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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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
- ------------------------------- -------------------------------
(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 by check whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). 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 May 12, 2003
- ----- ---------------------------
Class A common stock, par value $.01 per share 29,869,664
Class B common stock, par value $.01 per share 25,362,809
PART I--FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements:
Consolidated Statements of Financial Condition - 1
March 31, 2003 (unaudited) and December 31, 2002
Consolidated Statements of Income (unaudited) - Three Months 2
Ended March 31, 2003 and March 31, 2002
Consolidated Statements of Cash Flows (unaudited) - Three Months 3
Ended March 31, 2003 and March 31, 2002
Notes to Consolidated Financial Statements (unaudited) 4
ITEM 2. Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 15
ITEM 4. Controls and Procedures 16
PART II--OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds 16
ITEM 6. Exhibits and Reports on Form 8-K 16
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
eSpeed, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
As of March 31, 2003 and December 31, 2002
March 31, 2003 December 31, 2002
-------------- -----------------
(Unaudited)
Assets
Cash $ 1,401,480 $ 1,313,190
Reverse repurchase agreements with related parties 173,713,280 186,685,709
------------ ------------
Total cash and cash equivalents 175,114,760 187,998,899
Fixed assets, net 24,555,032 26,383,590
Investments 11,173,549 11,174,718
Intangible assets, net 18,766,339 19,527,505
Receivable from related parties 10,077,447 5,266,445
Other assets 3,506,405 2,359,718
------------ ------------
Total Assets $243,193,532 $252,710,875
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Payable to related parties $ 2,727,853 $ 18,857,071
Accounts payable and accrued liabilities 13,240,450 15,398,757
------------ ------------
Total Liabilities 15,968,303 34,255,828
------------ ------------
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 $.01 per share; 200,000,000 shares
authorized; 29,862,446 and 29,783,682 shares issued and outstanding 298,625 297,837
Class B common stock, par value $.01 per share; 100,000,000 shares
authorized; 25,362,809 and 25,388,814 shares issued and outstanding 253,628 253,888
Additional paid-in capital 271,225,718 270,656,627
Unamortized expense of business partner securities (2,654,200) (3,251,923)
Treasury stock, 186,399 and 24,600 shares of Class A common stock at cost (2,094,004) (221,892)
Accumulated deficit (39,884,546) (49,359,498)
------------ ------------
Total stockholders' equity 227,225,229 218,455,047
------------ ------------
Total liabilities and stockholders' equity $243,193,532 $252,710,875
============ ============
See notes to the consolidated financials statements.
1
eSpeed, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended March 31, 2003 and March 31, 2002
(Unaudited)
For the three months ended
--------------------------------------
March 31, 2003 March 31, 2002
-------------- --------------
Revenues:
Transaction revenues with related parties
Fully electronic transactions $ 22,509,651 $ 21,588,338
Voice-assisted brokerage transactions 5,161,600 4,482,500
Screen-assisted open outcry transactions 48,989 107,346
-------------- ------------
Total transaction revenues with related parties 27,720,240 26,178,184
Software Solutions fees from related parties 3,649,267 2,855,689
Software Solutions and licensing fees from unrelated parties 2,131,442 298,315
Interest income from related parties 542,270 700,987
-------------- ------------
Total revenues 34,043,219 30,033,175
-------------- ------------
Expenses:
Compensation and employee benefits 8,843,664 9,318,303
Occupancy and equipment 7,177,352 5,918,685
Professional and consulting fees 1,111,300 1,921,985
Communications and client networks 1,594,470 1,357,427
Marketing 333,561 1,649,145
Administrative fees paid to related parties 2,578,520 2,141,425
Non-cash business partner securities 705,027 406,403
Other 2,319,194 1,349,684
-------------- ------------
Total expenses 24,663,088 24,063,057
-------------- ------------
Income before (benefit) provision for income taxes 9,380,131 5,970,118
Income tax (benefit) provision (94,826) 114,000
-------------- ------------
Net income $ 9,474,957 $ 5,856,118
============== ============
Per share data:
Basic net income per share $ 0.17 $ 0.11
============== ============
Fully diluted net income per share $ 0.17 $ 0.10
============== ============
Basic weighted average shares of common stock
outstanding 55,096,194 54,987,309
============== ============
Fully diluted weighted average shares of common stock
outstanding 57,371,590 56,576,284
============== ============
See notes to the consolidated financials statements.
2
eSpeed, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2003 and March 31, 2002
(Unaudited)
For the three months ended
-------------------------------------
March 31, 2003 March 31, 2002
-------------- --------------
Cash flows from operating activities:
Net income $ 9,474,957 $ 5,856,118
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,963,410 2,369,833
Amortization of non-cash business partner securities 705,027 406,403
Equity in net (income) losses of certain unconsolidated investments 33,222 34,340
Non-cash issuance of securities under employee benefit plan 99,804 52,210
(Increase) decrease in operating assets:
Other assets (1,178,739) 243,890
Receivable from related parties (4,811,003) (1,302,791)
Decrease in operating liabilities:
Payable to related parties (16,129,217) (2,938,736)
Accounts payable and accrued liabilities (2,158,306) (1,174,778)
------------- -------------
Net cash (used in) provided by operating activities (10,000,845) 3,546,489
------------- -------------
Cash flows from investing activities:
Purchase of fixed assets (636,371) (2,307,439)
Sale of fixed assets 2,752,425 -
Capitalization of software development costs (3,203,694) (1,016,817)
Capitalization of patent defense costs (286,047) (1,187,826)
------------- -------------
Net cash used in investing activities (1,373,687) (4,512,082)
------------- -------------
Cash flows from financing activities:
Repurchase of Treasury stock (1,872,112) -
Proceeds from exercises of options 362,505 -
------------- -------------
Net cash used in financing activities (1,509,607) -
------------- -------------
Net decrease in cash and cash equivalents (12,884,139) (965,593)
------------- -------------
Cash and cash equivalents, beginning of period 187,998,899 159,898,608
------------- -------------
Cash and cash equivalents, end of period $175,114,760 $158,933,015
============= =============
See notes to the consolidated financial statements.
3
ESPEED, INC. AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: eSpeed, Inc. (eSpeed or, together with its wholly owned
subsidiaries, the Company) 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 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 commenced operations
on March 10, 1999 as a division of CFS. eSpeed is a Delaware corporation that
was incorporated on June 3, 1999. In December 1999, the Company completed its
initial public offering.
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. The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles (GAAP) requires
management to make estimates and assumptions that affect the reported amounts of
the assets and liabilities, revenues and expenses, and the disclosure of
contingent assets and liabilities in the consolidated financial statements.
Management believes that the estimates utilized in preparing the consolidated
financial statements are reasonable and prudent. Estimates, by their nature, are
based on judgment and available information. As such, actual results could
differ from the estimates included in these consolidated financial statements.
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 condensed 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, 2002. The consolidated statement of financial condition at
December 31, 2002 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 the current period presentation.
2. FIXED ASSETS
Fixed assets consist of the following: March 31, 2003 December 31, 2002
--------------------------------------
Computer and communication equipment $ 15,921,673 $ 20,050,177
Software, including software development costs 31,276,258 27,659,228
Leasehold improvements and other fixed assets 2,368,589 1,128,370
--------------------------------------
49,566,520 48,837,775
Less accumulated depreciation & amortization (25,011,488) (22,454,185)
--------------------------------------
Fixed assets, net $ 24,555,032 $ 26,383,590
======================================
On February 28, 2003, the Company sold to Cantor fixed assets with a net book
value of approximately $2.5 million pursuant to a sale-leaseback agreement. The
Company retains use of the assets and will be charged an amount under the
Administrative Services Agreement.
4
ESPEED, INC. AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INCOME TAXES
The provision (benefit) for income taxes consisted of:
For the three months ended
-----------------------------------------
March 31, 2003 March 31, 2002
--------------------- --------------------
(in thousands)
Current:
U.S. federal $ - $ -
U.S. state and local 141 114
Non- U.S. - -
--------------------- --------------------
141 114
Deferred (236) -
--------------------- --------------------
Provision (benefit) for income taxes $ (95) $ 114
===================== ====================
At March 31, 2003, the Company had net operating loss ("NOL") carryforwards for
income tax purposes of approximately $7,103,000.
The Company adjusted its valuation allowance against the deferred tax asset as
of the beginning of the quarter ended March 31, 2003 by $3,984,000 to reflect
management's estimate that it is more likely than not that all NOL carryforwards
will be utilized in the future.
The remaining valuation allowance of $12,742,000 at March 31, 2003 primarily
relates to non-deductible warrant expenses where there is significant
uncertainty as to realization. Additionally, tax benefits associated with
employee exercises in 2002 of stock options will serve to reduce taxes currently
payable. However, the valuation allowance has been increased by the $820,000 tax
benefit of such, which will be recorded to additional paid-in capital when
realized.
4. BUSINESS PARTNER TRANSACTIONS
Non-cash charges for the issuance of business partner securities in previously
disclosed transactions were as follows:
For the three months ended
------------------------------------
March 31, 2003 March 31, 2002
------------------------------------
Freedom $ 299,100 $ 299,100
Deutsche Bank 107,304 107,303
UBS 298,623 -
------------------------------------
$ 705,027 $ 406,403
====================================
There were no significant events or modifications impacting previously disclosed
business partner transactions during the quarter ended March 31, 2003. There
were no new business partner transactions executed in the quarter ended March
31, 2003.
5
ESPEED, INC. AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. 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 not permitted to be resold or
repledged. The fair value of such collateral at March 31, 2003 and December 31,
2002 totaled $175,057,367 and $189,588,910, respectively.
Investments in TradeSpark, L.P. ("Tradespark") and the limited partnership (the
"LP") that invested in Freedom International Brokerage ("Freedom") are accounted
for using the equity method. The carrying value of such related party
investments was $7,646,773 and $7,679,995 at March 31, 2003 and December 31,
2002, respectively, and is included in investments in the consolidated
statements of financial condition. For the three months ended March 31, 2003,
the Company's share of the net income of the LP was $10,251, and its share of
the net losses of TradeSpark was $64,903.
Under the Amended and Restated Joint Services Agreement between the Company and
Cantor and joint services agreements between the Company and TradeSpark,
Freedom, Municipal Partners, LLC ("MPLLC") and CO2e.com ("CO2e"), the Company
owns and operates the electronic trading system and is responsible for providing
electronic brokerage services, and Cantor, TradeSpark, Freedom, MPLLC or CO2e
provides 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, if a transaction is fully electronic, the Company
receives 65% of the aggregate transaction revenues and TradeSpark or Freedom
receives 35% of the transaction revenues. If TradeSpark or Freedom provides
voice-assisted brokerage services with respect to a transaction, then the
Company receives 35% of the revenues and TradeSpark or Freedom receives 65% of
the revenues. The Company and MPLLC each receive 50% of the fully electronic
revenues related to municipal bonds. The Company's agreement with CO2e provides
that it receives 50% of CO2e's fully electronic revenues and 15% of CO2e's
voice-assisted and open outcry revenues until December 2003, and 20% of voice-
assisted and open outcry revenues thereafter. In addition, the Company receives
25% of the net revenues from Cantor's gaming businesses.
Under those services agreements, the Company has agreed to provide Cantor,
TradeSpark, Freedom, MPLLC and CO2e 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, Freedom and MPLLC the actual direct and indirect
costs, including overhead, of providing such services and receives payment on a
monthly basis. These services are provided to CO2e at no additional cost other
than the revenue sharing arrangement set forth above. 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
three-month periods ended March 31, 2003 and 2002 totaling $2,578,520 and
$2,141,425, respectively. The services provided under both the Amended and
Restated Joint Services Agreement and the Administrative Services Agreement are
not the result of arm's-length negotiations because Cantor controls the Company.
As a result, the amounts charged for
6
ESPEED, INC. AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
In the second quarter of 2003, CFLP received $21,045,000 of insurance proceeds
in settlement for property damage related to the September 11 Events. Under its
$40,000,000 property insurance coverage jointly shared with CFLP, the Company is
entitled to up to approximately $20,000,000 of such amount as replacement assets
are purchased in the future.
Amounts due to or from related parties pursuant to the transactions described
above are non-interest bearing. As of March 31, 2003, receivables from
Tradespark, Freedom and MPLLC amounted to $186,208, $430,692 and $1,220,029,
respectively, and are included in receivable from related parties, net in the
consolidated statements of financial condition.
On February 28, 2003, the Company sold to Cantor fixed assets with a net book
value of approximately $2.5 million pursuant to a sale-leaseback agreement. The
Company retains use of the assets and will be charged an amount under the
Administrative Services Agreement.
6. EMPLOYEE SHARE TRANSACTIONS
The Company issued 7,439 shares of its Class A common stock valued at $116,569
as the Company's matching contribution to the eSpeed Inc. Deferral Plan for
Employees of Cantor Fitzgerald, L.P. and its Affiliates during the three months
ended March 31, 2003 with respect to employee contributions in 2002. The Company
issued 5,814 shares of its Class A common stock valued at $52,210 as the
Company's matching contribution during the three months ended March 31, 2002
with respect to employee contributions in 2001.
During the three month periods ended March 31, 2003 and 2002, the Company issued
options to purchase 5,000 and 225,000 shares, respectively, of its Class A
common stock to employees of the Company. The options were issued with exercise
prices equal to the market price of the underlying Class A common stock at the
date of grant. The options had been granted pursuant to the eSpeed, Inc. 1999
Long-Term Incentive Plan.
7. STOCK BASED COMPENSATION
Pursuant to guidelines contained in APB 25, the Company records no expense for
options issued to employees. Had the Company adopted the provisions of SFAS No.
123 "Accounting for Stock Based Compensation" (SFAS 123) and accounted for
employee stock option awards at fair value, the Company would have recognized
additional pre-tax compensation expense related to employee stock option awards
of $4,083,884 ($2,450,330 after tax) and $4,137,929 ($2,482,757 after tax) for
the three months ended March 31, 2003 and 2002, respectively. The following
table represents the effect had the Company accounted for the options in its
stock-based compensation plan based on the fair value of awards at grant date in
a manner consistent with the methodology of SFAS 123.
For the three months ended
-------------------------------------
March 31, 2003 March 31, 2002
-------------------------------------
Net Income $ 9,474,957 $ 5,856,118
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards granted, net of tax (2,450,330) (2,482,757)
-------------------------------------
Pro forma net income $ 7,024,627 $ 3,373,361
=====================================
Basic - as reported $ 0.17 $ 0.11
Basic - pro forma $ 0.13 $ 0.06
Fully diluted - as reported $ 0.17 $ 0.10
Fully diluted - pro forma $ 0.12 $ 0.06
7
ESPEED, INC. AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. 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 March 31, 2003, eSpeed Government Securities, Inc.'s liquid
capital of $114,095,931 was in excess of minimum requirements by $114,070,931.
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 March 31, 2003, eSpeed Securities, Inc. had net capital of
$7,020,808, which was $6,701,881 in excess of its required net capital, and
eSpeed Securities, Inc.'s net capital ratio was .68 to 1.
The regulatory requirements referred to above may restrict the Company's ability
to withdraw capital from its regulated subsidiaries.
9. 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, 2002.
10. SEGMENT AND GEOGRAPHIC DATA
SEGMENT INFORMATION: The Company currently operates its business in one segment,
that of operating interactive electronic business-to-business vertical
marketplaces for the trading of financial and non-financial products, licensing
software, and providing technology support services to Cantor and other related
and unrelated parties.
PRODUCT INFORMATION: The Company currently markets its services through the
following products: core products, including an integrated network engaged in
electronic trading in government securities in multiple marketplaces over the
eSpeed(R) system; new product rollouts, including introduction of products in
non-equity capital markets; products enhancement software, which enables clients
to engage in enhanced electronic trading of core products and future product
rollouts and, eSpeed Software SolutionsSM , which allows customers to use the
Company's intellectual property and trading expertise to build electronic
marketplaces and exchanges, develop customized trading interfaces and enable
real-time auctions and debt issuance. The majority of the Company's revenues
are from its core products.
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.
8
ESPEED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three months ended Three months ended
Transaction revenues: March 31, 2003 March 31, 2002
----------------------------------------------
Europe $ 7,036,051 $ 5,761,541
Asia 607,729 909,700
----------------------------------------------
Total Non-Americas 7,643,780 6,671,241
Americas 20,076,460 19,506,943
----------------------------------------------
Total $ 27,720,240 $ 26,178,184
==============================================
March 31, 2003 December 31, 2002
Average long-lived assets:
Europe $ 3,940,541 $ 5,576,717
Asia 334,320 387,632
----------------------------------------------
Total Non-Americas 4,274,861 5,964,349
Americas 21,428,299 17,536,681
----------------------------------------------
Total $ 25,703,160 $ 23,501,030
==============================================
9
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, 2002. 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 March 31, 2003.
10
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND MARCH 31, 2002
REVENUES
For the three months ended
-------------------------------------------
March 31, 2003 March 31, 2002
Transaction revenues with related parties
Fully electronic transactions $ 22,509,651 $ 21,588,338
Voice-assisted brokerage transactions 5,161,600 4,482,500
Screen-assisted open outcry transactions 48,989 107,346
-------------------- -------------------
Total transaction revenues with related parties 27,720,240 26,178,184
Software Solutions fees from related parties 3,649,267 2,855,689
Software Solutions and licensing fees from unrelated parties 2,131,442 298,315
Interest income from related parties 542,270 700,987
-------------------- -------------------
Total revenues $ 34,043,219 $ 30,033,175
==================== ===================
TRANSACTION REVENUES WITH RELATED PARTIES
We have entered into a Joint Services Agreement with Cantor under which we and
Cantor have agreed to collaborate to provide brokerage and related services to
clients in multiple electronic markets for transactions in securities and other
products. Under the Joint Services Agreement, as currently in effect, we are
responsible for providing electronic brokerage services, and Cantor provides
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.
Under this agreement, we and Cantor share revenues derived from transactions
effected in the marketplaces in which we collaborate and other specified
markets. The portion of the transaction revenues that we and Cantor receive is
based on several factors, including whether: (1) the marketplace is one in which
we collaborate with Cantor; (2) the transaction is fully electronic or Cantor
provides voice-assisted brokerage services; (3) the product traded is a
financial or other product; and (4) the product is traded on the Cantor
ExchangeSM. The percentage of the transaction revenues we receive ranges from
2.5% to 65%. However, in general, for fully electronic transactions, we receive
65% of the transaction revenues and Cantor receives 35% of the transaction
revenues; and for voice-assisted brokerage transactions, Cantor receives 93% of
the transaction revenues and we receive 7% of the transaction revenues. In
addition, if the transactions relate to a gaming business, we receive 25% of the
net trading revenues. We have agreed to provide to Cantor technology support
services at cost.
We have also entered into services agreements with TradeSpark, Freedom, MPLLC
and CO2e pursuant to which we provide the technology infrastructure for the
transactional and technology related elements of the TradeSpark, Freedom, MPLLC
and CO2e marketplaces, as well as certain other services, in exchange for
specified percentages of transaction revenues from the marketplaces. In general,
if a transaction is fully electronic, we receive 65% of the aggregate
transaction revenues and TradeSpark or Freedom receives 35% of the transaction
revenues. If TradeSpark or Freedom provides voice-assisted brokerage services
with respect to a transaction, then we receive 35% of the revenues and
TradeSpark or Freedom receives 65% of the revenues. We and MPLLC each receive
50% of the fully electronic revenues related to municipal bonds. Our agreement
with CO2e provides that we receive 50% of CO2e's fully electronic revenues and
15% of CO2e's voice-assisted and open outcry revenues until December 2003;
thereafter we will receive 20% of voice-assisted and open outcry revenues.
For the three months ended March 31, 2003, we earned transaction revenues with
related parties of $27,720,240, an increase of 6% as compared to transaction
revenues with related parties of $26,178,184 for the three months ended March
31, 2002. This increase resulted primarily from market conditions in Europe,
where market fluctuations drove increases in our European product volumes and
transactions counts. For the three months ended March 31, 2003, 81% of our
transaction revenues were generated from fully electronic transactions.
11
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.
SOFTWARE SOLUTIONS FEES FROM RELATED PARTIES
Under various services agreements, the Company has agreed to provide Cantor,
TradeSpark, Freedom, MPLLC and CO2e 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, Freedom and MPLLC the actual direct and indirect
costs, including overhead, of providing such services and receives payment on a
monthly basis. These services are provided to CO2e at no additional cost other
than the revenue sharing arrangement set forth above. 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. Software Solutions fees from related parties for the three
months ended March 31, 2003 were $3,649,267. This compares with Software
Solutions fees from related parties for the three months ended March 31, 2002 of
$2,855,689, an increase of 28%, principally due to an increase in demand for
our support services from Cantor.
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 March 31, 2003 were $2,131,442
as compared to Software Solutions and licensing fees from unrelated parties of
$298,315 for the three months ended March 31, 2002, an increase of 614%, 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 March 31, 2003, weighted average interest rates on
overnight reverse repurchase agreements were 1.2% as compared to 1.8% for the
three months ended March 31, 2002. As a result, we generated interest income
from related parties of $542,270 for the three months ended March 31, 2003 as
compared to $700,987 for the three months ended March 31, 2002, a decrease of
23%.
12
EXPENSES
For the three months ended
------------------------------------------
March 31, 2003 March 31, 2002
Compensation and employee benefits $ 8,843,664 $ 9,318,303
Occupancy and equipment 7,177,352 5,918,685
Professional and consulting fees 1,111,300 1,921,985
Communications and client networks 1,594,470 1,357,427
Marketing 333,561 1,649,145
Administrative fees paid to related parties 2,578,520 2,141,425
Non-cash business partner securities 705,027 406,403
Other 2,319,194 1,349,684
------------------ --------------
Total Expenses $ 24,663,088 $ 24,063,057
================== ==============
COMPENSATION AND EMPLOYEE BENEFITS
At March 31, 2003, we had 322 employees, which was an increase from the 274
employees we had at March 31, 2002. However, prior to the September 11 Events,
we had 492 employees. For the three months ended March 31, 2003, our
compensation costs were $8,843,664 as compared to compensation costs of
$9,318,303 for the three months ended March 31, 2002. This decrease in
compensation costs despite an increase in the number of employees resulted from
an increase in the percentage of time spent by certain employees on software
application development. The costs associated with such development are
capitalized and amortized over the associated application's estimated useful
life of three years.
Substantially all of our employees are full-time employees located predominately
in the New York metropolitan area and London. Compensation costs include
salaries, bonuses, payroll taxes and costs of employer-provided benefits for our
employees. We expect that our future compensation costs will increase depending,
in part, upon a variety of factors, including our incremental revenue growth.
OCCUPANCY AND EQUIPMENT
Occupancy and equipment costs were $7,177,352 for the three months ended March
31, 2003, an increase of 21% as compared to occupancy and equipment costs of
$5,918,685 for the three months ended March 31, 2002. The increase was primarily
caused by the occupancy and build-out of our temporary corporate headquarters in
New York City, which took place in the second quarter of 2002.
Occupancy expenditures primarily consist of the rent and facilities costs of our
offices in the New York metropolitan area and our offices in London and Tokyo.
We moved into our temporary corporate headquarters in New York City during the
second quarter of 2002. The lease for our temporary headquarters will expire in
February 2004, and at this time management is evaluating various location
alternatives. We anticipate that our occupancy costs will increase as we build
out our current space and add infrastructure. Although we believe that equipment
costs will increase in the future as we replace lost equipment, we anticipate
that such equipment costs will remain below those incurred prior to the
September 11 Events. We expect a portion of our capital expenditures to be
covered by insurance proceeds from our property and casualty insurance coverage.
PROFESSIONAL AND CONSULTING FEES
Professional and consulting fees were $1,111,300 for the three months ended
March 31, 2003 as compared to $1,921,985 for the three months ended March 31,
2002, a decrease of 42%, primarily due to a decrease in legal and contract
employee personnel costs.
13
COMMUNICATIONS AND CLIENT NETWORKS
Communications costs were $1,594,470 for the three months ended March 31, 2003
as compared to $1,357,427 for the three months ended March 31, 2002, a 17%
increase. The increase was principally due to a resumption of normal data and
telephone costs after a temporary decline caused by the September 11 Events.
Communication 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 continue
to increase in the near future as we continue to connect additional customers to
our network.
MARKETING
We incurred marketing expenses of $333,561 for the three months ended March 31,
2003 as compared to marketing expenses during the three months ended March 31,
2002 of $1,649,145, a decrease of 80%, resulting from a planned reduction in
marketing costs. Marketing expenses in the first quarter of 2002 were higher
primarily as the result of the development of a major 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 costs of
providing such services. Administrative fees paid to related parties amounted to
$2,578,520 for the three months ended March 31, 2003, a 20% increase over the
$2,141,425 of such fees for the three months ended March 31, 2002. Overall,
administrative fees decreased in the months following the September 11 Events as
compared to the months prior to the September 11 Events. We do not expect a
significant change in the level of future administrative fees paid to related
parties in 2003.
Administrative fees paid to related parties are dependent upon both the costs
incurred by Cantor and the portion of Cantor's administrative services that is
utilized by us.
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. Generally, this
expense is amortized over the term of the related agreement. Non-cash business
partner securities charges were $705,027 for the three months ended March 31,
2003, an increase of 73% as compared to non-cash business partner securities
charges of $406,403 for the three months ended March 31, 2002. This increase
resulted primarily from the amortization of the value of warrants issued under
an agreement executed with a business partner in August 2002. We believe period
to period comparisons are not meaningful as these transactions do not recur on a
regular basis. Note 4 of our consolidated financial statements in this Report on
Form 10-Q contains further details regarding the expense for non-cash business
partner securities.
OTHER EXPENSES
Other expenses consist primarily of recruitment fees, travel, amortization of
intangible assets, business-related insurance expense and promotional and
entertainment expenditures. For the three months ended March 31, 2003, other
expenses were $2,319,194, an increase of 72% as compared to other expenses of
$1,349,684 for the three months ended March 31, 2002, principally due to
increases in business-related insurance costs and an increase in the
amortization of intangible assets. Other expenses are expected to increase
primarily due to an increase in the amortization of capitalized legal fees
associated with the Wagner and other patents.
14
INCOME TAXES
We adjusted our valuation allowance against our deferred tax asset as
of the beginning of the quarter ended March 31, 2003 by $3,984,000 to reflect
management's estimate that it is more likely than not that all NOL carryforwards
will be utilized in the future. The credit for the adjustment to the valuation
allowance served to offset the tax provision on the current period's earnings to
reflect a net benefit for income taxes of $95,000 for the first quarter of 2003.
The tax provision in future periods is expected to be based on an estimated
effective tax rate of approximately 40%.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, we had cash and cash equivalents of $175.1 million, a
decrease of $12.9 million as compared to December 31, 2002. We used cash of
$10.0 million in our operating activities, consisting of net income after
non-cash items of $14.3 million net of $24.3 million of other changes ,
including the net reduction of liabilities. We also used net cash of $1.4
million resulting from purchases of fixed assets and intangible assets,
capitalization of software development costs and patent defense costs, offset by
proceeds from asset sales. In addition, we used $1.9 million to repurchase
Class A common stock.
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 Amended and Restated Joint Services Agreement, remits the amount owed to us.
In addition, we have entered into similar services agreements with TradeSpark,
Freedom, MPLLC and CO2e. Under the Administrative Services Agreement, the
Amended and Restated Joint Services Agreement and the services agreements with
TradeSpark, Freedom, MPLLC and CO2e any net receivable or payable is settled at
the discretion of the parties.
We anticipate that we will experience an increase in our capital expenditures
and lease commitments consistent with our anticipated growth in operations,
infrastructure, personnel and our anticipated move into a new headquarters. We
currently anticipate that we will continue to experience growth in our operating
expenses for the foreseeable future and that our operating expenses will be a
material use of our cash resources. Our property and casualty insurance coverage
may mitigate our capital expenditures for the near term.
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 March 31, 2003, we had invested $173.7 million of our cash in securities
purchased under reverse repurchase agreements, which are fully collateralized
by U.S. Government securities held in a custodial account at JP Morgan Chase.
These reverse repurchase agreements have an overnight maturity and, as such, are
highly liquid. We generally 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.
15
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 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
Cantor Fitzgerald Securities, 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. Of the $139.6 million raised,
approximately $8.9 million has been used to fund investments in various
entities, approximately $63.5 million has been used to acquire fixed assets and
to pay for the development of capitalized software, approximately $23.0 million
has been used to purchase intangible assets and pay for the defense of patents,
and approximately $8.2 million has been used for other working capital purposes.
The remaining $36 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 March 31, 2003, approximately $29.7
million has been paid to Cantor under the Administrative Services Agreement
between Cantor and us.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit No. Description
- ----------- -----------
99 Certification by the Chief Executive Officer and Chief
Financial Officer Relating to a Periodic Report
Containing Financial Statements
(b) Reports on Form 8-K.
We filed a Current Report on Form 8-K on May 13, 2003 under Item 9 of
Form 8-K in satisfaction of the requirements of "Item 12. Disclosure of Results
of Operations and Financial Condition," where the Company announced its
preliminary operating statistics for the quarter ended March 31, 2003.
16
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: May 15, 2003
17
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 officer 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 officer 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
functions):
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 officer and I have
indicated in this quarterly report whether there were
significant changes in internal controls or in the 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: May 15, 2003
/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 officer 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 officer 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
functions):
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 officer and I have
indicated in this quarterly report whether there were
significant changes in internal controls or in the 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: May 15, 2003
/s/ Jeffrey M. Chertoff
----------------------------------------
Jeffrey M. Chertoff
Senior Vice President and Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
99 Certification by the Chief Executive Officer and Chief
-- Financial Officer Relating to a Periodic Report
Containing Financial Statements