<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 March 31, 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
24,703,896 shares of Common Stock were issued and outstanding as of May 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........................................ 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 22
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................... 23
Item 4. Submission of Matters to a Vote of Security Holders............. 24
Item 6. Exhibits and Reports on Form 8-K................................ 25
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HAMBRECHT & QUIST GROUP
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND MARCH 31, 1999
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1998 1999
---------------- ---------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Cash and cash equivalents.............................................................. $ 66,959,567 $ 67,089,175
Receivables:
Customers (net of allowance of $1,175,000 and $1,400,000, respectively) ............. 215,657,363 309,358,152
Lewco Securities Corp................................................................ -- 70,055,299
Syndicate managers................................................................... 11,013,798 29,006,941
Related parties...................................................................... 17,632,094 21,048,254
Notes (net of allowance of $4,341,348 and $4,512,716, respectively)................. 13,554,957 5,800,677
Income taxes......................................................................... 4,032,103 --
Other................................................................................ 20,486,412 16,088,798
Marketable trading securities, at market value......................................... 31,677,092 51,176,897
Long-term investments, at estimated fair value......................................... 129,622,466 131,929,958
Deferred income taxes.................................................................. 75,813,545 79,306,406
Furniture, equipment and leasehold improvements, net of accumulated depreciation and
amortization......................................................................... 16,962,409 16,234,891
Other assets .......................................................................... 3,256,553 2,807,382
---------------- ---------------
Total assets................................................................. $606,668,359 $799,902,830
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Payables:
Customers............................................................................ $ 83,221,535 $184,169,121
Compensation and benefits............................................................ 123,933,699 158,959,909
Lewco Securities Corp. .............................................................. 11,396,221 --
Syndicate settlements................................................................ 4,442,449 16,521,493
Income taxes payable................................................................. -- 2,277,664
Trade accounts payable............................................................... 2,897,223 5,297,484
Accrued expenses and other........................................................... 25,898,187 30,160,713
Securities sold, not yet purchased, at market value.................................... 18,122,784 25,170,405
---------------- ---------------
Total liabilities............................................................ 269,912,098 422,556,789
---------------- ---------------
Commitments and contingencies
Stockholders' equity:
Common stock (par value $0.01 and 100,000,000 shares authorized, 24,561,944 and
24,469,897 shares issued, respectively) .............................................. 245,619 244,699
Additional paid-in capital........................................................... 157,217,641 147,937,315
Stock notes receivable from employees................................................ (3,079,872) (2,486,130)
Retained earnings.................................................................... 207,441,350 245,329,180
Unrealized losses on investments available for sale, net............................. (3,258,584) (3,925,837)
Cumulative translation loss.......................................................... (144,671) --
Treasury stock, at cost (978,802 and 446,832 shares, respectively) (21,665,222) (9,753,186)
---------------- ---------------
Total stockholders' equity................................................... 336,756,261 377,346,041
---------------- ---------------
Total liabilities and stockholders' equity................................... $606,668,359 $799,902,830
================ ===============
</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 SIX MONTHS ENDED MARCH 31, 1998 AND 1999
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------------- -------------------------------
1998 1999 1998 1999
--------------- --------------- --------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Principal transactions..................... $27,840,923 $45,007,351 $55,069,526 $77,980,199
Commissions................................ 13,196,993 16,181,337 24,479,382 31,410,068
Investment banking......................... 24,024,398 47,564,988 46,911,863 57,175,575
Corporate finance fees..................... 19,756,720 19,530,859 37,310,974 33,639,581
Interest and dividends..................... 6,394,019 6,636,082 12,734,821 12,954,389
Net investment gains....................... 9,115,050 13,334,156 9,777,712 27,798,903
Other...................................... 7,068,137 4,965,683 12,733,660 12,132,016
--------------- --------------- --------------- ---------------
Total revenues........................... 107,396,240 153,220,456 199,017,938 253,090,731
--------------- --------------- --------------- ---------------
EXPENSES:
Compensation and benefits.................. 53,698,120 76,618,506 99,508,969 126,545,356
Brokerage and clearance.................... 5,822,664 9,309,315 11,052,513 16,766,399
Occupancy and equipment.................... 5,642,931 4,766,699 11,102,810 10,227,527
Communications............................. 3,792,169 3,660,170 7,329,078 7,387,354
Interest................................... 913,376 685,192 2,037,408 1,490,780
Other...................................... 9,516,271 12,897,022 28,310,382 24,203,437
--------------- --------------- --------------- ---------------
Total expenses........................... 79,385,531 107,936,904 159,341,160 186,620,853
--------------- --------------- --------------- ---------------
Income before income tax provision....... 28,010,709 45,283,552 39,676,778 66,469,878
INCOME TAX PROVISION......................... 12,044,605 19,471,928 17,061,015 28,582,048
--------------- --------------- --------------- ---------------
Net income............................... $15,966,104 $25,811,624 $22,615,763 $37,887,830
=============== =============== =============== ===============
EARNINGS PER SHARE:
Basic...................................... $0.66 $1.07 $0.93 $1.56
Diluted.................................... $0.60 $0.98 $0.85 $1.45
WEIGHTED AVERAGE SHARES:
Basic...................................... 24,221,147 24,221,969 24,191,223 24,249,280
Diluted.................................... 26,479,657 26,330,128 26,499,839 26,151,711
</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 SIX MONTHS ENDED MARCH 31, 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)
Change in 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)
Forfeitures of common stock........ (92,047) (920) (1,979,764)
Reductions of stock notes.......... 593,742
Net income......................... 37,887,830
Change in net unrealized losses.... (667,253)
Change in translation loss.........
Treasury stock transactions........ (7,300,562)
------------ ----------- ----------- ------------ ------------ ------------
BALANCE, MARCH 31, 1999............ 24,469,897 $ 244,699 $147,937,315 $ (2,486,130) $245,329,180 $ (3,925,837)
============ ========== ============ ============ ============ =============
<CAPTION>
CUMULATIVE TREASURY
TRANSLATION STOCK, AT
LOSS COST TOTAL
----------- ----------- ------------
<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 losses.... (2,955,467)
Change in 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
Forfeitures of common stock........ (1,980,684)
Reductions of stock notes.......... 573,742
Net income......................... 37,887,830
Change in net unrealized losses.... (667,253)
Change in translation loss......... 144,671 144,671
Treasury stock transactions........ 11,912,036 4,611,474
------------ ----------- ------------
BALANCE, MARCH 31, 1999............ -- $(9,753,186) $377,346,041
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
-5-
<PAGE>
HAMBRECHT & QUIST GROUP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES..................................... $ (9,512,121) $(18,830,420)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of long-term investments..................................... (50,180,258) (24,289,420)
Proceeds from sales/distributions of long-term investments............. 30,773,848 48,440,241
Purchases of furniture, equipment and leasehold improvements........... (4,898,055) (2,804,766)
Increases in notes receivable.......................................... (8,945,000) (58,000)
Repayments of notes receivable......................................... 5,998,195 7,640,913
Other, net............................................................. 5,054,886 --
------------- -------------
Net cash and cash equivalents provided by (used in) investing
activities................................................... (22,196,384) 28,928,968
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt obligations......................................... 8,000,000 --
Repayments of debt obligations......................................... (10,700,000) --
Proceeds from sales of common stock.................................... 2,682,978 2,290,206
Purchases of treasury stock............................................ -- (12,120,396)
Other, net............................................................. 251,376 (138,750)
------------- -------------
Net cash and cash equivalents provided by (used in) financing
activities................................................... 234,354 (9,968,940)
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... (31,474,151) 129,608
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......................... 42,637,732 66,959,567
------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................... $ 11,163,581 $ 67,089,175
============= ==============
</TABLE>
The accompanying notes are an integral part of these statements.
-6-
<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 1999 and the results of
operations and cash flows for the three month and six month periods ended March
31, 1998 and 1999.
Certain amounts in the fiscal 1998 financial statements have been
reclassified to conform to the fiscal 1999 presentation.
2. SALE OF HAMBRECHT & QUIST EUROMARKETS:
Effective March 3, 1999, the Company sold its 100 percent interest in HQEM
to a U.K.-based investment banking firm. In connection with the sale, the
Company recorded a loss of $2.1 million, which is included in other operating
expenses.
The Company will continue and further develop its European operations from
London, where it already has a branch office.
-7-
<PAGE>
3. COMPREHENSIVE INCOME:
The Company adopted SFAS 130 as of October 1, 1998. The after-tax
components of comprehensive income for the three month and six month periods
ended March 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------- ----------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income......................................... $15,966,104 $25,811,624 $22,615,763 $37,887,830
Components of other comprehensive income
(loss):
Net unrealized gains (losses) on investments
available for sale............................ (1,094,665) (934,429) (2,820,067) (667,253)
Foreign currency translation adjustment.......... (140,934) 140,410 (140,934) 144,671
----------- ----------- ----------- -----------
Comprehensive income............................... $14,730,505 $25,017,605 $19,654,762 $37,365,248
=========== =========== =========== ===========
</TABLE>
4. EARNINGS PER SHARE:
The Company's basic and diluted earnings per share for the three month
and six month periods ended March 31, 1998 and 1999 are as follows:
WEIGHTED
AVERAGE PER SHARE
NET INCOME SHARES AMOUNTS
-------------- -------------- ---------
FOR THE THREE MONTHS ENDED -
March 31, 1998:
Basic earnings per share...... $15,966,104 24,221,147 $0.66
Options outstanding........... -- 2,258,510
----------- ----------
Diluted earnings per share.... $15,966,104 26,479,657 $0.60
=========== ==========
March 31, 1999:
Basic earnings per share...... $25,811,624 24,221,969 $1.07
Options outstanding........... -- 2,108,159
----------- ----------
Diluted earnings per share.... $25,811,624 26,330,128 $0.98
=========== ==========
FOR THE SIX MONTHS ENDED -
March 31, 1998:
Basic earnings per share...... $22,615,763 24,191,223 $0.93
Options outstanding........... -- 2,308,616
----------- ----------
Diluted earnings per share.... $22,615,763 26,499,839 $0.85
=========== ==========
March 31, 1999:
Basic earnings per share...... $37,887,830 24,249,280 $1.56
Options outstanding........... -- 1,902,431
----------- ----------
Diluted earnings per share.... $37,887,830 26,151,711 $1.45
=========== ==========
-8-
<PAGE>
5. RECEIVABLES FROM RELATED PARTIES:
At September 30, 1998 and March 31, 1999 receivables from related parties
consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1998 1999
------------- ------------
<S> <C> <C>
Notes receivable from related parties and employees...... $ 2,034,354 $ 1,571,771
Asset management fees and profit participations.......... 7,240,551 7,082,095
Related party and other advances......................... 8,357,189 12,394,388
------------- ------------
$17,632,094 $21,048,254
============ ============
</TABLE>
Asset management fees and profit participations at September 30, 1998 and
March 31, 1999, include profit participations receivable of $7,240,551 and
$7,082,095, 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 $3,848,492 and
$1,204,627 for the three month periods ended March 31, 1998 and 1999,
respectively and $5,459,678 and $4,404,987 for the six month periods ended March
31, 1998 and 1999, 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 March 31, 1999,
$9,585,384 relates to advances to related parties, directors and employees for
purchases of investments made on their behalf.
6. MARKETABLE TRADING SECURITIES AND SECURITIES SOLD, NOT YET PURCHASED:
At September 30, 1998 and March 31, 1999, marketable trading securities and
securities sold, not yet purchased, consisted of the following:
SEPTEMBER 30, MARCH 31,
1998 1999
--------------- ---------------
Marketable trading securities-
Equity securities................ $ 8,994,939 $13,516,507
Convertible bonds................ 10,366,290 23,093,263
Options.......................... 79,062 --
U.S. government securities..... 12,236,801 14,567,127
--------------- ---------------
$31,677,092 $51,176,897
=============== ===============
Securities sold, not yet purchased-
Equity securities................ $17,674,404 $25,082,850
Convertible bonds................ 373,852 62,055
Options.......................... 74,528 25,500
--------------- ---------------
$18,122,784 $25,170,405
=============== ===============
-9-
<PAGE>
7. LONG-TERM INVESTMENTS:
At September 30, 1998 and March 31, 1999, the Company's long-term
investments, at estimated fair value, consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1998 1999
------------- -----------
<S> <C> <C>
Marketable equity securities available for sale by Guaranty
Finance..............................................................$ 6,512,887 $14,630,214
World Access, Inc. .................................................... 23,778,230 --
Marketable equity securities - other................................... 23,559,166 37,233,527
------------- -----------
Total marketable investments................................. 53,850,283 51,863,741
------------- -----------
Nonmarketable securities and investment partnership interests.......... 50,116,787 49,859,156
Venture Partners and venture capital funds............................. 23,545,117 28,096,782
Lewco Securities....................................................... 2,110,279 2,110,279
------------- -----------
Total nonmarketable investments.............................. 75,772,183 80,066,217
------------- -----------
Total long-term investments..................................$129,622,466 $131,929,958
============= ============
</TABLE>
In March 1998, the Company purchased a large block of World Access, Inc.
(WAXS) common stock in a private transaction. The Company's remaining WAXS
position was sold during February 1999 in open market transactions. No amounts
were drawn on the related line of credit which expired in February 1999.
The cost of the Company's long-term investments at September 30, 1998 and
March 31, 1999, was $153,916,280 and $138,631,862, respectively.
Following is an analysis of the net investment gains for the three month
and six month periods ended March 31, 1998 and 1999:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------- ------------------------------
1998 1999 1998 1999
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Realized gains.................................... $ 4,714,632 $ 4,045,516 $12,567,017 $ 8,869,139
Change in unrealized gains and (losses), net...... 4,400,418 9,288,640 (2,789,305) 18,929,764
-------------- ------------- ------------- -------------
Net investment gains.............................. $ 9,115,050 $13,334,156 $ 9,777,712 $27,798,903
============== ============= ============= =============
</TABLE>
The cost and estimated fair values of Guaranty Finance's investments in
marketable equity securities available for sale at September 30, 1998 and March
31, 1999 are as follows:
SEPTEMBER 30, MARCH 31,
1998 1999
------------- --------------
Cost $13,046,427 $22,501,606
Gross unrealized gains...................... 641,714 455,987
Gross unrealized losses..................... (7,175,254) (8,327,379)
------------- --------------
Estimated fair value........................ $ 6,512,887 $14,630,214
============= ==============
-10-
<PAGE>
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 six month periods ended March 31, 1998 and 1999 are
as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------- ----------------------------
1998 1999 1998 1999
----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Gross proceeds................. $ 537,663 $2,163,854 $5,289,066 $4,465,233
Gross realized gains........... 302,606 77,160 1,222,664 1,261,960
Gross realized losses.......... -- -- -- (2,500)
</TABLE>
8. EMPLOYEE BENEFIT PLANS:
SAVINGS AND EMPLOYEE STOCK OWNERSHIP TRUST
As of March 31, 1999, the ESOP owned approximately 5.2 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.
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........................... (444,705) $ 2.10 - $13.75
Canceled............................ (549,330) $ 5.54 - $43.25
------------
Outstanding at March 31, 1999......... 6,006,492 $ 2.10 - $32.75
============
Of the outstanding options at March 31, 1999, 2,010,960 options to purchase
shares had vested.
-11-
<PAGE>
9. TREASURY STOCK TRANSACTIONS:
During fiscal 1998 and the six months ended March 31, 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........................ 578,250 12,120,396
Employee benefit plan issuances.............. (1,110,220) (24,032,432)
------------ -------------
Treasury shares at March 31, 1999 446,832 $ 9,753,186
============ =============
10. NET CAPITAL REQUIREMENTS:
At September 30, 1998 and March 31, 1999, H&Q LLC's regulatory net capital
of $50,484,565 and $66,989,190, respectively, was 26 percent and 20 percent,
respectively, of aggregate debit items at September 30, 1998 and March 31, 1999,
and its net capital in excess of the minimum required was $46,533,220 and
$60,433,184, respectively.
11. 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 $6,702,828 at March
31, 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 March 31, 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.
During the quarter ended March 31, 1999, H&Q LLC entered into a Stipulation of
Facts and Consent to Penalty with Division of Enforcement of the NYSE. Without
admitting or denying any matter, the firm consented to a finding that it
violated Section 220.8(b) of Regulation T promulgated by the Board of Governors
of the Federal Reserve System by failing to take appropriate action on certain
occasions in 1997 when customers' delivery-versus-payment purchases were not
paid for within the required time period. In settlement of the matter, the firm
consented to a censure and a fine of $35,000. 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
-12-
<PAGE>
defendants or under the terms of the underwriting, indemnification or other
agreements to contribute to settlements or judgments arising out of these cases.
The Company is contesting the complaints in all cases and believes that there
are meritorious defenses in each of these lawsuits. Although the ultimate
outcome of the Company's litigation cannot be ascertained at this time, it is
the opinion of the Company's management, based on discussions with counsel, that
the resolution of these actions and others will not have a material adverse
effect on the Company's financial statements taken as a whole.
H&Q has indemnified certain of its officers, directors and agents, and
certain of its affiliates, as permitted under applicable state law. Under these
provisions, H&Q itself is and will be subject to indemnification assertions by
officers, directors, agents or certain of its affiliates who are or may become
defendants in litigation that may result in the normal course of business.
Although the ultimate outcome of indemnification assertions outstanding as of
March 31, 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.
-13-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE STATEMENTS IN THIS QUARTERLY REPORT THAT RELATE TO FUTURE PLANS,
EVENTS, OR PERFORMANCE ARE FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS INCLUDE,
BUT ARE NOT LIMITED TO, THOSE RELATING TO THE 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.
Effective March 3, 1999, the Company sold its 100 percent interest in
Hambrecht & Quist Euromarkets, S.A. to a U.K.-based investment banking firm. The
Company will continue and further develop its European operations from London,
where it already has a branch office.
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.
-14-
<PAGE>
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.
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 and a significantly
higher level of principal investment activities, as more fully described below
in "--Overview--Effects of Principal Investment Activities." 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 $50.2 million and $24.3 million in principal investments during the
six months ended March 31, 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.
-15-
<PAGE>
Such marketable and nonmarketable investments are presented in the Company's
balance sheets as long-term investments. At September 30, 1998 and March 31,
1999, the Company's long-term investments totaled $129.6 million and $131.9
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 March 31, 1998 and 1999, the Company recorded net investment gains
of $9.1 million and $13.3 million, respectively and for the six month periods
ended March 31, 1998 and 1999, the Company recorded net investment gains of $9.8
million and $27.8 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 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 by both it and Lewco, the adverse effects of the
year 2000 issue will be mitigated. However, if all such necessary 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 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
-16-
<PAGE>
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 and phase two in April 1999.
The Company expects to complete phase three by August 1999, leaving four months
to execute any necessary contingency plan actions described in phase four.
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 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 an incremental $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 six months ended March 31, 1999, approximately $60,000 and $560,000,
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 six
months ended March 31, 1999, H&Q's share of Lewco's expenses was $40,000 and
$570,000, 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
-17-
<PAGE>
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 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
REVENUES. Total revenues for the period increased 43% from $107.4 million
for the three months ended March 31, 1998 to $153.2 million for the three months
ended March 31, 1999.
Principal transactions revenue increased 62% from $27.8 million to $45.0
million due primarily to increased volumes in the OTC business.
Commissions increased 23% from $13.2 million to $16.2 million. This
increase was primarily due to an increase in NYSE-listed transactions.
Investment banking revenue increased 98% from $24.0 million to $47.6
million, and increased as a percentage of revenues from 22% to 31%. The Company
managed or co-managed 22 public offerings during the three month period ended
March 31, 1998, compared to 33 during the three month period ended March 31,
1999.
Corporate finance fees decreased 2% from $19.8 million to $19.5.
Interest and dividends increased 3% from $6.4 million to $6.6 million.
Net investment gains for the three month period increased 46% from
$9.1million to $13.3 million. For the three months ended March 31, 1998, there
were realized gains of $4.7 million and a change in unrealized gains of $4.4
million. For the three months ended March 31, 1999, there were realized gains of
$5.8 million and a change in unrealized gains of $7.5 million.
Other revenues decreased 30% from $7.1 million to $5.0 million. The
decrease related primarily to decreases in accrued profit participation
distributions from venture funds managed by the Company.
EXPENSES. Total expenses for the period increased 36% from $79.4 million
for the three months ended March 31, 1998 to $107.9 million for the three months
ended March 31, 1999.
Compensation and benefits expense increased 43% from $53.7 million to $76.6
million. The increase was due primarily to higher incentive compensation
expenses accrued on higher revenues. Compensation and benefits expense as a
percentage of total revenues was 50% in both periods.
Brokerage and clearance expense increased 60% from $5.8 million to $9.3
million. The percentage increase was primarily attributable to higher charges
from Lewco, which include H&Q's allocation of year 2000 systems programming
changes, and higher floor brokerage charges related to increased commissions.
-18-
<PAGE>
Occupancy and equipment expense decreased 14% from $5.6 million to $4.8
million. The decrease was due primarily to lower depreciation expense
attributable to the Company's current efforts to replace its employees' personal
computers and related infrastructure with leased equipment.
Communications expense decreased 3% from $3.8 million to $3.7 million.
Interest expense decreased 25% from $913,000 to $685,000 primarily due to
lower interest paid on the financing of customer balances.
Other expenses increased 36% from $9.5 million to $12.9 million. This
increase was due primarily to increased IT consulting fees and a loss on sale of
HQEM.
INCOME TAX PROVISION. The Company's effective income tax rate was 43% for
the three months ended March 31, 1998 and 1999.
SIX MONTHS ENDED MARCH 31, 1998 COMPARED TO SIX MONTHS ENDED MARCH 31, 1999
REVENUES. Total revenues for the period increased 27% from $199.0 million
for the six months ended March 31, 1998 to $253.1 million for the six months
ended March 31, 1999.
Principal transactions revenue increased 42% from $55.1 million to $78.0
million due primarily to increased volumes in the OTC business.
Commissions increased 28% from $24.5 million to $31.4 million. This
increase was primarily due to an increase in NYSE-listed transactions.
Investment banking revenue increased 22% from $46.9 million to $57.2
million, and decreased as a percentage of revenues from 24% to 23%. The Company
managed or co-managed 43 public offerings during the six month period ended
March 31, 1998, compared to 40 during the six month period ended March 31, 1999.
Corporate finance fees decreased 10% from $37.3 million to $33.6 million
due primarily to the completion of fewer merger and acquisition transactions
during the six month period ended March 31, 1999.
Interest and dividends increased 2% from $12.7 million to $13.0 million.
Net investment gains for the six month period increased 184% from $9.8
million to $27.8 million. For the six months ended March 31, 1998, there were
realized gains of $12.6 million offset by a change in unrealized losses of $2.8
million. For the six months ended March 31, 1999, there were realized gains of
$10.2 million and a change in unrealized gains of $17.6 million.
Other revenues decreased 5% from $12.7 million to $12.1 million.
EXPENSES. Total expenses for the period increased 17% from $159.3 million
for the six months ended March 31, 1998 to $186.6 million for the six months
ended March 31, 1999.
Compensation and benefits expense increased 27% from $99.5 million to
$126.5 million. The increase was due primarily to higher incentive compensation
expenses accrued on higher revenues. Compensation and benefits expense as a
percentage of total revenues was 50% in both periods.
-19-
<PAGE>
Brokerage and clearance expense increased 51% from $11.1 million to $16.8
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.
Occupancy and equipment expense decreased 8% from $11.1 million to $10.2
million. The decrease was due primarily to lower depreciation expense
attributable to the Company's current efforts to replace its employees' personal
computers and related infrastructure with leased equipment.
Communications expense increased 1% from $7.3 million to $7.4 million.
Interest expense decreased 25% from $2.0 million to $1.5 million primarily
due to lower interest paid on the financing of customer balances.
Other expenses decreased 14% from $28.3 million to $24.2 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 IT consulting fees and a
loss on sale of HQEM.
Income Tax Provision. The Company's effective income tax rate was 43% for
the six months ended March 31, 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 March 31, 1999, the Company had liquid assets consisting
primarily of cash and cash equivalents of $67.1 million and amounts on deposit
with Lewco of $165,118,250 million. Such amounts on deposit with Lewco are a
component of the March 31, 1999 receivable from Lewco of $70.1 million. As of
March 31, 1999, Guaranty Finance had a bank line of credit of $25.0 million with
no balance outstanding, which expired on April 30, 1999. 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 March 31,
1999 was approximately 2.1:1. The Company's assets include receivables from
customers and Lewco, securities held for trading purposes, short-term
investments and securities held for investment purposes. A substantial portion
of the Company's receivables are secured by customer securities or security
transactions in the process of settlement. Securities held for trading purposes
are actively traded and readily marketable. As of March 31, 1999, securities
held for trading purposes include government securities mutual funds totaling
$14.6 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 March 31, 1999, H&Q LLC was required
to maintain minimum regulatory net capital in accordance with SEC
-20-
<PAGE>
rules of approximately $6.6 million and had total regulatory net capital of
approximately $67.0 million, or approximately $60.4 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.
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
-21-
<PAGE>
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 March
31, 1999, the fair value of the Company's trading securities was $51.2 million
in long positions and $25.2 million in short positions. The net potential loss
in fair value at March 31, 1999, using a 10% hypothetical decline in prices, is
estimated to be approximately $2.6 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 March 31, 1999,
the fair value of the Company's marketable long-term investment securities was
$51.9 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. .
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."
-22-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Certain significant legal proceedings and matters have been previously
disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1998. Following is a summary of recent material developments in
such proceedings.
ASPEC TECHNOLOGY, INC. SECURITIES LITIGATION
The state court cases have been consolidated under the Jonas case and a
Consolidated Class Action Complaint was filed on January 29, 1999, alleging
violations of California and federal securities laws.
BMJ MEDICAL MANAGEMENT, INC. SECURITIES LITIGATION
On March 8, 1999, the state court case was removed to the federal
bankruptcy court in Miami on the ground that the claims asserted there arise out
of or are related to the BMJ bankruptcy proceedings. A motion to remand the case
to the state court was subsequently filed and is pending. In the federal class
action case, on April 12, 1999, the court dismissed the state law claim and
denied the defendants' motions to dismiss the federal securities law claims. In
an adversary proceeding filed by BMJ, BMJ v. Sapir, et al., Adv. Pro. No. 99-68,
the Delaware bankruptcy court declined to stay the litigation, but imposed
certain restrictions on discovery and other matters.
CYBERMEDIA, INC. SECURITIES LITIGATION
On March 7, 1999, the plaintiffs filed a Second Amended Consolidated
Complaint against most of the same defendants, including H&Q and its research
analyst.
DAOU SYSTEMS, INC. SECURITIES LITIGATION
The underwriters have been voluntarily dismissed from the litigation
without prejudice.
EVOLVING SYSTEMS, INC. SECURITIES LITIGATION
The case has been settled. The underwriters did not contribute to the
settlement.
INDIVIDUAL, INC. SECURITIES LITIGATION
On March 22, 1999, the Court of Appeals affirmed the district court's
dismissal of the complaint. The plaintiffs thereafter petitioned for rehearing;
on April 14, 1999, the petition was denied.
PUBLIC OFFERING FEE ANTITRUST LITIGATION
On February 11, 1999, the court ordered that the three complaints
previously filed as Gillet v. Goldman, Sachs & Co., et al., Prager v. Goldman,
Sachs & Co., et al., and Holzman v. Goldman Sachs & Co., et al. be consolidated
under the caption In Re Public Offering Fee Antitrust Litigation, Civil Action
No. 98 Civ. 7890 (LMM)(SEG). On March 15, 1999, the plaintiffs filed a
consolidated amended complaint against H&Q and 24 other underwriters. The
consolidated amended complaint alleges that defendants conspired to fix the
"fee" paid by purported class members to buy and sell IPO securities of
-23-
<PAGE>
U.S. companies by invariably setting the underwriters' spread at 7%,
particularly in issuances of $20 million to $80 million, in violation of Section
1 of the Sherman Act. The Consolidated Amended Complaint seeks treble damages
and injunctive relief, as well as reasonable attorneys' fees and costs. On April
29, 1999, the defendants filed a motion to dismiss. Separately, the Antitrust
Division of the United States Department of Justice has begun a civil
investigation into essentially the same matters.
OMEGA RESEARCH SECURITIES LITIGATION
On February 26, 1999, the district court granted in part and denied in part
the motions to dismiss, and granted the plaintiffs the opportunity to file an
amended complaint as to certain claims. On March 23, 1999, the plaintiffs filed
a Notice of Appeal to the United States Court of Appeals for the Eleventh
Circuit. On April 23, 1999, the plaintiffs and defendants agreed to Stipulated
Voluntary Dismissal of Appeal, thereby ending the litigation.
SCHADE V HAMBRECHT & QUIST GROUP
The dismissal of the case remains on appeal. The SEC and NASD
investigations are continuing with respect to IPO allocations by H&Q and other
investment banks.
SS&C TECHNOLOGIES, INC. SECURITIES LITIGATION
The parties have agreed to a settlement of the litigation. The agreement
does not require a payment by the underwriters.
STB SYSTEMS, INC. SECURITIES LITIGATION
On April 9, 1999, the court issued an order sustaining in part and
overruling in part defendants' Special Exceptions to Plaintiff's Original
Petition. On April 23, 1999, plaintiffs filed a First Amended Petition for
Damages, Injunctive and Other Equitable Relief. Discovery has been stayed
pending the filing and consideration of further motions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company's Annual Meeting of Stockholders was held on February 24,
1999.
(b) Not applicable.
(c) At the Annual Meeting of Stockholders, the following matters were
voted upon: (i) the election of two persons to Class III of the Board
of Directors of the Company, (ii) the proposal to amend and restate
the Company's 1996 Equity Plan and (iii) the ratification of the
appointment of Arthur Andersen LLP, as independent public accountants
for the Company for the fiscal year ending September 30, 1999.
The results of the voting on matters presented at the Annual Meeting of
Stockholders were as follows:
-24-
<PAGE>
1. ELECTION OF CLASS III DIRECTORS
WITHHOLD
NAME OF NOMINEE FOR AUTHORITY
---------------- ---------- ---------
William E. Mayer 21,345,937 95,875
Edmund H. Shea, Jr. 21,345,919 95,893
2. AMENDMENT AND RESTATEMENT OF 1996 EQUITY PLAN
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTES
---------- --------- -------- ----------
<S> <C> <C> <C> <C>
Proposal to amend and restate the 11,613,491 3,767,554 339,413 5,721,354
Company's 1996 Equity Plan
</TABLE>
3. RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
FOR AGAINST ABSTAIN
---------- ------- --------
Ratification of the appointment of Arthur
Andersen LLP as the Company's independent 21,098,334 54,627 288,851
public accountants
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- ------------
3.02 Registrant's Bylaws, as amended.
10.24 Credit Agreement dated as of April 30, 1999
between Hambrecht & Quist California and
Bank of America NT & SA.
27 Financial Data Schedule.
b) Reports on Form 8-K
None.
-25-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HAMBRECHT & QUIST GROUP,
a Delaware Corporation
By: /s/ Patrick J. Allen
-------------------------
Patrick J. Allen
Chief Financial Officer
(On behalf of the Registrant and as
Principal Financial and Accounting
officer)
Date: May 12, 1999
-26-
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.02 Registrant's Bylaws, as amended.
10.24 Credit Agreement dated as of April 30, 1999
between Hambrecht & Quist
California and Bank of America NT & SA.
27 Financial Data Schedule.
-27-
<PAGE>
BYLAWS
OF
HAMBRECHT & QUIST GROUP
AS AMENDED AND RESTATED APRIL 14, 1999
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is CT CORPORATION SYSTEM.
1.2 OTHER OFFICES
The board of directors may at any time establish other offices at any
place or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place, within or outside
the State of Delaware, designated by the board of directors or by the written
consent of all of the persons entitled to vote at such meeting, such written
consent shall be filed with the Secretary of the Corporation. In the absence of
any such designation, stockholders' meetings shall be held at the registered
office of the corporation.
2.2 ANNUAL MEETING
The annual meeting of stockholders shall be held each year on a date
and at a time designated by the board of directors. However, if such day falls
on a legal holiday, then the meeting shall be held at the same time and place on
the next succeeding full business day. At the meeting, directors shall be
elected and any other proper business may be transacted.
2.3 SPECIAL MEETING
(a) Special meetings of the stockholders, for any purpose or purposes,
may be called by the Board of Directors, the Chairman of the board of Directors,
the President, or the holders of shares entitled to cast not less than ten
percent (10%) of the votes at the meeting.
<PAGE>
(b) Upon written request to the Chairman of the Board of Directors, the
President, any Vice President or the Secretary of the corporation by any person
or persons (other than the Board of Directors) entitled to call a special
meeting of the stockholders, such officer forthwith shall cause notice to be
given to the stockholders entitled to vote, that a meeting will be held at a
time requested by the person or persons calling the meeting, such time to be not
less than thirty-five (35) nor more than sixty (60) days after receipt of such
request. If such notice is not given within twenty (20) days after receipt of
such request, the person or persons calling the meeting may be given notice
thereof in the manner provided by law or in these Bylaws. Nothing contained in
this Section 2.3 shall be construed as limiting, fixing or affecting the time or
date when a meeting of stockholders called by action of the Board of Directors
may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
Except as otherwise may be required by law and subject to subsection
2.3(b) above, written notice of each meeting of stockholders shall be given to
each stockholder entitled to vote at that meeting (see Section 2.8 below), by
the secretary, Assistant Secretary or other person charged with that duty, not
less than ten (10) (or, if sent by third class mail, thirty (30)) nor more than
sixty (60) days before such meeting.
Notice of any meeting of stockholders shall state the date, place and
hour of the meeting and,
(a) in the case of a special meeting, the general nature of the
business to be transacted, and no other business may be transaction at such
meeting;
(b) in the case of an annual meeting, the general nature of matters
which the Board of Directors, at the time the notice is given, intends to
present for action by the stockholders;
(c) in the case of any meeting at which directors are to be elected,
the names of the nominees intended at the time of the notice to be presented by
management for election; and
(d) in the case of any meeting, if action is to be taken on any of the
following proposals, the general nature of such proposal:
(1) a proposal to approve a transaction within the provisions of
Delaware General Corporations law, Section 144 (relating to certain transactions
in which a director has an interest);
(2) a proposal to approve a transaction within the provisions of
Delaware General Corporation Law, Section 254 (relating to amending the
Certificate of Incorporation of the corporation);
(3) a proposal to approve a transaction within the provisions of
Delaware General Corporation Law, Sections 251 (relating to merger or
consolidation); and
(4) a proposal to approve a transaction within the provisions of
Delaware General Corporation Law, Section 275 (dissolution).
At a special meeting, notice of which has been given in accordance with
this Section, action may not be taken with respect to business, the general
nature of which has
-2-
<PAGE>
not been stated in such notice. At an annual meeting, action may be taken with
respect to business stated in the notice of such meeting, given in accordance
with this section, and, subject to subsection 2.4(d) above, with respect to any
other business as may properly come before the meeting.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Notice of any meeting of stockholders shall be given either personally
or by first-class mail, or, if the corporation has outstanding shares held of
record by 500 or more persons on the record date for such meeting, third-class
mail, or telegraphic or other written communication, addressed to the
stockholder at the address of that stockholder appearing on the books of the
corporation or given by the stockholder to the corporation for the purpose of
notice. If no such address appears on the corporation's books or is given,
notice shall be deemed to have been given if sent to that stockholder by
first-class mail or telegraphic or other written communication to the
corporation's principal executive office, or if published at least once in a
newspaper of general circulation in the county where that office is located.
Notice shall be deemed to have been given at the time when delivered personally
or deposited in the mail or sent by telegram or other means of written
communication.
If any notice addressed to a stockholder at the address of that
stockholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the stockholder
at that address, all future notices shall be deemed to have been duly given
without further mailing if these shall be available to the stockholder on
written demand by the stockholder at the principal executive office of the
corporation for a period of one year from the date of the giving of the notice.
An affidavit of the secretary or an assistant secretary or of the
transfer agent of the corporation that the notice has been given shall, in the
absence of fraud, be prima facie evidence of the facts stated therein.
2.6 QUORUM
(a) At any meeting of the stockholders, a majority of the shares
entitled to vote, represented in person or by proxy, shall constitute a quorum.
If a quorum is present, the affirmative vote of the majority of shares
represented at the meeting and entitled to vote on any matter shall be the act
of the stockholders, unless the vote of a greater number of voting by classes is
required by law or by the Certificate of Incorporation, and except as provided
in subsection (b) below.
(b) The stockholders present at a duly called or held meeting of the
stockholders at which a quorum is present may continue to do business until
adjournment, notwithstanding the withdrawal of enough stockholders to leave less
than a quorum, provided that any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.
(c) In the absence of a quorum, no business other than adjournment may
be transacted, except as described in subsection (b) above.
2.7 ADJOURNED MEETING; NOTICE
Any meeting of stockholders may be adjourned from time to time, whether
or not a quorum is present, by the affirmative vote of a majority of shares
represented at such
-3-
<PAGE>
meeting either in person or by proxy and entitled to vote at such meeting. When
a meeting is adjourned to another time or place, unless these Bylaws otherwise
require, notice need not be given of the adjourned meeting if the time and place
thereof are announced at the meeting at which the adjournment is taken. At the
adjourned meeting the corporation may transact any business that might have been
transacted at the original meeting. If the adjournment is for more than
forty-five (45) days, or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
2.8 VOTING
(a) The stockholders entitled to vote at any meeting of stockholders
shall be determined in accordance with the provisions of Section 2.11 of these
Bylaws, subject to the provisions of Sections 217 and 218 of the General
Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors
and joint owners of stock and to voting trusts and other voting agreements).
Except as provided in this Section 2.8, or as may be otherwise provided
in the certificate of incorporation, each stockholder shall be entitled to one
vote for each share of capital stock held by such stockholder.
(b) Until such time as the corporation becomes a "listed corporation"
within the meaning of Section 301.5 of the California Corporations Code, at a
stockholders' meeting at which directors are to be elected, or at elections held
under special circumstances, a stockholder shall be entitled to cumulate votes
(i.e., cast for any candidate a number of votes greater than the number of votes
which such stockholder normally is entitled to cast). Each holder of stock, or
of any class or classes or of a series or series thereof, who elects to cumulate
votes shall be entitled to as many votes as equals the number of votes which
(absent this provision as to cumulative voting) he would be entitled to cast for
the election of directors with respect to his shares of stock multiplied by the
number of directors to be elected by him, and he may cast all of such votes for
a single director or may distribute them among the number to be voted for, or
for any two or more of them, as he may see fit; provided, however, no
stockholder shall be entitled to so cumulate such stockholder's votes unless the
candidates for which such stockholder is voting have been placed in nomination
prior to the voting and a stockholder has given notice at the meeting, prior to
the vote, of an intention to cumulate votes.
(c) At such time as the corporation becomes a listed corporation within
the meaning of Section 301.5 of the California Corporations Code and thereafter,
stockholders shall not be entitled to cumulate votes.
2.9 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these Bylaws. All waivers,
consents and approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
-4-
<PAGE>
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise provided in the certificate of incorporation, any
action required by this chapter to be taken at any annual or special meeting of
stockholders of a corporation, or any action that may be taken at any annual or
special meeting of such stockholders, may be taken without a meeting, without
prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
In order that the corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, or entitled to express consent to corporate action in writing without a
meeting, or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held.
(ii) The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting, when no prior
action by the board of directors is necessary, shall be the day on which the
first written consent is expressed.
(iii) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
-5-
<PAGE>
2.12 PROXIES
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the corporation, but no such
proxy shall be voted or acted upon after eleven (11) months from its date,
unless the proxy provides for a longer period. A proxy shall be deemed signed if
the stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of Section
212(c) of the General Corporation Law of Delaware.
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
Stock of the corporation held by its subsidiary or subsidiaries are not
entitled to vote in any matter.
2.14 INSPECTORS OF ELECTION
Before any meeting of stockholders, the Board of Directors may appoint
any persons, other than nominees for the office, to act as inspectors of
election at the meeting or its adjournment. If no inspectors of election are so
appointed, the chairman of the meeting may, and on the request of any
stockholder or a stockholder's proxy shall, appoint inspectors of election at
the meeting. The number of inspectors shall be either one (1) or three (3). If
inspectors are appointed at a meeting on the request of one or more stockholders
or proxies, the majority of shares represented in person or proxy shall
determine whether one (1) or three (3)inspectors are to be appointed. If any
person appointed as inspector fails to appear or fails or refuses to act, the
chairman of the meeting may, and upon the request of any stockholder or a
stockholder's proxy shall, appoint a person to fill that vacancy.
These inspectors shall:
(a) Determine the number of shares outstanding and the voting power of
each, the shares represented at the meeting, the existence of a quorum, and the
authenticity, validity, and effect of proxies;
(b) Receive votes, ballots, or consents;
(c) Hear and determine all challenges and questions in any way arising
in connection with the right to vote;
-6-
<PAGE>
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election or
vote with fairness to all stockholders.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware
and any limitations in the certificate of incorporation or these Bylaws relating
to action required to be approved by the stockholders or by the outstanding
shares, the business and affairs of the corporation shall be managed and all
corporate powers shall be exercised by or under the direction of the board of
directors.
3.2 NUMBER OF DIRECTORS
The authorized number of directors shall be seven (7). This number may
be changed by a duly adopted amendment to the certificate of incorporation or by
an amendment to this bylaw adopted by the vote or written consent of the holders
of a majority of the stock issued and outstanding and entitled to vote or by
resolution of a majority of the board of directors.
No reduction of the authorized number of directors shall have the
effect of removing any director before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
(a) For so long as the Board of Directors consists of more than two
directors, the directors shall be divided into three classes, designated Class
I, Class II and Class III. Each class shall consist, as nearly as possible, of
one-third (1/3) of the total number of directors constituting the entire Board
of Directors. At any time following the effectiveness of this provision, but
before the first annual meeting of the stockholders held after the effectiveness
of this provision, the Board of Directors may designate by resolution the
classification of existing directors, with the initial terms of such directors
as follows: Class I directors will serve until the first annual meeting of the
stockholders held after the effectiveness of this provision, Class II directors
will serve until the second annual meeting of the stockholders held after the
effectiveness of this provision and Class III directors will serve until the
third annual meeting of the stockholders held after the effectiveness of this
provision. At the first annual meeting of the stockholders held after the
effectiveness of this provision and at each succeeding annual meeting of
stockholders, successors to the class of directors whose term expires at such
annual meeting shall be elected for three-year terms. If the number of directors
is changed, any increase or decrease shall be apportioned among the classes so
as to maintain the number of directors
-7-
<PAGE>
in each class as nearly equal as possible, and any additional directors of any
class elected to fill a vacancy resulting from an increase in such class shall
hold office for a term that shall coincide with the remaining term of that
class, but in no case will a decrease in the number of directors shorten the
term of any incumbent director. Notwithstanding the foregoing, this provision
will become effective only when the corporation becomes a "listed corporation"
within the meaning of Section 301.5 of the California Corporations Code, until
such time, all directors shall be elected at each annual meeting of stockholders
to hold office until the next annual meeting.
(b) A director shall hold office until the annual meeting for the year
in which his or her term expires and until his or her successor shall be elected
and shall qualify, subject, however, to prior death, resignation, retirement,
disqualification or removal from office. Except as otherwise required by law,
any vacancy on the Board of Directors that results from an increase in the
number of directors or any other vacancy occurring in the Board of Directors
shall be filled by a majority of the directors then in office, even if less than
a quorum, or by a sole remaining director. Any director elected to fill a
vacancy not resulting from an increase in the number of directors shall have the
same remaining term as that of his or her predecessor.
(c) Directors need not be stockholders unless so required by the
certificate of incorporation or these Bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to fill
a vacancy, shall hold office until his successor is elected and qualified or
until his earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
Any director may resign at any time upon written notice to the
corporation. When one or more directors so resigns and the resignation is
effective at a future date, a majority of the directors then in office,
including those who have so resigned, shall have power to fill such vacancy or
vacancies, the vote thereon to take effect when such resignation or resignations
shall become effective, and each director so chosen shall hold office as
provided in this section in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
Bylaws:
(a) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(b) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
certificate of incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these Bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in
-8-
<PAGE>
Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or stockholders
holding at least ten (10) percent of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office as aforesaid,
which election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
The board of directors of the corporation may hold meetings, both
regular and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, members of the board of directors, or any committee designated by
the board of directors, may participate in a meeting of the board of directors,
or any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 FIRST MEETINGS
The first meeting of each newly elected board of directors shall be
held at such time and place as shall be fixed by the vote of the stockholders at
the annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the stockholders to fix the
time or place of such first meeting of the newly elected board of directors, or
in the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
board of directors, or as shall be specified in a written waiver signed by all
of the directors.
3.7 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice
at such time and at such place as shall from time to time be determined by the
board.
3.8 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two (2) directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of
-9-
<PAGE>
the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.9 QUORUM
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
3.10 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these Bylaws.
3.11 ADJOURNED MEETING; NOTICE
If a quorum is not present at any meeting of the board of directors,
then the directors present thereat may adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum is
present.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, any action required or permitted to be taken at any meeting of the
board of directors, or of any committee thereof, may be taken without a meeting
if all members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
3.13 FEES AND COMPENSATION OF DIRECTORS
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, the board of directors shall have the authority to fix the
compensation of directors.
3.14 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to
-10-
<PAGE>
benefit the corporation. The loan, guaranty or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.15 REMOVAL OF DIRECTORS
The Board of Directors may declare vacant the office of a director who
has been declared of unsound mind by an order of court or who has been convicted
of a felony.
The entire Board of Directors or any individual director may be removed
from office without cause by the affirmative vote of a majority of the
outstanding shares entitled to vote on such removal; provided, however, that
unless the entire Board is removed, no individual director may be removed when
the votes cast against such director's removal, or not consenting in writing to
such removal, would be sufficient to elect that director if voted cumulatively
at an election at which the same total number of votes cast were cast (or, if
such action is taken by written consent, all shares entitled to vote were voted)
and the entire number of directors authorized at the time of such director's
most recent election were then being elected.
Unless otherwise restricted by statute, by the certificate of
incorporation or by these Bylaws, any director or the entire board of directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors.
No reduction of the authorized number of directors shall have the
effect of removing any director prior to the expiration of such director's term
of office.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution passed by a majority of the
whole board, designate one or more committees, with each committee to consist of
one or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors or in the bylaws of the corporation, shall have and may
exercise all the powers and authority of the board of directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers that may require it; but no
such committee shall have the power or authority to (i) amend the certificate of
incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the board of directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix any of the preferences or rights of such shares
relating to dividends, redemption,
-11-
<PAGE>
dissolution, any distribution of assets of the corporation or the conversion
into, or the exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of stock of the
corporation), (ii) adopt an agreement of merger or consolidation under Sections
251 or 252 of the General Corporation Law of Delaware, (iii) recommend to the
stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, (iv) recommend to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or (v) amend
the bylaws of the corporation; and, unless the board resolution establishing the
committee, the bylaws or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend, to
authorize the issuance of stock, or to adopt a certificate of ownership and
merger pursuant to Section 253 of the General Corporation Law of Delaware.
4.2 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report
the same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Article III of these Bylaws, Section
3.5 (place of meetings and meetings by telephone), Section 3.7 (regular
meetings), Section 3.8 (special meetings and notice), Section 3.9 (quorum),
Section 3.10 (waiver of notice), Section 3.11 (adjournment and notice of
adjournment), and Section 3.12 (action without a meeting), with such changes in
the context of those bylaws as are necessary to substitute the committee and its
members for the board of directors and its members; provided, however, that the
time of regular meetings of committees may also be called by resolution of the
board of directors and that notice of special meetings of committees shall also
be given to all alternate members, who shall have the right to attend all
meetings of the committee. The board of directors may adopt rules for the
government of any committee not inconsistent with the provisions of these
Bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a Chairman of the Board, a
President, one or more Vice Presidents, a Secretary, and a Chief Financial
Officer, and any such other officers with such titles and duties as the Board of
Directors may determine.
5.2 ELECTION OF OFFICERS
The officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Sections 5.3 or 5.5 of these
Bylaws, shall be chosen by the Board of Directors, subject to the rights, if
any, of an officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or empower the president to
appoint, such
-12-
<PAGE>
other officers and agents as the business of the corporation may require, each
of whom shall hold office for such period, have such authority, and perform such
duties as are provided in these Bylaws or as the board of directors may from
time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
Any vacancy occurring in any office of the corporation shall be filled
by the Board of Directors.
5.6 CHAIRMAN OF THE BOARD
The Chairman of the Board, if there be such an officer, shall, if
present, preside at all meetings of the Board of Directors and shall exercise
and perform such other powers and duties as may be assigned from time to time by
the Board of Directors or prescribed by these Bylaws. If no President is
appointed, the Chairman of the Board is the general manager and Chief Executive
Officer of the corporation, and shall exercise all powers of the President
described in Section 5.7 below.
5.7 PRESIDENT
Subject to such powers, if any, as may be given by the Board of
Directors to the Chairman of the Board, if there be such an officer, the
President shall be the general manager and Chief Executive Officer of the
corporation and shall have general supervision and control over the business and
affairs of the corporation, subject to the control of the Board of Directors.
The President may sign and execute, in the name of the corporation, any
instrument authorized by the Board of Directors, except when the signing and
execution thereof shall have been expressly delegated by the Board of Directors
or by these Bylaws to some other officer or agent of the corporation. The
President shall have all the general powers and duties of management usually
vested in the president of a corporation, and shall have such other powers and
duties as may be prescribed from time to time by the Board of Directors or these
Bylaws. The President shall have discretion to prescribe the duties of other
officers and employees of the corporation in a manner not inconsistent with the
provisions of these Bylaws and the directions of the Board of Directors.
5.8 VICE PRESIDENTS
In the absence or disability of the President, in the event of a
vacancy in the office of President, or in the event such officer refuses to act,
the Vice President shall perform all the duties of the President and, when so
acting, shall have all the powers of, and be subject to all the restrictions on,
the President. If at any such time the corporation has more than
-13-
<PAGE>
one vice president, the duties and powers of the President shall pass to each
Vice President in order of such Vice President's rank as fixed by the Board of
Directors or, if the Vice Presidents are not so ranked, to the Vice President
designated by the Board of Directors. The Vice Presidents shall have such other
powers and perform such other duties as may be prescribed for them from time to
time by the Board of Directors, the President or pursuant to these Bylaws.
5.9 SECRETARY
The Secretary shall:
(a) Keep, or cause to be kept, minutes of all meetings of the
corporation's stockholders, Board of Directors, and committees of the Board of
Directors, if any. Such minutes shall be kept in written form.
(b) Keep, or cause to be kept, at the principal executive office
of the corporation, or at the office of its transfer agent or registrar, if any,
a record of a corporation's stockholders, showing the names and addresses of all
stockholders and the number of classes of shares held by each. Such records
shall be kept in written form or any other form capable of being converted into
written form.
(c) Keep, or cause to be kept, at the principal executive office
of the corporation, or if the principal office is not in California, at its
principal business office in California, an original or copy of these Bylaws, as
amended.
(d) Give, or cause to be given, notice of all meetings of
stockholders, directors and committees of the Board of Directors, as required by
law or by these Bylaws.
(e) Keep the seal of the corporation, if any, in safe custody.
(f) Exercise such powers and perform such duties as are usually
vested in the office of secretary of a corporation, and exercise such other
powers and perform such other duties as may be prescribed from time to time by
the Board of Directors or these Bylaws.
If any Assistant Secretaries are appointed, the Assistant
Secretary, or one of the Assistant Secretaries in the order of their rank as
fixed by the Board of Directors or, if they are not so ranked, the Assistant
Secretary designated by the Board of Directors, in the absence or disability of
the Secretary or in the event of such officer's refusal to act or if a vacancy
exists in the office of Secretary, shall perform the duties and exercise the
powers of the Secretary and discharge such duties as may be assigned from time
to time pursuant to these Bylaws or by the Board of Directors.
5.10 CHIEF FINANCIAL OFFICER
The Chief Financial Officer shall:
(a) Be responsible for all functions and duties of the treasurer
of the corporation.
(b) keep and maintain, or cause to be kept and maintained,
adequate and correct books and records of account for the corporation.
(c) Receive or be responsible for receipt of all monies due and
payable
-14-
<PAGE>
to the corporation from any source whatsoever; have charge and custody of, and
be responsible for, all monies and other valuables of the corporation and be
responsible for deposit of all such monies in the name and to the credit of the
corporation with such depositories as may be designated by the Board of
Directors or a duly appointed and authorized committee of the Board of
Directors.
(d) Disburse or be responsible for the disbursement of the funds
of the corporation as may be ordered by the Board of Directors or a duly
appointed and authorized committee of the Board of Directors.
(e) Render to the Chief Executive Officer and the Board of
Directors a statement of the financial condition of the corporation if called
upon to do so.
(f) Exercise such powers and perform such duties as are usually
vested in the office of chief financial officer of a corporation, and exercise
such other powers and perform such other duties as may be prescribed by the
Board of Directors or these Bylaws.
If any Assistant Financial Officer is appointed, the Assistant
Financial Officer, or one of the Assistant Financial Officers, if there are more
than one, in the order of their ranks as fixed by the Board of Directors or, if
they are not so ranked, the Assistant Financial Officers designated by the Board
of Directors, shall, in the absence or disability of the Chief Financial Officer
or in the event of such officer's refusal to act, perform the duties and
exercise the powers of the Chief Financial Officer, and shall have such powers
and discharge such duties as may be assigned from time to time pursuant to these
Bylaws or by the Board of Directors.
5.11 COMPENSATION
The compensation of the officers shall be fixed from time to time by
the Board of Directors, and no officer shall be prevented from receiving such
compensation by reason of the fact that such officer is also a director of the
corporation.
5.12 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the stockholders.
ARTICLE VI
INDEMNITY
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware, indemnify each of its
directors and officers against expenses (including attorneys' fees), judgments,
fines, settlements, and other amounts actually and reasonably incurred in
connection with any proceeding, arising by reason of the fact that such person
is or was an agent of the corporation. For purposes of this Section 6.1, a
"director" or "officer" of the corporation includes any person (i) who is or was
a director or officer of the corporation, (ii) who is or was serving at the
request of the
-15-
<PAGE>
corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the extent and in the manner
permitted by the General Corporation Law of Delaware, to indemnify each of its
employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the corporation (other
than a director or officer) includes any person (i) who is or was an employee or
agent of the corporation, (ii) who is or was serving at the request of the
corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was an employee or agent of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.3 INSURANCE
The corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of the General Corporation Law of Delaware.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive office or at
such place or places as designated by the board of directors, keep a record of
its stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these Bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
-16-
<PAGE>
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the president, any vice president, the
treasurer, the secretary or assistant secretary of this corporation, or any
other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
ARTICLE VIII
GENERAL MATTERS
8.1 CHECKS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
-17-
<PAGE>
8.2 BANK ACCOUNTS
The Board of Directors or its duly appointed and authorized committee
from time to time may authorize the opening and keeping of general and/or
special bank accounts with such banks, trust companies, or other depositories as
may be selected by the Board of Directors, its duly appointed and authorized
committee or by any officer or officers, agent or agents, of the corporation to
whom such power may be delegated from time to time by the Board of Directors.
The Board of Directors or its duly appointed and authorized committee may make
such rules and regulations with respect to said bank accounts, not inconsistent
with the provisions of these Bylaws, as are deemed advisable.
8.3 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
The board of directors, except as otherwise provided in these Bylaws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.4 LOANS
No loans shall be contracted on behalf of the corporation and no
negotiable paper shall be issued in its name, unless and except as authorized by
the Board of Directors or its duly appointed and authorized committee. When so
authorized by the Board of Directors or such committee, any officer or agent of
the corporation may effect loans and advances at any time for the corporation
from any bank, trust company, or other institution, or from any firm,
corporation or individual, and for such loans and advances may make, execute and
deliver promissory notes, bonds or other evidences of indebtedness of the
corporation and, when authorized as aforesaid, may mortgage, pledge, hypothecate
or transfer any and all stocks, securities and other property, real or personal,
at any time held by the corporation, and to that end endorse, assign and deliver
the same as security for the payment of any and all loans, advances,
indebtedness, and liabilities of the corporation. Such authorization may be
general or confined to specific instances.
8.5 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of a corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply to
shares represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the treasurer
or an assistant treasurer, or the secretary or an assistant secretary of such
corporation representing the number of shares registered in certificate form.
Any or all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate has ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer, transfer agent or
registrar at the date of issue.
-18-
<PAGE>
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.6 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.7 LOST CERTIFICATES
Except as provided in this Section 8.7, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and canceled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.
8.8 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these Bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a corporation and a natural
person.
8.9 DIVIDENDS
The directors of the corporation, subject to any restrictions contained
in the certificate of incorporation, may declare and pay dividends upon the
shares of its capital stock pursuant to the General Corporation Law of Delaware.
Dividends may be paid in cash, in property, or in shares of the corporation's
capital stock.
The directors of the corporation may set apart out of any of the funds
of the corporation available for dividends a reserve or reserves for any proper
purpose and may
-19-
<PAGE>
abolish any such reserve. Such purposes shall include but not be limited to
equalizing dividends, repairing or maintaining any property of the corporation,
and meeting contingencies.
8.10 FISCAL YEAR
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
8.11 SEAL
This Corporation shall have a corporate seal, which shall have the name
of the corporation inscribed thereon and shall otherwise be in such form as may
be approved from time to time by the Board of Directors.
8.12 TRANSFER OF STOCK
Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction in its books.
8.13 STOCK TRANSFER AGREEMENTS
The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the General Corporation Law of Delaware.
8.14 REGISTERED STOCKHOLDERS
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
The original or other bylaws of the corporation may be adopted, amended
or repealed by the stockholders entitled to vote; provided, however, that the
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal bylaws.
-20-
<PAGE>
ARTICLE X
DISSOLUTION
If it should be deemed advisable in the judgment of the board of
directors of the corporation that the corporation should be dissolved, the
board, after the adoption of a resolution to that effect by a majority of the
whole board at any meeting called for that purpose, shall cause notice to be
mailed to each stockholder entitled to vote thereon of the adoption of the
resolution and of a meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with Section
103 of the General Corporation Law of Delaware. Upon such certificate's becoming
effective in accordance with Section 103 of the General Corporation Law of
Delaware, the corporation shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent
in writing, either in person or by duly authorized attorney, to a dissolution,
no meeting of directors or stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103 of the General
Corporation Law of Delaware. Upon such consent's becoming effective in
accordance with Section 103 of the General Corporation Law of Delaware, the
corporation shall be dissolved. If the consent is signed by an attorney, then
the original power of attorney or a photocopy thereof shall be attached to and
filed with the consent. The consent filed with the Secretary of State shall have
attached to it the affidavit of the secretary or some other officer of the
corporation stating that the consent has been signed by or on behalf of all the
stockholders entitled to vote on a dissolution; in addition, there shall be
attached to the consent a certification by the secretary or some other officer
of the corporation setting forth the names and residences of the directors and
officers of the corporation.
ARTICLE XI
CUSTODIAN
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
The Court of Chancery, upon application of any stockholder, may appoint
one or more persons to be custodians and, if the corporation is insolvent, to be
receivers, of and for the corporation when:
(a) at any meeting held for the election of directors the
stockholders are so divided that they have failed to elect successors to
directors whose terms have expired or would have expired upon qualification of
their successors; or
(b) the business of the corporation is suffering or is threatened
with irreparable injury because the directors are so divided respecting the
management of the affairs of the corporation that the required vote for action
by the board of directors cannot be obtained and the stockholders are unable to
terminate this division; or
-21-
<PAGE>
(c) the corporation has abandoned its business and has failed
within a reasonable time to take steps to dissolve, liquidate or distribute its
assets.
11.2 DUTIES OF CUSTODIAN
The custodian shall have all the powers and title of a receiver
appointed under Section 291 of the General Corporation Law of Delaware, but the
authority of the custodian shall be to continue the business of the corporation
and not to liquidate its affairs and distribute its assets, except when the
Court of Chancery otherwise orders and except in cases arising under Sections
226(a)(3) or 352(a)(2) of the General Corporation Law of Delaware.
-22-
<PAGE>
CREDIT AGREEMENT
Dated as of April 30, 1999
between
HAMBRECHT & QUIST CALIFORNIA
and
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I. DEFINITIONS.............................................1
1.01 Certain Defined Terms.......................................1
1.02 Other Interpretive Provisions...............................8
1.03 Accounting Principles.......................................9
ARTICLE II. THE CREDIT..............................................9
2.01 Amount and Terms of Commitment..............................9
2.02 Loan Accounts.............................................. 9
2.03 Procedure for Borrowing....................................10
2.04 Voluntary Termination or Reduction of Commitment...........10
2.05 Prepayment and Repayment...................................10
2.06 Interest...................................................10
2.07 Commitment Fee.............................................11
2.08 Computation of Fees and Interest...........................11
2.09 Payments by the Company....................................11
2.10 Extension of Termination Date..............................11
ARTICLE III. CONDITIONS PRECEDENT...................................12
3.01 Conditions of Initial Loan.................................12
3.02 Conditions to All Loans....................................13
ARTICLE IV. REPRESENTATIONS AND WARRANTIES.........................13
4.01 Corporate Existence and Power..............................13
4.02 Corporate Authorization; No Contravention..................13
4.03 Governmental Authorization.................................14
4.04 Binding Effect.............................................14
4.05 Litigation.................................................14
4.06 No Default.................................................14
4.07 ERISA Compliance...........................................14
4.08 Use of Proceeds; Regulation U..............................15
4.09. Title to Properties........................................15
4.10 Taxes......................................................15
4.11 Financial Condition........................................15
4.12 Regulated Entities.........................................15
4.13 No Burdensome Restrictions.................................16
4.14 Copyrights, Patents, Trademarks and Licenses, etc..........16
4.15 Material Subsidiaries......................................16
4.16 Insurance..................................................16
4.17 Full Disclosure............................................16
i
<PAGE>
4.18 H&Q LLC Compliance.........................................16
4.19 Margin Regulations.........................................16
4.20 Ownership of H&Q LLC.......................................17
4.21 Year 2000 Compliance.......................................17
ARTICLE V. AFFIRMATIVE COVENANTS..................................17
5.01 Financial Statements.......................................17
5.02 Certificates; Other Information............................18
5.03 Notices....................................................18
5.04 Preservation of Corporate Existence, Etc...................19
5.05 Maintenance of Property....................................20
5.06 Insurance..................................................20
5.07 Payment of Obligations.....................................20
5.08 Compliance with Laws.......................................21
5.09 Compliance with ERISA......................................21
5.10 Inspection of Property and Books and Records...............21
5.11 Use of Proceeds............................................21
ARTICLE VI. NEGATIVE COVENANTS.....................................21
6.01 Limitation on Liens........................................21
6.02 Consolidations and Mergers.................................22
6.03 Limitation on Indebtedness.................................22
6.04 Transactions with Affiliates...............................23
6.05 Use of Proceeds............................................23
6.06 ERISA......................................................23
6.07 Change in Business.........................................23
6.08 Accounting Changes.........................................23
6.09 Tangible Net Worth.........................................23
6.10 Consolidated Loss..........................................23
6.11 Minimum Net Capital........................................23
ARTICLE VII. EVENTS OF DEFAULT......................................23
7.01 Event of Default...........................................23
7.02 Remedies...................................................25
7.03 Rights Not Exclusive.......................................26
ARTICLE VIII. MISCELLANEOUS......................................26
8.01 Amendments and Waivers.....................................26
8.02 Notices....................................................26
8.03 No Waiver; Cumulative Remedies.............................27
8.04 Costs and Expenses.........................................27
8.05 Indemnification............................................27
8.06 Payments Set Aside.........................................27
8.07 Successors and Assigns.....................................28
ii
<PAGE>
8.08 Assignments, Participations, etc...........................28
8.09 Confidentiality............................................28
8.10 Set-off....................................................29
8.11 Counterparts...............................................29
8.12 Severability...............................................29
8.13 No Third Parties Benefited.................................29
8.14 Governing Law..............................................29
8.15 Entire Agreement...........................................30
EXHIBITS:
Exhibit A Form of Notice of Borrowing
Exhibit B Form Compliance Certificate
SCHEDULES:
Schedule 4.15 - Material Subsidiaries
Schedule 6.01 - Existing Liens
iii
<PAGE>
CREDIT AGREEMENT
This CREDIT AGREEMENT is entered into as of April 30, 1999, between
HAMBRECHT & QUIST CALIFORNIA, a California corporation (the "Company"), and BANK
OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank").
WHEREAS, the Bank has agreed to make available to the Company a revolving
credit facility upon the terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual agreements, provisions and
covenants contained herein, the parties agree as follows:
ARTICLE I.
DEFINITIONS
1.01 CERTAIN DEFINED TERMS. The following terms have the following
meanings:
"ACT" shall mean the Securities Exchange Act of 1934, as amended
from time to time.
"AFFILIATE" means, as to any Person, any other Person which,
directly or indirectly, is in control of, is controlled by, or is
under common control with, such Person. A Person shall be deemed to
control another Person if the controlling Person possesses, directly
or indirectly, the power to direct or cause the direction of the
management and policies of the other Person, whether through the
ownership of voting securities, membership interests, by contract, or
otherwise.
"AGGREGATE DEBIT ITEMS" means aggregate debit items computed in
accordance with the Formula for Determination of Reserve Requirement
for Brokers and Dealers, Exhibit A to Rule 15c3-3, as the same is
computed from time to time with respect to any Person in accordance
with such Rule.
"AGREEMENT" means this Credit Agreement.
"APPENDIX D" means Appendix D to Rule 15c3-1.
"ASSIGNEE" has the meaning specified in subsection 8.08(a).
"ATTORNEY COSTS" means and includes all fees and disbursements of
any law firm or other external counsel, the allocated cost of internal
legal services and all disbursements of internal counsel.
"BASE RATE" means, for any day, the higher of: (a) 0.50% per
annum above the latest Federal Funds Rate, which means, for any day,
the rate set forth in the weekly statistical release designated as
H.15(519), or any successor publication, published by the Federal
Reserve Bank of New York (including any such successor, "H.15(519)")
on the preceding Business Day opposite the caption
<PAGE>
"Federal Funds (Effective)"; or, if for any relevant day such rate is
not so published on any such preceding Business Day, the rate for such
day will be the arithmetic mean as determined by the Bank of the rates
for the last transaction in overnight Federal funds arranged prior to
9:00 a.m. (New York City time) on that day by each of three leading
brokers of Federal funds transactions in New York City selected by the
Bank; and (b) the rate of interest in effect for such day as publicly
announced from time to time by the Bank in San Francisco, California,
as its "reference rate." (The "reference rate" is a rate set by the
Bank based upon various factors including the Bank's costs and desired
return, general economic conditions and other factors, and is used as
a reference point for pricing some loans, which may be priced at,
above, or below such announced rate.) Any change in the reference rate
announced by the Bank shall take effect at the opening of business on
the day specified in the public announcement of such change.
"BASE RATE LOAN" means a Loan that bears interest based on the
Base Rate.
"BORROWING DATE" means any date on which a Loan is made to the
Company under Section 2.03.
"BUSINESS DAY" means any day other than a Saturday, Sunday or
other day on which commercial banks in San Francisco, California or
Chicago, Illinois are authorized or required by law to close.
"CHANGE OF OWNERSHIP" means the Company ceases to own or control
directly or indirectly at least 100% of equity interests of H&Q LLC or
the Company loses the ability to appoint and direct the management of
H&Q LLC.
"CLOSING DATE" means the date on which all conditions precedent
set forth in Section 3.01 are satisfied or waived by the Bank.
"CODE" means the Internal Revenue Code of 1986, and regulations
promulgated thereunder.
"COMMISSION" means the Securities and Exchange Commission, or any
regulatory body that succeeds to the functions thereof.
"COMMITMENT" has the meaning specified in Section 2.01.
"COMPLIANCE CERTIFICATE" means a certificate substantially in the
form of Exhibit B.
"CONTINGENT OBLIGATION" means, as to any Person, any direct or
indirect liability of that Person, whether or not contingent, with or
without recourse, (a) with respect to any Indebtedness, lease,
dividend, letter of credit or other obligation (the "primary
obligations") of another Person (the "primary obligor"), including any
obligation of that Person (i) to purchase, repurchase or otherwise
2
<PAGE>
acquire such primary obligations or any security therefor, (ii) to
advance or provide funds for the payment or discharge of any such
primary obligation, or to maintain working capital or equity capital
of the primary obligor or otherwise to maintain the net worth or
solvency or any balance sheet item, level of income or financial
condition of the primary obligor, (iii) to purchase property,
securities or services primarily for the purpose of assuring the owner
of any such primary obligation of the ability of the primary obligor
to make payment of such primary obligation, or (iv) otherwise to
assure or hold harmless the holder of any such primary obligation
against loss in respect thereof (each, a "Guaranty Obligation"); (b)
with respect to any Surety Instrument issued for the account of that
Person or as to which that Person is otherwise liable for
reimbursement of drawings or payments; or (c) to purchase any
materials, supplies or other property from, or to obtain the services
of, another Person if the relevant contract or other related document
or obligation requires that payment for such materials, supplies or
other property, or for such services, shall be made regardless of
whether delivery of such materials, supplies or other property is ever
made or tendered, or such services are ever performed or tendered.
"CONTRACTUAL OBLIGATION" means, as to any Person, any provision
of any security issued by such Person or of any agreement,
undertaking, contract, indenture, mortgage, deed of trust or other
instrument, document or agreement to which such Person is a party or
by which it or any of its property is bound.
"DEFAULT" means any event or circumstance which, with the giving
of notice, the lapse of time, or both, would (if not cured or
otherwise remedied during such time) constitute an Event of Default.
"DOLLARS", "DOLLARS" and "$" each mean lawful money of the United
States.
"DESIGNATED SELF-REGULATORY ORGANIZATION" shall have the meaning
assigned to such term in Section 3(a)(26) of the Act.
"ERISA" means the Employee Retirement Income Security Act of
1974, and regulations promulgated thereunder.
"ERISA AFFILIATE" means any trade or business (whether or not
incorporated) under common control with the Company within the meaning
of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of
the Code for purposes of provisions relating to Section 412 of the
Code).
"ERISA EVENT" means (a) with respect to a Pension Plan, any of
the events set forth in Section 4043(c) of ERISA or the regulations
thereunder, other than any such event for which the 30-day notice
requirement under ERISA has been waived in regulations issued by the
PBGC; (b) a withdrawal by the Company or any ERISA Affiliate from a
Pension Plan subject to Section 4063 of ERISA during a plan year in
which it was a substantial employer (as defined in Section 4001(a)(2)
of ERISA) or a cessation of operations which is treated as
3
<PAGE>
such a withdrawal under Section 4062(e) of ERISA; (c) a complete or
partial withdrawal by the Company or any ERISA Affiliate from a
Multiemployer Plan or notification that a Multiemployer Plan is in
reorganization; (d) the filing of a notice of intent to terminate, the
treatment of a Plan amendment as a termination under Section 4041 or
4041A of ERISA, or the commencement of proceedings by the PBGC to
terminate a Pension Plan or Multiemployer Plan; (e) an event or
condition which might reasonably be expected to constitute grounds
under Section 4042 of ERISA for the termination of, or the appointment
of a trustee to administer, any Pension Plan or Multiemployer Plan; or
(f) the imposition of any liability under Title IV of ERISA, other
than PBGC premiums due but not delinquent under Section 4007 of ERISA,
upon the Company or any ERISA Affiliate.
"EVENT OF DEFAULT" means any of the events or circumstances
specified in Section 7.01.
"FOCUS REPORT" means a Financial and Operational Combined Uniform
Single Report required to be filed on a monthly or quarterly basis, as
the case may be, with the SEC or any report which is required in lieu
of such report.
"FDIC" means the Federal Deposit Insurance Corporation, and any
Governmental Authority succeeding to any of its principal functions.
"FRB" means the Board of Governors of the Federal Reserve System,
and any Governmental Authority succeeding to any of its principal
functions.
"GAAP" means generally accepted accounting principles set forth
from time to time in the opinions and pronouncements of the Accounting
Principles Board and the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial
Accounting Standards Board (or agencies with similar functions of
comparable stature and authority within the U.S. accounting
profession), which are applicable to the circumstances as of the date
of determination.
"GOVERNMENTAL AUTHORITY" means any nation or government, any
state or other political subdivision thereof, any central bank (or
similar monetary or regulatory authority) thereof, any entity
exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government, and any
corporation or other entity owned or controlled, through stock or
capital ownership or otherwise, by any of the foregoing.
"GUARANTY OBLIGATION" has the meaning specified in the definition
of "Contingent Obligation."
"H&Q LLC" means Hambrecht & Quist LLC, a limited liability
company formed under the laws of the State of Delaware in which the
Company owns directly or indirectly 100% of the equity interests.
4
<PAGE>
"INDEBTEDNESS" of any Person means, without duplication, (a) all
indebtedness for borrowed money; (b) all obligations issued,
undertaken or assumed as the deferred purchase price of property or
services (other than trade payables entered into in the ordinary
course of business on ordinary terms); (c) all non-contingent
reimbursement or payment obligations with respect to Surety
Instruments; (d) all material Contingent Obligations; (e) all
obligations evidenced by notes, bonds, debentures or similar
instruments, including obligations so evidenced incurred in connection
with the acquisition of property, assets or businesses; (f) all
indebtedness created or arising under any conditional sale or other
title retention agreement, or incurred as financing, in either case
with respect to property acquired by the Person (even though the
rights and remedies of the seller or bank under such agreement in the
event of default are limited to repossession or sale of such
property); (g) all obligations with respect to capital leases; (h) all
net indebtedness referred to in clauses (a) through (g) above secured
by (or for which the holder of such Indebtedness has an existing
right, contingent or otherwise, to be secured by) any Lien upon or in
property (including accounts and contracts rights) owned by such
Person, even though such Person has not assumed or become liable for
the payment of such Indebtedness; and (i) all Guaranty Obligations in
respect of indebtedness or obligations of others of the kinds referred
to in clauses (a) through (g) above. For all purposes of this
Agreement, the Indebtedness of any Person shall include all recourse
Indebtedness of any partnership or joint venture or limited liability
company in which such Person is a general partner or a joint venturer
or a member.
"INDEMNIFIED LIABILITIES" has the meaning specified in Section
8.05.
"INDEMNIFIED PERSON" has the meaning specified in Section 8.05.
"INDEPENDENT AUDITOR" has the meaning specified in subsection
5.01(a).
"INSOLVENCY PROCEEDING" means, with respect to any Person, (a)
any case, action or proceeding with respect to such Person before any
court or other Governmental Authority relating to bankruptcy,
reorganization, insolvency, liquidation, receivership, dissolution,
winding-up or relief of debtors, or (b) any general assignment for the
benefit of creditors, composition, marshalling of assets for
creditors, or other, similar arrangement in respect of its creditors
generally or any substantial portion of its creditors; undertaken
under U.S. Federal, state or foreign law, including the Federal
Bankruptcy Reform Act of 1978 (11 U.S.C. ss.101, et seq.).
"LIEN" means any security interest, mortgage, deed of trust,
pledge, hypothecation, assignment, charge or deposit arrangement,
encumbrance, lien (statutory or other) or preferential arrangement of
any kind or nature whatsoever in respect of any property (including
those created by, arising under or evidenced by any conditional sale
or other title retention agreement, the interest of a lessor under a
capital lease, any financing lease having substantially the same
economic effect as any of the foregoing, or the filing of any
financing statement naming the
5
<PAGE>
owner of the asset to which such lien relates as debtor, under the
Uniform Commercial Code or any comparable law) and any contingent or
other agreement to provide any of the foregoing, but not including the
interest of a lessor under an operating lease.
"LOAN" means an extension of credit by the Bank to the Company
under Article II.
"LOAN DOCUMENTS" means this Agreement and all other documents
delivered to the Bank in connection herewith.
"MATERIAL ADVERSE EFFECT" means (a) a material adverse change in,
or a material adverse effect upon, the operations, business,
properties, condition (financial or otherwise) or prospects of the
Company or the Company and its Subsidiaries taken as a whole or as to
H&Q LLC; (b) a material impairment of the ability of the Company to
perform under any Loan Document and to avoid any Event of Default; or
(c) a material adverse effect upon the legality, validity, binding
effect or enforceability against the Company of any Loan Document.
"MATERIAL SUBSIDIARY" means, at any time, in addition to the
entities listed on Schedule 4.15 hereto, any Subsidiary having total
assets as of the last day of each fiscal quarter equal to or greater
than 15% or more of Company's total consolidated assets, in each case,
based upon the Company's most recent annual or quarterly financial
statements delivered to the Bank under Section 5.01.
"MULTIEMPLOYER PLAN" means a "multiemployer plan", within the
meaning of Section 4001(a)(3) of ERISA, to which the Company or any
ERISA Affiliate makes, is making, or is obligated to make
contributions or, during the preceding three calendar years, has made,
or been obligated to make, contributions.
"NET CAPITAL" shall have the meaning specified in Rule 15c3-1.
"NOTICE OF BORROWING" means a notice in substantially the form of
Exhibit A.
"OBLIGATIONS" means all advances, debts, liabilities,
obligations, covenants and duties arising under any Loan Document
owing by the Company to the Bank or any Indemnified Person, whether
direct or indirect (including those acquired by assignment), absolute
or contingent, due or to become due, now existing or hereafter
arising.
"ORGANIZATION DOCUMENTS" means, for any corporation, the
certificate or articles of incorporation, the bylaws, any certificate
of determination or instrument relating to the rights of preferred
shareholders of such corporation, any shareholder rights agreement,
and all applicable resolutions of the board of directors (or any
committee thereof) of such corporation.
"PARTICIPANT" has the meaning specified in subsection 8.08(b).
6
<PAGE>
"PBGC" means the Pension Benefit Guaranty Corporation, or any
Governmental Authority succeeding to any of its principal functions
under ERISA.
"PENSION PLAN" means a pension plan (as defined in Section 3(2)
of ERISA) subject to Title IV of ERISA which the Company sponsors,
maintains, or to which it makes, is making, or is obligated to make
contributions, or in the case of a multiple employer plan (as
described in Section 4064(a) of ERISA) has made contributions at any
time during the immediately preceding five (5) plan years.
"PERMITTED LIENS" has the meaning specified in Section 6.01.
"PERSON" means an individual, partnership, corporation, limited
liability company, business trust, joint stock company, trust,
unincorporated association, joint venture or Governmental Authority.
"PLAN" means an employee benefit plan (as defined in Section 3(3)
of ERISA) which the Company sponsors or maintains or to which the
Company makes, is making, or is obligated to make contributions and
includes any Pension Plan.
"REQUIREMENT OF LAW" means, as to any Person, any law (statutory
or common), treaty, rule or regulation or determination of an
arbitrator or of a Governmental Authority, in each case applicable to
or binding upon the Person or any of its property or to which the
Person or any of its property is subject.
"RESPONSIBLE OFFICER" means the chief executive officer, the
chief operating officer, the chief financial officer or any controller
of the Company, or any other officer having substantially the same
authority and responsibility.
"RULE 15c3-1" shall mean Rule 15c3-1 (17 CFR 240.15c3-1) adopted
by the SEC under the Act, as in effect from time to time, or any rule
or regulation of the SEC which replaces Rule 15c3-1.
"RULE 15c3-3" shall mean Rule 15c3-3 (17 CFR 240.15c3-3) adopted
by the SEC under the Act, as in effect from time to time, or any rule
or regulation of the SEC which replaces Rule 15c3-3.
"SEC" means the Securities and Exchange Commission, or any
Governmental Authority succeeding to any of its principal functions.
"SUBSIDIARY" of a Person means any corporation, association,
partnership, limited liability company, joint venture or other
business entity of which more than 50% of the voting stock, membership
interests or other equity interests (in the case of Persons other than
corporations), is owned or controlled directly or indirectly by the
Person, or one or more of the Subsidiaries of the Person, or a
combination thereof. Unless the context otherwise clearly requires,
references herein to a "Subsidiary" refer to a Subsidiary of the
Company.
7
<PAGE>
"SURETY INSTRUMENTS" means all letters of credit (including
standby and commercial), banker's acceptances, bank guaranties,
shipside bonds, surety bonds and similar instruments.
"TANGIBLE NET WORTH" means the Company's consolidated tangible
net worth computed according to GAAP.
"TERMINATION DATE" means the earlier to occur of:
(a) the date that is 364 days after the Closing Date or, if this
Agreement is extended pursuant to Section 2.10, the date that is 364
days after the prior Termination Date; provided, that if the
Termination Date shall fall on a date that is not a Business Day, the
Termination Date shall be the immediately preceding Business Day; and
(b) the date on which the Commitment terminates in accordance
with the provisions of this Agreement.
"UNFUNDED PENSION LIABILITY" means the excess of a Plan's benefit
liabilities under Section 4001(a)(16) of ERISA, over the current value
of that Plan's assets, determined in accordance with the assumptions
used for funding the Pension Plan pursuant to Section 412 of the Code
for the applicable plan year.
"UNITED STATES" and "U.S." each means the United States of
America.
"WHOLLY-OWNED MATERIAL SUBSIDIARY" means any Wholly-Owned
Subsidiary which is also a Material Subsidiary.
"WHOLLY-OWNED SUBSIDIARY" means any corporation in which (other
than directors' qualifying shares required by law) 100% of the capital
stock of each class having ordinary voting power, and 100% of the
capital stock of every other class, in each case, at the time as of
which any determination is being made, is owned, beneficially and of
record, by the Company, or by one or more of the other Wholly-Owned
Subsidiaries of the Company, or both.
1.02 OTHER INTERPRETIVE PROVISIONS.
(a) The meanings of defined terms are equally applicable to the
singular and plural forms of the defined terms.
(b) The words "hereof", "herein", "hereunder" and similar words refer
to this Agreement as a whole and not to any particular provision of this
Agreement; and subsection, Section, Schedule and Exhibit references are to this
Agreement unless otherwise specified. The term "documents" includes any and all
instruments, documents, agreements, certificates, indentures, notices and other
writings, however evidenced. The term "including" is not limiting and means
"including without limitation." In the computation of periods of time from a
specified date to a later specified date, the word "from" means "from and
including"; the words "to" and "until" each mean "to but excluding", and the
word "through" means "to and including."
8
<PAGE>
(c) Unless otherwise expressly provided herein, (i) references to
agreements (including this Agreement) and other contractual instruments shall be
deemed to include all subsequent amendments and other modifications thereto, but
only to the extent such amendments and other modifications are not prohibited by
the terms of any Loan Document, and (ii) references to any statute or regulation
are to be construed as including all statutory and regulatory provisions
consolidating, amending, replacing, supplementing or interpreting the statute or
regulation.
(d) The captions and headings of this Agreement are for convenience of
reference only and shall not affect the interpretation of this Agreement. This
Agreement and other Loan Documents may use several different limitations, tests
or measurements to regulate the same or similar matters. All such limitations,
tests and measurements are cumulative and shall each be performed in accordance
with their terms. Unless otherwise expressly provided, any reference to any
action of the Bank by way of consent, approval or waiver shall be deemed
modified by the phrase "in its sole discretion."
(e) This Agreement and the other Loan Documents are the result of
negotiations between and have been reviewed by counsel to the Bank and the
Company, and are the products of both parties. Accordingly, they shall not be
construed against the Bank merely because of the Bank's involvement in their
preparation.
1.03 ACCOUNTING PRINCIPLES. Unless the context otherwise clearly
requires, all accounting terms not expressly defined herein shall be construed,
and all financial computations required under this Agreement shall be made, in
accordance with GAAP, consistently applied. References herein to "fiscal year"
and "fiscal quarter" refer to such fiscal periods of the Company.
ARTICLE II.
THE CREDIT
2.01 AMOUNT AND TERMS OF COMMITMENT. The Bank agrees, on the terms and
conditions set forth herein, to make Loans to the Company from time to time on
any Business Day during the period from the Closing Date to the Termination
Date, in an aggregate amount not to exceed at any time outstanding $20,000,000
(such amount, as the same may be reduced under Section 2.04 or as a result of
one or more assignments under Section 8.08, the "Commitment"). Within the limits
of the Commitment, and subject to the other terms and conditions hereof, the
Company may borrow under this Section 2.01, prepay under Section 2.05 and
reborrow under this Section 2.01; provided, however, that the Company shall
repay all outstanding Loans, together with all accrued but unpaid interest at
least once during each fiscal quarter and may not submit a Notice of Borrowing
to the Bank pursuant to Section 2.03 for a period of ten consecutive Business
Days following the date such repayment is made.
2.02 LOAN ACCOUNTS. The Loans made by the Bank shall be evidenced by
one or more loan accounts or records maintained by the Bank in the ordinary
course of business. The loan accounts or records maintained by the Bank shall be
conclusive absent manifest error of the amount of the Loans made by the Bank to
the Company and the interest and payments thereon.
9
<PAGE>
Any failure to record or any error in doing so shall not, however, limit or
otherwise affect the obligation of the Company hereunder to pay any amount owing
with respect to the Loans.
2.03 PROCEDURE FOR BORROWING. Each Loan shall be made upon the
Company's irrevocable written notice delivered to the Bank in the form of a
Notice of Borrowing and purportedly signed by a Responsible Officer, which
notice must be received by the Bank prior to 2:00 p.m. (Chicago time) on the
requested Borrowing Date specifying: (i) the amount of the Loan, which shall be
in a minimum amount of $1,000,000 or any multiple of $1,000,000 in excess
thereof; and (ii) the requested Borrowing Date, which shall be a Business Day.
The Bank shall then promptly attempt to contact another Responsible Officer by
telephone at the telephone number of such Responsible Officer designated in a
written notice to the Bank from the Company in order to confirm the validity of
such Notice of Borrowing; provided, that if the Bank is unable to confirm the
validity of such Notice of Borrowing with another Responsible Officer as
aforesaid by 3:00 p.m. (Chicago time) on the requested Borrowing Date, then the
Bank shall postpone disbursing such Loan until the next Business Day on which it
is able to confirm the validity of such Notice of Borrowing with another
Responsible Officer as aforesaid. The proceeds of each Loan will be made
available to the Company by the Bank either by crediting the account of the
Company on the books of the Bank, or by wire transfer in accordance with written
instructions provided to the Bank by the Company.
2.04 VOLUNTARY TERMINATION OR REDUCTION OF COMMITMENT. The Company may,
upon not less than five Business Days' prior notice to the Bank, terminate the
Commitment, or permanently reduce the Commitment by a minimum amount of
$1,000,000, or any multiple of $1,000,000 in excess thereof; unless, after
giving effect thereto and to any prepayments of Loans made on the effective date
thereof, the then-outstanding principal amount of the Loans would exceed the
amount of the Commitment then in effect. Once reduced in accordance with this
Section, the Commitment may not be increased. All accrued commitment fees to,
but not including the effective date of any reduction or termination of the
Commitment, shall be paid on the effective date of such reduction or
termination.
2.05 PREPAYMENT AND REPAYMENT. Notwithstanding the provisions of
Section 2.04, the Company may also, at any time or from time to time, without
penalty, upon not less than one Business Day's irrevocable notice to the Bank,
prepay Loans in whole or in part, in minimum amounts of $1,000,000 or any
multiple of $1,000,000 in excess thereof. Such notice of prepayment shall
specify the date and amount of such prepayment. Further, in addition to the
quarterly repayment required by Section 2.01, the Company shall repay to the
Bank on the Termination Date the aggregate principal amount of all Loans
outstanding on such date, together with accrued interest and all other fees and
amounts due and owing the Bank.
2.06 INTEREST. Each Loan shall bear interest on the outstanding
principal amount thereof from the applicable Borrowing Date at a rate per annum
equal to the Base Rate. Interest on each Loan shall be paid in arrears on the
last day of each March, June, September and December. Interest shall also be
paid on the date of any prepayment of Loans under Section 2.05 for the portion
of the Loans so prepaid and upon payment (including prepayment) in full thereof
and, during the existence of any Event of Default, interest shall be paid on
demand of the Bank. Notwithstanding anything contained in this Section, while
any Event of Default exists or after acceleration, the Company shall pay
interest (after as well as before entry of judgment thereon to
10
<PAGE>
the extent permitted by law) on the principal amount of all outstanding Loans,
at a rate per annum which is determined by adding 2% per annum to the Base Rate
then in effect for such Loans.
2.07 COMMITMENT FEE. The Company shall pay to the Bank a commitment fee
on the average daily unused portion of the Commitment, computed on a quarterly
basis in arrears on the last Business Day of each calendar quarter based upon
the daily utilization for that quarter as calculated by the Bank, equal to 1%
percent per annum. Such commitment fee shall accrue from the Closing Date to the
Termination Date and shall be billed quarterly in arrears on the monthly Account
Analysis Statement prepared for the Company by the Bank in the regular course of
business, with the final payment to be made on the Termination Date; provided
that, in connection with any reduction or termination of Commitment under
Section 2.04, the accrued commitment fee calculated for the period ending on
such date shall also be paid on the date of such reduction or termination, with
the following quarterly payment being calculated on the basis of the period from
such reduction or termination date to such quarterly payment date. The
commitment fee provided in this subsection shall accrue at all times after the
above-mentioned commencement date, including at any time during which one or
more conditions in Article III are not met.
2.08 COMPUTATION OF FEES AND INTEREST. All computations of commitment
fees under Section 2.07 shall be made on the basis of a year of 360 days and
actual days elapsed. All computations of interest for Base Rate Loans when the
Base Rate is determined by the Bank's "reference rate" shall be made on the
basis of a year of 365 or 366 days, as the case may be, and actual days elapsed.
Interest and fees shall accrue during each period during which interest or such
fees are computed from the first day thereof to the last day thereof. Each
determination of an interest rate by the Bank shall be conclusive and binding on
the Company in the absence of manifest error.
2.09 PAYMENTS BY THE COMPANY. All payments to be made by the Company
shall be made without set-off, recoupment or counterclaim. Except as otherwise
expressly provided herein, all payments by the Company shall be made to the Bank
at the address from time to time specified by the Bank for such purpose, and
shall be made in dollars and in immediately available funds, no later than 2:00
p.m. (Chicago time) on the date specified herein. Any payment received by the
Bank later than 2:00 p.m. (Chicago time) shall be deemed to have been received
on the following Business Day and any applicable interest or fee shall continue
to accrue. Whenever any payment is due on a day other than a Business Day, such
payment shall be made on the following Business Day, and such extension of time
shall in such case be included in the computation of interest or fees, as the
case may be.
2.10 EXTENSION OF TERMINATION DATE. Unless the Commitment shall have
terminated pursuant to the terms of this Agreement, the Company may, by
irrevocable notice delivered to the Bank not less than 30, nor more than 60,
days prior to the then-current Termination Date, request that such Termination
Date be extended to the date that is 364 days after such Termination Date,
subject to the conditions contained in Section 3.02. Upon receipt of such
request, the Bank may, in its sole discretion, elect, by written notice
delivered to the Company not later than 10 days prior to the then-current
Termination Date, to so extend such Termination Date, subject to satisfaction of
such conditions precedent as the Bank may deem appropriate in
11
<PAGE>
its sole discretion. Failure of the Bank to deliver such notice by such date to
the Company shall be deemed an election by the Bank not to extend the
Termination Date.
ARTICLE III.
CONDITIONS PRECEDENT
3.01 CONDITIONS OF INITIAL LOAN. The obligation of the Bank to make the
initial Loan hereunder is subject to the condition that the Bank has received on
or before the Closing Date all of the following, in form and substance
satisfactory to the Bank:
(a) CREDIT AGREEMENT. This Agreement executed by the Company;
(b) RESOLUTIONS; INCUMBENCY. (i) Copies of the resolutions of the board
of directors of the Company authorizing the transactions contemplated hereby,
certified as of the Closing Date by the Secretary of the Company; and (ii) a
certificate of the Secretary of the Company certifying the names and true
signatures of the officers of the Company authorized to execute, deliver and
perform, as applicable, this Agreement, and all other Loan Documents to be
delivered by it hereunder;
(c) ORGANIZATION DOCUMENTS; GOOD STANDING. Each of the following
documents: (i) the articles or certificate of incorporation and the bylaws of
the Company as in effect on the Closing Date, certified by the Secretary of the
Company as of the Closing Date; and (ii) a good standing and tax good standing
certificate dated not earlier than 10 days prior to the Closing Date for the
Company from the Secretary of State (or similar, applicable Governmental
Authority) of its state of incorporation and each state where the Company is
qualified to do business as a foreign corporation pursuant to the terms of
Section 4.01;
(d) LEGAL OPINION. A favorable opinion of counsel to the Company,
addressed to the Bank, with respect to such legal matters relating hereto as the
Bank may request;
(e) PAYMENT OF FEES. Evidence of payment by the Company of all accrued
and unpaid fees, costs and expenses to the extent then due and payable on the
Closing Date, together with Attorney Costs of the Bank to the extent invoiced
prior to or on the Closing Date, plus such additional amounts of Attorney Costs
as shall constitute the Bank's reasonable estimate of Attorney Costs incurred or
to be incurred by it through the closing proceedings (provided that such
estimate shall not thereafter preclude final settling of accounts between the
Company and the Bank); including any such costs, fees and expenses arising under
or referenced in Sections 2.07 and 8.04;
(f) CERTIFICATE. A certificate signed by a Responsible Officer, dated
as of the Closing Date, stating that: (i) the representations and warranties
contained in Article IV are true and correct on and as of such date, as though
made on and as of such date; (ii) no Default or Event of Default exists or would
result from the execution and delivery of this Agreement; and (iii) there has
occurred since September 30, 1998, no event or circumstance that has resulted or
could reasonably be expected to result in a Material Adverse Effect; and
12
<PAGE>
(g) OTHER DOCUMENTS. Such other approvals, opinions, documents or
materials as the Bank may request.
3.02 CONDITIONS TO ALL LOANS. The obligation of the Bank to make any
Loan (including the initial Loan) is subject to the satisfaction of the
following conditions precedent on the relevant Borrowing Date:
(a) NOTICE OF BORROWING. The Bank shall have received a Notice of
Borrowing;
(b) CONTINUATION OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties in Article IV shall be true and correct on and as of such
Borrowing Date with the same effect as if made on and as of such Borrowing Date
(except to the extent such representations and warranties expressly refer to an
earlier date, in which case they shall be true and correct as of such earlier
date); and
(c) NO EXISTING DEFAULT. No Default or Event of Default shall exist or
shall result from such Loan.
Each Notice of Borrowing submitted by the Company hereunder shall
constitute a representation and warranty by the Company hereunder, as of the
date of each such notice and as of each Borrowing Date, that the conditions in
this Section 3.02 are satisfied.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to the Bank that:
4.01 CORPORATE EXISTENCE AND POWER. Each of the Company and its
Material Subsidiaries: (a) is a corporation or limited liability company duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization; (b) has the power and authority and all
governmental licenses, authorizations, consents and approvals to own its assets,
carry on its business and to execute, deliver, and perform its obligations under
the Loan Documents; (c) is duly qualified as a foreign corporation or limited
liability company and is licensed and in good standing under the laws of each
jurisdiction where its ownership, lease or operation of property or the conduct
of its business requires such qualification or license; and (d) is in compliance
with all Requirements of Law; except, in each case referred to in clause (c) or
clause (d), to the extent that the failure to do so could not reasonably be
expected to have a Material Adverse Effect.
4.02 CORPORATE AUTHORIZATION; NO CONTRAVENTION. The execution, delivery
and performance by the Company of this Agreement and each other Loan Document to
which the Company is party, have been duly authorized by all necessary corporate
action, and do not and will not: (a) contravene the terms of any of the
Company's Organization Documents; (b) conflict with or result in any breach or
contravention of, or the creation of any Lien under, any document evidencing any
Contractual Obligation to which the Company is a party or any order, injunction,
13
<PAGE>
writ or decree of any Governmental Authority to which the Company or its
property is subject; or (c) violate any Requirement of Law.
4.03 GOVERNMENTAL AUTHORIZATION. No approval, consent, exemption,
authorization, or other action by, or notice to, or filing with, any
Governmental Authority is necessary or required in connection with the
execution, delivery or performance by, or enforcement against, the Company or
any of its Material Subsidiaries of the Agreement or any other Loan Document.
4.04 BINDING EFFECT. This Agreement and each other Loan Document to
which the Company is a party constitute the legal, valid and binding obligations
of the Company, enforceable against the Company in accordance with their
respective terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws affecting the enforcement of creditors'
rights generally or by equitable principles relating to enforceability.
4.05 LITIGATION. There are no actions, suits, proceedings, claims or
disputes pending, or to the best knowledge of the Company, threatened or
contemplated, at law, in equity, in arbitration or before any Governmental
Authority, against the Company, or its Subsidiaries or any of their respective
properties which: (a) purport to affect or pertain to this Agreement or any
other Loan Document, or any of the transactions contemplated hereby or thereby;
or (b) are reasonably expected to have a Material Adverse Effect. No injunction,
writ, temporary restraining order or any order of any nature has been issued by
any court or other Governmental Authority purporting to enjoin or restrain the
execution, delivery or performance of this Agreement or any other Loan Document,
or directing that the transactions provided for herein or therein not be
consummated as herein or therein provided.
4.06 NO DEFAULT. No Default or Event of Default exists or would result
from the incurring of any Obligations by the Company. As of the Closing Date,
neither the Company nor any Subsidiary is in default under or with respect to
any Contractual Obligation in any respect which, individually or together with
all such defaults, could reasonably be expected to have a Material Adverse
Effect, or that would, if such default had occurred after the Closing Date,
create an Event of Default under subsection 7.01(e).
4.07 ERISA COMPLIANCE.
(a) Each Plan is in compliance in all material respects with the
applicable provisions of ERISA, the Code and other federal or state law. Each
Plan which is intended to qualify under Section 401(a) of the Code has received
a favorable determination letter from the Internal Revenue Service, and any
Governmental Authority succeeding to any of its principal functions under the
Code, and to the best knowledge of the Company, nothing has occurred which would
cause the loss of such qualification. The Company and each ERISA Affiliate has
made all required contributions to any Plan subject to Section 412 of the Code,
and no application for a funding waiver or an extension of any amortization
period pursuant to Section 412 of the Code has been made with respect to any
Plan.
(b) There are no pending or, to the best knowledge of Company,
threatened claims, actions or lawsuits, or action by any Governmental Authority,
with respect to any Plan which has resulted or could reasonably be expected to
result in a Material Adverse Effect. There has been
14
<PAGE>
no prohibited transaction or violation of the fiduciary responsibility rules
with respect to any Plan which has resulted or could reasonably be expected to
result in a Material Adverse Effect.
(c) (i) No ERISA Event has occurred or is reasonably expected to occur;
(ii) no Pension Plan has any Unfunded Pension Liability; (iii) neither the
Company nor any ERISA Affiliate has incurred, or reasonably expects to incur,
any liability under Title IV of ERISA with respect to any Pension Plan (other
than premiums due and not delinquent under Section 4007 of ERISA); (iv) neither
the Company nor any ERISA Affiliate has incurred, or reasonably expects to
incur, any liability (and no event has occurred which, with the giving of notice
under Section 4219 of ERISA, would result in such liability) under Section 4201
or 4243 of ERISA with respect to a Multiemployer Plan; and (v) neither the
Company nor any ERISA Affiliate has engaged in a transaction that could be
subject to Section 4069 or 4212(c) of ERISA.
4.08 USE OF PROCEEDS; REGULATION U. The Company will not, and will not
permit any of its Subsidiaries, to use Loan proceeds in such a manner as to
result in a violation of Regulation G, T, U or X of the Board of Governors of
the FRB.
4.09. TITLE TO PROPERTIES. The Company and each Subsidiary have good
record and marketable title in fee simple to, or valid leasehold interests in,
all real property necessary or used in the ordinary conduct of their respective
businesses, except for such defects in title as could not, individually or in
the aggregate, have a Material Adverse Effect. As of the Closing Date, the
property of the Company and its Material Subsidiaries is subject to no Liens,
other than Permitted Liens.
4.10 TAXES. The Company and its Material Subsidiaries have filed (or
obtained appropriate extensions for) all Federal and other material tax returns
and reports required to be filed, and have paid all Federal and other material
taxes, assessments, fees and other governmental charges levied or imposed upon
them or their properties, income or assets otherwise due and payable, except
those which are being contested in good faith by appropriate proceedings and for
which adequate reserves have been provided in accordance with GAAP. There is no
proposed tax assessment against the Company or any Subsidiary that would, if
made, have a Material Adverse Effect.
4.11 FINANCIAL CONDITION. The audited consolidated financial statements
of Hambrecht & Quist Group and its Subsidiaries dated September 30, 1998, and
the related consolidating statements of income or operations, shareholders'
equity and cash flows for the fiscal year ended on that date: (i) were prepared
in accordance with GAAP consistently applied throughout the period covered
thereby, except as otherwise expressly noted therein; (ii) fairly present the
financial condition of the Company and its Subsidiaries as of the date thereof
and results of operations for the period covered thereby; and (iii) show all
material indebtedness and other liabilities, direct or contingent, of the
Company and its consolidated Subsidiaries as of the date thereof, including
liabilities for taxes, material commitments and material Contingent Obligations.
Since September 30, 1998, there has been no Material Adverse Effect.
4.12 REGULATED ENTITIES. None of the Company, any Person controlling
the Company, or any Material Subsidiary, is an "Investment Company" within the
meaning of the Investment Company Act of 1940. The Company is not subject to
regulation under the Public Utility
15
<PAGE>
Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act,
any state public utilities code, or any other Federal or state statute or
regulation limiting its ability to incur Indebtedness.
4.13 NO BURDENSOME RESTRICTIONS. Neither the Company nor any Subsidiary
is a party to or bound by any Contractual Obligation, or subject to any
restriction in any Organization Document, or any Requirement of Law, which could
reasonably be expected to have a Material Adverse Effect.
4.14 COPYRIGHTS, PATENTS, TRADEMARKS AND LICENSES, ETC. The Company or
its Material Subsidiaries own or are licensed or otherwise have the right to use
all of the patents, trademarks, service marks, trade names, copyrights,
contractual franchises, authorizations and other rights that are reasonably
necessary for the operation of their respective businesses, without conflict
with the rights of any other Person. To the best knowledge of the Company, no
slogan or other advertising device, product, process, method, substance, part or
other material now employed, or now contemplated to be employed, by the Company
or any Material Subsidiary infringes upon any rights held by any other Person.
No claim or litigation regarding any of the foregoing is pending or threatened,
and no patent, invention, device, application, principle or any statute, law,
rule, regulation, standard or code is pending or, to the knowledge of the
Company, proposed, which, in either case, could reasonably be expected to have a
Material Adverse Effect.
4.15 MATERIAL SUBSIDIARIES. As of the Closing Date, the Company has no
Material Subsidiaries other than those specifically disclosed in Schedule 4.15
hereto.
4.16 INSURANCE. The properties of the Company and its Material
Subsidiaries are insured with financially sound and reputable insurance
companies not Affiliates of the Company, in such amounts, with such deductibles
and covering such risks as are customarily carried by companies engaged in
similar businesses and owning similar properties in localities where the Company
or such Material Subsidiary operates.
4.17 FULL DISCLOSURE. None of the representations or warranties made by
the Company in the Loan Documents as of the date such representations and
warranties are made or deemed made, and none of the statements contained in any
exhibit, report, statement or certificate furnished by or on behalf of the
Company in connection with the Loan Documents, contains any untrue statement of
a material fact or omits any material fact required to be stated therein or
necessary to make the statements made therein, in light of the circumstances
under which they are made, not misleading as of the time when made or delivered.
4.18 H&Q LLC COMPLIANCE. H&Q LLC is a member in good standing of the
New York Stock Exchange, Inc., its designated examining authority, and is
operating pursuant to the alternative net capital requirements provided for in
paragraph (a)(1)(ii) of Rule 15c3-1.
4.19 MARGIN REGULATIONS. H&Q LLC is a broker and dealer subject to the
provisions of Regulation T of the Board of Governors of the Federal Reserve
System. H&Q LLC maintains procedures and internal controls reasonably adapted to
insure that neither H&Q LLC nor any of its Subsidiaries extends or maintains
credit to or for its customers other than in accordance with the provisions of
Regulation T, and officers of H&Q LLC regularly supervise its activities and
16
<PAGE>
those of its Subsidiaries and the activities of officers and employees of H&Q
LLC and its Subsidiaries to insure that neither H&Q LLC nor any of its
Subsidiaries extends or maintains credit to or for its or their customers other
than in accordance with the provisions of Regulation T, except for occasional
inadvertent failures to comply with Regulation T in connection with transactions
which are not material either in number or amount.
4.20 OWNERSHIP OF H&Q LLC. The Company owns directly or indirectly 100%
of the equity interests of H&Q LLC.
4.21 YEAR 2000 COMPLIANCE. The Company has conducted a comprehensive
review and assessment of the computer applications of the Company and its
Subsidiaries and has made inquiry of their material suppliers, service vendors
(including data processors) and customers, with respect to any defect in
computer software, databases, hardware, controls and peripherals related to the
occurrence of the year 2000 or the use at any time of any date which is before,
on and after December 31, 1999, in connection therewith. Based on the foregoing
review, assessment and inquiry, the Company believes that with regard to its
internal systems it has identified such potential defects and has developed and
implemented a plan to address any such defect that could reasonably be expected
to have a Material Adverse Effect. As of the date hereof, the Company has not
been advised by any of its third party suppliers that they will be unable to
resolve any year 2000 compliance issues.
ARTICLE V.
AFFIRMATIVE COVENANTS
So long as the Bank shall have any Commitment hereunder, or any Loan or
other Obligation shall remain unpaid or unsatisfied, unless the Bank waives
compliance in writing:
5.01 FINANCIAL STATEMENTS. The Company shall deliver to the Bank, in
form and detail satisfactory to the Bank:
(a) as soon as available, but not later than 100 days after the end of
each fiscal year, a copy of the audited consolidated balance sheet of Hambrecht
& Quist Group and its Subsidiaries as at the end of such year and the related
consolidated statements of income or operations, shareholders' equity and cash
flows for such year, setting forth in each case in comparative form the figures
for the previous fiscal year, and accompanied by the opinion of Arthur Andersen
LLP or another nationally-recognized independent public accounting firm
("Independent Auditor") which report shall state that such consolidated
financial statements present fairly the financial position for the periods
indicated in conformity with GAAP applied on a basis consistent with prior
years. Such opinion shall not be qualified or limited because of a restricted or
limited examination by the Independent Auditor of any material portion of the
Company's or any Subsidiary's records;
(b) as soon as available, but not later than 60 days after the end of
each of the first three fiscal quarters of each fiscal year, a copy of the
unaudited consolidated balance sheet of Hambrecht & Quist Group and its
Subsidiaries as of the end of such quarter (which may be in the form of any 10Q
filing made with the SEC) and the related consolidated statements of income,
17
<PAGE>
shareholders' equity and cash flows for the period commencing on the first day
and ending on the last day of such quarter, and certified by a Responsible
Officer as fairly presenting, in accordance with GAAP (subject to ordinary, good
faith year-end audit adjustments), the financial position and the results of
operations of the Company and the Subsidiaries;
(c) as soon as available, but not later than 100 days after the end of
each fiscal year, a copy of an unaudited consolidating balance sheet of
Hambrecht & Quist Group and its Subsidiaries as at the end of such year and the
related consolidating statement of income for such year, certified by a
Responsible Officer as having been developed and used in connection with the
preparation of the financial statements referred to in subsection 5.01(a);
(d) as soon as available, but not later than 60 days after the end of
each of the first three fiscal quarters of each fiscal year, a copy of the
unaudited consolidating balance sheets of Hambrecht & Quist Group and its
Subsidiaries, and the related consolidating statements of income for such
quarter, all certified by a Responsible Officer as having been developed and
used in connection with the preparation of the financial statements referred to
in subsection 5.01(b); and
(e) concurrently with its submission to the SEC, a copy of H&Q LLC's
FOCUS Report.
5.02 CERTIFICATES; OTHER INFORMATION. The Company shall furnish to the
Bank:
(a) concurrently with the delivery of the financial statements referred
to in subsection 5.01(a), a certificate of the Independent Auditor stating that
in making the examination necessary therefor no knowledge was obtained of any
Default or Event of Default, except as specified in such certificate;
(b) concurrently with the delivery of the financial statements referred
to in subsections 5.01(a) and (b), a Compliance Certificate executed by a
Responsible Officer;
(c) promptly, copies of all financial statements and reports that
Hambrecht & Quist Group sends to its shareholders, and copies of all financial
statements and Forms 10K, 10Q and 8K that Hambrecht & Quist Group or any
Subsidiary may make to, or file with, the SEC; and
(d) promptly, such additional information regarding the business,
financial or corporate affairs of the Company or any Subsidiary as the Bank may
from time to time request.
5.03 NOTICES. The Company shall promptly notify the Bank:
(a) of the occurrence of any Default or Event of Default, and of the
occurrence or existence of any event or circumstance that foreseeably will
become a Default or Event of Default;
(b) of any matter that has resulted or may result in a Material Adverse
Effect, including (i) breach or non-performance of, or any default under, a
Contractual Obligation of the Company or any Subsidiary; (ii) any dispute,
litigation, investigation, proceeding or suspension between the Company or any
Subsidiary and any Governmental Authority; or (iii) the
18
<PAGE>
commencement of, or any material development in, any litigation or proceeding
affecting the Company or any Subsidiary; including pursuant to any applicable
environmental laws;
(c) of the occurrence of any of the following events affecting the
Company or any ERISA Affiliate (but in no event more than 10 days after such
event), and deliver to the Bank a copy of any notice with respect to such event
that is filed with a Governmental Authority and any notice delivered by a
Governmental Authority to the Company or any ERISA Affiliate with respect to
such event: (i) an ERISA Event; (ii) a material increase in the Unfunded Pension
Liability of any Pension Plan; (iii) the adoption of, or the commencement of
contributions to, any Plan subject to Section 412 of the Code by the Company or
any ERISA Affiliate; or (iv) the adoption of any amendment to a Plan subject to
Section 412 of the Code, if such amendment results in a material increase in
contributions or Unfunded Pension Liability; and
(d) of any material change in accounting policies or financial
reporting practices by the Company or any of its consolidated Material
Subsidiaries.
Each notice under this Section shall be accompanied by a written
statement by a Responsible Officer setting forth details of the occurrence
referred to therein, and stating what action the Company or any affected
Subsidiary proposes to take with respect thereto and at what time. Each notice
under subsection 5.03(a) shall describe with particularity any and all clauses
or provisions of this Agreement or other Loan Document that have been (or
foreseeably will be) breached or violated.
5.04 PRESERVATION OF CORPORATE EXISTENCE, ETC. The Company shall, and
shall cause each Material Subsidiary to: (a) preserve and maintain in full force
and effect its corporate existence and good standing under the laws of its state
or jurisdiction of incorporation; (b) preserve and maintain in full force and
effect all governmental rights, privileges, qualifications, permits, licenses
and franchises necessary or desirable in the normal conduct of its business
except in connection with transactions permitted by Section 6.02; (c) use
reasonable efforts, in the ordinary course of business, to preserve its business
organization and goodwill; (d) preserve or renew all of its registered patents,
trademarks, trade names and service marks, the non-preservation of which could
reasonably be expected to have a Material Adverse Effect; (e) maintain in good
standing its corporate existence and its membership in the NYSE, the NASD, the
PSE, the American and Chicago Stock Exchanges, the Options Clearing Corporation,
the Securities and Futures Authority and in all similar institutions or
associations in which H&Q LLC as of the date of this Agreement, is a member, and
comply with all of the rules and regulations of such institutions and all such
memberships (except for any noncompliance which would not cause a Material
Adverse Effect); and not change the nature of its business; provided, however,
H&Q LLC may terminate its membership on an exchange or other institution which
is not material to the business or financial conditions of H&Q LLC; and (f) at
all times cause H&Q LLC to fully comply with the requirements of 17 CFR 240.15c3
and all other capital and financial responsibility requirements of the SEC, the
NYSE, the NASD, the PSE, the American and Chicago Stock Exchanges, the Options
Clearing Corporation, the Securities and Futures Authority and all similar
institutions or associations in which H&Q LLC, as of the date of this Agreement,
is a member and which are material to the business or financial condition of H&Q
LLC; provided, however, H&Q LLC need not comply with such requirements or
institutions of which it has ceased to be a member.
19
<PAGE>
5.05 MAINTENANCE OF PROPERTY. The Company shall maintain, and shall
cause each Material Subsidiary to maintain, and preserve all its property which
is used or useful in its business in good working order and condition, ordinary
wear and tear excepted. The Company and each Material Subsidiary shall use the
standard of care typical in the industry in the operation and maintenance of its
facilities.
5.06 INSURANCE. The Company shall maintain, and shall cause each
Material Subsidiary to maintain, with financially sound and reputable
independent insurers, insurance with respect to its properties and business
against loss or damage of the kinds customarily insured against by Persons
engaged in the same or similar business, of such types and in such amounts as
are customarily carried under similar circumstances by such other Persons.
5.07 PAYMENT OF OBLIGATIONS. The Company shall, and shall cause each
Material Subsidiary to, pay and discharge as the same shall become due and
payable (or obtain appropriate extensions for), all their respective obligations
and liabilities, including: (a) all tax liabilities, assessments and
governmental charges or levies upon it or its properties or assets, unless the
same are being contested in good faith by appropriate proceedings and adequate
reserves in accordance with GAAP are being maintained by the Company or such
Material Subsidiary; (b) all lawful claims which, if unpaid, would by law become
a Lien upon its property; and (c) all Indebtedness, as and when due and payable,
but subject to any subordination provisions contained in any instrument or
agreement evidencing such Indebtedness.
5.08 COMPLIANCE WITH LAWS. The Company shall comply, and shall cause
each Material Subsidiary to comply, in all material respects with all
Requirements of Law of any Governmental Authority having jurisdiction over it or
its business (including the Federal Fair Labor Standards Act), except such as
may be contested in good faith or as to which a bona fide dispute may exist.
5.09 COMPLIANCE WITH ERISA. The Company shall, and shall cause each of
its ERISA Affiliates to: (a) maintain each Plan in compliance in all material
respects with the applicable provisions of ERISA, the Code and other federal or
state law; (b) cause each Plan which is qualified under Section 401(a) of the
Code to maintain such qualification; and (c) make all required contributions to
any Plan subject to Section 412 of the Code.
5.10 INSPECTION OF PROPERTY AND BOOKS AND RECORDS. The Company shall
maintain and shall cause each Material Subsidiary to maintain proper books of
record and account, in which full, true and correct entries in conformity with
GAAP consistently applied shall be made of all financial transactions and
matters involving the assets and business of the Company and such Material
Subsidiary. The Company shall permit, and shall cause each Subsidiary to permit,
representatives and independent contractors of the Bank to visit and inspect any
of their respective properties, to examine their respective corporate, financial
and operating records, and make copies thereof or abstracts therefrom, and to
discuss their respective affairs, finances and accounts with their respective
directors, officers, and independent public accountants, all at the expense of
the Company and at such reasonable times during normal business hours and as
often as may be reasonably desired, upon reasonable advance notice to the
Company; provided, however, when an Event of Default exists the Bank may do any
of the foregoing at the expense of the Company at any time during normal
business hours and without advance notice.
20
<PAGE>
5.11 USE OF PROCEEDS. The Company shall use the proceeds of the Loans
for working capital and other general corporate purposes not in contravention of
any Requirement of Law or of any Loan Document, including, without limitation,
funding or prepaying certain payables owing to H&Q LLC. In the event the Company
makes other prepayments or payables advances to any other Subsidiary, the
Company shall be required to promptly document such payment with a promissory
note and shall promptly assign such promissory note to the Bank.
ARTICLE VI.
NEGATIVE COVENANTS
So long as the Bank shall have any Commitment hereunder, or any Loan or
other Obligation shall remain unpaid or unsatisfied, unless the Bank waives
compliance in writing:
6.01 LIMITATION ON LIENS. The Company shall not, and shall not suffer
or permit any Material Subsidiary to, directly or indirectly, make, create,
incur, assume or suffer to exist any Lien upon or with respect to any part of
its property, whether now owned or hereafter acquired, other than the following
("Permitted Liens"):
(a) any Lien existing on property of the Company or any Material
Subsidiary on the Closing Date and set forth in Schedule 6.01 securing
Indebtedness outstanding on such date;
(b) any Lien created under any Loan Document;
(c) Liens for taxes, fees, assessments or other governmental charges
which are not delinquent or remain payable without penalty, or to the extent
that non-payment thereof is permitted by Section 5.07, provided that no notice
of lien has been filed or recorded under the Code;
(d) carriers', warehousemen's, mechanics', landlords', materialmen's,
repairmen's or other similar Liens arising in the ordinary course of business
which are not delinquent or remain payable without penalty or which are being
contested in good faith and by appropriate proceedings, which proceedings have
the effect of preventing the forfeiture or sale of the property subject thereto;
(e) Liens (other than any Lien imposed by ERISA) consisting of pledges
or deposits required in the ordinary course of business in connection with
workers' compensation, unemployment insurance and other social security
legislation;
(f) Liens on the property of the Company or its Subsidiary securing (i)
the non-delinquent performance of bids, trade contracts (other than for borrowed
money), leases, statutory obligations, (ii) contingent obligations on surety and
appeal bonds, and (iii) other non-delinquent obligations of a like nature; in
each case, incurred in the ordinary course of business, provided all such Liens
in the aggregate would not (even if enforced) cause a Material Adverse Effect;
21
<PAGE>
(g) Liens consisting of judgment or judicial attachment liens, provided
that the enforcement of such Liens is effectively stayed and all such liens in
the aggregate at any time outstanding for the Company and its Subsidiaries do
not exceed $20,000,000;
(h) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business which, in the
aggregate, are not substantial in amount, and which do not in any case
materially detract from the value of the property subject thereto or interfere
with the ordinary conduct of the businesses of the Company and its Subsidiaries;
(i) Liens on assets of corporations which become Subsidiaries after the
date of this Agreement, provided, however, that such Liens existed at the time
the respective corporations became Subsidiaries and were not created in
anticipation thereof;
(j) Liens arising solely by virtue of any statutory or common law
provision relating to banker's liens, rights of set-off or similar rights and
remedies as to deposit accounts or other funds maintained with a creditor
depository institution; provided that (i) such deposit account is not a
dedicated cash collateral account and is not subject to restrictions against
access by the Company in excess of those set forth by regulations promulgated by
the FRB, and (ii) such deposit account is not intended by the Company or any
Subsidiary to provide collateral to the depository institution;
(k) in addition to the foregoing, other Liens securing Indebtedness
incurred after the date hereof, and which Indebtedness secured by such Liens, in
the aggregate, is less than $25,000,000 at any one time outstanding.
6.02 CONSOLIDATIONS AND MERGERS. The Company shall not, and shall not
suffer or permit any Material Subsidiary to, merge, consolidate with or into, or
convey, transfer, lease or otherwise dispose of (whether in one transaction or
in a series of transactions) all or substantially all of its assets (whether now
owned or hereafter acquired) to or in favor of any Person, except:
(a) any Material Subsidiary may merge with the Company, provided that
the Company shall be the continuing or surviving corporation, or with any one or
more Material Subsidiaries, provided that if any transaction shall be between a
Material Subsidiary and a Wholly-Owned Material Subsidiary, the Wholly-Owned
Material Subsidiary shall be the continuing or surviving corporation; and
(b) any Material Subsidiary may sell all or substantially all of its
assets (upon voluntary liquidation or otherwise), to the Company or another
Wholly-Owned Material Subsidiary.
6.03 LIMITATION ON INDEBTEDNESS. The Company shall not, and shall not
suffer or permit any Material Subsidiary to, create, incur, assume, suffer to
exist, or otherwise become or remain directly or indirectly liable with respect
to, any Indebtedness, except: (a) Indebtedness incurred pursuant to this
Agreement; (b) letters of credit issued for the Company's account by the Bank
which shall not exceed the aggregate face amount of $5,000,000 outstanding at
any one time; (c) letters of credit issued for H&Q LLC's account by Bank of New
York which shall not exceed the aggregate face amount of $8,000,000 outstanding
at any one time; (d) secured line of credit issued for the account of Hambrecht
& Quist Guaranty Finance, LLC by Silicon Valley
22
<PAGE>
Bank which shall not exceed the aggregate principal amount of $25,000,000
outstanding at any one time; and (e) additional unsecured Indebtedness which in
the aggregate shall not exceed $30,000,000 outstanding at any one time.
6.04 TRANSACTIONS WITH AFFILIATES. The Company shall not, and shall not
suffer or permit any Material Subsidiary to, enter into any transaction with any
Affiliate of the Company, except upon fair and reasonable terms no less
favorable to the Company or such Material Subsidiary than would obtain in a
comparable arm's-length transaction with a Person not an Affiliate of the
Company or such Material Subsidiary.
6.05 USE OF PROCEEDS. The Company shall not, and shall not permit any
Subsidiary, to use any portion of the Loan proceeds, directly or indirectly in a
manner which would violate Section 4.08 or Section 5.11.
6.06 ERISA. The Company shall not, and shall not suffer or permit any
of its ERISA Affiliates to: (a) engage in a prohibited transaction or violation
of the fiduciary responsibility rules with respect to any Plan which has
resulted or could reasonably expected to result in liability of the Company in
an aggregate amount in excess of 10% of Tangible Net Worth; or (b) engage in a
transaction that could be subject to Section 4069 or 4212(c) of ERISA.
6.07 CHANGE IN BUSINESS. The Company shall not, and shall not suffer or
permit any Subsidiary to, conduct any business other than the business of the
Company or of such Subsidiary carried on as of the date hereof and such other
businesses which are related to the broker-dealer, investment banking and
related financial services activities of the Company or such Subsidiary.
6.08 ACCOUNTING CHANGES. The Company shall not, and shall not suffer or
permit any Material Subsidiary to, make any significant change in accounting
treatment or reporting practices, except as required by GAAP, or change the
fiscal year of the Company.
6.09 TANGIBLE NET WORTH. The Company shall not permit its consolidated
Tangible Net Worth to be less than $275,000,000 at any time.
6.10 CONSOLIDATED LOSS. The Company shall not permit its consolidated
loss for any fiscal quarter to exceed $20,000,000.
6.11 MINIMUM NET CAPITAL. The Company shall not at any time permit
H&Q's LLC Net Capital to be less than the greater of (i) 9% of H&Q LLC's
Aggregate Debit Items, or (ii) 2% above the minimum net capital requirement for
H&Q LLC as prescribed by the alternative net capital requirements of Rule
15c3-1.
ARTICLE VII.
EVENTS OF DEFAULT
7.01 EVENT OF DEFAULT. Any of the following shall constitute an "Event
of Default":
23
<PAGE>
(a) NON-PAYMENT. The Company fails to pay, (i) when and as required to
be paid herein, any amount of principal of any Loan, or (ii) within five days
after the same becomes due, any interest, fee or any other amount payable
hereunder or under any other Loan Document; or
(b) REPRESENTATION OR WARRANTY. Any representation or warranty by the
Company made or deemed made herein, in any other Loan Document, or which is
contained in any certificate, document or financial or other statement by the
Company, or any Responsible Officer, furnished at any time under this Agreement,
or in or under any other Loan Document, is incorrect in any material respect on
or as of the date made or deemed made; or
(c) SPECIFIC DEFAULTS. The Company fails to perform or observe any
term, covenant or agreement contained in any of Sections 5.01, 5.02, 5.03
or 5.09 or in Article VI; or
(d) OTHER DEFAULTS. The Company fails to perform or observe any other
term or covenant contained in this Agreement or any other Loan Document, and
such default shall continue unremedied for a period of 20 days after the earlier
of (i) the date upon which a Responsible Officer knew or reasonably should have
known of such failure and (ii) the date upon which written notice thereof is
given to the Company by the Bank; or
(e) CROSS-DEFAULT. (i) The Company or any Material Subsidiary (A) fails
to make any payment in respect of any Indebtedness having an aggregate principal
amount including amounts owing to all creditors under any combined or syndicated
credit arrangement) of more than $10,000,000 when due (whether by scheduled
maturity, required prepayment, acceleration, demand, or otherwise) and such
failure continues after the applicable grace or notice period, if any, specified
in the relevant document on the date of such failure; or (B) fails to perform or
observe any other condition or covenant, or any other event shall occur or
condition exist, under any agreement or instrument relating to any such
Indebtedness, and such failure continues after the applicable grace or notice
period, if any, specified in the relevant document on the date of such failure
if the effect of such failure, event or condition is to cause, or to permit the
holder or holders of such Indebtedness or beneficiary or beneficiaries of such
Indebtedness (or a trustee or agent on behalf of such holder or holders or
beneficiary or beneficiaries) to cause such Indebtedness to be declared to be
due and payable prior to its stated maturity, or any material Contingent
Obligation to become payable or cash collateral in respect thereof to be
demanded.
(f) INSOLVENCY; VOLUNTARY PROCEEDINGS. The Company or any Material
Subsidiary (i) ceases or fails to be solvent, or generally fails to pay, or
admits in writing its inability to pay, its debts as they become due, subject to
applicable grace periods, if any, whether at stated maturity or otherwise; (ii)
voluntarily ceases to conduct its business in the ordinary course; (iii)
commences any Insolvency Proceeding with respect to itself; or (iv) takes any
action to effectuate or authorize any of the foregoing; or
(g) INVOLUNTARY PROCEEDINGS. (i) Any involuntary Insolvency Proceeding
is commenced or filed against the Company or any Material Subsidiary, or any
writ, judgment, warrant of attachment, execution or similar process, is issued
or levied against a substantial part of the Company's or any Material
Subsidiary's properties, and any such proceeding or petition shall not be
dismissed, or such writ, judgment, warrant of attachment, execution or similar
process shall not be released, vacated or fully bonded within 60 days after
commencement, filing
24
<PAGE>
or levy; (ii) the Company or any Material Subsidiary admits the material
allegations of a petition against it in any Insolvency Proceeding, or an order
for relief (or similar order under non-U.S. law) is ordered in any Insolvency
Proceeding; or (iii) the Company or any Material Subsidiary acquiesces in the
appointment of a receiver, trustee, custodian, conservator, liquidator,
mortgagee in possession (or agent therefor), or other similar Person for itself
or a substantial portion of its property or business; or
(h) ERISA. (i) An ERISA Event shall occur with respect to a Pension
Plan or Multiemployer Plan which has resulted or could reasonably be expected to
result in liability of the Company under Title IV of ERISA to the Pension Plan,
Multiemployer Plan or the PBGC in an aggregate amount in excess of 25% of
Tangible Net Worth; (ii) the aggregate amount of Unfunded Pension Liability
among all Pension Plans at any time exceeds 25% of Tangible Net Worth; or (iii)
the Company or any ERISA Affiliate shall fail to pay when due, after the
expiration of any applicable grace period, any installment payment with respect
to its withdrawal liability under Section 4201 of ERISA under a Multiemployer
Plan in an aggregate amount in excess of 25% of Tangible Net Worth; or
(i) MONETARY JUDGMENTS. One or more non-interlocutory judgments,
non-interlocutory orders, decrees or arbitration awards is entered against the
Company or any Subsidiary involving in the aggregate a liability on the part of
the Company or any Material Subsidiary (to the extent not covered by independent
third-party insurance as to which the insurer does not dispute coverage) as to
any single or related series of transactions, incidents or conditions, of
$20,000,000 or more, and the same shall remain unvacated and unstayed pending
appeal for a period of 10 days after the entry thereof; or
(j) NON-MONETARY JUDGMENTS. Any non-monetary judgment, order or decree
is entered against the Company or any Subsidiary which does or would reasonably
be expected to have a Material Adverse Effect, and there shall be any period of
10 consecutive days during which a stay of enforcement of such judgment or
order, by reason of a pending appeal or otherwise, shall not be in effect; or
(k) CHANGE OF OWNERSHIP. There occurs any Change of Ownership; or
(l) DESIGNATED SELF-REGULATORY ORGANIZATION REVOCATION. Any Designated
Self-Regulatory Organization shall revoke H&Q LLC's membership therein or shall
suspend such membership and such membership shall not be reinstated within 10
days of such suspension; or
(m) COMMISSION REVOCATION. The Commission shall revoke H&Q LLC's status
as a broker-dealer or shall suspend such status and such status shall not be
reinstated within 10 days of such suspension; or
(n) ADVERSE CHANGE. There occurs a Material Adverse Effect.
7.02 REMEDIES. If any Event of Default occurs, the Bank may: (a)
declare the commitment of the Bank to make Loans to be terminated, whereupon
such commitment shall be terminated; (b) declare the unpaid principal amount of
all outstanding Loans, all interest accrued and unpaid thereon, and all other
amounts owing or payable hereunder or under any other Loan Document to be
immediately due and payable, without presentment, demand, protest or other
25
<PAGE>
notice of any kind, all of which are hereby expressly waived by the Company; and
(c) exercise all rights and remedies available to it under the Loan Documents or
applicable law; provided, however, that upon the occurrence of any event
specified in subsection (f) or (g) of Section 7.01 (in the case of clause (i) of
subsection (g) upon the expiration of the 60-day period mentioned therein), the
obligation of the Bank to make Loans shall automatically terminate and the
unpaid principal amount of all outstanding Loans and all interest and other
amounts as aforesaid shall automatically become due and payable without further
act of the Bank.
7.03 RIGHTS NOT EXCLUSIVE. The rights provided for in this Agreement
and the other Loan Documents are cumulative and are not exclusive of any other
rights, powers, privileges or remedies provided by law or in equity, or under
any other instrument, document or agreement now existing or hereafter arising.
ARTICLE VIII. MISCELLANEOUS
8.01 AMENDMENTS AND WAIVERS. No amendment or waiver of any provision of
this Agreement or any other Loan Document, and no consent with respect to any
departure by the Company therefrom, shall be effective unless the same shall be
in writing and signed by the Bank and the Company, and then any such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given.
8.02 NOTICES.
(a) All notices, requests, consents, approvals, waivers and other
communications shall be in writing (including, unless the context expressly
otherwise provides and except as specifically provided in Section 2.03, by
facsimile transmission, provided that any matter transmitted by the Company by
facsimile (i) shall be immediately confirmed by a telephone call from the
recipient at the number specified on the signature page hereof with respect to
such Person, and (ii) shall be followed promptly by delivery of a hard copy
original thereof) and mailed, telecopied or delivered, to the address or
facsimile number specified for notices on the signature page hereof with respect
to such Person; or, as directed to the Company or the Bank, to such other
address as shall be designated by such party in a written notice to the other
parties, and as directed to any other party, at such other address as shall be
designated by such party in a written notice to the Company and the Bank.
(b) All such notices, requests and communications shall, when
transmitted by overnight delivery, or faxed, be effective when delivered for
overnight (next-day) delivery, or transmitted in legible form by facsimile
machine, respectively, or if mailed, upon the third Business Day after the date
deposited into the U.S. mail, or if delivered, upon delivery; except that
notices pursuant to Article II shall not be effective until actually received by
the Bank.
(c) Any agreement of the Bank herein to receive certain notices by
telephone or facsimile is solely for the convenience and at the request of the
Company. The Bank shall be entitled to rely on the authority of any Person
purporting to be a Person authorized by the Company to give such notice and the
Bank shall not have any liability to the Company or other Person on account of
any action taken or not taken by the Bank in reliance upon such telephonic or
facsimile notice. The obligation of the Company to repay the Loans shall not be
affected in
26
<PAGE>
any way or to any extent by any failure by the Bank to receive written
confirmation of any telephonic or facsimile notice or the receipt by the Bank of
a confirmation which is at variance with the terms understood by the Bank to be
contained in the telephonic or facsimile notice.
8.03 NO WAIVER; CUMULATIVE REMEDIES. No failure to exercise and no
delay in exercising, on the part of the Bank, any right, remedy, power or
privilege hereunder, shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, remedy, power or privilege hereunder preclude any
other or further exercise thereof or the exercise of any other right, remedy,
power or privilege.
8.04 COSTS AND EXPENSES. The Company shall: (a) pay or reimburse the
Bank within five Business Days after demand (subject to subsection 3.01(e)) for
all costs and expenses incurred by the Bank in connection with the development,
preparation, delivery, administration and execution of, and any amendment,
supplement, waiver or modification to this Agreement, any Loan Document and any
other documents prepared in connection herewith or therewith, and the
consummation of the transactions contemplated hereby and thereby, including
Attorney Costs incurred by the Bank with respect thereto; and (b) pay or
reimburse the Bank within five Business Days after demand for all costs and
expenses (including Attorney Costs) incurred by it in connection with the
enforcement, attempted enforcement, or preservation of any rights or remedies
under this Agreement or any other Loan Document during the existence of an Event
of Default or after acceleration of the Loans (including in connection with any
"workout" or restructuring regarding the Loans, and including in any Insolvency
Proceeding or appellate proceeding).
8.05 INDEMNIFICATION. The Company shall indemnify, defend and hold the
Bank and each of its officers, directors and employees (each, an "Indemnified
Person") harmless from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, charges, expenses and
disbursements (including Attorney Costs) of any kind or nature whatsoever which
may at any time (including at any time following repayment of the Loans) be
imposed on, incurred by or asserted against any such Indemnified Person in any
way relating to or arising out of the Company's failure to perform any of its
obligations under this Agreement or any document contemplated by or referred to
herein, including with respect to any investigation, litigation or proceeding
(including any Insolvency Proceeding or appellate proceeding), whether or not
any Indemnified Person is a party thereto (all the foregoing, collectively, the
"Indemnified Liabilities"); provided, that the Company shall have no obligation
hereunder to any Indemnified Person with respect to Indemnified Liabilities
resulting solely from the gross negligence or willful misconduct of any
Indemnified Person. The agreements in this Section shall survive payment of all
other Obligations.
8.06 PAYMENTS SET ASIDE. To the extent that the Company makes a payment
to the Bank, or the Bank exercises its right of set-off, and such payment or the
proceeds of such set-off or any part thereof are subsequently invalidated,
declared to be fraudulent or preferential, set aside or required (including
pursuant to any settlement entered into by the Bank in its discretion) to be
repaid to a trustee, receiver or any other party, in connection with any
Insolvency Proceeding or otherwise, then to the extent of such recovery the
obligation or part thereof originally intended to be satisfied shall be revived
and continued in full force and effect as if such payment had not been made or
such set-off had not occurred.
27
<PAGE>
8.07 SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns, except that the Company may not assign or transfer any
of its rights or obligations under this Agreement without the prior written
consent of the Bank.
8.08 ASSIGNMENTS, PARTICIPATIONS, ETC.
(a) The Bank may at any time and from time to time, with the prior
consent of the Company, at all times other than during the existence of an Event
of Default, which consent shall not be unreasonably withheld (provided, that no
consent of the Company shall be required in connection with any assignment and
delegation by the Bank to an Affiliate of the Bank), assign and delegate to one
commercial bank ("Assignee") all of the Loans, the Commitment and the other
rights and obligations of the Bank hereunder; provided, however, that the
Company may continue to deal solely and directly with the Bank in connection
with the interest so assigned to an Assignee until written notice of such
assignment, together with payment instructions, addresses and related
information with respect to the Assignee, shall have been given to the Company
by the Bank and the Assignee.
(b) The Bank may at any time and from time to time, without notice to
or the consent of the Company, sell to one or more commercial banks or other
Persons (a "Participant") participating interests in any Loans, the Commitment
and the other interests of the Bank hereunder and under the other Loan
Documents.
(c) Notwithstanding any other provision in this Agreement, the Bank may
at any time create a security interest in, or pledge, all or any portion of its
rights under and interest in this Agreement in favor of any Federal Reserve Bank
in accordance with Regulation A of the FRB or 31 U.S. Treasury Regulation CFR
ss.203.14, and such Federal Reserve Bank may enforce such pledge or security
interest in any manner permitted under applicable law.
8.09 CONFIDENTIALITY. The Bank agrees to take normal and reasonable
precautions and exercise due care to maintain the confidentiality of all
information identified as "confidential" or "secret" by the Company and provided
to it by the Company or any Subsidiary, under this Agreement or any other Loan
Document, and the Bank shall not use any such information other than in
connection with or in enforcement of this Agreement and the other Loan Documents
or in connection with other business now or hereafter existing or contemplated
with the Company or any Subsidiary; except to the extent such information (i)
was or becomes generally available to the public other than as a result of
disclosure by the Bank, or (ii) was or becomes available on a non-confidential
basis from a source other than the Company, provided that such source is not
bound by a confidentiality agreement with the Company; provided, however, that
the Bank may disclose such information (A) at the request or pursuant to any
requirement of any Governmental Authority to which the Bank is subject or in
connection with an examination of the Bank by any such authority; (B) pursuant
to subpoena or other court process; (C) when required to do so in accordance
with the provisions of any applicable Requirement of Law; (D) to the extent
reasonably required in connection with any litigation or proceeding to which the
Bank or may be party; (E) to the extent reasonably required in connection with
the exercise of any remedy hereunder or under any other Loan Document; (F) to
the Bank's independent auditors and other professional advisors; (G) to any
Participant or Assignee, actual or potential, provided that such
28
<PAGE>
Person agrees in writing to keep such information confidential to the same
extent required of the Bank hereunder; (H) as expressly permitted under the
terms of any other document or agreement regarding confidentiality to which the
Company or any Subsidiary is party or is deemed party with the Bank; and (I) to
its Affiliates solely for the purpose of facilitating the Bank's rights and
obligations under this Agreement.
8.10 SET-OFF. In addition to any rights and remedies of the Bank
provided by law, if an Event of Default exists or the Loans have been
accelerated, the Bank is authorized at any time and from time to time, without
prior notice to the Company, any such notice being waived by the Company to the
fullest extent permitted by law, to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held by,
and other indebtedness at any time owing by, the Bank to or for the credit or
the account of the Company against any and all Obligations owing to the Bank,
now or hereafter existing. The Bank agrees promptly to notify the Company after
any such set-off and application made by the Bank; provided, however, that the
failure to give such notice shall not affect the validity of such set-off and
application.
8.11 COUNTERPARTS. This Agreement may be executed in any number of
separate counterparts, each of which, when so executed, shall be deemed an
original, and all of said counterparts taken together shall be deemed to
constitute but one and the same instrument.
8.12 SEVERABILITY. The illegality or unenforceability of any provision
of this Agreement or any instrument or agreement required hereunder shall not in
any way affect or impair the legality or enforceability of the remaining
provisions of this Agreement or any instrument or agreement required hereunder.
8.13 NO THIRD PARTIES BENEFITED. This Agreement is made and entered
into for the sole protection and legal benefit of the Company, the Bank and
their permitted successors and assigns, and no other Person shall be a direct or
indirect legal beneficiary of, or have any direct or indirect cause of action or
claim in connection with, this Agreement or any of the other Loan Documents.
8.14 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE INTERNAL LAW OF THE STATE OF NEW YORK; PROVIDED THAT THE
BANK AND THE COMPANY SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW.
29
<PAGE>
8.15 ENTIRE AGREEMENT. This Agreement, together with the other Loan
Documents, embodies the entire agreement and understanding between the Company
and the Bank, and supersedes all prior or contemporaneous agreements and
understandings of such Persons, verbal or written, relating to the subject
matter hereof and thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the day and year first above written.
HAMBRECHT & QUIST CALIFORNIA
By: /s/ Patrick J. Allen
Title: Chief Financial Officer
By: /s/ David M. McAuliffe
Title: Chief Operating Officer
Notices:
Hambrecht & Quist California
One Bush Street
San Francisco, CA 94104
Attention: Lisa L. Lewis
Telephone: 415/439-3228
Facsimile: 415/677-7742
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: /s/ Jeff Kovarik
Title: Vice President
Notices (other than Borrowing Notices):
Bank of America National Trust and Savings Association
231 S. LaSalle St., Suite 1012
Chicago, IL 60697
Attention: Jeff Kovarik
Telephone: 312/828-8870
Facsimile: 312/828-3359
30
<PAGE>
EXHIBIT A
NOTICE OF BORROWING
Date: _______________, 199_
To: Bank of America National Trust and Savings Association
regarding that certain Credit Agreement dated as of April 30,
1999 (as extended, renewed, amended or restated from time to
time, the "Agreement") between Hambrecht & Quist California
and Bank of America National Trust and Savings Association
(the "Bank")
Ladies and Gentlemen:
The undersigned, a Responsible Officer of Hambrecht & Quist California
(the "Company"), refers to the Agreement, the terms defined therein being used
herein as therein defined, and hereby gives you notice irrevocably, pursuant to
Section 2.03 of the Agreement, of the Borrowing specified below:
1. The Business Day of the proposed Borrowing is _____________, 19__
.
2. The aggregate amount of the proposed Borrowing is $_____________.
The undersigned hereby certifies that the following statements are true
on the date hereof, and will be true on the date of the proposed Borrowing,
before and after giving effect thereto and to the application of the proceeds
therefrom:
(a) the representations and warranties of the Company contained in Article
IV of the Agreement are true and correct as though made on and as of
such date (except to the extent such representations and warranties
relate to an earlier date, in which case they are true and correct as
of such date); and
(b) no Default or Event of Default has occurred and is continuing, or
would result from such proposed Borrowing.
HAMBRECHT & QUIST CALIFORNIA
By:__________________________
Title:_______________________
1
<PAGE>
EXHIBIT B
HAMBRECHT & QUIST CALIFORNIA
COMPLIANCE CERTIFICATE
Financial
Statement Date: _______, 199_
Reference is made to that certain Credit Agreement dated as of April
30, 1999 (as extended, renewed, amended or restated from time to time, the
"Agreement") between Hambrecht & Quist California, a California corporation (the
"Company") and Bank of America National Trust and Savings Association (the
"Bank"). Unless otherwise defined herein, capitalized terms used herein have the
respective meanings assigned to them in the Credit Agreement.
The undersigned Responsible Officer of Hambrecht & Quist California,
hereby certifies as of the date hereof that he/she is the of the Company, and
that, as such, he/she is authorized to execute and deliver this Certificate to
the Bank on the behalf of the Company and its consolidated Subsidiaries, and
that: [Use the following paragraph if this Certificate is delivered in
connection with the financial statements required by subsection 5.01(a) of the
Agreement.]
1. Attached as Schedule 1 hereto are (a) a true and correct copy of the
audited consolidated balance sheet of the Hambrecht & Quist Group and its
consolidated Subsidiaries as at the end of the fiscal year ended
_______________, 199__ and (b) the related consolidated statements of income or
operations, shareholders' equity and cash flows for such fiscal year, setting
forth in each case in comparative form the figures for the previous fiscal year,
and accompanied by the opinion of _________________ or another
nationally-recognized certified independent public accounting firm (the
"Independent Auditor") which report shall state that such consolidated financial
statements are complete and correct and have been prepared in accordance with
GAAP, and fairly present, in all material respects, the financial position of
the Company and its consolidated Subsidiaries for the periods indicated and on a
basis consistent with prior periods.
or
[Use the following paragraph if this Certificate is delivered in connection with
the financial statements required by subsection 5.01(b) of the Agreement.]
1. Attached as Schedule 1 hereto are (a) a true and correct copy of the
unaudited consolidated balance sheet of the Hambrecht & Quist Group and its
consolidated Subsidiaries as of the end of the fiscal quarter ended __________,
199__, and (b) the related unaudited consolidated statements of income,
shareholders' equity, and cash flows for the period commencing on the first day
and ending on the last day of such quarter, and certified by a Responsible
Officer that such financial statements were prepared in accordance with GAAP
(subject only to ordinary, good faith year-end audit
2
<PAGE>
adjustments and the absence of footnotes) and fairly present, in all material
respects, the financial position and the results of operations of the Company
and its consolidated Subsidiaries.
2. The undersigned has reviewed and is familiar with the terms of the
Agreement and has made, or has caused to be made under his/her supervision, a
detailed review of the transactions and conditions (financial or otherwise) of
the Company during the accounting period covered by the attached financial
statements.
3. To the best of the undersigned's knowledge, the Company, during such
period, has observed, performed or satisfied all of its covenants and other
agreements, and satisfied every condition in the Credit Agreement to be
observed, performed or satisfied by the Company, and the undersigned has no
knowledge of any Default or Event of Default.
4. The following financial covenant analyses and information set forth
on Schedule 2 attached hereto are true and accurate on and as of the date of
this Certificate.
IN WITNESS WHEREOF, the undersigned has executed this Certificate as of
______________,199_.
HAMBRECHT & QUIST CALIFORNIA
By: _________________________
Title: ______________________
3
<PAGE>
Date: ______________, 199__
For the fiscal quarter/year ____
ended ______________, 199__
SCHEDULE 2
to the Compliance Certificate
($in 000's)
<TABLE>
<CAPTION>
COMPLIANCE
SECTION ACTUAL REQUIRED/PERMITTED (YES OR NO)
<S> <C> <C> <C> <C>
6.03 Indebtedness $_____________ Not to exceed $5,000,000 ______
for letters of credit for the
Company; $8,000,000 for
letters of credit for H&Q
LLC; $25,000,000 for
Hambrecht & Quist Guaranty
Finance line of credit; or
$30,000,000 for other
unsecured Indebtedness
6.09 Consolidated Tangible
Net Worth $_____________ Not less than $275,000,000 _______
6.10 Consolidated Net Income
[Loss] $_____________ Consolidated Loss not more than _______
$20,000,000 for any fiscal quarter
6.11 H&Q LLC's Minimum Net
Capital to Aggregate Debit
Items _____________% H&Q LLC's Net Capital not less ________
than greater of (i) 9% of its
Aggregate Debit Items or (ii)
2% above its minimum net
capital requirements
</TABLE>
4
<PAGE>
SCHEDULE 4.15
MATERIAL SUBSIDIARIES
Hambrecht & Quist LLC, a Delaware limited liability company
Hambrecht & Quist Capital Management Incorporated, a California corporation
Hambrecht & Quist Guaranty Finance, LLC, a California limited liability company
5
<PAGE>
SCHEDULE 6.01
EXISTING LIENS
Subsidiary: Hambrecht & Quist Guaranty Finance, LLC
Secured Party: Silicon Valley Bank
Lien(s): All Hambrecht & Quist Guaranty Finance, LLC
assets, except for cash and marketable securities
6
<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> MAR-31-1999
<CASH> 67,089
<RECEIVABLES> 451,358
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 51,177
<PP&E> 16,235
<TOTAL-ASSETS> 799,903
<SHORT-TERM> 0
<PAYABLES> 397,386
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 25,170
<LONG-TERM> 0
0
0
<COMMON> 145,696
<OTHER-SE> 231,650
<TOTAL-LIABILITY-AND-EQUITY> 779,903
<TRADING-REVENUE> 77,980
<INTEREST-DIVIDENDS> 12,954
<COMMISSIONS> 31,410
<INVESTMENT-BANKING-REVENUES> 57,176
<FEE-REVENUE> 41,730
<INTEREST-EXPENSE> 1,491
<COMPENSATION> 126,545
<INCOME-PRETAX> 66,470
<INCOME-PRE-EXTRAORDINARY> 66,470
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,888
<EPS-PRIMARY> 1.56<F1>
<EPS-DILUTED> 1.45<F1>
<FN>
<F1> Reflects basic and diluted EPS, respectively, prepared in accordance with
SFAS No. 128.
</FN>
</TABLE>
