<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 22, 1999
REGISTRATION NO. 333-78407
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
THE HULL GROUP INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 6211 36-4292284
(State of incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
</TABLE>
311 SOUTH WACKER DRIVE
CHICAGO, IL 60606
(312) 697-2700
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
M. BLAIR HULL, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
THE HULL GROUP INC.
311 SOUTH WACKER DRIVE
CHICAGO, IL 60606
(312) 697-2700
(Name, address, including zip code, and telephone number, including area code,
of agent for service):
Copies to:
<TABLE>
<S> <C>
EDWARD S. BEST, ESQ. WILLIAM R. KUNKEL, ESQ.
MAYER, BROWN & PLATT SKADDEN, ARPS, SLATE, MEAGHER & FLOM
190 SOUTH LASALLE STREET (ILLINOIS)
CHICAGO, IL 60603 333 WEST WACKER DRIVE
(312) 782-0600 CHICAGO, IL 60606
(312) 407-0700
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
SUBJECT TO COMPLETION -- JUNE 22, 1999
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PROSPECTUS
, 1999
[HULL LOGO]
THE HULL GROUP INC.
6,250,000 SHARES OF COMMON STOCK
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THE HULL GROUP INC.:
- - We are a global market maker in equity derivatives and equity securities.
- - The Hull Group Inc.
311 South Wacker Drive
Chicago, Illinois 60606
(312) 697-2700
PROPOSED SYMBOL & MARKET:
- - HULL/Nasdaq National Market
THE OFFERING:
- - We are offering 6,250,000 shares of our common stock.
- - The underwriters have an option to purchase an additional 937,500 shares of
our common stock from us to cover over-allotments.
- - This is our initial public offering, and no public market currently exists for
our common stock.
<TABLE>
<CAPTION>
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PER SHARE TOTAL
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<S> <C> <C>
Public offering price (Estimated): $13.00-15.00 $
Underwriting fees:
Proceeds to The Hull Group Inc.:
</TABLE>
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THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete, nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
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DONALDSON, LUFKIN & JENRETTE
ABN AMRO ROTHSCHILD
A DIVISION OF ABN AMRO INCORPORATED
PUTNAM, LOVELL,
DE GUARDIOLA & THORNTON, INC.
The undersigned is facilitating Internet distribution.
DLJDIRECT INC.
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE
PERMITTED BY U.S. FEDERAL SECURITIES LAW TO OFFER THESE SECURITIES USING THIS
PROSPECTUS,
WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE DOCUMENTATION
FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED EFFECTIVE BY
THE SEC. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR SOLICITATION OF YOUR
OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THAT WOULD NOT BE
PERMITTED OR LEGAL.
<PAGE> 3
[GRAPHICS]
TABLE OF CONTENTS
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<CAPTION>
PAGE
<S> <C>
Prospectus Summary................... 1
Risk Factors......................... 6
Forward-looking Statements........... 17
Our Company.......................... 18
Use of Proceeds...................... 18
Dividend Policy...................... 18
Dilution............................. 19
Capitalization....................... 20
Selected Consolidated Financial
Information........................ 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 23
Our Industry......................... 35
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Our Business......................... 39
Our Management....................... 53
Certain Relationships and Related
Transactions....................... 61
Principal Stockholders............... 62
Description of Capital Stock......... 63
Shares Eligible for Future Sale...... 66
Underwriting......................... 67
Legal Matters........................ 69
Experts.............................. 69
Additional Information............... 70
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
<PAGE> 4
PROSPECTUS SUMMARY
You should read this entire prospectus carefully, including the risks of
investing in our common stock discussed under "Risk Factors" on pages 6 to 17.
Unless we indicate otherwise, the information in this prospectus, other than
historical financial information, gives effect to our conversion from a limited
liability company to a corporation, which will take place immediately before the
completion of this offering.
OUR COMPANY
OUR BUSINESS
We are a leading global market maker in exchange-traded equity
derivatives and an active market maker in equity securities worldwide. We
provide market-making and transaction execution services to a diverse group of
participants on 28 exchanges in nine countries. Our market-making activities
focus on providing customers with rapid executions at the best possible price.
Since 1985, we have been at the forefront in developing and applying financial
theory, along with information and communication technology, to trading equity
derivatives and equity securities. Our dedicated team of financial engineers,
software developers and traders develop proprietary, real-time valuation and
risk management systems to price and trade equity derivatives and equity
securities for our own account. The Hull System combines financial engineering,
trading and electronic systems to create a competitive advantage. We have
applied the Hull System to expand successfully, first into U.S. markets and then
into international electronic markets.
Our net revenues have increased from $51.7 million in 1994 to $103.1
million in 1998, representing a compound annual growth rate of 18.8%. Our 1998
pre-tax income was $40.6 million, and our 1998 pro forma net income, after
giving effect to our conversion from a limited liability company to a
corporation, was $14.7 million. In connection with our initial public offering,
we are awarding 1,066,667 shares of restricted stock to our employees and the
pro forma adjustments include a $6.9 million charge relating to these awards.
Electronic trading has become increasingly important to our business, as net
revenues through electronic trading have increased from 12.5% to 66.9% of our
total net revenues from 1994 to 1998. We have proven our ability to deliver
profitable results over time as demonstrated by our average annual pre-tax
return on average equity over the last ten years of 38.9% and over the last five
years of 42.4%. Our 1998 pre-tax return on average equity was 43.1% and our 1998
pro forma return on average equity was 26.5%.
In 1998, we traded about 28 million equity derivatives contracts. We
believe we rank among the top three market makers in actively traded U.S. equity
index options, including the S&P 500, the Dow Jones Industrial Average and the
Russell 2000, where we have historically maintained a 6% to 8% market share. We
have captured significant market shares in index and individual equity options,
including the German DAX, the U.K. FT-SE, the French CAC 40 and the Swiss SMI,
that we trade on 11 European exchanges. In some cases these market shares are as
high as 24%. We are also active market makers in Hang Seng index options on the
Hong Kong Futures Exchange. We also have access to the Japanese equity
derivatives markets through our alliance with Daiwa Securities, the second
largest securities firm in Japan, and Sumitomo Bank, the second largest bank in
Japan. In addition, we make markets in select individual equity options and
individual equity securities in all major markets in the United States and in
eight
<PAGE> 5
foreign countries. In 1998, our automated equity trading system traded more than
two billion shares of stock, representing about 1.2% of the total volume on the
New York Stock Exchange.
Through Hull Transaction Services, our market-making activities include
executing and routing orders forwarded to us by online brokers, large retail
broker-dealers, money center banks and hedge funds. We currently execute order
flow in over 1,000 issues. In addition to our market-making activities, we also
manage several private investment funds. Our asset management business uses the
technology and experience developed in our market-making business to provide
diversified, risk-controlled products that are quantitatively driven.
Our risk management system includes active participation at all levels of
the firm, from our executive committee to our trading staff. In evaluating our
risk, we look at risk on a profit center basis, as well as firm-wide. We have a
comprehensive risk management system to monitor, evaluate and manage the risks
inherent in our business. Our automated proprietary trading and risk management
system immediately incorporates all new trades into our overall risk profile on
a real-time basis.
Currently, equity derivatives and equity securities in the United States
are primarily listed and traded on open outcry exchanges. However, there has
been a worldwide trend toward the use of electronic trading platforms. A
majority of equity derivatives and equity securities exchanges worldwide,
including those in France, Germany, Japan, Sweden and Switzerland, are now
completely electronic. Several other exchanges, including exchanges in the
United Kingdom and Australia, have announced plans to convert to electronic
trading platforms. Although the large exchanges in the United States remain open
outcry, even some of those exchanges are adopting electronic trading mechanisms.
Additionally, the International Securities Exchange, a new U.S.-based exchange
formed by a consortium of leading online brokers, has announced it will begin
fully electronic equity options trading in the first quarter of 2000. We believe
the trend toward electronic trading will ultimately result in fully electronic
worldwide markets.
OUR COMPETITIVE STRENGTHS
We believe the Hull System has positioned us to compete effectively in
the global equities market, based on the following strengths:
- We are a globally diversified industry leader. We are a leading market
maker in both the United States and Europe. We trade over 3,700
products on 28 exchanges in nine countries worldwide. In 1998, we
generated 56.7% of our net revenues from our activities outside the
United States.
- We develop and use sophisticated technology. We are recognized by
major exchanges as a pioneer in applying information and communication
technology to market-making activities worldwide, particularly on
electronic exchanges.
- We are an innovator in financial engineering and valuation. Our
financial engineers create valuation and portfolio management models
that allow us to better understand the relationships between
derivatives and securities. This understanding increases the efficiency
and effectiveness of our market-making activities.
- We have strong trading capabilities. We successfully combine our
trading expertise with state-of-the-art technology and quantitative
models. We have a trading staff of over 100 people, who implement our
proprietary valuation models.
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<PAGE> 6
- We have sophisticated risk management systems. Our systems allow for
real-time risk management and enable us to evaluate current market
exposure and make appropriate portfolio management decisions.
OUR GROWTH STRATEGY
We intend to enhance our position as a leader in the market-making
industry and grow by:
- Capitalizing on the growth in electronic trading worldwide through the
use of advanced information and communication technology. We believe
the U.S. markets will become increasingly electronic, and we intend to
apply our expertise in electronic trading to benefit from this trend.
- Continuing to expand our market-making activities in existing and new
markets and products worldwide.
- Developing Hull Transaction Services to become a significant provider
of trade routing and order execution services to capitalize on the
growth in online trading.
- Expanding our asset management business to become a significant
provider of diversified, risk-controlled products.
- Attracting, retaining and developing highly skilled employees. The
ultimate success of our financial engineering, risk management and
market-making functions depends on our ability to develop our
professional employee base.
THE OFFERING
The following information does not include up to 937,500 additional
shares of our common stock which the underwriters have an option to purchase
from us solely to cover over-allotments. Unless we indicate otherwise, this
prospectus assumes that the underwriters do not exercise this option. If the
underwriters exercise their over-allotment option in full, 32,187,500 shares of
our common stock will be outstanding after the offering.
Common stock offered............. 6,250,000 shares
Common stock to be outstanding
after the offering............... 31,250,000 shares
Use of proceeds.................. We plan to use the net proceeds from the
offering as additional capital for one or
more of the following purposes: expanding
our market making in existing and new
markets and products, expanding Hull
Transaction Services and our asset
management business and for general
corporate purposes, including investing in
technology systems and personnel. See "Use
of Proceeds."
Dividend policy.................. We do not anticipate paying any cash
dividends on our common stock for the
foreseeable future. See "Dividend Policy."
Proposed Nasdaq National Market
Symbol......................... HULL
3
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
You should read the summary consolidated financial information together
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," our unaudited pro forma consolidated financial statements and our
consolidated financial statements and their notes included in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT INFORMATION:
Revenues:
Market-making activities,
net(a)....................... $ 48,238 $ 22,450 $ 63,299 $ 103,424 $ 91,991 $ 20,823 $ 35,821
Asset management fees.......... 153 3,026 6,675 11,610 9,995 2,736 1,099
Other income................... 3,313 283 478 1,210 1,127 394 119
-------- -------- -------- ---------- ---------- -------- --------
Net revenues................... 51,704 25,759 70,452 116,244 103,113 23,953 37,039
Total operating expenses......... 23,294 27,013 36,409 56,189 62,552 15,111 16,795
-------- -------- -------- ---------- ---------- -------- --------
Income (loss) before income
taxes(b)....................... $ 28,410 $ (1,254) $ 34,043 $ 60,055 $ 40,561 $ 8,842 $ 20,244
======== ======== ======== ========== ========== ======== ========
UNAUDITED PRO FORMA INFORMATION(C):
Pro forma net income............. $ 14,700 $ 8,386
========== ========
Pro forma net income per share,
as adjusted for the
offering(d).................... $ 0.47 $ 0.27
========== ========
OTHER OPERATING INFORMATION:
Pre-tax return on average
equity......................... 48.7% (2.0)% 50.3% 71.6% 43.1% 37.5%(e) 79.4%(e)
Percent of net revenues:
Through electronic trading..... 12.5% 22.3% 22.9% 42.7% 66.9% 52.7% 83.7%
From foreign operations........ 17.2% 14.5% 14.9% 31.1% 56.7% 40.4% 81.3%
Transaction volume:
Equity derivatives
(contracts).................. 11,598 10,549 9,540 21,157 27,924 5,368 6,130
Equity securities (shares)..... 180,237 559,341 872,152 1,814,484 3,091,462 467,775 753,645
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
----------------------------------------------
(UNAUDITED)
PRO FORMA AS
ADJUSTED FOR
HISTORICAL PRO FORMA(C) OFFERING(C)(D)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C>
BALANCE SHEET INFORMATION:
Total assets............................................ $1,479,493 $1,470,853 $1,551,228
Total liabilities....................................... 1,370,853 1,370,853 1,370,853
---------- ---------- ----------
Total members' equity/stockholders' equity.............. $ 108,640 $ 100,000 $ 180,375
========== ========== ==========
Book value per share.................................... $ 4.00 $ 5.77
========== ==========
</TABLE>
- ------------------------------
(a) Market-making activities, net, includes revenues from principal
transactions, interest and dividend income and interest and dividend
expense, all of which are related to our market-making activities. See
"Selected Consolidated Financial Information" for more detailed
information.
(b) Since we have operated historically as a limited liability company, we have
accounted for incentive-based compensation to our members as distributions
of members' equity rather than as compensation expense. As a result, our
income or loss before income taxes and our compensation expense have not
reflected these amounts for services rendered by our members. Accordingly,
our income or loss before income taxes understates the expected operating
costs we will incur after the offering. As a corporation, we will include
all incentive-based compensation to our employees in compensation expense.
For financial information that reflects pro forma
4
<PAGE> 8
compensation expense as if we had been a corporation, see our unaudited pro
forma consolidated financial statements.
(c) The unaudited pro forma information reflects adjustments which are
necessary, in our management's opinion, for a fair presentation of our
consolidated financial condition and results of operations on a pro forma
basis. The pro forma information gives effect to our conversion from a
limited liability company to a corporation. The adjustments for our
conversion to a corporation include anticipated distributions to members
prior to the offering under our limited liability company operating
agreement, including distributions for member income taxes related to our
earnings. These distributions will result in total stockholders' equity of
$100.0 million immediately before this offering and would have amounted to
approximately $18.4 million at March 31, 1999.
The following table summarizes the income statement effects of the pro
forma adjustments:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
1998 1999
------------ ---------------
<S> <C> <C>
Income before income taxes.................................. $ 40,561 $20,244
Compensation, excluding IPO awards........................ (8,776) (5,059)
IPO awards................................................ (6,869) (971)
Provision for income taxes................................ (10,216) (5,828)
-------- -------
Pro forma net income........................................ $ 14,700 $ 8,386
======== =======
</TABLE>
See our unaudited pro forma consolidated financial statements for more
detailed information concerning these adjustments.
(d) Calculated based on the weighted-average shares of our common stock
outstanding after giving effect to the unaudited pro forma adjustments and
as adjusted to reflect the issuance of 6,250,000 shares of common stock at
the midpoint of the range of initial public offering prices listed on the
cover page of this prospectus. See our unaudited pro forma consolidated
financial statements for more detailed information concerning these
adjustments and the calculation of pro forma net income per share. There is
no difference between basic and diluted pro forma net income per share.
(e) Annualized.
5
<PAGE> 9
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the following factors before you decide to buy our
common stock. You should also consider the other information in this prospectus,
including our consolidated financial statements and the notes to those
statements. The risks and uncertainties described below are not the only ones
facing our firm. Additional risks and uncertainties which we don't presently
know about may also affect us. Any of the following factors may materially
adversely affect our business, results of operations or financial condition. In
that case, the market price of our common stock may decline, and you may lose
all or part of your investment.
FLUCTUATIONS IN OUR OPERATING RESULTS MAY AFFECT OUR STOCK PRICE AND BUSINESS
Our Operating Results May Fluctuate Significantly, Which May Cause Volatility
in the Market Price of Our Common Stock
Our operating results have fluctuated in the past and may fluctuate
significantly in the future, including from quarter to quarter. These
fluctuations may cause volatility in the market price of our common stock.
Because of these fluctuations, period-to-period comparisons of our revenues and
operating results are not necessarily meaningful. You should not rely on those
comparisons as indicators of our future performance.
Declines in Our Revenues May Cause Us to Experience Losses
Our net revenues have fluctuated and may continue to fluctuate primarily
due to the securities market risks described in this section. Our expense
structure is based on historical expense levels and the levels of demand for our
market-making services. If our revenues decline and we are unable to adjust our
cost structure on a timely basis, we may experience losses.
We May Be Unable to Sustain or Improve Our Operating Results or Meet
Expectations, Which May Cause the Market Price of Our Common Stock to Decline
We may also be unable to sustain our historical rates of revenue growth
or improve our operating results or sustain our profitability from quarter to
quarter. In addition, our operating results in future periods may be below the
expectations of securities analysts and investors. In that event, the market
price of our common stock may decline.
OUR MARKET-MAKING ACTIVITIES EXPOSE US TO UNIQUE RISKS
We currently derive, and expect to continue to derive, a majority of our
revenues from market-making activities. Our future success will depend on the
continued growth of demand for our market-making services and our ability to
respond to that demand.
We May Experience Significant Losses from Our Market-Making Activities
We conduct our market-making activities mainly as a principal, which
subjects our capital to significant risks. We may experience significant losses
due to these risks. Our activities involve the purchase, sale or short sale of
securities for our own account and for hedging purposes. These activities
involve a number of risks, including risks of price fluctuations, changes in
interest rates and rapid changes in the liquidity of markets. These risks may
limit our ability either to purchase or sell securities in those transactions.
In addition, we may have difficulty borrowing securities to deliver to
purchasers to whom we sold short, or lenders from whom we have borrowed.
6
<PAGE> 10
From time to time, we have large position concentrations in securities of
a single issuer or issuers engaged in a specific industry. We have recently
experienced large position concentrations with the securities of a number of
issuers engaged in technology businesses and services. These concentrations have
in the past resulted, and may in the future result, in higher losses than would
occur if our positions and activities were less concentrated.
As a market maker, we attempt to derive a profit from the difference
between the prices at which we buy and sell securities. However, competitive
forces often require us to match the quotes other market makers display and to
hold varying amounts of securities in inventory. Maintaining inventory positions
subjects us to a high degree of risk. We may be unable to manage that risk
successfully and we may experience significant losses.
Derivatives Transactions Involve Greater Risks than Other Securities
Transactions and We May Experience Losses as a Result of Those Risks
Derivatives transactions involve greater risks than transactions in the
underlying securities. A substantial portion of our activity is in derivatives.
Transactions in option or futures contracts may result in losses which are not
offset by increases in the value of the underlying portfolio of securities or by
declines in the cost of the underlying securities to be acquired. A principal
risk in derivatives transactions is the rapid fluctuation in market prices of
derivatives contracts. In addition, because of the low initial margin deposits
required to establish a derivatives position, derivatives transactions often
involve substantial leverage. As a result, a relatively small movement in the
price of the contract may result in substantial losses.
The holder of an option or futures contract can terminate that contract
prior to its exercise or expiration only by entering into a closing transaction.
This requires a secondary market for the contract on the exchange on which the
contract was purchased. There may not be a liquid secondary market for an option
or futures contract we hold when we wish to close out our position. If there
isn't a liquid secondary market for an option or futures contract we hold, we
may not be able to close out our position and may have to purchase or sell the
underlying security, make or receive a cash settlement or meet ongoing margin
requirements.
Our Hedges and Other Risk Management Policies and Procedures May Not Be
Effective and May Leave Us Exposed to Unidentified or Unexpected Risks
Our policies and procedures to identify, monitor and manage risks may not
be fully effective. As a result, we face risks of losses, including potentially
catastrophic losses. Some of our methods of managing risk are based on our use
of observed historical market behavior. These methods may not accurately model
future risk exposures, which may be significantly greater than the historical
measures indicate.
We utilize a variety of instruments and strategies to hedge our exposure
to various types of risk. Many of these strategies are based on historical
trading patterns and correlations. For example, if we hold a long position in an
asset, we may hedge that position by taking a short position in an asset which
has historically moved in a direction which would offset a change in the value
of the long position. However, these strategies may not be fully effective in
mitigating our risk exposure in all market environments or against all types of
risk. Unexpected developments may cause market prices to move differently in the
future than they have historically.
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<PAGE> 11
We face the risk that the price of the securities being hedged may not
move in the same direction or to the same degree as the contract or securities
underlying the derivatives contract. This risk has three components:
- Correlation risk -- the risk that price movements on a contract on one
security used to hedge exposure to a different security, i.e.
"cross-hedging," may not correlate to price movements of the security
being hedged;
- Basket risk -- the risk that price movements on a basket of securities
used to hedge exposure to an index will not adequately reflect the
price movements of the index; and
- Basis risk -- the risk that the price of the derivatives contract and
the price of the security being hedged may not correlate.
Our Proprietary Models May Not Generate Accurate Pricing Information and May
Not Apply to New Products, Which May Cause Us to Suffer Losses
We rely on the pricing information we derive from our proprietary
valuation models. Our models could fail to generate accurate theoretical prices
for derivatives and securities due to programming or data processing errors. If
that were to happen, we may suffer substantial losses. Also, we have in the
past, and may from time to time in the future, expand our market-making
activities to new products, including non-equity based products. Our models may
not be effective when applied to new products and we may suffer substantial
losses that could cause us to withdraw from trading those products.
WE MAY SUFFER RISKS RELATED TO THE SECURITIES MARKETS
Changes in the Structure of the Securities Markets May Decrease Our
Opportunities and Profits
If the current market structure changes, order flow to which we presently
have access may be diverted. As a result, our trading volume and profits may
decrease. For example, we may be unable to adapt to new electronic trading
formats. Electronic Communications Networks, commonly known as ECNs, have
recently emerged as an alternative forum to which broker-dealers and
institutional investors can direct their limit orders. In addition, the proposed
International Securities Exchange, commonly called ISE, will be the first fully
electronic options market in the United States. If we do not actively
participate in these ECNs or other alternative markets, we may experience a
reduction in our order flow. If significant amounts of trading move from
exchange-based products to the OTC markets, our return on capital may also
decrease because we would need greater amounts of capital to participate in
those markets.
Declining Spreads Between Bid and Ask Prices May Reduce Our Profits
Inefficiencies in the markets in which we have historically operated are
declining, which may make our market-making activities in those markets less
profitable. This decline is reflected in reduced spreads between bid and ask, or
buy and sell, prices and results from several fundamental changes in the
securities markets, including:
- the increased use of technology;
- the emergence of online discount brokers;
- the increased prominence of online investors;
- increased trading volume of institutional investors;
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<PAGE> 12
- consolidation among firms in the securities industry; and
- new government regulations.
The spreads market makers receive for executing transactions in equity
derivatives and equity securities may continue to decrease in the future. In the
past, Nasdaq has taken regulatory actions to reduce spreads between bid and ask
prices for securities. Nasdaq, the NYSE and the American Stock Exchange are
currently examining proposed regulations which will require securities to trade
in decimals instead of fractions. The adoption of those regulations would likely
result in a further decrease in spreads between bid and ask prices, which may
make executing transactions and market making less profitable.
Our Revenues May Decrease Due to Declines in Market Volume or Liquidity or
Changes in Prices or Volatility
As a market-making and asset management firm, our businesses are
materially affected by conditions in the financial markets and economic
conditions generally, both in the United States and elsewhere around the world.
As a result, changes in those conditions, especially unexpected, significant
changes, may cause our revenues to decrease.
During recent years, unusually favorable and sustained performance of the
equity derivatives and equities securities markets has attracted substantial
inflows of new funds to those markets. A decline in cash flows into the U.S.
equity markets or a slowdown in investment activity by mutual funds and other
institutional and retail investors may have an adverse effect on the securities
markets generally. If there is a market downturn, our businesses may be
adversely affected in many ways. A decline in the volume of securities markets
or in market liquidity may reduce our market-making activities and, as a result,
may reduce our revenues. Since we hold both long and short positions, an
unusually large increase in market prices, including changes due to mergers and
acquisitions and changes in dividend policies, may affect our revenues as much
as an unusually large decrease in market prices.
In addition, because the fees which we charge for managing private
investment funds are based on the value of their assets and on their
performance, any of the factors described in the preceding paragraph may reduce
the revenues we receive from our asset management business.
We May Experience Losses from Other Risks Associated with the Securities
Industry
The securities business also involves various other risks, including
customer default, employee misconduct, errors and omissions and litigation. We
may experience substantial losses associated with these risks.
WE FACE RISKS RELATED TO THE TECHNOLOGIES WE USE
We May Experience Substantial Losses if Our or Other Parties' Computer and
Communications Systems Fail
Our market-making and asset management activities depend on the integrity
and performance of the computer and communications systems supporting them. Any
significant degradation or failure of our computer systems or any other systems
we use to process transactions, or any other systems of third parties that
affect our business, including securities exchange systems, may cause us to
suffer delays in processing transactions. These delays may cause substantial
losses for us and our customers. Extraordinary transaction volume, equipment
failure or other events may cause our computer systems to operate at an
unacceptably slow speed
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<PAGE> 13
or even to fail. Our backup systems may also fail, or may not be adequate to
restore our operations. We cannot assure you that our network protections will
work. Our systems may also fail as a result of a tornado, fire or other natural
disaster, power or telecommunications failure, terrorism or war.
Year 2000 Problems in Our or Other Parties' Computer Systems May Disrupt Our
Business and Uncertainty About Potential Year 2000 Problems May Reduce Our
Revenues
With the Year 2000 approaching, many companies and governmental entities
around the world are reviewing and modifying their computer systems to ensure
that they are Year 2000 compliant. A failure of our computer systems, or
computer systems of other parties that we rely on, to be Year 2000 compliant may
reduce our revenues in many ways.
Many existing computer systems and microprocessors, including those in
non-information technology equipment and systems, use only two digits to
identify a year in the date field with the assumption that the first two digits
of the year are always "19". As a result, computers which are not Year 2000
compliant may read the year as 1900. Systems which calculate, compare or sort
using the incorrect date may malfunction.
If we fail to identify and fix our transaction processing, securities
valuation, communications or data processing systems or to fix or replace
third-party software, hardware or services on a timely basis, it may, for
example:
- cause settlement of transactions to fail;
- lead to incomplete or inaccurate accounting, recording or processing of
transactions;
- result in inaccurate pricing and valuation information or give rise to
uncertainty about our exposure to market risks and our need for
liquidity; or
- result in litigation, which may be costly and time-consuming to defend.
In addition, our customers, governmental agencies, utility companies,
Internet access companies, third-party service providers, including our clearing
agents, and others outside our control, particularly exchanges and other
broker-dealers and market makers, may not be Year 2000 compliant. The failure by
any of these entities to be Year 2000 compliant may result in a systematic
failure beyond our control, including:
- a loss or reduction in our order flow;
- limitations on our ability to effectively engage in market-making
activities; or
- prolonged Internet, telecommunications or electrical failure.
We believe that uncertainty about the Year 2000 problem generally may
cause many market participants to reduce the level of their market activities
temporarily as they assess the effectiveness of these efforts during a
"phase-in" period beginning in late 1999. We believe that lenders are likely to
take similar steps, which will result in a reduction in available funding
sources. As a result, there may be a downturn in customer and general market
activity for a period of time before and after January 1, 2000. This may reduce
our revenues substantially, depending on how long the reduction in activity
continues and how broadly it affects the markets. We cannot predict the
magnitude of the impact which these kinds of reductions may have on our
business.
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<PAGE> 14
Third Parties May Infringe Our Intellectual Property Rights and We May Not Be
Able to Renew Licenses to Essential Intellectual Property, Which May Result in
Significant Costs and Adversely Affect Our Ability to Conduct Our Business
Third parties may copy or otherwise obtain and use our intellectual
property without our permission. Third parties may also independently develop
technologies similar to ours. Any unauthorized use of our proprietary technology
could increase competition and adversely affect our business. These technologies
are becoming increasingly easy to duplicate, particularly as employees leave
with proprietary knowledge. We may have difficulty monitoring unauthorized uses
of our proprietary technology. The precautions we have taken may not prevent
misappropriation of our technology.
In addition, we may have to litigate in the future to:
- protect our trade secrets;
- determine the validity and scope of other parties' proprietary rights;
- defend against claims that we have infringed other parties' rights; or
- defend against claims that our rights are invalid.
Any litigation, even if we are successful, may result in significant costs and
divert resources from our business. In addition, if other parties claim that we
have infringed their rights, we may have to enter into royalty or licensing
agreements, even if the claims are without merit. These agreements may not be
available on reasonable terms.
We also license some software from third parties. These licenses are
essential to our business. If any of these third parties terminate our licenses
or stop doing business, we may not be able to replace the licensed software.
WE CANNOT PREDICT OUR FUTURE CAPITAL NEEDS OR OUR ABILITY TO CONTINUE TO OBTAIN
FINANCING FROM OUR CLEARING BROKERS OR TO SECURE ADDITIONAL FINANCING, WHICH MAY
REQUIRE US TO SELL ASSETS OR REPURCHASE LIABILITIES AT UNFAVORABLE PRICES
Our business depends on the availability of adequate funding to provide
regulatory capital to meet applicable regulatory requirements. Historically, we
have satisfied these needs from internally generated funds and short-term
borrowings. We rely on our clearing brokers as our primary source of short-term
financing. If we are unable to obtain additional financing when we need funds,
or if we are unable to continue to obtain short-term financing from our clearing
brokers or other sources, we may need to liquidate securities positions.
Generally, we pledge securities to our clearing brokers to secure financing.
These clearing brokers may liquidate positions if necessary to repay our
borrowings. In some market environments, including times of market volatility or
uncertainty, the market may not be very liquid. In that case, we may be unable
to sell some securities positions, or we may have to sell securities positions
at depressed prices.
Our clearing brokers require us to maintain minimum net capital and if we
fail to do so, they may be unwilling to continue to provide us financing. If our
clearing brokers or other sources of short-term financing were unable or
unwilling to provide financing, we may be unable to find other financing sources
to replace them. We may also need to raise additional funds from time to time to
support our expansion into new opportunities or respond to competitive
pressures. Additional financing may not be available when needed on terms
favorable to us.
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<PAGE> 15
WE DEPEND ON OUR ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL
Our future success depends on our ability to attract and retain key
personnel. Competition for highly qualified management, trading, compliance and
technical personnel is intense. We may lose those professionals due to increased
competition or other factors in the future.
FINANCIAL OR OTHER PROBLEMS EXPERIENCED BY THIRD PARTIES MAY DISRUPT OUR
BUSINESS OR CAUSE US LOSSES
Third parties that owe us money, securities or other assets may not
perform their obligations to us, which may disrupt our business or cause us
losses. These parties include our counterparties, clearing brokers, exchanges,
clearing houses and other financial intermediaries as well as issuers whose
securities we hold. These parties may default on their obligations to us due to
bankruptcy, lack of liquidity, operational failure or other reasons. Default
risk may arise from events or circumstances which are difficult to detect,
including fraud. We may not receive full information with respect to the
financial condition of a counterparty.
As a market maker, the majority of our securities transactions are
conducted as principal with broker-dealer counterparties. We clear our
securities transactions principally through a few unaffiliated clearing brokers.
In addition, at any time, a substantial portion of our assets are held at one or
more clearing brokers. As a result, we rely on our clearing brokers to discharge
adequately their obligations on a timely basis. If any of our principal clearing
brokers or other financing sources were unable or unwilling to clear our
transactions, we may not be able to find other clearing brokers or financing
sources to replace them.
OUR FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO MEET INCREASING DEMAND
Our future success will depend on our ability to respond to the demand
for existing services and products and new services, products and technologies
on a timely and cost-effective basis. The worldwide market-making industry is
characterized by:
- rapid technological change;
- rapidly increasing transaction volumes;
- changing customer demands;
- the need to enhance existing or introduce new services and products;
and
- evolving industry standards.
New services, products and technologies introduced by other market makers may
render our existing services, products and technologies less competitive. We may
not be successful in developing, introducing or marketing new services, products
and technologies.
WE FACE INTENSE COMPETITION, WHICH MAY INCREASE OUR COSTS OR REDUCE OUR REVENUES
We derive a substantial majority of our revenues from market-making
activities. The market for these services is rapidly evolving and intensely
competitive. We expect competition to continue and intensify in the future. We
may incur increasing costs competing for market opportunities and, if we are
unable to compete successfully for market opportunities, our revenues may be
reduced. We face competition from many firms varying in size and strategy, some
of which have greater resources than we do. We may not be able to compete
effectively with current or future competitors.
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<PAGE> 16
In the United States, large financial institutions represent a
significant group of our competitors. Some of these financial institutions have
shown interest in penetrating the equity derivatives markets recently, including
by acquiring some of our competitors. In addition, our current and potential
competitors have established or may establish other cooperative relationships or
may consolidate to enhance their services and products. These combinations may
acquire significant market share and may possess greater financial and operating
resources than we do.
LEGAL AND REGULATORY RISKS ARE INHERENT AND SUBSTANTIAL IN OUR BUSINESS
We Operate Under Extensive Government Regulation, Which Increases Our Cost of
Doing Business and Limits Our Discretion in Conducting Our Business
The securities industry faces extensive regulation both in the United
States and abroad. This regulation increases our cost of doing business and
limits our discretion in conducting our business. In the United States, the SEC,
the Commodity Futures Trading Commission, commonly called the CFTC, the National
Association of Securities Dealers, Inc., commonly called the NASD, the National
Futures Association, commonly called the NFA, securities and commodities
exchanges, other self-regulatory organizations, commonly called SROs, and state
securities commissions regulate us. Outside the United States, we are subject to
regulation by securities regulatory authorities and exchanges in the countries
in which we do business. These regulatory bodies are responsible for
safeguarding the integrity of the securities markets and protecting the
interests of participants in those markets. We operate under regulation
concerning aspects of our business, including:
- sales methods;
- trade practices;
- use and safekeeping of customers' funds and securities;
- capital structure;
- record-keeping;
- financing of customers' purchases; and
- conduct of directors, officers and employees.
Regulatory Limits and Actions May Affect Our Ability to Liquidate or Hold
Positions in Futures or Option Contracts, Which May Require Us to Hold or Sell
Positions at Unfavorable Prices
The liquidity of a secondary market in futures or option contracts may be
adversely affected by limits established by commodities exchanges on the amount
of fluctuation in a contract price during a single trading day. Once the
contract reaches the daily limit, the exchanges will not permit any transactions
at a price beyond the limit, which may require us to continue to hold open
futures positions at unfavorable prices and to make additional margin deposits.
Also, the liquidity of a secondary market in futures or option contracts on an
exchange may be adversely affected by other factors, including the following:
- exchanges may restrict opening or closing transactions or both;
- exchanges may stop or suspend trading in particular classes or series
of contracts or underlying securities;
- government intervention may interrupt normal operations on an exchange;
and
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<PAGE> 17
- exchanges may, for economic or other reasons, decide to discontinue the
trading of futures or option contracts, or a particular class or series
of contracts.
The exchanges on which we operate may impose limits on the maximum number
of positions on the same side of the market which an investor may hold in an
underlying security. In addition, some regulatory authorities and exchanges have
established limits on the maximum net long or net short position which a single
investor may hold or control in a particular futures or option contract. These
regulatory authorities and exchanges may require an investor to liquidate any
positions in excess of those limits, which may be at unfavorable prices, and may
impose other sanctions or restrictions. Although our firm and the funds which we
manage are not currently considered a single investor for these purposes, these
limits may still affect our operations, particularly if they were considered a
single investor in the future.
Our Business Involves Substantial Risks of Litigation and Potential Securities
Laws Liability, Which May Cause Us to Incur Significant Expenses or Interrupt
Our Business
Many aspects of our business involve substantial risks of liability. We
are exposed to substantial liability under Federal, state and foreign securities
laws, other Federal, state and foreign laws and court decisions, as well as
rules and regulations adopted by domestic and foreign regulatory authorities and
SROs. We also face the risk of litigation and claims which may be without merit.
We may incur significant legal expenses defending against those claims.
We, and some of our officers and employees, have, in the past, been
involved in claims under these laws, rules and regulations. These claims have
resulted in the payment of fines and settlements. We and our officers and other
employees may, in the future, be involved in similar claims. An adverse ruling
against us or our officers or other employees may result in us or our officers
or other employees being required to pay a substantial fine or settlement and
may result in temporary or permanent suspension of trading privileges.
Changes in Legislation or Regulations May Affect Our Ability to Conduct Our
Business or Reduce Our Profitability
The regulatory environment in which we operate may change. These changes
may affect our ability to conduct our business or reduce our profitability. Our
market-making and asset management activities may be affected not only by
legislation or regulations of general applicability, but also by
industry-specific legislation or regulations. The SEC, the CFTC, other U.S. or
foreign governmental regulatory authorities, the NASD, the NFA, securities and
commodities exchanges or other SROs may all adopt new or revised regulations
which affect our business. Changes in the interpretation or enforcement of
existing laws and rules by those entities may also affect our business. In
particular, our market-making activities do not currently expose us to
transaction taxes. However, governmental authorities have from time to time
proposed taxes on transactions in equity derivatives and equity securities. The
imposition of any transaction taxes may significantly reduce the profitability
of our market-making activities.
We Must Meet Regulatory Capital Requirements, Which May Affect Our Ability to
Conduct Our Business or to Withdraw Capital from Our Subsidiaries
The SEC, the NASD and various other regulatory agencies have stringent
rules with respect to the maintenance of specific levels of regulatory capital
by securities brokers. These rules include the SEC's Uniform Net Capital Rules.
If we fail to maintain the required regulatory capital, we may be subject to
suspension or revocation of registration. An unusually
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<PAGE> 18
large charge against regulatory capital may adversely affect our ability to
expand or even maintain our present levels of business. In addition, a change in
the regulatory capital rules, a change in the interpretation of existing rules
or the imposition of new rules or any unusually large charge against regulatory
capital may limit our operations which require the intensive use of capital or
restrict our ability to withdraw capital from our regulated subsidiaries. Any
limitation on our ability to withdraw capital may limit our ability to pay cash
dividends, repay debt or repurchase shares of our outstanding stock.
WE FACE RISKS INHERENT IN OUR INTERNATIONAL BUSINESS
We have market-making activities in equity derivatives and equity
securities markets in several foreign countries, in addition to the United
States. We intend to expand our business to other international markets, which
may include emerging markets. As we continue to expand our business in
international markets, our exposure to the risks inherent in our international
business will increase.
Legal and Regulatory Requirements of Foreign Countries May Limit Our Ability
to Expand Internationally
Many foreign countries have extensive laws and regulations governing the
securities industry. In some of these countries, the laws and regulations are
evolving and we may have difficulty determining their exact requirements. The
compliance requirements of these different countries may limit our ability to
expand internationally. We may not be able to obtain the necessary regulatory
approvals to expand internationally or, if we obtain the approvals, we may not
be able to continue to comply with those laws and regulations. In addition,
third parties with which we have formed alliances may fail to comply with
applicable laws and regulations. Their actions may affect the success of our
alliances and subject us to penalties or liability.
Procedures and Requirements of Foreign Exchanges May Expose Us to Significant
Losses
Some of the foreign exchanges on which we operate may require different
margin, exercise, settlement or expiration procedures from those on U.S.
exchanges. In some of these foreign markets, many of the protections provided in
U.S. exchange transactions are not available, which may expose us to significant
losses. For example, they may not have daily price fluctuation limits so market
movements may continue to an unlimited extent.
We May Experience Losses from Other Risks Associated with International
Business
In addition, there are other risks inherent in doing business in
international markets, including:
- exchange controls or other restrictions, which may restrict our ability
to convert local currency into U.S. dollars or other currencies, or to
take those dollars or other currencies out of those countries;
- tariffs and other trade barriers;
- difficulties in staffing and supervising foreign operations;
- political, economic and financial instability; and
- fluctuations in currency exchange rates, including possible currency
devaluations, which may adversely affect the value of assets we hold.
We may experience substantial losses associated with these risks.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH, WHICH MAY REDUCE OUR PROFITS OR THE
EFFECTIVENESS OF OUR MANAGEMENT
Over the last several years, we have experienced significant growth in
our business and the number of our employees. We may not be able to manage our
growth successfully. The increased costs associated with our expected growth may
not be offset by corresponding increases
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<PAGE> 19
in our revenues. The growth of our business has also placed a significant strain
on our management and operations and we expect it to continue to do so in the
near future. This growth has required and will continue to require us to
increase our investment in management personnel, financial and management
systems and controls and facilities. In addition, if we acquire other businesses
in the future, we may not be able to successfully incorporate these new
businesses into our operations.
OUR DIRECTORS AND EXECUTIVE OFFICERS OWN A SIGNIFICANT PERCENTAGE OF OUR COMMON
STOCK AND WILL BE ABLE TO CONTROL OUR FIRM AND PREVENT A TAKEOVER OF OUR FIRM
Immediately after the offering, our directors and executive officers will
collectively own approximately 47.8% of our outstanding common stock, assuming
that the underwriters do not exercise their overallotment option. M. Blair Hull,
our Chairman and Chief Executive Officer, individually will own approximately
38.3% of our outstanding common stock immediately after the offering, assuming
that the underwriters do not exercise their overallotment option. As a group,
our directors and executive officers will be able to:
- control the election of all of the members of our Board;
- significantly influence the approval of all matters requiring
stockholder approval; and
- continue to have significant control over our affairs.
As a result, our directors and executive officers will be able to delay or
prevent a transaction which would cause a change in our control, even if our
other stockholders consider the transaction to be in their best interests.
PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE OF INCORPORATION AND BYLAWS MAY
DELAY OR PREVENT A TAKEOVER OF OUR FIRM
We are organized under the laws of the State of Delaware. Some provisions
of Delaware law may delay or prevent a transaction which would cause a change in
our control. In addition, our certificate of incorporation contains some
provisions which may delay or prevent this type of transaction, even if our
stockholders consider the transaction to be in their best interests. Our
certificate of incorporation authorizes our Board to determine the number of
shares and the terms of any unissued series of our preferred stock without any
vote or action by our stockholders. As a result, our Board can authorize and
issue shares of preferred stock with voting or conversion rights which may
adversely affect the voting or other rights of holders of our common stock. In
addition, the rights given to the holders of a series of preferred stock may
prohibit a merger, reorganization, sale of all or substantially all of our
assets, liquidation or other extraordinary corporate transaction.
Our certificate of incorporation divides our Board into three classes of
directors, so only approximately one-third of the directors will be subject to
reelection each year. Also, we have adopted advance notice provisions in our
bylaws which require our stockholders to present their nominations for directors
or other business proposals within a specified time frame. These provisions make
the removal of incumbent directors and the election of new directors more time-
consuming and difficult, which may discourage third parties from attempting to
obtain control of our firm, even if the change in control would be in the best
interests of our stockholders.
THERE ARE SPECIFIC RISKS RELATING TO THIS OFFERING
An Active Trading Market May Not Develop or Continue
Before the offering, no public market has existed for our common stock
and an active trading market may not develop or continue. We will apply to list
our common stock on the Nasdaq National Market. That listing does not, however,
guarantee that an active trading market for our common stock will develop and
continue after the offering.
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<PAGE> 20
Our Common Stock May Trade at Prices Below the Initial Public Offering Price
We will negotiate the initial public offering price of our common stock
with the representatives of the underwriters, but the price may not reflect the
market price for our common stock after the offering. The price of our common
stock may fluctuate widely, depending on many factors, including:
- the perceived prospects of our firm and the securities industry in
general after the offering;
- differences between our actual financial and operating results and
those expected by investors and analysts;
- changes in analysts' recommendations or projections; and
- changes in general economic or market conditions and broad market
fluctuations.
Our common stock may trade at prices significantly below the initial public
offering price.
Investors Will Incur Immediate and Substantial Dilution
The estimated initial public offering price of our common stock is
substantially higher than the pro forma net tangible book value per share of our
outstanding common stock immediately after the offering. If you purchase common
stock in this offering, you will incur immediate and substantial dilution of
$8.23 per share in the pro forma net tangible book value per share from the
price you pay for our common stock.
Future Sales by Existing Stockholders May Depress the Market Price of Our
Common Stock
If our stockholders sell substantial amounts of our common stock in the
public market after the offering, the market price of our common stock may fall.
Those sales also may make it more difficult for us to sell stock in the future
at an appropriate time and price. After the offering, 31,250,000 shares of our
common stock will be outstanding if the underwriters do not exercise their
overallotment option. Of those shares, only the 6,250,000 shares which we are
offering in this offering will be freely tradeable, other than any shares
purchased by affiliates. Our existing stockholders will own the remaining
25,000,000 shares. They may sell those shares into the public market in the
future after they satisfy their required holding periods.
We Have Significant Discretion in the Use of Proceeds
We plan to use the net proceeds from the offering as additional capital
for expanding market making in existing and new markets and products, expanding
Hull Transaction Services and our asset management business, and for general
corporate purposes, including investing in additional technology systems and
additional personnel and identifying and pursuing strategic opportunities as
they may arise from time to time. However, we have not allocated and cannot
estimate the portion of the net proceeds which we will use for any of these
purposes. We will have significant discretion in applying the net proceeds of
this offering. Although we have no plans or agreements regarding any material
acquisitions on the date of this prospectus, we may seek acquisitions of
complementary businesses, products or technologies, and we may use a portion of
the net proceeds for those acquisitions.
FORWARD-LOOKING STATEMENTS
This prospectus contains some "forward-looking statements" based on our
current expectations, assumptions, estimates and projections about our firm and
our industry. These forward-looking statements also involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in the forward-looking statements. Factors which may cause or contribute to
those differences include those discussed in the "Risk Factors" section and
elsewhere in this prospectus. We will not necessarily update publicly any
forward-looking
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<PAGE> 21
statements for any reason, even if new information becomes available or other
events occur in the future.
OUR COMPANY
Our firm was formed in 1985 as Hull Trading Company, an Illinois general
partnership. In 1995, we converted to an Illinois limited liability company with
the name Hull Trading Company, L.L.C. and on January 1, 1999, we changed our
name to Hull and Associates, L.L.C. On November 12, 1998, we formed Hull Trading
Company, L.L.C., a Delaware limited liability company, as our wholly owned
subsidiary. Immediately before the closing of this offering, we will reorganize
into a newly formed Delaware corporation called The Hull Group Inc., with Hull
and Associates, L.L.C. as its wholly owned subsidiary. Some members of Hull and
Associates that own a 30.8% membership interest in Hull and Associates in the
aggregate will receive shares of our common stock in exchange for their
membership interests at a rate of 250,000 shares per percentage membership
interest, for an aggregate of approximately 7,711,000 shares of our common
stock. M. Blair Hull, Inc., a holding company for M. Blair Hull, our Chairman
and Chief Executive Officer, and members of his family, owns the remaining 69.2%
membership interest in Hull and Associates. In connection with this
reorganization, the stockholders of M. Blair Hull, Inc. will exchange their
stock in M. Blair Hull, Inc. for our common stock so that M. Blair Hull, Inc.
will become a wholly owned subsidiary of The Hull Group Inc. The stockholders of
M. Blair Hull, Inc. will receive an aggregate of approximately 17,289,000 shares
of our common stock upon these exchanges.
Our main offices are at 311 South Wacker Drive, Chicago, Illinois 60606
and our telephone number is (312) 697-2700.
USE OF PROCEEDS
We estimate that the net proceeds to us from selling our common stock in
the offering will be approximately $80.4 million, or $92.6 million if the
underwriters exercise their over-allotment option in full, after deducting our
estimated offering and transaction expenses and underwriting discounts and
commissions. These amounts assume an initial public offering price of $14.00 per
share, which is the midpoint of the range listed on the cover page of this
prospectus. We plan to use the net proceeds from the offering as additional
capital for one or more of the following purposes: expanding market making in
existing and new markets and products, expanding Hull Transaction Services and
our asset management business, and for general corporate purposes, including
investing in technology systems and personnel. We have not allocated and cannot
estimate the portion of the net proceeds which we will use for any of these
purposes. We may also use a portion of the proceeds of this offering to pursue
acquisitions of or strategic investments in businesses, products or technologies
that are complementary to our business. We do not have any commitments or
agreements with respect to any acquisitions or investments.
DIVIDEND POLICY
We intend to retain future earnings, if any, to finance the growth of our
business, and do not anticipate paying any cash dividends on our common stock
for the foreseeable future. The payment of dividends is within our Board's
discretion and will depend on our results of operations, financial condition,
capital requirements and future prospects, restrictions imposed by our financing
arrangements, legal and regulatory restrictions and other factors that our Board
deems relevant.
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DILUTION
Our pro forma net tangible book value on March 31, 1999 was approximately
$100.0 million, or $4.00 per share of our common stock. Net tangible book value
per share represents the amount of our total tangible assets minus our total
liabilities, divided by the 25,000,000 shares of our common stock that were
outstanding on March 31, 1999 on a pro forma basis. The pro forma information
gives effect to our conversion from a limited liability company to a
corporation, including incentive-based compensation related to services rendered
by our former members, the provision for corporate income taxes and other
transactions as described in our unaudited pro forma consolidated financial
statements. The adjustments for our conversion to a corporation include
anticipated distributions to members prior to the offering under our limited
liability company operating agreement, including distributions for member income
taxes related to our earnings. After giving effect to the sale of 6,250,000
shares of our common stock in the offering at an assumed initial public offering
price of $14.00 per share, which is the midpoint of the range listed on the
cover page of this prospectus, resulting in estimated net proceeds of $80.4
million, our pro forma net tangible book value on March 31, 1999 would have been
approximately $180.4 million, or $5.77 per share. This represents an immediate
increase in pro forma net tangible book value of $1.77 per share to our existing
stockholders and an immediate dilution of $8.23 per share to new investors who
purchase our common stock in the offering at the assumed initial public offering
price. The following table shows this immediate and substantial per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $14.00
Pro forma net tangible book value per share on March 31,
1999, before giving effect to the offering............. $4.00
Increase in pro forma net tangible book value per share
attributable to the offering........................... 1.77
-----
Pro forma net tangible book value per share on March 31,
1999, after giving effect to the offering................. 5.77
------
Dilution in pro forma net tangible book value per share to
new investors............................................. $ 8.23
======
</TABLE>
The following table summarizes the differences between the number of
shares of our common stock purchased from us, the total cash consideration paid
to us and the average price per share paid by our existing stockholders and by
new investors in the offering at an assumed initial public offering price of
$14.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ----------------------
NUMBER PERCENT AMOUNT PERCENT
<S> <C> <C> <C> <C>
Existing stockholders................ 25,000,000 80.0% $100,000,000 55.0%
New investors........................ 6,250,000 20.0 80,375,000 45.0
---------- ----- ------------ -----
Total.............................. 31,250,000 100.0% $180,375,000 100.0%
========== ===== ============ =====
</TABLE>
If the underwriters exercise their over-allotment option in full, our pro
forma net tangible book value per share of common stock on March 31, 1999 would
be $5.98 per share after giving effect to the offering. This represents dilution
of $8.02 per share to new investors who purchase our common stock in the
offering at the assumed initial public offering price. In that case, the number
of shares purchased by new investors would increase to 7,187,500, or 22% of the
total number of shares of our common stock to be outstanding after the offering,
and the 25,000,000 shares held by our existing stockholders would represent 78%
of the total number of shares to be outstanding after the offering.
19
<PAGE> 23
CAPITALIZATION
The following table shows our consolidated capitalization on March 31,
1999, on an historical basis, on a pro forma basis and on a pro forma basis as
adjusted to give effect to the sale of 6,250,000 shares of our common stock in
the offering at an assumed initial public offering price of $14.00 per share,
resulting in estimated net proceeds of $80.4 million. The pro forma information
gives effect to our conversion from a limited liability company to a
corporation, including incentive-based compensation related to services rendered
by our former members, the provision for corporate income taxes and other
transactions as described in our unaudited pro forma consolidated financial
statements. The adjustments for our conversion to a corporation include
anticipated distributions to members prior to the offering under our limited
liability company operating agreement, including distributions for member income
taxes related to our earnings. You should read this table together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," our unaudited pro forma consolidated financial statements and our
consolidated financial statements and their notes included in this prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
-------------------------------------
PRO FORMA
AS ADJUSTED
HISTORICAL PRO FORMA FOR OFFERING
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt........................................... $ -- $ -- $ --
======== ======== ========
Long-term debt............................................ $ -- $ -- $ --
Members' equity........................................... 108,640 -- --
Stockholders' equity:
Common stock, par value $0.01 per share; 100,000,000
shares authorized, 25,000,000 shares issued and
outstanding (pro forma), 31,250,000 shares issued and
outstanding (pro forma as adjusted).................. -- 250 313
Additional paid-in capital.............................. -- 114,683 194,995
Retained earnings....................................... -- -- --
Unearned compensation(a)................................ -- (14,933) (14,933)
-------- -------- --------
Total stockholders' equity(b)........................ -- 100,000 180,375
-------- -------- --------
Total capitalization................................. $108,640 $100,000 $180,375
======== ======== ========
</TABLE>
- ------------------------------
(a) Unearned compensation relates to the awards under our 1999 Special
Restricted Stock Plan.
(b) We are also authorized to issue 25,000,000 shares of preferred stock, par
value $0.01 per share. No shares of our preferred stock are currently
outstanding.
20
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL INFORMATION
We have derived the selected historical consolidated income statement
information for the years ended December 31, 1996, 1997 and 1998 from our
audited consolidated financial statements and their notes. Those audited
financial statements are included in this prospectus. We have derived the
summary historical consolidated income statement information for the years ended
December 31, 1994 and 1995 from our audited consolidated financial statements
and their notes. Those financial statements are not included in this prospectus.
We have derived the selected historical consolidated income statement
information for the three months ended March 31, 1998 and 1999 and the
consolidated balance sheet information as of March 31, 1999 from our unaudited
interim consolidated financial statements included in this prospectus, and in
our management's opinion, those financial statements include all adjustments,
which are of a normal recurring nature, necessary for a fair presentation. Our
operating results for the three months ended March 31, 1999 do not necessarily
indicate results that we expect for the year ended December 31, 1999.
We have derived the unaudited pro forma information for the year ended
December 31, 1998 and as of and for the three months ended March 31, 1999 from
our unaudited pro forma consolidated financial statements included in this
prospectus. The unaudited pro forma information does not represent our results
of operations for any future date or period.
You should read the selected consolidated financial information together
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," our unaudited pro forma consolidated financial statements and our
consolidated financial statements and their notes included in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT INFORMATION:
Revenues:
Market-making activities....... $47,772 $22,330 $60,443 $109,637 $ 96,234 $20,395 $37,640
Asset management fees.......... 153 3,026 6,675 11,610 9,995 2,736 1,099
Interest & dividends........... 3,368 4,845 17,525 61,137 45,489 13,169 12,795
Other income................... 3,313 283 478 1,210 1,127 394 119
------- ------- ------- -------- -------- ------- -------
Total revenues............... 54,606 30,484 85,121 183,594 152,845 36,694 51,653
Interest & dividend expense.... 2,902 4,725 14,669 67,350 49,732 12,741 14,614
------- ------- ------- -------- -------- ------- -------
Net revenues................... 51,704 25,759 70,452 116,244 103,113 23,953 37,039
Operating expenses:
Compensation................... 12,136 11,475 17,225 23,603 25,400 5,498 7,656
Market-making related costs.... 4,239 5,287 8,784 17,496 20,315 5,138 4,894
Other operating expenses....... 6,919 10,251 10,400 15,090 16,837 4,475 4,245
------- ------- ------- -------- -------- ------- -------
Total operating expenses..... 23,294 27,013 36,409 56,189 62,552 15,111 16,795
------- ------- ------- -------- -------- ------- -------
Income (loss) before income
taxes(a)....................... $28,410 $(1,254) $34,043 $ 60,055 $ 40,561 $8,842 $20,244
======= ======= ======= ======== ======== ======= =======
Net income (loss)................ $28,129 $ (541) $33,700 $ 52,747 $ 29,660 $6,907 $15,775
======= ======= ======= ======== ======== ======= =======
</TABLE>
21
<PAGE> 25
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED OR AS OF DECEMBER 31, ENDED MARCH 31,
--------------------------------------------------------- --------------------------
1994 1995 1996 1997 1998 1998 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C>
UNAUDITED PRO FORMA INFORMATION(B):
Pro forma net income............ $ 14,700 $ 8,386
Pro forma stockholders' equity
as adjusted for the
offering...................... $ 180,375
Pro forma book value per share
as adjusted for the
offering...................... $ 5.77
Pro forma net income per
share......................... $ 0.59 $ 0.34
Pro forma net income per share,
as adjusted for the
offering(c)................... $ 0.47 $ 0.27
Pro forma basic and diluted
shares, as adjusted for the
offering(c)................... 31,250,000 31,250,000
BALANCE SHEET INFORMATION:
Total assets.................... $309,597 $582,737 $893,816 $1,652,292 $ 1,793,095 $2,404,342 $ 1,479,493
Total liabilities............... 244,537 522,434 818,869 1,559,585 1,697,516 2,308,400 1,370,853
Total members'
equity/stockholders' equity... 65,060 60,303 74,947 92,707 95,579 95,942 108,640
Long-term borrowings............ -- 6,000 -- -- -- -- --
OTHER OPERATING INFORMATION:
Pre-tax return on average
equity........................ 48.7% (2.0)% 50.3% 71.6% 43.1% 37.5%(d) 79.4%(d)
Percent of net revenues:
Through electronic trading.... 12.5% 22.3% 22.9% 42.7% 66.9% 52.7% 83.7%
From foreign operations....... 17.2% 14.5% 14.9% 31.1% 56.7% 40.4% 81.3%
Transaction volume:
Equity derivatives
(contracts)................. 11,598 10,549 9,540 21,157 27,924 5,368 6,130
Equity securities (shares).... 180,237 559,341 872,152 1,814,484 3,091,462 467,775 753,645
</TABLE>
- ------------------------------
(a) Since we have operated historically as a limited liability company, we have
accounted for incentive-based compensation to our members as distributions
of members' equity rather than as compensation expense. As a result, our
income or loss before income taxes and our compensation expense have not
reflected these amounts for services rendered by our members. Accordingly,
our income or loss before income taxes understates the expected operating
costs we will incur after the offering. As a corporation, we will include
all incentive-based compensation to our employees in compensation expense.
For financial information that reflects pro forma compensation expense as if
we had been a corporation, see our unaudited pro forma consolidated
financial statements.
(b) The unaudited pro forma information reflects adjustments which are
necessary, in our management's opinion, for a fair presentation of our
consolidated financial condition and results of operations on a pro forma
basis. The pro forma information gives effect to our conversion from a
limited liability company to a corporation. The adjustments for our
conversion to a corporation include anticipated distributions to members
prior to the offering under our limited liability company operating
agreement, including distributions for member income taxes related to our
earnings. These distributions will result in total stockholders' equity of
$100.0 million immediately before this offering and would have amounted to
approximately $18.4 million at March 31, 1999.
The following table summarizes the income statement effects of the pro forma
adjustments:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
1998 1999
------------ ---------------
<S> <C> <C>
Income before income taxes.................................. $ 40,561 $20,244
Compensation, excluding IPO awards........................ (8,776) (5,059)
IPO awards................................................ (6,869) (971)
Provision for income taxes................................ (10,216) (5,828)
-------- -------
Pro forma net income........................................ $ 14,700 $ 8,386
======== =======
</TABLE>
See our unaudited pro forma consolidated financial statements for more
detailed information concerning these adjustments.
(c) Calculated based on the weighted-average shares of our common stock
outstanding after giving effect to the unaudited pro forma adjustments and
as adjusted to reflect the issuance of 6,250,000 shares of common stock at
the midpoint of the range of initial public offering prices listed on the
cover page of this prospectus. See our unaudited pro forma consolidated
financial statements for more detailed information concerning these
adjustments and the calculation of pro forma net income per share. There is
no difference between basic and diluted pro forma net income per share.
(d) Annualized.
22
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis along with our
consolidated financial statements and the notes to those statements included in
this prospectus. The discussion contains some forward-looking statements based
on our current expectations, estimates and projections about our firm and our
industry. Our actual results may differ materially from those anticipated in the
forward-looking statements. Factors which could cause or contribute to those
differences include, but are not limited to, those discussed in this section and
elsewhere in this prospectus, particularly in the "Risk Factors" section.
OVERVIEW
We are a leading global market maker in exchange-traded equity
derivatives and an active market maker in equity securities worldwide. We
provide market-making and transaction execution services to a diverse group of
participants on 28 exchanges in nine countries. The focus of our market-making
activities is to provide customers with rapid executions at the best possible
price.
Our lines of business are worldwide market-making activities and asset
management. Through Hull Transaction Services, our market-making activities
include executing and routing orders forwarded to us primarily by online
brokers, large retail broker-dealers, money center banks and hedge funds. We
make markets in listed U.S. equity index options and in selected individual
equity options in all major markets in the United States. We also make markets
in a variety of equity index options and individual equity options in eight
foreign countries, primarily on electronic exchanges located in Europe and Asia.
In addition to derivatives market making, we make markets in individual equity
securities on U.S. and foreign exchanges. We also provide asset management
services to outside investors by applying our expertise in valuation, electronic
trading, portfolio construction, technology and risk management.
Immediately before the closing of this offering, we will reorganize into
a newly formed Delaware corporation called The Hull Group Inc., with Hull and
Associates, L.L.C. as its wholly owned subsidiary. In connection with this
reorganization, our limited liability company operating agreement will
terminate. Each member of Hull and Associates will receive shares of our common
stock in exchange for his or her membership interest in Hull and Associates at a
rate of 250,000 shares per percentage membership interest, for an aggregate of
25,000,000 shares of common stock. Immediately before this reorganization, we
expect that Hull and Associates will make some distributions to members in
accordance with our limited liability company operating agreement, including
distributions for member income taxes related to our earnings.
DERIVATIVES
Derivatives are financial instruments that derive their value from
underlying assets, indices, reference rates or a combination of these variables.
Equity derivatives typically include options, futures, forwards, convertible
securities and swaps. Equity derivatives provide dealers and customers the
opportunity to harness market volatility and manage risk.
Our derivative transactions are an integral part of our market-making
activities. The derivative instruments we enter into are generally traded on
exchanges. We use derivatives in our market-making activities to facilitate
customer transactions, to take proprietary positions and to manage risk. We also
enter into derivative transactions to manage our interest rate and foreign
currency exposure.
23
<PAGE> 27
REVENUE TRENDS
Our net revenues from electronic trading have increased significantly in
recent years and have comprised an increasing percentage of our total
market-making revenues. The following table shows our net revenues derived
through market-making processes that are electronic:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS
------------------------------ ENDED
1996 1997 1998 MARCH 31, 1999
(IN THOUSANDS, EXCEPT PERCENTAGE INFORMATION)
<S> <C> <C> <C> <C>
Net revenues through electronic
trading............................ $16,118 $49,594 $68,954 $30,984
Net revenues through electronic
trading as % of net revenues....... 22.9% 42.7% 66.9% 83.7%
</TABLE>
This trend is a result of our ability to capitalize on the migration of
foreign exchanges to electronic platforms. Through the use of our proprietary
information and communications technology, we have been able to expand our
market-making activities into new electronic markets. Because exchanges in
Europe and Asia have adopted electronic trading platforms more broadly than U.S.
exchanges, our net revenues from our operations in Europe and Asia have
represented an increasing percentage of our net revenues, as the following table
shows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, THREE MONTHS
--------------------- ENDED
1996 1997 1998 MARCH 31, 1999
<S> <C> <C> <C> <C>
Net revenues from U.S. operations.......... 85.2% 68.9% 43.3% 18.7%
Net revenues from European
operations............................... 13.5 30.3 50.0 70.4
Net revenues from Asian operations......... 1.3 0.8 6.7 10.9
----- ----- ----- -----
Net revenues..................... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
We believe that the foreign electronic markets will continue to be a key part of
our growth strategy.
REVENUES
Our revenues consist principally of revenues from market-making
activities as well as management and incentive fees from our asset management
business. We derive revenues from market-making activities by capturing the
spread between the bid, the price at which we stand ready to buy securities, and
the ask, the price at which we stand ready to sell securities. In doing this, we
build up inventories of securities. Our revenues from market-making activities
also include net gains or losses from these inventories. Managing the inherent
risk in these inventories is integral to our profitability. Additionally, to the
extent we have a long position in a security, we may receive dividend income and
may pay interest for the cost of carry, and conversely, if we have a short
position in a security we may receive interest income and may incur dividend
expense to the holder of the security. Our net revenues from market-making
activities include our net interest and dividend income and expense.
Our market-making revenues are primarily affected by market volume, price
volatility and liquidity. Our securities inventories are generally maintained on
a market-neutral basis. As a result, the portfolio is structured so that a
change in market prices should not affect our profitability. A decline in the
volume of securities markets or in market liquidity may reduce our market-making
activities and assets under management and, as a result, may reduce our
24
<PAGE> 28
revenues. Lower price levels of securities or reduced volatility on securities
markets may result in reduced volume and reduce our revenues. Sudden sharp
unanticipated movements in market values of securities may also reduce our
revenues.
OPERATING EXPENSES
Our operating expenses largely consist of employee compensation and
market-making related costs. A substantial portion of these expenses is variable
in nature. Employee compensation expense, which is largely incentive-based,
fluctuates, for the most part, based on changes in net revenues and our
profitability. Market-making related costs consist of execution, clearing and
brokerage fees, which fluctuate primarily based on changes in trade and share
volume, the mix of domestic versus foreign volume and the clearing fees charged
by our clearing brokers.
Since historically we have operated as a limited liability company,
bonuses paid or to be paid to our principals have been accounted for as
distributions rather than as compensation expense. After our conversion to a
corporation, we will include these payments to our former principals in
compensation expense as discussed in our unaudited pro forma consolidated
financial statements included in this prospectus.
Compensation expense primarily consists of salaries and benefits and
incentive-based compensation paid to personnel. Incentive-based compensation
paid to market-making personnel is a function of individual performance, profit
center performance and total firm profitability. In calculating each profit
center's performance, we take into account the risk inherent in our
market-making activities by reducing the return on capital based on the amount
of risk taken. Because each individual market maker is compensated based on
risk-adjusted returns, this provides financial incentives to align their
interests with the firm's risk profile. Incentive-based compensation paid to all
other personnel is a function of individual performance and total firm
profitability. Incentive-based compensation, including the bonuses paid to our
principals described in the prior paragraph, represented 52.7%, 64.8%, 51.6% and
61.8% of total employee compensation and benefits expense for the years ended
December 31, 1996, 1997 and 1998 and the period ended March 31, 1999.
Market-marking related costs primarily represent clearing fees paid to
clearing brokers to process and clear exchange-traded transactions. Clearing
fees are traditionally higher for foreign transactions than for domestic
transactions. Clearing fees are higher for equity securities transactions than
for exchange-traded equity derivatives transactions. Due to our high volume, we
have been able to negotiate volume discounts from a majority of our clearing
brokers.
INCOME TAXES
As a limited liability company we did not incur any U.S. Federal or state
income taxes. The taxable income or loss was included in the respective income
taxes of the members. In connection with the completion of the reorganization,
we will become taxable as a "C" corporation for Federal and state income tax
purposes. The income taxes reflected in the historical consolidated financial
statements relate to our foreign subsidiaries. For the pro forma impact of
becoming taxable as a "C" corporation on our results of operations for the year
ended December 31, 1998 and the three months ended March 31, 1999, see our
unaudited pro forma financial statements included in this prospectus.
25
<PAGE> 29
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Our revenues from market-making activities increased 84.6% from $20.4
million in the first quarter of 1998 to $37.6 million in the first quarter of
1999. This increase was primarily due to favorable market conditions and an
increase in our worldwide market-making activities. Our revenues from foreign
market-making activities increased 286.9% from $7.9 million in 1998 to $30.6
million in 1999. Our results reflect overall strength in both Europe and Asia,
including new market-making operations we opened in 1998. Our revenues from U.S.
market-making activities decreased 43.8% from $12.5 million in 1998 to $7.0
million in 1999. This decrease reflects our increased focus on allocating
resources toward electronic markets, and away from open outcry markets, which
are primarily located in the United States. Our asset management revenues
decreased by 59.8% from $2.7 million in the first quarter of 1998 to $1.1
million in the first quarter of 1999. This decrease was due to lower incentive
fees due to below-average performance in our funds in the first quarter of 1999
versus above-average performance in the first quarter of 1998. Our funds are
market-neutral and we believe that market-neutral funds generally posted
below-average returns in the first quarter of 1999.
Our interest and dividend income decreased by 2.8% from $13.2 million in
the first quarter of 1998 to $12.8 million in the first quarter of 1999.
Additionally, our interest and dividend expense increased by 14.7% from $12.7
million in the first quarter of 1998 to $14.6 million in the first quarter of
1999. This increase resulted from larger securities inventories carried during
the first quarter of 1999.
Our compensation expense increased by 39.3% from $5.5 million in the
first quarter of 1998 to $7.7 million in the first quarter of 1999. This
increase was primarily due to the increase in number of employees and increased
firm profitability. Our incentive-based compensation expense increased by 101.6%
due to the increase in our profitability.
Our market-making related costs decreased 4.7% from $5.1 million in the
first quarter of 1998 to $4.9 million in the first quarter of 1999. Our other
operating expenses, which consist of professional fees, communications,
technology and occupancy expenses, remained constant between these quarters.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Our revenues from market-making activities decreased 12.2% from $109.6
million in 1997 to $96.2 million in 1998. This decrease was primarily due to
poor performance in our market-making activities in U.S. index products. The
decrease in our revenues from U.S. market-making activities more than offset an
increase in our revenues from foreign market-making activities. Our revenues
from foreign market-making activities increased $24.0 million or 71.0% from
$33.8 million in 1997 to $57.8 million in 1998. This increase resulted from our
ability to capitalize on the migration of foreign exchanges to electronic
platforms and is due to a combination of greater market share in existing
markets and expanded operations. In the fourth quarter of 1998, we expanded into
two new markets in Europe and made significant investments in our operation in
Hong Kong. We believe that the foreign electronic markets will continue to be a
key part of our growth strategy.
The decrease in revenues from our market-making activities in U.S. index
products in 1998 resulted in part from the market events in the third and fourth
quarters. These events caused a widespread decline in equity prices, increase in
volatility and reduction in liquidity in global equity markets. Declines in
equity prices and increases in volatility do not necessarily negatively affect
our results. However, the valuation models that we and other market
26
<PAGE> 30
participants use are developed based, in part, on historical market
relationships and those relationships diverged significantly from historical
patterns during that period.
Our asset management revenues decreased by 13.9% from $11.6 million in
1997 to $10.0 million in 1998. This decrease was due to lower performance-based
incentive fees as a result of the market dislocations described in the prior
paragraph. The decrease was partially offset by fees from Hull Quantitative
Fund, L.L.C. which we formed in July 1998.
Our interest and dividend income decreased by 25.6% from $61.1 million in
1997 to $45.5 million in 1998. Additionally, our interest and dividend expense
decreased by 26.2% from $67.4 million in 1997 to $49.7 million in 1998. These
decreases resulted from lower securities inventories carried in 1998.
Our compensation expense increased by 7.6% from $23.6 million in 1997 to
$25.4 million in 1998. This increase was primarily due to the increase in the
number of our employees. The number of our employees increased from 201 at
December 31, 1997 to 225 at December 31, 1998. The expense for base salaries
increased 25.4% from 1997 to 1998, due primarily to the increase in the number
of our employees. This increase was offset by a 17.0% decrease in our
incentive-based compensation expense due to the decrease in our profitability.
Our market-making related costs increased 16.1% from $17.5 million in
1997 to $20.3 million in 1998. This increase was due to increased volumes,
particularly in our foreign operations where per transaction fees for trading
equity securities are higher. Our other operating expenses increased 11.6% from
$15.1 million in 1997 to $16.8 million in 1998, due to increased communications
and technology expense and higher employment levels.
Our pre-tax net income decreased by 32.5% from $60.1 million in 1997 to
$40.6 million in 1998. This decrease was primarily due to our decreased revenues
from market making and asset management and, to a lesser extent, to our
increased expenses.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Our revenues from market-making activities increased 81.4% from $60.4
million in 1996 to $109.6 million in 1997. This increase was primarily due to
favorable market conditions and increased industry volume and an increase in our
market share. Revenues from our foreign market-making activities increased
267.7% from $9.2 million in 1996 to $33.8 million in 1997. This increase
resulted from our greater market share in existing markets and entering into new
markets in Europe. Our revenues from U.S. market-making activities increased
47.9% from $51.2 million in 1996 to $75.8 million in 1997. Our asset management
revenues increased by 73.9% from $6.7 million in 1996 to $11.6 million in 1997.
This increase was due to an increase in assets under management and increased
performance-based incentive fees.
Our interest and dividend income increased by 248.9% from $17.5 million
in 1996 to $61.1 million in 1997. Additionally, our interest and dividend
expense increased by 359.1% from $14.7 million in 1996 to $67.4 million in 1997.
These increases resulted from substantially larger securities inventories
carried in 1997.
Our compensation expense increased by 37.0% from $17.2 million in 1996 to
$23.6 million in 1997. This increase was primarily due to an increase in the
number of our employees and our increased profitability. Our expense for base
salaries increased 23.9% from 1996 to 1997, due primarily to the increase in the
number of our employees from 164 to 201. Our incentive-based compensation
expense increased by 57.1% due to the increase in our profitability.
27
<PAGE> 31
Our market-making related costs increased 99.2% from $8.8 million in 1996
to $17.5 million in 1997. This increase was due to increased volumes,
particularly in our foreign operations where transaction fees for trading equity
securities are higher. Our other operating expenses increased 45.1% from $10.4
million in 1996 to $15.1 million in 1997 primarily due to communications and
technology expense and related professional fees.
Our pre-tax net income increased 76.4% from $34.0 million in 1996 to
$60.1 million in 1997. This increase was due to our increased revenues from
market making and asset management, which were partially offset by our increased
expenses.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our business primarily through cash
generated from operations, and through secured financing provided by various
well-capitalized international clearing brokers. We maintain a highly liquid
balance sheet that can fluctuate significantly between financial statement dates
and is primarily based on the level of our long and short positions. Our long
and short positions are marked to market daily. As of March 31, 1999, we had
$1.5 billion in assets, of which 98.2% consisted of cash.
We clear substantially all of our exchange-traded securities through
clearing brokers. In addition to clearing and trade processing functions, the
clearing brokers provide us considerable securities and margin financing. Our
U.S. clearing and financing is provided primarily by Merrill Lynch Professional
Clearing and our foreign clearing and financing is provided primarily by the
Dutch bank Mees Pierson, NV. The amounts of financing extended are based on our
capital, the amount of margin we have on deposit and the overall risk of our
securities inventory. Generally, we pledge shares of stock and other assets to
our clearing brokers to secure this financing. Our clearing brokers are not
obligated to provide us financing.
Our financing with Mees Pierson and its affiliates is governed by
separate contracts for each country. Generally, we may only use this financing
for short-term working capital requirements in relation to our dealings with
Mees Pierson. The rates and terms of payment may vary from agreement to
agreement, and under some of our agreements, Mees Pierson may vary the rates
they charge from time to time. Several of our agreements require monthly
payments of interest, while others require payment on demand. Mees Pierson may
demand repayment of all or any part of our credit facility at any time, and may
terminate our financing arrangement at any time, in some cases upon 30 days'
notice, and in other cases, immediately. We have also entered into secured stock
borrowing arrangements with Mees Pierson, for which we pay Mees Pierson at rates
based on the daily values of securities we borrow.
We maintain investments in Hull Liquidity Fund, L.P., and Hull
Quantitative Fund, L.L.C. which provide for monthly redemptions but, because
those funds are broker-dealers, in some cases we will be prevented from making
cash distributions and redemptions from those funds. On March 31, 1999, our
investment in Hull Liquidity Fund was $11.7 million and our investment in Hull
Quantitative Fund was $3.3 million.
We are currently in negotiations to establish revolving credit agreements
with various banks to provide short-term financing to address short-term
regulatory capital and cash needs within our regulated subsidiaries. We
currently have no long-term debt.
Our capital expenditures were $5.1 million in 1998, $3.2 million in 1997
and $2.2 million in 1996, which represented 4.9%, 2.8% and 3.1% of our total net
revenues in those years. Our capital expenditures in 1998 were primarily related
to the purchase of technology and
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<PAGE> 32
communications equipment, as well as leasehold improvements and additional
office facilities to support our growth. In 1998, we completed the construction
of a state-of-the-art computer facility in our Chicago headquarters.
Substantially all of our capital improvements were funded without external
financing. We plan to use the net proceeds from the offering, in part, to invest
in technology systems and personnel as described under "Use of Proceeds."
As a registered broker-dealer, Hull Trading Company, L.L.C., our U.S.
market-making subsidiary, must meet regulatory requirements intended to ensure
the general financial soundness and liquidity of a broker-dealer and requiring
the maintenance of minimum levels of net capital, as defined in SEC Rule 15c3-1.
These regulations also may prohibit a broker-dealer from repaying subordinated
borrowings, paying cash dividends, making loans to its parent, affiliates or
employees, or otherwise entering into transactions which would result in a
reduction of its total net capital to less than 120% of its required minimum
capital. At March 31, 1999, Hull Trading Company had net capital of $32.0
million, which was $31.7 million in excess of its required net capital of $0.3
million.
Our foreign subsidiaries generally are regulated by the foreign
regulatory bodies in their countries. The rules of these regulators and foreign
tax laws may prevent us from receiving distributions, advances or repayment of
liabilities from these subsidiaries. Each of these subsidiaries must comply with
local minimum capital requirements. As of March 31, 1999, each subsidiary was in
compliance with its local capital adequacy requirement.
RISK MANAGEMENT
We have a comprehensive risk management system to monitor, evaluate and
manage the aggregate risks inherent in our business, including our European and
Asian operations. This system balances our ability to profit from market making
with our exposure to potential losses. Our main exposure is equity price risk.
Equity price risk results from changes in prices and volatilities of individual
equity securities, equity baskets and equity indexes. We seek to manage this
risk exposure through diversifying exposures, controlling position sizes and
establishing hedges in related securities or derivatives. For example, we may
hedge a portfolio of common stock by taking an offsetting position in a related
equity index futures contract. Our ability to manage an exposure may, however,
be limited by adverse changes in the liquidity of the security or the related
hedge instrument and in the correlation of price movements between the security
and the related hedge instrument.
Separation of duties and management oversight are fundamental elements of
our risk management process. Our risk management system includes active
participation at all levels of our firm, as follows:
- Executive Committee -- has ultimate responsibility for our overall risk
management policies;
- Risk and Capital Oversight Committee -- evaluates and recommends
trading and risk exposure limits to our executive committee and
monitors adherence to these limits on a weekly basis;
- Risk Department -- monitors our risk exposures on a daily basis; and
- Trading Staff -- continuously monitors portfolio risk compliance within
predetermined limits and executes trades using risk-adjusted values. We
compensate each individual trader based on risk-adjusted returns. Thus,
we provide our traders financial incentives to operate within these
predetermined risk limits.
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<PAGE> 33
In addition, we use a number of quantitative tools to manage our exposure
to market risk. These proprietary tools include:
- Systems that immediately incorporate all new trades into our aggregate
position information;
- Pricing models that provide real-time information regarding our risk
profile and hedge management capabilities;
- Risk evaluation models that calculate our value-at-risk, or VaR, under
a variety of different assumptions and approximations; and
- Risk management systems that compare the VaR, under these differing
scenarios, to predetermined risk limits for each profit center.
We use VaR to measure the potential loss in value of our trading
positions due to adverse movements in markets over a defined time horizon within
a specified confidence level. We calculate VaR estimates under a variety of
market scenarios every day, some of which assume that:
- Asset returns are not normally distributed,
- Substantial shifts in volatility may occur, and
- Substantially larger than normal price changes may occur.
For the VaR numbers reported below, we used a one-day time horizon and a
99% confidence level. This means that there is a one in 100 chance that our
daily market-making net gains and losses will fall below the expected daily
market-making net gains and losses by an amount at least as large as the
reported VaR. Thus, we would expect shortfalls from expected market-making net
gains and losses on a single trading day greater than the reported VaR to occur,
on average, about five times within a two-year period. Shortfalls can accumulate
over a longer time horizon such as a number of consecutive trading days. For a
discussion of the limitations of our risk measures, see "Risk Factors -- Our
Market-Making Activities Expose Us to Unique Risks -- Our Hedges and Other Risk
Management Policies and Procedures May Not be Effective and May Leave Us Exposed
to Unidentified or Unexpected Risks."
These VaR estimates cover positions in derivatives, underlying securities
and related hedges. Collectively these positions may include offsetting
positions in correlated securities. For example, the hedge of an index option
position may include an offsetting position in a basket of related equity
securities. Consequently, there is an underlying assumption that the degree of
correlation among these positions will remain within historical norms. We cannot
assure you that these relationships will remain within historical norms.
The modeling of the risk characteristics of our trading positions
involves a number of assumptions and approximations. While we believe that these
assumptions and approximations are reasonable, there is no uniform industry
methodology for estimating VaR, and different assumptions or approximations
could produce substantially different VaR estimates.
We use historical information to estimate our VaR. Given our reliance on
historical information, VaR is most effective in estimating risk exposures in
markets in which there are no sudden fundamental changes or shifts in market
conditions. An inherent limitation of VaR is that past changes in market risk
factors, even when weighted toward more recent observations, may not produce
accurate predictions of future market risk. For example, the changes in asset
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<PAGE> 34
volatilities to which we were exposed in the second half of 1998 were
substantially larger than those reflected in the historical information used
during that time period to estimate our VaR. Moreover, VaR calculated for a
one-day time horizon does not fully capture the market risk of positions that
cannot be liquidated or offset with hedges within one day.
VaR also should be evaluated in light of the methodology's other
limitations. For example, when calculating the VaR numbers shown below, we
assumed that asset returns are normally distributed. Non-linear risk exposures
on options and the potentially mitigating impact of intra-day changes in related
hedges would likely produce non-normal asset returns. Different assumptions
about the underlying distributions of price movements could produce a materially
different VaR.
The following table shows the VaR estimate for substantially all of our
market-making positions determined pursuant to the assumptions outlined above,
as of March 31, 1999:
<TABLE>
<CAPTION>
VAR ESTIMATE
(IN THOUSANDS)
<S> <C>
United States......................................... $2,635
Europe................................................ 1,351
Asia.................................................. 125
------
Firm-wide............................................. $4,111
======
</TABLE>
We set targeted limits for the components of VaR and limits for the
maximum probable losses in a catastrophic scenario. When establishing
catastrophic limits, we take into account the amount of capital used as well as
expected profits. Managing these risks is an integral part of trading.
Risk-adjusted return on capital, or RAROC, which we use for profit center bonus
pool calculations, is a key measure in determining a trader's or portfolio
manager's compensation. We use VaR to calculate risk adjustments in determining
RAROC. Because we compensate each individual trader and portfolio manager based
on risk-adjusted returns, we give them a financial incentive to operate within
our predetermined risk limits.
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<PAGE> 35
The following graph shows the frequency distribution of our daily
market-making gains and losses based on values derived from our proprietary
valuation models over the three-year period ended December 31, 1998. These gains
and losses may differ on a daily basis from gains and losses determined based on
the daily quoted closing prices.
DAILY NET GAINS AND LOSSES
1996 - 1998
<TABLE>
<CAPTION>
NUMBER OF DAYS
--------------
<S> <C>
Under (3,500) 3
(3,500) - (3,000) 0
(3,000) - (2,500) 8
(2,500) - (2,000) 4
(2,000) - (1,500) 10
(1,500) - (1,000) 29
(1,000) - (500) 50
(500) - 0 152
0 - 500 214
500 - 1,000 138
1,000 - 1,500 93
1,500 - 2,000 42
2,000 - 2,500 19
2,500 - 3,000 5
3,000 - 3,500 0
Over 3,500 7
</TABLE>
DAILY NET GAINS AND LOSSES (US$ IN THOUSANDS)
FOREIGN OPERATIONS AND FOREIGN CURRENCY TRANSACTIONS
We make markets on all major international electronic exchanges. Our
revenues from foreign market-making activities have grown, as a percent of our
total revenues, from 15.2% in 1996 to 60.1% in 1998. This trend is a result of
our ability to capitalize on the migration of foreign exchanges to electronic
platforms. The financial transactions of these operations are carried out in
foreign currencies. On March 31, 1999, 60.0% of our capital and 41.7% of our
total assets were denominated in foreign currencies, and exposed to the
fluctuations of foreign exchange rates. Our foreign currency exposure is
primarily in major currencies. It is our policy to hedge substantially all of
our net foreign currency exposure using futures and forward contracts.
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<PAGE> 36
EURO CONVERSION
The European Monetary Union, commonly known as the EMU, replaced the
national currencies of 11 participating European Union countries with a single
European currency -- the euro. The euro was launched on January 1, 1999, when
the European Central Bank assumed control of monetary policy for the
participating nations. During the transition period until the national
currencies are withdrawn from circulation, these currencies will continue to
exist but only as fixed denominations of the euro.
We implemented modifications to our trading and risk management systems
and programs to prepare for the transition to the euro. We tested the systems
and processes affected by the euro. We consider the initial redenomination
exercise to have been successful from the perspective of our internal systems
and books and records and we have not experienced any significant difficulties
relating to the euro.
YEAR 2000 READINESS DISCLOSURE
We began to address the year 2000 computer problem in 1998. Our year 2000
effort has been conducted under the direction of a multi-disciplinary year 2000
committee and in accordance with a written year 2000 plan. Our year 2000 plan
addresses information technology, or IT, systems, non-IT systems and third-party
service providers, including clearing agents, information service providers and
Internet access providers.
For IT and non-IT systems, our year 2000 plan includes six phases:
planning and awareness, inventory and assessment, remediation, validation and
testing, implementation and contingency planning. For our IT systems (including
our trading-related, communications and data processing systems), we have
completed the first three of these phases. We have substantially completed the
fourth phase, validation and testing, including successful completion of the
Securities Industry Association Industry-Wide Y2K Testing. However, we have not
completed point-to-point testing with some third-party service providers in
Europe, and due to scheduling difficulties do not expect to complete that
testing until September 1, 1999. We anticipate that we will substantially
complete the implementation phase for our IT systems by July 31, 1999. For our
non-IT systems, including fire and safety systems, heating and air conditioning
systems and security systems, we have completed all phases up through
implementation of year 2000 ready systems.
Our costs of remediation to date have been about $315,000 and we estimate
that the remaining costs of remediation will be about $165,000. Most of these
expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by our employees and a systems
testing facility for year 2000 compliance. These estimates do not include the
costs of systems, software and equipment that we are obtaining, replacing or
upgrading in the normal course of business.
We have sought to verify the year 2000 readiness of our third-party
service providers by reviewing year 2000 information on their World Wide Web
sites and by sending them requests for information. We have also participated in
industry testing, which allows us to validate the year 2000 readiness of some
service providers. With few exceptions, we are satisfied with the information
and responses we have received from our critical third-party service providers.
We have, however, very little or no control over our service providers or
other third parties, and generally have little ability to verify their claims to
being year 2000 ready. As a result, we believe that our most reasonably likely
worst case scenarios involve areas where we
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<PAGE> 37
rely on third parties, including utility companies and securities exchanges that
are not ready to process transactions in the year 2000. If any of our
significant service providers or other third parties do not successfully and
timely become year 2000 ready, our business or operations could be adversely
affected.
As a precautionary measure, we are developing contingency plans to
mitigate, to the extent possible, the effect of year 2000 problems on critical
processes. We expect to have a completed contingency plan in place by July 31,
1999. If we are required to implement our contingency plans, the cost of year
2000 compliance may be greater than the amount described above. We cannot assure
you that our contingency plans will be adequate.
RECENT ACCOUNTING DEVELOPMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. This statement requires companies to
capitalize some costs of computer software developed or obtained for internal
use and amortize those costs over the useful life of the related software. This
statement is effective for financial statements for fiscal years beginning after
December 15, 1998. We currently expense our costs of computer software developed
or obtained for internal use and are evaluating the impact of adopting this
statement.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, effective for fiscal years beginning after June 15,
1999. This statement establishes standards requiring that all derivative
financial instruments be recognized and measured at fair value regardless of the
purpose or intent for holding them. This statement also limits some of the
previously required quantitative disclosures relating to derivative financial
instruments held or issued for trading purposes. We do not expect our adoption
of this statement to have a significant impact on our consolidated financial
statements.
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<PAGE> 38
OUR INDUSTRY
OVERVIEW
We compete primarily in the global equities industry, which consists of
the equity derivatives market and the equity securities market. The global
equity derivatives market consists primarily of standardized exchange-listed
products traded on electronic and open-outcry exchanges worldwide. The market
also includes customized, over-the-counter products created by major financial
institutions for their customers. The global equity securities market consists
primarily of securities of corporate issuers that are traded on stock exchanges
or over-the-counter. The following table shows the equity market capitalization
and exchange-traded equity options volume in the United States, Europe and Asia
and the recent compound annual growth rate in those measures.
GLOBAL EQUITY MARKET CAPITALIZATION & EXCHANGE-TRADED EQUITY OPTIONS VOLUME
<TABLE>
<CAPTION>
EXCHANGE-TRADED
EQUITY MARKET CAPITALIZATION(A) EQUITY OPTIONS VOLUME(B)
------------------------------------ ---------------------------------
CAPITALIZATION ON COMPOUND ANNUAL 1998 ANNUAL COMPOUND ANNUAL
DECEMBER 31, 1998 GROWTH RATE CONTRACT VOLUME GROWTH RATE
(US$ IN THOUSANDS) (1996-1998) (IN THOUSANDS) (1996-1998)
<S> <C> <C> <C> <C>
United States........ $12,922,580,000 26.4% 447,576 21.4%
Europe............... 7,203,476,000 29.0% 269,174 31.1%
Asia................. 5,078,321,000 13.1% 40,636 16.2%
</TABLE>
- ------------------------------
(a) Source: Federation Internationale des Bourses de Valeurs
(b) Source: Futures Industry Association, Inc.
The market participants in the derivatives market can be divided into two
types of parties: customers and dealers. Customers include financial
institutions, commercial firms, mutual and pension funds, private investment
companies and retail investors. Customers typically use derivatives to manage
financial risks. Dealers include market makers, large banks, securities firms
and other market professionals. Dealers generate revenue by meeting customer
demand to buy or sell derivatives, and also use derivatives to manage risk.
Dealers, unlike customers, may also make markets by standing ready to make a
two-way market in derivatives products. A market maker will typically hedge a
given trade by entering into an offsetting transaction with another customer or
dealer or by establishing a position in a highly correlated instrument. Market
makers, like our firm, provide trading liquidity on regulated exchanges and
generally have an obligation to make fair and orderly markets.
Market makers typically offer to buy securities from, or sell securities
to, other dealers and customers. Firms that have elected to make a market in a
security may display the price at which they are willing to buy or sell those
securities. They will adjust their prices in response to the forces of supply
and demand for each security. A market maker typically acts as principal and
derives most of its revenues from the difference between the price paid when a
security is bought and the price received when that security is sold.
In the equity derivatives market, brokerage firms typically execute their
orders by dealing with independent market makers. In the equity securities
markets, most discount and online brokers do not have internal market-making
functions and, as a result, rely entirely on independent market makers for trade
execution. In addition, traditional brokerage firms in the
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<PAGE> 39
equity securities markets are increasingly electing to focus on their core
competencies and to outsource their market-making functions to independent
market makers.
RECENT TREND TOWARD ELECTRONIC TRADING PLATFORMS
There has been a worldwide trend toward the use of electronic trading
platforms that has transformed a number of key equity markets. Electronic
exchanges have emerged as a result of advances in technology, including
electronic order routing, trade matching, trade reporting and enhanced
availability of real-time price quotations. We believe the trend toward
electronic trading will ultimately result in fully electronic worldwide markets.
In the United States, trading is conducted primarily on open outcry
exchanges, although electronic trading is becoming more common. A majority of
the equity derivatives and equity securities exchanges worldwide, including
those in France, Germany, Japan, Sweden and Switzerland, are now completely
electronic. For example, Eurex, a combination of the German Deutsche Terminborse
and the Swiss Options and Financial Futures Exchange, has a completely
electronic order matching system, and is now the largest derivatives exchange in
the world. In addition, the Tokyo Stock Exchange recently closed its trading
floor and now conducts stock trading entirely electronically. Also, the Sydney
Futures Exchange and the Australian Stock Exchange have announced their intent
to merge, close their open outcry floors and use fully electronic trading
systems. Several other exchanges, including exchanges in the United Kingdom,
have announced plans to convert to electronic trading platforms. Although the
large exchanges in the United States remain open outcry, even some of those
exchanges are adopting electronic trading mechanisms. For example, the "E-mini,"
an electronically traded futures contract on the S&P 500 Index, was recently
launched to trade on the Chicago Mercantile Exchange, commonly called the CME.
Since it began trading in September 1997, the fully electronic trading of the
E-mini has grown from 190,000 in monthly contract volume to 831,000 in April
1999. Additionally, the ISE, a new U.S.-based exchange formed by a consortium of
leading online brokers, has announced it will begin fully electronic equity
options trading in the first quarter of 2000. The following table summarizes the
current trading format of seven major equity derivatives exchanges and eight
major equity securities exchanges worldwide.
<TABLE>
<CAPTION>
OPEN
EXCHANGE ELECTRONIC OUTCRY
<S> <C> <C>
EQUITY DERIVATIVES EXCHANGES:
CME (United States)....................................... X
CBOE (United States)...................................... X
Eurex (Germany and Switzerland)........................... X
Osaka (Japan)............................................. X
LIFFE (United Kingdom)(a)................................. X X
Marche des Options Negociables de Paris (France).......... X
Hong Kong Futures Exchange (China)(b)..................... X
EQUITY SECURITY EXCHANGES:
NYSE (United States)...................................... X
Nasdaq (United States).................................... X
Tokyo Stock Exchange (Japan).............................. X
London Stock Exchange (England)........................... X X
Osaka Stock Exchange (Japan).............................. X
Frankfurt Stock Exchange (Germany)........................ X X
Paris Stock Exchange (France)............................. X
Swiss Stock Exchange (Switzerland)........................ X
</TABLE>
- ---------------
(a) LIFFE has announced plans to convert to a fully electronic trading format in
2000.
(b) The Hong Kong Futures Exchange has announced plans to convert to a fully
electronic trading format in October 1999.
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THE EQUITY DERIVATIVES INDUSTRY
Derivatives are financial instruments that derive their value from
underlying assets, indices, reference rates or a combination of these variables.
Equity derivatives typically include options, futures, forwards, convertibles
and swaps. Equity derivatives provide dealers and customers the opportunity to
harness market volatility and manage risk. Market makers use derivatives to
facilitate customer transactions, to take proprietary positions and to manage
risk.
U.S. EQUITY DERIVATIVES INDUSTRY
Currently, equity derivatives in the United States are primarily listed
and traded on open outcry exchanges. These exchanges are both self-regulated and
regulated by the SEC and the CFTC. The U.S. OTC equity derivatives market is
substantially smaller by volume than the exchange market and is dominated by
major U.S. investment banks and other large financial institutions.
Significant growth in the volume of equities traded from 1996 to 1998 has
had a positive impact on the U.S. equity derivatives markets. During this
period, the volume of exchange-traded equity derivatives increased as well.
Approximately 450 million options contracts were traded in 1998 on U.S.
exchanges. The compound annual growth rate in equity options contract volume on
U.S. exchanges from 1996 to 1998 was approximately 21.4%.
INTERNATIONAL EQUITY DERIVATIVES INDUSTRY
Equity derivatives in international markets are primarily listed and
traded on electronic exchanges. Today, equity derivatives are traded on more
than 30 exchanges in at least 18 countries around the world. Significant equity
derivatives markets exist in the United Kingdom, continental Europe and several
Asian countries. The European equity derivatives market is growing faster than
the U.S. market, with compound annual growth rates in equity options contract
volume from 1996 to 1998 of approximately 31.1% on European exchanges.
THE EQUITY SECURITIES INDUSTRY
Equity securities are traded on more than 87 exchanges in at least 60
countries. During recent years, the volume of equity securities traded has grown
dramatically. We believe that the demand for equity securities will continue to
grow as the global economy expands.
U.S. EQUITY SECURITIES INDUSTRY
Equity securities in the United States are traded on both open-outcry
exchanges, including the NYSE, and electronic markets, including Nasdaq. Due to
favorable market conditions, companies have increasingly raised capital through
the U.S. equity securities markets. This has resulted in a significant increase
in the number of companies that are traded on exchanges or OTC.
During recent years, the trading volumes in U.S. equity markets have
grown dramatically. The average daily volume of equity securities traded on
Nasdaq increased from 569.4 million shares in December 1996 to 867.1 million
shares in December 1998. The average daily volume of equity securities traded on
the NYSE increased from 433.1 million shares in December 1996
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<PAGE> 41
to 692.8 million shares in December 1998. The increase in trading volume has
resulted from a number of factors, including:
- increased cash flows into equity-based mutual funds;
- high returns in U.S. equity markets;
- the emergence of the Internet and the rapid growth of online discount
brokers; and
- reduced transaction costs.
INTERNATIONAL EQUITY SECURITIES INDUSTRY
Equity securities in international markets are traded primarily on
electronic exchanges. The international equity securities markets have
experienced significant growth as local companies have increasingly used equity
capital as an alternative to debt financing. This growth is also the result of
increased participation in international equity securities markets by
individuals and institutions.
During recent years, the trading volumes in international equity
securities markets have grown dramatically. The total annual turnover of
securities traded on the eight major European exchanges increased from $3.6
trillion in 1996 to $7.4 trillion in 1998, representing an increase of 105.6%.
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OUR BUSINESS
OVERVIEW
We are a leading global market maker in exchange-traded equity
derivatives and an active market maker in equity securities worldwide. We
provide market-making and transaction execution services to a diverse group of
participants on 28 exchanges in nine countries. Our market-making activities
focus on providing customers with rapid executions at the best possible price.
Since 1985, we have been at the forefront in developing and applying financial
theory, along with information and communication technology, to trading equity
derivatives and equity securities. Our dedicated team of financial engineers,
software developers and traders develop proprietary, real-time valuation and
risk management systems to price and trade equity derivatives and equity
securities for our own account. The Hull System combines financial engineering,
trading and electronic systems to create a competitive advantage. We have
applied the Hull System to expand successfully, first into U.S. markets and then
into international electronic markets.
Our lines of business are worldwide market-making activities and asset
management. We make markets in listed U.S. equity index derivatives and in
selected individual equity options in all major markets in the United States. We
also make markets in a variety of equity index options and individual equity
options in eight foreign countries, primarily on electronic exchanges located in
Europe and Asia. In addition to derivatives market making, we make markets in
individual equity securities on U.S. and foreign exchanges. Through Hull
Transaction Services, our market-making activities include executing and routing
orders forwarded to us by online brokers, large retail broker-dealers, money
center banks and hedge funds. We also provide asset management services to
outside investors by applying our expertise in valuation, electronic trading,
portfolio construction, technology and risk management.
Our net revenues have increased from $51.7 million in 1994 to $103.1
million in 1998, representing a compound annual growth rate of 18.8%. Our 1998
pre-tax income was $40.6 million, and our 1998 pro forma net income, after
giving effect to our conversion from a limited liability company to a
corporation, was $14.7 million. In connection with our initial public offering,
we are awarding 1,066,667 shares of restricted stock to our employees and the
pro forma adjustments include a $6.9 million charge relating to these awards.
Electronic trading has become increasingly important to our business, as net
revenues from electronic trading have increased from 12.5% to 66.9% of our net
revenues from 1994 to 1998. We have proven our ability to deliver profitable
results over time as demonstrated by our average annual pre-tax return on
average equity over the last ten years of 38.9% and over the last five years of
42.4%. Our 1998 pre-tax return on average equity was 43.1% and our 1998 pro
forma return on average equity was 26.5%.
COMPETITIVE STRENGTHS
We believe the Hull System has positioned us to compete effectively in
the global equities market, based on the following strengths:
We Are a Globally Diversified Industry Leader. We are a leading market
maker in both the United States and Europe. Starting from a single exchange in
1985, we have successfully expanded by applying our U.S. market-making
strategies to equity derivatives and equity securities markets worldwide. We
trade over 3,700 products on 28 exchanges in nine countries worldwide. Our
breadth of business activities across numerous geographic markets provides a
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<PAGE> 43
diverse revenue stream and valuable knowledge. In addition to the United States,
we are now a leading market maker in equity derivatives and equity securities
internationally. In 1998, we generated 56.7% of our net revenues from our
activities in the following countries:
<TABLE>
<S> <C>
- China (Hong Kong) - Norway
- France - Sweden
- Germany - Switzerland
- Japan - United Kingdom
</TABLE>
We Develop and Use Sophisticated Technology. We are recognized by major
exchanges as a pioneer in applying information and communication technology to
market-making activities worldwide, particularly on electronic exchanges. This
recognition provides opportunities for our technical experts to help develop the
hardware and software standards that guide the evolving use of computer systems
in the equity derivatives and equity securities markets. We are often approached
at an early stage by leading exchanges seeking to cooperate in the development
of pilot projects. Some of our significant technological accomplishments
include:
- 1999 -- First remote access member of the Swiss Stock Exchange
- 1998 -- First remote access member of the Paris Bourse from Germany
- 1998 -- One of a select group of participants in beta testing for LIFFE
CONNECT(TM), the electronic trading system of the LIFFE
- 1997 -- Only firm given responsibility by the CBOE for calculating the
publicly distributed index option quotes for the Dow Jones
Industrial Average, commonly called the DJIA
- 1997 -- First to electronically quote markets on the "E-Mini" S&P 500
Index future on the CME, which is a miniature version of the
S&P 500 Index futures contract traded entirely through an
electronic system
- 1994 -- First electronic connection to GLOBEX, the 24-hour per day
electronic trade matching system run by a joint venture among
the Chicago Mercantile Exchange, Reuters and the Marche a Terme
Internationale de France, commonly known as MATIF
- 1992 -- Among the first to use wireless handheld computers for options
pricing on an exchange trading floor
We believe our future growth and profitability will depend largely on our
continued investment in new technology systems and personnel. In order to
strengthen our position as a leader in applying technology to market-making
activities we will continue to invest significantly in state-of-the-art
financial engineering and information and communication technology.
We Are an Innovator in Financial Engineering and Valuation. Our
financial engineers, many with Ph.D.'s, create our proprietary valuation and
portfolio management models. These models allow us to better understand the
relationships between derivatives and securities. This understanding increases
the efficiency and effectiveness of our market-making activities. Our typical
financial engineer has a strong mathematical and technological background and
trading experience. Working directly with our traders, our financial engineers
are able to continuously refine our existing models and create new models. Each
financial engineer's compensation is
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linked to a particular profit center's risk-adjusted profitability, reinforcing
the strong working relationship.
We Have Strong Trading Capabilities. We successfully combine our trading
expertise with state-of-the-art technology and quantitative models. We have a
trading staff of over 100 people, who implement our proprietary valuation
models. Our traders' compensation is based on risk-adjusted return on capital,
which creates a financial incentive for our traders to avoid making high-risk
trades.
We Have Sophisticated Risk Management Systems. Our risk management
systems are central to our success. Our market-making systems immediately
incorporate all new trades into each profit center's aggregate portfolio. Our
systems allow for real-time risk management and enable us to evaluate current
market exposure and make appropriate portfolio management decisions. These
decisions must adhere to risk limits that are set by our executive committee and
monitored by our risk and capital oversight committee both at the profit center
level and firm-wide.
OUR GROWTH STRATEGY
We intend to enhance our position as a leader in the market-making
industry and grow by:
Capitalizing on Growth in Electronic Trading. We believe we are
well-positioned to capitalize on the growth in electronic trading. Through the
use of advanced information and communication technology, we are able to expand
our market-making activities into new electronic markets from an existing
trading center, thereby creating economies of scale and avoiding capital
expenditures. We intend to use our technology to expand our operations in
electronic exchanges, many of which are in foreign markets. We believe the U.S.
markets will become increasingly electronic, and we intend to apply our
expertise in electronic trading to benefit from this trend.
Continuing to Expand Our Market-Making Activities. We intend to use our
ability to successfully combine financial engineering, technology and risk
management to expand our market-making activities to include:
- Additional equity-based products in our current geographic markets;
- Equity-based products in new geographic markets; and
- Non-equity based derivatives.
We have demonstrated our ability to adapt our business model to new markets and
products, and will continue to expand into new markets and products. For
example, we started on the CBOE, and later diversified into other U.S. exchanges
including the AMEX, the NYSE, the Pacific Stock Exchange and Nasdaq. We also
transported our expertise to equity index options and options on individual
equities in eight other countries.
Developing Hull Transaction Services. We intend to expand Hull
Transaction Services through investments in technology, further development of
models and marketing to become a significant provider of trade routing and order
execution services to capitalize on the growth in online trading. We currently
execute order flow in over 1,000 issues for our clients, and have agreed to
provide these services to several quantitative research institutions and other
institutional investors.
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Expanding Our Asset Management Business. We intend to expand our asset
management business to become a significant provider of diversified,
risk-controlled products for institutional investors and high net worth
individuals. In addition, we are developing new trading strategies and new
funds, and intend to expand beyond our current three funds to respond to
customer needs.
Attracting, Retaining and Developing Highly Skilled Employees. We intend
to continue to aggressively recruit high caliber personnel and retain them
through equity-based incentives. The ultimate success of our financial
engineering, risk management and market-making functions depends on our ability
to continue to develop our professional employee base. As a result, we carefully
select, train and retain highly skilled personnel.
OUR LINES OF BUSINESS
Our lines of business are worldwide market-making activities and asset
management. In addition, we have recently expanded our market-making activities
through the formation of Hull Transaction Services, which consists of executing
and routing orders forwarded to us by online brokers, large retail
broker-dealers, money center banks and hedge funds.
WORLDWIDE MARKET-MAKING ACTIVITIES
We make markets worldwide in equity index derivatives, individual equity
options and individual equity securities. Our market-making activities accounted
for 93.3% of our 1998 net revenues. The following table summarizes our major
market-making activities in 1998:
<TABLE>
<CAPTION>
INDUSTRY
EQUITY INDEX INDUSTRY HULL EQUITY
OPTION INDIVIDUAL EQUITY SECURITIES
VOLUME HULL OPTION VOLUME HULL VOLUME
(IN CONTRACTS) MARKET SHARE (IN CONTRACTS) MARKET SHARE (IN SHARES)
(IN THOUSANDS, EXCEPT PERCENTAGE INFORMATION)
<S> <C> <C> <C> <C> <C>
United States........ 80,171 6.8% 325,780 0.9% 2,021,508
Europe............... 38,487 15.2% 81,548 16.8% 306,932
Asia................. 6,039 5.4% 2,083 10.7% 763,022
</TABLE>
U.S. In 1998, we traded about 28 million equity derivative contracts. We
believe we rank among the top three market makers in actively traded U.S. equity
index options, including the S&P 500, the Dow Jones Industrial Average and the
Russell 2000, where we have historically maintained a 6% to 8% market share. We
also make markets in select individual equity options, targeting highly
capitalized equities primarily in the high-tech sector. In addition to our
market making in equity derivatives, we make markets in individual equity
securities to capitalize on market opportunities as they arise. We are active in
both the index options and equity options markets, and we use similar valuation
models in both. We also actively trade the underlying stocks and index futures.
We gather and apply price, volatility and other relevant information between
markets on a real-time basis, which improves the efficiency of our market-making
activities. We believe our real-time price monitoring and trade execution system
allows us to effectively hedge our risk.
In 1998, our automated equity trading system traded more than two billion
shares of stock, representing about 1.2% of the total volume on the NYSE. This
system uses our proprietary valuation models to identify market mispricings and
execute trades that seek to profit from these short-lived mispricings.
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The following table lists the U.S. index options, individual equity
options and individual equity securities which typically are among the greatest
volume of our U.S. market-making activity:
<TABLE>
<CAPTION>
INDIVIDUAL INDIVIDUAL
INDEX OPTIONS EQUITY OPTIONS EQUITY SECURITIES
<S> <C> <C>
S&P 500 Microsoft Corp. Microsoft Corp.
S&P 100 Cisco Systems, Inc. General Electric Co.
DJIA International Business Machines Corp. Wal-Mart Stores, Inc.
Russell 2000 Compaq Computer Corp. Intel Corp.
Nasdaq 100 General Electric Co. Exxon Corp.
</TABLE>
Europe. In Europe, we operate through two wholly owned subsidiaries,
Hull Trading, GmbH (Germany) and Hull Trading UK, Limited (England). Through
these subsidiaries, we are active market makers in the index options and all
constituent equity options on European exchanges. We also actively
trade the underlying stocks and index futures. In Frankfurt, this includes a
Eurex membership where we serve as a market maker for both the German and Swiss
equity derivatives markets. We are also a direct member of the underlying stock
markets for Germany (Xetra) and for Switzerland (SWX). Also in Frankfurt, we are
a direct member of the SBF Paris Bourse, where we trade remotely. In London, we
are a member of the LIFFE and the London Stock Exchange, and make markets in the
Swedish (OMLX) and Norwegian equity derivatives markets. We have captured
significant market shares in index and individual equity options, including the
German DAX, the U.K. FT-SE, the French CAC 40 and the Swiss SMI, that we trade
on 11 European exchanges. In some cases, these market shares are as high as 24%.
We believe the evolution of the pan-European market resulting from the
EMU, will increase cross-border equity investment and trading activity. We
currently make markets in options on the STOXX 50 and the Euro STOXX 50
pan-European equity indexes. We intend to increase the number of products and
exchanges in which we make markets in Europe in order to realize the greater
economies of scale and additional arbitrage opportunities afforded by the EMU.
The following table lists the European index options, individual equity
options and individual equity securities which typically are among the greatest
volume of our European market-making activity:
<TABLE>
<CAPTION>
INDIVIDUAL INDIVIDUAL
INDEX OPTIONS EQUITY OPTIONS EQUITY SECURITIES
<S> <C> <C>
German Deutscher Aktien Index (DAX) Daimler Chrysler AG Daimler Chrysler AG
U.K. Financial Times -- Stock Exchange 100 (FT-SE) BP Amoco plc BP Amoco plc
Swiss Market Index (SMI) Nestle S.A. Nestle S.A.
Swedish OMX Nokia Corp. Nokia Corp.
French Compagnie des Agents de Change 40 Index France Telecom France Telecom
(CAC 40) Deutsche Bank Deutsche Bank
Euro STOXX 50
</TABLE>
Asia. In Asia, we operate through our wholly owned Hong Kong subsidiary,
Hull Trading Asia, Ltd., as well as through an alliance with Daiwa Securities SB
Capital Markets Co. Ltd., a strategic alliance between Daiwa Securities, the
second largest securities firm in Japan, and Sumitomo Bank, the second largest
bank in Japan. We are active market makers in Hang Seng index options, options
on the individual equities underlying the index and exchange-traded stock and
index warrants. We have benefited from the automation of the Hong Kong Stock
Exchange
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and expect to realize further advantages when and if the Hong Kong stock index
options also become electronic.
Our alliance with Daiwa Securities SB gives us access to the Japanese
equity derivatives markets. Under this arrangement, Daiwa Securities SB make
markets in Japanese equity index options and futures, individual equity options
and individual equities using our proprietary technology. We believe the
continued deregulation of the Japanese markets serves as an important growth
area for us in the near future.
The following table lists the Asian index options, individual equity
options and individual equity securities which typically are among the greatest
volume of our Asian market-making activity:
<TABLE>
<CAPTION>
INDIVIDUAL INDIVIDUAL
INDEX OPTIONS EQUITY OPTIONS EQUITY SECURITIES
<S> <C> <C>
Nikkei 225 Sony Corp. Sony Corp.
Nikkei 300 NTT Data Corp. NTT Data Corp.
Hang Seng 33 HSBC Holdings HSBC Holdings
Tokyo Stock Price Index Honda Motor Co. Honda Motor Co.
Hang Seng 100 China Telecom China Telecom
</TABLE>
Hull Transaction Services. Hull Transaction Services, which Hull
Liquidity Fund, L.P. currently operates, provides customers with transaction
execution services by leveraging our existing technology and automated trading
systems. We intend to transfer this business to a new subsidiary of Hull. These
services include executing and routing orders forwarded to us by online brokers,
large retail broker-dealers, money center banks and hedge funds.
Hull Transaction Services has applied its real-time trade execution
system and market-making capability to develop a system that allows
institutional investors to trade large amounts of equity securities on a single
day while being guaranteed the volume-weighted average price, or VWAP, for those
securities. VWAP is increasingly being used in our industry to measure the
quality of execution services being provided to customers. Therefore, by
guaranteeing VWAP, we add value for our customers by increasing their ability to
enter and exit the market with minimal market impact.
Hull Transaction Services is exploring opportunities to obtain new
avenues for order flow for both equity derivatives and equity securities, which
could include payments for order flow. We are rapidly expanding this business
into other applications to which we can apply our technology. We will continue
to invest in technology, the development of proprietary models and marketing. We
currently execute order flow in over 1,000 issues for our clients. In addition,
we have agreed to provide execution services to several quantitative research
institutions and other institutional investors. Through our automated
technology, Hull Transaction Services provides customers with the following
benefits:
- improved liquidity;
- faster trade execution;
- competitive spreads; and
- lower transaction costs.
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ASSET MANAGEMENT BUSINESS
In addition to our market-making activities, we also manage several
private investment funds. We established Hull Equity Management, L.L.C. as our
subsidiary to develop private investment funds using our core competencies
including financial engineering, model building, trading expertise and
electronic trade execution. Our objective is to expand our capacity to provide
diversified, risk-controlled products that are quantitatively driven. We provide
these alternative investment products for qualified eligible purchasers, which
include high net worth individuals, endowments and other institutional
investors. Our asset management business accounted for 9.7% of our 1998 net
revenues.
Hull Equity Management manages the Hull Liquidity Fund, L.P. and two
relatively new funds, Hull Quantitative Fund, L.L.C. and Hull Quantitative
Offshore Fund, L.L.C. We have made investments in Hull Liquidity Fund and Hull
Quantitative Fund. Each quantitative fund holds its stock positions for an
average of 30 days, while the average turnover of the Hull Liquidity Fund is
approximately two days.
<TABLE>
<CAPTION>
HULL QUANTITATIVE
HULL LIQUIDITY FUND HULL QUANTITATIVE FUND OFFSHORE FUND
<S> <C> <C> <C>
Inception January 1994 July 1998 January 1999
Assets Under Management as
of March 31, 1999 $61.6 million $25.5 million $28.1 million
Management Fee None Based on assets under Based on assets under
management management
Incentive Fee Based on return in Based on return Based on return
excess of a minimum
benchmark
Securities Equities Equities Equities
Investment Philosophy Market-neutral Market-neutral Market-neutral
</TABLE>
Hull Liquidity Fund. To develop a trading strategy for this fund, we
used technology developed for our market-making business. This fund's system
collects real-time trading information electronically and uses it to generate
very short-term forecasts of a stock's theoretical value. Our system
automatically places an order to buy or sell when the current price and
theoretical value are out of line. This system allows this fund to trade the
highest capitalized securities in the marketplace, averaging over 20,000 trades
per day, and is fully automated. However, the program is continuously monitored
and traders can adjust the valuation parameters guiding these trades. This fund
is currently closed to new investors. We hold a 1.0% general partnership
interest and a 18.3% limited partnership interest in Hull Liquidity Fund.
Our Quantitative Funds. We believe our quantitative funds allow for much
greater assets under management than the Hull Liquidity Fund. These funds
execute trades entirely through an objective mathematical program, which reduces
trading costs and substantially removes human decision making from individual
equity trades. The major difference between the Hull Quantitative Fund and the
Hull Quantitative Offshore Fund is that the offshore fund serves non-U.S.
clients. We have a 13.1% membership interest in Hull Quantitative Fund, and no
membership interest in Hull Quantitative Offshore Fund.
OUR RISK MANAGEMENT SYSTEM
We have a comprehensive risk management system to monitor, evaluate and
manage the aggregate risks inherent in our business, including our European and
Asian operations. This system balances our ability to profit from market making
with our exposure to potential losses.
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Our main exposure is equity price risk. Equity price risk results from changes
in prices and volatilities of individual equity securities, equity baskets and
equity indexes. We seek to manage this risk exposure through diversifying
exposures, controlling position sizes and establishing hedges in related
securities or derivatives. For example, we may hedge a portfolio of common stock
by taking an offsetting position in a related equity index futures contract. Our
ability to manage an exposure may, however, be limited by adverse changes in the
liquidity of the security or the related hedge instrument and in the correlation
of price movements between the security and the related hedge instrument.
We use a number of quantitative tools to manage our exposure to market
risk. These proprietary tools include:
- Systems that immediately incorporate all new trades into our aggregate
position information;
- Pricing models that provide real-time information regarding our risk
profile and hedge management capabilities;
- Risk evaluation models that calculate our value-at-risk, or VaR, under
a variety of different assumptions and approximations; and
- Risk management systems that compare the VaR, under these differing
scenarios, to predetermined risk limits for each profit center.
We use VaR to measure the potential loss in value of our trading
positions due to adverse movements in markets over a defined time horizon within
a specified confidence level. We calculate VaR estimates under a variety of
market scenarios every day, some of which assume that:
- Asset returns are not normally distributed,
- Substantial shifts in volatility may occur, and
- Substantially larger than normal price changes may occur.
We set targeted limits for the components of VaR and limits for the
maximum probable losses in a catastrophic scenario. When establishing
catastrophic limits, we take into account the amount of capital used as well as
expected profits. Managing these risks is an integral part of trading. RAROC,
which we use for profit center bonus pool calculations, is a key measure in
determining a trader's or portfolio manager's compensation. We use VaR to
calculate risk adjustments in determining RAROC. Because we compensate each
individual trader and portfolio manager based on risk-adjusted returns, we give
them a financial incentive to operate within our predetermined risk limits.
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Separation of duties and management oversight are fundamental elements of
our risk management process. Our risk management system includes active
participation at all levels of the firm, from our executive committee to our
trading staff, as the following chart shows:
THE HULL RISK MANAGEMENT SYSTEM
[THE PRINTED VERSION CONTAINS A DIAGRAM OF THE HULL RISK MANAGEMENT SYSTEM
WITH THE VARIOUS GROUPS, THE NUMBER OF PERSONS IN EACH GROUP AND THEIR
RESPONSIBILITIES.]
RISK MANAGEMENT CHART
Executive Committee. Our executive committee has ultimate responsibility
for our overall risk management policies. This committee establishes all risk
limits and reviews each profit center's performance. This committee evaluates
the risks and opportunities presented by proposed profit centers.
Risk and Capital Oversight Committee. Our risk and capital oversight
committee evaluates and recommends trading and risk exposure limits to our
executive committee. This committee monitors adherence to these limits on a
weekly basis and provides general oversight of the risk management system. In
addition, this committee reviews potential exposures based on "what if"
scenarios. Our risk and capital oversight committee reports all violations of
risk limits to our executive committee.
Risk Department. Our Risk Department monitors our risk exposures on a
daily basis and immediately reports all violations of risk limits to our risk
and capital oversight committee. The risk department has the authority to
implement risk-reducing trades in any profit center worldwide in order to
achieve firm-wide compliance with risk limits.
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Trading Staff. At the profit center level, our portfolio managers are
responsible for continuously monitoring portfolio risk compliance within
predetermined limits set by our executive committee. In the case of a violation,
the portfolio manager is responsible for taking action to reduce risk exposure
in an amount sufficient to bring that profit center into compliance with
approved limits. Each portfolio manager has in-depth knowledge of the primary
sources of risk in his individual market and the instruments available to hedge
the profit center's exposures. Our trading staff continuously manages risk using
risk-adjusted values calculated in real-time by our automated proprietary
trading and risk management technology. Because we compensate each individual
trader and portfolio manager based on risk-adjusted returns, we give them a
financial incentive to operate within our predetermined risk limits.
OUR EMPLOYEES
As of March 31, 1999, we had 225 employees, of which 103 were in trading,
59 were in systems, 16 were in financial engineering, nine were in management
and 38 were in administrative or support functions. We have not entered into
employment agreements with any of our employees or any of our executive
officers. We have entered into a confidentiality and a non-competition agreement
with each of our principals. If any of our principals leave our firm for any
reason, they may not trade or make markets, except for their own account, in any
derivative or security in which we trade or make markets on specified major
exchanges for one year after their departure. In addition, they may not
encourage any of our employees to leave our firm for two years after their
departure. Our principals have also agreed not to use any of our confidential
information for reasons unrelated to our business. None of our employees are
parties to a collective bargaining agreement. We believe that our relations with
our employees are excellent.
CLEARING ARRANGEMENTS
We have clearing contracts with Merrill Lynch Professional Clearing Corp.
relating to our U.S. market-making activities. Our contract with Merrill Lynch
will remain in effect until terminated by either party. Our European and Asian
companies clear their trades through Mees Pierson and several of its affiliates,
and the contracts remain in effect until terminated by either party with the
amount of notice specified in the contract. In our clearing arrangements, we
earn interest income on balances due from our clearing brokers. We also incur
interest expense on any balances due to these clearing brokers. Through stock
borrowing agreements and credit facilities, we also borrow funds from our
clearing brokers and secure these borrowings with pledges of stock. Under these
credit facilities, our clearing brokers generally may terminate our financing at
any time.
OUR PRIMARY COMPETITION
The market for the services we provide is rapidly evolving and intensely
competitive. We expect competition to continue and intensify in the future. We
face competition from many firms varying in size and strategy. In the United
States, numerous small to mid-size firms compete with us on the exchange floors.
These firms typically have $1 million to $50 million in capital. We also compete
with independent traders. Worldwide, large financial institutions represent a
significant group of our competitors. Leading financial institutions have shown
significant interest in penetrating the equity derivatives markets recently,
including acquiring some of our competitors. In addition, our current and
potential competitors have established or may establish other cooperative
relationships or may consolidate to enhance their services and products. New
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competitors or alliances among competitors may emerge and they may acquire
significant market share.
In our market-making activities, we compete based on price, as reflected
in our bid-ask spreads. We also compete based on the speed at which our systems
react to real-time changes in the marketplace. Finally, we compete based on the
number of contracts we are willing to execute at a given price. In our execution
services business, we compete based on speed of execution and bid and ask
prices. In our asset management business, we compete primarily based on our
funds' risk-adjusted returns.
GOVERNMENT REGULATION
Extensive regulation in the United States and elsewhere generally governs
our business and our industry. In addition to the SEC, the NASD, other SROs,
including the various stock exchanges, and other regulatory bodies worldwide
require strict compliance with their rules and regulations. As a matter of
public policy, regulatory bodies in the United States and the rest of the world
are charged with safeguarding the integrity of the securities and other
financial markets and with protecting the interest of customers participating in
those markets, not with protecting the interests of creditors or stockholders of
market makers. In the United States, the SEC is the federal agency responsible
for the administration of the federal securities laws. Hull Trading Company,
L.L.C. is registered as a broker-dealer with the SEC and is a member of the
CBOE, which serves as its designated examining authority. Hull Liquidity Fund,
L.P. is also a registered broker-dealer with the SEC and is a member of the
NASD. Hull Quantitative Fund, L.L.C., is also registered as a broker-dealer with
the SEC and is a member of the Chicago Stock Exchange. SROs, including the CBOE,
and state securities and other regulatory authorities have oversight authority
over us. Similarly, our businesses are also subject to regulation by various
non-U.S. governmental and regulatory bodies and SROs in virtually all countries
where we do business.
Broker-dealers are subject to laws, rules and regulations that cover all
aspects of the securities business, including:
- sales methods,
- trade practices,
- use and safekeeping of customers' funds and securities,
- capital structure,
- record-keeping,
- financing of customers' purchases and
- conduct of directors, officers and employees.
Failure to comply with any of these laws, rules or regulations could lead
to adverse consequences including censure, fine, the issuance of
cease-and-desist orders or the suspension or disqualification of its directors,
officers or employees. Any of these adverse consequences could affect our
business. We and some of our officers and other employees have in the past, been
subject to claims arising from the violation of these rules and regulations
which resulted in the payment of fines and settlements. We and our officers and
other employees may be subject to future claims arising from the violation of
these laws, rules and regulations. An adverse ruling against us or our
employees, including censure or suspension, could cause our company or our
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officers and other employees to pay a substantial fine or settlement, and could
result in their suspension or expulsion. Any of these events could have a
material adverse effect on our business.
The commodity futures and options industry in the United States is
subject to regulation under the Commodity Exchange Act. The CFTC is the federal
agency charged with the administration of this act and the related regulations.
Hull Equity Management is registered with the CFTC as a commodity pool operator
and is a member of the NFA. We act as a market maker on various options
exchanges in the United States. In addition, we have received the following
appointments on some of these exchanges:
- We have been appointed as a specialist at the American Stock Exchange in
three classes of options, the Amex Institutional Index, the Major Market
Index and the S&P Midcap 400 Index.
- We have been appointed as a designated primary market maker, or DPM, in
five option classes at the CBOE. These classes of options are the Russell
2000 Index, the S&P Small Cap Index, the NYSE Composite Index, the S&P
500/BARRA Growth Index and the S&P 500/BARRA Value Index.
- We have been appointed as a lead market maker at the Pacific Exchange in
the Wilshire SmallCap Index Options.
The benefits and obligations arising from the appointments noted above
vary from exchange to exchange. In general, these appointments require us to
continuously maintain a two-sided market in our appointed options at prices that
assist in maintaining the supply and demand for such options at levels which are
sufficient to provide liquidity to buyers and sellers on the exchange floor. For
example, under CBOE rules, a DPM must:
(1) assure that market quotations are accurate;
(2) assure that these market quotations are firm for the number of
contracts designated by CBOE;
(3) determine formulas for generating automatically updated market
quotations;
(4) be present at the trading post on every business day and effect
trades which have a high degree of correlation with the overall
pattern of trading;
(5) participate at all times in any automated execution system which may
be open in its appointed options classes; and
(6) resolve trading disputes upon the request of any party to the
dispute.
In addition, CBOE rules provide that a DPM may participate pro rata with
the trading crowd in trades that take place at its principal bid or offer.
As a registered broker-dealer, we are subject to the SEC's Net Capital
Rule. The Net Capital Rule, which specifies minimum net capital requirements for
registered brokers-dealers, is designed to measure the general financial
integrity and liquidity of a broker-dealer. The Net Capital Rule requires that
at least a minimum part of a registered broker-dealer's assets be kept in
relatively liquid form. In general, net capital is defined as net worth, meaning
assets minus liabilities, plus qualifying subordinated borrowings and
discretionary liabilities, and less mandatory deductions that result from
excluding assets that are not readily convertible into cash
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and from valuing conservatively other assets. Among these deductions are
adjustments, which are commonly called haircuts, which reflect the possibility
of a decline in the market value of an asset prior to disposition.
If a firm fails to maintain the required net capital, the SEC and the
SROs or other regulatory bodies may suspend the firm or revoke its registration
and ultimately could require the firm's liquidation. The Net Capital Rule
prohibits the payment of dividends, the redemption of stock, the prepayment of
subordinated indebtedness and the making of any unsecured advance or loan to a
stockholder, employee or affiliate, if the payment would reduce the firm's net
capital below required levels.
The Net Capital Rule also provides that the SEC may restrict for up to 20
business days any withdrawal of equity capital, or unsecured loans or advances
to stockholders, employees or affiliates, commonly called capital withdrawal, if
the capital withdrawal, together with all other net capital withdrawals during a
30-day period, exceeds 30% of excess net capital and the SEC concludes that the
capital withdrawal may be detrimental to the financial integrity of the broker-
dealer. In addition, the Net Capital Rule provides that the total outstanding
principal amount of a broker-dealer's indebtedness under subordination
agreements, the proceeds of which are included in its net capital, may not
exceed 70% of the sum of the outstanding principal amount of all subordinated
indebtedness included in net capital, par or stated value of capital stock, paid
in capital in excess of par, retained earnings and other capital accounts for a
period in excess of 90 days.
A change in the Net Capital Rule, the imposition of new rules or any
unusually large charges against net capital could limit those of our operations
that require the intensive use of capital and also could restrict our ability to
withdraw capital. This in turn could limit our ability to pay dividends, repay
debt and repurchase shares of our outstanding stock. A significant operating
loss or any unusually large charge against net capital could adversely affect
our ability to expand or even maintain our present levels of business, which
could have a material adverse effect on our business.
Hull Liquidity Fund L.P. recently received a written inquiry from the
NASD regarding alleged violations of the NASD rules relating to trade reporting.
We believe we have meritorious defenses to the alleged violations and are in the
process of preparing our response. Even if the NASD were to determine that these
defenses were insufficient, we do not believe that the likely fines or
non-monetary penalties would have a material adverse effect on our business.
We are active in the international equity derivatives and equity
securities markets. Many of our affiliates which participate in those markets
are subject to comprehensive regulations, including some form of capital
adequacy rules and other customer protection rules. At present, our London
operations are regulated by The Securities and Futures Authority Limited. We
expect, however, that upon the enactment of some changes in laws, which are
currently being considered by Parliament, in 2000 the Financial Services
Authority will take over the responsibilities of The Securities and Futures
Authority Limited. In addition, our subsidiary Hull Trading UK Limited is a
member of the London Stock Exchange and LIFFE and is subject to the rules and
regulations of those exchanges.
We are subject to oversight by U.K. regulators following European Union
directives and the related legislation, rules and regulations. Among other
things, these directives require compliance with capital adequacy standards,
customer protection requirements and conduct of business rules. These standards,
requirements and rules are similar throughout the European Union and are
comparable in scope and purpose to those requirements imposed under SEC
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rules. European Union directives also permit more restrictive local regulation
in each jurisdiction, including those in which we operate. These local
requirements can result in competitive disadvantages to us. In addition, other
foreign government agencies regulate some of our subsidiaries and also have
capital standards and other requirements comparable to the rules of the SEC.
Compliance with regulatory capital requirements of these and other regulators
could limit those operations of our subsidiaries that require the intensive use
of capital. Compliance with these requirements, also could restrict our ability
to withdraw capital from our regulated subsidiaries, which in turn could limit
our ability to repay debt or pay dividends on the common stock.
In Germany, our subsidiary, Hull Trading GmbH, is regulated by German
regulatory agencies under European Union directives. Currently, our
market-making activities conducted through our Frankfurt office are supervised
by the Frankfurt Stock Exchange and by Eurex, by their Common Stock Exchange
Supervision Authority and, to some extent, by the Federal Securities Supervision
Authority. If our regulatory status in Germany changes or if we become subject
to regulation by other authorities in Germany, we may have increased net capital
requirements and additional administrative compliance obligations, which could
impact our business.
Hull Trading GmbH, obtained the necessary Swiss license from the Swiss
Banking Commission for its activities in Switzerland as a foreign securities
dealer and remote member of the Swiss Stock Exchange and Eurex. As a result, we
are now regulated by the Swiss Banking Commission and must comply with various
record-keeping and reporting requirements under the Swiss Stock Exchange Act. In
addition, Hull Trading GmbH, as a member of the Swiss Stock Exchange, must
comply with its net capital requirements.
OUR PROPERTIES
We currently have offices in Chicago, New York, Frankfurt, Hong Kong and
London. We lease all of our office space.
LEGAL ISSUES
We are operating in compliance in all material respects with our legal
and regulatory requirements, domestic and international. We are not currently a
party to any material litigation.
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<PAGE> 56
OUR MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table describes our executive officers and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
M. Blair Hull........................ 56 Chairman and Chief Executive Officer; Director
Arthur S. Margulis, Jr. ............. 36 President; Director
Peter J. Layton...................... 39 Executive Vice President; Director
Daniel G. Brennan.................... 35 Executive Vice President
William J. "Liam" Connell............ 39 Executive Vice President and Chief Information Officer
John C. Hiatt........................ 51 Executive Vice President and Chief Administrative
Officer
Timothy J. Hunter.................... 42 Executive Vice President and Chief Financial Officer
Patricia L. Levy..................... 40 General Counsel and Secretary
Alger B. "Duke" Chapman.............. 67 Director
Frederick Grauer..................... 52 Director
Craig Heimark........................ 44 Director
Wilmot J. Nicholson.................. 84 Director
</TABLE>
M. Blair Hull founded our firm in 1985 and since then has served as
Chairman and Chief Executive Officer and a Director (or similar capacities) of
our company and its predecessor organizations. Mr. Hull served on the Board of
Directors of the Chicago Board Options Exchange from 1988 to 1990 and on the
Board of Directors of the Options Clearing Corporation from 1992 to 1998. He is
currently a member of the Board of Trustees of the Cincinnati Stock Exchange and
the Board of Directors of BARRA, Inc. Presently, Mr. Hull is a member of the
Board of Trustees of the University of California Santa Barbara Foundation and
serves on the Investment Committee of Santa Clara University. He holds a B.A. in
Mathematics from the University of California Santa Barbara (1965), M.B.A. from
Santa Clara University (1969) and graduated from the Harvard OPM Program in
1990.
Arthur S. Margulis, Jr. is our President and a Director. Since joining
us in 1986, he has played a variety of roles in the firm, including managing
several market-making operations and serving as chairman of our executive
committee. Mr. Margulis is a member of the Chicago Mercantile Exchange and has
served on various committees of the Chicago Mercantile Exchange and the Chicago
Board Options Exchange. He received his M.B.A. in Finance from the University of
Chicago (1990) and his B.A. in Economics from Princeton University (1985).
Peter J. Layton is an Executive Vice President and a Director. Mr.
Layton joined our firm in 1988, and for the last five years, he has been
directly responsible for our equity stock trading operations. Mr. Layton is a
member of the Chicago Board Options Exchange, the Kansas City Board of Trade,
and the Chicago Stock Exchange and has been a member of the London Stock
Exchange and the Philadelphia Stock Exchange. Mr. Layton serves on various
industry and exchange committees. From 1985 to 1988 Mr. Layton worked at the
CBOE where he held positions as Director of Research. He received his M.B.A. in
Finance and Statistics from the University of Chicago (1987) and his B.A. in
Economics from the University of Chicago (1982).
Daniel G. Brennan is an Executive Vice President. Mr. Brennan joined our
firm in 1988. Since 1995, Mr. Brennan has co-managed our worldwide derivatives
trading, and is directly responsible for European Trading Operation in Frankfurt
and London. Mr. Brennan is a member
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<PAGE> 57
of the Chicago Board Options Exchange. He received his M.B.A. in Finance from
the University of Chicago (1992) and his B.S. in Finance and Marketing from
Marquette University (1986).
William J. "Liam" Connell is an Executive Vice President and our Chief
Information Officer. Prior to joining our company in 1998, he worked at Salomon
Brothers for ten years, most recently as a director responsible for electronic
commerce and risk management systems development. Prior to that, he worked at
IBM Ireland and National City Brokers, a brokerage firm based in Dublin,
Ireland, as a software developer. Mr. Connell received his B.A. in Mathematics
and Philosophy (1982), and his Master of Management Science (1983) from
University College, Dublin.
John C. Hiatt joined the firm as an Executive Vice President and our
Chief Administrative Officer in April 1999. From January 1998 until April 1999,
he was Vice President Clearing & Regulatory Affairs for The Timber Hill Group
LLC, a global market maker firm in Greenwich, Connecticut. From January 1994
through January 1998, he was the President and Chief Executive Officer of the
Board of Trade Clearing Corporation in Chicago. From 1992 to 1994, Mr. Hiatt
served as Executive Vice President, Treasurer and Chief Financial Officer of The
Options Clearing Corporation with responsibility for the overall direction and
administration of clearing operations, treasury operations, new products,
systems assurance testing, risk management and economic research. Prior to that
time he served respectively as Sr. V.P. -- Operations & Risk Management, V.P.
Regulation. He joined the Options Clearing Corporation in 1975 as Controller.
Mr. Hiatt, a U.S. Navy veteran, received a B.S. in Accounting (1974) and M.B.A.
in Finance and International Business (1980) from DePaul University. He also is
a Certified Public Accountant. Mr. Hiatt has served on the Illinois Society of
Certified Public Accountants' Committee on Broker-Dealers; the Clearing
Procedures Committee of the Chicago Board Options Exchange and he is currently a
member of the Business Conduct Committee. Finally, he also served on the faculty
of the Stuart School of Business at the Illinois Institute of Technology where
he taught a course on Options Price Theory.
Timothy J. Hunter is an Executive Vice President and our Chief Financial
Officer. Since joining our company in 1993, Mr. Hunter has been directly
responsible for our finances and overseas clearing, processing and profitability
analysis. From 1983 to 1993, he was Chief Financial Officer of Lind-Waldock and
Company, a futures brokerage firm located in Chicago, and from 1979 to 1982 he
was with Arthur Andersen and Company in their Banking and Financial Services
Audit Division. Mr. Hunter is a Certified Public Accountant and is a candidate
for an M.A. in Economics from the University of Illinois at Chicago and received
his B.A. in Business and International Studies from Iowa State University
(1979).
Patricia L. Levy joined the firm as our General Counsel and Secretary in
May 1999. From 1997 until joining the firm, Ms. Levy was General Counsel and
Senior Vice President for the Chicago Stock Exchange. From 1994 to 1997, Ms.
Levy was an Executive Director, Legal Affairs with SBC Warburg Dillon Read. From
1992 to 1994, Ms. Levy was a Director with O'Connor & Associates, a proprietary
options trading firm. Prior to joining O'Connor, Ms. Levy was an associate at
the law firm of Schiff Hardin & Waite. Ms. Levy holds a J.D. from the University
of Virginia (1985) and a B.Phil. from Miami University (1981).
Alger B. "Duke" Chapman, a Director, has been a Vice Chairman of ABN
AMRO Incorporated since 1997. From 1986 to 1997, Mr. Chapman served as Chairman
and Chief Executive Officer of the Chicago Board Options Exchange. Prior to
joining the CBOE, Mr. Chapman was Vice Chairman of American Express Bank Ltd.
and was responsible for building a private banking business. Mr. Chapman serves
on the Boards of Directors of Parson
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<PAGE> 58
Group L.L.C., a financial, accounting and risk management (insurance) consulting
and staffing company in Chicago; HDO, Inc., one of the largest tent and
structure companies in the United States; ABN AMRO Sage, a wholly-owned
subsidiary of ABN AMRO Incorporated and one of the largest options market maker
clearing organizations in the country; Arlington Capital Management, Ltd.; Prime
Holdings, Inc., an insurance company specializing in substandard risk; ISO New
England, an independent system that operates the wholesale electric power
transmission system for the New England states and creates competitive markets
for wholesale electricity products in New England; and the Futures Industry
Institute. He is the past President of the International Options Markets
Association and a former executive committee member and Chairman of the Ad Hoc
Committee on Derivatives of the International Federation of Stock Exchanges. Mr.
Chapman received his bachelor's degree from Williams College (1953) and his law
degree from Columbia University School of Law (1956).
Frederick Grauer, a Director, is a founder and Chairman of the Board of
eRugGallery, an e-commerce company located in Menlo Park, California. Dr. Grauer
is also a trustee of the Menlo School, an independent school located in
Atherton, California and an advisor to the Stanford Institute of Economic Policy
Research located at Stanford University, Stanford, California. From 1996 to
1998, Dr. Grauer was executive Chairman and then Co-Chair of Barclays Global
Investors, one of the largest institutional money managers in the world. In this
capacity, he was responsible for the global business strategy of BGI, oversight
of its businesses in Europe, Japan and capital markets and supervision of its
advanced active investing, indexing, global risk management, finance, planning
and technology functions. From 1983 to 1995, Dr. Grauer held various positions
with the predecessors of BGI including Chairman and Chief Executive Officer of
Wells Fargo Nikko Investment Advisors and Wells Fargo Investment Advisors and
their affiliates. He was also an Executive Vice President of Wells Fargo Bank.
Dr. Grauer holds a Ph.D. in Business from Stanford University (1977), a M.A. in
Economics from the University of Chicago (1972) and a B.A. in Economics from the
University of British Columbia (1969).
Craig Heimark, a Director, is an independent advisor to Silicon Valley
start-up ventures in the area of technology planning, financial and growth
strategies. Before becoming a venture capital advisor, Mr. Heimark worked at SBC
Warburg Dillon Read where he served as Head of Strategic Planning and Business
Development from 1996 to 1997 and Head of Systems from 1993 to 1996. From 1986
to 1993, Mr. Heimark was a General Partner of O'Connor & Associates, a
partnership located in Chicago and engaged in proprietary options trading, where
he was Head of Currency Options Business Unit (1984-1990), Head of
Systems/Technology Department (1987-1993) and Head of Systems of SBC/OC Services
L.P. (1990-1993). Mr. Heimark has a B.A. in Economics and a B.S. in Biology from
Brown University (1977).
Wilmot J. Nicholson, a Director, is involved with his own consulting and
management firm. Mr. Nicholson founded W.J. Nicholson Company, General
Contractors, and served as President and finally Chairman of the Board prior to
his retirement in 1985. He has served on the Planning Commission and City
Council of Santa Clara, California and was elected Mayor. He currently serves on
the boards of a number of public service organizations. He has been affiliated
with the School of Engineering at Santa Clara University, both as an instructor
and as Chairman of the Civil Engineering Department. He has been a member of the
Board of Regents of the University and a member of the Dean's Advisory Committee
of the School of Engineering. Since 1997, Mr. Nicholson has been the managing
partner of Alturos Ranches, a 29,000-acre farming operation in Northern
California. Mr. Nicholson has a Bachelor of Civil
55
<PAGE> 59
Engineering from the University of Santa Clara (1936) and did post-graduate work
at the Graduate School of Structural Engineering at the University of
California.
BOARD COMMITTEES
We plan to establish an audit committee and a compensation committee. The
audit committee will review our internal accounting procedures and consider and
report to our Board on other auditing and accounting matters, including the
selection of our independent auditors, the scope of annual audits, fees to be
paid to our independent auditors and the performance of our independent
auditors. The audit committee will be composed solely of directors who are not
our employees or affiliated with our management. The compensation committee will
review and recommend to our Board the salaries, benefits and stock option grants
of all employees, consultants, directors and other individuals we compensate.
The compensation committee will also administer our stock option and other
employee benefits plans. Our Board may from time to time establish other
committees.
COMPENSATION OF DIRECTORS
Directors who are our officers or employees receive no additional
compensation for their services as directors. We will pay directors who are not
our employees an annual retainer of $20,000 and we will reimburse all directors
for reasonable expenses they incur while attending Board and committee meetings.
On , 1999, our Board adopted an Outside Directors Stock Option
Plan. Under this plan, each director who is not our employee upon the closing of
this offering will receive an option to purchase 10,000 shares of our common
stock at the initial public offering price. Also, each director who is not our
employee who is first elected or appointed to our Board after the closing of
this offering will receive an option to purchase 10,000 shares of our common
stock at the closing market price on the grant date. Every year, each director
who is not our employee will receive an option to purchase 2,000 shares of our
common stock after the annual stockholders' meeting at the closing market price
on the grant date. All options granted under this plan will become exercisable
six months after the date they are granted (if the director is then still
providing services as a director) and will expire either ten years after the
date they were granted or one year after the director ceases to be a director
for any reason, whichever occurs first. The directors who are eligible for
grants under this plan may not participate in any of our other stock option
plans or benefit plans. We have reserved a total of 160,000 shares of common
stock for issuance under this plan.
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<PAGE> 60
EXECUTIVE COMPENSATION
Prior to the offering, we carried on our business as a limited liability
company. As a result, meaningful individual compensation information for
directors and executive officers based on operating as a corporation is not
available for periods prior to the offering.
The following table summarizes compensation paid by us for services
rendered during 1998 to our Chief Executive Officer and to each of the four
other most highly compensated executive officers, whom we refer to in this
prospectus as the named executive officers, based on salary and bonuses earned
during 1998. The amounts in the table include only compensation for 1998 and do
not include distributions paid to those persons as limited liability company
members during 1998.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS(A) COMPENSATION(B)
<S> <C> <C> <C>
M. Blair Hull.......................................... $100,000 $ 0 $ 0
Chairman and Chief Executive Officer
Peter J. Layton........................................ 225,000 579,500 3,200
Executive Vice President
Arthur S. Margulis, Jr. ............................... 240,000 498,466 3,200
President
Daniel G. Brennan...................................... 200,000 535,132 3,200
Executive Vice President
Timothy J. Hunter...................................... 200,000 419,834 3,200
Executive Vice President and
Chief Financial Officer
</TABLE>
- ---------------
(a) Payment of one-half of the reported bonus is deferred for three years
subject to forfeiture in the event the executive officer leaves our firm.
During the deferral period, the deferred amounts earn a return based on our
return on capital, a portion of which is paid quarterly.
(b) Represents amounts contributed on behalf of each executive officer by our
firm under our 401(k) plan.
401(k) PLAN
Generally, all employees aged 21 and over who have completed six months
of service with us may participate in our 401(k) plan. We may make matching
contributions to the accounts of our employees who make 401(k) contributions
during the year. Participants will vest in their account balances attributable
to matching contributions in 33.33 percent increments, and will become fully
vested after completing three years of service with us. Generally, distributions
from our 401(k) plan will be made following an employee's termination of
employment. The assets of our 401(k) plan may be invested in our common stock,
as directed by plan participants.
1999 LONG-TERM INCENTIVE PLAN
On , 1999, our Board adopted our 1999 Long-Term Incentive
Plan. Under this plan, we may grant stock options, stock appreciation rights,
shares of common stock and performance units to our employees and consultants.
The total number of shares of our common stock that we may award under this plan
is 9,215,000 shares, which may be adjusted in some cases. The maximum number of
shares of common stock that any individual participant may receive each year
under our long-term incentive plan is , and the maximum cash
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<PAGE> 61
payout for grants or awards under this plan each year to any of our key
executive officers is $ .
Our compensation committee administers our long-term incentive plan. This
plan essentially gives the compensation committee sole discretion and authority
to:
- select those employees to whom awards will be made and the type of
award;
- designate the number of shares covered by each award;
- establish vesting schedules and terms of each award;
- specify all other terms of awards; and
- interpret the plan.
Options awarded under our long-term incentive plan may be either
incentive stock options or nonqualified stock options. Incentive stock options
are intended to satisfy the requirements of Section 422 of the Internal Revenue
Code, while nonqualified stock options are not. We may grant stock appreciation
rights in connection with options, or as free-standing awards. If a participant
exercises an option, he or she will surrender the related stock appreciation
right. At a minimum, the exercise price of an option or stock appreciation right
must be at least 100% of the fair market value of a share of common stock on the
date on which we grant the option or stock appreciation rights or, if greater,
the par value of a share of common stock on that date. Options and stock
appreciation rights will be exercisable and will expire in accordance with the
terms set by the compensation committee. Under this plan, all options and stock
appreciation rights must expire within ten years after they are granted. If a
stock appreciation right is issued in connection with an option, the stock
appreciation right will expire when the related option expires. Special rules
and limitations apply to stock options which are intended to be incentive stock
options.
Under our long-term incentive plan, our compensation committee may grant
common stock awards to participants. During the period that a stock award is
subject to restrictions or limitations, the participants may receive dividend
rights awards relating to the shares.
Our compensation committee may award plan participants performance units
which entitle the participant to receive value for the units at the end of a
performance period, if and to the extent the award so provides. Our compensation
committee will establish the number of units and the performance measures and
periods when it makes an award.
All awards under our long-term incentive plan will accelerate and become
fully vested if a change in the control of our firm occurs.
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<PAGE> 62
In connection with the offering, we expect to issue options covering a
total of 2,599,208 shares of our common stock. The following table sets forth
grants of options under the 1999 Long-Term Incentive Plan to be made to the
named executive officers and to all executive officers as a group. The exercise
price per share of all these options will be the initial public offering price
of our common stock.
<TABLE>
<CAPTION>
SHARES UNDERLYING
NAME OPTIONS GRANTED
<S> <C>
M. Blair Hull............................................... --
Peter J. Layton............................................. 107,021
Arthur S. Margulis, Jr. .................................... 107,221
Daniel G. Brennan........................................... 96,539
Timothy J. Hunter........................................... 80,066
All executive officers as a group (eight people)............ 493,056
</TABLE>
1999 SPECIAL RESTRICTED STOCK PLAN
On , 1999, our Board adopted our 1999 Special Restricted
Stock Plan. Under a predecessor plan adopted by Hull and Associates, restricted
membership interests have been granted to certain of our key employees. Upon the
conversion of Hull and Associates into a "C" corporation, the restricted
membership interests will be converted into shares of our restricted stock and
be subject to the 1999 Special Restricted Stock Plan. The total amount of
membership interests subject to awards under the plan will be $14.9 million or
1,066,667 shares of our common stock, based on the initial public offering price
of our common stock. The restricted membership interests which have been granted
were contributed by M. Blair Hull and certain members of his family from their
personal holdings.
Awards under this plan will vest in equal annual increments over a period
of five years. An employee must be employed by us on the vesting date to become
vested in the shares. All unvested shares are forfeited at the time of an
employee's termination of employment and are then available to be re-allocated
at the discretion of our compensation committee. Any shares that are not so
re-allocated or that do not vest at the end of the fifth year will revert to M.
Blair Hull and the members of his family who had contributed the restricted
membership interests.
The following table sets forth the number of shares of restricted stock
to be granted under the 1999 Special Restricted Stock Plan to the named
executive officers and to all executive officers as a group.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
<S> <C>
M. Blair Hull............................................... --
Peter J. Layton............................................. 53,200
Arthur S. Margulis, Jr. .................................... 121,617
Daniel G. Brennan........................................... 48,450
Timothy J. Hunter........................................... 47,300
All executive officers as a group (eight people)............ 340,567
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
On , 1999, our Board adopted our Employee Stock Purchase
Plan. In general, all of our employees and the employees of our participating
subsidiaries may participate in our employee stock purchase plan for any
offering period. We will purchase shares issued under this plan in the open
market and resell them to the participants at a discount.
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<PAGE> 63
Eligible employees may choose to participate in our employee stock
purchase plan during an offering period by authorizing payroll deductions,
subject to limitations imposed by the Internal Revenue Code. Generally, offering
periods will start on January 1 and end on December 31 of each year, although
the first offering period under this plan will start on October 1, 1999 and will
end on December 31, 1999. On the last business day of each calendar quarter
during the offering period, we will use the participant's accumulated payroll
deductions on that date to purchase shares of our common stock. The purchase
price per share of our common stock purchased on that date will equal either:
(1) 85% of the fair market value of a share of our common stock
on the first day of the offering period, or
(2) 85% of the fair market value of a share of our common stock
on the exercise date,
whichever is lower. The purchase price may not be less than the par value per
share.
Participants may withdraw from our employee stock purchase plan at any
time during an offering period. If an employee withdraws, he or she may not
participate again in the plan until the beginning of the next offering period
and an employee's participation automatically terminates upon his or her
termination of employment for any reason. A participant may increase the amount
of his or her payroll deductions as of the first day of any payroll period
during an offering period and may decrease his or her payroll deductions up to
twice during any offering period. If an employee withdraws or terminates
participation in our employee stock purchase plan, we will return all
accumulated payroll deductions to the participant, without interest. A
participant may not sell common stock purchased under the plan within six months
after it is purchased under the plan.
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<PAGE> 64
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Immediately before the closing of this offering, we will reorganize into
a newly formed Delaware corporation called The Hull Group Inc., with Hull and
Associates, L.L.C. as its wholly owned subsidiary. Some members of Hull and
Associates that own a 30.8% membership interest in Hull and Associates in the
aggregate will receive shares of our common stock in exchange for their
membership interests at a rate of 250,000 shares per percentage membership
interest, for an aggregate of approximately 7,711,000 shares of our common
stock. For more information on the stock ownership of these members after the
reorganization, see "Principal Stockholders." Immediately before this
reorganization, we expect that the members of Hull and Associates will withdraw
members' equity from Hull and Associates in accordance with our limited
liability company operating agreement, including distributions for members'
income taxes related to our earnings.
M. Blair Hull, Inc., a holding company for M. Blair Hull, our Chairman
and Chief Executive Officer, and members of his family, owns the remaining 69.2%
membership interest in Hull and Associates. In connection with the
reorganization, the stockholders of M. Blair Hull, Inc. will exchange their
stock in M. Blair Hull, Inc. for our common stock so that M. Blair Hull, Inc.
will become a wholly owned subsidiary of The Hull Group Inc. At that time, M.
Blair Hull, Inc.'s only assets will be membership interests of Hull and
Associates, L.L.C. The stockholders of M. Blair Hull, Inc. will receive an
aggregate of approximately 17,289,000 shares of our common stock upon these
exchanges.
M. Blair Hull, our Chairman and Chief Executive Officer, is a director of
BARRA, Inc. In 1996, we paid BARRA approximately $75,000 for data analysis and
methodologies. In 1997, we paid BARRA $194,915 for data analysis, methodologies,
a seminar and software licenses. In 1998, we paid BARRA $377,547 for software
licenses and data analysis.
Arthur S. Margulis, Jr., our President, was the president and sole
shareholder of ASM Trading Inc. In 1997, ASM Trading paid us $116,350 of which
$32,000 was for a license fee and $84,350 was our share of ASM Trading's trading
profits.
Alger B. Chapman, one of our directors, is a Vice Chairman of ABN AMRO
Incorporated. ABN AMRO has provided us investment banking services in the past,
and we anticipate that it will continue to do so in the future. In addition,
during the last three years, ABN AMRO or its subsidiaries have paid us to
purchase customer information and for trading management services. During the
last three years, we have paid ABN AMRO or its subsidiaries for execution
services and order flow. In any year, these payments did not, in the aggregate,
exceed 5% of our consolidated gross revenues or 5% of ABN AMRO's consolidated
gross revenues.
On May 5, 1999, our subsidiary Hull Equity Management L.L.C. transferred
all of its rights to the business names and other intellectual property
associated with Efficient Capital Fund, LLC and ECF II, LLC to Efficient Capital
Management, LLC. Efficient Capital Fund and ECF II are private investment funds
formerly managed by Hull Equity Management. Hull Equity Management will receive
a 9.9% membership interest in Efficient Capital Management as consideration for
this transfer. Mr. Hull, our Chairman and CEO, and Mr. Layton, a Director and
Executive Vice President, own interests in Efficient Capital Management.
Some of our officers and directors have assets under management in one or
more of the investment funds we manage on terms generally available to third
parties. In addition, certain officers of ABN AMRO Incorporated as well as a
company owned by ABN AMRO's parent company have assets under management in two
of the investment funds we manage on terms generally available to third parties.
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<PAGE> 65
PRINCIPAL STOCKHOLDERS
The following table shows the beneficial ownership of our common stock
immediately before the closing of this offering by: (1) each person who we know
beneficially owns more than 5% of our common stock, (2) our directors and named
executive officers and (3) all of our directors and executive officers as a
group. Beneficial ownership, which is determined in accordance with the rules
and regulations of the SEC, means the sole or shared power to vote or direct the
voting or to dispose or direct the disposition of our common stock. The number
of shares of our common stock beneficially owned by a person includes shares of
common stock issuable with respect to options held by the person which are
exercisable within 60 days. The percentage of our common stock beneficially
owned by a person assumes that the person has exercised all options the person
holds which are exercisable within 60 days and that no other persons exercised
any of their options. Unless otherwise indicated in the footnotes, all of the
interests are owned directly, and the person has sole voting and dispositive
power. Unless otherwise indicated, the address of each beneficial owner listed
below is c/o The Hull Group Inc., 311 South Wacker Drive, Chicago, Illinois
60606.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
---------------------------------------------
PERCENT PRIOR TO PERCENT AFTER
NUMBER THE OFFERING THE OFFERING
<S> <C> <C> <C>
M. Blair Hull ...................................... 12,448,000 49.8% 38.3%
Peter J. Layton..................................... 940,000 3.8% 3.0%
Arthur S. Margulis, Jr. ............................ 1,025,000 4.1% 3.3%
Daniel G. Brennan................................... 607,500 2.4% 1.9%
Timothy J. Hunter................................... 414,500 1.7% 1.3%
Alger B. Chapman.................................... -- -- --
Frederick Grauer.................................... -- -- --
Craig Heimark....................................... -- -- --
Wilmot J. Nicholson................................. -- -- --
Edward B. Chez(1)................................... 4,840,920 19.4% 14.9%
All directors and executive officers as a group (12
people)........................................... 15,435,000 61.8% 47.8%
</TABLE>
- -------------------------
(1) These shares are held by trusts for the benefit of various members of M.
Blair Hull's family. Mr. Chez serves as a co-trustee for each of these
trusts and shares voting and dispositive power over these shares. Mr. Chez
disclaims beneficial ownership of the shares of our common stock held by
these trusts.
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<PAGE> 66
DESCRIPTION OF CAPITAL STOCK
The following description summarizes some of the general terms and
provisions of our capital stock and our certificate of incorporation and bylaws.
This description is not complete and you should refer to our certificate of
incorporation and bylaws and to Delaware law for more information.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of common
stock, par value $0.01 per share, and 25,000,000 shares of preferred stock, par
value $0.01 per share. Immediately before the closing of this offering,
25,000,000 shares of our common stock will be outstanding. After the offering,
31,250,000 shares of our common stock will be outstanding if the underwriters do
not exercise their over-allotment option, or 32,187,500 shares if the
underwriters exercise their over-allotment option in full. No shares of our
preferred stock are currently outstanding.
COMMON STOCK
Our certificate of incorporation authorizes us to issue 100,000,000
shares of our common stock. All holders of our common stock will share equally
on a per share basis in all dividends and other distributions which our Board
declares out of funds legally available for that purpose. Each stockholder is
entitled to one vote for each share of common stock which the stockholder owns
on all matters submitted to a vote of our stockholders. Our certificate of
incorporation does not provide for cumulative voting, which means that the
holders of a majority of the shares of our common stock can elect all of our
directors. The holders of our common stock do not have any right to convert or
have us redeem their shares or any preemptive rights to purchase any of our
securities. Upon our liquidation, dissolution or winding-up, all holders of our
common stock will share equally on a per share basis in our remaining assets
available for distribution after we satisfy all of our liabilities and pay
holders of any of our outstanding preferred stock their liquidation preferences.
Each outstanding share of common stock is, and all shares of our common stock
that we are offering will be, fully paid and nonassessable.
PREFERRED STOCK
Our certificate of incorporation authorizes us to issue 25,000,000 shares
of our preferred stock. Our Board can issue shares of our preferred stock, in
one or more series. For each series of our preferred stock, our Board can
determine the powers, preferences, rights, qualifications, limitations and
restrictions, including the dividend rights, conversion rights, voting rights,
terms of redemption, liquidation preferences and the number of shares in the
series. As a result, our Board can authorize and issue shares of preferred stock
with voting or conversion rights which may adversely affect the voting or other
rights of holders of our common stock. In addition, the issuance of preferred
stock may delay or prevent a transaction which would cause a change in our
control, because the rights given to the holders of a series of preferred stock
may prohibit a merger, reorganization, sale of all or substantially all of our
assets, liquidation or other extraordinary corporate transaction.
CLASSIFIED BOARD OF DIRECTORS
Our certificate of incorporation provides that our Board may establish
the number of our directors, provided that we must have at least three directors
and may not have more than 15, except that our Board currently consists of two
directors and may until a third initial director is
63
<PAGE> 67
appointed. Our Board will increase its size to seven directors before the
closing of the offering. A majority of the remaining directors may fill any
vacancy in our Board, including a vacancy resulting from an increase in the size
of our Board. Our certificate of incorporation divides our Board into three
classes of directors. Messrs. Grauer and Heimark will serve as Class I directors
and will hold office until our annual meeting of stockholders in 2000. Messrs.
Chapman, Layton and Nicholson will serve as Class II directors and will hold
office until our annual meeting in 2001. Messrs. Hull and Margulis will serve as
Class III directors and will hold office until our annual meeting in 2002. As
the term of each class expires, the directors elected to that class will hold
office for three years, unless they die or resign or are removed before that
time. As a result, at least two annual meetings of stockholders, instead of one,
will generally be required to change a majority of our directors. Also, our
stockholders can only remove directors for cause by the affirmative vote of the
holders of 66 2/3% or more of the outstanding shares of capital stock entitled
to vote in the election of directors.
We believe that our classified Board and the inability of our
stockholders to remove directors without cause or to fill vacancies on our Board
will help ensure the continuity and stability of our business strategy and
policies from year to year. However, it also makes the removal of incumbent
directors more time-consuming and difficult. This may discourage third parties
from attempting to obtain control of our firm, even if the change in control
would be in the best interests of our stockholders.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND BUSINESS PROPOSALS
We have adopted advance notice provisions in our bylaws which require our
stockholders to present their nominations for directors or other business
proposals for our annual meeting within a specified time frame. In general,
stockholders must deliver their notice of nominations or business proposals to
our Secretary not less than 60 days nor more than 90 days before the first
anniversary of the prior year's annual meeting of stockholders. Any nominations
must include all information relating to the nominated person which is required
to be disclosed in proxy statements under the Securities Act. Any business
proposals must include:
- a brief description of the business proposal;
- the reason for conducting that business at the annual meeting;
- any material interest of the proposing stockholder in that business;
and
- the name, address and number of shares owned by the proposing
stockholder.
These requirements make the election of new directors not nominated by our Board
more time-consuming and difficult, which may discourage third parties from
attempting to obtain control of our firm, even if the change in control would be
in the best interests of our stockholders.
AMENDMENT OF BYLAWS AND CERTIFICATE OF INCORPORATION
Our certificate of incorporation requires the approval of 66 2/3% or more
of the outstanding shares of capital stock entitled to vote to amend our by-laws
or the provisions of our certificate of incorporation relating to the
classification and composition of our Board. This requirement may discourage
third parties from attempting to obtain control of our firm.
64
<PAGE> 68
DELAWARE BUSINESS COMBINATION STATUTE
We are organized under Delaware law. Some provisions of Delaware law may
delay or prevent a transaction which would cause a change in our control. In
addition, our certificate of incorporation contains some provisions which may
delay or prevent this type of transaction, even if our stockholders consider the
transaction to be in their best interests.
After the offering, we will be subject to Delaware's anti-takeover laws.
Delaware law prohibits a publicly held corporation from engaging in a "business
combination" with an "interested stockholder" for three years after the
stockholder becomes an interested stockholder, unless the corporation's board of
directors and stockholders approve the business combination in a prescribed
manner. An "interested stockholder" is a person who directly or indirectly owns
15% or more of the corporation's outstanding voting stock. A "business
combination" includes a merger, asset sale or other transaction which results in
a financial benefit to the interested stockholder. Delaware law does not
prohibit these business combinations if:
(1) the corporation's board approves either the business
combination or the transaction, which results in the stockholder becoming
an interested stockholder before the stockholder becomes an interested
stockholder;
(2) after the transaction which results in the stockholder
becoming an interested stockholder, the interested stockholder owns at
least 85% of the corporation's outstanding stock; or
(3) the corporation's board approves the business combination and
the holders of at least two-thirds of the corporation's outstanding
voting stock which the interested stockholder does not own authorize the
business combination.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation provides that our directors will not be
personally liable to us or our stockholders for monetary damages for breach of a
fiduciary duty as a director, except for:
(1) any breach of the director's duty of loyalty to us or our
stockholders;
(2) misconduct or a knowing violation of law;
(3) liability under Delaware corporate law for an unlawful
payment of dividends or an unlawful stock purchase or redemption of
stock; or
(4) any transaction from which the director derives an improper
personal benefit.
Our certificate of incorporation and bylaws require us to indemnify and
advance expenses to our directors and officers to the fullest extent permitted
by Delaware law. Our certificate of incorporation and bylaws also permit us to
indemnify and advance expenses to our employees and agents if our Board approves
it.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Harris Trust and
Savings Bank. Its address is 311 West Monroe Street, Chicago, Illinois 60606 and
its telephone number at this location is 1-800-969-6715.
65
<PAGE> 69
LISTING
We will apply to list our common stock on the Nasdaq National Market
under the trading symbol "HULL."
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, no public market has existed for our common stock.
Future sales of substantial amounts of our common stock in the public market, or
the possibility of those sales, may reduce the market price of our common stock
and make it more difficult for us to raise capital by issuing additional stock.
After the offering, 31,250,000 shares of our common stock will be
outstanding if the underwriters do not exercise their over-allotment option and
no holders of our outstanding options exercise those options. Of those shares,
the 6,250,000 shares which we are offering in the offering will be freely
tradable without restriction or further registration under the Securities Act,
except for shares which our affiliates purchase. Shares which our affiliates
purchase will be subject to the volume and other limitations of Rule 144 under
the Securities Act. Our directors and officers will own the remaining 25,000,000
shares. All of these remaining shares will be subject to the volume and other
limitations of Rule 144.
In general, under Rule 144, a stockholder who has owned our common stock
for at least one year may, within any three-month period, sell up to the greater
of:
- 1% of the total number of shares of our common stock then outstanding,
which will equal approximately 312,500 shares immediately after the
offering; and
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four weeks before the person files a notice
on Form 144 for that sale.
Sales of shares under Rule 144 are also subject to manner of sale and
notice requirements and requirements as to the availability of current public
information about us. Under Rule 144, a stockholder who has not been our
affiliate for at least 90 days and who has beneficially owned shares of our
common stock for at least two years may sell those shares without complying with
the volume limitations or other requirements of Rule 144.
Our directors and officers have agreed not to sell, directly or
indirectly, any of our common stock or any securities convertible into or
exercisable or exchangeable for shares of our common stock without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation until at
least 180 days after the date of this prospectus.
At the closing of this offering, options to purchase approximately
2,599,208 shares of our common stock will be outstanding. After the offering, we
plan to file a registration statement on Form S-8 under the Securities Act
covering 9,375,000 shares of our common stock which are reserved for issuance
under our option plans. This registration statement will become effective
automatically when we file it. Shares of our common stock registered under this
registration statement will be available for sale in the open market, subject to
vesting restrictions. Any sales of these shares will be subject to the volume
limitations of Rule 144 described above.
66
<PAGE> 70
UNDERWRITING
Subject to the terms and conditions contained in the underwriting
agreement dated , 1999, the underwriters named below, who are
represented by Donaldson, Lufkin & Jenrette Securities Corporation, ABN AMRO
Incorporated and Putnam, Lovell, de Guardiola & Thornton, Inc. have severally
agreed to purchase from us the respective number of shares set forth opposite
their names below.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
<S> <C>
UNDERWRITERS:
Donaldson, Lufkin & Jenrette Securities Corporation.......
ABN AMRO Incorporated.....................................
Putnam, Lovell, de Guardiola & Thornton, Inc. ............
----------
Total..................................................
==========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of legal matters by their counsel and to other
specified conditions. The underwriting agreement provides that the underwriters
are obligated to purchase and accept delivery of all of the shares (other than
those shares covered by the over-allotment option described below) if they
purchase any of the shares.
The underwriters initially propose to offer some of the shares directly
to the public at the public offering price on the cover page of this prospectus
and some of the shares to dealers at the public offer price less a concession
not in excess of $ per share. The underwriters may allow, and such dealers
may re-allow, a concession not in excess of $ per share on sales to other
dealers. After the initial offering of shares to the public, the representatives
may change the public offering price and such concessions at any time without
notice.
DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation and a member of the selling group, is facilitating the distribution
of the shares sold in the offering over the Internet. The underwriters have
agreed to allocate a limited number of shares to DLJdirect Inc. for sale to its
brokerage account holders.
We have granted the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase, from time to time, in whole or in
part, up to 937,500 additional shares at the public offering price less the
underwriting fees. The underwriters may exercise such option solely to cover
overallotments, if any, made in connection with this offering. To the extent
that the underwriters exercise such option, each underwriter will become
obligated, subject to specified conditions, to purchase a number of additional
shares approximately proportionate to such underwriter's initial purchase
commitment.
The following table shows the underwriting fees to be paid to the
underwriters in connection with this offering. These amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase
additional shares of our common stock.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
<S> <C> <C>
Per share................................................... $ $
Total....................................................... $ $
</TABLE>
We estimate the offering expenses will total $1.0 million.
67
<PAGE> 71
The underwriters have reserved for sale, at the initial offering price,
up to 1,562,500 shares of our common stock for our employees, directors and
other individuals associated with us who have expressed an interest in
purchasing such shares of common stock in this offering. The number of shares of
common stock available for sale to the general public in this offering will be
reduced to the extent these individuals purchase the reserved shares. Any
reserved shares not purchased will be offered by the underwriters to the general
public on the same terms as the other shares offered by this prospectus.
We have agreed to indemnify the underwriters against some liabilities,
including civil liabilities under the Securities Act, or to contribute to
payments that the underwriters may be required to make in respect of those
liabilities.
We and our executive officers and directors have agreed that, subject to
some exceptions for a period of 180 days from the date of this prospectus, they
will not, without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation:
- offer, pledge, sell, contract to sell, sell or purchase any option or
contract to purchase or sell, as applicable, any shares of common stock
or any securities convertible into or exercisable or exchangeable for
common stock;
- grant any option, right or warrant to purchase or otherwise transfer or
dispose of, directly or indirectly, any shares of common stock or any
securities convertible into or exercisable or exchangeable for common
stock;
- enter into any swap or other arrangement that transfers all or a
portion of the economic consequences associated with the ownership of
common stock.
We will apply to list the shares of our common stock on the Nasdaq
National Market under the trading symbol "HULL."
Prior to the offering, no public market has existed for our common stock.
We will negotiate the initial public offering price for our common stock with
the representatives, but the price may not reflect the market price for our
common stock after the offering. Among the principal factors which we and the
representatives will consider in determining the initial public offering price
will be:
- the information included in this prospectus and otherwise available to
the representatives;
- the history of and prospects for our industry;
- our past and present operations, including our past and present
earnings and current financial position, the ability of our management
and our prospects for future earnings; and
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies and market conditions for
initial public offerings.
The representatives of the underwriters have advised us that the
underwriters do not expect discretionary sales to exceed % of the common stock
being offered.
Our common stock may trade at prices significantly below the initial
public offering price. Also, we cannot assure you that an active trading market
for our common stock will develop and continue after the offering.
68
<PAGE> 72
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of common stock
included in this offering in any jurisdiction where action for that purpose is
required. The shares included in this offering may not be offered or sold,
directly or indirectly, nor may this prospectus or any other offering material
or advertisement in connection with the offer and sale of any such shares be
distributed or published in any jurisdiction, except under circumstances that
will result in compliance with the applicable rules and regulations of such
jurisdiction. Persons who receive this prospectus are advised to inform
themselves about and to observe any restrictions relating to this offering and
the distribution of this prospectus. This prospectus is not an offer to sell or
a solicitation of an offer to buy any shares of common stock included in this
offering in any jurisdiction where that would not be permitted or legal.
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may overallot this offering,
creating a syndicate short position. In addition, the underwriters may bid for
and purchase shares of common stock in the open market to cover such syndicate
short position or to stabilize the price of the common stock. These activities
may stabilize or maintain the market price of the common stock above independent
market levels. The underwriters are not required to engage in these activities,
and may end any of these activities at any time.
ABN AMRO Incorporated and Putnam, Lovell, de Guardiola & Thornton, Inc.
have each provided us with investment banking services in the past, and we
anticipate that they will continue to do so in the future. In addition, during
the last three years, ABN AMRO or its subsidiaries have paid us to purchase
customer information and for trading management services and we have paid ABN
AMRO or its subsidiaries for execution services and order flow.
LEGAL MATTERS
Mayer, Brown & Platt, Chicago, Illinois, will pass on the validity of the
shares of our common stock which we are offering for us. Skadden, Arps, Slate,
Meagher & Flom (Illinois), Chicago, Illinois, will pass on legal matters for the
underwriters.
EXPERTS
We have included our consolidated financial statements as of December 31,
1997 and for the years ended December 31, 1996 and 1997 in this prospectus in
reliance on the report of Schultz & Chez, L.L.P., independent public
accountants, given on the authority of that firm as experts in accounting and
auditing. We have included our consolidated financial statements as of and for
the year ended December 31, 1998 in this prospectus in reliance on the report of
Ernst & Young LLP, independent auditors, given on the authority of that firm as
experts in accounting and auditing.
On March 5, 1999, we dismissed Schultz & Chez as our principal accountant
to audit our financial statements and engaged Ernst & Young as our principal
accountant to audit our financial statements for the year ended December 31,
1998. The decision to change accountants was approved by our executive
committee.
Schultz & Chez's report on our financial statements for the year ended
December 31, 1997 did not contain an adverse opinion or a disclaimer of opinion
and was not qualified or modified as to uncertainty, audit scope or accounting
principles. In connection with the audit of our financial statements for the
year ended December 31, 1997, and in subsequent interim
69
<PAGE> 73
periods through the date of dismissal, there was never any disagreement with
Schultz & Chez on any matter of accounting principle or practice, financial
statement disclosure or auditing scope of procedure, which disagreement, if not
resolved to the satisfaction of Schultz & Chez, would have caused it to make
reference to the subject matter of the disagreement in connection with its
report. In addition, there has never been a reportable event as described in
paragraph (a)(1)(v) of Item 304 of Regulation S-K under the Securities Exchange
Act.
Prior to engaging Ernst & Young, we had never consulted Ernst & Young
concerning either:
(1) the application of accounting principles to a specified
completed or uncompleted transaction;
(2) the type of audit opinion that might be rendered on our
financial statements;
(3) a written report or oral advice that the new accountant
concluded was an important factor considered by us in reaching a decision
as to an accounting, auditing or financial reporting issue; or
(4) any matter that was the subject of a reportable event as
described in paragraph (a)(1)(v) of Item 304.
ADDITIONAL INFORMATION
After this offering, we will be required to file annual, quarterly and
current reports, proxy statements and other information with the SEC. Our SEC
filings are available to the public over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document that we file with
the SEC at the SEC's public reference rooms in Washington, D.C., New York, New
York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for more
information on the public reference rooms. After we receive approval of our
common stock for listing on the Nasdaq Stock Market, you may also read any
document we file with the SEC at the offices of Nasdaq Operations, 1735 K
Street, N.W., Washington, D.C. 20006.
We filed a registration statement on Form S-1 with the SEC. This
prospectus does not contain all of the information in the registration
statement. Please refer to the registration statement for more information about
us and our common stock. Statements in this prospectus about any contract or any
other document are not necessarily complete and you should refer to the copy of
that contract or other document which we filed as an exhibit to the registration
statement. You may read a copy of the registration statement at any of the
sources described above.
70
<PAGE> 74
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF HULL TRADING COMPANY,
L.L.C. AND SUBSIDIARIES
Report of Independent Auditors.............................. F-2
Report of Independent Auditors.............................. F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998.......................... F-4
Consolidated Statements of Financial Condition as of
December 31, 1997 and 1998................................ F-5
Consolidated Statements of Members' Equity for the years
ended December 31, 1996, 1997 and 1998.................... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998.......................... F-7
Notes to Consolidated Financial Statements.................. F-8
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS OF HULL
AND ASSOCIATES, L.L.C. AND SUBSIDIARIES
Unaudited Interim Consolidated Statements of Operations for
the three months ended March 31, 1998 and 1999............ F-15
Unaudited Interim Consolidated Statement of Financial
Condition as of March 31, 1999............................ F-16
Unaudited Interim Consolidated Statement of Members' Equity
for the three months ended March 31, 1999................. F-17
Unaudited Interim Consolidated Statements of Cash Flows for
the three months ended March 31, 1998 and 1999............ F-18
Notes to Interim Unaudited Consolidated Financial
Statements................................................ F-19
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Pro Forma Consolidated Statements of Operations... F-21
Unaudited Pro Forma Consolidated Statements of Financial
Condition................................................. F-23
Notes to Unaudited Pro Forma Consolidated Financial
Statements................................................ F-24
</TABLE>
---------------------
The Hull Group Inc. is a holding company that was newly formed in connection
with the Offering and, accordingly, has not previously engaged in any business
operations, acquired any assets or incurred any liabilities other than in
connection with the Offering. Accordingly, the historical financial statements
of The Hull Group Inc. are not included in this Prospectus because management
has determined that they are not material to an investment decision.
F-1
<PAGE> 75
REPORT OF INDEPENDENT AUDITORS
The Members
Hull Trading Company, L.L.C.
We have audited the accompanying consolidated statement of financial
condition of Hull Trading Company, L.L.C. and subsidiaries as of December 31,
1997, and the related consolidated statements of operations, members' equity and
cash flows for each of the two years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Hull
Trading Company, L.L.C. and subsidiaries as of December 31, 1997, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
SCHULTZ & CHEZ, L.L.P.
Chicago, Illinois
February 5, 1998
F-2
<PAGE> 76
REPORT OF INDEPENDENT AUDITORS
The Members
Hull Trading Company, L.L.C.
We have audited the accompanying consolidated statement of financial
condition of Hull Trading Company, L.L.C. and subsidiaries as of December 31,
1998, and the related consolidated statements of operations, members' equity and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Hull
Trading Company, L.L.C. and subsidiaries at December 31, 1998, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
April 30, 1999
F-3
<PAGE> 77
HULL TRADING COMPANY, L.L.C.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
<S> <C> <C> <C>
REVENUES:
Principal transactions...................................... $60,443 $109,637 $ 96,234
Asset management fees....................................... 6,675 11,610 9,995
Interest & dividends........................................ 17,525 61,137 45,489
Other income................................................ 478 1,210 1,127
------- -------- --------
Total revenues............................................ 85,121 183,594 152,845
Interest & dividend expense................................. 14,669 67,350 49,732
------- -------- --------
Net revenues.............................................. 70,452 116,244 103,113
OPERATING EXPENSES:
Compensation................................................ 17,225 23,603 25,400
Exchange, clearing & brokerage.............................. 8,784 17,496 20,315
Communications & technology................................. 2,545 3,027 4,153
Occupancy................................................... 1,386 1,398 2,119
Professional fees........................................... 1,148 2,120 2,897
Depreciation & amortization................................. 2,059 2,411 2,897
Other operating expenses.................................... 3,262 6,134 4,771
------- -------- --------
Total operating expenses.................................. 36,409 56,189 62,552
------- -------- --------
Income before income taxes.................................. 34,043 60,055 40,561
Foreign income taxes........................................ 343 7,308 10,901
------- -------- --------
Net income................................................ $33,700 $ 52,747 $ 29,660
======= ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 78
HULL TRADING COMPANY, L.L.C.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------
1997 1998
<S> <C> <C>
ASSETS
Cash........................................................ $ 2,925 $ 2,723
Receivables from clearing brokers........................... 77,275 24,123
Securities owned............................................ 1,536,559 1,723,793
Investments in private investment funds..................... 10,334 16,990
Property, leasehold improvements and equipment, net......... 4,922 7,128
Other assets................................................ 20,277 18,338
---------- ----------
$1,652,292 $1,793,095
========== ==========
LIABILITIES AND MEMBERS' EQUITY
Short-term borrowings....................................... $ 5,192 $ 10,107
Payables to clearing brokers................................ 141,961 354,158
Securities sold, not yet purchased.......................... 1,384,847 1,281,634
Compensation payable........................................ 14,554 25,452
Income taxes payable........................................ 7,241 18,038
Accrued expenses and other liabilities...................... 5,790 8,127
---------- ----------
1,559,585 1,697,516
Members' equity................................... 92,707 95,579
---------- ----------
Total liabilities and members' equity............. $1,652,292 $1,793,095
========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 79
HULL TRADING COMPANY, L.L.C.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1997 1998
<S> <C> <C> <C>
Beginning of year........................................... $ 60,303 $ 74,947 $ 92,707
Member contributions........................................ 3,672 5,014 5,231
Member distributions........................................ (22,728) (40,001) (32,019)
Net income.................................................. 33,700 52,747 29,660
-------- -------- --------
End of year................................................. $ 74,947 $ 92,707 $ 95,579
======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 80
HULL TRADING COMPANY, L.L.C.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 33,700 $ 52,747 $ 29,660
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation & amortization............................. 2,059 2,411 2,897
Gain on sales of exchange memberships................... -- -- (498)
Equity in net income of private investment funds........ (1,499) (2,100) (1,606)
Decrease (increase) in receivables from clearing
brokers.............................................. 59,428 (73,315) 53,152
(Increase) in securities owned.......................... (394,360) (676,940) (187,234)
Decrease (increase) in other assets..................... 3,083 (4,739) 1,363
Increase (decrease) to payables to clearing brokers..... 127,426 (18,038) 212,197
Increase (decrease) in securities sold, not yet
purchased............................................ 169,621 745,097 (103,213)
Increase (decrease) compensation payable................ 4,361 1,588 (3,398)
Increase (decrease) in income taxes payable............. (1,183) 6,940 10,797
Increase (decrease) in accrued expenses and other
liabilities.......................................... (7,146) 2,511 2,337
--------- --------- ---------
Net cash provided by (used in) operating activities....... (4,510) 36,162 16,454
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, leasehold improvements and
equipment............................................... (2,156) (3,229) (5,103)
Sales/purchases of exchange memberships................... -- (228) 1,074
Investments in private investment funds................... (1,084) -- (5,050)
--------- --------- ---------
Net cash used in investing activities..................... (3,240) (3,457) (9,079)
CASH FLOWS FROM FINANCING ACTIVITIES:
Member contributions...................................... 3,672 5,014 5,231
Member distributions...................................... (22,078) (33,869) (17,723)
Increase (decrease) in short-term borrowings, net......... 8,706 (3,514) 4,915
(Decrease) in liabilities subordinated to claims of
general creditors....................................... (6,000) -- --
--------- --------- ---------
Net cash used in financing activities..................... (15,700) (32,369) (7,577)
--------- --------- ---------
Net increase (decrease) in cash........................... (23,450) 336 (202)
Cash at beginning of year................................. 26,039 2,589 2,925
--------- --------- ---------
Cash at end of year....................................... $ 2,589 2,925 $ 2,723
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 10,126 $ 63,315 $ 44,767
Cash paid for foreign income taxes........................ 1,526 368 104
SUPPLEMENTAL DISCLOSURE OF NON-CASH OPERATING AND
FINANCING ACTIVITY:
Compensation payable to members reflected as member
distributions........................................... 650 6,132 14,296
</TABLE>
See accompanying notes.
F-7
<PAGE> 81
HULL TRADING COMPANY, L.L.C.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION
Hull Trading Company, L.L.C. ("Hull"), an Illinois limited liability
company, and its wholly-owned subsidiaries Hull Trading GmbH ("GmbH"), Hull
Trading Asia, and Hull Trading U.K. Ltd., operate as market makers and traders
in exchange-traded equity derivatives and equity securities. Hull is a
registered broker-dealer with the Securities and Exchange Commission. Hull
Equity Management, L.L.C. ("HEM"), a wholly-owned subsidiary of Hull, operates
as the general partner and investment manager for a series of limited
partnerships and limited liability companies.
The consolidated financial statements are presented in U.S. dollars and
include the accounts of Hull Trading Company, L.L.C. and its wholly-owned
subsidiaries (collectively, "the Company"). All significant intercompany
balances and transactions have been eliminated in consolidation. Certain prior
years amounts were reclassified to conform with the 1998 presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
Securities owned and securities sold, not yet purchased are valued at
market value based on listed market prices. Unrealized gains and losses are
reflected in principal transactions on the consolidated statements of
operations. Securities sold, not yet purchased represent obligations of the
Company to purchase the securities at prevailing market prices. The ultimate
gains or losses recognized are dependent upon the prices at which these
securities are purchased to settle the obligation under the sales commitments.
Securities transactions are recorded on the trade date.
FUTURES TRANSACTIONS
Futures contracts are valued at market value based on exchange settlement
prices. Unrealized gains and losses on futures contracts are reflected in
principal transactions in the consolidated statements of operations.
PROPERTY, LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Property, leasehold improvements and computer software are recorded at
cost. Equipment and furniture is depreciated over their estimated useful lives
using accelerated methods. Leasehold improvements are amortized over the
respective lease term using the straight-line method. Computer software is
depreciated over five years using the straight-line method. At
F-8
<PAGE> 82
HULL TRADING COMPANY, L.L.C.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1997 and 1998, accumulated depreciation and amortization totaled
$11,977 and $14,117, respectively.
FOREIGN CURRENCIES
Assets and liabilities in foreign currencies are translated into U.S.
dollars using current exchange rates at the date of the consolidated statements
of financial condition. Revenues and expenses are translated at average rates
during the period. The functional currency of the Company's wholly-owned foreign
subsidiaries is the U.S. dollar. The foreign exchange gains and losses resulting
from these transactions are included in other operating expenses in the
consolidated statements of operations. Foreign exchange gains (losses) for the
years ended December 31, 1996, 1997 and 1998 were $(1,016), $(1,709) and $1,111,
respectively.
INCOME TAXES
No provision has been made for U.S. federal and state income taxes as the
taxable income or loss of the Company is included in the respective income tax
returns of the members. A provision has been made for foreign income taxes
related to Hull's earnings from its foreign subsidiaries.
INVESTMENTS IN PRIVATE INVESTMENT FUNDS
Investments in a series of limited partnerships and limited liability
companies (collectively, "private investment funds") are accounted for using the
equity method, under which the Company's share of net income or loss is
reflected in income as earned and distributions received, if any, are reductions
of the investments.
FAIR VALUE OF FINANCIAL INSTRUMENTS
All of the Company's financial instruments are carried at fair value or
amounts approximating fair value.
COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 131, Reporting Comprehensive Income, that requires companies to
report all changes in equity during a period, except those resulting from
investments by owners and distributions to owners. The Company has not presented
consolidated statements of comprehensive income because it does not have any
items of "other comprehensive income."
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
(the "AICPA") issued Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). This
statement requires that certain costs of computer software developed or obtained
for internal use be capitalized and amortized over the useful life of the
related software. SOP 98-1 is effective for financial statements for fiscal
years beginning after December 15, 1998. The Company currently expenses its
costs of computer
F-9
<PAGE> 83
HULL TRADING COMPANY, L.L.C.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
software developed or obtained for internal use and is evaluating the impact of
adopting SOP 98-1.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, effective for
fiscal years beginning after June 15, 1999. The new rules establish standards
requiring that all derivative financial instruments be recognized and measured
at fair value regardless of the purpose or intent for holding them. SFAS No. 133
also reduces certain previously required quantitative disclosures relating to
derivative financial instruments held or issued for trading purposes. The
adoption of SFAS No. 133 is not expected to have a significant impact on the
Company's consolidated financial statements.
3. SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
Securities owned and securities sold, not yet purchased consisted of the
following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------
1997 1998
(IN THOUSANDS)
<S> <C> <C>
Owned:
Equities.................................................. $ 560,039 $ 619,039
Options................................................... 976,520 1,104,754
---------- ----------
$1,536,559 $1,723,793
========== ==========
Sold, Not Yet Purchased:
Equities.................................................. $ 311,051 $ 249,243
Options................................................... 1,073,796 1,032,391
---------- ----------
$1,384,847 $1,281,634
========== ==========
</TABLE>
4. SHORT-TERM BORROWINGS
GmbH has a credit facility with a bank under which GmbH borrows on a
revolving basis. The borrowing is collateralized with securities owned by GmbH.
Interest is variable based on STIBOR and payable monthly. The interest rate at
December 31, 1997 and 1998 was 5.3% and 4.3%, respectively.
F-10
<PAGE> 84
HULL TRADING COMPANY, L.L.C.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INVESTMENTS IN PRIVATE INVESTMENT FUNDS
HEM is the general partner or managing member of private investment funds
that engage in various equity investment strategies. The Company also owns
interests in these private investment funds. Summary financial information for
these private investment funds at December 31, 1997 and 1998, and for the years
then ended, was as follows:
<TABLE>
<CAPTION>
1997 1998
(IN THOUSANDS)
<S> <C> <C>
Total assets................................................ $322,689 $584,323
Total liabilities........................................... 246,750 491,427
Total capital............................................... 75,939 92,896
Net income.................................................. 25,211 17,205
Company's carrying value.................................... 10,334 16,990
Company's pro-rata share of net income...................... 2,100 1,606
</TABLE>
The Company's pro-rata share of net income from the above private
investment funds for the year ended December 31, 1996 was approximately $1,499.
These amounts are reflected as principal transactions in the consolidated
statements of operations.
HEM's fee income from these private investment funds consists of
incentive fees, management fees and administrative and technology fees, as
provided for in each respective investment fund agreement. HEM earned fees of
$6,675, $11,610, and $9,995 in 1996, 1997 and 1998, respectively. These amounts
are reflected as asset management fees in the consolidated statements of
operations.
6. REGULATORY MATTERS
Hull is subject to the Securities and Exchange Commission's ("SEC")
Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of
minimum net capital. Hull has elected to compute net capital using the
alternative method, permitted by the Rule, which requires that Hull maintain
minimum net capital, as defined, equal to $250. At December 31, 1998, Hull had
net capital and net capital requirements of approximately $19,300 and $250,
respectively.
Certain other subsidiaries of Hull are also subject to capital adequacy
requirements of the countries in which they operate. As of December 31, 1998,
these subsidiaries were in compliance with their local capital adequacy
requirements.
Advances, dividend payments and other equity distributions from regulated
subsidiaries may be restricted by the regulations of various regulatory
agencies. These restrictions may limit the amounts that these subsidiaries pay
as dividends or advances.
F-11
<PAGE> 85
HULL TRADING COMPANY, L.L.C.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
The Company rents office space under leases containing real estate tax
and operating expense escalation clauses. The Company's principal lease is
cancelable upon ninety days written notice with a cancellation fee. At December
31, 1998, future non-cancelable minimum commitments under leases with remaining
terms exceeding one year were as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $ 901
2000........................................................ 920
2001........................................................ 864
2002........................................................ 752
2003........................................................ 772
Thereafter.................................................. 152
------
$4,361
======
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 was
approximately $1,153, $1,137 and $1,755, respectively.
At December 31, 1997 and 1998, Hull was contingently liable in the amount
of $2,500 under bank letters of credit used in lieu of certain cash deposits.
8. DERIVATIVE FINANCIAL INSTRUMENTS
Derivative contracts are financial instruments whose value is based upon
an underlying asset, index, reference rate or a combination of these factors.
The Company uses derivative financial instruments as part of its market-making
business and its overall risk management process. These financial instruments,
which generally include exchange-traded options and futures contracts and
forward contracts involving foreign currencies, expose the Company to varying
degrees of market, credit, and foreign currency risk. The Company records its
derivative trading activities at market or fair value and unrealized gains and
losses are recognized currently.
The Company's market-making and trading activities expose the Company to
market risk. Market risk is the potential change in an instrument's value caused
by fluctuations in interest and currency exchange rates, equity prices, credit
spreads, or other risks.
Credit risk arises from the possible inability of counterparties to meet
the terms of their contracts. Substantially all derivative financial instruments
entered into by the Company are exchange-traded. For exchange-traded contracts,
the clearing organization acts as the counterparty of specific transactions and,
therefore, bears the risk of delivery to and from counterparties to specific
positions. The credit risk associated with foreign currency forward contracts,
which are generally entered into by the Company with major international
dealers, is typically limited to the cost of replacing all contracts on which
the Company has recorded an unrealized gain.
F-12
<PAGE> 86
HULL TRADING COMPANY, L.L.C.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair values of derivative financial instruments at December 31, 1997
and 1998 were as follows:
<TABLE>
<CAPTION>
FAIR VALUES
-------------------------------------------------
1997 1998
---------------------- ------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
<S> <C> <C> <C> <C>
Options............................... $976,520 $1,073,796 $1,104,754 $1,032,391
</TABLE>
The fair values of futures contracts are not disclosed. Fair values for
exchange-traded futures contracts are based on listed market prices. Futures
contracts are settled in cash daily and therefore the receivable or payable is
limited to one day's price move. The fair values of forward contracts at
December 31, 1997 and 1998 were not significant.
The following table presents the average fair values of derivative
financial instruments for 1997 and 1998, calculated on a monthly basis:
<TABLE>
<CAPTION>
AVERAGE FAIR VALUES
-------------------------------------------------
1997 1998
---------------------- ------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
<S> <C> <C> <C> <C>
Options............................... $988,142 $ 959,225 $1,378,609 $ 841,207
</TABLE>
The notional or contractual amounts of derivative financial instruments
at December 31, 1997 and 1998, were as follows, in millions:
<TABLE>
<CAPTION>
NOTIONAL OR
CONTRACTUAL
AMOUNTS
-----------------
1997 1998
<S> <C> <C>
Options purchased........................................... $26,456 $30,364
Options written............................................. 26,618 25,969
Futures..................................................... 220 1,712
</TABLE>
The gross notional or contractual amounts of derivative financial
instruments represent the volume of these transactions and not the amount
potentially subject to market risk.
Substantially all revenues from principal transactions involve equities
and equity derivatives, including options and futures contracts.
9. AGREEMENTS WITH CLEARING BROKERS
The Company has clearing agreements with two principal clearing brokers.
The Company earns interest income and/or incurs interest expense on balances due
from/to these clearing brokers. At December 31, 1997 and 1998, substantially all
of the Company's securities owned, securities sold, not yet purchased and
receivables/payables from/to clearing brokers are amounts held by or due from/to
these clearing brokers.
F-13
<PAGE> 87
HULL TRADING COMPANY, L.L.C.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company has not presented business segment data in accordance with
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, because it operates predominantly in one business segment, the
business of market-making and trading in securities.
The Company's net revenues by geographic area are summarized below.
Amounts are determined principally by the respective legal jurisdiction of the
Company's subsidiaries.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
<S> <C> <C> <C>
United States......................................... $59,987 $ 80,054 $ 44,639
Europe................................................ 9,518 35,206 51,571
Asia.................................................. 947 984 6,903
------- -------- --------
Total................................................. $70,452 $116,244 $103,113
======= ======== ========
</TABLE>
Income before income taxes included approximately $1,454, $15,674 and
$28,613 of earnings attributable to non-U.S. subsidiaries for 1996, 1997 and
1998, respectively.
11. SUBSEQUENT EVENTS
During the period from January 1, 1999 to April 30, 1999, members made
contributions of $6,825 and distributions of $13,939.
On January 1, 1999, Hull Trading Company, L.L.C., an Illinois limited
liability company, changed its name to Hull and Associates, L.L.C.
Simultaneously, a new wholly-owned entity, Hull Trading Company, L.L.C., a
Delaware limited liability company, was formed and substantially all of the U.S.
market-making and trading operations were transferred at book value from Hull
Trading Company, L.L.C. into Hull and Associates, L.L.C. At January 1, 1999,
after giving effect to this restructuring, the members' equity of Hull and
Associates, L.L.C. and Hull Trading Company, L.L.C. (a Delaware limited
liability company), was approximately $95,579 and $48,933, respectively.
F-14
<PAGE> 88
HULL AND ASSOCIATES, L.L.C.
AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1999
<S> <C> <C>
REVENUES:
Principal transactions...................................... $20,395 $37,640
Asset management fees....................................... 2,736 1,099
Interest & dividends........................................ 13,169 12,795
Other income................................................ 394 119
------- -------
Total revenues............................................ 36,694 51,653
Interest & dividend expense................................. 12,741 14,614
------- -------
Net revenues.............................................. 23,953 37,039
OPERATING EXPENSES:
Compensation................................................ 5,498 7,656
Exchange, clearing & brokerage.............................. 5,138 4,894
Communications & technology................................. 825 1,032
Occupancy................................................... 374 676
Professional fees........................................... 660 1,115
Depreciation & amortization................................. 570 714
Other operating expenses.................................... 2,046 708
------- -------
Total operating expenses.................................. 15,111 16,795
------- -------
Income before income taxes.................................. 8,842 20,244
Foreign income taxes........................................ 1,935 4,469
------- -------
Net income................................................ $ 6,907 $15,775
======= =======
</TABLE>
See accompanying notes.
F-15
<PAGE> 89
HULL AND ASSOCIATES, L.L.C.
AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED
STATEMENT OF FINANCIAL CONDITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1999
--------------
<S> <C>
ASSETS
Cash........................................................ $ 7,033
Receivables from clearing brokers........................... 47,314
Securities owned............................................ 1,382,754
Investments in private investment funds..................... 16,559
Property, leasehold improvements and equipment, net......... 7,372
Other assets................................................ 18,461
----------
$1,479,493
==========
LIABILITIES AND MEMBERS' EQUITY
Short-term borrowings....................................... $ --
Payables to clearing brokers................................ 190,224
Securities sold, not yet purchased.......................... 1,130,366
Compensation payable........................................ 23,845
Income taxes payable........................................ 17,571
Accrued expenses and other liabilities...................... 8,847
----------
1,370,853
Members' equity................................... 108,640
----------
Total liabilities and members' equity............. $1,479,493
==========
</TABLE>
See accompanying notes.
F-16
<PAGE> 90
HULL AND ASSOCIATES, L.L.C.
AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED
STATEMENT OF MEMBERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, 1999
--------------
<S> <C>
Balance at December 31, 1998................................ $ 95,579
Member contributions........................................ 6,825
Member distributions........................................ (9,539)
Net income.................................................. 15,775
--------
Balance at March 31, 1999................................... $108,640
========
</TABLE>
See accompanying notes.
F-17
<PAGE> 91
HULL AND ASSOCIATES, L.L.C.
AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1998 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 6,907 $ 15,775
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 570 714
Equity in net (income) loss of private investment funds... (538) 431
Decrease (increase) in receivables from clearing
brokers................................................ 65,948 (23,191)
Decrease (increase) in other assets....................... 2,508 (123)
(Increase) decrease in securities owned................... (819,801) 341,039
Increase (decrease) to payables to clearing brokers....... 81,891 (163,934)
Increase (decrease) in securities sold, not yet
purchased.............................................. 677,745 (151,268)
(Decrease) in compensation payable........................ (11,840) (5,822)
Increase (decrease) in income taxes payable............... 1,618 (467)
Increase in accrued expenses and other liabilities........ 1,018 720
--------- ---------
Net cash provided by operating activities................... 6,026 13,874
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, leasehold improvements and
equipment................................................. (708) (958)
Investment in private investment funds...................... (1,500) --
--------- ---------
Net cash used in investing activities....................... (2,208) (958)
CASH FLOWS FROM FINANCING ACTIVITIES:
Member contributions........................................ 5,231 6,825
Member distributions........................................ (5,329) (5,324)
Decrease in short-term borrowings, net...................... (5,192) (10,107)
--------- ---------
Net cash used in investing activities....................... (5,290) (8,606)
--------- ---------
Net increase (decrease) in cash............................. (1,472) 4,310
Cash at beginning of period................................. 2,925 2,723
--------- ---------
Cash at end of period....................................... $ 1,453 $ 7,033
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest...................................... $ 10,933 $ 13,666
Cash paid for foreign income taxes.......................... 317 4,936
SUPPLEMENTAL DISCLOSURE OF NON-CASH OPERATING AND FINANCING
ACTIVITY:
Compensation payable to members reflected as capital
distributions............................................. 3,574 4,215
</TABLE>
See accompanying notes.
F-18
<PAGE> 92
HULL AND ASSOCIATES, L.L.C.
AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements of Hull and
Associates, L.L.C. (formerly Hull Trading Company, L.L.C., an Illinois limited
liability company) included herein have been prepared in accordance with
generally accepted accounting principles for interim financial information and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the unaudited
interim consolidated financial statements reflect all adjustments, which are of
a normal recurring nature, necessary for a fair presentation of financial
position, results of operations and cash flows of the Company for the interim
periods presented and are not necessarily indicative of a full year's results.
In preparing the unaudited interim consolidated financial statements,
management is required to make estimates and assumptions that affect the amounts
reported in the financial statements. Actual results could differ from those
estimates.
These financial statements should be read in conjunction with the
Company's audited consolidated financial statements for the year ended December
31, 1998.
F-19
<PAGE> 93
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated statements of operations
and financial condition give effect to the reorganization into a corporation and
the offering contemplated hereby and the pro forma adjustments, as described in
the "Notes to Unaudited Pro Forma Consolidated Financial Statements".
The pro forma adjustments are based upon available information and
certain assumptions that management believes are reasonable. The unaudited pro
forma consolidated financial information and accompanying notes should be read
in conjunction with the consolidated financial statements and notes thereto.
The unaudited pro forma financial information does not purport to
represent the results of operations or the financial position of the Company
which actually would have occurred had the reorganization and offering been
previously consummated or project the results of operations or the financial
position of the Company for any future date or period.
F-20
<PAGE> 94
HULL AND ASSOCIATES, L.L.C.
AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS THE HULL GROUP INC.
<S> <C> <C> <C>
REVENUES:
Principal transactions.......................... $ 96,234 $ $ 96,234
Asset management fees........................... 9,995 -- 9,995
Interest & dividends............................ 45,489 -- 45,489
Other income.................................... 1,127 -- 1,127
-------- -------- --------
Total revenues................................ 152,845 -- 152,845
Interest & dividend expense..................... 49,732 -- 49,732
-------- -------- --------
Net revenues.................................. 103,113 -- 103,113
OPERATING EXPENSES:
Compensation.................................... 25,400 8,776(c) 41,045
6,869(d)
Exchange, clearing & brokerage.................. 20,315 -- 20,315
Communications & technology..................... 4,153 -- 4,153
Occupancy....................................... 2,119 -- 2,119
Professional fees............................... 2,897 -- 2,897
Depreciation & amortization..................... 2,897 -- 2,897
Other operating expenses........................ 4,771 -- 4,771
-------- -------- --------
Total operating expenses...................... 62,552 15,645 78,197
-------- -------- --------
Income before income taxes...................... 40,561 (15,645) 24,916
Income taxes.................................... 10,901 (685)(a) 10,216
-------- -------- --------
Net income.................................... $ 29,660 $(14,960) $ 14,700
======== ======== ========
Weighted average shares outstanding:
Basic and diluted............................. 25,000(f)
========
Net income per share:
Basic and diluted............................. $ 0.59
========
</TABLE>
See accompanying notes.
F-21
<PAGE> 95
HULL AND ASSOCIATES, L.L.C.
AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
----------------------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS THE HULL GROUP INC.
<S> <C> <C> <C>
REVENUES:
Principal transactions............................ $37,640 $ -- $37,640
Asset management fees............................. 1,099 -- 1,099
Interest & dividends.............................. 12,795 -- 12,795
Other income...................................... 119 -- 119
------- ------- -------
Total revenues.................................. 51,653 -- 51,653
Interest & dividend expense....................... 14,614 -- 14,614
------- ------- -------
Net revenues.................................... 37,039 -- 37,039
OPERATING EXPENSES:
Compensation...................................... 7,656 5,059(c) 13,686
971(d)
Exchange, clearing & brokerage.................... 4,894 -- 4,894
Communications & technology....................... 1,032 -- 1,032
Occupancy......................................... 676 -- 676
Professional fees................................. 1,115 -- 1,115
Depreciation & amortization....................... 714 -- 714
Other operating expenses.......................... 708 -- 708
------- ------- -------
Total operating expenses........................ 16,795 6,030 22,825
------- ------- -------
Income before income taxes........................ 20,244 (6,030) 14,214
Income taxes...................................... 4,469 1,359(a) 5,828
------- ------- -------
Net income...................................... $15,775 $(7,389) $ 8,386
======= ======= =======
Weighted average shares outstanding:
Basic and diluted............................... 25,000(f)
=======
Net income per share:
Basic and diluted............................... $ 0.34
=======
</TABLE>
See accompanying notes.
F-22
<PAGE> 96
HULL AND ASSOCIATES, L.L.C.
AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
--------------------------------------
PRO FORMA
PRO FORMA THE HULL
HISTORICAL ADJUSTMENTS GROUP INC.
<S> <C> <C> <C>
ASSETS
Cash................................................... $ 7,033 $ (7,033)(e) $ --
Receivables from clearing brokers...................... 47,314 (11,383)(e) 35,931
Securities owned....................................... 1,382,754 - 1,382,754
Investments in private investment funds................ 16,559 -- 16,559
Property, leasehold improvements and equipment, net.... 7,372 -- 7,372
Other assets........................................... 18,461 9,776(b) 28,237
---------- --------- ----------
$1,479,493 $ (8,640) $1,470,853
========== ========= ==========
LIABILITIES AND MEMBERS' EQUITY/
STOCKHOLDERS' EQUITY
Short-term borrowings.................................. $ -- $ -- $ --
Payables to clearing brokers........................... 190,224 -- 190,224
Securities sold, not yet purchased..................... 1,130,366 -- 1,130,366
Compensation payable................................... 23,845 -- 23,845
Income taxes payable................................... 17,571 -- 17,571
Accrued expenses and other liabilities................. 8,847 -- 8,847
---------- --------- ----------
1,370,853 -- 1,370,853
Members' equity........................................ 108,640 (90,224)
(18,416)(e) --
Stockholders' equity:
Common stock, par value $.01 per share; 100,000
shares authorized, 25,000 shares issued and
outstanding....................................... -- 250 250
Additional paid-in capital........................... -- 9,526(b) 114,683
-- 14,933(d) --
-- 90,224 --
Retained earnings.................................... -- -- --
Unearned compensation................................ -- (14,933)(d) (14,933)
---------- --------- ----------
Total stockholders' equity................... 100,000 100,000
---------- --------- ----------
Total liabilities and members'
equity/stockholders' equity................ $1,479,493 $ (8,640) $1,470,853
========== ========= ==========
</TABLE>
See accompanying notes.
F-23
<PAGE> 97
HULL AND ASSOCIATES, L.L.C.
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
1. REORGANIZATION AND INITIAL PUBLIC OFFERING
Prior to the initial public offering (the "Offering"), Hull and
Associates, L.L.C. will become a wholly owned subsidiary of The Hull Group Inc.
("The Hull Group"). The Hull Group is a newly formed company, incorporated in
May 1999 in the state of Delaware, with no significant assets or liabilities and
which has not engaged in any substantial business activities prior to the
Offering. The Hull Group, prior to the Offering, will have 25,000,000 shares
issued and outstanding. The Hull Group intends to sell 6,250,000 shares of
common stock as part of the Offering. For pro forma purposes, the common stock
offering and, where applicable, the related transactions reflect an assumed
initial public offering price of $14.00 per share.
2. PRO FORMA ADJUSTMENTS
(a) Provision for Income Taxes. Adjustment to reflect additional income
taxes related to the conversion from a limited liability company
(L.L.C.) to a "C" corporation under SFAS No. 109 at an effective tax
rate of 41%.
(b) Deferred Tax Asset. Adjustment to reflect the tax benefit of the
liability for member distributions recorded prior to the conversion to
a "C" corporation.
(c) Compensation, excluding IPO Awards. Adjustment for additional
compensation expense to reflect incentive-based compensation to
members previously reflected as distributions of members' equity.
(d) IPO Awards. Adjustment to reflect the amortization of the 1,066,667
shares of restricted stock awarded to employees under the 1999 Special
Restricted Stock Plan ("the Plan"). The restricted stock will have a
value of $14.9 million, based on the estimated initial public offering
of the stock, approximately 46% of which will be amortized as a
non-cash expense in the year of grant. The remaining amortization will
occur over the four years following the year of grant. The restricted
stock awarded will be accounted for as a capital contribution to the
Company as the Plan is being funded by shares owned by the principal
stockholder.
The stock options to purchase 2,599,208 shares of common stock awarded
to employees and directors will be accounted for pursuant to
Accounting Principles Board Opinion ("APB") No. 25, as permitted by
paragraph 5 of SFAS No. 123. Since these options will have no
intrinsic value as of the date of grant, no compensation expense will
be recognized pursuant to APB No. 25. The estimated weighted-average
fair value of these options on the date of grant is $6.90 using a
Black-Scholes option pricing model. If SFAS No. 123 had been applied,
compensation expense of $4,076 and $1,019 would have been included in
the pro forma consolidated statements of operations for the year ended
December 31, 1998 and the three months ended March 31, 1999,
respectively. The fair value of each
F-24
<PAGE> 98
HULL AND ASSOCIATES, L.L.C.
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
option grant is estimated on the assumed date of grant using the
following assumptions:
<TABLE>
<S> <C>
Risk-free interest rate.................................... 5%
Expected volatility........................................ 50%
Dividend yield............................................. 0%
Weighted average expected life............................. 5 years
</TABLE>
(e) Cash Distributions. Adjustment to reflect certain anticipated cash
distributions to the members of Hull and Associates, L.L.C. prior to
the Offering in accordance with the Company's limited liability
company operating agreement, including distributions for member income
taxes related to the Company's earnings. Such distributions will
reduce stockholders' equity at the date of the reorganization, and
prior to the offering, to $100 million.
(f) Pro Forma Common Shares. Basic and diluted common shares outstanding
of 25,000,000 prior to the Offering includes the common stock.
F-25
<PAGE> 99
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
[HULL LOGO]
THE HULL GROUP INC.
6,250,000 SHARES OF COMMON STOCK
------------------------
PROSPECTUS
------------------------
DONALDSON, LUFKIN & JENRETTE
ABN AMRO ROTHSCHILD
A DIVISION OF ABN AMRO INCORPORATED
PUTNAM, LOVELL, DE GUARDIOLA & THORNTON, INC.
------------------------
DLJDIRECT INC.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representation as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of The Hull
Group Inc. have not changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 1999, the date which is 25 days after the date of this
prospectus, all dealers effecting transactions in these shares of common stock
may be required to deliver a prospectus. This is in addition to a dealer's
obligation to deliver a prospectus when acting as an underwriter and with
respect to an unsold allotment or subscription.
- --------------------------------------------------------------------------------
<PAGE> 100
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table shows the expenses to be incurred in connection with
the offering described in this registration statement, all of which will be paid
by the registrant. All amounts are estimates, other than the SEC registration
fee, the NASD filing fee and the Nasdaq listing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 31,970
NASD filing fee............................................. 12,000
Nasdaq listing fee.......................................... 100,000
Accounting fees and expenses................................ 300,000
Legal fees and expenses..................................... 300,000
Printing and engraving expenses............................. 200,000
Transfer agent's fees....................................... 7,500
Blue sky fees and expenses.................................. 5,000
Miscellaneous............................................... 43,530
----------
Total..................................................... $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102 of the Delaware General Corporation Law allows a corporation
to eliminate the personal liability of directors of a corporation to the
corporation or its stockholders for monetary damages for a breach of a fiduciary
duty as a director, except where the director (1) breached his duty of loyalty,
(2) failed to act in good faith, engaged in intentional misconduct or knowingly
violated a law, (3) authorized the payment of a dividend or approved a stock
repurchase in violation of Section 174 of the Delaware General Corporation Law
or (4) obtained an improper personal benefit from a transaction. The
registrant's Amended and Restated Certificate of Incorporation provides for this
limitation of liability.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, other than
an action by or in the right of the corporation, by reason of the fact that the
person is or was a director, officer, employee or agent of the corporation or is
or was serving at the corporation's request as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement of the actually and reasonably incurred by the person
in connection with the action, suit or proceeding if the person acted in good
faith and in a manner the person reasonably believed to be in or not opposed to
the best interests of the corporation, and with respect to any criminal action
or proceeding, had no reasonable cause to believe the person's conduct was
unlawful. The power to indemnify applies to actions brought by or in the right
of the corporation as well, but only to the extent of expenses, including
attorneys' fees but excluding judgments, fines and amounts paid in settlement,
actually and reasonably incurred by the person in connection with the defense or
settlement of the action or suit. And with the further limitation that in these
actions no indemnification shall be made in the event of any adjudication of
negligence or misconduct in the performance of his duties to the corporation,
unless a court believes that in light of all the
II-1
<PAGE> 101
circumstances indemnification should apply. The Registrant's Amended and
Restated Certificate of Incorporation and Bylaws require it to indemnify and
advance expenses to its directors and officers to the fullest extent permitted
by the Delaware General Corporation Law. The registrant will indemnify and
advance expenses to its directors or officers in connection with an action
initiated by that person only if the action was authorized by the registrant's
Board. The registrant's Amended and Restated Certificate of Incorporation and
Bylaws also permit it to indemnify and advance expenses to its employees and
agents, if its Board approves the indemnification and advancement.
Section 145 of the Delaware General Corporation Law permits a corporation
to 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 that person and incurred by that person
in any similar capacity, or arising out of that person's status, whether or not
the corporation would have the corporation to indemnify the person against that
liability. The Registrant's Bylaws permit it to purchase and maintain insurance
for its directors, officers, employees and agents, notwithstanding whether it
can indemnify these persons against the claims under the Delaware General
Corporation Law. The Registrant intends to purchase director and officer
liability insurance for its directors and officers.
Section 174 of the Delaware General Corporation Law provides, among other
things, that in the case of any negligent or willful approval of an unlawful
payment of dividends or an unlawful stock purchase or redemption, the directors
under whose administration the unlawful action may happen, may be held jointly
and severally liable, at any time within six years of the unlawful dividend,
purchase or redemption, to the corporation, and to its creditors in the event of
dissolution or insolvency, to the full amount of the unlawful dividend, purchase
or redemption. A director who was either absent when the unlawful actions were
approved or dissented at the time, may avoid liability by causing his or her
dissent to these actions to be entered in the books containing the minutes of
the meetings of the board of directors at the time the action occurred or
immediately after the absent director receives notice of the unlawful acts.
The proposed form of underwriting agreement filed as Exhibit 1.1 to this
registration statement provides for indemnification of directors and officers of
the registrant by the underwriters against some liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1, 1996, the registrant's predecessor has sold the
following securities without registration under the Securities Act of 1933:
In 1996, Hull and Associates, L.L.C., which was formerly known as
Hull Trading Company, L.L.C., the "LLC", sold membership interests to 15
employees for an aggregate purchase price of $3,672,000.
In 1997, the LLC sold membership interests to 19 employees for an
aggregate purchase price of $5,014,000.
In 1998, the LLC sold membership interests to 24 employees for an
aggregate purchase price of $5,231,000.
In 1999, the LLC sold membership interests to 23 employees for an
aggregate purchase price of $6,825,000.
II-2
<PAGE> 102
All of these sales of LLC membership interests were made in reliance on the
exemption from registration under Section 4(2) of the Securities Act of 1933 as
transactions not involving a public offering.
Immediately before the closing of this offering, the registrant will
reorganize into a newly formed Delaware corporation called The Hull Group Inc.,
with the LLC as a wholly owned subsidiary of the registrant. Some members of the
LLC owning an aggregate of 30.8% of the LLC will receive shares of the
registrant's common stock in exchange for their membership interests, at a rate
of 250,000 shares per percentage membership interest, for an aggregate of
approximately 7,711,000 shares of common stock. Immediately before the closing
of this offering, all of the stockholders of M. Blair Hull, Inc. will exchange
their stock in M. Blair Hull, Inc. for the registrant's common stock so that M.
Blair Hull, Inc. will become a wholly owned subsidiary of the registrant. The
stockholders of M. Blair Hull, Inc. will receive an aggregate of approximately
17,289,000 shares of common stock upon this exchange. The issuance of the
registrant's common stock upon contribution of membership interests in the LLC
and upon exchange of stock in M. Blair Hull, Inc. will be made in reliance on
the exemption from registration under Section 4(2) of the Securities Act of 1933
and Rule 506 thereunder as transactions not involving a public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
See the exhibit index, which is incorporated herein by reference.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreements,
certificates in the denominations and registered in the names as are required by
the underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of the registrant under the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission the indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities, other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit, or proceeding, is asserted by the
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether the indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
the issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the registrant
under Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-3
<PAGE> 103
SIGNATURES
UNDER THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS
DULY CAUSED THIS AMENDMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF CHICAGO, STATE OF ILLINOIS ON JUNE 21,
1999.
THE HULL GROUP INC.
By: /s/ TIMOTHY J. HUNTER
----------------------------------
Timothy J. Hunter
Executive Vice President and Chief
Financial Officer
UNDER THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT HAS
BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED BELOW.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<C> <S> <C>
/s/ M. BLAIR HULL* Chairman of the Board, Chief June 21, 1999
- ----------------------------------------------------- Executive Officer (Principal
M. Blair Hull Executive Officer); Director
/s/ ARTHUR S. MARGULIS, JR.* President and Director June 21, 1999
- -----------------------------------------------------
Arthur S. Margulis, Jr.
Executive Vice President and Chief June 21, 1999
- ----------------------------------------------------- Financial Officer (Principal
Timothy J. Hunter Financial and Accounting
Officer)
*By: /s/ TIMOTHY J. HUNTER
------------------------------------------------
Timothy J. Hunter
Attorney-in-fact
</TABLE>
II-4
<PAGE> 104
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <S>
1.1 -- Form of Underwriting Agreement.*
2.1 -- Stock Exchange Agreement, dated , 1999, among
The Hull Group Inc. and all of the stockholders of M.
Blair Hull, Inc.*
2.2 -- Contribution Agreement, dated , 1999, from
certain of the members of Hull and Associates, L.L.C. to
The Hull Group Inc.*
3.1 -- Certificate of Incorporation of The Hull Group Inc.+
3.2 -- By-laws of The Hull Group Inc.+
3.3 -- Amended and Restated Certificate of Incorporation of The
Hull Group Inc.*
4.1 -- Form of Common Stock Certificate.
5.1 -- Form of Opinion of Mayer, Brown & Platt, regarding
legality of securities being registered.
10.1 -- Form of Standard Option Agreement between Merrill Lynch
Professional Clearing Corp. and Hull Trading Company,
L.L.C.
10.2 -- Form of Customer Agreement between Merrill Lynch
Professional Clearing Corp. and Hull Trading Company,
L.L.C.
10.3 -- Clearing, Credit Facility and Securities Borrowing
Agreement, dated October 16, 1995, between MeesPierson
N.V. and Hull Trading GmbH.
10.4 -- Terms of Business Agreement, dated October 10, 1996,
between MeesPierson ICS Limited and Hull Trading Asia
Limited.
10.5 -- Form of Customer Agreement, dated March 11, 1998, between
MeesPierson Futures Clearing Services (Asia) Limited and
Hull Trading Asia Limited.
10.6 -- Form of Customer Agreement, dated August 26, 1998,
between MeesPierson ICS Limited and Hull Trading Asia
Limited.
10.7 -- Form of Settlement Bank Agreement, dated November 1995,
between Hull Trading GmbH and MeesPierson N.V.
(Settlement Bank) and Deutsch Borse AG, Frankfurt am
Main.
10.8 -- Form of 1999 Special Restricted Stock Plan of The Hull
Group Inc.
10.9 -- Form of Outside Directors' Stock Option Plan of The Hull
Group Inc.
10.10 -- Form of Employee Stock Purchase Plan of The Hull Group
Inc.*
10.11 -- Form of 1999 Long Term Incentive Plan of The Hull Group
Inc.
16.1 -- Letter from Schultz & Chez, L.L.P.
21.1 -- List of subsidiaries of The Hull Group Inc.
23.1 -- Consent of Ernst & Young L.L.P.
23.2 -- Consent of Schultz & Chez, L.L.P.
23.3 -- Consent of Mayer, Brown & Platt (included in Exhibit
5.1).
27.1 -- Financial Data Schedule.
</TABLE>
- ------------------------------
* To be filed by amendment.
+ Previously filed.
<PAGE> 1
EXHIBIT 4.1
COMMON STOCK COMMON STOCK
NUMBER SHARES
[LOGO]
- --------------- ------------------------------ ---------------
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP 444757 10 8
THIS CERTIFIES THAT [Name]
is the owner of [Amount]
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $.01 PAR VALUE, OF
THE HULL GROUP INC.
transferable only on the books of the Corporation by the holder hereof in person
or by duly authorized attorney upon surrender of this Certificate properly
endorsed. This certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
[SEAL]
Dated:
Secretary Chairman
<PAGE> 2
THE HULL GROUP INC.
The Corporation will furnish without charge to each stockholder who so
requests, a full statement of the powers, designations, preferences and
relative, participating, optional or other special rights of each class of
authorized capital stock of the Corporation or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT ______ Custodian _____
TEN ENT - as tenants by the entireties (Cust) (Minor)
with right of survivorship
JT TEN - as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as Act______________________
tenants in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, __________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
Attorney to transfer such Shares on the books of the within-named Corporation
with full power of substitution in the premises.
Dated
---------------------
------------------------------------------
Signature
------------------------------------------
THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATSOEVER
Signature(s) Guaranteed:
By
---------------------------------
<PAGE> 1
EXHIBIT 5.1
[MAYER, BROWN, & PLATT LETTERHEAD]
______ __, 1999
The Board of Directors
The Hull Group Inc.
311 South Wacker Drive
Chicago, Illinois 60606
Dear Sirs:
We have acted as counsel to The Hull Group Inc., a Delaware corporation
(the "Company"), in connection with the registration of 7,187,500 shares
(including 937,500 shares subject to an over-allotment option) of the Company's
common stock, par value $0.01 per share (the "Common Stock"), on the Form S-1
Registration Statement (File No. 333-78407) filed by the Company with the
Securities and Exchange Commission on the date hereof (the "Registration
Statement").
As such counsel, we have examined originals or copies certified or
otherwise identified to our satisfaction of the Company's Charter and Bylaws,
resolutions of the Company's Board of Directors and such other records,
certificates and documents and such questions of law as we considered necessary
or appropriate for purposes of this opinion. In rendering such opinion, we have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as originals and the conformity to authentic original documents
of all documents submitted to us as copies.
Based upon and subject to the foregoing, we are of the opinion that the
Common Stock, when sold, will be duly authorized, legally issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to all references to our firm in the Registration
Statement.
Very truly yours,
<PAGE> 1
EXHIBIT 10.1
MERRILL LYNCH PROFESSIONAL CLEARING CORP.
101 HUDSON STREET
JERSEY CITY, NEW JERSEY, 07302
STANDARD OPTION AGREEMENT AND
OPTION ACCOUNT INFORMATION SHEET
INDIVIDUAL & JOINT ACCOUNT
Account No. ___________
This form supplements other information obtained from you for purposes of
approving your options transactions - no options transactions will be allowed
prior to such approval.
1. Customer Name HULL TRADING COMPANY L.L.C. Date of Birth
------------------------------- ------------
2. Address 311 SOUTH WACKER DRIVE/SUITE 1400 CHICAGO, IL 60606
------------------------------------------------------------------
3. Employer _________________________________________________________________
4. Occupation _____________________________ Position ________________________
5. Marital Status _________________________ No. of Dependents _______________
6. Estimated Net Worth ____________________ Estimated Liquid Net Worth ______
7. ( ) Investment Real Estate
( ) Cash
( ) Securities
( ) Other(describe) ___________________________________________________
8. Estimated Annual Income ____________________ Spouses Income ______________
9 Past Investment Experiences (specify size, frequency of transactions, type
of transactions and years of experience):
A. Options _______________________________________________________________
B. Stocks/Bonds __________________________________________________________
C. Commodities____________________________________________________________
D. Other (specify)________________________________________________________
10. Investment Objectives (Number in order of Priority):
( )Income ( )Trading Profits ( )Speculation
11. Date combined Disclosure Document and Special Statement for Uncovered
Option Writers Furnished _________________________________________________
12. Types of Option Trading-Anticipated
( )Buy Calls ( )Buy Puts ( )Spreads
( )Write Calls ( )Write Puts ( )Combination (straddles, etc.)
( )Covered ( )Covered
( )Uncovered ( )Uncovered
13. Types of Transactions for Which Account is Approved:
( )Level 1 -- writing covered listed call options
( )Level 2 -- level 1, plus buying listed puts and calls
( )Level 3 -- level 1 and level 2, plus spreading listed options;
buying straddles and combinations; writing puts.
( )Level 4 -- level 1, level 2, and level 3, plus all other types
of transactions (listed and OTC) selling of uncovered call options
including variable (ratio) hedging, straddles and combinations.
14. Is an investment advisory, counselor, attorney or any other person with
authority, phoning in instructions for his account?
( ) Yes ( ) No (If Yes, the next line must be completed)
Name and address of authorized party: TYPE OF POWER
( ) Limited
( ) General
15. If customer refuses to give any background information requested,
check here ( ).
<PAGE> 2
STANDARD OPTION AGREEMENT
INDIVIDUAL AND JOIN ACCOUNTS ONLY
Gentlemen:
In connection with any transaction executed by you on my behalf for the
purchase and sale of put and call options, I agree as follows:
1. All transactions shall be subject to the constitution, rules, regulations,
customs, and usages or the exchange of the exchange, or market and its
clearing house, if any, where executed. I further agree that I will not,
either alone or in concert with others, violate the position or exercise
limits which the Exchanges or marketplace where executed, may establish
from time to time as set forth in the booklet "Characteristics and Risks or
Standardized Options."
2. In the case of options sold or written by me in a cash account:
(a) With respect to a call option which if exercised against me will
require the delivery of securities sold, I will keep such securities in
my account with you until the expiration of the option period, and will
not sell or withdraw such securities. If the option is exercised, you
may deliver such securities to the purchaser without previous notice to
me.
(b) With respect to any put option which if exercised against me will
require payment for securities purchased, I will keep in my account
sufficient funds from such payment until the expiration of the option
period, and will not withdraw such funds or utilized them for any
purpose . If the option is exercised you may use such funds for the
purchase of such securities without previous notice to me.
3. Any securities and funds held by you in any account of mine with you shall
be held by you as security from the performance by me of my obligations to
you under this agreement.
4. As option transactions involve a high degree of risk, I understand that:
(a) I should not purchase an option unless I am able to sustain a total
loss of the premium and transaction costs, and I should not write a
call option unless I either own the underlying security (or a security
convertible, exchangeable, or exercisable into such underlying
security) or am able to sustain substantial financial losses, and that
I should not write a put option unless I am able to sustain substantial
financial losses.
(b) I may not be able to close a position in the event that a secondary
market in the option ceases to exist or the listing exchange restricts
or suspends trading in the option.
5. I have been advised of and agree to abide by your policies and federal
regulations regarding margining of options and related transactions.
6. I agree to advise you of any changes in my financial situation and needs,
experience, or investment objectives.
7. In case of my insolvency, death or attachment of my property, you may, with
respect to any pending options, take such steps as you consider necessary
to protect yourself against loss.
8. Any agreement by me with you, whether previously or hereafter made
applicable to any account of mine with you shall also apply to such option
transactions except to the extent which it conflicts with this agreement.
In the event of a conflict, this agreement shall control, and where this is
no conflict, each provision of each agreement shall apply.
9. I(we) have received and read the booklet entitled "Characteristics and
Risks of Standardized Options", the Special Statement for Uncovered Option
Writers, the Equity Flex Option Disclosure Document, and the Merrill Lynch
Professional Clearing Corp. ("MLPCC") allocation disclosure statement and
am aware of the special risks attendant to option trading. The statements
contained on this form are accurate.
10. I have reviewed the background and financial information contained on the
reverse side of this agreement and verify that it accurately reflects the
information which I furnished your company. I have also reviewed my
approval level of trading online 13 and it is consistent with my investment
objectives as well as the degree of risk I am willing to assume in relation
to options trading.
11. In the case of an option scheduled to expire, the notification must be
given to MLPCC before 5:00 P.M. New York time on the business day prior to
the expiration date. If I fail to notify you to exercise an option my
account(s), you may exercise buy are not obligated to exercise for my
account only those options in the money in an around sufficient for them to
be exercised by the Options Clearing Corporation.
12. Regarding any margin transactions I may make and supplementing the terms
and conditions of your margin agreement, in the event I do not meet your
margin calls promptly, you are authorized in your sole discretion, and
without notification to me, to take any and all steps necessary to protect
yourselves in connection with put or call transactions made for my account,
including without limitation to the right to buy or sell short, or short
exempt, for my account and risk any part or all of the shares represented
by options endorsed by you for my account, or to buy, sell or exercise
(including but not limited to exercising a long option(s) hedging short
position(s) for my account and risk any puts or calls as you may deem
necessary to fully protect yourselves. Any and all losses and expenses
incurred by you in this contract will be reimbursed by me.
13. AGREEMENT TO ARBITRATE CONTROVERSIES
- ARBITRATION IS FINAL AND BINDING
- THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT, INCLUDING
THE RIGHT TO A JURY TRIAL.
- PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN AND DIFFERENT
FROM COURT PROCEDURES, THE ARBITRATORS' AWARD IS NOT REQUIRED TO INCLUDE
FACTUAL FINDINGS OR LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR TO
SEEK MODIFICATION OF RULINGS BY THE ARBITRATORS IS STRICTLY LIMITED
- THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF ARBITRATORS
WHO WERE OR ARE AFFILIATED WITH THE SECURITIES INDUSTRY.
HAVE AGREED THAT ALL CONTROVERSIES WHICH MAY ARISE BETWEEN US, OR BETWEEN
ME AND THE ORGANIZATION THAT HAS INTRODUCED MY ACCOUNT CARRIED BY YOU,
INCLUDING BUT NOT LIMITED TO THOSE INVOLVING ANY TRANSACTION OR THE
CONSTRUCTION, PERFORMANCE, OR BREACH OF THIS OR ANY OTHER AGREEMENT BETWEEN
US, WHETHER ENTERED INTO PRIOR, ON OR SUBSEQUENT TO THE DATE HEREOF, SHALL
BE DETERMINED BY ARBITRATION. ANY ARBITRATION UNDER THIS AGREEMENT SHALL
BE CONDUCTED ONLY BEFORE THE NEW YORK STOCK EXCHANGE, INC., THE AMERICAN
STOCK EXCHANGE, INC., OR ARBITRATION FACILITY PROVIDED BY ANY OTHER
EXCHANGE, THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. OR THE
MUNICIPAL SECURITIES RULEMAKING BOARD, AND IN ACCORDANCE WITH ITS
ARBITRATION RULES THEN IN FORCE. I/WE MAY ELECT IN THE FIRST INSTANCE
WHETHER ARBITRATION SHALL BE CONDUCTED BEFORE THE NEW YORK STOCK EXCHANGE,
INC., THE AMERICAN STOCK EXCHANGE, INC., OTHER EXCHANGES, THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC. OR THE MUNICIPAL SECURITIES
RULEMAKING BOARD, BUT IF I/WE/FAIL TO MAKE SUCH ELECTION, BY REGISTERED
LETTER OR TELEGRAM ADDRESSED TO YOU AT THE OFFICE WHERE I MAINTAIN MY
ACCOUNT, BEFORE THE EXPIRATION OF FIVE DAYS AFTER RECEIPT OF A WRITTEN
REQUEST FROM YOU TO MAKE SUCH ELECTION, THEN YOU MAY MAKE SUCH
ELECTION JUDGMENT UPON THE AWARD OF ARBITRATORS MAY BE ENTERED IN ANY
COURT, STATE OR FEDERAL, HAVING JURISDICTION.
NO PERSON SHALL BRING A PUTATIVE OR CERTIFIED CLASS ACTION TO ARBITRATION,
NOR SEEK TO ENFORCE ANY PRE-DISPUTE ARBITRATION AGREEMENT AGAINST ANY
PERSON WHO HAS INITIATED IN COURT A PUTATIVE CLASS ACTION, OR WHO IS A
MEMBER OF A PUTATIVE CLASS WHO HAS NOT OPTED OUT OF THE CLASS WITH RESPECT
TO ANY CLAIMS ENCOMPASSED BY THE PUTATIVE CLASS ACTION UNTIL:
i. THE CLASS CERTIFICATION IS DENIED; OR
ii. THE CLASS IS DECERTIFIED; OR
iii. THE CUSTOMER IS EXCLUDED FROM THE CLASS BY THE COURT.
SUCH FORBEARANCE TO ENFORCE AN AGREEMENT TO ARBITRATE SHALL NOT CONSTITUTE
A WAIVER OF ANY RIGHTS UNDER THIS AGREEMENT EXCEPT TO THE EXTENT STATED
HEREIN.
14. Absent the written designation of an agent to transact business on my
behalf (power of attorney). I alone may make trading decisions in my
account; however, unless I give specific instructions to the contrary, you
may exercise discretion in the selection of the exchange or marketplace of
the execution of dually traded options.
15. THIS AGREEMENT AND ITS ENFORCEMENT SHALL BE GOVERNED BY THE STATE OF NEW
YORK WITHOUT GIVING EFFECT TO ITS CHOICE OF LAW OR CONFLICTS OF LAW
PRINCIPLES, SHALL COVER INDIVIDUALLY AND COLLECTIVELY ALL ACCOUNTS WHICH
THE UNDERSIGNED MAY OPEN OR REOPEN WITH YOU; OR WHICH MAY BE INTRODUCED TO
YOU, INCLUDING YOUR SUBSIDIARIES AND AFFILIATES, THROUGH THE COURTESY OF
THE AFOREMENTIONED INTRODUCING FIRM; SHALL INURE TO THE BENEFIT OF YOUR
AFFILIATES AND YOUR SUCCESSORS, AND THOSE OF THE AFOREMENTIONED
INTRODUCING FIRM, WHETHER BY MERGER, CONSOLIDATION OR OTHERWISE, AND
ASSIGNS, AND THEIR RESPECTIVE EMPLOYEES AND AGENTS; YOU MAY TRANSFER
ACCOUNTS OF THE UNDERSIGNED TO YOUR SUCCESSORS AND ASSIGNS AND THOSE OF THE
AFOREMENTIONED INTRODUCING FIRM; AND THIS AGREEMENT SHALL BE BINDING UPON
THE HEIRS, EXECUTORS, ADMINISTRATORS, SUCCESSORS AND ASSIGNS OF THE
UNDERSIGNED.
ALLOCATION DISCLOSURE STATEMENT
Exercise assignment notices for option contracts are allocated among
customer short positions pursuant to computerized procedures which randomly
selects from all customers short option positions, including positions
established on the day of assignment, those contracts which are subject to
exercise. All short positions are liable for assignment at any time. A
more detailed description of our random allocation procedure is available
upon request.
BY SIGNING THIS AGREEMENT, I/WE ACKNOWLEDGE (1) THAT, IN ACCORDANCE WITH
PARAGRAPH 13, I/WE AGREE IN ADVANCE TO ARBITRATE ANY CONTROVERSIES WHICH
MAY ARISE WITH MLPCC, OR BETWEEN US AND THE ORGANIZATION THAT HAS
INTRODUCED MY/OUR ACCOUNT CARRIED BY YOU AND, (2) RECEIPT OF A COPY OF THIS
AGREEMENT.
/s/ STEVEN O'MALLEY 12/22/98
------------------------------------- ---------------------------------
Customer's Signature Date Signed Second Signature Date Signed
(Required for Joint Account)
---------------------------------------------------
Registered Options Principal (Date Signed)
(over)
<PAGE> 1
EXHIBIT 10.2
CUSTOMER AGREEMENT
In consideration for you (the "Broker") opening or maintaining one or more
accounts (the "Account") for the undersigned (the "Customer"), the Customer
agrees to the terms and conditions contained in this Agreement. The heading of
each provision of this Agreement is for descriptive purposes only and shall not
be deemed to modify or qualify any of the rights or obligations set forth in
each such provision. For purposes of this Agreement, "securities and other
property" means, but is not limited to, money, securities, financial
instruments and commodities of every kind and nature and related contracts and
options, except that the provisions of paragraph 21 herein (the arbitration
clause) shall not apply to commodities accounts. This definition includes
securities or other property currently or hereafter held, carried or maintained
by you or by any of your affiliates, in your possession or control, or in the
possession or control of any such affiliate, for any purpose, in and for any of
my accounts now or hereafter opened, including any account in which I may have
an interest.
1. Applicable Rules and Regulations
All transactions in the Customer's Account shall be subject to the
constitution, rules, regulations, customs and usages of the exchange or
market, and its clearing house, if any, where the transactions are
executed by the Broker or its agents, including its subsidiaries and
affiliates. Also, where applicable, the transactions shall be subject (a)
to the provisions of (1) the Securities Exchange Act of 1934, as amended,
and (2) the Commodities Exchange Act, as amended; and (b) to the rules and
regulations of (1) the Securities and Exchange Commission, (2) the Board
of Governors of the Federal Reserve System and (3) the Commodities Futures
Trading Commission.
2. Agreement Contains Entire Understanding/Assignment
This Agreement contains the entire understanding between the Customer and
the Broker concerning the subject matter of this Agreement. Customer may
not assign the rights and obligations hereunder without first obtaining
the prior written consent of the Broker.
3. Severability
If any provision of this Agreement is held to be invalid, void or
unenforceable by reason of any law, rule, administrative order or judicial
decision, that determination shall not effect the validity of the
remaining provisions of this Agreement.
4. Waiver
Except as specifically permitted in this Agreement, no provision of this
Agreement can be, nor be deemed to be, waived, altered, modified or
amended unless such is agreed to in a writing signed by the Broker.
5. Delivery of Securities
Without abrogating any of the Broker's rights under any other portion of
this Agreement and subject to any indebtedness of the Customer to the
Broker, the Customer is entitled, upon appropriate demand, to receive
physical delivery of fully paid securities in the Customer's Account.
6. Liens
All securities and other property of the Customer in any account in which
the Customer has an interest shall be subject to a lien for the discharge
of any and all indebtedness or any other obligation of the Customer to the
Broker. All securities and other property of the Customer shall be held by
the Broker as security for the payment of any such obligations or
indebtedness to the Broker in any Account that the Customer may have an
interest, and the Broker subject to applicable law may, at any time and
without prior notice to the Customer, use and/or transfer any or all
securities and other property interchangeably in any Account(s) in which
the Customer has an interest (except regulated commodity Accounts).
7. Pledge of Securities and Other Property
Within the limitations imposed by applicable laws, rules and regulations,
all securities and other property of the Customer may be pledged and
repledged and hypothecated and rehypothecated by the Broker from time to
time, without notice to the Customer, either separately or in common with
such other securities and other property of other bona fide Customers of
the Broker, for any amount due to the Broker, in the Customer's
Account(s). The Broker may do so without retaining in its possession or
under its control for delivery a like amount of similar securities or
other property.
8. Interest
Debit balances of the Account(s) of the Customer shall be charged with
interest in accordance with the Broker's established custom, as disclosed
to the Customer pursuant to the provisions of Rule 10b-16 of the
Securities Exchange Act of 1934.
9. Disclosures Regarding Liquidations and Covering Positions
THE CUSTOMER SHOULD CLEARLY UNDERSTAND THAT, NOTWITHSTANDING A GENERAL
POLICY OF GIVING CUSTOMERS NOTICE OF A MARGIN DEFICIENCY, THE BROKER IS NOT
OBLIGATED TO REQUEST ADDITIONAL MARGIN FROM THE CUSTOMER IN THE EVENT THE
CUSTOMER'S ACCOUNT FALLS BELOW MINIMUM MAINTENANCE REQUIREMENTS. MORE
IMPORTANTLY, THERE MAY/WILL BE CIRCUMSTANCES WHERE THE BROKER WILL
LIQUIDATE SECURITIES AND/OR OTHER PROPERTY IN THE ACCOUNT WITHOUT NOTICE TO
THE CUSTOMER TO ENSURE THAT MINIMUM MAINTENANCE REQUIREMENTS ARE SATISFIED.
10. Liquidations and Covering Positions
THE BROKER SHALL HAVE THE RIGHT IN ACCORDANCE WITH ITS GENERAL POLICIES
REGARDING MARGIN MAINTENANCE REQUIREMENTS TO REQUIRE ADDITIONAL COLLATERAL
OR THE LIQUIDATION OF ANY SECURITIES AND OTHER PROPERTY WHENEVER IN
BROKER'S DISCRETION IT CONSIDERS IT NECESSARY FOR ITS PROTECTION INCLUDING
IN THE EVENT OF, BUT NOT LIMITED TO: THE FAILURE OF THE CUSTOMER TO
PROMPTLY MEET ANY CALL FOR ADDITIONAL COLLATERAL; THE FILING OF A PETITION
IN BANKRUPTCY BY OR AGAINST THE CUSTOMER; THE APPOINTMENT OF A RECEIVER IS
FILED BY OR AGAINST CUSTOMER; AN ATTACHMENT IS LEVIED AGAINST ANY ACCOUNT
OF THE CUSTOMER OR IN WHICH THE CUSTOMER HAS AN INTEREST OR; THE CUSTOMER'S
DEATH. IN SUCH EVENT, THE BROKER IS AUTHORIZED TO SELL ANY AND ALL
SECURITIES AND OTHER PROPERTY IN ANY ACCOUNT OF THE CUSTOMER WHETHER
CARRIED INDIVIDUALLY OR JOINTLY WITH OTHERS, TO BUY ALL SECURITIES OR OTHER
PROPERTY WHICH MAY BE SHORT IN SUCH ACCOUNT(S), TO CANCEL ANY OPEN ORDERS
AND TO CLOSE ANY OR ALL OUTSTANDING CONTRACTS, ALL WITHOUT DEMAND FOR
MARGIN OR ADDITIONAL MARGIN, OTHER NOTICE OF SALE OR PURCHASE, OR OTHER
NOTICE OR ADVERTISEMENT EACH OF WHICH IS EXPRESSLY WAIVED BY THE CUSTOMER.
ANY SUCH SALES OR PURCHASES MAY BE MADE AT BROKER'S DISCRETION ON ANY
EXCHANGE OR OTHER MARKET WHERE SUCH BUSINESS IS USUALLY TRANSACTED OR AT
PUBLIC AUCTION OR PRIVATE SALE, AND BROKER MAY BE THE PURCHASER FOR
BROKER'S OWN ACCOUNT. IT IS UNDERSTOOD A PRIOR DEMAND, OR CALL, OR PRIOR
NOTICE OF THE TIME AND PLACE OF SUCH SALE OR PURCHASE SHALL NOT BE
CONSIDERED A WAIVER OF BROKER'S RIGHT TO SELL OR BUY WITHOUT DEMAND OR
NOTICE AS HEREIN PROVIDED.
11. Margin
The Customer agrees to maintain in all accounts with the Broker such
positions and margins as required by all applicable statutes, rules,
regulations, procedures and custom, or as the Broker deems necessary or
advisable. The Customer agrees to promptly satisfy all margin and
maintenance calls.
12. Satisfaction of Indebtedness
The Customer agrees to satisfy, upon demand, any indebtedness, and to pay
any debit balance remaining when the Customer's Account is closed, either
partially or totally. Customer Account(s) may not be closed without Broker
first receiving all securities and other property for which the Account is
short and all funds to pay in full for all securities and other property
in which the Account(s) are long.
13. Transactions and Settlements
All orders for the purchase or sale of securities and other property will
be authorized by the Customer and executed with the understanding that an
actual purchase or sale is intended and that it is the Customer's intention
and obligation in every case to deliver certificates or commodities to
cover any and all sales or to pay for any purchase upon the Broker's
demand. If the Broker makes a short sale of any securities and other
property at the Customer's direction or if the Customer fails to deliver to
the Broker any securities and other property that the Broker has sold at
the Customer's direction, the Broker is authorized to borrow the securities
and other property necessary to enable the Broker to make delivery and the
Customer agrees to be responsible for any cost or loss the Broker may
incur, or the cost of obtaining the securities and other property if the
Broker is unable to borrow it. The Broker is the Customer's agent to
complete all such transactions and is authorized to make advances and
expend monies as are required.
14. Sales By Customer
The Customer understands and agrees any order to sell "short" will be
designated as such by the Customer, and that the Broker will mark the order
as "short". All other sell orders will be for securities owned ("long"), at
that time, by the Customer by placing the order the Customer affirms that
he will deliver the securities on or before the settlement date.
15. Broker As Agent
The Customer understands that the Broker is acting as the Customer's
agent, unless the Broker notifies the Customer, in writing before the
settlement date for the transaction, that the Broker is acting as a dealer
for its own account or as agent for some other person.
16. Confirmations and Statements
Confirmations of transactions and statements for the Customer's Account(s)
shall be binding upon the Customer if the Customer does not object, in
writing, within ten days after receipt by the Customer. Notice or other
communications including margin and maintenance calls delivered or mailed
to the address given below shall, until the Broker has received notice in
writing of a different address, be deemed to have been personally
delivered to the Customer whether actually received or not.
<PAGE> 2
17. SUCCESSORS
Customer hereby agrees that this Agreement and all the terms thereof shall
be binding upon Customer's heirs, executors, administrators, personal
representatives and assigns. This Agreement shall enure to the benefit of
the Broker's present organization, and any successor organization,
irrespective of any change or changes at any time in the personnel thereof,
for any cause whatsoever.
18. CHOICE OF LAWS
THIS AGREEMENT SHALL BE DEEMED TO HAVE BEEN MADE IN THE STATE OF NEW YORK
AND SHALL BE CONSTRUED, AND THE RIGHTS AND LIABILITIES OF THE PARTIES
DETERMINED, IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
19. CAPACITY TO CONTRACT, CUSTOMER AFFILIATION
By signing below, the Customer, represents that he/she is of legal age, and
that he/she is not an employee of any exchange, or of any corporation of
which any exchange owns a majority of the capital stock, or of a member
firm or member corporation registered on any exchange, or of a bank, trust
company, insurance company or of any corporation, firm or individual
engaged in the business of dealing, either as broker or as principal, in
securities, bills of exchange, acceptances or other forms of commercial
paper, and that the Customer will promptly notify the Broker in writing if
the Customer is now or becomes so employed. The Customer also represents
that no one except the Customer has an interest in the account or accounts
of the Customer with you.
20. ARBITRATION DISCLOSURES
o ARBITRATION IS FINAL AND BINDING ON THE PARTIES.
o THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT,
INCLUDING THE RIGHT TO JURY TRIAL.
o PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN AND DIFFERENT
FROM COURT PROCEEDINGS.
o THE ARBITRATORS' AWARD IS NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR
LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR TO SEEK MODIFICATION
OF RULINGS BY THE ARBITRATORS IS STRICTLY LIMITED.
o THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF
ARBITRATORS WHO WERE OR ARE AFFILIATED WITH THE SECURITIES INDUSTRY.
21. ARBITRATION
THE CUSTOMER AGREES, AND BY CARRYING AN ACCOUNT FOR THE CUSTOMER THE BROKER
AGREES THAT ALL CONTROVERSIES WHICH MAY ARISE BETWEEN US CONCERNING ANY
TRANSACTION OR THE CONSTRUCTION, PERFORMANCE, OR BREACH OF THIS OR ANY
OTHER AGREEMENT BETWEEN US PERTAINING TO SECURITIES AND OTHER PROPERTY,
WHETHER ENTERED INTO PRIOR, ON OR SUBSEQUENT TO THE DATE HEREOF, SHALL BE
DETERMINED BY ARBITRATION. ANY ARBITRATION UNDER THIS AGREEMENT SHALL BE
CONDUCTED PURSUANT TO THE FEDERAL ARBITRATION ACT AND THE LAWS OF THE STATE
DESIGNATED IN PARAGRAPH 18, BEFORE THE AMERICAN ARBITRATION ASSOCIATION, OR
BEFORE THE NEW YORK STOCK EXCHANGE, INC. OR AN ARBITRATION FACILITY
PROVIDED BY ANY OTHER EXCHANGE OF WHICH THE BROKER IS A MEMBER, OR THE
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. OR THE MUNICIPAL
SECURITIES RULEMAKING BOARD AND IN ACCORDANCE WITH THE RULES THEN IN EFFECT
OF THE SELECTED ORGANIZATION. THE CUSTOMER MAY ELECT IN THE FIRST INSTANCE
WHETHER ARBITRATION SHALL BE BY THE AMERICAN ARBITRATION ASSOCIATION, OR BY
AN EXCHANGE OR SELF-REGULATORY ORGANIZATION OF WHICH THE BROKER IS A
MEMBER. BUT IF THE CUSTOMER FAILS TO MAKE SUCH ELECTION, BY REGISTERED
LETTER OR TELEGRAM ADDRESSED TO THE BROKER AT THE BROKER'S MAIN OFFICE
BEFORE THE EXPIRATION OF TEN DAYS AFTER RECEIPT OF A WRITTEN REQUEST FROM
THE BROKER TO MAKE SUCH ELECTION, THEN THE BROKER MAY MAKE SUCH ELECTION,
THE AWARD OF THE ARBITRATORS, OR OF THE MAJORITY OF THEM, SHALL BE FINAL,
AND JUDGMENT UPON THE AWARD RENDERED MAY BE ENTERED IN ANY COURT, STATE OR
FEDERAL, HAVING JURISDICTION. NO PERSON SHALL BRING A PUTATIVE OR CERTIFIED
CLASS ACTION TO ARBITRATION, NOR SEEK TO ENFORCE ANY PRE-DISPUTE
ARBITRATION AGREEMENT AGAINST ANY PERSON WHO HAS INITIATED IN COURT A
PUTATIVE CLASS ACTION; OR WHO IS A MEMBER OF A PUTATIVE CLASS WHO HAS NOT
OPTED OUT OF THE CLASS WITH RESPECT TO ANY CLAIMS ENCOMPASSED BY THE
PUTATIVE CLASS ACTION UNTIL: (i) THE CLASS CERTIFICATION IS DENIED; OR (ii)
THE CLASS IS DECERTIFIED; OR (iii) THE CUSTOMER IS EXCLUDED FROM THE CLASS
BY THE COURT. SUCH FORBEARANCE TO ENFORCE AN AGREEMENT TO ARBITRATE SHALL
NOT CONSTITUTE A WAIVER OF ANY RIGHTS UNDER THIS AGREEMENT EXCEPT TO THE
EXTENT STATED HEREIN.
22. DISCLOSURES TO ISSUERS
Under rule 14b-1(c) of the Securities Exchange Act of 1934, we are required
to disclose to an issuer the name, address, and securities position of our
customers who are beneficial owners of that issuer's securities unless the
customer objects. Therefore, please check one of the boxes below:
[ ] Yes, I do object to the disclosure of such information.
[ ] No, I do not object to the disclosure of such information.
23. LOAN OR PLEDGE OF SECURITIES
THE CUSTOMER HEREBY AUTHORIZES THE BROKER TO LEND EITHER TO ITSELF OR TO
OTHERS ANY SECURITIES HELD BY THE BROKER IN THE CUSTOMER'S MARGIN ACCOUNT
AND TO CARRY SUCH PROPERTY IN ITS GENERAL LOANS. SUCH PROPERTY MAY BE
PLEDGED, REPLEDGED, HYPOTHECATED OR REHYPOTHECATED EITHER SEPARATELY OR IN
COMMON WITH OTHER SUCH PROPERTY FOR ANY AMOUNTS DUE TO THE BROKER THEREON
OR FOR A GREATER SUM AND THE BROKER SHALL HAVE NO OBLIGATION TO RETAIN A
LIKE AMOUNT OF SIMILAR PROPERTY IN ITS POSSESSION AND CONTROL.
BY SIGNING THIS AGREEMENT THE CUSTOMER ACKNOWLEDGES THAT:
1. THE SECURITIES IN THE CUSTOMER'S MARGIN ACCOUNT MAY BE LOANED TO THE
BROKER OR LOANED OUT TO OTHERS AND:
2. THAT THE CUSTOMER HAS RECEIVED A COPY OF THIS AGREEMENT.
THIS AGREEMENT CONTAINS A PRE-DISPUTE ARBITRATION CLAUSE AT PARAGRAPH 21.
(X) STEVEN O'MALLEY 12/22/98 (X)
----------------------------------- ------------------------------------
Customer Signature/Date Customer Signature/Date
HULL TRADING COMPANY L.L.C.
----------------------------------- ------------------------------------
Customer Address Account Number
311 SOUTH WACKER DRIVE/SUITE 1400
-----------------------------------
CHICAGO, IL 60606
o If joint account, all customers must sign.
o Please indicate Preference in Paragraph 22 and fill in name of state in
Paragraph 18.
o Retain second copy for your files.
<PAGE> 1
EXHIBIT 10.3
Clearing, Credit Facility and Securities Borrowing Agreement
------------------------------------------------------------
Regarding Option and Futures Contracts Traded at the
----------------------------------------------------
Deutsche Terminborse (DTB) As Well As the Trading in Related Values
---------------------------------------------------------------------
Between
MeesPierson N.V., Niederlassung Frankfurt
Borsenstrasse 7-11
60313 Frankfurt am Main
Germany
-hereinafter "MPF"-
and
Hull Trading GmbH
Friedrichstrasse 2-6
60323 Frankfurt am Main
Germany
-hereinafter "Client"-
Whereas:
MPF is a member of the Deutsche Terminborse GmbH (hereinafter "DTB") in the
capacity of a General Clearing Member (GCM).
The Client is, as a Non-Clearing Member (NCM), a member of the DTB in the
capacity of market maker principal. Pursuant to the rules and regulations of the
DTB, the Client is obliged to clear all its transactions on the DTB through a
General Clearing Member.
MPF is prepared to offer its services as General Clearing Member subject to the
following conditions and provisions.
The parties hereby agree as follows:
1
<PAGE> 2
PART I
Definitions
1. Definitions
1.1 In this Agreement the terms hereinafter listed shall have the following
meaning:
DTB Rules: Exchange Rules of DTB
(Borsenordnung fur die DTB)
Clearing Conditions for Trading at the DTB (Clearing-
Bedingungen fur den Handel an der DTB)
Conditions for Trading at the DTB
(Bedingungen fur den Handel an der DTB)
Fee Regulations of the DTB
(Gebuhrenordnung fur die DTB)
Arbitration Rules for the DTB
(Schiedsgerichtsordnung der DTB)
NCM-GCM-Clearing Agreement
(NCM-GCM-Clearing Vereinbarung)
DKV: Deutscher Kassenverein Aktiengesellschaft
Underlying Values: The values underlying the options or futures
contracts traded at the DTB.
Net Liq.: Net liquidation balance: The balance of the Client's
rights and duties as they appear from MPF's books,
calculated daily by MPF on the basis of the closing
prices determined by the DTB.
Haircut: The overnight risk computed on a daily basis by MPF
as a deduction of the market value of securities
(e.g. stocks, options, bonds, futures) long and
short in the account of the Client held with MPF.
Credit Limit: The maximum amount which the Client is allowed to
draw under the Credit Facility.
Size of the Position: The mathematical financial absolute value of all
which the Client can claim or possess as stated in
MPF's books (credit), decreased by the mathematical
financial absolute value of all which the Client owes
as stated in MPF's books (debit).
Time Value: The amount by which the premium exceeds the intrinsic
value of an option.
Collateral Value: The values of securities, rights, claims, moneys,
goods and monetary values given as security which MPF
has determined in accordance with Article 16.
General Clearing Member (GCM): General Clearing Member of the DTB.
Related Values Values which are determined, at the discretion of
MPF, to be related to trading on the DTB; this shall
always include the Underlying Values.
2
<PAGE> 3
1.2 All terms defined in the DTB Rules and used in this Agreement shall have
the meaning as defined in the DTB Rules unless otherwise defined herein.
2. COMMENCEMENT AND DURATION
2.1 This Agreement comes into force after it has been signed by the parties and
will apply for an indefinite period of time until notice is given pursuant
to the provisions set out in this Agreement.
2.2 This Agreement is exclusive. The Client will not simultaneously enter into
a clearing agreement with another General Clearing Member.
2.3 This Agreement shall replace any existing clearing and credit facility
agreements.
3
<PAGE> 4
PART II
Clearing Activities
3. Contracts
3.1 The present Agreement pertaining to the clearing activities is based on the
rules of the DTB, i.e., Exchange Rules, Clearing Conditions, Conditions for
Trading, Fee Regulation and Arbitration Rules as amended from time to time,
which form an integral part of this Agreement.
3.2 For the duration of this Agreement and based on the Client's direct orders
to the DTB and for the Client's account and risk, MPF enters into options
and futures contracts resulting from the Client's transactions in
Tradeable Contracts on the DTB with the DTB in its own name and for the
Client's account and risk.
3.3 Based on the Client's direct orders to the DTB and for its account and
risk, MPF will hold "long positions" and "short positions" in options and
futures contracts. The Client is responsible for closing or exercising
these positions against the DTB. MPF will also accept as property and hold
on behalf of the Client the Underlying Values delivered on account of
Assignments, Allocations or Exercises.
3.4 Should MPF decide it desirable, it has the authority to set binding
restrictions or limits from time to time with regard to the number and/or
type of options or futures contracts or transactions in Related Values.
Such restrictions will be confirmed in writing to the Client, also
mentioning the date and duration.
3.5 At all times, the Client is obliged to enable MPF to fulfil, upon first
request, any payment and delivery obligations towards the DTB ensuing from
the options and futures contracts. The Client must do so, for example, by
providing MPF with sufficient cash and Underlying Values or by having
sufficient credit at its disposal with MPF to fulfil these obligations. The
Client has an obligation towards MPF to fulfil or deliver all which MPF, to
the Client's account and risk, must fulfil or deliver towards the DTB or
third parties pursuant to this Agreement.
4. Services Pertaining to Clearing Activities
4.1 MPF will, at the Client's order, buy or sell, acquire title to and hold for
the Client's benefit or deliver Related Values, all of the foregoing in its
own name, but for the Client's account and risk. The Client will strictly
adhere to any of MPF's procedures as provided to Client in writing from
time to time regarding the buying and selling of Related Values. Unless
otherwise agreed upon by parties in writing MPF is not obliged to hold the
Related Values it has accepted in its name for the benefit of the Client in
segregated accounts. MPF is furthermore only obliged to deliver upon the
Client's request an equal amount of the type of Related Values MPF has
received through book entry with the DKV. Until such time as the Client has
requested delivery, MPF shall be entitled to dispose of the Related Values.
4.2 The Client is not permitted to execute, for clearance by MPF, transactions
in either Underlying Values, or in securities, currencies, goods or values
which are not Underlying Values without MPF's mediation or permission,
such permission not to be unreasonably withheld.
4.3 At all times, the Client is obliged to enable MPF to promptly fulfill any
obligations ensuing from transactions in Underlying Values, for example by
providing MPF with sufficient cash and Underlying Values or by having
sufficient credit at its disposal with MPF in order to be able to meet
these obligations. The Client has an obligation towards MPF to fulfil or
deliver all which MPF must fulfil or deliver towards DTB or any third party
pursuant to this Agreement.
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5. Accounts and Administration
5.1 MPF will keep accounts of all rights and obligations obtained from options
and futures contracts for the Client's risk and account as well as the
Underlying Values which MPF has received, delivered or will deliver and
amounts of money received or paid. For that purpose MPF will open any
account and sub-accounts it may deem necessary in the Client's name in its
books, in the currencies in which is traded.
5.2 The following items will be either credited or debited to the
aforementioned accounts:
- all options and futures contracts and transactions in Underlying
Values entered into for the Client's account and risk;
- premiums received or paid;
- Underlying Values received or delivered as a result of Exercises,
Allocations or Assignments;
- the exercise price received or paid, dividends or any dividend tax
paid or received;
- costs, reimbursements, commissions, and interest owed by the Client;
- cash withdrawals;
- money drawn by the Client under the credit facility (if applicable);
- time deposits entered into by the Client;
- the actual closing value of the Underlying Values borrowed by the
Client as calculated pursuant to the DTB Rules.
5.3 Each Trading Day before official hours and each Expiration Day, MPF
will (subject to force majeure) provide the Client with a statement of
the state of affairs of the account and positions as at the end of the
previous Trading Day. This statement consists of the following
positions:
- position review statement
- unsettled position report
- daily confirmation report
- DTB margin requirements
- daily position report
- daily cash position report.
5.4 The statement provided by MPF pursuant to article 5.3 does not only serve
to inform the Client but also to confirm all transactions entered into for
the Client's account and risk. On the day on which the information is
provided, the Client is obliged to report immediately to MPF any incorrect
or incomplete entries and have these corrected.
Should MPF observe any mistakes made in the statement, MPF is obliged to
inform the Client of said mistakes without delay. Except for intent or
gross negligence, MPF is not liable for any losses resulting from incorrect
or incomplete statements by MPF.
If the Client has no comments regarding the statement or passes such
comment on after the time limit imposed by this section, the statement
shall be regarded as having been approved and serves as full proof of the
contents.
6. Orders, Exercises, Assignments
6.1 The Client must place all orders regarding option contracts or futures
contracts through its own computer system which is linked to the DTB
system.
6.2 Information regarding Assignments is available from the DTB computer system
and has to be obtained by the Client at its own risk.
6.3 If the Client was assigned one or several option series and does not have
the Underlying Values to be delivered on the first Trading Day after the
official day of exercise of the option, the Client
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will either instruct MPF to purchase such Underlying Values or the Client
will instruct MPF to borrow the respective Underlying Values in order to
make the respective deliveries. The costs incurred by MPF resulting from an
untimely delivery of the Underlying Values shall be borne by the Client.
The purchase price including commissions and possible disbursements or the
costs of borrowing securities will be debited to the account of the Client.
6.4 In the event of an Assignment by the DTB MPF will deliver or accept the
relevant Underlying Values to the Client's account and risk.
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PART III
GRANTING OF CREDIT (CREDIT FACILITY)
7. CREDIT FACILITY
7.1 The Client will have disposal of a credit facility to an amount and on
conditions determined by the parties. The aforementioned particularities
will be set out in a credit letter which will form an integral part of this
Agreement (Appendix 1). The Client will only be allowed to enter into
credit agreements required for the financing of its activities with MPF.
7.2 The credit facility granted shall solely be used to finance the Client's
trading activities which are, at the discretion of MPF, related to trading
on the DTB and shall not be used for any other purposes.
7.3 The Client can dispose of the credit facility in the way of i) a current
account advance or ii) an advance for a fixed period.
An advance for a fixed period may be obtained for a minimum period of 1 day
at a minimum amount of DM 5,000,000 for "Inland" advances and for a minimum
period of 1 week with a minimum amount of DM 1 million for "Ausland"
advances. MPF may refuse advances with a life either shorter or longer
and/or to a smaller amount without giving grounds for doing so.
7.4 Credit which has been granted, in whatever form, may be canceled without
delay at all times and under any circumstances by giving two weeks notice.
A cancellation with immediate effect shall be allowed if there is an
important reason.
7.5 The credit facility shall also end in the event of and upon termination of
this Clearing, Credit and Securities Borrowing Agreement.
7.6 MPF's customer statement, as defined in article 5.3, shall be regarded as
full proof of the granting of the credit facility, as well as of the size
and the form of the credit.
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PART IV
Securities Borrowing (Borrowing Facility)
8. Borrowing Agreement
8.1 Upon the Client's request and after the parties have come to an agreement
with regard to the amount of securites to be borrowed and the duration, MPF
may provide the Client through the securities borrowing system of the DKV
or any other securities borrowing channel with securities quoted on an
officially recognized stock exchange under a borrowing agreement. The
result of the foregoing will hereinafter be called the Borrowing Agreement.
Securities which have been borrowed for the purpose of fulfilling the
Client's delivery obligations ensuing from the sale of securities to third
parties, which the Client does not yet possess, (so-called unsettled short
stock positions), as well as obligations resulting from exercised, assigned
and/or tendered options or futures contracts can only be used for that
purpose.
8.2 Hereby MPF is irrevocably authorized by the Client, but not obliged, to
enter into a Borrowing Agreement with the Client in the event the Client
has the obligation to deliver securities to third parties which it does not
have in its portfolio on the first trading day after the transaction
resulting in the obligation to deliver securities.
8.3 MPF's customer statement, as defined in article 5.3, shall serve as full
proof of the existence of the Borrowing Agreement and of the number and
type of securities which have been borrowed.
8.4 MPF will deliver to the Client the securities to be borrowed in
unencumbered ownership free from attachments, security rights or
encumbrances or other third party rights. MPF guarantees towards the Client
its power of disposal and indemnifies the Client against execution or
possible defects.
8.5 The borrowed securities will be delivered by book entry transfer through
the DKV to the Client's credit or to the credit of the party to which an
obligation to deliver exists, unless the Client requests a different manner
of delivery. MPF will attempt to arrange for the delivery to take place on
the settlement date agreed to upon entering into the securities
transaction.
8.6 Client declares that it is aware of the fact that MPF in turn borrows the
securities to be lent to the Client from third parties and is therefore
dependent on same. MPF can therefore not be held liable in the event that
MPF should not be able to lend securities to the Client.
9. Costs
9.1 Any costs and charges which may ensue from the delivery or redelivery of
borrowed securities are to the Client's account.
10. End of the Agreement/ Demandability
10.1 Subject to divergent written agreements, a Borrowing Agreement shall apply
for an indefinite period of time until notice is given by either of the
parties.
10.2 All Borrowing Agreements shall end if and when this Clearing, Credit
Facility and Securities Borrowing Agreement ends.
10.3 The parties may furthermore end a Borrowing Agreement by way of a written
notice in due observance of a notice period of two Trading Days, or one
Trading day, provided however that in the latter, notice is given before
10:00 a.m. Frankfurt time.
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10.4 In all events in which MPF cannot in reason be required to allow the
Borrowing Agreement to continue, MPF is allowed to terminate the Borrowing
Agreement with immediate effect.
10.5 In the event the Agreement terminated pursuant to the aforementioned
paragraphs, does not end on a Trading Day or ends on a day on which no
trade can take place in the borrowed securities, the period shall be
extended until the next trading day.
11. REDELIVERY
11.1 On the day on which a Borrowing Agreement ends pursuant to what has been
set out in this Agreement, the Client will redeliver to MPF through a
credit of MPF's account with the DKV a like amount of the borrowed
securities in unencumbered ownership free from attachments. The breach of
the foregoing obligation shall be subject to assessment to Client of any
costs or fines imposed upon MPF by the lender of the borrowed securities as
stipulated by the agreement(s) in place between MPF and the lender of the
securities.
11.2 Borrowed securities have to be returned to MPF in case of conversion-,
compensation- or other purchase offers two banking days prior to the
beginning of the time period for the acceptance or submission of such
offers. If the borrowed securities are not returned on time MPF will
purchase the respective number of securities on account of Client on the
next trading day and debit the Client for the purchase price including
disbursements. If such purchase is not possible the provision under 11.1
shall apply.
11.3 If certain securities are taken from the collective deposit of securities
with the DKV into a separate deposit because the remaining term is less
than six months or for assignment purposes the securities have been divided
into series or groups or have been terminated early, the borrowed
securities out of the respective category of securities have to be returned
not later than five trading days prior to the maturity date or the date
announced by the DKV for the split-up of the series for assignment
purposes.
12. RIGHTS RELATED TO SECURITIES
12.1 During the period in which the Client is borrowing securities, all and any
rights related to the securities will be exercised by the Client on the
understanding that the Client is obliged to reimburse MPF for, or to
deliver, any distributions it has received or rights it has been granted.
These rights will include, but not be restricted to:
(i) distributions in cash including dividends, interest or principals;
(ii) distributions by way of securities
(iii) rights granted to obtain securities;
(iv) voting rights.
12.2 The Client will exercise the rights set out in the foregoing paragraph
solely after consultation with and approval by MPF.
12.3 The Client is obliged to fully reimburse MPF for monetary distributions on
the day on which these are made payable. In the event a distribution is
made in the same securities as those which have been borrowed, the
distributed securities will be regarded as being part of the loan. The
Client will deliver to MPF any other rights or distributions on the day on
which they are made payable.
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PART V
General Provisions
13. The Client's Equity / Private Capital / Solvency / Liquidity
13.1 At all times, the Client will meet the requirements set by MPF with regard
to the Client's solvency and liquidity. In particular the Client will at
all times meet the requirements set from time to time by MPF with regard to
the capital requirements and the relations between the Net Liquidation
Value (Net Liq.) and the Haircut as determined by MPF. At all times the Net
Liq. has to be of a positive value. MPF's requirements which apply when
this Agreement is signed have been set out in Appendix 3 of this Agreement.
Any specific requirements will be notified to the Client by MPF in writing.
13.2 At all times, the Client will maintain a Net Liq. which exceeds the total
amount of Time Value included in its position as determined by MPF.
13.3 If at any time the Client should not comply with what has been set out in
the foregoing paragraphs it will immediately, without any warning, summons
or proof of default being required, take steps to end the infringement of
the foregoing paragraphs and meet all instructions or (trading)
restrictions set by MPF without delay. Should the Client fail to take any
steps or fail to comply with the aforementioned instructions or (trading)
restrictions, MPF has the discretionary power to take all steps it deems
advisable in order to end the infringement without prejudice to the
exercise of other powers by MPF pursuant to this Clearing, Credit Facility
and Securities Borrowing Agreement.
13.4 Without MPF's prior written consent, the Client is not allowed to transfer
to any third party as collateral any part of its capital, securities,
claims, and movable property, or to encumber these with any security
rights, encumbrances or other third party rights, or to place them at the
disposal of third parties or grant any other rights thereupon.
14. Information Provided to MPF and Third Parties/Applicable Rules
14.1 MPF has the irrevocable authority to provide to the DTB any information
concerning the Client to which they are entitled pursuant to the DTB-Rules.
14.2 Upon request, the Client will provide full information regarding its
financial position and all business data requested by MPF, such as for
example the Articles of Association and extracts from public or court
registers. Within 10 months of the closing of the financial year, the
Client will make available a copy of the annual accounts. Additionally, the
Client will immediately inform MPF of any facts or circumstances which
might influence the exercising of its activities in the short or long run,
including changes in its financial position, legal entity and the Client's
or its representatives' or authorized agents' authority.
14.3 At all times, the parties will strictly adhere to the provisions set out in
the DTB-Rules and all directions given and exercise orders set by the DTB
pursuant to the foregoing regulations. At all times, the parties will
familiarize themselves with the contents of the aforementioned regulations,
enforcement decisions and directives, so that any unfamiliarity therewith
will be to the relevant party's own account. MPF may at all times, without
further consultation, rely on the correctness of any information or order
of the DTB.
14.4 If MPF should suffer financial damage due to the Client's infringement of
the foregoing paragraph, for example because the DTB takes (disciplinary)
measures against MPF, the Client will reimburse the former for that damage,
inclusive of interest and costs. The Client shall indemnify MPF in this
matter.
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15. Fees Owed, Costs and Interest Rates
15.1 With regard to services rendered by MPF pursuant to this Agreement
(clearing, financial records, credit facility, security borrowing facility)
the Client owes fees, reimbursements, costs and interest in accordance with
the tariffs determined by MPF from time to time.
Said tariffs may by adjusted by MPF, of which adjustment the Client will be
informed 30 days beforehand in writing. The tariffs applicable upon the
signing of this Agreement have been set out in Appendix 4 of this
Agreement. If the Client does not agree to an adjustment covered by this
paragraph, the Client may terminate this agreement by giving MPF 30 days
notice in writing within the 30 day period following notification of the
adjustment by MPF. The Client grants MPF the irrevocable authority to debit
to Client's account fees, reimbursements, costs and interest to which MPF
is entitled.
15.2 All costs related to the establishment of collateral pursuant to this
Agreement shall be to the Client's account.
15.3 The Client shall pay all reasonable costs incurred inside and outside a
court of law, including the costs of legal counsel and legal costs incurred
with regard to proceedings or disputes between MPF and the Client in which
judgment has been awarded against the Client. Any costs incurred by MPF
with regard to legal proceedings or disputes between the Client and a third
party, in which MPF becomes involved, shall be to the Client's account.
15.4 MPF shall pay all reasonable costs incurred inside and outside a court of
law, including the costs of legal counsel and legal costs incurred with
regard to proceedings or disputes between MPF and the Client in which
judgment has been awarded against MPF.
16. Collateral
16.1 The Client is obliged to provide MPF with collateral in the reasonable
amount and form requested by MPF for all which MPF may, for whatever
reason, claim from the Client whether or not due. The foregoing shall
include provisional claims, claims under time limit or future claims. The
Client is obliged to render its full cooperaton to all that which may be
useful or necessary to establish the collateral.
In the event the collateral given is to MPF's exclusive opinion no longer
sufficient, or acceptable or threatens to become insufficient or
unacceptable, taking into account the coverage value whicn MPF has assigned
to it, the Client will, upon the first request, settle an additional or
replacement collateral to the amount and form requested by MPF within the
reasonable time to be set by MPF. For clearing activities provision of
collateral is based on the calculation modus prescribed by the DTB for the
provision or securities by NCM to a GCM.
Collateral shall be valued as follows: cash deposits at 100%, acceptable
bank guaranties at the nominal amount of the guaranty, other securities at
current market value adjusted at MPF's sole discretion for risk and
liquidity.
MPF will calculate on each Trading Day the amount of collateral to be
provided and the value of the collateral which have been provided by the
Client. If the value of the amount provided does not meet the required
amount, Client is obliged to provide additional collateral within a period
of time to be set by MPF.
If the value of the collateral provided exceeds not for only a temporary
period of time all claims of MPF against the Client resulting from this
Agreement MPF shall waive the exceeding amount of collateral upon request
by the Client.
16.2 All securities, claims, rights (hereinafter also including options and
futures contracts) cash, goods or other values, which MPF, for whatever
reason, acquires (whether or not in its own name) for
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the Client's benefit, as well as of the Client's rights and claims towards
MPF, will hereby be pledged to MPF as collateral as referred to in the
foregoing paragraph. The aforementioned right of pledge shall in each case
be regarded as automatically established at the moment at which MPF
commences to keep the securities, rights, claims, cash, goods or other
values or when rights or claims arise.
16.3 MPF has the authority to pledge to the DTB, or to provide as collateral for
any claims by the DTB in any other manner, securities accepted by the DTB
or cash which it has been given as collateral by the Client.
16.4 All securities, rights, claims, cash, goods, or other values pledged by the
Client to MPF must be free unencumbered of any other security rights or
encumbrances, or any attachments or garnishments or third party rights or
whatever nature.
16.5 MPF has the exclusive authority to exercise all rights related to or
ensuing from the pledge securities, rights, claims, cash, goods and other
values.
16.6 MPF shall at all times be entitled to set off all and any claims it has
against the Client, whether or not due and payable or whether or not
contingent, against any counterclaims of the Client on MPF whether due and
payable or not, regardless of the currency in which such claims are
denominated. If, however, the claim of MPF on the Client or the
counterclaim of the Client on MPF is not yet due and payable - and provided
MPF's claim and the Client's counterclaim are denominated in the same
currency - MPF shall not exercise its right of set-off except in the event
an attachment is levied upon the Client's counterclaim or recovery is
sought from such counterclaim in any other way, or in the event a right in
rem is created thereon or the Client assigns his counterclaim.
Claims denominated in foreign currency shall be set off at the rate of
exchange of the day of set-off.
If possible, MPF shall inform the Client in advance that it will exercise
its rights of set-off.
17. Trading Practice
17.1 At all times the Client has an obligation towards MPF to exercise the
utmost diligence in the manner in which it trades on the DTB, other German
exchanges and on foreign exchanges, if applicable, and the manner in which
it manages its options and futures contracts and disposes of same or enters
into obligations with regard to same.
17.2 MPF is authorized to require the Client that the Client takes steps to
decrease the risk involved with already existing positions in options and
futures contracts and/or Underlying Values to the degree reasonably desired
by MPF.
MPF also has the authority to introduce restrictions with regard to the
Size of the Position in general and with regard to the Size of the specific
Positions in options and futures contracts, positions in Underlying Values
and the amount of credit withdrawn in particular.
17.3 Should the Client fail to take measures to adjust the Size of its
Positions, or the risk related to its positions, to the limits or
restrictions set by MPF, MPF has the discretionary power to take all
measures it deems advisable to adjust the Size of the Positions or the risk
related to the positions to the established limits and restrictions. The
foregoing without prejudice to MPF's other powers pursuant to this
Agreement and the law.
17.4 The Client is obligated to provide MPF with a power of attorney in the form
of Appendix 5 hereto, pursuant to which MPF can act on behalf of the Client
in accordance with section 17.3 hereof.
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17.5 Any liability of MPF for failing to exercise any right pursuant to section
17.2. or 17.3 hereof is herewith excluded unless in case of intent or
gross negligence.
17.6 The Client must ensure that it can be contacted at all times.
18. Measures to be taken by MPF
18.1 Events
In the following events, MPF is authorized to take one or more of the
measures set out in article 18.2 without prejudice to MPF's other rights in
pursuance of this Clearing, Credit Facility and Securities Borrowing
Agreement and the law.
a) In the event the Client does not, does not correctly or timely comply
with any obligation ensuing from this Clearing, Credit Facility and
Securities Borrowing Agreement or an agreement related hereto, or in the
event of an occurrence which, in MPF's opinion may result in the Client's
inability to comply with, or to sufficiently or timely comply with its
obligations.
b) In the event the Client's membership of the DTB ends, the Client's
membership is suspended, or any other disciplinary measures, given whatever
name or to whatever extent, are taken by the DTB.
c) In the event of the Client's suspension of payments or bankruptcy.
d) In the event an attachment or garnishment is exercised on any part of
the Client's assets.
e) In the event the Client loses full control of a substantial part of its
assets or loses the power to act independently.
f) In the event of the Client's liquidation or dissolution in so far the
Client is a legal entity.
g) In the event the Client, is placed under the control of an administrator
or, as a private person, under the control of a ward.
18.2 Measures
a) This Clearing, Credit Facility and Securities Borrowing Agreement and
all agreements related thereto may be terminated immediately without the
observance of any term of notice. In that event all MPF's claims towards
the Client will immediately become payable upon demand, to the extent this
was not already the case.
b) The execution of this Agreement and all agreements related thereto may
be suspended.
c) MPF may demand from the Client or its legal successor to liquidate the
options and futures contracts and Underlying Values within the fixed time
to be set by MPF.
d) MPF may on its own initiative and without prior consultation or approval
from Client, for the account and risk of the Client or its legal
successors, close, open or exercise options and/or futures contract
positions, dispose of Underlying Values or sell or buy Underlying Values.
In such cases, MPF will act on the basis of the power of attorney to be
provided in the form of Appendix 5 hereto.
e) Collateral that has been established may be sold, which includes the
liquidation by sale and transfer of the entire options and futures contract
position and Underlying Values to third parties.
f) Claims announcing legal interest.
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g) Take all other measures which MPF deems advisable in order to protect
its interests.
18.3 The Client is liable towards MPF for any damages, including consequential
damage which MPF may suffer due to the Client's act of default. The Client
will fully indemnify MPF for any third party claims, regarding damages,
costs (of whatever nature) and interest which MPF may incur due to the
Client's act of default.
19. MPF'S Liability
19.1 MPF is obliged to award damages to the Client for any damage which the
Client might suffer due to an act of default or any other act committed by
MPF, but only in the event that the damage is the result of intent or gross
negligence. Consequential damage is expressly excluded.
19.2 In the event however, that the damage is the result of measures taken as
referred to in articles 13.3, 17.3, 17.4, and 18.2 of this Agreement, MPF
shall only be liable in case of intent or gross negligence.
19.3 MPF shall also not be liable with regard to measures taken in order to
comply with obligations ensuing from the DTB rules.
19.4 To the extent that MPF acts as an intermediary towards third parties,
acting in its own name for account and risk of the Client, it is always
understood that MPF shall not be liable for any failure of whatever nature
in the performance of obligations by said third party.
20. Amendments
20.1 Amendments to this Agreement and the accompanying appendices can only be
done in writing.
21. Termination
21.1 Without prejudice to the provisions in the parts pertaining to the Clearing
and Credit Facility and the Securities Borrowing Facility the parties may
terminate this Agreement in writing by giving notice with due observance
of a term of one month.
21.2 In the event circumstances occur as a result of which MPF cannot be
reasonably expected to continue its relation with the Client, MPF is
entitled, without prejudice to what has been provided in this Agreement, to
terminate this Agreement immediately in writing without further notice.
21.3 This Agreement shall end upon the termination of the Client's membership of
the DTB.
21.4 In the events set out in the foregoing paragraphs, MPF will transfer the
options and futures contracts positions and Underlying Values to another
General Clearing Member of the Client's choice and release the collateral,
after the Client has met all of MPF's claims towards the Client, or settle
all accounts and pay out the proceeds to the Client. It for whatever reason
such transfer should not occur within any fixed time set by MPF or in the
case of a settlement of the accounts, MPF has the authority to liquidate
the Client's position and, to the extent required, sell any collateral.
22. Applicable Law/General Business Conditions of the German Private Banks/Venue
22.1 The laws of the Federal Republic of Germany shall apply to this Agreement.
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22.2 The parties further agree the application of the General Business
Conditions of the German Private Banks, a copy of which is enclosed hereto
as Appendix 6.
22.3 All disputes ensuing from or related to this Agreement will be brought
before the competent court in Frankfurt am Main unless disputes arising
from clearing activities have to be brought before the arbitration court of
the DTB.
23. TRADE ON FOREIGN EXCHANGES/OTC TRADING
23.1 This Agreement only applies to the Client's activities on the DTB and does
not apply to the trade on other (foreign) exchanges. The Client shall not
without prior permission from MPF develop, either directly or indirectly,
activities on exchanges other than the DTB or activities in OTC products.
23.2 With regard to the trade on exchanges other than the DTB, MPF will issue
rules with regard to which this Agreement will be applied as analogous as
possible provided, however, that approva1 has been granted.
24. CHARACTER OF OBLIGATIONS
24.1 All the Client's obligations which ensue from this Agreement and its
related agreements shall be unseverable.
24.2 In the event the Client carries out its activities in the form of an
interest grouping of persons, such as a partnership firm or general
partnership, all of its members will be jointly and severally liable
towards MPF.
26. FORCE MAJEURE
25.1 Neither MPF nor Client shall be liable if any failure is the result of
force majeure, inclusive of, but not restricted to, international
conflicts; violent and armed actions; riots; natural disasters.
26. LIMITATIONS OF LIABILITY
26.1 MPF shall not be liable for measures taken or acts of default committed by
the DTB, or foreign exchanges or exchange organizations; actions of
domestic or foreign governmental authorities, disturbances among MPF's
personnel or the personnel of third parties whose services MPF employs;
boycotts; failures in the electricity supply or failure or impediments in
the means of communication or equipment or computer systems of MPF or third
parties whose services MPF employs, inclusive of failures caused by
capacity shortages of the equipment, means of communication or systems. If
such a situation should occur, MPF will take any measures which it may
reasonably be expected to take in order to diminish its negative effect for
the Client.
26.2 In the execution of the Client's order and of other agreements concluded
with the Client, MPF has the authority to employ the services of third
parties as well as the authority to deposit the Client's goods and other
values deposited with third parties in MPF's name. MPF is not liable for
any shortcomings of said third parties if MPF demonstrates that it has
exercised due diligence in its choice of that third party. In the event
MPF is not liable for any shortcomings of said third parties, it will, in
the event the Client has suffered damages, support the Client as much as
possible to rectify that damage.
27. NO WAIVERS/EXERCISE OF POWERS
27.1 In the event MPF exercises only one or more of its powers ensuing from this
Agreement or the law, this will never be interpreted as the waiving of any
rights or powers or entail that MPF is
15
<PAGE> 16
limited in exercising any right or power. The fact that MPF has been
awarded certain rights or powers does not imply that MPF is obliged to
exercise said powers.
28. Severability
28.1 In the event that any provision of this Agreement is or becomes invalid,
the validity of the other provisions shall remain unaffected. This shall
also apply in the event that this Agreement is incomplete with respect to
certain provisions intended by the parties but not formally included in
this Agreement. In such case, the parties shall replace the invalid or
missing provision by a valid provision which comes as close as possible to
the provision initially intended by the parties.
This agreed in duplicate:
Frankfurt am Main, 16 October, 1995 Frankfurt 23/10/95
- ----------------------------------- -------------------------
Place, Date
/s/ Authorized Signatory /s/ Authorized Signatory
- ----------------------------------- -------------------------
MeesPierson N.V., Hull Trading GmbH
Niederlassung Frankfurt By:
/s/ Authorized Signatory /s/ Authorized Signatory
- ----------------------------------- -------------------------
MeesPierson N.V., Hull Trading GmbH
Niederlassung Frankfurt By:
16
<PAGE> 1
EXHIBIT 10.4
Terms Of Business Agreement
of
MeesPierson ICS Limited
with
Hull Trading Asia Ltd.
<PAGE> 2
TERMS OF BUSINESS AGREEMENT
1. INTRODUCTION
1.1. This terms of business (the 'Terms of Business') constitutes a
legally binding agreement that will apply to the business described
herein. This Terms of Business supersedes any other Terms of
Business or as relevant any other notices that may previously have
been sent to the Client by MeesPierson ICS Limited ('ICS').
1.2. No document, agreement or other arrangement referred to hereunder,
or otherwise, shall be deemed to be effective unless and until such
document, agreement or arrangement has been recorded in writing and
signed by an authorised signatory of ICS and of the Client.
1.3. ICS is regulated by the Securities and Futures Authority Limited
('SFA') in the conduct of investment business.
1.4. This Terms of Business sets out the basis on which ICS (whose
registered office and principal place of business is at Camomile
Court, 23 Camomile Street, London EC3A 7PP) will provide to:
Hull Trading Asia Limited
...................................................................
whose principal place of business is
Level 26, One Pacific Place
...................................................................
88 Queensway Hong Kong
...................................................................
(the 'Client') such services with respect to dealings in
investments as ICS may agree in writing with the Client from time
to time in, or with reference to, this Terms of Business. ICS may
also, to the extent ICS agrees in writing to do so, provide
additional services or facilities to the Client.
2. DEFINITIONS
2.1. The expressions in this Terms of Business shall have the following
meanings unless the context requires otherwise:
'associate': any undertaking controlled by ICS; any parent company
of ICS; any undertaking controlled by a parent company of ICS; or
any other person whose business or domestic relationship might
reasonably be expected to give rise to a community of interest;
'business day': a day other than a Saturday or a Sunday on which
commercial banks are open for this type of business in London or
any other financial centre deemed necessary by ICS;
'exchange': any recognised or designated investment exchange (as
defined by the rules of SFA) of which ICS is from time to time a
member;
'FSA': the Financial Services Act 1986 as amended from time to
time;
'LIFFE': the London International Financial Futures and Options
Exchange Limited;
'rules and regulations': the rules, regulations or by-laws of any
self regulating organisation or exchange which ICS is from time to
time regulated by or a member of;
'rules of SFA': shall have the meaning given in the SFA rule book;
'self regulating organisation': shall have the meaning ascribed
thereto in the FSA;
'SFA': the Securities and Futures Authority Limited;
'Terms of Business': this 'Terms of Business Agreement' and as
appropriate any other documentation entered into between the Client
and ICS in connection with the services to be provided pursuant to
this Terms of Business.
2.2. The headings in this Terms of Business are inserted for
convenience only and shall be ignored in construing the provisions
hereof. In the case that the Client is an individual all references
shall apply directly to that named individual and in the case that
the Client is a body corporate all references shall be to that body
corporate and to all directors, employees and agents of that body
corporate as may be appropriate.
3. CATEGORISATION
3.1. ICS is required by the rules of SFA to categorise its
counterparties. Confirmation of the Client's categorisation under
the rules of SFA will be provided to the Client by means of a
separate notice. Unless
<PAGE> 3
the Client gives ICS written notice that the Client's personal or
financial circumstances have changed, ICS shall deem that the
circumstances giving rise to such categorisation have not changed.
4. SERVICES TO BE PROVIDED
4.1. ICS shall, unless it has reasonable grounds for refusing to do so,
provide the Client with execution, clearing or other additional
services on or in relation to any relevant exchange in respect of
transactions in any of the investments as are set out in Appendix A
to this Terms of Business. For the avoidance of doubt, ICS shall
not be required to enter into or otherwise accept any transaction
from or on behalf of the Client unless and until such transaction
shall be included, in writing, within the Terms of Business.
4.2. In providing any service to the Client ICS shall, subject to all
relevant instructions, payments and other details having been duly
received from the Client, use all reasonable endeavours to:
a) procure the registration by any relevant clearing house of
contracts or transactions executed on any exchange on the
instructions of or to the order of the Client (whether by ICS or
otherwise);
b) where relevant, submit to any relevant clearing house or exchange
notices of exercise of options by the Client and relay to the
Client notices of assignment of options against the Client.
c) accept or make delivery of physical commodities, securities or
other assets underlying any investments and
d) provide to the Client such confirmations or statements relating
to the Client's accounts as are specified in this Terms of
Business.
4.3. Without prejudice to the general willingness of ICS to execute,
clear or provide other services to the Client, ICS shall not be
under any obligation to enter into any particular transaction, or
to accept or act in accordance with any instruction if ICS has
reasonable grounds for refusing to do so.
5. CAPACITY OF ICS
5.1. Unless otherwise agreed in writing by ICS, ICS in providing
services to the Client will act as principal and not as agent for
the Client (or any client of the Client). ICS has no fiduciary
obligations to the Client and, accordingly, the duties and
obligations of ICS to the Client are limited to those expressly set
out hereunder.
5.2. ICS will accept any instructions to execute transactions from the
Client on an execution-only basis and will not advise upon the
merits of a particular transaction or determine whether any
transaction is suitable for the Client. Accordingly, the Client
will make its own judgement and decision with respect to any
transactions and no representation or warranty is given by ICS as
to the value, merits or suitability of any investment purchased or
transaction undertaken by the Client.
6. BEST EXECUTION
6.1. ICS shall not owe any duty to the Client of 'best execution'
whether under the rules of SFA or otherwise.
7. TIME
7.1. It is acknowledged and agreed by ICS and the Client that time
shall be of the essence in relation to any payment or delivery or
other obligation required under this Terms of Business, including,
without limitation, the provision by the Client of any margin or
other amounts due in relation to transactions under this Terms of
Business.
8. AGGREGATION OF ORDERS
8.1. ICS may, where relevant, aggregate or combine orders for any
Client with orders for any other client or for ICS or for any
associate of ICS. Combining orders with those of other persons may
result in the Client obtaining, on other occasions, a more
favourable price and, on other occasions, a less favourable price,
than if the order had been executed separately.
9. INTERMEDIATE BROKERS
9.1. The Client agrees that ICS may use any intermediate brokers
(including non-United Kingdom intermediate brokers) in relation to
any transactions effected with or for the Client.
10. COLD CALLING
10.1. The Client authorises ICS to visit or telephone the Client to
discuss investments, or otherwise, without express invitation.
While this is designed to increase the effectiveness of ICS's
services, the Client may forego any statutory rights which might
otherwise have entitled him to treat transactions entered into as a
result of an uninvited call as unenforceable.
<PAGE> 4
11. CLIENT'S ACCOUNT
11.1. All assets, liabilities, rights or obligations arising from any
transaction effected by ICS or any associate with or for the Client
and all cash, investments, positions or other assets held by or
under the control of ICS or any associate shall be deemed debited
or credited (as the case may be) to one or more accounts in the
name of the Client.
12. DUE AUTHORISATION
12.1. The Client warrants, undertakes and represents to ICS that both at
the date hereof and at the time of any transaction entered into by
ICS for the account of the Client:
a) subject to this Terms of Business, and unless we agree in writing
otherwise, the Client's investments or other assets to which this
Terms of Business apply are and will be for so long as this
Terms of Business are in force beneficially owned by the Client
free from any charge, lien, pledge or encumbrance, unless the
Client has expressly notified in writing ICS that the Client is
acting as a trustee or agent in respect of any particular
investment or other asset. In such a case the Client will
warrant, undertake and represent this in respect of, and on
behalf of, the person or persons for whom the Client is trustee
or agent;
b) wherever the Client acts as trustee or agent for another, the
Client is authorised by the Client's principal with full power
and capacity to instruct us upon the terms of this Terms of
Business;
12.2. The Client will provide ICS, forthwith upon demand, evidence
reasonably satisfactory to ICS of the necessary approvals,
authorisations, authorities, consents and licences referred to in
Paragraph 12.1 above.
13. AGENT OR ATTORNEY
13.1. If the Client wishes a third party to act on behalf of the Client
at any time, the Client must inform ICS in writing in such form as
ICS may require of the name of such third party and acknowledge
that ICS will only deal with such third party on production by them
of a Power of Attorney given by the Client in their favour.
13.2. Any direction given by such duly appointed attorney is to be
understood as emanating from the Client and the Client will be
fully responsible for all consequences of ICS acting on such
direction.
14. CLIENT INFORMATION
14.1. The Client will, following a request by ICS, provide promptly to
ICS copies of its latest audited accounts (if applicable) and any
such other financial or other information as ICS may reasonably
request.
14.2. The Client will give immediate written notification to ICS:
a) of any material change in the personal or financial position,
constitution or control of the Client or of any other change
which may reasonably be thought to be relevant to the
relationship between ICS and the Client;
b) if any warranty, representation, undertaking or other information
provided by the Client to ICS shall become untrue or misleading
or incapable of performance in any material respect;
c) of the occurrence of any event or circumstance referred to in
Paragraph 27.1; and
d) of any other information which may reasonably be considered
material to ICS in deciding whether to provide, or continue to
provide, services to the Client or in determining the basis on
which such services should be provided.
15. INSTRUCTIONS
15.1. Instructions to ICS may be communicated either in writing, by
facsimile transmission, by telex or by other electronic means to
ICS at the address stated in Paragraph 1.4 (or such other address
as ICS shall from time to time notify in writing to the Client).
15.2. ICS will have no obligation to act upon any instruction unless and
until the instruction is actually received by ICS. Such instruction
must be received by ICS during normal London business hours and
allow ICS a reasonable time to carry the instruction into effect.
ICS may, in its absolute discretion, refuse to accept any order or
other instruction for the account of the Client.
15.3. The Client shall be bound by, and ICS may rely on and act in
accordance with, any instructions which ICS believes, in good
faith, to have been given by an authorised employee, agent, officer
or other representative of the Client. ICS may continue to rely
upon authorised signatures provided by the Client unless and until
it receives written notification of any change.
<PAGE> 5
15.4. ICS may, if specifically agreed with the Client, and subject to
the execution of such third party mandate, power of attorney or
further indemnity as ICS may reasonably require, accept
instructions for the account of the Client from any third party.
The Client shall be bound by and ICS may rely on and act in
accordance with any instructions which ICS believes, in good faith,
to have been given by a duly authorised third party. Instructions
from third parties must be given in writing but ICS accepts no
responsibility for any errors or omissions resulting from such
instructions.
15.5. ICS will not be responsible for any delays or inaccuracies in the
transmission of instructions or other information or in the
clearing, registration of or exercise of rights under, transactions
due to any cause beyond ICS's reasonable control. If ICS requests
instructions from the Client and the Client does not respond within
a reasonable time, ICS reserves the right to take such steps as it
considers appropriate in the circumstances, whether for its own
protection or otherwise.
15.6. The Client agrees that all telephone conversations with ICS may,
without further warning, be recorded and may be used as evidence in
the event of any dispute. Such recordings will be and remain the
sole property of ICS and will, in the absence of manifest error, be
accepted by the Client as evidence of the orders, instructions,
communications or conversations so recorded. The period of
retention of such recordings shall be at the sole discretion of
ICS.
16. REPORTING
16.1. ICS will, when required by the rules of SFA to do so, send a
confirmation note relating to any transaction to the Client (or a
person nominated in writing by the Client) prior to the
close of the next business day following the transaction. The terms
of any confirmation will, save in the case of manifest error, be
conclusive unless ICS is notified in writing by or on behalf of the
Client of any disagreement forthwith, and in any event, prior to
the close of the third business day after the deemed date of
receipt of such confirmation.
16.2. ICS will send to the Client (or a person nominated in writing by
the Client) statements of account in accordance with any applicable
requirements of the rules of SFA. The terms of any account
statement will, save in the case of manifest error, be conclusive
unless ICS is notified in writing by or on behalf of the Client of
any disagreement forthwith, and in any event, prior to the close of
the third business day after the deemed date of receipt of such
statement.
17. MARGIN
17.1. The Client agrees to pay or deliver to ICS on demand, in relation
to any transaction or proposed transaction, such sums or property
by way of deposit or margin as ICS may from time to time reasonably
require. In relation to exchange traded transactions, such deposit
or margin shall be of such amount or value as shall be not less
than that required under the rules of the relevant exchange but ICS
may, acting reasonably, require a greater amount of deposit or
margin.
17.2. ICS reserves the right to vary, by notice to the Client and at its
sole discretion, its margin requirements at any time.
17.3. Deposits or margin shall be provided to ICS in such manner and in
such form as ICS may reasonably request.
17.4. The Client is responsible for maintaining appropriate arrangements
with ICS at all times for tile communication of margin calls from
ICS.
17.5. If ICS is unable to contact the Client, having made reasonable
efforts to do so, or if the Client fails to comply with its
obligations to provide suitable deposit or margin to ICS within
such time as ICS may reasonably determine, ICS may take such steps
as it considers necessary or may exercise any of its rights
hereunder to protect its position including, without limitation,
its rights to close out or liquidate transactions or positions,
invoice back or otherwise settle early any transaction or to sell
or realise any collateral or other property held on behalf of the
Client or to terminate its relationship with the Client provided
that it shall at all times seek to act in such a way as it
reasonably believes will minimise any potential loss and maximise
any potential benefit to the Client.
18. COLLATERAL
18.1. The Client may provide assets, in such form as is from time to
time acceptable to ICS to be held by ICS as collateral against the
liabilities, from time to time being and actual or contingent, of
the Client.
18.2. Any asset which is not of a type acceptable to ISC as collateral
will not be accepted by ICS as collateral against the Client's
liabilities or obligations. For the avoidance of doubt, ICS neither
offers nor provides, on an agreed basis or otherwise, any safe
custody service as envisaged by the safekeeping rules of SFA and
will
<PAGE> 6
not accept, or continue to hold, as collateral against the Client's
liabilities or obligations any asset which ceases to be acceptable
to ICS as collateral.
18.3. Any assets provided by the Client as collateral to ICS will be
registered in the name of a nominee company or in the name of an
eligible custodian or any other person in accordance with the
Client's specific written instructions, in accordance with the
rules of SFA.
18.4. ICS will assume responsibility for claiming and receiving
dividends, interest payments and other rights accruing to the
Client.
18.5. ICS will act on the clear written instructions of the Client
regarding the exercise of conversion, subscription and voting
rights and in respect of takeovers, capital reorganisations and
other offers, always providing that sufficient notice is given by
the Client to enable such action to be taken. In the event that ICS
does not receive clear written instructions from the Client, ICS
reserves the right to act or refrain from acting in relation to
corporate actions in such manner as it may determine to be in the
best interests of the Client but will not be under any liability
whatsoever for any loss or damage sustained by the Client as a
result of any action or otherwise on the part of ICS.
18.6. ICS accepts no liability to the Client for the default of any
eligible custodian or nominee company, except that ICS does not
disclaim responsibility for any losses which may be proven as
arising directly from the fraud or willful default or negligence of
ICS or from the default of MeesPierson ICS Nominees Limited.
18.7. ICS shall have the right (subject to an obligation to account to
the Client for property of the same nature and description but not
necessarily identical to the property originally delivered to ICS
and subject to ICS's other rights hereunder) to pledge, charge,
loan or otherwise use or dispose of all or part of any deposit,
margin or other property provided by the Client (or on the Client's
behalf) to ICS under this Terms of Business as if ICS were the
beneficial owner thereof. This may result in securities delivered
to ICS by the client being registered other than in the name of the
Client.
18.8. ICS may return to the Client collateral other than the original
collateral or original type of collateral which has been deposited
with ICS. Nothing in this Paragraph shall prevent ICS, at its sole
discretion, returning to the client cash equivalent where the
original collateral has matured.
18.9. Any cash, securities or other assets delivered to ICS under this
Terms of Business may be deposited with or pledged or charged to
or otherwise placed as security with an intermediate broker,
clearing house or exchange upon such terms as ICS may in its sole
discretion agree with such person or persons in respect of its or
the Client's obligations and liabilities to that intermediate
broker, clearing house or exchange.
18.10. If securities are deposited with or pledged or charged to or
otherwise placed as security with an intermediate broker, clearing
house or exchange as aforesaid and if such securities are, in the
unlikely event of the default of ICS, subsequently realised the
proceeds of sale (to the extent that they exceed the amount owed by
the Client to ICS and to the extent that they are returned to ICS
and the Client Money Rules of SFA apply) be subject to the pooling
rules of the Client Money Rules of SFA. The effect of this is,
broadly, that such sale proceeds may be used to meet the claims of
other segregated clients in the event of an overall deficiency in
client money held for segregated clients of ICS.
19. SECURITY
19.1. All cash, investments or other assets of the Client which may at
any time be in the possession or control of ICS or carried in the
books of ICS for any purpose, including safe-keeping, shall be held
by ICS subject to a general lien and right of set off against any
liabilities of the Client to ICS whether or not ICS has made
advances to the Client in connection with such investments or other
assets and irrespective of the number of accounts which the Client
may have with ICS.
19.2. The Client, with full title guarantee and as continuing security
for all the Client's liabilities and obligation to ICS under this
Terms of Business or otherwise, hereby charges, by way of first,
fixed charge and grants a pledge over all securities, documents of
or entering title to property, cash or other assets of any nature
held by or subject to the control of ICS by way of deposit or
margin (or any nominee or custodian of ICS) for the account of the
Client (including, without limitation, the benefit of all
contractual rights and obligations and any proceeds of sale and any
securities or other assets which ICS has agreed to hold as
custodian) and grants a general lien and right of set-off as
security for the performance of the Client's obligations hereunder
and under any transaction or any other obligation of the Client to
ICS or any associate of ICS. To the extent that security shall be
held by ICS as security for obligation to an associate of ICS, ICS
shall hold the benefit of that security as trustee and agent for
that associate.
19.3. ICS shall have, to the greatest extent permitted by law, all of
the rights of a secured party with respect to any money or other
assets charged to ICS and the Client will, at the request of ICS,
take such action as ICS may
<PAGE> 7
reasonably require to perfect or enforce any security interest and
irrevocably appoint ICS as its attorney to take any such action on
its behalf.
19.4. The Client warrants to ICS that all deposits, margin, cash,
securities or other assets of any nature furnished or deposited
with ICS by or on behalf of the Client are the sole and beneficial
property of the Client or are furnished or deposited with ICS
pursuant to this clause with the legal and beneficial owner's
unconditional consent and free of such owner's interest and, in any
event, will be furnished to or deposited with ICS free and clear of
any lien, charge or other encumbrance and undertakes that the
Client will not charge, assign or otherwise dispose of or create
any interest therein.
20. FEES, COMMISSIONS AND OTHER EXPENSES
20.1. ICS's fees and charges for its services will be those specified in
Appendix B. Such fees or charges may be varied from time to time by
ICS by notice in writing to the Client. ICS may share such fees or
charges with associates or other third parties and will provide
details to the Client on request
20.2. In addition to the fees and charges referred to in clause 20.1,
the Client will, unless otherwise agreed, reimburse ICS on demand
with respect to any costs or expenses incurred by ICS in carrying
out its duties hereunder including, but not limited to, bank,
broking, exchange, custodian, clearing and transaction fees, stamp
duty (if any), value added tax and other applicable taxes and
charges.
20.3. ICS retains the right to pass on to the Client any legal or other
third party costs incurred in relation to any course of action
required by ICS in conjunction with the exercise of any of ICS's
rights hereunder, including, without limitation, the preparation
of any necessary documentation, costs of legal advice or action,
enforcement of any right or remedy, or otherwise as circumstances
may require.
20.4. ICS and any associate shall, unless otherwise agreed in writing
with the Client, be entitled to receive and retain any benefit,
including any commissions, rebates or reductions (whether from
standard rates of commission or otherwise) received in connection
with any service or transaction provided or entered into by ICS or
any associate hereunder.
21. WARRANTIES AND UNDERTAKINGS
21.1. The Client warrants to ICS that, both at the date hereof and at
the time of any transaction entered into by ICS for the account of
the Client:
a) if it is a body corporate, it is duly incorporated and validly
existing under the laws of the country of its incorporation;
b) it has and will at all times have the necessary power, authority
and consents required to enable it to enter into the Terms of
Business with ICS constituted by this Terms of Business and to
perform its obligations hereunder and such agreement constitutes
legal, valid and binding obligations of the Client enforceable
against it;
c) all necessary authorisations (including, without limitation, any
regulatory or governmental consents or approvals) to enable or
entitle the Client to enter into and perform its obligations
hereunder and to carry on its business have been obtained and are
in full force and effect and will remain in such force and effect
at all times during the term hereof;
d) all information supplied by the Client to ICS is true, complete
and accurate in all material respects; and
e) unless specifically agreed to the contrary with ICS, or as
otherwise required by the rules of any Exchange, the Client is
contracting with ICS and will enter into all transactions with
ICS as a principal and will give transactions to ICS to clear
only when the Client is dealing as principal and no other person
has or will have any interest in any contract or transaction
entered into for the account of the Client.
21.2. The Client irrevocably undertakes to ICS that:
a) it will provide ICS with all necessary delivery documents,
information and payments for settlement of transactions in
sufficient time (which may be specifically stipulated by ICS) to
enable ICS to confirm transactions, effect delivery, implement
instructions and pay and secure settlement or other monies in
accordance with the requirements of the relevant transaction,
exchange, clearing house or market;
b) it will duly make or accept delivery of any commodities,
securities or other assets underlying any contract or transaction
where required under the terms of such contract or transaction;
c) it will liquidate on demand any debit balance on any account of
the Client with ICS;
<PAGE> 8
d) it will notify ICS promptly, and in all cases within any such
period of time as ICS may from time to time require, of any
transaction entered into by the Client which is to be cleared by
ICS together with such additional details as ICS may reasonably
require; and
e) it will notify ICS forthwith, on becoming aware of the same, of
any inaccuracies, errors or omissions either in the Client's own
accounts or in any information, statement or report received from
or provided to ICS.
22. MATERIAL INTERESTS
22.1. ICS may without further reference to or consent from the Client
effect a transaction with or for the Client notwithstanding that
ICS or any associate of ICS has directly or indirectly a material
interest of any description in the transaction or has a
relationship of any description with any other person such as to
place ICS or any associate in a position where its duty or interest
in relation to that other person may conflict with its duty to the
Client.
22.2. ICS may, if it considers in good faith that such transaction is in
the interests of the Client, effect sales, purchases, or other
dealings with itself or any associate or other Clients of ICS or
any associate.
22.3. ICS may employ and pay any associate on reasonable and proper
terms to perform custodial, agency or related administrative
services, to make deposits or effect foreign exchange transactions
or to provide such other services to or for the account of the
Client as ICS may determine.
22.4. Any interests, relationships or arrangements arising under this
Clause 22 may not be separately disclosed to the Client at the time
of the transaction. ICS shall be entitled to exercise its rights
and powers under this Clause 22 without accounting to the Client
for any profit of ICS or any associate of ICS resulting therefrom.
23. PAYMENTS
23.1. All amounts including, without limitation, all margin, fees and
charges payable by the Client hereunder shall be due on demand, in
such currency as ICS may reasonably determine and shall be paid
without set-off, counterclaim or deduction.
23.2. All sums expressed to be payable to ICS hereunder are exclusive of
any VAT or other applicable taxes or duties (together 'Taxes'). All
Taxes shall be payable to ICS by the Client at the same time as the
sums to which any Taxes relate.
23.3. All amounts owed by the Client to ICS or any associate, including
any costs of collection, shall bear interest, both before and after
judgement, from the date when the amounts fall due for settlement
until final payment calculated on a day to day basis at such rate
as may be defined under the terms of any credit or other facility
and otherwise at a rate as set out in Appendix B in respect of the
amounts so due. Any such rates may be varied from time to time as
may be notified in writing to the Client by ICS.
23.4. ICS may agree to pay to the Client interest on amounts standing to
the credit of the Client's account with ICS at such rates as set
out in Appendix B. Any such rates may be varied from time to time
as may be notified in writing to the Client by ICS.
23.5. Until the Client has paid or discharged in full all monies and
liabilities owed to ICS or any associate any monies from time to
time outstanding to the credit of the Client's account with ICS
shall not be due and payable although ICS may, in its absolute
discretion, make payments to the Client from any such account or
otherwise exercise its rights of set-off or combination or
consolidation.
24. CLIENT MONEY
24.1. ICS will not treat any of the Client's money as client money as
defined by the rules of SFA. This means that the Client's money
will not be subject to the protections conferred by the Client
Money Rules of SFA and, as a consequence, the Client's money will
not be segregated from ICS's money and will be used by ICS in the
course of ICS's business. The Client will therefore rank as a
general creditor of ICS. Should the Client wish ICS to hold the
Client's money as client money, a request should be made in writing
and, if ICS agrees to do so, it will do so subject to such terms as
may be agreed between ICS and the Client.
25. COMBINATION AND CONSOLIDATION OF ACCOUNTS AND SET-OFF
25.1. Without prejudice and in addition to any other rights hereunder or
to which it may be entitled at law, ICS, for itself and as agent
for any associate to whom it has delegated any of its duties
hereunder may, at any time and without notice, notwithstanding any
settlement of account or any other matter whatsoever:
a) combine or consolidate all or any of the accounts of the Client
with ICS or any associate established in connection with this
Terms of Business, of any nature whatsoever and whether held
individually or jointly with others, with all or any liabilities
to ICS or any associate under or pursuant to this Terms of
Business; or
<PAGE> 9
b) set-off, transfer or apply any cash, investments, positions or
other assets held in or credited to any such accounts including,
without limitation, any margin or segregated funds or any
proceeds of sale or any indebtedness, liabilities or obligations
of ICS or any associate of ICS under or pursuant to this Terms
of Business, whether or not expressed in the same currency,
including, without limitation, any payment of margin or fees or
charges due to ICS or any associate of ICS or payments pursuant
to any indemnity under or pursuant to this Terms of Business.
For the avoidance of doubt, any reference in this Clause to any
indebtedness, obligations or liabilities shall include all
indebtedness, obligations or liabilities of any nature under or
pursuant to this Terms of Business, whether present or future,
actual or contingent, primary or collateral, several or joint,
secured or unsecured.
25.2. The Client agrees that any indebtedness, liability or obligation
owed to an associate of ICS under or pursuant to this Terms of
Business shall be enforceable by ICS on behalf of and as trustee
and agent for, such associate.
25.3. Where any set-off, consolidation, combination or transfer requires
the conversion of one currency to another, such conversion shall be
carried out at such rates and in such manner as ICS may reasonably
determine.
26. NETTING UNDER FOA MASTER NETTING AGREEMENT
26.1. ICS is a member of the Futures and Options Association ('FOA') and
is a participant in the FOA initiative to provide greater legal
certainty and security to netting arrangements between
counterparties.
26.2. If the Client is domiciled or otherwise subject to the laws and
regulations of any of the jurisdictions which permit the use of an
FOA Master Netting Agreement ('FOA Agreement'), the FOA Agreement
shall, subject to such modifications as are required for such a
jurisdiction, be deemed to be incorporated within this Terms of
Business. Details of the relevant jurisdictions and copies of the
FOA Agreement are available from ICS on request.
26.3 As a consequence of the FOA Agreement, any relevant amounts due to
or from the Client shall be capable of netting at the option of
either ICS or the Client to the extent permitted by the FOA
Agreement. In the event of any conflict between the terms of this
Terms of Business and the FOA Agreement, then the FOA Agreement
shall prevail, but only to the extent of any such conflict.
27.
DEFAULT
27.1. If, at any time:
a) the Client fails to provide adequate instruction or payment or
provide adequate margin or other security or collateral to ICS
hereunder when due or required by ICS or if any instructions or
documents received by ICS are incomplete, incorrect or otherwise
inadequate;
b) the Client fails duly to perform or commits a breach of any
provision of this Terms of Business or the terms of any
transactions entered into with or through ICS or any associate
of ICS under or pursuant to this Terms of Business, other than
an obligation referred to in Paragraph 27.1(a), and such breach,
if capable of remedy, is not remedied by the Client within seven
calendar days of written notice to remedy the same by ICS;
c) the Client fails, on demand, to liquidate any debit
balance on any account the Client may have with ICS or any
associate;
d) the Client (being an individual) dies or has a bankruptcy
petition presented against the Client;
e) the Client (being a partnership) has a bankruptcy petition
presented against one or more of the Client's partners or the
partnership is wound up or otherwise terminated;
f) in relation to the Client (being a body corporate) an order is
made or resolution passed for the liquidation or winding up of
the Client whether compulsory or voluntary (other than for the
purpose of a bona fide reconstruction or amalgamation previously
approved in writing by ICS such consent not to be unreasonably
withheld or delayed); the Client compounds with or enters into
any arrangement or composition with or for the benefit of its
creditors (or proposes to do so) including any voluntary
arrangement as defined in the Insolvency Act 1986; the Client is
unable to pay its debts within the meaning of Section 123 of the
Insolvency Act 1986; or the Client ceases or threatens to cease
substantially to carry on its business generally or disposes or
threatens to dispose of any material part of its undertaking,
assets or revenues;
<PAGE> 10
g) a receiver, administrator, trustee or similar officer is
appointed or an encumbrancer takes possession with respect to
any part of the Client's assets, undertaking or revenues or any
distress, execution or other process is levied or enforced or
saved out upon or against any part of the Client's assets,
undertaking or revenues;
h) a petition is presented for the making of an administration
order under the Insolvency Act 1986 in respect of the Client;
i) in relation to any of the events described in clauses (d), (e),
(f), (g) or (h) above, circumstances exist under which any such
event may occur or similar or analogous proceedings are taken or
occur under the law of any other jurisdiction;
j) any security created by the Client pursuant to this Terms of
Business becomes enforceable or ceases, for any reason, to
constitute good and valid security or any obligation of the
Client for the payment or repayment of money, whether present or
future, actual or contingent, shall become payable prior to its
stated maturity or by reason of default or is not paid when due;
k) action is taken against ICS, or any associate, or against the
Client in relation to the Client's activities under the rules of
any exchange, clearing house or regulatory authority;
ICS may, in its sole discretion and without further notice to the
Client or prejudice to any other rights or claims of ICS exercise
all or any of the remedies specified in Paragraph 27.3 which
remedies shall be cumulative so that exercise of any one or more of
such remedies shall not preclude exercise of any other.
27.2. ICS shall, at any time, be entitled to suspend this Terms of
Business, with regard to new business, with the Client and the
Client's rights hereunder for any period reasonably necessary to
enable it to determine whether any of the events in Paragraph 27.1
has occurred.
27.3. In any of the circumstances described in Paragraph 27.1, ICS may
forthwith, without further notice and without prejudice to any
other right or remedy it may have:
a) require early settlement of any or all transactions entered into
by the Client pursuant to this Terms of Business;
b) cancel, rescind, close out, liquidate, determine or transfer
any or all of the Client's open or unperformed orders,
contracts or positions notwithstanding that the dates for
performance thereof may not have arrived;
c) sell, charge to any third party, or otherwise dispose of any
funds, investments or other property or assets (including cash)
held by way of margin or collateral or otherwise subject to the
custody or control of ICS or any associate under or pursuant to
this Terms of Business;
d) combine or consolidate any of the Client's accounts with ICS or
any associate of ICS under or pursuant to this Terms of Business
or exercise any other power conferred by Clause 25;
e) at the risk and expense of the Client, take such steps
including, without limitation, demanding additional margin,
borrowing on behalf of the Client or entering into sales,
purchases or other transactions including any purchase or buy-in
to cover short sales as it may reasonably consider to be
appropriate;
f) take any action it may be required to take under the default
rules of any exchange or clearing house;
g) enforce any security it may have in respect of the Client's
obligations;
h) terminate this Terms of Business and all or any related
agreements with the Client as ICS may, in its absolute
discretion, determine;
i) serve notice on the Client of the event of default whereupon the
Client shall be obliged to make immediate payment of all monies
due to ICS and to provide full cash cover for all contingent
liabilities of ICS in respect of all transactions, positions,
orders or investments or other obligations incurred by ICS for
or on behalf of the Client or;
j) take any other action which ICS reasonably considers appropriate
to protect its position.
For the avoidance of doubt no such action shall include or
constitute discretionary management as understood within the rules
of SFA
27.4 ICS shall have no liability whatsoever to the Client for any loss
or liability or loss of profit or gain incurred or suffered by the
Client in consequence of any excercise by ICS of any right or
remedy hereunder and any purchase, sale, transaction or other
action may be undertaken by ICS at such price and on such terms as
ICS shall determine provided that it shall at all times seek to
act in such a way as it reasonably believes will
<PAGE> 11
minimise any potential loss and maximise any potential benefit to
the Client. The Client irrevocably appoints ICS as its attorney to
take action in the name of the Client for the purpose of exercising
any right or remedy hereunder.
27.5. In exercising any right or remedy pursuant to this Clause 27, ICS
is authorised to effect such currency conversions and enter into
such foreign exchange transactions with, or on behalf of, the
Client, as may reasonably be necessary, at such rates and in such
manner as ICS may reasonably determine.
27.6. Any restrictions on the power of ICS to sell or otherwise deal
with assets of the Client charged to ICS contained in the Law of
Property Act 1925 or any other applicable law are, to the extent
permitted by that law, excluded.
28. LIMITATION OF LIABILITY
28.1. Neither ICS nor any of its directors or employees shall be under
any liability whatsoever for any loss or damage sustained by the
Client, including any consequential loss, loss of profit or loss of
trading opportunity, as a result of any actual or proposed
transactions or as a direct or indirect result of any services
provided by ICS or any associate hereunder, including, without
limitation, any loss or damage resulting, directly or indirectly,
from:
a) any failure or delay or default on the part of the Client or any
third party which is not an associate of ICS, including any
exchange or clearing house, in providing accurate information or
performing its functions;
b) any event or circumstance beyond the reasonable control of ICS
including, but not limited to, any failure or defective
performance of any communication, settlement, computer or
accounting system or equipment; or
c) any reliance placed by the Client on any market or other
information supplied to the Client by ICS or any associate not
relating to the services hereunder. Such information may be
unverified and no representation or warranty is given as to the
accuracy or reasonableness of such information.
28.2. Nothing in Paragraph 28.1 will exclude any liability of ICS, its
associates or any of their respective directors, employees or
agents for any loss suffered by the Client such as is caused by the
wilful negligence, default or fraud of ICS, its associates or any
of their respective directors or employees.
28.3. Nothing in this Terms of Business will exclude or restrict any
duty or liability or will entitle ICS to be compensated or
indemnified against the consequences to ICS of any contravention by
ICS of any duty which arises under the FSA, the rules of SFA or the
rules and regulations of any relevant exchange which may not be
excluded or restricted.
29. INDEMNITY
29.1. Notwithstanding any termination of this Terms of Business the
Client shall agree to indemnify and keep indemnified on a
continuing basis ICS, its directors or employees on reasonable
demand from and against all demands, claims, liabilities, losses,
damages, costs and expenses whatsoever including all interest,
penalties, reasonable legal and other costs and expenses, together
with value added tax and similar taxes (other than corporation tax
on the overall net income of ICS or any associate thereon) made,
suffered or incurred, directly or indirectly, by ICS, its directors
or employees as a result of:
a) the due performance by ICS of its obligations or the provision
of its services hereunder; or
b) any default, breach or failure by the Client in the performance
of its obligations hereunder including, without limitation, any
failure to make delivery or to meet margin calls; or
c) any representation or warranty given by or on behalf of the
Client being untrue or misleading in any material respect; or
d) the occurrence of any of the events referred to in Paragraph 27;
save to the extent the same arises from the negligence, default,
breach of this Terms of Business or fraud of ICS, its directors or
employees.
29.2. The Client undertakes to indemnify ICS on demand against any loss
or liability incurred by ICS, together with any related legal or
other expenses incurred by ICS, in acting upon instructions which
ICS believes, in good faith, to have been received from any
authorised employee, agent, officer or other representative of the
Client or from any duly authorised third party.
<PAGE> 12
30. CONFIDENTIALITY
30.1. ICS undertakes to keep and treat as confidential any information
concerning the business, assets, dealings or affairs of the Client,
always provided that:
a) such undertaking shall not extend to information which is
already within the public domain or to disclosure by ICS to an
associate where reasonably required in connection with this
Terms of Business; and
b) ICS shall be permitted to disclose such information if legally
required to do so or if requested to do so by any regulatory
authority or Exchange having jurisdiction over ICS or the
Client.
31. DELEGATION AND ASSIGNMENT OF POWERS
31.1. ICS may delegate or otherwise assign to any of its associates or
successors from time to time in existence any of its powers, duties
or benefits hereunder.
31.2. The Client's rights and obligations arising out of this Terms of
Business or interest in any monies or securities or other assets of
the Client held or controlled by ICS or any nominee or custodian
of ICS for the time being may not be assigned or otherwise
transferred without ICS's prior written consent.
32. VARIATION
32.1. Without prejudice to any outstanding order or transaction or any
rights or obligations subsisting at such time, ICS shall have the
right to amend or revoke the terms and conditions of this Terms of
Business at ICS's absolute discretion. Such amendment or revocation
shall be notified to the Client in writing and shall be deemed to
have been accepted by the Client unless written notice of objection
is received within five business days after the deemed date of
receipt of such notification.
32.2. This Terms of Business will be considered to be amended, mutatis
mutandis, without separate confirmation, for any change to the
rules of SFA or any relevant statute or rules and regulations which
come into effect after the date of this Terms of Business.
33. SEVERABILITY
33.1. If at any time any provision herein is or becomes illegal, invalid
or unenforceable in any respect by virtue of any law of any
jurisdiction or otherwise, neither the legality, validity or
enforceability of any other provision hereof or of such provision
under the law of any other jurisdiction shall in any way be
affected or impaired thereby.
34. LIFFE RULES
34.1. As a member of LIFFE, ICS is required by the rules of LIFFE to
include certain terms (as amended from time to time by LIFFE) as
part of ICS's Terms of Business agreement with the Client. These
terms apply in relation to any LIFFE business and, where expressly
provided otherwise, to non-LIFFE business and are set out in
Appendix C.
35. WAIVERS
35.1. Any failure by ICS or the Client to insist upon strict compliance
with this Terms of Business shall not constitute nor be deemed to
constitute a waiver by it of any of its rights or remedies. The
rights and remedies conferred upon ICS and the Client hereby shall
be cumulative and the exercise or waiver of any part thereof shall
not preclude or inhibit the exercise of any other or additional
rights and remedies.
36. NOTICES AND INSTRUCTIONS
36.1. Any instruction, notice or communication given hereunder or in
connection herewith shall be sufficiently given or served if
delivered to the Client personally or if sent by first class post,
telex or facsimile to the Client at the address stated herein or to
such other address as shall from time to time have been notified in
writing by the Client to ICS for such purposes in accordance with
the provisions of this Clause.
36.2. Any such instruction, notice or communication shall be deemed to
have been received by the Client on the same business day as
dispatched by ICS if delivered to the Client personally or if sent
by telex or facsimile to the Client or to have been received on the
third business day after the date of posting if sent by first class
post.
37. TERMINATION
37.01. ICS may terminate this Terms of Business at any time by giving the
Client one months' notice in writing or forthwith upon written
notice in any of the circumstances set out in Clause 27, or upon
any of the following events:
<PAGE> 13
a) any judgement or order is entered against the Client, in
relation to Paragraph 27.1 k) or otherwise, which has, or may
have, in the reasonable opinion of ICS, a material adverse
effect on the reputation or financial standing of ICS, any
associate or the Client;
b) it is determined that, or ICS has reasonable cause to believe
that, any information or assertion provided or made to ICS is,
or becomes, or will become, in any material way inaccurate or
misleading; or
c) ICS, in its absolute discretion, considers it necessary or
desirable for its own protection of the Client;
37.2. The Client may terminate this Terms of Business at any time by
giving ICS three months' notice in writing. ICS may agree to accept
a lesser period of notice but, in the event that it does so,
reserves the right to charge fees as may be appropriate for the
entirety of such three month period.
37.3. Any termination of this Terms of Business will not prejudice any
accrued rights or obligations relating to any transaction effected
prior to termination or any right or remedy available to ICS or any
associate or any provision of this Terms of Business intended to
survive termination.
38. FORCE MAJEURE
38.1 It is hereby agreed that ICS shall not be liable or have any
responsibility of any kind to the Client for the non-performance of
any of ICS's obligations hereunder or any loss or damage thereby
incurred by reason of any cause beyond the control of ICS,
including any breakdown or failure of transmission or
communication or computer facilities, postal or other strikes or
similar industrial action and the failure of any relevant exchange,
clearing house and/or broker for any reason to perform its
obligations.
39. APPLICABLE RULES AND REGULATIONS
39.1. All transactions undertaken by ICS shall be subject to the rules
and regulations, provisions and usages of any relevant Exchange or
clearing house and to all applicable laws or regulations.
39.2. In the event of any conflict between this Terms of Business and
any mandatory provision of the rules of SFA or the rules of any
other regulatory authority or Exchange which ICS is from time to
time regulated by or a member of, the rules of SFA or the rules of
such regulatory authority or Exchange shall, to the extent of any
conflict, prevail.
40. GOVERNING LAW AND JURISDICTION
40.1. This Terms of Business shall be governed by and construed in
accordance with English Law.
40.2. Subject to the arbitration provisions relating to LIFFE contained
in Appendix C the Client irrevocably submits to the exclusive
jurisdiction of the English courts to settle any dispute or claim
which may arise out of or in connection with this Terms of Business
always provided that this shall not prevent ICS or the Client
bringing an action in the courts of any other competent
jurisdiction.
<PAGE> 14
AGREEMENT AND ACCEPTANCE
Acknowledgement of the Client's acceptance of this Terms of Business is
evidenced by signing and returning to the Company the duplicate of this Terms of
Business.
Yours sincerely
For and on behalf of MeesPierson ICS Limited
DIRECTOR COMPLIANCE OFFICER
-------------------------------------------------------------------
I AGREE WITH AND ACCEPT THE TERMS AND CONDITIONS SET OUT IN THIS TERMS OF
BUSINESS.
Accepted by:
Signed: /s/ AUBREY JUDSON ELLIS
------------------------------
Name (capitals): Aubrey Judson Ellis
------------------------------
For and on behalf of: Hull Trading Asia Limited
------------------------------
Dated: March 11, 1998
------------------------------
<PAGE> 1
EXHIBIT 10.5
NAME: HULL TRADING ASIA LIMITED
ACCOUNT NO:
A. CUSTOMER AGREEMENT
To: MEESPIERSON FUTURES CLEARING SERVICES (ASIA) LIMITED Date: March 11 1998
1. Introduction/General
(a) The following are the terms and conditions to which I/We will be
subject upon opening, and in respect of, any account held by me/us
with you.
(b) The following definitions are used herein.
- "the Agreement" means this document and the terms and
conditions set out herein.
- "the Clearing House" means HKFE Clearing Corporation Limited;
- "Commodities" shall include, but not be limited to, gold,
silver and other physical commodities, monies, foreign
currencies, securities (as defined from time to time in the
Securities Ordinance), stocks, currency options, foreign
exchange contracts, index options, index futures contracts,
commodity forward or futures contracts, securities futures
contracts, stock futures, commodity options, securities
futures options, stock options, currency forward [???]
relating to, commodities, foreign currencies or securities;
- "the CTO" means the Commodities Trading Ordinance, Chapter
250 of the Laws of Hong Kong as amended from time to time;
- "the Customer" means me/us. In addition, "the Customer"
wherever used shall where the Customer(s) is/are
individual(s) include his/their respective executors and
administrators and where the Customer is a sole
proprietorship include his executors and administrators and
his or their successors in the business and in the case of a
partnership firm include the partners who are the partners of
the firm at the time when the Customer's account or accounts
are being maintained and their respective executors and
administrators and any other person or persons who shall at
any time hereafter be or have been a partner of and in the
firm and his or their respective executors and administrators
and the successors to such partnership business and where the
Customer is a corporation include its successors;
- "the Exchange" means Hong Kong Futures Exchange Limited;
- "MeesPierson" means you;
-1-
<PAGE> 2
- "the SFC Ordinance" means the Securities and Futures
Commission Ordinance, Chapter 24 of the Laws of Hong Kong as
amended from time to time.
(c) This Agreement is subject to and governed by the provisions of the
CTO and Hong Kong law.
(d) The rules and regulations of the Exchange and the Clearing House
shall be binding on the Customer and MeesPierson. Those rules and
regulations contain provisions requiring MeesPierson in certain
circumstances to disclose the name and beneficial identity of the
Customer.
(e) MeesPierson, its directors and/or employees may trade on their own
account and, subject to the provisions of the CTO and the SFC
Ordinance. MeesPierson may take the opposite position to the
Customer's order in relation to any futures/options contract,
whether on MeesPierson own account or for the account of other
customers of MeesPierson, provided that such trade is executed
competitively on the floor in accordance with the rules and
regulation of the Exchange or other exchanges governing the
relevant markets.
(f) Unless otherwise confirmed in writing by MeesPierson and agreed by
the Customer and MeesPierson, MeesPierson is acting solely as
broker to any transactions made with MeesPierson by the Customer.
(g) In all transactions referred to in the Agreement MeesPierson may
contract as principal.
(h) The terms and conditions of the Agreement shall inure to the
benefit of, and bind MeesPierson, MeesPierson's successors and
assigns, whether by merger, consolidation or otherwise, as well as
the heirs, executors, administrators, legatees, successors,
personal representatives and assigns of the Customer.
(i) The Customer submits to the non-exclusive jurisdiction of the
Court of Hong Kong in respect of all disputes, differences and
claims relating to or arising out of the Agreement.
(j) Notices, and any other communications may be transmitted to the
Customer at the address, or telephone number or telex number or
fax number given herein, or at such other address or telephone
shall notify MeesPierson in writing and all communications so
transmitted, whether by mail, fax, telegraph, telephone, messenger
or otherwise, shall be deemed transmitted when telephoned or when
deposited in the mail, or when received by a transmitting agent.
(k) No provision of the Agreement shall in any respect be waived or
amended unless such waiver or amendment is in writing and signed
by an authorised officer of MeesPierson. This Agreement shall not
be revoked by the Customer except in writing. Such revocation,
however, shall not affect any transaction entered into by
MeesPierson pursuant to the Agreement before written notice of the
revocation has been received by MeesPierson.
(l) MeesPierson may take or omit to take any action which it considers
appropriate in order to ensure compliance with any such
constitution, rules and regulations, including (without
limitation) adjusting any account(s), disregarding any unexecuted
order or rescinding any executed transactions.
(m) If any provision hereof is inconsistent with any present or future
law, rules or regulations of any exchange, or any authority having
jurisdiction over the subject matter of the Agreement, such
provision shall be deemed to be rescinded or modified in
accordance with any such law, rules or regulations. In all other
respects, the Agreement shall continue and remain in full force
and effect.
-2-
<PAGE> 3
(n) Unless otherwise agreed, the Customer may not trade on margin and
MeesPierson is under no obligation to make credit facilities
available. Before MeesPierson conducts any transaction on the
Customer's behalf, the Customer will put MeesPierson in funds to
complete such transaction. Notwithstanding the foregoing, and
without prejudice to the other relevant provisions of the
Agreement, the Customer will at all times be liable for the
payment on demand of any debit balance or other obligation or
liability owing on any account which may arise for whatever
reason.
(o) The Customer will indemnify MeesPierson and its officers,
employees, agents and account executives for any loss, cost,
claim, liability or expense arising out of or connected with any
breach hereunder including any costs reasonably and necessarily
incurred in collecting any debts due or in connection with the
closure of any account.
(p) The Customer authorises MeesPierson to conduct a credit enquiry or
check on the Customer for the purpose of ascertaining the
Customer's financial situation and investment objectives.
(q) If any provision of the Agreement shall be held to be invalid or
unenforceable by any Court or regulatory agency or body, such
invalidity or unenforceability shall attach only to such
provision. The validity of the remaining provisions shall not be
affected thereby and the Agreement shall be carried out as if any
such invalid or unenforceable provision were not contained herein.
(r) Where the Agreement is signed by or on behalf of a firm or
otherwise by or on behalf of more than one person:
(i) any liability arising hereunder shall be deemed to be the
joint and several liability of the partners in the firm or
of such persons as aforesaid;
(ii) MeesPierson has no obligation to inquire into the purpose or
propriety of any instruction or the application of any funds
affected, by any partner of the firm or any such persons as
aforesaid;
(iii) notwithstanding any other agreements which have been made
between them the rule of survivorship shall apply to all
accounts and, on the death of any one of them, all funds,
securities and properties for the time being standing to the
credit of any account and anything held by MeesPierson,
whether by way of security or otherwise, shall be held to
the order of the survivor(s);
(iv) any one of them has full authority to give any instruction
with respect to any account; to receive demands, notes,
confirmations, reports, statements and other communications
of any kind such communications shall be binding on each of
them notwithstanding that such communications have not been
actually sent to or received by every one of them; generally
to deal with MeesPierson in connection with the Agreement as
fully and completely as if the others had no interest
therein; and
(v) the Agreement continues to be valid and binding for all
purposes notwithstanding any change in the partnership or
constitution of the firm by the introduction of a new
partner or by the death, insanity or bankruptcy or
retirement of any partner.
If the Agreement is signed by or on behalf of more than one person
and any one or more of such persons is not bound by the Agreement
(whether by reason of his or their lack of capacity or improper
execution of the Agreement or otherwise), the remaining person or
persons shall continue to be bound by the Agreement as if such
other person or persons had never been party hereto.
-3-
<PAGE> 4
(s) The Agreement shall remain in effect and binding on the Customer
notwithstanding (i) any amalgamation or merger that may be
effected by MeesPierson with any other company, (ii) any
reconstruction by MeesPierson involving the formation of and
transfer of the whole or any undertakings and assets to a new
company or (iii) the sale or transfer of all or any part of any
undertakings and assets to another company whether the company
(with which MeesPierson amalgamates or merges or the company to
which is transferred all or any part of any undertakings and
assets either on a reconstruction or sale or transfer as aforesaid
shall or shall not differ from in its objects, character or
constitution; the Agreement shall remain valid and effectual in
all respects, and that the benefit thereof and all rights
conferred upon MeesPierson thereby may be assigned to and enforced
by, any such company and proceeded on in the same manner to all
intents and purposes as if such company had been named herein
instead of or in addition to MeesPierson.
(t) The Customer may not assign any contract entered into between the
Customer and MeesPierson or any of the rights or obligations
thereunder without the consent in writing from MeesPierson which
consent MeesPierson shall not be under any obligation to give.
2. Orders
(a) MeesPierson shall have no obligation to provide the Customer with
information with respect to the Customer's positions and shall
have no obligation but the right at the discretion of MeesPierson
to close any position in any account MeesPierson may carry on the
Customer's behalf. MeesPierson shall have the right (at the
absolute discretion of MeesPierson, and without assigning any
reason therefor) to refuse to act for the Customer in any
particular transaction.
(b) In case of the sale of any Commodities or other properties by
MeesPierson at the direction of the Customer and the Customer's
failure to supply MeesPierson therewith, the Customer authorises
MeesPierson to borrow any Commodities, or other properties
necessary to make delivery thereof, and the Customer agrees to
guarantee, indemnify and hold MeesPierson harmless against any
loss which MeesPierson may sustain thereby, any premiums which
MeesPierson may be required to pay, or for any loss which
MeesPierson may sustain by reason of the inability of MeesPierson
to borrow the Commodities or other properties sold.
(c) Liquidating instruction and sufficient good funds where necessary
on open futures positions maturing in a current month must be
given to MeesPierson at least two business days prior to the first
notice day in the case of long positions and in the case of short
positions, at least five business days prior to the last trading
day. If instructions or good funds are not received by
MeesPierson, MeesPierson may, without notice, liquidate the
Customer's position upon such terms and by such methods which
MeesPierson shall deem fit and, having done so, MeesPierson shall
not be liable for any loss or liability which arises whether
directly or indirectly as a result.
(d) MeesPierson shall not be responsible for delays in the
transmission of orders due to a breakdown or failure of
transmission of communication facilities, or to any other cause or
causes beyond the control or anticipation of MeesPierson. All
orders, instructions or requests whether by letter, facsimile or
otherwise or made orally are accepted and transmitted at the
Customer's risk. On request the Customer shall confirm in writing
verbal orders, instructions or requests. It is understood that the
risk of instructions being given by persons purporting to be the
Customer's authorised representatives is borne solely by the
Customer and MeesPierson shall not be responsible nor liable
for any loss that may result from any unauthorised instructions.
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(e) The Customer may not withdraw nor amend any order or instruction
after the same has been given unless MeesPierson consents to such
withdrawal or amendment. In giving consent to such withdrawal or
amendment, MeesPierson may impose such conditions, including
indemnities for costs and expenses, as it deems fit.
(f) When MeesPierson on behalf of the Customer executes sell or buy
orders, MeesPierson, MeesPierson's directors, officers, employees,
and agents of MeesPierson and, any floor broker may buy or sell
for an account in which any such person has interest, subject to
the limitations and conditions, if any, contained in the
constitution, rules, regulations, customs, usages, rulings, and
interpretations then extant or in force of the Exchange or other
market upon which such buy or sell orders are executed.
MeesPierson may execute any order on behalf of the customer by way
of a cross-trade.
3. Lien & Power of Sale
(a) Without prejudice and in addition to any general lien, right of
set-off or similar right to which MeesPierson may be entitled by
law, all of the Customer's interest in any Commodities or other
property held by MeesPiersen for any purpose or carried by
MeesPierson in any account for the Customer (either individually
or jointly with others) or which may be in the possession of
MeesPierson, or in the possession of any group companies of
MeesPierson, at any time and for any purpose, including
safe-keeping, shall be subject to a general lien in favour of
MeesPierson. MeesPierson shall also have the right to cancel any
open orders for the sale or purchase of any Commodities and/or
sell such properties (and MeesPierson is authorised to do all such
things necessary in connection with such sale) and utilise the
proceeds to offset and discharge part or all of the obligations of
the Customer to MeesPierson or to any of its group companies,
regardless of whether any other person is interested in or
MeesPierson has made advances in connection with such properties,
and irrespective of the number of accounts the Customer may carry
with MeesPierson.
(b) Whenever MeesPierson considers it necessary, it may cancel any
open orders for the sale or purchase of any Commodities and/or
sell any Commodities or other property belonging to the Customer
or in which the Customer has an interest all on written notice to
the Customer. Such sale or purchase may be public or private and
may be made without advertising or notice to the Customer and in
such manner as MeesPierson may at its sole discretion determine.
At any such sale MeesPierson may purchase the properties or any of
them free of any right of redemption and in respect of any such
sale MeesPierson shall have no liability for any loss incurred and
the Customer will not make any claim against MeesPierson
concerning the manner of sale or timing thereof. The proceeds of
such transactions are to be applied to reduce the indebtedness
owing to MeesPierson.
(c) The Customer shall be liable for all losses whether or not the
account is liquidated and for any debts and deficiencies in the
Customer's accounts including all debts and deficiencies resulting
from a liquidation of the Customer's account.
(d) The Customer is bound by rule 631 of the Exchange which permits
the Chief Executive of the Exchange to take steps to limit
positions or require the closing out of contracts of the Customer
who in the opinion of the Chief Executive are accumulating
positions which are or may be detrimental to the Exchange's
markets.
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(e) The Customer agrees to maintain such collateral and/or margin as
MeesPierson may from time to time require. The Customer also
agrees to pay immediately on demand any amount owing to
MeesPierson with respect to any of the Customer's accounts. The
Customer will be responsible for all the expenses incurred by
MeesPierson in connection with the above and MeesPierson will not
be liable for any loss that may thereby be incurred. MeesPierson
may without demand or notice close out open positions. MeesPierson
has reserved in the Agreement the right to close out any open
positions(s) without notice (i) when the margins on deposit with
MeesPierson are exhausted, inadequate in the opinion of
MeesPierson to protect it against possible price fluctuations or
any adverse conditions or (ii) any other appropriate
circumstances.
(f) MeesPierson shall have the right to (i) satisfy any obligation the
Customer may have to MeesPierson (either directly or by way of
guaranty or suretyship) out of any properties belonging to the
Customer in the custody or under the control of MeesPierson and
(ii) cancel any outstanding orders in order to close the account
or accounts of the Customer, all without demand for margin or
additional margin, notice to the Customer, the Customer's heirs,
executors, administrators, legatees, personal representatives or
assigns, of sale or purchase or other notice of advertisement and
whether or not the ownership interest shall be solely the
Customer's or jointly with others, in the following circumstances:
(i) whenever MeesPierson at its sole discretion shall consider it
necessary for the protection of MeesPierson, because of margin
requirements or otherwise, or, (ii) in the event that a petition
for bankruptcy or winding up (as the case may be), or notice of
the appointment of a receiver, is filed by or against the Customer
or, (iii) when an attachment is levied against the account(s) of
the Customer with MeesPierson, or, (iv) in the event of the death
or judicial declaration of incompetence of the Customer. Any sale
or purchase may be made at the discretion of MeesPierson in any
manner and on any market it thinks fit. In all cases, a prior
demand or call, or prior notice of the time or place of sale or
purchase shall not be considered a waiver of the right of
MeesPierson to sell or to buy without demand or notice as herein
provided. In all cases, the Customer shall be liable for any
deficiency remaining in such account(s) in the event the
liquidation thereof in whole or in part by MeesPierson or by the
Customer. Debit balance(s) in such account(s) shall be charged
with interest thereon at a rate to be determined by MeesPierson
from time to time and the Customer shall promptly settle, upon
demand, all liabilities outstanding to MeesPierson, together with
all costs of collection (including legal fees).
4. Customer's Account
(a) All monies or other properties received by MeesPierson from the
Customer or from any other person, including the Clearing House
for the account of the Customer in respect of the futures/options
contracts transacted on behalf of the Customer shall be held by
MeesPierson as trustee, segregated from MeesPierson's own assets
and paid into a segregated bank account.
(b) The Customer hereby authorises MeesPierson to apply any monies
which the Customer may pay to MeesPierson in order to (i) meet the
obligations of MeesPierson to the Clearing House (provided that no
withdrawal from the Customer's accounts with MeesPierson may be
made which would have the effect that the relevant margin
requirements or trading liabilities conducted on behalf of any
Customer are thereby financed by any other Customer), (ii) pay
commission, brokerage, levies and other proper charges for
contracts transacted by MeesPierson on behalf of the Customer,
(iii) make payments in accordance with the Customer's directions
(provided that no money may be paid into another account of the
Customer unless that account is also a segregated bank account).
The Customer acknowledges that MeesPierson may apply such monies
in or towards meeting MeesPierson's obligations to any party
insofar as such obligations arise in connection with or incidental
to all futures/options contracts
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transacted on the Customer's behalf. The Customer agrees that
MeesPierson may retain interest on the Customer's money.
5. Clearing House Account
In respect of any account of MeesPierson maintained with the Clearing
House, whether or not such account is maintained wholly or partly in
respect of the futures/options contracts transacted an behalf of the
Customer and whether or not money paid by the Customer has been paid to
the Clearing House, as between MeesPierson and the Clearing House,
MeesPierson deals as principal and accordingly no such account is
impressed with any trust or other equitable interest in favour of the
Customer and monies paid to the Clearing House are thereby freed from the
trust referred to in clause 4(a) above.
6. Margin Call
Margin calls must be met within the period specified by MeesPierson from
time to time. MeesPierson is obliged to report to the Exchange particulars
of all open positions in respect of which two successive margin calls
and/or demands for variation adjustment are not met within the period
specified by MeesPierson. MeesPierson may require more margin or
variation adjustment than that specified by the Exchange and/or the
Clearing House and/or other exchanges and may close out open positions
unilaterally in respect of which any margin calls and/or demands for
variation adjustments are not met.
7. Margin Requirements
The original and variation margin, to be determined from time to time by
MeesPierson at its sole discretion, will be maintained by the Customer in
any and all accounts the Customer may at any time carry with MeesPierson.
If MeesPierson determines that additional margin is required, the Customer
will deposit with MeesPierson such additional margin forthwith upon
demand. However, notwithstanding any demand for additional margin,
MeesPierson may at any time proceed in accordance with paragraph 3(e)
above.
8. MeesPierson may at any time and at its sole discretion change margin
requirements. New margin requirements once established shall apply to
existing positions as well as to new positions. Margin requirements may be
met by a deposit of cash or securities or any other form acceptable by
MeesPierson and in accordance with the rules and regulations of the
Exchange or other exchanges governing the relevant markets.
9. Transactions in Foreign Currencies
In the event that the Customer directs MeesPierson to enter into any
contract on an exchange or other market on which such transactions are
effected in a foreign currency: (a) any profit or loss arising as a result
of a fluctuation in the exchange rate affecting such currency will be
entirely for the account and risk of the Customer; (b) all initial and
subsequent deposits for margin purposes shall be made in such currency in
such amounts as MeesPierson may at its sole discretion, require; and (c)
when such a contract is liquidated MeesPierson shall debit or credit the
account of the Customer in the currency in which such account is
denominated at a rate of exchange (where the relevant contract is
denominated in a currency other than that of the account) determined by
MeesPierson at its sole discretion on the basis of the then prevailing
money market rates of exchange.
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10. Levies & Commission
(a) Every contract executed on the floor of the Exchange shall be
subject to applicable Compensation Fund levies and levies pursuant
to Securities and Futures Commission Ordinance the cost of both of
which shall be borne by the Customer.
(b) Every contract executed in the Stock Index Futures Market on the
floor of the Exchange shall be subject to the charge of a special
levy pursuant to the Exchanges (Special Levy) Ordinance, the cost
of which shall be borne by the Customer.
(c) In respect of contracts executed in markets other than those
organised by the Exchange, any charges levied on such contracts by
the relevant markets shall be borne by the Customer.
(d) The Customer will pay commission and other charges which
MeesPierson may think fit at a rate to be determined by
MeesPierson and charges pursuant to Hong Kong law or the rules of
the Exchange or other exchanges governing the relevant markets.
11. Rules & Laws
(a) All transactions shall be subject to the constitution, rules,
regulations, customs, usages, rulings and interpretations, from
time to time extant or in force of the Exchange or other markets
(and of their respective clearing house, if any), where the
transactions are executed by MeesPierson or MeesPierson agents.
All transactions under this agreement shall also be subject to any
law, rule, or regulation then applicable thereto, including but
not by way of limitation, the provisions of the CTO, as amended
from time to time, and the rules and regulations thereunder.
(b) All transactions entered between MeesPierson and the Customer
relating to any money, foreign currency, currency option, currency
future, or currency forward contract or foreign exchange contract
shall be governed by and subject to all the rules, regulations,
orders and laws of the country of currency or money concerned and
those of Hong Kong and or the by-laws, rules and regulations of
the exchange concerned in which the transaction is done.
(c) All transactions related to futures/options contracts executed in
markets other than those organised by the Exchange will be subject
to the rules and regulations of those markets and not those of the
Exchange, with the result that the Customer may have a markedly
different level and type of protection in relation to those
transactions as compared to the level and type of protection
afforded by the rules of the Exchange.
12. Confirmation & Statements
Written confirmations of the execution of the Customer's orders and
statements of the Customer's accounts shall be conclusive and deemed to be
accepted if not objected to in writing by the Customer directed to the
address stated herein (or such other address communicated in writing by
MeesPierson) within 2 working days after transmission thereof to the
Customer, by mail or otherwise.
13. Telephone recordings
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MeesPierson may record all incoming and outgoing telephone conversations
with its dealing desks and marketing desks. All recordings shall be used
solely for the purpose of verifying instructions given and the accuracy of
transactions.
14. Indemnity
If MeesPierson commits a default and the Customer suffers pecuniary loss
thereby, the liability of the Compensation Fund will be restricted to
valid claims as provided for in the CTO and the SFC Ordinance and will be
subject to the monetary limits specified in the Ordinances and accordingly
that there can be no assurance that any pecuniary loss sustained by reason
of such a default will necessarily be recouped from the Compensation Fund
in full, in part or at all.
15. Limitation of MeesPierson's liability
(a) Without prejudice to the remainder of this clause 15, where the Customer's
account is a discretionary one the Customer agrees that MeesPierson's
liability for all and any damages, losses, expenses, costs (and interest
thereon) claimed by the Customer shall be excluded, save in respect of
personal injury or death and/or in the case of liability arising from
gross neglect, fraud or wilful default by a director or employee of
MeesPierson or where and to the extent that the CTO or the rules of the
Exchange prohibit such exclusion. Without prejudice to clause 2(d)
hereof, the Customer acknowledges that MeesPierson will not be liable for
any loss or damage suffered by the Customer whether directly or indirectly
as a result of any inability or failure on the part of MeesPierson to
comply with or fulfil any instructions given by or on behalf of the
Customer for any cause beyond the reasonable control of MeesPierson,
including but not limited to government restrictions, rulings by any
exchange or regulatory body, changes in applicable laws or regulations,
suspensions in trading, wars, strikes, civil disorder or other
circumstances having the same or similar effect.
(b) The Customer warrants, undertakes and acknowledges that where trading is
conducted pursuant to this Agreement by or on the instructions or directions or
with the involvement of a Registered Trader (as defined in Chapters 10 and/or 11
of the Exchange's Rules) who is an employee of the Customer:-
(i) any act or omission or default on the part of the Registered Trader will
be (as between the Customer and MeesPierson and between either of them and
any third party) the sole responsibility of the Customer and the Customer
will fully indemnify and hold harmless MeesPierson against any liability
of whatsoever nature arising from any act or omission or default of the
Registered Trader and all costs, expenses and other liabilities of
MeesPierson arising therefrom and/or from any act taken by MeesPierson in
the light of the Registered Trader's activities with MeesPierson
considered at the time in question it was reasonable to take. To this end,
the Customer will maintain at all times a valid policy or policies of
insurance to cover risk to MeesPierson from the Registered Trader's
presence and activities on MeesPierson's premises;
(ii) unless provided otherwise by the Exchange's Rules or any agreement entered
into between the Exchange and MeesPierson, the Registered Trader shall not
be an employee of MeesPierson for any purpose;
(iii) the Customer shall use its best endeavours to ensure that at all times the
Registered Trader acts in a manner which does not involve any breach of
the Exchange's Rules or any applicable legislation or (subject to (iv)
below) which might in any way give cause for the Registered Trader's
registration with the Exchange or the SFC to be put at risk;
(iv) in its absolute discretion, MeesPierson may without prior notice to the
Customer impose such restrictions upon the Registered Trader (including
preventing him from conducting or being involved in any trading on
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any of the Exchange's markets or making use of or having access to
MeesPierson's facilities and equipment) as MeesPierson thinks necessary in
order to protect the interests of MeesPierson's other customers, the
Exchange or MeesPierson itself;
(v) on request the Customer will provide forthwith to MeesPierson such
information about the Registered Trader and his trading activities
(including all relevant documents) as MeesPierson thinks fit;
(vi) the Customer undertakes and will ensure that the Registered Trader does
nothing which harms the interests or reputation of any other customer of
MeesPierson, the Exchange, MeesPierson or any company within the
MeesPierson group of companies or any employee, officer or other
representative of any of them and in particular the Customer will ensure
that the Registered Trade does not misuse or disclose to any third party
any confidential information belonging to MeesPierson;
(vii) the Customer will fully reimburse MeesPierson forthwith on demand for all
fees, costs and other expenses incurred by it (including the costs of
seeking legal or other advice) in respect of the application for
registration of the Registered Trader with the Exchange and the SFC and
any subsequent re-registrations or amendments to the terms of registration
of the Registered Trader, including the termination of any registration.
16. Appointment of Attorney
The Customer appoints the Chief Executive of the Exchange (or such other
persons as the Board of the Exchange may appoint) as the Customer's
attorney to do all things necessary to transfer any open positions held by
MeesPierson on the Customer's behalf and money and securities standing to
the credit of the Customer's account with MeesPierson to another member of
the Exchange in the event of MeesPierson's membership being suspended or
revoked.
17. Client Information Statement
The Customer warrants that the information contained in the attached
Client Information Statement (which is required to be completed by the
Customer pursuant to Rule 601(a) of the Exchange Rules) is true and
complete. The Customer will notify MeesPierson forthwith of any material
changes in the information supplied in the Client Information Statement.
MeesPierson is entitled to rely on such information until it has received
written notice of any changes therein.
B. RISK DISCLOSURE STATEMENT
INTRODUCTION
1. This risk disclosure statement is furnished to all clients pursuant to
the rules and regulations of the Exchange.
2. The purpose of this statement is to ensure that clients only enter into
futures and options contracts on the Exchange having read and understood
the contents of this statement and, as a result, having understood the
nature and extent of the risks involved in, and their obligations and
rights in respect of, futures and options trading.
3. All clients must therefore receive a risk disclosure statement, read it,
have it explained to them, understand it and confirm (by signing the
acknowledgments by customer below) that they have read it and understood
it.
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4. No member of the Exchange ("Member") can accept an order from a client or
transact any business on behalf of a client unless and until the
acknowledgment attached to the risk disclosure statement has been returned
to them having been duly completed by the client.
5. However, this risk disclosure statement is not intended to constitute a
comprehensive statement of the risks and significant aspects of trading in
the futures and options trading. Clients must study futures and options
trading in any event before they trade.
6. Further, this statement must not be taken as an endorsement or promotion
by the Exchange of futures and option trading.
Risks Involved in Futures Trading
7. The risk of significant losses through trading futures contracts can be
substantial. Clients must therefore consider carefully in advance whether
such trading is suitable for them in the light of their financial
condition and investment objectives. In considering whether to trade in
futures contracts, clients should be aware of the following:
7.1 Clients may lose all of the initial margin fund and any additional
funds deposited by them with Members for the purpose of
establishing and/or maintaining a position in the futures market.
If the market moves against the clients' positions, the clients
may be called upon to deposit substantial amounts of additional
margin funds at short notice in order to maintain the position. If
the required funds are not provided within the prescribed time,
the position may be liquidated unilaterally at a loss and the
clients will be liable for any resulting deficit.
7.2 Under certain market conditions, clients may find it difficult if
not impossible to liquidate/close out a position. This can occur
when for example the market makes a limit move.
7.3 Clients can place stop loss or stop limit orders with their
brokers with a view to automatically liquidating/closing out a
position when the market or loss incurred reaches a certain level.
However, placing such orders will not necessarily limit the
clients' losses because market conditions may make it impossible
to execute such orders.
7.4 A spread position may be as risky as a simple "long" or "short"
position.
7.5 A high degree of leverage can often be achieved in futures trading
because of the relatively small margin requirements. This degree
of leverage can work against clients as well as for them - the
leverage can lead to large losses as well as large gains.
Risks Involved in Options Trading
8. The purchase and/or writing of options involves a high degree of risk
because of, principally, the volatile nature of the stock and commodity
markets. Clients must therefore consider carefully in advance whether such
trading is suitable for them in the light of their financial condition and
investment objectives. In considering whether to trade in options
contracts, clients should be aware of the following:
8.1 Both buyer and seller of an option must be aware of the
subject-matter of the option and whether or not the
subject-matter, e.g. a stock or a commodity, is to be delivered or
received or if the option is to be settled by a cash-payment. If
the option is on a future, the purchase will acquire a futures
position with associated liabilities for margin (see section 7
above).
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8.2 If the market moves against the writers of options, additional
margin is likely to be required from the writers at short notice.
Option writers are liable for potentially unlimited losses whilst
their gains are limited to the option premium. The writer of an
option will also be exposed to the risk of the purchaser
exercising the option, in which case the writer will be obligated
to either settle the option in cash or to acquire or deliver the
underlying interest. If the option is on a future, the writer will
acquire a position in a future with associated liabilities for
margin (see the section 7 above). If the option is 'covered' by
the writer holding a corresponding position in the underlying
interest or a future or another option, the risk may be reduced.
If the option is not covered, the risk of loss can be unlimited.
8.3 Options are wasting assets; it is possible that option holders may
suffer the loss of the whole premium paid in respect of the
option. In order to close out an open option position (whether at
a profit or otherwise), it is necessary to either exercise the
option or offset the long position in the market through a
closing trade. However, market conditions may make it impossible
to execute such orders.
8.4 Some options can be exercised only on the expiry date (e.g. Hang
Seng Index Options). Other options may be exercised at any time
before expiration.
8.5 A high degree of leverage can often be achieved in options
trading. This degree of leverage can work against clients as well
as for them - the leverage can lead to large losses as well as
large gains.
8.6 Both buyers and sellers of options should calculate the extent to
which the value of the options must increase for your position to
become profitable, taking into account the premium and all
transaction costs. If you are contemplating purchasing
deep-out-of-the-money options, you should be aware that the chance
of such options becoming profitable ordinarily is remote.
8.7 Certain exchanges in some jurisdictions permit deferred payment of
the option premium, exposing the purchaser to liability for margin
payments not exceeding the amount of the premium. The purchaser is
still subject to the risk of losing the premium and transaction
costs. When the option is exercised or expires, the purchaser is
responsible for any unpaid premium outstanding at that times.
RISKS INVOLVED IN TRADING IN HANG SENG CHINA ENTERPRISES INDEX FUTURES CONTRACTS
9. Trading in Hang Seng China Enterprises Index Futures Contracts is subject
to the risks described in section 7 above. In addition to those risks, the
trading will involve the following potential risks:
9.1 Political Risks: A change of leadership or political or social
unrest in the People's Republic of China ("the PRC") may lead to
major changes in economic and other policies. It is noted however
that the Government of the PRC has been carrying out an open-door
policy since 1978.
9.2 Economic Risks: The PRC Government plans to replace the PRC's
planned economy with a socialist market economy. (The planned
economy involves the State Planning Commission directly
influencing the development of the economy, including the
operation of businesses and control over citizen's income, and
consumption levels and patterns.) The PRC economy is in a
transition stage. Central government continues to exercise an
important influence on many aspects of the operation of businesses
in the PRC and the pace of economic development and change. It may
therefore be a considerable time before market forces become a
major factor in the allocation of resources in the PRC economy.
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9.3 Foreign Currency Risks: The PRC Government controls and manages
its foreign exchange reserves through measures including
import/export restrictions and regulations directly controlling
the conversion of Renminbi ("RMB") into foreign currencies. With
effect from 1st January 1994 the foreign exchange control system
has been further reformed by the incorporation of the official RMB
and swap RMB exchange rates. This has resulted in a centralised
inter-bank foreign exchange trading centre supervised and
controlled by the People's Bank of China through the State Foreign
Exchange Administration. In the PRC all foreign exchange
transactions involving RMB must be effected through authorized
banks designated by the People's Bank and at rates calculated by
the People's Bank based on the price of the foreign currency and
taking into account:
9.3.1 dealings on the previous day in the inter-bank foreign
exchange market;
9.3.2 the median rate for daily foreign exchange rates between
RMB and U.S. dollars published after taking into account
fluctuations in the international foreign exchange
market;
9.3.3 the exchange rates between RMB and other major
currencies.
Such adopted rates float within a range prescribed by the People's Bank.
Although the conversion of RMB into Hong Kong dollars or other currencies
is generally completed without delay at the authorised banks, there is no
guarantee that such conversions can be carried out at all times. All
foreign exchange income of Chinese enterprises (apart from enterprises
with foreign investments) must be settled and sold to authorised banks in
accordance with the authorised bank's published exchange rates.
9.4 Legal and regulatory risks:
(a) Corporate law: PRC company law is in its infancy;
provisions for the protection of shareholders' rights and
access to corporate information are different from those
in Hong Kong and other developed countries. There are no
nationally applicable corporate PRC laws, apart from the
Standard Opinion which currently forms the basis of the
legal framework governing joint stock limited companies.
(b) Securities law: PRC securities law is incomplete. The
regulatory framework of the PRC securities industry is
in its infancy. Currently there is no PRC law applicable
to PRC enterprises seeking to issue shares and obtain
listings outside the PRC, although the securities rules
and regulations applicable to PRC companies seeking to
issue shares and obtain listings within the PRC are
generally applied.
(c) Tax law: Shares in PRC companies are a relatively new
form of investment in the PRC. It is uncertain whether
income or capital gains arising from dealings in such
shares will be chargeable to tax and, if so, how.
Generally, PRC company law is materially different from Hong Kong company
law, particularly in the area of investor protection. The lack of
investor protection in the PRC is compensated to some extent by the
mandatory requirements of the Stock Exchange of Hong Kong Limited that PRC
companies listed in Hong Kong have certain provisions in their Articles of
Association. Key material differences between PRC and Hong Kong company
law include: derivative actions by minority shareholders and other
minority protection; remedies against misfeasant directors, financial
disclosure, variation of class rights, general meeting procedures and
payment of dividends.
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Risks Involved in Trading in Currencies Futures and Options Contracts
10. Trading in currencies futures and options contracts is subject to the
risks described in sections 7 and 8 above. Clients must ensure in advance
of any trading that they are familiar with those risks and the systemic
risks involved in trading in currencies generally, including volatility,
exchange restrictions and the risk of major systemic collapses in currency
markets.
11. The profit or loss in transactions in foreign currency-denominated
contracts (whether they are traded in your own or another jurisdiction)
will be affected by fluctuations in currency rates where there is a need
to convert from the currency denomination of the contract to another
currency.
12. The One Day Rolling Currency Futures Contract ("ODRCF Contract"), similar
to other exchange-traded futures contracts, provides a versatile and
well-leveraged investment vehicle to investors. However, increases in both
the volatility of the relative currency value and the volume of world
trade have resulted in an exposure to dramatically higher foreign exchange
risk in recent years. It has not been uncommon for major currencies to
fluctuate in value by twenty or thirty percent vis-a-vis the U.S. dollar
in a period of less than one year. In addition, a variety of other factors
including interest rate movements, macro and micro economic conditions and
political stability may also affect the value of currencies.
13. Investors should only participate in the ODRCF market if they fully
appreciate the risks inherent in the foreign exchange market and employ
strategies consistent with their currency value expectations, investment
objectives and tolerance for risk. Investors should also be aware of the
potential risks associated with possible exchange rate fluctuations where
foreign exchange investments are priced and/or settled in a currency other
than their home currency.
Other Risks Involved in Trading Futures and Option Contracts
14. You should ask the firm with which you deal about the terms and conditions
of the specific futures or options which you are trading and associated
obligations (e.g. the circumstances under which you may become obliged to
make or take delivery of the underlying interest of a futures contract
and, in respect of options, expiration dates and restrictions on the time
for exercise). Under certain circumstances the specifications of
outstanding contracts (including the exercise price of an option) may be
modified by the exchange or clearing house to reflect changes in the
underlying interest.
15. Market conditions (e.g. illiquidity) and/or the operation of the rules of
certain markets (e.g. the suspension of trading in any contract or
contract month because of price limits or 'circuit breakers') may increase
the risk of loss by making it difficult or impossible to effect
transactions or liquidate/offset positions. If you have sold options, this
may increase the risk of loss.
16. Further, normal pricing relationships between the underlying interest and
the future, and the underlying interest and the option may not exist. This
can occur when, for example, the futures contract underlying the option is
subject to price limits while the option is not. The absence of an
underlying reference price may make it difficult to judge 'fair' value.
17. You should familiarize yourself with the protections accorded money or
other property you deposit for domestic and foreign transactions,
particularly in the event of a firm insolvency or bankruptcy. The extent
to which you may recover your money or property may be governed by
specific legislation or local rules. In some jurisdictions, property which
had been specifically identifiable as your own will be pro-rated in the
same manner as cash for purposes of distribution in the event of a
shortfall.
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<PAGE> 16
18. Before you begin to trade, you should obtain a clear explanation of all
commissions, fees and other charges for which you will be liable. These
charges will affect your net profit (if any) or increase your loss.
19. If you wish your broker to trade for you in markets other than those
operated by the Exchange, you must ensure that your broker is permitted to
trade in those markets and that you are familiar with the requirements of,
and types of redress in, those markets. The Exchange cannot and will not
supervise your broker's trading in those markets and the Compensation Fund
established under the Commodities Trading Ordinance is not available for
defaults in trading on those markets. Transactions on markets in other
jurisdictions, including markets formally linked to a domestic market, may
expose you to additional risk. Such markets may be subject to regulation
which may offer different or diminished investor protection. Your local
regulatory authority will be unable to compel the enforcement of the rules
of regulatory authorities or markets in other jurisdictions where your
transactions have been effected.
20. Most open-outcry and electronic trading facilities are supported by
computer-based component systems for the order-routing, execution,
matching, registration or clearing of trades. As with all facilities and
systems, they are vulnerable to temporary disruption or failure. Your
ability to recover certain losses may be subject to limits on liability
imposed by the system provider, the market, the clearing house and/or
member firms. Such limits may vary: you should ask the firm with which you
deal for details in this respect.
21. Trading on an electronic trading system may differ not only from trading
in an open-outcry market but also from trading on other electronic
trading systems. If you undertake transactions on an electronic trading
system, you will be exposed to risks associated with the system including
the failure of hardware and software. The result of any system failure may
be that your order is either not executed according to your instructions
or is not executed at all.
22. In some jurisdictions, and only then in restricted circumstances, firms
are permitted to effect off-exchange transactions. The firm with which you
deal may be acting as your counterparty to the transactions. It may be
difficult or impossible to liquidate an existing position, to assess the
value, to determine a fair price or to assess the exposure to risk. For
these reasons, these transactions may involve increased risks.
Off-exchange transactions may be less regulated or subject to a separate
regulatory regime. Before you undertake such transactions, you should
familiarize yourself with applicable rules and attendant risks.
C. Disclosure of Company information
1. In accordance with Rule 601(c) of the Exchange's Rules, we disclose the
following to you:
Company Name : MeesPierson Futures Clearing
Services (Asia) Limited
Membership category : Futures Commission Merchant
Registration number (required by
the Commodities Trading Ordinance) : CDC 000370
Staff responsible for your
account :
Dealing Director/
Name Dealer Representative Registration No.
---- --------------------- ----------------
Michiel Alexander de Boer Dealing Director CD 001089
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<PAGE> 17
Emma Jane McDonald Dealer's Representative CDR 011746
D. Explanation of Margin Procedures and Unilateral Closing Out of Clients'
Positions
Pursuant to Rule 602(q) of the Exchange's Rules, MeesPierson is required
to explain the margin procedures and the circumstances under which the
Customer's positions may be closed out without the Customer's consent. For
the purposes of Rule 602(q), the following explanation is given.
Margin Procedures
1. The Agreement sets out detailed provisions regarding the
operation of margin calls and requirements: see in particular
clauses 6 and 7 of the Agreement.
2. MeesPierson follows all margin rules laid down by all Exchanges on
which products are traded on margin.
3. Any changes in margin requirements (whether imposed by the
Exchange or by MeesPierson) will be communicated to the Customer
by MeesPierson's representatives in an appropriate manner.
Unilateral closing out of the Customer's positions
4. The Customer must remember that, in the event of a default,
MeesPierson may close out the Customer's open positions without
prior notice to or consent from the Customer as provided for by
the terms of the Agreement. MeesPierson has reserved in the
Agreement the right to close out any open positions(s) without
notice (i) when the margins on deposit with MeesPierson are
exhausted, inadequate in the opinion of MeesPierson to protect it
against possible price fluctuations or any adverse conditions or
(ii) any other appropriate circumstances.
5. No conduct or omission on behalf of MeesPierson, nor any agreement
purportedly entered into on MeesPierson's behalf (save an
agreement in accordance with the terms of the Agreement), shall
constitute any form of waiver or variation or relaxation
MeesPierson's rights to close out the Customer's positions
unilaterally.
6. Any steps taken by MeesPierson to close out the Customer's
positions unilaterally will be entirely without prejudice to
MeesPierson's other rights under the Agreement and otherwise, in
particular the right to payments from the Customer of all amounts
outstanding.
E. Statement of Particulars of Approved Contracts
MeesPierson is licensed to trade in the products approved by the Exchange
from time to time. MeesPierson will provide contract specifications for
those products to the client.
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<PAGE> 18
F. Acknowledgements by Customer
I/We acknowledge that:
(i) I/We have read carefully the Agreement (section A) and additional
sections B to E above.
(ii) the contents of the Agreement and the additional sections have
been fully explained to me/us in a language which I/we understand.
I/We have agreed to the Agreement, the additional sections and the
attachments referred to in those documents being in English and
with their contents.
(iii) I/We have been given an adequate opportunity to ask questions of
MeesPierson's representatives and to consult my/our own legal
advisers about the Agreement, the additional sections and the
attachments.
(iv) I/We have received the Agreement, the additional sections and the
attachments.
(v) I am/We are trading on my/our own account.
Signed by (if an individual) or for and on behalf of (if a corporation)
/s/ AUBREY JUDSON ELLIS
the customer: HULL TRADING ASIA LIMITED
Dated: March 11, 1998 (Company Chop)
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<PAGE> 19
For Corporation(s) :
Signed on behalf of the Corporation below-mentioned pursuant to a resolution
duly passed at a duly convened and held meeting of the Board of Directors
thereof, a certified copy of which is annexed hereto.
For and on behalf of: HULL TRADING ASIA LIMITED
Name : Aubrey Judson Ellis
Title : Director
/s/ AUBREY JUDSON ELLIS
- -------------------------------
Signature
Accepted by :
Name : For and on behalf of
MeesPierson Futures Clearing
Services (Asia) Limited
- ------------------------------- -------------------------------
Signature Director
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<PAGE> 1
EXHIBIT 10.6
Name: Hull Trading Company, L.L.C.
Account No:
A. CUSTOMER AGREEMENT
To: MeesPierson Futures Clearing Services (Asia) Limited Date: August 26, 1998
1. Introduction/General
(a) The following are the terms and conditions to which I/We will be subject
upon opening, and in respect of, any account held by me/us with you.
(b) The following definitions are used herein:
- "the Agreement" means this document and the terms and conditions
set out herein.
- "the Clearing House" means HKFE Clearing Corporation Limited;
- "Commodities" shall include, but not be limited to, gold, silver
and other physical commodities, monies, foreign currencies,
securities (as defined from time to time in the Securities
Ordinance), stocks, currency options, foreign exchange contracts,
index options, index futures contracts, commodity forward or
futures contracts, securities futures contracts, stock futures,
commodity options, securities futures options, stock options,
currency forward or futures contracts, financial futures and
contracts for the future delivery of, or otherwise relating to,
commodities, foreign currencies or securities;
- "the CTO" means the Commodities Trading Ordinance, Chapter 250 of
the Laws of Hong Kong as amended from time to time;
- "the Customer" means me/us. In addition, "the Customer" wherever
used shall where the Customer(s) is/are individual(s) include
his/their respective executors and administrators and where the
Customer is a sole proprietorship include his executors and
administrators and his or their successors in the business and in
the case of a partnership firm include the partners who are the
partners of the firm at the time when the Customer's account or
accounts are being maintained and their respective executors and
administrators and any other person or persons who shall at any
time hereafter be or have been a partner of and in the firm and
his or their respective executors and administrators and the
successors to such partnership business and where the Customer is
a corporation include its successors;
- "the Exchange" means Hong Kong Futures Exchange Limited;
- "MeesPierson" means you;
- "the SFC Ordinance" means the Securities and Futures Commission
Ordinance, Chapter 24 of the Laws of Hong Kong as amended from
time to time.
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<PAGE> 2
(c) This Agreement is subject to and governed by the provisions of
the CTO and Hong Kong law.
(d) The rules and regulations of the Exchange and the Clearing House
shall be binding on the Customer and MeesPierson. Those rules and
regulations contain provisions requiring MeesPierson in certain
circumstances to disclose the name and beneficial identity of the
Customer.
(e) MeesPierson, its directors and/or employees may trade on their
own account and, subject to the provisions of the CTO and the SFC
Ordinance, MeesPierson may take the opposite position to the
Customer's order in relation to any futures/options contract,
whether on MeesPierson own account or for the account of other
customers of MeesPierson, provided that such trade is executed
competitively on the floor in accordance with the rules and
regulation of the Exchange or other exchanges governing the
relevant markets.
(f) unless otherwise confirmed in writing by MeesPierson and agreed
by the Customer and MeesPierson, MeesPierson is acting solely as
broker to any transactions made with MeesPierson by the Customer.
(g) In all transactions referred to in the Agreement MeesPierson may
contract as principal.
(h) The terms and conditions of the Agreement shall inure to the
benefit of, and bind MeesPierson, MeesPierson's successors and
assigns, whether by merger, consolidation or otherwise, as well
as the heirs, executors, administrators, legatees, successors,
personal representatives and assigns of the Customer.
(i) The Customer submits to the non-exclusive jurisdiction of the
Court of Hong Kong in respect of all disputes, differences
and claims relating to or arising out of the Agreement.
(j) Notices, and any other communications may be transmitted to the
Customer at the address, or telephone number or telex Number or
fax number given herein, or at such other address or telephone
number or telex number or fax number as the Customer hereafter
shall notify MeesPierson in writing, and all communications so
transmitted, whether by mail, fax, telegraph, telephone,
messenger or otherwise, shall be deemed transmitted when
telephoned or when deposited in the mail, or when received by a
transmitting agent.
(k) No provision of the Agreement shall in any respect be waived or
amended unless such waiver or amendment is in writing and signed
by an authorised officer of MeesPierson. This Agreement shall not
be revoked by the Customer except in writing. Such revocation,
however, shall not affect any transaction entered into by
MeesPierson pursuant to the Agreement before written notice of
the revocation has been received by MeesPierson.
(l) MeesPierson may take or omit to take any action which it
considers appropriate in order to ensure compliance with any
such constitution, rules and regulations, including (without
limitation) adjusting any account(s), disregarding any unexecuted
order or rescinding any executed transactions.
(m) If any provision hereof is inconsistent with any present or
future law, rules or regulations of any exchange, or any
authority having jurisdiction over the subject matter of the
Agreement, such provision shall be deemed to be rescinded or
modified in accordance with any such law, rules or regulations.
In all other respects, the Agreement shall continue and remain in
full force and effect.
(n) Unless otherwise agreed, the Customer may not trade on margin and
MeesPierson is under no obligation to make credit facilities
available. Before MeesPierson conducts any transaction on the
Customer's behalf, the Customer will put MeesPierson in funds to
complete such
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<PAGE> 3
transaction. Notwithstanding the foregoing, and without prejudice
to the other relevant provisions of the Agreement, the Customer
will at all times be liable for the payment on demand of any
debit balance or other obligation or liability owing on any
account which may arise for whatever reason.
(o) The Customer will indemnify MeesPierson and its officers,
employees, agents and account executives for any loss, cost,
claim, liability or expense arising out of or connected with any
breach hereunder including any costs reasonably and necessarily
incurred in collecting any debts due or in connection with the
closure of any account.
(p) The Customer authorises MeesPierson to conduct a credit enquiry
or check on the Customer for the purpose of ascertaining the
Customer's financial situation and investment objectives.
(q) If any provision of the Agreement shall be held to be invalid or
unenforceable by any Court or regulatory agency or body, such
invalidity or unenforceability shall attach only to such
provision. The validity of the remaining provisions shall not be
affected thereby and the Agreement shall be carried out as if any
such invalid or unenforceable provision were not contained
herein.
(r) Where the Agreement is signed by or on behalf of a firm or
otherwise by or on behalf of more than one person:
(i) any liability arising hereunder shall be deemed to be
the joint and several liability of the partners in the
firm of such persons as aforesaid;
(ii) MeesPierson has no obligation to inquire into the purpose
or propriety of any instruction or the application of any
funds affected, by any partner of the firm or any such
persons as aforesaid;
(iii) notwithstanding any other arrangements which have been
made between them, the rule of survivorship shall apply
to all accounts and, on the death of any of them, all
funds, securities and properties for the time being
standing to the credit of any account and anything held
by MeesPierson, whether by way of security or otherwise,
shall be held to the order of the survivor(s);
(iv) any one of them has full authority to give any
instruction with respect to any account; to receive
demands, notes, confirmations, reports, statements and
other communications of any kind, such communications
shall be binding on each of them notwithstanding that
such communications have not been actually sent to or
received by every one of them; generally to deal with
MeesPierson in connection with the Agreement as fully and
completely as if the others had no interest therein; and
(v) the Agreement continues to be valid and binding for all
purposes notwithstanding any change in the partnership or
constitution of the firm by the introduction of a new
partner or by the death, insanity or bankruptcy or
retirement of any partner.
If the Agreement is signed by or on behalf of more than one
person and any one or more of such persons is not bound by the
Agreement (whether by reason of his or their lack of capacity or
improper execution of the Agreement or otherwise), the remaining
person or persons shall continue to be bound by the Agreement as
if such other person or persons had never been party hereto.
(s) The Agreement shall remain in effect and binding on the Customer
notwithstanding (i) any amalgamation or merger that may be
effected by MeesPierson with any other company, (ii) any
reconstruction by MeesPierson involving the formation of and
transfer of the whole or any
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<PAGE> 4
undertakings and assets to a new company or (iii) the sale or
transfer of all or any part of any undertakings and assets to
another company whether the company with which MeesPierson
amalgamates or merges or the company to which is transferred all
or any part of any undertakings and assets either on a
reconstruction or sale or transfer as aforesaid shall or shall
not differ from in its objects, character or constitution; the
Agreement shall remain valid and effectual in all respects, and
that the benefit thereof and all rights conferred upon
MeesPierson thereby may be assigned to and enforced by, any such
company and proceeded on in the same manner to all intents and
purposes as if such company had been named herein instead of or
in addition to MeesPierson.
(t) The Customer may not assign any contract entered into between the
Customer and MeesPierson or any of the rights or obligations
thereunder without the consent in writing from MeesPierson which
consent MeesPierson shall not be under any obligation to give.
2. Orders
(a) MeesPierson shall have no obligation to provide the Customer with
information with respect to the Customer's positions and shall have no
obligation but the right at the discretion of MeesPierson to close any
position in any account MeesPierson may carry on the Customer's
behalf. MeesPierson shall have the right (at the absolute discretion
of MeesPierson, and without assigning any reason therefor) to refuse
to act for the Customer in any particular transaction.
(b) In case of the sale of any Commodities or other properties by
MeesPierson at the direction of the Customer and the Customer's
failure to supply MeesPierson therewith, the Customer authorises
MeesPierson to borrow any Commodities, or other properties necessary
to make delivery thereof, and the Customer agrees to guarantee,
indemnify and hold MeesPierson harmless against any loss which
MeesPierson may sustain thereby, any premiums which MeesPierson may
be required to pay, or for any loss which MeesPierson may sustain by
reason of the inability of MeesPierson to borrow the Commodities or
other properties sold.
(c) Liquidating instruction and sufficient good funds where necessary on
open futures positions maturing in a current month must be given to
MeesPierson at least two business days prior to the first notice day
in the case of long positions and in the case of short positions, at
least five business days prior to the last trading day. If
instructions or good funds are not received by MeesPierson,
MeesPierson may, without notice, liquidate the Customer's position
upon such terms and by such methods which MeesPierson shall deem fit
and, having done so, MeesPierson shall not be liable for any loss or
liability which arises whether directly or indirectly as a result.
(d) MeesPierson shall not be responsible for delays in the transmission of
orders due to a breakdown or failure of transmission of communication
facilities, or to any other cause or causes beyond the control or
anticipation of MeesPierson. All orders, instructions or requests
whether by letter, facsimile or otherwise or made orally are accepted
and transmitted at the Customer's risk. On request the Customer shall
confirm in writing verbal orders, instructions or requests. It is
understood that the risk of instructions being given by persons
purporting to be the Customer's authorised representatives is borne
solely by the Customer and MeesPierson shall not be responsible nor
liable for any loss that may result from any unauthorised
instructions.
(e) The Customer may not withdraw nor amend any order or instruction after
the same has been given unless MeesPierson consents to such withdrawal
or amendment. In giving consent to such withdrawal or amendment,
MeesPierson may impose such conditions, including indemnities for
costs and expenses, as it deems fit.
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<PAGE> 5
(f) When MeesPierson on behalf of the Customer executes sell or buy
orders, MeesPierson, MeesPierson's directors, officers, employees, and
agents of MeesPierson and, any floor broker may buy or sell for an
account in which any such person has interest, subject to the
limitations and conditions, if any, contained in the constitution,
rules, regulations, customs, usages, rulings, and interpretations then
extant or in force of the Exchange or other market upon which such buy
or sell orders are executed. MeesPierson may execute any order on
behalf of the customer by way of a cross-trade.
3. Lien & Power of Sale
(a) Without prejudice and in addition to any general lien, right of
set-off or similar right to which MeesPierson may be entitled by law,
all of the Customer's interest in any Commodities or other property
held by MeesPierson for any purpose or carried by MeesPierson in any
account for the Customer (either individually or jointly with others)
or which may be in the possession of MeesPierson, or in the possession
of any group companies of MeesPierson, at any time and for any
purpose, including safe-keeping, shall be subject to a general lien in
favour of MeesPierson. MeesPierson shall also have the right to cancel
any open orders for the sale or purchase of any Commodities and/or
sell such properties (and MeesPierson is authorised to do all such
things necessary in connection with such sale) and utilise the
proceeds to offset and discharge part or all of the obligations of the
Customer to MeesPierson or to any of its group companies, regardless
of whether any other person is interested in or MeesPierson has made
advances in connection with such properties, and irrespective of the
number of accounts the Customer may carry with MeesPierson.
(b) Whenever MeesPierson considers it necessary, it may cancel any open
orders for the sale or purchase of any Commodities and/or sell any
Commodities or other property belonging to the Customer or in which
the Customer has an interest with or without notice to the Customer.
Such sale or purchase may be public or private and may be made without
advertising or notice to the Customer and in such manner as
MeesPierson may at its sole discretion determine. At any such sale
MeesPierson may purchase the properties or any of them free of any
right of redemption and in respect of any such sale MeesPierson shall
have no liability for any loss incurred and the Customer will not make
any claim against MeesPierson concerning the manner of sale or timing
thereof. The proceeds of such transactions are to be applied to reduce
the indebtedness owing to MeesPierson.
(c) The Customer shall be liable for all losses whether or not the account
is liquidated and for any debts and deficiencies in the Customer's
accounts including all debts and deficiencies resulting from a
liquidation of the Customer's account.
(d) The Customer is bound by rule 631 of the Exchange which permits the
Chief Executive of the Exchange to take steps to limit positions or
require the closing out of contracts of the Customer who in the
opinion of the Chief Executive are accumulating positions which are or
may be detrimental to the Exchange's markets.
(e) The Customer agrees to maintain such collateral and/or margin as
MeesPierson may from time to time require. The Customer also agrees to
pay immediately on demand any amount owing to MeesPierson with respect
to any of the Customer's accounts. The Customer will be responsible
for all the expenses incurred by MeesPierson in connection with the
above and MeesPierson will not be liable for any loss that may thereby
be incurred. MeesPierson may without demand or notice close out open
positions. MeesPierson has reserved in the Agreement the right to
close out any open position(s) without notice (j) when the margins on
deposit with MeesPierson are exhausted, inadequate in the opinion of
MeesPierson to protect it against possible price fluctuations or any
adverse conditions or (ii) any other appropriate circumstances.
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<PAGE> 6
(f) MeesPierson shall have the right to (i) satisfy any obligation the
Customer may have to MeesPierson (either directly or by way of
guaranty or suretyship) out of any properties belonging to the
Customer in the custody or under the control of MeesPierson and
(ii) cancel any outstanding orders in order to close the account
or accounts of the Customer, all without demand for margin or
additional margin, notice to the Customer, the Customer's heirs,
executors, administrators, legatees, personal representatives or
assigns, of sale or purchase or other notice of advertisement and
whether or not the ownership interest shall be solely the
Customer's or jointly with others, in the following
circumstances:- (i) whenever MeesPierson at its sole discretion
shall consider it necessary for the protection of MeesPierson,
because of margin requirements or otherwise, or, (ii) in the event
that a petition for bankruptcy or winding up (as the case may be),
or notice of the appointment of a receiver, is filed by or against
the Customer or, (iii) when an attachment is levied against the
account(s) of the Customer with MeesPierson, or, (iv) in the event
of the death or judicial declaration of incompetence of the
Customer. Any sale or purchase may be made at the discretion of
MeesPierson in any manner and on any market it thinks fit. In all
cases, a prior demand or call, or prior notice of the time or
place of sale or purchase shall not be considered a waiver of the
right of MeesPierson to sell or to buy without demand or notice as
herein provided. In all cases, the Customer shall be liable for
any deficiency remaining in such account(s) in the event the
liquidation thereof in whole or in part by MeesPierson or by the
Customer. Debit balance(s) in such account(s) shall be charged
with interest thereon at a rate to be determined by MeesPierson
from time to time and the Customer shall promptly settle, upon
demand, all liabilities outstanding to MeesPierson, together with
all costs of collection (including legal fees).
4. Customer's Account
(a) All monies or other properties received by MeesPierson from the
Customer or from any other person, including the Clearing House
for the account of the Customer in respect of the futures/options
contracts transacted on behalf of the Customer shall be held by
MeesPierson as trustee, segregated from MeesPierson's own assets
and paid into a segregated bank account.
(b) The Customer hereby authorises MeesPierson to apply any monies
which the Customer may pay to MeesPierson in order to (i) meet
the obligations of MeesPierson to the Clearing House (provided
that no withdrawal from the Customer's accounts with MeesPierson
may be made which would have the effect that the relevant margin
requirements or trading liabilities conducted on behalf of any
Customer are thereby financed by any other Customer), (ii) pay
commission, brokerage, levies and other proper charges for
contracts transacted by MeesPierson on behalf of the Customer,
(iii) make payments in accordance with the Customer's directions
(provided that no money may be paid into another account of the
Customer unless that account is also a segregated bank account).
The Customer acknowledges that MeesPierson may apply such monies
in or towards meeting MeesPierson's obligations to any party
insofar as such obligations arise in connection with or
incidental to all futures/options contracts transacted on the
Customer's behalf. The Customer agrees that MeesPierson may
retain interest on the Customer's money.
5. Clearing House Account
In respect of any account of MeesPierson maintained with the Clearing
House, whether or not such account is maintained wholly or partly in respect
of the futures/options contracts transacted on behalf of the Customer and
whether or not money paid by the Customer has been paid to the Clearing
House, as between MeesPierson and the Clearing House, MeesPierson deals as
principal and accordingly no such account is impressed with any trust or
other equitable interest in favour of the Customer and monies paid to the
Clearing House are thereby freed from the trust referred to in clause 4(a)
above.
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6. Margin Call
Margin calls must be met within the period specified by MeesPierson from
time to time. MeesPierson is obliged to report to the Exchange particulars
of all open positions in respect of which two successive margin calls
and/or demands for variation adjustment are not met within the period
specified by MeesPierson. MeesPierson may require more margin or variation
adjustment than that specified by the Exchange and/or the Clearing House
and/or other exchanges and may close out open positions unilaterally in
respect of which any margin calls and/or demands for variation adjustments
are not met.
7. Margin Requirements
The original and variation margin, to be determined from time to time by
MeesPierson at its sole discretion, will be maintained by the Customer in
any and all accounts the Customer may at any time carry with MeesPierson.
If MeesPierson determines that additional margin is required, the Customer
will deposit with MeesPierson such additional margin forthwith upon demand.
However, notwithstanding any demand for additional margin, MeesPierson may
at any time proceed in accordance with paragraph 3(e) above.
8. MeesPierson may at any time and at its sole discretion change margin
requirements. New margin requirements once established shall apply to
existing positions as well as to new positions. Margin requirements may be
met by a deposit of cash or securities or any other form acceptable by
MeesPierson and in accordance with the rules and regulations of the
Exchange or other exchanges governing the relevant markets.
9. Transactions in Foreign Currencies
In the event that the Customer directs MeesPierson to enter into any
contract on an exchange or other market on which such transactions are
effected in a foreign currency: (a) any profit or loss arising as a result
of a fluctuation in the exchange rate affecting such currency will be
entirely for the account and risk of the Customer; (b) all initial and
subsequent deposits for margin purposes shall be made in such currency in
such amounts as MeesPierson may, at its sole discretion, require; and (c)
when such a contract is liquidated MeesPierson shall debit or credit the
account of the Customer in the currency in which such account is
denominated at a rate of exchange (where the relevant contract is
denominated in a currency other than that of the account) determined by
MeesPierson at its sole discretion on the basis of the then prevailing
money market rates of exchange.
10. Levies & Commission
(a) Every contract executed on the floor of the Exchange shall be subject
to applicable Compensation Fund levies and levies pursuant to
Securities and Futures Commission Ordinance the cost of both of which
shall be borne by the Customer.
(b) Every contract executed in the Stock Index Futures Market on the floor
of the Exchange shall be subject to the charge of a special levy
pursuant to the Exchanges (Special Levy) Ordinance, the cost of which
shall be borne by the Customer.
(c) In respect of contracts executed in markets other than those organised
by the Exchange, any charges levied on such contracts by the relevant
markets shall be borne by the Customer.
(d) The Customer will pay commission and other charges which MeesPierson
may think fit at a rate to be determined by MeesPierson and charges
pursuant to Hong Kong law or the rules of the Exchange or other
exchanges governing the relevant markets.
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<PAGE> 8
11. Rules & Laws
(a) All transactions shall be subject to the constitution, rules,
regulations, customs, usages, rulings and interpretations, from time
to time extant or in force of the Exchange or other markets (and of
their respective clearing house, if any), where the transactions are
executed by MeesPierson or MeesPierson agents. All transactions under
this agreement shall also be subject to any law, rule, or regulation
then applicable thereto, including but not by way of limitation, the
provisions of the CTO, as amended from time to time, and the rules and
regulations thereunder.
(b) All transactions entered between MeesPierson and the Customer relating
to any money, foreign currency, currency option, currency future, or
currency forward contract or foreign exchange contract shall be
governed by and subject to all the rules, regulations, orders and laws
of the country of the currency or money concerned and those of Hong
Kong and/or the by-laws, rules and regulations of the exchange
concerned in which the transaction is done.
(c) All transactions related to futures/options contracts executed in
markets other than those organised by the Exchange will be subject to
the rules and regulations of those markets and not those of the
Exchange, with the result that the Customer may have a markedly
different level and type of protection in relation to those
transactions as compared to the level and type of protection afforded
by the rules of the Exchange.
12. Confirmation & Statements
Written confirmations of the execution of the Customer's orders and
statements of the Customer's accounts shall be conclusive and deemed to be
accepted if not objected to in writing by the Customer directed to the
address stated herein (or such other address communicated in writing by
MeesPierson) within 2 working days after transmission thereof to the
Customer, by mail or otherwise.
13. Telephone recordings
MeesPierson may record all incoming and outgoing telephone conversations
with its dealing desks and marketing desks. All recordings shall be used
solely for the purpose of verifying instructions given and the accuracy of
transactions.
14. Indemnity
If MeesPierson commits a default and the Customer suffers pecuniary loss
thereby, the liability of the Compensation Fund will be restricted to valid
claims as provided for in the CTO and the SFC Ordinance and will be subject
to the monetary limits specified in the Ordinances and accordingly that
there can be no assurance that any pecuniary loss sustained by reason of
such a default will necessarily be recouped from the Compensation Fund in
full, in part or at all.
15. Limitation of MeesPierson's liability
(a) Without prejudice to the remainder of this clause 15, where the Customer's
account is a discretionary one the Customer agrees that MeesPierson's
liability for all and any damages, losses, expenses, costs (and interest
thereon) claimed by the Customer shall be excluded, save in respect of
personal injury or death and/or in the case of liability arising from
gross neglect, fraud or wilful default by a director or employee of
MeesPierson or where and to the extent that the CTO or the rules of the
Exchange prohibit
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<PAGE> 9
such exclusion. Without prejudice to clause (2)(d) hereof, the Customer
acknowledges that MeesPierson will not be liable for any loss or damage
suffered by the Customer whether directly or indirectly as a result of any
inability or failure on the part of MeesPierson to comply with or fulfil
any instructions given by or on behalf of the Customer for any cause beyond
the reasonable control of MeesPierson, including but not limited to
government restrictions, rulings by any exchange or regulatory body,
changes in applicable laws or regulations, suspensions in trading, wars,
strikes, civil disorder or other circumstances having the same or similar
effect.
(b) The Customer warrants, undertakes and acknowledges that where trading is
conducted pursuant to this Agreement by or on the instructions or
directions or with the involvement of a Registered Trader (as defined in
Chapters 10 and/or 11 of the Exchange's Rules) who is an employee of the
Customer:-
(i) any act or omission or default on the part of the Registered Trader will be
(as between the Customer and MeesPierson and between either of them and any
third party) the sole responsibility of the Customer and the Customer will
fully indemnify and hold harmless MeesPierson against any liability of
whatsoever nature arising from any act or omission or default of the
Registered Trader and all costs, expenses and other liabilities of
MeesPierson arising therefrom and/or from any act taken by MeesPierson in
the light of the Registered Trader's activities which MeesPierson
considered at the time in question it was reasonable to take. To this end,
the Customer will maintain at all times a valid policy or policies of
insurance to cover risk to MeesPierson from the Registered Trader's
presence and activities on MeesPierson's premises;
(ii) unless provided otherwise by the Exchange's Rules or any agreement entered
into between the Exchange and MeesPierson, the Registered Trader shall not
be an employee of MeesPierson for any purpose;
(iii) the Customer shall use its best endeavours to ensure that at all times the
Registered Trader acts in a manner which does not involve any breach of
the Exchange's Rules or any applicable legislation or (subject to (iv)
below) which might in any way give cause for the Registered Trader's
registration with the Exchange or the SFC to be put at risk;
(iv) in its absolute discretion, MeesPierson may without prior notice to the
Customer impose such restrictions upon the Registered Trader (including
preventing him from conducting or being involved in any trading on any of
the Exchange's markets or making use of or having access to MeesPierson's
facilities and equipment) as MeesPierson thinks necessary in order to
protect the interests of MeesPierson's other customers, the Exchange or
MeesPierson itself;
(v) on request the Customer will provide forthwith to MeesPierson such
information about the Registered Trader and his trading activities
(including all relevant documents) as MeesPierson thinks fit;
(vi) the Customer undertakes and will ensure that the Registered Trader does
nothing which harms the interests or reputation of any other customer of
MeesPierson, the Exchange, MeesPierson or any company within the
MeesPierson group of companies or any employee, officer or other
representative of any of them and in particular the Customer will ensure
that the Registered Trade does not misuse or disclose to any third party
any confidential information belonging to Mees Pierson;
(vii)the Customer will fully reimburse MeesPierson forthwith on demand for all
fees, costs and other expenses incurred by it (including the costs of
seeking legal or other advice) in respect of the application for
registration of the Registered Trader with the Exchange and the SFC and any
subsequent re-registrations or amendments to the terms of registration of
the Registered Trader, including the termination of any registration.
16. Appointment of Attorney
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<PAGE> 10
The Customer appoints the Chief Executive of the Exchange (or such other
persons as the Board of the Exchange may appoint) as the Customer's
attorney to do all things necessary to transfer any open positions held by
MeesPierson on the Customer's behalf and money and securities standing to
the credit of the Customer's account with MeesPierson to another member of
the Exchange in the event of MeesPierson's membership being suspended or
revoked.
17. Client Information Statement
The Customer warrants that the information contained in the attached Client
Information Statement (which is required to be completed by the Customer
pursuant to Rule 601(a) of the Exchange Rules) is true and complete. The
Customer will notify MeesPierson forthwith of any material changes in the
information supplied in the Client Information Statement. MeesPierson is
entitled to rely on such information until it has received written notice
of any changes therein.
B. RISK DISCLOSURE STATEMENT
Introduction
1. This risk disclosure statement is furnished to all clients pursuant to the
rules and regulations of the Exchange.
2. The purpose of this statement is to ensure that clients only enter into
futures and options contracts on the Exchange having read and understood
the contents of this statement and, as a result, having understood the
nature and extent of the risks involved in, and their obligations and
rights in respect of, futures and options trading.
3. All clients must therefore receive a risk disclosure statement, read it,
have it explained to them, understand it and confirm (by signing the
acknowledgments by customer below) that they have read it and understood
it.
4. No member of the Exchange ("Member") can accept an order from a client or
transact any business on behalf of a client unless and until the
acknowledgment attached to the risk disclosure statement has been returned
to them having been duly completed by the client.
5. However, this risk disclosure statement is not intended to constitute a
comprehensive statement of the risks and other significant aspects of
trading in the futures and options trading. Clients must study futures and
options trading in any event before they trade.
6. Further, this statement must not be taken as an endorsement or promotion by
the Exchange of futures and option trading.
Risks involved in futures trading
7. The risk of significant losses through trading futures contracts can be
substantial. Clients must therefore consider carefully in advance whether
such trading is suitable for them in the light of their financial condition
and investment objectives. In considering whether to trade in futures
contracts, clients should be aware of the following:
7.1 Clients may lose all of the initial margin fund and any additional
funds deposited by them with Members for the purpose of establishing
and/or maintaining a position in the futures market. If the market
moves against the clients' positions, the clients may be called upon
to deposit substantial amounts of additional margin funds at short
notice in order to maintain the position.
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<PAGE> 11
If the required funds are not provided within the prescribed time, the
position may be liquidated unilaterally at a loss and the clients will
be liable for any resulting deficit.
7.2 Under certain market conditions, clients may find it difficult if not
impossible to liquidate/close out a position. This can occur when for
example the market makes a limit move.
7.3 Clients can place stop loss or stop limit orders with their brokers
with a view to automatically liquidating/closing out a position when
the market or loss incurred reaches a certain level. However, placing
such orders will not necessarily limit the clients' losses because
market conditions may make it impossible to execute such orders.
7.4 A spread position may be as risky as a simple "long" or "short"
position.
7.5 A high degree of leverage can often be achieved in futures trading
because of the relatively small margin requirements. This degree of
leverage can work against clients as well as for them - the leverage
can lead to large losses as well as large gains.
Risks involved in options trading
8. The purchase and/or writing of options involves a high degree of risk
because of, principally, the volatile nature of the stock and commodity
markets. Clients must therefore consider carefully in advance whether such
trading is suitable for them in the light of their financial condition and
investment objectives. In considering whether to trade in options
contracts, clients should be aware of the following:
8.1 Both buyer and seller of an option must be aware of the subject-matter
of the option and whether or not the subject-matter, e.g. a stock or a
commodity, is to be delivered or received or if the option is to be
settled by a cash-payment. If the option is on a future, the purchaser
will acquire a futures position with associated liabilities for margin
(see section 7 above).
8.2 If the market moves against the writers of options, additional margin
is likely to be required from the writers at short notice. Option
writers are liable for potentially unlimited losses whilst their gains
are limited to the option premium. The writer of an option will also
be exposed to the risk of the purchaser exercising the option, in
which case the writer will be obligated to either settle the option in
cash or to acquire or deliver the underlying interest. If the option
is on a future, the writer will acquire a position in a future with
associated liabilities for margin (see the section 7 above). If the
option is 'covered' by the writer holding a corresponding position in
the underlying interest or a future or another option, the risk may be
reduced. If the option is not covered, the risk of loss can be
unlimited.
8.3 Options are wasting assets; it is possible that option holders may
suffer the loss of the whole premium paid in respect of the option. In
order to close out an open option position (whether at a profit or
otherwise), it is necessary to either exercise the option or offset
the long position in the market through a closing trade. However,
market conditions may make it impossible to execute such orders.
8.4 Some options can be exercised only on the expiry date (e.g. Hang Seng
Index Options). Other options may be exercised at any time before
expiration.
8.5 A high degree of leverage can often be achieved in options trading.
This degree of leverage can work against clients as well as for them -
the leverage can lead to large losses as well as large gains.
8.6 Both buyers and sellers of options should calculate the extent to
which the value of the options must increase for your position to
become profitable, taking into account the
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<PAGE> 12
premium and all transaction costs. If you are contemplating purchasing
deep-out-of-the-money options, you should be aware that the chance of
such options becoming profitable ordinarily is remote.
8.7 Certain exchanges in some jurisdictions permit deferred payment of
the option premium, exposing the purchaser to liability for margin
payments not exceeding the amount of the premium. The purchaser is
still subject to the risk of losing the premium and transaction costs.
When the option is exercised or expires, the purchaser is responsible
for any unpaid premium outstanding at that times.
Risks involved in trading in Hang Seng China Enterprises Index Futures Contracts
9. Trading in Hang Seng China Enterprises Index Futures Contracts is subject
to the risks described in section 7 above. In addition to those risks, the
trading will involve the following potential risks:
9.1 Political Risks: A change of leadership or political or social unrest
in the People's Republic of China ("the PRC") may lead to major
changes in economic and other policies. It is noted however that the
Government of the PRC has been carrying out an open-door policy since
1978.
9.2 Economic Risks: The PRC Government plans to replace the PRC's planned
economy with a socialist market economy. (The planned economy involves
the State Planning Commission directly influencing the development of
the economy, including the operation of businesses and control over
citizen's income, and consumption levels and patterns.) The PRC
economy is in a transition stage. Central government continues to
exercise an important influence on many aspects of the operation of
businesses in the PRC and the pace of economic development and change.
It may therefore be a considerable time before market forces become a
major factor in the allocation of resources in the PRC economy.
9.3 Foreign Currency Risks: The PRC Government controls and manages its
foreign exchange reserves through measures including import-export
restrictions and regulations directly controlling the conversion of
Renminbi ("RMB") into foreign currencies. With effect from 1st January
1994 the foreign exchange control system has been further reformed by
the incorporation of the official RMB and swap RMB exchange rates.
This has resulted in a centralised inter-bank foreign exchange trading
centre supervised and controlled by the People's Bank of China through
the State Foreign Exchange Administration. In the PRC all foreign
exchange transactions involving RMB must be effected through
authorised banks designated by the People's Bank and at rates
calculated by the People's Bank based on the price of the foreign
currency and taking into account:
9.3.1 dealings on the previous day in the inter-bank foreign
exchange market;
9.3.2 the median rate for daily foreign exchange rates between
RMB and U.S. dollars published after taking into account
fluctuations in the international foreign exchange market;
9.3.3 the exchange rates between RMB and other major currencies.
Such adopted rates float within a range prescribed by the People's Bank.
Although the conversion of RMB into Hong Kong dollars or other currencies
is generally completed without delay at the authorised banks, there is no
guarantee that such conversions can be carried out at all times. All
foreign exchange income of Chinese enterprises (apart from enterprises with
foreign investments) must be settled and sold to authorised banks in
accordance with the authorised bank's published exchange rates.
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<PAGE> 13
9.4 Legal and regulatory risks:
(a) Corporate law: PRC company law is in its infancy; provisions for
the protection of shareholders' rights and access to corporate
information are different from those in Hong Kong and other
developed countries. There are no nationally applicable corporate
PRC laws, apart from the Standard Opinion which currently forms
the basis of the legal framework governing joint stock limited
companies.
(b) Securities law: PRC securities law is incomplete. The regulatory
framework of the PRC securities industry is in its infancy.
Currently there is no PRC law applicable to PRC enterprises
seeking to issue shares and obtain listings outside the PRC,
although the securities rules and regulations applicable to PRC
companies seeking to issue shares and obtain listings within the
PRC are generally applied.
(c) Tax law: Shares in PRC companies are a relatively new form of
investment in the PRC. It is uncertain whether income or capital
gains arising from dealings in such shares will be chargeable to
tax and, if so, how.
Generally, PRC company law is materially different from Hong Kong company
law, particularly in the area of investor protection. The lack of investor
protection in the PRC is compensated to some extent by the mandatory
requirements of the Stock Exchange of Hong Kong Limited that PRC companies
listed in Hong Kong have certain provisions in their Articles of
Association. Key material differences between PRC and Hong Kong company law
include: derivative actions by minority shareholders and other minority
protection; remedies against misfeasant directors, financial disclosure,
variation of class rights, general meeting procedures and payment of
dividends.
Risks involved in trading in currencies futures and options contracts
10. Trading in currencies futures and options contracts is subject to the
risks described in sections 7 and 8 above. Clients must ensure in advance
of any trading that they are familiar with those risks and the systemic
risks involved in trading in currencies generally, including volatility,
exchange restrictions and the risk of major systemic collapses in currency
markets.
11. The profit or loss in transactions in foreign currency-denominated
contracts (whether they are traded in your own or another jurisdiction)
will be affected by fluctuations in currency rates where there is a need to
convert from the currency denomination of the contract to another currency.
12. The One Day Rolling Currency Futures Contract ("ODRCF Contract"),
similar to other exchange-traded futures contracts, provides a versatile
and well-leveraged investment vehicle to investors. However, increases in
both the volatility of the relative currency value and the volume of world
trade have resulted in an exposure to dramatically higher foreign exchange
risk in recent years. It has not been uncommon for major currencies to
fluctuate in value by twenty or thirty percent vis-a-vis the U.S. dollar in
a period of less than one year. In addition, a variety of other factors
including interest rate movements, macro and micro economic conditions and
political stability may also affect the value of currencies.
13. Investors should only participate in the ODRCF market if they fully
appreciate the risks inherent in the foreign exchange market and employ
strategies consistent with their currency value expectations, investment
objectives and tolerance for risk. Investors should also be aware of the
potential risks associated with possible exchange rate fluctuations where
foreign exchange investments are priced and/or settled in a currency other
than their home currency.
Other risks involved in trading futures and option contracts
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<PAGE> 14
14. You should ask the firm with which you deal about the terms and conditions
of the specific futures or options which you are trading and associated
obligations (e.g. the circumstances under which you may become obliged to
make or take delivery of the underlying interest of a futures contract and,
in respect of options, expiration dates and restrictions on the time for
exercise). Under certain circumstances the specifications of outstanding
contracts (including the exercise price of an option) may be modified by
the exchange or clearing house to reflect changes in the underlying
interest.
15. Market conditions (e.g. illiquidity) and/or the operation of the rules of
certain markets (e.g. the suspension of trading in any contract or contract
month because of price limits or 'circuit breakers') may increase the risk
of loss by making it difficult or impossible to effect transactions or
liquidate/offset positions. If you have sold options, this may increase the
risk of loss.
16. Further, normal pricing relationships between the underlying interest and
the future, and the underlying interest and the option may not exist. This
can occur when, for example, the futures contract underlying the option is
subject to price limits while the option is not. The absence of an
underlying reference price may make it difficult to judge 'fair' value.
17. You should familiarize yourself with the protections accorded money or
other property you deposit for domestic and foreign transactions,
particularly in the event of a firm insolvency or bankruptcy. The extent to
which you may recover your money or property may be governed by specific
legislation or local rules. In some jurisdictions, property which had been
specifically identifiable as your own will be pro-rated in the same manner
as cash for purposes of distribution in the event of a shortfall.
18. Before you begin to trade, you should obtain a clear explanation of all
commissions, fees and other charges for which you will be liable. These
charges will affect your net profit (if any) or increase your loss.
19. If you wish your broker to trade for you in markets other than those
operated by the Exchange, you must ensure that your broker is permitted to
trade in those markets and that you are familiar with the requirements of,
and types of redress in, those markets. The Exchange cannot and will not
supervise your broker's trading in those markets and the Compensation Fund
established under the Commodities Trading Ordinance is not available for
defaults in trading on those markets. Transactions on markets in other
jurisdictions, including markets formally linked to a domestic market, may
expose you to additional risk. Such markets may be subject to regulation
which may offer different or diminished investor protection. Your local
regulatory authority will be unable to compel the enforcement of the rules
of regulatory authorities or markets in other jurisdictions where your
transactions have been effected.
20. Most open-outcry and electronic trading facilities are supported by
computer-based component systems for the order-routing, execution,
matching, registration or clearing of trades. As with all facilities and
systems, they are vulnerable to temporary disruption or failure. Your
ability to recover certain losses may be subject to limits on liability
imposed by the system provider, the market, the clearing house and/or
member firms. Such limits may vary: you should ask the firm with which you
deal for details in this respect.
21. Trading on an electronic trading system may differ not only from trading
in an open-outcry market but also from trading on other electronic trading
systems. If you undertake transactions on an electronic trading system, you
will be exposed to risks associated with the system including the failure
of hardware and software. The result of any system failure may be that your
order is either not executed according to your instructions or is not
executed at all.
22. In some jurisdictions, and only then in restricted circumstances, firms
are permitted to effect off-exchange transactions. The firm with which you
deal may be acting as your counterparty to the transactions. It may be
difficult or impossible to liquidate an existing position, to assess the
value, to determine a fair price or to assess the exposure to risk. For
these reasons, these transactions may
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<PAGE> 15
involve increased risks. Off-exchange transactions may be less regulated or
subject to a separate regulatory regime. Before you undertake such
transactions, you should familiarize yourself with applicable rules and
attendant risks.
C. DISCLOSURE OF COMPANY INFORMATION
1. In accordance with Rule 601(c) of the Exchange's Rules, we disclose the
following to you:
Company Name : MeesPierson Futures Clearing Services
(Asia) Limited
Membership category : Futures Commission Merchant
Registration number (required
by the Commodities Trading
Ordinance) : CDC 370
Staff responsible for your
account :
Dealing Director/
Name Dealer Representative Registration No.
---- --------------------- ----------------
Michiel Alexander de Boer Dealing Director CD 1089
Emma Jane McDonald Dealer Director CD 1221
D. EXPLANATION OF MARGIN PROCEDURES AND UNILATERAL CLOSING OUT OF CLIENTS'
POSITIONS
Pursuant to Rule 602(q) of the Exchange's Rules, MeesPierson is required
to explain the margin procedures and the circumstances under which the
Customer's positions may be closed out without the Customer's consent. For
the purposes of Rule 602(q), the following explanation is given.
Margin Procedures
1. The Agreement sets out detailed provisions regarding the operation of
margin calls and requirements: see in particular clauses 6 and 7 of
the Agreement.
2. MeesPierson follows all margin rules laid down by all Exchanges on
which products are traded on margin.
3. Any changes in margin requirements (whether imposed by the Exchange or
by MeesPierson) will be communicated to the Customer by MeesPierson's
representatives in an appropriate manner.
Unilateral closing out of the Customer's positions
4. The Customer must remember that, in the event of a default,
MeesPierson may close out the Customer's open positions without prior
notice to or consent from the Customer as provided for by the terms of
the Agreement. MeesPierson has reserved in the Agreement the right to
close out any open position(s) without notice (i) when the margins on
deposit with MeesPierson are
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<PAGE> 16
exhausted, inadequate in the opinion of MeesPierson to protect it
against possible price fluctuations or any adverse conditions or (ii)
any other appropriate circumstances.
5. No conduct or omission on behalf of MeesPierson, nor any agreement
purportedly entered into on MeesPierson's behalf (save an agreement in
accordance with the terms of the Agreement), shall constitute any form
of waiver or variation or relaxation MeesPierson's rights to close out
the Customer's positions unilaterally.
6. Any steps taken by MeesPierson to close out the Customer's positions
unilaterally will be entirely without prejudice to MeesPierson's other
rights under the Agreement and otherwise, in particular the right to
payments from the Customer of all amounts outstanding.
E. STATEMENT OF PARTICULARS OF APPROVED CONTRACTS
MeesPierson is licensed to trade in the products approved by the Exchange
from time to time. MeesPierson will provide contract specifications for
those products to the client.
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<PAGE> 17
F. ACKNOWLEDGEMENTS BY CUSTOMER
I/We acknowledge that:
(i) I/We have read carefully the Agreement (section A) and additional
sections B to E above.
(ii) the contents of the Agreement and the additional sections have been
fully explained to me/us in a language which I/we understand. I/We
have agreed to the Agreement, the additional sections and the
attachments referred to in those documents being in English and with
their contents.
(iii) I/We have been provided with a copy of the Exchange's disclaimer in
relation to indices and proprietary products developed by the
Exchange and I/We confirm that I/We have read this disclaimer prior
to entering into this Agreement.
(iv) I/We have been given an adequate opportunity to ask questions of
MeesPierson's representatives and to consult my/our own legal
advisers about the Agreement, the additional sections and the
attachments.
(iv) I/We have received the Agreement, the additional sections and the
attachments.
(v) I am/We are trading on my/our own account.
Signed by (if an individual) or for and on behalf of (if a corporation)
/s/ AUBREY JUDSON ELLIS JR.
the customer: Hull Trading Company, L.L.C.
Dated: August 26, 1998 (Company Chop)
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<PAGE> 18
FOR CORPORATION(S) :
Signed on behalf of the Corporation below-mentioned pursuant to a resolution
duly passed at a duly convened and held meeting of the Board of Directors
thereof, a certified copy of which is annexed hereto.
For and on behalf of Hull Trading Company, L.L.C.
Name : Aubrey Judson Ellis, Jr.
Title : Principal
/s/ AUBREY JUDSON ELLIS JR.
_____________________________________
Signature
ACCEPTED BY :
Name : For and on behalf of
MeesPierson Futures Clearing Services
(Asia) Limited
_____________________________________ ______________________________________
Signature Director
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<PAGE> 1
EXHIBIT 10.7
Settlement Bank Agreement [DEUTSCHE BORSE LOGO]
between
Hull Trading GmbH,
Friedrichstrasse 2-6160323 Frankfurt am Main
- --------------------------------------------------------------------------------
- - hereafter referred to as "IBIS/IBIS-R-Partcipant" -
and
MeesPierson N.V., Niederlassung Frankfurt,
Borsenstrasse 7 - 11, 60313 Frankfurt am Main
- --------------------------------------------------------------------------------
- - hereafter referred to as "Settlement Bank" -
and
Deutsche Borse AG, Frankfurt am Main.
Preliminary Statement
The IBIS/IBIS-R-Participant has entered into a connection agreement with
Deutsche Borse AG for the purpose of participation on the electronic trading
system of Frankfurter Wertpapierborse (Integrated Stock Exchange Trading and
Information System - IBIS/IBIS-R).
To ensure due settlement of transactions and the ownership of accounts at
Landeszentralbank (regional branch of the central bank) and at Deutscher
Kassenverein Aktiengesellschaft or, as the case may be, the instruction of an
account holder at Deutscher Kassenverein Aktiengesellschaft to clear the
transactions is one prerequisite among others for admission to participate on
the electronic trading system. The IBIS/IBIS-R-participant has instructed the
Settlement Bank to clear and to settle the transactions matched through the
electronic trading system.
This being premised, the parties enter into the following Settlement Bank
Agreement:
1. Subject of the Agreement
(1) The Settlement Bank hereby assumes full liability towards Deutsche Borse AG
and the IBIS/IBIS-R-Participant for the due fulfilment of any closed
transaction of the IBIS/IBIS-R-Participant within the electronic trading system.
(2) The IBIS/IBIS-R-Participant shall adhere to the maximum transaction volume
(position limit) as agreed between it and the Settlement Bank within the
framework of the Settlement Bank being entrusted with the settlement. The
Settlement Bank has to inform Deutsche Borse AG about any exceeding of the
position limit.
<PAGE> 2
Settlement Bank Agreement [DEUTSCHE BORSE LOGO]
(3) The settlement bank shall have the right to carry out without undue delay
(promptly) all close out transactions for the account of the IBIS/IBIS-R-
Participant to the extent that the amount of its transactions exceed its
position limit. The IBIS/IBIS-R-Participant shall compensate the Settlement
Bank for any negative price difference resulting from such close out
transactions.
(4) The IBIS/IBIS-R-Participant shall provide the user-identification to the
Settlement Bank to enable it to take an insight at any time in all transactions
concluded in the electronic trading system on the respective exchange day as
well as in the quotes actually entered by the IBIS/IBIS-R-Participant.
(5) To the extent that the necessary technical conditions are met, Deutsche
Borse AG shall on each exchange day between 4 p.m. and 6.30 p.m. transmit via
CMA-spool-procedure to the Settlement Bank a list, in which all transactions
concluded by the IBIS/IBIS-R-Participant on such exchange day are listed.
2. Termination of the Settlement Bank Agreement
(1) The Settlement Bank has the right to terminate the Settlement Bank Agreement
at any time under observation of a period of one month. By the end of this
period the IBIS/IBIS-R-participant has to delete all buy and/or sell offers
(quotes) entered into the electronic trading system and to close out all
existing positions or to transfer them to another IBIS/IBIS-R-participant.
Thereafter it may not enter any new quotes unless another bank has entered into
a Settlement Bank Agreement with the IBIS/IBIS-R-participant and Deutsche Borse
AG. The obligation of the Settlement Bank being a party of the terminated
agreement shall remain unaffected to ensure due fulfilment of all securities
transactions of the IBIS/IBIS-R-participant concluded up to the end of the
period of termination date.
(2) The IBIS/IBIS-R-participant has the right to terminate the Settlement Bank
Agreement at any time provided that it deletes all buy and/or sell offers
(quotes) entered into the electronic trading system and provided that existing
positions are closed out or having been transfered to another IBIS/IBIS-R-
participant.
(3) The right to terminate this agreement at any time for material default shall
remain unaffected.
(4) The termination notice shall be effective only if it is received by the
Deutsche Borse AG in its capacity as agent of the Settlement Bank and the IBIS/
IBIS-R-Participant in written form or by telefax.
In addition, the trading monitoring office of Frankfurter Wertpapierborse has to
be informed in any case (telephone +49-69/21 01-13 10 hotline). Deutsche Borse
AG shall promptly inform the Settlement Bank and the IBIS/IBIS-R-Participant
respectively of the receipt of the termination notice.
<PAGE> 3
Settlement Bank Agreement
[DEUTSCHE BORSE LOGO]
(5) Deutsche Borse AG shall in case of a termination for material default by the
Settlement Bank or the IBIS/IBIS-R-Participant without examining whether
material default has actually occurred, withdraw promptly the possibility of the
IBIS/IBIS-R-participant on part of the system to enter quotes and to conclude
transactions within the Integrated Stock Exchange Trading and Information
System - IBIS/IBIS-R - and shall delete all then still existing buy and/or sell
offers within the electronic trading system upon its termination of the
Settlement Bank Agreement and after expiry of the termination period. The above
shall not occur if prior to the termination or simultaneously therewith another
bank shall have entered into a Settlement Bank Agreement with the
IBIS/IBIS-R-Participant and Deutsche Borse AG.
3. Final provisions
(1) Should any provision of this Agreement be or become invalid, the validity of
the remaining provisions of this Agreement shall not be affected. Any invalid
provision has to get a meaning or has to be supplemented or has to be replaced
by a valid provision that, in economic terms, comes as close as possible to its
original intention. This shall also apply if a supplementary incompleteness
becomes obvious through the practising of this Agreement. The parties shall
carry out all necessary alterations, amendments or adjustments of this Agreement
in the spirit of fine cooperation taking consideration to common economic
interests.
(2) Alterations, amendments and supplements and side-letter agreements must be
in written form.
(3) Place of performance and non-exclusive jurisdiction of this Agreement is
Frankfurt am Main.
Frankfurt am Main
- --------------------------------------------------------------------------------
Place and Date
Burkhard Nather Evertvanden Brink
- --------------------------------------------------------------------------------
For the Settlement Bank
/s/ ALISON GRAEME Alison Graeme
- --------------------------------------------------------------------------------
For the IBIS/IBIS-R-Participant
- --------------------------------------------------------------------------------
For Deutsche Borse AG
- --------------------------------------------------------------------------------
[LEGALLY NON BINDING TRANSLATION FOR CONVENIENCE ONLY. PLEASE USE THE GERMAN
FORM!]
<PAGE> 1
EXHIBIT 10.8
THE HULL GROUP INC.
1999 SPECIAL RESTRICTED STOCK PLAN
Mayer, Brown & Platt
Chicago, Illinois
<PAGE> 2
THE HULL GROUP INC.
Certificate
I, ____________, ____________ of The Hull Group Inc. having in my custody
and possession the corporate records of said corporation, do hereby certify that
attached hereto is a true and correct copy of The Hull Group Inc. 1999 Special
Restricted Stock Plan as in effect as of _____________, 1999.
WITNESS my hand this ___ day of ___________, 1999.
--------------------------
As Aforesaid
<PAGE> 3
THE HULL GROUP INC.
1999 SPECIAL RESTRICTED STOCK PLAN
1. Purpose. The purpose of The Hull Group Inc. 1999 Special Restricted Stock
Plan (the "Plan") is to retain the services of and motivate certain key
employees of The Hull Group Inc. ("Hull") by awarding to such employees
equity-based incentives. Upon the conversion of Hull Trading Company,
L.L.C. to a corporation (the "Conversion"), the limited liability company
membership interests ("Interests") outstanding under the [NAME OF
PREDECESSOR PLAN] (the "Prior Plan") as of the Conversion will be
automatically converted to Awards (as defined in subsection 6.1) hereunder
as described in subsection 5.4.
2. Administration.
2.1. Administration by Committee. The Plan shall be administered by the
Compensation Committee of the Board of Directors of Hull (the
"Committee"), which Committee shall consist of two or more persons who
constitute "non-employee directors" within the meaning of Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and "outside directors" within the meaning of Treas.
Reg. ss. 1.162-27(e)(3).
2.2. Authority. Subject to the provisions of the Plan, the Committee shall
have the authority to (a) manage and control the operation of the
Plan, (b) conclusively interpret and construe the provisions of the
Plan, and prescribe, amend and rescind rules, regulations and
procedures relating to the Plan, (c) make Awards under the Plan, in
such amounts and subject to such restrictions, limitations and
conditions as it deems appropriate, (d) modify the terms of, cancel
and reissue, or repurchase outstanding Awards, (e) prescribe the form
of agreement, certificate or other instrument evidencing any Award
under the Plan, (f) correct any defect or omission and reconcile any
inconsistency in the Plan or in any Award hereunder, (g) extend the
vesting date of any Award under the Plan, (h) accelerate the vesting
date of any Award under the plan, and (i) make all other
determinations and take all other actions as it deems necessary or
desirable for the implementation and administration of the Plan. The
determination of the Committee on matters within its authority shall
be conclusive and binding on Hull and all other persons.
3. Participation. Subject to the terms and conditions of the Plan, the
Committee shall determine and designate, from time to time, from among the
key employees of Hull those persons who will be granted one or more Awards
under the Plan and thereby become "Participants" in the Plan. Individuals
whose Interests under the Prior Plan are converted to Awards under the Plan
as of the Conversion shall also be "Participants" in the Plan for periods
on and after the Conversion.
<PAGE> 4
4. Definition of Fair Market Value. For purposes of the Plan, the "Fair Market
Value" of a share of common stock of Hull ("Stock") as of any date shall be
the closing market composite price for such Stock as reported on the Nasdaq
National Market on that date or, if Stock is not traded on that date, on
the immediately preceding date on which Stock was traded. In the event that
the Stock is not listed for trading on a national exchange or or quoted on
an inter-dealer quotation system, the Fair Market Value shall be determined
by the Committee.
5. Shares Subject to the Plan; Conversion of Interests.
5.1. Number of Shares Reserved. Subject to the provisions of subsection
5.3, a total of 1,066,667 shares of Stock are reserved for issuance
under the Plan.
5.2. Reusage and Reversion of Shares.
(a) In the event of the termination of any Award under the Plan (by
reason of forfeiture, expiration, cancellation, surrender or
otherwise), that number of shares of Stock that was subject to
the Award but not delivered shall again be available for Awards
under the Plan.
(b) Notwithstanding the provisions of paragraph (a), the following
shares shall not be available for reissuance under the Plan: (i)
shares with respect to which the Participant has received the
benefits of ownership (other than voting rights), either in the
form of dividends or otherwise; and (ii) shares which are
withheld from any Award under the Plan to satisfy tax withholding
obligations (as described in subsection 7.3).
(c) To the extent that, upon termination of the Plan, any shares of
Stock remain available for issuance hereunder, such shares shall
be distributed pro rata to the individuals who initially
contributed the Interests for issuance under the Prior Plan.
5.3. Adjustments to Interests or Shares Reserved. In the event of any
merger, consolidation, reorganization, recapitalization, spinoff,
stock dividend, stock split, reverse stock split, exchange or other
distribution with respect to shares of Stock or other change in the
structure or capitalization affecting the Stock, the type and number
of shares of Stock, as applicable, which are or may be subject to
Awards under the Plan and the terms of any outstanding Awards shall be
equitably adjusted by the Committee, in its sole discretion, to
preserve the value of benefits awarded or to be awarded to
Participants under the Plan.
<PAGE> 5
5.3. Conversion of Interests. Upon the Conversion, any Interests then
outstanding under the Prior Plan shall be cancelled and shall be
substituted with shares of Stock which are subject to the same
restrictions as the Interests for which the shares are substituted.
The conversion of Interests to shares of Stock shall be done in
conformity with the same methodology used to convert unrestricted
Interests into shares of Stock in connection with the Conversion.
6. Awards.
6.1. Definition. Subject to the terms of this Section 6, an "Award" under
the Plan means a grant of shares of Stock which are subject to the
restrictions of this Section 6. The term "Award" shall also include
any Interests which are converted to shares of Stock under the Plan in
accordance with subsection 5.4. The period beginning on the date of
grant of an Award and ending on the vesting or forfeiture of such
award is referred to as the "Restricted Period". Interests which are
converted to shares of Stock under the Plan in accordance with
subsection 5.4 shall be considered to have been granted as an Award
under the Plan as of the date of the Conversion.
6.2. Terms and Conditions of Awards. Awards under the Plan shall be subject
to the following terms and conditions:
(a) Awards will vest in equal annual installments over a period of
five years, beginning on the first anniversary of the date the
Award is granted; provided, however, that no portion of an Award
will vest after the Expiration Date (as defined in paragraph (b))
and, the Award will become fully vested upon the death of the
Participant.
(b) The "Expiration Date" of an Award will be the earliest of (i) the
date on which the Participant's employment with Hull terminates
for any reason, (ii) the ten year anniversary of date on which
the Award is granted, or (iii) such other date specified by the
Committee at the time of grant.
(c) Beginning on the date an Award is granted and including any
applicable Restricted Period, the Participant, as owner of the
shares of Stock subject to the Award shall have the right to vote
such shares; provided, however, that payment of dividends with
respect to shares of Stock shall be subject to the following:
(i) Prior to the date that a Participant has a fully earned and
vested right to the shares of Stock comprising an Award,
the Committee, in its sole discretion, may award Dividend
Rights (as defined below) with respect to such shares.
-3-
<PAGE> 6
(ii) On and after the date that a Participant has a fully earned
and vested right to the shares of Stock comprising an
Award, but before the shares have been distributed to the
Participant, the Participant shall be entitled to Dividend
Rights with respect to such shares, at the time and in the
form determined by the Committee.
(iii) On and after date that a Participant has a fully earned and
vested right to the shares of Stock comprising an Award,
and the shares have been distributed to the Participant,
the Participant shall have all dividend rights (and other
rights) of a stockholder with respect to such shares.
A "Dividend Right" with respect to shares of Stock comprising an Award
shall entitle the Participant, as of each dividend payment date, to an
amount equal to the dividends payable with respect to a share of Stock
multiplied by the number of such shares. Dividend Rights shall be
settled in cash or in shares of Stock, as determined by the Committee,
shall be payable at the time and in the form determined by the
Committee, and shall be subject to such other terms and conditions as
the Committee may determine.
7. Miscellaneous.
7.1. Effective Date; Duration. The Plan shall be effective upon the later
of its adoption by the Board of Directors of Hull (the "Board") or its
approval by the stockholders of Hull (the "Effective Date"). The Plan
shall automatically terminate in accordance with Section 9 upon the
fifth anniversary of the Effective Date.
7.2. Limit on Distribution. Distribution of shares of Stock under the Plan
shall be subject to the following:
(a) Notwithstanding any other provision of the Plan, Hull shall have
no liability to deliver any shares of Stock under the Plan unless
such delivery would comply with all applicable laws and the
applicable requirements of any securities exchange or similar
entity.
(b) In the case of a Participant who is subject to Section 16(a) and
16(b) of the Exchange Act, the Committee may, at any time, add
such conditions and limitations to any Award to such Participant,
or any feature of any such Award, as the Committee, in its sole
discretion, deems necessary or desirable to comply with Section
16(a) or 16(b) and the rules and regulations thereunder or to
obtain any exemption therefrom.
-4-
<PAGE> 7
(c) To the extent that the Plan provides for issuance of certificates
to reflect the transfer of shares of Stock, the transfer of such
shares may be effected on a non-certificated basis, to the extent
not prohibited by applicable law or the rules of any securities
exchange or similar entity.
7.3. Withholding. Hull may require any Participant to pay to Hull the
amount of tax required by law to be withheld with respect to any Award
under the Plan. In addition, the Committee may, in its discretion and
subject to such rules as it may adopt from time to time, permit a
participant to elect to have Hull withhold from any Award under the
Plan (or to have Hull accept from the participant), for tax
withholding purposes, shares of Stock, valued at their fair market
value, but in no event shall the fair market value of the number of
shares so withheld (or accepted) exceed the amount necessary to meet
the minimum Federal, state and local marginal tax rates then in effect
that are applicable to the Participant and to the particular
transaction.
7.4. Transferability. Awards under the Plan are not transferable except as
designated by a Participant by will or by the laws of descent and
distribution.
7.5. Notices. Any notice or document required to be filed with the
Committee under the Plan will be properly filed if delivered or mailed
by registered mail, postage prepaid, to the Committee, in care of
Hull, at its principal executive offices. The Committee may, by
advance written notice to affected persons, revise such notice
procedure from time to time. Any notice required under the Plan (other
than a notice of election) may be waived by the person entitled to
notice.
7.6. Form and Time of Elections. Unless otherwise specified herein, each
election required or permitted to be made by any Participant or other
person entitled to benefits under the Plan, and any permitted
modification or revocation thereof, shall be in writing filed with the
Committee at such times, in such form, and subject to such
restrictions and limitations, not inconsistent with the terms of the
Plan, as the Committee shall require.
7.7. Agreement With Hull. At the time of an Award to a Participant under
the Plan, the Committee may require a Participant to enter into an
agreement with Hull in a form specified by the Committee, agreeing to
the terms and conditions of the Plan and to such additional terms and
conditions, not inconsistent with the Plan, as the Committee may, in
its sole discretion, prescribe.
7.8. Limitation of Implied Rights.
-5-
<PAGE> 8
(a) Neither a Participant nor any other person shall, by reason of
the Plan, acquire any right in or title to any assets, funds or
property of Hull whatsoever, including, without limitation, any
specific funds, assets, or other property which Hull, in its sole
discretion, may set aside in anticipation of a liability under
the Plan. A Participant shall have only a contractual right to
benefits or amounts, if any, payable under the Plan, unsecured by
any assets of Hull. Nothing contained in the Plan shall
constitute a guarantee by Hull that the assets of Hull shall be
sufficient to pay any amounts or benefits to any person.
(b) The Plan does not constitute a contract of employment, and
selection as a Participant will not give any employee the right
to be retained in the employ of Hull, nor any right or claim to
any benefit or payment under the Plan, unless such right or claim
has specifically accrued under the terms of the Plan. Except as
otherwise provided in the Plan, no Award under the Plan shall
confer upon the holder thereof any right as a stockholder of Hull
prior to the date on which he fulfills all service requirements
and other conditions for receipt of such rights.
7.9. Evidence. Evidence required of anyone under the Plan may be by
certificate, affidavit, document or other information which the
person acting on it considers pertinent and reliable, and signed,
made or presented by the proper party or parties.
7.10. Gender and Number. Where the context admits, words in one gender
shall include the other gender, words in the singular shall include
the plural and the plural shall include the singular.
8. Change in Control.
8.1. Acceleration. Except as otherwise provided in the Plan or any
agreement reflecting the applicable Award, upon a Participant's
termination of employment by Hull for reasons other than cause within
24 months following the occurrence of a Change in Control, all Stock
Awards shall become fully vested.
8.2. Definition of Change in Control. For purposes of the Plan, the term
"Change in Control" means a change in the beneficial ownership of
Hull's voting stock or a change in the composition of the Board which
occurs as follows:
(a) any "Person" (as such term is used in Section 13(d) and 14(d)(2)
of the Exchange Act), other than Hull, any entity owned, directly
or indirectly, by the stockholders of Hull in substantially the
same proportions as their ownership of stock of Hull, and any
trustee or other fiduciary holding
-6-
<PAGE> 9
securities under an employee benefit plan of Hull or its
subsidiaries or such proportionately owned corporation) becomes
through acquisitions of securities of Hull after the Effective
Date of the Plan, the "beneficial owner" (as defined in Rule
13d-3 promulgated under the Exchange Act), directly or
indirectly, of securities of Hull representing 40% or more of the
combined voting power of Hull's then outstanding securities
having the right to vote for the election of directors;
(b) the stockholders of Hull approve a merger or consolidation of
Hull with any other corporation, other than (A) a merger or
consolidation which would result in the voting securities of Hull
outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into
voting securities of the surviving entity) more than 50% of the
combined voting power of the voting securities of Hull or such
surviving entity outstanding immediately after such merger or
consolidation, or (B) a merger or consolidation effected to
implement a recapitalization of Hull (or similar transaction) in
which no Person acquires more than 15% of Hull's then outstanding
securities having the right to vote for the election of
directors;
(c) the stockholders of Hull approve a plan of complete liquidation
of Hull or an agreement for the sale or disposition by Hull of
all or substantially all of Hull's assets (or any transaction
having a similar effect); or
(d) during any 24 month period, individuals who at the beginning of
such period constitute the board of directors of Hull, and any
new director (other than a director designated by a Person who
has entered into an agreement with Hull to effect a transaction
described in paragraph (a), (b) or (c) of this subsection 12.2)
whose election by the board or nomination for election by Hull's
stockholders was approved by a vote of at least two- thirds of
the directors then still in office who either were directors at
the beginning of the period or whose election or nomination for
election was previously so approved, cease for any reason to
constitute at least a majority thereof.
-7-
<PAGE> 10
9. Amendment and Termination. The Board may, at any time, amend or terminate
the Plan, provided that, subject to subsection 5.3 (relating to certain
adjustments to shares), no amendment or termination may materially
adversely affect the rights of any Participant or beneficiary under any
Award made under the Plan prior to the date such amendment is adopted by
the Board; provided, however, that the Plan shall automatically terminate
upon the fifth anniversary of the Conversion and, upon such termination,
any shares of Stock which have been reserved for issuance under Plan and
which have not been issued shall be transferred to the individual(s) who
originally contributed the Interests under the Prior Plan which were
converted into shares of Stock under the Plan as of the Conversion.
Notwithstanding the foregoing or any other provision of the Plan or any
Award agreement, the Board or the Committee may amend the Plan or the terms
of any Award to the extent it deems necessary to preserve
pooling-of-interest accounting treatment for any transaction which is
intended to be accounted for through such accounting method.
-8-
<PAGE> 1
EXHIBIT 10.9
THE HULL GROUP INC.
OUTSIDE DIRECTORS' STOCK OPTION PLAN
Mayer, Brown & Platt
Chicago, Illinois
THE HULL GROUP INC.
<PAGE> 2
Certificate
I, ___________, ____________ of The Hull Group Inc. having in my custody
and possession the corporate records of said corporation, do hereby certify that
attached hereto is a true and correct copy of The Hull Group Inc. Outside
Directors' Stock Option Plan as in effect as of _________________, 1999.
WITNESS my hand this ____ day of ____________, 1999.
---------------------------
As Aforesaid
<PAGE> 3
THE HULL GROUP INC.
OUTSIDE DIRECTORS' STOCK OPTION PLAN
1. Purpose; Effective Date. The Hull Group Inc. Outside Directors' Stock
Option Plan (the "Plan") has been established to attract and retain as
non-employee directors of The Hull Group Inc. ("Hull") persons whose abilities,
experience and judgment can contribute to the continued progress of Hull and its
subsidiaries and to facilitate the directors' ability to acquire a proprietary
interest in Hull. The Plan shall be effective upon the later of its adoption by
the Board of Directors of Hull (the "Board") or the date it is approved by the
stockholders of Hull. The Plan shall be unlimited in duration and, in the event
of Plan termination, shall remain in effect as long as any Options (as defined
in subsection 5.1) under it are outstanding.
2. Administration.
2.1. Administration by Committee. The Plan shall be administered by the
Compensation Committee of the Board of Directors of Hull (the "Committee").
Notwithstanding the foregoing, no member of the Committee shall act with respect
to the administration of the Plan except to the extent consistent with the
exempt status of the Plan under Rule 16b-3 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
2.2. Authority. Subject to the provisions of the Plan, the Committee shall
have the authority to (a) conclusively interpret the Plan and to adopt, amend
and rescind administrative guidelines and other rules and regulations relating
to the Plan, (b) correct any defect or omission and to reconcile any
inconsistency in the Plan or in any award made hereunder, and (c) make all other
determinations and to take all other actions as it deems necessary or desirable
for the implementation and administration of the Plan. The determination of the
Committee on matters within its authority shall be conclusive and binding on
Hull and all other persons.
3. Participation. Only Outside Directors shall be eligible to participate
in the Plan. As of any applicable date, an "Outside Director" is a person who is
serving as a director of Hull and who is not an officer or employee of Hull or
any subsidiary or affiliate of Hull as of that date.
4. Shares Subject to the Plan.
4.1. Number of Shares Reserved. The shares of Stock with respect to which
awards may be made under the Plan shall be shares currently authorized but
unissued or currently held or
<PAGE> 4
subsequently acquired by Hull as treasury shares, including shares purchased in
the open market or in private transactions. Subject to the provisions of
subsection 4.3, the number of shares of Stock which may be issued with respect
to awards under the Plan shall not exceed 160,000 shares.
4.2. Reusage of Shares. In the event of the termination (by reason of
forfeiture, expiration, cancellation, surrender or otherwise) of any award under
the Plan, that number of shares of Stock that was subject to the award but not
delivered shall again be available for awards under the Plan.
4.3. Adjustments to Shares Reserved. In the event of any merger,
consolidation, reorganization, recapitalization, spinoff, stock dividend, stock
split, reverse stock split, exchange or other distribution with respect to
shares of Stock or other change in the corporate structure or capitalization
affecting the Stock, the type and number of shares of Stock which are or may be
subject to awards under the Plan and the terms of any outstanding awards
(including the Option Price) shall be equitably adjusted by the Committee, in
its sole discretion, to preserve the value of benefits awarded or to be awarded
to Outside Directors under the Plan.
5. Options.
5.1. Definition of Option. The grant of an "Option" under this Section 5
entitles the Outside Director to purchase shares of Stock at the Option Price,
subject to the terms of this Section 5. Options granted under this Section 5
shall be non-qualified stock options which are not intended to be "incentive
stock options" as that term is described in section 422(b) of the Internal
Revenue Code of 1986, as amended.
5.2. Awards of Options. Each Outside Director shall be awarded Options
under this Section 5 in accordance with the following:
(a) Upon his initial election or appointment to the Board for his first
term, each Outside Director shall be awarded an Option to purchase
10,000 shares of Stock.
(b) As of the date of each regular annual meeting of Hull's stockholders
(beginning with the 2000 annual meeting of stockholders), each person
who is an Outside Director at the close of such meeting shall be
awarded an Option to purchase 2,000 shares of Stock.
5.3. Option Price. The price at which shares of Stock may be purchased upon
the exercise of an Option (the "Option Price") shall be the greater of (i) the
Fair Market Value (as
2
<PAGE> 5
defined in subsection 6.8) of a share of Stock as of the date on which the
Option is granted, or (ii) the par value of a share of Stock on such date.
5.4. Exercise of Option. Each Option granted to an Outside Director under
this Section 5 shall become exercisable on the six month anniversary of the date
it is granted but shall not be exercisable after the Expiration Date (as defined
in subsection 5.6) and no Option shall become exercisable after the date on
which the Outside Director ceases for any reason to be a director of Hull. Upon
an Outside Director's termination of service as a director for any reason, all
Options which are then not exercisable shall be forfeited.
5.5. Payment of Option Price. The full Option Price for each share of Stock
purchased upon the exercise of any Option shall be paid at the time of such
exercise and, as soon as practicable thereafter, a certificate representing the
shares so purchased shall be delivered to the person entitled thereto. The
Option Price shall be payable in cash, in shares of Stock (valued at Fair Market
Value as of the day of exercise), in any combination thereof or through a
cashless exercise arrangement.
5.6. Expiration Date. The "Expiration Date" with respect to an award under
the Plan means the earlier of the following dates:
(a) the ten-year anniversary of the date on which the award is granted; or
(b) the one-year anniversary of the date on which the Outside Director's
service as a director of Hull terminates for any reason.
6. Miscellaneous.
6.1. Compliance with Applicable Laws; Limits on Distribution. Distribution
of shares of Stock shall be subject to the following:
(a) Notwithstanding any other provision of the Plan, Hull shall have no
liability to deliver any shares of Stock under the Plan unless such
delivery would comply with all applicable laws and the applicable
regulations or requirements of any securities exchange or similar
entity.
(b) The Committee may, at any time, add such conditions and limitations to
any Option awarded hereunder or any feature of any such Option, as the
Committee, in its sole discretion, deems necessary or desirable to
comply
3
<PAGE> 6
with Section 16(a) or 16(b) of the Exchange Act and the rules and
regulations thereunder or to obtain any exemption therefrom.
(c) To the extent that the Plan provides for issuance of certificates to
reflect the transfer of shares of Stock, the transfer of such shares
may be effected on a non-certificated basis, to the extent not
prohibited by applicable law or the rules of any securities exchange
or similar entity.
6.2. Transferability. Options awarded under the Plan are not transferable
except as designated by an Outside Director by will or by the laws of descent
and distribution. To the extent that the Outside Director who receives an Option
under the Plan has the right to exercise such Option, the Option may be
exercised during the lifetime of the Outside Director only by the Outside
Director.
6.3. Notices. Any notice or document required to be filed with the
Committee under the Plan will be properly filed if delivered or mailed by
registered mail, postage prepaid, to the Committee, in care of Hull, at its
principal executive offices. The Committee may, by advance written notice to
affected persons, revise such notice procedure from time to time. Any notice
required under the Plan (other than a notice of election) may be waived by the
person entitled to notice.
6.4. Agreement With Hull. At the time of the grant of an Option to an
Outside Director under the Plan, the Committee may require an Outside Director
to enter into an agreement with Hull (the "Agreement") in a form specified by
the Committee, agreeing to the terms and conditions of the Plan and to such
additional terms and conditions, not inconsistent with the Plan, as the
Committee may, in its sole discretion, prescribe.
6.5. Limitation of Implied Rights. The Plan does not constitute a contract
of continued service, and participation in the Plan shall not give any Outside
Director the right to be retained as a director of Hull, nor any right or claim
to any benefit under the Plan, unless such right or claim has specifically
accrued under the terms of the Plan. Except as otherwise provided in the Plan,
no award under the Plan shall confer upon the holder thereof any right as a
stockholder of Hull prior to the date on which he fulfills all service
requirements and other conditions for receipt of such rights.
6.6. Evidence. Evidence required of anyone under the Plan may be by
certificate, affidavit, document or other information which the person acting on
it considers pertinent and reliable, and signed, made or presented by the proper
party or parties.
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6.7. Gender and Number. Where the context admits, words in one gender shall
include the other gender, words in the singular shall include the plural and the
plural shall include the singular.
6.8. Definition of Fair Market Value. For purposes of the Plan, the "Fair
Market Value" of a share of common stock of Hull as of any date shall be the
closing market composite price for such Stock as reported on the Nasdaq National
Market on that date or, if Stock is not traded on that date, on the immediately
preceding date on which Stock was traded. In the event that the Stock is not
listed for trading on a national exchange or quoted on an inter-dealer quotation
system, the Fair Market Value shall be determined by the Committee.
7. Amendment and Termination.
The Board may, at any time, amend or terminate the Plan, provided that,
subject to subsection 4.3 (relating to certain adjustments to shares), no
amendment or termination may materially adversely affect the rights of any
Outside Director under any Option made under the Plan prior to the date such
amendment is adopted by the Board. Notwithstanding the foregoing or any other
provision of the Plan or any Agreement, the Board or the Committee may amend the
Plan or the terms of any Option to the extent it deems necessary to preserve
pooling-of-interest accounting treatment for any transaction which is intended
to be accounted for through such accounting method.
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<PAGE> 1
EXHIBIT 10.11
THE HULL GROUP INC.
1999 LONG TERM INCENTIVE PLAN
Mayer, Brown & Platt
Chicago, Illinois
<PAGE> 2
THE HULL GROUP INC.
Certificate
I, ___________, ____________ of The Hull Group Inc. having in my custody
and possession the corporate records of said corporation, do hereby certify that
attached hereto is a true and correct copy of The Hull Group Inc. 1999 Long Term
Incentive Plan as in effect as of _____________, 1999.
WITNESS my hand this ____ day of _____________, 1999.
As Aforesaid
<PAGE> 3
THE HULL GROUP INC.
1999 LONG TERM INCENTIVE PLAN
1. Purpose; Effective Date. The Hull Group Inc. 1999 Long Term Incentive
Plan (the "Plan") has been established to increase stockholder value and to
advance the interests of The Hull Group Inc. ("Hull") and its subsidiaries
(collectively, the "Company") by awarding equity and performance based
incentives designed to attract, retain and motivate employees and consultants
who perform services for the Company. As used in the Plan, the term "subsidiary"
means any business, whether or not incorporated, in which Hull has an ownership
interest. The Plan shall be effective upon the later of its adoption by the
Board of Directors of Hull (the "Board") or its approval by the stockholders of
Hull. The Plan shall be unlimited in duration and, in the event of Plan
termination, shall remain in effect as long as any Awards under it are
outstanding; provided, however, that no Incentive Stock Options (as defined in
subsection 5.1) may be granted under the Plan on a date that is more than ten
years from the date the Plan is adopted.
2. Administration.
2.1. Administration by Committee. The Plan shall be administered by the
Compensation Committee of the Board of Directors of Hull (the "Committee"),
which Committee shall consist of two or more persons who constitute
"non-employee directors" within the meaning of Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and "outside
directors" within the meaning of Treas. Reg. ss. 1.162- 27(e)(3).
2.2. Authority. Subject to the provisions of the Plan, the Committee shall
have the authority to (a) manage and control the operation of the Plan, (b)
conclusively interpret and construe the provisions of the Plan, and prescribe,
amend and rescind rules, regulations and procedures relating to the Plan, (c)
make Awards (as defined in Section 3) under the Plan, in such forms and amounts
and subject to such restrictions, limitations and conditions as it deems
appropriate, including, without limitation, Awards which are made in combination
with or in tandem with other Awards (whether or not contemporaneously granted)
or compensation or in lieu of current or deferred compensation, (d) modify the
terms of, cancel and reissue, or repurchase outstanding Awards (including, but
not limited to, repurchasing or settling any Option (as defined in subsection
5.1) in cash upon a Change in Control (as defined in subsection 11.2)), (e)
prescribe the form of agreement, certificate or other instrument evidencing any
Award under the Plan, (f) correct any defect or omission and reconcile any
inconsistency in the Plan or in any Award hereunder, (g) extend the exercise or
vesting date of any Award under the Plan, (h) accelerate the vesting or exercise
date of any Award under the plan, and (i) make all other determinations and take
all other actions as it deems necessary or desirable for the implementation and
administration of the Plan; provided, however, that in no event shall the
Committee cancel or modify any Option granted for the purpose of reissuing an
additional option to the option holder
<PAGE> 4
at a lower option price. The determination of the Committee on matters within
its authority shall be conclusive and binding on the Company and all other
persons.
3. Participation. Subject to the terms and conditions of the Plan, the
Committee shall determine and designate, from time to time, from among the
employees and consultants who provide services to the Company those persons who
will be granted one or more Awards under the Plan, and thereby become
"Participants" in the Plan. In the discretion of the Committee, and subject to
the terms of the Plan, a Participant may be granted any Award permitted under
the provisions of the Plan, and more than one Award may be granted to a
Participant; provided, however, that only employees of the Company may be
awarded Incentive Stock Options under the Plan. Except as otherwise agreed by
the Committee and the Participant, or except as otherwise provided in the Plan,
an Award under the Plan shall not affect any previous Award under the Plan or an
award under any other plan maintained by the Company. For purposes of the Plan,
the term "Award" shall mean any award or benefit granted to any Participant
under the Plan.
4. Shares Subject to the Plan.
4.1. Number of Shares Reserved. The shares of common stock of Hull
("Stock") with respect to which Awards may be made under the Plan shall be
shares currently authorized but unissued or currently held or subsequently
acquired by Hull as treasury shares, including shares purchased in the open
market or in private transactions. Subject to the provisions of subsection 4.4,
the number of shares of Stock which may be issued with respect to Awards under
the Plan shall not exceed 9,215,000 shares.
4.2. Individual Limits on Awards. Notwithstanding any other provision of
the Plan to the contrary, the maximum aggregate number of shares of Stock that
may be granted or awarded to any Participant under the Plan for any calendar
year shall be _________ and the maximum aggregate cash payout with respect to
grants or awards under the Plan in any calendar year to any Covered Employee
(within the meaning of section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code")), shall be $_________. The determination made under
the foregoing provisions of this subsection 4.2 shall be based on the shares
subject to the Awards at the time of grant, regardless of when the Awards become
exercisable.
4.3. Reusage of Shares.
(a) In the event of the termination (by reason of forfeiture, expiration,
cancellation, surrender or otherwise) of any Award under the Plan,
that number of shares of Stock that was subject to the Award but not
delivered shall again be available for Awards under the Plan.
(b) In the event that shares of Stock are delivered under the Plan as a
Stock Award (as defined in Section 7) and are thereafter forfeited or
reacquired by Hull pursuant to
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rights reserved upon the award thereof, such forfeited or reacquired
shares shall again be available for Awards under the Plan.
(c) Notwithstanding the provisions of paragraphs (a) or (b), the following
shares shall not be available for reissuance under the Plan: (i)
shares with respect to which the Participant has received the benefits
of ownership (other than voting rights), either in the form of
dividends or otherwise; (ii) shares which are withheld from any Award
or payment under the Plan to satisfy tax withholding obligations (as
described in subsection 10.5); and (iii) shares which are surrendered
to fulfill tax obligations (as described in subsection 10.5).
4.4. Adjustments to Shares Reserved. In the event of any merger,
consolidation, reorganization, recapitalization, spinoff, stock dividend, stock
split, reverse stock split, exchange or other distribution with respect to
shares of Stock or other change in the corporate structure or capitalization
affecting the Stock, the type and number of shares of Stock which are or may be
subject to Awards under the Plan and the terms of any outstanding Awards
(including the price at which shares of Stock may be issued pursuant to an
outstanding award) shall be equitably adjusted by the Committee, in its sole
discretion, to preserve the value of benefits awarded or to be awarded to
Participants under the Plan.
5. Options.
5.1. Definitions. The grant of an "Option" under this Section 5 entitles
the Participant to purchase shares of Stock at the Option Price (as defined in
subsection 5.3), subject to the terms of this Section 5. Options granted under
this Section 5 may be either Incentive Stock Options or Non-Qualified Stock
Options, as determined in the discretion of the Committee. An "Incentive Stock
Option" is an Option that is intended to satisfy the requirements applicable to
an "incentive stock option" described in section 422(b) of the Code. A
"Non-Qualified Stock Option" is an Option that is not intended to be an
"incentive stock option" as that term is described in section 422(b) of the
Code.
5.2. Restrictions Relating to Incentive Stock Options. To the extent that
the aggregate fair market value of Stock with respect to which Incentive Stock
Options are exercisable for the first time by any individual during any calendar
year (under all plans of the Company) exceeds $100,000, such options shall be
treated as Non-Qualified Stock Options, to the extent required by section 422 of
the Code.
5.3. Option Price. The price at which shares of Stock may be purchased upon
the exercise of an Option (the "Option Price") shall be established by the
Committee or shall be determined by a method established by the Committee at the
time the Option is granted; provided, however, that in no event shall such price
be less than the greater of: (i) 100% of the Fair Market Value (as defined in
subsection 10.11) of a share of Stock as of the date on which the Option is
granted; or (ii) the par value of a share of Stock on such date.
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5.4. Exercise. Except as otherwise expressly provided in the Plan, an
Option may be exercised, in whole or in part, in accordance with terms and
conditions established by the Committee at the time of grant; provided, however,
that no Option shall be exercisable after the Expiration Date (as defined in
Section 9) applicable to that Option. The full Option Price of each share of
Stock purchased upon the exercise of any Option shall be paid at the time of
such exercise (except that, in the case of a cashless exercise arrangement
approved by the Committee, payment may be made as soon as practicable after the
exercise) and, as soon as practicable thereafter, a certificate representing the
shares so purchased shall be delivered to the person entitled thereto. The
Option Price shall be payable in cash or in shares of Stock (valued at Fair
Market Value as of the day of exercise), or in any combination thereof, as
determined by the Committee and, to the extent provided by the Committee, a
Participant may elect to pay the Option Price upon the exercise of an Option
through a cashless exercise arrangement. The exercise of an Option will result
in the surrender of the corresponding rights under a tandem Stock Appreciation
Right, if any.
5.5. Post-Exercise Limitations. The Committee, in its discretion, may
impose such restrictions on shares of Stock acquired pursuant to the exercise of
an Option (including stock acquired pursuant to the exercise of a tandem Stock
Appreciation Right) as it determines to be desirable, including, without
limitation, restrictions relating to disposition of the shares and forfeiture
restrictions based on service, performance, Stock ownership by the Participant,
and such other factors as the Committee determines to be appropriate.
6. Stock Appreciation Rights
6.1. Definition. Subject to the terms of this Section 6, a "Stock
Appreciation Right" granted under the Plan entitles the Participant to receive,
in cash or Stock, value equal to all or a portion of the excess of: (a) the Fair
Market Value of a specified number of shares of Stock at the time of exercise;
over (b) a specified price which shall not be less than 100% of the Fair Market
Value of the Stock at the time the Stock Appreciation Right is granted, or, if
granted in tandem with an Option, the exercise price with respect to shares
under the tandem Option.
6.2. Exercise. If a Stock Appreciation Right is not in tandem with an
Option, then the Stock Appreciation Right shall be exercisable in accordance
with the terms established by the Committee in connection with such rights after
the Expiration Date applicable to that Stock Appreciation Right. If a Stock
Appreciation Right is in tandem with an Option, then the Stock Appreciation
Right shall be exercisable at the time the tandem Option is exercisable. The
exercise of a Stock Appreciation Right will result in the surrender of the
corresponding rights under the tandem Option.
6.3. Settlement of Award. Upon the exercise of a Stock Appreciation Right,
the value to be distributed to the Participant, in accordance with subsection
6.1, shall be distributed in shares
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<PAGE> 7
of Stock (valued at their Fair Market Value at the time of exercise), in cash,
or in a combination thereof, in the discretion of the Committee.
6.4. Post-Exercise Limitations. The Committee, in its discretion, may
impose such restrictions on shares of Stock acquired pursuant to the exercise of
a Stock Appreciation Right as it determines to be desirable, including, without
limitation, restrictions relating to disposition of the shares and forfeiture
restrictions based on service, performance, ownership of Stock by the
Participant, and such other factors as the Committee determines to be
appropriate.
7. Stock Awards.
7.1. Definition. Subject to the terms of this Section 7, a "Stock Award"
under the Plan is a grant of shares of Stock to a Participant, the earning,
vesting or distribution of which is subject to one or more conditions
established by the Committee. Such conditions may relate to events (such as
performance or continued employment) occurring before or after the date the
Stock Award is granted, or the date the Stock is earned by, vested in or
delivered to the Participant. If the vesting of Stock Awards is subject to
conditions occurring after the date of grant, the period beginning on the date
of grant of a Stock Award and ending on the vesting or forfeiture of such Stock
(as applicable) is referred to as the "Restricted Period". Stock Awards may
provide for delivery of the shares of Stock at the time of grant, or may provide
for a deferred delivery date.
7.2. Terms and Conditions of Awards. Beginning on the date of grant (or, if
later, the date of distribution) of shares of Stock comprising a Stock Award,
and including any applicable Restricted Period, the Participant, as owner of
such shares, shall have the right to vote such shares; provided, however, that
payment of dividends with respect to Stock Awards shall be subject to the
following:
(a) On and after the date that a Participant has a fully earned and vested
right to the shares comprising a Stock Award, and the shares have been
distributed to the Participant, the Participant shall have all
dividend rights (and other rights) of a stockholder with respect to
such shares.
(b) Prior to the date that a Participant has a fully earned and vested
right to the shares comprising a Stock Award, the Committee, in its
sole discretion, may award Dividend Rights (as defined below) with
respect to such shares.
(c) On and after the date that a Participant has a fully earned and vested
right to the shares comprising a Stock Award, but before the shares
have been distributed to the Participant, the Participant shall be
entitled to Dividend Rights with respect to such shares, at the time
and in the form determined by the Committee.
A "Dividend Right" with respect to shares comprising a Stock Award shall entitle
the Participant, as of each dividend payment date, to an amount equal to the
dividends payable with respect to a
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<PAGE> 8
share of Stock multiplied by the number of such shares. Dividend Rights shall be
settled in cash or in shares of Stock, as determined by the Committee, shall be
payable at the time and in the form determined by the Committee, and shall be
subject to such other terms and conditions as the Committee may determine.
8. Performance Units.
8.1. Definition. Subject to the terms of this Section 8, the Award of
"Performance Units" under the Plan entitles the Participant to receive value for
the units at the end of a Performance Period to the extent provided under the
Award. The number of units earned, and the value received for them, will be
contingent on the degree to which the performance measures established at the
time of grant of the Award are met. For purposes of the Plan, the "Performance
Period" with respect to the award of any Performance Units shall be the period
over which the applicable performance is to be measured.
8.2. Terms and Conditions of Awards. For each Participant, the Committee
will determine the value of Performance Units, which may be stated either in
cash or in units representing shares of Stock; the performance measures used for
determining whether the Performance Units are earned; the Performance Period
during which the performance measures will apply; the relationship between the
level of achievement of the performance measures and the degree to which
Performance Units are earned; whether, during or after the Performance Period,
any revision to the performance measures or Performance Period should be made to
reflect significant events or changes that occur during the Performance Period;
and the number of earned Performance Units that will be paid in cash and the
number of earned Performance Units to be paid in shares of Stock.
8.3. Settlement. Settlement of Performance Units shall be subject to the
following:
(a) The Committee will compare the actual performance to the performance
measures established for the Performance Period and determine the
number of units as to which settlement is to be made, and the value of
such units.
(b) Settlement of units earned shall be wholly in cash, wholly in Stock or
in a combination of the two, to be distributed in a lump sum or
installments, as determined by the Committee.
(i) For Performance Units stated in units representing shares of
Stock when granted, one share of Stock will be distributed for
each unit earned, or cash will be distributed for each unit
earned equal to either (A) the Fair Market Value of a share of
Stock as of the last day of the Performance Period or (B) the
average Stock value over a period determined by the Committee.
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(ii) For Performance Units stated in cash when granted, the value of
each unit earned will be distributed in its initial cash value,
or shares of Stock will be distributed based on the cash value
of the units earned divided by (A) the Fair Market Value of a
share of Stock at the end of the Performance Period or (B) the
average Stock value over a period determined by the Committee.
(c) Shares of Stock distributed in settlement of the units shall be
subject to such vesting requirements and other conditions, if any, as
the Committee shall determine.
8.4. Termination During Performance Period. If a Participant's termination
of employment with the Company occurs during a Performance Period with respect
to any Performance Units granted to him, the Committee may determine that the
Participant will be entitled to settlement of all or any portion of the
Performance Units as to which he would otherwise be eligible, and may accelerate
the determination of the value and settlement of such Performance Units or make
such other adjustments as the Committee, in its sole discretion, deems
desirable.
9. Expiration of Awards. The "Expiration Date" with respect to an Award
under the Plan means the date established as the Expiration Date by the
Committee at the time of the grant; provided, however, that the Expiration Date
with respect to any Award shall not be later than the ten-year anniversary of
the date on which the Award is granted. If a Stock Appreciation Right is in
tandem with an Option, then the "Expiration Date" for the Stock Appreciation
Right shall be the Expiration Date for the related Option.
10. Miscellaneous.
10.1. Compliance with Applicable Laws; Limits on Distribution. Distribution
of shares of Stock or other amounts under the Plan shall be subject to the
following:
(a) Notwithstanding any other provision of the Plan, Hull shall have no
liability to deliver any shares of Stock under the Plan or make any
other distribution of benefits under the Plan unless such delivery or
distribution would comply with all applicable laws and the applicable
regulations or requirements of any securities exchange or similar
entity.
(b) In the case of a Participant who is subject to Section 16(a) and
16(b) of the Exchange Act, the Committee may, at any time, add such
conditions and limitations to any Award to such Participant, or any
feature of any such Award, as the Committee, in its sole discretion,
deems necessary or desirable to comply with Section 16(a) or 16(b) of
the Exchange Act and the rules and regulations thereunder or to
obtain any exemption therefrom.
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(c) To the extent that the Plan provides for issuance of certificates to
reflect the transfer of shares of Stock, the transfer of such shares
may be effected on a non- certificated basis, to the extent not
prohibited by applicable law or the rules of any securities exchange
or similar entity.
(d) Prior to the delivery of any shares of Stock under the Plan, Hull may
require a written statement that the recipient is acquiring the
shares for investment and not for the purpose or with the intention
of distributing the shares and will not dispose of them in violation
of the registration requirements of the Securities Act of 1933.
10.2. Performance-Based Compensation. To the extent that the Committee
determines that it is necessary or desirable to conform any Awards under the
Plan with the requirements applicable to "Performance-Based Compensation", as
that term is used in section 162(m)(4)(C) of the Code, it may, at or prior to
the time an Award is granted, take such steps and impose such restrictions with
respect to such Award as it determines to be necessary or desirable.
10.3. Transferability. Awards under the Plan are not transferable except as
designated by a Participant by will or by the laws of descent and distribution.
To the extent that the Participant who receives an Award under the Plan has the
right to exercise such Award, the Award may be exercised during the lifetime of
the Participant only by the Participant.
10.4. Notices. Any notice or document required to be filed with the
Committee under the Plan will be properly filed if delivered or mailed by
registered mail, postage prepaid, to the Committee, in care of Hull, at its
principal executive offices. The Committee may, by advance written notice to
affected persons, revise such notice procedure from time to time. Any notice
required under the Plan (other than a notice of election) may be waived by the
person entitled to notice.
10.5. Withholding. The Company shall be entitled to deduct from any payment
under the Plan the amount of any tax required by law to be withheld with respect
to such payment or may require any participant to pay such amount to the Company
prior to and as a condition of making such payment. In addition, the Committee
may, in its discretion and subject to such rules as it may adopt from time to
time, permit a participant to elect to have the Company withhold from any
payment under the Plan (or to have the Company accept from the participant), for
tax withholding purposes, shares of Stock, valued at their fair market value,
but in no event shall the fair market value of the number of shares so withheld
(or accepted) exceed the amount necessary to meet the minimum Federal, state and
local marginal tax rates then in
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effect that are applicable to the participant and to the particular transaction.
10.6. Form and Time of Elections. Unless otherwise specified herein, each
election required or permitted to be made by any Participant or other person
entitled to benefits under the Plan, and any permitted modification or
revocation thereof, shall be in writing filed with the Committee at such times,
in such form, and subject to such restrictions and limitations, not inconsistent
with the terms of the Plan, as the Committee shall require.
10.7. Agreement With Hull. At the time of an Award to a Participant under
the Plan, the Committee may require a Participant to enter into an agreement
with Hull (the "Agreement") in a form specified by the Committee, agreeing to
the terms and conditions of the Plan and to such additional terms and
conditions, not inconsistent with the Plan, as the Committee may, in its sole
discretion, prescribe.
10.8. Limitation of Implied Rights.
(a) Neither a Participant nor any other person shall, by reason of the
Plan, acquire any right in or title to any assets, funds or property
of the Company whatsoever, including, without limitation, any specific
funds, assets, or other property which the Company, in its sole
discretion, may set aside in anticipation of a liability under the
Plan. A Participant shall have only a contractual right to benefits or
amounts, if any, payable under the Plan, unsecured by any assets of
the Company. Nothing contained in the Plan shall constitute a
guarantee by the Company that the assets of the Company shall be
sufficient to pay any amounts or benefits to any person.
(b) The Plan does not constitute a contract of employment, and selection
as a Participant will not give any employee the right to be retained
in the employ of the Company, nor any right or claim to any benefit or
payment under the Plan, unless such right or claim has specifically
accrued under the terms of the Plan. Except as otherwise provided in
the Plan, no Award under the Plan shall confer upon the holder thereof
any right as a stockholder of Hull prior to the date on which he
fulfills all service requirements and other conditions for receipt of
such rights.
10.9. Evidence. Evidence required of anyone under the Plan may be by
certificate, affidavit, document or other information
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which the person acting on it considers pertinent and reliable, and signed, made
or presented by the proper party or parties.
10.10. Gender and Number. Where the context admits, words in one gender
shall include the other gender, words in the singular shall include the plural
and the plural shall include the singular.
10.11. Definition of Fair Market Value. For purposes of the Plan, the "Fair
Market Value" of a share of common stock of Hull as of any date shall be the
closing market composite price for such Stock as reported on the Nasdaq National
Market on that date or, if Stock is not traded on that date, on the immediately
preceding date on which Stock was traded. In the event that the Stock is not
listed for trading on a national exchange or quoted on an inter-dealer quotation
system, the Fair Market Value shall be determined by the Committee.
11. Change in Control.
11.1. Acceleration. Except as otherwise provided in the Plan or the
Agreement reflecting the applicable Award, upon a Participant's termination of
employment by the Company for reasons other than cause within 24 months
following the occurrence of a Change in Control:
(a) All outstanding Options (regardless of whether in tandem with Stock
Appreciation Rights) and Stock Appreciation Rights (regardless of
whether in tandem with Options) shall become fully exercisable.
(b) All Stock Awards shall become fully vested.
(c) Performance Units may be paid out in such manner and amounts as
determined by the Committee.
11.2. Definition of Change in Control. For purposes of the Plan, the term
"Change in Control" means a change in the beneficial ownership of Hull's voting
stock or a change in the composition of the Board which occurs as follows:
(a) any "Person" (as such term is used in Section 13(d) and 14(d)(2) of
the Exchange Act), other than Hull, any entity owned, directly or
indirectly, by the stockholders of Hull in substantially the same
proportions as their ownership of stock of Hull, and any trustee or
other fiduciary holding securities under an employee benefit plan of
Hull or its subsidiaries or such proportionately owned corporation)
becomes through acquisitions of securities of Hull after the Effective
Date of the Plan, the "beneficial owner" (as defined in Rule 13d-3
promulgated under the Exchange Act),
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directly or indirectly, of securities of Hull representing 40% or more
of the combined voting power of Hull's then outstanding securities
having the right to vote for the election of directors;
(b) the stockholders of Hull approve a merger or consolidation of Hull
with any other corporation, other than (A) a merger or consolidation
which would result in the voting securities of Hull outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the
surviving entity) more than 50% of the combined voting power of the
voting securities of Hull or such surviving entity outstanding
immediately after such merger or consolidation, or (B) a merger or
consolidation effected to implement a recapitalization of Hull (or
similar transaction) in which no Person acquires more than 15% of
Hull's then outstanding securities having the right to vote for the
election of directors;
(c) the stockholders of Hull approve a plan of complete liquidation of
Hull or an agreement for the sale or disposition by Hull of all or
substantially all of Hull's assets (or any transaction having a
similar effect); or
(d) during any 24 month period, individuals who at the beginning of such
period constitute the board of directors of Hull, and any new director
(other than a director designated by a Person who has entered into an
agreement with Hull to effect a transaction described in paragraph
(a), (b) or (c) of this subsection 11.2) whose election by the board
or nomination for election by Hull's stockholders was approved by a
vote of at least two-thirds of the directors then still in office who
either were directors at the beginning of the period or whose election
or nomination for election was previously so approved, cease for any
reason to constitute at least a majority thereof.
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12. Amendment and Termination.
The Board may, at any time, amend or terminate the Plan, provided that,
subject to subsection 4.4 (relating to certain adjustments to shares), no
amendment or termination may materially adversely affect the rights of any
Participant or beneficiary under any Award made under the Plan prior to the date
such amendment is adopted by the Board. Notwithstanding the foregoing or any
other provision of the Plan or any Award agreement, the Board or the Committee
may amend the Plan or the terms of any Award to the extent it deems necessary to
preserve pooling-of-interest accounting treatment for any transaction which is
intended to be accounted for through such accounting method.
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EXHIBIT 16.1
June 21, 1999
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We have read the paragraphs under the heading "Experts" in Amendment No. 1
to the Registration Statement on Form S-1 (File No. 333-78407) of The Hull Group
Inc. (the "Company") and concur with the statement contained in the second
paragraph that on March 5, 1999, the Company dismissed Schultz & Chez, L.L.P. as
the Company's principal accountant to audit the Company's financial statements
and with the statements contained in the remaining paragraphs under the heading
"Experts". We have no basis to agree or disagree with other statements of the
registrant contained therein.
/s/ SCHULTZ & CHEZ, L.L.P.
<PAGE> 1
EXHIBIT 21.1
List of Subsidiaries of The Hull Group Inc.
Name Jurisdiction of Organization
- ---- ----------------------------
Hull and Associates, L.L.C. Delaware
Hull Equity Management, L.L.C. Illinois
Hull Trading GmbH Germany
Hull Trading Asia Limited Hong Kong
Hull Trading UK Limited United Kingdom
Hull Liquidity Fund, L.P. Delaware
Hull Quantitative Fund, L.L.C. Delaware
M. Blair Hull, Inc. Illinois
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated April 30, 1999, with respect to the financial
statements of Hull Trading Company, L.L.C. included in Amendment No. 1 to the
Registration Statement on Form S-1 (File No. 333-78407) and related Prospectus
of The Hull Group Inc.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
June 21, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 5, 1998, with respect to the consolidated
financial statements of Hull Trading Company, L.L.C. included in Amendment No. 1
to the Registration Statement on Form S-1 (File No. 333-78407) and related
Prospectus of The Hull Group Inc.
Schultz & Chez, L.L.P.
Chicago, Illinois
June 21, 1999
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<ARTICLE> BD
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 MAR-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 MAR-31-1999
<CASH> 2,723 7,033
<RECEIVABLES> 24,123 47,314
<SECURITIES-RESALE> 0 0
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<INSTRUMENTS-OWNED> 1,723,793 1,382,754
<PP&E> 7,128 7,372
<TOTAL-ASSETS> 1,793,095 1,479,493
<SHORT-TERM> 10,107 0
<PAYABLES> 354,158 190,224
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<INSTRUMENTS-SOLD> 1,281,634 1,130,366
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0 0
0 0
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<INTEREST-EXPENSE> 49,732 14,614
<COMPENSATION> 25,400 7,656
<INCOME-PRETAX> 40,561 20,244
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<CHANGES> 0 0
<NET-INCOME> 29,660 15,775
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