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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to __________________
Commission file number 0-28191
ESPEED, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-4063515
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(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) No.)
135 East 57th Street
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(Address of Principal Executive Offices)
New York, New York 10022
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(City, State, Zip Code)
(212) 938-5000
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(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
- ----------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 11, 2002
- ----- --------------------------------
Class A common stock, par value $.01 per share 29,563,966
Class B common stock, par value $.01 per share 25,388,814
PART I--FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Page
Consolidated Statements of Financial Condition - 1
September 30, 2002 (unaudited) and December 31, 2001
Consolidated Statements of Operations (unaudited) - Three Months 2
Ended September 30, 2002 and September 30, 2001
Consolidated Statements of Operations (unaudited) - Nine Months 3
Ended September 30, 2002 and September 30, 2001
Consolidated Statements of Cash Flows (unaudited) - Nine Months 4
Ended September 30, 2002 and September 30, 2001
Notes to Consolidated Financial Statements (unaudited) 5
ITEM 2. Management's Discussion and Analysis of Financial Condition 12
and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 22
ITEM 4. Controls and Procedures 23
PART II--OTHER INFORMATION
ITEM 1. Legal Proceedings 23
ITEM 2. Changes in Securities and Use of Proceeds 25
ITEM 4. Submission of Matters to a Vote of Security Holders 26
ITEM 5. Other Information 26
ITEM 6. Exhibits and Reports on Form 8-K 27
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
eSPEED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AS OF
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
September 30, 2002 December 31, 2001
----------------------- -----------------------
(unaudited)
Assets
Cash and cash equivalents............................................... $ 2,487,475 $ 2,567,932
Reverse repurchase agreements with related parties...................... 191,806,160 157,330,676
----------------------- -----------------------
Total cash and cash equivalents....................................... 194,293,635 159,898,608
Fixed assets, net....................................................... 23,832,236 19,137,269
Investments............................................................. 12,046,550 11,732,863
Intangible assets,net................................................... 16,985,409 9,122,491
Other assets............................................................ 2,378,568 3,207,832
----------------------- -----------------------
Total assets $ 249,536,398 $ 203,099,063
======================= =======================
Liabilities and Stockholders' Equity
Liabilities:
Payable to related parties, net......................................... $ 7,697,122 $ 6,822,163
Accounts payable and accrued liabilities................................ 34,003,315 23,095,092
----------------------- -----------------------
Total liabilities 41,700,437 29,917,255
----------------------- -----------------------
Stockholders' equity:
Preferred stock, par value $0.01 per share; 50,000,000 shares authorized;
8,000,750 and 8,000,750 shares issued
and outstanding........................................................ 80,008 80,008
Class A common stock, par value $0.01 per share; 200,000,000
shares authorized; 28,491,091 and 26,590,668 shares issued
and outstanding......................................................... 284,911 265,906
Class B common stock, par value $0.01 per share; 100,000,000
shares authorized; 26,488,814 and 28,354,737 shares
issued and outstanding.................................................. 264,888 283,547
Additional paid-in capital.............................................. 267,335,144 266,791,989
Unamortized expense of business partner securities...................... (1,794,600) (2,691,900)
Treasury stock, 24,600 shares of Class A common stock at cost........... (221,892) (221,892)
Accumulated deficit..................................................... (58,112,498) (91,325,850)
----------------------- -----------------------
Total stockholders' equity 207,835,961 173,181,808
----------------------- -----------------------
Total liabilities and stockholders' equity $ 249,536,398 $ 203,099,063
======================= =======================
See notes to consolidated financial statements
1
eSPEED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
(UNAUDITED)
For the three months ended
--------------------------
September 30, September 30,
2002 2001
Revenues:
Transaction revenues with related parties
Fully electronic transactions.................................. $ 22,782,614 $ 15,676,495
Voice-assisted brokerage transactions.......................... 4,649,045 5,577,545
Screen-assisted open outcry transactions....................... 11,465 146,673
------------------- --------------------
Total transaction revenues with related parties................. 27,443,124 21,400,713
Software Solutions fees from related parties...................... 3,422,729 4,806,225
Software Solutions and licensing fees from unrelated parties ..... 1,332,589 691,677
Interest income from related parties.............................. 780,209 1,292,718
------------------- --------------------
Total revenues 32,978,651 28,191,333
------------------- --------------------
Expenses:
Compensation and employee benefits................................ 9,113,762 14,738,315
Occupancy and equipment........................................... 6,338,062 7,414,913
Professional and consulting fees.................................. 1,148,854 1,196,878
Communications and client networks................................ 1,465,111 2,470,533
Marketing......................................................... 1,280,340 999,188
Administrative fees paid to related parties....................... 2,291,423 2,911,382
Loss on unconsolidated investments................................ -- 3,833,679
Non-cash business partner securities.............................. 541,266 517,328
Provision for September 11 Events................................. -- 14,368,554
Other............................................................. 3,011,944 2,461,958
------------------- --------------------
Total expenses 25,190,762 50,912,728
------------------- --------------------
Income (loss) before provision for income taxes 7,787,889 (22,721,395)
------------------- --------------------
Income tax provision:
Federal........................................................... -- --
State and local................................................... 122,065 129,000
------------------- --------------------
Total tax provision 122,065 129,000
------------------- --------------------
Net income (loss) $ 7,665,824 $ (22,850,395)
=================== ====================
Per share data:
Basic net income (loss) per share.............................. $ 0.14 $ (0.42)
Fully diluted net income (loss) per share...................... $ 0.14 $ (0.42)
Basic weighted average shares of common stock
outstanding................................................. 54,980,044 54,973,648
Fully diluted weighted average shares of common stock
outstanding................................................. 56,498,915 54,973,648
See notes to consolidated financial statements
2
eSPEED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
(UNAUDITED)
For the nine months ended
-------------------------
September 30, September 30,
2002 2001
Revenues:
Transaction revenues with related parties
Fully electronic transactions.................................... $ 65,608,590 $ 57,752,654
Voice-assisted brokerage transactions............................ 13,478,973 17,275,168
Screen-assisted open outcry transactions......................... 134,727 313,581
------------------- -------------------
Total transaction revenues with related parties.................... 79,222,290 75,341,403
Software Solutions fees from related parties......................... 9,747,204 12,775,813
Software Solutions and licensing fees from unrelated parties ........ 2,436,719 1,339,596
Business interruption insurance proceeds from parent................. 12,832,886 --
Interest income from related parties................................. 2,221,821 4,701,569
------------------- -------------------
Total revenues 106,460,920 94,158,381
------------------- -------------------
Expenses:
Compensation and employee benefits................................... 27,748,412 46,124,822
Occupancy and equipment.............................................. 18,048,318 22,329,398
Professional and consulting fees..................................... 4,263,576 7,232,006
Communications and client networks................................... 4,516,545 6,672,676
Marketing............................................................ 4,514,868 3,997,959
Administrative fees paid to related parties.......................... 6,578,674 7,753,500
Loss on unconsolidated investments................................... -- 3,833,679
Non-cash business partner securities................................. 1,354,072 816,228
Provision for September 11 Events.................................... -- 14,368,554
Other................................................................ 5,873,038 6,756,622
------------------- -------------------
Total operating expenses 72,897,503 119,885,444
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Income (loss) before provision for income taxes 33,563,417 (25,727,063)
------------------- -------------------
Income tax provision:
Federal.............................................................. -- --
State and local...................................................... 350,065 387,000
------------------- -------------------
Total tax provision.............................................. 350,065 387,000
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Net income (loss) $ 33,213,352 $ (26,114,063)
=================== ===================
Per share data:
Basic net income (loss) per share................................ $ 0.60 $ (0.48)
Fully diluted net income (loss) per share........................ $ 0.59 $ (0.48)
Basic weighted average shares of common stock
outstanding................................................... 54,979,037 54,076,897
Fully diluted weighted average shares of common stock
outstanding................................................... 56,683,137 54,076,897
See notes to consolidated financial statements
3
eSpeed, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS For
the nine months ended September 30, 2002 and September 30, 2001
(unaudited)
For the nine For the nine
months ended months ended
September 30, September 30,
2002 2001
Cash flows from operating activities:
Net income (loss)............................................................. $ 33,213,352 $ (26,114,063)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation.............................................................. 7,152,472 4,311,096
Amortization.............................................................. 2,367,888 227,665
Amortization of non-cash business partner securities...................... 1,354,072 816,228
Equity in net losses of certain unconsolidated investments................ 203,842 252,636
Loss on unconsolidated investments........................................ -- 3,833,679
Non-cash issuance of securities under employee benefit plans ............. 54,638 364,123
Provision for September 11 Events......................................... -- 14,368,554
(Increase) decrease in operating assets:
Other assets 84,726 (3,566,773)
Increase (decrease) in operating liabilities:
Payable to related parties, net........................................... 874,959 (6,757,208)
Accounts payable and accrued liabilities.................................. 10,908,226 13,894,349
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Net cash provided by operating activities................................. 56,214,175 1,630,286
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Cash flows from investing activities:
Purchases of fixed assets..................................................... (5,281,319) (9,235,941)
Capitalization of software development costs.................................. (6,339,116) (5,616,672)
Increase in intangible assets, net............................................ (10,230,806) (6,094,591)
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Net cash used in investing activities..................................... (21,851,241) (20,947,204)
-------------- -------------
Cash flows from financing activities:
Proceeds from issuance of securities.......................................... -- 47,750,000
Proceeds from issuance of securities under the ESPP........................... -- 589,230
Proceeds from exercises of options............................................ 32,093 414,298
Payments for issuance related expenses........................................ -- (2,484,845)
------------- -------------
Net cash provided by financing activities................................. 32,093 46,268,683
------------- -------------
Net increase in cash and cash equivalents..................................... 34,395,027 26,951,765
------------- -------------
Cash and cash equivalents, beginning of period................................ 159,898,608 122,163,712
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Cash and cash equivalents, end of period...................................... $ 194,293,635 $ 149,115,477
============= =============
Supplemental disclosure of non-cash investing and financing activities:
Issuance of Class A common stock in exchange for investment $ 6,970,907
Issuance of Class A common stock in exchange for intangible asset 500,000
Issuance of warrants in exchange for intangible asset 197,000
Destruction of fixed assets resulting in insurance claim receivable 17,690,289
Issuance of Class A common stock in exchange for other assets 4,013,992
See notes to consolidated financial statements
4
eSpeed Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: eSpeed, Inc. (eSpeed or, together with its direct and
indirect wholly owned subsidiaries, the Company) is a majority owned subsidiary
of Cantor Fitzgerald Securities (CFS), which in turn is a 99.5% owned subsidiary
of Cantor Fitzgerald, L.P. (CFLP or, together with its subsidiaries, Cantor).
eSpeed primarily engages in the business of operating interactive vertical
electronic marketplaces designed to enable market participants to trade
financial and non-financial products more efficiently and at a lower cost than
traditional trading environments permit. All significant intercompany balances
and transactions have been eliminated in consolidation.
The Company's financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP)
and reflect all normal recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented. Pursuant to the rules and regulations of the Securities and
Exchange Commission (the SEC), certain footnote disclosures, which are normally
required under GAAP, have been omitted. It is recommended that these
consolidated financial statements be read in conjunction with the audited
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2001. The Consolidated Statement of
Financial Condition at December 31, 2001 was derived from audited financial
statements. The results of operations for any interim period are not necessarily
indicative of results for the full year. It is the Company's policy to make
reclassifications to prior period financial statements to conform to current
period presentation.
Software solutions fees: Pursuant to various services agreements, the Company
recognizes fees from related parties in amounts generally equal to its actual
direct and indirect costs, including overhead, of providing such services at the
time when such services are performed. For specific technology support functions
that are both utilized by the Company and provided to related parties, the
Company allocates the actual costs of providing such support functions based on
the relative usage of such support services by each party. In addition, certain
clients of the Company provide online access to their customers through use of
the Company's electronic trading platform. The Company receives up-front and/or
periodic fees from unrelated parties for the use of its platform. Such fees are
deferred and recognized as revenue ratably over the term of the licensing
agreement. The Company also receives patent license fees from unrelated parties.
Such fees are recognized as income ratably over the license period.
2. SEPTEMBER 11 EVENTS
On September 11, 2001, the Company's principal place of business at One World
Trade Center was destroyed and, in connection therewith, the Company lost 180
employees and Cantor and TradeSpark lost an aggregate of 478 employees (the
September 11 Events).
In 2001, the Company recognized a net provision of $13,323,189 for non-property
damage related to the September 11 Events. Such provision includes the
incremental costs associated with substituting external professionals for
deceased employees, write-off of software development costs, write-off of
goodwill and costs associated with the Company's restructuring, including costs
associated with the closing of two offices, as a result of the September 11
Events, less refunds received for marketing campaigns which were cancelled after
the September 11 Events. The write-off related to software development consists
of costs that previously were capitalized but have been written off because the
software being developed related to aspects of the Company's business that were
adversely affected by the September 11 Events. The write-off of goodwill relates
to goodwill associated with the acquisition of TreasuryConnect LLC.
5
eSpeed Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the components of the remaining liability related
to the September 11 Events as of September 30, 2002:
Description
- -----------
Recruitment $ 2,540,918
Restructuring 1,133,446
Other 267,428
---------
Total $ 3,941,792
=========
In 2002, CFLP received $40,000,000 of insurance proceeds pursuant to its
business interruption insurance coverage, of which $12,832,886 was attributable
to the Company and was received by the Company in August 2002. Such amount
represents payments for both lost revenues and increased expenses.
As a result of the September 11 Events, fixed assets with a book value of
approximately $17,796,420 were destroyed. The Company has recovered these losses
through its $40,000,000 of property insurance and, as such, has not recorded a
net loss related to the destruction of its fixed assets.
In addition, the Company is in the process of replacing assets that were
destroyed in connection with the September 11 Events. To the extent that the
cost of assets replaced exceeds the carrying value of the assets destroyed, the
Company would record a gain on replacement of assets resulting from potential
additional recoveries under the Company's property and casualty coverage. The
Company's property insurance covers full replacement cost of the assets actually
replaced. However, the Company cannot currently estimate the amount or timing of
any such gain, if any, and accordingly, no gains on replacement of fixed assets
have been recorded during the period.
3. FIXED ASSETS
September 30, December 31,
2002 2001
------------- ------------
Fixed assets consist of the following:
Computer and communication equipment $18,175,783 $ 10,021,646
Software, including software development costs 24,758,094 18,870,472
Leasehold improvements and other fixed assets 823,214 474,527
---------- ------------
43,757,091 29,366,645
Less accumulated depreciation and amortization (19,924,855) (10,229,376)
----------- ------------
Fixed assets, net $23,832,236 $ 19,137,269
=========== ============
4. INCOME TAXES
Since the date of the Company's initial public offering (the Offering), the
Company has been subject to income tax as a corporation. Net operating losses
(NOLs) from that date, approximating $17,900,000, are available on a carry
forward basis to offset operating income of the Company. However, a valuation
allowance has been recorded at September 30, 2002 to offset the full amount of
the NOLs as realization of this deferred tax benefit is dependent upon
generating sufficient taxable income prior to the expiration of the NOLs.
6
eSpeed Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. BUSINESS PARTNER TRANSACTIONS
Freedom
- -------
The Company and Cantor formed a limited partnership (the LP) to acquire an
interest in Freedom International Brokerage (Freedom), a Canadian government
securities broker-dealer and Nova Scotia unlimited liability company. The
Company shares in 15% of the LP's cumulative profits but not in cumulative
losses. Cantor will be allocated all of the LP's cumulative losses or 85% of the
cumulative profits. The Company issued fully vested, non-forfeitable warrants to
purchase shares of its Class A common stock to provide incentives over the three
year period ending April 2004 to the other Freedom owner participants to migrate
to the Company's fully electronic platform. The Company has recorded $897,300 as
a non-cash charge for the nine months ended September 30, 2002 representing
amortization of the value of the warrants at the time of issue. The remaining
unamortized balance of $1,794,600 will be recognized as an expense ratably
through April 2004. To the extent necessary to protect the Company from any
allocation of losses, Cantor is required to provide future capital contributions
to the LP up to an amount that would make Cantor's total contribution equal to
the Company's initial investment in the LP. The Company receives 65% of all
electronic transaction services revenues and Freedom receives 35% of such
revenues. The Company also receives 35% of revenues derived from Freedom's
voice-assisted transactions, other miscellaneous transactions and the sale of
market data or other information.
The Company entered into this transaction principally to expand its business in
Canadian fixed-income, foreign exchange and other capital markets products and
to leverage its opportunities to transact business with the six leading Canadian
financial institutions that are participants in Freedom. The Company was willing
to accept a reduced profits interest in order to avoid recognizing potentially
significant short-term losses prior to the anticipated achievement by Freedom of
profitability. The Company determined the appropriate number of shares and
warrants to be issued in this transaction based on the anticipated benefits to
be realized and the structure of the profit and loss arrangement.
Deutsche Bank
- -------------
In connection with an agreement with Deutsche Bank, AG (Deutsche Bank), the
Company previously sold Series C Redeemable Convertible Preferred Stock (Series
C Preferred) to Deutsche Bank, which had a value of approximately $3,330,000 as
of the date of issue. On July 30th of each year of the five year agreement in
which Deutsche Bank fulfills its liquidity and market-making obligations for
specified products, one-fifth of such Series C Preferred will automatically
convert into warrants to purchase shares of the Company's Class A common stock.
For the twelve months ended July 30, 2002, Deutsche Bank is deemed to have
fulfilled its obligations under the agreement. For the nine months ended
September 30, 2002, the Company has recognized a non-cash charge of $321,905,
representing the amortized value of the warrants at the time of issuance of the
Series C Preferred.
UBS
- ---
On August 21, 2002, the Company entered into an agreement with UBS and Cantor
for UBS to execute trades electronically on the eSpeed(R) system in U.S.
Securities, Agency Securities, European Government Bonds, UK Gilts, Japanese
Government Bonds and swaps of these various securities instruments. The
agreement has an initial term of two and one-half years, commencing as of
January 1, 2002. In addition to quarterly participation fees paid to Cantor, UBS
pays transaction fees to Cantor for each executed transaction, which are shared
with the Company pursuant to the Joint Services Agreement.
In addition, the Company issued to UBS a warrant to purchase 300,000 shares of
its Class A common stock. The warrant has a term of 10 years and has an exercise
price equal to $8.75, the market value of the underlying Class A common stock on
the date of issuance. The warrant is fully vested and
7
eSpeed Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
nonforfeitable, and is exercisable nine years and six months after issuance,
subject to acceleration upon the satisfaction by UBS of its yearly commitment
condition. The Company will record a non-cash charge equal to the fair value of
the warrant on the date of issuance of $2,189,910, which will be amortized over
the term of the agreement. The Company agreed to issue an additional warrant to
purchase 200,000 shares of its Class A common stock at an exercise price equal
to the market value of the underlying Class A common stock on the date of
issuance if the agreement is renewed for another two and one-half years. For the
nine months ended September 30, 2002, the Company has recognized a non-cash
charge of $135,067 related to the UBS warrants.
6. RELATED PARTY TRANSACTIONS
All of the Company's Reverse Repurchase Agreements are transacted on an
overnight basis with CFS. Under the terms of these agreements, the securities
collateralizing the Reverse Repurchase Agreements are held under a custodial
arrangement with a third party bank and are permitted to be resold or repledged.
The fair value of such collateral at September 30, 2002 and December 31, 2001
totaled $193,866,297 and $159,941,811, respectively.
Investments in TradeSpark and the LP that invested in Freedom are accounted for
using the equity method. The carrying value of such related party investments
was $8,628,221 and $8,832,064 at September 30, 2002 and December 31, 2001,
respectively, and is included in Investments in the Consolidated Statement of
Financial Condition. For the nine months ended September 30, 2002, the Company's
share of the net income of the LP was $54,586, and its share of the net losses
of TradeSpark was $258,428.
Under the Amended and Restated Joint Services Agreement, as amended (the Joint
Services Agreement), between the Company and Cantor and services agreements
between the Company and each of TradeSpark, Freedom and Municipal Partners, LLC
(MPLLC), the Company owns and operates the electronic trading system and is
responsible for providing electronic brokerage services, and Cantor, TradeSpark,
Freedom or MPLLC may provide voice-assisted brokerage services, fulfillment
services, such as clearance and settlement, and related services, such as credit
risk management services, oversight of client suitability and regulatory
compliance, sales positioning of products and other services customary to
marketplace intermediary operations. In general, for fully electronic
transactions, the Company receives 65% of the transaction revenues and Cantor,
TradeSpark or Freedom receives 35% of the transaction revenues. The Company and
MPLLC each receive 50% of the fully electronic revenues related to municipal
bonds. In general, for voice-assisted brokerage transactions, the Company
receives 7% of the transaction revenues, in the case of Cantor transactions, and
35% of the transaction revenues, in the case of TradeSpark or Freedom
transactions. In addition, the Company receives 25% of the net revenues from
Cantor's gaming businesses.
8
eSpeed Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under those services agreements, the Company has agreed to provide Cantor,
TradeSpark, Freedom and MPLLC technology support services, including systems
administration, internal network support, support and procurement for desktops
of end-user equipment, operations and disaster recovery services, voice and data
communications, support and development of systems for clearance and settlement
services, systems support for brokers, electronic applications systems and
network support, and provision and/or implementation of existing electronic
applications systems, including improvements and upgrades thereto, and use of
the related intellectual property rights. In general, the Company charges
Cantor, TradeSpark and Freedom the actual direct and indirect costs, including
overhead, of providing such services. The Company charges MPLLC an amount based
upon the actual direct and indirect costs, plus a reasonable profit less a
discount. In exchange for a 25% share of the net revenues from Cantor's gaming
businesses, the Company is obligated to spend and does not get reimbursed for
the first $750,000 each quarter of the costs of providing support and
development services for such gaming businesses.
Under an Administrative Services Agreement, Cantor provides various
administrative services to the Company, including accounting, tax, legal and
facilities management. The Company is required to reimburse Cantor for the cost
of providing such services. The costs represent the direct and indirect costs of
providing such services and are determined based upon the time incurred by the
individual performing such services. Management believes that this allocation
methodology is reasonable. The Administrative Services Agreement has a
three-year term which will renew automatically for successive one-year terms
unless cancelled upon six months' prior notice by either the Company or Cantor.
The Company incurred administrative fees for such services during the nine month
periods ended September 30, 2002 and September 30, 2001 totaling $6,578,674 and
$7,753,500, respectively.
The services provided under both the Joint Services Agreement and the
Administrative Services Agreement are not the result of arm's-length
negotiations because Cantor owns and controls the Company. As a result, the
amounts charged for services under these agreements may be higher or lower than
amounts that would be charged by third parties if the Company did not obtain
such services from Cantor.
Amounts due to or from related parties pursuant to transactions described above
are non-interest bearing. As of September 30, 2002, receivables from TradeSpark,
Freedom and MPLLC amounted to $275,337, $1,483,157 and $757,779, respectively,
and are included in payable to related parties, net in the consolidated
statements of financial condition.
7. INTERCONTINENTALEXCHANGE
On March 29, 2002, the Company entered into a long term licensing agreement (the
Agreement) with IntercontinentalExchange, Inc. (ICE) granting use of the Wagner
Patent to ICE. Under the terms of the Agreement, ICE pays the Company an annual
royalty of $2 million per year. Such annual payment is recognized as income
ratably throughout the year. The unearned portion of the annual royalty,
amounting to $1,000,000, is included in Accounts payable and accrued
liabilities. ICE will also pay to the Company $0.10 for each contract that
participants submit to the electronic futures exchange for trading, or $0.20 for
each contract contained in matched trades on the electronic futures exchange.
The Agreement will remain in effect until February 7, 2007, unless certain
contingencies are not met.
As part of the consideration for the Company's acquisition of the Wagner Patent,
the Company agreed to pay to the former owners a percentage of revenues
generated from the patent. Accordingly, the Company paid approximately $234,000
during the nine months ended September 30, 2002. Such amounts are recognized as
a reduction to revenues ratably throughout the year.
9
eSpeed Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. SETTLEMENT AGREEMENT
On August 26, 2002, the Company entered into a Settlement Agreement (the
Settlement Agreement) with Electronic Trading Systems Corporation, the former
owner of the Wagner Patent (ETS), the Chicago Mercantile Exchange Inc. (CME) and
the Board of Trade of the City of Chicago (CBOT) to resolve the litigation
related to the Wagner Patent. As part of the Settlement Agreement, all parties
will be released from the legal claims brought against each other without
admitting liability on the part of any party.
Under the terms of the Settlement Agreement, CME and CBOT will each pay $15
million to the Company as a fully paid up license, for a total of $30 million.
Each $15 million payment includes $5 million which was received in the three
months ended September 30, 2002, and $2 million per year until 2007. Of the $30
million to be received by the Company, $5,750,000 may be paid to ETS in its
capacity as the former owner of the Wagner Patent, and $24,250,000 is to be
recognized as revenue ratably over the remaining useful life of the patent as
"Software Solutions and licensing fees from unrelated parties". The Company has
recorded $449,000 of such Software Solutions and licensing fees from unrelated
parties for the nine month period ended September 30, 2002.
9. EMPLOYEE SHARE TRANSACTIONS
The Company issued 5,814 shares of its Class A common stock valued at $54,638 as
the Company's matching contribution to the eSpeed Inc. Deferral Plan for
Employees of Cantor Fitzgerald, L.P. and its Affiliates during the nine months
ended September 30, 2002 with respect to employee contributions in 2001. The
Company issued 14,050 shares of its Class A common stock valued at $220,432 as
the Company's matching contribution during the nine months ended September 30,
2001 with respect to employee contributions in 2000.
During the nine month periods ended September 30, 2002 and 2001, the Company
issued options to purchase 339,600 and 213,109 shares, respectively, of its
Class A common stock to employees of the Company. The options were issued at
strike prices equal to the market price of the underlying Class A common stock
at the date of grant. During the nine month periods ended September 30, 2002 and
2001, the Company issued 624 and 18,833 shares, respectively, of its Class A
common stock to employees as a result of exercises of options. The options had
been granted pursuant to the eSpeed, Inc. 1999 Long-Term Incentive Plan (the LT
Plan).
During the nine months ended September 30, 2001, the Company issued 10,934
shares of restricted Class A common stock valued at $220,247 to certain
employees under the LT Plan. For the three months ended September 30, 2001, the
Company recognized $31,008 of compensation expense related to the awards. The
Company elected to fully vest the restricted shares after the September 11
Events.
10. REGULATORY CAPITAL REQUIREMENTS
Through its subsidiary, eSpeed Government Securities, Inc., the Company is
subject to SEC broker-dealer regulation under Section 15C of the Securities
Exchange Act of 1934, which requires the maintenance of minimum liquid capital,
as defined. At September 30, 2002, eSpeed Government Securities, Inc.'s liquid
capital of $96,102,245 was in excess of minimum requirements by $96,077,245.
Additionally, the Company's subsidiary, eSpeed Securities, Inc., is subject to
SEC broker-dealer regulation under Rule 17a-3 of the Securities Exchange Act of
1934, which requires the maintenance of minimum net capital and requires that
the ratio of aggregate indebtedness to net capital, both as defined, shall not
exceed 15 to 1. At September 30, 2002, eSpeed Securities, Inc. had net capital
of $6,986,855, which was $6,669,892 in excess of its required net capital, and
eSpeed Securities, Inc.'s net capital ratio was .68 to 1.
10
eSpeed Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The regulatory requirements referred to above may restrict the Company's ability
to withdraw capital from its regulated subsidiaries.
11. COMMITMENTS AND CONTINGENCIES
There have been no significant changes in commitments and contingencies from the
matters described in the notes to the Company's consolidated financial
statements for the year ended December 31, 2001.
12. SEGMENT AND GEOGRAPHIC DATA
SEGMENT INFORMATION: The Company currently operates its business in one segment,
that of operating interactive electronic vertical marketplaces for the trading
of financial and non-financial products, licensing software and providing
technology support services.
PRODUCT INFORMATION: The Company currently markets its services through three
products: eSpeed Markets (SM), an integrated electronic trading marketplace;
eSpeed Software Solutions (SM), in which the Company recognizes fees from
technology support services and licensing fees; and eSpeed Online (SM), which
provides e-commerce businesses with online access to wholesale market
participants. Revenues from eSpeed Markets (SM) and eSpeed Online (SM) are
included in transaction revenues and eSpeed Markets (SM) comprises the majority
of those revenues.
GEOGRAPHIC INFORMATION: The Company operates in the Americas, Europe and Asia.
Revenue attribution for purposes of preparing geographic data is principally
based upon the marketplace where the financial product is traded, which, as a
result of regulatory jurisdiction constraints in most circumstances, is also
representative of the location of the client generating the transaction
resulting in commissionable revenue. The information that follows, in
management's judgment, provides a reasonable representation of the activities of
each region as of and for the periods indicated.
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
Transaction revenues: 2002 2001 2002 2001
- --------------------- -------------- ---------------- ---------------- --------------------
Europe $ 6,841,046 $ 4,550,737 $ 18,401,708 $ 14,743,371
Asia 695,008 359,210 2,037,547 1,181,140
------------- ------------- ------------- -------------
Total Non-Americas 7,536,054 4,909,947 20,439,255 15,924,511
Americas 19,907,070 16,490,766 58,783,035 59,416,892
---------- ---------- ---------- -------------
Total $ 27,443,124 $ 21,400,713 $ 79,222,290 $ 75,341,403
============= ============= ============= =============
September 30, December 31,
Average long-lived assets: 2002 2001
- -------------------------- ---------------------------------------
Europe $ 5,754,365 $ 4,543,563
Asia 389,407 472,098
------------- -------------
Total Non-Americas 6,143,772 5,015,661
Americas 17,065,353 12,049,313
------------- -------------
Total $ 23,209,125 $ 17,064,974
============= =============
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information in this report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements are
based upon current expectations that involve risks and uncertainties. Any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. For example, words such as "may,"
"will," "should," "estimates," "predicts," "potential," "continue," "strategy,"
"believes," "anticipates," "plans," "expects," "intends" and similar expressions
are intended to identify forward-looking statements. Our actual results and the
timing of certain events may differ significantly from the results discussed in
the forward-looking statements. Factors that might cause or contribute to such a
discrepancy include, but are not limited to, the effect of the September 11
Events on our operations, including in particular the loss of hundreds of
eSpeed, Cantor and TradeSpark employees, our limited operating history, the
possibility of future losses and negative cash flow from operations, the effect
of market conditions, including volume and volatility, and the current global
recession on our business, our ability to enter into marketing and strategic
alliances, to hire new personnel, to expand the use of our electronic system, to
induce clients to use our marketplaces and services and to effectively manage
any growth we achieve, and other factors that are discussed under "Risk Factors"
in our Annual Report on Form 10-K for the year ended December 31, 2001. The
following discussion is qualified in its entirety by, and should be read in
conjunction with, the more detailed information set forth in our financial
statements and the notes thereto appearing elsewhere in this filing.
OVERVIEW
We were incorporated on June 3, 1999 as a Delaware corporation. Prior to our
initial public offering, we were a wholly-owned subsidiary of, and we conducted
our operations as a division of, Cantor Fitzgerald Securities, which in turn is
a 99.5%-owned subsidiary of Cantor Fitzgerald, L.P. (collectively with its
affiliates, Cantor). We commenced operations as a division of Cantor on March
10,1999, the date the first fully electronic transaction using our eSpeed(R)
system was executed. Cantor has been developing systems to promote fully
electronic marketplaces since the early 1990s. Since January 1996, Cantor has
used our eSpeed(R) system internally to conduct electronic trading.
Concurrent with our initial public offering in December 1999, Cantor contributed
to us, and we acquired from Cantor, certain of our assets. These assets
primarily consist of proprietary software, network distribution systems,
technologies and other related contractual rights that comprise our eSpeed(R)
system.
We operate interactive electronic marketplaces and license customized real-time
software solutions to our clients. In general, we receive transaction fees based
on a percentage of the face value of products traded through our system.
Products may be traded on a fully electronic basis, electronically through a
voice broker, or via open outcry with prices displayed on data screens. We
receive different fees for these different system utilizations. Additionally, we
receive revenues from licensing software and providing technology support.
We continue to pursue our strategy to expand our client base and expand the
number and types of products that our clients can trade electronically on our
system. Other than Cantor, no client of ours accounted for more than 10% of our
revenues from our date of inception through September 30, 2002.
SEPTEMBER 11 EVENTS
On September 11, 2001, our principal place of business at One World Trade Center
was destroyed. In connection therewith, we lost approximately 180 employees and
Cantor and TradeSpark lost an aggregate of 478 employees.
12
Through the implementation of our business recovery plan, we immediately
relocated our surviving employees to various locations in the New York
metropolitan area. The United States government bond markets were closed on
September 11, 2001 and September 12, 2001. By the time the United States
government bond market reopened on September 13, 2001, we had re-established
global connectivity of our eSpeed(R) system. Our proprietary software was
unharmed.
We recognized a net provision of $13,323,189 in 2001 related to the September 11
Events. Such provision includes the incremental costs associated with
substituting external professionals for deceased employees, recruitment fees,
the impairment of software development costs and the costs associated with our
restructuring as a result of the loss of life.
The families of the deceased will receive a share of Cantor's partnership
profits for the next five years to pay for, among other things, 10 years of
healthcare coverage. The costs related to healthcare coverage, as well as any
payment of a percentage of Cantor's partnership profits to the families of the
deceased, will be borne by Cantor and not us.
The September 11 Events had an immediate adverse impact on our operations due to
the destruction of our principal place of business, the loss of 180 of our
employees and the loss of an aggregate of 478 employees of Cantor and
TradeSpark. We are uncertain at this time of the long-term impact of the
September 11 Events on us.
13
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
REVENUES
Three months ended
-----------------------------
September 30, September 30,
2002 2001
------------- -------------
Transaction revenues with related parties:
Fully electronic transactions......................................... $ 22,782,614 $ 15,676,495
Voice-assisted brokerage transactions................................. 4,649,045 5,577,545
Screen-assisted open outcry transactions.............................. 11,465 146,673
------------- -------------
Total transaction revenues with related parties............. 27,443,124 21,400,713
Software Solutions fees from related parties............................. 3,422,729 4,806,225
Software Solutions and licensing fees from unrelated parties............. 1,332,589 691,677
Interest income from related parties..................................... 780,209 1,292,718
------- ---------
Total revenues............................................. $ 32,978,651 $ 28,191,333
============= =============
TRANSACTION REVENUES WITH RELATED PARTIES
Under the Joint Services Agreement between us and Cantor and services agreements
between us and each of TradeSpark, Freedom and MPLLC, we own and operate the
electronic trading system and are responsible for providing electronic brokerage
services, and Cantor, TradeSpark, Freedom or MPLLC may provide voice-assisted
brokerage services, fulfillment services, such as clearance and settlement, and
related services, such as credit risk management services, oversight of client
suitability and regulatory compliance, sales positioning of products and other
services customary to marketplace intermediary operations. In general, for fully
electronic transactions, we receive 65% of the transaction revenues and Cantor,
TradeSpark or Freedom receives 35% of the transaction revenues. The Company and
MPLLC each receive 50% of the fully electronic revenues related to municipal
bonds. In general, for voice-assisted brokerage transactions, we receive 7% of
the transaction revenues, in the case of Cantor transactions, and 35% of the
transaction revenues, in the case of TradeSpark and Freedom transactions. In
addition, we receive 25% of the net revenues from Cantor's gaming businesses.
For the three months ended September 30, 2002, we earned transaction revenues
with related parties of $27,443,124, an increase of 28% as compared to
transaction revenues with related parties of $21,400,713 for the three months
ended September 30, 2001. For the three months ended September 30, 2002, 83% of
our transaction revenues were generated from fully electronic transactions.
Our revenues are currently highly dependent on transaction volume in the global
financial product markets. Accordingly, among other things, equity market
volatility, economic and political conditions in the United States and elsewhere
in the world, concerns over inflation, institutional and consumer confidence
levels, the availability of cash for investment by mutual funds and other
wholesale and retail investors, fluctuating interest and exchange rates and
legislative and regulatory changes and currency values may have an impact on our
volume of transactions. In addition, a significant amount of our revenues is
currently received in connection with our relationship with Cantor.
Consequently, our revenues have been negatively affected by the effect of the
September 11 Events on Cantor and may continue to be negatively affected in the
future if Cantor's business continues to suffer due to the September 11 Events
or otherwise.
14
SOFTWARE SOLUTIONS FEES FROM RELATED PARTIES
Under various services agreements, we provide Cantor, TradeSpark, Freedom and
MPLLC, technology support services, including systems administration, internal
network support, support and procurement for desktops of end-user equipment,
operations and disaster recovery services, voice and data communications,
support and development of systems for clearance and settlement services,
systems support for brokers, electronic applications systems and network
support, and provision and/or implementation of existing electronic applications
systems, including improvements and upgrades thereto, and use of the related
intellectual property rights. In general, we charge Cantor, TradeSpark and
Freedom the actual direct and indirect costs, including overhead, of providing
such services; provided, however, in exchange for a 25% share of the net
revenues from Cantor's gaming businesses, we are obligated to spend, and do not
otherwise get reimbursed for, the first $750,000 of costs for providing
technology support and development services in connection with such gaming
businesses. We charge MPLLC an amount based upon actual direct and indirect
costs of providing such services plus a reasonable profit less a discount.
Software Solutions fees from related parties for the three months ended
September 30, 2002 were $3,422,729. This compares with Software Solutions fees
from related parties for the three months ended September 30, 2001 of
$4,806,225, a decrease of 29%. As a result of the September 11 Events, there has
been a reduction in demand for our support services from Cantor and TradeSpark
due to the loss of their voice brokers, offset in part by additional Software
Solutions fees from MPLLC, and therefore a decrease in our Software Solutions
fees from related parties.
SOFTWARE SOLUTIONS AND LICENSING FEES FROM UNRELATED PARTIES
Certain of our clients provide online access to their customers through use of
our electronic trading platform for which we receive fees. Such fees are
deferred and recognized as revenues ratably over the term of the licensing
agreement. We also receive Software Solutions fees from unrelated parties by
charging our clients for additional connections to our system to help protect
them from possible business interruptions. Software Solutions and licensing fees
from unrelated parties for the three months ended September 30, 2002 were
$1,332,589 as compared to Software Solutions and licensing fees from unrelated
parties of $691,677 for the three months ended September 30, 2001, an increase
of 93%, due primarily to licensing fees earned from IntercontinentalExchange for
use of the Wagner Patent and licensing fees earned as part of the Wagner Patent
Settlement Agreement.
INTEREST INCOME FROM RELATED PARTIES
For the three months ended September 30, 2002, weighted average interest rates
on overnight reverse repurchase agreements were 1.6% as compared to 3.4% for the
three months ended September 30, 2001. As a result, we generated interest income
from related parties of $780,209 for the three months ended September 30, 2002
as compared to $1,292,718 for the three months ended September 30, 2001, a
decrease of 40%.
15
EXPENSES
Three months ended
-----------------------------
September 30, September 30,
2002 2001
------------- -------------
Compensation and employee benefits........................... $ 9,113,762 $ 14,738,315
Occupancy and equipment...................................... 6,338,062 7,414,913
Professional and consulting fees............................. 1,148,854 1,196,878
Communications and client networks........................... 1,465,111 2,470,533
Marketing.................................................... 1,280,340 999,188
Administrative fees paid to related parties.................. 2,291,423 2,911,382
Loss on unconsolidated investments........................... -- 3,833,679
Non-cash business partner securities ........................ 541,266 517,328
Provision for September 11 Events............................ -- 14,368,554
Other........................................................ 3,011,944 2,461,958
------------- -------------
Total expenses........................................ $ 25,190,762 $ 50,912,728
============= =============
COMPENSATION AND EMPLOYEE BENEFITS
At September 30, 2002, we had approximately 317 employees, which was virtually
unchanged as compared to the approximately 306 employees we had at September 30,
2001. However, prior to the September 11 Events, we had approximately 484
employees. This decrease in the number of employees was principally due to the
September 11 Events. Substantially all of our employees are full time employees
located predominantly in the New York metropolitan area and London. Compensation
costs include salaries, bonus accruals, payroll taxes and costs of
employer-provided benefits for our employees. For the three months ended
September 30, 2002, our compensation costs were $9,113,762 as compared to
$14,738,315 for the three months ended September 30, 2001, a decrease of 38%,
primarily as a result of the September 11 Events. Our future compensation costs
are uncertain and are dependent upon the degree and/or speed with which we
replace our lost employees and businesses.
OCCUPANCY AND EQUIPMENT
Occupancy and equipment costs were $6,338,062 for the three months ended
September 30, 2002 as compared to occupancy and equipment costs of $7,414,913
for the three months ended September 30, 2001, a decrease of 15%. The decrease
was primarily caused by our reduced need for office space as a result of the
September 11 Events. Occupancy expenditures primarily consist of the rent and
facilities costs of our offices in London, Tokyo and the New York metropolitan
area. We moved into our new corporate headquarters during the second quarter of
2002. We anticipate that our occupancy costs will remain substantially unchanged
in the near future as compared to the three months ended September 30, 2002.
Although we believe that our equipment costs will increase in the future, we
anticipate that equipment costs will remain below those incurred prior to the
September 11 Events.
PROFESSIONAL AND CONSULTING FEES
Professional and consulting fees were $1,148,854 for the three months ended
September 30, 2002 as compared to $1,196,878 for the three months ended
September 30, 2001, a decrease of 4%, primarily due to a decrease in legal and
contract employee personnel costs.
16
COMMUNICATIONS AND CLIENT NETWORKS
Communications costs were $1,465,111 for the three months ended September 30,
2002, a 41% decrease over communication costs of $2,470,533 for the three months
ended September 30, 2001, due principally to decreased data and telephone costs
subsequent to the September 11 Events. Communications costs include the costs of
local and wide area network infrastructure, the cost of establishing the client
network linking clients to us, data and telephone lines, data and telephone
usage and other related costs. We anticipate expenditures for communications and
client networks will increase in the near future as we continue to reconstruct
our digitally managed global network, increase connectivity and connect
additional customers to our network.
MARKETING
We incurred marketing expenses of $1,280,340 during the three months ended
September 30, 2002 as compared to marketing expenses during the three month
period ended September 30, 2001 of $999,188, an increase of 28%, resulting from
the development of a 2002 advertising campaign. We expect our marketing expenses
to decrease as we reduce spending related to our advertising campaign.
ADMINISTRATIVE FEES PAID TO RELATED PARTIES
Under an Administrative Services Agreement, Cantor provides various
administrative services to us, including accounting, tax, legal and facilities
management, for which we reimburse Cantor for the direct and indirect cost of
providing such services. Administrative fees paid to related parties were
$2,291,423 for the three months ended September 30, 2002 as compared to
administrative fees of $2,911,382 for the three months ended September 30, 2001,
a decrease of 21%, principally due to a decrease in charges from Cantor as a
result of the September 11 Events.
Administrative fees paid to related parties are dependent upon both the costs
incurred by Cantor, and the portion of Cantor's administrative services which we
utilize. Due to the continuing effects of the September 11 Events on both us and
Cantor, the level of future administrative fees cannot be reasonably determined
at this time.
LOSS ON INVESTMENTS
We did not record any write-offs of our unconsolidated investments in the third
quarter of 2002. In the third quarter of 2001, we wrote off our investments in
QV Trading Systems and Visible Markets, each of which ceased operations in the
third quarter 2001. We recognized a loss of $3,833,679 related to the
write-offs.
NON-CASH BUSINESS PARTNER SECURITIES
We enter into strategic alliances with other industry participants in order to
expand our business and to enter into new marketplaces. As part of these
strategic alliances, we have issued warrants and convertible preferred stock.
These securities do not require cash outlays and do not represent a use of our
assets. The expense related to these issuances is based on the value of the
securities being issued and the structure of the transaction. We believe period
to period comparisons are not meaningful as these transactions do not recur on a
regular basis.
17
OTHER EXPENSES
Other expenses consist primarily of recruitment fees, travel, promotional and
entertainment expenditures. For the three months ended September 30, 2002, other
expenses were $3,011,944, an increase of 22% as compared to other expenses of
$2,461,958 for the three months ended September 30, 2001, principally due to a
charitable contribution we made to the Cantor Fitzgerald Relief Fund in the
third quarter of 2002. We anticipate that other expenses will not increase in
the near future because, although we expect to incur additional recruitment fees
in the near future due to the September 11 Events, these recruitment costs were
estimated and included in the Provision for September 11 Events recorded in
2001.
NET INCOME
Excluding non-cash business partner securities, our net income was $8,207,089
for the three months ended September 30, 2002. Including the above non-cash
charges, our net income was $7,665,824 for the three months ended September 30,
2002.
RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
REVENUES
Nine months ended
-------------------------------
September 30, September 30,
2002 2001
------------- -------------
Transaction revenues with related parties:
Fully electronic transactions........................................ $ 65,608,590 $ 57,752,654
Voice-assisted brokerage transactions................................ 13,478,973 17,275,168
Screen-assisted open outcry transactions............................. 134,727 313,581
------------- -------------
Total transaction revenues with related parties............ 79,222,290 75,341,403
Software solutions fees from related parties............................. 9,747,204 12,775,813
Software solutions and licensing fees from unrelated parties............. 2,436,719 1,339,596
Business interruption insurance proceeds................................. 12,832,886 --
Interest income from related parties..................................... 2,221,821 4,701,569
------------- -------------
Total revenues............................................. $ 106,460,920 $ 94,158,381
============= =============
TRANSACTION REVENUES WITH RELATED PARTIES
For the nine months ended September 30, 2002, we earned transaction revenues
with related parties of $79,222,290, an increase of 5% as compared to
transaction revenues with related parties of $75,341,403 for the nine months
ended September 30, 2001. For the nine months ended September 30, 2002, 83% of
our transaction revenues were generated from fully electronic transactions.
Our revenues are currently highly dependent on transaction volume in the global
financial product markets. Accordingly, among other things, equity market
volatility, economic and political conditions in the United States and elsewhere
in the world, concerns over inflation, institutional and consumer confidence
levels, the availability of cash for investment by mutual funds and other
wholesale and retail investors, fluctuating interest and exchange rates and
legislative and regulatory changes and currency values may have an impact on our
volume of transactions. In addition, a significant amount of our revenues is
currently received in connection with our relationship with Cantor.
Consequently, our revenues have been negatively affected by the effect of the
September 11 Events on Cantor and may continue to be negatively affected in the
future if Cantor's business continues to suffer due to the September 11 Events
or otherwise.
18
SOFTWARE SOLUTIONS FEES FROM RELATED PARTIES
Software Solutions fees from related parties for the nine months ended September
30, 2002 were $9,747,204. This compares with Software Solutions fees from
related parties for the nine months ended September 30, 2001 of $12,775,813, a
decrease of 24%. As a result of the September 11 Events, there has been a
reduction in demand for our support services from Cantor and TradeSpark due to
the loss of their voice brokers, offset in part by additional Software Solutions
fees from MPLLC, and therefore a decrease in our Software Solutions fees from
related parties.
SOFTWARE SOLUTIONS AND LICENSING FEES FROM UNRELATED PARTIES
Certain of our clients provide online access to their customers through use of
our electronic trading platform for which we receive fees. Such fees are
deferred and recognized as revenues ratably over the term of the licensing
agreement. We also receive Software Solutions fees from unrelated parties by
charging our clients for additional connections to our system to help protect
them from possible business interruptions. Software Solutions and licensing fees
from unrelated parties for the nine months ended September 30, 2002 were
$2,436,719 as compared to Software Solutions and licensing fees from unrelated
parties of $1,339,596 for the nine months ended September 30, 2001, an increase
of 82%, due primarily to licensing fees earned from IntercontinentalExchange for
use of the Wagner Patent and licensing fees earned as part of the Wagner Patent
Settlement Agreement.
BUSINESS INTERRUPTION INSURANCE PROCEEDS
During the nine months ended September 30, 2002, we recognized $12,832,886 as
our portion of the $40 million insurance recovery received by Cantor. Such
amount was received in August 2002.
INTEREST INCOME FROM RELATED PARTIES
For the nine months ended September 30, 2002, weighted average interest rates on
overnight reverse repurchase agreements were 1.6% as compared to 4.5% for the
nine months ended September 30, 2001. As a result, we generated interest income
from related parties of $2,221,821 for the nine months ended September 30, 2002
as compared to $4,701,569 for the nine months ended September 30, 2001, a
decrease of 53%.
19
EXPENSES
Nine months ended
-------------------------------
September 30, September 30,
2002 2001
------------- -------------
Compensation and employee benefits........................... $ 27,748,412 $ 46,124,822
Occupancy and equipment...................................... 18,048,318 22,329,398
Professional and consulting fees............................. 4,263,576 7,232,006
Communications and client networks........................... 4,516,545 6,672,676
Marketing.................................................... 4,514,868 3,997,959
Administrative fees paid to related parties.................. 6,578,674 7,753,500
Loss on unconsolidated investments........................... -- 3,833,679
Non-cash business partner securities......................... 1,354,072 816,228
Provision for September 11 Events ........................... -- 14,368,554
Other........................................................ 5,873,038 6,756,622
------------- -------------
Total expenses.......................................... $ 72,897,503 $ 119,885,444
============= =============
COMPENSATION AND EMPLOYEE BENEFITS
At September 30, 2002, we had approximately 317 employees, which was virtually
unchanged as compared to the approximately 306 employees we had at September 30,
2001. However, prior to the September 11 Events, we had approximately 484
employees. This decrease in the number of employees was principally due to the
September 11 Events. Substantially all of our employees are full time employees
located predominantly in the New York metropolitan area and London. Compensation
costs include salaries, bonus accruals, payroll taxes and costs of
employer-provided benefits for our employees. For the nine months ended
September 30, 2002, our compensation costs were $27,748,412 as compared to
$46,124,822 for the nine months ended September 30, 2001, a decrease of 40%. Our
future compensation costs are uncertain and are dependent upon the degree and/or
speed with which we replace our lost employees and businesses.
OCCUPANCY AND EQUIPMENT
Occupancy and equipment costs were $18,048,318 for the nine months ended
September 30, 2002 as compared to occupancy and equipment costs of $22,329,398
for the nine months ended September 30, 2001, a decrease of 19%. The decrease
was primarily caused by our reduced need for office space as a result of the
September 11 Events. Occupancy expenditures primarily consist of the rent and
facilities costs of our offices in London, Tokyo and the New York metropolitan
area. We moved into our new corporate headquarters during the second quarter of
2002. We anticipate that our occupancy costs will increase slightly in the near
future as compared to the nine months ended September 30, 2002. Although we
believe that our equipment costs will increase in the future, we anticipate that
equipment costs will remain below those incurred prior to the September 11
Events.
PROFESSIONAL AND CONSULTING FEES
Professional and consulting fees were $4,263,576 for the nine months ended
September 30, 2002 as compared to $7,232,006 for the nine months ended September
30, 2001, a decrease of 41%, primarily due to a decrease in legal and contract
employee personnel costs.
COMMUNICATIONS AND CLIENT NETWORKS
Communications costs were $4,516,545 for the nine months ended September 30,
2002, a 32% decrease over communication costs of $6,672,676 for the nine months
ended September 30, 2001, due principally
20
to decreased data and telephone costs subsequent to the September 11 Events.
Communications costs include the costs of local and wide area network
infrastructure, the cost of establishing the client network linking clients to
us, data and telephone lines, data and telephone usage and other related costs.
We anticipate expenditures for communications and client networks will increase
in the near future as we continue to reconstruct our digitally managed global
network, increase connectivity and connect additional customers to our network.
MARKETING
We incurred marketing expenses of $4,514,868 during the nine months ended
September 30, 2002 as compared to marketing expenses during the nine month
period ended September 30, 2001 of $3,997,959, an increase of 13%, resulting
from the development of a 2002 advertising campaign. We expect our marketing
expenses to decrease as we reduce spending related to our advertising campaign.
ADMINISTRATIVE FEES PAID TO RELATED PARTIES
Under an Administrative Services Agreement, Cantor provides various
administrative services to us, including accounting, tax, legal and facilities
management, for which we reimburse Cantor for the direct and indirect cost of
providing such services. Administrative fees paid to related parties were
$6,578,674 for the nine months ended September 30, 2002 as compared to
administrative fees of $7,753,500 for the nine months ended September 30, 2001,
a decrease of 15%, principally due to a decrease in charges from Cantor as a
result of the September 11 Events.
Administrative fees paid to related parties are dependent upon both the costs
incurred by Cantor, and the portion of Cantor's administrative services which we
utilize. Due to the continuing effects of the September 11 Events on both us and
Cantor, the level of future administrative fees cannot be reasonably determined
at this time.
NON-CASH BUSINESS PARTNER SECURITIES
We enter into strategic alliances with other industry participants in order to
expand our business and to enter into new marketplaces. As part of these
strategic alliances, we have issued warrants and convertible preferred stock.
These securities do not require cash outlays and do not represent a use of our
assets. The expense related to these issuances is based on the value of the
securities being issued and the structure of the transaction. We believe period
to period comparisons are not meaningful as these transactions do not recur on a
regular basis.
LOSS ON INVESTMENTS
We did not record any write-offs of our unconsolidated investments in the nine
months ended September 30, 2002. In the third quarter of 2001, we wrote off our
investments in QV Trading Systems and Visible Markets, each of which ceased
operations in the third quarter 2001. We recognized a loss of $3,833,679 related
to the write-offs.
OTHER EXPENSES
Other expenses consist primarily of recruitment fees, travel, promotional and
entertainment expenditures. For the nine months ended September 30, 2002, other
expenses were $5,873,038 as compared to other expenses of $6,756,622 for the
nine months ended September 30, 2001, a decrease of 13%, principally as a result
of decreased recruitment fees. We anticipate that other expenses will not
increase in the near future because, although we expect to incur additional
recruitment fees in the near future due to the September 11 Events, these
recruitment costs were estimated and included in the Provision for September 11
Events recorded in 2001.
21
NET INCOME
Excluding non-cash business partner securities, our net income was $34,567,424
for the nine months ended September 30, 2002. Including the above non-cash
charges, our net income was $33,213,352 for the nine months ended September 30,
2002.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, we had cash and cash equivalents of $194.3 million, an
increase of $34.4 million as compared to December 31, 2001. We generated cash of
$56.2 million from our operating activities, consisting of net income after
non-cash items of $44.3 million and $11.9 million of other changes in operating
assets and liabilities. We also used net cash of $21.8 million resulting from
$21.8 million of purchases of fixed assets and intangible assets, capitalization
of software development costs and patent defense costs.
Our operating cash flows consist of transaction revenues from related parties
and Software Solutions fees from related and unrelated parties, various fees
paid to or costs reimbursed to Cantor, other costs paid directly by us and
interest income from related parties. In its capacity as a fulfillment service
provider, Cantor processes and settles transactions and, as such, collects and
pays the funds necessary to clear transactions with the counterparty. In doing
so, Cantor receives our portion of the transaction fee and, in accordance with
the Joint Services Agreement, remits the gross amount owed to us. In addition,
we have entered into similar services agreements with TradeSpark and Freedom.
Under the Administrative Services Agreement, the Joint Services Agreement and
the services agreements with TradeSpark and Freedom, any net receivable or
payable is settled at the discretion of the parties.
As a result of the September 11 Events, we anticipate that we will be required
to make significant capital expenditures in the near future, including the
acquisition of computer hardware, network infrastructure and facilities,
including our new corporate headquarters in New York City. However, we expect
insurance proceeds to fund a significant portion of these costs. In addition, we
do not currently plan to rebuild a third data center.
Under the current operating structure, our cash flows from operations and our
existing cash resources should be sufficient to fund our current working capital
and current capital expenditure requirements for at least the next 12 months.
However, we believe that there are a significant number of capital intensive
opportunities for us to maximize our growth and strategic position, including,
among other things, strategic alliances and joint ventures potentially involving
all types and combinations of equity, debt, acquisition, recapitalization and
reorganization alternatives. We are continually considering such options,
including the possibility of additional repurchases of our Class A common stock,
and their effect on our liquidity and capital resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At September 30, 2002, we had invested $191,806,160 of our cash in securities
purchased under reverse repurchase agreements with Cantor, which are fully
collateralized by U.S. Government securities held in a custodial account at The
Chase Manhattan Bank. These reverse repurchase agreements have an overnight
maturity and, as such, are highly liquid. We do not use derivative financial
instruments, derivative commodity instruments or other market risk sensitive
instruments, positions or transactions. Accordingly, we believe that we are not
subject to any material risks arising from changes in interest rates, foreign
currency exchange rates, commodity prices, equity prices or other market changes
that affect market risk sensitive instruments. Our policy is to invest our cash
in a manner that provides us with the appropriate level of liquidity to enable
us to meet our current obligations, primarily accounts payable, capital
expenditures and payroll, recognizing that we do not currently have outside bank
funding.
22
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have concluded, based on
their evaluation as of a date within 90 days prior to the date of the filing of
this Report, that our controls and procedures are effective to ensure that
information required to be disclosed by us in the reports filed by us under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms, and
include controls and procedures designed to ensure that information required to
be disclosed by us in such reports is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.
There were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of such
evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
By Statement of Claim dated October 8, 2002, Municipal Partners, LLC (MPLLC)
commenced an arbitration before the NASD against Cantor Fitzgerald Partners and
Howard Lutnick (the Arbitration). Although MPLLC did not name eSpeed as a
respondent in the Arbitration, MPLLC seeks, among other things, (i) a
declaration that the License and Service Agreement dated January 30, 2002,
between MPLLC and eSpeed is null and void and (ii) an order directing eSpeed to
reimburse MPLLC for certain costs. By Order to Show Cause signed on October 30,
2002, eSpeed, Cantor Fitzgerald Partners and Howard Lutnick moved for an order
staying the Arbitration in its entirety or, alternatively, staying the
Arbitration insofar as it seeks relief directly or indirectly against eSpeed.
By Summons and Complaint dated October 30, 2002, eSpeed commenced an action
against MPLLC seeking, among other things, payment for services rendered
pursuant to the License and Service Agreement and payment for eSpeed's share of
certain electronic revenues of MPLLC.
eSpeed patent related legal proceedings
On August 26, 2002, we entered into a Settlement Agreement (the Agreement) with
Electronic Trading Systems Corporation (ETS), the Chicago Mercantile Exchange
Inc. (CME) and the Board of Trade of the City of Chicago (CBOT) to resolve the
litigation related to the Wagner Patent (United States Patent No. 4,903,201).
The Wagner Patent deals with automated futures trading systems in which
transactions are completed by a computerized matching of bids and offers of
futures contracts on an electronic platform.
Under the terms of the Agreement, CME and CBOT will each pay $15 million to us
as a fully paid up license. Each $15 million payment will include $5 million,
payable within 30 business days of August 26, 2002, and $2 million per year
until 2007. We will recognize these payments, over the remaining life of the
Wagner Patent, under the caption "Software Solutions and licensing fees from
unrelated parties" in our consolidated statements of operations. The Wagner
Patent expires in February 2007. As part of the Agreement, all parties will be
released from the legal claims brought against each other without admitting
liability on the part of any party. We may be paying ETS up to $5,750,000 over
time out of the amounts we receive under the Agreement in connection with the
settlement of the litigation relating to the Wagner Patent.
After we acquired the Wagner patent in April 2001, we joined ETS, the prior
patent owner, as a plaintiff in litigation pending in the Southern District of
New York against the New York Mercantile Exchange. The plaintiffs allege that
the defendants in each case infringed the Wagner patent. The complaints seek
injunctive relief, a reasonable royalty, treble damages pursuant to 37 U.S.C.
ss.284, attorneys' fees, interest and costs. The defendants have asserted
counterclaims by which they contend they are entitled to their
23
attorneys' fees should they prevail. On June 26, 2002, the Judge in the New York
case entered an order following a Markman hearing construing the claims of the
patent. We believe that both of those Markman rulings were generally consistent
with our interpretation of the scope of the patent.
Expert discovery is ongoing in the New York case, and a limited amount of fact
discovery remains. The New York case is scheduled to be trial ready by
mid-December 2002 with a trial likely in 2003.
Although the ultimate outcome of these actions cannot be ascertained at this
time and the results of legal proceedings cannot be predicted with certainty, it
is the opinion of management that the resolution of these matters will not have
a material adverse effect on our financial condition or results of operations.
Cantor related legal proceedings
In February 1998, Market Data Corporation contracted with Chicago Board
Brokerage (a company controlled by the Chicago Board of Trade and Prebon Yamane)
to provide the technology for an electronic trading system to compete with
Cantor's United States Treasury brokerage business. Market Data Corporation is
controlled by Iris Cantor and Rodney Fisher, her nephew- in-law. Iris Cantor, a
company under the control of Iris Cantor referred to herein as Cantor Fitzgerald
Incorporated (CFI) and Rodney Fisher are limited partners of CFLP.
In April 1998, CFLP filed a complaint in the Delaware Court of Chancery against
Market Data Corporation, Iris Cantor, CFI, Rodney Fisher and Chicago Board
Brokerage seeking an injunction and other remedies. The complaint alleges that
Iris Cantor, CFI and Rodney Fisher violated certain duties, including fiduciary
duties under Cantor's partnership agreement, due to their competition with CFLP
with respect to the electronic trading system mentioned above. CFLP believes
Market Data Corporation's technology for electronic trading systems would be of
substantial assistance to competitors in the wholesale market if provided to
them. The complaint further alleges that Market Data Corporation and Chicago
Board Brokerage tortiously interfered with CFLP's partnership agreement and
aided and abetted Iris Cantor's, CFI's and Rodney Fisher's breaches of fiduciary
duty. Iris Cantor, CFI and Rodney Fisher counterclaimed seeking, among other
things, (1) to reform agreements they have with CFLP and (2) a declaration that
CFLP breached the implied covenant of good faith and fair dealing.
CFLP settled its dispute with Chicago Board Brokerage in April 1999, and Chicago
Board Brokerage subsequently announced it was disbanding its operations.
On March 13, 2000, the Delaware Court of Chancery ruled in favor of CFLP,
finding that Iris Cantor, CFI and Rodney Fisher had breached the Partnership
Agreement of CFLP, and that Market Data Corporation had aided and abetted that
breach. The court awarded CFLP declaratory judgment relief and court costs and
attorneys' fees. The defendants moved for re-argument with respect to the award
of fees and costs. The Court of Chancery adhered to its previous decision that
CFLP is entitled to recover court costs and attorneys' fees.
On November 5, 2001, the Court of Chancery entered an Order of Declaratory
Judgment, which provides that if Iris Cantor, CFI and/or Rod Fisher, through MDC
or otherwise, wish to compete with CFLP or its affiliates in a manner that could
reasonably be expected to harm a core business of CFLP, they must obtain the
written consent of CFLP's Managing General Partner. On December 4, 2001, the
defendants filed notices of appeal. The Delaware Supreme Court dismissed the
appeals as interlocutory. The Court has yet to enter a final order regarding
fees and costs. On June 21, 2002 (and revised July 8, 2002), the Court rendered
an opinion denying defendants' further reargument as to the damages award and
stated that the case is now ripe for appeal. The parties were asked to submit a
proposed form of order regarding the amount of damages. The Court has yet to
enter a final order. In a related proceeding, MDC has alleged that CFLP has
violated the declaratory judgment order by withholding its consent for MDC to
24
engage in certain business transactions. That matter is scheduled for a hearing
before the Delaware Court of Chancery's Special Master on January 8 and 9, 2003.
Two related actions are pending in New York. In a case pending in the Supreme
Court of New York, plaintiff CFLP alleges, among other things, that defendants
Market Data Corporation, CFI, Iris Cantor and Rodney Fisher misused confidential
information of CFLP in connection with the above-mentioned provision of
technology to Chicago Board Brokerage. In a case filed in the United States
District Court for the Southern District of New York, CFI and Iris Cantor
allege, among other things, that certain senior officers of CFLP breached
fiduciary duties they owed to CFI. The allegations in this lawsuit relate to
several of the same events underlying the court proceedings in Delaware.
Neither of these two cases had been pursued prior to the March 13, 2000 decision
in the court proceedings in Delaware. On May 15, 2000, the senior officers of
CFLP who are defendants in the federal action in New York moved to dismiss the
complaint against them on several grounds, including, among other things, that
matters that were adjudicated against them in Delaware.
On February 7, 2001, the court granted the motion to dismiss CFI's complaint.
CFI and Iris Cantor appealed. In November 2001, the United States Court of
Appeals for the Second Circuit heard oral arguments. It has yet to render a
decision.
On May 16, 2000, CFI filed an action in Delaware Superior Court, New Castle
County, against CFLP and CF Group Management, Inc. (CFGM) seeking payment of $40
million allegedly due pursuant to a settlement agreement in an earlier
litigation between the parties. The complaint alleges that CFI is entitled to a
one-time $40 million payment upon "an initial public offering of CFLP or of a
successor to a material portion of the assets and business of CFLP..." CFI
alleges that our initial public offering on December 10, 1999 triggered the
payment obligation under the settlement agreement. On September 26, 2000, CFLP
and CFGM filed an answer denying liability. Following the events of September
11, 2001, the action was stayed. The stay was lifted on September 1, 2002 and
the parties have resumed disclosure. CFLP intends to defend vigorously against
its claims.
Although we do not expect to incur any losses with respect to the pending
lawsuits or supplemental allegations relating to Cantor and Cantor's partnership
agreement, Cantor has agreed to indemnify us with respect to any liabilities we
incur as a result of any breach by Cantor of any covenant or obligation
contained in Cantor's partnership agreement and for any liabilities that are
incurred with respect to the litigation involving Market Data Corporation, Iris
Cantor, CFI and Rodney Fisher or MP.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(d) The effective date of our registration statement (Registration No.
333-87475) filed on Form S-1 relating to our initial public offering of Class A
common stock was December 9, 1999. In our initial public offering, we sold
7,000,000 shares of Class A common stock at a price of $22.00 per share and CFS,
the selling stockholder, sold 3,350,000 shares of Class A common stock at a
price of $22.00 per share. Our initial public offering was managed on behalf of
the underwriters by Warburg Dillon Read LLC, Hambrecht & Quist, Thomas Weisel
Partners LLC and Cantor Fitzgerald & Co. The offering commenced on December 10,
1999 and closed on December 15, 1999. Proceeds to us from our initial public
offering, after deduction of the underwriting discounts and commissions of
approximately $10.0 million and offering costs of $4.4 million, totaled
approximately $139.6 million. None of the expenses incurred in our initial
public offering were direct or indirect payments to our directors, officers,
general partners or their associates, to persons owning 10% or more of any class
of our equity securities or to our affiliates. Of the $139.6 million raised,
approximately $8.9 million has been used to fund investments in
25
various entities, approximately $57.1 million has been used to acquire fixed
assets and to pay for the development of capitalized software and approximately
$19.2 million has been used to purchase and perfect intangible assets. The
remaining $54.4 million has been invested in reverse repurchase agreements which
are fully collateralized by U.S. Government Securities held in a custodial
account at a third-party bank.
Of the amount of proceeds spent through September 30, 2002, approximately $24.5
million has been paid to Cantor under the Administrative Services Agreement
between Cantor and us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) We held our 2002 Annual Meeting of Stockholders (the Annual Meeting) on
October 23, 2002.
(b) The following directors were elected at the Annual Meeting and they are our
only directors: Howard W. Lutnick, Lee M. Amaitis, Joseph C. Noviello, Stephen
M. Merkel, Larry R. Carter, John H. Dalton, Frank R. Lautenberg, William J.
Moran and Albert M. Weis.
(c) Set forth below is a description of the matters voted upon at the Annual
Meeting, including the number of votes cast for, as well as the number of votes
withheld, as to each nominee for election as a director. There were no broker
non-votes.
Election of nine directors, each to serve until the next Annual Meeting of
stockholders and until his successor is duly elected and qualified:
- --------------------------------------------------------------------------------
Name of Candidate For Withhold Authority
- --------------------------------------------------------------------------------
Howard W. Lutnick 280,765,510 6,150,441
Lee M. Amaitis 280,765,510 6,150,441
Joseph C. Noviello 280,765,510 6,150,441
Stephen M. Merkel 280,765,510 6,150,441
Larry R. Carter 286,756,055 159,896
John H. Dalton 286,722,840 193,111
Frank R. Lautenberg 286,792,605 123,346
William J. Moran 286,792,605 123,346
Albert M. Weis 286,792,605 123,346
- --------------------------------------------------------------------------------
ITEM 5. OTHER INFORMATION
On October 11, 2002, Mitsui & Co. (Mitsui) invested $1,200,000 in CO2e.com, LLC
(CO2e), a Cantor subsidiary. CO2e's purpose is to form and operate one or more
electronic trading markets for products related to the mitigation of greenhouse
gasses and related activities and to provide brokerage information and
consulting services relating to the emission or mitigation of greenhouse gasses
and related issues. In connection therewith, we and CO2e entered into a Services
Agreement whereby we will receive 50% of CO2e's fully electronic revenues and
15% of CO2e's voice assisted and open outcry revenues until December 2003, and
20% thereafter. The Services Agreement supercedes the provisions of the Joint
Services Agreement with respect to CO2e transactions. Mitsui received 4% of the
equity of CO2e and we agreed to transfer certain intellectual property rights to
CO2e.
26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit No. Description
----------- -----------
10.19 Warrant Agreement, dated as of August 21, 2002, between
eSpeed, Inc. and UBS USA Inc.
10.20 Registration Rights Agreement, dated as of August 21,
2002, by and between eSpeed, Inc. and UBS USA Inc.
10.21 Services Agreement, dated as of October 11, 2002,
between eSpeed and CO2e.com LLC.
10.22 Amendment to the Joint Services Agreement, dated as of
October 11, 2002, by and among eSpeed, Inc., Cantor
Fitzgerald, L.P. and certain of their respective
affiliates.
10.23 Intellectual Property Rights Further Assurances
Agreement, dated as of October 11, 2002, between
eSpeed, Inc. and CO2e.com LLC.
10.24 Warrant Agreement, dated as of September 13, 2001,
between eSpeed, Inc. and Exchange Brokerage Systems
Corp.
99 Certification by the Chief Executive Officer and Chief
Financial Officer Relating to a Periodic Report
Containing Financial Statements.
(b) Report on Form 8-K.
We filed a Current Report on Form 8-K on August 29, 2002 that described
under Item 5 of Form 8-K the Settlement Agreement we entered into on August 26,
2002 with Electronic Trading Systems Corporation, The Chicago Mercantile
Exchange and The Board of Trade of the City of Chicago.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
eSpeed, Inc.
(Registrant)
/s/ Howard W. Lutnick
-----------------------------
Howard W. Lutnick
Chairman, Chief Executive Officer
and President
/s/ Jeffrey M. Chertoff
-----------------------------
Jeffrey M. Chertoff
Chief Financial Officer
Date: November 13, 2002
28
Certifications Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
I, Howard W. Lutnick, certify that:
1. I have reviewed this quarterly report on Form 10-Q of eSpeed, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Howard W. Lutnick
- -----------------------
Howard W. Lutnick
Chairman of the Board, Chief Executive Officer and President
I, Jeffrey M. Chertoff, certify that:
1. I have reviewed this quarterly report on Form 10-Q of eSpeed, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Jeffrey M. Chertoff
- -----------------------
Jeffrey M. Chertoff
Senior Vice President and Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Description
10.19 Warrant Agreement, dated as of August 21, 2002, between
eSpeed, Inc. and UBS USA Inc.
10.20 Registration Rights Agreement, dated as of August 21,
2002, by and between eSpeed, Inc. and UBS USA Inc.
10.21 Services Agreement, dated as of October 11, 2002,
between eSpeed and CO2e.com LLC
10.22 Amendment to the Joint Services Agreement, dated as of
October 11, 2002, by and among eSpeed, Inc., Cantor
Fitzgerald, L.P. and certain of their respective
affiliates.
10.23 Intellectual Property Rights Further Assurances
Agreement, dated as of October 11, 2002, between
eSpeed, Inc. and CO2e.com LLC.
10.24 Warrant Agreement, dated as of September 13, 2001,
between eSpeed, Inc. and Exchange Brokerage Systems
Corp.
99 Certification by the Chief Executive Officer and Chief
Financial Officer Relating to a Periodic Report
Containing Financial Statements.