<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 6, 1999
REGISTRATION NO. 333-78407
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 2
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:
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<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 -- JULY 6, 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:
- - HUL/New York Stock Exchange
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.
THE EXPECTED CONCURRENT PRIVATE PLACEMENT:
- - We expect to sell 360,000 shares of our common stock to Daiwa Securities Group
Inc. in a private placement at the time of the sale of our common stock in the
offering.
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<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.
- --------------------------------------------------------------------------------
DONALDSON, LUFKIN & JENRETTE
ABN AMRO ROTHSCHILD
A DIVISION OF ABN AMRO INCORPORATED
PUTNAM, LOVELL,
DE GUARDIOLA & THORNTON, INC.
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
[THE HULL GROUP LOGO]
Improving capital markets through innovation, technology and teamwork
TABLE OF CONTENTS
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<CAPTION>
PAGE
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Prospectus Summary................... 1
Risk Factors......................... 6
Forward-looking Statements........... 18
Our Company.......................... 18
Use of Proceeds...................... 20
Dividend Policy...................... 20
Dilution............................. 20
Capitalization....................... 22
Selected Consolidated Financial
Information........................ 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 25
Our Industry......................... 37
Our Business......................... 41
Our Management....................... 55
Certain Relationships and Related
Transactions....................... 63
Principal Stockholders............... 64
Description of Capital Stock......... 65
Shares Eligible for Future Sale...... 68
Certain United States Federal Tax
Consequences to Non-U.S. Holders of
Common Stock....................... 69
Underwriting......................... 73
Legal Matters........................ 75
Experts.............................. 75
Additional Information............... 76
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 are
a leading market maker 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 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.
<PAGE> 5
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.
- 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.
2
<PAGE> 6
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, 32,547,500 shares of
our common stock will be outstanding after the offering and the expected
concurrent private placement.
Common stock offered............. 6,250,000 shares
Common stock we expect to sell in
a private placement which would
close at the same time as the
offering....................... 360,000 shares
Common stock to be outstanding
after the offering and the
expected concurrent private
placement...................... 31,610,000 shares
Use of proceeds.................. We estimate that the net proceeds to us
from selling our common stock in the
offering and the expected concurrent
private placement will be approximately
$85.2 million. We expect to use the net
proceeds from the offering and the expected
concurrent private placement 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 NYSE Symbol............. HUL
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:
Pro forma net income(c).......... $ 14,700 $ 8,386
========== ========
Pro forma net income per share,
as adjusted(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
HISTORICAL PRO FORMA(c) ADJUSTED(d)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C>
BALANCE SHEET INFORMATION:
Total assets.............................................. $1,479,493 $1,470,853 $1,556,028
Total liabilities......................................... 1,370,853 1,370,853 1,370,853
---------- ---------- ----------
Total members' equity/stockholders' equity................ $ 108,640 $ 100,000 $ 185,175
========== ========== ==========
Book value per share...................................... $ 4.00 $ 5.86
========== ==========
</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 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 and the issuance of 360,000 shares of common
stock in the expected concurrent private placement at a 4.2% discount to
the midpoint of the range of initial public offering prices listed on the
cover page of this prospectus, after deducting our estimated offering and
transaction expenses and underwriting discounts and commissions.
(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 May Experience Significant Losses from Our Market-Making Activities
We currently derive, and expect to continue to derive, a majority of our
revenues from 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.
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
6
<PAGE> 10
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;
8
<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.
Employee Misconduct Could Harm Us and Is Difficult to Detect and Deter
There have been a number of highly publicized cases involving fraud or
other misconduct by employees in the securities industry in recent years, and we
run the risk that employee misconduct could occur. Misconduct by employees could
include binding us to transactions that exceed authorized limits or present
unacceptable risks, or hiding from us unauthorized or unsuccessful activities,
which, in either case, may result in unknown and unmanaged risks or losses.
Employee misconduct could also involve the improper use or disclosure of
confidential information, which could result in regulatory sanctions and serious
reputational or financial harm. It is not always possible to deter employee
misconduct and the precautions we take to prevent and detect this activity may
not be effective in all cases.
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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 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.
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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.
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
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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.
IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL, IT MAY ADVERSELY AFFECT
OUR ABILITY TO CONDUCT OUR BUSINESS
Our future success depends on our ability to attract and retain key
personnel. If we are unable to attract and retain our key personnel, it may
adversely affect our ability to conduct our business. 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.
IF WE ARE UNABLE TO MEET INCREASING DEMAND, IT MAY AFFECT OUR ABILITY TO EXPAND
OR MAINTAIN OUR BUSINESS
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. If we are unable to meet this demand, it
may adversely affect our ability to expand or even maintain our present levels
of business. The worldwide market-making industry is characterized by:
- rapid technological change;
- rapidly increasing transaction volumes;
- changing customer demands;
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- 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.
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.
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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
- 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
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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
Expand or Maintain 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 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
Legal and Regulatory Requirements of Foreign Countries May Limit Our Ability
to Expand Internationally
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. The compliance requirements of these different
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. 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.
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We May Experience Losses from Currency Restrictions or Fluctuations
We also face the risk that exchange controls or other restrictions
imposed by foreign governmental authorities 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. In addition, fluctuations in
currency exchange rates, including possible currency devaluations, 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 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 and the expected concurrent private
placement, our directors and executive officers will collectively beneficially
own approximately 48.8% 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 beneficially own
approximately 39.4% of our outstanding common stock immediately after the
offering and the expected concurrent private placement, 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
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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 NYSE. That listing does not, however, guarantee that an
active trading market for our common stock will develop and continue after the
offering.
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
$8.14 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 and the expected concurrent
private placement, 31,610,000 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,
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other than any shares purchased by affiliates. The private placement investor
would own 360,000 shares and our existing stockholders will own the remaining
25,000,000 shares. The existing stockholders may sell their shares into the
public market in the future after they satisfy their required holding periods.
The private placement investor would be able to sell its shares into the public
market in the future after it satisfies its required holding period.
We Have Significant Discretion in the Use of Proceeds, So We May Apply the
Proceeds Differently than Investors Expect
We expect to use the net proceeds from the offering and the expected
concurrent private placement 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 no specific plans for the proceeds of the offering and
the expected concurrent private placement 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 and the
expected concurrent private placement, so we may apply the proceeds differently
than investors expect. 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 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.
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The following charts show our ownership structure before and after the
reorganization. The ownership percentages after the reorganization assume the
sale of 6,250,000 shares of our common stock in the offering and the sale of
360,000 shares of our common stock in the expected concurrent private placement.
[Organization Chart]
The following chart shows the subsidiaries of Hull and Associates and the
contractual relationship between Hull Equity Management, L.L.C. and each of our
private investment funds.
[Organization Chart]
Our main offices are at 311 South Wacker Drive, Chicago, Illinois 60606
and our telephone number is (312) 697-2700.
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USE OF PROCEEDS
We estimate that the net proceeds to us from selling our common stock in
the offering and the expected concurrent private placement will be approximately
$85.2 million, or $97.4 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 and a private
placement price at a discount of 4.2% to the assumed initial public offering
price. We have no specific plans for the proceeds of the offering and the
expected concurrent private placement and cannot estimate the portion of the net
proceeds which we will use for any of these purposes. See "Risk Factors -- There
are Specific Risks Relating to this Offering -- We Have Significant Discretion
in the Use of Proceeds." We expect to use the net proceeds from the offering and
the expected concurrent private placement 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 may also use a portion of the proceeds of this
offering and the expected concurrent private placement 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.
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, and to the sale of 360,000 shares in the expected
concurrent private placement at a 4.2% discount to the assumed initial public
offering price of $14.00 per share, resulting in estimated net proceeds of $85.2
million, our pro forma net tangible book value on March 31, 1999 would have been
approximately $185.2 million, or $5.86 per share. This represents an immediate
increase in pro forma net tangible book value of
20
<PAGE> 24
$1.86 per share to our existing stockholders and an immediate dilution of $8.14
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 or the
expected concurrent private placement.................. $4.00
Increase in pro forma net tangible book value per share
attributable to the offering and the expected
concurrent private placement........................... 1.86
-----
Pro forma net tangible book value per share on March 31,
1999, after giving effect to the offering and the expected
concurrent private placement.............................. 5.86
------
Dilution in pro forma net tangible book value per share to
new investors............................................. $ 8.14
======
</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, by new
investors in the offering at an assumed initial public offering price of $14.00
per share and by the investor in the expected concurrent private placement at a
4.2% discount to the assumed initial public offering price:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ----------------------
NUMBER PERCENT AMOUNT PERCENT
<S> <C> <C> <C> <C>
Existing stockholders................ 25,000,000 79.1% $100,000,000 52.0%
New investors........................ 6,250,000 19.8 87,500,000 45.5
Expected private placement
investor........................... 360,000 1.1 4,828,000 2.5
---------- ----- ------------ -----
Total.............................. 31,610,000 100.0% $192,328,000 100.0%
========== ===== ============ =====
</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 $6.06 per share after giving effect to the offering and the expected
concurrent private placement. This represents dilution of $7.94 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 7,547,500, or 23% of the total number of shares of
our common stock to be outstanding after the offering and the expected
concurrent private placement. The 360,000 shares purchased in the expected
concurrent private placement would represent 1% of the total number of shares to
be outstanding and the 25,000,000 shares held by our existing stockholders would
represent 77% of the total number of shares to be outstanding.
21
<PAGE> 25
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. The pro forma as adjusted information gives 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 and the sale of 360,000 shares of our
common stock in the expected concurrent private placement at a 4.2% discount to
the assumed initial public offering price, resulting in estimated net proceeds
of $85.2 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
HISTORICAL PRO FORMA AS ADJUSTED
(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), 31,610,000 shares issued and
outstanding (pro forma as adjusted).................. -- 250 316
Additional paid-in capital.............................. -- 114,683 199,792
Retained earnings....................................... -- -- --
Unearned compensation(a)................................ -- (14,933) (14,933)
-------- -------- --------
Total stockholders' equity(b)........................ -- 100,000 185,175
-------- -------- --------
Total capitalization................................. $108,640 $100,000 $185,175
======== ======== ========
</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.
22
<PAGE> 26
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>
23
<PAGE> 27
<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:
Pro forma net income(b)......... $ 14,700 $ 8,386
Pro forma stockholders' equity
as adjusted(c)................ $ 185,175
Pro forma book value per share
as adjusted(c)................ $ 5.86
Pro forma net income per
share(b)...................... $ 0.59 $ 0.34
Pro forma net income per share,
as adjusted(c)................ $ 0.47 $ 0.27
Pro forma basic and diluted
shares, as adjusted(c)........ 31,610,000 31,610,000
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 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 and the issuance of 360,000 shares of common stock
in the expected concurrent private placement at a 4.2% discount to the
midpoint of the range of initial public offering prices listed on the cover
page of this prospectus, after deducting our estimated offering and
transaction expenses and underwriting discounts and commissions.
(d) Annualized.
24
<PAGE> 28
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. 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 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.
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. The stockholders of
M. Blair Hull, Inc. will receive an aggregate of approximately 17,289,000 shares
of our common stock upon these exchanges.
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
25
<PAGE> 29
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.
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
26
<PAGE> 30
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
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
27
<PAGE> 31
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.
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
28
<PAGE> 32
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 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
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$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.
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 and readily marketable
securities.
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 Corp. 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. Because we use margin financing to buy
securities, we maintain securities positions substantially greater than our
invested capital. However, because we hold both long and short securities
positions, this leverage does not imply unusual risk.
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.
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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 July 1, 1999, our
investment in Hull Liquidity Fund was $12.5 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 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 July 1, 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.
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<PAGE> 35
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.
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."
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<PAGE> 36
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
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............................................. $4,111
======
</TABLE>
We set targeted limits for the components of VaR and limits for the
maximum probable losses in a catastrophic scenario. When establishing
catastrophic limits, we take into account the amount of capital used as well as
expected profits. Managing these risks is an integral part of trading.
Risk-adjusted return on capital, or RAROC, which we use for profit center bonus
pool calculations, is a key measure in determining a trader's or portfolio
manager's compensation. We use VaR to calculate risk adjustments in determining
RAROC. Because we compensate each individual trader and portfolio manager based
on risk-adjusted returns, we give them a financial incentive to operate within
our predetermined risk limits.
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<PAGE> 37
The following graph shows the frequency distribution of our daily
market-making gains and losses based on values derived from our proprietary
valuation models over the three-year period ended December 31, 1998. These gains
and losses may differ on a daily basis from gains and losses determined based on
the daily quoted closing prices.
DAILY NET GAINS AND LOSSES
1996 - 1998
<TABLE>
<CAPTION>
NUMBER OF DAYS
--------------
<S> <C>
Under (3,500) 3
(3,500) - (3,000) 0
(3,000) - (2,500) 8
(2,500) - (2,000) 4
(2,000) - (1,500) 10
(1,500) - (1,000) 29
(1,000) - (500) 50
(500) - 0 152
0 - 500 214
500 - 1,000 138
1,000 - 1,500 93
1,500 - 2,000 42
2,000 - 2,500 19
2,500 - 3,000 5
3,000 - 3,500 0
Over 3,500 7
</TABLE>
DAILY NET GAINS AND LOSSES (US$ 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.
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
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<PAGE> 38
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. 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 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.
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<PAGE> 39
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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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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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> 43
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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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 -- One of the first remote access members 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 -- 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 linked to a particular profit center's
risk-adjusted profitability, reinforcing the strong working relationship.
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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.
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
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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
are a leading market maker 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 28 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 is a
division of Hull Liquidity Fund, L.P., 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 July 1, 1999 $64.9 million $21.7 million $12.7 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 10,000 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.
Although we calculate VaR estimates under these unusual market scenarios,
extreme market conditions may exceed these historically based scenarios. Under
these extreme market conditions, our risk management system may not sufficiently
manage our exposure to market risk, such as in the second half of 1998.
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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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 RISK MANAGEMENT CHART]
[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.]
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.
Trading Staff. At the profit center level, our portfolio managers are
responsible for continuously monitoring portfolio risk compliance within
predetermined limits set by our
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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 June 30, 1999, we had 241 employees, of which 105 were in trading,
64 were in systems, 20 were in financial engineering, nine were in management
and 43 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
competitors or alliances among competitors may emerge and they may acquire
significant market share.
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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
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.
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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 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.
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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 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
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<PAGE> 57
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> 58
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> 59
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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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
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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.
Our Board has adopted an Outside Directors' Stock Option Plan. Under this plan,
each director who is not our officer or 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 officer or
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 either the closing market composite price on the grant date (or, if
greater, the par value of a share of our common stock on the grant date). Every
year, each director who is not our officer or employee will receive an option to
purchase 2,000 shares of our common stock after the annual stockholders' meeting
at either the closing market composite price on the grant date (or, if greater,
the par value of a share of our common stock 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. The shares may be
newly issued shares or shares purchased in the open market or in private
transactions.
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<PAGE> 62
EXECUTIVE COMPENSATION
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.
1999 LONG-TERM INCENTIVE PLAN
Our Board has adopted, and our stockholders have approved, 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 8,715,000 shares, which may be adjusted in some
cases. The shares may be newly issued shares or shares purchased in the open
market or in private transactions. The maximum number of shares of common stock
that any individual participant may receive each year under our long-term
incentive plan is 300,000, and the maximum cash payout for grants or awards
under this plan each year to any of our key executive officers is $4,500,000.
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Our compensation committee administers our long-term incentive plan. This
plan essentially gives the compensation committee sole discretion and authority
to:
- select those employees and consultants 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.
Our compensation committee has also authorized our officers who are also
members of our Board to make awards under this plan to persons who are not
subject to Section 16(a) of the Securities Exchange Act. The number of shares of
our common stock subject to awards made by the officers in any calendar year
cannot exceed 50,000. With respect to these awards, the officers have the duties
which would otherwise be undertaken by the compensation committee under this
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. Our compensation committee also may impose restrictions on shares of
our common stock that are issued upon the exercise of options and stock
appreciation rights under this plan.
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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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
Our Board has adopted our 1999 Special Restricted Stock Plan. Under a
predecessor plan, M. Blair Hull, Inc. granted restricted membership interests of
Hull and Associates to certain of our key employees. In connection with the
reorganization of The Hull Group Inc., as a result of which M. Blair Hull, Inc.
and Hull and Associates will become our wholly owned subsidiaries, the
restricted membership interests of Hull and Associates will be replaced with
shares of our restricted stock that will be contributed by M. Blair Hull, which
shares will be subject to the 1999 Special Restricted Stock Plan. The membership
interests subject to the predecessor plan have a value of approximately $14.9
million, or 1,066,667 shares of our common stock, based on the assumed initial
public offering price of our common stock. The restricted membership interests
which have been granted were contributed by M. Blair Hull, Inc.
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
Our Board has adopted, and our stockholders have approved, our Employee
Stock Purchase Plan. In general, all of our employees and the employees of our
subsidiaries may participate in our employee stock purchase plan for any
offering period. A total of 500,000 shares
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of our common stock have been reserved for issuance under this plan, although we
initially plan to purchase shares issued under this plan in the open market and
resell them to the participants at a discount. The shares may be newly issued
shares or shares purchased in the open market or in private transactions.
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 each calendar quarter within 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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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. These distributions will result in
stockholders' equity of $100 million immediately before this offering and would
have amounted to approximately $18.4 million on a pro forma basis at March 31,
1999.
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. 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. 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
nominal 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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PRINCIPAL STOCKHOLDERS
The following table shows the beneficial ownership of our common stock
immediately before the closing of this offering and as adjusted to reflect the
sale of common stock in this offering and in the expected concurrent private
placement 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% 39.4%
Peter J. Layton..................................... 940,000 3.8% 3.0%
Arthur S. Margulis, Jr. ............................ 1,025,000 4.1% 3.2%
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)................................... 2,904,552 11.6% 9.2%
Kristin Hull Cortes(2).............................. 1,936,368 7.7% 6.1%
All directors and executive officers as a group (12
people)........................................... 15,435,000 61.8% 48.8%
</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.
(2) Of these shares, 968,184 shares are held by Ms. Cortes as custodian for
Courtney S. Hull, a minor. Ms. Cortes has voting and dispositive power over
these shares. The remaining 968,184 of these shares are held by a trust for
the benefit of Ms. Cortes. She shares voting and dispositive power over
these shares.
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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
and the expected concurrent private placement, 31,610,000 shares of our common
stock will be outstanding if the underwriters do not exercise their
over-allotment option, or 32,547,500 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.
REGISTRATION RIGHTS
After the offering, M. Blair Hull will be entitled to demand the
registration under the Securities Act of a portion of the shares of our common
stock he beneficially owns on up to four
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<PAGE> 69
occasions. Under the registration rights agreement, he may require us to
register up to one-third of his shares after the first anniversary of the
offering and an additional one-third after the second anniversary of the
offering. If we propose to register any of our equity securities under the
Securities Act after the required time periods, Mr. Hull will be entitled to
"piggyback" registration rights for those shares, subject to some limitations.
We are generally required to bear all expenses associated with these
registrations, except underwriting discounts and commissions, and to indemnify
Mr. Hull, subject to some limitations.
EXPECTED CONCURRENT PRIVATE PLACEMENT
We expect to enter into a stock purchase agreement with Daiwa Securities
Group Inc. prior to the pricing of the offering. Under the proposed arrangement,
we expect to sell 360,000 shares of our common stock to Daiwa immediately after
the closing of this offering at a price per share equal to the initial public
offering price less a discount of 4.2%. We cannot assure you that the expected
concurrent private placement will be completed or that it will be completed on
the terms described in this prospectus.
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 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
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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.
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.
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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.
LISTING
We will apply to list our common stock on the NYSE under the trading
symbol "HUL."
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 and the expected concurrent private placement,
31,610,000 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 tradeable 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
concurrent private placement investor would own 360,000 shares, and 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. M. Blair Hull will beneficially own 12,448,000 shares of our common stock
and will be entitled to registration rights for some of these shares as
described in our registration rights agreement with Mr. Hull.
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<PAGE> 72
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 316,100 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.
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-U.S. HOLDERS OF COMMON STOCK
The following discussion summarizes certain United States federal income
and estate tax consequences of the ownership and disposition of our common stock
by a "non-U.S. holder." You are a "non-U.S. holder" if you are, for United
States federal income tax purposes:
- a non-resident alien individual,
- a foreign corporation,
- a foreign partnership, or
- an estate or trust that is not subject to United States federal income
tax on a net income basis on income or gain from our common stock.
This summary does not discuss all aspects of United States federal income
taxation which may be important to particular non-U.S. holders in light of their
specific investment circumstances. These include non-U.S. holders subject to
special tax rules such as financial institutions, insurance companies,
broker-dealers, and tax-exempt organizations. These also include non-U.S.
holders that hold our common stock as a part of a straddle, hedge, conversion,
or synthetic security transaction for United States federal income tax purposes.
These taxpayers may be subject to tax rules that differ significantly from those
summarized below. The discussion is based on the tax laws of the United States,
including the Internal Revenue Code of 1986, as amended, existing and proposed
regulations, and administrative and judicial interpretations as
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currently in effect. These laws are subject to change, possibly on a retroactive
basis. You are urged to consult a tax advisor regarding the United States
federal tax consequences of acquiring, holding and disposing of our common stock
in your particular circumstances, as well as any tax consequences that may arise
under the laws of any state, local or foreign taxing jurisdiction.
DIVIDENDS
If you are a non-U.S. holder of our common stock, dividends paid to you
are subject to withholding of United States federal income tax at a 30% rate or
at a lower rate if you are eligible for the benefits of an income tax treaty
that provides for a lower rate.
Under currently effective United States Treasury regulations, dividends
paid to an address in a foreign country are presumed to be paid to a resident of
that country, unless the person making the payment has knowledge to the
contrary, for purposes of the 30% withholding tax discussed above. Under current
interpretations of United States Treasury Regulations, this presumption also
applies for purposes of determining whether a lower withholding rate applies
under an income tax treaty.
Under United States Treasury withholding regulations that will generally
apply to dividends paid after December 31, 2000, you must satisfy certain
certification requirements in order to claim the benefit of a lower treaty rate.
In addition, in the case of common stock held by a foreign partnership, the
certification requirement generally will apply to the partners of the
partnership and the partnership must provide certain information, including a
United States taxpayer identification number. These regulations also provide
look-through rules for tiered partnerships.
If you are eligible for a reduced rate of United States withholding tax
under a tax treaty, you may claim a refund of amounts withheld in excess of that
rate by filing a refund claim with the United States Internal Revenue Service.
If, however, the dividends are "effectively connected" with your conduct
of a trade or business within the United States, and they are attributable to a
permanent establishment that you maintain in the United States, if that is
required by an applicable income tax treaty as a condition for subjecting you to
United States income tax on a net income basis, then the dividends generally
will not be subject to withholding tax. Instead, "effectively connected"
dividends are subject to tax at rates applicable to United States citizens,
resident aliens and domestic United States corporations and if you are a
non-U.S. corporation, "effectively connected" dividends that you receive may,
under certain circumstances, be subject to an additional "branch profits tax" at
a 30% rate or at a lower rate if you are eligible for the benefits of an income
tax treaty that provides for a lower rate.
GAIN ON DISPOSITION OF COMMON STOCK
If you are a non-U.S. holder, you generally will not be subject to United
States federal income tax on gain that you recognize on a disposition of our
common stock unless:
- the gain is "effectively connected" with your conduct of a trade or
business in the United States, and the gain is attributable to a
permanent establishment that you maintain in the United States, if
that is required by an applicable income tax treaty as a condition
for subjecting you to United States taxation on a net income basis,
or
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- you are an individual, you hold our common stock as a capital asset,
and you are present in the United States for 183 or more days in the
taxable year of the sale and certain other conditions exist.
If you are a corporate non-U.S. holder, "effectively connected" gains
that you recognize may also, under certain circumstances, be subject to an
additional "branch profits tax" at a 30% rate or at a lower rate if you are
eligible for the benefits of an income tax treaty that provides for a lower
rate.
FEDERAL ESTATE TAXES
Our common stock held by a non-U.S. holder at the time of death will be
included in the holder's gross estate for United States federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, dividends paid to you will not be subject to United States
information reporting requirements and backup withholding tax if you are either:
- subject to the 30% withholding tax discussed above, or
- not subject to the 30% withholding tax because you are eligible for
the benefits of an income tax treaty that reduces or eliminates the
withholding tax.
Dividend payments to you will be reported to the Internal Revenue
Service, however, for purposes of the 30% withholding tax as discussed in the
"Dividends" section above. If you do not meet either of the two requirements
above for exemption from backup withholding tax, and you fail to provide certain
information including your United States taxpayer identification number, or
otherwise establish your status as an "exempt recipient", you may be subject to
backup withholding of United States federal income tax at a rate of 31% on
dividends paid on our common stock.
However, under the withholding regulations discussed above, dividend
payments generally will be subject to information reporting and backup
withholding unless certain certification requirements are met. See the
discussion under "Dividends" for the rules applicable to foreign partnerships
under these regulations.
If you sell our common stock outside of the United States through a
non-U.S. office of a non-U.S. broker, and the sale proceeds are paid to you
outside the United States, then United States backup withholding and information
reporting requirements generally will not apply to that payment. However, United
States information reporting but not backup withholding will apply to a payment
of sales proceeds, even if that payment is made to you outside the United
States, if you sell your Common Stock through a non-U.S. office of a broker
that:
- is a United States person,
- derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States,
- is a "controlled foreign corporation" under United States federal tax
law, or
- with respect to payments made after December 31, 2000, is a foreign
partnership, if at any time during its tax year,
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- one or more of its partners are U.S. persons as defined in U.S.
Treasury regulations who in the aggregate hold more than 50% of the
income or capital interest in the partnership, or
- such foreign partnership is engaged in a United States trade or
business,
unless the broker has documentary evidence in its files that you are a non-U.S.
person or you otherwise establish an exemption.
If you receive payments of the proceeds of a sale of common stock to or
through a United States office of a broker, the payment is subject to both
United States backup withholding and information reporting unless you certify
under penalties of perjury that you are a non-U.S. person or you otherwise
establish an exemption.
You generally may claim a refund of any amounts withheld under the backup
withholding rules that exceed your income tax liability by filing a refund claim
with the United States Internal Revenue Service.
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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, Putnam, Lovell, de Guardiola & Thornton, Inc. and DLJdirect 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. ............
DLJdirect 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. An electronic prospectus is available on the website maintained by
DLJdirect Inc.
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.
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
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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 NYSE under
the trading symbol "HUL."
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 5% 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.
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
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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.
Putnam, Lovell, de Guardiola & Thornton, Inc. has provided us with
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
Incorporated 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 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
75
<PAGE> 79
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 NYSE, you may also read any document we file
with the SEC at the offices of the NYSE, 20 Broad Street, New York, New York
10005.
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.
76
<PAGE> 80
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> 81
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> 82
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> 83
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> 84
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> 85
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> 86
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> 87
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> 88
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
F-9
<PAGE> 89
HULL TRADING COMPANY, L.L.C.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
after December 15, 1998. The Company currently expenses its costs of computer
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> 90
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> 91
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> 92
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> 93
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> 94
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> 95
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> 96
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> 97
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> 98
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> 99
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> 100
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> 101
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> 102
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> 103
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 and to sell 360,000 shares of common stock
as part of the expected concurrent private placement. 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> 104
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> 105
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 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> 106
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 and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 31,970
NASD filing fee............................................. 12,000
NYSE listing fee............................................ 175,000
Accounting fees and expenses................................ 275,000
Legal fees and expenses..................................... 275,000
Printing and engraving expenses............................. 175,000
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 circumstances indemnification
should apply. The Registrant's Amended and Restated Certificate
II-1
<PAGE> 107
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> 108
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> 109
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 JULY 2,
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 July 2, 1999
- ----------------------------------------------------- Executive Officer (Principal
M. Blair Hull Executive Officer); Director
/s/ ARTHUR S. MARGULIS, JR.* President and Director July 2, 1999
- -----------------------------------------------------
Arthur S. Margulis, Jr.
/s/ TIMOTHY J. HUNTER Executive Vice President and Chief July 2, 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> 110
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <S>
1.1 -- Form of Underwriting Agreement.*
2.1 -- Form of Share Exchange Agreement among The Hull Group
Inc. and all of the stockholders of M. Blair Hull, Inc.*
2.2 -- Form of Interest Exchange Agreement among certain of the
members of Hull and Associates, L.L.C. and 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 -- 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.
10.12 -- Form of Registration Rights Agreement between The Hull
Group Inc. and M. Blair Hull.*
10.13 -- Stock Purchase Agreement between The Hull Group Inc. and
Daiwa Securities 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 3.3
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
THE HULL GROUP INC.
THE HULL GROUP INC., a corporation organized and existing under the
Delaware General Corporation Law (the "Corporation"), does hereby certify:
1. The Corporation has not received any payment for any of its stock.
2. The Corporation's original certificate of incorporation was filed on
May 6, 1999 with the Secretary of State of the State of Delaware under the name
The Hull Group Inc.
3. The following amendment and restatement of the Corporation's
Certificate of Incorporation was approved and duly adopted by a majority of the
Corporation's Board of Directors in accordance with the provisions of Sections
241 and 245 of the Delaware General Corporation Law:
FIRST: The name of the Corporation is The Hull Group Inc.
SECOND: The address of the Corporation's registered office in the State
of Delaware is 1209 Orange Street, in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 125,000,000, divided into
100,000,000 shares of common stock of the par value of $0.01 per share, and
25,000,000 shares of preferred stock of the par value of $0.01 per share.
The Board of Directors is authorized, subject to limitations prescribed
by law and the provisions of Article FOURTH, to provide for the issuance of the
shares of preferred stock in series, and by filing a certificate pursuant to the
applicable law of the State of Delaware, to establish from time to time the
number of shares to be included in each such series, and to fix the designation,
powers, preferences and rights of the shares of each such series and the
qualifications, limitations or restrictions thereof.
<PAGE> 2
The authority of the Board of Directors with respect to each series
shall include, but not be limited to, determination of the following:
(a) The number of shares constituting that series and the
distinctive designation of that series;
(b) The dividend rate on the shares of that series, whether
dividends shall be cumulative, and, if so, from which date or dates,
and the relative rights of priority, if any, of payment of dividends on
shares of that series;
(c) Whether that series shall have voting rights, in addition
to the voting rights provided by law, and, if so, the terms of such
voting rights;
(d) Whether that series shall have conversion privileges, and,
if so, the terms and conditions of such conversion, including provision
for adjustment of the conversion rate in such events as the Board of
Directors shall determine;
(e) Whether or not the shares of that series shall be
redeemable, and, if so, the terms and conditions of such redemption,
including the date or dates upon or after which they shall be
redeemable, and the amount per share payable in case of redemption,
which amount may vary under different conditions and at different
redemption dates;
(f) Whether that series shall have a sinking fund for the
redemption or purchase of shares of that series, and, if so, the terms
and amount of such sinking fund;
(g) The rights of the shares of that series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, and the relative rights of priority, if any, of payment of
shares of that series; and
(h) Any other relative rights, preferences and limitations of
that series.
Dividends on outstanding shares of preferred stock shall be paid or
declared and set apart for payment before any dividends shall be paid or
declared and set apart for payment on the shares of common stock with respect to
the same dividend period.
If upon any voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, the assets available for distribution to holders
of shares of preferred stock of all series shall be insufficient to pay such
holders the full preferential amount to which they are entitled, then such
assets shall be distributed ratably among the shares of all series of preferred
stock in accordance with the respective preferential amounts (including unpaid
cumulative dividends, if any) payable with respect thereto.
2
<PAGE> 3
FIFTH: Holders of common stock and preferred stock of the Corporation
shall have no preemptive rights to purchase or subscribe for any class of stock
of the Corporation or securities convertible into or carrying a right to
purchase or subscribe for any class of stock of the Corporation, whether now or
hereafter authorized.
SIXTH: The incorporator of the Corporation is Michael J. Perlowski,
whose mailing address is 190 South LaSalle Street, Chicago, Illinois 60603.
SEVENTH: Unless and except to the extent that the By-laws of the
Corporation shall so require, the election of directors of the Corporation need
not be by written ballot.
EIGHTH: The number of directors constituting the entire Board of
Directors shall be not less than three nor more than 15 as fixed from time to
time by vote of a majority of the entire Board of Directors; provided, however,
that the number of directors shall not be reduced so as to shorten the term of
any director at the time in office; and provided, further, that the number of
directors constituting the entire Board of Directors shall be two until
otherwise fixed by a majority of the entire Board of Directors.
The Board of Directors shall be divided into three classes, as nearly
equal in numbers as the then total number of directors constituting the entire
Board of Directors permits with the term of office of one class expiring each
year. At the annual meeting of stockholders in 2000, directors of the first
class shall be elected to hold office for a term expiring at the next succeeding
annual meeting. At the annual meeting of stockholders in 2001, directors of the
second class shall be elected to hold office for a term expiring at the second
succeeding annual meeting. At the annual meeting of stockholders in 2002,
directors of the third class shall be elected to hold office for a term expiring
at the third succeeding annual meeting. Any vacancies in the Board of Directors
for any reason, and any directorships resulting from any increase in the number
of directors, may be filled by the Board of Directors, acting by a majority of
the directors then in office, although less than a quorum, and any directors so
chosen shall hold office until the next election of the class for which such
directors shall have been chosen and until their successors shall be elected and
qualified. Notwithstanding the foregoing, and except as otherwise required by
law, whenever the holders of any one or more series of preferred stock shall
have the right, voting separately as a class, to elect one or more directors of
the Corporation, the terms of the director or directors elected by such holders
shall expire at the next succeeding annual meeting of stockholders. Subject to
the foregoing, at each annual meeting of stockholders, the successors to the
class of directors whose term shall then expire shall be elected to hold office
for a term expiring at the third succeeding annual meeting.
Notwithstanding any other provisions of this Amended and Restated
Certificate of Incorporation or the By-Laws of the Corporation (and
notwithstanding the fact that some lesser percentage may be specified by law,
this Amended and Restated Certificate of Incorporation or the By-Laws of the
Corporation), any director or the entire Board of Directors of the Corporation
3
<PAGE> 4
may be removed at any time, but only for cause and only by the affirmative vote
of the holders of 66 2/3% or more of the outstanding shares of capital stock of
the Corporation entitled to vote generally in the election of directors
(considered for this purpose as one class) cast at a meeting of the stockholders
called for that purpose. Notwithstanding the foregoing, and except as otherwise
required by law, whenever the holders of any one or more series of preferred
stock shall have the right, voting separately as a class, to elect one or more
directors of the Corporation, the provisions of section (c) of this Article
shall not apply with respect to the director or directors elected by such
holders of preferred stock.
The provisions set forth in this Article may not be amended, altered,
changed or repealed in any respect, nor may any provision be adopted which is
inconsistent with this Article unless such action is approved by the affirmative
vote of the holders of 66 2/3% or more of the outstanding shares of capital
stock of the Corporation entitled to vote on the matter.
NINTH: Both the Board of Directors and the stockholders shall have the
power to make, adopt, amend, alter, change or repeal the By-laws of the
Corporation; provided, however, that the stockholders of the Corporation shall
not make, adopt, amend, alter, change or repeal the By-laws except by the
affirmative vote of the holders of 66 2/3% or more of the outstanding shares of
capital stock entitled to vote on the matter.
The provisions set forth in this Article may not be amended, altered,
changed or repealed in any respect, nor may any provision be adopted which is
inconsistent with this Article unless such action is approved by the affirmative
vote of the holders of 66 2/3% or more of the outstanding shares of capital
stock entitled to vote on the matter.
TENTH: A director of the Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except to the extent such exemption from liability or
limitation thereof is not permitted under the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended. Any amendment,
alteration, change or repeal of the foregoing sentence shall not adversely
affect any right or protection of a director of the Corporation hereunder in
respect of any act or omission occurring prior to the time of such amendment,
alteration, change or repeal.
ELEVENTH: The Corporation shall indemnify, to the fullest extent
permitted by applicable law as it presently exists or may hereafter be amended,
any current or former director or officer of the Corporation, and may indemnify
any current or former employee or agent of the Corporation, 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 (including an action, suit or proceeding by or in the right of the
Corporation) by reason of the fact that such person is or was a director,
officer, employee or agent of the Corporation or a fiduciary within the meaning
of the Employee Retirement Income Security Act of 1974 with respect to an
employee benefit plan of the Corporation, or is or was serving at the request of
the
4
<PAGE> 5
Corporation as a director, officer, employee or agent, or a fiduciary with
respect to an employee benefit plan, of another Corporation or of a partnership,
joint venture, trust, limited liability company or other enterprise, against
expenses (including attorney's fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding. The Corporation shall pay all expenses
(including attorneys' fees) incurred by any such current or former director or
officer of the Corporation, and may pay all expenses (including attorneys' fees)
incurred by any such other person, in defending any such action, suit or
proceeding in advance of its final disposition if such person furnishes the
Corporation (a) a written statement of such person's good faith belief that such
person is entitled to indemnification and (b) an undertaking by or on behalf of
such person to repay such amount if it shall ultimately be determined that such
person is not entitled to be indemnified by the Corporation. The Corporation
shall not be required to indemnify or advance expenses to any such person (a) in
connection with an action, suit or proceeding (or part thereof) initiated by
such person unless such action, suit or proceeding (or part thereof) was
authorized by the Board of Directors of the Corporation; (b) for any amounts
paid in settlement of any such action, suit or proceeding without the prior
written consent of the Board of Directors of the Corporation; or (c) if such
person did not act in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the Corporation. Any amendment,
alteration, change or repeal of this Article shall not adversely affect any
right or protection of any person hereunder in respect of any act or omission
occurring prior to the time of such amendment, alteration, change or repeal. The
rights conferred on any person by this Article shall not be deemed exclusive of
any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any statute, By-law, agreement, vote of
stockholders or directors or any other document or arrangement.
TWELFTH: The Corporation reserves the right at any time, and from time
to time, to amend, alter, change or repeal any provision contained in this
Amended and Restated Certificate of Incorporation, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted, in the manner now or hereafter prescribed by law; and all
rights, preferences and privileges of whatsoever nature conferred upon
stockholders, directors or any other persons whomsoever by and pursuant to this
Amended and Restated Certificate of Incorporation in its present form or as
hereafter amended are granted subject to the rights reserved in this Article.
THIRTEENTH: The name and mailing address of the persons who are to
serve as the initial directors of the Corporation until the annual meeting of
stockholders of the Corporation in 2000, or until their successors are elected
and qualify, are:
M. Blair Hull Arthur S. Margulis, Jr.
311 South Wacker Drive 311 South Wacker Drive
14th Floor 14th Floor
Chicago, Illinois 60606 Chicago, Illinois 60606
5
<PAGE> 6
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by Patricia Levy, its authorized officer, this 30th day of June, 1999.
THE HULL GROUP INC.
By: /s/ PATRICIA L. LEVY
-----------------------------------------
Title: General Counsel and Secretary
<PAGE> 1
EXHIBIT 5.1
[MAYER, BROWN, & PLATT LETTERHEAD]
July 2, 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, as amended (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,
Mayer, Brown & Platt
<PAGE> 1
EXHIBIT 10.9
THE HULL GROUP INC.
OUTSIDE DIRECTORS' STOCK OPTION 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. 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 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.
<PAGE> 4
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 the closing of an initial public offering of the Stock, each
person who is then an Outside Director shall be awarded an Option to
purchase 10,000 shares of Stock.
(b) 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; provided, however, that no person shall be
granted an Option under this paragraph and paragraph (b) next above.
(c) As of the date of each regular annual meeting of Hull's stockholders
(beginning with the year 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.
-4-
<PAGE> 7
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 New York Stock
Exchange Composite Transactions 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.
-5-
<PAGE> 1
EXHIBIT 10.10
THE HULL GROUP INC.
EMPLOYEE STOCK PURCHASE PLAN
----------------------------
Mayer, Brown & Platt
Chicago, Illinois
<PAGE> 2
THE HULL GROUP INC.
EMPLOYEE STOCK PURCHASE PLAN
1. Purpose; Effective Date. The Hull Group Inc. Employee Stock Purchase
Plan has been established to provide employees of The Hull Group Inc. ("Hull")
and its Participating Subsidiaries (as defined below) with an opportunity to
become owners of Hull through the purchase of shares of Hull's common stock
("Stock"). For purposes of the Plan, the term "Participating Subsidiary" means
any corporation in which Hull has, either directly or indirectly, at least a 50
percent ownership interest and which has been designated by Hull as a
Participating Subsidiary. It is intended that the Plan, and all rights granted
hereunder, will meet the requirements of an "employee stock purchase plan"
within the meaning of section 423 of the Internal Revenue Code of 1986, as
amended (the "Code"). The Plan, in all respects, shall be interpreted and
construed so as to be consistent with such requirements. The Plan shall be
effective as of October 1, 1999 and shall remain in effect until all shares
reserved for issuance hereunder have been issued or until the Plan is otherwise
terminated in accordance with the provisions of Section 10 hereof.
2. Administration by Committee; Authority. The Plan shall be administered
by the Compensation Committee of Hull's Board of Directors (the "Committee").
Subject to the terms and conditions 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) correct any
defect or omission and reconcile any inconsistency in the Plan; and (d) 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, the Participating Subsidiaries and all other
persons.
3. Participation. Subject to the terms and conditions of the Plan, each
employee of Hull and the Participating Subsidiaries who is employed by Hull or a
Participating Subsidiary as of the first day of an Offering Period (as defined
below) is eligible to participate in the Plan for that Offering Period. For
purposes of the Plan, an "Offering Period" is the calendar year; provided,
however, that the first Offering Period under the Plan shall be the period
commencing on October 1, 1999 and ending on December 31, 1999. An employee who
is eligible to participate in the Plan for an Offering Period may elect to
become a "Participant" in the Plan for that Offering Period by completing and
filing with Hull, or its designee, an "Election Form" which authorizes payroll
deductions from the Participant's pay. Subject to the terms and conditions of
the Plan, deductions pursuant to a Participant's Election Form shall commence
with the first payroll period ending after the first day of the Offering Period,
shall continue until the Participant terminates participation in the Plan in
accordance herewith or until the Plan is terminated, whichever occurs first, and
shall be credited to his Plan Account (as described in paragraph 6(d)). An
eligible
<PAGE> 3
employee may participate in the Plan only through payroll deductions. Other
contributions will not be accepted.
4. Shares Subject to Plan.
(a) Number of Shares Reserved. The shares of Stock which may be issued
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 paragraph 4(c), the number
of shares of Stock which may be issued under the Plan shall not
exceed 500,000 shares.
(b) Reusage of Shares. In the event of the expiration, withdrawal or other
cancellation of an Option (as defined in Section 5) under the Plan,
the number of shares of Stock that were subject to the Option but not
delivered shall again be available for issuance under the Plan.
(c) 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 Options
under the Plan and the terms of any outstanding Option (including the
price at which shares of Stock may be issued pursuant to an
outstanding Option) 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.
(d) Insufficient Shares. If, on an Exercise Date (as defined in paragraph
8(a)), Participants in the aggregate have outstanding Options to
purchase more shares of Stock than are then available for purchase
under the Plan, each Participant shall be eligible to purchase a
reduced number of shares of Stock on a pro rata basis and any excess
payroll deductions shall be returned to such Participants, without
interest, all as provided by uniform and nondiscriminatory rules
adopted by the Committee.
5. Grant of Options. As of the first day of each Offering Period (the
"Grant Date"), each employee who is a Participant for such Offering Period shall
be deemed to have been granted an "Option" under the Plan, provided, however,
that (a) no Participant shall be granted an Option to purchase shares of Stock
on any Grant Date if such Participant, immediately after the Option is granted,
owns stock possessing 5% or more of the total combined voting power or value of
all classes of stock of Hull or any subsidiary of Hull (determined in accordance
with section 424(f) of the Code), and (b) no Participant may purchase under the
Plan more than $25,000 of Fair Market Value (as defined in paragraph 9(h) of
shares of Stock (determined at the Grant Date) for each
<PAGE> 4
calendar year. This provision of paragraph 5(b) shall be interpreted in
accordance with section 423(b)(8) of the Code. For purposes of this Section 5,
the rules of section 424(d) of the Code shall apply in determining the stock
ownership of an individual, and stock which the Participant may purchase under
outstanding Options shall be treated as stock owned by the Participant.
6. Payroll Deductions.
(a) Source and Amount of Payroll Deductions. Payroll deductions shall be
made from the amounts paid to each Participant for each payroll period
in such amounts as the Participant shall authorize in his Election
Form. Subject to the provisions of Section 5, the Committee may, from
time to time, establish uniform and nondiscriminatory minimum and
maximum payroll deductions for any period.
(b) Insufficient Pay. If a Participant's pay is insufficient in any
payroll period to allow the entire payroll deduction contemplated
under the Plan, no deduction will be made for such payroll period.
Payroll deductions will resume with the next payroll period in which
the Participant has pay sufficient to allow for the deductions.
Payroll deductions under the Plan shall be made in any payroll period
only after other withholdings, deductions, garnishments and the like
have been made, and only if the remaining pay is sufficient to allow
the entire payroll deduction contemplated.
(c) Changes to Deductions. Subject to any minimum and maximum deductions
established by the Committee, a Participant may change the amount of
his payroll deduction for any subsequent Offering Period by filing a
new Election Form with Hull or its designated recordkeeper in
accordance with uniform and nondiscriminatory rules established by the
Committee.
(d) Plan Accounts. The Committee shall cause a separate bookkeeping
account (a "Plan Account") to be maintained for each Participant,
which Plan Account will reflect the accumulated payroll deductions
made on behalf of the Participant from time to time, reduced for any
distributions from such Plan Account pursuant to the provisions of the
Plan.
7. Termination of Participation.
(a) Voluntary Termination. A Participant, at any time and for any reason,
may voluntarily terminate participation in the Plan by written
notification of withdrawal delivered to the appropriate payroll office
at least 10 business days before the next payroll period.
(b) Automatic Termination. A Participant's participation in the Plan shall
be automatically terminated immediately (i) upon termination of his
employment with Hull or the Participating Subsidiaries for any reason,
or (ii) if the Participant sells or otherwise disposes of Stock
purchased pursuant to the Plan within __ months after such Stock is
purchased.
(c) Effect of Termination. In the event a Participant's participation in
the Plan is terminated for any reason, payroll deductions shall
immediately cease and any amounts then credited to the Participant's
Plan Account shall be returned to the Participant, without interest,
as soon as practicable after such cessation. A Participant whose
participation in
<PAGE> 5
the Plan has terminated may not rejoin the Plan until the next Offering Period
following the date of such termination, subject to the terms and conditions of
the Plan; provided, however, that if the Participant's termination of
participation occurs pursuant to subparagraph 7(b)(ii), the Participant may not
rejoin the Plan until the first Offering Period beginning coincident with or
next following the date which is __ months after the Participant's termination
of participation.
8. Exercise of Option/Purchase of Shares.
(a) Exercise of Option. On the last business day of each calendar quarter
(each an "Exercise Date"), each Participant who is then employed by
Hull or a Participating Subsidiary shall be deemed to have exercised
his Option with respect to that whole number of shares of Stock equal
to the quotient of (i) the balance in the Participant's Plan Account
as of the Exercise Date and (ii) the Exercise Price. For purposes of
the Plan, the "Exercise Price" shall be the lesser of (1) 85% of the
Fair Market Value of a share of Stock on the Grant Date, or (2) 85% of
the Fair Market Value of a share of Stock on the Exercise Date, but in
no event less than the par value of a share of Stock.
(b) Statements. As soon as practicable after each Exercise Date, a
statement shall be delivered to each Participant which shall include
the number of shares of Stock purchased on the Exercise Date on behalf
of such Participant under the Plan.
(c) Certificates. When requested by a Participant, a stock certificate for
whole shares of Stock purchased by the Participant under the Plan
shall be issued in the name of the Participant or, if so specified in
the Participant's Election Form, in the Participant's name and the
name of another person as joint tenants with right of survivorship or
as tenants in common.
(d) Excess Plan Account Balances. Any amounts remaining in a Participant's
Plan Account as of any Exercise Date after the purchase of shares
described herein shall be returned to the Participant in cash, without
interest, as soon as practicable after the Exercise Date.
9. Miscellaneous.
(a) Compliance with Applicable Laws; Limits on Issuance. Notwithstanding
any other provision of the Plan, Hull shall have no obligation to
issue any shares of Stock under the Plan unless such issuance would
comply with all applicable laws and the applicable regulations or
requirements of any securities exchange or similar entity. Prior to
the issuance 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.
(b) Transferability. Neither the right of a Participant to purchase shares
of Stock hereunder, nor his Plan Account balance, may be transferred,
pledged or assigned
<PAGE> 6
by the Participant and his rights hereunder may be exercised during
his lifetime only by him.
(c) Notices. Any notice or document required to be filed with the
Committee under or with respect to the Plan will be properly filed if
delivered or mailed by registered mail, postage prepaid, to the
Committee at Hull's principal executive offices. The Committee may, by
advance written notice to affected persons, revise any notice
procedure from time to time. Any notice required under the Plan may be
waived by the person entitled to notice.
(d) Withholding. All amounts withheld pursuant to the Plan, shares of
Stock issued hereunder and any payments pursuant to the Plan are
subject to withholding of all applicable taxes and Hull and its
subsidiaries shall have the right to withhold from any payment or
distribution of shares or to collect as a condition of any payment or
distribution under the Plan, as applicable, any taxes required by law
to be withheld. To the extent provided by the Committee, a Participant
may elect to have any distribution of shares otherwise required to be
made pursuant to the Plan to be withheld or to surrender to Hull or
its subsidiaries shares of Stock already owned by the Participant to
fulfill any tax withholding obligation; provided, however, 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.
(e) Limitation of Implied Rights. The Plan does not constitute a contract
of employment or continued service and participation in the Plan will
not give any employee the right to be retained in the employ of Hull
or any right or claim to any benefit under the Plan unless such right
or claim has specifically accrued under the terms of the Plan.
Participation in the Plan by a Participant shall not create any rights
in such Participant as a stockholder of Hull until shares of Stock are
registered in the name of the Participant.
(f) 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.
(g) 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.
(h) Definition of Fair Market Value. For purposes of the Plan, the "Fair
Market Value" of a share of Stock as of any date shall be the closing
market composite
<PAGE> 7
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.
10. Amendment or Termination of Plan. The Board may, at any time and in
any manner, amend, suspend or terminate the Plan or any election outstanding
under the Plan; provided, however, that no such amendment shall be made without
approval of Hull's stockholders to the extent such approval would be required
under section 423 of the Code, the rules of any securities exchange or similar
entity on which the Stock is listed or otherwise by applicable law.
<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. Section 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 300,000 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 $4,500,000. 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
2
<PAGE> 5
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.
3
<PAGE> 6
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
4
<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
5
<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 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. 2 to the
Registration Statement (Form S-1 No. 333-78407) and related Prospectus of The
Hull Group Inc.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
July 2, 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. 2
to the Registration Statement (Form S-1 File No. 333-78407) and related
Prospectus of The Hull Group Inc.
/s/ SCHULTZ & CHEZ, L.L.P.
Chicago, Illinois
July 2, 1999
