
in those segments. H&Q's research universe is presently divided into the
industry groups and industry segments set forth below. Rather than dedicating,
for example, just one senior analyst to cover all aspects of a broadly defined
industry, the Company dedicates focused research support to many segments within
each of the industries it serves. In certain instances an H&Q analyst provides
coverage for more than one industry segment.
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<TABLE>
<CAPTION>
HAMBRECHT & QUIST RESEARCH
TECHNOLOGY
INTERNET COMMUNICATIONS DISTRIBUTED SYSTEMS ENTERPRISE SOFTWARE
<S> <C> <C> <C>
oBusiness-to-Business oInternet Access oPCs oDBMS & Tools
E-Commerce oInternetworking/ oDistribution oSystems Management
oBusiness-to-Consumer LAN oPC Peripherals oEnterprise
E-Commerce oMobile oElectronic Manufacturing Applications
oBusiness-to-Consumer Media oTelecommunications Services oProductivity Applications
oInternet Software and Services Equipment/WAN oDesktop Software
oWireless
SEMICONDUCTOR/ APPLIED
TECHNICAL SYSTEMS CAPITAL EQUIPMENT TECHNOLOGIES
<S> <C> <C>
o Design Automation oAnalog oImaging
o Embedded Control oDigital oServices
o Technical Software oMixed Signal
oFabless
oEquipment
oCommunications IC
oSemiconductor Intellectual
Property
<CAPTION>
HEALTHCARE
EMERGING
PHARMACEUTICALS/ MEDICAL HEALTHCARE
BIOTECHNOLOGY DRUG DELIVERY DEVICES SERVICES
<S> <C> <C> <C>
oCardiovascular oContract Research
oOrthopedics Organizations
oUrology oHealth Maintenance
oOpthamology Organizations
oDiabetes Management oPhysician Network
Management
oSubacute
<CAPTION>
SERVICES
FINANCIAL SERVICES- HEALTHCARE INFORMATION BUSINESS
TRANSACTION PROCESSORS SERVICES SERVICES IT SERVICES
<S> <C> <C> <C>
oConsulting
oSystems Integration
oOutsourcing
<CAPTION>
BRANDED CONSUMER
BRANDED FOOD & BEVERAGE SPECIALTY SPORTS & LEISURE SERVICES
RETAILERS APPAREL
<S> <C> <C> <C> <C>
</TABLE>
In order to achieve this depth and specialization, the Company typically
recruits or trains analysts with significant industry and technical expertise,
in addition to financial analytical expertise. H&Q believes this specialized
approach enables it to generate analytical research that enhances the quality of
investment decisions in the fast-changing and technologically sophisticated
industries it covers.
H&Q's research analysts cover individual publicly traded companies and
periodically publish comprehensive studies of an industry or a long-term
investment theme. In addition to written publications, the Company's analysts
play a prominent role at the Company's investor conferences by presenting
summaries of key industry trends.
The Company's research analysts work closely with its investment banking
and venture capital and private equity professionals to identify promising
privately held companies. H&Q believes that early contacts with private
companies are important not only to develop its underwriting and principal
transactions activities, but also to achieve and maintain an understanding of
the rapidly evolving growth industries on which the Company focuses. The
research analysts also, from time to time, assist in screening and/or evaluating
proposed principal investments for the Company's venture capital and private
equity and investment banking professionals. In addition, H&Q's research
analysts work closely with sales and trading professionals to enhance the access
of the Company's institutional investor clients to up-to-date industry analysis.
H&Q has been recognized for its success in bringing together leading growth
companies and growth investors at the annual conferences it sponsors. Each
conference focuses on a different growth industry or geographic region. In
fiscal 1998, H&Q sponsored the following investment conferences:
<TABLE>
<CAPTION>
HAMBRECHT & QUIST CONFERENCE DATE LOCATION
<S> <C> <C>
Asia Pacific Private Equity CFO Conference November 1997 Hong Kong
Healthcare Conference January 1998 San Francisco
U.K./ European Private Equity CFO Conference February 1998 London
Communications Symposium February 1998 Dana Point, CA
plaNET.wall.street Snowbird Conference March 1998 Snowbird, UT
Technology Conference April 1998 San Francisco
H&Q-Rothschild/Biotechnology Investments Ltd. Life Sciences May 1998 London
Conference
Annual Private Equity CFO Conference June 1998 San Francisco
Branded Consumer Conference June 1998 Napa, CA
H&Q-Tamir Fishman Communication and Internet Conference September 1998 Tel Aviv
</TABLE>
More than 850 public and private companies made presentations to investment
professionals, venture capitalists and other participants in the securities and
emerging growth company industries at the most recent sessions of the Company's
annual conferences. The Hambrecht & Quist Technology Conference, which held its
26th annual session in 1998, was the first annual investment conference focusing
exclusively on emerging growth companies in the technology sector. For 16 years,
the Company's annual Healthcare Conference has provided a forum for companies in
the healthcare industry to give presentations to growth investors, and was the
first conference of its kind. Since 1993, Hambrecht & Quist has sponsored an
annual conference focused on emerging branded consumer companies. In October
1995, H&Q sponsored the first major investment conference dedicated solely to
Internet-related companies, and held follow-up conferences in each year since
then.
To facilitate the analysis of long-term trends, the Company has developed
the H&Q Growth Index, the H&Q Technology Index, the H&Q Internet Index, the H&Q
Healthcare Index and the H&Q Branded Consumer Index . Within these industry
indices are thirteen additional sector indices. These indices serve as a tool
for comparing certain industry groups with one another, with the marketplace as
a whole, and with the overall economy. Many growth companies use the H&Q Indices
to compare their stock price performance with other companies, for example, in
annual proxy statements.
INVESTMENT BANKING
Hambrecht & Quist provides its corporate clients with a broad range of
services, principally involving public offerings of equity and convertible debt
securities, private placements of equity securities, and advice in merger,
acquisition and strategic partnering transactions, as well as after-market
services and support.
H&Q's investment banking professionals focus their activities along the
same industry lines as the Company's research analysts. The Company believes
that by developing an in-depth understanding of the industries they serve, these
investment banking professionals enhance their ability to advise issuers with
respect to strategic and financing options.
DOMESTIC UNDERWRITING
H&Q is a leading underwriter of public offerings of equity securities for
emerging growth companies in its industry areas of focus. During fiscal 1998,
the Company lead managed 26 offerings and co-managed 62 offerings of equity and
convertible debt securities by 82 companies that raised an aggregate of over
$7.3 billion.
H&Q concentrates its domestic underwriting efforts in high-growth industry
sectors where the Company believes it has a relative competitive advantage due
to its investment banking relationships and its research, trading and
distribution capabilities. Within its selected industries, the Company
concentrates on emerging companies that it believes have the potential to become
industry leaders. H&Q believes that it has established a strong record
underwriting software, communications, biotechnology, computer hardware,
semiconductor, Internet, business information and outsourcing services and
healthcare services companies. The Company is also seeking to develop a strong
position as a managing underwriter of securities offerings by branded consumer
growth companies.
H&Q's strategy is to maintain long-term relationships with its corporate
clients by serving their capital raising needs beyond their initial public
offerings of securities. H&Q also seeks to increase its base of publicly held
clients by serving as a manager or co-manager in follow-on offerings for
companies that H&Q believes have attractive investment characteristics, whether
or not H&Q participated as a manager or co-manager in the initial public
offering of securities for such companies.
The following table sets forth the distribution among industries of public
equity offerings completed during fiscal 1998 in which the Company acted as
manager or co-manager and the number of transactions in which the Company served
as lead manager:
<TABLE>
<CAPTION>
Number of Transactions Number of Lead Managed
Industry Completed Transactions
- ------- ---------- -----------
<S> <C> <C>
Technology 53 13
Healthcare 20 7
Services 6 2
Branded Consumer 9 4
Total: 88 26
== ==
</TABLE>
During fiscal 1998, Hambrecht & Quist completed six convertible debt
transactions involving an aggregate of $645 million in securities. During fiscal
1998, underwriting revenues from convertible debt securities transactions
comprised less than 1% of the Company's total revenues. The Company's
convertible debt underwriting activities are small both in number of
transactions and dollars raised compared to major bracket firms overall, many of
which serve more mature industries.
Hambrecht & Quist provides after-market support to its underwriting clients
through the supply of information concerning institutional holdings within the
issuer's shareholder base, as well as data concerning the market performance of
the corporate client's stock and other stocks in the issuer's industry. The
Company's Corporate Services group identifies and accesses relevant research,
company news, market trends, institutional ownership data, trading activity and
performance reporting, and arranges meetings with institutional shareholders to
assist newly public companies in developing their investor relations efforts.
The Company participates in public offerings of securities either by acting
as manager or co-manager of an underwriting syndicate, or by acting as a member
of an underwriting syndicate managed by other investment banks. In both cases,
the Company risks its capital through its participation in a commitment to
purchase securities from an issuer and to resell them to the public. The
Company's syndicate activities include managing the marketing and book-building
process of underwritten transactions the Company is managing, participating in
discussions leading to the offering price of securities and the supervision of
initial market-making for lead-managed deals. The Syndicate department is also
responsible for developing and maintaining relationships with the syndicate
departments of other investment banks. At September 30, 1998, the Syndicate
department was comprised of ten employees.
INTERNATIONAL ACTIVITIES
H&Q's international investment banking business includes assisting non-U.S.
companies in raising capital in the United States and improving access to local
capital for growth companies in other countries. During fiscal 1998, revenues
from international activities comprised less than 11% of the Company's
underwriting revenues and less than 3% of the Company's total revenues.
During fiscal 1998, the Company managed or co-managed three offerings for
companies with primary operations outside the U.S., raising a total of
approximately $520 million. This level of underwriting activity for non-U.S.
companies represents a decrease from the 11 equity offerings raising a total of
$919 million, in which the Company served as a manager or co-manager during
fiscal 1997.
Hambrecht & Quist Euromarkets, S.A. ("H&Q Euromarkets"), formerly known as
Hambrecht & Quist Saint Dominique, is a wholly owned subsidiary of Hambrecht &
Quist. H&Q Euromarkets is a broker-dealer registered in France and an
underwriter and market-maker on the EASDAQ market, as well as for le Nouveau
Marche, a Paris-based stock market for emerging growth companies that was
launched in February 1996.
In the United Kingdom, H&Q holds a minority equity position in Beeson
Gregory Holdings Limited, a London-based brokerage firm and financial advisor
specializing in growth companies. In addition, the Company has a London office
with institutional sales and corporate finance functions.
In Israel, H&Q holds a minority interest position in Tamir Fishman & Co.
Ltd., a Tel Aviv-based investment bank, venture capital and financial consulting
company focused on Israeli growth companies.
The Company's strategy in Asian markets has been to focus initially on
venture capital investments in promising growth companies through H&Q's
minority, non-controlling investment in Asia Pacific. H&Q believes that this
strategy will enable the Company to develop and maintain relationships with
growth companies in the region. H&Q also has a Tokyo office with institutional
sales functions.
PRIVATE PLACEMENTS AND STRUCTURED FINANCE
H&Q formalized its private placement capabilities in 1991 with the creation
of a group which focuses on acting as placement agent in private securities
transactions. H&Q assists in the placement of these securities for a fee, but
without underwriting the offered securities. Acting as placement agent generally
entails advising the issuer regarding the structure and other aspects of the
financing, assisting in the preparation of appropriate disclosure documents and
soliciting prospective qualified investors. The private placement/structured
finance group places equity and fixed income securities with institutional
investors, private capital funds, strategic corporate investors and
sophisticated, high net worth individuals. During fiscal 1998, the group
completed 20 private placement transactions, raising over $300 million for
growth companies. This group often serves corporate clients in their early
stages and, as these entrepreneurial companies grow, H&Q seeks to sustain the
relationship and provide other services. The group also assists publicly traded
corporate clients that undertake convertible debt financings or conduct private
offerings of registered and unregistered securities.
MERGER AND ACQUISITION ADVISORY SERVICES
Hambrecht & Quist offers a broad range of merger and acquisition ("M&A")
advisory services to growth companies. The Company markets its M&A advisory
services both to H&Q's existing base of corporate clients and to other companies
that can benefit from the Company's expertise. The Company's advisory services
include: mergers, acquisitions, corporate sales, divestitures, strategic
alliances, cross-border partnerships, hostile takeover defense strategies,
fairness opinions and valuations. Since H&Q expanded its specialized M&A
practice in 1995, it has announced or completed more than 184 transactions with
an aggregate value of $20.1 billion. During fiscal 1998, H&Q handled a record
volume of M&A transactions providing M&A services in over 70 assignments
representing nearly $8.4 billion of completed transactions.
The Company's M&A expertise has been developed over the years and has been
supported by the close involvement of professionals from the industry groups in
both investment banking and research. The Company believes that early
identification of emerging industry and technical trends, together with focused
industry research coverage, enhances the effectiveness of its M&A professionals'
strategic and valuation advice. H&Q's M&A professionals provide industry
understanding and strategic advice as well as traditional execution skills.
SALES AND TRADING
H&Q provides a broad range of sales and trading services to investors and
seeks to serve as one of the top market-makers for the equity securities of
emerging growth companies for which H&Q has served as a managing or co-managing
underwriter. The Company leverages its research capability by identifying
companies that it believes have the potential to become leaders in their
respective industries and attempting to become a leading market-maker in the
shares of those companies, often taking large positions to satisfy the needs of
institutional clients for a liquid market in this group of companies.
INSTITUTIONAL SALES AND TRADING
At September 30, 1998, H&Q had 38 institutional sales professionals
covering growth-oriented investors in many countries, primarily in North
America, Western Europe and Japan. H&Q's focus on growth industries enables its
sales and trading organization to develop an in-depth understanding of these
sectors and companies and to better serve its investor clients. The Company's
institutional sales activities are conducted from its offices in San Francisco,
New York, Boston, San Diego and London.
At September 30, 1998, H&Q had 39 trading professionals involved in market
making in both Nasdaq and exchange-listed securities. The most significant
portion of the Company's institutional revenues arises from trading in Nasdaq
securities. At September 30, 1998, H&Q made a market in nearly 400 Nasdaq
stocks. Additionally, at September 30, 1998, H&Q had 27 coverage traders,
servicing the trading desks of major institutions worldwide. Orders are executed
daily as principal or agent in both the listed and Nasdaq markets for equities,
convertible and non-convertible debt, including municipal bonds, options and
other derivative securities. The Company's trading activities are conducted from
its offices in San Francisco, New York and Boston. Hambrecht & Quist clears its
trading transactions through Lewco.
EXECUTIVE FINANCIAL SERVICES
Since its founding in 1968, H&Q has provided retail brokerage services to
individual investors and small institutions interested in emerging growth
company securities. In 1994, this business unit was renamed Executive Financial
Services ("EFS") and its strategies were realigned in an effort to grow the
business. This strategic realignment entailed: (i) increasing the focus of this
business on broadening the range and depth of services provided to executives of
growth companies; (ii) providing appropriate services to all employees of this
client base, rather than only the top executives; (iii) attracting new high net
worth investors to H&Q by providing differentiated investment ideas and services
and (iv) recruiting and retaining additional experienced and productive brokers
to serve high net worth individuals.
The EFS group operates out of the Company's San Francisco, New York, Boston
and Newport Beach offices. In addition to handling Nasdaq and exchange-listed
brokerage transactions, EFS brokers provide other services, including sales of
restricted securities, fixed income investments and consulting for options,
hedging, the selection of outside money managers, mutual funds and cash
management. At September 30, 1998, the Executive Financial Services group
included 78 EFS brokers functioning in 65 partner teams.
VENTURE SERVICES
H&Q provides specialized services to the general and limited partners of
venture capital and buyout funds, corporate development functions within large
corporations and certain high net worth individuals who participate actively in
venture capital investments. These services include the sale of restricted
securities, management of in-kind stock distributions by venture capital funds
to their investors, sales of shelf-registered securities, private placements and
acquisition or sale of large equity positions. The Company also provides venture
capitalists with timely information concerning the publicly traded shares
included in venture capital investment portfolios. This group was established in
1994 as a separate department within H&Q in recognition of the strategic role
played by venture capital investors in H&Q's areas of focus and in establishing
and developing a close relationship between the Company and the companies in
which venture capitalists hold equity positions. At September 30, 1998, the
Venture Services group was comprised of five employees.
VENTURE CAPITAL, PRIVATE EQUITY AND PRINCIPAL INVESTMENT ACTIVITIES
From the Company's inception, venture capital investing has been an
important component of H&Q's strategy of identifying and building early
relationships with promising emerging growth companies. H&Q currently conducts a
broad range of venture capital, private equity and principal investment
activities. As of September 30, 1998, assets under management by the Company
amounted to over $280 million.
Effective July 1, 1998, the Company established a strategic relationship
with H&Q Venture Associates, L.L.C., a California limited liability company
("Venture Associates"). Venture Associates is an independent venture capital
organization owned and managed by former employees of Hambrecht & Quist that
provides fund management services to the Company and to outside parties. H&Q has
profit participation interests of varying percentages in the investment funds
and partnerships managed by Venture Associates and in those managed by WR
Hambrecht & Co., L.L.C., a California limited liability company, which
investment funds and partnerships are administered by Venture Associates.
SOLE PURPOSE INVESTMENT PARTNERSHIPS AND DIRECT STRATEGIC INVESTMENTS
Since 1992, the Company has made venture capital and mezzanine investments
by means of limited partnerships that are each formed for the sole purpose of
enabling the Company, its senior employees and others to invest in a specific
private company. Effective July 1, 1998, the Company commenced making its
portion of such investments side-by-side the individual investment partnerships.
The Company receives no management fees in connection with such investments, but
it receives an up-front load and participates in any profits of the
partnerships. Certain of the Company's professionals share in the profit
participation of each partnership based on their specific contribution in
identifying, structuring and monitoring the partnership's investment. In fiscal
1998, approximately $59.2 million was invested in such partnerships formed by
the Company, of which $12.2 million was invested by the Company. Following the
formation of Venture Associates, $4.0 million was invested by the Company
side-by-side with sole purpose investment partnerships and $2.1 million was
invested by the Company in partnerships established and managed by Venture
Associates.
Since the mid-1980s, and in addition to the sole purpose investment
partnerships, the Company has, from time to time, invested solely for its own
account in private companies that offer a strategic and financial opportunity.
The Company in recent years has also invested capital and obtained minority,
non-controlling interests in a number of complementary asset-management
organizations.
STRATEGIC AND SPECIALTY FUNDS
The following listing summarizes the Company's active and specialty funds
as of September 30, 1998:
HAMBRECHT & QUIST CAPITAL MANAGEMENT. In 1987, the Company formed Hambrecht
& Quist Capital Management Incorporated ("Capital Management") to make and
manage investments in publicly traded and privately held companies principally
engaged in the development, production or distribution of products or services
generally related to scientific advances in healthcare, agriculture and
environmental management. Capital Management manages two publicly traded
closed-end mutual funds: H&Q Healthcare Investors (NYSE:HQH) and H&Q Life
Sciences Investors (NYSE:HQL). At September 30, 1998, these funds had combined
net assets of approximately $258 million, of which approximately 22.3% was
comprised of venture capital and other investments subject to resale
restrictions. Capital Management is compensated solely on the basis of
management fees as a percentage of assets under management. Capital Management
is wholly owned by H&Q.
H&Q SERV*IS PARTNERS, L.P. In February, 1997, Hambrecht & Quist formed a
limited partnership with Johnson & Johnson ("J&J") that invests in healthcare
service and healthcare information technology companies strategic to J&J's
interests. J&J has committed $15 million in capital with an option to commit an
additional $15 million and the Company has committed $2.5 million in capital
with an option to commit an additional $2.5 million. The Company receives an
annual management fee based on a capital commitment of $30 million by J&J and
participates in any profits of the partnership. Certain of the Company's venture
capital and private equity professionals share in the profit participation.
EUCALYPTUS VENTURES L.P. In April 1998, Hambrecht & Quist served as a
sponsor for Eucalyptus Ventures L.P., an approximately $55 million venture
capital fund formed to invest in Israeli and Israeli-related growth companies.
The Company and one of its affiliates holds 5% of the limited partnership
interests of Eucalyptus Ventures L.P. and is a member of its general partner.
ASIA PACIFIC. Asia Pacific was established in 1985 to provide financial
advisory and fund management services to investors and entrepreneurs throughout
the Asia Pacific region. Hambrecht & Quist holds a minority, non-controlling
interest in Asia Pacific's management entities and is entitled to certain
participations in the profits of existing and future Asia Pacific funds.
In addition, the Company holds an economic interest in four funds managed
by Venture Associates: Adobe Ventures, L.P., Adobe Ventures II, L.P., TI
Ventures L.P. and TI Ventures II L.P.
ASSET-BASED FINANCING AND MEZZANINE INVESTMENTS
HAMBRECHT & QUIST GUARANTY FINANCE. In 1983, the Company established the
entity that became Guaranty Finance to provide equipment leasing to emerging
technology companies. In January 1998, Transition Capital, a provider of bridge
loans and mezzanine financing to emerging growth companies, was merged into
Guaranty Finance. Today, Guaranty Finance provides financings for private and
public emerging technology, biotechnology and healthcare companies, in the form
of secured loans, working capital lines of credit secured by accounts receivable
and inventory, equipment and tenant improvements leases, and in limited
instances invests in preferred stock of client companies. In addition to
receiving payments on loans and leases, Guaranty Finance may receive fees or
purchase warrants from its client companies at the time it enters into
transactions. Guaranty Finance seeks to obtain financial returns through
interest and lease income, fees and the receipt of warrants, or rights to
convert loans into equity. Guaranty Finance's current portfolio of financings
aggregated approximately $44.4 million at September 30, 1998. H&Q California is
a member of Guaranty Finance with an 87.5% interest, and individuals active in
the management of Guaranty Finance are members with an aggregate 12.5% interest.
ACCOUNTING, ADMINISTRATION AND OPERATIONS
H&Q's accounting, administration and operations personnel are responsible
for financial controls, internal and external financial reporting, compliance
with regulatory and legal requirements, office and personnel services, the
Company's information technology and telecommunications systems, and the
processing of the Company's securities transactions. The Company's employees
perform most of these functions. With the exception of payroll processing, which
is performed by an outside service bureau, all data processing functions are
performed by the Company's information technology department. The Company
believes that future growth will require implementation of new and enhanced
communications and information systems, the training of its personnel to operate
such systems and addressing potential adverse effects to such systems related to
the date change in the year 2000. Any difficulty or significant delay in the
implementation or operation of new systems, the training of personnel, or
adequately addressing the year 2000 issue could adversely affect the Company's
ability to manage growth. See "Factors Affecting the Company's Business,
Operating Results and Financial Condition Risks Associated with Management of
Growth and - Risks of Systems Failures."
Lewco acts as a clearing broker and depository for the Company. A portion
of Lewco's expenses, net of certain revenues, are reimbursed by the Company
based on the level of transactions processed on behalf of the Company.
COMPETITION
The securities business is intensely competitive. Many of the Company's
competitors have greater capital, financial and other resources than the
Company. The Company competes worldwide for growth-oriented institutional
investor clients and for United States underwritings of equity offerings by
emerging growth companies in H&Q's areas of focus. The Company competes for
venture capital and private equity and other principal investment opportunities
in the United States through wholly owned subsidiaries and internationally
through entities in which it holds minority interests.
In addition to competition from domestic and foreign firms currently in the
securities business, domestic commercial banks and investment banking boutiques
have recently entered the business. In recent years, large international banks
have entered the markets served by United States investment banks, including the
markets in which the Company competes. These large international banks have
hired investment banking, research and sales and trading professionals from the
Company and its competitors in the past, and the Company expects that these and
other competitors will continue to try to recruit professionals away from the
Company. The loss of any key professional could materially and adversely affect
the Company's operating results. The Company expects competition from domestic
and international banks to increase as a result of recent and anticipated
legislative and regulatory initiatives in the United States to remove or relieve
certain restrictions on commercial banks. The securities business has also
recently been experiencing consolidation, including the acquisition of several
of the Company's competitors by large commercial banks, providing competitors of
the Company with increased financial and other resources. The Company's focus on
growth companies also subjects it to direct competition from a group of
specialty securities firms and smaller investment banking boutiques that
specialize in providing services to the emerging growth company sector. Such
competition could adversely affect the Company's operating results, as well as
its ability to attract and retain highly skilled individuals. As a result of
increasing competition, revenues from individual underwriting transactions have
been increasingly allocated among a greater number of co-managers, a trend which
has resulted in reduced revenues for certain transactions.
The Company also faces competition from companies offering electronic
brokerage services, a rapidly developing and intensely competitive industry.
These competitors may undertake promotional activities focused on the Company's
brokerage customers, may have lower costs or provide fewer services and offer
their customers more attractive pricing or other terms than the Company offers.
The Company also anticipates competition from underwriters who attempt to effect
public offerings for emerging growth companies through new means of
distribution, including using electronic media such as the Internet. In
addition, disintermediation may result as issuers attempt to sell their
securities directly to purchasers, including sales using electronic media such
as the Internet. To the extent that issuers and purchasers of securities
transact business without the assistance of financial intermediaries such as the
Company, the Company's operating results could be adversely affected.
The principal competitive factors influencing the Company's business are
its professional staff, industry expertise, client relationships and its mix of
market and product capabilities.
EMPLOYEES
At September 30, 1998, the Company had a total of 827 employees, of whom 88
were engaged in research, 184 in investment banking, 340 in sales and trading,
39 in venture capital, private equity, principal investment and money management
activities and 176 in accounting, administration and operations. None of the
Company's employees are subject to a collective bargaining agreement. The
Company believes that its relations with its employees are good.
REGULATION
H&Q's business and the securities industry in general are subject to
extensive regulation in the United States at both the federal and state level,
as well as by industry self-regulatory organizations ("SROs"). Its business also
is subject to regulation by various foreign governments and regulatory bodies.
In the United States, a number of federal regulatory agencies are charged
with safeguarding the integrity of the securities and other financial markets
and with protecting the interests of customers participating in those markets.
The Securities and Exchange Commission (the "SEC") is the federal agency that is
primarily responsible for the regulation of broker-dealers and investment
advisers doing business in the United States, and the Board of Governors of the
Federal Reserve System promulgates regulations applicable to securities credit
transactions involving broker-dealers and certain other United States
institutions. Broker-dealers and investment advisers are subject to registration
and regulation by state securities regulators in those states in which they
conduct business. Industry SROs, each of which has authority over the firms that
are its members, include the National Association of Securities Dealers, Inc.
("NASD"), the New York Stock Exchange ("NYSE") and other securities exchanges.
H&Q LLC is registered as a broker-dealer with the SEC and in all of the 50
states, Puerto Rico and the District of Columbia, and is a member of, and
subject to regulation by, a number of securities industry SRO's, including the
NASD, the NYSE, the American, Chicago and Pacific Exchanges, and the Options
Clearing Corporation. H&Q LLC also has a 20% interest in Lewco, which is
registered as a broker-dealer with the SEC and is a member of the NASD, the NYSE
and other securities exchanges.
As a result of federal and state registration and SRO memberships, H&Q LLC
and Lewco are subject to overlapping schemes of regulation which cover all
aspects of their securities business. Such regulations cover matters including
capital requirements, the use and safekeeping of customers' funds and
securities, record keeping and reporting requirements, supervisory and
organizational procedures intended to assure compliance with securities laws and
to prevent the improper trading on material nonpublic information,
employee-related matters, including qualification and licensing of supervisory
and sales personnel, limitations on extensions of credit in securities
transactions, clearance and settlement procedures, requirements for the
registration, underwriting, sale and distribution of securities and rules of the
SROs designed to promote high standards of commercial honor and just and
equitable principles of trade. A particular focus of the applicable regulations
concerns the relationship between broker-dealers and their customers. As a
result, many aspects of the broker-dealer customer relationship are subject to
regulation including in some instances "suitability" determinations as to
certain customer transactions, limitations in the amounts that may be charged to
customers, timing of proprietary trading in relation to customers' trades and
disclosures to customers.
Much of the Company's underwriting and market-making business involves
securities traded on Nasdaq. Nasdaq's operations have been the subject of
extensive scrutiny, in the media and by government regulators, including by the
Antitrust Division of the United States Department of Justice. This scrutiny has
included allegations of collusion among Nasdaq market-makers. In July 1996, H&Q
LLC and 23 other Nasdaq market-makers entered into a Stipulation and Order with
the Department of Justice in which they agreed not to engage in any collusive
activities relating to prices, quotes or spreads in Nasdaq-traded securities.
In 1996, the SEC filed and simultaneously settled a disciplinary case
against the NASD and filed a report setting out the SEC's findings in detail.
The SEC's case concerned the NASD's enforcement oversight of Nasdaq, and the
settlement calls for a number of changes to Nasdaq's operations. In addition,
the SEC adopted new order-execution rules, including rules applicable to
dealers' handling of customer limit orders on Nasdaq. The application of these
rules was phased in during 1997. Further changes relating to the operations of
Nasdaq have been proposed and filed with the SEC. The Company is unable to
predict the outcome of any of the changes or proposed changes to Nasdaq, certain
of which could adversely affect the Company's operating results. Although the
SEC's investigation of Nasdaq trading practices has been settled with respect to
the NASD, it remains open for enforcement action against others, including
Nasdaq market-makers such as the Company, and their employees.
H&Q LLC, Capital Management and two other subsidiaries, Atlantic Investment
Advisers, Inc. and H&Q Venture Management, L.L.C., are registered as investment
advisers with the SEC and have notice filings in several states. As investment
advisers registered with the SEC, each is subject to the requirements of the
Investment Advisers Act of 1940, as amended (the "Advisers Act"), and the SEC's
regulations thereunder, as well as state securities laws and regulations. Such
requirements relate to, among other things, limitations on the ability of
investment advisers to charge performance-based or non-refundable fees to
clients, record-keeping and reporting requirements, disclosure requirements,
limitations on principal transactions between an adviser or its affiliates and
advisory clients, as well as general anti-fraud prohibitions. In addition,
Capital Management and the mutual funds it manages are subject to the
requirements of the Investment Company Act of 1940 and the SEC's regulations
thereunder.
H&Q LLC and Lewco also are subject to "Risk Assessment Rules" imposed by
the SEC. These rules require, among other things, that certain broker-dealers
maintain and preserve certain information, describe risk management policies and
procedures and report on the financial condition of certain affiliates whose
financial and securities activities are reasonably likely to have a material
impact on the financial and operational condition of the broker-dealers. Certain
"Materially Associated Persons" (as defined in the Risk Assessment Rules) of the
broker-dealers and the activities conducted by such Materially Associated
Persons may not be subject to regulation by the SEC. However, the possibility
exists that, on the basis of the information it obtains from the Risk Assessment
Rules, the SEC could seek legislative or regulatory changes in order to expand
its authority over the Company's unregulated subsidiaries either directly or
through its existing authority over the Company's regulated subsidiaries.
Violations of federal or state laws or regulations or rules of SROs could
subject the Company, its subsidiaries and/or its employees to disciplinary
proceedings or civil or criminal liability, including revocation of licenses,
censures, fines or temporary suspension or permanent bar from the conduct of
their business. Any such proceeding could have a material adverse effect upon
the Company's business.
In addition to being regulated in the United States, the Company's business
is subject to regulation by various foreign governments and regulatory bodies.
H&Q LLC is registered with and subject to regulation by the Ontario Securities
Commission, the Securities and Futures Authority of the United Kingdom pursuant
to the United Kingdom Financial Services Act of 1986, and the Ministry of
Finance, Tokyo, Japan. Foreign regulation governs all aspects of the investment
business, including regulatory capital, sales and trading practices, use and
safekeeping of customer funds and securities, record-keeping, margin practices
and procedures, registration standards for individuals, periodic reporting and
settlement procedures. In addition, Hambrecht & Quist Asset Management Ltd., a
subsidiary of the Company, is a member of and is subject to regulation by the
Investment Management Regulatory Organization Limited in the United Kingdom,
which regulates all aspects of its investment advisory business. H&Q
Euromarkets, a subsidiary of the Company, is a broker-dealer registered in
France and is also subject to regulation by the Societe du Nouveau Marche,
Societe de Bourse Francaise, Banque de France and La Commission d'Operation de
Bourse, and is an approved person of the NYSE.
In connection with the Company's venture capital and private equity
activities, H&Q, its affiliates and the investment funds which they manage are
relying on exemptions from registration under the Advisers Act, the Investment
Company Act of 1940, as amended, state securities laws and the laws of various
foreign countries. Failure to meet the requirements of any such exemptions could
have a material adverse effect on the manner in which the Company, its
affiliates and the investment funds carry out their investment activities and on
the compensation received by the Company and its affiliates from the investment
funds.
Additional legislation and regulations, including those relating to the
activities of broker-dealers and investment advisers, changes in rules
promulgated by the SEC or other United States or foreign governmental regulatory
authorities and SROs or changes in the interpretation or enforcement of existing
laws and rules may adversely affect the manner of operation and profitability of
the Company. H&Q's businesses may be materially affected not only by regulations
applicable to it as a financial market intermediary, but also by regulations of
general application. For example, the volume of H&Q's underwriting, merger and
acquisition, or venture capital and private equity activities in any year could
be affected by, among other things, existing and proposed tax legislation,
antitrust policy and other governmental regulations and policies (including the
interest rate policies of the Federal Reserve Board) and changes in
interpretation or enforcement of existing laws and rules that affect the
business and financial communities.
NET CAPITAL REQUIREMENTS
As broker-dealers registered with the SEC and member firms of the NYSE
and/or the NASD, H&Q LLC and Lewco are each subject to the capital requirements
of the SEC, the NYSE and/or the NASD. These capital requirements specify minimum
levels of capital, computed in accordance with regulatory requirements ("net
capital"), that each firm is required to maintain and also limit the amount of
leverage that each firm is able to obtain in its respective business.
H&Q LLC has elected to compute its net capital requirement under the
"alternative method" permitted by the SEC. Under this method, H&Q LLC is
required to maintain regulatory net capital, computed in accordance with the
SEC's regulations as supplemented by NYSE Rule 325, equal to the greater of $1.0
million or 2% of the amount of its securities "customer-related receivables,"
calculated in accordance with SEC's regulations.
The customer-related receivables referred to in the preceding paragraph
(also referred to as "aggregate debit items") represent the money owed to a
broker-dealer by its customers and certain other customer-related assets. "Net
capital" is essentially defined as net worth (assets minus liabilities, as
determined under generally accepted accounting principles), plus qualifying
subordinated borrowings, less the value of all of a broker-dealer's assets that
are not readily convertible into cash (such as goodwill, furniture, prepaid
expenses, exchange seats and unsecured receivables), and further reduced by
certain percentages (commonly called "haircuts") of the market value of a
broker-dealer's positions in securities and other financial instruments.
A failure of a broker-dealer to maintain its minimum required capital would
require it to cease executing customer transactions until it came back into
capital compliance, and could cause it to lose its membership on an exchange, or
in an SRO, its registration with the SEC, or require its liquidation. Further,
the decline in a broker-dealer's net capital below certain "early warning
levels," even though above minimum capital requirements, could cause material
adverse consequences to the broker-dealer. For example, the SEC's capital
regulations prohibit payment of dividends, redemption of stock and the
prepayment of subordinated indebtedness if a broker-dealer's net capital
thereafter would be less than 5% of aggregate debit items. These regulations
also prohibit principal payments in respect of subordinated indebtedness if a
broker-dealer's net capital thereafter would be less than 5% of aggregate debit
items. Under NYSE Rule 326, a member firm is required to reduce its business if
its net capital (after giving effect to scheduled maturities of subordinated
indebtedness or other planned withdrawals of regulatory capital during the
following six months) is less than 125% of its net capital minimum dollar amount
or 4% of aggregate debit items for 15 consecutive days. NYSE Rule 326 also
prohibits the expansion of a member's business if its net capital (after giving
effect to scheduled maturities of subordinated indebtedness or other planned
withdrawals of regulatory capital during the following six months) is less than
150% of its net capital minimum dollar amount or 5% of aggregate debt items for
15 consecutive days.
The SEC's capital rules also (i) require that broker-dealers notify it and
the NYSE, in writing, two business days prior to making withdrawals or other
distributions of equity capital or lending money to certain related persons, if
those withdrawals would exceed, in any 30-day period, 30% of the broker-dealer's
excess net capital and that they provide such notice within two business days
after any such withdrawal or loan that would exceed, in any 30-day period, 20%
of the broker-dealer's excess net capital, (ii) prohibit a broker-dealer from
withdrawing or otherwise distributing equity capital or making related party
loans if after such distribution or loan, the broker-dealer has net capital of
less than 120% of its net capital minimum dollar amount or 5% of aggregate debit
items and certain other circumstances, and (iii) provide that the SEC may, by
order, prohibit withdrawals of capital from a broker-dealer for a period of up
to 20 business days, if the withdrawals would exceed, in any 30-day period, 30%
of the broker-dealer's excess net capital and the SEC believes such withdrawals
would be detrimental to the financial integrity of the firm or would unduly
jeopardize the broker-dealer's ability to pay its customer claims or other
liabilities.
Compliance with regulatory capital requirements could limit those
operations of H&Q LLC and Lewco that require the intensive use of capital, such
as underwriting and trading activities, and financing of customer account
balances, and also could restrict the Company's ability to withdraw capital from
its affiliated broker-dealers, which in turn could limit its ability to pay
dividends, repay debt and redeem or purchase shares of its outstanding capital
stock.
The Company believes that at all times H&Q LLC and Lewco have been in
compliance in all material respects with the applicable minimum capital rules of
the SEC, the NYSE, and the NASD. As of September 30, 1998, H&Q LLC was required
to maintain minimum net capital, in accordance with SEC rules, of approximately
$4.0 million and had total net capital of approximately $50.5 million, or
approximately $46.5 million in excess of the amount required. Lewco also
computes its minimum net capital requirement under the alternative method. As of
September 30, 1998, Lewco was required to maintain minimum net capital of
$250,000. Lewco's total net capital on that date was approximately $16.6
million. H&Q Euromarkets is also subject to the net capital requirements of its
applicable regulatory agency and as of September 30, 1998, was in compliance
with all applicable regulatory capital adequacy requirements.
FACTORS AFFECTING THE COMPANY'S BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION
The statements in this Form 10-K that relate to future plans, events or
performance are forward-looking statements that involve risks and uncertainties.
Actual results might differ materially due to a variety of important factors,
including those factors discussed below. In addition, the Company cautions
readers that the following important factors, among others, have affected, and
in the future could materially affect, the Company's business, operating results
and financial condition.
For information concerning risks associated with significant competition
and with potential losses from litigation and potential liability under
securities laws see "- Competition" and "Item 3 - Legal Proceedings."
RISK OF REDUCED REVENUES DURING PERIODS OF DECLINING PRICES OR REDUCED
ACTIVITY IN MARKET FOR EMERGING GROWTH COMPANY SECURITIES
The Company's revenues are likely to be lower during periods of declining
prices or inactivity in the market for growth company securities due to the
Company's focus on serving growth companies and their investors. The Company's
business is particularly dependent on the market for equity offerings by
companies in the technology, healthcare, business information, outsourcing and
healthcare services and branded consumer industries. These markets have
historically experienced significant volatility not only in the number and size
of equity offerings, but also in the after-market trading volume and prices of
newly issued securities. In addition, the number of major investors and the size
of managed funds in the market for growth company securities is smaller than in
many other industrial sectors. This concentration produces higher volatility in
the number and size of corporate financing transactions conducted by emerging
growth companies as compared to companies in other industries, and higher
volatility in the volume of after-market trading of growth company securities.
The Company's revenues in large part are dependent on the number and size
of underwritten transactions by companies in the Company's targeted industries,
and the after-market trading for such companies. During certain periods,
relatively few public offerings for companies in these industries have been
completed, which materially adversely affected the Company's operating results.
Underwriting activities in H&Q's targeted industries can decline for a number of
reasons. Any historical or future market decline has and may result in many
pending securities offerings being delayed or canceled. During periods of market
decline, offerings are typically effected at lower valuations and smaller total
dollar sizes. Any future market decline will have an adverse effect on the
Company's operating results. Underwriting and brokerage activity can also be
materially adversely affected for a growth company or industry segment by
disappointments in quarterly performance relative to analysts' expectations, or
by changes in long-term prospects.
RISK OF REDUCED REVENUES DUE TO ECONOMIC, POLITICAL AND MARKET CONDITIONS
Reductions in public offering and merger and acquisition activities due to
changing economic, political or market conditions could cause the Company's
revenues to decline materially. The amount and profitability of these activities
are affected by many national and international factors, including economic,
political and market conditions; the level and volatility of interest rates;
legislative and regulatory changes; currency values; inflation; and the
availability of short-term and long-term funding and capital. Any one or more of
these factors may contribute to reduced levels of securities offerings and
merger and acquisition activities, which would result in lower revenues from the
Company's investment banking, trading and sales activities.
RISK OF REDUCED REVENUES DUE TO DECLINING MARKET VOLUME, PRICE OR LIQUIDITY
The Company's revenues may decrease in the event of a decline in market
volume, prices or liquidity. The securities business is subject to declines in
the volume of securities transactions and in market liquidity, which generally
result in lower revenues from trading activities and commissions. Lower price
levels of securities may result in a reduced volume of underwriting
transactions, which would cause a reduction in revenue from corporate finance
fees, as well as the recognition of losses from declines in the market value of
securities held in trading, investment and underwriting positions. Sudden sharp
declines in market values of securities can result in illiquid markets and the
failure of issuers and counterparties to perform their obligations, as well as
increases in customer claims. In such markets, the Company may incur losses in
its principal trading and market-making activities.
RISK OF LOSSES DUE TO FRAUD OR MISTAKES OF CUSTOMERS OR EMPLOYEES
The Company is exposed to the risk of significant losses as a result of
customer fraud, employee errors, misconduct and fraud (including unauthorized
transactions by traders) and failures in connection with the processing of
securities transactions. There can be no assurance that the Company's risk
management procedures and internal controls will prevent such losses from
occurring.
DEPENDENCE ON CASH INFLOWS TO MUTUAL FUNDS
A slow-down or reversal of cash inflows to mutual funds could lead to lower
underwriting and brokerage revenues for the Company, since mutual funds purchase
a significant portion of the securities offered to the public by emerging growth
companies. Any decline in the stock market could result in a significant decline
in net asset values of mutual funds focused on technology and other growth
industries. Declines in the market generally or declines in mutual fund net
asset values in particular could result in withdrawals of cash from such mutual
funds. To the extent that the decline in cash inflows into mutual funds and the
decline in net asset values of these funds reduce demand by fund managers for
new equity offerings by emerging growth companies, the Company's business and
results of operations could be materially adversely affected.
RISK OF REDUCED REVENUES DUE TO FOCUS ON RELATIVELY FEW INDUSTRIES
Because the Company focuses on relatively few industries, a general decline
in the market for securities of companies within any such industry, particularly
technology or healthcare, could lead to substantially lower revenues for the
Company. The market for securities offerings in each of the industries on which
the Company focuses may also be subject to industry-specific risks. For example,
the prospects for growth in the personal computer market affect companies in a
number of other industries, such as semiconductor-related companies and
companies in the software and networking equipment industries. Similarly,
changes in policies by the United States Food and Drug Administration or the
United States Health Care Financing Administration can produce sharp swings in
the market for the securities of biotechnology and healthcare services
companies. Technology and healthcare underwriting transactions continue to play
a large role in the Company's investment banking and research activities. This
industry concentration exposes the Company to the risk of substantial declines
in revenue in the event of downturns in underwriting activities in these
industries.
RISKS OF LOSSES DUE TO REGIONAL CONCENTRATION OF EMERGING GROWTH COMPANIES
As a result of the high proportion of venture capital invested in emerging
growth companies in California, H&Q's underwriting clients have to date been
concentrated in California. A natural disaster or significant economic downturn
in any state in which companies within the industries served by the Company are
concentrated could substantially reduce the Company's revenues. Approximately
46% of the companies for which H&Q served as manager or co-manager of a public
offering during fiscal 1998 had principal offices located in California. Any
adverse effect on emerging growth industries concentrated in California, or, to
a lesser extent, in other states in which emerging growth technology, healthcare
or service companies are also concentrated could also reduce the Company's
underwriting and brokerage business.
RISK OF REDUCED REVENUES DUE TO DECLINE IN TRADING OF GROWTH COMPANY
SECURITIES
The Company's revenues from brokerage transactions are generally
substantially lower when trading activities of securities of emerging growth
companies declines or when the stock market declines generally. H&Q derives a
significant portion of its revenues from brokerage transactions related to the
securities of growth companies. In the past, revenues from such brokerage
transactions have declined when the volume of trading on Nasdaq or NYSE
declined, or industry sectors or individual companies reported results below
investors' expectations. See "-Investment Banking" and " -Sales and Trading."
SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING RESULTS DUE TO LEVEL OF
BUSINESS ACTIVITY AND TIMING OF TRANSACTIONS
The Company's revenues and operating results may fluctuate from quarter to
quarter and from year to year due to a combination of factors. These factors
include the number of underwriting and merger and acquisition transactions
completed by the Company's clients, access to public markets for companies in
which the Company has invested as a principal, valuations of the Company's
principal investments, the level of institutional and retail brokerage
transactions, variations in expenditures for personnel, litigation expenses, and
the expenses of establishing new business units. The Company's revenues from an
underwriting transaction are recorded only when the underwritten securities
commence trading, and revenues from a merger or acquisition transaction are
recorded only when retainer fees are received or the transaction closes.
Accordingly, the timing of the Company's recognition of revenue from a
significant transaction can materially affect the Company's quarterly operating
results. Despite the variability of professional incentive compensation, the
Company could experience losses if the Company's revenues decline more quickly
than the Company's ability to change its cost structure. There can be no
assurance that the Company will be able to sustain profitability on a quarterly
or annual basis.
DEPENDENCE ON ABILITY TO RETAIN AND RECRUIT PERSONNEL
The Company's business is dependent on the highly skilled, and often highly
specialized, individuals it employs. Retention of research, investment banking,
sales and trading, venture capital and private equity, money management and
administrative professionals is particularly important to the Company's
prospects. Hambrecht & Quist's strategy is to establish relationships with its
prospective corporate clients in advance of any transaction and to maintain such
relationships over the long term by providing advisory services to corporate
clients in equity, convertible debt and merger and acquisition transactions.
Research professionals contribute significantly to the Company's ability to
secure a role in managing public offerings.
COMPETITION FOR PROFESSIONAL EMPLOYEES. From time to time, Hambrecht &
Quist has experienced losses of research, investment banking and sales and
trading professionals. The level of competition for key personnel has increased
recently, particularly due to the market entry efforts of certain international
and domestic commercial banks and other investment banks targeting or increasing
their efforts in some of the same industries that H&Q serves, most notably
technology and healthcare. There can be no assurance that losses of key
personnel due to such competition or otherwise will not occur in the future. The
loss of an investment banking, research or sales and trading professional,
particularly a senior professional with a broad range of contacts in an
industry, could materially and adversely affect the Company's operating results.
LIMITATIONS OF EMPLOYEE RETENTION MECHANISMS. The Company depends on many
key employees, including its managing directors, and in particular on its senior
executive officers. The loss of any key employee could materially and adversely
affect the Company. While Hambrecht & Quist generally does not have employment
agreements with its employees, it attempts to retain its employees with
incentives such as long-term deferred compensation plans, the issuance of
Company stock subject to continued employment and the grant of options to buy
Company stock that vest over a number of years of employment. These incentives,
however, may be insufficient in light of the increasing competition for
experienced professionals in the securities industry, particularly if the
Company's stock price declines or fails to appreciate sufficiently to be a
competitive source of a portion of professional compensation. See
"-Competition."
INABILITY TO RECRUIT QUALIFIED PERSONNEL. The Company expects further
growth in the number of its personnel. Competition for employees with the
qualifications desired by the Company is intense, especially with respect to
research and investment banking professionals with expertise in industries in
which underwriting or advisory activity is robust. Competition for the
recruiting and retention of employees has recently increased the Company's
compensation costs, and the Company expects that continuing competition will
cause its compensation costs to continue to increase. There can be no assurance
that the Company will be able to recruit a sufficient number of new employees
with the desired qualifications in a timely manner. The failure to recruit new
employees could materially and adversely affect the Company's operating results.
RISKS ASSOCIATED WITH FEDERAL, STATE AND FOREIGN REGULATION
The securities industry and the business of the Company are subject to
extensive regulation in the United States by the SEC, state securities
regulators and other governmental regulatory authorities. The business of the
Company also is regulated in the United States by industry SROs, including the
NASD, the NYSE and other exchanges. In addition, the business of the Company is
subject to regulation by governmental authorities and SROs in other countries or
territories in which the Company and entities in which it is an investor
operate, including France, Hong Kong, Israel, Japan, Malaysia, the Philippines,
Singapore, Taiwan, Thailand and the United Kingdom. The Company's international
operations also require compliance with the United States Foreign Corrupt
Practices Act. See "Legal Proceedings" and "-Regulation."
POTENTIAL LIMITS ON OPERATIONS DUE TO NET CAPITAL REQUIREMENTS. As a
registered broker-dealer and member of the NYSE, H&Q LLC is subject to the net
capital rules of the SEC, NYSE and NASD. These rules, which specify minimum net
capital requirements for registered broker-dealers and NYSE and NASD members,
are designed to assure that broker-dealers maintain adequate regulatory capital
in relation to their liabilities and the size of their customer business. These
requirements have the effect of requiring that at least a substantial portion of
a broker-dealer's assets be kept in cash or highly liquid investments.
Compliance with the net capital requirements could limit those operations that
require the intensive use of capital, such as underwriting and trading
activities. These rules also could restrict the Company's ability to withdraw
capital from H&Q LLC even in circumstances where H&Q LLC has more than the
minimum amount of required capital. See "-Net Capital Requirements."
COMPLIANCE WITH VENTURE CAPITAL AND PRIVATE EQUITY REGULATIONS. In
connection with the Company's venture capital and private equity activities, H&Q
and its affiliates, as well as the investment funds that they manage, are
relying on exemptions from registration under the Advisers Act, the Investment
Company Act of 1940, as amended, state securities laws and laws of various
foreign countries. Failure to meet the requirements of any such exemptions could
have a material adverse effect on the manner in which the Company, its
affiliates and the investment funds they manage carry out their investment
activities and on the compensation received by the Company and its affiliates
from the investment funds.
RISK OF PENALTIES DUE TO NONCOMPLIANCE. Compliance with many of the
regulations applicable to the Company involves a number of risks, particularly
in areas where applicable regulations may be subject to varying interpretation.
In the event of non-compliance by H&Q LLC with an applicable regulation,
governmental regulators and SROs may institute administrative or judicial
proceedings that may result in censure, fine, civil penalties (including treble
damages in the case of insider trading violations), the issuance of
cease-and-desist orders, the deregistration or suspension of the non-compliant
broker-dealer or investment adviser, the suspension or disqualification of the
broker-dealer's officers or employees or other adverse consequences. The Company
has been subject to proceedings and sanctions by such entities in the past and
expects to be subject to such proceedings in the future. The imposition of any
future penalties or orders on H&Q LLC could have a material adverse effect on
the Company's operating results and financial condition. See "-Regulation."
RISKS ASSOCIATED WITH CHANGING REGULATORY ENVIRONMENT. The regulatory
environment in which the Company operates is subject to change. The Company may
be adversely affected as a result of new or revised legislation or regulations
imposed by the SEC, other United States or foreign governmental regulatory
authorities or SROs. The Company also may be adversely affected by changes in
the interpretation or enforcement of existing laws and rules by these
governmental authorities and SROs.
NASDAQ ANTITRUST LITIGATION. Much of the Company's underwriting and
market-making business involves securities traded on Nasdaq. Nasdaq's operations
have been the subject of extensive scrutiny in the media and by government
regulators, including by the Antitrust Division of the United States Department
of Justice. This scrutiny has included allegations of collusion among Nasdaq
market-makers. In July 1996, H&Q LLC and 23 other Nasdaq market-makers entered
into a Stipulation and Order with the Department of Justice in which they agreed
not to engage in any collusive activities relating to prices, quotes or spreads
in Nasdaq-traded securities. See "Legal Proceedings -Nasdaq Antitrust
Litigation."
POTENTIAL ADVERSE EFFECTS OF CHANGES IN NASDAQ OPERATIONS. In 1996, the SEC
filed and simultaneously settled a disciplinary case against the NASD and filed
a report setting out the SEC's findings in detail. The SEC's case concerned the
NASD's enforcement oversight of Nasdaq, and the settlement calls for a number of
changes to Nasdaq's operations. In addition, the SEC adopted new order-execution
rules, including rules applicable to dealers' handling of customer limit orders
on Nasdaq. The application of these rules was phased in during 1997. Further
changes relating to the operations of Nasdaq have been proposed and filed with
the SEC. The Company is unable to predict the outcome of any of the changes or
proposed changes to Nasdaq, certain of which could adversely affect the
Company's operating results. Although the SEC's investigation of Nasdaq trading
practices has been settled with respect to the NASD, it remains open for
enforcement action against others, including Nasdaq market-makers such as the
Company, and their employees.
RISK OF CHANGES IN OTHER BUSINESS REGULATIONS. The Company's businesses may
be materially affected not only by regulations applicable to it as a financial
market intermediary, but also by regulations of general application. For
example, the volume of the Company's underwriting, merger and acquisition and
principal investment businesses in a given time period could be affected by,
among other things, existing and proposed tax legislation, antitrust policy and
other governmental regulations and policies (including the interest rate
policies of the Federal Reserve Board) and changes in interpretation or
enforcement of existing laws and rules that affect the business and financial
communities. The level of business and financing activity in each of the
industries on which the Company focuses can be affected not only by such
legislation or regulations of general applicability, but also by
industry-specific legislation or regulations.
RISKS ASSOCIATED WITH PRINCIPAL INVESTMENT ACTIVITIES
The Company uses a portion of its own capital in a variety of principal
investment activities, each of which involves risks of illiquidity, loss of
principal and revaluation of assets. At September 30, 1998, the Company's
principal investments represented $75.8 million invested in non-marketable
securities, venture capital funds and investment partnerships and $53.9 million
invested in marketable securities. The Company purchases equity securities and,
to a lesser extent, debt securities, in venture capital and other high risk
financings of early-stage, pre-public or "mezzanine stage" and turnaround
companies. The Company also provides asset-based financing and purchases equity
securities as part of bridge or mezzanine financing transactions. The Company's
nonmarketable investments at September 30, 1998 were valued at $75.8 million,
and the report of the Company's independent public accountants on the Company's
consolidated financial statements includes a statement regarding the inherent
uncertainty of valuation of the Company's nonmarketable investments. The
Company's investments, like its other activities, are concentrated in a small
number of industries and companies, and the companies in which the Company has
invested as principal face rapidly changing and highly competitive environments,
increasing the risks of illiquidity and loss of principal, and creating risks
associated with asset revaluation as market conditions change. In addition, the
management of principal investments often requires substantial attention from
the Company's professionals, particularly if the entity in which the Company has
invested experiences financial difficulties, a restructuring or a sale.
RISK OF LOSSES DUE TO ILLIQUIDITY OF INVESTMENTS. The absence of a public
market for securities received in principal investments means that the Company
will not receive a return on its capital invested for an indeterminate period of
time, if at all. A public market for these securities may not develop for
several years, if ever. The timing of access to liquidity depends on the general
market for initial public offerings of securities or mergers and acquisitions as
well as the particular company's results and prospects and trends in the
relevant industry. Delayed access to liquidity could adversely affect the
Company's returns on its principal investments, which would adversely affect the
Company's operating results.
RISK OF LOSS OF CAPITAL INVESTED IN PRINCIPAL TRANSACTIONS. The Company
also risks the loss of capital it has invested as a principal. The companies in
which H&Q invests often rely on new or developing technologies or novel business
models, or concentrate on markets which have not yet developed and may never
develop sufficiently to support successful operations. Companies supported by
venture capital and private equity have a high incidence of operating losses and
business failure, which typically results in loss of capital invested. Companies
to which H&Q provides mezzanine financing often require substantial cash to
support their operations, risking loss of H&Q's principal if the company in
which H&Q has invested is unable to raise additional capital through an initial
public offering of its securities. If a business that has received asset-based
financing from H&Q fails, H&Q will be required to repossess collateral, which
may not be salable at a price equal to H&Q's initial investment. The entities in
which H&Q invests as a principal often are unable to obtain conventional
financing. The equity securities that H&Q receives will be subordinate to the
issuer's debt, may also be subordinate to other classes of equity and typically
will not provide dividend income. Debt securities purchased by H&Q may rank
subordinate to other debt of the issuer. There can be no assurance that H&Q will
not experience significant losses as a result of its principal investment
activities. A material loss of capital would adversely affect H&Q's operating
results and financial condition.
VOLATILITY OF PRINCIPAL INVESTMENTS; ADJUSTMENTS TO CARRYING VALUE. H&Q may
be required to mark up or mark down the value of its principal investments as a
result of industry- or company-specific factors over which H&Q has no control.
Publicly traded securities held as principal investments, which at September 30,
1998 aggregated $53.9 million, are subject to significant volatility, increasing
the risk of a mark-down as a result of a decline in market prices generally or
the price of the particular security. If a significant mark-down of a material
asset were to occur in the future, the Company's operating results and financial
condition would be materially and adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
- -Overview" and Notes 2 and 7 of Notes to Consolidated Financial Statements
- -September 30, 1998.
RISK OF LOSSES FROM UNDERWRITING AND TRADING
The Company's underwriting, securities trading and market-making activities
are conducted by the Company as principal and subject the Company's capital to
significant risks, including market, credit, counterparty and liquidity risks.
These activities often involve the purchase, sale or short sale of securities as
principal in markets that may be characterized by relative illiquidity or that
may be particularly susceptible to rapid fluctuations in liquidity. The Company
from time to time has large position concentrations in securities of, or
commitments to, a single issuer, or issuers engaged in a specific industry,
particularly as a result of the Company's underwriting activities. The Company
tends to concentrate its trading positions and underwriting activities in a more
limited number of industry sectors and portfolio companies than many other
investment banks, which might result in higher trading losses than would occur
if the Company's positions and activities were less concentrated. In addition,
the trend in all major capital markets, for competitive and other reasons,
toward larger commitments on the part of lead underwriters means that, from time
to time, an underwriter (including a co-manager) may retain significant position
concentrations in individual securities.
RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH
Over the past several years, the Company has experienced significant growth
in its business activities and the number of its employees. This growth has
required and will continue to require increased investment in management
personnel, financial and management systems and controls, and facilities, which,
in the absence of continued revenue growth, would cause the Company's operating
margins to decline from current levels. In addition, as is common in the
securities industry, the Company is and will continue to be highly dependent on
the effective and reliable operation of its communications and information
systems. The Company believes that it will be required to implement new and
enhanced communications and information systems and train its personnel to
operate such systems. Any difficulty or significant delay in the implementation
or operation of existing or new systems or the training of personnel could
adversely affect the Company's ability to manage growth. See "-Accounting,
Administration and Operations" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISK OF SYSTEMS FAILURE
The Company's business is highly dependent on communications and
information systems. Any failure or interruption of the Company's systems, or of
the systems of the Company's clearing broker, could cause delays in the
Company's securities trading activities, which could have a material adverse
effect on the Company's operating results. There can be no assurance that the
Company or its clearing broker will not suffer any such systems failure or
interruption, whether caused by an earthquake, fire, other natural disaster,
power or telecommunications failure, act of God, act of war or otherwise, or
that the Company's back-up procedures and capabilities in the event of any such
failure or interruption will be adequate.
In addition, the Company and Lewco both utilize software and related
technology that will be affected by the date change in the year 2000. Any
failure by the Company or Lewco to adequately address the date change could have
a material adverse effect on the Company's financial condition and operations.
The failure to correct a material year 2000 issue could result in the
interruption in, or a failure of, certain normal business activities or
operations of the Company or expose it to third party liability. Such failures
could materially and adversely affect the Company's results of operations,
liquidity and financial condition. Due to the general uncertainty inherent in
the year 2000 issue, resulting in part from the uncertainty of the year 2000
readiness of third party suppliers and customers and the interconnection of
businesses, the Company cannot ensure its ability to timely and cost effectively
resolve problems associated with the year 2000 issue that may affect its
operations or business and is unable to determine at this time whether the
consequences of year 2000 failures will have a material impact on the Company's
results of operations, liquidity and financial condition. The Company's year
2000 plan is expected to significantly reduce the Company's level of uncertainty
about the year 2000 issue, and in particular about the year 2000 compliance and
readiness of its material third parties. The Company believes that, with the
completion of the plan as scheduled, the possibility of significant
interruptions of normal operations should be reduced. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Overview-Matters Related to the Year 2000."
DEPENDENCE ON AVAILABILITY OF CAPITAL AND FUNDING
A substantial portion of the Company's total assets consists of highly
liquid marketable securities and short-term receivables arising from securities
transactions. The funding needs of the Company to date have been satisfied from
internally generated funds and paid-in capital. In addition, the Company borrows
limited amounts on a collateralized basis from a bank to support the activities
of its Executive Financial Services group. There can be no assurance that
adequate financing to support the Company's businesses will be available in the
future on attractive terms, or at all. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations-Overview" and "-Liquidity and
Capital Resources."
RISK OF POTENTIAL CONFLICTS OF INTEREST
Executive officers, directors and employees of the Company from time to
time invest, or receive a profit interest, in investments in private or public
companies or investment funds in which the Company, or an affiliate of the
Company, is an investor or for which the Company carries out investment banking
assignments, publishes research or acts as a market-maker. In addition, the
Company has in the past organized and may in the future organize businesses,
such as Guaranty Finance, in which employees of H&Q acquire minority interests.
There is a risk that, as a result of such investment or profits interest, a
director, officer or employee may take actions which would conflict with the
best interests of Hambrecht & Quist. See "-Venture Capital, Private Equity and
Principal Investment Activities" and "Certain Relationships and Related
Transactions" incorporated by reference to Item 13 of this report on Form 10-K.
CONTROL OF THE COMPANY; ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS
As of December 21, 1998, the Company's current executive officers and
directors beneficially owned approximately 21.3% of the outstanding common
stock. Accordingly, these stockholders, if they were to act as a group, may be
able to influence the election of all of the Company's directors, increase the
authorized capital and otherwise control the policies of the Company. The
Company's Board of Directors has the authority to issue up to 5,000,000 shares
of Preferred Stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
stockholders. The rights of the holders of common stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of shares of Preferred Stock,
while potentially providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. In addition, the Company is subject to the provisions of
Section 203 of the Delaware General Corporation Law, which will prohibit the
Company from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. The application of Section 203
also could have the effect of delaying or preventing a change of control of the
Company. Certain provisions of the Company's Certificate of Incorporation and
Bylaws, including provisions that provide for the Board of Directors to be
divided into three classes to serve for staggered three-year terms, may have the
effect of delaying or preventing a change of control of the Company, which could
adversely affect the market price of the Company's common stock.
ITEM 2. PROPERTIES
The Company's principal executive offices in San Francisco, California
occupy approximately 175,000 square feet under leases which terminate December
31, 2005, subject to a 5-year extension option for the majority of the space. In
addition, the Company occupies approximately 23,000 square feet in a second
facility in San Francisco under a sublease which terminates on June 30, 2000 and
a successor lease which expires on December 31, 2003. The Company also leases
approximately 49,000 square feet in New York, New York, under a lease expiring
in 2007; approximately 26,000 square feet in Boston, Massachusetts, under a
lease expiring in 2008, approximately 1,800 square feet in San Diego,
California, under a lease expiring in 1999; approximately 8,800 square feet in
Newport Beach, California, under a sublease expiring in 2000, and approximately
2,500 square feet in London, England, under a lease expiring on March 30, 1999.
The Company believes that its present facilities, together with its current
options to extend lease terms and occupy additional space, are adequate for its
current and projected needs.
ITEM 3. LEGAL PROCEEDINGS
OVERVIEW
Many aspects of the Company's business involve substantial risks of
liability. An underwriter is exposed to substantial liability under federal and
state securities laws, other federal and state laws, and court decisions,
including decisions with respect to underwriters' liability and limitations on
indemnification of underwriters by issuers. For example, a firm that acts as an
underwriter may be held liable for material misstatements or omissions of fact
in a prospectus used in connection with the securities being offered or for
statements made by its securities analysts or other personnel.
In recent years, there has been an increasing incidence of litigation
involving the securities industry, including class actions that seek substantial
damages. The Company has been active in the underwriting of initial public
offerings (IPOs) and follow-on offerings of the securities of emerging and
mid-size growth companies, which often involve a higher degree of risk and often
are more volatile than the securities of more established companies. In
comparison with more established companies, such emerging and mid-size growth
companies are also more likely to be the subject of securities class actions, to
carry directors and officers liability insurance policies with lower limits than
more established companies, and to become insolvent. Each of these factors
increases the likelihood that an underwriter of an emerging or mid-size growth
company's securities will be required to contribute to any judgment or
settlement of a securities lawsuit.
The plaintiffs' attorneys in securities class action lawsuits frequently
name as defendants in lawsuits the managing underwriters of a public offering.
H&Q LLC is named a defendant in a number of class action lawsuits relating to
public offerings in which it served as a managing underwriter. In addition, H&Q
LLC is currently directly or indirectly subject to over 13 shareholder class
action lawsuits relating to public offerings in which H&Q LLC served as a member
of the underwriting syndicate but not as a managing underwriter. Plaintiffs'
attorneys also name as defendants investment banks which provide advisory
services in merger and acquisition transactions. The Company anticipates that
additional securities class action lawsuits naming H&Q LLC as a defendant will
be filed from time to time in the future, particularly in light of the increased
number of public offerings H&Q LLC has underwritten and the increased number of
merger and acquisition transactions in which H&Q LLC provided advisory services
in recent years and the fact that the securities sold in certain of such public
offerings have experienced or may in the future experience significant declines
in market value. In such lawsuits, all members of the underwriting syndicate
typically are included as members of a defendant class and/or are required by
law, or pursuant to the terms of the underwriting agreement, to bear a portion
of any expenses or losses (including amounts paid in settlement of the
litigation) incurred by the underwriters as a group in connection with the
litigation, to the extent not covered by the indemnification obligation of the
issuer of the securities underwritten. H&Q LLC has on occasion participated in
settlements of these types of lawsuits by making payments to the plaintiff
class. There can be no assurance that the Company or H&Q LLC will not find it
necessary to make substantial settlement payments in the future. The Company has
agreed to indemnify H&Q LLC against any expense or liability it may incur in
connection with any such lawsuits.
If the plaintiffs in any suits against the Company were to successfully
prosecute their claims, or if the Company were to settle such suits by making
significant payments to the plaintiffs, the Company's operating results and
financial condition could be materially and adversely affected. In addition, the
Company's charter documents allow indemnification of the Company's officers,
directors and agents to the maximum extent permitted under Delaware law. The
Company has entered into indemnification agreements with certain of these
persons. The Company has been and in the future may be the subject of
indemnification assertions under these charter documents or agreements by
officers, directors or agents of the Company who are or may become defendants in
litigation.
In addition to these financial costs and risks, the defense of litigation
has, to a certain extent, diverted, and is expected to divert in the future, the
efforts and attention of the Company's management and staff. The amount of time
which management and other employees are required to devote in connection with
the defense of litigation could be substantial and might materially divert their
attention from other responsibilities within the Company. Securities class
action litigation in particular is highly complex, and can extend for a
protracted period of time, thereby consuming substantial time and effort of the
Company's management and substantially increasing the cost of such litigation.
Further, the laws relating to securities class actions and other litigation
against securities firms are currently in a state of flux. The eventual impact
of the Private Securities Litigation Reform Act of 1995 and the Securities
Litigation Uniform Standards Act of 1998 on securities class action litigation
is not known.
The Company also has been subject to litigation in state and federal courts
relating to companies in which the Company has invested as a principal. The risk
of such litigation is magnified where H&Q has a substantial or controlling
interest in the Company, or where one or more of H&Q's employees serves on the
Company's Board of Directors. On occasion, such litigation has produced results
materially adverse to H&Q. In particular, during 1992, the Company settled
litigation relating to MiniScribe at an aggregate cost, including expenses, of
approximately $59.8 million. All of such payments relating to such MiniScribe
settlements were made prior to May 31, 1996. The Company, as a result of its
investments as a principal, or the service of the Company's employees as
directors of other entities or otherwise, is currently subject to litigation and
may be subject to additional litigation or settlement payments in the future.
In the normal course of business, the Company is also a defendant in
various civil actions and arbitrations arising out of its activities as a
broker-dealer in securities, as an underwriter, as an investor, as an employer
and as a result of other business activities. H&Q has in the past made
substantial payments in connection with the resolution of disputed claims, and
there can be no assurance that substantial payments in connection with the
resolution of disputed claims will not occur in the future.
An adverse resolution of any pending or future lawsuits against H&Q LLC or
the Company could materially affect the Company's operating results and
financial condition.
Set forth below are summaries of certain pending litigation matters to
which H&Q LLC is a party. The Company believes that the resolution of such
matters and the other pending litigation matters to which the Company is a party
will not have a material adverse effect on the Company's operating results or
financial condition.
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 three such actions name H&Q as a defendant. NEUMAN
V. ASPEC TECHNOLOGY, INC. ET AL., No. CV775089, JONAS V. ASPEC TECHNOLOGY, INC.,
ET AL., No. CV775037 and RESSLER, ET AL. V. ASPEC TECHNOLOGY, INC., No.
CV776083. 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.
CYBERMEDIA, INC. SECURITIES LITIGATION
On March 19, 1998, a purported class action complaint was filed against
H&Q, one of its research analysts and others in California state court in Los
Angeles on behalf of persons who purchased the common stock of CyberMedia, Inc.
between March 31, 1997 and March 12, 1998. BROWN V. CYBERMEDIA, INC. ET AL., Los
Angeles Superior Court, No. BC187898. The complaint alleges 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 complaint
alleges that the defendants each violated California Corporations Code Sections
25400/25500; California Civil Code Sections 1709-1710; and California Business &
Professions Code Section 17200.
The court granted plaintiffs' motions for consolidation of the pending
federal court actions on June 15, 1998. A Consolidated Amended Complaint was
filed on September 11, 1998. IN RE: CYBERMEDIA LITIGATION. CV98-1811CBM (Ex). It
is expected that the state court actions will be consolidated as well.
DAOU SYSTEMS, INC. SECURITIES LITIGATION
In August 1998, two purported shareholder class action complaints were
filed in the United States District Court for the Southern District of
California against Daou Systems, Inc., certain of its officers and directors and
others, including H&Q. BRODY V. DAOU SYSTEMS, INC., ET AL., Civil No.
98cv1537-E(CGA) and KATSMAN V. DAOU SYSTEMS, INC., ET AL., Civil No.
98cv1575S(LAB). The complaints allege that the defendants violated the
anti-fraud provisions of the Securities Exchange Act of 1934 (the "Exchange
Act") during the class period of February 13, 1997 to August 14, 1998. H&Q was a
co-manager of the company's initial public offering in February 1997 and
lead-manager of its follow-on offering in August 1997.
A case similar to the federal court lawsuits was filed in California State
Court on October 15, 1998. WOLFE V. DAOU SYSTEMS, ET AL., San Diego Superior
Court, Case No. 724965. The defendants have not yet responded to the either the
federal or state complaints.
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 initial public offering 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.
A Consolidated Class Action Complaint was filed on September 18, 1998,
alleging violations of the Securities Act and the Exchange Act. Motions to
dismiss have been filed and argued.
GILLET V. GOLDMAN, SACHS & CO. ET AL.; PRAGER V. GOLDMAN, SACHS & CO., ET
AL.; HOLZMAN V. GOLDMAN, SACHS & CO., ET AL.
In November and December 1998, three purported class action lawsuits were
filed against twenty-seven securities firms, including H&Q, in the United States
District Court for the Southern District of New York. GILLET V. GOLDMAN, SACHS &
CO. ET AL., Case No. 98CIV. 7890; PRAGER V. GOLDMAN, SACHS & CO., ET AL., Case
No. 98CIV. 8310 and HOLZMAN V. GOLDMAN, SACHS & CO., ET AL., Case No. 98CIV.
8525. In each case, the plaintiff alleges that the defendants conspired to
artificially inflate fees charged in connection with the underwriting of initial
public offerings of securities in violation of the Sherman Antitrust Act. None
of the defendants have responded to any of the complaints.
INDIVIDUAL, INC. SECURITIES LITIGATION.
On November 13, 1996, a securities class action lawsuit was filed in the
United States District Court for the District of Massachusetts against H&Q LLC
and others by purchasers of the common stock of Individual, Inc., a provider of
personalized information services. Individual, Inc. Securities Litigation, U. S.
D. C., District of Massachusetts, Master File No. 96-12272-DPW. The complaint
alleged, among other things, that the prospectus for the company's March 1996
initial public offering contained misstatements, or failed to make required
statements, relating to the company's relationship with its founder and then
chief executive officer, whose employment with the company terminated in August
1996. H&Q LLC was a co-manager of the offering. The defendants include the
company, certain of its current and former directors and officers, and the
underwriters. On February 28, 1997, the plaintiffs filed an Amended Consolidated
Complaint. On April 15, 1997, the defendants moved to dismiss the complaint.
On May 27, 1998, the defendants' motions to dismiss were granted. The
district court's decision is on appeal before the United States Court of Appeals
for the First Circuit, No. 98-1730.
LUMISYS, INC. SECURITIES LITIGATION
On July 9, 1997, a purported class action complaint was filed in the
California Superior Court in Santa Clara County against H&Q and others relating
to an initial public offering by Lumisys, Inc. in November 1995 that was
lead-managed by H&Q. WENGER, ET AL., V. LUMISYS, INC., ET AL., Case No.
CV767369. The complaint alleges violations of California state law on the basis
of false statements allegedly made by the defendants during the alleged class
period of November 15, 1995 through July 11, 1996. On July 10, 1997, a similar
complaint was filed in the federal district court in San Jose alleging
violations of the Exchange Act. WENGER, ET AL. V. LUMISYS, INC., ET AL., No.
C-97 20609 EAI. The defendants demurred to the complaint in the state court case
and on December 16, 1997, the court sustained the demurrers, in most respects
with leave to amend. In the federal court case, the defendants moved to dismiss
the complaint.
On March 30, 1998, the defendants' motion to dismiss the complaint in the
federal court was granted with leave to amend. 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. The
defendants' demurred to the Second Amended Complaint on August 11, 1998. On
December 2, 1998, the underwriters' demurrer was overruled.
NASDAQ MARKET-MAKERS ANTITRUST LITIGATION.
In December 1994, a consolidated amended complaint was filed in the United
States District Court for the Southern District of New York against 33
broker-dealer defendants, including H&Q LLC (94 Civ. 3996 (RWS), M.D.L. No.
1023) (the "Consolidated Action"). The complaint alleged that H&Q LLC and other
participants and market-makers on Nasdaq engaged in a conspiracy to fix the
"spread" between bid and asked prices for securities traded on Nasdaq in
violation of Section 1 of the Sherman Act. The plaintiff class was alleged to
include persons throughout the United States who are customers of the defendants
or their affiliates and who purchased or sold securities on Nasdaq during the
period from May 1, 1989 through May 27, 1994.
On December 29, 1997, the class period was extended through July 17, 1996
and the litigation was settled. H&Q has paid all amounts it was required to pay
pursuant to the settlement.
In addition, allegations of collusion among the market-makers became the
subject of investigations by the NASD, the SEC and the Antitrust Division of the
Department of Justice ("DOJ"). On July 16, 1996, H&Q LLC and 23 other Nasdaq
market makers entered into a Stipulation and Order resolving a civil complaint
filed by the DOJ, alleging that they violated Section 1 of the Sherman Act in
connection with certain market making practices (UNITED STATES OF AMERICA V.
ALEX. BROWN & SONS, ET AL., Civ. No. 96-CV-5313). The complaint alleged that the
defendants and other market makers engaged in activities that had the effect of
artificially inflating the quoted "inside spread"-i.e., the difference between
the best buying price and the best selling price-of certain Nasdaq stocks. In
entering into the Stipulation and Order, the parties agreed that the defendants
would not agree with other market-makers to set prices, quotes or spreads in
Nasdaq securities, or harass, intimidate or refuse to trade with other
market-makers for reducing their spread in any Nasdaq security or by reason of
the quantity of a Nasdaq security they are willing to trade at its quoted price.
In addition, the defendants each agreed, pursuant to the order, to (i) designate
an antitrust compliance officer to instruct traders and others concerning the
requirements of the proposed order, (ii) create and listen to audio tapes of the
portion of a firm's trading activity on Nasdaq and (iii) allow representatives
of the DOJ, without pre-arrangement, to appear at a defendant's offices to
listen in on trader conversations the firm is taping as they are occurring. The
agreement also requires the defendants to pass on complaints of possible
violations of the proposed order or taped conversations to the DOJ, and to allow
the DOJ to bring civil or criminal contempt charges for willful violations of
the order.
On April 23, 1997, the Court approved the DOJ settlement by granting the
DOJ's motion for entry of the Stipulation and Order and the termination of the
action. That approval was appealed to the United States Court of Appeals for the
Second Circuit by the plaintiffs in the Consolidated Action, acting as
intervenors.
On August 6, 1998, the Second Circuit Court of Appeals affirmed the
district court's approval of the DOJ settlement, and the settlement thereafter
became final.
OAK TECHNOLOGY SECURITIES LITIGATION.
The Company is a defendant in litigation pending in state and federal
courts relating to Oak Technology, Inc., a manufacturer of semiconductor chips.
Several proposed shareholder class action lawsuits were consolidated in an
amended complaint filed on August 14, 1996 in the state Superior Court in Santa
Clara County, California (IN RE OAK TECHNOLOGY SECURITIES LITIGATION, No.
CV758510). The consolidated complaint alleges, in general, that the Company and
others violated the California securities law by issuing false and misleading
statements relating to Oak Technology's financial situation during the period
from July 27, 1995 through May 22, 1996. H&Q LLC was the lead underwriter of the
initial public offering and a follow-on offering of Oak Technology securities in
1995, and made a market and issued research reports with respect to Oak
Technology's securities. The other defendants include Oak Technology, certain of
its officers and directors and others. On September 13, 1996, the defendants
demurred to the consolidated complaint in its entirety. On December 6, 1996, the
demurrers were sustained with leave to amend. Plaintiffs filed a second amended
complaint on September 22, 1997, which names H&Q, among others, as a defendant
and asserts causes of action for violations of California Corporations Code
Sections 25400, 25400, Civil Code Sections 1709 and 1710, and aiding and
abetting breaches of fiduciary duty and abuses of control by certain other
defendants. H&Q and other defendants demurred to this complaint. On December 3,
1997, the demurrers were sustained as to all causes of action except the claim
under California Corporations Code Section 25400.
In federal court, several cases based on the same general facts were filed,
and have been consolidated into one action. IN RE OAK TECHNOLOGY SECURITIES
LITIGATION, No. C-96-20552-SW (Northern District of California). Defendants
moved to dismiss the action, and the motion was granted by order dated August 1,
1997. A second amended complaint was filed on September 4, 1997 and the
defendants moved to dismiss it. A hearing has been held and the matter is under
submission.
On January 28, 1998, H&Q filed an answer denying the allegations that
remain against it in the state court case (IN RE OAK TECHNOLOGY SECURITIES
LITIGATION, No. CV758510).
OMEGA RESEARCH, INC. SECURITIES LITIGATION
On January 28, 1998, a purported class action complaint was filed against
H&Q and others in the federal court for the Southern District of Florida. RHODES
V. CRUZ, ET AL., Civ. No. 98-0174. The allegations concern the initial public
offering of Omega Research, Inc., for which H&Q acted as a co-manager. The
complaint alleges that during the period from October 4, 1997 to January 6,
1998, the defendants engaged in violations of the Securities Act.
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.
SCHADE V. HAMBRECHT & QUIST GROUP
On December 2, 1997, separate but similar lawsuits were filed against H&Q
and two other investment banks in California Superior Court in Orange County,
alleging that these investment banks had engaged in unlawful business practices
in violation of California Business & Professions Code Sections 17200 et seq.
and purported to sue on behalf of the general public. In each case the
plaintiffs sought injunctive relief and substantial but unspecified damages. The
case against H&Q was entitled EDWARD A. SCHADE V. HAMBRECHT & QUIST GROUP,
Orange County Superior Court, Case No. 787495. The cases alleged that the
allocation of shares of initial public offerings to the personal brokerage
accounts of corporate executives improperly influenced such corporate
executives' decisions with regard to the selection of investment banks to
provide investment banking services to their companies.
On May 4, 1998, H&Q filed a demurrer to the complaint. On September 29,
1998, the state court sustained the demurrers to the Schade complaints without
leave to amend. On December 3, 1998, the plaintiffs filed a notice of appeal.
SS&C TECHNOLOGIES, INC. SECURITIES LITIGATION
Beginning in March 1997, several purported class action lawsuits were filed
against SS&C Technologies, Inc. and others including H&Q relating to the
company's initial public offering on May 31, 1996 which was co-managed by H&Q.
The litigation has been consolidated in an amended class action complaint filed
on July 8, 1997 in the federal court in Connecticut. FEINER ET AL. V. SS&C
TECHNOLOGIES, INC., ET AL., Civil Action No. 397CV00656 (SBA). The complaint
purports to assert claims under Sections 11, 12(2) and 15 of the Securities Act.
It alleges, among other things, that the initial offering price was unreasonable
and unfair, and was based solely, primarily, or significantly upon the ability
of the underwriters to sell the stock, rather on than the fundamentals of the
issuer or market conditions or the demand for similar securities of comparable
companies.
On May 20, 1998, the defendants answered the Consolidated Amended Class
Action Complaint. On May 29, 1998, the lead plaintiffs moved for class
certification and on September 29, 1998, the underwriter defendants filed an
opposition to the plaintiffs' motion for class certification.
STB SYSTEMS, INC. SECURITIES LITIGATION
On October 9, 1998, a shareholder class action was filed against STB
Systems, Inc. and others, including H&Q, in the County Court at Law No. 1 of
Dallas County, Texas. BRODY V. STB SYSTEMS, INC., ET AL. (Citation No.
CC-98-09895-A). The complaint alleges that the defendants are liable for
violations of the Securities Act of 1933 and the Texas Securities Act in
connection with a follow-on offering on March 20, 1998, which was co-managed by
H&Q.
The defendants have not responded to the complaint.
STORM TECHNOLOGY, INC. SECURITIES LITIGATION
On March 14, 1997, a purported class action suit was filed in the
California Superior Court in Santa Clara County against Storm Technology, Inc.,
two of its officers or directors, a shareholder, and H&Q related to the
company's initial public offering on September 30, 1996 which was co-managed by
H&Q. Goldberg v. Storm Technology, Inc., et al., Santa Clara Superior Court, No.
CV764797. The suit alleges, among other things, that the prospectus and H&Q's
research reports were false and misleading, and purports to state claims under
Sections 25400, 2550, 1507 and 25401 of the California Corporations Code and
California Business and Professions Code Sections 17200, et seq., as well as
Sections 11 and 12 of the Securities Act. The defendants demurred and the
demurrers were sustained, with leave to amend. An amended complaint was filed on
October 16, 1997.
On December 12, 1997, two class action complaints similar to the state
court complaint were filed in the United States District Court for the Northern
District of California (Goldberg v. Storm Technology, Inc., et al., No.
C97-21101, alleging violations of the Securities Act, and Goldberg v. Storm
Technology, Inc. et al., No. C97-04516, alleging violations of the Exchange
Act).
On February 13, 1998, the court consolidated the two federal court actions.
Goldberg v. Storm Technology, Inc. et al., Nos. C97-21101 and C98-20186. On
March 13, 1998, the underwriters moved to dismiss the consolidated complaints.
On March 24, 1998, the state court sustained the defendants' demurrer
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.
In October 1998, Storm Technology filed for bankruptcy under Chapter 11 of
the United States Bankruptcy Code; it later voluntarily converted the case to
Chapter 7. On November 3, 1998, the federal court granted the defendants'
motions to dismiss, and dismissed the complaints with leave to amend. On
December 7, 1998, an Amended Class Action complaint was filed against the same
defendants, except for Storm.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of December 14,
1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Daniel H. Case III 41 Chairman and Chief Executive Officer of the Company and H&Q LLC; Director
Patrick J. Allen 36 Chief Financial Officer of the Company and H&Q LLC; Managing Director of
H&Q LLC
Todd D. Bakar 34 Managing Director and Director of Research, H&Q LLC
David G. Golden 40 Managing Director and Co-Director of Investment Banking, H&Q LLC
Paul L. Hallingby 52 Vice Chairman, H&Q LLC
John P. Hullar 42 Managing Director and Director of Worldwide Sales, H&Q LLC
Steven N. Machtinger 49 General Counsel and Secretary of the Company and H&Q LLC; Managing
Director of H&Q LLC
David M. McAuliffe 49 Chief Operating Officer of the Company and H&Q LLC
Cristina M. Morgan 46 Managing Director and Co-Director of Investment Banking, H&Q LLC
William R. Timken 63 Vice Chairman of the Company and H&Q LLC; Director
</TABLE>
Daniel H. Case III joined the Company in 1981, and was initially an
associate and then a principal in the Corporate Finance Department. He also
served as Vice President and then a partner in the Venture Capital Department,
both in San Francisco and in London. In 1983, he co-founded the business which
became Hambrecht & Quist Guaranty Finance. Mr. Case rejoined Corporate Finance
in 1986 as co-director of mergers and acquisitions, and became Managing Director
and head of Investment Banking in December 1987. In October 1989, he was elected
Executive Vice President and in October 1991, he was elected to the Board of
Directors of the Company. In April 1992, he was elected President and Co-Chief
Executive Officer. He became Chief Executive Officer in October 1994 and
Chairman of the Board of Directors in January 1998. Mr. Case also serves as a
director of Rational Software Corporation, a maker of object-oriented software
development tools, Electronic Arts Inc., a global interactive entertainment
software company, AMB Property Corporation, a real estate company, the National
Science and Technology Medal Foundation and the Bay Area Council. He has a B.A.
in Economics and Public Policy from Princeton University and studied management
at the University of Oxford as a Rhodes Scholar.
Patrick J. Allen joined Hambrecht & Quist in May 1995 as Vice President,
Finance. Since October 1, 1996, Mr. Allen has served as the Company's Chief
Financial Officer. In October 1996, Mr. Allen was named a Managing Director of
H&Q LLC. From November 1993 to April 1995, Mr. Allen was Chief Operating Officer
of Cruttenden Roth, an investment bank. Mr. Allen was previously a Senior Vice
President with Kemper Securities, an investment bank, and held various positions
from 1988 to 1993, including Chief Financial Officer of a predecessor firm. Mr.
Allen had been an auditor with Price Waterhouse, a public accounting firm, in
Newport Beach, California from 1984 to 1988. He holds a B.S. in Business
Administration from California Polytechnic University in San Luis Obispo.
Todd D. Bakar joined Hambrecht & Quist in 1987 as a Research Associate. In
1989, Mr. Bakar was promoted to Research Analyst in the Technology sector. Mr.
Bakar was named a Managing Director in 1994 and was named Director of Technology
Research in 1997. In November 1998, Mr. Bakar was named Director of Research. He
holds a B.A. from the University of California, Berkeley.
David G. Golden joined Hambrecht & Quist in 1988. Mr. Golden was named
Co-Director of Mergers and Acquisitions in 1992 and was named Director of
Mergers and Acquisitions in 1995. In 1998, Mr. Golden was named Co-Director of
Investment Banking. From 1984 through 1987, Mr. Golden was employed as an
Associate at the law firm of Davis Polk & Wardwell in New York and London, where
he practiced corporate finance and securities law. Mr. Golden received his A.B.
degree from Harvard University (magna cum laude, Phi Beta Kappa), and a J.D.
degree from Harvard Law School, where he was an editor of the Harvard Law
Review. Mr. Golden is a member of the Rockefeller University Council.
Paul L. "Barney" Hallingby joined the Company in 1983 as an institutional
salesman. He was named Managing Director of the Research Department in June 1988
and was elected Executive Vice President in October 1990. In July 1992, he
became Managing Director of Sales and Trading, and in October 1994, he became
Managing Director of Institutional Equity. In March 1998, Mr. Hallingby was
named Vice Chairman of Hambrecht and Quist, principally responsible for trading,
convertibles, and the growth of the firm's European operation. He holds a B.A.
in Political Science from the University of Pennsylvania and an M.B.A. in
Finance from Columbia University.
John P. Hullar joined Hambrecht & Quist in 1996, with more than 16 years in
the financial services business. Before joining Hambrecht & Quist, Mr. Hullar
worked at Morgan Stanley for 11 years, in Institutional Sales in New York and in
management positions in Research and Sales in Tokyo and London. Upon joining H&Q
in San Francisco, he assumed his current position as Managing Director and
Director of Worldwide Sales where he oversees all aspects of U.S. and
International Institutional Sales and Accounts, Executive Financial Services and
Venture Services Sales. Mr. Hullar holds a B.A. from Yale University and
attended N.Y.U's Stern Business School.
Steven N. Machtinger has served as the Company's General Counsel and
Secretary since 1988. He was named a Managing Director in 1990. Mr. Machtinger
was an attorney with the SEC from 1974 to 1983 and was General Counsel of Birr,
Wilson & Co., Inc., an investment bank, from 1983 to 1988. Mr. Machtinger holds
a B.A. in Government from Harvard College and a J.D. from the University of
California, Davis.
David M. McAuliffe joined the Company in July 1995 as Managing Director and
Co-Director of Investment Banking. In September 1996, Mr. McAuliffe was named
Chief Administrative Officer of the Company. In March 1998, he was named Chief
Operating Officer with day-to-day responsibility for the firm's broker-dealer
activities, including research, syndicate, investment banking, sales, trading
and administration. Prior to joining the Company, Mr. McAuliffe served in
various capacities in the Investment Banking and Merchant Banking divisions of
Kidder Peabody & Co., an investment bank, from 1974 to 1995. From April 1992 to
May 1995, he served as Kidder Peabody & Co.'s Co-Head of the Global Investment
Banking Division. Mr. McAuliffe holds a B.A. in Accounting from Boston College
and an M.B.A. from Harvard Business School.
Cristina M. Morgan joined the Company in 1982 as a research analyst, became
a principal in Corporate Finance in 1984 and has been a Senior Vice President of
H&Q LLC and its predecessor entity since March 1990. In 1990, Ms. Morgan was
elected Managing Director, Technology Equities in Corporate Finance, and in
1992, was named Director of Investment Banking. Since July 1995, Ms. Morgan has
been Co-Director of Investment Banking. Ms. Morgan holds a B.S. in Finance and
an M.B.A. in Finance from Arizona State University.
William R. Timken joined Hambrecht & Quist in 1969 and has been employed by
the Company in senior capacities since then. Mr. Timken was appointed Vice
Chairman of the Company in 1992. He is responsible for the activities of the
Company's Syndicate Department. Mr. Timken is a past member of the Board of
Governors of the Pacific Stock Exchange and the Board of Governors of the
National Association of Securities Dealers, Inc. Mr. Timken holds a B.A. degree
in Economics from Colby College.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information required by item 5 is incorporated by reference from the
information set forth under the heading "Corporate Information - Market Price
and Dividend Information" contained in the Company's 1998 Annual Report to
Stockholders (the "Annual Report") filed as Exhibit 13.01 to this Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
Information required by item 6 is incorporated by reference from the
information set forth under the heading "Selected Financial Data" in the Annual
Report filed as Exhibit 13.01 to this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information required by item 7 is incorporated by reference from the
information set forth under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Annual Report filed as
Exhibit 13.01 to this Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information required by item 7A is incorporated by reference from the
information set forth under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Annual Report filed as
Exhibit 13.01 to this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is set forth in Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors required by Item 10 is incorporated by
reference from the information set forth under the headings "Proposal No.
1-Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's definitive proxy statement for its annual meeting
of stockholders to be held on February 24, 1999. Information regarding executive
officers found under the caption "Executive Officers of the Registrant" in Part
I hereof is also incorporated by reference into this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
information set forth under the heading "Executive Compensation" in the
Company's definitive proxy statement for its annual meeting of stockholders to
be held on February 24, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the
information set forth under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement
for its annual meeting of stockholders to be held on February 24, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the
information set forth under the heading "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for its annual meeting
of stockholders to be held on February 24, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are incorporated by reference from the
financial statements contained in the Annual Report filed as Exhibit 13.01 to
this Form 10-K:
1. Financial Statements
Consolidated Financial Statements as of September 30,
1997, and 1998 and for the years ended September 30,
1996, 1997 and 1998
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
2. Financial Statement Schedules
All schedules are omitted because they are not
required or the information is shown in the financial
statements or notes thereto.
3. Exhibits
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
<S> <C>
3.01(1) Registrant's Amended and Restated Certificate of Incorporation (Exhibit 3.01).
3.02(5) Registrant's Bylaws, as amended (Exhibit 3.02).
4.01(1) Form of Specimen Certificate for Registrant's common stock (Exhibit 4.01).
10.01(7) Registrant's 1996 Equity Plan, as amended and restated on December 18, 1997* (Exhibit 10.01).
10.02(1) Registrant's 1995 Restricted Stock Plan, 1995 Stock Option Plan, and Hambrecht & Quist, L.P. 1995 Limited
Partnership Unit Plan* (Exhibit 10.02).
10.03(1) Form of Registrant's 1995 Stock Option Plan Nonstatutory Stock Option Agreement* (Exhibit 10.03).
10.04(1) Registrant's Savings and Employee Stock Ownership Plan, effective as of October 1, 1994* (Exhibit 10.04).
10.05(1) Lease between The Equitable Life Assurance Society of the United States and Hambrecht & Quist L.L.C. (formerly
Hambrecht & Quist Incorporated) dated January 27, 1988, as amended (Exhibit 10.05).
10.06(1) Assignment of Lease from Apple Computer, Inc. to Hambrecht & Quist L.L.C. dated March 27, 1996 (Exhibit 10.06).
10.07(1) Lease between Hambrecht & Quist L.L.C. (formerly Hambrecht & Quist Incorporated) and Rowes Wharf Associates
dated June 22, 1987, as amended (Exhibit 10.07).
10.08(1) Lease, Riders, and Addenda between 230 Park Avenue Associates and Hambrecht & Quist L.L.C. (formerly Hambrecht
& Quist Incorporated) dated December 1, 1995 (Exhibit 10.08).
10.09(1) Employment Agreement between Registrant and Daniel H. Case III, dated June 17, 1996* (Exhibit 10.13).
10.10(1) Hambrecht & Quist L.L.C.'s Operating Agreement, dated March 6, 1995 (Exhibit 10.14).
10.11(3) Registrant's 1996 Bonus and Deferred Sales Compensation Plan, as amended and restated on March 24, 1997*
(Exhibit 10.15).
10.12(1) Master Agreement between Hambrecht & Quist L.L.C. (formerly Hambrecht & Quist Incorporated), Wertheim
Schroder & Co. Incorporated, WSCI Limited Partnership and Lewco Securities Corp., dated December 23, 1991,
as amended on December 13, 1993 by Amendment No. 1 and July 5, 1995 by Amendment No. 2 (Exhibit (10.16).
10.13(1) Clearing and Other Services Agreement between Hambrecht & Quist L.L.C.(formerly Hambrecht & Quist
Incorporated), Wertheim Schroder & Co. Incorporated, WSCI Limited Partnership and Lewco Securities Corp., dated
December 23, 1991, as amended (Exhibit 10.17).
10.14(1) Letter Agreement between Registrant and H&Q Asia Pacific, Ltd., dated April 1, 1996 (Exhibit 10.18).
10.15(1) Form of Registrant's Indemnification Agreement (Exhibit 10.19).
10.16(1) Lease between The Equitable Life Assurance Society of the United States and Hambrecht & Quist L.L.C.(formerly
Hambrecht & Quist Incorporated) dated November 9, 1988, as amended (Exhibit 10.20).
10.17(2) Amendment No. 3 to Master Agreement between Hambrecht & Quist L.L.C. (formerly Hambrecht & Quist Incorporated),
Wertheim Schroder & Co. Incorporated, WSCI Limited Partnership and Lewco Securities Corp., effective
September 30, 1996 (Exhibit 10.21).
10.18(3) Consulting Agreement between Hambrecht & Quist L.L.C. and William J. Perry, dated April 1, 1997 (Exhibit 10.22).
10.19(4) Sublease between Chevron Real Estate Management Company and Hambrecht & Quist California, dated May 21, 1997
(Exhibit 10.23).
10.20(4) Lease between Pacific Resources Development Inc. and Hambrecht & Quist California, dated June 5, 1997 (Exhibit
10.24).
10.21(4) Amendment Nos. 6, 7 and 8 to Lease between Hambrecht & Quist L.L.C. (formerly Hambrecht & Quist Incorporated)
and Rowes Wharf Associates dated June 22, 1987, as amended (Exhibit 10.25).
10.22(6) Credit Agreement between Hambrecht & Quist California and Swiss Bank Corporation, dated March 4, 1998
(Exhibit 10.26).
10.23 Fourth Amendment to Hambrecht & Quist Lease dated as of January 27, 1988 and Sixth Amendment to
Hambrecht & Quist Lease dated as of November 9, 1988 between The Equitable Life Assurance Society of the United
States and Hambrecht & Quist L.L.C., dated as of November 27, 1997.
13.01 Certain information from Registrant's Annual Report to Stockholders for the year ended September 30,
1998 which is incorporated by reference in this Form 10-K.
21.01(2) List of Subsidiaries of the Registrant.
23.01 Consent of Independent Public Accountants.
27.01 Financial Data Schedule
</TABLE>
- ------------------
* Indicates management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the corresponding exhibit to the Registrant's
S-1 Registration Statement in the form declared effective on August 8,
1996, File No. 333-6431.
(2) Incorporated by reference to Registrant's Form 10-K filed for the fiscal
year ended September 30, 1996.
(3) Incorporated by reference to Registrant's Form 10-Q filed for the fiscal
quarter ended March 31, 1997.
(4) Incorporated by reference to Registrant's Form 10-K filed for the fiscal
year ended September 30, 1997.
(5) Incorporated by reference to Registrant's Form 10-Q filed for the fiscal
quarter ended December 31, 1997.
(6) Incorporated by reference to Registrant's Form 10-Q filed for the fiscal
quarter ended March 31, 1998.
(7) Incorporated by reference to the corresponding exhibit to the Registrant's
S-8 Registration Statement filed on June 16, 1998, File No. 333-56957.
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 21st day of
December, 1998.
HAMBRECHT & QUIST GROUP
By: /s/ Daniel H. Case III
------------------------------
Daniel H. Case III
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, report
has been signed by the following persons in the capacities and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
Chairman of the Board and Chief Executive December 21, 1998
/s/ Daniel H. Case III Officer and Director (Principal Executive
- ---------------------------- Officer)
(Daniel H. Case III)
/s/ William R. Timken Vice Chairman of the Board of Directors December 21, 1998
- ----------------------------
(William R. Timken)
Chief Financial Officer December 21, 1998
/s/ Patrick J. Allen (Principal Financial and Accounting
- ---------------------------- Officer)
(Patrick J. Allen)
/s/ Howard B. Hillman Director December 21, 1998
- ----------------------------
(Howard B. Hillman)
/s/ William E. Mayer Director December 21, 1998
- ----------------------------
(William E. Mayer)
/s/ William J. Perry Director December 15, 1998
- ----------------------------
(William J. Perry)
/s/ Edmund H. Shea, Jr. Director December 21, 1998
- ----------------------------
(Edmund H. Shea, Jr.)
</TABLE>
<PAGE>
HAMBRECHT & QUIST GROUP
EXHIBIT INDEX
EXHIBIT
NO. EXHIBIT TITLE
10.23 Fourth Amendment to Hambrecht & Quist Lease dated as of
January 27, 1988 and Sixth Amendment to Hambrecht & Quist Lease
dated as of November 9, 1988 between The Equitable Life Assurance
Society of the United States and Hambrecht & Quist L.L.C.,
dated as of November 27, 1997.
13.01 Certain information from Registrant's Annual Report to Stockholders
for the year ended September 30, 1998 which is incorporated by
reference in this Form 10-K.
23.01 Consent of Independent Public Accountants.
27.01 Financial Data Schedule.
FOURTH AMENDMENT TO
HAMBRECHT & QUIST LEASE DATED AS OF JANUARY 27, 1988
AND SIXTH AMENDMENT TO HAMBRECHT & QUIST LEASE
DATED AS OF NOVEMBER 9, 1988
THIS FOURTH AMENDMENT TO HAMBRECHT & QUIST OFFICE LEASE DATED JANUARY 27,
1988 AND THIS SIXTH AMENDMENT TO HAMBRECHT & QUIST OFFICE LEASE DATED AS OF
NOVEMBER 9, 1988 (collectively, this "Amendment") is made and entered into as of
November 26, 1997, by and between THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE
UNITED STATES, a New York corporation ("Landlord") and HAMBRECHT & QUIST LLC, a
Delaware limited liability company ("Tenant").
R E C I T A L S
A. Landlord and Tenant previously entered into that certain Office Lease
for space in that certain building commonly known as One Bush Street (the
"Building") located in San Francisco, California (the "Original Lease") dated as
of November 9, 1988, which Original Lease was amended by those certain Lease
Amendments No. 1 (the "First Amendment") dated as of August 1, 1989 and January
27, 1993, respectively, by that certain Lease Amendment Number Two (the "Second
Amendment") dated as of May 14, 1993, that certain Lease Amendment Number Three
(the "Third Amendment") dated as of January 17, 1995; that certain Lease
Amendment Number Four (the "Fourth Amendment") dated as of January 8, 1996; and
that certain Lease Amendment Number Five (the "Fifth Amendment") dated as of
June 10, 1996. Landlord and Tenant also previously entered into that certain
Office Lease for space in the Building dated as of January 27, 1988 (the "Second
Original Lease"), which Second Original Lease was amended by that certain Lease
Amendment No. One (the "First Amendment to Second Original Lease") dated as of
November 9, 1988 and that certain Lease Amendment No. Two (the "Second Amendment
to Second Original Lease") dated as of August 1, 1989. The Original Lease, the
First through Fifth Amendments, the Second Original Lease, the First and Second
Amendment to the Second Original Lease and all riders, exhibits, rules and
regulations referred to therein comprise, and are collectively referred to
herein as, the "Lease." All capitalized terms otherwise undefined in this
Amendment shall have the meanings assigned to such terms in the Lease.
B. Landlord and Tenant desire to amend the Lease to document the terms and
conditions of their agreement with respect to (i) the right of Tenant to lease
the Premises for an additional term of seven (7) years, (ii) the right of Tenant
to extend the term of the Lease for an additional period of five (5) years and
(iii) Tenant's right of first offer on additional space in the Building.
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AGREEMENT
NOW, THEREFORE, for valuable consideration, receipt and sufficiency of
which are hereby acknowledged, Landlord and Tenant agree as follows:
1. RECITALS. Recitals A and B above are true and correct and are
incorporated herein as though set forth in full.
2. TERM OF THE LEASE. The term of the Lease ("Term") shall be extended
commencing on the dates as set forth below (each, an "Extension Date") and
terminating on December 31, 2005.
RENTABLE
FLOORS SQUARE FEET COMMENCEMENT DATE
14-18 81,785 1/1/99
13 5,705 4/1/99
13 6,209 9/1/98
13 4,646 12/10/97
12 16,560 5/1/98
11 3,085 12/10/97
11 13,475 1/1/99
10 16,560 1/1/99
7 3,542 1/1/99
6 12,419 12/10/97
6 4,141 1/1/99
4 7,186 1/1/99
As of the applicable Extension Date (as set forth above), the applicable
space which is not currently part of the Premises shall be added to and shall
become a part of the Premises. The space described above is more particularly
described on Exhibit "A" attached hereto and made a part hereof. Landlord and
Tenant hereby agree that the rentable square feet described above shall not be
subject to redetermination and that such rentable square feet shall bind
Landlord and Tenant for all purposes of this Amendment. In no event shall
Landlord be deemed to have guaranteed the availability of the space described
above that is currently occupied by other tenants as of the stated availability
date or dates. If the then-existing tenant should hold over, or
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if for any other cause beyond Landlord's reasonable control, Landlord shall be
unable to deliver possession of such space as of the stated or agreed-to
availability date, Landlord shall have no liability whatsoever to Tenant.
Without limiting the above, Landlord agrees to use its commercially reasonable
efforts to enforce its right to possession to the subject space against such
other tenant, including institution of legal proceedings. The applicable
Extension Date shall be delayed until such time as such space shall become
available.
3. BASE EXPENSE AND TAX YEAR. Effective upon the Extension Date for each
space, the "Base Expense Year" and the "Base Tax Year" in the Basic Lease
Information shall be amended to read as follows:
RENTABLE
FLOORS SQUARE FEET BASE EXPENSE AND TAX YEAR
14-18 81,785 1999
13 5,705 1999
13 6,209 1998
13 4,646 1998
12 16,560 1998
11 3,085 1998
11 13,475 1999
10 16,560 1999
7 3,542 1999
6 12,419 1998
6 4,141 1999
4 7,186 1999
4. TENANT'S PERCENTAGE SHARE. Effective upon the Extension Date for each
space, the "Tenant's Percentage Share" in the Basic Lease Information shall be
amended to read as follows:
RENTABLE TENANT'S
FLOORS SQUARE FEET PERCENTAGE SHARE
14-18 81,785 29.16%
13 5,705 2.03%
13 6,209 2.21%
13 4,646 1.66%
12 16,560 5.90%
11 3,085 1.10%
11 13,475 4.80%
10 16,560 5.90%
7 3,542 1.27%
6 12,419 4.43%
6 4,141 1.47%
4 7,186 2.57%
5. BASE RENT. The "Base Rent" in the Basic Lease Information is hereby
amended to read as follows:
Extension Date through December 31, 2003: $36.00 per rentable square foot
per year
January 1, 2004 to December 31, 2005: $42.00 per rentable square foot per
year
6. TENANT IMPROVEMENTS. The Premises will be improved in accordance with
Exhibit "B" attached hereto and made a part hereof.
7. OPTION TO RENEW.
(a) Tenant shall have one (1) option to extend the Lease for a period of
five (5) years (the "Option Period") with at least twelve (12) months (but no
more than eighteen (18) months) prior written notice of its intention to extend
the Lease prior to the expiration of the Term. Notwithstanding anything herein
to the contrary, if Landlord has given notice to Tenant that an Event of
Default, as defined in the Lease, has occurred, which Event of Default has not
been cured by Tenant at the time Tenant gives Landlord notice of its exercise of
the option
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granted hereunder or at the time of the commencement date of the extended term,
the option shall automatically terminate and become null and void.
(b) In the event the renewal option is timely exercised, the Lease shall be
extended for the term of the Option Period upon all of the terms and conditions
of the Lease (except that the Option Period shall apply to the Additional Space
only to the extent provided in Section 7(h) below), provided that (i) the annual
Base Rent for the Option Period shall be ninety-five percent (95%) of the "Fair
Market Rent", subject to periodic adjustments thereto, for the Premises,
excluding all Additional Space, if any, already added to the Premises pursuant
to the provisions of Section 8 herein, (ii) the Base Expense and Tax Year shall
be 2006, (iii) Tenant shall have no further right to extend the term of this
Lease, (iv) the Premises shall be accepted by Tenant in "AS IS" condition with
no tenant improvements to be built by Landlord or tenant improvement allowance
to be paid by Landlord and (v) the provisions of Section 12 below shall apply to
such renewal. For purposes hereof, "Fair Market Rent" shall mean such base rent
as constitutes the prevailing base rent paid by new and renewing tenants, which
occupy a minimum of 25,000 square feet in other Class "A" office buildings in
the San Francisco financial district, which the parties agree will mean the area
on the north of Market Street, west of the Embarcadero, east of Kearny Street
and south of Washington Street, for comparable space and for comparable terms
pursuant to leases entered into or renewed by such other tenants on or about the
commencement of the Option Period. Determination of prevailing base rent shall
take into consideration all relevant lease terms, effective rental rates, rental
escalations, the Operating Expenses and Property Taxes to be paid by Tenant,
Building identification and signage, the age of tenant improvements and other
economic factors being obtained by such other tenants, including tenant
allowances and other monetary concessions, if any, granted to such other
tenants, in connection with comparable space.
(c) Within sixty (60) days after receipt of Tenant's notice of exercise,
Landlord shall notify Tenant in writing of Landlord's estimate of the Fair
Market Rent, including, without limitation, periodic adjustments thereto, and,
thus, of the Base Rent for the Option Period, based on the provisions of Section
7(b) above. Within thirty (30) days after receipt of such notice from Landlord,
Tenant shall have the right either to (i) accept Landlord's statement of Fair
Market Rent as the Base Rent for the Option Period; or (ii) elect to arbitrate
Landlord's estimate of Fair Market Rent, such arbitration to be conducted
pursuant to the provisions hereof. Failure on the part of Tenant to require
arbitration of Fair Market Rent within said 30-day period shall constitute
acceptance of the Base Rent for the Option Period as calculated by Landlord. If
Tenant elects arbitration, the arbitration shall be concluded within ninety (90)
days after the date of Tenant's election, subject to extension for an additional
30-day period if a third arbitrator is required and does not act in a timely
manner. To the extent that arbitration has not been completed prior to the
expiration of any preceding period for which Base Rent has been determined,
Tenant shall continue to pay Base Rent at such rate, with any appropriate
adjustment to be made once Fair Market Rent is ultimately determined by
arbitration and Tenant shall immediately pay any increase in Base Rent to
Landlord.
(d) In the event of arbitration, the judgment or the award rendered in any
such arbitration may be entered in any court having jurisdiction and shall be
final and binding between the parties. The arbitration shall be conducted and
determined as follows:
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(i) Tenant shall make demand for arbitration in writing within thirty
(30) days after service of Landlord's determination of Fair Market Rent given
under Section 7(c) above specifying therein the name and address of the person
to act as the arbitrator on its behalf. The arbitrator shall be qualified as a
real estate broker familiar with the Fair Market Rent of first-class commercial
office space in the downtown San Francisco area with at least ten (10) years of
experience. Failure on the part of Tenant to make a timely and proper demand for
such arbitration shall constitute a waiver of the right thereto. Within fifteen
(15) business days after the service of the demand for arbitration, Landlord
shall give notice to Tenant, specifying the name and address of the person
designated by Landlord to act as arbitrator on its behalf who shall be similarly
qualified.
(ii) In the event that two arbitrators are chosen pursuant to Section
7(d)(i) above, the arbitrators so chosen shall meet within ten (10) business
days after the second arbitrator is appointed and, if within ten (10) business
days after such first meeting the two arbitrators shall be unable to agree
promptly upon a determination of Fair Market Rent, they, themselves, shall
appoint a third arbitrator, who shall be a competent and impartial person with
qualifications similar to those required of the first two arbitrators pursuant
to Section 7(d)(i). In the event they are unable to agree upon such appointment
within five (5) business days after expiration of said 10-business day period,
the third arbitrator shall be selected by the parties themselves, if they can
agree thereon, within a further period of five (5) business days. If the parties
do not so agree, then either party, on behalf of both, may request appointment
of such a qualified person by the Presiding Judge of the Superior Court of the
County of San Francisco and the other party shall not raise any question as to
such person's full power and jurisdiction to entertain the application for and
make the appointment. The three arbitrators shall decide the dispute if it has
not previously been resolved by following the procedure set forth below.
(iii) Where an issue cannot be resolved by agreement between the two
arbitrators selected by Landlord and Tenant or settlement between the parties
during the course of arbitration, the issue shall be resolved by the three
arbitrators in accordance with the following procedure: The arbitrator selected
by each of the parties shall state in writing his or her determination of the
Fair Market Rent supported by the reasons therefor with counterpart copies to
each party. The arbitrators shall arrange for a simultaneous exchange of such
proposed resolutions. The role of the third arbitrator shall be to select which
of the two proposed resolutions most closely approximates his or her
determination of Fair Market Rent. The third arbitrator shall have no right to
propose a middle ground or any modification of either of the two proposed
resolutions. The resolution he or she chooses as most closely approximating his
or her determination shall constitute the decision of the arbitrators and be
final and binding upon the parties.
(iv) In the event of a failure, refusal or inability of any arbitrator
to act, his or her successor shall be appointed by the party on whose behalf
such arbitrator is to act, but in the case of the third arbitrator, his or her
successor shall be appointed in the same manner as provided for appointment of
the third arbitrator. The arbitrators shall attempt to decide the issue within
ten (10) business days after the appointment of the
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third arbitrator. Any decision in which the arbitrator appointed by Landlord and
the arbitrator appointed by Tenant concur shall be binding and conclusive upon
the parties.
(e) In the event that Tenant shall exercise the renewal option,
Landlord and Tenant shall execute an amendment to this Lease, setting forth the
lease terms to apply during the Option Period, within fifteen (15) business days
of the final determination of Fair Market Rent with respect to the Option
Period.
(f) The right contained in this Section is personal to Hambrecht &
Quist and its Permitted Assignees, as such term is defined below, and such right
shall not inure to the benefit of any assignee or subtenant of Hambrecht & Quist
other than a Permitted Assignee and in the event Hambrecht & Quist and its
Permitted Assignees assigns the Lease or subleases more than thirty-three
percent (33%) of the Premises, this right shall automatically terminate and
shall be null and void.
(g) "Permitted Assignees" are those parties for whom assignments are
permitted pursuant to Section 13.2 of the Original Lease or the Second Original
Lease, as applicable.
(h) The provisions of this Section 7 shall only apply to such
Additional Spaces which (i) at the time of the commencement of the Option Period
(i.e. January 1, 2006) have already been added to the Premises pursuant to
Section 8, and (ii) which have terms (including, without limitation all option
terms, if any) as determined by Landlord pursuant to Section 8 below that expire
during the Option Period (i.e. prior to December 31, 2010). With respect to such
Additional Spaces, if any, when Tenant exercises its option to extend the Term
of the Lease for the Option Period, Tenant shall also be deemed to have extended
the term of the Lease with respect to such Additional Spaces only for the
periods of time, if any, from the then expiration dates of such terms for such
Additional Spaces until the end of the Option Period (i.e. December 31, 2010)
(such extensions of the terms for such Additional Spaces are referred to
hereunder as the "Additional Space Extension Periods"). For the Additional Space
Extension Periods, such Additional Spaces shall be accepted by Tenant in "AS IS"
condition with no tenant improvements to be built by Landlord or tenant
improvement allowance to be paid by Landlord. With respect to such Additional
Spaces during their respective Additional Space Extension Periods, (w) the Base
Expense and Tax Year shall be 2006, (x) the other terms and conditions of the
Lease, as amended hereby, shall apply thereto, (y) the monthly and yearly Base
Rent payable by the Tenant for such Additional Spaces shall be the same rate per
rentable square foot, as it may be adjusted from time to time, for the remainder
of the Premises (excluding such Additional Spaces) as determined pursuant to
this section 7 above, and (z) Tenant shall pay all additional rent required
under the terms of the Lease on the same terms as those applicable to the
remainder of the Premises excluding such Additional Spaces. The provisions of
this Section 7(h) and such Additional Spaces shall not be taken into
consideration in determining Fair Market Rent in this section 7 above.
8. RIGHT OF FIRST OFFER:
(a) If at any time prior to the date on which the Term of the Lease
expires, Landlord determines that additional space in the Building ("Additional
Space") will become
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vacant and available at a future time prior to the expiration of the Term of the
Lease, provided Landlord has not given Tenant notice of an Event of Default
which has not been cured, Landlord shall give Tenant written notice (the
"Offer") of the future availability of Additional Space and the terms and
conditions (including, without limitation, Base Rent, and any and all additional
sums payable by a tenant) under which Landlord would be willing to rent the
space to a prospective tenant under a lease which commences as of the date such
Additional Space shall become available, on an "AS IS" basis without any tenant
improvements allowance or other payment by Landlord or with such tenant
improvement allowance, if any, offered by Landlord to Tenant, and for a period
of time equal to the remainder of the then existing Term of the Lease
(including, without limitation, the Option Period, if the Tenant has exercised
its option to extend the Term of the Lease for the Option Period) or for such
other term determined by Landlord; provided, however, in no event shall Landlord
be obligated to deliver an Offer to Tenant for Additional Space that will be
vacant and available no earlier than the last twenty four (24) months of the
Term. Tenant shall have fifteen (15) days following receipt of the Offer to
elect by written notice given to Landlord to lease the Additional Space upon the
terms and conditions contained in the Offer. Notwithstanding anything to the
contrary contained herein, such Additional Space will not be considered vacant
and available if any tenant occupying such space executes a new lease or an
amendment to lease with Landlord to extend the term of such tenant's occupancy
of such space, and nothing contained in this Section shall be construed to limit
the right of Landlord to enter into such lease or amendment to lease.
(b) If Tenant does not timely elect to lease such Additional Space on
the terms and conditions contained in the Offer, the Offer shall terminate and
Landlord may lease such Additional Space to other prospective tenants subject to
the following conditions:
(i) Landlord shall not offer to another tenant or prospective
tenant less than all the Additional Space; and
(ii) If Landlord desires to lease less than all the Additional
Space, Landlord shall give Tenant the right of first offer with respect to the
portion of the Additional Space Landlord desires to lease as set forth in
Section 8(a) above; and
(iii) Landlord shall be free to lease the Additional Space to any
unaffiliated person or entity on any terms and conditions or to any affiliated
person if the leasing is an "arm's-length" transaction for a bona fide
occupancy; provided, however, Landlord shall not lease the Additional Space to
any other person or entity on basic economic terms which in the aggregate are
less than ninety-five percent (95%) of the effective rate, as defined below, at
which Landlord offered the Additional Space to Tenant, without first giving
Tenant at least fifteen (15) days prior written notice of such economic terms
and the opportunity (during such fifteen (15) day period by delivery of written
notice to Landlord) to agree to lease such Additional Space on the same economic
terms and such other terms as proposed by Landlord in Landlord's good faith
discretion. Tenant's failure to give Landlord any written notice during such
fifteen (15) day period shall be deemed Tenant's election not to lease such
Additional Space. "Effective rate," as used herein, means the sum of Base Rent
and escalations to Base Rent, taking into account any tenant improvement
allowance which is part of the proposed other lease and any free rent, moving
allowances, lease takeovers to be paid by Landlord and other sums to be paid by
Landlord to the tenant or other monetary credits from Landlord to the tenant.
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For any item in such calculation which is customarily discounted to present
value, the discount rate shall be eight percent (8%). In addition to the
foregoing, if a lease is not signed within six (6) months after delivery of the
Offer to Tenant, Landlord shall not lease the Additional Space to any other
person or entity without first giving Tenant another right of first offer as
provided in this Section 8.
If Landlord does lease the Additional Space in question to another tenant, then
if during the Term of the Lease, (i) such tenant's lease expires, (ii) such
tenant vacates such Additional Space, and (iii) Landlord determines that such
Additional Space is otherwise vacant and available, then Landlord shall not
lease such Additional Space to any other person or entity without first giving
Tenant another right of first offer with respect to such Additional Space as
provided in Section 8(a) above.
(c) If Tenant does timely accept the Offer as provided herein and
execute a lease amendment therefor, such Additional Space shall be added to and
deemed a part of the Premises for all purposes of the Second Original Lease, and
on all terms and conditions contained in the Offer. The amendment shall include,
without limitation:
(i) The delivery date;
(ii) The rentable area of the Premises with the addition of the
Additional Space;
(iii) The percentage that constitutes Tenant's Percentage Share
of Operating Expenses and Property Taxes, as adjusted to reflect the increased
rentable area of the Premises;
(iv) The rental commencement date for the Additional Space; and
(v) The other terms and conditions contained in the Offer.
(d) The right contained in this Section is personal to Hambrecht &
Quist and its Permitted Assignees, and such right shall not inure to the benefit
of any assignee or subtenant of Hambrecht & Quist other than a Permitted
Assignee and in the event Hambrecht & Quist and its Permitted Assignees assigns
the Lease or subleases more than thirty-three percent (33%) of the Premises,
this right shall automatically terminate and shall be null and void.
In no circumstances shall Landlord be deemed to have guaranteed the
availability of such Additional Space to Tenant as of the stated availability
date or dates. If the then-existing tenant should hold over, or if for any other
cause beyond Landlord's reasonable control, Landlord shall be unable to deliver
possession of such Additional Space as of the stated or agreed-to availability
date, Tenant's sole recourse shall be a delay in the commencement of Base Rent
until such time as possession is legally delivered by Landlord to Tenant.
Without limiting the above, Landlord agrees to use its commercially reasonable
efforts to enforce its right to possession to the subject space against such
other tenant, including institution of legal proceedings.
9. LIMITED RECOURSE. Notwithstanding anything to the contrary in the Lease
or in any document delivered by Landlord in connection with the consummation of
the transaction
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contemplated hereby, it is expressly understood and agreed that The Equitable
Life Assurance Society of the United States is acting solely on behalf and for
the benefit of Separate Account No. S-16III and Landlord's liability shall be
limited to, and payable and collectible only out of, assets allocated to, or
held by Landlord for the benefit of, Separate Account No. S-16III (including,
without limitation, the Building) and no other property or asset of Landlord or
of any of Landlord's directors, officers, employees, shareholders,
contractholders or policyholders, shall be subject to any lien, levy, execution,
setoff or other enforcement procedure for satisfaction of any right or remedy of
Tenant in connection with the transaction contemplated hereby.
10. CROSS DEFAULT. An Event of Default by Tenant under that certain
Original Lease as amended by the First through Fifth Amendments and this
Amendment shall constitute an Event of Default under the Second Original Lease
as amended by the First and Second Amendments to the Second Original Lease and
this Amendment and an Event of Default under that certain Second Original Lease
as amended by the First and Second Amendments to the Second Original Lease and
this Amendment shall constitute an Event of Default under that certain Original
Lease as amended by the First through Fifth Amendments and this Amendment. Upon
an Event of Default by Tenant, Landlord shall have any and all remedies
available pursuant to the Lease , as amended.
11. OPERATING EXPENSES. "Operating Expenses" shall be amended to reflect
that in the event Landlord elects to purchase energy on an alternate basis, for
purposes of calculating Operating Expenses, the sums paid that are attributable
to such energy purchased in the first full calendar year of such alternative
basis shall be deemed the expenses paid in such Base Year for such energy.
12. RENT CREDIT AND INTERIM RENT. The references in the Lease to and
provisions providing for "Rent Credit," "Interim Rent" and "Free Rent" are not
applicable to this Amendment or the Lease and shall be deleted in their
entirety.
13. RIGHT TO SEPARATELY METER. The following shall be added to Section 7 of
the Lease: "Landlord shall have the right at any time to install an electric
current meter or meters in the Premises or otherwise to measure the amount of
electric current consumed on the Premises, and the cost of such meter or meters
or other corrective measures and the installation and maintenance thereof shall
be paid for by Landlord."
14. BROKERAGE COMMISSIONS. Landlord and Tenant represent and warrant to
each other that they have dealt with no broker, agent or other person in
connection with the transaction evidenced by this Amendment and that no broker,
agent, or other person brought about this transaction, other than Compass
Management and Leasing ("Landlord's Broker"), and Landlord agrees that Tenant
shall have no obligation to pay commission or any other form of compensation to
Landlord's Broker with regard to this leasing transaction, and each party hereby
agrees to indemnify and hold the other harmless from and against any claims by
any other broker, agent or other person claiming a commission or other form of
compensation by virtue of having dealt with the indemnifying party with regard
to this leasing transaction. The provisions of this Section 14 shall survive the
termination of this Lease.
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15. ADDITIONAL SPACE. When space is added to the Premises pursuant to this
Amendment, such space shall be added to the Second Original Lease as amended by
the First and Second Amendments to the Second Original Lease, on the terms and
conditions contained therein as amended hereby.
16. RATIFICATION. Except as modified by this Amendment, the Lease is hereby
ratified by Landlord and Tenant and shall remain in full force and effect. In
the event of any conflict between the Lease and this Amendment, this Amendment
shall control.
17. COUNTERPARTS. This Amendment may be executed in counterparts, each of
which shall be deem an original, all of which together shall constitute one and
the same instrument.
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have each caused their duly
authorized representatives to execute this Amendment as of the date or dates set
forth below.
LANDLORD:
THE EQUITABLE ASSURANCE SOCIETY OF
THE UNITED STATES
Date: December 10, 1997 By: /s/ James M. Piane
Its: Investment Officer
TENANT:
HAMBRECHT & QUIST LLC, a Delaware limited
liability company
Date: December 10, 1997 By: /s/ J. Logan Burke
Its: Vice President
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE, OUTSTANDING SHARES AND OPERATING DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30,
----------------------------------------------------
1994 1995 1996 1997 1998
---------- --------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues
Principal transactions .............. $ 37,255 $ 54,653 $103,889 $122,817 $105,861
Commissions ......................... 13,398 23,375 34,421 38,707 49,725
Investment banking .................. 29,234 70,360 154,272 90,471 91,332
Corporate finance fees .............. 18,561 20,709 37,962 54,237 75,080
Interest and dividends .............. 2,952 3,974 14,707 22,629 27,236
Net investment gains ................ 10,270 33,852 24,434 229 2,415
Other ............................... 7,660 13,916 23,017 17,142 21,476
------- ------- ------- ------- -------
Total revenues ...................... 119,330 220,839 392,702 346,232 373,125
------- ------- ------- ------- -------
Expenses
Compensation and benefits ........... 60,175 105,370 198,613 178,873 187,065
Brokerage and clearance ............. 7,367 10,441 13,629 17,258 23,064
Occupancy and equipment ............. 6,679 7,803 10,677 17,183 21,514
Communications ...................... 6,244 7,394 9,614 14,762 15,353
Interest ............................ 987 2,083 4,314 4,454 3,628
Other ............................... 11,841 15,849 28,788 36,605 51,957
Total expenses ...................... 93,293 148,940 265,635 269,135 302,581
Income before income tax provision .. 26,037 71,899 127,067 77,097 70,544
Income tax provision ..................... 10,119 22,461 38,466 33,923 30,333
------- ------- -------- -------- ------
Net income ............................... $15,918 $ 49,438 $ 88,601 $ 43,174 $ 40,211
======= ======= ======== ======== ======
Earnings per share
Basic .............................. $ 1.83 $ 1.64
Diluted ............................ $ 1.68 $ 1.51
Weighted average shares
Basic ............................. 23,569,306 24,551,064
Diluted ........................... 25,682,887 26,613,541
PRO FORMA INFORMATION:
Net income before income
tax adjustment ......................... $ 88,601
Income tax adjustment(1) ................ (17,443)
-----------
Pro forma net income..................... $ 71,158
===========
Pro forma earnings per share(2)
Basic .............................. $ 3.60
Diluted............................. $ 3.27
Pro forma weighted average shares
Basic................................. 19,752,726
Diluted............................... 21,734,143
CONSOLIDATED BALANCE SHEET DATA:
Total assets .............................. $155,160 $319,630 $537,917 $678,937 $606,668
Debt obligations .......................... 12,684 13,771 8,365 2,700 0
Stockholders' equity
and partners' capital .................... 63,591 105,462 226,711 297,378 336,756
Book value per common share
outstanding(3) ........................... $ 4.43 $ 6.31 $ 9.99 $ 12.51 $ 14.28
OPERATING DATA:
Total employees(4) ........................ 426 498 685 823 845
Return on average stockholders' equity
and partners' capital .................... 28% 5% 60% 16% 13%
Compensation and benefits expense as
a percentage of total revenues ........... 50% 4% 51% 52% 50%
Non-compensation and benefits expense as a
percentage of total revenues .............. 28% 1% 16% 26% 31%
</TABLE>
- ----------------------
(1) Includes taxes on LP's earnings as if LP's earnings were subject to an
effective tax rate of 44 percent.
(2) Pro forma earnings per common share are determined by dividing pro forma net
income by the weighted average number of common shares, including common share
equivalents, outstanding during the year. Pro forma earnings per common share
are not shown prior to 1996 because the amounts would not be meaningful.
(3) Includes equivalent shares related to LP units outstanding at September 30,
1994 and 1995. Shown at end of period.
(4) Shown at end of period.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE STATEMENTS IN THIS ANNUAL REPORT THAT RELATE TO FUTURE PLANS, EVENTS OR
PERFORMANCE ARE FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS INCLUDE, BUT ARE NOT
LIMITED TO, THOSE RELATING TO THE COMPANY'S PRINCIPAL INVESTMENT ACTIVITIES, ITS
PLANS TO ADDRESS THE YEAR 2000 ISSUE, ITS CURRENT EQUITY CAPITAL LEVELS AND ITS
MARKET RISKS. 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 BROKER
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, 1998 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.
For example, the Company's record results of operations for fiscal 1996
were achieved during consistently favorable economic and market conditions for
equity offerings by companies in the industries and of the size on which the
Company focuses. By contrast, during the Company's second and third fiscal
quarters of 1997 and the fourth quarter of fiscal 1998, the economic and market
conditions were not as favorable for such equity offerings, particularly for
equity offerings of emerging growth technology companies. During fiscal 1996,
1997 and 1998, the Company managed or co-managed 134, 94 and 88 public
offerings, respectively. The fourth fiscal quarter of 1998 was one of the
slowest periods for public offerings this decade. During the 1997 and 1998
fourth fiscal quarters, the Company managed or co-managed 31 and 13 public
offerings, respectively.
EFFECTS OF COMPETITION
The securities business is intensely competitive. Many of the Company's
competitors have greater capital, financial and other resources than the
Company. 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, 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. 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
"Overview - 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. Average employee headcount was 841 in
fiscal 1998 compared to 759 in fiscal 1997. This employee growth has increased
fixed expenses associated with compensation and benefits costs, occupancy and
equipment costs and communications costs. 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 effect 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 $87.4 million and $65.7 million in principal investments during 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. ("WAXS") position at September 30,
1998 was partially 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 September 30, 1998, the
Company's long-term investments totaled $117.2 million and $129.6 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 1996, 1997 and 1998, the Company
recorded net investment gains of $24.4 million, $229,000 and $2.4 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 YEAR 2000
To the fullest extent permitted by law, the following year 2000 discussion
is a "Year 2000 Readiness Disclosure" within the meaning of the Year 2000
Information and Disclosure Act.
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 correctly disclose its
year 2000 compliance progress to the Company and 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, liquidity and
financial condition of the Company, could lead to enforcement actions by
regulatory agencies and could expose it to third party liability.
The Company has engaged an independent consulting firm to assist in impact
analysis, solution design and project planning; however, the Company retains all
responsibility for its year 2000 issues, plans and compliance efforts. The year
2000 plan followed by the Company contains four phases: phase one is the
identification and prioritization of all in-house and third party information
technology and noninformation technology systems; phase two is the diagnostic
testing of all critical information technology and noninformation technology
systems for year 2000 compliance; phase three is the implementation of
solutions, including all necessary repair work, modifications, and replacements
to system software and hardware; and phase four is the execution of the
contingency plan created during phases one through three for those areas where
repair work fails. The Company substantially completed phase one in December
1998. The Company expects to complete phases two and three by March and June
1999, respectively, leaving six months to execute the contingency plan actions
described in phase four.
The total cost associated with the Company's year 2000 plan is not expected
to be material to the Company's financial position. 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. None of the Company's other information
technology projects have been delayed due to the implementation of its year 2000
plan.
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 $1.4 million. The Company's
remaining portion of the expenses incurred to address this issue as budgeted by
Lewco is expected to be approximately $700,000 in fiscal 1999 which amount will
be funded through operating cash flows.
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 of personnel trained in this area, the ability to
locate and correct all relevant computer code, timely responses to and
corrections by third parties, 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 effect on the
Company's operations, liquidity and financial condition. The Company is
presently monitoring the progress of these and other entities' year 2000
compliance.
RESTRUCTURING(1)
H&Q California succeeded in January 1983 to the business of Hambrecht &
Quist, a partnership formed in 1968. Between January 1983 and November 1993, H&Q
California conducted, either directly or through subsidiaries or affiliates, all
of the Company's activities. Hambrecht & Quist, L.P. ("LP") was formed in
November 1993 for the purpose of owning and managing investments in certain
operating affiliates.
On August 8, 1996, the Company effected a series of restructuring
transactions (the "Restructuring"), pursuant to which, among other things, (i)
LP transferred cash and assets totaling $31.0 million to a liquidating trust for
the benefit of LP's partners, (ii) Hambrecht & Quist Guaranty Finance, LLC
("Guaranty Finance") distributed assets whose book value was approximately $2.5
million to its equity owners other than LP, (iii) LP and H&Q California entered
into separate merger transactions, pursuant to which LP was merged into the
Company and H&Q California became a wholly owned subsidiary of the Company, and
(iv) the equity holders of H&Q California and LP became owners of shares of the
Company's common stock.
- --------
(1) Refer to Note 1 of Notes to the Consolidated Financial Statements for a
detailed description of the Company's organizational structure, including the
effects of the restructuring transactions completed in August 1996.
<PAGE>
RESULTS OF OPERATIONS
FISCAL YEARS ENDED SEPTEMBER 30, 1998 AND 1997
REVENUES. Total revenues increased 8% from $346.2 million in 1997 to $373.1
million in 1998.
Principal transactions revenue decreased 14% from $122.8 million to $105.9
million due primarily to narrower margins in the OTC business.
Commissions increased 28% from $38.7 million to $49.7 million. This
increase was primarily due to an increase in NYSE listed transactions.
Investment banking revenue increased 1% from $90.5 million to $91.3
million, and decreased as a percentage of revenues from 26% to 24%. The Company
managed or co-managed 88 public offerings during 1998, compared to 94 during
1997.
Corporate finance fees increased 38% from $54.2 million to $75.1 million
due primarily to the completion of a higher level of merger and acquisition
transactions during 1998.
Interest and dividend revenue increased 20% from $22.6 million to $27.2
million. The increase related primarily to interest earned on higher average
customer margin loans outstanding.
Net investment gains increased 955% from $229,000 to $2.4 million. For
1997, realized gains of $20.5 million were offset by a change in unrealized loss
of $20.3 million. For 1998, realized gains of $18.3 million were offset by a
change in unrealized loss of $15.9 million. Net investment gains in 1997 include
net investment losses of $18.1 related to investee companies in the airline
industry. The Company recorded a realized loss of $9.9 million on its investment
in Air South Airlines, Inc. ("Air South"), a regional airline that filed for
bankruptcy in August 1997. In 1997 and 1998, the Company recorded unrealized
losses of $8.2 million and $2.2 million, respectively, on its investment in
another regional airline.
Other revenues increased 25% from $17.1 million to $21.5 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 12% from $269.1 million
for 1997 to $303.0 million for 1998.
Compensation and benefits expense increased 5% from $178.9 million to
$187.1 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 52% and 50%, respectively, for 1997 and 1998.
Brokerage and clearance expense increased 34% from $17.3 million to $23.1
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 25% from $17.2 million to $21.5
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
early 1999. During the six month period ended September 30, 1998, the Company
incurred additional depreciation expense of approximately $1.0 million as a
result of a change in remaining useful lives estimated for the existing
computers and related infrastructure.
Communications expense increased 4% from $14.8 million to $15.4 million.
This increase was due to increases in telecommunications expenses and quotes and
information services expenses resulting from the hiring of additional employees.
Other expenses increased 42% from $36.6 million to $52.0 million. This
increase was due primarily to increased travel and entertainment expenses,
losses in error, bad debts and professional services fees. In 1997, the Company
recorded a $1.8 million loss related to letters of credit issued to two of Air
South's creditors. In 1998, the Company recorded an additional $8.0 million for
its settlement costs related to the Nasdaq market-makers antitrust class action
litigation. Also in 1998, the Company recorded $3.2 million in bad debt expense
related to Guaranty Finance's notes receivable.
INCOME TAX PROVISION. The Company's effective income tax rate was 44% in
1997 and decreased to 43% in 1998, primarily due to lower statutory state tax
rates.
FISCAL YEARS ENDED SEPTEMBER 30, 1997 AND 1996.
REVENUES. Total revenues decreased 12% from $392.7 million in 1996 to
$346.2 million in 1997.
Principal transactions revenue increased 18% from $103.9 million to $122.8
million. This increase was due to an increase in Nasdaq market activity and the
expansion of the Company's equity sales and trading capabilities.
Commissions increased 13% from $34.4 million to $38.7 million. This
increase was primarily due to the expansion of the Company's listed
institutional equity business.
Investment banking revenue decreased 41% from $154.3 million $90.5 million,
and decreased as a percentage of revenues from 39% to 26%. The company managed
or co-managed 134 public offerings during 1996 compared to 94 during 1997.
Corporate finance fees increased 43% from $38.0 million to $54.2 million.
The increase results primarily from an increased number and size of advisory
assignments.
Interest and dividend revenues increased 54% from $14.7 million to $22.6
million. The increase related primarily to interest earned on higher average
customer margin loans outstanding, higher average notes receivable outstanding
and higher average investments in cash equivalents outstanding during the
period.
Net investment gains decreased 99% from $24.4 million to $229,000. Net
investment gains included realized and unrealized gains on the Company's
investment in The BISYS Group, Inc. ("BISYS") of $15.1 million for 1996 and $1.5
million for 1997. Net investment gains in 1997 included net investment losses of
$18.1 million related to two investee companies in the airline industry. The
Company recorded a realized loss of $9.9 million on its investment in Air South.
The Company recorded an unrealized loss of $8.2 million on its investment in
another regional airline.
Other revenues decreased 26% from $23.0 million to $17.1 million. The
decrease was due primarily to a decrease in profit participation distributions
from venture funds managed by the Company and the recognition by Guaranty
Finance of a $3.3 million gain on the sale of a building in 1996.
EXPENSES. Total expenses increased 1% from $265.6 million in 1996 to $269.1
million in 1997.
Compensation and benefits expense decreased 10% from $198.6 million to
$178.9 million. The decrease was due primarily to lower bonus expenses accrued
as a result of lower revenues. Compensation and benefits expense as a percentage
of total revenues was 51% in 1996 and 52% in 1997.
Brokerage and clearance expense increased 27% from $13.6 million to $17.3
million. The percentage increase generally corresponded with an increase in
principal transactions revenue and agency commissions.
Occupancy and equipment expense increased 61% from $10.7 million to $17.2
million as a result of increases in depreciation expense related to computer and
telecommunications equipment upgrades and procurements for new employees and
increases in rent expense for additional office space leased.
Communications expense increased 54% from $9.6 million to $14.8 million.
This increase was due to increases in telecommunications expenses and quotes and
information services expenses resulting from the hiring of additional employees.
Interest expense increased 3% from $4.3 million to $4.5 million. This
increase related primarily to higher average customer payables outstanding
during 1997.
Other expenses increased 27% from $28.8 million to $36.6 million. This
increase was due to increases in professional services fees, travel,
entertainment and conference expenses and bad debt expense. In the fourth fiscal
quarter, the Company recorded a $1.8 million loss related to letters of credit
issued to two of Air South's creditors.
INCOME TAX PROVISION. The Company's effective income tax rate was 30.3% in
1996 and increased to 44% in 1997. The Company's effective income tax rate in
1996 was less than the combined federal and state statutory income tax rates
because LP was not subject to corporate federal or state income tax. The
Company's higher effective tax rate in 1997 resulted from the Restructuring.
Subsequent to the Restructuring, all Company income became subject to corporate
federal and state income tax. The pro forma income tax adjustment in 1996 was
determined assuming that all of the Company's combined operations had been
subject to corporate federal and state income tax.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically satisfied its funding needs with its own
capital resources, consisting almost entirely of internally generated retained
earnings and capital raised from the sale of its common stock to employee
stockholders and the public through its initial public offering. As of September
30, 1998, H&Q LLC had liquid assets consisting primarily of cash and cash
equivalents of $67.0 million and amounts on deposit with Lewco of $110.0
million. Such amounts on deposit with Lewco are a component of the September 30,
1998 payable to Lewco of $11.4 million. As of September 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 on April 30, 1999. At September 30, 1998, H&Q also
had a $26.7 million line of credit with a financial institution collateralized
by the Company's investment in WAXS. This line of credit was reduced to $15.9
million in October 1998.
The Company's consolidated balance sheet reflects the Company's relatively
unleveraged financial position. The ratio of assets to equity as of September
30, 1998 was approximately 1.8:1. 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 September 30, 1998, securities
held for trading purposes include government securities mutual funds totaling
$12.2 million. Securities held for investment purposes are for the most part
illiquid and are carried at valuations that reflect this lack of liquidity. The
Company's stockholders' equity reflects $21.7 million of treasury stock. The
Company purchased $25.5 million of treasury stock during its fourth fiscal
quarter.
H&Q LLC, as a broker-dealer, is registered with the SEC and is a member of
the NASD and the NYSE, and is subject to the capital requirements of these
regulatory entities. H&Q LLC's regulatory net capital has historically exceeded
these minimum requirements. As of September 30, 1998, H&Q LLC was required to
maintain minimum regulatory net capital in accordance with SEC rules of
approximately $4.0 million and had total regulatory net capital of approximately
$50.5 million, or approximately $46.5 million in excess of its requirement.
Hambrecht & Quist Euromarkets, a wholly owned investment bank and
securities broker dealer in France, was in compliance with all applicable
regulatory capital adequacy requirements at September 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.
RISK MANAGEMENT
RISK MANAGEMENT CONTROL STRUCTURE
The Company has established various policies and procedures for the
management of its exposure to operating, principal and credit risks. Operating
risk arises out of the daily conduct of the Company's business and relates to
the possibility that one or more of the Company's personnel could commit the
Company to imprudent business activities or to the possibility of improper
processing of transactions. Principal risk relates to the fact that the Company
owns a variety of investments which are subject to changes in value and could
result in the Company incurring material losses. Credit risk occurs because the
Company extends credit to various of its customers in the form of margin and
other types of loans.
Operating risk is monitored by the Company's Risk Management Committee and
Commitment Committee. The Risk Management Committee reviews the overall business
activities of the Company and makes recommendations for addressing issues which,
in the judgment of its members, could result in a material loss to the Company.
When transactions are pending, the Commitment Committee meets weekly to evaluate
and approve potential investment banking transactions prior to their execution
by the Company.
Principal risk is managed primarily though the daily monitoring of funds
committed to the various types of securities owned by the Company and by
limiting the exposure to any one investment or type of investment. The two most
common categories of securities owned are those related to the daily trading
activities of the Company's brokerage and underwriting operations and those
which arise out of the Company's principal investing activities. See "Risk
Management - Market Risk."
The Company's credit risk is monitored by its Credit Committee, which
includes senior management from its brokerage, operations, financial and legal
departments. The committee meets when specific situations arise to review large,
concentrated or high profile accounts and to take appropriate actions to limit
the Company's exposure to loss on these accounts. Such actions typically consist
of setting higher margin requirements for large or concentrated accounts,
requiring a reduction in the level of margin debt or, in some cases, requiring
the transfer of the account to another broker-dealer.
MARKET RISK
Hambrecht & Quist's primary market risk exposure is to equity price changes
and the resulting impact on the Company's marketable trading and long-term
investment portfolios. The Company has limited market risk exposure to changes
in interest rates related to its short-term investment portfolio. The Company
does not have material assets and liabilities denominated in foreign currencies
and therefore, foreign currency risk is not material.
Equity price risk is inherent in the Company's securities holdings. The two
categories of securities owned are those related to the daily trading activities
of the Company's brokerage and underwriting operations and those which arise out
of the Company's long-term principal investing activities. Equity price risk is
managed primarily though the daily monitoring of funds committed to the various
types of securities owned by the Company and by limiting the exposure to any one
investment or type of investment.
The Company attempts to limit its exposure to market risk on securities
held as a result of its daily trading activities by limiting its intraday and
overnight inventory of trading securities to that needed to provide the
appropriate level of liquidity in the securities for which it is a market maker.
Security inventory positions are balanced and marked to market daily. At
September 30, 1998, the fair value of the Company's trading securities was $31.7
million in long positions and $18.1 million in short positions. The net
potential loss in fair value at September 30, 1998, using a 10% hypothetical
decline in prices, is estimated to be approximately $1.4 million. Occasionally,
the Company enters into exchange-traded option contracts to hedge against
potential losses in inventory positions, thus reducing the potential loss
exposure. Such options are marked to market and are included in the Company's
marketable trading securities portfolio.
The Company's primary method of limiting market risk on securities
positions held in the Company's long-term investment portfolio is to liquidate
positions when they become freely tradable. The Company's long-term investment
portfolio consists primarily of marketable and nonmarketable equity ownerships
in numerous portfolio companies. Many of the marketable securities owned by the
Company result from the public registration by the portfolio company of
previously private, nonmarketable shares. In these cases, the Company is nearly
always subject to trading restrictions that prevent the Company from disposing
of the security until all such restrictions expire. Additionally, the extent of
the Company's ownership or the nature of its relationship to the investee
company may impose additional trading restrictions on the Company's investment.
Based on individual securities reviews, the Company may elect to hold freely
tradable marketable security positions for a period after the restrictions have
lapsed. In some cases, such positions are monitored daily. At September 30,
1998, the fair value of the Company's marketable investment securities was $53.9
million. The net potential loss in fair value, using a 10% hypothetical decline
in prices, is estimated to be approximately $5.4 million. In the case of larger
holdings of marketable investment securities, such as the Company's investment
in WAXS, the Company may enter into various hedge contracts such as options to
reduce the Company's potential loss exposure. The effects of such hedge
contracts are included in the Company's valuation of the hedged security.
The Company has consistently applied the above risk management methods
during the past fiscal year and expects to maintain the same methodologies and
procedures in future reporting periods.
The effects of equity price risk on the Company's long-term investment
portfolio was evident in the recent volatile equity markets. General equity
price declines and declines specific to industries in which the Company focuses
resulted in the Company recording net unrealized losses on its long-term
investment portfolio of $8.9 million in the Company's 1998 fourth fiscal
quarter. See "Overview - Effects of Market Conditions."
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Hambrecht & Quist Group:
We have audited the accompanying consolidated balance sheets of Hambrecht &
Quist Group (a Delaware corporation) and Subsidiaries as of September 30, 1997
and 1998, and the related consolidated statements of operations, changes in
stockholders' equity and partners' capital and cash flows for the years ended
September 30, 1996, 1997 and 1998. These financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Hambrecht &
Quist Group and Subsidiaries as of September 30, 1997 and 1998, and the results
of their operations and their cash flows for the years ended September 30, 1996,
1997 and 1998, in conformity with generally accepted accounting principles.
As discussed in Notes 2 and 7 to the consolidated financial statements,
long-term investments include nonmarketable investments amounting to $65,514,883
and $75,772,183 (22 and 23 percent of total stockholders' equity) as of
September 30, 1997 and 1998, respectively, which have been valued at fair value
as determined by management. We have reviewed the procedures applied by
management in valuing such investments and have inspected the underlying
documentation, and in the circumstances we believe the procedures are reasonable
and the documentation appropriate. However, because of the inherent uncertainty
of valuation, management's estimate of fair values may differ significantly from
the values that would have been used had a ready market existed for the
securities and the differences could be material.
ARTHUR ANDERSEN LLP
San Francisco, California,
November 13, 1998
<PAGE>
HAMBRECHT & QUIST GROUP
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
------------ -------------
<S> <C> <C>
Cash and cash equivalents .......................................................... $ 42,637,732 $ 66,959,567
Receivables:
Customers (net of allowance of $1,050,000 and $1,175,000, respectively) .......... 183,796,833 215,657,363
Lewco Securities Corp. ........................................................... 157,570,375 --
Syndicate managers ............................................................... 15,494,668 11,013,798
Related parties .................................................................. 17,397,164 17,632,094
Notes (net of allowance of $998,573 and $4,341,348, respectively) ................ 17,490,727 13,554,957
Income taxes ..................................................................... 531,955 4,032,103
Other ............................................................................ 14,194,982 20,486,412
Marketable trading securities, at market value ..................................... 32,617,567 31,677,092
Long-term investments, at estimated fair value ..................................... 117,199,728 129,622,466
Deferred income taxes .............................................................. 56,734,654 75,813,545
Furniture, equipment and leasehold improvements, net of accumulated depreciation and
amortization ..................................................................... 18,782,846 16,962,409
Other assets ....................................................................... 4,487,399 3,256,553
------------- -------------
Total assets ............................................................. $ 678,936,630 $ 606,668,359
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Payables:
Customers ........................................................................ $ 186,445,656 $ 83,221,535
Compensation and benefits ........................................................ 118,967,915 123,933,699
Lewco Securities Corp. ........................................................... -- 11,396,221
Syndicate settlements ............................................................ 21,355,653 4,442,449
Income taxes payable ............................................................. 6,563,552 --
Trade accounts payable ........................................................... 2,829,377 2,897,223
Accrued expenses and other ....................................................... 30,926,355 25,898,187
Securities sold, not yet purchased, at market value ................................ 11,770,127 18,122,784
Debt obligations ................................................................... 2,700,000 --
------------- -------------
Total liabilities ........................................................ 381,558,635 269,912,098
------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock (par value $0.01 and 100,000,000 shares authorized, 23,790,337 and
24,561,944 issued, respectively) ............................................... 237,903 245,619
Additional paid-in capital ....................................................... 136,271,533 157,217,641
Stock notes receivable from employees ............................................ (5,620,260) (3,079,872)
Retained earnings ................................................................ 167,230,812 207,441,350
Unrealized losses on investments available for sale, net ......................... (303,117) (3,258,584)
Cumulative translation loss ...................................................... -- (144,671)
Treasury stock, at cost (21,615 and 978,802 shares, respectively) ................ (438,876) (21,665,222)
------------- -------------
Total stockholders' equity ............................................... 297,377,995 336,756,261
------------- -------------
Total liabilities and stockholders' equity ............................... $ 678,936,630 $ 606,668,359
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
HAMBRECHT & QUIST GROUP
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997, AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Principal transactions ............. $103,889,312 $122,816,953 $105,860,709
Commissions ........................ 34,420,431 38,706,851 49,725,475
Investment banking ................. 154,271,774 90,470,621 91,332,041
Corporate finance fees ............. 37,962,437 54,237,209 75,080,234
Interest and dividends ............. 14,707,327 22,629,092 27,235,663
Net investment gains ............... 24,434,401 228,979 2,414,790
Other .............................. 23,016,922 17,142,186 21,475,868
------------ ------------ ------------
Total revenues ................... 392,702,604 346,231,891 373,124,780
------------ ------------ ------------
EXPENSES:
Compensation and benefits .......... 198,613,070 178,872,709 187,065,268
Brokerage and clearance ............ 13,628,832 17,258,305 23,064,046
Occupancy and equipment ............ 10,677,161 17,183,241 21,513,669
Communications ..................... 9,614,368 14,762,047 15,352,793
Interest ........................... 4,314,085 4,453,983 3,628,473
Other .............................. 28,787,669 36,604,823 51,956,513
------------ ------------ ------------
Total expenses ................... 265,635,185 269,135,108 302,580,762
------------ ------------ ------------
Income before income tax provision 127,067,419 77,096,783 70,544,018
INCOME TAX PROVISION ................. 38,466,246 33,922,585 30,333,480
============ ============ ============
Net income ....................... $ 88,601,173 $ 43,174,198 $ 40,210,538
============ ============ ============
EARNINGS PER SHARE:
Basic................................ $ 1.83 $ 1.64
Diluted.............................. $ 1.68 $ 1.51
WEIGHTED AVERAGE SHARES:
Basic................................ 23,569,306 24,551,064
Diluted.............................. 25,682,887 26,613,541
PRO FORMA INFORMATION (UNAUDITED):
Net income before income tax adjustment.. $ 88,601,173
Income tax adjustment.................... (17,443,418)
-----------
Pro forma net income................... $ 71,157,755
==========
Pro forma earnings per share:
Basic.................................. $ 3.60
Diluted................................ $ 3.27
Pro forma weighted average shares:
Basic.................................. 19,752,126
Diluted................................ 21,734,143
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
Hambrecht & Quist Group
----------------------------------------------------------------------------------
Number Additional Stock
of Common Common Paid - in Notes Retained
Shares Stock Capital Receivable Earnings
-------------- ------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1995 ................ 14,609,188 $ 25,412,585 $(7,659,714) $ 72,205,112
Sales of common stock or partners' capital
additions .............................. 2,080,348 11,994,895 (7,831,585) --
Reductions of stock and capital notes .... -- -- 8,981,733 --
Repurchases of common stock or partners'
capital withdrawals .................... (608,368) (2,201,212) -- (1,409,601)
Distribution of LP interest to Group Trust -- -- -- 4,493,971
Transfer of LP notes receivable to H&Q ... -- -- (8,227,753) --
Net income through August 7, 1996 ........ -- -- -- 33,688,550
Partners' capital distributions payable .. -- -- -- --
Partners' capital distributions .......... -- -- -- --
Change in net unrealized gains ........... -- -- -- --
---------- ----------- ----------- ------------ ------------
Balance, August 7, 1996 .................. 16,081,168 35,206,268 (14,737,319) 108,978,032
Distribution of cash and securities to LP
Trust .................................. -- -- -- -- --
Merger between H&Q and LP. ............... 2,587,762 (35,019,579) 56,366,873 -- --
Purchase of additional interest in .......
Guaranty Finance ........................ -- -- -- -- --
---------- ----------- ----------- ------------ -----------
Balance, August 8, 1996 .................. 18,668,930 186,689 56,366,873 (14,737,319) 108,978,032
Sale of common stock in initial public
offering plus net underwriting revenue of
$425,000 ................................ 4,025,000 40,250 60,276,750 -- --
Reductions of stock notes ................ -- -- -- 1,186,816 --
Net income from August 8 to September 30,
1996 .................................... -- -- -- -- 15,078,582
Change in net unrealized losses .......... -- -- -- -- --
---------- ----------- ----------- ------------ -----------
BALANCE, SEPTEMBER 30, 1996 ................ 22,693,930 226,939 116,643,623 (13,550,503) 124,056,614
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 .......... -- -- -- -- --
Purchases of treasury stock (21,615
shares) ................................. -- -- -- 9,908 --
---------- ----------- ----------- ------------ -----------
BALANCE, SEPTEMBER 30, 1997 ................ 23,790,337 237,903 136,271,533 (5,620,260) 167,230,812
Sales of common stock .................... 894,316 8,943 25,297,557 -- --
Forfeitures of common stock .............. (122,709) (1,227) (2,422,351) -- --
Reductions of stock notes ................ -- -- -- 2,540,388 --
Net income ............................... -- -- -- -- 40,210,538
Change in net unrealized losses .......... -- -- -- -- --
Change in translation loss ............... -- -- -- -- --
Purchases of treasury stock (1,115,000
shares), net of issuances (157,813
shares) ................................ -- -- (1,929,098) -- --
---------- ----------- ----------- ----------- ------------
BALANCE, SEPTEMBER 30, 1998 ................. 24,561,944 $ 245,619 $157,217,641 $(3,079,872) $207,441,350
========== =========== ============ =========== ============
<CAPTION>
Hambrecht & Quist Group
--------------------------------------------------------------
Cumulative
Unrealized Translation Treasury Subtotal
Losses, Net Loss Stock, at cost H&Q Group
--------------- -------------- --------------- -----------
<S> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1995 ................ $89,957,983
Sales of common stock or partners' capital
additions .............................. 4,163,310
Reductions of stock and capital notes .... 8,981,733
Repurchases of common stock or partners'
capital withdrawals .................... (3,610,813)
Distribution of LP interest to Group Trust 4,493,971
Transfer of LP notes receivable to H&Q ... (8,227,753)
Net income through August 7, 1996 ........ 33,688,550
Partners' capital distributions payable .. --
Partners' capital distributions .......... --
Change in net unrealized gains ........... --
------------- ------------- ------------- -----------
Balance, August 7, 1996 .................. 129,446,981
Distribution of cash and securities to LP
Trust .................................... --
Merger between H&Q and LP. ............... (557,280) 20,790,014
Purchase of additional interest in
Guaranty Finance.................. ...... (136,410) (136,410)
------------- ------------- ------------- -----------
Balance, August 8, 1996 .................. (693,690) 150,100,585
Sale of common stock in initial public
offering plus net underwriting revenue of
$425,000 ................................ -- 60,317,000
Reductions of stock notes ................ -- 1,186,816
Net income from August 8 to September 30,
1996 .................................... -- 15,078,582
Change in net unrealized losses .......... 28,466 28,466
------------- ------------- ------------- -----------
BALANCE, SEPTEMBER 30, 1996 ................ (665,224) 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 .......... 362,107 362,107
Purchases of treasury stock (21,615
shares) .................................. -- -- (438,876) (428,968)
------------- ------------- ------------- -----------
BALANCE, SEPTEMBER 30, 1997 ................ (303,117) (438,876) 297,377,995
Sales of common stock .................... -- -- 25,306,500
Forfeitures of common stock .............. -- -- (2,423,578)
Reductions of stock notes ................ -- -- 2,540,388
Net income ............................... -- 40,210,538
Change in net unrealized losses .......... (2,955,467) -- (2,955,467)
Change in translation loss ............... -- (144,671) -- (144,671)
Purchases of treasury stock (1,115,000
shares), net of issuances (157,813
shares) ................................ -- -- (21,226,346) (23,155,444)
------------- ------------- ------------- -----------
BALANCE, SEPTEMBER 30, 1998................. (3,258,584) $ (144,671) $ (21,665,222) $336,756,261
============= ============= ============= ===========
<CAPTION>
Hambrecht & Quist, LP
----------------------------------------------------------------------
Capital
Partners' Notes Distributions Unrealized Subtotal
Capital Receivable Payable Gains, Net H&Q LP Total
---------- ------------ ------------ --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1995 ................ $ 26,194,002 $(2,232,013) $(10,445,367) 1,987,478 15,504,100 $105,462,083
Sales of common stock or partners' capital
additions .............................. 7,595,591 (7,333,171) -- -- 262,420 4,425,730
Reductions of stock and capital notes .... -- 1,337,431 -- -- 1,337,431 10,319,164
Repurchases of common stock or partners'
capital withdrawals .................... (420,344) -- -- -- (420,344) (4,031,157)
Distribution of LP interest to Group Trust -- -- -- -- -- 4,493,971
Transfer of LP notes receivable to H&Q ... -- 8,227,753 -- -- 8,227,753 --
Net income through August 7, 1996 ........ 39,834,040 -- -- -- 39,834,040 73,522,590
Partners' capital distributions payable .. -- -- (14,034,971) -- (14,034,971) (14,034,971)
Partners' capital distributions .......... (24,480,338) -- 24,480,338 -- -- --
Change in net unrealized gains ........... -- -- -- 1,101,224 1,101,224 1,101,224
---------- ------------ ------------ --------- ---------- ------------
Balance, August 7, 1996 .................. 48,722,951 -- -- 3,088,702 51,811,653 181,258,634
Distribution of cash and securities to LP
Trust .................................. (27,375,657) (3,645,982)(31,021,639) (31,021,639)
Merger between H&Q and LP. ............... (21,347,294) 557,280 (20,790,014) --
Purchase of additional interest in
Guaranty Finance ....................... -- -- -- (136,410)
---------- ------------ ------------ --------- ---------- ------------
Balance, August 8, 1996 .................... -- -- -- -- -- 150,100,585
Sale of common stock in initial public
offering plus net underwriting revenue of
$425,000 ................................ 60,317,000
Reductions of stock notes ................ 1,186,816
Net income from August 8 to September 30,
1996 .................................... 15,078,582
Change in net unrealized losses .......... 28,466
---------- ------------ ------------ --------- ---------- ------------
BALANCE, SEPTEMBER 30, 1996 ................ -- -- -- -- -- 226,711,449
Sales of common stock .................... 19,805,599
Forfeitures of common stock .............. (455,760)
Reductions of stock notes ................ 8,209,370
Net income ............................... 43,174,198
Change in net unrealized losses .......... 362,107
Purchases of treasury stock (21,615
shares) ................................. (428,968
---------- ------------ ------------ --------- ---------- ------------
BALANCE, SEPTEMBER 30, 1997 ................ -- -- -- -- -- 297,377,995
Sales of common stock .................... 25,306,500
Forfeitures of common stock .............. (2,423,578)
Reductions of stock notes ................ 2,540,388
Net income ............................... 40,210,538
Change in net unrealized losses .......... (2,955,467)
Change in translation loss ............... (144,671)
Purchases of treasury stock (1,115,000
shares), net of issuances (157,813
shares) .................................. (23,155,444)
---------- ------------ ------------ --------- ---------- ------------
BALANCE, SEPTEMBER 30, 1998 ................ -- -- -- -- -- $336,756,261
========== ============ ============ ========= ========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
HAMBRECHT & QUIST GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
-------------- ------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................... $ 88,601,173 $ 43,174,198 $ 40,210,538
------------ ------------ ------------
Adjustments to reconcile net income to net cash and cash
equivalents provided by operating activities-
Depreciation and amortization .................................. 6,724,686 9,524,109 11,150,635
Net investment gains ........................................... (24,434,401) (228,979) 2,414,790
Net gains on sales of leased assets ............................ (3,394,352) -- (4,542,528)
Deferred tax benefit ........................................... (26,967,633) (19,139,165) (16,620,647)
Minority interest in income of subsidiaries .................... 685,105 388,934 178,927
Changes in operating assets and liabilities-
Customers, net ............................................... 2,854,297 28,575,358 (135,084,651)
Lewco Securities Corp. ....................................... (38,541,879) (77,038,187) 168,966,596
Syndicate managers ........................................... (3,203,996) (2,751,770) 4,480,870
Income taxes receivable, net ................................. (4,439,132) 8,509,311 (3,077,361)
Related parties and other receivables ........................ (14,196,022) (11,367,316) (6,902,474)
Marketable trading securities, net ........................... (49,676,915) 11,670,441 7,293,132
Other assets ................................................. 6,497,018 (1,438,338) 1,408,818
Compensation and benefits payable ............................ 63,683,797 35,046,851 19,744,660
Syndicate settlements ........................................ (6,879,034) 2,824,910 (16,913,204)
Trade accounts payable ....................................... 1,538,586 346,016 67,846
Accrued expenses and other payables .......................... 11,145,247 11,088,519 (4,246,208)
Other, net ................................................... (1,244,456) 57,084 6,477,124
------------ ------------ ------------
Total adjustments .......................................... (79,849,084) (3,932,222) 29,966,745
------------ ------------ ------------
Net cash and cash equivalents provided by
operating activities ..................................... 8,752,089 (1,438,338) 70,177,283
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of long-term investments ................................. (32,727,770) (87,351,958) (65,678,756)
Proceeds from sales/distributions of long-term investments ......... 36,222,554 61,778,580 46,919,387
Purchases of furniture, equipment and leasehold improvements (11,138,680) (12,904,169) (8,497,403)
Increases in notes receivable ...................................... (10,500,000) (13,337,311) (11,963,000)
Payments of notes receivable ....................................... -- 5,348,011 12,555,995
Purchase of additional 17.5 percent of Guaranty Finance ............ (1,374,922) -- --
Other, net ......................................................... -- -- 3,525,432
------------ ------------ ------------
Net cash and cash equivalents used in investing
activities ............................................... (19,518,818) (46,466,847) (23,138,345)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt obligations ..................................... 19,732,057 21,459,227 9,500,000
Repayments of debt obligations ..................................... (25,137,973) (27,124,048) (12,200,000)
Proceeds from sales of common stock and partners' capital
contributions .................................................... 68,992,106 5,924,858 5,651,681
<PAGE>
HAMBRECHT & QUIST GROUP AND HAMBRECHT & QUIST, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Repurchases of common stock and partners' capital withdrawals ...... (4,031,157) -- --
Partners' capital distributions .................................... (33,836,338) -- --
Distributions to minority members of Guaranty Finance .............. (300,000) -- (187,500)
Investment by minority members in Transition Capital ............... 625,000 -- --
Purchases of treasury stock ........................................ -- (428,968) (25,481,284)
------------ ------------ ------------
Net cash and cash equivalents provided by (used in)
financing activities ..................................... 26,043,695 (168,931) (22,717,103)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..................... 15,276,966 (7,393,802) 24,321,835
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ....................... 34,754,568 50,031,534 42,637,732
------------ ------------ ------------
66,959,567
CASH AND CASH EQUIVALENTS AT END OF YEAR ............................. $ 50,031,534 $ 42,637,732 $ 66,959,567
============ ============ ============
SCHEDULE OF SUPPLEMENTAL INFORMATION:
Taxes paid to taxing authorities ................................... $ 67,051,664 $ 40,009,539 $ 35,081,320
Interest paid ...................................................... 4,314,084 4,453,983 3,628,473
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
H&Q LLC long-term investments, net, were reclassified
from H&Q LLC marketable securities ............................... -- 18,165,165 --
H&Q California received marketable long-term investments
as repayment for profit participations receivable ................ -- 2,881,718 708,368
H&Q common stock sales and LP partners' capital
contributions were made with stock and capital notes
receivable from employees ........................................ 15,164,756 289,035 --
H&Q common stock was issued to employees in exchange
for reductions in compensation and benefits and taxes payable .... 7,256,604 22,090,111 21,765,215
H&Q common stock was forfeited by employees resulting in
decreases in compensation and benefits expense ................... -- 455,760 2,423,578
Net unrealized gains (losses) on subsidiaries' long-term
investments, net of tax, were recorded as increases (decreases) in
equity, minority interest (included in other payables) ........... (3,641,069) 413,867 3,728,854
H&Q California's limited partnership interest in LP was
distributed to certain current and former employees in
exchange for reductions in compensation and benefits payable ..... 4,493,971 -- --
The Restructuring resulted in the following non cash reductions
to long-term investments and stockholders' equity and
partners' capital:
Distribution of securities by LP to the LP Trust ................ 21,665,639 -- --
Distribution of securities by Guaranty Finance to minority
member ....................................................... 2,485,968 -- --
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. ORGANIZATION, NATURE OF OPERATIONS AND RESTRUCTURING:
ORGANIZATION
The financial statements include the consolidated operations of Hambrecht &
Quist Group, a Delaware corporation ("H&Q", "Hambrecht & Quist" or the
"Company"). H&Q was formed in fiscal 1996 to be the sole parent of Hambrecht &
Quist California, a California corporation ("H&Q California") (formerly known as
Hambrecht & Quist Group) and to succeed to the assets of Hambrecht & Quist,
L.P., a California limited partnership ("LP"). The 1996 historical consolidated
financial statements include the combined operations of H&Q California and LP
(see Note 2).
On August 8, 1996, through separate mergers (collectively, the "Mergers"),
a newly formed subsidiary of H&Q merged with H&Q California, and LP merged with
H&Q. All of the shareholders of H&Q California exchanged each of their common
shares for four shares of H&Q common stock. All of the former partners of LP
exchanged each of their partnership units for 24 shares of H&Q common stock.
Subsequently, the assets and liabilities of LP were contributed by H&Q to H&Q
California. The Mergers were accounted for at the respective stockholders' and
partners' carrying values, which represent the entities' carrying values. The
individuals' carrying values were used because each individual party to the
Mergers was a promoter of H&Q and its initial public offering (under Securities
and Exchange Commission accounting guidelines). No minority interest resulted
from the Mergers. All references to historical number of shares and per-share
amounts have been restated to reflect the effect of the four-for-one exchange of
shares.
Subsequent to the Mergers, on August 9, 1996, H&Q issued 4,025,000 new
shares in an initial public offering (the "Offering"). The net proceeds of the
Offering were $60,317,000.
NATURE OF OPERATIONS
H&Q consolidates its wholly owned subsidiary, H&Q California, and its
subsidiaries. H&Q California owns the following wholly owned subsidiaries.
Hambrecht & Quist L.L.C., a Delaware limited liability company ("H&Q LLC"), is
an investment banking subsidiary and securities broker-dealer that primarily
serves companies and investors involved in the technology, healthcare, services
and branded consumer industries. Hambrecht & Quist Euromarkets, S.A. ("H&Q EM"),
formerly Hambrecht & Quist Saint Dominique, is a broker-dealer registered in
France providing investment banking services to European companies. Hambrecht &
Quist Capital Management Incorporated, a California corporation ("Capital
Management"), is a registered investment adviser. Capital Management is the
investment adviser to two publicly traded closed-end mutual funds, H&Q
Healthcare Investors and H&Q Life Sciences Investors. Hambrecht & Quist Venture
Partners, a California limited partnership ("Venture Partners"), is a venture
capital fund management partnership.
H&Q California also owns 87.5 percent of Hambrecht & Quist Guaranty
Finance, LLC ("Guaranty Finance"), a California limited liability company. The
remaining 12.5 percent minority interest is owned by individuals active in the
management of Guaranty Finance and is included in accrued expenses and other
payables in the consolidated financial statements. Guaranty Finance provides
secured, asset-based financings that include tenant improvement and real estate
leases, equipment leases, accounts receivable and inventory financing, loan
guarantees, bridge loans and mezzanine financing for emerging growth technology,
biotechnology and healthcare companies.
Effective January 26, 1998, Hambrecht & Quist Transition Capital LLC
("Transition Capital"), a provider of bridge loans and mezzanine financing, was
merged into Guaranty Finance. Previously, H&Q California owned an 87.5 percent
interest in and was the managing member of Transition Capital. 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 Securities
Corp. ("RVR"), a registered broker-dealer serving companies with small
capitalizations. Previously, H&Q California owned 100 percent of RVR. RVR's 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.
Other entities are not consolidated and are accounted for on an equity
basis, which approximates fair value. H&Q owns a 15 percent interest in
Hambrecht & Quist Asia Pacific, Ltd., a British Virgin Islands company ("Asia
Pacific") (see Note 4) and has profit participation interests of 25 to 35
percent in investment funds managed by Asia Pacific. Asia Pacific provides
financial advisory and fund management services in the Asia Pacific region. H&Q
LLC owns approximately 20 percent of Lewco Securities Corporation, a Delaware
corporation ("Lewco") (see Notes 7 and 11). Lewco is a clearing broker and
depository for H&Q LLC and Schroder & Co., which owns approximately 80 percent,
with two other minority owners. All expenses, net of certain revenues, are
reimbursed by both owners based on the volume of transactions processed on their
behalf. These costs are reported as expenses in the consolidated statements of
operations. Other less significant investment and venture capital partnerships
are recorded in long-term investments at their estimated fair value (see Note
2).
Effective July 1, 1998, the Company established a strategic relationship
with H&Q Venture Associates, L.L.C. , a California limited liability company
("Venture Associates") (see Note 4). Venture Associates is owned and managed by
former employees of Hambrecht & Quist and provides fund management services to
the Company (see Note 11) and to outside parties. H&Q has profit participation
interests of varying percentages in all of the investment funds and partnerships
managed by Venture Associates.
Prior to its merger with H&Q, LP operated primarily as a holding
partnership for certain current and prior operating affiliates of H&Q
California. Such ownership of operating affiliates included a 30 percent
ownership of H&Q LLC and a 70 percent ownership of Guaranty Finance. Such
ownership interests were transferred to H&Q as part of the Mergers. H&Q
California owned the remaining 70 percent of H&Q LLC. An entity controlled by
the CEO of the Company and a third party owned the remaining 30 percent of
Guaranty Finance. H&Q California was the one percent general partner of LP, and
the same employee shareholders of H&Q California were the limited partners.
RESTRUCTURING
Prior to the Mergers, H&Q California and LP significantly restructured
their operations through a series of transactions and distributions (the
"Restructuring") designed to simplify the Company's structure. The following
transactions were completed as part of the Restructuring in 1996.
H&Q California distributed its limited partnership interest in LP to a
liquidating trust (the "Group Trust") benefiting certain current and former
employees. The result of the distribution was a charge to compensation expense
and an addition to stockholders' equity of $4,493,971, which represented the
value of the limited partnership interest. Previously, such limited partnership
value was eliminated in consolidation due to intercompany ownership.
LP distributed cash and securities totaling $31,021,639 to a liquidating
trust (the "LP Trust") benefiting the partners of LP. The cash and securities
distributed totaled $9,356,000 and $21,665,639, respectively. The securities
distributed included securities held by LP and securities distributed to LP by
H&Q LLC and Guaranty Finance. H&Q LLC's securities distribution included its
remaining holdings of The BISYS Group, Inc. ("BISYS") (see Note 7). Guaranty
Finance also distributed $2,485,968 of securities to its minority member. All
securities were distributed at their estimated fair value.
H&Q California purchased an additional 17.5 percent interest in Guaranty
Finance for $1,374,922 from the minority member. Such purchase resulted in no
remaining ownership of Guaranty Finance by the Company's CEO. The purchase was
accounted for as a purchase of minority interest and resulted in the recording
of an immaterial amount of goodwill.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION AND COMBINATION
All significant intercompany accounts and transactions have been eliminated
in consolidation and combination. The 1996 historical financial statements and
footnote disclosures represent the combined financial position and results of
operations and changes in shareholders' equity and partners' capital and cash
flows for H&Q California and LP.
USE OF ESTIMATES
The preparation of these financial statements requires the use of certain
estimates by management in determining the entity's assets, liabilities, revenue
and expenses. The most significant estimates with regard to these financial
statements relate to the valuation of long-term investments, as discussed below.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, demand deposits with banks,
money market accounts and cash equivalent short-term investments. Cash
equivalent short-term investments include U.S. Treasury bills, reverse
repurchase agreements and other U.S. government securities totaling $29,949,090
and $50,667,696 at September 30, 1997 and 1998, respectively. Cash equivalents
have original maturities of 90 days or less.
SECURITIES TRANSACTIONS
Customers' securities transactions are recorded on a settlement-date basis,
with related commission income and expenses recorded on a trade-date basis.
Marketable securities owned and securities sold, not yet purchased are recorded
on a trade-date basis. Final underwriting settlements are recorded when
received.
MARKETABLE TRADING SECURITIES
Marketable trading securities and securities sold, not yet purchased are
reported at prevailing market prices. Realized and unrealized gains and losses
on marketable trading securities and securities sold, not yet purchased are
included in principal transactions revenue.
LONG-TERM INVESTMENTS
Long-term investments include marketable equity securities and
nonmarketable securities (which include restricted securities of publicly traded
companies, securities of private companies and investment partnership and other
venture capital interests).
H&Q California and H&Q LLC own marketable equity securities and
nonmarketable investments. Marketable equity securities are reported at
prevailing market prices. Discounts are applied for holdings which are
restricted in their disposition. Nonmarketable investments are not registered
for public sale or carry restrictions on sale and are reported at estimated fair
value as determined by management. Factors considered by management in valuing
nonmarketable investments include the type of investment, purchase cost,
marketability, restrictions on disposition, subsequent purchases of the same or
similar investments by other investors, and current financial position and
operating results of the investee entities. Warrants and other rights to
purchase investments are valued at cost, which approximates estimated fair
value. Realized and unrealized gains and losses on long-term investments owned
by H&Q and H&Q LLC are included in revenues as net investment gains.
Also included in long-term investments are investments owned by Guaranty
Finance. Guaranty Finance primarily owns marketable equity securities. Under
Statement of Financial Accounting Standards No. 115 (SFAS 115), Accounting for
Certain Investments in Debt and Equity Securities, entities such as Guaranty
Finance must carry its available-for-sale securities at fair value and report
unrealized gains and losses in stockholders' equity. At September 30, 1997 and
1998, the unrealized loss for Guaranty Finance was $346,419 and $6,533,540,
respectively and H&Q's recorded portion, net of the related tax effects, was
$303,117 and $3,258,584, respectively.
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements are recorded at cost.
Depreciation of furniture and equipment is provided using accelerated and
straight-line methods. These assets are depreciated over periods ranging from
three to seven years based on estimated useful lives. Leasehold improvements are
amortized over the lesser of the useful life of the improvement or the term of
the lease. Expenditures for repairs and maintenance that do not significantly
increase the life of the asset are charged to expense as incurred.
INCOME TAXES AND PRO FORMA INCOME TAX ADJUSTMENT
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
109"). Under this method, the Company recognizes taxes payable or refundable for
the current year and deferred tax liabilities and assets for future consequences
of events that have been recognized in the Company's financial statements or tax
returns.
No provision has been made in the financial statements for income taxes
related to the income of LP. Pursuant to applicable federal and state income tax
regulations, all income or loss of LP is reportable by each partner directly to
the taxing authority. As part of the Mergers (see Note 1), LP merged into the
Company and ceased existence. For financial reporting purposes, the 1996
consolidated statement of operations includes a pro forma income tax adjustment
of $17,443,418 representing taxes on LP's income as if LP's earnings were
subject to income taxes at an effective tax rate of 44 percent.
COMMON STOCK AND PARTNERS' CAPITAL TRANSACTIONS
Since the Offering in 1996, common stock issuances have been to employees,
directors and the Savings and Employee Stock Ownership Trust ("SESOT")(see Note
12). The issuances to the SESOT are more fully described in Note 12. Issuances
to employees and directors include awards to new employees, awards to employees
under the 1996 Bonus and Deferred Sales Compensation Plan ("Compensation
Plan")(see Note 12) and exercises of stock options by current and former
employees and directors. Awards to new employees and awards under the
Compensation Plan are recorded as compensation and benefits expense.
Prior to the Offering, all of H&Q's common stock transactions were recorded
pursuant to the terms of the Hambrecht & Quist Shareholders' Agreement (the
"Agreement") which required all stock issuances and repurchases and all stock
option grants to be recorded using fair market value, as determined by the
Company's Board of Directors (the "Board"). The Board approved a formula value
approximating fair market value, which resulted in transactions being recorded
at premiums over the Company's net book value, as determined under generally
accepted accounting principles. Under the Agreement, all selling shareholders
were required to first offer their shares to the Company before seeking an
independent buyer. The Company repurchased all selling shareholders' shares
subject to the terms of the Agreement, which was terminated in connection with
the Offering.
All LP partnership unit sales and repurchases were recorded at the
partnership's fair market value, as defined in the Hambrecht & Quist Limited
Partnership Agreement, using a formula value similar to H&Q's.
TREASURY STOCK TRANSACTIONS
The Company's treasury stock purchases are comprised of common stock
purchased on the open market and common stock repurchased in connection with
unpaid employee stock notes receivable (see Note 11). Open market purchases of
common stock are recorded at the Company's cost. Stock note repurchases of
common stock are recorded at the carrying value of the unpaid employee stock
note. The Company's treasury stock issuances relate to issuances of common stock
pursuant to the Company's employee benefit plans (See Note 12). Differences
between the first-in first-out cost of the treasury stock and the grant price of
the shares issued are charged to additional paid in capital.
During 1997 and 1998, the Company's treasury stock transactions were as
follows:
Shares Cost
------------- -------------
Treasury shares at September 30, 1996 .......... -- $ --
Open market purchases ........................ 20,000 428,968
Employee stock notes receivable repurchases .. 1,615 9,908
------------ ------------
Treasury shares at September 30, 1997 .......... 21,615 438,876
Open market purchases ........................ 1,115,000 25,481,284
Employee benefit plan issuances .............. (157,813) (4,254,938)
------------ ------------
Treasury shares at September 30, 1998 .......... 978,802 $ 21,665,222
============ ============
Subsequent to September 30, 1998, the Company purchased on the open market
294,000 shares for $4,803,386.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Company's financial assets and liabilities are
carried at market or estimated fair value or are carried at amounts that
approximate current fair value because of their short-term nature. Estimates are
made at a specific point in time, based on relevant market information and
information about the financial instruments.
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. Diluted earnings
per share is computed by dividing net income by weighted average shares
including the dilutive effects of stock options. Diluted earnings per share
calculations result in the same earnings per share previously reported by the
Company. 1996 pro forma earnings per share is determined using pro forma net
income (see above). The Company's basic and diluted earnings per share for 1996,
1997 and 1998 are as follows:
Weighted
Average Per Share
Net Income Shares Amount
----------- ---------- --------
1996:
Basic earnings per share ........ $71,157,755 19,752,126 $ 3.60
Options outstanding ............. -- 1,982,017
----------- ----------
Diluted earnings per share ...... $71,157,755 21,734,143 $ 3.27
=========== ==========
1997:
Basic earnings per share ........ $43,174,198 23,569,306 $ 1.83
Options outstanding ............. -- 2,113,581
----------- ----------
Diluted earnings per share ...... $43,174,198 25,682,887 $ 1.68
=========== ==========
1998:
Basic earnings per share ........ $40,210,538 24,551,064 $ 1.64
Options outstanding ............. -- 2,062,477
----------- ----------
Diluted earnings per share ...... $40,210,538 26,613,541 $ 1.51
=========== ==========
Subsequent to September 30, 1998, the Company granted shares and options to
employees under various compensation plans (see Note 12).
STOCK OPTION PLANS
The Company uses the intrinsic value method to account for its stock option
plans (in accordance with the provisions of Accounting Principles Board Opinion
No. 25). Under this method, compensation expense is recognized for awards of
options to purchase shares of common stock to employees under compensatory plans
only if the fair market value of the stock at the option grant date (or other
measurement date, if later) is greater than the amount the employee must pay to
acquire the stock. Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123") permits companies to
continue using the intrinsic value method or to adopt a fair value based method
to account for stock option plans. The fair value based method results in
recognizing as expense over the vesting period the fair value of all stock-based
awards on the date of grant. The Company has elected to continue to use the
intrinsic value method and the pro forma disclosures required by SFAS 123 are
included in Note 12.
NEW ACCOUNTING STANDARDS
In 1997, the FASB issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income ("SFAS 130") and Statement of Financial
Accounting Standards No. 131, Disclosure about Segments of an Enterprise and
Related Information ("SFAS 131"). The Company is required to and will implement
the provisions of these new standards effective beginning with the Company's
1999 fiscal year. SFAS 130 establishes standards for the reporting and display
of comprehensive income, which includes net income and changes in equity except
those resulting from investments by, or distributions to, stockholders. SFAS 131
establishes standards for disclosures related to business operating segments.
The adoption of these standards will not have an effect on the Company's
financial position or results of operations but will impact financial statement
disclosure.
In 1998, the FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133").
The Company is required to and will implement the provisions of this new
standard effective with its 2000 fiscal year. SFAS 133 establishes accounting
and reporting standards requiring that every derivative instrument be recorded
in the balance sheet as either an asset or as a liability measured at its fair
value and that changes in the fair value be recognized currently in the
statement of operations. The Company has not yet quantified the impact of
adopting SFAS 133 on its financial statements but does not believe it will have
a material effect on the Company's financial position or results of operations.
DERIVATIVES
The Company's derivatives activities were limited primarily to
exchange-traded option contracts to reduce market risk on inventories in Nasdaq
and exchange-listed securities. The fair value of such options are included in
marketable trading securities and securities sold, not yet purchased (see Note
6) and realized and unrealized gains thereon are recognized in principal
transactions revenue (see Note 2). Additionally, from time to time, the Company
may hedge investments held in its long-term investment portfolio (see Note 7).
The fair value of such hedges are included in long-term investments and the
realized and unrealized gains thereon are recognized in net investment gains
revenue (see Note 2).
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at
the exchange rate on the balance sheet date, while revenues and expenses are
translated at average rates of exchange prevailing during the year. Translation
adjustments are accumulated as a separate component of stockholders' equity.
RECLASSIFICATIONS
Certain amounts in the 1996 and 1997 financial statements have been
reclassified to conform to the 1998 presentation.
3. RECEIVABLES FROM AND PAYABLES TO CUSTOMERS:
Receivables from and payables to customers include amounts due to or from
customers as a result of cash and margin transactions. Securities owned by
customers are held as collateral for these receivables. Such collateral is not
reflected in the consolidated financial statements.
4. RECEIVABLES FROM RELATED PARTIES:
At September 30, 1997 and 1998 receivables from related parties consisted
of the following:
1997 1998
------------ ------------
Notes receivable from related parties and employees $ 2,696,455 $ 2,034,354
Asset management fees and profit participations ... 5,989,569 7,240,551
Related party and other advances .................. 8,711,140 8,357,189
=========== ===========
$17,397,164 $17,632,094
=========== ===========
Notes receivable from related parties and employees as of September 30,
1997 and 1998 include notes receivable from Asia Pacific of $1,757,670 and
$812,464, respectively.
Asset management fees and profit participations at September 30, 1997 and
1998, include profit participations receivable of $5,527,057 and $7,240,551,
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 $13,685,248,
$8,735,436 and $7,796,183 for the years ended September 30, 1996, 1997 and 1998,
respectively. Also included in other revenues are management fees earned by
Capital Management of $3,669,463, $3,617,583 and $4,059,010 for 1996, 1997 and
1998, respectively.
Related party and other advances include temporary advances made to related
parties for operating expenses and to related parties, directors and employees
for purchases of investments. Of the amount outstanding at September 30, 1998,
$7,307,777 relates to advances to related parties, directors and employees for
purchases of investments made on their behalf. Also included in related party
and other advances is $819,807 in advances made to Venture Associates (see Notes
1 and 11) under a $2.0 million revolving credit facility.
5. NOTES RECEIVABLE:
Notes receivable include advances made by Guaranty Finance in exchange for
notes receivable. The notes bear interest at rates between 6.75 percent to 14
percent and are secured by certain of the borrowers' tangible and intangible
assets. At September 30, 1998, principal payments are due on the notes
receivable as follows:
1999 ........................ $ 11,116,029
2000 ........................ 6,599,783
2001 ........................ 180,493
------------
17,896,305
Less - allowance for losses (4,341,348)
------------
$ 13,554,957
============
6. MARKETABLE TRADING SECURITIES AND SECURITIES SOLD, NOT YET PURCHASED:
At September 30, 1997 and 1998, marketable trading securities and
securities sold, not yet purchased, consisted of the following:
1997 1998
------------ -----------
Marketable trading securities-
Equity securities .............. $10,367,207 $ 8,994,939
Convertible bonds .............. 2,086,750 10,366,290
Options ........................ 26,840 79,062
U.S. government securities ..... 20,136,770 12,236,801
=========== ===========
$32,617,567 $31,677,092
=========== ===========
Securities sold, not yet purchased-
Equity securities .............. $11,359,430 $17,674,404
Convertible bonds .............. -- 373,852
Options ........................ 410,697 74,528
=========== ===========
$11,770,127 $18,122,784
=========== ===========
7. LONG-TERM INVESTMENTS
At September 30, 1997 and 1998, the Company's long-term investments, at
estimated fair value, consisted of the following:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Marketable equity securities available for sale by Guaranty
Finance ................................................... $ 14,023,208 $ 6,512,887
World Access, Inc. .......................................... 23,778,230
------------
Marketable equity securities - other ........................ 37,661,637 23,559,166
------------ ------------
Total marketable investments ...................... 51,684,845 53,850,283
------------ ------------
Nonmarketable securities and investment partnership interests 39,568,602 50,116,787
Venture Partners and affiliated venture capital funds ....... 15,756,670 14,312,839
Venture capital funds managed by others ..................... 8,079,332 9,232,278
Lewco Securities ............................................ 2,110,279 2,110,279
------------ ------------
Total nonmarketable investments ................... 65,514,883 75,772,183
------------ ------------
Total long-term investments ....................... $117,199,728 $129,622,466
============ ============
</TABLE>
In March 1998, the Company purchased a large block of World Access, Inc.
("WAXS") common stock in a private transaction. The Company partially hedged the
position through a series of options transactions that are recorded as a
component of the investment. This position collateralizes a $26,708,402 line of
credit, also obtained in March 1998 from a financial institution (see Note 9).
No amounts have been drawn on this line of credit as of September 30, 1998. The
line of credit was reduced to $15,873,363 subsequent to September 30, 1998 (see
Note 9).
The cost of the Company's long-term investments at September 30, 1997 and
1998, was $119,412,383 and $153,916,280, respectively.
Following is an analysis of the net investment gains for the years ended
September 30, 1996, 1997 and 1998:
1996 1997 1998
------------ ------------ ------------
Realized gains ............... $ 24,045,279 $ 20,527,924 $ 18,308,855
Change in unrealized gains and
(losses), net .............. 389,122 (20,298,945) (15,894,065)
============ ============ ============
Net investment gains ......... $ 24,434,401 $ 228,979 $ 2,414,790
============ ============ ============
Included in net investment gains are realized and unrealized gains on the
Company's investment in BISYS of $15,093,727, $1,465,206 and $36,451 for 1996,
1997 and 1998, respectively. As part of the Restructuring in 1996 (see Note 1),
H&Q LLC distributed shares of BISYS valued at $14,267,556 to LP and recorded
realized gains of $6,589,963 on the distribution.
Included in net investment gains in 1997 and 1998 are net investment losses
of $18,126,682 and $2,179,899, respectively, related to two investee companies
in the airline industry. In 1997, the Company recorded a realized loss of
$9,878,854 on its investment in Air South Airlines, Inc. (Air South), a regional
airline that filed for bankruptcy in August 1997. In 1997 and 1998, the Company
recorded unrealized losses of $8,247,828 and $2,179,899, respectively, on its
investment in another regional airline. In 1997, the Company also recorded a
loss, included in other expense, of $1,802,176 related to letters of credit
issued to two of Air South's creditors.
The cost and estimated fair values of Guaranty Finance's investments in
marketable equity securities available for sale at September 30, 1997 and 1998
are as follows:
1997 1998
------------ ------------
Cost .................. $ 14,369,649 $ 13,046,427
Gross unrealized gains 1,975,968 641,714
Gross unrealized losses (2,322,409) (7,175,254)
============ ============
Estimated fair value .. $ 14,023,208 $ 6,512,887
============ ============
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 years ended September 30, 1996, 1997 and 1998 are as follows:
1996 1997 1998
----------- ----------- -----------
Gross proceeds ...... $ 4,531,113 $ 2,882,175 $ 7,573,145
Gross realized gains 2,587,095 446,302 2,537,827
Gross realized losses (301,244) -- --
8. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
The following summarizes the Company's furniture, equipment and leasehold
improvements as of September 30, 1997 and 1998:
1997 1998
------------ ------------
Furniture and equipment ....................... $ 31,672,647 $ 37,658,519
Leasehold improvements ........................ 12,489,222 14,330,746
Less- Accumulated depreciation and amortization (25,379,023) (35,026,856)
============ ============
$ 18,782,846 $ 16,962,409
============ ============
For the years ended September 30, 1996, 1997 and 1998, occupancy and
equipment expense included depreciation and amortization expense on furniture,
equipment and leasehold improvements of $3,873,463, $7,342,719, and $10,024,152,
respectively.
9. DEBT OBLIGATIONS:
Debt obligations consist of the following:
<TABLE>
<CAPTION>
1997 1998
-------------- ---------------
<S> <C> <C>
Lines of credit-
$15,000,000 bank line of credit (H&Q California); interest on individual
advances at prime plus 0.75 percent (9.25 percent at September 30, 1997)
or at LIBOR plus 2.5 percent (8.25 percent at September 30, 1997) fixed
for the term of the advance; collateralized in full by marketable
securities and certain customer receivables; average balance outstanding
in 1997 and 1998 was $5,115,091 and $84,615, respectively; expired March
30, 1998................................................................. $1,100,000 --
$20,000,000 bank line of credit (H&Q California); interest on
overnight advances at prime (8.25 percent at September 30, 1998);
unsecured; $10,000,000 drawn for four days in 1997 and
no amounts drawn in 1998; expires April 30, 1999......................... -- --
$26,708,402 bank line of credit (H&Q California); interest at
Eurodollar rate plus 0.50 percent (5.81 percent at September 30, 1998)
collateralized in full by WAXS position (See Note 7); no balance
outstanding in 1998; replaced on October 2, 1998
with a new line of credit (see below).................................... -- --
$11,000,000 bank line of credit (Guaranty Finance); interest at
prime plus 1.25 percent (9.75 percent at September 30, 1997);
collateralized in full by Guaranty Finance's assets, except for cash and
marketable securities; average balance outstanding in 1997 and 1998 was
$785,833 and $1,030,000, respectively;
expired February 28, 1998................................................. 700,000 --
$10,000,000 bank line of credit (Transition Capital); interest at
prime plus 1.75 percent (10.25 percent at September 30, 1997);
collateralized in full by Transition Capital's assets, except for cash and
marketable securities; average balance outstanding in 1997 and 1998 was
$283,333 and $360,000, respectively;
expired January 26, 1998.................................................. 900,000 --
$25,000,000 bank line of credit (Guaranty Finance); interest at
prime plus 1.00 percent (9.25 percent at September 30, 1998);
collateralized in full by Guaranty Finance assets, except for cash and
marketable securities; average balance outstanding in
1998 was $214,286; expires February 27, 1999.............................. -- --
---------- ---------------
$2,700,000 $ --
========== ==============
</TABLE>
The average prime rate for 1997 and 1998 was 8.5 percent. Interest expense
on debt obligations was $1,135,501, $617,563 and $191,556 during fiscal 1996,
1997 and 1998, respectively.
Subsequent to September 30, 1998, the line of credit for $26,708,402 was
revised to $15,873,363. There were no changes to the terms.
10. INCOME TAXES:
The income tax provision consisted of the following components for the
years ended September 30, 1996, 1997 and 1998:
State and
Federal City Total
------------ ------------ ------------
1996--
Current ... $ 44,972,093 $ 20,461,786 $ 65,433,879
Deferred .. (23,048,950) (3,918,683) (26,967,633)
------------ ------------ ------------
Total $ 21,923,143 $ 16,543,103 $ 38,466,246
============ ============ ============
1997--
Current ... $ 36,907,127 $ 16,154,623 $ 53,061,750
Deferred .. (12,885,782) (6,253,383) (19,139,165)
------------ ------------ ------------
Total $ 24,021,345 $ 9,901,240 $ 33,922,585
============ ============ ============
1998--
Current ... $ 36,526,122 $ 10,428,005 $ 46,954,127
Deferred .. (12,494,532) (4,126,115) (16,620,647)
------------ ------------ ------------
Total $ 24,031,590 $ 6,301,890 $ 30,333,480
============ ============ ============
The deferred income tax asset as of September 30, 1997 and 1998, is
composed of the following:
1997 1998
----------- -----------
Compensation and benefits accruals ........... $36,440,726 $46,093,948
Net unrealized losses on long-term investments 4,237,582 15,462,917
Other liability accruals ..................... 6,288,318 3,270,884
Depreciation and amortization ................ 3,255,848 4,601,813
Other ........................................ 6,512,180 6,383,983
----------- -----------
Deferred income tax asset ............ $56,734,654 $75,813,545
=========== ===========
There was no valuation allowance against deferred tax assets at September
30, 1997 and 1998.
The following is a reconciliation of the income tax expense to the amount
computed by applying the federal statutory rate to income before income tax
expense:
<TABLE>
<CAPTION>
1996 1997 1998
-------------------- --------------------- -------------------
Amount Rate Amount Rate Amount Rate
------------ ----- ------------ ----- ------------ ----
<S> <C> <C> <C> <C> <C> <C>
Tax expense computed at statutory rate . $ 44,473,597 35.0% $ 26,983,873 35.0% $ 24,690,406 35.0%
State and local tax provision, net of
federal income tax benefit .......... 10,753,017 8.5 6,202,866 8.0 4,822,515 6.9
Nondeductible expenses ................. 765,470 0.6 677,372 0.9 798,209 1.1
LP income not subject to tax (Note 2) .. (17,443,418) (13.7) -- -- -- --
Other, net ............................. (82,420) (0.1) 58,474 0.1 22,350 --
------------ ----- ------------ ----- ------------ ----
$ 38,466,246 30.3% $ 33,922,585 44.0% $ 30,333,480 43.0%
============ ==== ============ ==== ============ ====
</TABLE>
11. RELATED-PARTY TRANSACTIONS:
INVESTMENT TRANSACTIONS
The Company makes investments in private companies directly, through
investment partnerships and through the venture capital funds it manages.
Venture Partners manages the majority of the Company's venture capital funds
(see Note 1) and earns management fees and profit participation distributions
(see Note 4).
Directors, officers and employees of H&Q or its subsidiaries may have
additional interests in such private companies directly or through various
affiliated venture capital or other investment entities. Such parties may also
serve on the boards of directors of companies in which the Company has invested.
Guaranty Finance provides lease and other financing to companies in which
H&Q, its subsidiaries and its affiliates have equity investments.
OPERATING AND CREDIT ADVANCES
H&Q pays operating expenses on behalf of certain related parties, primarily
Asia Pacific and Venture Associates (see Notes 1 and 4), and is reimbursed for
those expenses. Operating expenses that have not yet been reimbursed are
included in receivables from related parties (see Note 4). Additionally, H&Q
entered into a $2.0 million credit facility with Venture Associates (see Note 4)
on July 1, 1998. Under the terms of the credit facility, H&Q agreed to make
advances to Venture Associates for the short-term purpose of funding its
investment obligations. Interest on balances advanced under the credit facility
is at prime plus one percent.
STOCK NOTES RECEIVABLE
In connection with sales of the Company's common stock, the Company
received stock notes receivable from employees, which, at September 30, 1997 and
1998, had principal balances of $5,620,260 and $3,079,872, respectively, and are
treated as a reduction of stockholders' equity. These notes bear interest at
rates ranging from 6.0 percent to 7.5 percent and have maturity dates ranging
from 1998 through 2000.
Capital notes receivable from LP partners represent amounts due from
partners, including H&Q, for their capital contributions to LP. Such amounts are
recorded as a reduction of partners' capital. In 1996, capital notes receivables
from LP partners of $8,227,753 were transferred to H&Q California and are
reflected in the stock notes receivable amounts described above.
LEWCO SECURITIES CORP.
H&Q LLC is a co-owner of Lewco (see Note 1), a securities clearing firm
that is a registered broker-dealer and member of each major stock exchange. H&Q
LLC holds a subordinated note for $300,000 issued by Lewco. The interest on this
note is paid quarterly at the prime rate, with the principal balance due
December 31, 1999. The subordinated note receivable and H&Q LLC's investment in
Lewco are carried in long-term investments (see Note 7). H&Q LLC uses Lewco,
which renders its services to its owners on a cost-sharing basis, to process its
securities transactions and all other related clearing services. Lewco also
maintains the Company's customer and broker accounts.
Amounts receivable from Lewco result from customer and H&Q LLC proprietary
transactions. Interest on the interest-bearing amounts receivable from Lewco is
earned at a fluctuating rate (4.80 percent and 3.98 percent at September 30,
1997 and 1998, respectively).
12. EMPLOYEE BENEFIT PLANS:
SAVINGS AND EMPLOYEE STOCK OWNERSHIP TRUST
Under the SESOT (see Note 2), the Company established an Employee Stock
Ownership Plan ("ESOP") and a profit-sharing plan ("PSP") with an employee
salary deferral (or 401(k)) feature. Collectively, the ESOP and PSP are referred
to as the Hambrecht & Quist Group Savings and Employee Stock Ownership Plan (the
"Plan" or "SESOP"). Substantially all full-time employees of H&Q and its
subsidiaries and certain affiliates are eligible to participate in the Plan.
Under the Plan, the Company may match employees' 401(k) contributions to
the PSP up to $4,000 per employee per year by making Company common stock
contributions to the ESOP. The Company may also make discretionary cash
contributions to the PSP. For 1996, 1997 and 1998, the Company recorded
compensation expense of $1,590,000, $1,943,760 and $1,092,394, respectively, to
the ESOP under the matching provision. Subsequent to September 30, 1998, the
Company issued approximately 43,000 shares of common stock to the ESOP in
satisfaction of its compensation and benefits payable. No discretionary
contributions were made to the PSP in 1996, 1997 or 1998.
As of September 30, 1998, the ESOP owned approximately 6 percent of the H&Q
common stock outstanding.
BONUS AND DEFERRED SALES COMPENSATION PLAN
The Company may pay bonuses to its executives and other professional
employees under the Compensation Plan (see Note 2). The Compensation Committee
of the Board (the "Committee"), in its sole discretion, may offer such employees
the ability to elect to receive a percentage (the "Percentage") of such bonus or
commission in H&Q common stock, valued at not less than 90 percent of the fair
market value on the date of grant. Unless otherwise determined by the Committee,
the stock vests ratably over three years following the date of grant.
Determinations with respect to executive officers are made by the Board instead
of the Committee. At the date of the bonus payment, the employee may choose to
decline any offered common stock, and instead receive cash payments equal to the
Percentage over three years following the date of grant. If his or her
employment terminates within the three year vesting period, the employee
forfeits the unvested common stock or future cash payments. In February 1998,
the 1996 Equity Plan ("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, all of
which may be issued as stock options or stock awards. Additionally, the 1996
Plan was amended to provide for automatic annual increases of shares issuable
under the Compensation Plan (See Note 2) 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.
The Company paid bonuses in October 1998. Under the Compensation Plan,
537,808 shares valued at $9,039,468 were issued to executives and professionals
effective October 15, 1998. All such amounts were included in compensation and
benefits payable as of September 30, 1998.
STOCK OPTION PLANS
The Company has three stock option plans, the 1985 Stock Option Plan (1985
Plan), 1995 Stock Option Plan (1995 Plan) and the 1996 Plan. Additionally, the
Company has granted stock options outside the 1985, 1995 and 1996 plans.
The Company's 1985 Plan, which provided for the granting of options to
purchase 4,000,000 shares of the Company's common stock, expired September 30,
1994, except as to the options then outstanding. As of September 30, 1998,
158,000 options remain outstanding under the 1985 Plan. The Company's 1995 Plan
provided for the granting of incentive options and nonqualified options to
purchase 4,972,000 shares of the Company's common stock to officers, employees
and directors at a price not less than 85 percent of fair market value at the
date the option was granted, subject to certain limitations regarding incentive
stock options. Due to the creation of the 1996 Plan, no further options will be
granted under the 1995 Plan. As of September 30, 1998, 3,264,896 options
remained outstanding under the 1995 Plan. The 1996 Plan provides for the
granting of incentive and nonqualified options to purchase shares of the
Company's common stock to Company employees, directors and consultants. As of
September 30, 1998, 885,900 options are outstanding under the 1996 Plan. Outside
the 1985, 1995 and 1996 plans, 1,017,481 options have been granted to certain
officers and directors. Such options were granted with an exercise price equal
to fair market value (see Note 2) at the date of grant.
Options become exercisable as determined at the date of grant by the
Committee or the Board, in the case of executive officers and directors.
Generally, options become exercisable over a five year period from the date of
grant and expire seven years after the date of grant.
Details of stock options are as follows:
Number
of Shares Exercise Price
---------- ----------------
Outstanding at September 30, 1995........ 2,934,428 $ 2.04 - $ 5.54
Granted................................ 4,530,320 $ 6.52 - $13.75
Exercise...............................(1,609,628) $ 2.10 - $ 4.74
Canceled............................... (157,600) $ 2.62 - $ 5.54
-----------
Outstanding at September 30, 1996........ 5,697,520 $ 2.04 - $13.75
Granted................................ 301,600 $16.13 - $31.06
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................................ 739,000 $13.75 - $43.25
Exercised.............................. (565,467) $ 2.10 - $22.13
Canceled............................... (414,412) $ 4.60 - $32.75
===========
Outstanding at September 30, 1998........ 5,326,277 $ 2.10 - $43.25
===========
Of the outstanding options at September 30, 1998, 1,947,586 had vested.
Subsequent to September 30, 1998, the Company issued 1,399,000 stock options at
an exercise price of $14.75 which was equal to fair market value at the date of
grant.
In October 1998, the Company's Board authorized a stock option exchange
program whereby non-executive officer employees holding stock options under the
1996 Plan were offered the opportunity to exchange two existing options for one
new option. The new options are exercisable at $14.75 per share, the fair market
value of the Company's common stock as of the effective date of the program, and
vest over a five-year period. Upon conclusion of the program, a total of 417,500
existing options at a weighted average exercise price of $32.79 were exchanged
for new options, resulting in a net decrease of 208,750 shares subject to stock
options.
The Company applies the intrinsic value method in accounting for its stock
options plans. In 1996, 625,988 options were granted at an exercise price below
fair market value on the date of grant, and resulted in a $1,165,903 charge to
compensation expense. Other grants of options did not result in compensation
expense in 1996, 1997 or 1998. Had the Company used the fair value based method
proscribed by SFAS 123 (see Note 2), the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
1996 1997 1998
----------- ----------- -----------
Net income
As reported ............ $71,157,755 $43,174,198 $40,210,538
Pro forma .............. 66,010,945 41,354,111 32,325,904
Diluted earnings per share
As reported ............ $ 3.27 $ 1.68 $ 1.51
Pro forma .............. $ 3.04 $ 1.61 $ 1.21
The fair value of each option grant in 1997 and 1998 is estimated on the
date of grant using the Black-Scholes option-pricing model. The fair value of
each option grant in 1996 is estimated using the minimum value method. The
weighted average assumptions used for options, respectively are as follows:
expected volatility of 58.0 percent and 91.0 percent in 1997 and 1998,
respectively (not applicable in 1996); risk-free interest rates of 6.17, 5.86
and 4.40 percent in 1996, 1997 and 1998, respectively; and the expected life of
5.95 years for all seven year grants and 2.80 years for all three year grants in
1996 and 1997 and the expected life of 4.94 years for all seven year grants in
1998.
STOCK APPRECIATION RIGHTS
In fiscal 1996 the Company awarded Stock Appreciation Rights ("SARs") to
key employees and executives. These SARs have a service period of one year and
result in additional cash compensation to the individuals based on the increase
in the Company's book value during the service period to which the SARs relate.
The SARs vest and are paid over three years, with immediate cancellation of
vesting upon employment termination.
Compensation expense recorded for SARs awards was $9,461,954 for 1996. The
remaining SARs liability of $1,919,551 will be paid on January 15, 1999. Such
amount is included in compensation and benefits payable at September 30, 1998.
13. NET CAPITAL REQUIREMENTS:
As a registered broker-dealer, H&Q LLC is subject to the Securities and
Exchange Commission's Uniform Net Capital Rule 15c3-1 (the "Rule") and the
capital rules of the New York Stock Exchange, Inc., of which H&Q LLC is a
member. H&Q LLC has elected to compute its net capital requirement under the
"alternative" method, which requires minimum net capital to be the greater of
$1,000,000 or two percent of aggregate debit balances arising from customers'
transactions, as defined. The Rule also provides that equity capital may not be
withdrawn or cash distributions paid if the resulting net capital would be less
than the amounts required under the Rule. Accordingly, the payment of
distributions and advances to H&Q by H&Q LLC is limited to excess net capital
under the most restrictive of these requirements. At September 30, 1997 and
1998, H&Q LLC's regulatory net capital of $67,030,028 and $50,484,565,
respectively, was 27 percent and 26 percent, respectively, of aggregate debit
items and its net capital in excess of the minimum required was $62,087,429 and
$46,533,220, respectively.
At September 30, 1998, H&Q EM was in compliance with all applicable
regulatory capital adequacy requirements.
14. COMMITMENTS AND CONTINGENCIES:
Aggregate annual rentals for office space under noncancelable operating
leases are as follows:
1999............................... $ 9,596,377
2000............................... 9,420,762
2001............................... 9,609,905
2002............................... 9,655,214
2003............................... 9,714,879
Thereafter......................... 27,486,866
-------------
$75,484,003
=============
Certain of these leases have escalation clauses. Rental expense, net of
sublease income, charged to occupancy and equipment expense for the years ended
September 30, 1996, 1997 and 1998, was $4,716,591, $6,427,289 and $7,387,323,
respectively.
Lewco conducts a stock borrow/stock lending business. On behalf of Lewco,
the Company has agreed to guarantee its proportional share of secured loans
resulting from this business. The Company's contingent liability relating to its
net unsecured position under this indemnity agreement was $3,483,890 at
September 30, 1998. Also, in connection with H&Q LLC's option trading
activities, the Company has issued a letter of credit totaling $8,000,000 at
September 30, 1998 benefiting the Options Clearing Corporation.
The Company has other contingent liabilities, including contractual
commitments arising in the normal course of business, the resolution of which,
in management's opinion, will not have an adverse effect on the Company's
financial position.
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. All settlement amounts were paid
before September 30, 1998.
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 an 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 manager, co-manager or member of the underwriting
syndicate. These cases involve claims under federal and/or 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 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
September 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.
15. FINANCIAL INSTRUMENTS WITH MARKET RISK AND CONCENTRATIONS OF CREDIT RISK:
In the normal course of business, H&Q LLC enters into various financial
transactions with market risk in connection with its proprietary trading
activities. These transactions primarily include purchases and sales of
marketable trading securities, including equity options. H&Q LLC records its
marketable trading securities at market value (see Note 2). H&Q LLC's options
are primarily executed to minimize its market risk exposure of its underlying
trading positions as well as to benefit from changing market conditions. All
options transacted by H&Q LLC are exchange-traded in organized markets and have
terms of less than one year. Additionally, H&Q LLC, H&Q California and Guaranty
Finance purchase long-term investments with market risk. Occasionally, such
purchases are hedged. All long-term marketable investments, including hedges
thereon, are recorded at market value (see Note 2). The Company's exposure to
market risk is determined by a number of factors, including the size,
composition and diversification of positions held and market volatility.
Management actively monitors its market risk exposure by reviewing the
effectiveness of hedging strategies and setting market risk limits.
In the normal course of business, H&Q LLC's customer activities involve the
execution, settlement and financing of various customer securities transactions.
These activities may expose H&Q LLC to off-balance-sheet credit risk in the
event that the customer is unable to fulfill its contracted obligations. H&Q
LLC's customer securities activities are transacted on either a cash or margin
basis. In margin transactions, H&Q LLC extends credit to the customer, subject
to various regulatory and internal margin requirements, collateralized by cash
and securities in the customer's account. H&Q LLC monitors collateral and
required margin levels daily and, pursuant to such guidelines, requests
customers to deposit additional collateral or reduce securities positions when
necessary. H&Q LLC is also exposed to credit risk when its margin accounts or a
margin account is collateralized by a concentration of a particular security and
when that security decreases in value.
In addition, H&Q LLC executes customer short-sale transactions. Such
transactions may expose H&Q LLC to off-balance-sheet risk in the event that
margin requirements are not sufficient to fully cover losses that customers may
incur. In the event that the customer fails to satisfy its obligations, H&Q LLC
may be required to purchase financial instruments at prevailing market prices in
order to fulfill the customer's obligations.
In accordance with industry practice, H&Q LLC records customer transactions
on a settlement-date basis, which is generally three business days after trade
date. H&Q LLC is therefore exposed to risk of loss on these transactions in the
event of the customers' or brokers' inability to meet the terms of their
contracts, in which case H&Q LLC may have to purchase or sell financial
instruments at prevailing market prices. Settlement of these transactions is not
expected to have a material effect on H&Q LLC's balance sheet.
As a securities broker-dealer, H&Q LLC provides services to diverse groups
of corporations and institutional and individual investors. A substantial
portion of H&Q LLC's transactions is executed with and on behalf of
institutional investors, including other broker-dealers, commercial banks,
insurance companies, pension plans, mutual funds and other financial
institutions. H&Q LLC's exposure to credit risk associated with the
nonperformance of these customers in fulfilling their contractual obligations
pursuant to securities transactions can be directly impacted by volatile trading
markets. As of September 30, 1998, the Company did not have significant
concentrations of credit risk with any single counterparty or with collateral
represented by any single security.
16. INDUSTRY SEGMENT AND GEOGRAPHIC AREA DATA:
The Company is primarily engaged in a single line of business as a
securities firm, which comprises several types of services, such as principal
and agency transactions, underwriting and investment banking and long-term
equity investing. These activities constitute a single business segment.
The assets and revenues related to the Company's foreign operations are not
significant.
17. QUARTERLY DATA (UNAUDITED):
The following table sets forth selected highlights for each of the fiscal
quarters during the years ended September 30, 1997 and 1998 (dollars in
thousands, except per share data):
<PAGE>
Diluted
Income Earnings
Before Per
Total Income Net Share
Revenues Taxes Income (1)
---------- -------- -------- --------
1997:
First quarter ....... $ 94,900 $ 28,145 $ 15,761 $ 0.62
Second quarter ...... 74,653 13,373 7,489 $ 0.29
Third quarter ....... 82,299 18,239 10,214 $ 0.40
Fourth quarter ...... 94,380 17,340 9,710 $ 0.37
-------- -------- --------
Total year ........ $346,232 $ 77,097 $ 43,174 $ 1.68
======== ======== ========
1998:
First quarter ....... $ 91,622 $ 11,666 $ 6,650 $ 0.25
Second quarter ...... 107,396 28,011 15,966 $ 0.60
Third quarter ....... 102,789 24,401 13,913 $ 0.52
Fourth quarter ...... 71,318 6,466 3,682 $ 0.14
-------- -------- --------
Total year ........ $373,125 $ 70,544 $ 40,211 $ 1.51
======== ======== ========
(1) The sum of the quarters' diluted earnings per share do not always equal the
total year amounts due to the effect of averaging the number of shares of common
stock and common stock equivalents throughout the year.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report dated November 13, 1998 included in this Form 10-K,
into the Company's previously filed Form S-8 Registration Statements Nos.
333-13799 and 333-56957.
ARTHUR ANDERSEN LLP
San Francisco, California
December 15, 1998
<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 Annual
Report on Form 10-K and is qualified in its entirety by reference to such
consolidated financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 66,960
<RECEIVABLES> 282,377
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 31,677
<PP&E> 16,762
<TOTAL-ASSETS> 606,668
<SHORT-TERM> 0
<PAYABLES> 251,789
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 18,123
<LONG-TERM> 0
0
0
<COMMON> 154,383
<OTHER-SE> 182,373
<TOTAL-LIABILITY-AND-EQUITY> 606,668
<TRADING-REVENUE> 105,861
<INTEREST-DIVIDENDS> 27,236
<COMMISSIONS> 49,725
<INVESTMENT-BANKING-REVENUES> 91,332
<FEE-REVENUE> 88,539
<INTEREST-EXPENSE> 3,628
<COMPENSATION> 187,065
<INCOME-PRETAX> 70,544
<INCOME-PRE-EXTRAORDINARY> 70,544
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,211
<EPS-PRIMARY> 1.64 <F1>
<EPS-DILUTED> 1.51 <F1>
<FN>
<F1> Reflects basic and diluted EPS, respectively, prepared in accordance with
SFAS No. 128.
</FN>
</TABLE>
