<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-11855
HAMBRECHT & QUIST GROUP
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3246636
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
ONE BUSH STREET
SAN FRANCISCO, CALIFORNIA 94104
(Address of principal executive offices, including zip code)
(415) 439-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
24,444,585 shares of Common Stock were issued and outstanding as of August
10, 1999.
<PAGE>
HAMBRECHT & QUIST GROUP
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements............................................. 3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 22
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................. 23
Item 6. Exhibits and Reports on Form 8-K.................................. 24
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HAMBRECHT & QUIST GROUP
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND JUNE 30, 1999
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1999
---------------- ---------------
(unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents.............................................................. $ 66,959,567 $ 31,262,115
Receivables:
Customers (net of allowance of $1,175,000 and $1,400,000, respectively) ............. 215,657,363 371,621,947
Lewco Securities Corp................................................................ -- 16,600,536
Syndicate managers................................................................... 11,013,798 33,608,518
Related parties...................................................................... 17,632,094 22,233,244
Notes (net of allowance of $4,341,348 and $4,207,777, respectively)................. 13,554,957 8,970,839
Income taxes......................................................................... 4,032,103 --
Other................................................................................ 20,486,412 32,639,591
Marketable trading securities, at market value......................................... 31,677,092 53,276,599
Long-term investments, at estimated fair value......................................... 129,622,466 137,290,435
Deferred income taxes.................................................................. 75,813,545 86,471,117
Furniture, equipment and leasehold improvements, net of accumulated depreciation and
Amortization......................................................................... 16,962,409 16,135,183
Other assets .......................................................................... 3,256,553 4,452,641
---------------- ---------------
Total assets................................................................. $606,668,359 $814,562,765
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Payables:
Customers............................................................................ $ 83,221,535 $123,773,808
Compensation and benefits............................................................ 123,933,699 152,136,782
Lewco Securities Corp. .............................................................. 11,396,221 --
Syndicate settlements................................................................ 4,442,449 24,121,120
Income taxes payable................................................................. -- 8,509,135
Trade accounts payable............................................................... 2,897,223 8,806,115
Accrued expenses and other........................................................... 25,898,187 35,153,425
Securities sold, not yet purchased, at market value.................................... 18,122,784 37,327,697
Debt obligations....................................................................... -- 1,500,000
---------------- ---------------
Total liabilities............................................................ 269,912,098 391,328,082
---------------- ---------------
Commitments and contingencies
Stockholders' equity:
Common stock (par value $0.01 and 100,000,000 shares authorized, 24,561,944
and 24,642,991 shares issued, respectively) ......................................... 245,619 246,430
Additional paid-in capital........................................................... 157,217,641 155,566,803
Stock notes receivable from employees................................................ (3,079,872) (2,158,248)
Retained earnings.................................................................... 207,441,350 282,444,230
Unrealized losses on investments available for sale, net............................. (3,258,584) (3,901,700)
Cumulative translation loss.......................................................... (144,671) --
Treasury stock, at cost (978,802 and 259,847 shares, respectively) (21,665,222) (8,962,832)
---------------- ---------------
Total stockholders' equity................................................... 336,756,261 423,234,683
---------------- ---------------
Total liabilities and stockholders' equity................................... $606,668,359 $814,562,765
================ ===============
</TABLE>
The accompanying notes are an integral part of these statements.
-3-
<PAGE>
HAMBRECHT & QUIST GROUP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- -------------------------------
1998 1999 1998 1999
--------------- --------------- --------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Principal transactions..................... $ 27,123,478 $ 45,800,173 $ 82,193,004 $123,780,372
Commissions................................ 12,808,123 18,468,148 37,287,505 49,878,216
Investment banking......................... 28,225,102 58,288,923 75,136,965 115,464,498
Corporate finance fees..................... 20,000,124 35,257,972 57,311,098 68,897,553
Interest and dividends..................... 6,797,761 6,935,529 19,532,582 19,889,918
Net investment gains....................... 1,576,572 4,170,075 11,354,284 31,968,978
Other...................................... 6,257,610 9,220,064 18,991,270 21,352,080
--------------- --------------- --------------- ---------------
Total revenues........................... 102,788,770 178,140,884 301,806,708 431,231,615
--------------- --------------- --------------- ---------------
EXPENSES:
Compensation and benefits.................. 51,606,410 84,239,278 151,115,379 210,784,634
Brokerage and clearance.................... 6,518,429 5,033,453 17,570,942 21,799,852
Occupancy and equipment.................... 6,162,844 6,154,227 17,265,654 16,381,754
Communications............................. 3,795,801 3,893,371 11,124,879 11,280,725
Interest................................... 975,955 1,219,525 3,013,363 2,710,305
Other...................................... 9,328,762 12,486,908 37,639,144 36,690,345
--------------- --------------- --------------- ---------------
Total expenses........................... 78,388,201 113,026,762 237,729,361 299,647,615
--------------- --------------- --------------- ---------------
Income before income tax provision....... 24,400,569 65,114,122 64,077,347 131,584,000
INCOME TAX PROVISION......................... 10,488,180 27,999,072 27,549,195 56,581,120
--------------- --------------- --------------- ---------------
Net income............................... $ 13,912,389 $ 37,115,050 $ 36,528,152 $ 75,002,880
=============== =============== =============== ===============
EARNINGS PER SHARE:
Basic...................................... $0.57 $1.51 $1.50 $3.05
Diluted.................................... $0.52 $1.39 $1.37 $2.83
WEIGHTED AVERAGE SHARES:
Basic...................................... 24,534,385 24,514,100 24,424,145 24,565,708
Diluted.................................... 26,653,279 26,697,817 26,613,378 26,502,630
</TABLE>
The accompanying notes are an integral part of these statements.
-4-
<PAGE>
HAMBRECHT & QUIST GROUP
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 1998 AND NINE MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL
COMMON COMMON STOCK PAID-IN STOCK NOTES RETAINED UNREALIZED
SHARES CAPITAL RECEIVABLE EARNINGS LOSSES, NET
-------------- -------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1997........ 23,790,337 $ 237,903 $ 136,271,533 $ (5,620,260) $ 167,230,812 $ (303,117)
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 - - - - - (2,955,467)
Translation loss.............. - - - - - -
Treasury stock transactions... - - (1,929,098) - - -
-------------- -------------- -------------- -------------- -------------- --------------
BALANCE, SEPTEMBER 30, 1998........ 24,561,944 245,619 157,217,641 (3,079,872) 207,441,350 (3,258,584)
Sales of common stock 182,135 1,821 5,832,291 - - -
Forfeitures of common stock... (101,088) (1,010) (1,979,674) - - -
Reductions of stock notes..... - - - 921,624 - -
Net income.................... - - - - 75,002,880 -
Change in net unrealized losses - - - - - (643,116)
Translation loss.............. - - - - - -
Treasury stock transactions... - - (5,503,455) - - -
-------------- -------------- -------------- -------------- -------------- --------------
BALANCE, JUNE 30, 1999............. 24,642,991 $ 246,430 $ 155,566,803 $ (2,158,248) $ 282,444,230 $ (3,901,700)
============== ============== ============== ============== ============== ==============
<CAPTION>
CUMULATIVE TREASURY
TRANSLATION STOCK, AT TOTAL
LOSS COST
-------------- -------------- --------------
<S> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1997....... - $ (438,876) $297,377,995
Sales of common stock........ - - 25,306,500
Forfeitures of common stock.. - - (2,423,578)
Reductions of stock notes.... - - 2,540,388
Net income................... - - 40,210,538
Change in net unrealized loss - - (2,955,467)
Translation loss............. (144,671) - (144,671)
Treasury stock transactions.. - (21,226,346) (23,155,444)
-------------- -------------- --------------
BALANCE, SEPTEMBER 30, 1998....... (144,671) (21,665,222) 336,756,261
Sales of common stock - - 5,834,112
Forfeitures of common stock.. - - (1,980,684)
Reductions of stock notes.... - - 921,624
Net income................... - - 75,002,880
Change in net unrealized loss - - (643,116)
Translation loss............. 144,671 - 144,671
Treasury stock transactions.. - 12,702,390 7,198,935
-------------- -------------- --------------
BALANCE, JUNE 30, 1999............$ - $(8,962,832) $423,234,683
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
-5-
<PAGE>
HAMBRECHT & QUIST GROUP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
--------------- ----------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES..................................... 18,688,450 (43,561,369)
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of long-term investments..................................... (61,113,378) (39,681,002)
Proceeds from sales/distributions of long-term investments............. 38,242,551 63,239,818
Purchases of furniture, equipment and leasehold improvements........... (5,978,778) (4,404,060)
Increases in notes receivable.......................................... (11,345,000) (4,813,501)
Repayments of notes receivable......................................... 11,374,988 9,531,190
Other, net............................................................. 4,559,381 --
--------------- ----------------
Net cash and cash equivalents provided by (used in) investing
Activities................................................... (24,260,236) 23,872,445
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt obligations......................................... 9,500,000 1,500,000
Repayments of debt obligations......................................... (12,200,000) --
Proceeds from sales of common stock.................................... 4,514,832 5,091,579
Purchases of treasury stock............................................ -- (22,461,357)
Other, net............................................................. (187,500) (138,750)
--------------- ----------------
Net cash and cash equivalents provided by (used in) financing
activities................................................... 1,627,332 (16,008,528)
--------------- ----------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... (3,944,454) (35,697,452)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......................... 42,637,732 66,959,567
--------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................... $ 38,693,278 $ 31,262,115
=============== ================
</TABLE>
The accompanying notes are an integral part of these statements.
-6-
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION:
The condensed consolidated financial statements include Hambrecht &
Quist Group and its subsidiaries ("H&Q" or the "Company"). The information
contained in the following notes to the consolidated financial statements is
condensed from that which would appear in the annual consolidated financial
statements; accordingly, the accompanying condensed financial statements should
be read in conjunction with the 1998 Consolidated Financial Statements and
related notes thereto incorporated by reference into the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1998. Any capitalized terms
used but not defined have the same meaning given to them in the 1998
Consolidated Financial Statements.
The preparation of financial statements requires the use of certain
estimates by management in determining the entity's assets, liabilities,
revenues and expenses. Accounting measurements at interim dates inherently
involve greater reliance on estimates than at year-end. Actual results could
differ from those estimates. The results of operations for the interim periods
presented are not necessarily indicative of the results to be expected for the
entire year.
The condensed consolidated financial statements included herein are
unaudited; however, they include all adjustments of a normal recurring nature
which, in the opinion of management, are necessary to present fairly the
financial position of the Company at June 30, 1999 and the results of operations
and cash flows for the three month and nine month periods ended June 30, 1998
and 1999.
Certain amounts in the fiscal 1998 financial statements have been
reclassified to conform to the fiscal 1999 presentation.
2. COMPREHENSIVE INCOME:
The Company adopted SFAS 130 as of October 1, 1998. The after-tax
components of comprehensive income for the three month and nine month periods
ended June 30, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
1998 1999 1998 1999
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net income......................................... $13,912,389 $37,115,050 $36,528,152 $75,002,880
Components of other comprehensive income
(loss):
Net unrealized gains (losses) on investments
available for sale............................ (455,512) 24,138 (3,275,579) (643,116)
Foreign currency translation adjustment.......... (94,564) -- (235,498) 144,671
------------- ------------- ------------- --------------
Comprehensive income............................... $13,362,313 $37,139,188 $33,017,075 $74,504,435
============= ============= ============= =============
</TABLE>
-7-
<PAGE>
3. EARNINGS PER SHARE:
The Company's basic and diluted earnings per share for the three month
and nine month periods ended June 30, 1998 and 1999 are as follows:
WEIGHTED
AVERAGE PER SHARE
NET INCOME SHARES AMOUNTS
--------------- --------------- -----------
FOR THE THREE MONTHS ENDED -
June 30, 1998:
Basic earnings per share......... $13,912,389 24,534,385 $0.57
Options outstanding.............. -- 2,118,894
--------------- ---------------
Diluted earnings per share....... $13,912,389 26,653,279 $0.52
=============== ===============
June 30, 1999:
Basic earnings per share......... $37,115,050 24,514,100 $1.51
Options outstanding.............. -- 2,183,717
--------------- ---------------
Diluted earnings per share....... $37,115,050 26,697,817 $1.39
=============== ===============
FOR THE NINE MONTHS ENDED -
June 30, 1998:
Basic earnings per share......... $36,528,152 24,424,145 $1.50
Options outstanding.............. -- 2,189,233
--------------- ---------------
Diluted earnings per share....... $36,528,152 26,613,378 $1.37
=============== ===============
June 30, 1999:
Basic earnings per share......... $75,002,880 24,565,708 $3.05
Options outstanding.............. -- 1,936,922
--------------- ---------------
Diluted earnings per share....... $75,002,880 26,502,630 $2.83
=============== ===============
4. RECEIVABLES FROM RELATED PARTIES:
At September 30, 1998 and June 30, 1999 receivables from related
parties consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1999
--------------- ---------------
<S> <C> <C>
Notes receivable from related parties and employees...... $ 2,034,354 $ 13,460,867
Asset management fees and profit participations.......... 7,240,551 7,118,233
Related party and other advances......................... 8,357,189 1,654,144
--------------- ---------------
$17,632,094 $ 22,233,244
=============== ===============
</TABLE>
Notes receivable from related parties and employees as of June 30, 1999
include notes receivables of $11,518,976 from H&Q-managed employee investment
funds.
Asset management fees and profit participations at September 30, 1998
and June 30, 1999, include profit participations receivable of $7,240,551 and
$6,604,316 respectively from venture and investment partnerships managed by
Venture Partners. Included in other revenues are management fees and profit
participation distributions from venture capital funds of $1,937,789 and
$3,947,378 for the three month periods ended June 30, 1998 and 1999,
respectively and $7,397,467 and $8,352,365 for the nine month periods ended June
30, 1998 and 1999, respectively.
-8-
<PAGE>
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 June 30,
1999, $933,168 relates to advances to related parties, directors and employees
for purchases of investments made on their behalf.
5. MARKETABLE TRADING SECURITIES AND SECURITIES SOLD, NOT YET PURCHASED:
At September 30, 1998 and June 30, 1999, marketable trading securities
and securities sold, not yet purchased, consisted of the following:
SEPTEMBER 30, JUNE 30,
1998 1999
--------------- ---------------
Marketable trading securities-
Equity securities..................... $ 8,994,939 $21,797,254
Convertible bonds..................... 10,366,290 18,902,363
Options............................... 79,062 --
U.S. government securities.......... 12,236,801 12,576,982
--------------- ---------------
$31,677,092 $53,276,599
=============== ===============
Securities sold, not yet purchased-
Equity securities..................... $17,674,404 $34,094,032
Convertible bonds..................... 373,852 3,233,665
Options............................... 74,528 --
--------------- ---------------
$18,122,784 $37,327,697
=============== ===============
6. LONG-TERM INVESTMENTS:
At September 30, 1998 and June 30, 1999, the Company's long-term
investments, at estimated fair value, consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1999
----------------- -----------------
<S> <C> <C>
Marketable equity securities available for sale by Guaranty
Finance.............................................................. $ 6,512,887 $ 17,416,800
World Access, Inc. .................................................... 23,778,230 --
Marketable equity securities - other................................... 23,559,166 34,985,459
----------------- -----------------
Total marketable investments................................. 53,850,283 52,402,259
----------------- -----------------
Nonmarketable securities and investment partnership interests.......... 50,116,787 52,017,219
Venture Partners and venture capital funds............................. 23,545,117 30,760,678
Lewco Securities....................................................... 2,110,279 2,110,279
----------------- -----------------
Total nonmarketable investments.............................. 75,772,183 84,888,176
----------------- -----------------
Total long-term investments.................................. $129,622,466 $137,290,435
================= =================
</TABLE>
The cost of the Company's long-term investments at September 30, 1998
and June 30, 1999, was $153,916,280 and $148,462,544 respectively.
-9-
<PAGE>
Following is an analysis of the net investment gains for the three
month and nine month periods ended June 30, 1998 and 1999:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -----------------------------
1998 1999 1998 1999
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Realized gains.................................... $4,021,167 $8,688,678 $16,588,996 $17,557,817
Change in unrealized gains and (losses), net...... (2,444,595) (4,518,603) (5,234,712) 14,411,161
-------------- -------------- ------------- -------------
Net investment gains.............................. $1,576,572 $4,170,075 $11,354,284 $31,968,978
============== ============== ============== ==============
</TABLE>
The cost and estimated fair values of Guaranty Finance's investments in
marketable equity securities available for sale at September 30, 1998 and June
30, 1999 are as follows:
SEPTEMBER 30, JUNE 30,
1998 1999
-------------- ---------------
Cost........................................ $13,046,427 $25,239,795
Gross unrealized gains...................... 641,714 607,021
Gross unrealized losses..................... (7,175,254) (8,430,016)
-------------- ---------------
Estimated fair value........................ $ 6,512,887 $17,416,800
============== ===============
Gross proceeds, gross realized gains and gross realized losses from
sales of Guaranty Finance's investments in marketable equity securities
available for sale for the three month and nine month periods ended June 30,
1998 and 1999 are as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- ------------------------------
1998 1999 1998 1999
--------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Gross proceeds........................... $661,530 $1,428,088 $5,950,596 $3,296,118
Gross realized gains..................... 474,745 32,830 1,697,409 1,294,790
Gross realized losses.................... -- (153,454) -- (153,454)
</TABLE>
7. EMPLOYEE BENEFIT PLANS:
SAVINGS AND EMPLOYEE STOCK OWNERSHIP TRUST
As of June 30, 1999, the ESOP owned approximately 5 percent of the H&Q
common stock outstanding.
1996 EQUITY PLAN
In February 1999, the 1996 Plan was amended to increase the number of
shares of the Company's common stock reserved for issuance under the
Compensation Plan and the 1996 Plan by 2,500,000 shares, all of which may be
issued as stock options or stock awards. In addition, effective January 1, 1999,
750,000 shares became available for issuance under the 1996 Plan as a result of
the automatic annual increase provisions of the 1996 Plan. Following such
increases, an aggregate of 8,250,000 shares of the Company's common stock have
been reserved for issuance under the Compensation Plan and the 1996 Plan.
-10-
<PAGE>
BONUS AND DEFERRED SALES COMPENSATION PLAN
The Company paid bonuses in April 1999. Under the Compensation Plan,
405,001 shares valued at $15,187,538 were issued to executives and professionals
effective April 15, 1999. All such amounts were included in compensation and
benefits payable as of March 31, 1999.
STOCK OPTION PLANS
Details of stock options are as follows:
NUMBER
OF SHARES EXERCISE PRICE
-------------- ---------------------
Outstanding at September 30, 1997.... 5,567,156 $ 2.10 - $31.06
Granted............................ 739,000 $13.75 - $43.25
Exercise........................... (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
Granted............................ 1,674,250 $14.75 - $31.88
Exercised.......................... (786,937) $ 2.10 - $32.75
Canceled........................... (549,330) $ 5.54 - $43.25
--------------
Outstanding at June 30, 1999......... 5,664,260 $ 2.10 - $32.75
===============
Of the outstanding options at June 30, 1999, 1,665,728 options to
purchase shares had vested.
8. TREASURY STOCK TRANSACTIONS:
During fiscal 1998 and the nine months ended June 30, 1999, the
Company's treasury stock transactions were as follows:
Shares Cost
-------------- ---------------
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
Open market purchases..................... 878,250 22,461,357
Employee benefit plan issuances........... (1,597,205) (35,163,747)
-------------- --------------
Treasury shares at June 30, 1999............ 259,847 $ 8,962,832
============== ===============
9. NET CAPITAL REQUIREMENTS:
At September 30, 1998 and June 30, 1999, H&Q LLC's regulatory net
capital of $50,484,565 and $89,124,857, respectively, was 26 percent and 21
percent, respectively, of aggregate debit items at September 30, 1998 and June
30, 1999, and its net capital in excess of the minimum required was $46,533,220
and $80,828,488, respectively.
-11-
<PAGE>
10. COMMITMENTS AND CONTINGENCIES:
Lewco conducts a stock borrow/stock loan business. On behalf of Lewco,
the Company has agreed to guarantee its proportional share of secured loans
resulting from this business. The Company's contingent liability relating to its
net unsecured position under this indemnity agreement was $5,266,986 at June 30,
1999. Also, in connection with H&Q LLC's option trading activities, the Company
has issued a letter of credit totaling $8,000,000 at June 30, 1999 with the
Options Clearing Corporation.
The Company has other contingent liabilities, including contractual
commitments arising in the normal course of business, the resolution of which,
in management's opinion, will not have a material adverse effect on the
Company's financial position.
As is the case with many firms in the securities industry, the Company
is a defendant or co-defendant in a number of actions. These civil actions and
arbitrations have arisen in the normal course of the Company's business and are
incidental to its activities as a broker-dealer in securities, as an
underwriter, as a corporate financial advisor, as 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 civil actions to which the firm is a party have been brought on
behalf of various classes of claimants and seek damages of material or
indeterminate amounts. Most of the Company's current proceedings relate to
public underwritings of securities in which H&Q LLC participated as a lead
manager, co-manager or member of the underwriting syndicate. These cases involve
claims under federal and/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 the
underwriting, indemnification or other agreements to contribute to settlements
or judgments arising out of these cases. The Company is contesting the
complaints in all cases and believes that there are meritorious defenses in each
of these lawsuits. Although the ultimate outcome of the Company's litigation
cannot be ascertained at this time, it is the opinion of the Company's
management, based on discussions with counsel, that the resolution of these
actions and others will not have a material adverse effect on the Company's
financial statements taken as a whole.
H&Q has indemnified certain of its officers, directors and agents, and
certain of its affiliates, as permitted under applicable state law. Under these
provisions, H&Q itself is and will be subject to indemnification assertions by
officers, directors, agents or certain of its affiliates who are or may become
defendants in litigation that may result in the normal course of business.
Although the ultimate outcome of indemnification assertions outstanding as of
June 30, 1999, cannot be ascertained at this time, it is the opinion of the
Company's management, based on discussions with counsel, that the resolution of
these assertions will not have a material adverse effect on the Company's
financial statements taken as a whole.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE STATEMENTS IN THIS QUARTERLY REPORT THAT RELATE TO FUTURE PLANS,
EVENTS, OR PERFORMANCE ARE FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS INCLUDE,
BUT ARE NOT LIMITED TO, THOSE RELATING TO THE COMPANY'S GROWTH STRATEGIES,
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 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 INVESTMENT FUND CASH INFLOWS OR
OUTFLOWS, CHANGES IN THE TECHNOLOGY AND HEALTHCARE INDUSTRIES AND OTHER
INDUSTRIES IN WHICH THE COMPANY IS ACTIVE, CHANGES IN DEMAND FOR INVESTMENT
BANKING AND SECURITIES BROKERAGE SERVICES, THE COMPANY'S ABILITY TO RECRUIT AND
RETAIN KEY EMPLOYEES, CHANGES IN SECURITIES AND BANKING LAWS AND REGULATIONS,
TRADING AND PRINCIPAL INVESTMENT ACTIVITIES, LITIGATION AND OTHER FACTORS
DISCUSSED BELOW IN "OVERVIEW." THE COMPANY'S ANNUAL REPORT ON FORM 10-K (THE
"FORM 10-K") FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 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 other
investment funds, and by factors that apply to particular industries, such as
technological advances and changes in the regulatory environment. Substantial
fluctuations can occur and have occurred in the Company's operating results and
in the component sources of the Company's revenues due to these and other
factors. In periods of reduced market activity, profitability has been and is
likely to be adversely affected. Accordingly, net earnings for any period should
not be considered representative of any other period.
EFFECTS OF COMPETITION
The securities business is intensely competitive. Certain of the
Company's competitors have greater capital, financial and other resources than
the Company. Since 1997, 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 exists as a
result of competition from such entities as well as from new market entrants.
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.
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EFFECTS OF COMPANY FACTORS AND GROWTH STRATEGIES
The scope of the Company's business activities is expected to increase
to include increased emphasis on building existing operations. The accompanying
growth in the number of employees will create 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 $61.1 million and $39.7 million in principal investments during the
nine months ended June 30, 1998 and 1999, respectively. 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, 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, 1998 and June 30, 1999, the Company's
long-term investments totaled $129.6 million and $137.3 million, respectively.
Net investment gains are included in the Company's statement of operations and
include net realized gains and losses and the net change in unrealized gains and
losses for the period. For the three month periods ended June 30, 1998 and 1999,
the Company recorded net investment gains of $1.6 million and $4.2 million,
respectively and for the nine month periods ended June 30, 1998 and 1999, the
Company recorded net investment gains of $11.4 million and $32.0 million,
respectively. The higher net investment gains in the 1999 period are attributed
to appreciation across a large number of individual investments in the Company's
portfolio.
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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 uses 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 shut down business
operations for some period of time.
Based on ongoing assessments and testing, the Company has been
modifying or replacing portions of its software so that its computer systems
will properly utilize dates beyond December 31, 1999. Lewco, the Company's
clearing firm, has also been modifying or replacing significant portions of its
software used in connection with processing Company and customer trading
activity and maintaining Company and customer information. The Company believes
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 is 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 believes that with the modifications
to existing software and conversions to new software completed to date by both
it and Lewco, the adverse effects of the year 2000 issue will be mitigated.
However, if such modifications and conversions are not successful, 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 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 retesting; 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, phase two in April 1999, and phase three in June 1999. The
Company is currently retesting, refining its contingency planning, and testing
software currently in development.
Lewco has been participating in industry wide testing on the Company's
behalf. Testing of mission critical systems with several of the major exchanges
started in January 1999. The Company has also participated in "point to point"
testing with Lewco and other third party systems, and will continue
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to do so. The Company migrated all of its end-user computers and file and print
servers to the Intel-NT platform during April and May 1999. This migration was
planned apart from any year 2000 issue, and therefore the costs are not included
in the year 2000 budget described below. The Company expects to enact a hardware
and software "freeze" from October 1999 through the year end; only regulatory or
business critical changes will be made during this time frame. All such changes
will undergo year 2000 validation testing prior to being implemented.
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 $2.0 million. A majority of the $2.0 million budgeted has
been and will be incurred and expensed in the Company's 1999 fiscal year. This
figure includes expenses for testing, programming changes, replacement hardware
and software, consultant fees, and related payroll costs for its IT group and
other employees on the year 2000 team. During the three months and nine months
ended June 30, 1999, approximately $230,000 and $790,000, respectively was
incurred and expensed. 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 has not devoted material
amounts of its labor resources, but has incurred certain expenses as a result of
its ownership interest in Lewco. In total, the Company's portion of expenses
that have been and will be incurred is approximately $2.5 million. The Company's
portion of the expenses incurred to address this issue as budgeted by Lewco is
expected to be approximately $880,000 in fiscal 1999; this amount has been and
will be funded through operating cash flows. During the three months and nine
months ended June 30, 1999, H&Q's share of Lewco's expenses was $83,000 and
$653,000, respectively, and is included in brokerage and clearance expenses.
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.
The Company has contacted all of its major vendors to assess their
compliance efforts and the Company's exposure in the event of failure of their
efforts. The Company has received responses from all such vendors, has tailored
its own year 2000 plan accordingly, and in some cases continues to monitor
certain vendors' compliance progress. In addition to Lewco, the Company relies
on various third party systems or services to conduct its business, including
Nasdaq, Inc., the 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. Although the Company is developing a detailed
contingency plan, if certain third party systems and services, such as stock
exchanges, major utility providers or Lewco fail, it is unlikely that a
contingency plan could be developed to adequately protect against business
disruption due to such failures.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
REVENUES. Total revenues for the period increased 73% from $102.8
million for the three months ended June 30, 1998 to $178.1 million for the three
months ended June 30, 1999.
Principal transactions revenue increased 69% from $27.1 million to
$45.8 million due primarily to increased volumes in the OTC business.
Commissions increased 44% from $12.8 million to $18.5 million. This
increase was primarily due to an increase in NYSE-listed transactions.
Investment banking revenue increased 107% from $28.2 million to $58.3
million, and increased as a percentage of revenues from 27% to 33%. The Company
managed or co-managed 32 public offerings during the three month period ended
June 30, 1998, compared to 42 during the three month period ended June 30, 1999.
Corporate finance fees increased 76% from $20.0 million to $35.3
million primarily due to the completion of more merger and acquisition
transactions during the three month period ended June 30, 1999.
Interest and dividends increased 2% from $6.8 million to $6.9 million.
Net investment gains for the three month period increased 165% from
$1.6 million to $4.2 million. For the three months ended June 30, 1998, there
were realized gains of $4.0 million and a change in unrealized losses of $2.4
million. For the three months ended June 30, 1999, there were realized gains of
$8.7 million and a change in unrealized losses of $4.5 million.
Other revenues increased 47% from $6.3 million to $9.2 million. The
increase related primarily to increases in accrued profit participation
distributions and management fees from venture and other investment funds
managed by the Company.
EXPENSES. Total expenses for the period increased 44% from $78.4
million for the three months ended June 30, 1998 to $113.0 million for the three
months ended June 30, 1999.
Compensation and benefits expense increased 63% from $51.6 million to
$84.2 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 50% for the three months ended June 30, 1998
and 47% for the three months ended June 30, 1999.
Brokerage and clearance expense decreased 23% from $6.5 million to $5.0
million. The decrease was primarily attributable to the adjustment of accruals
made for prior period estimated clearing costs.
Occupancy and equipment expense was $6.2 million for each of the three
month periods ended June 30, 1998 and 1999.
Communications expense increased 3% from $3.8 million to $3.9 million.
Interest expense increased 20% from $1.0 million to $1.2 million
primarily due to higher interest paid on the financing of customer balances.
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Other expenses increased 34% from $9.3 million to $12.5 million. This
increase was due primarily to increased information technology consulting fees.
INCOME TAX PROVISION. The Company's effective income tax rate was 43% for
the three months ended June 30, 1998 and 1999.
NINE MONTHS ENDED JUNE 30, 1998 COMPARED TO NINE MONTHS ENDED JUNE 30, 1999
REVENUES. Total revenue for the period increased 43% from $301.8
million for the nine months ended June 30, 1998 to $431.2 million for the nine
months ended June 30, 1999.
Principal transactions revenue increased 51% from $82.2 million to
$123.8 million due primarily to increased volumes in the OTC business.
Commissions increased 34% from $37.3 million to $49.9 million. This
increase was primarily due to an increase in NYSE-listed transactions.
Investment banking revenue increased 54% from $75.1 million to $115.5
million, and increased as a percentage of revenues from 25% to 27%. The Company
managed or co-managed 75 public offerings during the nine month period ended
June 30, 1998, compared to 83 during the nine month period ended June 30, 1999.
Corporate finance fees increased 20% from $57.3 million to $68.9
million due primarily to the completion of more merger and acquisition
transactions during the nine month period ended June 30, 1999.
Interest and dividends increased 2% from $19.5 million to $19.9
million.
Net investment gains for the nine month period increased 182% from
$11.4 million to $32.0 million. For the nine months ended June 30, 1998, there
were realized gains of $16.6 million offset by a change in unrealized losses of
$5.2 million. For the nine months ended June 30, 1999, there were realized gains
of $17.6 million and a change in unrealized gains of $14.4 million.
Other revenues increased 12% from $19.0 million to $21.4 million. The
increase related primarily to increases in accrued profit participation
distributions and management fees from venture and other investment funds
managed by the Company.
EXPENSES. Total expenses for the period increased 26% from $237.7
million for the nine months ended June 30, 1998 to $299.6 million for the nine
months ended June 30, 1999.
Compensation and benefits expense increased 39% from $151.1 million to
$210.8 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 50% for the nine months ended June 30, 1998 and
49% for the nine months ended June 30, 1999
Brokerage and clearance expense increased 24% from $17.6 million to
$21.8 million. The percentage increase was primarily attributable to higher
charges from Lewco, which include H&Q's allocation of year 2000 systems
programming changes, and higher floor brokerage charges related to increased
commissions.
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Occupancy and equipment expense decreased 5% from $17.3 million to
$16.4 million. The decrease was due primarily to lower depreciation expense
attributable to the Company's current efforts to replace its employee's personal
computers and related infrastructure with leased equipment.
Communications expense increased 1% from $11.1 million to $11.3
million.
Interest expense decreased 10% from $3.0 million to $2.7 million
primarily due to lower interest paid on the financing of customer balances.
Other expenses decreased 2% from $37.6 million to $36.7 million. This
decrease was due primarily to a charge in December 1997 of $8.0 million for the
Company's unaccrued portion of its settlement of the Nasdaq market-makers
antitrust class action litigation offset by increased information technology
consulting fees and a loss on the sale of HQEM.
INCOME TAX PROVISION. The Company's effective income tax rate was 43% for
the nine months ended June 30, 1998 and 1999.
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. As of June 30, 1999, the Company had liquid assets consisting
primarily of cash and cash equivalents of $31.3 million and amounts on deposit
with Lewco of $239.0 million. Such amounts on deposit with Lewco are a component
of the June 30, 1999 receivable from Lewco of $16.6 million. As of June 30,
1999, Guaranty Finance had a bank line of credit of $25 million with $1.5
million outstanding. While the Company has not required additional bank
financing during the past several years, it has available an additional $20.0
million committed line of credit with a commercial bank expiring April 30, 2000.
The Company's consolidated balance sheet reflects the Company's
relatively unleveraged financial position. The ratio of assets to equity as of
June 30, 1999 was approximately 1.9:1. The Company's assets include receivables
from customers and Lewco, securities held for trading purposes, short-term
investments and securities held for investment purposes. A substantial portion
of the Company's receivables are secured by customer securities or security
transactions in the process of settlement. Securities held for trading purposes
are actively traded and readily marketable. As of June 30, 1999, securities held
for trading purposes include government securities mutual funds totaling $12.6
million. Securities held for investment purposes are for the most part illiquid
and are carried at valuations that reflect this lack of liquidity.
H&Q LLC, as a broker-dealer, is registered with the SEC and is a member
of the NASD and the NYSE. As such, H&Q LLC is subject to the capital
requirements of these regulatory entities. H&Q LLC's regulatory net capital has
historically exceeded these minimum requirements. As of June 30, 1999, H&Q LLC
was required to maintain minimum regulatory net capital in accordance with SEC
rules of approximately $8.3 million and had total regulatory net capital of
approximately $89.1 million, or approximately $80.8 million in excess of its
requirement.
The Company believes that its current level of equity capital, combined
with funds anticipated to be generated from operations, will be adequate to fund
its operations for the foreseeable future.
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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
cause the Company to incur 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
The Company'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 June
30, 1999, the fair value of the
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Company's trading securities was $53.3 million in long positions and $37.3
million in short positions. The net potential loss in fair value at June 30,
1999, using a 10% hypothetical decline in prices, is estimated to be
approximately $1.6 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 June 30, 1999, the
fair value of the Company's marketable long-term investment securities was $52.4
million. The net potential loss in fair value, using a 10% hypothetical decline
in prices, is estimated to be approximately $5.2 million. In the case of larger
holdings of marketable investment securities, 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 quarter and expects to maintain the same methodologies and
procedures in future reporting periods.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 3 is set forth in Item 2 under the
heading "Management's Discussion and Analysis of Financial Conditions and
Results of Operations - Risk Management - Market Risk."
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Certain significant legal proceedings and matters have been previously
disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1998. Following is a summary of recent material developments in
such proceedings.
ASPEC TECHNOLOGY, INC. SECURITIES LITIGATION
On June 7, 1999, H&Q filed a demurrer to the Consolidated Class Action
Complaint in the pending state court action.
BMJ MEDICAL MANAGEMENT, INC. SECURITIES LITIGATION
On May 19, 1999, the bankruptcy court in the Southern District of
Florida granted an agreed order to remand the Lighthouse case to the Circuit
Court of the Fifteenth Judicial District in and for Palm Beach County, Florida.
On May 26, 1999, the federal district court for the Southern District of Florida
responded to the defendants' motion for reconsideration of its denial of the
motion to dismiss by declining to change its ruling or to certify the order for
interlocutory appeal. On June 1, 1999, the underwriters moved to dismiss the
state court complaint. On June 29, 1999, in an adversary proceeding filed by
BMJ, BMJ v. Sapir, et al., Adv. Pro No. 99-68, the bankruptcy court in Delaware
ordered that all litigation be stayed until August 20, 1999.
LUMISYS, INC. SECURITIES LITIGATION
The plaintiffs have voluntarily dismissed the federal court case
without prejudice.
STB SYSTEMS, INC. SECURITIES LITIGATION
On June 7, 1999, the Court dismissed certain of the claims against the
underwriters. The plaintiffs filed a Second Amended Petition on July 8, 1999. On
July 19, 1999, the underwriters requested that certain of the claims against
them be dismissed.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
27 Financial Data Schedule.
b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HAMBRECHT & QUIST GROUP,
a Delaware Corporation
By: /s/ Patrick J. Allen
----------------------------------
Patrick J. Allen
Chief Financial Officer
(On behalf of the Registrant and as
Principal Financial and Accounting
officer)
Date: August 13, 1999
-25-
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
27 Financial Data Schedule.
-26-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated financial statements contained in the Company's Quarterly
Report on Form 10-Q and is qualified in its entirety by reference to such
consolidated financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 31,262
<RECEIVABLES> 485,675
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 53,277
<PP&E> 16,135
<TOTAL-ASSETS> 814,563
<SHORT-TERM> 0
<PAYABLES> 352,500
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 37,328
<LONG-TERM> 1,500
0
0
<COMMON> 153,655
<OTHER-SE> 269,580
<TOTAL-LIABILITY-AND-EQUITY> 814,563
<TRADING-REVENUE> 123,780
<INTEREST-DIVIDENDS> 19,890
<COMMISSIONS> 49,878
<INVESTMENT-BANKING-REVENUES> 115,464
<FEE-REVENUE> 84,797
<INTEREST-EXPENSE> 2,710
<COMPENSATION> 126,545
<INCOME-PRETAX> 131,584
<INCOME-PRE-EXTRAORDINARY> 131,584
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 75,003
<EPS-BASIC> 3.05<F1>
<EPS-DILUTED> 2.83<F1>
<FN>
<F1> Reflects basic and diluted EPS, respectively, prepared in accordance
with SFAS No. 128.
</FN>
</TABLE>
