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Filed Pursuant to Rule 424(b)(4)
Registration Statement No. 333-87475
PROSPECTUS
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9,000,000 SHARES
[LOGO]
CLASS A COMMON STOCK
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We operate global interactive electronic marketplaces designed to enable market
participants to trade financial instruments and other products instantaneously,
more effectively and at a lower cost than traditional trading methods. Of the
9,000,000 shares of Class A common stock offered by this prospectus, we are
offering 6,000,000 shares and the selling stockholder, Cantor Fitzgerald
Securities, is offering 3,000,000 shares. We will not receive any proceeds from
the sale by the selling stockholder of shares of our Class A common stock.
No public market currently exists for our Class A common stock. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price. Our Class A common stock has been approved for
quotation on the Nasdaq National Market under the symbol "ESPD."
INVESTING IN OUR CLASS A COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 5 TO READ ABOUT CERTAIN RISKS YOU SHOULD CONSIDER BEFORE
BUYING SHARES OF OUR CLASS A COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PER SHARE TOTAL
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Public offering price....................................................... $ 22.00 $198,000,000
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Underwriting discounts and commissions...................................... $ 1.43 $ 12,870,000
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Proceeds, before expenses, to us............................................ $ 20.57 $123,420,000
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Proceeds to the selling stockholder......................................... $ 20.57 $ 61,710,000
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We and the selling stockholder have granted the underwriters a 30-day option to
purchase up to an additional 1,000,000 and 350,000 shares, respectively, of
Class A common stock to cover over-allotments at the initial public offering
price per share less the underwriting discounts and commissions. If the option
is exercised in full, the total underwriting discounts and commissions will be
$14,800,500, the total proceeds, before expenses, to us will be $143,990,000 and
the total proceeds to the selling stockholder will be $68,909,500.
The underwriters expect to deliver the shares of Class A common stock in New
York, New York on December 15, 1999.
WARBURG DILLON READ LLC
HAMBRECHT & QUIST
THOMAS WEISEL PARTNERS LLC
CANTOR FITZGERALD & CO.
The date of this prospectus is December 10, 1999.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary......................................................................................... 1
Risk Factors............................................................................................... 5
Forward-Looking Statements................................................................................. 20
Use of Proceeds............................................................................................ 20
Dividend Policy............................................................................................ 20
Dilution................................................................................................... 21
Capitalization............................................................................................. 22
Selected Financial Data.................................................................................... 23
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 24
Business................................................................................................... 30
Management................................................................................................. 50
Relationship with Cantor................................................................................... 54
Principal and Selling Stockholders......................................................................... 61
Description of Capital Stock............................................................................... 62
Shares Eligible for Future Sale............................................................................ 65
Underwriting............................................................................................... 66
Legal Matters.............................................................................................. 69
Experts.................................................................................................... 69
Where You Can Find More Information........................................................................ 69
Index to Financial Statements.............................................................................. F-1
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eSPEED (SM) is a service mark of eSpeed, and INTERACTIVE MATCHING (SM) and
CANTOR EXCHANGE (SM) are service marks licensed by eSpeed.
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Unless otherwise indicated, all information in this prospectus assumes that
the underwriters' over-allotment option will not be exercised.
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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. Unless otherwise indicated, the
information in this prospectus assumes that the contribution of assets to us by
Cantor Fitzgerald, L.P. and its affiliates which is described below has taken
place.
OVERVIEW OF OUR BUSINESS
We operate global interactive electronic marketplaces that enable the
trading of financial instruments and other products instantaneously, more
effectively and at lower cost than traditional trading methods. Our marketplaces
are currently used by most of the largest financial institutions and wholesale
market participants to trade in a wide range of global financial instruments,
including government securities denominated in U.S. dollars, Euros, Yen, British
Pounds Sterling, Canadian dollars and currencies of emerging market countries,
as well as securities of U.S. agencies, municipal securities, Eurobonds,
corporate bonds and other global fixed income securities and U.S. Treasury
futures. We operate the largest global electronic marketplace for U.S. Treasury
securities and leading global electronic marketplaces for other fixed income
securities and financial instruments. We also operate a U.S. Treasury futures
exchange marketplace that is known as the CANTOR EXCHANGE (SM), the first fully
electronic futures exchange for the trading of U.S. Treasury futures. Our
current marketplaces process financial instrument transactions of over
$150 billion per day, of which more than $6 billion are wholly-electronic
orders. Our revenues are driven by trading activity and volume in our
marketplaces. We commenced operations in March 1999 as a division of Cantor
Fitzgerald and have not yet made a profit.
We believe we operate the only electronic marketplaces used for trading in
multiple instruments on a global basis. Over 500 institutions worldwide
participate in our marketplaces, including all of the 25 largest bond trading
firms in the world, as identified by Euromoney Magazine. Most of these
institutions use our proprietary screen displays and/or trading platforms, which
allow us to deliver information and execute transactions instantaneously, on a
secure basis through their computer network security barriers.
OUR INDUSTRY
Traditional trading methods are relatively slow, expensive and limited. In
both the fixed income and futures markets, trading practices historically have
centered around a method of trading known as open outcry, where trading activity
is focused on a central location, or pit. Market participants in the pit often
have access to better and more timely market information than outsiders. In
order to access the pit, individuals and institutional traders must send their
orders through several layers of middlemen. Transaction costs are high due to
the number of people involved in an open outcry system and execution can be
slow. Program trading is difficult or impossible to implement because of the
current manual nature of these markets, especially programs designed to
automatically and simultaneously execute multiple trades in different, but
related, financial products. Processing, confirming and clearing paper-based
trades are also very time consuming and expensive. Paper and telephone-based
trading produces delayed information and results in compliance programs that are
expensive to manage and can be circumvented. Because of these impediments,
non-electronic trading methods limit trading volume and liquidity.
OUR ELECTRONIC MARKETPLACE SOLUTION
Our interactive electronic marketplaces are powered by our eSPEED (SM)
system, which employs our private, instantaneous, electronic network and
proprietary transaction processing software. Our eSPEED (SM) system has a
flexible design which allows us to quickly and easily add new financial
instruments in multiple currencies and trading models. It uses our network
distribution system, which we believe is one of the most robust systems in
operation, enabling us to provide access to accurate market information and
instantaneous trade execution. The system is designed to minimize the need for
human intermediaries in the trading process by providing clients with multiple
methods of accessing our marketplaces and executing trades directly, utilizing
INTERACTIVE MATCHING (SM), our proprietary, rules-based trading method that
interactively executes buy and sell orders from multiple market participants.
The benefits of our eSPEED (SM) system include the following:
o instantaneous price dissemination and trade execution;
o lower transaction costs;
o multiple product program trading;
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o greater accuracy and decreased probability of erroneous trades;
o integrated compliance and credit risk functions;
o highly efficient pricing on illiquid securities; and
o ability to automate back-office functions.
OUR GROWTH STRATEGY
Our objective is to be the leading provider of interactive electronic
marketplaces worldwide. Our growth strategy to achieve this objective includes:
o focusing exclusively on developing and operating interactive electronic
marketplaces;
o expanding the number of financial and non-financial products in our
electronic marketplaces;
o converting clients to fully electronic trading;
o leveraging existing eSPEED (SM) system connectivity to deploy new
products and services;
o enabling online retail broker access to wholesale marketplaces, where
appropriate, for fixed income securities and other financial products so
as to allow bonds and other financial instruments to trade online similar
to stocks;
o pursuing acquisitions and strategic alliances; and
o leveraging our eSPEED (SM) system for use in non-financial,
business-to-business and consumer marketplaces.
OUR HISTORY
We commenced operations in March 1999 as a division of Cantor Fitzgerald.
Over the past 25 years, Cantor has been a leading global broker-dealer of fixed
income securities. In 1972, Cantor developed the world's first screen-based
brokerage market in U.S. government securities. Since the early 1990s, Cantor
has been developing systems to promote fully electronic marketplaces. Since
1996, Cantor has invested more than $200 million in information technology,
including the development of proprietary electronic transaction processing
software, network distribution systems and related contractual rights, which
culminated in the development of our eSPEED (SM) system.
Today, Cantor executes in excess of $45 trillion in transaction volume
annually and is a major facilitator of liquidity in numerous financial products
through its offices in the United States, Canada, Europe and Asia. Our eSPEED
(SM) system provides the only way to electronically access Cantor's
marketplaces. Consequently, we believe that clients will be strongly motivated
to use our interactive electronic marketplaces. We share with Cantor a portion
of the transaction-based revenues paid by financial market participants for
trades using our electronic marketplaces. Cantor and most of the largest
financial institutions in the world are currently our primary clients. See
"Relationship with Cantor--Joint Services Agreement."
Concurrent with this offering, Cantor is contributing to us substantially
all of our assets, including the eSPEED (SM) system. In exchange for these
assets, we are issuing to Cantor common stock that will represent approximately
98% of the voting power of our outstanding capital stock after this offering. We
believe our relationship with Cantor is a significant competitive advantage.
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 Web site
is http://www.espeed.com and our e-mail address is [email protected]. We are a
Delaware corporation.
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THIS OFFERING
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Class A common stock offered by:
eSpeed.................................. 6,000,000 shares
The selling stockholder................. 3,000,000 shares
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Total................................ 9,000,000 shares
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Common stock to be outstanding after this
offering................................ 9,000,000 shares of Class A common stock and 41,000,000 shares of
Class B common stock (1)(2)
Use of proceeds........................... We intend to use the net proceeds from this offering for
(1) investment in hardware and software for entry into existing and
new marketplaces, (2) hiring technology and other professionals to
develop new products, (3) sales, marketing and advertising and
(4) working capital and general corporate purposes, including
possible acquisitions. See "Use of Proceeds" and "Relationship with
Cantor."
Voting rights............................. The rights of holders of shares of common stock are substantially
identical, except that holders of Class B common stock will be
entitled to 10 votes per share, while holders of Class A common stock
will be entitled to one vote per share. See "Description of Capital
Stock."
Nasdaq National Market symbol............. ESPD
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(1) Excludes 6,600,000 shares of Class A common stock reserved for issuance upon
exercise of options we have granted under our stock option plan in
connection with this offering at an exercise price per share equal to the
initial public offering price.
(2) Excludes 135,000 shares of Class A common stock reserved for issuance upon
exercise of warrants we have granted in connection with this offering. These
warrants have an exercise price per share equal to the initial public
offering price.
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SUMMARY CONSOLIDATED FINANCIAL DATA
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FOR THE PERIOD FROM MARCH 10, 1999
(DATE OF COMMENCEMENT OF OPERATIONS)
TO SEPTEMBER 24, 1999
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STATEMENT OF OPERATIONS DATA: (1)
Total revenues.............................................. $ 24,139,469
Total expenses.............................................. 30,925,117
Loss before benefit for income taxes........................ (6,785,648)
Net loss.................................................... (6,613,841)
PRO FORMA DATA: (2)
Pro forma net loss.......................................... $ (6,785,648)
Basic and diluted pro forma net loss per share.............. $ (0.15)
Shares outstanding.......................................... 44,000,000
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SEPTEMBER 24, 1999
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ACTUAL AS ADJUSTED (3)
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STATEMENT OF FINANCIAL CONDITION DATA:
Cash........................................................ $ 200,000 $ 121,170,000
Total assets................................................ 10,798,264 131,768,264
Total liabilities........................................... 11,756,806 11,756,806
Total stockholder's equity.................................. (958,542) 120,011,458
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(1) Excludes a one-time, non-cash charge of approximately $4 million that we
expect to incur in the fourth quarter of fiscal 1999 due to option grants we
made to Cantor employees exercisable at the initial public offering price.
(2) Pro forma data present the net loss and net loss per share data as if we
were subject to income tax as a corporation. The tax benefit for state and
local tax, which is available to us as a division of Cantor, is not
available to us as a corporation because of our net operating loss position.
The determination of shares outstanding and loss per share data reflects the
effect of the consummation of the formation transactions as discussed in
"Relationship with Cantor--The Formation Transactions" as if those events
had taken place at the beginning of the period.
(3) Reflects the sale of the 6,000,000 shares of Class A common stock offered by
us hereby, at an initial public offering price of $22.00 per share, after
deducting the estimated offering expenses and underwriting discounts and
commissions payable by us.
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__________________________________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 in 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 eSpeed.
We are a recently formed company. 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; and
o respond to technological developments or service offerings by
competitors.
We may not be able to implement our business plan successfully, or at all.
BECAUSE WE HAVE A HISTORY OF LOSSES, WE EXPECT TO CONTINUE TO INCUR LOSSES AND
GENERATE NEGATIVE CASH FLOW FROM OPERATIONS FOR THE FORESEEABLE FUTURE.
Since our inception, we have incurred substantial costs to develop our
technology and infrastructure. As a result, from our inception through September
24, 1999, we have sustained cumulative net losses of $6.6 million or
$6.8 million on a pro forma basis. We expect that we will continue to incur
losses and generate negative cash flow from operations for the foreseeable
future 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 AND CANTOR'S
CLIENTS DO NOT UTILIZE 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 which will
utilize our interactive electronic marketplaces. We cannot assure you that we
will be able to continue to expand our 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 MARKETING AND STRATEGIC ALLIANCES, WE MAY NOT
GENERATE INCREASED TRADING IN OUR ELECTRONIC MARKETPLACES.
We expect to enter into strategic alliances with other market participants,
such as retail brokers, exchanges, market makers, clearinghouses 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 enter into these
strategic alliances on terms that are favorable to us, or at all. The success of
these relationships will depend on the amount of increased trading in our
electronic marketplaces by the clients of these strategic alliance partners.
These arrangements may not generate the expected number of new clients or
increased trading volume we are seeking.
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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, brand and the adaptability
of our electronic marketplaces for non-financial products. In order to build
this awareness, our marketing efforts must succeed and we must provide
high-quality services. These efforts will 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 by clients to whom we provide services to facilitate
settlement operations;
o decreased client service satisfaction;
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. The
assets acquired by us from Cantor in the formation transactions have been
acquired by us "as is." Although Cantor has been using the systems and
technology being transferred to us in its business, there can be no assurance
that such systems and technology are entirely free from defects. To the extent
any defects are discovered, we will not have any recourse against Cantor. Any
system failure that causes an interruption in service or decreases the
responsiveness of our service, including failures caused by client error or
misuse of our systems, could damage our reputation, business and brand name.
IF WE DO NOT EFFECTIVELY MANAGE OUR GROWTH, OUR EXISTING PERSONNEL AND SYSTEMS
MAY BE STRAINED AND OUR BUSINESS MAY NOT OPERATE EFFICIENTLY.
In order to execute our business plan, we must grow significantly. This
growth will place significant strain on our personnel, management systems and
resources. We expect that the number of our employees, including technical and
management-level employees, will 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 and 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.
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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 change,
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 financial
markets knowledge and technology skills. 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 officers or other personnel. All of the members of our senior management
team are also officers, partners or key employees of Cantor. As a result, they
dedicate only a portion of their professional efforts to our business and
operations. We cannot assure you that the time these persons devote to our
business and operations in the future will be adequate and that we will not
experience an adverse effect on our operations due to the demands placed on our
management team by their other professional obligations. We intend to strive to
provide high quality services that will allow us to establish and maintain
long-term relationships with our clients. Our ability to do so will depend, in
large part, upon the individual employees who represent us in our dealings with
clients. The market for qualified programmers, technicians and sales persons is
extremely competitive and has grown more so in recent periods as electronic
commerce has experienced growth. We cannot assure you that we will be successful
in our efforts to recruit and retain the required personnel.
IF CANTOR OR WE ARE UNABLE TO PROTECT THE INTELLECTUAL PROPERTY RIGHTS WE
LICENSE FROM CANTOR OR OWN, OUR ABILITY TO OPERATE ELECTRONIC TRADING
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
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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 intend to use our eSPEED(SM) service mark for the services described
herein and have applied to register that service mark in a number of
jurisdictions around the world. Although several existing third party
registrations and applications for trademarks consisting of designations similar
to ours in certain European countries have recently come to light, they are for
goods and services that are different 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
European countries, thereby requiring us to adopt and use another service mark
for our services in such countries.
IF IT BECOMES NECESSARY TO PROTECT OR DEFEND OUR INTELLECTUAL PROPERTY RIGHTS,
WE MAY HAVE TO RESORT TO COSTLY LITIGATION.
We may have to resort to litigation to enforce our intellectual property
rights, protect our trade secrets, determine the validity and scope of the
proprietary rights of others, or defend ourselves from claims of infringement,
invalidity or unenforceability. We may incur substantial costs and diversion of
resources as a result of litigation, even if we win. In the event we do not win,
we may have to enter into royalty or licensing agreements. We cannot assure you
that an agreement would be available to us on reasonable terms, if at all.
One of the patents we license from Cantor and which relates to INTERACTIVE
MATCHING (SM) is currently the subject of litigation involving Liberty Brokerage
Investment Corporation and Liberty Brokerage Inc. This patent is exclusively
licensed to us subject to certain conditions. We will assume responsibility for
defending this suit on behalf of Cantor and its affiliates. If we are not
successful in defending this lawsuit, it could materially adversely affect our
exclusive ability to use the technology covered by the patent and our ability to
compete effectively. We have also agreed to indemnify Cantor with respect to all
costs arising in connection with or relating to this lawsuit, including any
damages or judgments. We cannot assure you that any of the patents owned or
licensed by us will be upheld by a court as valid and/or enforceable. See
"Business--Our Intellectual Property" and "--Legal Proceedings."
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 United States 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.
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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 United States 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.
On May 5, 1999, Cantor and The Board of Trade of the City of Chicago, The
New York Mercantile Exchange and The Chicago Mercantile Exchange were sued by
Electronic Trading Systems, Inc. in the United States District Court for the
Northern District of Texas (Dallas Division) for alleged infringement of Wagner
United States patent 4,903,201, entitled "Automated Futures Trade Exchange." The
patent relates to a system and method for implementing an electronic,
computer-automated futures exchange and affects only the CANTOR EXCHANGE (SM).
If the plaintiff is successful in this lawsuit, we may be required to obtain a
license to develop and market one or more of our services, to cease developing
or marketing services or to redesign those services. We cannot assure you that
we would be able to obtain these licenses or that we would be able to obtain
them at commercially reasonable rates or, if unable to obtain licenses, that we
would be able to redesign our services to avoid infringement. Therefore, this
lawsuit could materially adversely affect our ability to offer electronic
trading marketplaces in the future. See "Business--Legal Proceedings."
DUE TO INTENSE COMPETITION IN OUR INDUSTRY, OUR MARKET SHARE AND FINANCIAL
PERFORMANCE COULD SUFFER.
The electronic trading and Internet-based 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 more effectively leverage existing relationships with clients and
strategic partners or exploit more recognized brand names to market and
sell their services.
Our current and prospective competitors are numerous and include:
o Interdealer brokerage firms, including Liberty Brokerage Investment
Corporation and Garban-Intercapital plc.
o Technology companies and market data and information vendors, including
Reuters Group plc, Bloomberg L.P. and Bridge Information Systems, Inc.;
o Securities or futures exchanges or similar entities, including the
Chicago Board of Trade, the Chicago Mercantile Exchange, the Chicago
Board of Options Exchange, Eurex, the New York Stock Exchange and the
Nasdaq National Market;
o Electronic communications networks, crossing systems and similar entities
such as Investment Technology Group and Optimark Technologies Inc.; and
o Consortia such as BrokerTec Global LLC and EuroMTS.
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
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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 Rod Fisher are limited partners of Cantor. See
"Business--Legal Proceedings."
The number of businesses providing Internet-based 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 MATCHINGSM
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 e-Bay, priceline.com,
Amazon.com and a number of other large Internet companies that have expertise in
developing online commerce and in facilitating Internet traffic, including
America Online, Microsoft and Yahoo!, 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 MAY DEVELOP ELECTRONIC TRADING NETWORKS, WE COULD
COMPETE WITH THEM IN ASPECTS OF OUR BUSINESS.
Consortia owned by some of our clients have announced their intention to
explore the development of electronic trading networks. BrokerTec Global LLC, a
proposed electronic inter-dealer fixed income broker whose members include
Citigroup, Credit Suisse First Boston, Deutsche Bank AG, Goldman Sachs Group,
Lehman Brothers, Merrill Lynch & Co., Dresdner Kleinwort Benson, ABN-AMRO and
Morgan Stanley Dean Witter, has announced its intention to develop or acquire a
facility for electronic trading of U.S. Treasury securities, Euro-denominated
sovereign debt and other fixed income securities and futures-related products.
All of the members of BrokerTec Global LLC are currently clients of Cantor and
ours. Consortia such as BrokerTec Global LLC may compete with us and our
electronic marketplaces in the future. We currently compete with a similar
consortium called EuroMTS in Europe. The members of EuroMTS include the leading
fixed income dealers in European government securities, as well as clients of
Cantor and ours.
IF WE EXPERIENCE LOW TRADING VOLUME IN SECURITIES AND FINANCIAL PRODUCTS, OUR
PROFITABILITY COULD SUFFER.
We have experienced significant fluctuations in the aggregate trading
volume of securities and financial products being traded in our marketplaces. We
expect that fluctuations in the trading volume of securities and financial
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 materially adversely affect our
profitability. These factors include:
o economic and political conditions in the United States 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 rising interest rates;
o fluctuating exchange rates;
o legislative and regulatory changes; and
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o currency values.
In the past several years, the U.S. financial markets have achieved
historic highs. We do not believe these strong markets can continue
indefinitely. Our revenues and profitability are likely to decline significantly
during periods of stagnant economic conditions or low trading volume in the U.S.
and global financial markets.
IF OUR SYSTEMS PROVE NOT TO BE YEAR 2000 COMPLIANT, WE COULD EXPERIENCE
SIGNIFICANT BUSINESS INTERRUPTIONS.
With the Year 2000 approaching, many institutions around the world are
reviewing and modifying their computer systems to ensure that they are Year 2000
compliant. The issue, in general terms, is that many existing computer systems
and microprocessors with date functions, including those in non-information
technology equipment and systems, use only two digits to identify a year in the
date field with the assumption that the first two digits of the year are always
"19". Consequently, on January 1, 2000, computers that are not Year 2000
compliant may read the year as 1900. Systems that calculate, compare or sort
using the incorrect date may malfunction.
Because our business is dependent upon the proper functioning of our
proprietary software, technologies and computer systems, a failure of our
software, technologies or systems to be Year 2000 compliant would have a
material adverse effect on us. If not remedied, potential risks include business
interruption or shutdown, financial loss, regulatory actions, reputational harm
and legal liability.
In addition, we depend upon the proper functioning of third-party computer
and non-information technology systems. These parties include subcontractors,
such as third-party administrators, and vendors, such as software vendors and
providers of telecommunication services, quotation equipment and other
utilities. If the third parties with which we interact have Year 2000 problems
that are not remedied, disruptions may result, which could result in shutdowns
by us and financial loss, regulatory actions, reputational harm and legal
liability. Disruption or suspension of activity in the world's financial markets
is also possible. In addition, uncertainty about the success of remediation
efforts generally may cause many market participants to reduce the level of
their market activities temporarily as they assess the effectiveness of these
efforts during a "phase-in" period beginning in late 1999. This in turn could
result in a general reduction in trading and other market activities. We cannot
predict the impact that such reduction would have on us. Some of our contracts
with our clients represent that our systems will be Year 2000 compliant. For
these and other reasons, we may also be exposed to litigation with our clients
as a result of Year 2000 problems. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Impact of the Year 2000."
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 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 currency 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, trade practices among
broker-dealers, use and safekeeping of clients' funds and securities, capital
structure, record-keeping, the financing of clients' purchases, broker-dealer
and employee registration requirements and the conduct of directors, officers
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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.
IF WE ENTER NEW MARKETS, WE MAY NOT BE ABLE TO SUCCESSFULLY ADAPT OUR TECHNOLOGY
AND MARKETING STRATEGY FOR USE IN THOSE MARKETS.
We intend to leverage our eSPEED (SM) system and Cantor's relationships 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 could suffer losses while
developing new marketplaces or 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
financial products by the end of 2000, 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 which 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, National Association of Securities
Dealers, Inc., Commodity Futures Trading Commission and other agencies
extensively regulate the U.S. securities industry. Our international operations
may be subject to similar regulations in specific jurisdictions. 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;
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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 consumer products and services we anticipate offering through our
electronic marketplaces are likely to be regulated by federal and state
governments. Our ability to provide such services will be affected by these
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
broker-dealers. 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.
As of September 24, 1999, if each of our regulated U.S. subsidiaries,
eSpeed Securities, Inc. and eSpeed Government Securities, Inc., had been subject
to the Uniform Net Capital Rule, the minimum net capital we would have had to
maintain would have been $5,000 and $25,000, respectively. At that time, eSpeed
Securities, Inc. and eSpeed Government Securities, Inc. had total net capital of
approximately $90,000, or approximately $85,000 and $65,000, respectively, in
excess of the minimum amount that would have been required. In addition, we may
be subject to net capital requirements in foreign jurisdictions.
BECAUSE WE INTEND TO OFFER ACCESS TO SOME OF OUR MARKETPLACES TO ONLINE RETAIL
BROKERS, 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 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.
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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 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 may also become subject to legal proceedings and claims
against Cantor and its affiliates as a result of the formation transactions.
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. See
"Relationship with Cantor--Assignment and Assumption Agreements."
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, combined with the net proceeds we will
receive from this offering, will be sufficient to meet our anticipated working
capital and capital expenditure requirements for at least the next 12 months.
However, 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; 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.
RISKS RELATED TO OUR RELATIONSHIP WITH CANTOR
BECAUSE WE DEPEND ON CANTOR'S BUSINESS, EVENTS WHICH IMPACT CANTOR'S OPERATING
RESULTS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR REVENUES.
We recognized over 46% of our revenues for the period from March 10, 1999
to September 24, 1999 from transactions in which we received amounts based on
fixed percentages of commissions paid to Cantor. Consequently, any reductions in
the amount of commissions paid to Cantor, including events which impact Cantor's
business or operating results, could have a material adverse effect on our most
significant source of revenues.
In addition, fees paid to us by Cantor for system services represented
37.7% of our revenues for the period from March 10, 1999 to September 24, 1999.
These fee revenues are remitted to us on a monthly basis.
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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
which negatively impact Cantor's financial position and ability to remit our
share of transaction revenues and system service fees could have a material
adverse effect on our revenues.
CONFLICTS OF INTEREST AND COMPETITION WITH CANTOR MAY ARISE.
Various conflicts of interest between us and Cantor may arise in the future
in a number of areas relating to our past and ongoing relationships, including
competitive business activities, potential acquisitions of businesses or
properties, the election of new directors, payment of dividends, incurrence of
indebtedness, tax matters, financial commitments, marketing functions, indemnity
arrangements, service arrangements, issuances of our capital stock, sales or
distributions by Cantor of its shares of our common stock and the exercise by
Cantor of control over our management and affairs. Our Joint Services Agreement
with Cantor provides that in some circumstances Cantor can unilaterally
determine the commissions that will be charged to clients for effecting trades
in marketplaces in which we collaborate with Cantor. The determination of the
nature of commissions charged to clients does not affect the allocation of
revenues that Cantor and we share with respect to those transactions. However,
in circumstances in which Cantor determines to charge clients lower commissions,
the amount that we receive in respect of our share of the commissions will
correspondingly be decreased. A majority of our directors and officers following
this offering 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. Upon completion of this offering, Cantor will own all of the outstanding
shares of our Class B common stock, representing approximately 98% 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. See "Relationship with 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.
As part of the formation transactions, Cantor will contribute substantially
all of our assets to us. Although Cantor has agreed, subject to certain
conditions, not to compete with us in providing electronic brokerage services,
Cantor is currently engaged in financial instruments and securities transaction
execution and processing operations and other activities which 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 the limited circumstances described
under "Relationship with Cantor--Joint Services Agreement--Non-competition
Provisions." 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. See "Relationship with Cantor."
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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 have 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. See "Relationship
with Cantor."
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 WHICH ARE
RELATED TO CANTOR.
Initially, Cantor will be our most significant client. Cantor holds direct
and indirect ownership and management interests in numerous other entities which
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 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. See "Business--Legal Proceedings." 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.
RISKS RELATED TO E-COMMERCE AND THE INTERNET
IF ELECTRONIC MARKETPLACES FOR SECURITIES AND FINANCIAL PRODUCTS 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 in a wide range of securities and financial
products. Historically, securities and commodities markets operated through an
open outcry format in which buyers and sellers traded securities in pits through
verbal communication. These open outcry markets have recently begun to be
supplanted with new systems which match buyers and sellers electronically. The
utilization of our interactive electronic marketplaces depends on the continued
acceptance and utilization of these electronic securities and commodities
markets. We cannot assure you that the growth and acceptance of the use of
electronic markets will continue.
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IF E-COMMERCE AND INTERNET USAGE DOES NOT CONTINUE TO GROW, WE WILL NOT BE ABLE
TO ACHIEVE OUR BUSINESS OBJECTIVES.
As part of our business strategy, we expect to do business with online and
traditional retail brokers. We expect to enable these firms to provide to their
clients access, where appropriate, to trading in fixed income securities and
futures and other wholesale financial products markets through the Internet.
Our strategic and financial objectives would be adversely impacted if
Internet usage does not continue to grow. Consumer 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 retail customers. This could negatively
affect the growth of our business.
OUR NETWORKS AND THOSE OF OUR THIRD PARTY SERVICE PROVIDERS MAY BE VULNERABLE TO
SECURITY RISKS, WHICH COULD MAKE OUR CLIENTS HESITANT TO USE OUR ELECTRONIC
MARKETPLACES.
We expect the secure transmission of confidential information over public
networks to be a critical element of our operations. Our networks and those of
our third party service providers, including Cantor and associated clearing
corporations, and our clients may be vulnerable to unauthorized access, computer
viruses and other security problems. Persons who circumvent security measures
could wrongfully use our information or cause interruptions or malfunctions in
our operations, which could make our clients hesitant to use our electronic
marketplaces. We may be required to expend significant resources to protect
against the threat of security breaches or to alleviate problems, including
reputational harm and litigation, caused by any breaches. Although we intend to
continue to implement industry-standard security measures, we cannot assure you
that those measures will be sufficient.
RISKS RELATED TO OUR CAPITAL STRUCTURE
BECAUSE THE VOTING CONTROL OF OUR COMMON STOCK WILL BE 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.
After this offering, Cantor will beneficially own all of our outstanding
Class B common stock, representing approximately 98% 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 Class B common
stock issued to Cantor upon consummation of the formation transactions may be
transferred without conversion to Class A common stock.
17
<PAGE>
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.
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. Our Amended and Restated Certificate of Incorporation and our 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.
You may not be able to challenge decisions that have an adverse effect upon
holders of the 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.
BECAUSE WE ARE A HOLDING COMPANY, WE WILL DEPEND ON OUR SUBSIDIARIES TO GENERATE
REVENUES AND DISTRIBUTE CASH TO US.
We are a holding company. Our sole assets are our equity interests in our
subsidiaries. We have no independent means of generating revenues. We will incur
income taxes on revenues that we generate. We intend to cause our subsidiaries
to distribute cash to us in amounts sufficient to cover our tax liabilities, if
any. Our subsidiaries' ability to distribute cash to us will be subject to legal
restrictions, including the net capital rules and the requirements that they
have surplus capital or earnings available for distribution. We cannot assure
you that our subsidiaries will be able to provide us with the funds necessary to
satisfy our obligations or conduct our operations as contemplated by our
business strategy.
RISKS RELATED TO THIS OFFERING
THERE HAS NOT BEEN ANY PRIOR PUBLIC MARKET FOR OUR CLASS A COMMON STOCK, AND WE
CANNOT ASSURE YOU THAT AN ACTIVE TRADING MARKET WILL DEVELOP OR BE SUSTAINED.
Prior to this offering, there has been no public market for the Class A
common stock and we cannot assure you that an active trading market will develop
or be sustained. The initial public offering price of our Class A common stock
has been determined through negotiation between us and the representatives of
the underwriters and may not be indicative of the market price for our Class A
common stock after this offering.
THE MARKET PRICE OF OUR CLASS A COMMON STOCK MAY FLUCTUATE WIDELY AND TRADE AT
PRICES BELOW THE INITIAL PUBLIC OFFERING PRICE.
The price of our Class A common stock after this offering may fluctuate
widely, depending upon many factors, including our perceived prospects, and the
prospects of the financial industries in general, differences between our actual
financial and operating results and those expected by investors and analysts,
changes in
18
<PAGE>
analysts' recommendations or projections, changes in general valuations for
Internet and e-commerce-related companies, changes in general economic or market
conditions and broad market fluctuations. As a result, our Class A common stock
may trade at prices significantly below the initial public offering price.
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 technological and product development and improvements in existing
and new marketplaces, hiring technology and other personnel to develop new
products, sales, marketing and advertising initiatives and working capital and
general corporate purposes, including possible 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.
YOUR SHARE OWNERSHIP IN eSPEED WILL BE IMMEDIATELY AND SUBSTANTIALLY DILUTED.
Purchasers of our Class A common stock in this offering will experience
immediate and substantial dilution in net tangible book value of $19.60 per
share.
FUTURE SALES OF OUR SHARES 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 holders of common
stock and securities convertible into or exercisable or exchangeable for common
stock issued prior to this offering or in connection with the consummation of
the formation transactions 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 common stock or securities convertible into or
exercisable or exchangeable for common stock, subject to certain exceptions, for
a period of 180 days after the date of this prospectus without the prior written
consent of Warburg Dillon Read LLC, we and these persons may be released of this
obligation by Warburg Dillon Read LLC in its sole discretion in whole or in part
at any time with or without notice.
We plan to register an additional 5,000,000 shares of our Class A common
stock under the Securities Act within 90 days after the closing of this offering
for use by us as consideration for future acquisitions. Upon such registration,
these shares generally will be freely tradable after issuance, unless the resale
thereof is contractually restricted or unless the holders thereof are subject to
the restrictions on resale provided in Rule 145 under the Securities Act. In any
event, any registered shares so issued will be subject to contractual
restrictions and, thus, will not be freely tradable during the 180-day period
after the date of this prospectus.
After this offering, we intend to initially register 20%, or approximately
10,000,000 shares of Class A common stock, of the total outstanding shares of
our common stock, which are reserved for issuance upon exercise of options
granted under our stock option plan. 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 we register these shares, they can be sold in the public market
upon issuance, subject to restrictions under the securities laws applicable to
resales by affiliates. We also plan to register the shares of Class A common
stock issuable under our stock purchase plan. See "Shares Eligible for Future
Sale."
19
<PAGE>
___________________________FORWARD-LOOKING STATEMENTS___________________________
This prospectus contains forward-looking statements that involve risks and
uncertainties. Discussions containing such forward-looking statements are found
in the material set forth under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," as well as in this prospectus generally. When used
in this prospectus, the words "anticipate," "believe," "expect," "estimate" and
similar expressions are generally intended to identify forward-looking
statements. Our actual results could differ materially from those anticipated in
the forward-looking statements as a result of certain factors, including the
risks described in "Risk Factors" and elsewhere in this prospectus.
_________________________________USE OF PROCEEDS________________________________
We estimate that we will receive net proceeds (after deducting underwriting
discounts and commissions and estimated offering expenses) of $120,970,000
($141,540,000 if the underwriters exercise their over-allotment option in full).
We intend to use the net proceeds of this offering as follows:
o approximately $25 million will be for investment in hardware and software
for entry into new product segments, expansion of our current markets and
an increase in communication links to our clients;
o approximately $25 million will be for hiring of technology and other
professionals to develop new markets in both financial and non-financial
sectors; and
o approximately $25 million will be for marketing to current and new
institutional clients and to promote general awareness and acceptance of
the retail trading of fixed income securities and other financial
instruments.
We intend to use the remainder of the net proceeds for working capital and
general corporate purposes, including possible acquisitions. We do not currently
have any agreements with respect to any such acquisitions. The occurrence of
unforeseen events, opportunities or changed business conditions, however, could
cause us to use the 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 believe that the net
proceeds of this offering and cash flows from operations will be sufficient to
fund our working capital needs and capital expenditure requirements for the
foreseeable future. We will not receive any of the proceeds from the sale of
shares by the selling stockholder of our Class A 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 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.
20
<PAGE>
____________________________________DILUTION____________________________________
The net tangible book value of our common stock, including our Class B
common stock, at September 24, 1999, before adjustment for this offering, was
$(958,542), or $(0.02) per share. Net tangible book value per share represents
the amount of total tangible assets less total liabilities, divided by the
number of shares of common stock outstanding. After giving effect to the sale of
the 6,000,000 shares of Class A common stock by us in this offering, at an
initial public offering price of $22.00 per share, our net tangible book value
at September 24, 1999 would have been $120,011,458, or $2.40 per share,
calculated as follows:
<TABLE>
<S> <C> <C>
Initial public offering price per share............................................. $22.00
Net tangible book value per share at September 24, 1999.................. $(0.02)
------
Increase in net tangible book value per share attributable to
new investors......................................................... 2.42
------
As adjusted net tangible book value per share after this offering................... 2.40
------
Dilution per share to new investors................................................. $19.60
------
------
</TABLE>
Assuming the underwriters' over-allotment option is exercised in full, the
net tangible book value at September 24, 1999 would have been $140,581,458, or
$2.76 per share, the immediate increase in net tangible book value of shares
owned by existing stockholders would have been $2.78 per share, and the
immediate dilution to purchasers of shares of Class A common stock in this
offering would have been $19.24 per share.
The following table summarizes at September 24, 1999, after giving effect
to the sale of the 6,000,000 shares of Class A common stock by us in this
offering at an initial public offering price of $22.00 per share, and the
consummation of the formation transactions as discussed in "Relationship with
Cantor--The Formation Transactions," (1) the number and percentage of shares of
common stock issued by us, (2) the total cash and non-cash consideration paid
for our common stock, and (3) the average price per share of common stock paid
by our existing stockholders to us prior to this offering and by the public
stockholders to us in this offering:
<TABLE>
<CAPTION>
SHARES OF COMMON TOTAL CASH AND NON-CASH
STOCK OWNED CONSIDERATION AVERAGE
------------------------ -------------------------- PRICE PER
NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE
---------- ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)....................... 44,000,000 88% $ 5,655,299 4% $ 0.13
Public stockholders(1)......................... 6,000,000 12 132,000,000 96 22.00
---------- ---- ------------ ----
Total..................................... 50,000,000 100% $137,655,299 100%
---------- ---- ------------ ----
---------- ---- ------------ ----
</TABLE>
The calculations in the tables set forth above do not reflect (1) an
aggregate of 10,000,000 shares of Class A common stock reserved for issuance
under our stock option plan, including 6,600,000 shares of Class A common stock
subject to options we have granted in connection with this offering and
(2) 135,000 shares of Class A common stock reserved for issuance upon exercise
of warrants we have granted in connection with this offering. See
"Management--1999 Long-Term Incentive Plan" and "Underwriting."
- ------------------
(1) Sales by the selling stockholder in this offering will reduce the number of
shares held by existing stockholders to 41,000,000 shares, or approximately
82% of the total shares of common stock outstanding, and, together with this
offering, will result in 9,000,000 shares being held by new investors, or
18% of the total shares of common stock outstanding after this offering.
21
<PAGE>
_________________________________CAPITALIZATION_________________________________
The following table sets forth as of September 24, 1999:
o our actual capitalization after the consummation of the formation
transactions described in "Relationship with Cantor--The Formation
Transactions" and the conversion by the selling stockholder of 3,000,000
shares of Class B common stock into an equal number of shares of Class A
common stock; and
o our capitalization on an as adjusted basis to reflect the sale of the
6,000,000 shares of Class A common stock offered by us hereby at an
initial public offering price of $22.00 per share after deducting the
estimated offering expenses and underwriting discounts and commissions
payable by us.
This information is qualified by, and should be read in conjunction with,
the financial statements and related notes appearing at the end of this
prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 24, 1999
----------------------------
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
Cash............................................................................... $ 200,000 $121,170,000
---------- ------------
---------- ------------
Stockholders' equity:
Preferred stock, par value $0.01 per share; 50,000,000 shares authorized, no
shares issued or outstanding.................................................. $ -- $ --
Class A common stock, par value $0.01 per share; 200,000,000 shares authorized,
3,000,000 shares issued and outstanding, actual; and 9,000,000 shares issued
and outstanding, as adjusted.................................................. 30,000 90,000
Class B common stock, par value $0.01 per share; 100,000,000 shares authorized,
41,000,000 issued and outstanding, actual; and 41,000,000 shares issued and
outstanding, as adjusted...................................................... 410,000 410,000
Additional paid-in capital......................................................... 5,215,299 126,125,299
Accumulated deficit................................................................ (6,613,841) (6,613,841)
---------- ------------
Total stockholders' equity.................................................... (958,542) 120,011,458
---------- ------------
Total capitalization............................................................... $ (958,542) $120,011,458
---------- ------------
---------- ------------
</TABLE>
22
<PAGE>
_____________________________SELECTED FINANCIAL DATA____________________________
The following selected financial data for eSpeed should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and with the audited financial statements, related
notes and other financial information beginning on page F-1. The results of
operations for the period ended September 24, 1999 are not necessarily
indicative of the results that may be expected for the full year ending December
31, 1999, or any other future period.
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM MARCH 10,
1999 (DATE OF
COMMENCEMENT OF
OPERATIONS) TO
SEPTEMBER 24, 1999
------------------
<S> <C>
STATEMENT OF OPERATIONS DATA:(1)
Total revenues................................................................................ $ 24,139,469
------------
Expenses:
Compensation and employee benefits.......................................................... 14,704,940
Occupancy and equipment..................................................................... 6,632,436
Professional and consulting fees............................................................ 3,615,348
Communications and client networks.......................................................... 2,445,792
Transaction services fees................................................................... 1,337,282
Administrative fees......................................................................... 1,067,200
Other....................................................................................... 1,122,119
------------
Total expenses.............................................................................. 30,925,117
------------
Loss before benefit for income taxes.......................................................... (6,785,648)
Income tax benefit............................................................................ 171,807
------------
Net loss...................................................................................... $ (6,613,841)
------------
------------
PRO FORMA DATA:(2)
Pro forma net loss.......................................................................... $ (6,785,648)
Basic and diluted pro forma net loss per share.............................................. $ (0.15)
Shares of common stock outstanding.......................................................... 44,000,000
<CAPTION>
STATEMENT OF FINANCIAL CONDITION: SEPTEMBER 24, 1999
------------
<S> <C>
Cash and cash equivalents..................................................................... $ 200,000
Total assets.................................................................................. 10,798,264
Total liabilities............................................................................. 11,756,806
Total stockholder's equity.................................................................... (958,542)
</TABLE>
- ------------------
(1) Excludes a one-time, non-cash charge of approximately $4 million that we
expect to incur in the fourth quarter of fiscal 1999 due to option grants we
made to Cantor employees exercisable at the initial public offering price.
(2) Pro forma data present the net loss per share data as if we were subject to
income tax as a corporation. The tax benefit for state and local tax, which
is available to us as a division of Cantor, is not available to us as a
corporation because of our net operating loss position. The determination of
shares outstanding and loss per share data reflects the effect of the
consummation of the formation transactions as discussed in "Relationship
with Cantor--The Formation Transactions" as if those events had taken place
at the beginning of the period.
23
<PAGE>
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, the more detailed information and our financial statements and
the notes thereto appearing elsewhere in this prospectus.
OVERVIEW
eSpeed was incorporated on June 3, 1999 as a Delaware corporation and,
following this offering, will operate primarily through its wholly-owned
subsidiaries, eSpeed Securities, Inc., eSpeed Government Securities, Inc.,
eSpeed Markets, Inc. and eSpeed Securities International Limited. Prior to this
offering, eSpeed was a wholly-owned subsidiary of, and it conducted its
operations as a division of, Cantor Fitzgerald Securities, which in turn is a
99.5%-owned subsidiary of Cantor Fitzgerald, L.P. eSpeed commenced operations as
a division of Cantor on March 10, 1999, the date the first fully electronic
transaction using the eSPEED (SM) executed. Cantor has been developing
systems to promote fully electronic marketplaces since the early 1990's. Since
January 1996, Cantor has used the eSPEED (SM) system internally to conduct
electronic trading.
Concurrent with this offering, Cantor is contributing to us, and we are
acquiring from Cantor, substantially all 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. See
"Relationship with Cantor--The Formation Transactions."
Since commencing operations, we have relied on Cantor to provide financing
and cash flow for our operations and we have incurred a net loss over this
period. This loss primarily results from expenditures on our technology and
infrastructure incurred in building our revenue base. Our focus for the
immediate future is to enable fully electronic trading of additional financial
products and to aggressively seek to migrate Cantor's existing clients to our
eSPEED (SM) system.
As of September 24, 1999, we had an accumulated net loss of $6,613,841. We
expect that we will continue to incur losses and generate negative cash flow
from operations for the foreseeable future 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.
If we were subject to income tax as a corporation, as of September 24,
1999, the pro forma net loss would have been $6,785,648. This pro forma
adjustment reflects the tax benefit for state and local tax, which is available
to us as a division of Cantor, but is not available to us as a corporation.
Since we paid no previous taxes to state and local governments due to our net
operating loss position, we would not receive a refund.
In September 1999, our board of directors changed our fiscal year from the
last Friday of March to December 31.
24
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth statement of operations data for the period
from March 10, 1999 (date of commencement of operations) to September 24, 1999.
(This accounting period was closed as of the last Friday of the month.)
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 10, 1999 (DATE OF
COMMENCEMENT OF OPERATIONS) TO
SEPTEMBER 24, 1999
-------------------------------
<S> <C>
Revenues:
Transaction Revenues:
Fully electronic transactions......................................... $ 3,820,807
Voice-assisted brokerage transactions ................................ 8,382,086
Screen assisted open outcry transactions.............................. 2,831,704
-----------
Total transaction revenues..................................... 15,034,597
System services fees.................................................... 9,104,872
-----------
Total revenues................................................. 24,139,469
-----------
Expenses:
Compensation and employee benefits.................................... 14,704,940
Occupancy and equipment............................................... 6,632,436
Professional and consulting fees...................................... 3,615,348
Communications and client networks ................................... 2,445,792
Transaction services fees............................................. 1,337,282
Administrative fees................................................... 1,067,200
Other................................................................. 1,122,119
-----------
Total expenses................................................. 30,925,117
-----------
Loss before benefit for income taxes.................................... $(6,785,648)
-----------
-----------
<CAPTION>
<S> <C>
Revenues:
Transaction Revenues:
Fully electronic transactions......................................... 15.8%
Voice-assisted brokerage transactions ................................ 34.7
Screen assisted open outcry transactions.............................. 11.8
-----
Total transaction revenues..................................... 62.3
System services fees.................................................... 37.7
-----
Total revenues................................................. 100.0
-----
Expenses:
Compensation and employee benefits.................................... 60.9
Occupancy and equipment............................................... 27.5
Professional and consulting fees...................................... 15.0
Communications and client networks ................................... 10.1
Transaction services fees............................................. 5.5
Administrative fees................................................... 4.5
Other................................................................. 4.6
-----
Total expenses................................................. 128.1
-----
Loss before benefit for income taxes.................................... (28.1)%
-----
-----
</TABLE>
REVENUES
Transaction Revenues
We operate interactive electronic marketplaces. We have entered into a
Joint Services Agreement with Cantor under which we and Cantor have agreed to
collaborate to provide brokerage and related services to clients in multiple
electronic markets for transactions in securities and other financial products.
In addition, we may, in our discretion, collaborate on operating markets for
non-financial products. Under this agreement, we will own and operate the
electronic trading systems and will be responsible for providing electronic
brokerage services, and Cantor will provide voice-assisted brokerage services,
clearance and settlement services 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. While we have no obligation under the Joint Services Agreement to do
so, we intend to use approximately $25 million of the proceeds received by us
from this offering for sales, marketing and advertising expenses related to our
existing marketplaces and the development of new marketplaces. Under this
agreement, we and Cantor have agreed to share revenues derived from transactions
effected in the marketplaces in which we collaborate and other specified
markets.
If the transactions:
o are effected in a marketplace in which we collaborate with Cantor, are
fully electronic transactions and relate to financial products, such as
fixed income securities, futures contracts, derivatives and commodities,
that are not traded on the CANTOR EXCHANGE (SM), or products that are
traded on the CANTOR EXCHANGE (SM), then we will receive the aggregate
transaction revenues and pay to Cantor service fees equal to 35% and 20%
of the transaction revenues, respectively.
o are effected in a marketplace in which we collaborate with Cantor,
involve voice-assisted brokerage services that Cantor provides and the
transactions relate to (1) financial products that are not traded on the
CANTOR EXCHANGE (SM), or (2) products that are traded on the CANTOR
EXCHANGE (SM), then, in the case
25
<PAGE>
of a transaction described in (1), Cantor will receive the aggregate
transaction revenues and pay to us a service fee equal to 7% of the
transaction revenues, and, in the case of a transaction described in (2),
we will receive the aggregate transaction revenues and pay to Cantor a
service fee equal to 55% of the transaction revenues.
o are effected in a marketplace in which we do not collaborate with Cantor,
but in which we do provide electronic brokerage services, and (1) the
transaction relates to a financial product, then we will receive the
aggregate transaction revenues and pay to Cantor a service fee equal to
20% of the transaction and data revenues paid to or received by us or (2)
the transaction relates to a non-financial product, then we will receive
all of the transaction revenues.
o are not effected through an electronic marketplace, but are
electronically assisted, such as screen-assisted open outcry
transactions, then Cantor receives the aggregate transaction revenues and
pays to us a service fee equal to 2.5% of the transaction 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 aggressively convert
new clients to our eSPEED (SM) system. Other than Cantor, no client of ours
accounts for more than 10% of our transaction revenues.
The process of converting these marketplaces includes modifying existing
Cantor 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.
System Services Fees
We have agreed to provide to Cantor technology support services at cost,
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 and settlement services, (7) systems
support for Cantor brokers, (8) electronic applications systems and network
support for the unrelated dealer businesses with respect to which we will 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 potential
application in a gaming business. These revenues are received from Cantor and
represented 37.7% of revenues for the period from March 10, 1999 to
September 24, 1999.
EXPENSES
Compensation and employee benefits
We currently employ approximately 330 professionals, substantially all of
whom are full time employees who are located predominantly in New York and
London. Compensation costs include salary, bonus accruals, payroll taxes and
costs of employer-provided medical benefits for our employees. We have granted
approximately 300,000 stock options to certain employees of Cantor at an
exercise price per share equal to the initial public offering price. This will
result in an estimated, one time non-cash charge to eSpeed of approximately $4
million. We intend to hire additional technical, sales and marketing, product
development and administrative personnel from within and outside Cantor in order
to expand our business. As a result, we anticipate that compensation expense may
increase significantly in subsequent periods.
Occupancy and equipment
Occupancy and equipment costs include depreciation on computer and
communications equipment and amortization of software owned by us, lease costs
of other fixed assets leased by us from Cantor and a charge for premises costs
from Cantor. Fixed assets are reflected as if they were contributed to us by
Cantor in a non-cash transaction effective March 10, 1999 at their then current
net book value (cost less accumulated depreciation) of $7,370,560. Cantor leases
from third parties under operating lease arrangements certain computer related
fixed assets that we have the right to use at rates intended to equal costs
incurred by
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Cantor. Our equipment expenses should increase as we continue to invest in
technology and related equipment.
Professional and consulting fees
Professional and consulting fees consist primarily of consultant costs paid
to outside computer professionals who perform specialized enhancement activities
for us. We currently have approximately 20 contracted consultants and additional
outside service providers working under short-term contracts costing
approximately $500,000 per month in the aggregate. The costs of professional
legal counsel engaged to defend the patents used in our business amounted to
approximately $344,000 for the period from March 10, 1999 to September 24, 1999.
Our professional and consulting expenses will likely increase over the
foreseeable future.
Communications and client networks
Communications costs include the costs of local and wide area network
infrastructure, the cost of establishing the client network linking clients to
us, data and telephone lines, data and telephone usage and other related costs.
We expect such costs to increase as we continue to expand into new marketplaces
and geographic locations and establish additional communication links with
clients. However, certain communications costs are decreasing globally due to
increased competition in the communications industry. This may or may not result
in a decrease in our communications costs.
Transaction services fees
Under the Joint Services Agreement, we are required to pay to Cantor a
transaction services fee of 20% or 35%, depending on the type of transaction, of
commissions paid by clients related to fully electronic transactions. As we
continue to sign up new clients, in conjunction with Cantor, and the volume of
business processed in the fully electronic brokerage channel increases, this
expense and associated revenues will also increase. See "Relationship with
Cantor--Joint Services Agreement."
Administrative fees
An Administrative Services Agreement with Cantor has been entered into
under which Cantor has agreed to provide various administrative services to us,
including, but not limited to, accounting, tax, legal and human resources, and
we have agreed to provide sales and marketing services at cost to Cantor. We are
required to reimburse Cantor for its costs of providing these services plus an
allocation of overhead. We have provided for the cost of such services in our
financial statements under the terms set forth in the Administrative Services
Agreement as if it was effective for the period from March 10, 1999 to
September 24, 1999. This amount averaged approximately $150,000 per month for
the period from March 10, 1999 to September 24, 1999. As we expand our business,
the services provided by Cantor, and accordingly the expense, will likely also
increase. As circumstances warrant, we will consider adding employees to take
over these services from Cantor. See "Relationship with Cantor--Administrative
Services Agreement."
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Other expenses
Other expenses consist primarily of travel, promotional and entertainment
expenditures. These expenses will also continue to increase over the foreseeable
future as we seek to expand our business.
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
September 24, 1999. Results of any period are not necessarily indicative of
results for a full year.
<TABLE>
<CAPTION>
QUARTER ENDED YEAR TO DATE
MARCH 10 TO QUARTER ENDED SEPTEMBER 24, SEPTEMBER 24,
MARCH 26, 1999 JUNE 25, 1999 1999 1999
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Transaction Revenues:
Fully electronic transactions................... $ 76,621 $ 1,153,471 $ 2,590,715 $ 3,820,807
Voice-assisted brokerage transactions........... 664,597 3,900,345 3,817,144 8,382,086
Screen assisted open outcry transactions........ 379,316 1,376,962 1,075,426 2,831,704
---------- ----------- ----------- ------------
Total transaction revenues................... 1,120,534 6,430,778 7,483,285 15,034,597
System services fees.............................. 827,716 4,138,578 4,138,578 9,104,872
---------- ----------- ----------- ------------
Total revenues............................... 1,948,250 10,569,356 11,621,863 24,139,469
---------- ----------- ----------- ------------
Expenses:
Compensation and employee benefits.............. 1,267,838 6,403,446 7,033,656 14,704,940
Occupancy and equipment......................... 676,023 2,854,350 3,102,063 6,632,436
Professional and consulting fees................ 185,985 1,596,097 1,833,266 3,615,348
Communications and client networks.............. 221,159 1,103,081 1,121,552 2,445,792
Transaction services fees....................... 26,817 403,715 906,750 1,337,282
Administrative fees............................. 93,701 461,266 512,233 1,067,200
Other........................................... 15,235 500,034 606,850 1,122,119
---------- ----------- ----------- ------------
Total expenses............................... 2,486,758 13,321,989 15,116,370 30,925,117
---------- ----------- ----------- ------------
Loss before benefit for income taxes.............. $ (538,508) $(2,752,633) $(3,494,507) $ (6,785,648)
---------- ----------- ----------- ------------
---------- ----------- ----------- ------------
</TABLE>
As of March 26, 1999, June 25, 1999 and September 24, 1999, three, 10 and
45 of our clients, respectively, had fully electronic trading capabilities
through us. As of November 15, 102 of our clients had fully electronic
capabilities through us.
LIQUIDITY AND CAPITAL RESOURCES
During the period from March 10, 1999 to September 24, 1999, we generated
cash from operations of $3,602,564. This was attributable to offsetting the
costs of funding our net loss of $6,613,841 through amounts payable to Cantor
and accruals for compensation and benefits.
Our cash flow is comprised of transaction revenues and system services fees
from Cantor, and charges from Cantor of various fees, occupancy costs and other
expenses paid by Cantor on our behalf. In acting in its capacity as a broker,
Cantor will process and settle the transaction and, as such, collect/pay the
funds necessary to clear the transaction with the counterparty. In doing so,
Cantor will receive our commission on the transaction, and in accordance with
the Administrative Services Agreement and the Joint Services Agreement, will
remit the gross amount of the commission owed to us. Under the Administrative
Services Agreement and the Joint Services Agreement, any net receivable or
payable will be settled monthly at the discretion of the parties.
Our ability to withdraw capital from our regulated 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.
We believe that cash flows from operations and the net proceeds of this
offering will be sufficient to fund our working capital needs and capital
expenditure requirements for the forseeable future. In the event we consummate
any acquisitions, we may need to incur indebtedness or raise public or private
debt or issue
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equity to help finance any such acquisitions. There is no assurance that any
such financing will be obtainable on acceptable terms or at all.
IMPACT OF THE YEAR 2000
The year 2000 computer problem refers to the potential for system and
processing failures of date related data as a result of computer controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that have time sensitive software may recognize a
date represented as 00 as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions in operations,
including, among other things, a temporary inability to process transactions,
send transmissions to clearing agents or engage in similar normal business
activities.
Our year 2000 plan is part of normal day-to-day Information Technology
department efforts, using existing staff. Over 150 Information Technology
employees, including 20 systems managers from eSpeed and other managers from
Cantor, are responsible for addressing potential year 2000 problems, including
identification, assessment, repair and testing of their respective applications
and systems. Year 2000 managers meet monthly to discuss critical paths, modify
priorities to adjust to unforeseen problems and review the master year 2000
project plan.
We and Cantor believe we have thoroughly tested all mission critical
systems using the testing procedures and key dates that have been established
for the Wall Street testing program conducted by the Securities Industry
Association. In order to ensure compliance, each system must complete four
levels of testing:
(1) unit testing to determine whether each individual application's
functionality remained intact;
(2) integration testing to validate two or more compliant systems perform
as expected;
(3) point-to-point testing to validate that clients still have expected
functionality; and
(4) industry-wide testing to show functionality between other participants.
In addition, all applications have participated in individual
point-to-point testing as required.
We and Cantor have completed our internal information technology and
non-information technology assessment and testing, and we believe that our and
Cantor's internal software and hardware systems will function properly with
respect to dates in the year 2000 and thereafter. Our and Cantor's contingency
plan in the event of any system failure due to the year 2000 problem will be to
manually process trades.
Cost
Based on our and Cantor's assessment to date, our and Cantor's combined
costs associated with upgrades to hardware and software, testing and remediating
our systems are approximately $9.0 million. The majority of this was incurred
prior to our commencement of operations. We anticipate incurring an additional
$150,000 to complete our year 2000 project activities.
Risks
Because we and Cantor are dependent, to a very substantial degree, upon the
proper functioning of computer systems, the failure of any computer system to be
year 2000 compliant could materially adversely affect us. Failure of this kind
could, for example, cause execution of trades to be inefficient or even to fail,
lead to incomplete or inaccurate accounting, recording or processing of trades
or result in generation of erroneous results or adversely affect our ability to
develop new products. If not remedied, potential risks include business
interruption or shutdown, financial loss, regulatory actions, reputational harm
and legal liability.
MARKET RISK ISSUES
In the normal course of business, we maintain no inventory of securities
and, as such, we are not subject to market risk on investments.
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____________________________________BUSINESS____________________________________
OVERVIEW OF OUR BUSINESS
We operate global interactive electronic marketplaces designed to enable
market participants to trade financial instruments and other products
instantaneously, more effectively and at lower cost than traditional trading
methods. Our marketplaces are currently used by most of the largest financial
institutions and wholesale market participants to trade in a wide range of
global fixed income securities, futures, options and other financial
instruments. These financial instruments include government securities
denominated in U.S. dollars, Euros, Yen, British Pounds Sterling, Canadian
dollars and currencies of emerging market countries, as well as securities of
U.S. agencies, municipal securities, Eurobonds, corporate bonds and other global
fixed income securities and U.S. Treasury futures. We operate the largest global
electronic marketplace for U.S. Treasury securities and leading global
electronic marketplaces for the other fixed income securities and financial
instruments, most of which have been converted or are being converted to our
eSPEED (SM) electronic trading platform. Our current marketplaces process
financial instrument transactions of over $150 billion per day, of which more
than $6 billion are wholly-electronic orders not involving any person as an
intermediary. Our revenues are driven by trading activity and volumes in our
marketplaces.
We believe we operate the only electronic marketplaces used for trading in
multiple securities and financial and non-financial instruments on a global
basis. We also operate a U.S. Treasury futures exchange marketplace that is
known as the CANTOR EXCHANGE (SM). It is the first fully electronic futures
exchange for the trading of U.S. Treasury futures and, we expect, will serve as
our platform for the electronic trading of a broad range of futures contracts
globally. Over 500 institutions worldwide participate in our marketplaces,
including all of the 25 largest bond trading firms in the world, as identified
by Euromoney Magazine. Most of these institutions use our proprietary eSPEED
(SM) screen displays and/or trading platforms, which allow us to deliver
information and execute transactions instantaneously through their computer
security barriers that permit or exclude entry into their internal network. We
have devoted significant resources to developing client arrangements, providing
point-to-point communication links, and creating proprietary software to
establish connectivity through these security barriers in order to deliver data
and execute transactions for our clients on a secure basis.
Our interactive electronic marketplaces are powered by our eSPEED (SM)
system, which employs our private, instantaneous, electronic network and
proprietary transaction processing software. Our system supports execution of
trades internally by Cantor and enables fully electronic trading by our clients.
We believe these components form one of the most robust trading systems in the
world. The network is distributed and permits market participants to view
information and execute trades in a fraction of a second from locations around
the globe. Our trades are processed using INTERACTIVE MATCHING (SM), our
proprietary, rules-based trading method that interactively executes the orders
of multiple market participants. INTERACTIVE MATCHING (SM) encourages trading by
giving the successful active participant in a transaction a time-based right of
first refusal on the next sale/purchase. Some of the rules employed in
INTERACTIVE MATCHING (SM) provide participants that expose their orders to the
market with priority in the interactive auction process. Because of its unique
trading rules, we believe that INTERACTIVE MATCHING (SM) is attractive to both
large and small market participants and represents a competitive advantage over
other existing electronic trading systems.
Concurrent with this offering, Cantor is contributing to us the proprietary
software, network distribution systems, technologies and related contractual
rights that comprise our eSPEED (SM) system. We will work to provide multiple
electronic markets for transactions in securities, other financial instruments
and other financial and non-financial products. Cantor will continue to provide
telephonic access for those clients who wish to trade via telephone. Clients
dealing with Cantor who prefer the more rapid and less costly method of trading
via fully electronic means will have their transactions routed through our
eSPEED (SM) system. Cantor or other third parties will provide clearing and
other transaction support services in trades in which we participate. Cantor
currently operates the largest wholesale marketplace for U.S. Treasury
securities and leading marketplaces for many other fixed income securities and
financial instruments. Cantor also operates other non-financial markets, such as
energy, commodities and acid rain emissions. We have converted 11 of
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the largest Cantor marketplaces, including U.S. Treasury and European government
securities, to our electronic trading platform. We intend to convert most of
Cantor's remaining marketplaces to our electronic trading platform by the end of
2000. Cantor has been a leading global broker-dealer of fixed income securities
over the past 25 years. Cantor developed the world's first screen-based
brokerage market in U.S. government securities in 1972. Today, Cantor executes
in excess of $45 trillion in transaction volume annually and is a major
facilitator, and, in some cases, provider, of liquidity in numerous financial
products through its offices in the United States, Canada, Europe and Asia. We
believe our relationship with Cantor is a significant competitive advantage. Our
eSPEED (SM) system provides the only way to electronically access Cantor's
marketplaces. Consequently, we believe that clients will be strongly motivated
to use our interactive electronic marketplaces.
OUR INDUSTRY
Our initial markets include global fixed income securities, futures,
options and other financial products. However, our potential markets include any
fungible products, goods or services which can be quantified and bought or sold.
Wholesale Fixed Income Securities Trading. The fixed income securities
market is one of the largest financial markets in the world. In the United
States alone, there are over $13 trillion of fixed income securities
outstanding, and in the U.S. Government Securities market alone, there is
reported to be approximately $200 billion a day in trading just among the
primary dealers and their clients. Other fixed income instruments are traded
widely, and in Europe, Asia and the emerging markets there are another
approximately $13 trillion of fixed income securities outstanding and trading on
a daily basis. In Europe, the creation of the Euro has manifested a market
second only to the United States in breadth. We expect continued significant
growth in these fixed income markets as the issue of currency translation is
removed as an obstacle to the development of a large unified Pan-European market
for securities.
Futures and Options Trading. 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. Futures and options provide
several important economic benefits, including the ability to shift or otherwise
manage market risk. In part because these markets provide the opportunity for
leveraged investments, they attract large pools of risk capital. In 1998, over
1.5 billion futures contracts were traded in the world's futures markets, and
over 750 million options contracts were traded on a variety of exchanges.
Currently, most of that 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.
Traditional Trading Methods for Financial Marketplaces. In both the fixed
income and futures markets, trading practices historically have centered on a
method of trading known as open outcry, where all trading activity is focused on
a central physical location, or pit. This method of trading can create
significant value for the market participants in the pit, who often have access
to better and more timely market information than other market participants. All
other market participants have to access the market through this central
location. Additionally, in order to access the pit, individuals and
institutional traders must send their orders through several layers of
middlemen, who assist in handling such orders. This process is inefficient. In
today's heavily regulated open outcry U.S. futures markets, for example, an
order can be routed through multiple people during its execution, adding
significant costs to the transaction. Virtually all U.S. futures exchanges are
controlled by their members and floor traders. Professional broker dealers,
traders, institutional traders and individuals currently must trade with these
floor members, who are the market makers. These factors result in higher direct
and indirect costs of trade execution.
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TRADITIONAL ORDER EXECUTION
Limitation of Traditional Trading Methods. While traditional financial
markets facilitate large volume trading, they have significant shortcomings.
Direct access is substantially limited and, therefore, many investors may not
receive efficient pricing. Transaction costs are high due to the number of
people involved in an open outcry system. Execution can be slow. Program
trading, especially programs designed to automatically and simultaneously
execute multiple trades in different, but related, financial products, is
difficult to implement because of the current manual nature of these markets.
Significant expense is also incurred in processing, confirming, clearing and
implementing compliance programs designed to monitor and manage the exposure of
individual professionals, as well as the entire enterprise. Paper and
telephone-based trading produces delayed information and results in compliance
programs that are expensive to manage and can be circumvented. Therefore,
institutions bear increased risk. These factors impede trading by limiting
volume and liquidity.
*The above graphic is for illustrative purposes only and is not
representative of all transactions.
Emergence of Electronic Exchanges. Many financial exchanges worldwide,
including certain exchanges in France, Germany, Japan, Sweden, Switzerland and
the United Kingdom, are now partially or completely electronic. In the United
States, however, trading in many types of financial instruments continues to be
conducted primarily on open outcry exchanges. Recently, many exchanges have
introduced side-by-side markets for voice and electronic access and, as a
result, have created separate pools of liquidity. Moreover, substantially all of
the electronic trading systems introduced internationally and in the United
States have been implemented on a regional basis. Most of these systems provide
limited market liquidity and are designed to accommodate trading in one or a
limited number of securities and financial products, typically equity
securities. We believe that wholesale market participants and institutions will
ultimately look for a limited number of marketplaces to meet most of their
trading needs. This is because market participants will not want to work with
multiple trading platforms and connect their information technology platforms
and compliance programs to a large number of disparate systems. We believe the
trend toward electronic trading will continue and will ultimately result in a
majority of markets worldwide becoming fully electronic.
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In addition, recently there has been considerable discussion regarding the
move toward the demutualization of exchanges. Exchanges have historically been
operated on a not-for-profit basis for the benefit of their respective members,
and this governance structure has limited their ability to adopt new
technologies and respond quickly to market changes. In response to technological
advances in trading systems, many exchanges are contemplating the reorganization
of their ownership and management structures and are seeking to form alliances
with strategic partners. These developments have created, and are expected to
continue to create, opportunities for strategic acquisitions and alliances.
Online Trading. Favorable investing environments and advances in
technology have led to the rapid development of online and traditional retail
brokerage businesses. Technological advances have created new and inexpensive
means for individual investors to directly access markets online and participate
in the securities markets. According to International Data Corporation, the
number of online brokerage accounts grew from approximately 1.5 million at the
end of 1996 to over 6.4 million at the end of 1998, representing $324.0 billion
in assets and over 300,000 trades per day, primarily in equity securities.
International Data Corporation also estimates that, by 2002, 30% of investors
will trade online, and there will be over 24 million online accounts, a 275%
increase from 1998. 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 which promote greater liquidity, enhanced access and
more efficient pricing will increase trading among retail investors.
OUR ELECTRONIC MARKETPLACE SOLUTION
We operate a private electronic network for wholesale financial markets
through which we are connected to most of the largest financial institutions
worldwide. We have installed in the offices of our existing client base,
comprising more than 500 leading dealers, banks and other financial
institutions, 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) system
enables us to introduce and distribute a broad mix of products and services
more quickly, cost effectively and seamlessly than competitors.
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eSPEED INTERACTIVE MATCHING
[GRAPHIC]
*The above graphic is for illustrative purposes only and is not
representative of all transactions.
OUR eSPEED (SM) system:
o has a flexible design which allows us to quickly and easily add new
financial instruments in multiple currencies and trading models;
o uses a network distribution system, which we believe is one of the most
robust systems in operation, and which enables us to provide access to a
broad mix of accurate, instantaneous market data and fast and highly
reliable trade execution;
o is designed to minimize the need for human intermediaries in the trading
process by providing clients with multiple methods of accessing our
marketplaces and executing trades directly; and
o uses INTERACTIVE MATCHING (SM), our proprietary, rules-based trading
method that interactively executes buy and sell orders from multiple
market participants.
These system features enable us to operate the only integrated trading network
engaged in electronic trading in multiple products and marketplaces on a global
basis.
The benefits of our eSPEED (SM) system include the following:
Instantaneous Price Dissemination and Trade Execution. Our eSPEED (SM)
system provides clients with the ability to access pricing and other
information and execute trades instantaneously, as opposed to traditional
trading methods which provide less timely information, and less efficient
trade execution.
Lower Transaction Costs. Our eSPEED (SM) system streamlines the entire
trading process by eliminating the significant layers of manual intervention
which currently exist at both the front-end of the process, including order
entry, matching and postings functions, as well as at the middle and back-end of
the process (clearance, settlement, tracking and reporting functions), resulting
in significantly lower transaction costs for our clients.
Multiple Product Program Trading. Our eSPEED (SM) system provides our
clients with the ability to execute sophisticated and complex transactions and
trading strategies, including the trading of multiple products across multiple
markets simultaneously.
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Greater Accuracy and Decreased Probability of Erroneous Trades. Our
eSPEED (SM) system 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.
Integrated Compliance and Credit Risk Functions. Our eSPEED (SM) system
includes a comprehensive range of compliance and credit risk management
components which perform several critical functions, including: (1)
continuously monitoring trading activity to ensure that clients are staying
within credit limits; (2) automatically preventing further trades once credit
limits have been exceeded; and (3) evaluating and calculating positions and risk
exposure across various products and credit limits. These risk, credit and
compliance tools are highly sophisticated and can be customized for our clients
and integrated into their information technology platforms.
Highly Efficient Pricing on Illiquid Securities. Our MOLE system enables
us to provide prices for illiquid financial products through multiple trades in
other related financial instruments. These multi-variable trades are extremely
difficult to execute in traditional markets due to their complexity and the slow
speed of manual execution.
Ability to Automate Back-Office Functions. Our eSPEED (SM) system
automates previously paper and telephone-based transaction processing,
confirmation and other functions, substantially improving and reducing the cost
of client back-offices, and enabling straight-through processing.
Improved Access for Online Retail Brokers. Our eSPEED (SM) system enables
online and traditional retail brokers to provide clients with real-time access
to previously unavailable wholesale marketplaces for fixed income securities,
futures, options and other financial instruments. We believe that this will
increase retail interest in the trading of these financial products and further
enhance the overall liquidity and efficiency of the market.
We believe our eSPEED (SM) system provides us with significant competitive
advantages over existing electronic trading systems and new entrants seeking to
develop and introduce limited electronic trading systems to the global
securities and financial instruments marketplaces. We also believe that the time
and expense required to develop and install electronic trading networks will
serve as a significant barrier to entry to many other potential competitors.
OUR GROWTH STRATEGY
Our objective is to be the leading provider of interactive electronic
marketplaces in the world. We believe we can extend our expertise in the
creation of real-time electronic marketplaces to a broad range of financial and
non-financial products and services. Our growth strategy to achieve this
objective includes the following key elements:
Focus Exclusively on Developing and Operating Interactive Electronic
Marketplaces. We intend to capitalize on the trend toward the increased use of
electronic trading platforms by focusing our business exclusively on the
development and operation of interactive electronic marketplaces worldwide. We
believe this operational focus provides us with a significant advantage over
competitors that have multiple and sometimes conflicting business objectives,
rigid business practices and cumbersome ownership structures that may impede
their ability to efficiently develop and implement electronic trading platforms
of their own.
Expand the Number of Financial and Non-Financial Products in Our Electronic
Marketplaces. Our electronic marketplaces currently handle the trading of
financial products which have among the highest average annual trading volumes
of all financial products, including U.S. government securities, U.S. Treasury
futures, non-U.S. G-7 government bonds, Eurobonds, corporate bonds, agency
securities, U.K. gilts, emerging markets securities, U.S., European and other
repurchase agreements and municipal bonds. We plan to significantly expand the
types of securities and financial products traded in our marketplaces. Our goal
is to include in our electronic marketplaces the full range of fixed income
securities, futures, options and other securities and financial products that
are currently traded in today's markets worldwide. Initially, we will focus our
expansion efforts on the securities and financial instruments traded by Cantor
that have not yet been converted to electronic trading. We expect to further
extend our marketplaces to include additional
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financial and non-financial products through a variety of approaches together
with Cantor or other strategic partners.
Convert Clients to Fully Electronic Trading. Currently, less than 4% of
the trades executed in our marketplaces, representing more than $6 billion in
volume, are executed on a fully electronic basis without the assistance of a
broker. We intend to continue to convert substantially all of Cantor's clients
to a fully electronic trading environment. We believe the ease of use, low price
and efficient execution that our electronic marketplaces afford will encourage
clients to convert their trading to fully electronic trading. We have a team of
over 30 persons dedicated to enhancing client awareness of the advantages of
electronic trading and providing client support in converting trading activity
to a fully electronic trading format, and we intend to increase that number. We
also expect to leverage Cantor's historical client relationships in connection
with these efforts.
Leverage Existing eSPEED (SM) System Connectivity to Deploy New Products
and Services. Our eSPEED (SM) system provides connectivity to, and the
opportunity to electronically interact with, a global client base that includes
dealers, banks and financial institutions at hundreds of sites around the globe.
As a result, a significant number of our major clients currently have installed
the hardware necessary to trade on a fully electronic basis. Utilizing the
existing infrastructure and flexible architecture of this system, we will be
able to install with relative ease and at marginal incremental cost, the
components that will enable a client to electronically trade in additional types
of securities and financial products. We expect access to this existing global
private trading network to enable us to introduce and distribute a broad mix of
electronic trading products and services, more quickly, cost effectively and
seamlessly than competitors without access to such a network.
Creating Online Retail Broker Access to Wholesale Markets for Fixed Income
Securities and Other Financial Products. We intend to create retail
marketplaces, where appropriate, to enable online and traditional retail brokers
to provide their clients with real-time access to previously unavailable
wholesale marketplaces for retail trading of fixed income securities, futures,
options and other financial instruments. While retail investors generally have
been able to buy and sell equity securities at the same prices and spreads as
wholesale market participants and institutional investors, this has not been the
case with fixed income securities, futures, options and other financial
instruments. We believe our eSPEED (SM) system will expand marketplaces and/or
retail volume and enhance execution for individual retail investors.
Pursue Acquisitions and Strategic Alliances. We intend to capitalize on
the highly fragmented nature of the financial marketplaces and the trends toward
exchange demutualization and consolidation among regional and global market
participants. We expect to pursue an acquisition-based growth program that will
enable us (1) to acquire complementary technologies and service capabilities in
a cost-effective manner and (2) to broaden our product base and the securities
markets in which we provide our electronic trading services. We will seek to
enter into joint ventures and other strategic alliances to create additional
liquidity in the global financial products markets and to attract new trading
participants to those markets. We believe the flexibility afforded by our
corporate governance structure will enable us to implement these strategies, as
well as to anticipate and respond to developments and trends in the global
financial markets, more efficiently than competitors, such as exchanges, which
have broadly dispersed memberships and cumbersome management structures.
Leverage Our eSPEED (SM) System for Use in Other Business-to-Business and
Consumer Markets. We believe that our eSPEED (SM) system is easily adaptable to
other products. Because of the scale of the system and its ease of adaptability,
we believe our eSPEED (SM) system and INTERACTIVE MATCHING (SM) will have
applications across a broad range of products, including Internet-based
marketplaces for a wide array of consumer goods and services, particularly those
involving multiple buyers and sellers. We are well positioned to leverage
significant costs and efforts which have been incurred to develop our eSPEED
(SM) system to quickly create electronic markets in a wide range of products.
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OUR TRADING SERVICES AND TECHNOLOGY PLATFORM
Electronic marketplaces are emerging as significant interactive mediums for
trading financial and non-financial products. In an electronic marketplace,
substantially all of the participants' actions are facilitated through an
electronic medium, such as a private electronic network or the Internet, which
limits the need for actual face-to-face or voice-to-voice participant
interaction.
In our electronic marketplaces, participants may either electronically
execute trades themselves or call brokers/terminal operators who input trade
orders for them. In a fully electronic trade, all stages of the trade occur
electronically. The participant inputs its order instructions directly into our
electronic trading system, using a keyboard, an application programming
interface or other software. The system provides to the participant, normally
within 300 milliseconds, an on-screen confirmation that the participant's order
has been accepted. Once a trade is executed, the participant receives an
on-screen trade confirmation. Simultaneously, an electronic confirmation is sent
to the participant's back office system enabling straight-through processing for
the participant. A broker/terminal operator assisted trade is executed in
substantially the same manner as an electronic trade, except the participant
telephones a broker/terminal operator who inputs the participant's order into
our electronic marketplace system.
Over time, we expect electronically brokered trading to be the predominant
trading method in our marketplaces. However, through our affiliation with
Cantor, we intend to maintain broker/terminal operator trading capabilities.
Unlike most traditional exchanges which have created side-by-side markets for
voice and electronic access and, as a result, have created separate pools of
liquidity, our markets operate seamlessly. Fully electronic and broker/terminal
operator orders are transacted within our eSPEED (SM) system, resulting in one
pool of liquidity. Retail investors will participate in our online marketplaces
for financial products through their online or traditional retail broker. Retail
investors will follow their retail brokers' order entry procedures. Once a
retail broker confirms its client's account status, suitability and
creditworthiness, our systems will route the online order to our appropriate
electronic marketplace. We will receive transactional fees from retail brokers
for enabling their retail clients to trade online in our marketplaces.
Our electronic marketplaces operate on a proven technology platform that
emphasizes scalability, performance and reliability. Our technology platform
consists of:
o a proprietary, internally developed network distribution system,
o transaction processing software which includes a proprietary order
matching engine, a credit and risk management system, security pricing
engines and associated middle and back office operations systems; and
o client interfaces.
Together, these components enable banks, broker-dealers, and other
participants in our marketplaces to cost-effectively trade financial products on
an instantaneous basis.
Network Distribution System. Our eSPEED (SM) system contains a
proprietary, sophisticated, hub and spoke digital network. This network uses
Cisco Systems network architecture and has points of presence in the major
financial hubs of the world, including New York, London, Tokyo, Frankfurt,
Paris, Milan, Chicago, Los Angeles, Toronto and Johannesburg. It is comprised of
over 50,000 miles of cable and over 800 network routers and uses 200 high
capacity super servers. This internally designed distribution network provides
connections with over 500 financial institutions, including most of the largest
financial institutions in the world. The redundant structure of the system
provides backup and re-routing of data transmission if one spoke of a hub fails.
This backup is critical to maintaining our clients' real-time connections to us.
We believe it is one of the largest and most robust interactive network
distribution systems currently in operation.
Our distribution system accepts orders and postings instantaneously and
distributes responses, generally in 300 milliseconds. The network can transport
150 million bits of information per second around the world and is currently
running at approximately 12% of capacity. In addition to our own network system,
we also distribute encrypted data and receive trading information from clients
using the services of multiple, major Internet service providers throughout the
world. These connections enable us to offer Internet-based trading to our global
clients.
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Transaction Processing Software. Our software applications have been
developed internally and are central to our eSPEED (SM) system. Our order
matching 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, limiting market and credit risk.
Our pricing engines provide prices for illiquid financial products through
multiple trades in other related financial instruments. These three critical
applications work together seamlessly and are supported by middle and back
office software that verifies, confirms, reports, stores, tracks and, if
applicable, clears each trade.
o Trading Engines. Our trading engines use INTERACTIVE MATCHING (SM), our
proprietary rules-based method, to process in excess of 150 transactions
per second per product. These engines were developed to support trading
of homogeneous products, which are products with the same underlying
characteristics, such as government bonds and futures contracts, and
heterogeneous products, which are products which may be similar, but
which have some aspects that differentiate them from other products in
the same class, such as municipal bonds, corporate bonds and Eurobonds.
These trading engines are designed to be modular and flexible to allow
modification in order to apply them to other markets. In Europe, for
example, we have added a component that allows us to process the trading
of debt in multiple currencies. Our trading 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 trade over the Internet. When used together, our trading engines can
trade a wide range of homogeneous and heterogeneous products and can
handle trades ranging in size from $1,000 to billions of dollars.
We believe our 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 by providing them
priority in the interactive marketplace. 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/purchase. In addition, in many markets we have structured
our pricing policy to provide that the party that provides market
liquidity by inputting a price to buy or sell pays less commission (or no
commission) than the participant that acts 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 easily adaptable and, as part of our
business strategy, we intend to apply it in other non-financial markets
for a variety of products and services.
o Credit and Risk Management Systems. Our credit and risk management
systems are critical to the operation of our real-time, electronic
marketplaces. Our proprietary credit and risk management systems perform
a variety of functions: (1) they continuously monitor trades of our
clients to ensure that they have not exceeded their credit limits,
(2) they can automatically prevent further trading once a client has
reached a pre-determined credit limit, and (3) they can evaluate trade
transactions and calculate both individual positions and risk exposure
across various products and credit limits. These systems can also be made
available to our global clients to enable them to monitor the position of
their traders and their clients who participate in our marketplaces.
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 clients while maintaining control of
their trading activity and risk.
o Pricing Engines. We have internally developed a number of sophisticated,
analytical software tools that permit us to price financial products that
trade in less liquid markets and for which current pricing information is
not readily available. For example, MOLE is a computer application that
enables us to offer prices and therefore create and enhance a marketplace
for financial products that have limited liquidity. MOLE currently uses
data from existing cash and futures markets to calculate pricing for
transactions where no market prices currently exist.
o Middle and Back Office Applications. Our middle and back office
applications support clearance, settlement, tracking and reporting of
trades and provide links to outside entities such as the
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Government Securities Clearance Corporation, National Securities
Clearance Corporation, Depository Trust Company, SWIFT, Euroclear, New
York Clearing Corp. and most other global clearing organizations. In the
financial markets, clearance and settlement is the process by which a
security and cash payment are exchanged and the trade is completed. In
some markets, the cash and security are both passed to a clearing
organization for settlement. In other transactions, both parties send
either cash or a security to Cantor and Cantor settles the trade and
sends each party the cash or security due. Our reporting and accounting
systems are designed to ensure that all charges and commissions for a
trade are tracked and recorded. Our accounting systems are designed to
ensure that books and records are kept in accordance with regulatory
guidelines and accounting standards.
Client Interfaces. Our systems can be accessed by our clients in four ways:
o using our eSPEED (SM) proprietary software;
o using our application programming interface to write their own software
linking their networks and software applications directly to our systems;
o through our proprietary, real-time private distribution system and the
Internet, both for wholesale clients and for retail clients who
participate in our marketplaces through online and traditional retail
brokers; and
o through software developed in alliances with third-party vendors such as
QV Trading and SunGard/ASC. Our application programming interface enables
clients to conduct computer price updating, program trading and
straight-through processing.
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<PAGE>
PRODUCTS CURRENTLY TRADING ELECTRONICALLY
The following table identifies the categories of securities and financial
products which are traded in our interactive electronic marketplaces, including
the approximate average daily electronic and non-electronic trading volume of
these financial products in all markets (including our marketplaces). References
to "N/A" indicate that we have been unable to determine the market size from
reliable, independent third party sources.
<TABLE>
<CAPTION>
AVERAGE DAILY
TRADING VOLUME
(ELECTRONIC AND
WHOLESALE MARKET NON-ELECTRONIC)
FINANCIAL PRODUCTS (IN BILLIONS) DESCRIPTION
------------------ --------------- -----------
<S> <C> <C>
U.S. Government Securities $ 197.6 Debt obligations issued and backed by the full
faith and credit of the United States
government.
- ----------------------------------------------------------------------------------------------------------------
French, German and Italian $ 50.0 Debt obligations issued by the French, German
Government Bonds and Italian governments.
- ----------------------------------------------------------------------------------------------------------------
United Kingdom and other European N/A Debt obligations issued by the United Kingdom
Government Bonds and other European governments.
- ----------------------------------------------------------------------------------------------------------------
Eurobonds N/A Securities syndicated and sold internationally
that may be issued in a currency other than that
of the country of the issuer.
- ----------------------------------------------------------------------------------------------------------------
Corporate Bonds $ 10.0 Debt obligations issued by private corporations
that may pay interest periodically and return
the face value of the bond at maturity.
- ----------------------------------------------------------------------------------------------------------------
Agency Securities $ 53.3 Securities issued, or pooled, serviced and,
sometimes, guaranteed by government agencies to
finance their activities, including credit
support of home mortgages and farm credit.
- ----------------------------------------------------------------------------------------------------------------
Emerging Market Government Bonds and $ 16.8 Securities issued by the governments and other
Emerging Market Eurobonds issuers in countries with developing economies.
They include Brady Bonds, which are U.S. dollar
denominated bonds that may be fully or partially
collateralized by U.S. Treasury zero-coupon
bonds.
- ----------------------------------------------------------------------------------------------------------------
Global Repurchase Agreements and Reverse N/A Short-term sales of government securities with a
Repurchase Agreements (U.S., Europe and promise to repurchase the securities at a higher
Emerging Market Countries) price. Repos and reverse repos are typically
overnight transactions used to finance
government bonds.
- ----------------------------------------------------------------------------------------------------------------
Municipal Bonds $ 8.8 Debt obligations issued by state and local
governments.
- ----------------------------------------------------------------------------------------------------------------
Interest Rate Futures 1.1(1) Instruments that call for the delivery of
interest-bearing securities or interest rate
products or their cash equivalent at a specific
delivery (or maturity) date for an agreed upon
price (the future price) to be paid at contract
maturity. Interest rate futures exist for a
number of financial instruments, including
government securities and Eurodollar deposits.
</TABLE>
- ------------------
(1) Number of contracts in millions.
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<PAGE>
FUTURE ELECTRONIC PRODUCTS
The following tables identify the categories of securities and financial
products which we expect to be traded in our interactive electronic marketplaces
by the end of 2000, including the approximate average daily electronic and
non-electronic trading volume of these financial products in all markets.
References to "N/A" indicate that we have been unable to determine the market
size from reliable, independent third party sources.
<TABLE>
<CAPTION>
AVERAGE DAILY
TRADING VOLUME
(ELECTRONIC AND
WHOLESALE MARKET NON-ELECTRONIC)
FINANCIAL PRODUCTS (IN BILLIONS) DESCRIPTION
------------------ --------------- -----------
<S> <C> <C>
Mortgage Backed $ 73.7 Securities that represent either an ownership claim in a pool of
Securities mortgages or an obligation that is secured by a pool of
mortgages.
- ------------------------------------------------------------------------------------------------------------
Interest Rate Swaps $ 68.3 Contractual agreements entered into between two counterparties
under which each agrees to make periodic payments to each other
for an agreed upon time based on a notional amount of principal.
- ------------------------------------------------------------------------------------------------------------
Oil, Natural Gas, N/A Transactions involving the delivery or price of oil, natural
Electricity, Foreign gas, electricity or foreign currency exchange.
Exchange
- ------------------------------------------------------------------------------------------------------------
Canadian and Japanese N/A Debt obligations issued by the Canadian and Japanese
Government Bonds governments.
</TABLE>
<TABLE>
<CAPTION>
AVERAGE DAILY
TRADING VOLUME
(ELECTRONIC AND
NON-ELECTRONIC)
(IN MILLIONS OF
FUTURES CONTRACTS) DESCRIPTION
------- --------------- -----------
<S> <C> <C>
Equity Index Futures 169,000 Instruments that call for the delivery of the cash equivalent of
a stock index at a specific delivery (or maturity) date for an
agreed upon price (the future price) to be paid at contract
maturity.
- ------------------------------------------------------------------------------------------------------------
Foreign Exchange 108,000 Instruments that call for the delivery of foreign currency at a
Futures specific delivery (or maturity) date for an agreed upon price
(the future price) to be paid at contract maturity.
- ------------------------------------------------------------------------------------------------------------
Energy Futures 255,000 Instruments that call for the delivery of an energy-related
asset or its cash equivalent at a specific delivery (or
maturity) date for an agreed upon price (the future price) to be
paid at contract maturity. Energy futures exist for a number of
energy-related assets, including gasoline and crude oil.
- ------------------------------------------------------------------------------------------------------------
Metal Futures 65,000 Instruments that call for the delivery of a metal or its cash
equivalent at a specific delivery (or maturity) date for an
agreed upon price (the future price) to be paid at contract
maturity. Metal futures exist for a number of metals, including
gold, silver and copper.
</TABLE>
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<PAGE>
Options and options on futures products data set forth below do not include
over-the-counter traded products in which substantial volumes are traded on a
daily basis.
<TABLE>
<CAPTION>
AVERAGE DAILY
TRADING VOLUME
(ELECTRONIC AND
NON-ELECTRONIC)
(IN MILLIONS OF
OPTIONS AND OPTIONS ON FUTURES CONTRACTS) DESCRIPTION
- ------------------------------ --------------- -----------
<S> <C> <C>
Options on Interest Rate 343,000 Contractual obligations that give the holder the right
Products to buy or sell interest-bearing debt, such as Treasury
notes, certificates of deposit or securities guaranteed
by the Government National Mortgage Association, at a
specified exercise price on or before a specified
expiration date.
- -----------------------------------------------------------------------------------------------------------
Options on Equity Products 320,000 Contractual obligations that give the holder the right
to buy or sell the cash equivalent of an equity index
such as the S&P 500 at a specified exercise price on or
before a specified expiration date. An investor also
can buy or sell an option on an equity index future.
- -----------------------------------------------------------------------------------------------------------
Options on Individual Equity 1,300,000 Contractual obligations that give the holder the right
Products to buy or sell an individual stock at a specified
exercise price on or before a specified expiration
date.
- -----------------------------------------------------------------------------------------------------------
Options on Foreign Exchange 21,600 Contractual obligations that give the holder the right
Products to buy or sell a quantity of a foreign currency for a
specific amount of domestic currency at a specified
exercise price on or before a specified expiration
date.
- -----------------------------------------------------------------------------------------------------------
Options on Energy Products 48,300 Contractual obligations that give the holder the right
to buy or sell a future contract on an energy product
such as gasoline or oil at a specified exercise price
on or before a specified expiration date.
- -----------------------------------------------------------------------------------------------------------
Options on Metal Products 11,800 Contractual obligations that give the holder the right
to buy or sell a specific amount of metal such as gold
at a specified exercise price on or before a specified
expiration date.
</TABLE>
42
<PAGE>
SALES AND MARKETING
We expect to promote our electronic marketplaces and brokerage-related
services to Cantor's existing clients and new clients through a combination of
sales, advertising, marketing and co-marketing campaigns. We also expect to
leverage the historical client relationships of Cantor's employees under the
Joint Services Agreement. We intend to build and enhance the eSPEED (SM) brand
name recognition through a sales, advertising and marketing campaign. We expect
to market to retail clients through a variety of campaigns, including
co-marketing campaigns with our online and traditional retail brokers. We intend
to design our sales, marketing and advertising campaigns to promote brand
awareness and educate the marketplace regarding the nature of our electronic
marketplaces, products and services and the advantages associated with the
automation of trading activities, such as enhanced instantaneous information
flow, price transparency and more direct and cost-effective market access, tight
spreads and instantaneous trade execution.
OUR CLIENTS
Clients for our marketplaces 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. Through our eSPEED (SM) system, we
expect to enable retail brokerage firms to expand their businesses by providing
them with the ability to offer their individual clients the option of trading
bonds and futures electronically in the same way they trade equity securities
and we expect to include other marketplaces previously unavailable to retail
investors, or not available to them at reasonable spreads or commissions. We
intend to provide to wholesale and retail investors and to Cantor access to our
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
intend to provide to third parties and to Cantor the infrastructure, including
systems administration, internal network support and operations and disaster
recovery services, that is critical to providing fully electronic marketplaces
for trading in a wide range of financial products. Other than Cantor, no client
of ours accounts for more than 10% of our revenues.
STRATEGIC ALLIANCES
In 1997, Cantor entered into an agreement with the New York Cotton
Exchange, which, upon merging with the Coffee, Sugar & Cocoa Exchange, became
known as the New York Board of Trade. The agreement sets forth the terms and
conditions pursuant to which Cantor operates an electronic marketplace, called
the CANTOR EXCHANGE (SM), for futures contracts cleared by and under the
regulatory supervision of the New York Board of Trade. Cantor has assigned to us
all of its rights and obligations under its agreement with a subsidiary of the
New York Board of Trade to jointly operate the CANTOR EXCHANGE (SM). Under the
agreement, 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).
Pursuant to the agreement, neither we nor our affiliates shall during the
term of the agreement establish in the United States an electronic market for
trading futures contracts or options on futures contracts on cotton, cheese,
coffee, sugar, cocoa, milk or frozen orange juice. We have agreed that within
the United States we shall exclusively operate for the CANTOR EXCHANGE (SM)
markets for U.S. Treasury futures and other products so designated by the CANTOR
EXCHANGE (SM). We and our affiliates may establish any electronic market that is
located physically outside the United States for such products if the New York
Board of Trade is not capable of providing regulatory or clearing services with
respect to such products.
SOFTWARE DEVELOPMENT
We devote substantial efforts to the development and improvement of our
electronic marketplaces. We will work with our clients to identify their
specific needs and make modifications to our software, network distribution
systems and technologies which are responsive to those needs. We are pursuing a
four-pronged approach to our research and development efforts: (1) internal
development; (2) strategic partnering; (3) acquisitions; and (4) licensing. We
have approximately 150 persons involved in our internal software development
efforts. Our technology team's objective will be to develop new products and
services that employ proven technology designed to provide superior electronic
trade execution and marketplace services to our clients. We will also focus our
efforts on enhancing our Web site and Internet screen interface to
43
<PAGE>
facilitate real-time markets, comply with the standard Internet security
protocol and future security protocols and migrate transactions to the public
networks 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 having open architecture and
standards. In addition, we have forged strategic alliances with organizations
such as Sungard/ASC and QV Trading through which we will work to develop
sophisticated, front-end trading applications and products. We expect to license
products from and to companies when it is cost effective or profitable to do so.
COMPETITION
The development and operation of electronic trading marketplaces in
securities and other financial instruments are evolving. As a result,
competition in these marketplaces is currently very fragmented. We expect to
face competition from a number of different sources varying in size, business
objectives and strategy. Our eSPEED (SM) system currently competes, and we
expect it to compete, directly and indirectly, with:
o traditional trading methods, including manual buy/sell order input by
registered brokers in response to telephone originated requests and
execution of trades in open outcry trading pits on exchange floors, such
as the Chicago Board of Trade, the Chicago Mercantile Exchange and other
exchanges and over-the-counter markets;
o products developed and used by exchanges and financial services firms,
such as Liberty Brokerage Investment Corporation and Garban-Intercapital
plc, seeking to act as market intermediaries;
o automated trade execution services developed by third party vendors for
commercialization in a wide range of financial products markets;
o the products and services of market data, information and communication
vendors, such as Reuters Group plc, Bloomberg L.P. and Bridge Information
Systems Inc., that have created electronic networks which link them to
most major financial institutions and that have attempted, in some cases,
to expand their networks to include trading platforms;
o consortia comprised of leading financial institutions and service
providers, such as BrokerTec Global LLC, which has announced its
intention to explore the development of electronic trading networks, and
EuroMTS; and
o in the event we extend the application of our INTERACTIVE MATCHING SM
technology to conducting or facilitating real-time markets in
commodity-type consumer goods and services over the Internet, both online
and traditional sellers of these products and services.
The electronic trading services we provide our wholesale clients enable
them to expand the range of services they provide to their ultimate clients,
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 wholesale clients that we obtain in providing our
electronic trading services to compete with these wholesale clients in other
securities and financial instrument transactions.
We believe our electronic marketplaces will compete primarily on the basis
of speed, efficiency, price and ability to provide access to liquidity to market
participants.
OUR INTELLECTUAL PROPERTY
We have adopted a comprehensive intellectual property protection program to
protect our proprietary technology. We currently have licenses covering four of
Cantor's patents in the United States. 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.
44
<PAGE>
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. Additional patent
applications likely will be filed in the near future to further protect our
proprietary technology.
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.
REGULATION
The securities industry and financial markets in the United States and
elsewhere are subject to extensive regulation. As a service provider to the
securities industry and financial markets, and as a registered broker-dealer,
our business activities fall within the scope of these regulations.
Regulation of the U.S. Securities Industry and Broker-Dealers.
As a matter of public policy, regulatory bodies in the United States and
the rest of the world are charged with safeguarding the integrity of the
securities and other financial markets and with protecting the interests of
investors participating in those markets. In the United States, the Securities
and Exchange Commission is the federal agency responsible for the administration
of the federal securities laws. Our regulated U. S. subsidiaries, eSpeed
Securities, Inc. and eSpeed Government Securities, Inc., are registered with the
Securities and Exchange Commission as, respectively, a broker-dealer and a
government securities broker. They are also members of the National Association
of Securities Dealers, Inc., a self regulatory body to which most broker-dealers
belong. Certain self-regulatory organizations, such as the National Association
of Securities Dealers, Inc., adopt rules and examine broker-dealers and require
strict compliance with their rules and regulations. The Securities and Exchange
Commission and self-regulatory organization rules cover many aspects of a
broker-dealer's business, including capital structure and withdrawals, sales
methods, trade practices among broker-dealers, use and safekeeping of customer's
funds and securities, record-keeping, the financing of clients' purchases,
broker-dealer and employee registration and the conduct of directors, officers
and employees. In connection with a violation of these rules, the SEC,
self-regulatory organizations and state securities commissions may conduct
administrative proceedings which can result in censure, fine, the issuance of
cease-and-desist orders or the suspension or expulsion of a broker-dealer, its
officers or employees.
Effect of Net Capital Requirements. As a registered broker-dealer and
member of the National Association of Securities Dealers, Inc., eSpeed
Securities, Inc. is subject to the Uniform Net Capital Rule under the Exchange
Act. The Uniform Net Capital Rule specifies the minimum level of net capital a
broker-dealer must maintain and also requires that at least a minimum part of
its assets be kept in relatively liquid form. Government securities brokers must
comply with similar net capital requirements established in rules promulgated by
the U.S. Treasury Department. As of September 24, 1999, if each of our regulated
U.S. subsidiaries, eSpeed Securities, Inc. and eSpeed Government Securities,
Inc., had been subject to the Uniform Net Capital Rule, the minimum net capital
required of each would have been $5,000 and $25,000, respectively. As of that
date, each of our U.S. subsidiaries had total net capital of approximately
$90,000, or $85,000 and $65,000, respectively, in excess of the minimum amount
that would have been required as of that date.
The Securities and Exchange Commission and the National Association of
Securities Dealers, Inc. impose rules that require notification when net capital
falls below certain predefined criteria, dictate the ratio of debt to equity in
the regulatory capital composition of a broker-dealer and constrain the ability
of a broker-dealer to expand its business under certain circumstances.
Additionally, the Uniform Net Capital Rule and the National Association of
Securities Dealers, Inc. rules impose certain requirements that may have the
effect of prohibiting a broker-dealer from distributing or withdrawing capital
and requiring prior notice to the Securities and Exchange Commission and the
National Association of Securities Dealers, Inc. for certain withdrawals of
capital. Because our principal asset will be the ownership of stock in our
broker-dealer subsidiaries, these rules governing net capital and restrictions
on withdrawals of funds could operate to prevent us from meeting our financial
obligations on a timely basis.
Application of Exchange Act to Internet Business. The Securities Exchange
Act of 1934 governs, among other things, the operation of the financial products
markets and broker-dealers. When enacted, the
45
<PAGE>
Securities Exchange Act of 1934 did not contemplate the conduct of a securities
business throughout the Internet. Although the Securities and Exchange
Commission, in releases and no-actions letters, has provided guidance on various
issues related to the conduct of a securities business through the Internet, the
application of the laws to the conduct of a securities business through the
Internet continues to evolve. Uncertainty regarding these issues may adversely
affect the viability and profitability of our business.
Financial Futures and Options. Financial futures and options in financial
futures are subject to regulation by the Commodity Futures Trading Commission
under the Commodity Exchange Act, and exchanges that provide facilities for the
trading of those products are also subject to Commodity Futures Trading
Commission regulation. As a service provider to the CANTOR EXCHANGE (SM), a
futures exchange that is a designated contract market under the Commodity
Exchange Act, we could be adversely affected by changes in laws or regulations
governing the products or clients of the CANTOR EXCHANGE (SM).
Exchange Regulation. Securities exchanges must register with the
Securities and Exchange Commission and comply with various requirements of the
Securities Exchange Act of 1934. Effective April 1999, new rules expanded the
scope of exchange regulation to include many brokerage matching and execution
systems, such as the matching systems which we support. The new rules impose
various requirements relating to fair access, capacity, security, record-keeping
and reporting. Our subsidiaries expect to comply with these requirements.
Although we do not expect the compliance costs to be significant, our
subsidiaries could encounter unforseen expenses associated with operation of
these rules.
Regulation of the Non-U.S. Securities Industries and Investment Service
Providers.
The securities industry and financial markets in the European Union and
elsewhere are subject to extensive regulation. As the owner and operator of
electronic marketplaces for the securities industry and financial markets, our
business activities may fall within the scope of those regulations depending
upon the extent to which we are characterized as providing a regulated
investment service.
The securities industry in the member states of the European Union is
extensively regulated by agencies in each member state. European Union measures
provide for the mutual recognition of regulatory agencies and of prudential
supervision making possible the grant of a single authorization for the provider
of investment services which, broadly, is valid throughout the European Union.
As an investment service provider in the United Kingdom, our principal regulator
would be the Securities and Futures Authority. The conduct of an investment
business is also regulated by agencies in each of the other member states in
which we may provide investment services. The provision of investment services
is also regulated by other agencies in other jurisdictions in which we operate
such as the Securities and Futures Commission in Hong Kong and the local
government agency delegated by the Japanese Financial Supervisory Agency in
Japan.
As a matter of public policy, regulatory bodies in the European Union and
the rest of the world are charged with safeguarding the integrity of the
securities and other financial markets and with protecting the interests of
investors participating in those markets. We are seeking authorization from the
Securities and Futures Authority to provide investment services in the United
Kingdom and we intend to exercise our rights under the European Union Investment
Services Directive to provide such investment services throughout the European
Union. Similar authorization applications will be made in other jurisdictions
such as Hong Kong and Japan where such authorization is necessary to operate an
electronic marketplace.
The Securities and Futures Authority and other regulatory agencies in the
European Union may conduct administrative proceedings which can result in
censure, fine, the prevention of activities or the suspension or expulsion of an
investment services provider. The applicable investment service regulations
cover minimum financial resource requirements and conduct of business rules for
all authorized investment businesses.
Investment exchanges may be operated and authorized as investment
businesses in the European Union, subject to the provision of the Investment
Services Directive. Alternatively, investment exchanges can obtain authorization
as an investment exchange from each member state in the European Union in
accordance with the applicable regulations of that member state.
Changes in Existing Laws and Rules. Additional legislation or regulation,
changes in existing laws and rules or changes in the interpretation or
enforcement of existing laws and rules, either in the United States or
elsewhere, may directly affect our mode of operation and our profitability.
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LEGAL PROCEEDINGS
On May 5, 1999, Cantor Fitzgerald, L.P. and The Board of Trade of the City
of Chicago, The New York Mercantile Exchange and The Chicago Mercantile Exchange
were sued by Electronic Trading Systems Corporation in the United States
District Court for the Northern District of Texas (Dallas Division) for alleged
infringement of Wagner United States patent 4,903,201, entitled "Automated
Futures Trade Exchange." The patent relates to a system and method for
implementing an electronic, computer-automated futures exchange. On July 1,
1999, Cantor answered the complaint, asserting, among other things, that the
'201 patent was invalid and not infringed by Cantor and that Cantor was not the
real party in interest. Although not identified by the complaint, Cantor
believes that the system being charged with infringement is a version of the
electronic trading system used by the CANTOR EXCHANGE (SM), which Cantor is
contributing to us in connection with this offering. If the plaintiff is
successful in the lawsuit, we may be required to obtain a license to develop and
market one or more of our services, to cease developing or marketing services or
to redesign these services. We cannot assure you that we would be able to obtain
these licenses or that we would be able to obtain them at commercially
reasonable rates or, if unable to obtain licenses, that we would be able to
redesign our services to avoid infringement.
On June 21, 1999, Cantor and its affiliate CFPH, LLC, brought suit against
Liberty Brokerage Investment Corporation and Liberty Brokerage Inc. in the
United States District Court for the District of Delaware for infringement of
the Fraser et al. U.S. patent 5,905,974, entitled "Automated Auction Protocol
Processor." Cantor alleged in the complaint that Liberty was infringing the '974
patent by making, using, selling and/or offering for sale systems and methods
that embody or use the inventions claimed in the '974 patent. On August 10,
1999, Cantor and CFPH, L.L.C. voluntarily dismissed the suit without prejudice.
Subsequently, on August 10, 1999, Liberty filed an action for declaratory
judgment in the United States District Court for the District of Delaware
against Cantor and two of its affiliates, Cantor Fitzgerald Securities and CFPH,
LLC, claiming that the '974 patent was invalid, unenforceable and not infringed
by Liberty. On October 12, 1999, Cantor, Cantor Fitzgerald Securities and CFPH,
LLC moved (1) to dismiss all claims against Cantor Fitzgerald Securities for
failure to state a claim upon which relief can be granted and (2) to dismiss the
action as against Cantor, Cantor Fitzgerald Securities and CFPH, LLC for lack of
an actual case or controversy within the meaning of 28 U.S.C. Section 2201. On
November 22, 1999, the Court granted the motion to dismiss the action as against
Cantor Fitzgerald Securities, and denied the motion to dismiss the action as
against Cantor and its affiliate CFPH, LLC. We cannot assure you that we or
Cantor will bring a claim for infringement of the '974 patent against Liberty,
that the '974 patent will be found to be valid and/or enforceable or that
Liberty will be found to have infringed the '974 patent. We have assumed
responsibility for defending this suit on behalf of Cantor and its affiliates
and the risk of loss associated with it.
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 CFI, and Rodney
Fisher are limited partners of Cantor Fitzgerald, L.P.
In April 1998, Cantor Fitzgerald, L.P. 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 Cantor Fitzgerald, L.P. with respect to the electronic
trading system mentioned above. The complaint further alleges that Market Data
Corporation and Chicago Board Brokerage tortiously interfered with Cantor'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 Cantor Fitzgerald, L.P. and (2) a declaration that Cantor Fitzgerald, L.P.
breached the implied covenant of good faith and fair dealing. Cantor has agreed
to indemnify us for any liabilities that we incur with respect to any current or
future litigation involving (1) Market Data Corporation, (2) Iris Cantor, (3)
CFI or (4) Rodney Fisher.
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On July 12, 1998, the Court of Chancery held Cantor Fitzgerald, L.P. was
likely to succeed on the merits of its claims that Iris Cantor, CFI and Rodney
Fisher had breached their partnership obligations to Cantor but had not shown
that the defendants' conduct was likely to cause imminent irreparable harm
between the date of the opinion and a final hearing. The Court of Chancery,
therefore, denied Cantor Fitzgerald, L.P.'s request for preliminary injunctive
relief and scheduled a final trial. Cantor Fitzgerald, L.P. settled its dispute
with Chicago Board Brokerage in April 1999 and Chicago Board Brokerage
subsequently announced it was disbanding its operations. The remaining parties
have completed the final trial and the Court of Chancery's decision is expected
following post-trial oral arguments which took place on December 7, and 8, 1999.
We believe Market Data Corporation's technology for electronic trading systems
will be of substantial assistance to competitors in the wholesale market if
provided to them.
Two related actions are pending in New York. In a case pending in the
Supreme Court of New York, New York County, plaintiff Cantor Fitzgerald, L.P.
alleges, among other things, that defendants Market Data Corporation, CFI, Iris
Cantor and Rodney Fisher misused confidential information of Cantor Fitzgerald,
L.P. 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 Cantor Fitzgerald, L.P. 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 has been pursued during the pendency of the court proceedings in
Delaware.
In addition to the allegations set forth in the pending lawsuits, Cantor
has received correspondence from the attorneys representing Iris Cantor, CFI,
Market Data Corporation and Rodney Fisher in the proceedings in Delaware,
expressing a purported concern that Cantor and/or certain of its partners may be
in breach of Cantor's partnership agreement (including, among other things, the
partnership agreement's provisions relating to competition with the partnership)
and the general partnership agreement of Cantor Fitzgerald Securities with
respect to our initial public offering. Generally, these attorneys have alleged
that various purported conflicts of interest will exist arising from the fact
that certain of our directors and officers will simultaneously hold positions
with Cantor Fitzgerald, L.P. Moreover, these attorneys have asserted that our
business plan may not be consistent with certain purported rights of Market Data
Corporation (including purported intellectual property rights) and other parties
and they have requested more information regarding our initial public offering.
Although we do 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 us with respect to any liabilities we incur as a
result of such lawsuits or allegations.
Cantor and Reuters are parties to a confidential arbitration under the
auspices of the American Arbitration Association in New York, New York, which
began in June 1995 with respect to a January 1993 agreement among Reuters,
Cantor and Market Data Corporation. Cantor has agreed to indemnify us against
all claims asserted by Reuters or Market Data Corporation relating to this
agreement or arising out of the arbitration.
The agreement executed in 1993 involves, among other things, the delivery
by Cantor of certain market data arising out of non-United States government
bond and U.S. municipal bond interdealer brokerage transactions for transmittal
over Reuters' network. The agreement also contemplated the joint development by
Cantor and Reuters of an electronic trading system for certain transactions in
non-United States government bonds. Cantor and Reuters did not develop this
electronic trading system. In the arbitration, Reuters alleges that Cantor
materially breached the agreement primarily by failing to provide non-screen,
voice brokerage data concerning non-United States government bonds and U.S.
municipal bonds that Reuters contends are subject to the agreement and fraud.
Reuters is seeking to recover from Cantor amounts representing past payments for
market data, the reimbursement of attorneys' fees and other damages. Cantor has
denied Reuters' allegations that there has been any material breach of this
agreement or fraud, and has asserted a breach of contract claim and various
other counterclaims against Reuters, including claims for Reuters' failure since
February 1997 to pay any of the money due Cantor for data under this agreement.
In February 1997, Reuters unilaterally ceased making such payments to Cantor in
connection with the dispute and in November 1999 stopped distributing Cantor's
market data that was provided to Reuters.
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Reuters has recently asserted that, in the event it prevails in the
arbitration, it may be entitled to receive from Cantor, and possibly from us,
revenues in respect of the sale, license, dissemination, delivery or other
distribution of the data subject to this agreement. Reuters has also asserted
that, if it loses the arbitration, it could still, at the conclusion of the
arbitration, try to cure its multiple breaches and seek to have the agreement
remain in effect. Cantor believes that it did not materially breach this
agreement and believes that Reuters would not be entitled to (1) any of our
revenues, even if Reuters prevailed in the arbitration or (2) cure its own
breaches and cause the agreement to remain in effect, in the event Cantor
prevails. As stated above, Reuters ceased making payments under this agreement
in 1997 and has ceased distributing the data covered by the agreement. Cantor
has notified Reuters that Cantor has terminated the agreement based on Reuters'
material breaches.
Market Data Corporation recently made an application for an order directing
(1) Reuters to pay Cantor for providing the data, (2) Cantor to continue to
provide Market Data Corporation with data for transmission to Reuters, and (3)
Reuters to accept and distribute the data over Reuters' network. That
application has been denied on the basis of Market Data Corporation's failure to
demonstrate that monetary damages would be an inadequate remedy for any damages
it may suffer as a result of Reuters' and Cantor's actions. Even if any relief
were granted to Market Data Corporation, we do not believe it would have a
material adverse effect on our business.
Recently, the panel in the arbitration rendered a decision interpreting
certain portions of the agreement in a manner contrary to that which Cantor
believes was intended and concluded that Cantor had failed to deliver certain
non-screen, voice brokerage data to Reuters that the panel concluded was
required to be delivered under the agreement. Cantor maintains that it has not
materially breached the agreement, that any breach was cured by Cantor, that the
agreement cannot be terminated at Reuter's insistence, that Reuters has
underpaid Cantor and that, by ceasing to make payments since 1997 and
discontinuing the distribution of Cantor's data, Reuters has materially breached
the agreement. The panel has not resolved these issues and the arbitration is
still continuing.
We cannot assure you that Market Data Corporation and/or Reuters will not
seek to assert claims against us or Cantor relating to our activities, either in
the arbitration or in another proceeding. In any event, Cantor has agreed to
indemnify us with respect to any claims asserted by Reuters or Market Data
Corporation relating to the agreement or arising out of the arbitration.
EMPLOYEES
We have approximately 330 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
Our principal executive offices are located at One World Trade Center, New
York, New York. Our principal executive offices occupy approximately
50,000 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 $1.2 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 $800,000 annually for use of this
space. We believe our facilities are adequate for our reasonably foreseeable
future needs.
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___________________________________MANAGEMENT___________________________________
The following table provides information regarding our directors, executive
officers and persons who will become our directors upon the closing of this
offering:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
Howard W. Lutnick............................... 38 Chairman of the Board and Chief Executive
Officer
Frederick T. Varacchi........................... 33 President and Chief Operating Officer;
Director(1)
Douglas B. Gardner.............................. 38 Vice Chairman; Director(1)
Kevin C. Piccoli................................ 42 Senior Vice President and Chief Financial
Officer
Stephen M. Merkel............................... 41 Senior Vice President, General Counsel and
Secretary
Richard C. Breeden.............................. 50 Director(1)
Larry R. Carter................................. 56 Director(1)
William J. Moran................................ 58 Director(1)
Joseph P. Shea.................................. 45 Director(1)
</TABLE>
- ------------------
(1) Appointment as a director will become effective upon the closing of this
offering.
Our board of directors currently consists of one director, Mr. Lutnick. At
the time of completion of this offering, our board of directors will consist of
seven directors, three of whom will be non-employee directors.
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 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 Capital
Markets, 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. Mr. Varacchi is a member of
the Board of Directors of Expert Ease Software and QV Trading Systems Inc.
Douglas B. Gardner. Mr. Gardner has been our Vice Chairman since June 1999.
Mr. Gardner has been an Executive Managing Director of Cantor since October
1999. He previously served as Senior Managing Director and Chief Administrative
Officer of Cantor from January 1994 to October 1999, where he was responsible
for overseeing all worldwide finance and support related functions. Mr. Gardner
serves as a director and is on the executive and finance committees of the
CANTOR EXCHANGE(SM). Prior to joining Cantor, Mr. Gardner was a partner of DG
Equities, a commercial and residential real estate developer and owner. From
1983 to 1985, Mr. Gardner was associated with Lehman Brothers in the
High-Technology Division of its Corporate Finance Department.
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Kevin C. Piccoli. Mr. Piccoli has been our Senior Vice President and Chief
Financial Officer since September 1999. He has been a Managing Director of
Cantor since October 1999 and Senior Vice President and Chief Financial Officer
of Cantor, responsible for its global accounting, regulatory, management
reporting and treasury functions, since July 1999. Prior to joining Cantor, he
was a Managing Director and Chief Financial Officer at Greenwich Capital
Holdings, Inc., a subsidiary of National Westminster Bank, from April 1992 to
July 1999. Mr. Piccoli's responsibilities at Greenwich included global
accounting, tax and regulatory reporting. Prior to joining Greenwich in April
1992, Mr. Piccoli was an audit partner at Coopers & Lybrand.
Stephen M. Merkel. Mr. Merkel has been our Senior Vice President, General
Counsel and Secretary since June 1999. Mr. Merkel 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 will become our director upon the closing
of this offering. 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 is a
director of The Philadelphia Stock Exchange, Inc.
Larry R. Carter. Mr. Carter will become our director upon the closing of
this offering. Mr. Carter joined Cisco Systems 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.I.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 Network Appliance,
Inc., Ultratech Stepper, Inc. and QLogic Corporation.
William J. Moran. Mr. Moran will become our director upon the closing of
this offering. Mr. Moran joined the Chase Manhattan Corporation and the Chase
Manhattan Bank in 1975 as Internal Control Executive. After several promotions,
Mr. Moran was named General Auditor in 1992, Executive Vice President in 1997
and a member of the Management Committee in 1999. Before joining Chase,
Mr. Moran was with the accounting firm of Peat, Marwick, Mitchell & Co. for nine
years.
Joseph P. Shea. Mr. Shea will become our director upon the closing of this
offering. 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
In connection with the closing of this offering, we will establish (1) an
Audit Committee, all of the members of which will be non-employee directors, and
(2) a Compensation Committee.
The Audit Committee will be responsible for recommending to the Board of
Directors the engagement of our independent auditors and reviewing with our
independent auditors the conduct and results of the audits, our internal
accounting controls, audit practices and the professional services furnished by
our independent auditors.
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The Compensation Committee will be responsible for reviewing and approving
all compensation agreements for our officers and for administering our stock
option plan and our stock purchase plan.
COMPENSATION OF DIRECTORS
Directors who are also our employees will not receive additional
compensation for serving as directors. We have granted our initial non-employee
directors options to purchase 20,000 shares of our common stock at an exercise
price per share equal to the initial public offering price per share. Any other
options to be granted to non-employee directors will be in amounts to be
determined by our board of directors. Non-employee directors also will be
reimbursed for out-of-pocket expenses incurred in attending meetings of our
board of directors or committees of our board of directors.
EXECUTIVE COMPENSATION
We are a recently formed company. Prior to March 1999, we did not conduct
any operations. As a result, we have not previously paid any compensation to our
Chief Executive Officer or other executive officers. We intend to pay or
allocate for payment to Messrs. Lutnick, Varacchi, Gardner, Piccoli and Merkel a
pro rata portion of their annual salaries of $350,000, $500,000, $250,000,
$125,000 and $150,000, respectively, for services they provide to us during
1999.
1999 LONG-TERM INCENTIVE PLAN
In December 1999, our board of directors and stockholder approved our
adoption of our 1999 Long-Term Incentive Plan. The purpose of the plan is to
allow us to attract, retain and award present and prospective officers,
employees, directors, consultants and certain other individuals (including
employees of Cantor) and to compensate them in a way that provides additional
incentives and enables such individuals to increase their ownership interests in
our Class A common stock. Individual awards under the plan may take the form of:
o either incentive stock options or non-qualified stock options;
o stock appreciation rights;
o restricted or deferred stock;
o dividend equivalents;
o bonus shares and awards in lieu of our obligations to pay cash
compensation; and
o other awards, the value of which is based in whole or in part upon the
value of our Class A common stock.
The plan will generally be administered by a committee, which will
initially be the Compensation Committee of our board, except that our board will
perform the committee's functions under the plan for purposes of grants of
awards to non-employee directors, and may perform any other function of the
committee as well. The committee generally is empowered to select the
individuals who will receive awards and the terms and conditions of those
awards, including the number of shares subject to the award exercise prices for
options and other exercisable awards, vesting and forfeiture conditions (if
any), performance conditions, the extent to which awards may be transferable and
periods during which awards will remain outstanding. Awards may be settled in
cash, shares, other awards or other property, as determined by the committee.
The maximum number of shares of our Class A common stock that may be
subject to outstanding awards under the plan will not exceed 20% of the
aggregate number of shares of all classes of common stock outstanding determined
immediately after each award is granted. The number of shares deliverable upon
exercise of incentive stock options is limited to 10,000,000 shares of Class A
common stock.
In connection with this offering, options in the form of non-qualified
stock options to purchase a total of 6,600,000 shares of Class A common stock
have been granted to our directors, executive officers and other employees as
follows: 20,000 shares to each of our three initial non-employee directors,
250,000 shares to Joseph Shea, 2,500,000 shares to Howard Lutnick, 800,000
shares to Frederick Varacchi, 375,000 shares to Douglas Gardner, 100,000 shares
to Stephen Merkel, 65,000 shares to Kevin Piccoli, 2,150,000 shares to our
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other employees and other persons eligible to receive options under our plan and
300,000 shares to employees of Cantor. Each of the above options has an exercise
price per share equal to the initial public offering price. Except as to
Mr. Lutnick, all options are nontransferrable. As to Mr. Lutnick, 500,000 shares
are immediately exercisable and are transferable to members of his family (or a
trust established for the benefit of his family) in order to facilitate his
estate planning. All options generally are subject to vesting requirements and
expire on the earlier of 10 years after the date of grant or in connection with
a termination of employment. However, Mr. Lutnick's immediately exercisable
option and the options granted to Cantor employees expire five years after the
date of grant and generally do not terminate in connection with a termination of
employment. All options generally shall vest and become exercisable upon a
change in control of eSpeed, except that as to Messrs. Varacchi, Gardner,
Merkel, Piccoli, Shea and Lee Amaitis (the "Covered Employees"), their options
shall vest but continue to become exercisable in accordance with their original
vesting schedule (regardless of whether their employment with eSpeed continues).
However, if, following the change in control of eSpeed, Mr. Lutnick at any time
ceases to be eSpeed's chairman and chief executive officer (other than by reason
of his death or disability), all then-unexercisable options held by the Covered
Employees shall become fully exercisable as of such date.
The plan will remain in effect until terminated by our board. The plan may
be amended by our board without the consent of our stockholders, except that any
amendment, although effective when made, will be subject to stockholder approval
if required by any Federal or state law or regulation or by the rules of any
stock exchange or automated quotation system on which our common stock may then
be listed or quoted. The number of shares reserved or deliverable under the plan
and the number of shares subject to outstanding awards are subject to adjustment
in the event of stock splits, stock dividends and other extraordinary corporate
events.
We generally will be entitled to a tax deduction equal to the amount of
compensation realized by a participant through awards under the plan, except (1)
no deduction is permitted in connection with incentive stock options if the
participant holds the shares acquired upon exercise for the required holding
periods; and (2) deductions for some awards could be limited under the
$1.0 million deductibility cap of Section 162(m) of the Internal Revenue Code.
This limitation, however, should not apply to awards granted under the plan
during a grace period of approximately three years following this offering, and
should not apply to certain options, stock appreciation rights and
performance-based awards granted thereafter if we comply with certain
requirements under Section 162(m).
STOCK PURCHASE PLAN
In November 1999, our board of directors and stockholder approved the
adoption of our Stock Purchase Plan. The Stock Purchase Plan will permit our
eligible employees to purchase shares of our common stock at a discount.
Employees who elect to participate will have amounts withheld through payroll
deductions during purchase periods. At the end of each purchase period,
accumulated payroll deductions will be used to purchase stock at a price
determined by the administrative committee that administers the Stock Purchase
Plan, but which will not be less than 85% of the lower of the market price at
the beginning of the purchase period or the end of the purchase period,
including interim dates, as may be determined by the administrative committee.
Our Class A common stock that is purchased under the Stock Purchase Plan may be
subject to a holding period. We have reserved 425,000 shares of our Class A
common stock for issuance under the Stock Purchase Plan.
The Stock Purchase Plan will remain in effect until terminated by our board
or until no shares of our Class A common stock are available for issuance under
the Stock Purchase Plan. The Stock Purchase Plan may be amended by our board
without the consent of our stockholders, except that any amendment, although
effective when made, will be subject to stockholder approval if required by any
federal or state law or regulation or by the rules of any stock exchange or
automated quotation system on which our common stock may then be listed or
quoted.
The Stock Purchase Plan is intended to qualify under Section 423 of the
Internal Revenue Code, and as such, we will not be entitled to any tax deduction
where a participant holds the purchased shares for the longer of two years from
the beginning of the purchase period, or one year from the end of the purchase
period.
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RELATIONSHIP WITH CANTOR
- --------------------------------------------------------------------------------
THE FORMATION TRANSACTIONS
Concurrently with this offering, Cantor is contributing to us, and we are
acquiring from Cantor, substantially all of our assets. These assets primarily
consist of proprietary software, network distribution systems, technologies and
related contractual rights that comprise our eSPEED (SM) system. In exchange for
these assets, we are issuing to Cantor 43,999,900 shares of our Class B common
stock, representing approximately 98% of the voting power of our outstanding
capital stock after this offering. Cantor has elected to convert 3,000,000 of
these shares into shares of the Class A common stock which it is offering
hereby.
Cantor conceived of and has been developing systems to promote fully
electronic marketplaces since the early 1990's. Since 1996, Cantor has invested
more than $200 million in information technology, which culminated in the
development of our eSPEED (SM) system. Cantor's technology initiatives during
this period included software development, infrastructure and maintenance
associated with operating Cantor's entire global securities business. The
evolutionary process which led to the development of the eSPEED (SM) system
was a combination of the development of Cantor's brokerage, trading, clearance,
settlement, analytical pricing and related systems and was impacted by the
continual improvement in computer processing and the changing trading
environment. Accordingly, it is difficult to separately quantify development or
other systems costs associated with the ultimate development of the eSPEED (SM)
system as it emanated in part from all of the information technology initiatives
of Cantor.
Since January 1996, Cantor has used the eSPEED (SM) system internally to
conduct electronic trading. In March 1999, the first fully electronic
transaction using the eSPEED (SM) system was executed by a client.
Cantor has previously entered into contractual agreements or other
arrangements with many of the participants that trade in our electronic
marketplaces. These agreements and arrangements provide the general terms and
conditions, including those relating to warranties and allocations of liability,
under which those participants may electronically execute trades in our
marketplaces; none of these participants are obligated to use our marketplaces
under these agreements. We either have, or will have upon the closing of this
offering, the rights and obligations under many of these arrangements as they
relate to operating our eSPEED (SM) system. Certain of our subsidiaries have
been registered as broker-dealers with the National Association of Securities
Dealers, Inc. and the regulatory authorities of various states. We also intend
to obtain any foreign regulatory approvals for our foreign subsidiaries that are
necessary or advisable. As we receive the regulatory approvals and licenses
necessary to operate our electronic marketplaces globally and increase client
awareness of our electronic marketplaces, we intend to enter directly into
tri-party agreements and other arrangements with clients and Cantor. We assist
market participants, including Cantor, in participating in the electronic
marketplaces that are created and supported by our eSPEED (SM) system. We share
with Cantor a portion of the transaction-based revenues paid by market
participants for transactions effected through our electronic marketplaces or
which are otherwise electronically assisted. Cantor and many of the largest
financial institutions in the world are currently our primary clients.
Following this offering, Cantor will continue to operate its equity dealing
business, money market and securities lending business, matched book repurchase
agreement business, investment advisory business and other specified businesses,
including those in which Cantor acts as a dealer. These businesses are carried
out in over 10 locations around the world. We will not share in any revenues
generated by these businesses, other than service fees we may become entitled to
receive in connection with hardware maintenance and other systems support
development services we may provide to Cantor. Following this offering, Cantor
will also continue to provide voice brokerage services, clearance, settlement
and fulfillment services and other related services in connection with our
electronic marketplaces. Accordingly, upon conversion of Cantor's marketplaces
to our eSpeed platform, orders for financial instruments will continue to be
received and executed by Cantor brokers over the telephone, and this method of
order entry by Cantor into our electronic trading platform is contemplated to
continue for the foreseeable future. It is anticipated that a significant
percentage of orders and revenues will continue to be recorded by Cantor, and a
sharing of commissions (as described below under "Joint Services Agreement")
with us will occur. Since it is not possible to predict the level of acceptance
by clients, and individual traders located within each client, of fully
electronic order entry
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<PAGE>
processing, we anticipate that each marketplace product will experience widely
varying direct electronic usage rates by clients and their trading personnel.
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.
ASSIGNMENT AND ASSUMPTION AGREEMENTS
We have entered into Assignment and Assumption Agreements with Cantor
pursuant to which Cantor is contributing to us rights and interests in the
assets and contractual and other arrangements which comprise our eSPEED (SM)
system. In consideration for the contribution of these assets, rights and
interests, we will issue to Cantor shares of our Class B common stock
representing approximately 100% of the outstanding shares of our capital stock
prior to this offering and we will assume certain liabilities relating to the
assets which Cantor is contributing to us. These liabilities include accrued
compensation and benefits and other accrued liabilities. Under the terms of the
Assignment and Assumption Agreements, Cantor has agreed to indemnify us with
respect to liabilities and losses we suffer which result from the operation of,
and events relating to, the assets transferred to us prior to and in connection
with their transfer, except that we will assume the defense of and indemnify
Cantor with respect to any liabilities arising out of the patent litigation
involving Liberty Brokerage. We have agreed to indemnify Cantor with respect to
liabilities and losses which they suffer which result from our ownership and
operation of these assets.
JOINT SERVICES AGREEMENT
We have entered into a Joint Services Agreement with Cantor under which we
and Cantor have agreed to collaborate to provide brokerage and related services
to clients in multiple electronic markets for transactions in securities and
other financial products. In addition, we may in our discretion collaborate on
non-financial products. This agreement will be effective upon completing the
formation transactions and provides for a perpetual term. Under the agreement,
we will own and operate the electronic trading systems and will be responsible
for providing electronic brokerage services, and Cantor will provide
voice-assisted brokerage services, clearance, settlement and fulfillment
services 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.
All information and data (other than information relating to bids, offers
or trades or other information that is input into, created by or otherwise
resides on an electronic trading system for financial products) created,
developed, used in connection with or relating to the operation of and effecting
of transactions in any marketplace will be the sole property of Cantor or us, as
applicable, on the following basis: (1) if the data relate to financial
products, the data belong solely to Cantor, (2) if the data relate to a
collaborative marketplace in which only products that are non-financial products
are traded, the ownership of the data will be determined by Cantor and us on a
case-by-case basis through good faith negotiations, (3) if the data relate to a
marketplace in which we do not collaborate with Cantor but in which we provide
electronic brokerage services and only non-financial products are traded, the
data belong solely to us and (4) if the data relate to a non-collaborative
marketplace that is not a marketplace in which we provide electronic brokerage
services and in which financial products are traded, the data belong solely to
Cantor. All right, title and interest in the data relating to bids, offers or
trades or other information that is input into, created by or otherwise resides
on an electronic trading system for financial products belong to Cantor. We have
the right to use such data only in connection with the execution of transactions
in such markets.
Commission Sharing Arrangement
Under this agreement, we and Cantor have agreed to 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 effect 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
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<PAGE>
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 will receive the aggregate
transaction revenues and pay a service fee to Cantor. In other cases, Cantor
will receive the aggregate transaction revenues and pay a service fee to us. The
amount of the service fee and the portion of the transaction revenues that we
and Cantor receive is based on several factors, including whether: (1) the
marketplace is one in which we collaborate with Cantor; (2) the transaction is
fully electronic or Cantor provides voice-assisted brokerage services; (3) the
product traded is a financial product; and (4) the product is traded on the
CANTOR EXCHANGE (SM). Generally, we share revenues as follows:
FULLY ELECTRONIC TRANSACTIONS IN COLLABORATIVE MARKETPLACES. If a
transaction is fully electronic and is effected in a marketplace in which
we collaborate with Cantor, we will receive the aggregate transaction
revenues and pay to Cantor a service fee equal to:
o 35% of the transaction revenues, if the product is a financial
product that is not traded on the CANTOR EXCHANGE (SM);
o 20% of the transaction revenues, if the product is traded on the
CANTOR EXCHANGE (SM); and
o an amount determined on a case-by-case basis, if the product is
not a financial product and is not traded on the CANTOR
EXCHANGE (SM).
VOICE-ASSISTED TRANSACTIONS IN COLLABORATIVE MARKETPLACES. If Cantor
provides voice-assisted brokerage services with respect to a transaction
that is effected in a marketplace in which we collaborate with Cantor:
o Cantor will receive the aggregate transaction revenues and pay to
us a service fee equal to 7% of the transaction revenues, if the
product is a financial product that is not traded on the CANTOR
EXCHANGE (SM);
o we will receive the aggregate transaction revenues and pay to
Cantor a service fee equal to 55% of the transaction revenues, if
the product is traded on the CANTOR EXCHANGE (SM); and
o we will receive an amount determined on a case-by-case basis, if
the product is not a financial product and is not traded on the
CANTOR EXCHANGE (SM).
NON-COLLABORATIVE MARKETPLACES INVOLVING ELECTRONIC BROKERAGE
SERVICES. If a transaction is effected in a marketplace in which we do not
collaborate with Cantor:
o Cantor will receive the aggregate transaction revenues and pay to
us a service fee equal to 30% of the portion of the transaction
revenues we would have received had we collaborated with Cantor,
if Cantor either itself or through a third party provides
electronic brokerage services in that marketplace;
o we will receive the aggregate transaction revenues and pay to
Cantor a service fee equal to 20% of the transaction revenues, if
the product is a financial product and we provide electronic
brokerage services; and
o we will receive 100% of the transaction revenues and will not pay
Cantor a service fee, if the product is not a financial product
and we provide electronic brokerage service.
ELECTRONICALLY ASSISTED TRANSACTIONS IN NON-ELECTRONIC
MARKETPLACES. If a transaction is not effected in an electronic
marketplace, but is electronically assisted, such as a screen assisted open
outcry transaction, we will receive 2.5% of the transaction revenues.
In the event that Cantor's direct costs payable to third parties for
providing clearance, settlement and fulfillment services with respect to a
transaction in a collaborative marketplace with respect to any financial product
for any month exceed the direct costs incurred by Cantor to clear and settle a
cash transaction in United States Treasury securities for such month, the cost
of the excess is borne pro rata by Cantor and us in the same proportion as the
transaction revenues and service fees for such transaction are to be shared.
In the event that a client does not pay, or pays only a portion of, the
transaction revenues relating to a transaction, then we and Cantor each bear our
respective share of the loss based on the percentage of the transaction revenues
we would otherwise have been entitled to receive with respect to such
transaction.
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System Services
We have also agreed to 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 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 will 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 potential application in a gaming business. Cantor will pay to us
an amount equal to the direct and indirect costs, including overhead, that we
incur in performing these services. We will not receive service fees or
otherwise be entitled to share in transaction revenues relating to the system
services that we provide to Cantor for unrelated dealer businesses. We have
agreed not to use confidential information, including business plans and
software, obtained from or used by Cantor in connection with the provision of
these services to parties other than Cantor. For the purposes of the Joint
Services Agreement, an unrelated dealer business means (1) Cantor's equity
businesses as they exist from time to time, (2) Cantor's money market
instruments and securities lending division, as they exist from time to time,
(3) any business or portion thereof or activity in which Cantor acts as a dealer
or otherwise takes market risk or positions, including in the process of
executing matched principal transactions, providing the services of a specialist
or market maker or providing trading or arbitrage operations, (4) activities
wherever located that would, if conducted in the United Kingdom, be subject to
the United Kingdom Gaming Act of 1963 or activities wherever located currently
or in the future involving betting, gambling, odds making, lotteries, gaming,
wagering, staking, drawing or casting losts and similar or related activities
and (5) any business not involving operating a marketplace.
Intellectual Property
Cantor has granted to us a license covering Cantor's patents and patent
applications that relate to the eSPEED (SM) system. The license is perpetual,
irrevocable, world-wide 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 trademarks "Cantor
Exchange," "Interactive Matching" and "CX".
Non-competition and Market Opportunity Provisions
The Joint Services Agreement imposes the following performance obligations
on us and restricts our ability to compete with Cantor and Cantor's ability to
compete with us in the following circumstances:
o If Cantor wishes to create a new financial product marketplace, Cantor
may require us to provide electronic brokerage services with respect to
that marketplace. We must use our commercially reasonable efforts to
develop an electronic trading system for that marketplace within a
specified time period. If, after diligent effort, we are unable to do so,
we have no liability to Cantor for our failure and Cantor may create and
operate the marketplace in any manner that Cantor deems to be acceptable.
Cantor's proposal to create a new marketplace must be commercially
reasonable and Cantor must diligently pursue the development of the
marketplace and cause the new marketplace to become operational within a
specified time period.
o If Cantor wishes to create a new financial product marketplace and Cantor
does not require us to develop an electronic trading system for that
marketplace as described in the preceding paragraph, Cantor must, in any
event, notify us of its intention to create the new marketplace. We will
have a right of first refusal to provide electronic brokerage services
with respect to that marketplace. We must use commercially reasonable
efforts to develop and put into operation an electronic trading system
for the marketplace within a specified time period. If we are able to do
so, transactions in the marketplace
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<PAGE>
will be subject to the revenue sharing arrangements described above. If
we are unable to do so, or we elect not to provide electronic brokerage
services with respect to the new marketplace, Cantor may provide or
otherwise obtain electronic brokerage services for that marketplace in
any manner that Cantor deems to be acceptable. Cantor's proposal to
create a new marketplace must be commercially reasonable and Cantor must
diligently pursue the development of the marketplace and cause the new
marketplace to become operational within a specified time period.
o If Cantor wishes to create a new electronic marketplace for a product
that is not a financial product, Cantor must notify us of its intention
to do so. We will have the opportunity to offer to provide the electronic
brokerage services with respect to the new marketplace. If Cantor rejects
our offer, Cantor may operate the marketplace in any manner that Cantor
deems to be acceptable.
o If we wish to create a new electronic marketplace for a financial
product, we must notify Cantor of our intention to do so. Cantor will
have a right of first refusal to provide the applicable voice-assisted
brokerage services, clearance, settlement and fulfillment services and/or
related services for that marketplace. If Cantor (1) elects not to
provide such services or (2) fails to notify us within a specified time
period that it will provide such services, we may provide or otherwise
obtain those services for that marketplace in any manner that we deem to
be acceptable.
o If we wish to create a new electronic marketplace for a product that is
not a financial product, we must notify Cantor of our intention to do so.
Cantor will have the opportunity to offer to provide the applicable
voice-assisted brokerage services, clearance, settlement and fulfillment
services and/or related services for that marketplace. If we reject
Cantor's offer, we may create and operate the marketplace in any manner
that we deem to be acceptable.
o Subject to the exceptions described below, we may not directly or
indirectly: (1) engage in any activities competitive with a business
activity conducted by Cantor now or in the future; or (2) provide or
assist any other person in providing voice-assisted brokerage services,
clearance, settlement and fulfillment services and/or related services.
We are permitted to engage in these activities:
o in collaboration with Cantor;
o with respect to a new marketplace involving a financial product,
after Cantor has indicated that it is unable or unwilling to provide
such voice-assisted brokerage services, clearance, settlement and
fulfillment services and/or related services with respect to that
marketplace;
o with respect to a new marketplace involving a product that is not a
financial product, after having considered in good faith any
proposal submitted by Cantor relating to the provision of those
services; or
o with respect to an unrelated dealer business in which we develop and
operate a fully electronic marketplace.
o Subject to the exceptions described below, Cantor may not directly or
indirectly provide or assist any other person in providing electronic
brokerage services. Cantor is permitted to engage in these activities:
o in collaboration with us; or
o with respect to a new marketplace, after (1) we have indicated that
we are unable to develop an electronic trading system for that new
marketplace within a specified time period or (2) we have declined
to exercise our right of first refusal or have exercised our right
of first refusal but are unable to develop an electronic trading
system within a specified time period.
o The unrelated dealer businesses retained by Cantor are expressly excluded
from our rights of first refusal and the restrictions on Cantor's ability
to compete with us. However, we may create fully electronic marketplaces
in unrelated dealer businesses.
We and Cantor are entitled to pursue and may enter into alliance
opportunities, including strategic alliances, joint ventures, partnerships or
similar arrangements, with third parties and consummate business combinations
with third parties on the following basis only. If an alliance opportunity (1)
relates to a person that directly or indirectly provides voice-assisted
brokerage services and engages in business operations that do not involve
electronic brokerage services, then Cantor is entitled to pursue and consummate
a transaction
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with respect to that alliance opportunity, (2) relates to a person that directly
or indirectly provides electronic brokerage services and engages in business
operations that do not involve any voice-assisted brokerage service, then we are
entitled to pursue and consummate a transaction with respect to that alliance
opportunity or (3) is an alliance opportunity with respect to a person other
than those described in clauses (1) and (2) above, then we and Cantor will
cooperate to jointly pursue and consummate a transaction with respect to such
alliance opportunity on mutually agreeable terms. A business combination
includes a transaction initiated by and in which either we or Cantor is/are the
acquiror involving (A) a merger, consolidation, amalgamation or combination, (B)
any sale, dividend, split or other disposition of any capital stock or other
equity interests (or securities convertible into or exchangeable for or options
or warrants to purchase any capital stock or other equity equivalents) of the
person, (C) any tender offer (including without limitation of a self-tender),
exchange offer, recapitalization, dissolution or similar transaction, (D) any
sale, dividend or other disposition of a significant portion of the assets and
properties of the person (even if less than all or substantially all of such
assets or properties), and (E) entering into any agreement or understanding, or
the granting of any rights or options, with respect to any of the foregoing.
ADMINISTRATIVE SERVICES AGREEMENT
We have entered into an Administrative Services Agreement with Cantor that
states the terms under which Cantor will provide certain administrative and
management services to us. Cantor will make 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 will arrange for our insurance coverage and will 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 will 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 relating to the operation of our eSPEED (SM) system.
These assets are subject to operating leases with third party leasing companies.
Under this provision of the Administrative Services Agreement, we have agreed to
be bound by the general terms and conditions of the operating leases relating to
the assets used by us. See Note 5 of the Notes to the Consolidated Financial
Statements. Under the Administrative Services Agreement, we will provide sales,
marketing and public relations services to Cantor. Cantor will reimburse us for
the actual costs incurred by us, plus other reasonable costs, including
reasonably allocated overhead. The Administrative Services Agreement has a
three-year term which will renew automatically for successive one-year terms
unless canceled by either us or Cantor upon six months' prior notice; provided,
however, that our right to use our New York space expires at the time that
Cantor's lease expires in 2006 and our right to use our London office space
expires at the earlier of (1) the time Cantor's lease expires in 2016 or (2)
until Cantor ceases to be an affiliate of ours and Cantor asks us to vacate.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Registration Rights Agreement to be entered into by Cantor
and us, Cantor is to receive piggyback and demand registration rights.
The piggyback registration rights allow Cantor to register the shares of
Class A common stock issued or issuable to it in connection with the conversion
of its Class B common stock whenever we propose to register any shares of
Class A common stock for our own or another's account under the Securities Act
for a public offering, other than:
o any shelf registration of shares of Class A common stock to be used as
consideration for acquisitions of additional businesses; and
o registrations relating to employee benefit plans.
Cantor will also have the right, on three occasions, to require that we
register under the Securities Act any or all of the shares of Class A common
stock issued or issuable to it in connection with the conversion of its Class B
common stock. No more than one of these registrations may be demanded within the
first year after the closing of this offering. 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
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Agreement. The ability of Cantor to exercise its registration rights for the
period of 180 days after this offering will be restricted by the lock-up
agreements described under "Shares Eligible for Future Sale."
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, including
this offering; 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 following this
offering 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. Upon
completion of this offering, Cantor will own all of the outstanding shares of
our Class B common stock, representing approximately 98% 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.
Our relationship with Cantor may result in agreements that are not the
result of arm's length negotiations. As a result, the prices charged to us or by
us for services provided under agreements with Cantor may be higher or lower
than prices that may be charged by third parties and the terms of these
agreements may be more or less favorable to us than those that we could have
negotiated with third parties. However, we intend that transactions between us
and Cantor and/or its other affiliates will be subject to the approval of a
majority of our independent directors.
In addition, Cantor can compete with us under certain circumstances. See
"--Joint Services Agreement--Non-competition Provisions."
CONSULTING SERVICES
For consulting services provided to us and Cantor by Martin J. Wygod in
connection with this offering, we have issued to Martin J. Wygod or his
designees warrants to purchase an aggregate number of shares of our Class A
common stock equal to 1.5% of the aggregate number of shares of Class A common
stock offered by this prospectus (excluding any shares purchased pursuant to the
underwriters' over-allotment option). The warrants have a five-year term and are
exercisable commencing on the first anniversary of the date of issuance 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.
We granted Mr. Wygod piggyback and demand registration rights in connection
with the warrants. The piggyback registration rights allow Mr. Wygod to have
registered the shares of Class A common stock issued or issuable upon exercise
of the warrants and will be substantially similar to the piggyback registration
rights to be granted to Cantor. Mr. Wygod also has the right, on one occasion,
to require that we register under the Securities Act, a minimum of 75% of the
aggregate number of shares of Class A common stock underlying the warrants. The
demand registration right is only available when we are eligible to use
Form S-3 to register the shares.
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PRINCIPAL AND SELLING STOCKHOLDERS
- --------------------------------------------------------------------------------
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of the date of this prospectus and after giving
effect to this offering by:
o each person or entity that we know beneficially owns more than 5% of our
common stock;
o each of our directors and director nominees;
o each of our executive officers;
o all of our current directors, director nominees and executive officers as
a group; and
o the selling stockholder.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF COMMON STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED
--------------------------------------------- ----------------------------------------
PRIOR TO OFFERING AFTER OFFERING PRIOR TO OFFERING AFTER OFFERING(3)
NAME OF BENEFICIAL ------------------ ---------------------- ------------------ ------------------
OWNER(1)(2) CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
- ---------------------------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Howard W. Lutnick........... 100 100 41,500,000(4)(5) 41,000,000(4) 100% 100% 82.2% 100%
Cantor Fitzgerald, L.P...... 100 100 41,000,000(6) 41,000,000(6) 100% 100% 82.2% 100%
Frederick T. Varacchi....... -- -- -- -- -- -- -- --
Douglas B. Gardner.......... -- -- -- -- -- -- -- --
Kevin C. Piccoli............ -- -- -- -- -- -- -- --
Stephen M. Merkel........... -- -- -- -- -- -- -- --
Richard C. Breeden.......... -- -- -- -- -- -- -- --
Larry R. Carter............. -- -- -- -- -- -- -- --
William J. Moran............ -- -- -- -- -- -- -- --
Joseph P. Shea.............. -- -- -- -- -- -- -- --
All directors, director
nominees and executive
officers as a group
(9 persons)............... 100 100 41,500,000(4)(5) 41,000,000(4) 100% 100% 82.2% 100%
<CAPTION>
SELLING STOCKHOLDER
- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cantor Fitzgerald
Securities................ 100 100 32,800,000(4)(5) 32,800,000(4) 100% 100% 65.6% 80%
</TABLE>
- ------------------
(1) The address of each holder of more than five percent of our common stock
listed above is One World Trade Center, New York, NY 10048.
(2) Unless otherwise indicated, we believe that the persons named in this table
have sole voting and investment power with respect to the shares of common
stock shown. Shares of Class B common stock are convertible into shares of
Class A common stock at any time in the discretion of the holder on a
one-for-one basis. Accordingly, a holder of shares of Class B common stock
is deemed to be the beneficial owner of an equal number of shares of Class A
common stock for purposes of this table.
(3) Assumes no exercise of the underwriters' over-allotment option.
(4) Includes shares of Class B common stock that are owned by Cantor Fitzgerald,
L.P. and Cantor Fitzgerald Securities, of which Cantor Fitzgerald, L.P. is
the managing partner. CF Group Management, Inc. is the Managing General
Partner of Cantor Fitzgerald, L.P. and Mr. Lutnick is the President and sole
stockholder of CF Group Management, Inc.
(5) Includes 500,000 shares underlying immediately exercisable options.
(6) Includes shares of Class B common stock that are owned by Cantor Fitzgerald
Securities.
Cantor currently intends, at some point after the one-year period following
the completion of this offering, to distribute to its limited partners a portion
of the shares of Class B common stock owned by Cantor. In the event of any such
distribution, these shares would convert to shares of Class A common stock. The
terms on which such distribution, if any, may be made have not yet been
determined.
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__________________________DESCRIPTION OF CAPITAL STOCK__________________________
GENERAL
Following the completion of this offering, our authorized capital stock
will consist of 200,000,000 shares of Class A common stock, $.01 par value,
100,000,000 shares of Class B common stock, $.01 par value, and 50,000,000
shares of preferred stock, $.01 par value. Upon completion of this offering
(1) we will have 9,000,000 shares of Class A common stock and 41,000,000 shares
of Class B common stock outstanding; and (2) we will have outstanding options to
purchase 6,600,000 shares of Class A common stock.
The following summary of the terms and provisions of our capital stock does
not purport to be complete. You should refer to our Amended and Restated
Certificate of Incorporation and our By-Laws, and to applicable law, for a
complete description of the terms and provisions of our capital stock.
COMMON STOCK
The holders of Class A common stock and Class B common stock have identical
voting rights except that holders of Class A common stock are entitled to one
vote per share while holders of Class B common stock are entitled to 10 votes
per share on all matters to be voted on by stockholders. Holders of shares of
Class A common stock and Class B common stock are not entitled to cumulate their
votes in the election of directors. Generally, all matters to be voted on by
stockholders must be approved by a majority or, in the case of election of
directors, by a plurality of the votes entitled to be cast by holders of all
shares of Class A common stock and Class B common stock present in person or
represented by proxy, voting together as a single class, subject to any voting
rights granted to holders of any preferred stock. Amendments to our Amended and
Restated Certificate of Incorporation that would nevertheless change the powers,
preferences or special rights of the Class A common stock or the Class B common
stock so as to affect them adversely also must be approved by a majority of the
votes entitled to be cast by the holders of the shares affected by the
amendment, voting as a separate class. Any amendment to our Amended and Restated
Certificate of Incorporation to increase the authorized shares of any Class A
common stock will be deemed not to affect adversely the powers, preferences or
special rights of the Class A common stock. However, any amendment to our
Amended and Restated Certificate of Incorporation to increase the authorized
shares of Class B common stock or to amend, alter, change or repeal the rights
of Class B common stock must be approved by a majority of the voting power of
all of the outstanding shares of Class B common stock. The holders of Class A
common stock and Class B common stock are entitled to such dividends as may be
declared in the discretion of our board of directors out of legally available
funds, subject to the preferential dividend rights of any shares of preferred
stock. Holders of Class A common stock and Class B common stock have no
preemptive rights to purchase shares of our stock. Our Amended and Restated
Certificate of Incorporation provides that 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. Each share of Class B common stock will automatically convert into
a share of Class A common stock upon any sale, pledge or other transfer (a
Transfer), whether or not for value, by the initial registered holder, other
than any Transfer by the initial holder to (1) Cantor Fitzgerald, L.P., (2) any
entity controlled by Cantor Fitzgerald, L.P. or by Howard Lutnick and (3) Howard
Lutnick, his spouse, his estate, any of his descendants, any of his relatives,
or any trust established for his benefit or for the benefit of his spouse, any
of his descendants or any of his relatives. Notwithstanding anything to the
contrary set forth herein, any holder of Class B common stock may pledge his,
her or its shares of Class B common stock to a pledgee pursuant to a bona fide
pledge of the shares as collateral security for indebtedness due to the pledgee
so long as the shares are not transferred to or registered in the name of the
pledgee. In the event of any pledge meeting these requirements, the pledged
shares will not be converted automatically into shares of Class A common stock.
If the pledged shares of Class B common stock become subject to any foreclosure,
realization or other similar action by the pledgee, they will be converted
automatically into shares of Class A common stock upon the occurrence of that
action. The automatic conversion provisions in our Amended and Restated
Certificate of Incorporation may not be amended, altered, changed or repealed
without the approval of the holders of a majority of the voting power of all
outstanding shares of Class A common stock.
Shares of Class A common stock and Class B common stock are not subject to
any redemption provisions and shares of Class A common stock are not convertible
into any other securities. All outstanding
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shares of Class A common stock and Class B common stock are fully paid and
nonassessable. The shares of our Class A common stock we will sell in this
offering will also be fully paid and nonassessable when we receive payment for
the shares.
PREFERRED STOCK
Our Amended and Restated Certificate of Incorporation provides for
50,000,000 authorized shares of preferred stock, of which none are outstanding.
The existence of authorized but unissued preferred stock may enable our board of
directors to render more difficult or to discourage an attempt to obtain control
of us by means of a merger, tender offer, proxy contest or otherwise. For
example, if in the due exercise of its fiduciary obligations, our board of
directors were to determine that a takeover proposal is not in our best
interests, our board of directors could cause shares of preferred stock to be
issued without stockholder approval in one or more private offerings or other
transactions that might dilute the voting or other rights of the proposed
acquiror or insurgent stockholder group. In this regard, the Amended and
Restated Certificate of Incorporation grants our board of directors broad power
to establish the rights and preferences of authorized and unissued preferred
stock. The issuance of shares of preferred stock pursuant to our board of
directors' authority described above could decrease the amount of earnings and
assets available for distribution to holders of shares of common stock and
adversely affect the rights and powers, including voting rights, of these
holders and may have the effect of delaying, deterring or preventing a change in
control of our company. Our board of directors currently does not intend to seek
stockholder approval prior to any issuance of preferred stock, unless otherwise
required by law.
WARRANTS
In connection with this offering, we have issued warrants representing the
right to acquire up to 135,000 shares of Class A common stock at the initial
public offering price per share. See "Relationship with Cantor--Consulting
Services."
LIMITATION ON DIRECTORS' LIABILITIES
Our Amended and Restated Certificate of Incorporation limits, to the
maximum extent permitted under Delaware law, the personal liability of directors
and officers for monetary damages for breach of their fiduciary duties as
directors and officers, except in certain circumstances involving certain
wrongful acts, such as a breach of the director's duty of loyalty or acts of
omission which involve intentional misconduct or a knowing violation of law.
Section 145 of the Delaware General Corporation Law permits us to indemnify
officers, directors or employees against expenses, including attorney's fees,
judgments, fines and amounts paid in settlement in connection with legal
proceedings if the officer, director or employee acted in good faith and in a
manner reasonably believed to be in or not opposed to our best interests and,
with respect to any criminal act or proceeding, if he or she had no reasonable
cause to believe his or her conduct was unlawful. Indemnification is not
permitted as to any matter as to which the person is adjudged to be liable
unless, and only to the extent that, the court in which such action or suit was
brought upon application determines that, despite the adjudication of liability,
but in view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for such expenses as the court deems proper.
Individuals who successfully defend such an action are entitled to
indemnification against expenses reasonably incurred in connection with the
action.
Our Amended and Restated By-Laws require us to indemnify directors and
officers against, to the fullest extent permitted by law, liabilities which they
may incur under the circumstances described in the preceding paragraph.
We plan to maintain standard policies of insurance under which coverage is
provided (1) to our directors and officers against loss arising from claims made
by reason of breach of duty or other wrongful act and (2) to us with respect to
payments which may be made by us to such officers and directors pursuant to the
above indemnification provision or otherwise as a matter of law.
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ANTI-TAKEOVER PROVISIONS
GENERAL
Certain provisions of the Delaware General Corporation Law and our Amended
and Restated Certificate of Incorporation and our Amended and Restated By-Laws
may delay, discourage or prevent a change in control of our company unless the
takeover or change in control is approved by our board of directors. These
provisions also may render the removal of directors and management more
difficult. These provisions may discourage bids for our common stock at a
premium over the market price and may adversely affect the market price and
voting and other rights of the holders of our common stock.
CERTIFICATE OF INCORPORATION AND BY-LAWS
Our Amended and Restated Certificate of Incorporation provides that
stockholders may act only at an annual or special meeting of stockholders and
may not act by written consent, other than by unanimous written consent. Our
Amended and Restated By-Laws provide that special meetings of stockholders may
be called only by the Chairman of our board of directors, or in the event the
Chairman of our board is unavailable, the Vice Chairman acting jointly with the
President. Our Amended and Restated By-Laws require advance written notice prior
to a meeting of stockholders of a proposal or director nomination which a
stockholder desires to present at such a meeting, which generally must be
received by our Secretary not later than 120 days prior to the first anniversary
of the date of our proxy statement for the preceding year's annual meeting. In
addition, our Amended and Restated Certificate of Incorporation permits us to
issue additional shares of Class B common stock or "blank check" preferred
stock.
All amendments to our Amended and Restated By-Laws must be approved by
either the holders of a majority of the voting power of all outstanding capital
stock entitled to vote or by a majority of our board of directors.
These provisions reduce our vulnerability to an unsolicited acquisition
proposal and discourage certain tactics that may be used in proxy fights.
However, these provisions could have the effect of discouraging others from
making tender offers for shares of our common stock and, as a consequence, they
also may inhibit fluctuations in the market price of our common stock that could
result from actual or rumored takeover attempts. These provisions also may have
the effect of preventing changes in our management.
DELAWARE ANTI-TAKEOVER LAW
We are subject to Section 203 of the Delaware General Corporation Law. In
general, Section 203 prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years following the date the person became an interested
stockholder, unless the "business combination" or the transaction in which the
person became an "interested stockholder" is approved in a prescribed manner.
Generally, a "business combination" includes a merger, asset or stock sale or
other transaction resulting in a financial benefit to the "interested
stockholder." An "interested stockholder" is a person who, together with
affiliates and associates, owns 15% or more of a corporation's outstanding
voting stock, or was the owner of 15% or more of a corporation's outstanding
voting stock at any time within the prior three years, other than "interested
stockholders" prior to the time our common stock is quoted on Nasdaq. The
existence of this provision would be expected to have an anti-takeover effect
with respect to transactions not approved in advance by our board of directors,
including discouraging takeover attempts that might result in a premium over the
market price for the shares of our common stock held by stockholders.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the common stock is American Stock
Transfer & Trust Company.
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_________________________SHARES ELIGIBLE FOR FUTURE SALE________________________
Upon completion of this offering, we will have 9,000,000 outstanding shares
of Class A common stock and 41,000,000 shares of Class B common stock. The
9,000,000 shares sold in this offering will be freely tradable without
restriction under the Securities Act except for any shares purchased by our
affiliates. The remaining 41,000,000 shares of Class B common stock held by
existing stockholders are "restricted securities" as that term is defined in
Rule 144.
These restricted shares will become eligible for sale in the public market,
subject to the volume limitations under Rule 144 as described below, from time
to time following this offering, commencing in September 2000. All of these
restricted shares are subject to the contractual restrictions on sale described
below under the caption "Lock-up Agreements."
Rule 144 makes available an exemption from the registration requirements of
the Securities Act. In general, under Rule 144, a person (or persons whose
shares are aggregated) who owns shares that were acquired from the issuer or an
affiliate of the issuer at least one year prior to the proposed sale will be
entitled to sell in any three-month period a number of shares that does not
exceed the greater of:
o 1% of the then outstanding shares of the Class A common stock
(approximately 90,000 shares immediately after this offering); or
o the average weekly trading volume during the four calendar weeks
preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission.
Sales pursuant to Rule 144 are subject to certain requirements relating to
manner of sale, notice and availability of current public information about us.
A person (or persons whose shares are aggregated) who is not deemed to have been
an affiliate of ours at any time during the 90 days immediately preceding the
sale and who owns shares that were acquired from the issuer or an affiliate of
the issuer at least two years prior to the proposed sale is entitled to sell
such shares pursuant to Rule 144(k) without regard to the limitations described
above.
There has been no public market for our Class A common stock prior to this
offering and no assurance can be given that an active public market for our
Class A common stock will develop or be sustained after completion of this
offering. Sales of substantial amounts of Class A common stock, or the
perception that these sales could occur, could adversely affect the prevailing
market price of our Class A common stock and could impair our ability to raise
capital or effect acquisitions through the issuance of our Class A common stock.
We plan to register an additional 5,000,000 shares of our Class A common
stock under the Securities Act within 90 days after the closing of this offering
for use by us as consideration for future acquisitions. Upon registration, these
shares generally will be freely tradable after issuance, unless the resale
thereof is contractually restricted or unless the holders thereof are subject to
the restrictions on resale provided in Rule 145 under the Securities Act. Any
registered shares so issued will be subject to contractual restrictions that
will prevent the shares from being freely tradable during the 180-day period
after the date of this prospectus.
After this offering, we intend to initially register 20% of the total
outstanding shares of our common stock, or approximately 10,000,000 shares of
Class A common stock, for issuance upon exercise of options granted under our
stock option plan. 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. We also
plan to register the 425,000 shares of Class A common stock issuable under our
stock purchase plan. Once we register the shares issuable under these plans,
they can be sold in the public market upon issuance, subject to restrictions
under the securities laws applicable to resales by affiliates.
Cantor will have piggyback and demand registration rights to have
registered the shares of Class A common stock issued or issuable to it in
connection with the conversion of its Class B common stock and Martin Wygod will
have piggyback and demand registration rights to have registered the shares of
Class A common stock issued or issuable to him or his designees upon exercise of
the warrants. See "Relationship with Cantor--Registration Rights Agreement" and
"--Consulting Services."
LOCK-UP AGREEMENTS
We and our directors, executive officers and holders of our common stock
and securities convertible into or exercisable or exchangeable for common stock
issued prior to this offering or upon the consummation of the formation
transactions have agreed pursuant to certain "lock-up" agreements with the
underwriters that, subject to certain exceptions, 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 common stock or securities convertible
into or exercisable or exchangeable for common stock for a period of 180 days
after the date of this prospectus without the prior written consent of Warburg
Dillon Read LLC. Warburg Dillon Read LLC, in its sole discretion, may release
the shares subject to the lock-up agreements in whole or in part at any time
with or without notice. However, Warburg Dillon Read LLC has no current plan to
do so.
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__________________________________UNDERWRITING__________________________________
The selling stockholder and we have entered into an underwriting agreement
with the underwriters named below. Warburg Dillon Read LLC, Hambrecht and Quist
LLC and Thomas Weisel Partners LLC are acting as representatives of the
underwriters.
The underwriting agreement provides for the purchase of a specific number
of shares of Class A common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the commitment
of any other underwriter to purchase shares. Subject to the terms and conditions
of the underwriting agreement, each underwriter has severally agreed to purchase
the number of shares of Class A common stock set forth opposite its name below.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- ---- ----------------
<S> <C>
Warburg Dillon Read LLC................................... 3,195,000
Hambrecht & Quist LLC..................................... 1,952,500
Thomas Weisel Partners LLC................................ 1,952,500
Cantor Fitzgerald & Co.................................... 100,000
Banc of America Securities LLC............................ 100,000
BancBoston Robertson Stephens Inc......................... 100,000
CIBC Oppenheimer Corp..................................... 100,000
Credit Lyonnais Securities (USA), Inc..................... 100,000
Deutsche Bank Securities Inc.............................. 100,000
A.G. Edwards & Sons, Inc.................................. 100,000
Lazard Freres & Co. LLC................................... 100,000
Lehman Brothers Inc....................................... 100,000
PaineWebber Incorporated.................................. 100,000
Prudential Securities Incorporated........................ 100,000
Salomon Smith Barney Inc.................................. 100,000
Schroder & Co. Inc........................................ 100,000
SG Cowen Securities Corporation........................... 100,000
William Blair & Company, L.L.C............................ 50,000
Blaylock & Partners, L.P.................................. 50,000
Brean Murray & Co., Inc................................... 50,000
Dain Rauscher Wessels..................................... 50,000
First Union Securities, Inc............................... 50,000
U.S. Bancorp Piper Jaffray Inc............................ 50,000
Putnam, Lovell & Thornton Inc............................. 50,000
Raymond James & Associates, Inc........................... 50,000
C.E. Unterberg, Towbin.................................... 50,000
Volpe Brown Whelan & Company, LLC......................... 50,000
----------
Total........................................... 9,000,000
----------
----------
</TABLE>
This is a firm commitment underwriting. This means that the underwriters
have agreed to purchase all of the shares offered by this prospectus, other than
those covered by the over-allotment option described below, if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.
The representatives have advised us that the underwriters propose to offer
the shares directly to the public at the public offering price that appears on
the cover page of this prospectus. In addition, the representatives may offer
some of the shares to certain securities dealers at such price less a concession
of $0.86 per share. The underwriters may also allow to dealers, and such dealers
may reallow, a concession not
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in excess of $0.10 per share to certain other dealers. After the shares are
released for sale to the public, the representatives may change the offering
price and other selling terms at various times.
We and the selling stockholder have granted the underwriters an
over-allotment option. This option, which is exercisable for up to 30 days after
the date of this prospectus, permits the underwriters to purchase a maximum of
1,350,000 additional shares of our Class A common stock to cover
over-allotments. If the underwriters exercise all or part of this option, they
will purchase shares covered by the option at the public offering price that
appears on the cover page of this prospectus, less the underwriting discount. If
this option is exercised in full, the underwriters will purchase 1,000,000
shares from us and 350,000 shares from the selling stockholder. To the extent
that the underwriters exercise the over-allotment option in part and not in
full, the underwriters will purchase shares from us and the selling stockholder
on a pro rata basis. If this option is exercised in full, the total price to the
public will be $228 million, the total proceeds to us will be approximately
$154 million and the total proceeds to the selling stockholder will be
$74 million. The underwriters have severally agreed that, to the extent the
over-allotment option is exercised, each of the underwriters will purchase a
number of additional shares proportionate to its initial amount reflected in the
above table.
The following table provides information regarding the amount of the
discount to be paid to the underwriters by us and the selling stockholder:
<TABLE>
<CAPTION>
PAID BY US PAID BY THE SELLING STOCKHOLDER
--------------------------------------------- ---------------------------------------------
NO EXERCISE OF FULL EXERCISE OF NO EXERCISE OF FULL EXERCISE OF
OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Per Share................. $ 1.43 $ 1.43 $ 1.43 $ 1.43
Total..................... $ 8,580,000 $10,010,000 $ 4,290,000 $ 4,790,500
</TABLE>
We estimate that the total expenses of this offering, excluding the
underwriting discount, will be approximately $2,450,000.
We, Cantor and the selling stockholder have agreed to indemnify the
underwriters against specified liabilities, including liabilities under the
Securities Act.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners has been named as a lead or co-manager on 94 filed
public offerings of equity securities, of which 76 have been completed, and has
acted as a syndicate member in an additional 52 public offerings of equity
securities. Thomas Weisel Partners does not have any material relationship with
us or any of our officers, directors or other controlling persons, except with
respect to its contractual relationship with us pursuant to the underwriting
agreement entered into in connection with this offering.
We and our directors, executive officers and holders of our common stock
and securities convertible into or exercisable or exchangeable for common stock
issued prior to this offering, or upon consummation of the formation
transactions, have agreed pursuant to certain "lock-up" agreements with the
underwriters that, subject to certain exceptions, 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 common stock or securities convertible
into or exercisable or exchangeable for common stock for a period of 180 days
after the date of this prospectus without the prior written consent of Warburg
Dillon Read LLC. Warburg Dillon Read LLC, in its sole discretion, may release
the shares subject to the lock-up agreements in whole or in part at any time
with or without notice. However, Warburg Dillon Read LLC has no current plan to
do so.
At our request, the underwriters have reserved for sale at the initial
public offering price up to 440,000 shares of our Class A common stock for our
officers, directors, employees, clients, friends and related persons who express
an interest in purchasing these shares. The number of shares of our Class A
common stock available for sale to the general public will be reduced to the
extent these persons purchase these reserved shares. The underwriters will offer
any shares not so purchased by these persons to the general public on the same
basis as the other shares in this initial public offering.
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Cantor Fitzgerald & Co., a subsidiary of the selling stockholder and an
indirect subsidiary of Cantor, is participating in this offering as an
underwriter. Consequently, this offering is being conducted in accordance with
Rule 2720 of the Conduct of Rules of the NASD, which provides that, among other
things, when an NASD member participates in the underwriting of its subsidiary's
equity securities, the initial public offering price can be no higher than that
recommended by a "qualified independent underwriter" meeting certain standards.
In accordance with this requirement, Warburg Dillon Read LLC is serving in this
role and will recommend a price in compliance with the requirements of Rule
2720. In connection with this offering, Warburg Dillon Read LLC in its role as
qualified independent underwriter has performed due diligence investigations and
reviewed and participated in the preparation of this prospectus and the
registration statement of which this prospectus forms a part. In addition, the
underwriters may not confirm sales to any discretionary account without the
prior specific approval of the customer.
Prior to this offering, there has been no public market for our Class A
common stock. Consequently, the offering price for our Class A common stock has
been determined by negotiations between us, the selling stockholder and the
underwriters and is not necessarily related to our asset value, net worth or
other established criteria of value. The factors considered in these
negotiations, in addition to prevailing market conditions, included the history
of and prospects for the industry in which we compete, an assessment of our
management, our prospects, our capital structure and certain other factors as
were deemed relevant.
Rules of the Securities and Exchange Commission may limit the ability of
the underwriters to bid for or purchase shares before the distribution of the
shares is completed. However, the underwriters may engage in the following
activities in accordance with the rules:
o Stabilizing transactions--The representatives may make bids for or
purchases of the shares for the purpose of pegging, fixing or maintaining
the price of the shares, so long as stabilizing bids do not exceed a
specified maximum.
o Over-allotments and syndicate covering transactions--The underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. If a short position is
created in connection with this offering, the representatives may engage
in syndicate covering transactions by purchasing shares in the open
market. The representatives may also elect to reduce any short position
by exercising all or part of the over-allotment option.
o Penalty bids--If the representatives purchase shares in the open market
in a stabilizing transaction or syndicate covering transaction, they may
reclaim a selling concession from the underwriters and selling group
members who sold those shares as part of this offering.
Stabilization and syndicate covering transactions may cause the price of
the shares to be higher than it would be in the absence of these transactions.
The imposition of a penalty bid might also have an effect on the price of the
shares if it discourages resales of the shares.
Neither us nor the underwriters make any representation or prediction as to
the effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or otherwise.
If these transactions are commenced, they may be discontinued without notice at
any time.
For consulting services provided to us and Cantor by Martin J. Wygod in
connection with this offering, we have issued to Mr. Wygod or his designees
warrants to purchase an aggregate number of shares of our Class A common stock
equal to 1.5% of the aggregate number of shares of Class A common stock offered
by this prospectus (excluding any shares purchased pursuant to the underwriters'
over-allotment option). See "Relationship with Cantor--Consulting Services."
Under Conduct Rule 2710 of the National Association of Securities Dealers, Inc.,
these warrants may be deemed to constitute underwriting compensation by the
NASD. Pursuant to Conduct Rule 2710, Mr. Wygod has agreed that he will not sell,
transfer, assign, pledge or hypothecate the warrants or the underlying Class A
common stock for a period of one year following the effective date of this
offering, other than to certain permitted transferees who agree to be bound by
the lock-up for the remainder of the lock-up period.
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__________________________________LEGAL MATTERS_________________________________
Certain legal matters related to this offering will be passed upon for us
and the selling stockholder by Morgan, Lewis & Bockius LLP, New York, New York
and Stephen Merkel, our Senior Vice President, General Counsel and Secretary.
Upon the closing of this offering, we will grant to Mr. Merkel options to
acquire 100,000 shares of our Class A common stock. Certain legal matters
related to this offering will be passed upon for the underwriters by Dewey
Ballantine LLP, New York, New York.
_____________________________________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-1 with respect to
the Class A common stock being offered by this prospectus. 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 revelant exhibit,
to which reference is hereby made. 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, IL 60661, and 7 World Trade Center, 13th Floor, New York,
NY 10048. You may call the Securities and Exchange Commission at 1-800-SEC-0330
for further information about the operation of the public reference rooms.
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934 and, in accordance
therewith, will file periodic reports, proxy statements and other information
with the Securities and Exchange Commission. Upon approval of the Class A common
stock for quotation on the Nasdaq National Market, such reports, proxy and
information statements and other information may also be inspected at the
National Association of Securities Dealers, Inc., 1735 K Street, NW, Washington,
D.C. 20006.
The Securities and Exchange Commission maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission. The address of the Securities and Exchange Commission's Web site is
http://www.sec.gov.
69
<PAGE>
[This page intentionally left blank]
<PAGE>
INDEX TO FINANCIAL STATEMENTS
eSPEED, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................................................................ F-2
Consolidated Statement of Financial Condition............................................................... F-3
Consolidated Statement of Operations........................................................................ F-4
Consolidated Statement of Cash Flows........................................................................ F-5
Consolidated Statement of Changes in Stockholder's Equity................................................... F-6
Notes to Consolidated Financial Statements.................................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Stockholder of eSpeed, Inc.:
We have audited the accompanying consolidated statement of financial condition
of eSpeed, Inc. and Subsidiaries (the "Company") as of September 24, 1999, and
the related statements of operations, cash flows and changes in stockholder's
equity for the period from March 10, 1999 (date of commencement of operations)
to September 24, 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at September 24, 1999,
and the results of its operations and its cash flows for the period from
March 10, 1999 (date of commencement of operations) to September 24, 1999, in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
New York, New York
December 7, 1999
F-2
<PAGE>
eSPEED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 24, 1999
<TABLE>
<S> <C>
ASSETS
Cash............................................................................................... $ 200,000
-----------
Fixed assets, at cost.............................................................................. 10,973,124
Less accumulated depreciation and amortization..................................................... (2,021,726)
-----------
Fixed assets, net.................................................................................. 8,951,398
Prepaid expenses, principally computer maintenance agreements...................................... 1,646,866
-----------
Total assets................................................................................ $10,798,264
-----------
-----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Payable to affiliates, net......................................................................... $ 5,097,480
Accrued compensation and benefits.................................................................. 4,861,668
Accounts payable and accrued liabilities........................................................... 1,797,658
-----------
Total liabilities........................................................................... 11,756,806
-----------
Commitments and contingencies
Stockholder's equity:
Preferred stock, par value $0.01 per share; 50,000,000 shares authorized, no share issued or
outstanding................................................................................... --
Class A common stock, par value $0.01 per share; 200,000,000 shares authorized; 3,000,000 shares
issued and outstanding........................................................................ 30,000
Class B common stock, par value $0.01 per share; 100,000,000 shares authorized, 41,000,000 shares
issued and outstanding........................................................................ 410,000
Additional paid in capital......................................................................... 5,215,299
Accumulated deficit................................................................................ (6,613,841)
-----------
Total stockholder's equity......................................................................... (958,542)
-----------
Total liabilities and stockholder's equity......................................................... $10,798,264
-----------
-----------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
eSPEED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MARCH 10, 1999
(DATE OF COMMENCEMENT OF OPERATIONS) TO SEPTEMBER 24, 1999
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL ADJUSTMENTS(1) (UNAUDITED)
------------ -------------- -----------
<S> <C> <C> <C>
Revenues:
Transaction revenues............................................ $ 15,034,597 $ -- $15,034,597
System services fees from affiliates............................ 9,104,872 9,104,872
------------ ---------- -----------
Total revenues............................................. 24,139,469 24,139,469
------------ ---------- -----------
Expenses:
Compensation and employee benefits.............................. 14,704,940 14,704,940
Occupancy and equipment......................................... 6,632,436 6,632,436
Professional and consulting fees................................ 3,615,348 3,615,348
Communications and client networks.............................. 2,445,792 2,445,792
Transaction services fees paid to affiliates.................... 1,337,282 1,337,282
Administrative fees paid to affiliates.......................... 1,067,200 1,067,200
Other........................................................... 1,122,119 1,122,119
------------ ---------- -----------
Total expenses............................................. 30,925,117 30,925,117
------------ ---------- -----------
Loss before benefit for income taxes.............................. (6,785,648) -- (6,785,648)
------------ ---------- -----------
Income tax benefit:
Federal......................................................... -- --
State and local................................................. 171,807 (171,807) --
------------ ---------- -----------
Total tax benefit.......................................... 171,807 (171,807) --
------------ ---------- -----------
Net loss................................................... $ (6,613,841) $ (171,807) $(6,785,648)
------------ ---------- -----------
------------ ---------- -----------
Per share data:
Basic and diluted net loss per share............................ $ (0.15)
Shares of common stock outstanding.............................. 44,000,000
</TABLE>
- ------------------
(1) Pro forma income tax is computed as if the Company was subject to income tax
as a corporation. As such, the tax benefit for state and local tax which is
available to the Company as a division of CFS is no longer available as the
Company would be in a net operating loss position.
See notes to consolidated financial statements.
F-4
<PAGE>
eSPEED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MARCH 10, 1999 (DATE OF COMMENCEMENT OF OPERATIONS) TO
SEPTEMBER 24, 1999
<TABLE>
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................................... $(6,613,841)
Non-cash item included in net loss:
Depreciation and amortization................................................... 2,021,726
Increase in operating asset:
Prepaid expenses................................................................ (444,643)
Increase in operating liabilities:
Accrued compensation and benefits............................................... 3,370,832
Payable to affiliate, net....................................................... 5,097,480
Accounts payable and accrued liabilities........................................ 171,010
-----------
Cash provided by operating activities......................................... 3,602,564
-----------
Cash flows from investing activities:
Acquisitions of fixed assets....................................................... (1,999,851)
Capitalization of software development costs....................................... (1,602,713)
-----------
(3,602,564)
-----------
Cash flows from financing activities:
Capital contribution............................................................... 200,000
-----------
Net increase in cash................................................................. 200,000
Cash balance, beginning of period.................................................... --
-----------
Cash balance, end of period.......................................................... $ 200,000
-----------
-----------
Supplemental disclosure of non-cash financing activities:
Effective March 10, 1999, Cantor Fitzgerald Securities made 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
----------
----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
eSPEED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE PERIOD FROM MARCH 10, 1999 (DATE OF COMMENCEMENT OF OPERATIONS) TO
SEPTEMBER 24, 1999
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------------ PAID IN ACCUMULATED STOCKHOLDER'S
CLASS A CLASS B CAPITAL DEFICIT EQUITY
---------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, March 10, 1999................... $ -- $ -- $ -- $ -- $ --
Cash capital contribution............... 1 199,999 200,000
Non-cash capital contribution........... 439,999 5,015,300 5,455,299
Conversion of Class B common stock to
Class A common stock................. 30,000 (30,000) --
Net loss................................ (6,613,841) (6,613,841)
---------- ---------- ---------- ----------- -----------
Balance, September 24, 1999............... $ 30,000 $ 410,000 $5,215,299 $(6,613,841) $ (958,542)
---------- ---------- ---------- ----------- -----------
---------- ---------- ---------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
eSPEED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM MARCH 10, 1999 (DATE OF COMMENCEMENT OF OPERATIONS)
TO SEPTEMBER 24, 1999
1. ORGANIZATION AND FORMATION TRANSACTION
eSpeed, Inc. (eSpeed or, together with its wholly owned subsidiaries, the
Company) is a wholly 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 CFS and its subsidiaries, Cantor). eSpeed commenced operations on
March 10, 1999 as a division of CFS. eSpeed is a Delaware corporation that was
formed on June 3, 1999. In September 1999, the Company's Board of Directors
changed eSpeed's fiscal year from the last Friday of March to December 31. The
Company engages in the business of operating interactive electronic marketplaces
designed to enable market participants to trade securities and other products
more efficiently and at a lower cost than traditional trading environments
permit.
The Company filed a registration statement on Form S-1 with the Securities
and Exchange Commission for a public offering (the Offering) of Class A common
stock on September 21, 1999. The number of shares to be offered and the initial
offering price will be determined at a future date. On or prior to the effective
date of the Offering, and upon obtaining various regulatory approvals, the
formation transactions will be consummated and, as such, the accompanying
financial statements reflect such transactions and the activities of eSpeed
while operating as a division of CFS as the historical basis financial
statements of eSpeed. The formation transactions include an initial capital
contribution of net assets of $5,455,299. This contribution includes 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 Cantor 43,999,900 shares of Class B common stock.
Immediately thereafter, Cantor converted 3,000,000 shares of Class B common
stock to 3,000,000 shares of Class A common stock which will be sold in the
Offering.
Upon completion of the Offering, the capitalization of eSpeed will consist
of 200,000,000 shares of authorized Class A common stock, $.01 par value,
100,000,000 shares of Class B common stock, $.01 par value, and 50,000,000
shares of preferred stock, $.01 par value. The rights of holders of shares of
common stock will be substantially identical, except that holders of Class B
common stock will be entitled to 10 votes per share, while holders of Class A
common stock will be entitled to one vote per share. Additionally, each share of
Class B common stock will be convertible at any time, at the option of the
holder, into one share of Class A common stock. In connection with the Offering,
the Company issued warrants for 135,000 shares of Class A common stock. These
warrants have a five-year term and are exercisable commencing on the first
anniversary of the date of issuance at a price per share equal to the initial
public offering price. These warrants are dilutive in nature.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES--The preparation of the consolidated financial statements
in conformity with generally accepted accounting principles 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. 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.
FIXED ASSETS--Fixed assets, which comprise computer and communication
equipment and software, are depreciated over their estimated economic useful
lives of three to five years using an accelerated method. Upon commencement of
operations, the Company adopted Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." Accordingly,
internal and external
F-7
<PAGE>
eSPEED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM MARCH 10, 1999 (DATE OF COMMENCEMENT OF OPERATIONS)
TO SEPTEMBER 24, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
direct costs of application development and of obtaining software for internal
use are capitalized and amortized over their estimated economic useful lives of
three years on a straight line basis.
NEW ACCOUNTING PRONOUNCEMENTS--In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("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. eSpeed has evaluated the impact of adopting SFAS
No. 133 and believes it will not have a material effect on its financial
statements.
3. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 24,
1999
-------------
<S> <C>
Computer and communication equipment................................. $ 8,324,521
Software, including software development costs....................... 2,648,603
-------------
10,973,124
Less accumulated depreciation and amortization....................... (2,021,726)
-------------
Fixed assets, net.................................................... $ 8,951,398
-------------
-------------
</TABLE>
4. INCOME TAXES
The Company has 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 their
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 eSpeed will be used as a reduction of
the taxable income of CFS and, as such, eSpeed will be reimbursed for such tax
and has recognized the benefit as an offset to payable to affiliates. Upon
completion of the Offering, the stand-alone operations of eSpeed will be subject
to income tax as a corporation.
5. COMMITMENTS AND CONTINGENCIES
LEASES--Under an administrative services agreement, eSpeed is obligated for
minimum rental payments under various non-cancelable leases with third parties,
principally for office space and computer equipment, expiring at various dates
through 2004 as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD ENDING DECEMBER 31:
- ----------------------------------
<S> <C>
1999................................................................. $ 1,078,351
2000................................................................. 4,627,449
2001................................................................. 4,388,356
2002................................................................. 4,388,356
2003................................................................. 4,308,659
Thereafter........................................................... 24,569,975
-------------
Total................................................................ $ 43,361,146
-------------
-------------
</TABLE>
Rental expense under the above and under all other operating leases
amounted to $2,450,446 for the period ended September 24, 1999.
F-8
<PAGE>
eSPEED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM MARCH 10, 1999 (DATE OF COMMENCEMENT OF OPERATIONS)
TO SEPTEMBER 24, 1999
5. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
LEGAL MATTERS--On May 5, 1999, Cantor, The Board of Trade of the City of
Chicago, The New York Mercantile Exchange and The Chicago Mercantile Exchange,
were sued by Electronic Trading Systems, Inc. in the United States District
Court for the Northern District of Texas (Dallas Division) for alleged
infringement of Wagner United States patent 4,903,201, entitled "Automated
Futures Trade Exchange." The patent relates to a system and method for
implementing an electronic, computer-automated futures exchange. On July 1,
1999, Cantor answered the complaint, asserting, among other things, that the
'201 patent was invalid and not infringed by Cantor and that Cantor was not the
real party in interest. Although not identified by the complaint, Cantor
believes that the system being charged with infringement is a version of the
electronic trading system used by the Cantor Exchange which Cantor is
contributing to the Company in connection with this offering. If the plaintiff
is successful in the lawsuit, the Company may be required to obtain a license to
develop and market one or more of its services, to cease developing or marketing
such services or to redesign such services. There can be no assurances that the
Company would be able to obtain such licenses or that the Company would be able
to obtain them at commercially reasonable rates, or if unable to obtain licenses
that the Company would be able to redesign its services to avoid infringement.
Cantor owns U.S. patent 5,905,974, entitled "Automated Auction Protocol
Processor." On August 10, 1999, Liberty Brokerage Investment Corporation filed
an action for declaratory judgment in the United States District Court for the
District of Delaware against Cantor, claiming that the '974 patent was invalid,
unenforceable and not infringed by Liberty. On October 12, 1999, Cantor moved
(1) to dismiss all claims against Cantor for failure to state a claim upon which
relief can be granted and (2) to dismiss the action against Cantor for lack of
an actual case or controversy within the meaning of the law. On November 22,
1999, the Court granted the motion to dismiss the action as against Cantor
Fitzgerald Securities, and denied the motion to dismiss the action as against
Cantor and its affiliate CFPH, LLC. The Company cannot be assured that the
Company or Cantor will bring a claim for infringement of the '974 patent against
Liberty, that the '974 patent will be found to be valid and/or enforceable or
that Liberty will be found to have infringed the '974 patent. The Company will
assume responsibility for defending this suit on behalf of Cantor and its
affiliates.
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 CFI, and Rodney
Fisher are limited partners of Cantor Fitzgerald, L.P.
In April 1998, Cantor Fitzgerald, L.P. 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 Cantor Fitzgerald, L.P. with respect to the electronic
trading system mentioned above. The complaint further alleges that Market Data
Corporation and Chicago Board Brokerage tortiously interfered with Cantor'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 Cantor Fitzgerald, L.P. and (2) a declaration that Cantor Fitzgerald, L.P.
breached the implied covenant of good faith and fair dealing. Cantor has agreed
to indemnify the Company for any liabilities that the Company incurs with
respect to any current or future litigation involving (1) Market Data
Corporation, (2) Iris Cantor, (3) CFI or (4) Rodney Fisher.
On July 12, 1998, the Court of Chancery held Cantor Fitzgerald, L.P. was
likely to succeed on the merits of its claims that Iris Cantor, CFI and Rodney
Fisher had breached their partnership obligations to
F-9
<PAGE>
eSPEED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM MARCH 10, 1999 (DATE OF COMMENCEMENT OF OPERATIONS)
TO SEPTEMBER 24, 1999
5. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Cantor but had not shown that the defendants' conduct was likely to cause
imminent irreparable harm between the date of the opinion and a final hearing.
The Court of Chancery, therefore, denied Cantor Fitzgerald, L.P.'s request for
preliminary injunctive relief and scheduled a final trial. Cantor Fitzgerald,
L.P. settled its dispute with Chicago Board Brokerage in April 1999 and Chicago
Board Brokerage subsequently announced it was disbanding its operations. The
remaining parties have completed the final trial and the Court of Chancery's
decision is expected following post-trial oral arguments on December 7, 1999.
The Company believes Market Data Corporation's technology for electronic trading
systems will be of substantial assistance to competitors in the wholesale market
if provided to them.
Two related actions are pending in New York. In a case pending in the
Supreme Court of New York, New York County, plaintiff Cantor Fitzgerald, L.P.
alleges, among other things, that defendants Market Data Corporation, CFI, Iris
Cantor and Rodney Fisher misused confidential information of Cantor Fitzgerald,
L.P. 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 Cantor Fitzgerald, L.P. 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 has been pursued during the pendency of the court proceedings in
Delaware.
In addition to the allegations set forth in the pending lawsuits, Cantor
has received correspondence from the attorneys representing Iris Cantor, CFI,
Market Data Corporation and Rodney Fisher in the proceedings in Delaware,
expressing a purported concern that Cantor and/or certain of its partners may be
in breach of Cantor's partnership agreement (including, among other things, the
partnership agreement's provisions relating to competition with the partnership)
and the general partnership agreement of Cantor Fitzgerald Securities with
respect to the Company's initial public offering. Generally, these attorneys
have alleged that various purported conflicts of interest will exist arising
from the fact that certain of the Company's directors and officers will
simultaneously hold positions with Cantor Fitzgerald, L.P. Moreover, these
attorneys have asserted that the Company's business plan may not be consistent
with certain purported rights of Market Data Corporation (including purported
intellectual property rights) and other parties and they have requested more
information regarding the Company's initial public offering.
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.
Cantor and Reuters are parties to a confidential arbitration under the
auspices of the American Arbitration Association in New York, New York, which
began in June 1995 with respect to a January 1993 agreement among Reuters,
Cantor and Market Data Corporation. Cantor has agreed to indemnify the Company
against all claims asserted by Reuters or Market Data Corporation relating to
this agreement or arising out of the arbitration.
The agreement executed in 1993 involves, among other things, the delivery
by Cantor of certain market brokerage data arising out of non-United States
government bond and U.S. municipal bond interdealer brokerage transactions for
transmittal over Reuters' network. The agreement also contemplated the joint
development by Cantor and Reuters of an electronic trading system for certain
transactions in non-United States government bonds. Cantor and Reuters did not
develop this electronic trading system. In the arbitration, Reuters alleges that
Cantor materially breached the agreement primarily by failing to provide non-
screen, voice brokerage data concerning non-United States government bonds and
U.S. municipal bonds that Reuters contends are subject to the agreement and
fraud. Reuters is seeking to recover from Cantor amounts representing past
payments for market data, the reimbursement of attorneys' fees and other
damages. Cantor
F-10
<PAGE>
eSPEED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM MARCH 10, 1999 (DATE OF COMMENCEMENT OF OPERATIONS)
TO SEPTEMBER 24, 1999
5. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
has denied Reuters' allegations that there has been any material breach of this
agreement or fraud, and has asserted a breach of contract claim and various
other counterclaims against Reuters, including claims for Reuters' failure since
February 1997 to pay any of the money due Cantor for data under this agreement.
In February 1997, Reuters unilaterally ceased making such payments to Cantor in
connection with the dispute and in November 1999 stopped distributing Cantor's
market data that was provided to Reuters.
Reuters has recently asserted that, in the event it prevails in the
arbitration, it may be entitled to receive from Cantor, and possibly from the
Company, revenues in respect of the sale, license, dissemination, delivery or
other distribution of the data subject to this agreement. Reuters has also
asserted that, if it loses the arbitration, it could still, at the conclusion of
the arbitration, try to cure its multiple breaches and seek to have the
agreement remain in effect. Cantor believes that it did not materially breach
this agreement and believes that Reuters would not be entitled to (1) any of the
Company's revenues, even if Reuters prevailed in the arbitration or (2) cure its
own breaches and cause the agreement to remain in effect, in the event Cantor
prevails. As stated above, Reuters ceased making payments under this agreement
in 1997 and has ceased distributing the data covered by the agreement. Cantor
has notified Reuters that Cantor has terminated the agreement based on Reuters'
material breaches.
Market Data Corporation recently made an application for an order directing
(1) Reuters to pay Cantor for providing the data, (2) Cantor to continue to
provide Market Data Corporation with data for transmission to Reuters, and (3)
Reuters to accept and distribute the data over Reuters' network. That
application has been denied on the basis of Market Data Corporation's failure to
demonstrate that monetary damages would be an inadequate remedy for any damages
it may suffer as a result of Reuters' and Cantor's actions. Even if any relief
were granted to Market Data Corporation, the Company does not believe it would
have a material adverse effect on its business.
Recently, the panel in the arbitration rendered a decision interpreting
certain portions of the agreement in a manner contrary to that which Cantor
believes was intended and concluded that Cantor had failed to deliver certain
non-screen, voice brokerage data to Reuters that the panel concluded was
required under the agreement. Cantor maintains that it has not materially
breached the agreement, that any breach was cured by Cantor, that the agreement
cannot be terminated at Reuter's insistence, that Reuters has underpaid Cantor
and that, by ceasing to make payments since 1997 and discontinuing the
distribution of Cantor's data, Reuters has materially breached the agreement.
The panel has not resolved these issues and the arbitration is still continuing.
The Company cannot give any assurance that Market Data Corporation and/or
Reuters will not seek to assert claims relating to the Company's activities
against the Company or Cantor, either in the arbitration or in another
proceeding. In any event, Cantor has agreed to indemnify the Company with
respect to any claims asserted by Reuters or Market Data Corporation relating to
the agreement or arising out of the arbitration.
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 Company generates its revenues by providing
securities trading activities to, and by executing transactions with,
institutional customers of CFS and certain of its affiliates. Revenues for these
services are transaction based. As a result, the Company's revenues could vary
based on the transaction volume of financial markets around the world.
F-11
<PAGE>
eSPEED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM MARCH 10, 1999 (DATE OF COMMENCEMENT OF OPERATIONS)
TO SEPTEMBER 24, 1999
6. RELATED PARTY TRANSACTIONS
The Company operates interactive electronic marketplaces. For providing
these services, the Company receives a percentage of the transaction revenues
ranging from 2.5% to 100% from Cantor's marketplace businesses, depending on the
type of electronic services provided for the transaction. Revenues from such
transactions during the period ended September 24, 1999 totaled $15,034,597.
On certain transactions (those where the Company receives 100% of the
commission revenue share), CFS or its affiliate provides the Company with
services for which CFS or its affiliate is paid a fee of 20% or 35% of the
transaction revenue earned on the transaction. Charges to the Company from CFS
and its affiliates for such transaction services during the period ended
September 24, 1999 totaled $1,337,282.
The Company also provides network, data center and server administration
support and other technology services to CFS and its affiliates. The Company
charges CFS and its affiliates for these services commensurate with its costs of
providing these services. System services fees received from CFS and its
affiliates during the period ended September 24, 1999 totaled $9,104,872.
Under an administrative services agreement, CFS and its affiliates provide
various administrative services to the Company, including accounting, tax, sales
and marketing, legal, and facilities management. The Company is required to
reimburse CFS or its affiliate 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 month's
prior notice by either the Company or CFS and its affiliates. The Company
incurred administrative fees for such services during the period ended
September 24, 1999 totaling $1,067,200.
7. REGULATORY CAPITAL REQUIREMENTS
Through its broker-dealer subsidiaries, eSpeed Government Securities, Inc.
and eSpeed Securities, Inc., the Company will be subject to Securities and
Exchange Commission broker-dealer regulation under Section 15C and Rule 17a-5,
respectively, of the Securities Exchange Act of 1934. As such, at current
business levels these subsidiaries would be required to maintain minimum net
capital, as defined, of $25,000 and $5,000, respectively. In addition, eSpeed's
broker-dealer subsidiary in the United Kingdom, eSpeed Securities International
Limited, expects to be subject to the rules of the Securities and Futures
Authority, which requires minimum net capital of approximately $50,000.
8. EMPLOYEE BENEFIT PLAN
Employees of eSpeed are eligible to participate in the Cantor Fitzgerald
Deferral Plan (the Plan), which is a deferred-salary plan sponsored by CFLP,
whereby an eligible employee may elect to defer a portion of his salary by
directing eSpeed to contribute to the Plan. The Plan is available to all
employees of eSpeed meeting certain eligibility requirements and is subject to
the provisions of the Employee Retirement Income Security Act of 1974. While the
Company has the option to contribute to the Plan on behalf of its participants,
no such contribution was made during the period ended September 24, 1999. The
administration of the Plan is performed by CFLP. The Company pays its
proportionate share of such administrative costs under the Administrative
Services Agreement.
9. LONG-TERM INCENTIVE PLAN
The Company intends to adopt a Long-Term Incentive Plan (the Plan) which
will provide 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
F-12
<PAGE>
eSPEED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM MARCH 10, 1999 (DATE OF COMMENCEMENT OF OPERATIONS)
TO SEPTEMBER 24, 1999
9. LONG-TERM INCENTIVE PLAN--(CONTINUED)
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 will administer the
Plan and will generally be empowered to select the individuals who will receive
the awards and the terms and conditions of those awards.
The Plan also authorizes the automatic grant of NQSOs to non-employee
directors upon initial election as a director and additional grants at each
annual meeting thereafter. These options will have an exercise price equal to
the fair market value of the Class A common stock on the date of grant.
In connection with the Offering, the Company also intends to issue
6,300,000 stock options to certain officers, directors and employees at an
exercise price equal to the initial public offering price. Additionally, the
Company anticipates granting approximately 300,000 stock options to certain
employees of Cantor at an exercise price equal to the initial public offering
price. This will result in an estimated, one time non-cash charge to the Company
of $4,000,000.
10. STOCK PURCHASE PLAN
The Company intends to adopt a Stock Purchase Plan to permit eligible
employees, including employees of Cantor, to purchase shares of eSpeed common
stock at a discount. At the end of each purchase period, as defined, accumulated
payroll deductions will be 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.
11. SEGMENT AND GEOGRAPHIC DATA
SEGMENT INFORMATION--The Company currently operates its business in one
segment, that of operating interactive electronic marketplaces for the trading
of securities and other financial products. This segment comprised approximately
62% of revenues for the period ended September 24, 1999. The remainder of the
Company's revenues were derived from system services fees received from CFS and
its affiliates.
GEOGRAPHIC INFORMATION--The Company operates in the U.S., 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
F-13
<PAGE>
eSPEED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM MARCH 10, 1999 (DATE OF COMMENCEMENT OF OPERATIONS)
TO SEPTEMBER 24, 1999
11. SEGMENT AND GEOGRAPHIC DATA--(CONTINUED)
that follows, in management's judgement, provides a reasonable representation of
the activities of each region as of and for the period ended September 24, 1999:
<TABLE>
<S> <C>
Transaction revenues:
Europe....................................................................... $ 4,210,154
Asia......................................................................... 333,695
-----------
Total non-U.S............................................................. 4,543,849
U.S.......................................................................... 10,490,748
-----------
Total..................................................................... $15,034,597
-----------
-----------
</TABLE>
<TABLE>
<S> <C>
Average long-lived assets:
Europe....................................................................... $ 2,716,108
Asia......................................................................... 1,019,523
-----------
Total non-U.S............................................................. 3,735,631
U.S.......................................................................... 4,613,005
-----------
Total..................................................................... $ 8,348,636
-----------
-----------
</TABLE>
12. QUARTERLY INFORMATION (UNAUDITED)
The unaudited quarterly results of operations of the Company for 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. Results of any
period are not necessarily indicative of results for a full year.
<TABLE>
<CAPTION>
MARCH 10,
1999
(DATE OF
COMMENCEMENT
OF
OPERATIONS)
TO
MARCH 26,
1999 JUNE 25, 1999 SEPT. 24, 1999
------------ ------------- --------------
<S> <C> <C> <C>
Total revenues..................................................... $1,948,250 $10,569,356 $ 11,621,863
---------- ----------- ------------
Total expenses..................................................... 2,486,758 13,321,989 15,116,370
---------- ----------- ------------
Loss before provision for income taxes............................. (538,508) (2,752,633) (3,494,507)
Income tax benefit................................................. 13,470 68,849 89,488
---------- ----------- ------------
Net loss........................................................... $ (525,038) $(2,683,784) $ (3,405,019)
---------- ----------- ------------
---------- ----------- ------------
</TABLE>
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<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED 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 HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF SUCH
INFORMATION.
9,000,000 Shares
[LOGO]
Class A Common Stock
THROUGH AND INCLUDING JANUARY 4, 2000 (THE 25TH DAY AFTER COMMENCEMENT OF THIS
OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK
OFFERED BY THIS PROSPECTUS, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY
BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
WARBURG DILLON READ LLC
HAMBRECHT & QUIST
THOMAS WEISEL PARTNERS LLC
CANTOR FITZGERALD & CO.
