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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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
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eSpeed, Inc.
(Exact name of Registrant as Specified in Its Charter)
Delaware 13-4063515
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation)
One World Trade Center, 103rd Floor, New York, NY 10048
(Address of Principal Executive Offices) (Zip Code)
(212) 938-3773
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b)of the Act:
Title of Each Class Name of Each Exchange on which Registered
None None
Securities registered pursuant to Section 12(g)of the Act:
Class A Common Stock, $. 01 par value
(Title of Class)
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Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
The aggregate market value of voting common equity held by
non-affiliates of the registrant, based upon the closing price of the Class A
common stock on February 8, 2001 as reported on the Nasdaq National Market, was
approximately $454,732,663.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at February 8, 2001
Class A Common Stock, par value $.01 per share 19,159,612 shares
Class B Common Stock, par value $.01 per share 32,724,600 shares
DOCUMENTS INCORPORATED BY REFERENCE.
None.
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eSPEED, INC.
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
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PART I
ITEM 1. BUSINESS........................................................1
Item 2. PROPERTIES.....................................................33
ITEM 3. LEGAL PROCEEDINGS..............................................35
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............36
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................37
ITEM 6. SELECTED FINANCIAL DATA........................................39
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................41
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK....................................................50
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................74
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............75
ITEM 11. EXECUTIVE COMPENSATION.........................................79
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.....................................................83
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................87
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K....................................................94
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PART I
ITEM 1. BUSINESS
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, those discussed elsewhere in this
report in the section entitled "Risk Factors."
OVERVIEW OF OUR BUSINESS
We are a leading provider of business-to-business electronic marketplace
solutions. We host and operate electronic marketplaces and real-time auctions
and license software to market participants through our fully-integrated network
and over the Internet. Our products enable market participants to transact
business instantaneously, more effectively and at lower cost. In 2000, we
processed over 3 million electronic transactions, totaling more than $32
trillion of transactional volume. During the past year, we added over 35 new
products to our electronic marketplaces, entered into key software licensing
agreements and more than tripled our revenues. We have over 650 clients,
including the largest fixed income trading firms and leading natural gas and
electricity trading firms in the world. We have offices in the U.S., Europe,
Asia and Canada.
We believe we offer one of the most robust, large-scale, instantaneous and
reliable transaction processing systems. Our global private network permits
market participants to view information and execute transactions in a fraction
of a second. Our proprietary software provides an end-to-end solution, including
front-end applications, transaction processing engines, credit and risk
management tools and back-office and clearance modules, enabling
straight-through processing.
Our revenues consist primarily of transaction fees, software licensing fees and
system services fees. We do not risk our own capital in transactions or extend
credit to market participants.
Our eSpeed(sm) system is accessible to our clients through (1) our proprietary
application programming interface, or API, our dedicated front-end software
application, (2) via the Internet through a browser interface or Java applet and
(3) front-end trading systems developed by third-party software companies. Our
system runs on large-scale hardware located in three data centers located in the
U.S. and Europe and is distributed either over our global network or via the
Internet through links to multiple, global Internet service providers.
Additionally, our system operates a fully regulated U.S. futures exchange
currently known as the Cantor Exchange(sm). This exchange is the first fully
electronic futures exchange in the U.S. and serves as our platform for the
electronic trading of a broad range of futures contracts globally. The New York
Board of Trade, through its subsidiaries, provides clearing and regulatory
services and we provide electronic execution and related services for the Cantor
Exchange(sm). Currently, the Cantor Exchange(sm) has obtained regulatory
authority to operate in the United Kingdom, Denmark, Finland, France, Hong Kong,
Ireland, Italy, Japan, Norway, Portugal and in eight German states.
We market our services through the following three basic products: eSpeed
Markets(sm), eSpeed Private Label(sm) and eSpeed Online(sm).
o eSpeed Markets(sm) is a full service solution combining all of our
proprietary software and our global high-speed private network. eSpeed
Markets(sm) currently operates in some of the largest and most complex
marketplaces, and is designed to be extendible to any multiple buyer,
multiple seller marketplace. eSpeed Web Markets(sm) offers the core
features of eSpeed Markets(sm) through a complete Internet-only
distribution channel.
o eSpeed Private Label(sm) provides a complete outsourced solution to our
clients to enable them to distribute their branded products to their
customers through online offerings, auctions, including private and
reverse auctions, and request-for-quote capabilities.
o eSpeed Online(sm) provides retail-based e-commerce businesses with online
access to wholesale market participants. It enables them to offer their
customers access to a variety of markets that are traditionally available
only to institutional investors and wholesalers.
Our objective is to be the world's leading provider of interactive electronic
marketplaces and related software solutions. We believe that the scalability and
extendibility of our eSpeed(sm) suite of products enable us to introduce new
markets and distribute products and services more quickly, cost effectively and
seamlessly than our competitors.
We commenced operations in March 1999 as a division of Cantor Fitzgerald
Securities, a subsidiary of Cantor Fitzgerald, L.P. Our initial focus was the
global fixed income, foreign exchange and futures and options trading markets,
which we refer to as the Financial Vertical. Our relationship with Cantor, a
leading global inter-dealer broker in the fixed income markets, has enabled us
to become the leader in this electronic marketplace. In the last year, we have
significantly expanded the types of products traded electronically through our
eSpeed(sm) system. Our goal is to offer the full range of financial products
currently traded in today's global markets. In 2000, we entered the North
American energy market with a group of leading energy industry partners. We plan
to serve additional marketplaces, which we refer to as vertical marketplaces,
including global energy, bandwidth, telecommunications, chemicals, electronic
components, metals and other markets that can benefit from more efficient,
centralized, electronic trading facilities. We also plan to leverage our
electronic marketplace expertise and reputation to sell software products and
services directly to participants in these marketplaces.
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OUR INDUSTRY
Historically, the trading of products has been an inefficient process. Buying,
selling or trading activity is traditionally effected through either (1) a
central physical location, like a trading pit or auction house, where market
participants have to access the market through this central location, (2) a
broker or bilateral arrangement with a buyer or seller or (3) several layers of
middlemen and salesmen who assist in handling orders. Each of these approaches
is people and time intensive, which adds to the direct and indirect cost of the
product bought or sold.
Additional inefficiencies with transaction execution include lack of real-time
price information, small disparate groups of interested buyers and sellers,
limited liquidity and problems associated with executing trades as market prices
change. As more transactions occur and participants extend credit to each other,
there are added risks to both buyers and sellers because of the lack of
sophisticated risk management tools. Also, after a buy or sell order is
executed, there are the additional tasks of recording, accounting, tracking,
delivering and financially settling the transaction. Each of these tasks, if
done manually, can add potential cost and error to the process as additional
participants or systems enter the transaction cycle.
Electronic marketplaces have emerged as effective means of conducting
business-to-business transactions. In an electronic marketplace, substantially
all of the participants' actions are facilitated through an electronic medium,
such as a private electronic network or over the Internet, which effectively
eliminates the need for actual face-to-face or voice-to-voice participant
interaction, reducing the inefficiencies inherent in a physical market.
Additionally, as adoption of the Internet has become more widespread, businesses
are recognizing online channels as an efficient means of distribution of their
products to their customers.
Many financial exchanges worldwide, including certain exchanges in France,
Germany, Japan, Sweden, Switzerland and the United Kingdom, are now partially or
completely electronic. Various electronic marketplaces have been implemented to
address the varied needs of the broad business-to-business initiatives,
including marketplaces aimed at the procurement of finished goods or services,
as well as neutral marketplaces for the trading of commodity or commodity-like
goods. We believe the trading of commodity-like products will require
capabilities found in the financial markets, including real-time pricing,
futures and other hedging capabilities and robust interactive trading.
Additionally, we believe companies will seek to outsource online solutions for
the electronic distribution of their products to avoid the difficulty and cost
of developing and maintaining their own online solutions.
OUR SOLUTION
Our electronic marketplace end-to-end solution includes real-time and auction-
based transaction processing, credit and risk management tools and back-end
processing and billing systems, all accessible through our global privately
managed high-speed data network and over the Internet. Because of the scale and
adaptability of our system, our eSpeed(sm) products have applications across a
broad range of companies, industries and vertical marketplaces, including any
business-to-business marketplace involving multiple buyers and multiple sellers.
In addition, we license
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our software to provide a complete outsourced solution to our clients enabling
them to distribute their branded products to their customers through online
offerings and auctions, including private and reverse auctions, and
request-for-quote capabilities. Our products enable market participants to
transact business instantaneously, more effectively and at lower cost.
OUR TECHNOLOGY PLATFORM
Our electronic marketplace solutions operate on our technology platform that
emphasizes scalability, performance, adaptability and reliability. Our
technology platform consists of:
o our proprietary, internally developed real-time global network distribution
system;
o our proprietary transaction processing software, which includes order
matching auction engines, fully integrated credit and risk management
systems, pricing engines and associated middle and back-office operations
systems;
o client interfaces ranging from Windows, Java, UNIX, our proprietary static
library API and proprietary vendor access; and
o customized inventory distribution and auction protocols designed to be used
by our clients and partners in their distribution and trading systems.
Together, these components enable our clients to effect transactions in real-
time, with straight-through processing.
Network distribution system
Our eSpeed(sm) system contains a proprietary hub- and-spoke digital network.
This network uses Cisco Systems' network architecture and is operated by
Cisco-certified engineers. Our network's high-speed points of presence comprise
the major business centers of the world, including New York, London, Tokyo,
Frankfurt, Paris, Milan, Chicago, Los Angeles and Toronto. Altogether, we manage
22 hubs linked by over 50,000 miles of cable, over 1,000 Cisco network devices
and more than 450 high capacity Sun super servers and Compaq Alpha super servers
located in three data centers in New York, London and Rochelle Park, New Jersey.
The redundant structure of our system provides multiple backup paths and
re-routing of data transmission if one spoke of a hub fails. We believe we
operate one of the largest and most robust interactive trading network
distribution systems currently in operation.
Our distribution system accepts orders and postings instantaneously and
distributes responses, generally in 300 milliseconds. We estimate that our
network is currently running at approximately 15% of capacity.
In addition to our own network system, we also receive and distribute secure
trading information from clients using the services of multiple, major Internet
service providers throughout the
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world. These connections enable us to offer our products and services via the
Internet to our global clients.
Transaction processing software
Most of our software applications have been developed internally and are central
to the success of our eSpeed(sm) system. Our auction and trading engines operate
in real time, facilitating efficient interaction between buyers and sellers. Our
credit and risk management systems monitor and regulate these buyers and
sellers. Our pricing engines provide prices for illiquid financial products
derived from multiple trades in other related financial instruments. These
critical applications work together seamlessly and are supported by middle and
back office software that verifies, confirms, reports, stores, tracks and, if
applicable, enables the settlement of each transaction. Our transaction
processing software includes verification mechanisms at various stages of the
execution process, which result in significantly reduced manual intervention,
decreased probability of erroneous trades and more accurate execution for
clients.
eSpeed(sm) transaction engines
Our auction and transaction engines use Interactive Matching(sm), our
proprietary rules-based method, to process in excess of 150 transactions per
second per auction, instrument or product. These engines were developed to
support trading in the largest capital markets in the world, such as government
bonds and futures contracts, and the more diverse, fragmented and database
intensive markets, such as U.S. municipal bonds (with over 1.7 million different
issues), corporate bonds and Eurobonds. These transaction engines are designed
to be modular and flexible to allow modification in order to apply them to other
markets and auction types. In Europe, for example, we have added a component
that allows us to process transactions and auctions in multiple currencies
simultaneously. Our transaction engines have embedded security features and an
added messaging layer to provide security from unauthorized use. In addition, we
use encryption to protect our clients that transact business over the Internet.
We believe our marketplace expertise and rules-based systems provide incentives
for clients to actively participate in our marketplaces. For example,
Interactive Matching(sm) provides incentives to participate in our marketplaces
by encouraging participants to expose their orders to the market. In standard
auctions, the incentive is for participants to wait until the last moment to
make a bid or offer. Our priority rules encourage trading activity by giving the
last successful active participant a time-based right of first refusal on the
next sale or purchase. In addition, in many markets we have structured our
pricing policy to provide incentives. The party that provides auction products
for the market or creates liquidity (by inputting a price to buy or sell) pays
less commission (or no commission) than the participant that consummates the
trade by acting on that price. With our pricing policies and proprietary
priority rules, our system is designed to increase activity and to draw
participants into the market. This proprietary rules-based system is adaptable
and, as part of our business strategy, we intend to apply it across other
non-financial markets for multiple products and services.
eSpeed Credit Master(sm) - credit and risk management systems
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Our credit and risk management systems are critical to the operation of our
electronic marketplaces. These systems (1) continuously monitor trades of our
clients to help prevent them from exceeding their credit limits, (2)
automatically prevent further trading once a client has reached a pre-determined
credit limit and (3) evaluate transactions and calculate both individual
positions and risk exposure across various products and credit limits. Our
proprietary credit and risk management systems can also be made available to our
global clients to enable them to monitor the position of their traders and are
integrated with our private label systems so our global clients can monitor the
credit of their customers who transact directly with them online. These systems
store client data relevant to credit and risk management, such as financial
statements, credit documents, contacts and internal analyses. These systems also
enable our clients to make our electronic marketplaces available to their
customers while maintaining control of their customers' trading activity and
risk.
eSpeed Name Give-Up Matrix(sm) - credit monitoring
Through the use of our name give-up matrix, we enable our market participants to
create counterparty credit exposure limits to manage the counterparties with
which they transact in non-central counterparty markets. In these markets,
participants settle transactions directly with other participants. Using this
module, the participants can pre-select the counterparties that they are willing
to transact with in that market. The module displays all prices to market
participants, and highlights and enables execution on prices that are from
approved counterparties. Additionally, the module has features that permit each
participant to manage the activities of its traders on a real-time basis.
eSpeed(sm) pricing engines and analytics
We have developed a number of analytical software tools that permit us to price
products that trade in less liquid markets and for which current pricing
information is not readily available. For example, our MOLE(sm) system (Multiple
Order Link Engine) is a computer application that enables us to link multiple
markets, offer prices and create and enhance marketplaces for products that have
limited liquidity. In the Financial Vertical, MOLE(sm) currently uses data from
existing cash and futures markets to calculate pricing for transactions where no
market prices currently exist, thereby facilitating liquidity. These
multi-variable trades are extremely difficult to execute in voice-based markets
due to their complexity and the slow speed of manual execution.
eSpeed(sm) middle and back-office applications
Our middle and back-office applications support clearance, settlement, tracking
and reporting of trades and provide links to outside clearing entities. For
example, in the financial markets, we outsource our fulfillment services to
Cantor, where both parties to a trade send either cash or securities to Cantor
and Cantor settles the trade and sends each party the cash or securities due.
Our reporting and accounting systems are designed to track and record all
charges and commissions for a trade. Our eSpeed(sm) system and products automate
previously paper and
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telephone-based transaction processing, confirmation and other functions,
substantially improving and reducing the cost of many of our clients' back
offices, and enabling straight-through processing.
Client interfaces
Our system can be accessed by our clients in four ways:
o using our eSpeed(sm) proprietary front-end trading software;
o using our application programming interface for clients to write their own
software linking their networks and software applications directly to our
systems. Our application programming interface enables clients to conduct
computer price updating, program trading and straight-through processing;
o through the Web via a browser, or using a downloaded Java application or
dedicated proprietary software application via the Internet, both for
wholesale clients and for retail clients who participate in our
marketplaces; and
o through software developed in alliances with third-party independent
software vendors.
eSPEED(sm) PRODUCTS
We market our services through the following three products: eSpeed Markets(sm),
eSpeed Private Label(sm) and eSpeed Online(sm).
eSpeed Markets(sm)
eSpeed Markets(sm) is a full service solution combining all of our proprietary
software and our global high-speed private network. eSpeed Markets(sm) currently
operates in some of the largest and most complex marketplaces, and is designed
to be extendible to any multiple buyer, multiple seller marketplace. eSpeed Web
Markets(sm) offers the core features of eSpeed Markets(sm) with a complete
Internet-only distribution channel.
eSpeed Markets(sm) enables us to operate what we believe is the only integrated
network engaged in electronic trading in multiple products and marketplaces on a
global basis. We believe that the time and expense required to develop and
install electronic trading networks will serve as a significant barrier to
entry.
Financial Vertical
Wholesale fixed income. The global fixed income market is the largest financial
market in the world. The Bond Market Association estimates that in the U.S.
alone, as of the second quarter of 2000, there were over $15 trillion of fixed
income securities outstanding with over $360 billion of volume traded daily. In
the U.S. Treasury securities market, there is reported to be over $200
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billion a day in trading just among the primary dealers and their clients. In
Europe, Asia and the emerging markets, there were approximately $16 trillion of
fixed income securities outstanding at December 31, 1999. In Europe, the
creation of the Euro has manifested a market second only to the U.S. in breadth.
In Asia, the Japanese government bond market grew 44.6%, from $2.8 trillion
outstanding in 1997 to $4.1 trillion outstanding in 1999. The global market for
interest rate swaps, interest rate options and currency swaps had over $60
trillion in notional value outstanding as of June 2000.
Foreign exchange. The trading of currencies in all monetary pairs represents the
largest trading volume market in the world. The Bank for International
Settlements estimates the daily volume traded in the foreign exchange markets to
have been $1.97 trillion in 1999.
Futures and options. Futures and options trading is a leading financial activity
throughout the world, with contracts traded on a wide variety of financial
instruments, commodities and indexes. According to the Futures Industry
Association, Inc., in 2000, over 1.4 billion futures contracts and over 1.5
billion options contracts were traded in the world's futures and options
markets. Currently, most futures trading is still being done on open outcry
exchanges, but there has been a significant movement towards the conversion of
these markets to electronic trading. To date, we believe the most successful
initiatives have been made in Europe. We believe that there is significant
opportunity in the continued conversion of these markets to electronic networks,
such as our own.
Limitations of the traditional financial market
While the traditional financial market facilitates trading, it has significant
shortcomings such as the following:
o limited direct access and, therefore, many investors may not receive
efficient pricing;
o high transaction costs and slow execution due to the number of people
involved in a voice transaction;
o difficulty in implementing program trading, especially programs designed to
automatically and simultaneously execute multiple trades in different, but
related products;
o significant expense incurred in processing, confirming and clearing manual
processes; and
o compliance and regulatory risk associated with voice transactions and non-
automated audit trails.
Our Financial Vertical solution
The Financial Vertical contains many of Cantor's largest marketplaces, including
U.S. Treasury and agency securities, European, Japanese, Canadian and emerging
market sovereign bonds, U.S. and global corporate bonds, mortgage-backed
securities, municipal bonds, interest rate
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swaps and options, futures, options, repos and basis trades. Cantor is a major
facilitator and, in some cases, provider of liquidity in numerous financial
products through its offices in the U.S., Canada, Europe and Asia. Our eSpeed
Markets(sm) product provides the only way to electronically access Cantor's
marketplaces. Our eSpeed Markets(sm) product also will power the electronic
platform of Freedom International Brokerage, the leading inter-dealer broker of
Canadian fixed income products, foregin exchanges and other capital producs,
upon the closing of our recent alliance with Freedom, Cantor and six leading
financial institutions.
Our private electronic network for wholesale financial markets is connected to
most of the largest financial institutions worldwide. We have installed in the
offices of our existing client base the technology infrastructure necessary to
provide price information and trade execution on an instantaneous basis in a
broad range of securities and financial instruments. We believe our eSpeed(sm)
suite of products enables us to introduce and distribute a broad mix of
financial products and services quickly, efficiently and at lower cost.
In our electronic marketplaces, participants may either electronically execute
trades themselves or call brokers, who then input trade orders into the market
for them. In a fully electronic trade, all stages of the trade occur
electronically. The participant inputs its buy or sell order instructions
directly into our electronic trading system using our software, a web-browser,
or electronically through an application programming interface or other
software. Our system provides to the participant, normally within 300
milliseconds, an on-screen confirmation that the participant's order has been
accepted. Simultaneously, an electronic confirmation can be sent to the
participant's back office and risk system, enabling risk management capabilities
and straight-through processing for the participant. A broker assisted trade is
executed in substantially the same manner as an electronic trade, except that
the participant telephones a broker, who then inputs the participant's order
into our electronic marketplace system.
Energy Vertical
In September 2000, we, together with Coral Energy Holding (an affiliate of
Shell), Dominion Energy, Dynegy, Koch Energy Trading, TXU Energy Trading,
Williams Energy Marketing & Trading and Cantor, announced the formation of
TradeSpark, a new comprehensive energy marketplace. TradeSpark was created as a
wholesale marketplace for energy-related products and services in North America
with both electronic trading systems and voice brokers. As part of our
arrangement with TradeSpark, we have implemented electronic marketplaces for
natural gas, electricity, coal, weather derivatives and emission allowances. It
is the intention of TradeSpark to provide the full spectrum of energy-related
tradable instruments, including cash, spot, forward, futures, indices and data
sales.
TradeSpark unites our technology platform, accessed over both a private global
network and the Internet, and our partners' in-depth energy market knowledge and
liquidity to bring speed, neutrality, efficiency and technological leadership to
the energy trading market.
Since inception, over 120 companies, including most of the major energy trading
firms in North America, have traded using TradeSpark. We effected over 12,500
transactions comprising over
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$16 billion of transaction volume since TradeSpark's inception. Gas Daily
reports that the TradeSpark partners, together with Dynegy and Entergy, traded
approximately 32.8 billion cubic feet of natural gas per day and Power Markets
Week reports that these companies traded 403 million megawatt hours of
electricity during 2000. These companies estimate they traded roughly 20% of all
gas and power traded in North America during the last quarter of 2000. Forrester
Research predicts that, by 2004, online sales of natural gas will total $166
billion, representing 25% of all natural gas sales, and online sales of
electricity will total $101 billion, or 11% of all electricity sales.
Limitations affecting the traditional energy market
The traditional voice-brokered energy marketplace has been fraught with
inefficiencies, including the lack of real-time price information, small pools
of liquidity, high transaction costs and problems associated with executing
trades in a fast moving market. More recently, credit has become a major issue
to the market participants because of massive price fluctuations caused by
various states' approaches to deregulation, the lack of a liquid hedging market
and limited risk management tools. While there have been a handful of electronic
systems and single dealer platforms initiated over the past three years, we
believe that none have unbiased information about prices and enough products or
liquidity to give companies exchange-like execution in the energy marketplace.
Our Energy Vertical solution
Powered by our full trading platform encompassed in eSpeed Markets(sm),
TradeSpark offers an end-to-end marketplace and trading solution that includes
real-time and auction-based transaction processing, risk management tools and
back-end processing systems, as well as access to a fully registered futures
exchange, allowing for the creation of futures and options products for this
marketplace.
Designed to bring marketplace efficiency to the energy markets, TradeSpark is
fully operational and employs approximately 50 brokerage personnel with access
to eSpeed's electronic trading platform. TradeSpark offers three possible points
of access to one pool of liquidity: over the Internet, through eSpeed's private
network and through TradeSpark voice brokers.
eSpeed Private Label(sm)
eSpeed Private Label(sm) provides a complete outsourced solution to our clients,
enabling them to distribute their branded products to their customers through
online offerings and auctions, including private and reverse auctions, and
request-for-quote capabilities. Our eSpeed Private Label(sm) product takes
advantage of the scalability, flexibility and functionality of our eSpeed(sm)
system to allow our clients to quickly create online connectivity to their
customers.
We have signed private label agreements with Visible Markets, Sanwa Securities
and the Federal Home Loan Bank. Visible Markets is the first browser-based
auction marketplace for mortgage-backed securities, asset-backed securities and
investment grade corporate bonds. eSpeed Private
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Label(sm) will supplement Visible Markets' existing online, auction-based
marketplace for less liquid fixed income products. Sanwa Securities is the
securities subsidiary of Sanwa Bank, one of the largest financial institutions
in Japan. We expect that the first product that Sanwa will transact with its
customers through our real-time technology platform will be Japanese government
bonds. The Federal Home Loan Bank is a U.S. Government sponsored enterprise and
one of the largest issuers in the global short-term securities market. Our
electronic auction- based technology will power the Federal Home Loan Bank's
primary discount note auctions.
eSpeed Online(sm)
eSpeed Online(sm) provides retail-based e-commerce businesses with online access
to wholesale market participants. It enables these online businesses to offer
their customers access to a variety of markets that are traditionally available
only to institutional investors and wholesalers. eSpeed Online(sm) also links to
middle and back-office systems, providing a complete end-to-end retail solution
for trade execution, risk management, processing and billing. To date, we have
signed agreements with 13 online brokers, including AB Watley, Bondpage.com,
Charles Schwab, Firstrade Securities, MostActives.com, Mr. Stock, Muriel
Siebert, myTrack, Scot Trade, Sutton Online, The Net Investor, Tradescape and
WebStreet Securities. On January 2, 2001, Charles Schwab & Co. introduced U.S.
Treasuries and Agency securities to its customer base through eSpeed Online(sm).
Technological advances have created new and inexpensive means for individual
investors to directly access markets online and participate in the securities
markets. According to Forrester Research, the number of active online accounts
grew from approximately 1.5 million at the end of 1996 to over 8.6 million at
the end of 1999, representing $806.0 billion in assets. Despite the growth in
online accounts and access to public equity markets, there has been very limited
access for retail Internet trading in fixed income securities, futures, options
and other wholesale financial instruments at cost-effective pricing and spreads.
We believe that the emergence of electronic marketplaces that promote greater
liquidity, enhanced access and more efficient pricing will increase trading
among retail investors in financial and other products other than equities. We
believe that companies will increasingly seek an outsourced solution to
distribute their products electronically.
OUR GROWTH STRATEGY
Our objective is to be the world's leading provider of interactive electronic
marketplaces and related software solutions to a broad range of industries and
vertical marketplaces. We believe we can extend our expertise in the creation of
instantaneous electronic marketplaces to a broad range of products and services.
Our growth strategy to achieve this objective includes the following key
elements:
Expand system functionality and develop new products, software and services for
our existing financial and energy markets
-11-
We plan to continue to expand the types of financial, energy and other products
traded in our marketplaces both in the United States and abroad. Our goal is to
include in our electronic marketplaces the full range of products, including
futures, options and other derivatives of these products, that are currently
traded in today's markets worldwide. In addition, we plan to develop software
and services to add new methods to effect transactions in these products. We
expect that our traditional client base will begin to trade new products as we
develop electronic marketplaces for them, and we intend to continue to convert
existing clients to our fully electronic platform.
Leverage our eSpeed(sm) system for use in a wide range of additional business-
to-business markets and industries
Because of the scale of our system and its ease of adaptability, we believe our
eSpeed(sm) system has applications across a broad range of products, including
Internet-based marketplaces for a wide array of goods and services, particularly
those involving multiple buyers and sellers. As evidenced by the formation of
TradeSpark, we are well positioned to leverage the significant costs and efforts
that have been incurred developing our eSpeed(sm) system to quickly create
electronic markets in a wide range of products. We plan to serve additional
marketplaces, including global energy, bandwidth, telecommunications, chemicals,
electronic components, metals and other markets that can benefit from more
efficient, centralized, electronic trading facilities.
License our software to provide a broad range of market participants with an
outsourced solution for online distribution of their products
We provide a complete outsourced solution to our clients to enable them to
distribute their branded products to their customers through online offerings,
auctions, including private and reverse auctions, and request-for-quote
capabilities. We have a dedicated sales force that focuses on licensing our
software solutions to existing and new clients.
Pursue strategic alliances and acquisitions
We are continually exploring opportunities to maximize our growth, including
acquisitions, strategic alliances, joint ventures, private placements,
recapitalizations or any combination of the foregoing, to expand our vertical
markets and generate future growth. We are seeking to enter into joint ventures
and other strategic alliances to create liquidity in new and existing product
markets, and to attract new participants to trade those products. We have
employed this strategy in our recent formation of TradeSpark and our alliance
with Freedom.
OUR CLIENTS
Our clients in the Financial Vertical include banks, dealers, brokers and other
wholesale market participants, over 500 of which currently participate in our
electronic marketplaces, including the 25 largest bond trading firms in the
world, as identified by Euromoney Magazine. Our clients in the Energy Vertical
include energy trading companies, utilities and other wholesale market
-12-
participants, over 120 of which currently participate in our electronic
marketplace, including leading North American energy trading companies.
We are providing wholesale and retail investors access to the electronic
marketplaces and brokerage-related services supported by our eSpeed(sm) system.
We expect that a significant portion of our clients who use brokers will migrate
to fully electronic access over the coming years. We also expect to add clients
for our eSpeed Private Label(sm) product from a wide variety of industries. We
further intend to provide third parties with the infrastructure, including
systems administration, internal network support and operations and disaster
recovery services, that is critical to providing fully electronic marketplaces
in a wide variety of products. Other than Cantor, no client of ours accounts for
more than 10% of our revenues.
SALES, MARKETING AND CORPORATE DEVELOPMENT
We promote our electronic marketplaces and services to our existing and
prospective clients through a combination of sales, marketing and co-marketing
campaigns. We leverage our client relationships through a variety of direct
marketing and sales initiatives and build and enhance our brand image through
marketing campaigns targeted at a diverse audience, including traders, potential
partners and the investor and press communities. We market to our existing and
prospective retail clients through a variety of co-marketing/co- branding
initiatives with our online partners. We have designed our sales and marketing
efforts to promote brand awareness and educate our audience regarding the nature
of our electronic marketplaces, products and services and the advantages
associated with the automation of trading activities. We have a team of over 60
sales and marketing personnel globally.
Additionally, our senior management and our corporate development staff actively
work to establish strategic relationships, develop new markets for our
technology and structure and execute investments and acquisitions. They promote
eSpeed at conferences, conventions, events and speaking engagements that advance
both our technology and our brand name. In many cases, these engagements are
focused within specific vertical markets that we intend to develop in the
future. All of these efforts are intended to enhance our image, profile and
profitability.
SOFTWARE DEVELOPMENT
We devote substantial efforts to the development and improvement of our
electronic marketplaces and licensed software products. We work with our clients
to identify their specific requirements and make modifications to our software,
network distribution systems and technologies that are responsive to those
needs. Our research and development efforts focus on internal development,
strategic partnering, acquisitions and licensing. We have approximately 400
technology professionals, of which 225 persons are software developers. Our
technology team's objective is to develop new products and services in order to
provide superior electronic marketplace solutions to our clients. We also focus
our efforts on enhancing our Internet interfaces to facilitate real-time markets
and comply with the standard Internet security protocol and future security
protocols in order to capitalize on the development of new commercial
marketplaces. We are continuing to develop new marketplaces and products using
our internally
-13-
developed application software. In addition, we have forged strategic alliances
with third-party independent software vendors through which we will work to
develop sophisticated, front-end applications and products.
COMPETITION
The development and operation of electronic marketplaces are evolving. As a
result, competition in these marketplaces is currently fragmented. We expect to
face competition from a number of different sources varying in size, business
objectives and strategy.
Our current and prospective competitors are numerous and include inter-dealer
brokerage firms, market data and information vendors, securities and futures
exchanges, electronic communications networks, crossing systems, consortia,
business-to-business marketplace infrastructure and software companies and niche
energy market and other commodity business-to-business Internet-based trading
systems.
The electronic marketplace solutions we provide to our clients enable them to
expand the range of services they provide to their ultimate customers, which are
also potential participants in our electronic marketplaces. We intend to
structure our relationships with our clients and conduct our operations to
mitigate the potential for this competition. We do not intend to use the access
to the customer base of our clients that we obtain in providing our electronic
marketplace solutions to compete with these clients in other product
transactions.
We believe our electronic marketplaces compete primarily on the basis of speed,
functionality, efficiency, price, system stability and ability to provide market
participants with access to liquidity.
OUR INTELLECTUAL PROPERTY
We have adopted a comprehensive intellectual property program to protect our
proprietary technology. We currently have licenses covering four of Cantor's
patents in the U.S. One patent relates to a data processing system and method
for electronically trading select items such as fixed income instruments. Two
patents relate to a fixed income portfolio index processor. One patent relates
to a system for shared remote access of multiple application programs by one or
more computers. Foreign counterpart applications for some of these U.S. patents
have been filed. The licenses are exclusive, except in the event that we do not
seek to or are unable to provide to Cantor any requested services covered by the
patents and Cantor elects not to require us to do so.
We also have an agreement to license several pending U.S. patent applications
relating to various other aspects of our electronic trading systems, including
both functional and design aspects. We have filed a number of patent
applications to further protect our proprietary technology and innovations in
the past six months.
-14-
We cannot at this time determine the significance of any of the foregoing
patents, or future patents, if issued, to our business. We can give no assurance
that any of the foregoing patents is valid and enforceable, or that any of these
patents would not be infringed by a third party competing or seeking to compete
with our business.
EMPLOYEES
As of December 31, 2000, we had 493 employees, five of whom are our executive
officers. None of these employees is represented by a union. We believe that we
have good relations with our employees.
RISK FACTORS
In addition to the other information in this Report, the following risk
factors should be considered carefully in evaluating us and our business.
RISKS RELATED TO OUR BUSINESS
Because we have a limited operating history, you may not be able to accurately
evaluate us.
We have had limited operations to date and, as a result, we have a limited
operating history upon which to evaluate the merits of investing in our Class A
common stock. As an early stage company, we are subject to risks, expenses and
difficulties associated with implementing our business plan that are not
typically encountered by more mature companies. In particular, our prospects are
subject to risks, expenses and uncertainties encountered by companies in the new
and rapidly evolving market for electronic commerce products and services. These
risks include our failure or inability to:
o provide services to our clients that are reliable and cost-effective;
o expand our sales structure and marketing programs;
o increase awareness of our brand or market positioning;
o respond to technological developments or service offerings by competitors;
and
o expand into other non-financial markets.
We may not be able to implement our business plan successfully, or at all.
We expect to continue to incur losses and generate negative cash flow from
operations.
Since our inception through December 31, 2000, we have sustained a cumulative
net loss of approximately $73.0 million. We expect that we will continue to
incur losses and generate negative cash flow from operations for at least the
first half of 2001 as we continue to develop
-15-
our systems and infrastructure and expand our brand recognition and client base
through increased marketing efforts.
If we do not expand the use of our electronic systems, or if our clients do not
use our marketplaces or services, our revenues and profitability will be
adversely affected.
The use of electronic marketplaces is relatively new. The success of our
business plan depends, in part, on our ability to maintain and expand the
network of brokers, dealers, banks and other financial institutions that use our
interactive electronic marketplaces. We cannot assure you that we will be able
to continue to expand our vertical marketplaces, or that we will be able to
retain the current participants in our marketplaces. None of our agreements with
market participants require them to use our electronic marketplaces.
If we are unable to enter into additional marketing and strategic alliances or
our current strategic alliances are not successful, we may not generate
increased trading in our electronic marketplaces.
We expect to continue to enter into strategic alliances with other market
participants, such as retail brokers, exchanges, energy companies, communication
companies, market makers, consortia, clearinghouses, major market participants
and technology companies, in order to increase client access to and use of our
electronic marketplaces. We cannot assure you that we will be able to continue
to enter into these strategic alliances on terms that are favorable to us, or at
all. In addition, we cannot assure you that our current strategic alliances will
be successful. The success of our current and future relationships will depend
on the amount of increased trading in our electronic marketplaces by the
customers of these strategic alliance partners. These arrangements may not
generate the expected number of new clients or increased trading volume we are
seeking.
To increase awareness of our electronic marketplaces, we may need to incur
significant marketing expenses.
To successfully execute our business plan, we must build awareness and
understanding of our electronic marketplace services, software products, brand
and the adaptability of our electronic marketplaces for non-financial vertical
markets. In order to build this awareness, our marketing efforts must succeed
and we must provide high quality services. These efforts may require us to incur
significant expenses. We cannot assure you that our marketing efforts will be
successful or that the allocation of funds to these marketing efforts will be
the most effective use of those funds.
If we experience computer systems failures or capacity constraints, our ability
to conduct our operations could be harmed.
We internally support and maintain many of our computer systems and networks.
Our failure to monitor or maintain these systems and networks or, if necessary,
to find a replacement for this
-16-
technology in a timely and cost- effective manner would have a material adverse
effect on our ability to conduct our operations.
We also rely and expect to rely on third parties for various computer and
communications systems, such as telephone companies, online service providers,
data processors, clearance organizations and software and hardware vendors. Our
systems, or those of our third-party providers, may fail or operate slowly,
causing one or more of the following:
o unanticipated disruptions in service to our clients;
o slower response times;
o delays in our clients' trade execution;
o failed settlement of trades;
o incomplete or inaccurate accounting, recording or processing of trades;
o financial losses;
o litigation or other client claims; and
o regulatory sanctions.
We cannot assure you that we will not experience systems failures from power or
telecommunications failure, acts of God or war, human error, natural disasters,
fire, power loss, sabotage, hardware or software malfunctions or defects,
computer viruses, intentional acts of vandalism and similar events. Any system
failure that causes an interruption in service or decreases the responsiveness
of our service, including failures caused by client error or misuse of our
systems, could damage our reputation, business and brand name.
If we do not effectively manage our growth, our existing personnel and systems
may be strained and our business may not operate efficiently.
In order to execute our business plan, we must grow significantly. This growth
will place significant strain on our personnel, management systems and
resources. We expect that the number of our employees, including technical and
management-level employees, may continue to increase for the foreseeable future.
We must continue to improve our operational and financial systems and managerial
controls and procedures, and we will need to continue to expand, train and
manage our technical workforce. We must also maintain close coordination among
our technical, compliance, accounting, finance, marketing and sales
organizations. We cannot assure you that we will manage our growth effectively,
and failure to do so could result in our business operating inefficiently.
-17-
We operate in a rapidly evolving business environment. If we are unable to adapt
our business effectively to keep pace with these changes, our operations will be
adversely affected.
The pace of change in our market is extremely rapid. Operating in such a
rapidly-changing business environment involves a high degree of risk. Our
success will depend on our ability to adapt effectively to these changing market
conditions.
If we are unable to keep up with rapid technological changes, we may not be able
to compete effectively.
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality, accessibility and features of our proprietary
software, network distribution systems and technologies. The financial services
and e-commerce industries are characterized by rapid technological changes,
changes in use and client requirements and preferences, frequent product and
service introductions embodying new technologies and the emergence of new
industry standards and practices that could render our existing proprietary
technology and systems obsolete. Our success will depend, in part, on our
ability to:
o develop and license leading technologies useful in our business;
o enhance our existing services;
o develop new services and technologies that address the increasingly
sophisticated and varied needs of our existing and prospective clients; and
o respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
The development of proprietary electronic trading technology entails significant
technical, financial and business risks. Further, the adoption of new Internet,
networking or telecommunications technologies may require us to devote
substantial resources to modify and adapt our services. We cannot assure you
that we will successfully implement new technologies or adapt our proprietary
technology and transaction-processing systems to client requirements or emerging
industry standards. We cannot assure you that we will be able to respond in a
timely manner to changing market conditions or client requirements.
If we were to lose the services of members of management and employees who
possess specialized market knowledge and technology skills, we may not be able
to manage our operations effectively or develop new electronic marketplaces.
Our future success depends, in significant part, on the continued service of
Howard Lutnick, our Chairman and Chief Executive Officer, Frederick Varacchi,
our President and Chief Operating Officer, and our other executive officers and
managers and sales and technical personnel who possess extensive knowledge and
technology skills in our markets. We cannot assure you that we would be able to
find an appropriate replacement for Mr. Lutnick or Mr. Varacchi if the need
-18-
should arise. Any loss or interruption of Mr. Lutnick's or Mr. Varacchi's
services could result in our inability to manage our operations effectively
and/or develop new electronic marketplaces. We have not entered into employment
agreements with and we do not have "key person" life insurance policies on any
of our executive officers or other personnel. All of the members of our senior
management team are also officers, partners or key employees of Cantor. As a
result, they dedicate only a portion of their professional efforts to our
business and operations. We cannot assure you that the time these persons devote
to our business and operations in the future will be adequate and that we will
not experience an adverse effect on our operations due to the demands placed on
our management team by their other professional obligations. We intend to strive
to provide high quality services that will allow us to establish and maintain
long-term relationships with our clients. Our ability to do so will depend, in
large part, upon the individual employees who represent us in our dealings with
clients. The market for qualified programmers, technicians and sales persons is
extremely competitive and has grown more so in recent periods as electronic
commerce has experienced growth. We cannot assure you that we will be successful
in our efforts to recruit and retain the required personnel.
If Cantor or we are unable to protect the intellectual property rights we
license from Cantor or own, our ability to operate electronic marketplaces may
be materially adversely affected.
Our business is dependent on proprietary technology and other intellectual
property rights. We license our patented technology from Cantor. The license
arrangement is exclusive, except in the event that (1) we are unwilling to
provide to Cantor any requested services covered by the patents with respect to
a marketplace and Cantor elects not to require us to do so, or we are unable to
provide such services or (2) we do not exercise our right of first refusal to
provide to Cantor electronic brokerage services with respect to a marketplace,
in which case Cantor retains a limited right to use the patents and patent
applications solely in connection with the operation of that marketplace. We
cannot guarantee that the concepts which are the subject of the patents and
patent applications covered by the license from Cantor are patentable or that
issued patents are or will be valid and enforceable. Where patents are granted
in the U.S., we can give no assurance that equivalent patents will be granted in
Europe or elsewhere, as a result of differences in local laws affecting
patentability and validity. Moreover, we cannot guarantee that Cantor's issued
patents are valid and enforceable, or that third parties competing or intending
to compete with us will not infringe any of these patents. Despite precautions
we or Cantor has taken or may take to protect our intellectual property rights,
it is possible that third parties may copy or otherwise obtain and use our
proprietary technology without authorization. It is also possible that third
parties may independently develop technologies similar to ours. It may be
difficult for us to monitor unauthorized use of our proprietary technology and
intellectual property rights. We cannot assure you that the steps we have taken
will prevent misappropriation of our technology or intellectual property rights.
We use our eSpeed(sm) service mark for the services described herein and have
registered that service mark in a number of jurisdictions around the world.
Although several existing third-party registrations and applications for
trademarks and servicemarks consisting of designations similar to ours in
certain countries have come to light, they are for goods and services that are
of a different type from those being offered under our eSpeed(sm) service mark.
Although we are not
-19-
presently aware of any third-party objections to our use or registration of our
eSpeed(sm) service mark in these countries, and believe we could defend against
any third-party claims asserted in these countries, such registrations and
applications could potentially affect the registration, and/or limit our use, of
our eSpeed(sm) service mark in these countries, thereby requiring us to adopt
and use another service mark for our services in such countries.
If it becomes necessary to protect or defend our intellectual property rights,
we may have to resort to costly litigation.
We may have to resort to litigation to enforce our intellectual property rights,
protect our trade secrets, determine the validity and scope of the proprietary
rights of others or defend ourselves from claims of infringement, invalidity or
unenforceability. We may incur substantial costs and diversion of resources as a
result of litigation, even if we win. In the event we do not win, we may have to
enter into royalty or licensing agreements. We cannot assure you that an
agreement would be available to us on reasonable terms, if at all.
If our software licenses from third parties are terminated, our ability to
operate our business may be materially adversely affected.
We license software from third parties, much of which is integral to our systems
and our business. The licenses are terminable if we breach our obligations under
the license agreements. If any of these relationships were terminated or if any
of these third parties were to cease doing business, we may be forced to spend
significant time and money to replace the licensed software. However, we cannot
assure you that the necessary replacements will be available on reasonable
terms, if at all.
If the strength of our domain names is diluted, the value of our proprietary
rights may decrease.
We own many Internet domain names, including "www.espeed.com." The regulation of
domain names in the U.S. and in foreign countries may change and the strength of
our names could be diluted. We may not be able to prevent third parties from
acquiring domain names that infringe or otherwise decrease the value of our
trademarks and other proprietary rights.
If we infringe on patent rights or copyrights of others, we could become
involved in costly litigation.
Patents or copyrights of third parties may have an important bearing on our
ability to offer certain of our products and services. We cannot assure you that
we are or will be aware of all patents or copyrights containing claims that may
pose a risk of infringement by our products and services. In addition, patent
applications in the U.S. are generally confidential until a patent is issued. As
a result, we cannot evaluate the extent to which our products and services may
be covered or asserted to be covered by claims contained in pending patent
applications. In general, if one or more of our products or services were to
infringe patents held by others, we may be required to stop developing or
marketing the products or services, to obtain licenses to develop
-20-
and market the services from the holders of the patents or to redesign the
products or services in such a way as to avoid infringing on the patent claims,
which could limit the manner in which we conduct our operations.
Due to intense competition, our market share and financial performance could
suffer.
The electronic trading and Internet-based financial and non-financial services
markets are highly competitive and many of our competitors are more established
and have greater financial resources than us. We expect that competition will
intensify in the future. Many of our competitors also have greater market
presence, engineering and marketing capabilities and technological and personnel
resources than we do. As a result, as compared to us, our competitors may:
o develop and expand their network infrastructures and service offerings more
efficiently or more quickly;
o adapt more swiftly to new or emerging technologies and changes in client
requirements;
o take advantage of acquisitions and other opportunities more effectively;
o devote greater resources to the marketing and sale of their products and
services; and
o leverage existing relationships with clients and strategic partners more
effectively or exploit more recognized brand names to market and sell their
services.
Our current and prospective competitors are numerous and include interdealer
brokerage firms, technology companies and market data and information vendors,
securities and futures exchanges, electronic communications networks, crossing
systems, software companies, consortia, business-to-business marketplace
infrastructure companies and niche market energy and other commodity business-
to-business Internet-based trading systems.
We believe that we may also face competition from large computer software
companies, media and technology companies and some securities brokerage firms
that are currently our clients. In addition, Market Data Corporation, which is
controlled by Iris Cantor and Rodney Fisher, has technology for electronic
trading systems that, if provided to our competitors in the wholesale market,
will be of substantial assistance to them in competing with us. Iris Cantor and
Rodney Fisher are limited partners of Cantor.
The number of businesses providing Internet-based financial and non-financial
services is rapidly growing, and other companies, in addition to those named
above, have entered into or are forming joint ventures or consortia to provide
services similar to those provided by us. Others may acquire the capabilities
necessary to compete with us through acquisitions.
-21-
In the event we extend the application of our Interactive Matching(sm)
technology to conducting or facilitating auctions of consumer goods and services
over the Internet, we expect to compete with both online and traditional sellers
of these products and services. The market for selling products and services
over the Internet is new, rapidly evolving and intensely competitive. Current
and new competitors can launch new sites at a relatively low cost. We expect we
will potentially compete with a variety of companies with respect to each
product or service we offer. We may face competition from a number of other
large Internet companies that have expertise in developing online commerce and
in facilitating Internet traffic, which could choose to compete with us either
directly or indirectly through affiliations with other e-commerce companies. We
cannot assure you that we will be able to compete effectively with such
companies.
Because some of our clients have developed electronic trading networks, we
compete with them in aspects of our business.
Consortia owned by some of our clients have developed electronic trading
networks. Such consortia compete with us and our electronic marketplaces in some
areas of our business and may compete with us in other areas in the future.
If we experience low trading volume in products, our profitability could suffer.
We have experienced significant fluctuations in the aggregate trading volume of
products being traded in our marketplaces. We expect that fluctuations in the
trading volume of products traded in our marketplaces will occur in the future
from time to time and have a direct impact on our future operating results. This
may cause significant fluctuations in our profitability when the trading volumes
are low.
If adverse economic and political conditions occur, substantial declines in the
U.S. and global financial services markets may result and our profitability
could suffer.
The global financial services business is, by its nature, risky and volatile and
is directly affected by many national and international factors that are beyond
our control. Any one of these factors may cause a substantial decline in the
U.S. and global financial services markets, resulting in reduced trading volume
and turnover. These events could have a material adverse effect on our
profitability. These factors include:
o economic and political conditions in the U.S. and elsewhere in the world;
o concerns over inflation and wavering institutional/consumer confidence
levels;
o the availability of cash for investment by mutual funds and other wholesale
and retail investors;
o fluctuating interest and exchange rates;
o legislative and regulatory changes; and
-22-
o currency values.
Because there is less U.S. Treasury debt outstanding, trading in our
marketplaces may decline.
Our business is highly dependent upon the volume of bonds being traded through
our eSpeed(sm) system. As the U.S. reduces its outstanding Treasury debt, there
may be a decline in the volume of U.S. Treasury securities traded through our
eSpeed(sm) system.
Because we expect to continue to expand our operations outside North America, we
may face special economic and regulatory challenges that we may not be able to
meet.
We operate electronic marketplaces throughout Europe and Asia and we plan to
further expand our operations throughout these regions and other regions in the
future. There are certain risks inherent in doing business in international
markets, particularly in the regulated brokerage industry. These risks include:
o less developed automation in exchanges, depositories and national clearing
systems;
o unexpected changes in regulatory requirements, tariffs and other trade
barriers;
o difficulties in staffing and managing foreign operations;
o fluctuations in exchange rates;
o reduced protection for intellectual property rights;
o seasonal reductions in business activity during the summer months; and
o potentially adverse tax consequences.
We are required to comply with the laws and regulations of foreign governmental
and regulatory authorities of each country in which we conduct business. These
may include laws, rules and regulations relating to any aspect of the securities
business, including sales methods, capital structure, record-keeping,
broker-dealer and employee registration requirements and the conduct of
directors, officers and employees. Any failure to develop effective compliance
and reporting systems could result in regulatory penalties in the applicable
jurisdiction.
The growth of the Internet as a means of conducting international business has
also raised many legal issues regarding, among other things, the circumstances
in which countries or other jurisdictions have the right to regulate Internet
services that may be available to their citizens from service providers located
elsewhere. In many cases, there are no laws, regulations, judicial decisions or
governmental interpretations that clearly resolve these issues. This uncertainty
may adversely affect our ability to use the Internet to expand our international
operations, and creates
-23-
the risk that we could be subject to disciplinary sanctions or other penalties
for failure to comply with applicable laws or regulations.
As we enter new markets, we may not be able to successfully adapt our technology
and marketing strategy for use in those markets.
We are leveraging our eSpeed(sm) system to enter new markets. We cannot assure
you that we will be able to successfully adapt our proprietary software,
electronic distribution networks and technology for use in other markets. Even
if we do adapt our software, networks and technology, we cannot assure you that
we will be able to attract clients and compete successfully in any such new
markets. We cannot assure you that our marketing efforts or our pursuit of any
of these opportunities will be successful. If these efforts are not successful,
we may realize less than expected earnings, which in turn could result in a
decrease in the market value of our Class A common stock. Furthermore, these
efforts may divert management attention or inefficiently utilize our resources.
We intend to create electronic marketplaces for many vertical markets and extend
into others, but there is no guarantee that we will be able to do so.
If we acquire other companies, we may not be able to integrate their operations
effectively.
Our business strategy contemplates expansion through the acquisition of
exchanges and other companies providing services or having technologies and
operations that are complementary to ours. Acquisitions entail numerous risks,
including:
o difficulties in the assimilation of acquired operations and products;
o diversion of management's attention from other business concerns;
o assumption of unknown material liabilities of acquired companies;
o amortization of acquired intangible assets, which would reduce future
reported earnings; and
o potential loss of clients or key employees of acquired companies.
We cannot assure you that we will be able to integrate successfully any
operations, personnel, services or products that might be acquired in the
future, and our failure to do so could adversely affect our profitability and
the value of our Class A common stock.
Because our business is subject to extensive government and other regulation, we
may face restrictions with respect to the way we conduct our operations.
The Securities and Exchange Commission, NASD Regulation, Inc., Commodity Futures
Trading Commission and other agencies extensively regulate the U.S. financial
industry. Our international operations may become subject to similar regulations
in specific jurisdictions. In addition, our activities in the Energy Vertical
may be subject to regulation by the Federal Energy
-24-
Regulatory Commission under the Federal Power Act. Certain of our U.S.
subsidiaries are required to comply strictly with the rules and regulations of
these agencies. As a matter of public policy, these regulatory bodies are
responsible for safeguarding the integrity of the securities and other financial
markets and protecting the interests of investors in those markets. Most aspects
of our U.S. broker-dealer subsidiaries are highly regulated, including:
o the way we deal with our clients;
o our capital requirements;
o our financial and Securities and Exchange Commission reporting practices;
o required record keeping and record retention procedures;
o the licensing of our employees; and
o the conduct of our directors, officers, employees and affiliates.
If we fail to comply with any of these laws, rules or regulations, we may be
subject to censure, fines, cease-and-desist orders, suspension of our business,
suspensions of personnel or other sanctions, including revocation of
registration as a broker-dealer. Changes in laws or regulations or in
governmental policies could have a material adverse effect on the conduct of our
business. These agencies have broad powers to investigate and enforce compliance
and punish non-compliance with their rules and regulations. We cannot assure you
that we and/or our directors, officers and employees will be able to fully
comply with, and will not be subject to, claims or actions by these agencies.
The products and services we offer through our electronic marketplaces are
likely to be regulated by federal, state and foreign governments. Our ability to
provide such services will be affected by these regulations. In addition, as we
expand our business to other vertical markets, it is likely that we will be
subject to additional federal, state and foreign regulations. The implementation
of unfavorable regulations or unfavorable interpretations of existing
regulations by courts or regulatory bodies could require us to incur significant
compliance costs or cause the development of affected markets to become
impractical.
Because we are subject to risks associated with net capital requirements, we may
not be able to engage in operations that require significant capital.
The Securities and Exchange Commission, Commodity Futures Trading Commission and
various other regulatory agencies have stringent rules and regulations with
respect to the maintenance of specific levels of net capital by regulated
companies. Net capital, which is assets minus liabilities, is the net worth of a
broker or dealer, less deductions for certain types of assets. If a firm fails
to maintain the required net capital, it may be subject to suspension or
revocation of registration by the Securities and Exchange Commission or
Commodity Futures Trading Commission, and suspension or expulsion by these
regulators could ultimately lead to the firm's
-25-
liquidation. If these net capital rules are changed or expanded, or if there is
an unusually large charge against net capital, operations that require the
intensive use of capital would be limited. Also, our ability to withdraw capital
from broker- dealer subsidiaries could be restricted, which in turn could limit
our ability to pay dividends, repay debt and redeem or purchase shares of our
outstanding stock. A large operating loss or charge against net capital could
adversely affect our ability to expand or even maintain our present levels of
business, which could have a material adverse effect on our business. In
addition, we may become subject to net capital requirements in foreign
jurisdictions.
Because we offer access to some of our marketplaces to online retail brokers and
others, we are subject to risks relating to uncertainty in the regulation of the
Internet.
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. However, laws and regulations may be
adopted in the future that address issues such as user privacy, pricing,
taxation and the characteristics and quality of products and services. For
example, the Telecommunications Act sought to prohibit transmitting various
types of information and content over the Internet. Several telecommunications
companies have petitioned the Federal Communications Commission to regulate
Internet service providers and other online service providers in a manner
similar to long distance telephone carriers and to impose access fees on those
companies. This could increase the cost of transmitting data over the Internet.
Moreover, it may take years to determine the extent to which existing laws
relating to issues such as property ownership, libel and personal privacy are
applicable to the Internet. Any new laws or regulations relating to the Internet
could adversely affect our business.
Because brokerage services involve substantial risks of liability, we may become
subject to risks of litigation.
Many aspects of our business, and the businesses of our clients, involve
substantial risks of liability. Dissatisfied clients frequently make claims
regarding quality of trade execution, improperly settled trades, mismanagement
or even fraud against their service providers. We and our clients may become
subject to these claims as the result of failures or malfunctions of systems and
services provided by us and third parties may seek recourse against us. We could
incur significant legal expenses defending claims, even those without merit. An
adverse resolution of any lawsuits or claims against us could result in our
obligation to pay substantial damages.
In addition, we are subject to legal proceedings and claims against Cantor and
its affiliates as a result of the transactions surrounding our formation.
Although Cantor has agreed to indemnify us against claims or liabilities arising
from our assets or operations prior to the formation transactions, we cannot
assure you that such claims or litigation will not harm our business.
If we cannot deter employee misconduct, we may be harmed.
-26-
There have been a number of highly publicized cases involving fraud or other
misconduct by employees in the financial services industry in recent years, and
we run the risk that employee misconduct could occur. Misconduct by employees
could include hiding unauthorized or unsuccessful activities from us. In either
case, this type of conduct could result in unknown and unmanaged risks or
losses. Employee misconduct could also involve the improper use of confidential
information, which could result in regulatory sanctions and serious reputational
harm. It is not always possible to deter employee misconduct, and the
precautions we take to prevent and detect this activity may not be effective in
all cases.
Because our business is developing, we cannot predict our future capital needs
or our ability to secure additional financing.
We anticipate, based on management's experience and current industry trends,
that our existing cash resources will be sufficient to meet our anticipated
working capital and 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, acquisitions, joint ventures, strategic alliances
or other investments. As a result, we may need to raise additional funds to:
o increase the regulatory net capital necessary to support our operations;
o support more rapid growth in our business;
o develop new or enhanced services and products;
o respond to competitive pressures;
o acquire complementary technologies;
o enter into strategic alliances;
o acquire companies with marketplace or other specific domain expertise; and
o respond to unanticipated requirements.
We cannot assure you that we will be able to obtain additional financing when
needed on terms that are acceptable, if at all.
The market price of our Class A common stock may fluctuate and future sales of
our shares could adversely affect the market price of our Class A common stock.
The market price of our Class A common stock may fluctuate widely, depending
upon many factors, including our perceived prospects and the prospects of the
financial and other business-to-business marketplaces in general, differences
between our actual financial and operating results and those expected by
investors and analysts, changes in analysts' recommendations or
-27-
projections, seasonality, changes in general valuations for Internet and
e-commerce-related companies, changes in general economic or market conditions
and broad market fluctuations.
Future sales of our shares also could adversely affect the market price of our
Class A common stock. If our existing stockholders sell a large number of
shares, or if we issue a large number of shares of our common stock in
connection with future acquisitions, strategic alliances or otherwise, the
market price of our Class A common stock could decline significantly. Moreover,
the perception in the public market that these stockholders might sell shares of
Class A common stock could depress the market price of our Class A common stock.
We have registered under the Securities Act 10,630,000 shares of our Class A
common stock, which are reserved for issuance upon exercise of options granted
under our stock option plan. Since our board of directors has determined,
subject to stockholder approval, to increase the amount of shares available for
issuance under our stock option plan, we will likely register additional shares.
In addition, if we increase our total outstanding shares of common stock, we
will register additional shares of Class A common stock so that the stock
available for issuance under our stock option plan will be registered. Once
registered, these shares can be sold in the public market upon issuance, subject
to restrictions under the securities laws applicable to resales by affiliates.
In addition, we have registered under the Securities Act 425,000 shares of our
Class A common stock issuable under our stock purchase plan. We also will be
issuing new shares of our Class A common stock in connection with our matching
program for our 401(k) plan. The maximum number of new shares we will be issuing
in connection with our 401(k) plan is $3,000 worth per employee per year.
On June 9, 2001, approximately 2.9 million shares of our Class A common stock
that have been distributed to partners of Cantor as part of a deferred stock
distribution by Cantor will become eligible for sale in the public market,
subject to volume, manner of sale and other applicable restrictions, under Rule
144. Approximately 750,000 of these shares are subject to a 90 day lock-up
agreement with the underwriters of a proposed public offering by us and certain
selling stockholders of shares of our Class A common stock.
In addition, we have issued shares of our Class A common stock, warrants and
convertible preferred stock and have granted registration rights in connection
with certain of our strategic alliances. See "Item 13. Certain Relationships and
Related Transactions."
RISKS RELATED TO OUR RELATIONSHIP WITH CANTOR
Because we currently depend on Cantor's business, events which adversely affect
Cantor's business may have a material adverse effect on our revenues.
Since inception, we have recognized substantially all of our revenues in
connection with our relationship with Cantor. Consequently, any events which
adversely affect Cantor's business or operating results could have a material
adverse effect on our most significant source of revenues.
-28-
We are a general creditor of Cantor to the extent that there are transaction
revenues and system service fees owing to us from Cantor. Events that adversely
affect Cantor's financial position and ability to remit our share of transaction
revenues and system service fees could have a material adverse effect on our
revenues.
Conflicts of interest and competition with Cantor may arise.
Various conflicts of interest between us and Cantor may arise in the future in a
number of areas relating to our past and ongoing relationships, including
competitive business activities, potential acquisitions of businesses or
properties, the election of new directors, payment of dividends, incurrence of
indebtedness, tax matters, financial commitments, marketing functions, indemnity
arrangements, service arrangements, issuances of our capital stock, sales or
distributions by Cantor of its shares of our common stock and the exercise by
Cantor of control over our management and affairs. Our Joint Services Agreement
with Cantor provides that, in some circumstances, Cantor can unilaterally
determine the commissions that will be charged to clients for effecting trades
in marketplaces in which we collaborate with Cantor. The determination of the
nature of commissions charged to clients does not affect the allocation of
revenues that Cantor and we share with respect to those transactions. However,
in circumstances in which Cantor determines to charge clients lower commissions,
the amount that we receive in respect of our share of the commissions will be
correspondingly decreased. A majority of our directors and officers also serve
as directors and/or officers of Cantor. Simultaneous service as an eSpeed
director or officer and service as a director or officer, or status as a
partner, of Cantor could create, or appear to create, potential conflicts of
interest when such directors, officers and/or partners are faced with decisions
that could have different implications for us and for Cantor. Mr. Lutnick, our
Chairman and Chief Executive Officer, is the sole stockholder of the managing
general partner of Cantor. As a result, Mr. Lutnick controls Cantor. As of
February 8, 2001, Mr. Lutnick controlled approximately 95.3% of the combined
voting power of all classes of our voting stock. Mr. Lutnick's simultaneous
service as our Chairman and Chief Executive Officer and his control of Cantor
could create or appear to create potential conflicts of interest when Mr.
Lutnick is faced with decisions that could have different implications for us
and for Cantor.
Because our Joint Services Agreement with Cantor has a perpetual term and
contains non-competition provisions and restrictions on our ability to pursue
strategic transactions, this agreement may become burdensome to our business.
Although Cantor has agreed, subject to certain conditions, not to compete with
us in providing electronic brokerage services, Cantor is currently engaged in
securities transaction and other financial instruments execution and processing
operations and other activities that are related to the electronic trading
services we provide. Our Joint Services Agreement obligates us to perform
technology support and other services for Cantor at cost, whether or not related
to our electronic brokerage services, sets forth the ongoing revenue sharing
arrangements between Cantor and us and subjects us and Cantor to non-competition
obligations. The Joint Services Agreement precludes us from entering into lines
of business in which Cantor now or in the future may engage, or providing, or
assisting any third party in providing, voice-assisted brokerage services,
clearance, settlement and fulfillment services and related services, except
under limited
-29-
circumstances. Although we believe Cantor has no plans to form, acquire or
commence any other operations similar to ours, the Joint Services Agreement
permits Cantor to perform, in limited circumstances, electronic brokerage
operations. In addition, the Joint Services Agreement imposes limitations on our
ability to pursue strategic alliances, joint ventures, partnerships, business
combinations, acquisitions and similar transactions. Because the Joint Services
Agreement has a perpetual term, even in the event of a breach by one of the
parties, and does not provide for modification under its terms, this agreement
may become burdensome for us, may distract us from focusing on our internal
operations, may deter or discourage a takeover of our company and may limit our
ability to expand our operations.
Because agreements between us and Cantor are not the result of arm's-length
negotiations, we may receive lower commissions from, and pay higher service fees
to, Cantor than we would with respect to third party service providers.
In connection with the formation transactions, we entered into Assignment and
Assumption Agreements, an Administrative Services Agreement, a Joint Services
Agreement and several other agreements with Cantor relating to the provision of
services to each other and third parties. These agreements are not the result of
arm's-length negotiations because Cantor owns and controls us. As a result, the
prices charged to us or by us for services provided under the agreements may be
higher or lower than prices that may be charged by third parties and the terms
of these agreements may be generally less favorable to us than those that we
could have negotiated with third parties.
Because we depend on services and access to operating assets provided by third
parties to Cantor, we may not have recourse against those third parties.
Many of the assets and services provided by Cantor under the terms of the
Administrative Services Agreement are leased or provided to Cantor by
third-party vendors. As a result, in the event of a dispute between Cantor and a
third-party vendor, we could lose access to, or the right to use, as applicable,
office space, personnel, corporate services and operating assets. In such a
case, we would have no recourse with respect to the third-party vendor. Our
inability to use these services and operating assets for any reason, including
any termination of the Administrative Services Agreement between us and Cantor
or the agreements between Cantor and third-party vendors, could result in
serious interruptions of our operations.
Our reputation may be affected by actions taken by Cantor and entities that are
related to Cantor.
Cantor currently is our most significant client. Cantor holds direct and
indirect ownership and management interests in numerous other entities that
engage in a broad range of financial services and securities-related activities.
Actions taken by, and events involving, Cantor or these related companies which
are perceived negatively by the securities markets, or the public generally,
could have a material adverse effect on us and could affect the price of our
Class A common stock. In addition, events which negatively affect the financial
condition of Cantor may negatively affect us. These events could cause Cantor to
lose clients that may trade in our
-30-
marketplaces, could impair Cantor's ability to perform its obligations under the
Joint Services Agreement, the Administrative Services Agreement and other
agreements Cantor enters into with us and could cause Cantor to liquidate
investments, including by selling or otherwise transferring shares of our common
stock.
If we become subject to litigation and other legal proceedings, we may be
harmed.
From time to time, we and Cantor may become involved in litigation and other
legal proceedings relating to claims arising from our and their operations in
the normal course of business. Cantor is currently subject to a number of legal
proceedings that could affect us. We cannot assure you that these or other
litigation or legal proceedings will not materially affect our ability to
conduct our business in the manner that we expect or otherwise adversely affect
us. See note 4 of the notes to our consolidated financial statements.
RISKS RELATED TO E-COMMERCE AND THE INTERNET
If electronic marketplaces do not continue to grow, we will not be able to
achieve our business objectives.
The success of our business plan depends on our ability to create interactive
electronic marketplaces for a wide range of products. Historically, securities
and commodities markets operated through open outcry formats which have recently
begun to be supplanted by new systems that match buyers and sellers
electronically. The energy markets in which we participate through TradeSpark
operate through phone-based and bulletin-board formats and have recently begun
to transact electronically. The utilization of our products and services depends
on the continued acceptance, adoption and growth of electronic markets. We
cannot assure you that the growth and acceptance of the use of electronic
markets will continue.
If e-commerce and Internet usage does not continue to grow, we will not be able
to achieve our business objectives.
Our strategic and financial objectives would be adversely impacted if e-
commerce adoption and usage does not continue to grow. Business-to-business use
of the Internet as a medium of commerce is a recent phenomenon and is subject to
a high level of uncertainty. Internet usage may be inhibited for a number of
reasons, including:
o access costs;
o inadequate network infrastructure;
o security concerns;
o uncertainty of legal, regulatory and tax issues concerning the use of the
Internet;
o concerns regarding ease of use, accessibility and reliability;
-31-
o inconsistent quality of service; and
o lack of availability of cost-effective, high-speed service.
If Internet usage grows, the Internet infrastructure may not be able to support
the demands placed on it, or the Internet's performance and reliability may
decline. Similarly, Web sites have experienced interruptions in their service as
a result of outages and other delays occurring throughout the Internet network
infrastructure. If these outages or delays occur frequently, use of the Internet
as a commercial or business medium could grow more slowly or decline. Even if
Internet usage continues to grow, online trading in the wholesale securities
markets, and in particular the fixed income securities and futures markets, may
not be accepted by our clients. This could negatively affect the growth of our
business.
Our networks and those of our third-party service providers may be vulnerable to
security risks, which could make our clients hesitant to use our electronic
marketplaces.
We expect the secure transmission of confidential information over public
networks to be a critical element of our operations. Our networks and those of
our third-party service providers, including Cantor and associated clearing
corporations, and our clients may be vulnerable to unauthorized access, computer
viruses and other security problems. Persons who circumvent security measures
could wrongfully use our information or cause interruptions or malfunctions in
our operations, which could make our clients hesitant to use our electronic
marketplaces. We may be required to expend significant resources to protect
against the threat of security breaches or to alleviate problems, including
reputational harm and litigation, caused by any breaches. Although we intend to
continue to implement industry-standard security measures, we cannot assure you
that those measures will be sufficient.
RISKS RELATED TO OUR CAPITAL STRUCTURE
Because the voting control of our common stock is concentrated among the holders
of our Class B common stock, the market price of our Class A common stock may be
adversely affected by disparate voting rights.
As of February 8, 2001, Cantor beneficially owned approximately 95.2% of the
combined voting power of all classes of our voting stock. As long as Cantor
beneficially owns a majority of the combined voting power of our common stock,
it will have the ability, without the consent of the public stockholders, to
elect all of the members of our board of directors and to control our management
and affairs. In addition, it will be able to determine the outcome of matters
submitted to a vote of our stockholders for approval and will be able to cause
or prevent a change in control of our company. In certain circumstances, the
shares of our Class B common stock issued to Cantor upon consummation of the
formation transactions may be transferred without conversion to our Class A
common stock.
-32-
The holders of our Class A common stock and Class B common stock have
substantially identical rights, except that holders of our Class A common stock
are entitled to one vote per share, while holders of our Class B common stock
are entitled to 10 votes per share on all matters to be voted on by stockholders
in general. This differential in the voting rights and our ability to issue
additional Class B common stock could adversely affect the market price of our
Class A common stock.
Delaware law and our charter may make a takeover of our company more difficult
and dilute your percentage of ownership of our common stock.
Provisions of Delaware law, such as its business combination statute, may have
the effect of delaying, deferring or preventing a change in control of our
company. In addition, our Amended and Restated Certificate of Incorporation
authorizes the issuance of preferred stock, which our board of directors can
create and issue without prior stockholder approval and with rights senior to
those of our common stock, as well as additional shares of our Class B common
stock and warrants to purchase our common stock. Any such issuances would make a
takeover of our company more difficult and may dilute your percentage ownership
of our common stock. Our Amended and Restated Certificate of Incorporation and
our Second Amended and Restated By-Laws include provisions which restrict the
ability of our stockholders to take action by written consent and provide for
advance notice for stockholder proposals and director nominations. These
provisions may have the effect of delaying or preventing changes of control or
management of our company, even if such transactions would have significant
benefits to our stockholders. As a result, these provisions could limit the
price some investors might be willing to pay in the future for shares of our
Class A common stock.
Delaware law may protect decisions of our board of directors that have a
different effect on holders of our Class A and Class B common stock.
Stockholders may not be able to challenge decisions that have an adverse effect
upon holders of our Class A common stock if our board of directors acts in a
disinterested, informed manner with respect to these decisions, in good faith
and in the belief that it is acting in the best interests of our stockholders.
Delaware law generally provides that a board of directors owes an equal duty to
all stockholders, regardless of class or series, and does not have separate or
additional duties to either group of stockholders, subject to applicable
provisions set forth in a company's charter.
Item 2. Properties
We have offices in the U.S., Europe, Asia and Canada. Our principal executive
offices are located at One World Trade Center, New York, New York. Our principal
executive offices occupy approximately 60,000 square feet of leased space, which
we occupy pursuant to the Administrative Services Agreement with Cantor. Our
right to use this space expires at the time that Cantor's lease expires in 2012.
We will pay Cantor approximately $2.0 million annually for use of this space.
Our largest presence outside of New York is in London, where we have the right
to use approximately 15,000 square feet of Cantor's existing office space. Our
right to use
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this space expires at the earlier of (1) the time that Cantor's lease expires in
2016 or (2) when Cantor ceases to be an affiliate of ours and Cantor asks us to
vacate. We will pay Cantor approximately $1.9 million annually for use of this
space. We believe our facilities are adequate for our reasonably foreseeable
future needs. Additionally, we occupy approximately 18,750 square feet of space
in our Concurrent Computing Center in Rochelle Park, New Jersey. We will pay
Cantor approximately $900,000 annually for the use of this space. We believe our
facilities are adequate for the forseeable future.
-34-
ITEM 3. LEGAL PROCEEDINGS
The information required by this Item is incorporated by reference to
note 4 of the notes to our consolidated financial statements beginning on page
61 of this report.
-35-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its 2000 Annual Meeting of Stockholders (the Annual
Meeting) on October 26, 2000.
(b) The following directors were elected at the Annual Meeting and they are
our only directors: Howard W. Lutnick, Frederick T. Varacchi, Douglas B.
Gardner, Richard C. Breeden, Larry R. Carter, William J. Moran and Joseph P.
Shea.
(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 and broker non-votes, as to each nominee for election as a director and
as to the approval of the Additional Investment Right described in 2. below.
1. Election of seven directors, each to serve until the next Annual Meeting of
Stockholders and until his successor is duly elected and qualified.
Name of WITHHOLD BROKER
Candidate FOR AUTHORITY NON-VOTES
- ------------ ----------- --------- ---------
Howard W. Lutnick 369,365,533 47,431 0
Frederick T. Varacchi 369,365,533 47,431 0
Douglas B. Gardner 369,365,533 47,431 0
Richard C. Breeden 369,365,533 47,431 0
Larry R. Carter 369,365,533 47,431 0
William J. Moran 369,365,533 47,431 0
Joseph P. Shea 369,365,533 47,431 0
2. Approval of the Additional Investment Right, which will entitle each of
Dynegy Inc. and Williams Energy Marketing & Trading Company to invest $25
million in shares of our Class A common stock at a 10% discount four times in
connection with an investment by each of them of $2.5 million in each of four
business ventures in which Dynegy, Williams, other market participants and we
will establish marketplaces for electronic trading of such products as natural
gas liquids, petrochemicals, crude oil and bandwidth.
FOR AGAINST ABSTENTIONS BROKER NON-VOTES
- --------- ------- ----------- ----------------
366,627,165 10,428 5,918 2,769,413
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Price Range of Class A Common Stock
Our Class A common stock was initially offered to the public on December 10,
1999 at $22.00 per share. It has traded since that date on the Nasdaq National
Market under the symbol "ESPD." Through February 28, 2001, the high and low
sales prices for our Class A common stock, as reported by Nasdaq, were as
follows:
High Low
1999
Fourth Quarter (beginning December 10)..................................... $63.75 $30.00
2000
First Quarter.............................................................. 89.88 36.50
Second Quarter............................................................. 61.48 22.00
Third Quarter.............................................................. 49.25 20.00
Fourth Quarter............................................................. 30.00 13.25
2001
First Quarter (through February 28, 2001).................................. 34.75 13.63
On February 28, 2001, the last reported closing price of our Class A common
stock on the Nasdaq National Market was $25.1875 and there were approximately
482 holders of record of our Class A common stock and two holders of record of
our Class B common stock.
Dividend Policy
We intend to retain our future earnings, if any, to help finance the
growth and development of our business. We have never paid a cash dividend on
our common stock and we do not expect to pay any cash dividends on our common
stock in the foreseeable future.
In the event we decide to declare dividends on our common stock in the
future, such declaration will be subject to the discretion of our board of
directors. Our board of directors may take into account such matters as general
business conditions, our financial results, capital requirements, contractual,
legal and regulatory restrictions on the payment of dividends by us to our
stockholders or by our subsidiaries to us and any such other factors as our
board of directors may deem relevant.
-37-
Use of Proceeds of Initial Public Offering
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 $5.8 million has been used to fund investments in various
entities, approximately $25.3 million has been used to acquire fixed assets and
to pay for the development of capitalized software and approximately $10.3
million has been used for other working capital purposes. The remaining $98.2
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 December 31, 2000,
approximately $8.2 million has been paid to Cantor under the Administrative
Services Agreement between Cantor and us.
The occurrence of unforeseen events, opportunities or changed business
conditions, however, could cause us to use the net proceeds of our initial
public offering in a manner other than as described above.
-38-
ITEM 6. SELECTED FINANCIAL DATA
In the table below, we provide you with our selected historical financial data.
We have prepared this statement of operations and statement of financial
condition data using our consolidated financial statements for the period from
March 10, 1999 to December 31, 1999 and the year ended December 31, 2000. The
consolidated financial statements for these periods were audited by Deloitte &
Touche LLP, independent auditors. The following selected financial data should
be read in conjunction with "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" beginning on page 41 of this
Report and with our consolidated financial statements and the notes thereto
beginning on page 51 of this Report.
For the period from
March 10, 1999 to For the year ended
Statement of operations data: December 31, 1999 December 31, 2000
----------------- -----------------
(in thousands, except per share data)
Total revenues.............................. $38,189 $118,931
------- --------
Expenses:
Compensation and employee benefits 21,502 53,963
Occupancy and equipment..................... 10,293 21,561
Professional and consulting fees............ 5,149 13,036
Communications and client networks 3,355 4,589
Marketing................................... -- 8,285
Fulfillment services fees................... 3,528 27,904
Administrative fees paid to
affiliates.................................. 1,662 6,524
Non-cash business partner
securities(1)............................... -- 33,391
Options granted to Cantor
employees(2)................................ 2,850 --
Other....................................... 2,649 9,684
----- -----
Total operating expenses.................... 50,988 178,937
------ -------
Loss before (benefit) provision for
income taxes................................ (12,799) (60,006)
Income tax (benefit) provision.............. (212) 406
----- ---
Net loss.................................... (12,587) (60,412)
======== ========
Basic and diluted net loss per
share....................................... $(0.28) $(1.17)
======= =======
Weighted average shares of common
stock outstanding........................... 44,495 51,483
-39-
December 31, 2000
-----------------
Statement of financial condition:
(in thousands)
Cash and cash equivalents...................................... $122,164
Total assets................................................... 155,122
Total liabilities.............................................. 22,864
Total stockholders' equity..................................... 132,258
(1) Includes (i) warrants to purchase 666,666 shares of our Class A common
stock at an exercise price of $35.20 per share issued by us to each of
Dynegy and Williams, as a result of which we recorded a non-cash charge
against earnings of $29,805,305 to reflect the value of the warrants; (ii)
28,374 shares of Class A common stock issued by us to the shareholders of
MPI in connection with Cantor's acquisition of MPI's brokerage business, as
a result of which we recorded a non-cash charge against earnings of
$1,350,000 to reflect the value of the stock; and (iii) 8,000,000 shares of
convertible preferred stock issued by us in connection with our investment
in TradeSpark, as a result of which we recorded a non-cash charge against
earnings of $2,235,200 to reflect the value of 80,000 shares of our Class A
common stock issuable upon conversion of the preferred stock if none of
certain revenue targets are met. See "Item 13. Certain Relationships and
Related Transactions - Williams and Dynegy", "- Municipal Partners" and "-
TradeSpark."
(2) Represents a one-time, non-cash charge due to option grants we made to
Cantor employees and a consultant exercisable at our initial public
offering price of $22.00 per share.
-40-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS:
The following discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors.
The following discussion is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and our financial statements and
the notes thereto appearing elsewhere in this Report.
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. We commenced operations as a
division of Cantor on March 10, 1999, the date the first fully electronic
transaction using our eSpeedsm system was executed. Cantor has been developing
systems to promote fully electronic marketplaces since the early 1990s. Since
January 1996, Cantor has used our eSpeedsm system internally to conduct
electronic trading. In September 1999, our board of directors changed our fiscal
year end from the last Friday of March to December 31.
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 eSpeedsm
system.
As of December 31, 2000, we had a cumulative net loss of $73.0 million. This
loss primarily resulted from expenditures on our technology and infrastructure
incurred in building our revenue base and from non-cash charges incurred in
connection with the issuance of business partner securities. We expect that we
will continue to incur losses and generate negative cash flow from operations
for at least the first half of 2001 as we continue to develop our systems and
infrastructure and expand our brand recognition and client base through
increased marketing efforts. In light of the rapidly changing nature of our
business and the fact that our 1999 operations began on March 10, 1999, we
believe that period-to-period comparisons of our operating results will not
necessarily be meaningful and should not be relied upon as an indication of
future performance.
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 have entered into a Joint Services Agreement with Cantor under which we and
Cantor agreed to collaborate to provide brokerage and related services to
clients in multiple electronic markets
-41-
for transactions in securities and other products. Under the Joint Services
Agreement, 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 amount of the service fee and the portion of the
transaction revenues that we and Cantor receive are 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
product; and (4) the product is traded on the Cantor Exchangesm. The percentage
of the transaction revenues we receive ranges from 2.5% to 100%. However, in
general, we receive 100% of the transaction revenues for fully electronic
transactions, paying to Cantor fulfillment services fees equal to 35% (20% if
the product is traded on the Cantor Exchangesm) of the transaction revenues and
Cantor receives 100% of the transaction revenues for voice-assisted brokerage
transactions, paying to us 7% of the transaction revenues. In addition, if the
transactions relate to a gaming business, we receive a service fee equal to 25%
of the net trading revenues. We have agreed to provide to Cantor technology
support services at cost.
We have also entered into a services agreement with TradeSpark pursuant to which
we provide the technology infrastructure for the transactional and technology
related elements of the TradeSpark energy marketplace as well as certain other
services in exchange for specified percentages of transaction revenues from the
marketplace. If a transaction is fully electronic, we receive 100% of the
aggregate transaction revenues and pay to TradeSpark a fulfillment services fee
equal to 35% of the transaction revenues. In general, if TradeSpark provides
voice-assisted brokerage services with respect to a transaction, then we receive
35% of the revenues and TradeSpark receives 65% of the revenues.
We are pursuing an aggressive strategy to convert most of Cantor's financial
marketplace products to our eSpeedsm system and, with the assistance of Cantor,
to continue to create new markets and convert new clients to our eSpeedsm
system. The process of converting these marketplaces includes modifying existing
trading systems to allow for transactions to be entered directly from a client
location, signing an agreement with the client, installing the hardware and
software at the client location and establishing communication lines between us
and the client. Other than Cantor, no client of ours accounted for more than 10%
of our transaction revenues from our date of inception through December 31,
2000.
-42-
RESULTS OF OPERATIONS
For the period from March 10, 1999 through December 31, 1999 and the year ended
December 31, 2000
Revenues
Period from March 10,
1999 (date of
commencement of
operations) to Percentage of Year ended Percentage of
December 31, 1999 total revenues December 31, 2000 total revenues
----------------- -------------- ----------------- --------------
(in thousands) (in thousands)
Transaction Revenues:
Fully electronic transactions..................... $10,080 26.4% $80,597 67.8%
Voice-assisted brokerage transactions............. 11,777 30.8 15,144 12.7
Screen assisted open outcry transactions.......... 3,525 9.2 2,450 2.1
----- --- ----- ---
Total transaction revenues........................ 25,382 66.4 98,191 82.6
System services and licensing fees................ 12,459 32.7 12,399 10.4
Interest income................................... 348 0.9 8,341 7.0
--- --- ----- ---
Total revenues.................................... $38,189 100.0% $118,931 100.0%
======= ====== ======== ======
Transaction revenues
For the year ended December 31, 2000, we earned $98.2 million in transaction
revenues, a 287% increase over transaction revenues of $25.4 million for the
period from March 10, 1999 to December 31, 1999. The growth in these revenues
was attributable to the continued roll out of electronic marketplaces and an
increase in the number of clients electronically trading through our eSpeedsm
system, as well as the fact that we operated for a full 12-month period in 2000.
As of December 31, 2000, we had converted 43 product marketplaces to our
eSpeedsm system.
Our revenues are currently highly dependent on transaction volume in the fixed
income markets globally. 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 may have an impact on our volume of
transactions. It is anticipated that as new marketplaces are converted to our
eSpeedsm system, more of our income will be generated from marketplaces around
the world.
System services and licensing fees
System services fees and licensing fees for the year ended December 31, 2000
were $12.4 million. This compares with system services fees for the period from
March 10, 1999 to December 31, 1999 of $12.5 million. We had no licensing fees
in 1999. For the year ended December 31, 2000, system services fees decreased as
a result of a decrease in traditional brokerage support and the migration to
fully electronic transactions. As a percentage of
-43-
revenues, system services and licensing fees decreased from 32.6% for the period
from March 10, 1999 to December 31, 1999 to 10.4% for the year ended December
31, 2000 as a result of our increased transaction revenues. We anticipate that
as we license our software to additional market participants, our revenues from
system services and licensing fees will grow.
Interest income
For the year ended December 31, 2000, we generated interest income from
overnight reverse repurchase agreements of $8.3 million, at a weighted average
interest rate of 6.3%, as compared to interest income of $0.3 million for the
period from March 10, 1999 to December 31, 1999. This increase primarily
reflects the fact that we received the net proceeds from our initial public
offering on December 15, 1999.
Expenses
Period from March 10,
1999 (date of
commencement of
operations) to Year ended
December 31, 1999 December 31, 2000
----------------- -----------------
(in thousands) (in thousands)
Compensation and employee benefits $21,502 $53,963
Occupancy and equipment.................... 10,293 21,561
Professional and consulting fees........... 5,149 13,036
Communications and client networks 3,355 4,589
Marketing.................................. -- 8,285
Fulfillment services fee................... 3,528 27,904
Administrative fees paid to
affiliates................................. 1,662 6,524
Options granted to Cantor
employees.................................. 2,850 --
Non-cash business partner
securities................................. -- 33,391
Other...................................... 2,649 9,684
----- -----
Total operating expenses................... $50,988 $178,937
======= ========
Compensation and employee benefits
At December 31, 2000, we had 493 professionals as compared to 331 professionals
at December 31, 1999. For the year ended December 31, 2000, our compensation
costs were $54.0 million as compared to compensation costs of $21.5 million for
the period from March 10, 1999 to December 31, 1999, a 151.0% increase,
principally due to our increased number of employees. We continue to believe
that we have established a core level of personnel to develop new
-44-
electronic marketplaces and maintain the existing infrastructure we have
established. Accordingly, while we will continue to add personnel, we estimate
our compensation costs will increase at more modest rates.
Occupancy and equipment
Occupancy and equipment costs were $21.6 million for the year ended December 31,
2000 as compared to occupancy and equipment costs of $10.3 million for the
period from March 10, 1999 to December 31, 1999, an increase of 109.5%. The
increase in occupancy and equipment costs was due to the expansion of space
needed to accommodate our additional personnel and an increase in the number of
our international locations. Our equipment expenses should increase as we
continue to invest in technology and related equipment. Occupancy expenditures
are comprised principally of the rent and facilities costs of our New York and
London offices.
Professional and consulting fees
Professional and consulting fees were $13.0 million for the year ended December
31, 2000 as compared to professional and consulting fees of $5.1 million for the
period from March 10, 1999 to December 31, 1999, an increase of 153.2%, due to
an increase in our strategic investment activities and expenses incurred in
connection with technology development. Our professional and consulting fees
will likely increase in the foreseeable future.
Communications and client networks
Communications costs were $4.6 million for the year ended December 31, 2000 as
compared to $3.4 million for the period from March 10, 1999 to December 31,
1999, an increase of 36.8%. Communications costs increased in 2000, primarily
due to the longer period of operations of our business in 2000. We expect such
costs to increase as we continue to expand into new marketplaces and geographic
locations and establish additional communication links with clients.
Marketing expenses
We incurred marketing expenses of $8.3 million for the year ended December 31,
2000 as compared to nominal marketing expenses during the period from March 10,
1999 to December 31, 1999. The increase in marketing expenses was due to the
implementation of our marketing program in 2000. Although we do not anticipate
that our marketing expenses will significantly change over the foreseeable
future with respect to our current operations, they may increase as we expand
the scope of our business.
Fulfillment services fees
Under various services agreements that we have entered, we are required to pay
fulfillment services fees of 20% or 35%, depending on the type of transaction,
of commissions paid by clients related to fully electronic transactions. For the
year ended December 31, 2000, these
-45-
costs were $27.9 million as compared to fulfillment services fees of $3.5
million for the period from March 10, 1999 to December 31, 1999, an increase of
690.9%. This increase was due to the increased number of fully electronic
transactions processed through our eSpeedsm system. As we continue to sign up
new clients and the volume of business processed in the fully electronic
brokerage channel increases, this expense will increase commensurately with our
transaction revenues but will not increase with respect to our software
licensing revenues.
Administrative fees paid to affiliates
Administrative fees paid to affiliates amounted to $6.5 million for the year
ended December 31, 2000 as compared to administrative fees of $1.7 million for
the period from March 10, 1999 to December 31, 1999, an increase of 292.5%.
Administrative fees increased as we expanded our business. As we continue to
expand our business, administrative fees will likely also increase.
Non-cash business partner securities
As a result of the issuance by us of warrants to purchase 666,666 shares of our
Class A common stock to each of Dynegy and Williams, we recorded a non-cash
charge against earnings of $29.8 million to reflect the value of the warrants.
As a result of the issuance by us of 28,374 shares of our Class A common stock
to the shareholders of MPI, we recorded a non-cash charge against earnings of
$1.4 million to reflect the value of the stock.
In conjunction with our investment in TradeSpark, we issued 5.5 million shares
of our Series A Redeemable Convertible Preferred Stock and 2.5 million shares of
our Series B Redeemable Convertible Preferred Stock. If certain revenue targets
are met, the preferred stock is convertible at the holders' option into warrants
to purchase up to 8 million shares of our Class A common stock. To the extent
that the revenue targets are not met, each share of preferred stock is
convertible into 1/100th of a share of our Class A common stock. As a result of
our issuance of the preferred stock, we recorded a non-cash charge against
earnings of $2.2 million to reflect the value of 80,000 shares of our Class A
common stock issuable upon conversion of the preferred stock if none of the
targets are met. We will recognize additional non-cash charges related to the
issuance of these business partner warrants and will take such charges if and
when they are converted over the next six years.
We have agreed to issue warrants to purchase 400,000 shares of our Class A
common stock in connection with the Freedom transaction. We currently expect to
record a one-time non-cash charge of approximately $3.6 million , representing
the value of the warrants, upon the closing of the transaction, which we
anticipate will occur in the first quarter of 2001.
Other expenses
Other expenses consist primarily of recruitment fees, travel, promotional and
entertainment expenditures. For the year ended December 31, 2000, other expenses
were $9.7 million as
-46-
compared to other expenses of $2.6 million for the period from March 10, 1999 to
December 31, 1999, an increase of 266.0%, primarily due to an increase in
recruitment fees.
Net Loss
Excluding non-cash charges for business partner securities, our net loss was
$27.0 million for the year ended December 31, 2000 as compared to a net loss of
$12.6 million for the period from March 10, 1999 to December 31, 1999. Including
the non-cash charges, we incurred a net loss of $60.4 million for the year ended
December 31, 2000 as compared to a net loss of $12.6 million for the period from
March 10, 1999 to December 31, 1999. Other than the non-cash charges, the losses
primarily resulted from expenditures on our technology and infrastructure
incurred in building our revenue base. We expect that we will continue to incur
losses and generate negative cash flow from operations for at least the first
half of 2001 as we continue to develop our systems and infrastructure and expand
our brand recognition and client base through increased marketing efforts. In
light of the rapidly changing nature of our business and our limited operating
history, we believe that period-to-period comparisons of our operating results
will not necessarily be meaningful and should not be relied upon as an
indication of future performance.
-47-
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth, by quarter, statement of operations data for the
period from March 10, 1999 (date of commencement of operations) to December 31,
2000. Results of any period are not necessarily indicative of results for a full
year.
1999 2000
---- ----
Quarter ended Quarter ended
March 10 to ------------------------------------- ------------------------------------------------
March 26 June 25 September 24 December 31 March 31 June 30 September 30 December 31
-------- ------- ------------ ----------- -------- ------- ------------ -----------
(in thousands)
Revenues:
Transaction Revenues:
Fully electronic
transactions........... $77 $1,153 $2,591 $6,259 $14,502 $20,413 $19,989 $25,692
Voice-assisted
brokerage
transactions........... 665 3,900 3,817 3,395 3,861 3,370 3,481 4,432
Screen assisted open
outcry transactions ... 380 1,377 1,075 693 883 689 487 392
--- ----- ----- --- --- --- --- ---
Total transaction
revenues .............. 1,122 6,430 7,483 10,347 19,246 24,472 23,957 30,516
System services and
licensing fees......... 826 4,139 4,139 3,355 3,161 3,101 3,101 3,036
Interest income........ -- -- -- 348 1,843 2,086 2,316 2,096
-- -- -- --- ----- ----- ----- -----
Total revenues......... 1,948 10,569 11,622 14,050 24,250 29,659 29,374 35,648
----- ------ ------ ------ ------ ------ ------ ------
Expenses:
Compensation and
employee benefits...... 1,268 6,403 7,034 6,797 11,338 14,440 14,004 14,181
Occupancy and
equipment.............. 676 2,855 3,102 3,660 4,700 4,956 5,790 6,115
Professional and
consulting fees........ 186 1,596 1,833 1,534 2,458 3,300 2,815 4,463
Communications and
client networks........ 221 1,103 1,122 909 840 1,010 1,209 1,530
Marketing.............. -- -- -- -- 1,129 3,670 2,106 1,380
Fulfillment services
fees................... 27 404 907 2,190 5,076 7,157 6,882 8,789
Administrative fees
paid to affiliates..... 94 461 511 596 1,604 1,708 1,527 1,685
Non-cash business
partner securities..... -- -- -- -- 29,805 3,586 --
Options granted to
Cantor employees....... -- -- -- 2,850 -- -- -- --
Other.................. 15 500 607 1,527 1,938 2,533 2,654 2,559
-- --- --- ----- ----- ----- ----- -----
Total expenses......... 2,487 13,322 15,116 20,063 29,083 68,579 40,573 40,702
----- ------ ------ ------ ------ ------ ------ ------
Loss before benefit
for income taxes....... $(539) $(2,753) $(3,494) $(6,013) $(4,833) $(38,920) $(11,199) $(5,054)
====== ======== ======== ======== ======== ========= ========= ========
The financial markets in which we operate are generally affected by seasonality.
Traditionally, the financial markets around the world experience lower volume
during the summer and at the end of the year due to a general slowdown in the
business environment and, therefore, transaction volume levels may decrease
during those periods. However, because of volatility in global markets caused by
the uncertainty of the outcome of the U.S. presidential election, as well
-48-
as policy changes from the Federal Reserve Bank of the United States, the
anticipated year-end slowdown did not occur as dramatically in 2000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, we had cash and cash equivalents of $122.2 million. We
used cash of $10.6 million in our operating activities, consisting of net loss
after non-cash items of $21.0 million offset in part by a $10.4 million increase
in net operating liabilities. We also used net cash of $2.1 million resulting
from $25.9 million of purchases of fixed assets and investments, reduced by net
proceeds from issuances of our Class A common stock.
Our operating cash flows consist of transaction revenues and system services
fees, various fees paid to or costs reimbursed to Cantor, other costs paid
directly by us and investment income. 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 a similar services agreement with TradeSpark and expect to
enter into a services agreement with Freedom upon the closing of that
transaction. Under the Administrative Services Agreement and the Joint Services
Agreement, any net receivable or payable is settled monthly, at the discretion
of the parties.
Although we have no material commitments for capital expenditures, we anticipate
that we will experience an increase in our capital expenditures and lease
commitments consistent with our anticipated growth in operations, infrastructure
and personnel. We currently anticipate that we will continue to experience
significant growth in our operating expenses for the foreseeable future and that
our operating expenses will be a material use of our cash resources.
Under the current operating structure, our cash flows from operations and our
other 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 and
their effect on our liquidity and capital resources.
-49-
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2000, we had invested $122.0 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 The Chase Manhattan
Bank. 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 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.
-50-
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
eSPEED, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report............................................. 52
Consolidated Statements of Financial Condition........................... 53
Consolidated Statements of Operations.................................... 54
Consolidated Statements of Cash Flows.................................... 56
Consolidated Statements of Changes in Stockholders' Equity............... 58
Notes to Consolidated Financial Statements............................... 59
-51-
Independent Auditors' Report
To the Board of Directors
and Stockholders of eSpeed, Inc.:
We have audited the accompanying consolidated statements of financial condition
of eSpeed, Inc. and Subsidiaries (the "Company") as of December 31, 2000 and
1999, and the related statements of operations, cash flows and changes in
stockholders' equity for the year ended December 31, 2000 and for the period
from March 10, 1999 (date of commencement of operations) to December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2000
and 1999, and the results of its operations and its cash flows for the year
ended December 31, 2000 and for the period from March 10, 1999 (date of
commencement of operations) to December 31, 1999, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
February 14, 2001
New York, New York
-52-
eSPEED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
As of December 31, 2000 and December 31, 1999
December 31, December 31,
2000 1999
- -------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents................................. $122,163,712 $134,845,522
Fixed assets, net......................................... 23,441,365 9,470,072
Investments............................................... 5,833,679 --
Other assets.............................................. 3,683,507 11,495
--------- ------
Total assets.............................................. $155,122,263 $144,327,089
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Payable to affiliates, net................................ $11,370,248 $6,743,929
Accounts payable and accrued liabilities.................. 11,494,262 2,071,347
---------- ---------
Total liabilities......................................... 22,864,510 8,815,276
---------- ---------
Stockholders' Equity:
Preferred stock, par value $.01 per share;
50,000,000 shares authorized, 8,000,000 and
no shares issued and outstanding.......................... 80,000 --
Class A common stock, par value $.01 per
share; 200,000,000 shares authorized;
16,342,202 and 10,350,000 shares issued and
outstanding............................................... 163,422 103,500
Class B common stock, par value $.01 per
share; 100,000,000 shares authorized;
35,520,480 and 40,650,000 shares issued and
outstanding............................................... 355,205 406,500
Additional paid-in capital................................ 205,908,024 147,588,726
Subscription receivable................................... (1,250,000) --
Accumulated deficit....................................... (72,998,898) (12,586,913)
------------ ------------
Total stockholders' equity................................ 132,257,753 135,511,813
----------- -----------
Total liabilities and stockholders' equity................ $155,122,263 $144,327,089
============ ============
See notes to consolidated financial statements
-53-
eSPEED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the year ended December 31, 2000 and the period from March 10, 1999 (date
of commencement of operations) to December 31, 1999
For the period
For the year from March 10,
ended 1999 to
December 31, December 31,
2000 1999
- -------------------------------------------------------------------------------------------------
Revenues:
Transaction revenues:
Fully electronic transactions.......................... $80,596,552 $10,079,842
Voice-assisted brokerage transactions.................. 15,144,343 11,777,306
Screen assisted open outcry transactions............... 2,450,333 3,524,399
--------- ---------
Total transaction revenues............................. 98,191,228 25,381,547
System services and licensing fees..................... 12,398,847 12,459,574
Interest income........................................ 8,340,815 347,804
--------- -------
Total revenues......................................... 118,930,890 38,188,925
----------- ----------
Expenses:
Compensation and employee benefits..................... 53,963,239 21,502,326
Occupancy and equipment................................ 21,560,535 10,292,349
Professional and consulting fees....................... 13,036,494 5,148,796
Communications and client networks..................... 4,588,626 3,355,070
Marketing.............................................. 8,285,385 --
Fulfillment services fees.............................. 27,903,849 3,527,945
Administrative fees paid to affiliates................. 6,524,341 1,662,058
Non-cash business partner securities................... 33,390,505 --
Options granted to Cantor employees.................... -- 2,850,073
Other.................................................. 9,683,776 2,649,110
--------- ---------
Total expenses......................................... 178,936,750 50,987,727
----------- ----------
Loss before provision (benefit) for income
taxes.................................................. (60,005,860) (12,798,802)
------------ ------------
Provision (benefit) for income taxes:
Federal................................................ -- --
State and local........................................ 406,125 (211,889)
------- ---------
-54-
For the period
For the year from March 10,
ended 1999 to
December 31, December 31,
2000 1999
- -------------------------------------------------------------------------------------------------
Total tax provision (benefit).......................... 406,125 (211,889)
------- ---------
Net loss............................................... $(60,411,985) $(12,586,913)
============= =============
Share and per share data:
Basic and diluted net loss per share................... $(1.17) $(.28)
Weighted average shares of common stock
outstanding............................................ 51,482,505 44,495,000
See notes to consolidated financial statements
-55-
eSPEED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31, 2000 and for the period from March 10, 1999
(date of commencement of operations) to December 31, 1999
For the period
For the year from March 10,
ended 1999 to
December 31, December 31,
2000 1999
- -------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss............................................... $(60,411,985) $(12,586,913)
Non-cash items included in net loss:
Depreciation and amortization.......................... 6,098,754 3,086,555
Issuances of non-cash business partner
securities............................................. 33,390,505 --
Issuances of stock options............................. -- 2,850,073
(Increase) decrease in operating assets:
Other assets........................................... (3,672,012) 1,190,728
Increase (decrease) in operating
liabilities:
Payable to affiliates, net............................. 4,626,319 6,743,929
Accounts payable and accrued liabilities............... 9,422,915 (1,046,137)
--------- -----------
Net cash (used in) provided by operating
activities............................................. (10,545,504) 238,235
------------ -------
Cash flows from investing activities:
Purchases of fixed assets.............................. (11,043,479) (2,717,462)
Capitalization of software development costs (9,026,568) (2,468,605)
Purchases of investments............................... (5,833,679) --
----------- --
Net cash used in investing activities.................. (25,903,726) (5,186,067)
------------ -----------
Cash flows from financing activities:
Proceeds from issuances of securities.................. 25,000,000 143,990,000
Proceeds from issuance of securities under
the ESPP............................................... 371,448 --
Payments for issuance related expenses................. (1,604,028) (4,396,646)
Proceeds from capital contributions.................... -- 200,000
-- -------
Net cash provided by financing activities 23,767,420 139,793,354
---------- -----------
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For the period
For the year from March 10,
ended 1999 to
December 31, December 31,
2000 1999
- -------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash
equivalents............................................ (12,681,810) 134,845,522
------------ -----------
Cash and cash equivalents, beginning of
period................................................. 134,845,522 --
----------- --
Cash and cash equivalents, end of period............... $122,163,712 $134,845,522
============ ============
Supplemental disclosure of non-cash financing activities:
Effective March 10, 1999, the Company received an initial
capital contribution as follows:
Fixed assets..................................................................... $7,370,560
Prepaid expenses................................................................. 1,202,223
Accrued compensation and benefits................................................ (1,490,836)
Accounts payable and accrued expenses............................................ (1,626,648)
-----------
Total non-cash capital contributed............................................... $5,455,299
==========
See notes to consolidated financial statements
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eSPEED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the year ended December 31, 2000 and for the period from March 10, 1999
(date of commencement of operations) to December 31, 1999
Common Common Additional Total
Preferred Stock Stock Paid-In Subscription Accumulated Stockholders'
Stock Class A Class B Capital receivable Deficit Equity
- -------------------------------------------------------------------------------------------------------------------------------
Balance, March 10, 1999...... $-- $-- $-- $-- $-- $-- $--
Capital contribution (100
shares)...................... 1 199,999 200,000
Non-cash capital contribution
(43,990,900 shares).......... 439,999 5,015,300 5,455,299
Conversion of Class B common
stock to Class A common
stock (3,350,000 shares)..... 33,500 (33,500)
Initial public offering of
Class A common stock
(7,000,000 shares)........... 70,000 143,920,000 143,990,000
Costs of initial public
offering..................... (5,749,481) (5,749,481)
Issuances of options......... 2,850,073 2,850,073
Issuances of warrants........ 1,352,835 1,352,835
Net loss..................... (12,586,913) (12,586,913)
------- -------- -------- ------------ ------------ ------------- -------------
Balance, December 31, 1999... -- 103,500 406,500 147,588,726 -- (12,586,913) 135,511,813
Conversions of Class B common
stock to Class A common
stock (5,129,520 shares)..... 51,295 (51,295) --
Issuance of Preferred Stock
(8,000,000 shares)........... 80,000 2,155,200 2,235,200
Issuance of Class A common
stock (845,819 shares)....... 8,458 27,591,542 (1,250,000) 26,350,000
Issuances of warrants........ 29,805,305 29,805,305
Costs of issuance of
securities................... (1,604,028) (1,604,028)
Issuances of Class A common
stock under the ESPP (16,863
shares)...................... 169 371,279 371,448
Net loss..................... (60,411,985) (60,411,985)
------- -------- -------- ------------ ------------ ------------- -------------
Balance, December 31, 2000... $80,000 $163,422 $355,205 $205,908,024 $(1,250,000) $(72,998,898) $132,257,753
======= ======== ======== ============ ============ ============= ============
See notes to consolidated financial statements
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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 wholly owned
subsidiaries, the Company) primarily engages in the business of operating
interactive business-to-business 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 Offering) (see Note 6).
The accompanying financial statements include activities of the Company while
operating as a division of CFS from March 10, 1999 to the Offering.
Use of Estimates: 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.
Transaction Revenues: Securities transactions and the related transaction
revenues are recorded on a trade date basis.
Cash and Cash Equivalents: The Company considers all highly liquid investments
with original maturity dates of 90 days or less at the date of acquisition to be
cash equivalents. Cash equivalents consist of securities purchased under
agreements to resell (Reverse Repurchase Agreements). It is the policy of the
Company to obtain possession of the collateral with a market value equal to or
in excess of the principal amount deposited. Collateral is valued daily and the
Company may require counter-parties to deposit additional collateral or return
amounts deposited when appropriate.
Fixed Assets: Fixed assets, principally computer and communication equipment and
software, are depreciated over their estimated economic useful lives (generally
three to five years) using an accelerated method. Internal and external direct
costs of application development and of
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obtaining software for internal use are capitalized and amortized over their
estimated economic useful life of three years on a straight-line basis.
Leasehold improvements are amortized over their estimated economic useful lives,
or the remaining lease term, whichever is shorter.
Investments: The Company accounts for its investments in entities at historical
cost when the Company does not have significant influence in the investee.
Investments in which the Company does have significant influence are accounted
for using the equity method. The Company does not maintain trading inventory of
marketable equity securities.
Stock Based Compensation: Awards to employees of options to purchase the common
stock of the Company are accounted for under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations.
No expense is recognized for awards under non-compensatory plans. Options and
warrants granted to non-employees are accounted for under the Financial
Accounting Standards Board's Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation", where the options or
warrants granted are recognized based on the fair value of the options or
warrants at the time of the grant.
New Accounting Pronouncements: In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The statement, as amended, is effective
for fiscal years beginning after June 15, 2000. On January 1, 2001, the Company
adopted SFAS No. 133 and amendments. The adoption did not have a material impact
on the Company's financial statements.
Reclassifications: Certain reclassifications have been made to prior year
balances in order to conform to the current year presentation.
2. Fixed Assets
December 31, December 31,
Fixed assets consist of the following: 2000 1999
- --------------------------------------------------------------------------------
Computer and communication equipment.......... $19,920,077 $9,544,265
Software, including software development costs 12,038,930 3,012,362
Leasehold improvements and other fixed assets 422,396 --
------- --
32,381,403 12,556,627
Less accumulated depreciation and amortization (8,940,038) (3,086,555)
----------- -----------
Fixed assets, net............................. $23,441,365 $9,470,072
=========== ==========
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3. Income Taxes
Through December 9, 1999, the Company operated as a division of CFS, which is a
New York partnership. Under applicable federal and state income tax laws, the
taxable income or loss of a partnership is allocated to each partner based upon
such partner's ownership interest. CFS is, however, subject to the
Unincorporated Business Tax (UBT) of the City of New York, and the benefit for
income taxes represents a reduction in UBT. The loss generated by the Company
while it operated as a division of CFS was used as a reduction of the taxable
income of CFS and, as such, the Company was reimbursed for such tax.
Since the commencement date of the Offering, December 10, 1999, the Company has
been subject to income tax as a corporation. Net operating losses (NOLs) from
that date, approximating $27,200,000, will be available on a carry forward basis
to offset future operating income of the Company. However, a valuation allowance
has been recorded at December 31, 2000 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.
4. Commitments and Contingencies
Leases: Under an administrative services agreement, eSpeed is obligated to
Cantor for minimum rental payments under Cantor's various non-cancelable leases
with third parties, principally for office space and computer equipment,
expiring at various dates through 2014 as follows:
For the Year Ending December 31:
- --------------------------------------------------------------------------------
2001............................................................ $5,083,188
2002............................................................ 5,142,996
2003............................................................ 5,040,930
2004............................................................ 4,775,042
2005............................................................ 4,090,313
Thereafter...................................................... 26,427,293
----------
Total........................................................... $50,559,762
===========
Rental expense under the above and under all other operating leases amounted to
$7,341,614 and $3,738,303 for the year ended December 31, 2000 and for the
period ended December 31, 1999, respectively.
Legal Matters: 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.
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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. Cantor has
agreed to indemnify the Company for any liabilities that are incurred with
respect to any current or future litigation involving Market Data Corporation,
Iris Cantor, CFI or Rodney Fisher.
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. A hearing on issues relating to CFLP's final relief took place on June
14, 2000. The parties are awaiting the entry by the Court of a final declaratory
judgment and/or award of monetary damages.
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 pending 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
the March 13, 2000 decision from the Delaware Court of Chancery prevents Iris
Cantor and CFI from relitigating matters that were adjudicated against them in
Delaware. Iris Cantor and CFI filed papers opposing the motion to dismiss on
June 5, 2000, and the defendants filed a reply on June 15, 2000. On February 7,
2001, the court granted the motion to dismiss CFI's complaint.
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
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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 the Company's 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.
On June 12, 2000, CFLP and CFGM filed a lawsuit in the Delaware Court of
Chancery against Iris Cantor, CFI and Rodney Fisher, seeking a declaratory
judgment that an Offer to Exchange, dated May 8, 2000 (the Exchange Offer),
pursuant to which certain partnership units in CFLP could be exchanged for
"e-units" that are entitled to receive distributions of the Company's stock from
CFLP on certain future dates subject to certain conditions, did not breach any
fiduciary duty or otherwise violate Delaware law. On July 18, 2000, CFI, Iris
Cantor and Rodney Fisher filed their respective answers, affirmative defenses,
counterclaims and third-party claims, in which they claim that certain special
conditions imposed upon them in connection with the Exchange Offer and not upon
other partners effectively precluded their participation in the Exchange Offer,
violated the Partnership Agreement of CFLP and constituted a breach of fiduciary
duty, and that accepting those conditions would conflict with their fiduciary
duties to Market Data Corporation. CFI, Iris Cantor and Rodney Fisher claim that
CFGM and Howard Lutnick, the Chairman and Chief Executive Officer of the Company
and sole shareholder of CFGM, the Managing General Partner of CFLP, breached
their fiduciary duties and engaged in self-dealing in allegedly structuring the
formation of the Company, the transfer of assets to the Company, the receipt of
stock options, salaries and other compensation by Howard Lutnick and other
Company executives from the Company, and the initial public offering of the
Company's shares. They further allege that CFGM and Howard Lutnick converted
Partnership assets (CFLP's technology assets) and intend to migrate CFLP's
brokerage business to the Company without sharing the value of the Company with
CFI, Iris Cantor and Rodney Fisher. Rodney Fisher also contends that the
Company, which he has named as a third-party defendant, aided and abetted these
alleged breaches of fiduciary duties. Among other things, CFI, Iris Cantor and
Rodney Fisher have requested the removal of CFGM as the managing general partner
of CFLP, a declaration that CFGM and Howard Lutnick have breached their
fiduciary duties to CFI, Iris Cantor and Rodney Fisher and have breached the
settlement agreement in an earlier litigation and the partnership agreement of
CFLP, a declaration that the Exchange Offer and all or certain of the amendments
to the partnership agreement are null and void, unspecified damages and a
constructive trust on any proceeds derived from the challenged conduct. On
September 15, 2000, CFLP, CFGM, Howard Lutnick and the Company responded to the
counterclaims by answering certain counterclaims and moving for dismissal and
for judgment on the pleadings with respect to the counterclaims. A hearing on
those motions has been scheduled for March 15, 2001.
Although the Company does not expect to incur any losses with respect to the
pending lawsuits or supplemental allegations surrounding Cantor's partnership
agreement, Cantor has agreed to indemnify the Company with respect to any
liabilities the Company incurs as a result of such lawsuits or allegations.
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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 the financial condition or results of operations of
the Company.
Risks and Uncertainties: The majority of the Company's revenues consist of fees
earned in connection with its interactive electronic business-to-business
vertical marketplaces. Revenues for these services are transaction based. As a
result, the Company's revenues could vary based on the transaction volume of
markets around the world.
5. Related Party Transactions
During the year ended December 31, 2000 and the period ended December 31, 1999,
all of the Company's Reverse Repurchase Agreements were 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 sold or repledged.
The fair value of such collateral at December 31, 2000 and 1999 totaled
$122,620,469 and $138,162,421, respectively. At December 31, 2000 and 1999,
Reverse Repurchase Agreements totaled $122,002,249 and $134,644,521,
respectively.
Under a Joint Services Agreement between the Company and Cantor, and under a
Services Agreement among the Company and TradeSpark, LP (TradeSpark), the
Company earns transaction revenues equal to a percentage of Cantor's or
TradeSpark's commission revenues on customer transactions for services provided
by the Company. The percentage of the transaction revenues ranges from 2.5% to
100%, depending on the type of electronic services provided for the transaction.
Revenues from such transactions during the year ended December 31, 2000 and the
period ended December 31, 1999 totaled $98,191,228 and $25,381,547,
respectively.
On certain transactions (those where the Company receives 100% of the commission
revenue share), Cantor and TradeSpark provide the Company with fulfillment
services for which Cantor is paid a fee of 20% or 35%, and TradeSpark is paid a
fee of 35%, of the transaction revenues earned on the transaction. Charges to
the Company for such fulfillment services during the year ended December 31,
2000 and the period ended December 31, 1999 totaled $27,903,849 and $3,527,945,
respectively.
The Company also provides network, data center and server administration support
and other technology services to Cantor and TradeSpark. The Company charges for
these services commensurate with its costs of providing these services. System
services fees received during the year ended December 31, 2000 and the period
ended December 31, 1999 totaled $12,333,222 and $12,459,574, respectively.
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
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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 year ended December 31, 2000 and the period ended December
31, 1999 totaling $6,524,341 and $1,662,058, respectively.
6. Capitalization
The rights of holders of shares of Class A and Class B common stock are
substantially identical, except that holders of Class B common stock are
entitled to 10 votes per share, while holders of Class A common stock are
entitled to one vote per share. Additionally, each share of Class B common stock
is convertible at any time, at the option of the holder, into one share of Class
A common stock. The Company initially issued 100 shares of Class B common stock
to Cantor in exchange for a cash contribution of $200,000.
Prior to the Offering, Cantor contributed net assets of $5,455,299. This
contribution included fixed assets with a net book value of $7,370,560 and
prepaid expenses of $1,202,223, and the assumption of liabilities consisting of
accrued compensation, accounts payable and other liabilities of $3,117,484. In
exchange for the contribution of net assets, the Company issued to Cantor
43,999,900 shares of Class B common stock. Immediately thereafter, Cantor
converted 3,350,000 shares of Class B common stock into Class A common stock and
sold them in the Offering.
In the Offering, 10,350,000 shares of Class A common stock were sold at $22 per
share, of which 7,000,000 shares were sold by the Company, raising approximately
$144,000,000 in proceeds before Offering expenses. The remaining shares were
sold by CFS.
In June 2000, the Company sold 1,578,142 shares of Class A common stock to
minority investors for consideration of $50,000,000, as discussed in Note 7. In
connection with this transaction, one half of the shares sold by the Company
were purchased from Cantor for $25,000,000.
In July 2000, in conjunction with the acquisition by Cantor of a municipal bond
brokerage business, the Company issued 28,374 shares of Class A common stock to
the shareholders of the acquired business. The Company also granted an
additional 28,374 shares of Class A common stock to certain employees of the
acquired business in exchange for promissory notes, both as discussed in Note 7.
During the year ended December 31, 2000, the Company sold 16,863 shares of Class
A common stock pursuant to the Company's Employee Stock Purchase Plan as
discussed in Note 10.
In September 2000, the Company issued 8 million shares of Redeemable Convertible
Preferred Stock (the Preferred Stock) to business partners in conjunction with
an investment in the TradeSpark Qualified Vertical. As more fully described in
Note 7, if certain conditions are met,
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the Preferred Stock is convertible at the option of the holder into warrants to
purchase the Company's Class A common stock. To the extent the conditions are
not met, the Company may either redeem the Preferred Stock or convert the
Preferred Stock into 1/100th of a share of the Company's Class A common stock.
7. Business Partner Transactions
Williams and Dynegy: In June 2000, the Company sold to The Williams Companies,
Inc. (Williams) and Dynegy, Inc. (Dynegy) one Unit each consisting of (i)
789,071 shares (the Shares) of the Company's Class A common stock and (ii)
warrants (the Warrants) exercisable for the purchase of up to 666,666 shares of
Class A common stock, for an aggregate purchase price for each Unit of
$25,000,000. The Warrants have a per share exercise price of $35.20, a ten year
term and are exercisable during the last 4 1/2 years of the term, subject to
acceleration under certain prescribed circumstances intended to provide
incentives to Williams and Dynegy to invest in four Qualified Verticals as
described below. The Shares will not be transferable prior to the first
anniversary of the Closing. The Company recorded a non-cash charge of
$29,805,305 at the time of the Closing to reflect the value of the Warrants.
Each of Williams and Dynegy agreed that, subject to the satisfaction of certain
conditions, it will invest $2,500,000 in at least four entities (the Qualified
Verticals) to be formed by the Company and Cantor within 12 months of the
Closing (subject to extension for a period not to exceed six months under
certain prescribed circumstances, the Investment Period). It is expected that
each Qualified Vertical will be jointly owned by industry market participants,
the Company and Cantor and will establish a new vertical electronic and
telephonic marketplace with the Company in which such Qualified Vertical will
broker and possibly clear transactions for the industry market participants and
other clients. TradeSpark, the first Qualified Vertical, was established in
September 2000. Products that may be traded on other Qualified Verticals include
natural gas liquids, petrochemicals, crude oil and bandwidth. Each of Williams
and Dynegy will not necessarily invest in the same Qualified Verticals as the
other. In connection with up to four additional Qualified Verticals, Williams
and, subject to certain limitations, Dynegy, will be entitled to invest
$25,000,000 in shares of the Company's Class A common stock (the Additional
Investment Right). Such right provides for investment at a 10% discount to the
average trading price for the 10 trading days preceding the date of such party's
investment in such new Qualified Vertical, or, under certain circumstances, the
public announcement of the formation of such Qualified Vertical. The Additional
Investment Right was approved by stockholders at the Company's 2000 Annual
Meeting of Stockholders on October 26, 2000. Any shares of Class A common stock
purchased pursuant to the Additional Investment Right will not be transferable
prior to the first anniversary of issuance.
The Company entered into a stock purchase agreement with Cantor providing for
the purchase by the Company from Cantor of half of the number of shares
purchased by Williams and Dynegy, in the aggregate, each time an Additional
Investment Right is exercised for the same purchase price per share as is paid
by Williams and Dynegy at the time.
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TradeSpark: On September 25, 2000, the Company and Cantor, in conjunction with
Williams and other participants in the energy market, formed TradeSpark to
operate a wholesale electronic and telephonic marketplace in North America for
natural gas, electricity, coal, emissions allowances, and weather financial
products.
The Company invested $2,000,000 for a 5% interest in TradeSpark and Cantor
invested $4,250,000 and contributed certain assets in exchange for a 28.33%
interest. The remaining 66.67% interest was purchased by energy industry market
participants (EIPs). The Company has also entered into a technology services
agreement with TradeSpark pursuant to which the Company provides the technology
infrastructure for the transactional and technology related elements of the
TradeSpark marketplace as well as certain other services in exchange for
specified percentages of transaction revenues from the marketplace.
In order to provide incentives to the EIPs to trade on the TradeSpark electronic
marketplace, the Company issued 5.5 million shares of Series A Redeemable
Convertible Preferred Stock (Series A Preferred Stock) and 2.5 million shares of
Series B Redeemable Convertible Preferred Stock (Series B Preferred Stock) to a
limited liability company newly-formed by the EIPs. Upon the satisfaction of
certain revenue thresholds and other conditions, principally related to the
volume of transactions executed through the TradeSpark marketplace, the Series A
Preferred Stock and Series B Preferred Stock are convertible into Series A and B
Warrants, respectively, to collectively purchase up to 8 million shares of the
Company's Class A common stock at an exercise price of $27.94 per share. To the
extent that the conditions to full conversion are not satisfied, each share of
unconverted Series A and B Preferred Stock may be redeemed at the Company's
option, or may be converted into 1/100th of a share of the Company's Class A
common stock. The Company has recognized a non-cash charge of $2,235,200, equal
to the fair value of the 80,000 shares of Class A common stock issuable upon
conversion of the preferred stock, if none of the conditions are met. The
Company will recognize additional non-cash charges related to the issuance of
these shares of preferred stock if and when they are converted over the next six
years, which non-cash charges could aggregate $53,644,800 if all conditions
(including but not limited to TradeSpark total transaction revenues of at least
$250,000,000) are met and all shares of preferred stock are converted. The fair
value of the Preferred Stock was estimated based on the value of the warrants
into which the Preferred Stock would be converted (assuming full conversion),
discounted for liquidity, hedging, and dilution issues. The warrants were valued
using a modified Black-Scholes pricing model and asumptions as to risk-free
interest rate, expected life and range of expected volatility of 6.3%, 10 years,
and 32% to 55%, respectively.
Municipal Partners: On July 21, 2000, Cantor Fitzgerald Partners, an affiliate
of eSpeed, purchased the U.S. municipal bond brokerage business and certain
other assets of Municipal Partners, Inc. (MPI) for approximately $1,500,000 and
eSpeed issued to MPI's shareholders 28,374 shares of the Company's Class A
common stock having a value at the date of issuance of $1,350,000. Although the
purchased assets are owned by Cantor Fitzgerald Partners, eSpeed is entitled to
100% of the revenues generated from any fully electronic transaction effected in
a marketplace utilizing the eSpeedsm system by its affiliates pursuant to a
Joint Services Agreement, as amended, among eSpeed and its affiliates, including
Cantor Fitzgerald Partners.
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In addition, in order to provide incentives to promote the use of the eSpeedsm
trading platform in connection with the purchased business, eSpeed granted an
aggregate of 28,374 restricted shares of its Class A common stock to certain
employees and shareholders of MPI in exchange for interest-bearing promissory
notes that are due July 21, 2010 (the Pledged Shares). The promissory notes are
reflected in the consolidated statement of financial condition as Subscription
Receivable within stockholders' equity. The Pledged Shares may be redeemed, at
the option of eSpeed, by cancellation of the related note(s) if eSpeed does not
receive $3,000,000 in electronic transaction revenues generated by Cantor's
municipal bond brokerage business for any consecutive 12-month period within
three years of July 21, 2000.
8. Long-Term Incentive Plan
The Company has adopted the eSpeed, Inc. 1999 Long-Term Incentive Plan (the LT
Plan) which provides for awards in the form of 1) either incentive stock options
or non-qualified stock options (NQSOs); 2) stock appreciation rights; 3)
restricted or deferred stock; 4) dividend equivalents; 5) bonus shares and
awards in lieu of obligations to pay cash compensation; and 6) other awards, the
value of which is based in whole or in part upon the value of eSpeed's common
stock.
The Compensation Committee of the Board of Directors administers the LT Plan and
is generally empowered to determine award recipients, and the terms and
conditions of those awards. Awards may be granted to directors, officers,
employees, consultants and service providers of the Company and its affiliates.
9. Options and Warrants
During the year ended December 31, 2000, the Company issued 3,770,312 options to
employees pursuant to the LT Plan. The exercise prices for the options equaled
or exceeded the value of the Company's Class A common stock on the date of each
award. The options generally vest ratably over four or five years from the grant
date.
Concurrent with the Offering, the Company issued 6,227,445 options to employees
and outside directors of the Company, of which 500,000 were immediately
exercisable. At the time of the grant, the remaining options were originally
scheduled to vest as follows: 3,915,000 spread ratably over the five successive
anniversaries of the Offering, 1,752,445 spread ratably over the four successive
anniversaries of the Offering, and 60,000 spread ratably over the three
successive six month anniversaries of the Offering.
On October 19, 2000, the option terms were amended so that, effective on the
first anniversary of the Offering, future vesting occurs ratably on a quarterly
basis. This amendment had no financial impact as the market value of the
Company's Class A common stock was below the exercise price of all outstanding
options at that date.
The weighted average grant date fair values of employee stock options granted
were $16.90 and $13.29 for the year ended December 31, 2000 and the period ended
December 31, 1999,
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respectively. 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, the Company's net loss and loss per
common share would have increased by $28,738,843 and $0.56, and $6,642,591 and
$0.15, for the year ended December 31, 2000 and the period ended December 31,
1999, respectively.
Concurrent with the Offering, the Company issued 290,320 options to Cantor
employees and a consultant. The estimated fair value of the options at the time
of the Offering resulted in a one-time non-cash charge to the Company of
$2,850,073 in the period ended December 31, 1999.
The Company issued 135,000 warrants to a consultant in connection with the
Offering. The grant date estimated fair value of $1,352,835 has been recorded
both as an increase to additional paid-in capital and as an increase in Offering
costs which have been charged against additional paid-in capital.
The fair value of the above options and warrants was estimated using a modified
Black-Scholes option pricing model. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of the stock options or warrants. The
assumptions which were used in the Black-Scholes model for the year ended
December 31, 2000 and the period ended December 31, 1999 included risk-free
interest rates of 5.25% and 6.0%, expected lives ranging from two to eight years
and three to eight years, and expected volatility of 80% and 55% , respectively.
There were no assumed dividends.
In June 2000, the Company sold 1,333,332 warrants to purchase Class A common
stock to business partners as discussed in Note 7. The warrants expire in June
2010 and are generally exercisable beginning December 2004. The estimated fair
value of the warrants at the time of issuance resulted in a one-time non-cash
charge to the Company of $29,805,305. The fair value of the warrants was
estimated using a modified Black-Scholes pricing model and assumptions as to
risk-free interest rate, expected life, and expected volatility of 7.4%, 10
years, and 48%, respectively.
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The following table summarizes changes in options and warrants from March 10,
1999 (date of commencement of operations) to December 31, 2000.
Cantor Weighted
eSpeed Employee & Average
Employee Consultant Exercise
Options Options Warrants Total Price Expiration Dates
- --------------------------------------------------------------------------------------------------------------------------------
Granted...................................... 6,227,445 290,320 135,000 6,652,765 $22.00 12/2004 - 12/2009
Exercised.................................... -- -- -- -- --
Canceled..................................... (24,900) (24,900) $22.00
------- ------- ------
Balance, December 31, 1999................... 6,202,545 290,320 135,000 6,627,865 $22.00 12/2004 - 12/2009
Granted...................................... 3,770,312 1,333,332 5,103,644 $25.76 2/2010 - 12/2010
Exercised.................................... -- -- -- -- --
Canceled..................................... (292,460) -- (292,460) $24.38
-------- -- -------- ------
Balance, December 31, 2000................... 9,680,397 290,320 1,468,332 11,439,049 $23.62 12/2004 - 12/2010
========= ======= ========= ========== ====== =================
The following table provides further details relating to the Company's stock
options and warrants outstanding as of December 31, 2000.
Options & Warrants Outstanding Options & Warrants Exercisable
----------------------------------------- ------------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Number Exercise Contractual Life Number Exercise
Range of Exercise Prices Outstanding Price (in years) Exercisable Price
- ---------------------------------------------------------------------------------------------------------------------
10.00 to 19.99................................... 2,220,510 16.29 9.9 -- --
20.00 to 29.99................................... 7,049,483 22.22 8.3 2,145,657 22.00
30.00 to 39.99................................... 1,662,606 32.91 9.4 -- --
40.00 to 49.99................................... 448,110 43.19 9.5 -- --
50.00 to 59.99................................... 44,894 55.01 9.2 -- --
60.00 to 69.99................................... 11,346 62.93 9.2 -- --
70.00 to 77.00................................... 2,100 74.80 9.2 -- --
-----
11,439,049 23.62 8.8 2,145,657 22.00
========== ===== === ========= =====
10. Stock Purchase Plan
The Company has adopted a qualified Employee Stock Purchase Plan to permit
eligible employees to purchase shares of eSpeed common stock at a discount. At
the end of each quarterly purchase period, as defined, accumulated payroll
deductions are used to purchase stock at a price determined by a Stock Purchase
Plan Administrative Committee, which will generally not be less than 85% of the
lowest market price at various defined dates during the purchase period. The
Company has reserved 425,000 shares of Class A common stock for issuance under
the Stock Purchase Plan. During the year ended December 31, 2000, the Company
issued 16,863 shares to employees at an average price of $21.99. In 2001, the
Company issued 13,601 shares of Class A common stock at a price of $13.33 per
share in consideration of amounts withheld in the fourth quarter.
11. Deferred Compensation Plan
Employees of the Company are eligible to participate in the eSpeed Inc. Deferral
Plan for Employees of Cantor Fitzgerald, L.P. and its Affiliates (the Plan),
whereby eligible employees may elect to defer a portion of their salaries by
directing the Company to contribute to the Plan.
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The Plan is available to all employees of the Company meeting certain
eligibility requirements and is subject to the provisions of the Employee
Retirement Income Security Act of 1974. Employee contributions are directed to
one or more investment funds, one of which, beginning in 2000, invests in the
Company's Class A common stock (the eSpeed Stock Fund). The Company will match
contributions to the eSpeed Stock Fund annually with up to $3,000 of the
Company's Class A common stock per participant. In 2001, the Company will
contribute 13,764 shares of its Class A common stock relating to employee
contributions to the eSpeed Stock Fund for the year ended December 31, 2000. The
administration of the Plan is performed by CFLP. The Company pays its
proportionate share of such administrative costs under the Administrative
Services Agreement.
12. Regulatory Capital Requirements
Through its subsidiary, eSpeed Government Securities, Inc., the Company is
subject to Securities and Exchange Commission (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 December 31, 2000, eSpeed
Government Securities, Inc.'s liquid capital of $28,944,299 was in excess of
minimum requirements by $28,919,299.
Additionally, the Company's subsidiary, eSpeed Securities, Inc., is subject to
SEC broker-dealer regulation under Rule 17a-5 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 December 31, 2000, eSpeed Securities, Inc. had net capital of
$3,723,330, which was $3,552,207 in excess of its required net capital, and
eSpeed Securities, Inc.'s net capital ratio was 0.69 to 1.
13. 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
affiliates.
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.
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For the period
For the year from March 10,
ended 1999 to
December 31, December 31,
Transaction Revenues: 2000 1999
- -------------------------------------------------------------------------------------------------
Europe................................................. $16,346,790 $5,392,923
Asia................................................... 1,397,154 450,457
--------- -------
Total Non-Americas..................................... 17,743,944 5,843,380
Americas............................................... 80,447,284 19,538,167
---------- ----------
Total.................................................. $98,191,228 $25,381,547
=========== ===========
December 31, December 31,
Average long-lived assets 2000 1999
- -------------------------------------------------------------------------------------------------
Europe.................................................... $2,225,886 $2,257,914
Asia...................................................... 791,570 925,790
------- -------
Total Non-Americas........................................ 3,017,456 3,183,704
Americas.................................................. 13,736,827 5,236,613
---------- ---------
Total..................................................... $16,754,283 $8,420,317
=========== ==========
14. Subsequent Event
On January 29, 2001, the Company and Cantor agreed to form a limited partnership
(the LP) to acquire an interest in Freedom International Brokerage (Freedom), a
Canadian government securities broker-dealer. The Company has agreed to
contribute 310,770 shares of its Class A common stock to the LP as a limited
partner. The Company will share in 15% of the LP's cumulative profits but not in
cumulative losses. Cantor agreed to contribute 103,589 shares of the Company's
Class A common stock as the general partner. Cantor will be allocated all of the
LP's cumulative losses or 85% of the cumulative profits. The LP will exchange
the 414,359 shares for a 66.7% interest in Freedom. In addition, the Company
will issue warrants to purchase 400,000 shares of its Class A common stock to
provide incentives to the other Freedom owner participants to migrate to the
Company's fully electronic platform. Accordingly, the Company currently expects
to record a one-time non-cash charge of approximately $3,600,000 representing
the value of the warrants.
The Company will be entitled to 100% of the electronic transaction services
revenues generated by Freedom and will pay 35% of that to Freedom as a fee in
respect of fulfillment services. The Company will also receive 35% of Freedom's
revenues derived from all voice-assisted transactions, other miscellaneous
transactions and the sale of market data or other information.
-72-
15. Quarterly Information (Unaudited)
The unaudited quarterly results of operations of the Company for 2000 and 1999
are prepared in accordance with generally accepted accounting principles. The
information presented reflects all adjustments (which consist of normal
recurring accruals) that are, in management's opinion, necessary for the fair
presentation of results of operations for the periods presented.
2000 Quarter Ended
------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Total revenues...................................................... $24,250,227 $29,658,717 $29,373,596 $35,648,350
Total expenses...................................................... 29,083,643 68,578,359 40,572,267 40,702,481
---------- ---------- ---------- ----------
Loss before provision for income taxes.............................. (4,833,416) (38,919,642) (11,198,671) (5,054,131)
Income tax provision................................................ 92,500 107,500 88,125 118,000
------ ------- ------ -------
Net loss............................................................ $(4,925,916) $(39,027,142) $(11,286,796) $(5,172,131)
============ ============= ============= ============
Net loss per share.................................................. $(0.10) $(0.76) $(0.22) $(0.10)
======= ======= ======= =======
1999 Quarter Ended
March 10 ------------------
through 26,
1999 June 25 September 24 December 31
---- ------- ------------ -----------
Total revenues...................................................... $1,948,250 $10,569,356 $11,621,863 $14,049,456
Total expenses...................................................... 2,486,758 13,321,989 15,116,370 20,062,610
--------- ---------- ---------- ----------
Loss before provision for income taxes.............................. (538,508) (2,752,633) (3,494,507) (6,013,154)
Income tax benefit.................................................. (13,470) (68,849) (89,488) (40,082)
-------- -------- -------- --------
Net loss............................................................ $(525,038) $(2,683,784) $(3,405,019) $(5,973,072)
========== ============ ============ ============
Net loss per share.................................................. $(0.01) $(0.06) $(0.08) $(0.13)
======= ======= ======= =======
-73-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
-74-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides information as of February 8, 2001 regarding our
directors and executive officers.
Name Age Title
--- -----
Howard W. Lutnick............. 39 Chairman of the Board and Chief Executive
Officer
Frederick T. Varacchi......... 35 President and Chief Operating Officer;
Director
Douglas B. Gardner............ 39 Vice Chairman; Director
Jeffrey G. Goldflam........... 47 Senior Vice President and Chief Financial
Officer
Stephen M. Merkel............. 42 Senior Vice President, General Counsel and
Secretary
Richard C. Breeden............ 51 Director(1)
Larry R. Carter............... 57 Director(1)
William J. Moran.............. 59 Director(1)
Joseph P. Shea................ 46 Director
(1) Non-employee director and member of the Audit and Compensation Committees.
Howard W. Lutnick. Mr. Lutnick has been our Chairman of the Board of Directors
and Chief Executive Officer since June 1999. Mr. Lutnick joined Cantor in 1983
and has served as President and Chief Executive Officer of Cantor since 1991. He
directs all facets of eSpeed's and Cantor's worldwide operations. Mr. Lutnick's
company, CF Group Management, Inc., is the managing general partner of Cantor.
Mr. Lutnick serves as co-chairman of the Cantor Exchange(sm). Mr. Lutnick is a
member of the Executive Committee of the Intrepid Museum Foundation's Board of
Trustees, the Zachary and Elizabeth M. Fisher Center for Alzheimer's Disease
Research at Rockefeller University, the Board of Managers of Haverford College,
the Board of Directors of City Harvest and the Board of Directors of New York
City Public/Private Initiatives, Inc.
Frederick T. Varacchi. Mr. Varacchi has been our President and Chief Operating
Officer since June 1999. Mr. Varacchi has been an Executive Managing Director
and the Chief Operating Officer of Cantor since October 1999. From March 1998 to
October 1999, he served as Senior Managing Director and Chief Information
Officer of Cantor. Before joining Cantor, Mr. Varacchi was Senior Vice President
and Chief Technology Officer of Greenwich Natwest, a financial services division
of National Westminster Bank, overseeing information technology for the company
from January 1995 to February 1998. From March 1990 to January 1995, Mr.
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Varacchi worked for Chase Manhattan Bank, where he held a variety of senior
technology positions, including Head of Global Network Systems for Private
Banking. From January 1989 to March 1990, Mr. Varacchi served in a variety of
positions with Salomon Smith Barney, including as Head of Front Office Systems.
Douglas B. Gardner. Mr. Gardner has been our Vice Chairman since June 1999. Mr.
Gardner has been an Executive Managing Director of Cantor since October 1999. He
previously served as Senior Managing Director and Chief Administrative Officer
of Cantor from January 1994 to October 1999, where he was responsible for
overseeing all worldwide finance and support related functions. Mr. Gardner
serves as a director and is on the executive and finance committees of the
Cantor Exchange(sm). Prior to joining Cantor, Mr. Gardner was a partner of DG
Equities, a commercial and residential real estate developer and owner. From
1983 to 1985, Mr. Gardner was associated with Lehman Brothers in the
High-Technology Division of its Corporate Finance Department. Mr. Gardner is a
member of the Board of Directors of the Government Securities Clearing
Corporation and the National Futures Association.
Jeffrey G. Goldflam. Mr. Goldflam has been our Senior Vice President and Chief
Financial Officer since September 2000. Mr. Goldflam has been Senior Vice
President and Chief Financial Officer of Cantor since September 2000. From July
1995 to September 2000, Mr. Goldflam was Executive Vice President and Chief
Financial Officer of Fimat USA, Inc., a wholly-owned subsidiary of Societe
Generale Bank, a French bank, and from August 1989 to July 1995, he was
Executive Vice President and Chief Financial Officer of Brody, White & Co., a
financial services firm that was acquired by Fimat USA, Inc. in 1995. Prior to
1989, Mr. Goldflam was Senior Vice President, Treasurer and a member of the
Board of Directors of Thomson McKinnon Securities Inc., a financial services
firm.
Stephen M. Merkel. Mr. Merkel has been our Senior Vice President, General
Counsel and Secretary since June 1999. Mr. Merkel has been Executive Managing
Director of Cantor since December 2000 and has also been Senior Vice President,
General Counsel and Secretary of Cantor since 1993, where he is responsible for
Cantor's legal, compliance, tax, risk and credit departments. Mr. Merkel serves
as a director and Secretary of the Cantor Exchange(sm). Prior to joining Cantor,
Mr. Merkel was Vice President and Assistant General Counsel of Goldman Sachs &
Co. from February 1990 to May 1993. From September 1985 to January 1990, Mr.
Merkel was associated with the law firm of Paul, Weiss, Rifkind, Wharton &
Garrison.
Richard C. Breeden. Mr. Breeden has been our director since December 1999. Mr.
Breeden has been Chairman of the Board and Chief Executive Officer of Equivest
Finance, Inc., a publicly traded vacation ownership company, since October 1997
and President since October 1998. Mr. Breeden has served as Trustee for the
Bennett Funding Group, Inc. since 1996. Mr. Breeden also has served as President
of Richard C. Breeden & Co., a consulting firm, since 1996. From 1993 to 1996,
Mr. Breeden served as Chairman of the worldwide financial services practice of
Coopers & Lybrand and, from 1989 to 1993, Mr. Breeden was Chairman of the U.S.
Securities and Exchange Commission. Mr. Breeden was a director of The
Philadelphia Stock Exchange, Inc.
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Larry R. Carter. Mr. Carter has been our director since December 1999. Mr.
Carter joined Cisco Systems, a computer technology company, in January 1995 as
Vice President, Finance and Administration and as Chief Financial Officer and
Secretary. In July 1997, he was promoted to Senior Vice President, Finance and
Administration, Chief Financial Officer and Secretary. From 1992 to January
1995, Mr. Carter was Vice President and Corporate Controller at Advanced Micro
Devices. His career also includes four years with V.L.S.I. Technology Inc. as
Vice President, Finance and Chief Financial Officer and two years at S.G.S.
Thompson Microelectronics Inc. as Vice President, Finance, Administration and
Chief Financial Officer. He also spent 19 years at Motorola, Inc., where he held
a variety of financial positions, the last being Vice President and Controller,
M.O.S. Group. Mr. Carter is on the Board of Directors of Cisco Systems, Network
Appliance, Inc., Transmeta Corp. and QLogic Corporation.
William J. Moran. Mr. Moran has been our director since December 1999. Mr. Moran
is Executive Vice President and General Auditor of J.P. Morgan Chase & Co. Mr.
Moran joined the Chase Manhattan Corporation and the Chase Manhattan Bank in
1975 as Internal Control Executive. After several promotions, Mr. Moran was
named General Auditor in 1992, Executive Vice President in 1997 and a member of
the Management Committee in 1999. Before joining Chase, Mr. Moran was with the
accounting firm of Peat, Marwick, Mitchell & Co. for nine years.
Joseph P. Shea. Mr. Shea has been our director since December 1999. Mr. Shea has
been with Cantor since 1989. He has been Executive Managing Director since
October 1999, was Senior Managing Director in charge of U.S. taxable fixed
income securities from 1997 to 1999, was Managing Director of the corporate bond
and U.S. government agency securities departments from 1995 to 1997 and was
Managing Director of the corporate bond department from 1989 to 1995.
Committees of the Board
Our board of directors has an Audit Committee and a Compensation Committee. The
members of our Audit Committee are Messrs. Breeden, Carter and Moran, all of
whom are independent directors. Our Audit Committee selects the independent
auditors, reviews such auditors' independent status, consults with such auditors
and with management with regard to the adequacy of our internal accounting
controls and considers any non-audit functions to be performed by the
independent auditors.
The members of our Compensation Committee are Messrs. Breeden, Carter and Moran.
The Compensation Committee is responsible for reviewing and approving all
compensation arrangements for our executive officers and for overseeing our
stock option and stock purchase plans.
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, our directors,
executive officers and any person holding more than 10% of our Class A common
stock are required to file initial forms of ownership of our Class A common
stock and reports of changes in that ownership with the Securities and Exchange
Commission. Specific due dates for these forms have been established, and we are
required to disclose in this report any failure to file by these dates.
Based solely on our review of the copies of such forms received by it
with respect to fiscal 2000, or written representations from certain reporting
persons, to the best of our knowledge, all reports were filed on a timely basis.
-78-
ITEM 11. EXECUTIVE COMPENSATION
The following table provides certain summary information concerning all
compensation earned by our Chief Executive Officer and each of the other four
most highly compensated executive officers (collectively, the Named Executive
Officers) whose annual salary and bonus for the period from March 10, 1999
through December 31, 1999 and the year ended December 31, 2000 exceeded $100,000
in the aggregate.
Summary Compensation Table
Long-Term
Compensation
Awards
---------------------
Securities Underlying
Name and Principal Position Year Salary Bonus Options (#)
- -------------------------------------- ---- -------- ------ ---------------------
Howard W. Lutnick..................... 2000 $350,000 $650,000 625,000
Chairman and Chief 1999 280,000 2,500,000
Executive Officer
Frederick T. Varacchi................. 2000 500,000 500,000 200,000
President and Chief Operating 1999 400,000 800,000
Officer
Douglas B. Gardner.................... 2000 250,000 350,000 75,000
Vice Chairman 1999 200,000 375,000
Jeffrey G. Goldflam................... 2000 38,356 62,500 80,000
Senior Vice President and
Chief Financial Officer
Stephen M. Merkel..................... 2000 150,000 300,000 100,000
Senior Vice President and 1999 120,000 100,000
General Counsel
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The following table sets forth the options granted during 2000 and the
value of the options held on December 31, 2000 by our Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
- --------------------------------------------------------------------------------
Percent of
Number of Total
Shares Options
Underlying Granted to Exercise or
Options Employees in Base Price Expiration Grant Date
Name Granted 2000 ($/share) Date Present Value ($)
- -------------------------- ---------- ------------ ----------- ---------- ----------------
Howard W. Lutnick......... 625,000(1) 17.0% $16.875 11/27/10 8,352,405(3)
Frederick T. Varacchi..... 200,000(1) 5.4 16.875 11/27/10 2,672,770(3)
Douglas B. Gardner........ 75,000(1) 2.0 16.875 11/27/10 1,002,289(3)
Jeffrey G. Goldflam....... 65,000(2) 1.8 27.50 9/17/10 1,289,008(4)
15,000(1) 0.4 16.875 11/27/10 200,458(3)
Stephen M. Merkel......... 100,000(1) 2.7 16.875 11/27/10 1,336,385(3)
- ----------
(1) Twenty percent of the options vest on November 28, 2001 and 5% vest
quarterly thereafter.
(2) Twenty percent of the options vest on September 18, 2001 and 5% vest
quarterly thereafter.
(3) The fair value of the options was estimated using a modified Black-Scholes
option pricing model and the following assumptions: risk-free interest
rate of 5.25%, no expected dividends, expected stock price volatility of
80% and assumed to be exercised at 80% of their original life.
(4) The fair value of the options was estimated using a modified Black-Scholes
option pricing model and the following assumptions: risk-free interest
rate of 5.83%, no expected dividends, expected stock price volatility of
65% and assumed to be exercised at 80% of their original life.
-80-
The following table provides information, with respect to the Named
Executive Officers, concerning options and SARs held as of December 31, 2000.
Aggregated Option/SAR Exercises In Last Fiscal Year
and Fiscal Year-End Option/SAR Values
Number of Securities
Shares Value Underlying Unexercised Value of Unexercised In-the-
Acquired Realized Options/SARs at Fiscal Money Options/ SARs at
on on Year-End (#) Fiscal Year-End($)(1)
Exercise Exercise --------------------------- ----------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------- -------- --------- ----------- ------------- ----------- -------------
Howard W. Lutnick ....... 0 -- 1,000,000 2,125,000 0 0
Frederick T. Varacchi ... 0 -- 200,000 200,000 0 0
Douglas B. Gardner ...... 0 -- 93,750 356,250 0 0
Jeffrey G. Goldflam ..... 0 -- 0 80,000 0 0
Stephen M. Merkel ....... 0 -- 25,000 175,000 0 0
- ----------
(1) Based on the last reported price of $15.675 for the Class A common stock
on December 29, 2000.
Compensation of Directors
Directors who are also our employees do not receive additional
compensation for serving as directors. In 2000, we granted our non-employee
directors options to purchase 10,000 shares of our Class A common stock at an
exercise price per share equal to $17.00, which was the price of our Class A
common stock on the date of grant, October 26, 2000. These options vest in three
equal installments beginning on the first of three semi-anniversaries of the
date of grant. Non-employee directors were also reimbursed for out-of-pocket
expenses incurred in attending meetings of our board of directors or committees
of our board of directors. Beginning in 2001, our non-employee directors will
receive annual compensation of $25,000 and options to purchase 10,000 shares of
our Class A common stock, which options shall vest in three equal installments
beginning on the first of three semi-anniversaries of the date of grant. They
will also receive compensation for each quarterly meeting of the board of
directors attended of $2,000 and options to purchase 1,500 shares of our Class A
common stock, which options shall vest in three equal installments beginning on
the first of three semi-anniversaries of the date of grant and will receive
$1,000 for each additional board of directors or committee of the board of
directors meeting actually attended, whether by telephone or otherwise. If both
a board of directors and committee of the board of directors meeting are held on
the same date, an aggregate of $1,000 will be paid for attendance at both
meetings. Non-employee directors will also be reimbursed for all out-of-pocket
expenses incurred in attending meetings of our board of directors or committees
of our board of directors.
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Compensation Committee Interlock and Insider Participation
The Compensation Committee of our board of directors consists of
Messrs. Breeden, Carter and Moran. All of the members of the Compensation
Committee are non-employee directors and are not former officers. During 2000,
none of our executive officers served as a member of the board of directors or
on the compensation committee of a corporation where any of its executive
officers served on our Compensation Committee or on our board of directors.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
By Management. The following table sets forth certain information, as
of February 8, 2001, with respect to the beneficial ownership of our common
equity by: (i) each director; (ii) each of the Named Executive Officers; and
(iii) all executive officers and directors as a group. Each person listed below
can be reached at our headquarters located at One World Trade Center, 103rd
Floor, New York, NY 10048. Shares of Class B common stock are convertible into
shares of Class A common stock at any time in the discretion of the holder on a
one-for-one basis. Accordingly, a holder of Class B common stock is deemed to be
the beneficial owner of an equal number of shares of Class A common stock for
purposes of this table.
Beneficial Ownership(1)
----------------------------------------------------
Class A common Class B common
stock stock
--------------------- -------------------
Name Shares % Shares %
- -------------------------------------------------- ------------ ------- ------------ ---
Howard W. Lutnick................................. 36,490,662(2) 69.0%(3) 32,724,600(4) 100%
Frederick T. Varacchi(5).......................... 235,896 1.2%(6) -- --
Douglas B. Gardner(7)............................. 126,383 * -- --
Jeffrey G. Goldflam............................... 91 * -- --
Stephen M. Merkel(8).............................. 44,440 * -- --
Richard C. Breeden(9)............................. 35,833 * -- --
Larry R. Carter(10)............................... 58,833 * -- --
William J. Moran(11).............................. 16,333 * -- --
Joseph P. Shea(12)................................ 106,004 * -- --
All executive officers and directors as a group
(9 persons)....................................... 37,114,475 69.6%(13) 32,724,600 100%
- ----------
* Less than 1 %
(1) Based upon information supplied by officers and directors, and filings
under Sections 13 and 16 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
(2) Includes (1) 1,000,000 shares of Class A common stock subject to options
currently exercisable or exercisable within 60 days of February 8, 2001,
(2) 5,839,019 shares of Class B common stock held by Cantor Fitzgerald,
L.P., which shares are immediately convertible into shares of Class A
common stock, (3) 26,885,581 shares of Class B common stock held by
Cantor Fitzgerald Securities, which shares are immediately convertible
into Class A common stock, (4) 2,217,208 shares of Class A common stock
held by Cantor Fitzgerald Securities and (5) 193,735 shares of Class A
common stock held by CF Group Management, Inc. Does not include 605,254
shares of Class A common stock to be transferred to Mr. Lutnick and
193,734 shares of Class A common stock to be transferred to CF Group
Management, Inc. as part of a deferred stock transfer by Cantor
Fitzgerald, L.P. to Cantor Fitzgerald, L.P. partners in connection with
the modification of Cantor Fitzgerald, L.P. partnership units, subject
to forfeiture with respect to limited partners in the event of
discontinued status as a limited partner or violations of certain
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provisions of the Cantor Fitzgerald, L.P. partnership agreement
determined as of July 2001 and January 2002. Cantor Fitzgerald, L.P. is
the managing partner of Cantor Fitzgerald Securities. CF Group
Management, Inc. is the managing general partner of Cantor Fitzgerald,
L.P. and Mr. Lutnick is the President and sole stockholder of CF Group
Management, Inc.
(3) Percentage based on (1) 19,159,612 shares of Class A common stock
outstanding on February 8, 2001, (2) 32,724,600 shares of Class B common
stock immediately convertible to Class A common stock and (3) 1,000,000
shares of Class A common stock subject to options currently exercisable
or exercisable within 60 days of February 8, 2001.
(4) Includes (1) 5,839,019 shares of Class B common stock held by Cantor
Fitzgerald, L.P., which shares are immediately convertible into shares
of Class A common stock and (2) 26,885,581 shares of Class B common
stock held by Cantor Fitzgerald Securities, which shares are immediately
convertible into Class A common stock. Cantor Fitzgerald, L.P. is the
managing partner of Cantor Fitzgerald Securities. CF Group Management,
Inc. is the managing general partner of Cantor Fitzgerald, L.P. and Mr.
Lutnick is the President and sole stockholder of CF Group Management,
Inc.
(5) Includes 200,000 shares of Class A common stock subject to options
currently exercisable or exercisable within 60 days of February 8, 2001.
Does not include 34,499 shares of Class A common stock to be transferred
to Mr. Varacchi as part of a deferred stock transfer by Cantor
Fitzgerald, L.P. to Cantor Fitzgerald, L.P. partners, in connection with
the modification of Cantor Fitzgerald, L.P. partnership units, subject
to forfeiture with respect to limited partners in the event of
discontinued status as a limited partner or violations of certain
provisions of the Cantor Fitzgerald, L.P. partnership agreement
determined as of July 2001 and January 2002.
(6) Percentage based on 19,159,612 shares of Class A common stock
outstanding on February 8, 2001 and 200,000 shares of Class A common
stock subject to options currently exercisable or exercisable within 60
days of February 8, 2001.
(7) Includes 93,750 shares of Class A common stock subject to options
currently exercisable or exercisable within 60 days of February 8, 2001.
Does not include 37,365 shares of Class A common stock to be transferred
to Mr. Gardner as part of a deferred stock transfer by Cantor
Fitzgerald, L.P. to Cantor Fitzgerald, L.P. partners in connection with
the modification of Cantor Fitzgerald, L.P. partnership units, subject
to forfeiture with respect to limited partners in the event of
discontinued status as a limited partner or violations of certain
provisions of the Cantor Fitzgerald, L.P. partnership agreement
determined as of July 2001 and January 2002.
(8) Includes (1) 2,250 shares of Class A common stock beneficially owned by
Mr. Merkel's spouse and (2) 25,000 shares of Class A common stock
subject to options currently exercisable or exercisable within 60 days
of February 8, 2001. Does not include 19,063 shares of Class A common
stock to be transferred to Mr. Merkel as part of a deferred stock
transfer by Cantor Fitzgerald, L.P. to Cantor Fitzgerald, L.P. partners
in connection with the modification of Cantor Fitzgerald, L.P.
partnership units, subject to forfeiture with respect to limited
partners in the event of discontinued status as a limited partner or
violations of certain provisions of the Cantor Fitzgerald, L.P.
partnership agreement determined as of July 2001 and January 2002.
(9) Includes 13,333 shares of Class A common stock subject to options
currently exercisable or exercisable within 60 days of February 8, 2001.
(10) Consists of (1) 45,500 shares of Class A common stock owned by Cavallino
Ventures LLC, of which Mr. Carter is the President and (2) 13,333 shares
of Class A common stock subject to options currently exercisable or
exercisable within 60 days of February 8, 2001.
(11) Includes 13,333 shares of Class A common stock subject to options
currently exercisable or exercisable within 60 days of February 8, 2001.
(12) Includes 62,500 shares of Class A common stock subject to options
currently exercisable or exercisable within 60 days of February 8, 2001.
Does not include 43,504 shares of Class A common stock to be transferred
to Mr. Shea as part of a deferred stock transfer by Cantor Fitzgerald,
L.P. to Cantor Fitzgerald,
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L.P. partners in connection with the modification of Cantor Fitzgerald,
L.P. partnership units, subject to forfeiture with respect to limited
partners in the event of discontinued status as a limited partner or
violations of certain provisions of the Cantor Fitzgerald, L.P.
partnership agreement determined as of July 2001 and January 2002.
(13) Percentage based on (1) 19,159,612 shares of Class A common stock
outstanding on February 8, 2001, (2) 32,724,600 shares of Class B common
stock immediately convertible to Class A common stock and (3) 1,421,249
shares of Class A common stock subject to options currently exercisable
or exercisable within 60 days of February 8, 2001.
By Others. The following table sets forth certain information, as of
February 8, 2001, with respect to the beneficial ownership of our common equity
by each person or entity known to us to beneficially own more than 5% of our
Class A common stock and Class B common stock, other than our officers and
directors. Unless indicated otherwise, the address of each entity listed is One
World Trade Center, New York, NY 10048, and each entity listed has sole voting
and investment power over the shares beneficially owned. Shares of Class B
common stock are convertible into shares of Class A common stock at any time in
the discretion of the holder on a one-for-one basis. Accordingly, a holder of
Class B common stock is deemed to be the beneficial owner of an equal amount of
number of shares of Class A common stock for purposes of this table.
Name Beneficial Ownership(1)
------------------------------------------------
Class A common stock Class B common stock
---------------------- --------------------
Shares % Shares %(2)
------------ ------------ --------- ------
Cantor Fitzgerald Securities......................... 29,102,789(3) 56.1%(4) 26,885,581 82.2%
Cantor Fitzgerald, L.P............................... 34,941,808(5) 67.3%(4) 32,724,600(6) 100%
CF Group Management, Inc............................. 35,135,543(7) 67.7%(4) 32,724,600(6) 100%
Delaware Management Holdings(8)...................... 1,040,099 5.4%(9) -- --
Delaware Management Business Trust(10)............... 987,700 5.2%(9) -- --
Essex Investment Management Company(11).............. 1,156,050 6.0%(9) -- --
- -------------------
(1) Based upon filings under Section 13 of the Exchange Act.
(2) Based on 32,724,600 shares of Class B common stock outstanding on
February 8, 2001.
(3) Includes 26,885,581 shares of Class B common stock which are immediately
convertible into shares of Class A common stock.
(4) Percentage based on 19,159,612 shares of Class A common stock
outstanding on February 8, 2001 and 32,724,600 shares of Class B common
stock immediately convertible into Class A common stock.
(5) Consists of (1) 5,839,019 shares of Class B common stock owned by Cantor
Fitzgerald, L.P., of which 3,154,181 shares will be transferred as part
of a deferred stock transfer by Cantor Fitzgerald, L.P. to Cantor
Fitzgerald, L.P. partners in connection with the modification of Cantor
Fitzgerald, L.P. partnership units, subject to forfeiture with respect
to limited partners in the event of discontinued status as a limited
partner or violations of certain provisions of the Cantor Fitzgerald,
L.P. partnership agreement determined as of July 2001 and January 2002,
(2) 2,217,208 shares of Class A common stock owned by Cantor Fitzgerald
Securities and (3) 26,885,581 shares of Class B common stock owned by
Cantor Fitzgerald Securities,
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which shares are immediately convertible into Class A common stock.
Cantor Fitzgerald, L.P. is the managing partner of Cantor Fitzgerald
Securities.
(6) Consists of 5,839,019 shares of Class B common stock owned by Cantor
Fitzgerald, L.P. and 26,885,581 shares of Class B common stock owned by
Cantor Fitzgerald Securities. Cantor Fitzgerald, L.P. is the managing
partner of Cantor Fitzgerald Securities. CF Group Management, Inc. is
the managing general partner of Cantor Fitzgerald, L.P.
(7) Consists of (1) 193,735 shares of Class A common stock held by CF Group
Management, Inc., (2) 2,217,208 shares of Class A common stock held by
Cantor Fitzgerald Securities, (3) 26,885,581 shares of Class B common
stock held by Cantor Fitzgerald Securities, which shares are immediately
convertible into Class A common stock and (4) 5,839,019 shares of Class
B common stock held by Cantor Fitzgerald, L.P., which shares are
immediately convertible into Class A common stock. CF Group Management,
Inc. is the managing general partner of Cantor Fitzgerald, L.P. Does not
include 193,734 shares of Class A common stock to be transferred to CF
Group Management, Inc. as part of a deferred stock transfer by Cantor
Fitzgerald, L.P. to Cantor Fitzgerald, L.P. partners in connection with
the modification of Cantor Fitzgerald, L.P. partnership units, subject
to forfeiture with respect to limited partners in the event of
discontinued status as a limited partner or violations of certain
provisions of the Cantor Fitzgerald, L.P. partnership agreement
determined as of July 2001 and January 2002.
(8) The address of Delaware Management Holdings is 2005 Market Street,
Philadelphia, PA 19103. Delaware Management Holdings has sole
dispositive power with respect to only 1,036,299 shares of Class A
common stock.
(9) Percentage based on 19,159,612 shares of Class A common stock
outstanding on February 8, 2001.
(10) The address of Delaware Management Business Trust is 2005 Market Street,
Philadelphia, PA 19103. Delaware Management Business Trust has sole
dispositive power with respect to only 983,900 shares of Class A common
stock. Lincoln National Corp. is the ultimate parent of Delaware
Management Business Trust.
(11) The address for Essex Investment Management Company is 125 High Street,
Boston, MA 02110. Essex Investment Management Company has sole voting
power with respect to only 800,875 shares of Class A common stock.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Formation Transactions
Concurrently with our initial public offering, Cantor contributed to us certain
of our assets. These assets primarily consist of the proprietary software,
network distribution systems, technologies and related contractual rights that
comprise our eSpeed(sm) system. In exchange for these assets, we issued to
Cantor 43,999,900 shares of our Class B common stock, representing approximately
98% of the voting power of our capital stock outstanding at the time. Cantor
converted 3,350,000 of these shares into the shares of our Class A common stock
which it sold in our initial public offering in December 1999.
We entered into the agreements described below in connection with the formation
transactions and to help define the terms of our relationship with Cantor in the
future. In an effort to mitigate conflicts of interest between us and Cantor, we
and Cantor have agreed that none of these agreements may be amended without the
approval of a majority of our disinterested directors.
JOINT SERVICES AGREEMENT
Under our Joint Services Agreement with Cantor, we own and operate the
electronic trading systems and are responsible for providing electronic
brokerage services, and Cantor provides voice-assisted brokerage services,
clearance, settlement and other fulfillment and related services, such as credit
and risk management services, oversight of client suitability and regulatory
compliance, sales positioning of products and other services customary to
brokerage operations. This agreement provides for a perpetual term.
Commission sharing arrangement
Under the Joint Services Agreement, we and Cantor share revenues derived from
transactions effected in the marketplaces in which we collaborate and other
specified markets. We have agreed to collaborate with Cantor to determine the
amount of commissions to be charged to clients that affect transactions in these
marketplaces; however, in the event we are unable to agree with Cantor with
respect to a transaction pricing decision, Cantor is entitled to make the final
pricing decision with respect to transactions for which Cantor provides
voice-assisted brokerage services and we are entitled to make the final pricing
decision with respect to transactions that are fully electronic. We may not make
a final transaction pricing decision that results in the share of transaction
revenues received by Cantor being less than Cantor's actual cost of providing
clearance, settlement and fulfillment services and other transaction services.
In some cases, we receive the aggregate transaction revenues and pay a
fulfillment services fee to Cantor. In other cases, Cantor receives the
aggregate transaction revenues and pays a service fee to us. The amount of the
service fee and the portion of the transaction revenues that we and Cantor
receive are 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 product; and (4) the product is traded on the Cantor ExchangeSM. The
percentage of the transaction revenues we receive ranges from 2.5% to 100%.
However, in general, we receive 100% of the transaction
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revenues for fully electronic transactions, paying to Cantor fulfillment
services fees equal to 35% (and 20% if the product is traded on the Cantor
Exchange(sm)) of the transaction revenues, and Cantor receives 100% of the
transaction revenues for voice-assisted brokerage transactions, paying to us 7%
of the transaction revenues. In addition, if the transactions relate to a gaming
business, we receive a service fee equal to 25% of the net trading revenues.
System services
We also provide to Cantor technology support services, including (1) systems
administration, (2) internal network support, (3) support and procurement for
desktops of end-user equipment, (4) operations and disaster recovery services,
(5) voice and data communications, (6) support and development of systems for
clearance, settlement and other fulfillment services, (7) systems support for
Cantor brokers, (8) electronic applications systems and network support and
development for the unrelated dealer businesses with respect to which we do not
collaborate with Cantor and (9) provision and/or implementation of existing
electronic applications systems, including improvements and upgrades thereto,
and use of the related intellectual property rights, having application in a
gaming business. Cantor pays to us an amount equal to the direct and indirect
costs, including overhead, that we incur in performing these services.
Intellectual property
Cantor has granted to us a license covering Cantor's patents and patent
applications that relate to our eSpeed(sm) system. The license is perpetual,
irrevocable, worldwide and royalty free and is exclusive, except in the event
that (1) we are unwilling to provide to Cantor any requested services covered by
the patents with respect to a marketplace and Cantor elects not to require us to
do so, or we are unable to provide such services or (2) we do not exercise our
right of first refusal to provide to Cantor electronic brokerage services with
respect to a marketplace, in which events Cantor will have a limited right to
use the patents and patent applications solely in connection with the operation
of that marketplace. Cantor will cooperate with us, at our expense, in any
attempt by us to prevent any third party infringement of our patent rights under
the license. Cantor has also granted to us a non- exclusive, perpetual,
irrevocable worldwide, royalty-free right and license to use the servicemarks
"Cantor Exchange(sm)," "Interactive Matching(sm), "MOLE(sm)"and "CX(sm)".
Non-competition and market opportunity provisions
The Joint Services Agreement imposes performance obligations on us and restricts
our ability to compete with Cantor and Cantor's ability to compete with us in
markets that we and Cantor traditionally operate. We and Cantor have agreed to
exclude the TradeSpark and Freedom marketplaces from the provisions of the Joint
Services Agreement in order to enable us to enter into separate agreements in
connection with the new marketplaces.
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ADMINISTRATIVE SERVICES AGREEMENT
Under our Administrative Services Agreement with Cantor, Cantor provides certain
administrative and management services to us. Cantor makes available to us some
of its administrative and other staff, including its internal audit, treasury,
legal, tax, human resources, corporate development and accounting staffs.
Members of these staffs arrange for our insurance coverage and provide a wide
array of services, including administration of our personnel and payroll
operations, benefits administration, internal audits, facilities management,
promotional sales and marketing, legal, risk management, accounting and tax
preparation and other services. We reimburse Cantor for the actual costs
incurred by Cantor, plus other reasonable costs, including reasonably allocated
overhead and any applicable taxes. We have also entered into arrangements with
Cantor under which we have the right to use certain assets, principally computer
equipment, from Cantor. These assets are subject to operating leases with third
party leasing companies. Under the Administrative Services Agreement, we provide
sales, marketing and public relations services to Cantor. Cantor reimburses us
for the actual costs incurred by us, plus other reasonable costs, including
reasonably allocated overhead. The Administrative Services Agreement has a
three-year term which will renew automatically for successive one-year terms
unless canceled by either us or Cantor upon six months' prior notice; provided,
however, that our right to use our New York space expires at the time that
Cantor's lease expires in 2006 and our right to use our London office space
expires at the earlier of (1) the time Cantor's lease expires in 2016 or (2)
until Cantor ceases to be an affiliate of ours and Cantor asks us to vacate.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Registration Rights Agreement entered into by Cantor and us,
Cantor has received piggyback and demand registration rights.
The piggyback registration rights allow Cantor to register the shares of our
Class A common stock issued or issuable to it in connection with the conversion
of its shares of our Class B common stock whenever we propose to register any
shares of our Class A common stock for our own or another's account under the
Securities Act for a public offering, other than any shelf registration of
shares of our Class A common stock to be used as consideration for acquisitions
of additional businesses and registrations relating to employee benefit plans.
Cantor also has the right, on three occasions, to require that we register under
the Securities Act any or all of the shares of our Class A common stock issued
or issuable to it in connection with the conversion of its shares of our Class B
common stock. The demand and piggyback registration rights apply to Cantor and
to any transferee of shares held by Cantor who agrees to be bound by the terms
of the Registration Rights Agreement.
We have agreed to pay all costs of one demand and all piggyback registrations,
other than underwriting discounts and commissions. We have also agreed to
indemnify Cantor and any transferee for certain liabilities they may incur in
connection with the exercise of their registration rights. All of these
registration rights are subject to conditions and limitations, including (1) the
right of underwriters of an offering to limit the number of shares included in
that registration; (2) our right not to effect any demand registration
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within six months of a public offering of our securities; and (3) that Cantor
agrees to refrain from selling its shares during the period from 15 days prior
to and 90 days after the effective date of any registration statement for the
offering of our securities.
POTENTIAL CONFLICTS OF INTEREST AND COMPETITION WITH CANTOR
Various conflicts of interest between us and Cantor may arise in the future in a
number of areas relating to our past and ongoing relationships, including
potential acquisitions of businesses or properties, the election of new
directors, payment of dividends, incurrence of indebtedness, tax matters,
financial commitments, marketing functions, indemnity arrangements, service
arrangements, issuances of our capital stock, sales or distributions by Cantor
of its shares of our common stock and the exercise by Cantor of control over our
management and affairs. A majority of our directors and officers also serve as
directors and/or officers of Cantor. Simultaneous service as an eSpeed director
or officer and service as a director or officer, or status as a partner, of
Cantor could create or appear to create potential conflicts of interest when
such directors, officers and/or partners are faced with decisions that could
have different implications for us and for Cantor. Mr. Lutnick, our Chairman and
Chief Executive Officer, is the sole stockholder of the managing general partner
of Cantor. As a result, Mr. Lutnick controls Cantor. Cantor owns shares of our
Class A common stock and Class B common stock representing approximately 95.2%
of the total voting power of our capital stock. Mr. Lutnick's simultaneous
service as our Chairman and Chief Executive Officer and his control of Cantor
could create or appear to create potential conflicts of interest when Mr.
Lutnick is faced with decisions that could have different implications for us
and for Cantor.
Our relationship with Cantor may result in agreements that are not the result of
arm's-length negotiations. As a result, the prices charged to us or by us for
services provided under agreements with Cantor may be higher or lower than
prices that may be charged by third parties and the terms of these agreements
may be more or less favorable to us than those that we could have negotiated
with third parties. However, transactions between us and Cantor and/or its other
affiliates are subject to the approval of a majority of our independent
directors. In addition, Cantor can compete with us under certain circumstances.
WILLIAMS AND DYNEGY
On June 5, 2000, each of Williams and Dynegy purchased a unit consisting of (a)
789,071 shares of our Class A common stock and (b) warrants exercisable for the
purchase of up to 666,666 shares of our Class A common stock, for an aggregate
purchase price for the unit of $25.0 million. The warrants have a per share
exercise price of $35.20, a 10-year term and are exercisable during the last
four and one-half years of the term, subject to acceleration under certain
prescribed circumstances intended to provide incentives to Williams and Dynegy
to invest in four new electronic and telephonic verticals to be formed by us and
Cantor, which we refer to as Qualified Verticals, by June 2001 (subject to
extension for a period not to exceed six months under certain prescribed
circumstances). In connection with the four additional Qualified Verticals,
Williams and, subject to certain limitations, Dynegy, will be entitled to invest
$25.0 million in shares of our Class A common stock at a 10% discount to the
trading
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price of our Class A common stock at the time of the investment in or formation
of the Qualified Vertical.
At such time as Williams and Dynegy (or their permitted affiliate assignees)
have made an aggregate equity investment in us of an amount equal to at least
$100.0 million, valued on a cost basis (and for so long as such parties maintain
ownership of equity securities having such cost basis), Cantor will use its best
efforts to cause one designee jointly selected by Williams and Dynegy to be
nominated to our board of directors and to vote its shares of common equity in
favor of such designee.
In connection with the Williams and Dynegy transactions, we purchased from
Cantor 789,071 shares of our Class A common stock, representing half of the
number of shares of our Class A common stock sold by us to Williams and Dynegy,
for a purchase price of $25.0 million. In addition, Cantor has agreed to sell
half of the number of shares to be purchased by Williams and Dynegy, in the
aggregate, each time an additional investment right is exercised in connection
with a new Qualified Vertical for the same purchase price per share as is paid
by Williams and Dynegy at the time.
TRADESPARK
On September 22, 2000, we made a cash investment in TradeSpark of $2.0 million
in exchange for a 5% interest in TradeSpark, and Cantor made a cash investment
of $4.25 million in TradeSpark and agreed to contribute to TradeSpark certain
assets relating to its voice brokerage business in certain energy products in
exchange for a 28.33% interest in TradeSpark. We and Cantor also executed an
amendment to the Joint Services Agreement in order to enable each of us to
engage in this business transaction. The remaining 66.67% interest in TradeSpark
was purchased by energy industry market participants (EIPs). In connection with
such investment, we entered into a perpetual technology services agreement with
TradeSpark pursuant to which we provide the technology infrastructure for the
transactional and technology related elements of the TradeSpark marketplace as
well as certain other services to TradeSpark in exchange for specified
percentages of transaction revenues from the marketplace. If a transaction is
fully electronic, we receive the aggregate transaction revenues and pay to
TradeSpark a fulfillment services fee equal to 35% of the transaction revenues.
In general, if TradeSpark provides voice-assisted brokerage services with
respect to a transaction, then we receive 35% of the revenues and TradeSpark
receives 65% of the revenues. Cantor also entered into an administrative
services agreement with TradeSpark pursuant to which it will provide
administrative services to TradeSpark at cost. We and Cantor each received
representation rights on the management committee of TradeSpark in proportion to
our ownership interests in TradeSpark.
In order to provide incentives to the EIPs to trade on the TradeSpark electronic
marketplace, which will result in revenues to us under the TradeSpark technology
services agreement, we issued 5,500,000 shares of our Series A preferred stock
and 2,500,000 shares of our Series B preferred stock to a limited liability
company newly-formed by the EIPs (EIP Holdings) to hold their investments in
TradeSpark and the Series A and B preferred stock.
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MUNICIPAL PARTNERS
On July 21, 2000, Cantor acquired the brokerage business of MPI pursuant to an
Asset Purchase Agreement by and among us, Cantor, MPI and the individuals
signatory thereto for a cash payment of $1,500,000. In connection therewith, we
issued to MPIs' shareholders 28,374 shares of our Class A common stock (the
Restricted Stock) having a value at the date of issuance of $1,350,000. The
Restricted Stock is subject to a lock-up, which will be released as to 1/3 of
the shares on each of April 1, 2001, July 21, 2001 and July 21, 2002. Although
the purchased assets are owned by Cantor, we are entitled to 100% of the
revenues generated from any fully electronic transaction effected in a
marketplace utilizing our eSpeedSM system pursuant to the Joint Services
Agreement, less a 35% service fee paid to Cantor. In addition, in order to
provide incentives to promote the use of our eSpeedSM trading platform in
connection with the purchased business, we granted an aggregate of 28,374
restricted shares of our Class A common stock (the Additional Stock) pursuant to
our long-term incentive plan for an aggregate of $1,250,000 to certain employees
and stockholders of MPI that joined Cantor in exchange for interest-bearing
promissory notes in the same aggregate principal amount. The Additional Stock
may be redeemed, at our option, by cancellation of the related promissory note
if we do not receive $3,000,000 in electronic transaction revenues generated by
Cantor's municipal bond brokerage business for any consecutive 12-month period
during the three years following the closing on July 21, 2000.
FREEDOM INTERNATIONAL BROKERAGE
On January 29, 2001, we and Cantor formed a limited partnership to acquire 66.7%
of Freedom International Brokerage. We will contribute 310,770 shares of our
Class A common stock to the limited partnership and Cantor will contribute
103,589 shares of our Class A common stock. We will acquire a limited
partnership interest and a 15% profits interest. Cantor will acquire a general
partnership interest and a 85% profits interest. We will not be allocated any of
the partnership's losses, while Cantor will be allocated 100% of the
partnership's losses, with a preferential profits interest to the extent there
were prior, unrecovered losses. In addition, we will issue warrants to purchase
400,000 shares of our Class A common stock to provide incentives to the Freedom
owner-participants other than us and Cantor to migrate to our fully electronic
platform.
Upon the closing of the transaction, we will enter into a services agreement
with Freedom to provide for electronic trading technology and services and
infrastructure/back-offices services. Under this agreement, we will be entitled
to 100% of the electronic transaction services revenues and will pay a
fulfillment services fee of 35% to Freedom. We will also receive 35% of revenues
derived from all voice-assisted transactions, other miscellaneous transactions
and the sale of market data or other information that is not incidental to the
above services.
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OUR EMPLOYEES' PURCHASE OF CANTOR FITZGERALD, L.P. PARTNERSHIP UNITS
We have agreed to pay a cash bonus to five of our employees totaling $1.8
million. These employees will use the after-tax amount of the bonus to purchase
units in Cantor Fitzgerald, L.P. When an employee is no longer a partner of
Cantor (typically if he ceases to be employed by us), and if the employee has
been employed by us for a period of more than four years and does not go to work
for a competitor, then the employee will receive his capital in Cantor in four
equal annual installments, with interest at an applicable federal rate. Amounts
not paid to an employee who leaves before the fourth anniversary, or who leaves
and competes with us, Cantor or any of its affiliates, will be paid to us.
INSIDER COMPENSATION
Joseph Shea, one of our directors, received a total of $375,000 in salary and
bonus from us in fiscal year 2000 as compensation for his services as one of our
employees.
INDEMNIFICATION BY CANTOR
Although we do not expect to incur any losses with respect to pending lawsuits
or supplemental allegations surrounding Cantor's limited partnership agreement,
Cantor has agreed to indemnify us with respect to any liabilities we incur as a
result of such lawsuits or allegations.
REVERSE REPURCHASE AGREEMENTS
We enter into overnight reverse repurchase agreements with Cantor. At December
31, 2000, the reverse repurchase agreements totaled $122.0 million, including
accrued interest. The securities collateralizing the reverse repurchase
agreements are held under a custodial arrangement with a third party bank.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K:
(a)(1) Financial Statements. See Index to Financial Statements on page 51.
(a)(2) All other schedules are omitted because they are not applicable, not
required or the required information is in the financial statements or the notes
thereto.
(a)(3) The following Exhibits are filed as part of this Report as required by
Regulation S-K. The Exhibits designated by an asterisk (*) are management
contracts and compensation plans and arrangements required to be filed as
Exhibits to this Report. We have requested confidential treatment as to certain
portions of the Exhibits designated by a cross ("), which portions have been
omitted and filed separately with the Securities and Exchange Commission.
Exhibit Number Description
- -------------- -----------
2.1 -- Assignment and Assumption Agreement, dated as of December 9, 1999, by and among
Cantor Fitzgerald, L.P., Cantor Fitzgerald Securities, CFFE, LLC, Cantor
Fitzgerald L.L.C., CFPH, LLC, Cantor Fitzgerald & Co. and eSpeed, Inc.
(Incorporated by reference by Exhibit 2.1 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1999).
2.2 -- Assignment and Assumption Agreement, dated as of, December 9, 1999 by and among
Cantor Fitzgerald International, eSpeed Securities International Limited and
Cantor Fitzgerald International Holdings, L.P. (Incorporated by reference to
Exhibit 2.2 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999).
3.1 -- Amended and Restated Certificate of Incorporation of eSpeed, Inc. (Incorporated
by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form
S-1 (Reg. No. 333-87475)).
3.2 -- Second Amended and Restated By-Laws of eSpeed, Inc. (Incorporated by reference
to Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000).
3.3 -- Certificate of Designations, Preferences and Rights of Series A Redeemable
Convertible Preferred Stock of eSpeed, Inc. (Incorporated by reference to
Exhibit 3.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000).
3.4 -- Certificate of Designations, Preferences and Rights of Series B Redeemable
Convertible Preferred Stock of eSpeed, Inc. (Incorporated by reference to
Exhibit 3.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000).
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Exhibit Number Description
- -------------- -----------
4 -- Specimen Class A Common Stock Certificate. (Incorporated by reference to
Exhibit 4 to the Registrant's Registration Statement on Form S-1 (Reg. No.
333-87475)).
10.1* -- Long-Term Incentive Plan of eSpeed, Inc. (Incorporated by reference to Exhibit
10.1 to the Registrant's Registration Statement on Form S-1 (Reg. No.
333-87475)).
10.2 -- Amended and Restated eSpeed, Inc. Employee Stock Purchase Plan.
10.3 -- Joint Services Agreement, dated as of December 15, 1999, by and among Cantor
Fitzgerald, L.P., Cantor Fitzgerald International, Cantor Fitzgerald Gilts,
Cantor Fitzgerald Securities, Cantor Fitzgerald & Co., Cantor Fitzgerald
Partners, eSpeed, Inc., eSpeed Securities, Inc., eSpeed Government Securities,
Inc., eSpeed Securities International Limited and eSpeed Markets, P Inc.
(Incorporated by reference to Exhibit 10.3 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1999).
10.4 -- Amendment No. 1 to Joint Services Agreement, dated as of January 1, 2000, by
and among Cantor Fitzgerald L.P., Cantor Fitzgerald International, Cantor
Fitzgerald Gilts, Cantor Fitzgerald Securities, Cantor Fitzgerald & Co., Cantor
Fitzgerald Partners, eSpeed Inc., eSpeed Securities, Inc., eSpeed Government
Securities, eSpeed Securities International Limited and eSpeed Markets, Inc.
(Incorporated by reference to Exhibit 10.4 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1999).
10.5 -- Administrative Services Agreement, dated as of December 15, 1999, by and among
Cantor Fitzgerald, L.P., Cantor Fitzgerald International, Cantor Fitzgerald
Gilts, Cantor Fitzgerald Securities, Cantor Fitzgerald & Co., Cantor Fitzgerald
Partners, eSpeed, Inc., eSpeed Securities, Inc., eSpeed Government Securities,
Inc., eSpeed Securities International Limited and eSpeed Markets, Inc.
(Incorporated by reference to Exhibit 10.5 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1999).
10.6 -- Registration Rights Agreement, dated as of December 9, 1999, by and among
eSpeed and the Investors named therein. (Incorporated by reference to Exhibit
10.6 to the Registrant's Annual Report on Form 10-K for the year ended December
31, 1999).
10.7 -- Sublease Agreement, dated as of December 15, 1999, between Cantor Fitzgerald
Securities and eSpeed, Inc. (Incorporated by reference to Exhibit 10.7 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1999).
10.8 -- Warrants issued to Martin J. Wygod and a related trust. (Incorporated by
reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1999).
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Exhibit Number Description
- -------------- -----------
10.9 -- Registration Rights Agreement, dated as of June 5, 2000 among eSpeed, Inc.,
Williams Energy Marketing & Trading Company and Dynegy, Inc. (Incorporated by
reference to Exhibit 10.9 to the Registrant's Quarterly Report for the quarter
ended June 30, 2000).
10.10 -- Stock Purchase Agreement, dated April 26, 2000, between eSpeed, Inc. and Cantor
Fitzgerald Securities (Incorporated by reference to Exhibit 10.10 to the Registrant's
Quarterly Report for the quarter ended June 30, 2000).
10.11 -- Amendment to Stock Purchase Agreement, dated June 2, 2000, among eSpeed, Inc., Cantor
Fitzgerald Securities and Cantor Fitzgerald, L.P. (Incorporated by reference to Exhibit
10.11 to the Registrant's Quarterly Report for the quarter ended June 30, 2000).
10.12 -- Warrant issued to Dynegy, Inc. (Incorporated by reference to Exhibit 10.12 to the
Registrant's Quarterly Report for the quarter ended June 30, 2000).
10.13 -- Warrant issued to Williams Energy Marketing & Trading Company (Incorporated by reference to
Exhibit 10.13 to the Registrant's Quarterly Report for the quarter ended June 30, 2000).
10.14+ -- Subscription Agreement, dated April 26, 2000, among Dynegy, Inc., eSpeed, Inc. and Cantor
Fitzgerald, L.P. (Incorporated by reference to Exhibit 10.14 to the Registrant's Quarterly
Report for the quarter ended June 30, 2000).
10.15+ -- Subscription Agreement, dated April 26, 2000, among The Williams Companies, Inc., eSpeed, Inc.
and Cantor Fitzgerald, L.P. (Incorporated by reference to Exhibit 10.15 to the Registrant's
Quarterly Report for the quarter ended June 30, 2000).
10.16 -- Registration Rights Agreement, dated as of September 22, 2000 among eSpeed, Inc., EIP Holdings,
LLC, Williams Energy Marketing & Trading Company and Coral Energy Holding, LP, Koch Energy
Trading, Inc. TXU Energy Trading Company and Dominion Energy Exchange, Inc. (Incorporated by
reference to Exhibit 10.16 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000).
10.17 -- Amendment No. 2 to Joint Services Agreement, dated as of July 1, 2000, by and
among Cantor Fitzgerald, L.P., Cantor Fitzgerald International, Cantor
Fitzgerald Europe, Cantor Fitzgerald Securities, Cantor Fitzgerald & Co.,
Cantor Fitzgerald Partners, eSpeed Inc., eSpeed Securities, Inc., eSpeed
Government Securities, eSpeed International Limited and eSpeed Markets, Inc.
(Incorporated by reference to Exhibit 10.17 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000).
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Exhibit Number Description
- -------------- -----------
10.18 -- Amendment No. 3 to Joint Services Agreement, dated as of September 22, 2000, by
and among Cantor Fitzgerald, L.P., Cantor Fitzgerald International, Cantor
Fitzgerald Europe, Cantor Fitzgerald Securities, Cantor Fitzgerald & Co.,
Cantor Fitzgerald Partners, eSpeed Inc., eSpeed Securities, Inc., eSpeed
Government Securities, eSpeed International Limited and eSpeed Markets, Inc.
(Incorporated by reference to Exhibit 10.18 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000).
21 -- List of subsidiaries of eSpeed, Inc.
23 -- Consent of Deloitte & Touche LLP, independent auditors.
(b) Reports on Form 8-K.
We did not file any Form 8-K Current Reports during the last quarter of
the fiscal year ended December 31, 2000.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ Howard W. Lutnick
--------------------------------------------
Howard W. Lutnick
Chairman of the Board and
Chief Executive Officer
Dated: February 26, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
- ---------- ----- -----
/s/ Howard W. Lutnick Chairman of the Board and Chief Executive February 26, 2001
- ------------------------------------------ Officer (Principal Executive Officer)
Howard W. Lutnick
/s/ Frederick T. Varacchi President and Chief Operating Officer February 26, 2001
- ------------------------------------------
Frederick T. Varacchi
/s/ Douglas B. Gardner Vice Chairman February 26, 2001
- ------------------------------------------
Douglas B. Gardner
/s/ Jeffrey G. Goldflam Senior Vice President and Chief Financial February 26, 2001
- ------------------------------------------ Officer (Principal Financial and
Jeffrey G. Goldflam Accounting Officer)
/s/ Richard C. Breeden Director February 26, 2001
- ------------------------------------------
Richard C. Breeden
/s/ Larry R. Carter Director February 26, 2001
- ------------------------------------------
Larry R. Carter
/s/ William J. Moran Director February 26, 2001
- ------------------------------------------
William J. Moran
/s/ Joseph P. Shea Director February 26, 2001
- ------------------------------------------
Joseph P. Shea