As filed with the Securities and Exchange Commission on March 7, 2001
Registration No. 333-55746
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
AMENDMENT NO. 2 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
eSpeed, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-4063515
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
----------------
One World Trade Center, 103rd Floor
New York, New York 10048
(212) 938-3773
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
----------------
Stephen M. Merkel, Esq.
Senior Vice President, General Counsel and Secretary
eSpeed, Inc.
One World Trade Center, 103rd Floor
New York, New York 10048
(212) 938-3773
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
----------------
Copies to:
Christopher T. Jensen, Esq. Frederick W. Kanner, Esq.
Stephanie M. Gulkin, Esq. Dewey Ballantine LLP
Morgan, Lewis & Bockius LLP 1301 Avenue of the Americas
101 Park Avenue New York, New York 10019
New York, New York 10178 (212) 259-8000
(212) 309-6000
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. |_|
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. |_|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
----------------
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
==============================================================================
PRELIMINARY PROSPECTUS Subject to completion March 7, 2001
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7,135,000 Shares
[eSPEED LOGO]
Class A Common Stock
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We are a leading provider of business-to-business electronic marketplace
solutions. Our products enable market participants to transact business
instantaneously, more effectively and at lower cost. Of the 7,135,000 shares
of our Class A common stock offered by this prospectus, we are offering
2,500,000 shares and the selling stockholders are offering 4,635,000 shares.
We will not receive any proceeds from the sale of shares by the selling
stockholders.
Our Class A common stock is quoted on the Nasdaq National Market under the
symbol "ESPD." The last reported sale price of our Class A common stock on
February 23, 2001 was $25.125 per share.
Before buying any of these shares, you should carefully consider the risk
factors described in "Risk factors" beginning on page 8.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
Per share Total
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Public offering price $ $
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Underwriting discounts and commissions $ $
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Proceeds, before expenses, to us $ $
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Proceeds to the selling stockholders $ $
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One of the selling stockholders has granted the underwriters a 30-day option
to purchase up to an additional 1,070,250 shares of our Class A common stock
to cover over-allotments at the public offering price per share less the
underwriting discounts and commissions.
The underwriters are offering the shares of our Class A common stock as
described in "Underwriting." Delivery of the shares will be made on or
about , 2001.
Joint Book-Running Managers
UBS Warburg LLC Lehman Brothers
----------------
JP Morgan
Cantor Fitzgerald & Co.
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations other than those contained or incorporated by reference in this
prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized. This prospectus does not constitute an
offer to sell or the solicitation of an offer to buy any securities other than
the securities described in this prospectus or an offer to sell or the
solicitation of an offer to buy such securities in any circumstances in which
such offer or solicitation is unlawful. Neither the delivery of this prospectus
nor any sale made hereunder shall, under any circumstances, create any
implication that the information contained or incorporated by reference herein
is correct as of any time subsequent to the date of such information.
[The inside front cover graphic depicts our products as horizontal bars with
various vertical markets layered on top of the bars.]
TABLE OF CONTENTS
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Prospectus summary........................................................ 3
Risk factors.............................................................. 8
Forward-looking information............................................... 24
Use of proceeds........................................................... 24
Price range of Class A common stock....................................... 25
Dividend policy........................................................... 25
Capitalization............................................................ 26
Selected financial data................................................... 27
Management's discussion and analysis of financial condition and results
of operations........................................................... 28
Business.................................................................. 36
Management................................................................ 49
Certain transactions...................................................... 52
Selling stockholders...................................................... 58
Underwriting.............................................................. 59
Legal matters............................................................. 61
Experts................................................................... 61
Where you can find more information....................................... 61
Index to consolidated financial statements................................ F-1
eSpeed(SM), eSpeed Markets(SM), eSpeed Online(SM), eSpeed Web Markets(SM),
eSpeed Credit Master(SM), eSpeed Name Give-Up Matrix(SM) and eSpeed Private
Label(SM) are service marks of eSpeed, and Interactive Matching(SM), Cantor
Exchange(SM), CX(SM) and MOLE(SM) are service marks licensed by eSpeed.
-------------------------
Unless otherwise indicated, all information in this prospectus assumes that
the underwriters' over-allotment option will not be exercised.
Prospectus summary
This summary highlights some information from this prospectus. It may not
contain all of the information that is important to you. To understand this
offering fully, you should read carefully the entire prospectus, including the
risk factors and the financial statements.
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
utilizing our global private network and the Internet. In addition, we license
software to market participants. 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 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 system runs on large-scale hardware located
in three redundant data centers in the U.S. and Europe.
Our revenues consist primarily of transaction fees, recurring software
licensing fees and system services fees. We do not risk our own capital in
transactions or extend credit to market participants.
COMPETITIVE ADVANTAGES
We are a market leader in global fixed income electronic marketplaces. Because
of the scale and adaptability of our system, our eSpeed(SM) products have
applications across a broad range of industries and vertical marketplaces,
including any business-to-business marketplace involving multiple buyers and
multiple sellers. We believe we are well positioned to leverage the
significant investment of over $250 million incurred to develop our eSpeed(SM)
system to quickly create customized real-time software solutions for market
participants. Our global size, economies of scale and flexible products
provide us with a significant competitive advantage. Additionally, we have
extensive experience converting inefficient, voice-based marketplaces and
product distribution systems into liquid, efficient electronic markets. We
believe this combination of technology and operations expertise is a key
ingredient in our success.
MARKETS AND PRODUCTS
We market our services through the following three products: eSpeed Markets(SM),
eSpeed Private Label(SM) and eSpeed Online(SM).
3
o eSpeed Markets(SM) is a full service end-to-end solution combining all of our
proprietary marketplace software with 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 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.
o 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.
STRATEGY
Our objective is to be the world's leading provider of interactive electronic
marketplaces and related software solutions. Our strategy is to:
o expand system functionality and develop new products, software and services
for our existing financial and energy markets;
o leverage our eSpeed(SM) system for use in a wide range of additional business-
to-business markets and industries;
o license our software to provide a broad range of market participants with an
outsourced solution for online distribution of their products; and
o pursue acquisitions and strategic alliances to enhance our products and
software and to create new electronic marketplaces.
OUR HISTORY
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.
RECENT DEVELOPMENTS
eSpeed Markets(SM)
TradeSpark
In October 2000, we entered the North American energy market through the
creation of TradeSpark, LP with Coral Energy (an affiliate of Shell), Dominion
Energy, Koch Energy Trading, TXU Energy Trading, Williams Energy and Cantor.
TradeSpark operates marketplaces in North America for natural
4
gas, electricity, coal, weather derivatives and emission allowances. Our
eSpeed Markets(SM) product powers TradeSpark's electronic platform. To date,
over 120 companies have traded over the TradeSpark platform, generating over
$16 billion of transaction volume.
Freedom International
On January 29, 2001, we, Cantor, BMO Nesbitt Burns, CIBC World Markets,
Merrill Lynch Canada, RBC Dominion Securities, Scotia Capital Markets and TD
Securities entered into an agreement with Freedom International Brokerage,
Inc., the leading inter-dealer broker of Canadian fixed income products,
foreign exchange and other capital products, under which our eSpeed Markets(SM)
product will power Freedom's electronic platform.
eSpeed Private Label(SM)
Federal Home Loan Bank
On February 1, 2001, we announced our private label agreement with the Federal
Home Loan Bank, 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.
Sanwa Securities
On October 6, 2000, we entered into an agreement with Sanwa Securities, a
subsidiary of Sanwa Bank, one of the largest financial institutions in Japan,
to provide Sanwa with online distribution of Japanese government bonds and
other fixed income securities to its customers in Asia.
eSpeed Online(SM)
Charles Schwab & Co.
On January 2, 2001, Charles Schwab & Co. introduced U.S. Treasuries and Agency
securities to its customer base using eSpeed Online(SM). eSpeed Online(SM)
enables retail customers of Charles Schwab to buy and sell fixed income
securities and other financial instruments at prices and spreads offered by
wholesale market participants.
HOW TO CONTACT US
Our executive offices are located at One World Trade Center, 103rd Floor, New
York, New York 10048. Our telephone number is (212) 938-3773. Our website is
http://www.espeed.com and our email address is info@espeed.com. We are a
Delaware corporation.
5
The offering
Class A common stock offered by:
eSpeed......................................... 2,500,000 shares
The selling stockholders....................... 4,635,000 shares
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Total...................................... 7,135,000 shares
Common stock to be outstanding after this
offering(1)..................................... 24,077,404 shares of Class A common stock and
30,441,808 shares of Class B common stock.
Nasdaq National Market symbol .................... ESPD
Use of proceeds .................................. We intend to use the net proceeds from the sale of the shares we are selling
in this offering for (i) working capital and general corporate purposes,
including investment in hardware and software, sales, marketing and
advertising and hiring of technology and other professionals and (ii)
strategic investments or acquisitions. We will not receive any proceeds from
the sale of our Class A common stock by the selling stockholders. See "Use of
proceeds."
Voting rights .................................... The rights of holders of shares of our common stock are substantially
identical, except that holders of our Class B common stock are entitled to 10
votes per share, while holders of our Class A common stock are entitled to one
vote per share.
Risk factors ..................................... Investing in our Class A common stock involves significant risks. See "Risk
factors."
- ---------------
(1) The number of shares of our Class A and Class B common stock to be
outstanding after this offering is based on 19,159,612 shares of our Class
A common stock and 32,724,600 shares of our Class B common stock
outstanding on February 8, 2001 and excludes: (i) shares of our Class A
common stock equal to 20% of our outstanding Class A common stock reserved
for issuance upon exercise of options we have granted under our stock
option plan; (ii) 425,000 shares of our Class A common stock reserved for
issuance pursuant to our stock purchase plan; (iii) 1,333,332 shares of our
Class A common stock reserved for issuance upon exercise of warrants we
have granted to Dynegy and Williams; and (iv) 8,000,000 shares of our
Class A common stock reserved for issuance upon the exercise of
warrants that may be issued in connection with the full conversion of
our Series A Redeemable Convertible Preferred Stock and our Series B
Redeemable Convertible Preferred Stock issued to EIP Holdings.
6
Summary consolidated financial data
1999 2000
------------------------------------------------------ -----------------------------------------------------
Period Year
Statement of Quarter ended ended Quarter ended ended
operations Mar. 10 to ----------------------------- -------- ------------------------------------------ --------
data: Mar. 26 June 25 Sept. 24 Dec. 31 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Dec. 31
----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Total revenues .. $1,948 $10,569 $11,622 $14,050 $ 38,189 $24,250 $ 29,659 $ 29,374 $35,648 $118,931
Total operating
expenses(1).... 2,487 13,322 15,116 20,063 50,988 29,083 38,774 36,987 40,702 145,546
------ ------- ------- ------- -------- ------- -------- -------- ------- --------
Net loss from
operations..... (539) (2,753) (3,494) (6,013) (12,799) (4,833) (9,115) (7,613) (5,054) (26,615)
Non-cash
business
partner
securities(2).. -- -- -- -- -- -- (29,805) (3,586) -- (33,391)
Income tax
benefit
(provision).... 14 69 89 40 212 (93) (107) (88) (118) (406)
------ ------- ------- ------- -------- ------- -------- -------- ------- --------
Net loss ........ $ (525) $(2,684) $(3,405) $(5,973) $(12,587) $(4,926) $(39,027) $(11,287) $(5,172) $(60,412)
====== ======= ======= ======= ======== ======= ======== ======== ======= ========
December 31, 2000
-------------------------
Statement of financial condition data: Actual As adjusted(3)
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(in thousands)
Cash and cash equivalents ......................... $122,164 $184,413
Total assets ...................................... 155,122 217,371
Total liabilities ................................. 22,864 22,864
Total stockholders' equity ........................ 132,258 194,507
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(1) Includes a one-time, non-cash charge of approximately $2,850,073 that we
incurred in the fourth quarter of fiscal 1999 due to option grants we made
to Cantor employees and a consultant exercisable at our initial public
offering price of $22.00 per share.
(2) 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
Municipal Partners Inc. 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 "Certain
transactions - Williams and Dynegy", "-Municipal Partners" and
"--TradeSpark."
(3) Reflects (i) the sale of the 2,500,000 shares of our Class A common stock
offered by us hereby, at an estimated public offering price of $25.125 per
share, after deducting underwriting discounts and commissions and estimated
offering expenses payable by us; and (ii) the proceeds to us from the
exercise of warrants to purchase shares of Class A common stock by two of
the selling stockholders in connection with this offering.
7
Risk factors
The purchase of our Class A common stock involves substantial investment risks.
You should carefully consider the following risk factors, together with the
other information set forth in, or incorporated by reference into, this
prospectus, before purchasing our Class A common stock. If any of the following
risks actually occurs, our business, financial condition or results of
operations could be materially adversely affected, the trading price of our
Class A common stock could decline and you may lose all or part of your
investment.
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 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,
8
Risk factors
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 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.
9
Risk factors
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.
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
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
10
Risk factors
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 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
11
Risk factors
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 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.
12
Risk factors
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.
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:
13
Risk factors
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
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 the risk that we could be subject to disciplinary
sanctions or other penalties for failure to comply with applicable laws or
regulations.
14
Risk factors
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 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;
15
Risk factors
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 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.
16
Risk factors
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.
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, in addition to funds raised in this offering,
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.
17
Risk factors
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 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.
Although we and our directors, executive officers and certain holders of our
common stock and securities convertible into or exercisable or exchangeable for
our common stock have agreed pursuant to certain "lock-up" agreements with the
underwriters that we and they will not offer, sell, contract to sell, pledge,
grant any option to sell, or otherwise dispose of, directly or indirectly, any
shares of our common stock or securities convertible into or exercisable or
exchangeable for our common stock, subject to certain exceptions, for a period
of 90 days after the date of this prospectus without the prior written consent
of UBS Warburg LLC, we and these persons may be released of this obligation by
UBS Warburg LLC in its sole discretion in whole or in part at any time with or
without notice.
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 2.65 million shares of 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 and manner of sale restrictions, under Rule 144. Approximately
750,000 of these shares are subject to a 90 day lock-up agreement with the
underwriters. 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 "Certain 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.
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.
18
Risk factors
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 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.
19
Risk factors
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 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.
20
Risk factors
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;
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
21
Risk factors
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.
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.
22
Risk factors
RISKS RELATED TO THIS OFFERING
Management will have discretion over the use of proceeds we receive from this
offering and may not use the funds in a manner that you would approve.
We intend to use the majority of the net proceeds we receive from this offering
for (1) working capital and general corporate purposes, including investment in
hardware and software, sales, marketing and advertising and hiring of technology
and other professionals and (2) strategic investments or acquisitions. Pending
application of these uses, we intend to use the net proceeds to purchase
short-term marketable securities. Our management will have broad discretion with
respect to the use of these funds and the determination of the timing of
expenditures. We cannot assure you that management will use these funds in a
manner that you would approve or that the allocations will be in the best
interests of our stockholders.
23
Forward-looking information
The information in this prospectus contains forward-looking statements within
the meaning of Section 27A of the Securities Act 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
prospectus in the section entitled "Risk factors."
Use of proceeds
We estimate that we will receive net proceeds (after deducting underwriting
discounts and commissions and estimated offering expenses) of approximately
$62.2 million from this offering assuming a public offering price of $25.125.
We intend to use the net proceeds of this offering for (1) working capital and
general corporate purposes, including investment in hardware and software,
sales, marketing and advertising and hiring of technology and other
professionals and (2) strategic investments or acquisitions.
We do not currently have any binding agreements with respect to any acquisitions
other than our agreement with respect to Freedom International Brokerage. See
"Certain transactions -- Freedom International Brokerage." The occurrence of
unforeseen events, opportunities or changed business conditions, however, could
cause us to use the net proceeds of this offering in a manner other than as
described in this prospectus. Pending these uses, we intend to invest the net
proceeds we receive in short-term marketable securities. We will not receive any
of the proceeds from the sale of shares of our Class A common stock by the
selling stockholders.
24
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 23, 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 23, 2001) .................. 34.75 13.63
On February 23, 2001, the last reported closing price of our Class A common
stock on the Nasdaq National Market was $25.125 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.
25
Capitalization
The following table sets forth as of December 31, 2000:
o our actual capitalization; and
o our capitalization on an as adjusted basis to reflect both the conversion by
one of the selling stockholders of 2,282,792 shares of our Class B common
stock into an equal number of shares of our Class A common stock and the sale
of the 2,500,000 shares of our Class A common stock offered by us hereby at an
estimated public offering price of $25.125 per share after deducting estimated
offering expenses and underwriting discounts and commissions payable by us.
This information is qualified by, and should be read in conjunction with, our
consolidated financial statements and the notes thereto beginning on page F-1.
As of December 31, 2000
---------------------------
Actual As adjusted
-------------------------------------------------------------------------------
Cash and cash equivalents ....................... $122,163,712 $184,412,618
============ ============
Stockholders' equity:
Preferred stock, par value $0.01 per share;
50,000,000 shares authorized, 8,000,000 shares
issued and outstanding, actual; and 8,000,000
shares issued and outstanding, as adjusted .... 80,000 80,000
Class A common stock, par value $0.01 per
share; 200,000,000 shares authorized, 16,342,202
shares issued and outstanding, actual; and
21,259,994 shares issued and outstanding, as
adjusted ...................................... 163,422 212,600
Class B common stock, par value $0.01 per
share; 100,000,000 shares authorized, 35,520,480
issued and outstanding, actual; and
33,237,688 shares issued and outstanding, as
adjusted ...................................... 355,205 332,377
Additional paid-in capital ...................... 205,908,024
Subscription receivable(1) ...................... (1,250,000) (1,250,000)
Accumulated deficit ............................. (72,998,898) (72,998,898)
------------ ------------
Total stockholders' equity .................. $132,257,753 $194,506,659
------------ ------------
Total capitalization ........................ $132,257,753 $194,506,659
============ ============
- ---------------
(1) Represents interest-bearing promissory notes issued by certain employees and
stockholders of MPI in exchange for 28,374 restricted shares of our Class A
common stock that were granted to them. See "Certain transactions -
Municipal Partners."
26
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 "Management's discussion and analysis of financial
condition and results of operations" and our consolidated financial statements
and the notes thereto beginning on page F-1.
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
December 31, 2000
-------------------------
Statement of financial condition: Actual As adjusted(3)
-------------------------------------------------------------------------------
(in thousands)
Cash and cash equivalents ......................... $122,164 $184,413
Total assets ...................................... 155,122 217,371
Total liabilities ................................. 22,864 22,864
Total stockholders' equity ........................ 132,258 194,507
- ---------------
(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 "Certain 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.
(3) Reflects (i) the sale of the 2,500,000 shares of our Class A common stock
offered by us hereby, at an estimated public offering price of $25.125 per
share, after deducting underwriting discounts and commissions and estimated
offering expenses payable by us; and (ii) the proceeds to us from the
exercise of warrants to purchase shares of Class A common stock by two of
the selling stockholders in connection with this offering.
27
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,
including those set forth in "Risk factors" and elsewhere in this prospectus.
The following discussion is qualified in its entirety by, and should be read in
conjunction with, our consolidated financial statements and the notes thereto,
which begin on page F-1.
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 eSpeed(SM) system was executed. Cantor has been developing
systems to promote fully electronic marketplaces since the early 1990s. Since
January 1996, Cantor has used our eSpeed(SM) 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 eSpeed(SM)
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 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
28
Management's discussion and analysis of financial condition and results of
operations
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 Exchange(SM). 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 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. 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 eSpeed(SM) system and, with the assistance of
Cantor, to continue to create new markets and convert new clients to our
eSpeed(SM) 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.
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%
======= ===== ======== =====
29
Management's discussion and analysis of financial condition and results of
operations
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 eSpeed(SM)
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
eSpeed(SM) 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
eSpeed(SM) system and additional clients utilize our eSpeed(SM) 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 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.
30
Management's discussion and analysis of financial condition and results of
operations
Expenses
Period from March 10,
1999 (date of
commencement of
operations) to Year ended
December 31, 1999 December 31, 2000
-------------------------------------------------------------------------------
(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 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
31
Management's discussion and analysis of financial condition and results of
operations
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 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 eSpeed(SM) 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. Accordingly, we
currently expect to record a one-time non-cash charge of approximately
$3,600,000 representing the value of the warrants upon the closing of the
transaction which we anticipate will occur in the first quarter of 2001.
32
Management's discussion and analysis of financial condition and results of
operations
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 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.
33
Management's discussion and analysis of financial condition and results of
operations
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
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues: (in thousands)
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 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
34
Management's discussion and analysis of financial condition and results of
operations
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.
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.
35
Business
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 (1) through 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) through 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.
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Business
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.
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 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
37
Business
request-for-quote capabilities. Our products enable market participants to
transact business instantaneously, more effectively and at lower cost.
Our eSpeed(SM) system
[Graphic depicts our solution as a continuous circle
with text describing our software.]
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.
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Business
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.
[Graphic is a map of our global private network.]
Private network connects 22 global hub cities to 3 fully redundant data
centers and connects to the Internet via 8 Internet service providers
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 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,
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Business
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
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
40
Business
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 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.
41
Business
eSPEED(SM) PRODUCTS
We market our services through the following three products: eSpeed Markets(SM),
eSpeed Private Label(SM) and eSpeed Online(SM). The following table shows the
characteristics of our three products:
[Graphic is a table of the three products we market
and includes text about the products.]
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 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.
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Business
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 includes 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 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. The Financial Vertical will
also include Freedom's marketplaces upon the closing of the Freedom transaction.
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
43
Business
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 $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.
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Business
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 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.
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
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Business
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
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
46
Business
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 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.
47
Business
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.
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.
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 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.
48
Management
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. 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.
49
Management
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.
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.
50
Management
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.
51
Certain 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 Exchange(SM).
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%
(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.
52
Certain transactions
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.
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
53
Certain transactions
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. 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 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
54
Certain transactions
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.
CONSULTING SERVICES
For consulting services provided to us and Cantor by Martin J. Wygod in
connection with our initial public offering, we issued to Mr. Wygod or his
designees warrants to purchase 135,000 shares of our Class A common stock. The
warrants have a five-year term and are currently exercisable at a price per
share equal to the initial public offering price. The warrants are not
transferable, other than to charities and trusts established for the benefit of
Mr. Wygod's children and grandchildren. Pursuant to registration rights granted
in connection with the warrants, Mr. Wygod and his designee are selling
stockholders in this offering.
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 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
55
Certain transactions
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.
MUNICIPAL PARTNERS
On July 21, 2000, Cantor acquired the brokerage business of Municipal Partners
pursuant to an Asset Purchase Agreement by and among us, Cantor, Municipal
Partners and the individuals signatory thereto for a cash payment of $1,500,000.
In connection therewith, we issued to Municipal Partners' stockholders 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 eSpeed(SM) 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 eSpeed(SM)
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 Municipal Partners 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
56
Certain transactions
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.
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.
57
Selling stockholders
The following tables set forth certain information as of February 8, 2001 with
respect to the beneficial ownership of our Class A common stock by the selling
stockholders.
Prior to offering After offering
-------------------------------------- Class A ----------------------------------------
Class A Class B common stock Class A Class B
common stock common stock offered common stock common stock
-------------------------------------- -------------- ----------------------------------------
Name Shares % Shares % Shares Shares % Shares %
-----------------------------------------------------------------------------------------------------------------------------------
Cantor Fitzgerald Securities ... 29,102,789(1) 56.1(2) 26,885,581 82.2 4,500,000 24,602,789(3) 45.1(4) 24,602,789 80.8
Martin J. Wygod ................ 110,000 * -- -- 110,000 -- -- -- --
Trust f/b/o Adam Yellin(5) ..... 25,000 * -- -- 25,000 -- -- -- --
- ---------------
(1) Consists of (1) 26,885,581 shares of our Class B common stock and (2)
2,217,208 shares of our Class A common stock. Each share of Class B common
stock is immediately convertible into a share of Class A common stock.
Cantor Fitzgerald Securities is a subsidiary of Cantor Fitzgerald, L.P. See
"Certain transactions."
(2) Percentage based on 19,159,612 shares of our Class A common stock and
32,724,600 shares of our Class B common stock outstanding on February 8,
2001.
(3) Consists of 24,602,789 shares of our Class B common stock. Each share of
Class B common stock is immediately convertible into a share of Class A
common stock.
(4) Percentage based on 24,077,404 shares of our Class A common stock and
30,441,808 shares of our Class B common stock oustanding on February 8,
2001, as adjusted for this offering.
(5) The shares of Class A common stock are owned by Pamela S. Wygod, Trustee
under the Trust Agreement dated 12/30/87 for the benefit of Adam Yellin.
* Less than 1%
58
Underwriting
We, the selling stockholders and the underwriters for this offering named below
have entered into an underwriting agreement concerning the shares being offered.
Subject to conditions, each underwriter has severally agreed to purchase the
number of shares indicated in the following table. UBS Warburg LLC, Lehman
Brothers Inc. and J.P. Morgan Securities Inc. are the representatives of
the underwriters.
Underwriters Number of shares
- --------------------------------------------------------------------------------
UBS Warburg LLC .............................................
Lehman Brothers Inc. ........................................
J.P. Morgan Securities Inc. .................................
Cantor Fitzgerald & Co. .....................................
Total.. ..................................................
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have a 30-day option to buy up to 1,070,250 shares
from one of the selling stockholders, Cantor Fitzgerald Securities, at the
public offering price less the underwriting discounts and commissions, to cover
these sales. If any shares are purchased under this option, the underwriters
will severally purchase shares in approximately the same proportion as set forth
in the table above.
The following table provides information regarding the amount of the discount to
be paid to the underwriters by us and the selling stockholders:
Paid by us Paid by the selling stockholders
--------------------------------------------- ---------------------------------------------
No exercise of Full exercise of No exercise of Full exercise of
over-allotment option over-allotment option over-allotment option over-allotment option
- -----------------------------------------------------------------------------------------------------------------------------------
Per share ....................... $ $ $ $
Total ........................ $ $ $ $
We estimate that the total expenses of this offering payable by us, excluding
underwriting discounts and commissions, will be about $550,000.
Shares sold by the underwriters to the public will initially be offered at the
public offering price set forth on the cover of this prospectus. Any shares sold
by the underwriters to securities dealers may be sold at a discount of up to
$ per share from the public offering price. Any of these securities dealers
may resell any shares purchased from the underwriters to other brokers or
dealers at a discount of up to $ per share from the public offering price.
If all the shares are not sold at the public offering price, the representatives
may change the offering price and the other selling terms.
We have agreed with the underwriters not to offer, sell, contract to sell, hedge
or otherwise dispose of, directly or indirectly, any of our common stock or
securities convertible into or exchangeable for shares of common stock during
the period from the date of this prospectus continuing through the date 90 days
after the date of this prospectus, without the prior written consent of UBS
Warburg LLC. Our executive officers and directors and Cantor Fitzgerald
Securities have also agreed to these restrictions.
Cantor Fitzgerald & Co., a subsidiary of Cantor Fitzgerald Securities, a selling
stockholder and an indirect subsidiary of Cantor Fitzgerald, L.P., is
participating in this offering as an underwriter. Accordingly, this offering
will conform with the requirements set forth in Rule 2720 of the Conduct Rules
of the NASD.
In connection with this offering, the underwriters may purchase and sell shares
of our Class A common stock in the open market. These transactions may include
stabilizing transactions, short sales and purchases to cover positions created
by short sales. Stabilizing transactions consist of bids or purchases made for
the purpose of preventing or retarding a decline in the market price of our
Class A common stock while this offering is in progress. Short sales involve the
sale by the underwriters of a greater number of shares than they are required to
purchase in this offering. Short sales may be either "covered short sales" or
"naked short sales." Covered short sales are sales made in an amount not greater
than
59
Underwriting
the underwriters' over-allotment option to purchase additional shares in this
offering. The underwriters may close out any covered short position by either
exercising their over-allotment option or purchasing shares in the open market.
In determining the source of shares to close out the covered short position, the
underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through the over-allotment option. Naked short sales are sales
in excess of the over-allotment option. The underwriters must close out any
naked short position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are concerned there
may be downward pressure on the price of shares in the open market after pricing
that could adversely affect investors who purchase in this offering.
The underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of that underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise affect
the market price of our Class A common stock. As a result, the price of our
Class A common stock may be higher than the price that otherwise might exist in
the open market. If these activities are commenced, they may be discontinued by
the underwriters at any time. These transactions may be effected on the Nasdaq
National Market or otherwise.
We and the selling stockholders have agreed to indemnify the several
underwriters against some liabilities, including liabilities under the
Securities Act of 1933, and to contribute to payments that the underwriters may
be required to make in respect thereof.
60
Legal matters
Certain legal matters related to this offering will be passed upon for us by
Morgan, Lewis & Bockius LLP, New York, New York and Stephen Merkel, our Senior
Vice President, General Counsel and Secretary. Mr. Merkel is an Executive
Managing Director, Senior Vice President, General Counsel and Secretary of
Cantor, and beneficially owns 38,501 shares (of which 2,250 are owned by Mr.
Merkel's wife) shares and has options to acquire 200,000 shares of our Class A
common stock, of which 25,000 are currently exercisable or exercisable within 60
days of February 8, 2001. Dewey Ballantine LLP, New York, New York is acting as
counsel for the underwriters in connection with this offering.
Experts
The financial statements included in this prospectus and registration statement
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing in this prospectus and registration statement, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
Where you can find more information
We have filed with the Securities and Exchange Commission a registration
statement (of which this prospectus forms a part) on Form S-3 with respect to
the Class A common stock being offered by this prospectus. In addition, we file
annual, quarterly and current reports, proxy statements and other information
with the SEC. You may read and copy any document we file at the Public Reference
Section of the Securities and Exchange Commission, 450 Fifth Street, NW, Room
1024, Washington, D.C. 20549, and the Securities and Exchange Commission's
Regional Offices located at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048. You may call the SEC at 800-SEC-0330 for further information about the
operation of the public reference rooms. Our SEC filings are also available to
the public at the SEC's Website found at http:// www.sec.gov.
This prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules thereto. For further
information with respect to us and the shares of Class A common stock offered
hereby, reference is made to the registration statement, including the exhibits
and schedules thereto. Statements contained in this prospectus as to the
contents of any contract or other document referred to herein are not
necessarily complete and, where any contract is an exhibit to the registration
statement, each statement with respect to the contract is qualified in all
respects by the provisions of the relevant exhibit, to which reference is hereby
made.
In addition, the SEC allows us to "incorporate by reference" into this
prospectus the information we file with them, which means that we can disclose
important information to you by referring to those documents. The information
incorporated by reference is considered to be part of this prospectus, and
information that we file later with the SEC will automatically update and
supersede this information. We incorporate by reference the documents listed
below and any future filings we will make with the SEC under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until this offering is
terminated:
1. Our Annual Report on Form 10-K for the year ended December 31, 2000; and
61
Where you can find more information
2. The description of our Class A common stock contained in our Registration
Statement on Form 8-A (File No. 000-28191) filed with the SEC on November 17,
1999, and amended on March 7, 2001, including any further amendment or report
filed for the purpose of updating this description.
You may request a copy of these filings, which we will provide to you at no
cost, by writing or calling us at the following address and telephone number:
eSpeed, Inc., One World Trade Center, 103rd Floor, New York, New York 10048,
telephone: (212) 938-3773, Attention: Secretary.
62
ESPEED, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
-------------------------------------------------------------------------------
Independent Auditors' Report ............................................ F-2
Consolidated Statements of Financial Condition .......................... F-3
Consolidated Statements of Operations ................................... F-4
Consolidated Statements of Cash Flows ................................... F-5
Consolidated Statements of Changes in Stockholders' Equity .............. F-6
Notes to Consolidated Financial Statements .............................. F-7
F-1
eSPEED, INC. AND SUBSIDIARIES
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
F-2
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
F-3
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)
------------ --------------
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
F-4
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
------------ --------------
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
F-5
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
F-6
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 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
F-7
eSPEED, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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
============ ============
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.
F-8
eSPEED, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
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
F-9
eSPEED, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 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
F-10
eSPEED, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
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
F-11
eSPEED, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 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.
F-12
eSPEED, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 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.
F-13
eSPEED, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 eSpeed(SM) system by its affiliates pursuant to a
Joint Services Agreement, as amended, among eSpeed and its affiliates, including
Cantor Fitzgerald Partners. In addition, in order to provide incentives to
promote the use of the eSpeed(SM) 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
F-14
eSPEED, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 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
F-15
eSPEED, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
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
========= ========== ========= ========== ========= ================
F-16
eSPEED, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table provides further details relating to the Company's stock
options and warrants outstanding as of December 31, 2000.
Options & Warrants
Options & Warrants Outstanding 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. 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
F-17
eSPEED, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
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
============= =============
F-18
eSPEED, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
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)
=========== ============ ============= ============
March 10 1999 Quarter Ended
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)
============ =========== ============= ============
F-19
[The inside back cover graphic depicts the three products we market
and our position in those products.]
[eSpeed LOGO]
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses (other than underwriting
compensation expected to be incurred) in connection with this offering. All of
such amounts (except the SEC registration fee and the NASD filing fee) are
estimated. None of the expenses set forth in the following table are expected
to be paid by the selling stockholders.
SEC registration fee ............................................. $ 58,359.84
NASD filing fee .................................................. 23,843.94
Blue Sky fees and expenses ....................................... 10,000.00
Printing and engraving costs ..................................... 150,000.00
Legal fees and expenses .......................................... 200,000.00
Accounting fees and expenses ..................................... 100,000.00
Transfer agent and registrar fees and expenses ................... 3,500.00
Miscellaneous .................................................... 4,296.22
-----------
Total ........................................................... $550,000.00
===========
- ----------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Second Amended and Restated By-Laws provide that we shall, to the fullest
extent permitted by Section 145 of the General Corporation Law of the State of
Delaware (the "DGCL"), as amended from time to time, indemnify all persons
whom it may indemnify pursuant thereto.
Section 145 of the DGCL permits a corporation, under specified circumstances,
to indemnify its directors, officers, employees or agents against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlements
actually and reasonably incurred by them in connection with any action, suit
or proceeding brought by third parties by reason of the fact that they were or
are directors, officers, employees or agents of the corporation, if such
directors, officers, employees or agents acted in good faith and in a manner
they reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reason to believe their conduct was unlawful. In a derivative action, i.e.,
one by or in the right of the corporation, indemnification may be made only
for expenses actually and reasonably incurred by directors, officers,
employees or agents in connection with the defense or settlement of an action
or suit, and only with respect to a matter as to which they shall have acted
in good faith and in a manner they reasonably believed to be in or not opposed
to the best interests of the corporation, except that no indemnification shall
be made if such person shall have been adjudged liable to the corporation,
unless and only to the extent that the court in which the action or suit was
brought shall determine upon application that the defendant directors,
officers, employees or agents are fairly and reasonably entitled to indemnity
for such expenses despite such adjudication of liability.
The Underwriting Agreement, filed as Exhibit 1, provides that the Underwriters
named therein will indemnify us and hold us harmless and each of our
directors, officers or controlling persons from and against certain
liabilities, including liabilities under the Securities Act. The Underwriting
Agreement also provides that such Underwriters will contribute to certain
liabilities of such persons under the Securities Act.
II-1
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
1* Form of Underwriting Agreement
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 to Exhibit 2.1 to the
Registrant's Annual Report on Form 10-K for the fiscal 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 fiscal year ended December 31,
1999).
4 Specimen Class A common stock certificate (incorporated by reference
to Exhibit 4.1 to the Registrant's Registration Statement on Form S-1
(Reg. No. 333-87475)).
5* Opinion of Morgan, Lewis & Bockius LLP.
23.1 Consent of Deloitte & Touche LLP.
23.2* Consent of Morgan, Lewis & Bockius LLP (contained in Exhibit 5)
24* Powers of Attorney (included on signature page).
- ----------
* Previously filed.
(b) Financial Statement Schedules
The financial statement schedules are omitted because they are inapplicable or
the requested information is shown in the consolidated financial statements of
eSpeed, Inc. or related notes thereto.
ITEM 17. UNDERTAKINGS.
1. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report under Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee
benefit plan's annual report under Section 15(d) of the Securities Exchange
Act of 1934) that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
2. Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
3. The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance on Rule 430A and
II-2
contained in a form of Prospectus filed by us pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration Statement as of the time it was declared
effective.
(2) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 2 to
Registration Statement on Form S-3 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, the State of
New York, on the 7th day of March, 2001.
eSPEED, INC.
By: /s/ HOWARD W. LUTNICK
---------------------------------------
Name: Howard W. Lutnick
Title: Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2
to Registration Statement on Form S-3 has been signed by the following persons
in the capacities and on the date indicated.
Signature Title(s) Date
--------- -------- ----
/s/ HOWARD W. LUTNICK Chairman of the Board and Chief Executive March 7, 2001
----------------------------- Officer (Principal Executive Officer)
Howard W. Lutnick
* President and Chief Operating Officer March 7, 2001
-----------------------------
Frederick T. Varacchi
* Vice Chairman March 7, 2001
-----------------------------
Douglas B. Gardner
* Senior Vice President and Chief Financial March 7, 2001
----------------------------- Officer (Principal Financial and Accounting
Jeffrey G. Goldflam Officer)
II-4
Signature Title(s) Date
--------- -------- ----
* Director March 7, 2001
-----------------------------
Richard C. Breeden
* Director March 7, 2001
-----------------------------
Larry R. Carter
* Director March 7, 2001
-----------------------------
William J. Moran
* Director March 7, 2001
-----------------------------
Joseph P. Shea
*By: /s/ HOWARD W. LUTNICK
--------------------------
Howard W. Lutnick, Attorney-in-Fact
II-5
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
1* Form of Underwriting Agreement
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 to Exhibit 2.1 to
the Registrant's Annual Report on Form 10-K for the fiscal 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 fiscal year ended December 31,
1999).
4 Specimen Class A common stock Certificate (incorporated by
reference to Exhibit 4.1 to the Registrant's Registration Statement
on Form S-1 (Reg. No. 333-87475)).
5* Opinion of Morgan, Lewis & Bockius LLP.
23.1 Consent of Deloitte & Touche LLP.
23.2* Consent of Morgan, Lewis & Bockius LLP (contained in Exhibit 5)
24* Powers of Attorney (included on signature page).
- ----------
* Previously filed.