<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 December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-11855
HAMBRECHT & QUIST GROUP
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3246636
(State or other jurisdiction (I.R.S. Employer Identification 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 [ ]
24,185,858 shares of Common Stock were issued and outstanding as of
February 8, 1999.
<PAGE>
HAMBRECHT & QUIST GROUP
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements....................................... 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 20
Item 6. Exhibits and Reports on Form 8-K........................... 21
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HAMBRECHT & QUIST GROUP
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
September 30, December 31,
1998 1998
-------------- --------------
<S> <C> <C>
(unaudited)
ASSETS
Cash and cash equivalents.............................................................. $ 66,959,567 $ 93,039,624
Receivables:
Customers (net of allowance of $1,175,000) .......................................... 215,657,363 223,236,474
Lewco Securities Corp................................................................ -- 31,945,821
Syndicate managers................................................................... 11,013,798 4,159,438
Related parties...................................................................... 17,632,094 18,304,327
Notes (net of allowance of $4,341,348 and $5,048,677, respectively)................. 13,554,957 9,013,750
Income taxes......................................................................... 4,032,103 --
Other................................................................................ 20,486,412 18,782,854
Marketable trading securities, at market value......................................... 31,677,092 58,989,705
Long-term investments, at estimated fair value......................................... 129,622,466 125,645,152
Deferred income taxes.................................................................. 75,813,545 78,860,620
Furniture, equipment and leasehold improvements, net of accumulated depreciation and
amortization......................................................................... 16,962,409 15,883,918
Other assets .......................................................................... 3,256,553 3,403,769
-------------- --------------
Total assets................................................................. $606,668,359 $681,265,452
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Payables:
Customers............................................................................ $ 83,221,535 $154,988,826
Compensation and benefits............................................................ 123,933,699 112,500,758
Lewco Securities Corp. .............................................................. 11,396,221 --
Syndicate settlements................................................................ 4,442,449 7,577,570
Income taxes payable................................................................. -- 2,889,200
Trade accounts payable............................................................... 2,897,223 1,649,332
Accrued expenses and other........................................................... 25,898,187 27,075,642
Securities sold, not yet purchased, at market value.................................... 18,122,784 17,523,212
-------------- --------------
Total liabilities............................................................ 269,912,098 324,204,540
-------------- --------------
Commitments and contingencies
Stockholders' equity:
Common stock (par value $0.01 and 100,000,000 shares authorized,
24,561,944 shares issued) ........................................................... 245,619 245,619
Additional paid-in capital........................................................... 157,217,641 150,397,193
Stock notes receivable from employees................................................ (3,079,872) (2,557,626)
Retained earnings.................................................................... 207,441,350 219,517,556
Unrealized losses on investments available for sale, net............................. (3,258,584) (2,991,408)
Cumulative translation loss.......................................................... (144,671) (140,410)
Treasury stock, at cost (978,802 and 427,643 shares, respectively) (21,665,222) (7,410,012)
-------------- --------------
Total stockholders' equity................................................... 336,756,261 357,060,912
-------------- --------------
Total liabilities and stockholders' equity................................... $606,668,359 $681,265,452
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
HAMBRECHT & QUIST GROUP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1998
1997 1998
--------------- ---------------
(UNAUDITED)
REVENUES:
Principal transactions..................... $27,228,603 $32,972,848
Commissions................................ 11,282,389 15,228,731
Investment banking......................... 22,887,465 9,610,587
Corporate finance fees..................... 17,554,254 14,108,722
Interest and dividends..................... 6,340,802 6,318,307
Net investment gains....................... 662,662 14,464,747
Other...................................... 5,665,523 7,166,333
--------------- ---------------
Total revenues........................... 91,621,698 99,870,275
--------------- ---------------
EXPENSES:
Compensation and benefits.................. 45,810,849 49,926,850
Brokerage and clearance.................... 5,026,444 7,457,084
Occupancy and equipment.................... 5,459,879 5,460,828
Communications............................. 3,088,941 3,727,184
Interest................................... 1,124,032 805,588
Other...................................... 19,445,484 11,306,415
--------------- ---------------
Total expenses........................... 79,955,629 78,683,949
--------------- ---------------
Income before income tax provision....... 11,666,069 21,186,326
INCOME TAX PROVISION......................... 5,016,410 9,110,120
--------------- ---------------
Net income............................... $ 6,649,659 $12,076,206
=============== ===============
EARNINGS PER SHARE:
Basic...................................... $0.28 $0.50
Diluted.................................... $0.25 $0.47
WEIGHTED AVERAGE SHARES:
Basic...................................... 24,000,058 24,086,143
Diluted.................................... 26,385,308 25,827,748
The accompanying notes are an integral part of these statements.
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<PAGE>
HAMBRECHT & QUIST GROUP
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 1998 AND THREE MONTHS ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Number of Additional
Common Common Paid-In Stock Notes Retained Unrealized
Shares Stock 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)
Reductions of stock notes ....... 522,246
Net income ...................... 12,076,206
Change in net unrealized losses . 267,176
Change in translation loss ......
Treasury stock transactions ..... (6,820,448)
------------- ------------- ------------- ------------- -------------- ------------
BALANCE, DECEMBER 31, 1998 ...... 24,561,944 $ 245,619 $ 150,397,193 $(2,557,626) $219,517,556 $(2,991,408)
=========== ============= ============= ============ ============ ============
<CAPTION>
Cumulative Treasury
Translation Stock,
Loss at 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
Reductions of stock notes ............. 522,246
Net income ............................ 12,076,206
Change in net unrealized losses ....... 267,176
Change in translation loss ............ 4,261 4,261
Treasury stock transactions ........... 14,255,210 7,434,762
------------- ------------- -------------
BALANCE, DECEMBER 31, 1998 ............ $ (140,410) $ (7,410,012) $ 357,060,912
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements
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<PAGE>
HAMBRECHT & QUIST GROUP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
--------------- --------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES..................................... $(35,898,744) $ 7,524,577
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of long-term investments..................................... (13,655,259) (6,062,628)
Proceeds from sales/distributions of long-term investments............. 18,560,093 24,980,177
Purchases of furniture, equipment and leasehold improvements........... (2,718,156) (746,742)
Increases in notes receivable.......................................... (5,415,000) (58,000)
Repayments of notes receivable......................................... 3,607,799 3,891,878
Other, net............................................................. 4,178,687 --
--------------- --------------
Net cash and cash equivalents provided by investing activities. 4,558,164 22,004,685
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt obligations......................................... 7,000,000 --
Repayments of debt obligations......................................... (7,700,000) --
Proceeds from sales of common stock.................................... 1,770,496 1,492,931
Purchases of treasury stock............................................ -- (4,803,386)
Other, net............................................................. 168,938 (138,750)
--------------- --------------
Net cash and cash equivalents provided by (used in) financing
activities................................................... 1,239,434 (3,449,205)
--------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... (30,101,146) 26,080,057
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......................... 42,637,732 66,959,567
--------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................... $12,536,586 $93,039,624
=============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
HAMBRECHT & QUIST GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION:
The condensed consolidated financial statements include Hambrecht & Quist
Group and its subsidiaries ("H&Q" or the "Company"). The information contained
in the following notes to the consolidated financial statements is condensed
from that which would appear in the annual consolidated financial statements;
accordingly, the accompanying condensed financial statements should be read in
conjunction with the 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 December 31, 1998 and the results of
operations and cash flows for the three month periods ended December 31, 1997
and 1998.
Certain amounts in the fiscal 1998 financial statements have been
reclassified to conform to the fiscal 1999 presentation.
2. COMPREHENSIVE INCOME:
The Company adopted SFAS 130 as of October 1, 1998. The after-tax
components of comprehensive income for the three month periods ending December
31, 1997 and 1998, are as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31,
-------------------------------
1997 1998
--------------- -------------
<S> <C> <C>
Net income........................................................... $6,649,659 $12,076,206
Components of other comprehensive income (loss):
Net unrealized gains (losses) on investments
available for sale............................................. (1,725,402) 267,176
Foreign currency translation adjustment.......................... -- 4,261
-------------- -------------
Comprehensive income................................................ $4,924,257 $12,347,643
============== =============
</TABLE>
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<PAGE>
3. EARNINGS PER SHARE:
The Company's basic and diluted earnings per share for the three month
periods ended December 31, 1997 and 1998 are as follows:
WEIGHTED
AVERAGE PER SHARE
NET INCOME SHARES AMOUNTS
---------- ------------ ---------
FOR THE THREE MONTHS ENDED -
December 31, 1997:
Basic earnings per share....... $6,649,659 24,000,058 $0.28
Options outstanding............ -- 2,385,250
---------- -----------
Diluted earnings per share..... $6,649,659 26,385,308 $0.25
========== ===========
December 31, 1998:
Basic earnings per share....... $12,076,206 24,086,143 $0.50
Options outstanding............ -- 1,741,605
----------- -----------
Diluted earnings per share..... $12,076,206 25,827,748 $0.47
=========== ==========
4. RECEIVABLES FROM RELATED PARTIES:
At September 30, 1998 and December 31, 1998 receivables from related
parties consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1998
--------------- ------------
<S> <C> <C>
Notes receivable from related parties and employees...... $ 2,034,354 $1,948,290
Asset management fees and profit participations.......... 7,240,551 6,116,449
Related party and other advances......................... 8,357,189 10,239,588
----------- ----------
$17,632,094 $18,304,327
=========== ===========
</TABLE>
Notes receivable from related parties and employees as of September 30,
1998 and December 31, 1998 include notes receivable from Asia Pacific of
$812,464 and $688,523, respectively.
Asset management fees and profit participations at September 30, 1998
and December 31, 1998, include profit participations receivable of $7,240,551
and $5,507,751, respectively from venture and investment partnerships managed by
Venture Partners. Included in other revenues are management fees and profit
participation distributions from venture capital funds of $1,611,186 and
$3,226,960 for the three month periods ended December 31, 1997 and 1998,
respectively.
Related party and other advances include temporary advances made to
related parties for operating expenses and to related parties, directors and
employees for purchases of investments. Of the amount outstanding at December
31, 1998, $8,615,850 relates to advances to related parties, directors and
employees for purchases of investments made on their behalf. Also included in
related party and other advances as of September 30, 1998 and December 31, 1998
is $819,807 and $401,804, respectively, in advances made to Venture Associates.
-8-
<PAGE>
5. MARKETABLE TRADING SECURITIES AND SECURITIES SOLD, NOT YET PURCHASED:
At September 30, 1998 and December 31, 1998, marketable trading
securities and securities sold, not yet purchased, consisted of the following:
SEPTEMBER 30, DECEMBER 31,
1998 1998
-------------- --------------
Marketable trading securities-
Equity securities.................. $ 8,994,939 $18,303,081
Convertible bonds.................. 10,366,290 18,662,475
Options............................ 79,062 32,029
U.S. government securities....... 12,236,801 21,992,120
------------- --------------
$31,677,092 $58,989,705
============= ==============
Securities sold, not yet purchased-
Equity securities.................. $17,674,404 $16,122,611
Convertible bonds.................. 373,852 1,238,210
Options............................ 74,528 162,391
------------- --------------
$18,122,784 $17,523,212
============= ==============
6. LONG-TERM INVESTMENTS:
At September 30, 1998 and December 31, 1998, the Company's long-term
investments, at estimated fair value, consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1998
---------------- --------------
<S> <C> <C>
Marketable equity securities available for sale by Guaranty
Finance...................................................... $ 6,512,887 $ 7,962,996
World Access, Inc. ............................................ 23,778,230 11,970,000
Marketable equity securities - other........................... 23,559,166 29,244,162
------------ ------------
Total marketable investments......................... 53,850,283 49,177,158
------------ ------------
Nonmarketable securities and investment partnership interests.. 50,116,787 50,110,649
Venture Partners and affiliated venture capital funds.......... 14,312,839 15,550,722
Venture capital funds managed by others........................ 9,232,278 8,696,344
Lewco Securities............................................... 2,110,279 2,110,279
------------ ------------
Total nonmarketable investments...................... 75,772,183 76,467,994
------------ ------------
Total long-term investments.......................... $129,622,466 $125,645,152
============ ============
</TABLE>
In March 1998, the Company purchased a large block of World Access, Inc.
(WAXS) common stock in a private transaction. The Company partially hedged the
position through a series of options transactions that are recorded as a
component of the investment. This position collateralizes a $12.1 million line
of credit. No amounts have been drawn on this line of credit as of December 31,
1998.
The cost of the Company's long-term investments at September 30, 1998
and December 31, 1998, was $153,916,280 and $139,762,152, respectively.
Following is an analysis of the net investment gains for the three
month periods ended December 31, 1997 and 1998:
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<PAGE>
FOR THE THREE MONTHS ENDED
DECEMBER 31,
----------------------------------
1997 1998
---------------- ----------------
Realized gains............................ $7,852,385 $ 4,823,623
Change in unrealized gains and
(losses), net........................... (7,189,723) 9,641,124
------------ ------------
Net investment gains...................... $ 662,662 $14,464,747
=========== ===========
The cost and estimated fair values of Guaranty Finance's investments in
marketable equity securities available for sale at September 30, 1998 and
December 31, 1998 are as follows:
SEPTEMBER 30, DECEMBER 31,
1998 1998
-------------- --------------
Cost $13,046,427 $13,960,844
Gross unrealized gains...................... 641,714 393,255
Gross unrealized losses..................... (7,175,254) (6,391,103)
------------- --------------
Estimated fair value........................ $ 6,512,887 $7,962,996
================ ================
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 periods ended December 31, 1997 and 1998
are as follows:
FOR THE THREE MONTHS ENDED
DECEMBER 31,
--------------------------------
1997 1998
--------------- ---------------
Gross proceeds........................... $4,751,403 $1,632,760
Gross realized gains..................... 920,058 1,184,800
Gross realized losses.................... -- --
7. EMPLOYEE BENEFIT PLANS:
SAVINGS AND EMPLOYEE STOCK OWNERSHIP TRUST
In December 1998, the Company issued 42,630 shares of common stock valued
at $1,092,394 to the ESOP in satisfaction of compensation and benefits payable.
As of December 31, 1998, the ESOP owned approximately 5.5 percent of the
H&Q common stock outstanding.
BONUS AND DEFERRED SALES COMPENSATION PLAN
The Company paid bonuses in October 1998. Under the Compensation Plan,
547,677 shares valued at $7,941,317 were issued to executives and professionals
effective October 15, 1998. All such amounts were included in compensation and
benefits payable as of September 30, 1998.
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<PAGE>
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.............................. 1,619,250 $ 14.75 - $22.00
Exercised............................ (254,852) $ 2.10 - $11.25
Canceled............................. (420,500) $ 29.00 - $43.25
----------
Outstanding at December 31, 1998....... 6,270,175 $ 2.10 - $32.75
==========
Of the outstanding options at December 31, 1998, 1,837,854 options to
purchase shares had vested.
8. TREASURY STOCK TRANSACTIONS:
During fiscal 1998 and the three months ended December 31, 1998, 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...................... 294,000 4,803,386
Employee benefit plan issuances............ (845,159) (19,058,596)
----------- --------------
Treasury shares at December 31, 1998 427,643 $ 7,410,012
=========== ==============
9. NET CAPITAL REQUIREMENTS:
At September 30, 1998 and December 31, 1998, H&Q LLC's regulatory net
capital of $50,484,565 and $77,526,223, respectively, was 26 percent and 40
percent, respectively, of aggregate debit items at September 30, 1998 and
December 31, 1998, and its net capital in excess of the minimum required was
$46,533,220 and $73,617,864, respectively.
At December 31, 1998, HQEM was in compliance with all applicable regulatory
capital adequacy requirements.
10. COMMITMENTS AND CONTINGENCIES:
Lewco conducts a stock borrow/stock loan business. On behalf of Lewco, the
Company has agreed to guarantee its proportional share of secured loans
resulting from this business. The Company's contingent liability relating to its
net unsecured position under this indemnity agreement was $5,507,381 at December
31, 1998. Also, in connection with H&Q LLC's option trading activities, the
Company has issued a letter of credit totaling $8,000,000 at December 31, 1998
with the Options Clearing Corporation.
The Company has other contingent liabilities, including contractual
commitments arising in the normal course of business, the resolution of which,
in management's opinion, will not have a material adverse effect on the
Company's financial position.
-11-
<PAGE>
As is the case with many firms in the securities industry, the Company is a
defendant or co-defendant in a number of actions. These civil actions and
arbitrations have arisen in the normal course of the Company's business and are
incidental to its activities as a broker-dealer in securities, as an
underwriter, as a corporate financial advisor, as an investor and as an
employer. The Company is also involved, from time to time, in proceedings with,
and investigations by, governmental agencies and self-regulatory organizations.
Some of the actions have been brought on behalf of various classes of claimants
and seek damages of material or indeterminate amounts. Most of the Company's
current proceedings relate to public underwritings of securities in which H&Q
LLC participated as a lead manager, co-manager or member of the underwriting
syndicate. These cases involve claims under federal and/or state securities laws
and seek compensatory and other monetary damages. It is possible that H&Q and/or
H&Q LLC may be called upon as a member of a class of defendants or under the
terms of the underwriting, indemnification or other agreements to contribute to
settlements or judgments arising out of these cases. The Company is contesting
the complaints in all cases and believes that there are meritorious defenses in
each of these lawsuits. Although the ultimate outcome of the Company's
litigation cannot be ascertained at this time, it is the opinion of the
Company's management, based on discussions with counsel, that the resolution of
these actions and others will not have a material adverse effect on the
Company's financial statements taken as a whole.
H&Q has indemnified certain of its officers, directors and agents, and
certain of its affiliates, as permitted under applicable state law. Under these
provisions, H&Q itself is and will be subject to indemnification assertions by
officers, directors, agents or certain of its affiliates who are or may become
defendants in litigation that may result in the normal course of business.
Although the ultimate outcome of indemnification assertions outstanding as of
December 31, 1998, cannot be ascertained at this time, it is the opinion of the
Company's management, based on discussions with counsel, that the resolution of
these assertions will not have a material adverse effect on the Company's
financial statements taken as a whole.
11. SUBSEQUENT EVENT:
The Company announced in early February 1999 its intent to sell its 100
percent interest in HQEM to a U.K.-based investment banking firm. The sale is
subject to approval by French regulatory authorities, and is expected to close
on or before the end of the Company's second fiscal quarter ending March 31,
1999. The sale is not expected to have a material impact on the Company's
financial condition or results of operations.
The Company will continue and further develop its European operations from
London, where it already has a branch office.
-12-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE STATEMENTS IN THIS QUARTERLY REPORT THAT RELATE TO FUTURE PLANS,
EVENTS, OR PERFORMANCE ARE FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS INCLUDE,
BUT ARE NOT LIMITED TO, THOSE RELATING TO 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 IMPORTANT FACTORS. THESE FACTORS INVOLVE RISKS
AND UNCERTAINTIES RELATING TO, AMONG OTHER THINGS, GENERAL ECONOMIC AND MARKET
CONDITIONS, COMPETITIVE CONDITIONS WITHIN THE SECURITIES INDUSTRY, CHANGES IN
INTEREST RATES, STOCK MARKET PRICES AND INVESTMENT FUND CASH INFLOWS OR
OUTFLOWS, CHANGES IN THE TECHNOLOGY AND HEALTHCARE INDUSTRIES AND OTHER
INDUSTRIES IN WHICH THE COMPANY IS ACTIVE, CHANGES IN DEMAND FOR INVESTMENT
BANKING AND SECURITIES BROKERAGE SERVICES, THE COMPANY'S ABILITY TO RECRUIT AND
RETAIN KEY EMPLOYEES, CHANGES IN SECURITIES AND BANKING LAWS AND REGULATIONS,
TRADING AND PRINCIPAL INVESTMENT ACTIVITIES, LITIGATION AND OTHER FACTORS
DISCUSSED BELOW IN "OVERVIEW." THE COMPANY'S ANNUAL REPORT ON FORM 10-K (THE
"FORM 10-K") FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998 FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION CONTAINS ADDITIONAL INFORMATION ABOUT THESE
AND OTHER RISKS AND UNCERTAINTIES.
OVERVIEW
Hambrecht & Quist Group ("H&Q" or the "Company") is a holding company for
Hambrecht & Quist California ("H&Q California"), whose primary subsidiary,
Hambrecht & Quist L.L.C. ("H&Q LLC"), is an investment banking firm and
securities broker-dealer. H&Q California's other subsidiaries and affiliates are
engaged in investment banking, venture capital fund management, investment
advisory and lease and other asset-based financing activities.
EFFECTS OF MARKET CONDITIONS
The Company's business depends to a substantial extent on the overall
securities market and the sectors of the securities market represented by
companies in the technology and healthcare industries. The securities market is
affected by general economic and market conditions, including fluctuations in
interest rates, the volume of securities trading, price levels of securities and
the flow of investor funds into and out of equity mutual funds and other
investment funds, and by factors that apply to particular industries, such as
technological advances and changes in the regulatory environment. Substantial
fluctuations can occur and have occurred in the Company's operating results and
in the component sources of the Company's revenues due to these and other
factors. In periods of reduced market activity, profitability has been and is
likely to be adversely affected. Accordingly, net earnings for any period should
not be considered representative of any other period.
EFFECTS OF COMPETITION
The securities business is intensely competitive. Certain of the Company's
competitors have greater capital, financial and other resources than the
Company. Since 1997, the securities business has experienced consolidation,
including the acquisition of certain of the Company's competitors by large
commercial banks, providing competitors of the Company with increased financial
and other resources. In addition, competition for key personnel exists as a
result of competition from such entities as well as from new market entrants.
The Company has experienced losses of research, investment banking, venture
capital and sales and trading professionals from time to time and there can be
no assurance that losses of key personnel due to competition or other factors
will not occur in the future.
EFFECTS OF COMPANY FACTORS AND GROWTH STRATEGIES
Over the past several years, the Company has experienced growth in its
business activities and the number of its employees. During the quarter ended
December 31, 1998, the Company's headcount growth slowed. Average employee
headcount was 834 in the three month period ended December 31, 1998 compared to
831 in the three month period ended December 31, 1997. The Company expects its
headcount growth to resume.
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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 $13.6 million and $6.1 million in principal investments during the
three months ended December 31, 1997 and 1998, 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, investments in other special situation funds managed by outside fund
managers and investments in joint ventures. However, there can be no assurance
that the level and quality of potential investment opportunities made available
to the Company will be sufficient to support such historical levels of principal
investing or that any future or historical investments will achieve a level of
financial performance consistent with the Company's objectives.
The Company accounts for its marketable investments in public companies at
prevailing market prices, less discounts for illiquid or restricted holdings.
The Company accounts for its nonmarketable investments in private companies at
estimated fair value as determined by management of the Company. Such marketable
and nonmarketable investments are presented in the Company's balance sheets as
long-term investments. At September 30, 1998 and December 31, 1998, the
Company's long-term investments totaled $129.6 million and $125.6 million,
respectively. Net investment gains are included in the Company's statement of
operations and include net realized gains and losses and the net change in
unrealized gains and losses for the period. For the three month periods ended
December 31, 1997 and 1998, the Company recorded net investment gains of
$663,000 and $14.5 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.
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MATTERS RELATED TO THE YEAR 2000
To the fullest extent permitted by law, the following year 2000 discussion
is a "Year 2000 Readiness Disclosure" within the meaning of the Year 2000
Information and Disclosure Act.
The Company utilizes software and related information technologies that
will be affected by the date change in the year 2000. The year 2000 issue exists
because many computer systems and applications currently use two-digit date
fields to designate a year. When the century date change occurs, certain
date-sensitive systems may recognize the year 2000 as 1900, or not at all. This
inability to recognize or properly treat the year 2000 may result in a systems
failure or cause systems to process critical financial and operational
information incorrectly. Additionally, the Company relies on certain
noninformation technology systems such as communications and building operations
systems that could also be affected by the date change. The failure of these
noninformation technology systems could interrupt or shutdown business
operations for some period of time.
Based on ongoing assessments and testing, the Company has determined that
it will be required to modify or replace portions of its software so that its
computer systems will properly utilize dates beyond December 31, 1999. The
Company has also determined that Lewco, its clearing broker, will be required to
modify or replace significant portions of the software used by Lewco in
connection with processing Company and customer trading activity and maintaining
Company and customer information. The Company anticipates that its most
significant exposure to the year 2000 issue is through the clearing activities
performed for it by Lewco. While the Company holds an ownership position in
Lewco and will be responsible for a percentage of the costs incurred by Lewco to
address the issue, the Company does not control the management of the year 2000
problem by Lewco and is dependent on Lewco's ability to correctly disclose its
year 2000 compliance progress to the Company and to adequately address the
issue. The Company presently believes that with modifications to existing
software and conversions to new software by both it and Lewco, the adverse
effects of the year 2000 issue can be mitigated. However, if such modifications
and conversions are not made, or are not completed in a timely manner, the year
2000 issue could have a material impact on the operations, liquidity and
financial condition of the Company, could lead to enforcement actions by
regulatory agencies and could expose it to third party liability.
The Company has engaged an independent consulting firm to assist in impact
analysis, solution design and project planning; however, the Company retains all
responsibility for its year 2000 issues, plans and compliance efforts. The year
2000 plan followed by the Company contains four phases: phase one is the
identification and prioritization of all in-house and third party information
technology and noninformation technology systems; phase two is the diagnostic
testing of all critical information technology and noninformation technology
systems for year 2000 compliance; phase three is the implementation of
solutions, including all necessary repair work, modifications, and replacements
to system software and hardware, and 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. The Company expects to complete phases two and three by April and
August 1999, respectively, leaving four months to execute the contingency plan
actions described in phase four.
The Company and Lewco have been participating in industry wide testing.
Testing of mission critical systems with several of the major exchanges started
in January 1999. The Company's participation in the "point to point" as well as
internal testing will continue through October 1999. The Company intends to
migrate all of its end-user computers and file and print servers to the Intel-NT
platform, currently scheduled for April 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.
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 will be incurred and expensed in the Company's 1999 fiscal year. This
figure includes expenses for testing, programming changes, replacement hardware
and software,
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consultant fees, and related payroll costs for its IT group and other employees
on the year 2000 team. During the three months ended December 31, 1998,
approximately $560,000 was incurred and expensed, primarily as consulting fees
included in other expense. None of the Company's other information technology
projects have been delayed due to the implementation of its year 2000 plan.
With respect to Lewco's efforts, the Company does not expect to devote
material amounts of its labor resources, but does expect to incur certain
expenses as a result of its ownership interest in Lewco. To date, the Company's
portion of expenses incurred is approximately $2.2 million. The Company's
remaining portion of the expenses incurred to address this issue as budgeted by
Lewco is expected to be approximately $250,000 in calendar 1999 which amount
will be funded through operating cash flows. During the three months ended
December 31, 1998, H&Q's share of Lewco's expenses was $530,000 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 third
party compliance efforts. The Company is in the process of validating and
reviewing the responses from these suppliers and in some cases is seeking
additional information and assurances. In addition to Lewco, the Company relies
on various third party systems or services to conduct its business, including
Nasdaq, Inc., the New York Stock Exchange, Inc. and regional and national
telecommunications and market data services providers. The failure of any of
these entities to satisfactorily address the year 2000 issue could have a
material adverse effect on the Company's operations, liquidity and financial
condition. The Company is presently monitoring the progress of these and other
entities' year 2000 compliance. Although the Company is developing a contingency
plan, if certain third party systems and services, such as stock exchanges or
major utility providers fail, it is unlikely that a contingency plan can be
developed to adequately protect against business disruption due to such
failures.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1998
REVENUES. Total revenues for the period increased 9% from $91.6 million for
the three months ended December 31, 1997 to $99.9 million for the three months
ended December 31, 1998.
Principal transactions revenue increased 21% from $27.2 million to $33.0
million due primarily to increased volumes in the OTC business.
Commissions increased 35% from $11.3 million to $15.2 million. This
increase was primarily due to an increase in NYSE-listed transactions.
Investment banking revenue decreased 58% from $22.9 million to $9.6
million, and decreased as a percentage of revenues from 25% to 10%. The Company
managed or co-managed 7 public offerings during the three month period ended
December 31, 1998, compared to 21 during the three month period ended December
31, 1997.
Corporate finance fees decreased 20% from $17.6 million to $14.1 million
due primarily to the completion of fewer merger and acquisition transactions
during the three month period ended December 31, 1998.
Interest and dividend revenue was $6.3 million for both quarters.
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Net investment gains for the three month period increased 2,083% from
$663,000 to $14.5 million. For the three months ended December 31, 1997,
realized gains of $7.9 million were offset by a change in unrealized losses of
$7.2 million. For the three months ended December 31, 1998, there were realized
gains of $4.8 million and a change in unrealized gains of $9.6 million.
Other revenues increased 26% from $5.7 million to $7.2 million. The
increase related primarily to increases in accrued profit participation
distributions and gains on sales of assets.
EXPENSES. Total expenses for the period decreased 2% from $80.0 million for
the three months ended December 31, 1997 to $78.7 million for the three months
ended December 31, 1998.
Compensation and benefits expense increased 9% from $45.8 million to $49.9
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 48% from $5.0 million to $7.5
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 was $5.5 million during both periods,
Communications expense increased 21% from $3.1 million to $3.7 million
primarily due to higher quotes and information services expense.
Interest expense decreased 28% from $1.1 million to $806,000 primarily due
to lower interest paid on customer balances.
Other expenses decreased 42% from $19.4 million to $11.3 million. This
decrease was due primarily to a charge in December 1997 for the Company's
unaccrued portion of its settlement of the Nasdaq market-makers antitrust class
action litigation.
INCOME TAX PROVISION. The Company's effective income tax rate was 43% for
the three month periods ended December 31, 1997 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically satisfied its funding needs with its own
capital resources, consisting almost entirely of internally generated retained
earnings. As of December 31, 1998, the Company had liquid assets consisting
primarily of cash and cash equivalents of $93.0 million and amounts on deposit
with Lewco of $92.8 million. Such amounts on deposit with Lewco are a component
of the December 31, 1998 receivable from Lewco of $31.9 million. As of December
31, 1998, Guaranty Finance had a bank line of credit of $25.0 million with no
balance outstanding expiring on February 27, 1999. Guaranty Finance expects to
extend this line of credit to February 2000. While the Company has not required
additional bank financing during the past several years, it has available an
additional $20.0 million line of credit with a commercial bank expiring April
30, 1999. H&Q also has a $12.1 million line of credit with a financial
institution collateralized by the Company's investment in World Access, Inc.
expiring February 16, 1999. The $12.1 million line of credit is not expected to
be renewed.
The Company's consolidated balance sheet reflects the Company's relatively
unleveraged financial position. The ratio of assets to equity as of December 31,
1998 was approximately 1.9:1. The Company's assets include receivables from
customers and Lewco, securities held for trading purposes, short-term
investments and securities held for investment purposes. A substantial portion
of the Company's receivables are secured by customer securities or security
transactions in the process of settlement. Securities held for trading purposes
are actively traded and readily marketable. As of December 31, 1998, securities
held for trading purposes include government securities mutual funds totaling
$22.0 million. Securities held for investment purposes are for the most part
illiquid and are carried at valuations that reflect this lack of liquidity.
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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 December 31, 1998, H&Q LLC was
required to maintain minimum regulatory net capital in accordance with SEC rules
of approximately $3.9 million and had total regulatory net capital of
approximately $77.5 million, or approximately $73.6 million in excess of its
requirement.
HQEM was in compliance with all applicable regulatory capital adequacy
requirements at December 31, 1998.
The Company believes that its current level of equity capital, combined
with funds anticipated to be generated from operations, will be adequate to fund
its operations for the foreseeable future.
RISK MANAGEMENT
RISK MANAGEMENT CONTROL STRUCTURE
The Company has established various policies and procedures for the
management of its exposure to operating, principal and credit risks. Operating
risk arises out of the daily conduct of the Company's business and relates to
the possibility that one or more of the Company's personnel could commit the
Company to imprudent business activities or to the possibility of improper
processing of transactions. Principal risk relates to the fact that the Company
owns a variety of investments which are subject to changes in value and could
result in the Company incurring material losses. Credit risk occurs because the
Company extends credit to various of its customers in the form of margin and
other types of loans.
Operating risk is monitored by the Company's Risk Management Committee and
Commitment Committee. The Risk Management Committee reviews the overall business
activities of the Company and makes recommendations for addressing issues which,
in the judgment of its members, could result in a material loss to the Company.
When transactions are pending, the Commitment Committee meets weekly to evaluate
and approve potential investment banking transactions prior to their execution
by the Company.
Principal risk is managed primarily though the daily monitoring of funds
committed to the various types of securities owned by the Company and by
limiting the exposure to any one investment or type of investment. The two most
common categories of securities owned are those related to the daily trading
activities of the Company's brokerage and underwriting operations and those
which arise out of the Company's principal investing activities. See "--Risk
Management--Market Risk."
The Company's credit risk is monitored by its Credit Committee, which
includes senior management from its brokerage, operations, financial and legal
departments. The committee meets when specific situations arise to review large,
concentrated or high profile accounts and to take appropriate actions to limit
the Company's exposure to loss on these accounts. Such actions typically consist
of setting higher margin requirements for large or concentrated accounts,
requiring a reduction in the level of margin debt or, in some cases, requiring
the transfer of the account to another broker-dealer.
MARKET RISK
The Company's primary market risk exposure is to equity price changes and
the resulting impact on the Company's marketable trading and long-term
investment portfolios. The Company has limited market risk exposure to changes
in interest rates related to its short-term investment portfolio. The Company
does not have material assets and liabilities denominated in foreign currencies
and therefore, foreign currency risk is not material.
Equity price risk is inherent in the Company's securities holdings. The two
categories of securities owned are those related to the daily trading activities
of the Company's brokerage and underwriting operations and those which arise out
of the Company's long-term principal investing activities. Equity price risk is
managed primarily though the daily monitoring of funds committed to the
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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
December 31, 1998, the fair value of the Company's trading securities was $59.0
million in long positions and $17.5 million in short positions. The net
potential loss in fair value at December 31, 1998, using a 10% hypothetical
decline in prices, is estimated to be approximately $4.1 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 December 31, 1998,
the fair value of the Company's marketable investment securities was $49.2
million. The net potential loss in fair value, using a 10% hypothetical decline
in prices, is estimated to be approximately $4.9 million. In the case of larger
holdings of marketable investment securities, such as the Company's investment
in WAXS, the Company may enter into various hedge contracts such as options to
reduce the Company's potential loss exposure. The effects of such hedge
contracts are included in the Company's valuation of the hedged security.
The Company has consistently applied the above risk management methods
during the past quarter and expects to maintain the same methodologies and
procedures in future reporting periods.
The effects of equity price risk on the Company's long-term investment
portfolio was evident in the recent volatile equity markets. General equity
price declines and declines specific to industries in which the Company focuses
resulted in the Company recording net investment losses on its long-term
investment portfolio of $8.9 million in the Company's 1998 fourth fiscal quarter
and net investment gains of $14.5 million in the Company's 1999 first fiscal
quarter. See "Overview--Effects of Market Conditions."
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Certain significant legal proceedings and matters have been previously
disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1998. Following is a summary of recent material developments in
such proceedings and a summary of one new matter.
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 January 29, 1999, a lawsuit was filed in the Circuit Court of the
Fifteenth Judicial Circuit, in and for Palm Beach County, Florida, by two
orthopedic physician groups and their affiliated physicians relating to
investments they made in BMJ Medical Management, Inc. before the company went
public on February 4, 1998. They assert claims for unspecified damages and
rescission. LIGHTHOUSE ORTHOPAEDIC ASSOCIATES, INC., ET AL. V. DELPHI VENTURES,
ET AL., Case No.Cl99 1079AG. On February 2, 1999, a class action was filed in
federal district court in southern Florida for rescission and damages on behalf
of purchasers of the company's stock in the IPO and in the aftermarket. SAPIR,
ET AL. V. DELPHI VENTURES, ET AL., Case Number 99-8086 CIV-ZLOCH. H&Q was lead
manager of the IPO. In both cases, the defendants include the company's lead
venture capital investors, certain of the its officers and directors, the lead
underwriters and the company's auditors, but not the company itself, which has
filed for protection under Chapter 11.
CYBERMEDIA, INC. SECURITIES LITIGATION
The defendants filed motions to dismiss the federal court action on January
8, 1999. The state court action has been stayed by stipulation of the parties.
EVOLVING SYSTEMS, INC. SECURITIES LITIGATION
On December 14, 1998, the defendants' motions to dismiss were granted in
part and denied in part, and denied entirely as to the underwriters. On January
14, 1999, the underwriter defendants answered the complaint.
LUMISYS, INC. SECURITIES LITIGATION
On December 2, 1998, the state court sustained in part and overruled in
part the demurrers. On January 4, 1999, the underwriter defendants answered the
complaint.
NASDAQ MARKET-MAKERS ANTITRUST LITIGATION
On January 11, 1999, the SEC brought an administrative proceeding against
many major Nasdaq market-makers, including H&Q, relating to Nasdaq market-making
activities in 1994. Without admitting or denying the allegations, H&Q consented
to findings that it violated provisions of the federal securities laws; in
addition, it agreed to pay a civil penalty of $150,000 and disgorgement of $518.
It also agreed to a cease and desist order and to submit a description of
certain of its policies, procedures and practices for review by an independent
consultant. SEC ADMINISTRATIVE PROCEEDINGS FILE NO. 3-9803.
STB SYSTEMS, INC. SECURITIES LITIGATION
On January 5, 1999, the underwriters answered the complaint.
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STORM TECHNOLOGY, INC. SECURITIES LITIGATION
On January 15, 1999, the defendants moved to dismiss the Amended Class
Action Complaint.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
Exhibit
Number Description
27 Financial Data Schedule.
b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HAMBRECHT & QUIST GROUP,
a Delaware Corporation
By: /s/ Patrick J. Allen
---------------------------
Patrick J. Allen
Chief Financial Officer
(On behalf of the Registrant and as
Principal Financial and Accounting officer)
Date: February 12, 1999
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
27 Financial Data Schedule.
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<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> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 93,040
<RECEIVABLES> 305,443
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 58,990
<PP&E> 15,884
<TOTAL-ASSETS> 681,265
<SHORT-TERM> 0
<PAYABLES> 306,681
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 17,523
<LONG-TERM> 0
0
0
<COMMON> 148,085
<OTHER-SE> 208,976
<TOTAL-LIABILITY-AND-EQUITY> 681,265
<TRADING-REVENUE> 32,973
<INTEREST-DIVIDENDS> 6,318
<COMMISSIONS> 15,229
<INVESTMENT-BANKING-REVENUES> 9,611
<FEE-REVENUE> 18,645
<INTEREST-EXPENSE> 806
<COMPENSATION> 49,927
<INCOME-PRETAX> 21,186
<INCOME-PRE-EXTRAORDINARY> 21,186
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,076
<EPS-PRIMARY> 0.50<F1>
<EPS-DILUTED> 0.47<F1>
<FN>
<F1> Reflects basic and diluted EPS, respectively, prepared in accordance with
SFAS No. 128.
</FN>
</TABLE>
