<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to __________________
Commission file number 0-28191
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eSpeed, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-4063515
---------------------------------- ---------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) No.)
One World Trade Center, 103rd Floor
----------------------------------------
(Address of Principal Executive Offices)
New York, New York 10048
----------------------------------------
(City, State, Zip Code)
(212) 938-3773
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(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at July 27, 2000
----- ----------------------------
Class A Common Stock, par value $.01 per share 16,160,238
Class B Common Stock, par value $.01 per share 35,685,581
<PAGE>
Part I-FINANCIAL INFORMATION
ITEM 1. Financial Statements Page
Consolidated Statements of Financial Condition-- 1
June 30, 2000 (unaudited) and December 31, 1999
Consolidated Statements of Operations (unaudited)-Three Months 2
Ended June 30, 2000 and June 25, 1999
Consolidated Statements of Operations (unaudited)- Six Months 3
Ended June 30, 2000 and Period Ended June 25, 1999
Consolidated Statements of Cash Flows (unaudited)-Six Months 4
Ended June 30, 2000 and Period Ended June 25, 1999
Notes to Consolidated Financial Statements (unaudited) 5
ITEM 2. Management's Discussion and Analysis of Financial Condition 13
and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 23
PART II--OTHER INFORMATION
ITEM 1. Legal Proceedings 24
ITEM 2. Changes in Securities and Use of Proceeds 24
ITEM 6. Exhibits and Reports on Form 8-K 25
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
eSpeed, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
As of June 30, 2000 and December 31, 1999
1
<TABLE>
<CAPTION>
Assets
June 30, December 31,
2000 1999
(unaudited)
--------------- -------------
<S> <C> <C>
Cash ........................................................... $ 564,995 $ 201,001
Securities purchased under agreements to resell ................ 147,141,828 134,644,521
------------- -------------
Fixed assets, at cost .......................................... 22,108,664 12,556,627
Less accumulated depreciation and amortization ................. (5,305,775) (3,086,555)
------------- -------------
Fixed assets, net .............................................. 16,802,889 9,470,072
Prepaid expenses, principally computer maintenance agreements... 1,933,053 11,495
Other assets ................................................... 833,679 --
------------- -------------
Total assets .......................................... $ 167,276,444 $ 144,327,089
============= =============
Liabilities and Stockholders' Equity
Liabilities:
Payable to affiliates, net ..................................... $ 8,428,877 $ 6,743,929
Accounts payable and accrued liabilities ....................... 12,915,537 2,071,347
------------- -------------
Total liabilities .............................................. 21,344,414 8,815,276
------------- -------------
Stockholders' Equity:
Preferred stock, par value $.01 per share; 50,000,000 shares
authorized, no shares issued or outstanding .................... -- --
Class A common stock, par value $.01 per share; 200,000,000
shares authorized; 16,103,490 and 10,350,000 shares issued
and outstanding ................................................ 161,035 103,500
Class B common stock, par value $.01 per share; 100,000,000
shares authorized; 35,685,581 and 40,650,000 shares issued and
outstanding .................................................... 356,856 406,500
Additional paid in capital ..................................... 201,954,111 147,588,726
Accumulated deficit ............................................ (56,539,972) (12,586,913)
------------- -------------
Total stockholders' equity ........................... 145,932,030 135,511,813
------------- -------------
Total liabilities and stockholders' equity ..................... $ 167,276,444 $ 144,327,089
============= =============
</TABLE>
See notes to consolidated financial statements
1
<PAGE>
eSpeed, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months ended June 30, 2000 and June 25, 1999 (unaudited)
<TABLE>
<CAPTION>
For the three For the three
months ended months ended
June 30, June 25,
Revenues: 2000 1999
------------ ------------
<S> <C> <C>
Transaction revenues ..................................................... $ 24,471,969 $ 6,430,778
Interest income .......................................................... 2,085,751 --
System services fees from affiliates ..................................... 3,100,997 4,138,578
------------ ------------
Total revenues ........................................................... 29,658,717 10,569,356
------------ ------------
Expenses:
Compensation and employee benefits ....................................... 14,440,660 6,403,446
Occupancy and equipment .................................................. 4,955,490 2,854,350
Professional and consulting fees ......................................... 3,299,605 1,596,097
Communications and client networks ....................................... 1,009,638 1,103,081
Fulfillment service fees ................................................. 7,156,955 403,715
Administrative fees paid to affiliates ................................... 1,708,428 461,266
Marketing ................................................................ 3,670,492 --
Non-cash business partner warrants ....................................... 29,805,305 --
Other .................................................................... 2,531,786 500,034
------------ ------------
Total expenses ........................................................... 68,578,359 13,321,989
------------ ------------
Loss before provision (benefit) for income taxes ......................... (38,919,642) (2,752,633)
------------ ------------
Provision (benefit) for income taxes:
Federal .................................................................. --
------------
State and local .......................................................... 107,500 (68,849)
------------ ------------
Total tax provision/(benefit) ............................................ 107,500 (68,849)
------------ ------------
Net loss ................................................................. $(39,027,142) $ (2,683,784)
============ ============
Per share data
Basic and diluted net loss per share..................................... $ (.76) $ (.06)
Weighted average shares of common stock outstanding ...................... 51,225,449 44,000,000
</TABLE>
See notes to consolidated financial statements
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<PAGE>
eSpeed, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
for the six months ended June 30, 2000 and the period from March 10, 1999
(date of commencement of operations) to June 25, 1999 (unaudited)
<TABLE>
<CAPTION>
For the six For the period
months ended ended
June 30, June 25,
------------ ------------
Revenues: 2000 1999
<S> <C> <C>
Transaction revenues ..................................................... $ 43,718,365 $ 7,551,312
Interest income .......................................................... 3,928,525 --
System services fees from affiliates ..................................... 6,262,054 4,966,294
------------ ------------
Total revenues ........................................................... 53,908,944 12,517,606
------------ ------------
Expenses:
Compensation and employee benefits ....................................... 25,778,446 7,671,284
Occupancy and equipment .................................................. 9,655,239 3,530,373
Professional and consulting fees ......................................... 5,758,693 1,782,082
Communications and client networks ....................................... 1,849,332 1,324,240
Fulfillment service fees ................................................. 12,232,756 430,532
Administrative fees paid to affiliates ................................... 3,312,579 554,967
Marketing ................................................................ 4,799,565 --
Non-cash business partner warrants ....................................... 29,805,305 --
Other .................................................................... 4,470,088 515,269
------------ ------------
Total expenses ........................................................... 97,662,003 15,808,747
------------ ------------
Loss before provision (benefit) for income taxes ......................... (43,753,059) (3,291,141)
------------ ------------
Provision (benefit) for income taxes:
Federal .................................................................. -- --
State and local .......................................................... 200,000 (82,319)
------------ ------------
Total tax provision/(benefit) ............................................ 200,000 (82,319)
------------ ------------
Net loss................................................................. $(43,953,059) $ (3,208,822)
============ ============
Per share data
Basic and diluted net loss per share..................................... $ (.86) $ (.07)
Weighted average shares of common stock outstanding ...................... 51,112,724 44,000,000
</TABLE>
See notes to consolidated financial statements
-3-
<PAGE>
eSpeed, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended June 30, 2000 and the period from March 10, 1999
(date of commencement of operations) to June 25, 1999 (unaudited)
<TABLE>
<CAPTION>
For the six For the
months ended period ended
June 30, June 25,
Cash flows from operating activities: 2000 1999
------------ ------------
<S> <C> <C>
Net loss ...................................................... $(43,953,059) $ (3,208,822)
Non-cash items included in net loss:
Depreciation and amortization ........................... 1,537,736 1,046,350
Issuance of non-cash business partner warrants .......... 29,805,305 --
Increase in operating assets:
Prepaid expenses ........................................ (1,921,558) (1,150,582)
Other assets ............................................ (833,679) --
Increase (decrease) in operating liabilities:
Payable to affiliates, net .............................. 1,684,948 2,624,593
Accounts payable and accrued liabilities ...................... 10,412,161 1,840,302
------------ ------------
Cash (used in) provided by operating activities..... (3,268,146) 1,151,841
------------ ------------
Cash flows from investing activities:
Increase in securities purchased under agreements to resell.... (12,497,307) --
Purchases of fixed assets ..................................... (8,870,553) (1,151,841)
------------ ------------
Cash used in investing activities ....................... (21,367,860) (1,151,841)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of securities .......................... 25,000,000 --
Proceeds from capital contributions ..... -- 25,000
------------ ------------
Cash provided by financing activities ................... 25,000,000 25,000
------------ ------------
Net increase in cash .......................................... 363,994 25,000
------------ ------------
Cash balance, beginning of period ............................. 201,001 --
------------ ------------
Cash balance, end of period ................................... $ 564,995 $ 25,000
============ ============
</TABLE>
See notes to consolidated financial statements
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<PAGE>
eSpeed, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Introduction and Basis of Presentation
eSpeed, Inc. ("eSpeed" or, together with its wholly owned subsidiaries,
the "Company") is a leading provider of interactive business-to-business
electronic marketplace solutions designed to enable market participants to trade
financial and non-financial products more efficiently and at a lower cost than
traditional trading environments permit. eSpeed commenced operations on March
10, 1999 as a division of Cantor Fitzgerald Securities ("CFS"). eSpeed is a
Delaware corporation that was incorporated on June 3, 1999. In December 1999,
the Company completed its initial public offering (the "Offering"). eSpeed is a
majority owned subsidiary of CFS, which in turn is a 99.5% owned subsidiary of
Cantor Fitzgerald, L.P. ("CFLP", or together with its subsidiaries, "Cantor").
The accompanying financial statements include activities of the Company while
operating as a division of CFS from March 10, 1999 to the date of the Offering.
The Company's financial statements have been prepared in accordance
with the rules and regulations of the Securities Exchange Commission (the "SEC")
and reflect all normal recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented. Pursuant to such rules and regulations, certain footnote
disclosures, which are normally required under generally accepted accounting
principles, have been omitted. It is recommended that these consolidated
financial statements be read in conjunction with the audited consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the period ended December 31, 1999. The Consolidated Statement of Financial
Condition at December 31, 1999 was derived from audited financial statements.
The results of operations for any interim period are not necessarily indicative
of results for the full year.
2. Fixed Assets
<TABLE>
<CAPTION>
Fixed assets consist of the following: June 30, 2000 December 31, 1999
------------------ --------------------
<S> <C> <C>
Computer and communication equipment $ 15,449,910 $ 9,544,265
Software, including software development costs 6,658,754 3,012,362
------------------ --------------------
22,108,664 12,556,627
Less accumulated depreciation and amortization (5,305,775) (3,086,555)
------------------ --------------------
Fixed assets, net $ 16,802,889 $ 9,470,072
================== ====================
</TABLE>
3. Income Taxes
Since the date of the Offering, the Company has been subject to income
tax as a corporation. The Company has available $3,785,007 of United States net
operating losses to offset future United States source income. This net
operating loss can be carried forward through 2015. In addition, the Company,
through its wholly-owned subsidiary, eSpeed International Limited, has net
operating losses of $14,149,798 which will be available on an indefinite
carry-forward basis to offset future income in the United Kingdom.
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<PAGE>
eSpeed, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. Commitments and Contingencies
Legal Matters: In February 1998, Market Data Corporation
contracted with Chicago Board Brokerage (a company controlled by the Chicago
Board of Trade and Prebon Yamane) to provide the technology for an electronic
trading system to compete with Cantor's United States Treasury brokerage
business. Market Data Corporation is controlled by Iris Cantor and Rodney
Fisher, her nephew-in-law. Iris Cantor, a company under the control of Iris
Cantor referred to herein as Cantor Fitzgerald Incorporated ("CFI") and Rodney
Fisher are limited partners of CFLP.
In April 1998, CFLP filed a complaint in the Delaware Court of
Chancery against Market Data Corporation, Iris Cantor, CFI, Rodney Fisher and
Chicago Board Brokerage seeking an injunction and other remedies. The complaint
alleges that Iris Cantor, CFI and Rodney Fisher violated certain duties,
including fiduciary duties under Cantor's partnership agreement, due to their
competition with CFLP with respect to the electronic trading system mentioned
above. 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 CFLP and (2) a declaration that
CFLP breached the implied covenant of good faith and fair dealing. Cantor has
agreed to indemnify the Company for any liabilities that are incurred with
respect to any current or future litigation involving (1) Market Data
Corporation, (2) Iris Cantor, (3) CFI or (4) Rodney Fisher.
CFLP settled its dispute with Chicago Board Brokerage in April 1999,
and Chicago Board Brokerage subsequently announced it was disbanding its
operations. On March 13, 2000, the Delaware Court of Chancery ruled in favor of
CFLP, finding that Iris Cantor, CFI and Rodney Fisher had breached the
Partnership Agreement of CFLP, and that Market Data Corporation had aided and
abetted that breach. The court awarded CFLP declaratory judgment relief and
court costs and attorneys' fees. Counsel for the defendants have expressed their
intentions to appeal this result. The defendants moved for reargument with
respect to the award of fees and costs. CFLP believes Market Data Corporation's
technology for electronic trading systems would be of substantial assistance to
competitors in the wholesale market if provided to them. Final judgment is
expected to be entered shortly. Counsel for the defendants have expressed their
intentions to appeal this result (a previous appeal was dismissed as premature).
A hearing on issues relating to CFLP's final relief took place on June 14, 2000.
The parties are awaiting the entry by the Court of a final declaratory judgment
and/or award of monetary damages.
Two related actions are pending in New York. In a case pending in the
Supreme Court of New York, New York County, plaintiff CFLP alleges, among other
things, that defendants Market Data Corporation, CFI, Iris Cantor and Rodney
Fisher misused confidential information of CFLP in connection with the
above-mentioned provision of technology to Chicago Board Brokerage. In a case
pending in the United States District Court for the Southern District of New
York, CFI and Iris Cantor allege, among other things, that certain senior
officers of CFLP breached fiduciary duties they owed to CFI. The allegations in
this lawsuit relate to several of the same events underlying the court
proceedings in Delaware.
Neither of these two cases had been pursued prior to the March 13, 2000
decision in the court proceedings in Delaware. On May 15, 2000, the senior
officers of CFLP who are
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<PAGE>
eSpeed, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
defendants in the federal action in New York moved to dismiss the complaint
against them on several grounds, including inter alia that the March 13, 2000
decision from the Delaware Court of Chancery collaterally estops Iris Cantor and
CFI from relitigating matters that were adjudicated against them in Delaware.
Iris Cantor and CFI filed papers opposing the motion to dismiss on June 5, 2000,
and the defendants filed a reply on June 15, 2000.
On May 16, 2000, CFI filed an action in Delaware Superior Court, New
Castle County, against CFLP and CF Group Management, Inc. ("CFGM") seeking
payment of $40 million allegedly due pursuant to a settlement agreement in an
earlier litigation between the parties. The complaint alleges that CFI is
entitled to a one-time $40 million payment upon "an initial public offering of
CFLP or of a successor to a material portion of the assets and business of
CFLP..." CFI alleges that the initial public offering of eSpeed on December 10,
1999 triggers the payment obligation under the settlement agreement.
The attorneys for CFI, Iris Cantor and Rod Fisher contended that
conditions placed on their clients' acceptance of an Offer to Exchange, dated
May 8, 2000, pursuant to which certain partnership units in CFLP could be
exchanged for "e-units", which are entitled to receive distributions of eSpeed
stock from CFLP on certain future dates, subject to certain conditions (the
"Exchange Offer"), constituted a breach of fiduciary duty owed their clients by
CFGM. The attorneys for CFI and Iris Cantor (the "CFI Defendants") also
contended that the Exchange Offer violated CFGM's and CFLP's duties under a
settlement agreement in an earlier litigation between the parties and under
CFLP's partnership agreement. On June 12, 2000, CFLP and CFGM filed a lawsuit in
the Delaware Court of Chancery against Iris Cantor, in her individual and
trustee capacities, CFI and Rodney Fisher, seeking a declaratory judgment that,
with respect to both the Exchange Offer and amendments to the partnership
agreement effected in connection therewith, CFGM has not breached its fiduciary
duty, and CFGM and CFLP have not otherwise violated Delaware law. CFGM and CFLP
also requested that the Court declare that the amendments are valid. On July 18,
2000, the CFI Defendants and Mr. Fisher filed their respective answers,
affirmative defenses, counterclaims and third-party claims, and named Howard
Lutnick as a third-party defendant. In addition, Mr. Fisher has named eSpeed as
a third-party defendant and contends that it aided and abetted breaches of
fiduciary duty by CFGM and Howard Lutnick. The CFI Defendants and Mr. Fisher
seek, among other things, CFGM's removal as Managing General Partner of CFLP and
a declaration that the amendments are null and void.
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.
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, CFS and CFPH, LLC, claiming that the
`974 patent was invalid, unenforceable and not infringed by Liberty. On October
12, 1999, Cantor, CFS and CFPH, LLC moved (1) to dismiss all claims against CFS
for failure to state a
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<PAGE>
eSpeed, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
claim upon which relief can be granted and (2) to dismiss the action as against
Cantor, CFS 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 CFS, and denied the motion to dismiss
the action as against Cantor and CFPH, LLC. On January 5, 2000, Liberty filed an
Amended Complaint naming eSpeed as a defendant. On January 19, 2000, Cantor,
CFPH, LLC and eSpeed filed a Second Renewed Motion to Dismiss the action. On
March 8, 2000, oral arguments took place on the Second Renewed Motion to
Dismiss, which the court denied on June 13, 2000. On July 15, 2000, the parties
to the action filed a Joint Stipulated Dismissal with Prejudice for the
declaratory judgment action brought by Liberty. It is expected that the Court
will enter the order of dismissal by the end of August 2000. Upon entry of the
order, the litigation will be terminated.
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.
5. Related Party Transactions
The Company had overnight securities purchased under agreements to
resell ("Resale Agreements", or "Reverse Repurchase Agreements") with CFS
totaling $147,141,828 and $134,644,521, including accrued interest, at June 30,
2000 and December 31, 1999, respectively. Under the terms of the agreement, the
securities collateralizing the Resale Agreements are held under a custodial
arrangement with a third party bank.
Under a Joint Services Agreement between the Company and Cantor, the
Company earns transaction revenues equal to a percentage of Cantor's commission
revenues on customer transactions for services provided by the Company. The
percentage of the transaction revenues ranges from 2.5% to 100%, depending on
the type of electronic services provided for the transaction. Revenues from such
transactions during the three months ended June 30, 2000 and June 25, 1999
totaled $24,471,969 and $6,430,778, respectively. Revenues from such
transactions for the six months ended June 30, 1999 and for the period March 10,
1999 to June 25, 1999 totaled $43,718,365 and $7,551,312, respectively.
On certain transactions (those in which the Company receives 100% of
the commission revenue share), Cantor provides the Company with fulfillment
services for which Cantor is paid a fee of 20% or 35% of the transaction
revenues earned on the transaction. Charges to the Company from Cantor for such
fulfillment services during the three months ended June 30, 2000 and June 25,
1999 totaled $7,156,955 and $403,715, respectively. Charges to the Company from
Cantor for such fulfillment services during the six months ended June 30, 2000
and for the period March 10, 1999 to June 25, 1999 totaled $12,232,756 and
$430,532, respectively.
Under an Administrative Services Agreement between the Company and
Cantor, the Company provides network, data center and server administration
support and other technology services to Cantor. The Company charges Cantor for
these services commensurate with its costs of providing these services. System
services fees earned during the three months ended June 30, 2000 and June 25,
1999 totaled $3,100,997 and $4,138,578, respectively. System services fees
earned during the six months ended June 30, 2000 and for the period March 31,
1999 to June 25, 1999 totaled $6,262,054 and $4,966,294, respectively.
-8-
<PAGE>
eSpeed, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Under an Administrative Services Agreement, Cantor provides various
administrative services to the Company, including accounting, tax, sales and
marketing, legal and facilities management. The Company is required to reimburse
Cantor for the cost of providing such services. The costs represent the direct
and indirect costs of providing such services and are determined based upon the
time incurred by the individual performing such services. Management believes
that this allocation methodology is reasonable. The Administrative Services
Agreement has a three-year term, which will renew automatically for successive
one-year terms unless cancelled upon six months' prior notice by either the
Company or Cantor. The Company incurred administrative fees for such services
during the three months ended June 30, 2000 and June 25, 1999 totaling
$1,708,428 and $461,266, respectively. The Company incurred administrative fees
for such services during the six months ended June 30, 2000 and during the
period March 10, 1999 to June 25, 1999 totaling $3,312,579 and $554,967,
respectively.
6. Regulatory Capital Requirements
Through its subsidiary, eSpeed Government Securities, Inc., effective
December 2, 1999, the Company is subject to SEC broker-dealer regulation under
Section 15C of the Securities Exchange Act of 1934, which requires the
maintenance of minimum liquid capital, as defined. At June 30, 2000, eSpeed
Government Securities, Inc.'s liquid capital of $13,913,900 was in excess of
minimum requirements by $13,888,900.
Additionally, the Company's subsidiary, eSpeed Securities, Inc.,
effective December 1, 1999, is subject to SEC broker-dealer regulation under
Rule 17a-5 of the Securities Exchange Act of 1934, which requires the
maintenance of minimum net capital and requires that the ratio of aggregate
indebtedness to net capital, both as defined, shall not exceed 8 to 1. At June
30, 2000, eSpeed Securities, Inc. had net capital of $1,914,868, which was
$1,768,381 in excess of its required net capital of $146,487, and eSpeed
Securities, Inc.'s net capital ratio was 0.61 to 1.
7. Options and Warrants
During the six months ended June 30, 2000, the Company issued 450,126
options to employees. Of these options, 325,126 vest ratably over the four
successive anniversaries of the grant date and 125,000 vest ratably over the
five successive anniversaries of the grant date. The options had an estimated
fair value of $12,333,153 as of the grant date. No options or warrants were
exercised or expired and 99,137 options were forfeited during the six months
ended June 30, 2000.
Had the Company accounted for its options granted in its stock-based
compensation plan based on the fair value of awards at grant date in a manner
consistent with the methodology of SFAS 123, the Company's net loss and loss per
common share for the three months ended June 30, 2000 would have increased by
$6,047,830 and $0.12, respectively. The Company's net loss and net loss per
common share for the six months ended June 30, 2000 would have increased by
$11,677,284 and $0.23, respectively. As of June 30, 2000, the weighted average
remaining contractual life of options and warrants outstanding was approximately
8 3/4 years; and options for 530,001 shares were currently exercisable.
As discussed in Note 9 below, on June 5, 2000, the Company issued
warrants exercisable for the purchase of up to 1,333,332 shares of Class A
common stock. The warrants have a per share
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<PAGE>
eSpeed, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
exercise price of $35.203125, a ten year term and are exercisable during the
last 4 1/2 years of the term, subject to acceleration under certain prescribed
circumstances.
8. Segment and Geographic Data
Segment Information: The Company currently operates its business in one
segment, that of operating interactive electronic business-to-business vertical
marketplaces for the trading of financial and non-financial products. This
segment comprised approximately 83% of revenues for the three months ended June
30, 2000 and 61% of revenues for the three months ended June 25, 1999. This
segment comprised approximately 81% of revenues for the six months ended June
30, 2000 and 60% of revenues for the period from March 10, 1999 to June 25,
1999. The remainder of the Company's revenues was derived from system services
fees from Cantor and interest income.
Geographic Information: The Company operates in the Americas, Europe and
Asia. Revenue attribution for purposes of preparing geographic data is
principally based upon the marketplace where the financial product is traded,
which, as a result of regulatory jurisdiction constraints in most circumstances,
is also representative of the location of the client generating the transaction
resulting in commissionable revenue. The information that follows, in
management's judgment, provides a reasonable representation of the activities of
each region as of and for the periods indicated.
<TABLE>
<CAPTION>
Period from
Three months Three months Six months ended March 10,
Transaction ended June 30, ended June 25, June 30, 1999 to June
Revenues: 2000 1999 2000 25, 1999
--------------------------- -------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C>
Europe $ 3,984,135 $ 1,837,281 $ 7,126,980 $ 2,222,728
Asia 360,585 152,343 675,785 184,522
--------------- --------------- ---------------- --------------
Total Non-Americas 4,344,720 1,989,624 7,802,765 2,407,250
Americas 20,127,250 4,441,154 35,915,601 5,144,062
--------------- --------------- ---------------- --------------
Total $ 24,471,970 $ 6,430,778 $ 43,718,366 $ 7,551,312
=============== =============== ================ ==============
Average long-lived assets
June 30, 2000 Dec. 31, 1999
---------------- --------------
Europe $ 1,906,464 $ 2,257,914
Asia 832,057 925,790
---------------- --------------
Total Non-Americas 2,738,521 3,183,704
Americas 10,397,982 5,236,613
---------------- --------------
Total $ 13,136,503 $ 8,420,317
================ ==============
</TABLE>
-10-
<PAGE>
eSpeed, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
9. Subscription Agreement
On April 26, 2000, the Company entered into a Subscription Agreement
(each a "Subscription Agreement" and together, the "Subscription Agreements")
with each of The Williams Companies, Inc. ("Williams") and Dynegy, Inc.
("Dynegy") for the purchase by each of a Unit consisting of (i) 789,071 shares
(the "Shares") of the Company's Class A Common Stock, par value $0.01 per share
(the "Class A common stock"), and (ii) warrants (the "Warrants") exercisable for
the purchase of up to 666,666 shares of Class A common stock, for an aggregate
purchase price for each Unit of $25,000,000. The Warrants have a per share
exercise price of $35.203125, a ten year term and are exercisable during the
last 4 1/2 years of the term, subject to acceleration under certain prescribed
circumstances intended to provide incentives to Williams and Dynegy to invest in
four Qualified Verticals as described below. The purchase and sale of the Units
was consummated (the "Closing") in June 2000. The Shares will not be
transferable prior to the first anniversary of the Closing. As required by
Generally Accepted Accounting Principles, the Company recorded a one-time,
non-cash charge of $29,805,305 at the time of the Closing to reflect the cost of
the Warrants.
Each of Williams and Dynegy agreed in its Subscription Agreement that,
subject to the satisfaction of certain conditions, it will invest $2,500,000 in
at least four entities (the "Qualified Verticals") to be formed by the Company
and Cantor within 12 months of the Closing (subject to extension for a period
not to exceed six months under certain prescribed circumstances, the "Investment
Period"). It is expected that each Qualified Vertical will be jointly owned by
industry market participants, the Company and Cantor and will establish a new
vertical electronic and telephonic marketplace with the Company in which such
Qualified Vertical will broker and possibly clear transactions for the industry
market participants and other clients. It is anticipated that the first
Qualified Vertical to be so formed will be an electronic and telephonic
marketplace for North American wholesale transactions in natural gas,
electricity, coal and sulfur dioxide and nitrogen dioxide emissions. Products
that may be traded on other Qualified Verticals include natural gas liquids,
petrochemicals, crude oil and bandwidth. Each of Williams and Dynegy will not
necessarily invest in the same Qualified Verticals as the other. The
Subscription Agreements further provide that, in connection with up to four
additional Qualified Verticals (the "Additional Investment Right"), Williams
and, subject to certain limitations, Dynegy, will be entitled to invest
$25,000,000 in shares of Class A common stock at a 10% discount to the average
trading price for the 10 trading days preceding the date of such party's
investment in such new Qualified Vertical, or, under certain circumstances, the
public announcement of the formation of such Qualified Vertical. The Additional
Investment Right is subject to stockholder approval if required, and, in such
event, the Company has agreed to submit for a vote of its common stockholders,
at its next annual meeting of stockholders, the approval of the issuance of any
such shares and Cantor has agreed to vote the shares of common stock of the
Company beneficially owned by it in favor of such issuance. Any shares of Class
A common stock purchased pursuant to the Additional Investment Right will not be
transferable prior to the first anniversary of issuance.
Contemporaneously with the execution of the Subscription Agreements,
the Company entered into a stock purchase agreement with Cantor providing, as
amended, for the purchase by the Company from Cantor (i) at the Closing, of
789,071 shares of Class A common stock of the Company, representing half of the
number of shares of the Class A common stock being sold by the Company to
Williams and
-11-
<PAGE>
eSpeed, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Dynegy pursuant to the Subscription Agreements, for a purchase price of
$25,000,000 and (ii) of half of the number of shares purchased by Williams and
Dynegy, in the aggregate, each time an Additional Investment Right is exercised
for the same purchase price per share as is paid by Williams and Dynegy at the
time.
10. Subsequent Event
On July 21, 2000, Cantor Fitzgerald Partners, an affiliate of eSpeed,
purchased the U.S. municipal bond brokerage business and certain other assets of
Municipal Partners, Inc. for approximately $1,500,000 and eSpeed issued to
Municipal Partners Inc.'s shareholders 28,374 shares of the Company's Class A
common stock with a closing date value of $1,500,000. Although the purchased
assets are owned by Cantor Fitzgerald Partners, eSpeed is entitled to 100% of
the revenues generated from any fully electronic transaction effected in a
marketplace utilizing the eSpeed(sm) system by its affiliates pursuant to a
Joint Services Agreement, as amended, among eSpeed and its affiliates,
including Cantor Fitzgerald Partners. In addition, in order to provide
incentives to promote the use of the eSpeed(sm) trading platform in connection
with the purchased business, eSpeed sold 28,374 shares of its Class A common
stock to certain employees in exchange for interest-bearing promissory notes
that are due July 21, 2010 (the "Pledged Shares"). The Pledged Shares may be
redeemed, at the option of eSpeed, by cancellation of the related note(s) if
eSpeed does not receive $3,000,000 in electronic transaction revenues generated
by Cantor's municipal bond brokerage business for a 12-month period within
three years of July 21, 2000.
-12-
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information in this report contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Such
statements are based upon current expectations that involve risks and
uncertainties. Any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. For example,
words such as "may," "will," "should," "estimates," "predicts," "potential,"
"continue," "strategy," "believes," "anticipates," "plans," "expects,"
"intends" and similar expressions are intended to identify forward-looking
statements. Our actual results and the timing of certain events may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause or contribute to such a discrepancy include, but are
not limited to, those discussed under "Risk Factors" in our Annual Report on
Form 10-K for the year ended December 31, 1999. The following discussion is
qualified in its entirety by, and should be read in conjunction with, the more
detailed information set forth in our financial statements and the notes
thereto appearing elsewhere in this filing.
Overview
eSpeed, Inc. was incorporated on June 3, 1999 as a Delaware corporation. Our
wholly owned subsidiaries are eSpeed Securities, Inc., eSpeed Government
Securities, Inc., eSpeed Markets, Inc. and eSpeed International Limited. Prior
to our initial public offering, we were a wholly-owned subsidiary of, and we
conducted our operations as a division of, Cantor Fitzgerald Securities, which
in turn is a 99.5%-owned subsidiary of Cantor Fitzgerald, L.P. (collectively
with its affiliates, "Cantor"). We commenced operations as a division of
Cantor on March 10, 1999, the date the first fully electronic transaction
using our eSpeed(sm) system was executed. Cantor has been developing systems
to promote fully electronic marketplaces since the early 1990s. Since January
1996, Cantor has used our eSpeed(sm) system internally to conduct electronic
trading.
Concurrent with our initial public offering in December 1999, Cantor
contributed to us, and we acquired from Cantor, certain of our assets. These
assets primarily consist of proprietary software, network distribution
systems, technologies and other related contractual rights that comprise our
eSpeed(sm) system.
-13-
<PAGE>
Results of Operations
For the Three Months Ended June 30, 2000 and June 25, 1999
Revenues Three months ended
--------------------------------
June 30, 2000 June 25, 1999
------------- --------------
Transaction Revenues:
Fully electronic transactions ............ $20,413,009 $ 1,153,471
Voice-assisted brokerage transactions .... 3,370,116 3,900,345
Screen assisted open outcry transactions.. 688,844 1,376,962
----------- -----------
Total transaction revenues ............... 24,471,969 6,430,778
Interest income .......................... 2,085,751 --
System services fees ..................... 3,100,997 4,138,578
----------- -----------
Total revenues ............... $29,658,717 $10,569,356
=========== ===========
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 the Joint Services Agreement, we own
and operate the electronic trading systems and are responsible for providing
electronic brokerage services, and Cantor provides voice-assisted brokerage
services, fulfillment services, such as clearance and settlement, and related
services, such as credit risk management services, oversight of client
suitability and regulatory compliance, sales positioning of products and other
services customary to marketplace intermediary operations. Under this
agreement, Cantor and we have agreed to share revenues derived from
transactions effected in the marketplaces in which we collaborate and other
specified markets.
Generally, 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 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
-14-
<PAGE>
case of a transaction described in (1), Cantor receives the aggregate
transaction revenues and pays to us a service fee equal to 7% of the
transaction revenues, and, in the case of a transaction described in (2),
we 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 fulfillment 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 convert new clients to our
eSpeed(sm) system. 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
lines between us and the client. Other than Cantor, no client of ours accounted
for more than 10% of our transaction revenues for the three and six months ended
June 30, 2000.
For the three months ended June 30, 2000, we earned transaction revenues
of $24,471,969 as compared to $6,430,778 for the three months ended June 25,
1999, an increase of 281%. The growth in revenues for the three-month period was
attributable to the continued roll out of electronic marketplaces and an
increase in the number of clients electronically trading through our eSpeed(sm)
system. As of June 30, 2000, we had converted 32 out of over 40 marketplaces to
our eSpeed(sm) system. In addition, revenues for the three months ended June 30,
2000 were positively impacted by the high level of volatility in the fixed
income markets.
It is anticipated that as new marketplaces are converted to our
eSpeed(sm) system and additional clients utilize the eSpeed(sm) system, we will
increase income generated outside of fixed income and other financial service
marketplaces. Our revenues are currently highly dependent on transaction volume
in the fixed income markets globally. Accordingly, among other things, equity
market volatility, economic and political conditions in the United States and
elsewhere in the world, concerns over inflation and wavering
institutional/consumer confidence levels, the availability of cash for
investment by mutual funds and other wholesale and retail investors, rising
interest rates, fluctuating exchange rates, legislative and regulatory changes
and currency values may have an impact on our volume of transactions.
The financial markets in which we operate are generally affected by
seasonality. Traditionally, the financial markets around the world experience
lower volume during the summer and at the end of the year due to a general slow
down in the business environment, and therefore, transaction volume levels may
decrease during those periods.
-15-
<PAGE>
Interest Income
The net proceeds of our initial public offering on December 10, 1999 and
the net proceeds received from the sale of Class A common stock to Dynegy and
Williams, net of operating expenses paid, have been invested by us in reverse
repurchase agreements which are fully collateralized by U.S. Government
securities held in a custodial account at The Chase Manhattan Bank. For the
three months ended June 30, 2000, these investments generated interest income of
$2,085,751, at an average interest rate of 6.1%. We had no interest income for
the three months ended June 25, 1999.
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 Cantor's 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 business. System services fees from Cantor for the three months
ended June 30, 2000 were $3,100,997, and represented 10% of total revenues for
the period. This compares with system services fees for the three months ended
June 25, 1999 of $4,138,578, which represented 39% of total revenues for the
period. System services fees have decreased 25% for the period primarily as a
result of a decrease in Cantor's brokerage personnel. As a percentage of
revenues, the fees have decreased as a result of our increased transaction
revenues in the three months ended June 30, 2000.
Expenses Three months ended
---------------------------------
June 30, 2000 June 25, 1999
------------- ---------------
Compensation and employee benefits... $14,440,660 $ 6,403,446
Occupancy and equipment ............. 4,955,490 2,854,350
Professional and consulting fees .... 3,299,605 1,596,097
Communications and client networks... 1,009,638 1,103,081
Fulfillment services fees ........... 7,156,955 403,715
Administrative fees ................. 1,708,428 461,266
Marketing ........................... 3,670,492 --
Non-cash business partner warrants... 29,805,305 --
Other ............................... 2,531,786 500,034
----------- -----------
Total expenses .............. $68,578,359 $13,321,989
=========== ===========
-16-
<PAGE>
Compensation and employee benefits
At June 30, 2000, we had approximately 460 professionals, as compared to
approximately 265 employees at June 25, 1999. Substantially all of our employees
are full time employees located predominantly in New York and London.
Compensation costs include salaries, bonus accruals, payroll taxes and costs of
employer-provided medical benefits for our employees. For the quarter ended June
30, 2000, we had compensation costs of $14,440,660 as compared to $6,403,446 for
the three months ended June 25, 1999, an increase of 126%. This increase in
compensation expense was attributable to the increased number of professionals
we employed during the period ended June 30, 2000. During the quarter ended June
30, 2000, we continued to hire additional technical, sales and marketing,
product development and administrative personnel, including personnel from
Cantor, in order to expand our business. At present, we believe that we have
established a core level of personnel to develop new electronic marketplaces and
maintain the existing infrastructure we have established. Accordingly, while we
will continue to add personnel, we currently envision our compensation costs
increasing at more modest rates.
Occupancy and equipment
Occupancy and equipment costs were $4,955,490 for the three months ended
June 30, 2000 as compared to $2,854,350 for the three months ended June 25,
1999, an increase of 74%. The increase resulted principally from the continued
growth in scope of our business and increased personnel. Occupancy and equipment
costs included 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. 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 Cantor. Our equipment expenses should increase as we continue to
invest in technology and related equipment. Occupancy expenditures are comprised
principally of our rent and facilities costs of our New York and London offices
and are expected to increase as we acquire more space from Cantor and others to
accommodate our growth in headcount and technology.
Professional and consulting fees
Professional and consulting fees were $3,299,605 for the three months
ended June 30, 2000 as compared to $1,596,097 for the three months ended June
25, 1999, an increase of 106%. This increase resulted principally from fees
related to new business development and strategic initiatives. Professional and
consulting fees consisted primarily of legal fees and consultant costs paid to
outside computer professionals who performed specialized enhancement activities
for us. We currently have approximately 20 contracted consultants and additional
outside services providers working under short-term contracts costing
approximately $500,000 per month in the aggregate.
Communications and client networks
Communications costs were $1,009,638 for the three months ended June 30,
2000, an 8% decrease from communication costs of $1,103,081 for the three months
ended June 25, 1999. Communications costs included 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. The slight reduction in costs was attributable to a general
decrease in communication costs partially offset by the costs associated with
increase in the breadth of our network. We expect such costs to increase as
-17-
<PAGE>
we continue to expand into new marketplaces and geographic locations and
establish additional communication links with clients.
Fulfillment services fees
Under the Joint Service Agreement, we are required to pay to Cantor a
fulfillment services fee of 20%, 35% or 55%, depending on the type of
transaction, of commissions paid by clients related to fully electronic
transactions. Such costs were $7,156,955 for the three months ended June 30,
2000, an increase of 1666% as compared to $403,715 for the three months ended
June 25, 1999, principally as a result of our increased fully electronic
revenues. 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 will likely increase commensurately with our revenues.
Administrative fees
Under an Administrative Services Agreement with Cantor, 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 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 March 10, 1999. Administrative fees were $1,708,428 for the
three months ended June 30, 2000 as compared to administrative fees of $461,266
for the three months ended June 25, 1999, an increase of 270%, principally as a
result of our increased business activity. 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.
Marketing expenses
During the three months ended June 30, 2000, we launched a national
advertising campaign. We incurred marketing expenses of $3,670,492 during the
quarter, as compared to nominal marketing expenses during the three-month period
ended June 25, 1999. We do not anticipate that our marketing expenses will
significantly change over the foreseeable future.
Other expenses
Other expenses for the three months ended June 30, 2000 were $2,531,786
as compared to other expenses of $500,034 for the three months ended June 25,
1999, an increase of 406%, principally as a result of our increased business
activity. These expenses consisted primarily of recruitment fees, travel,
promotional and entertainment expenditures. We do not expect that these expenses
will significantly change over the foreseeable future.
-18-
<PAGE>
Non-cash Business Partner Warrants
In June 2000, Dynegy and Williams each purchased 789,071 shares of our
Class A common stock for a purchase price of $25,000,000, for a total of
$50,000,000. Pursuant to a stock purchase agreement with Cantor, we purchased
from Cantor 789,071 shares of our Class A common stock for a purchase price of
$25,000,000. As a result, our capital increased by a net amount of $25,000,000.
Additionally, each of Dynegy and Williams received warrants to purchase an
additional 666,666 shares of Class A common stock at an exercise price of
$35.203125 per share. As a result of the issuance of the warrants, we recorded a
non-cash, non-operating charge against earnings of $29,805,305 to reflect the
cost of the warrants.
Net Loss
Excluding a non-cash charge for business partner warrants issued to
Dynegy and Williams in June 2000, our net loss was $9,221,837 for the three
months ended June 30, 2000. Including the non-cash charge, we incurred a net
loss of $39,027,142 for the three months ended June 30, 2000. The business
partner warrants are discussed in more detail in Note 9 to the Notes to
Consolidated Financial Statements (unaudited) contained elsewhere in this
report. Other than the non-cash charge, the losses primarily resulted from
expenditures on our technology and infrastructure incurred in building our
revenue base. We expect that we will continue to incur losses and generate
negative cash flow from operations for 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.
For the Six Months Ended June 30, 2000 and the Period March 10, 1999
to June 25, 1999
<TABLE>
<CAPTION>
Revenues Six months ended Period March 10,
June 30, 1999 to June 25,
2000 1999
---------------- ----------------
Transaction Revenues:
<S> <C> <C>
Fully electronic transactions .............. $34,915,297 $ 1,230,092
Voice-assisted brokerage transactions ...... 7,231,356 4,564,942
Screen assisted open outcry transactions ... 1,571,712 1,756,278
----------- -----------
Total transaction revenues.. 43,718,365 7,551,312
Interest income ...................................... 3,928,525 --
System services fees ................................. 6,262,054 4,966,294
----------- -----------
Total revenues ....................................... $53,908,944 $12,517,606
=========== ===========
</TABLE>
-19-
<PAGE>
Transaction Revenues
For the six months ended June 30, 2000, we earned $43,718,365 in
transaction revenues as compared to $7,551,312 for the period March 10, 1999 to
June 25, 1999, a 479% increase. The growth in these revenues was attributable to
the continued roll out of electronic marketplaces and an increase in the number
of clients electronically trading through our eSpeed(sm) system. As of June 30,
2000, we had converted 32 out of over 40 marketplaces to our eSpeed(sm) system.
In addition, revenues for the six months ended June 30, 2000 were positively
impacted by the high level of volatility in the fixed income markets.
Interest Income
The net proceeds of our initial public offering on December 10, 1999 and
the net proceeds received from the sale of Class A common stock to Dynegy and
Williams, net of operating expenses paid, have been invested by us in reverse
repurchase agreements which are fully collateralized by U.S. Government
securities held in a custodial account at The Chase Manhattan Bank. For the six
months ended June 30, 2000, these investments generated interest income of
$3,928,525, at an average interest rate of 5.9%. We had no interest income for
the period March 10, 1999 to June 25, 1999.
System Services Fees
System services fees from Cantor for the six months ended June 30, 2000
were $6,262,054, and represented 12% of total revenues for the period. This
compares with system services fees for the period from March 10, 1999 to June
25, 1999 of $4,966,294, which represented 40% of total revenues for the period.
This increase of 26% in system services fees principally reflected the fact that
the 1999 period was shorter than the current period. As a percent of revenues,
the system services fees decreased as a result of our increased transaction
revenues for the six months ended June 30, 2000.
<TABLE>
<CAPTION>
Expenses Six months Period from March
ended 10, 1999 to June 25,
June 30, 2000 1999
------------------- ----------------------
<S> <C> <C>
Compensation and employee benefits... $25,778,446 $ 7,671,284
Occupancy and equipment ............. 9,655,239 3,530,373
Professional and consulting fees .... 5,758,693 1,782,082
Communications and client networks... 1,849,332 1,324,240
Fulfillment services fees ........... 12,232,756 430,532
Administrative fees ................. 3,312,579 554,967
Marketing ........................... 4,799,565 --
Non-cash business partner warrants... 29,805,305 --
Other ............................... 4,470,088 515,269
----------- -----------
Total expenses ...................... $97,662,003 $15,808,747
=========== ===========
</TABLE>
-20-
<PAGE>
Compensation and employee benefits
At June 30, 2000, we had approximately 460 professionals, as compared to
approximately 265 employees at June 25, 1999. Substantially all of our employees
are full time employees located predominantly in New York and London.
Compensation costs include salaries, bonus accruals, payroll taxes and costs of
employer-provided medical benefits for our employees. For the six months ended
June 30, 2000, our compensation costs were $25,778,446 as compared to
compensation costs of $7,671,284 for the period from March 10, 1999 to June 25,
1999, a 236% increase. This increase in compensation expense was attributable to
the increased number of professionals we employed during the six-month period
ended June 30, 2000. During the six months ended June 30, 2000, we continued to
hire additional technical, sales and marketing, product development and
administrative personnel, including personnel from Cantor, in order to expand
our business.
Occupancy and equipment
Occupancy and equipment costs were $9,655,239 for the six months ended
June 30, 2000 as compared to occupancy and equipment of $3,530,373 for the
period from March 10, 1999 to June 25, 1999, an increase of 173%. This increase
resulted principally from the continued growth in scope of our business and
increased personnel. Occupancy and equipment costs included 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. 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 Cantor. Our equipment
expenses should increase as we continue to invest in technology and related
equipment. Occupancy expenditures are comprised principally of our rent and
facilities costs of our New York and London offices.
Professional and consulting fees
Professional and consulting fees were $5,758,693 for the six months
ended June 30, 2000 as compared to professional and consulting fees of
$1,782,082 for the period from March 10, 1999 to June 25, 1999, an increase of
223%. This increase resulted principally from fees related to new business
development and strategic initiatives. Professional and consulting fees
consisted primarily of legal fees and consultant costs paid to outside computer
professionals who performed specialized enhancement activities for us. We
currently have approximately 20 contracted consultants and additional outside
services providers working under short-term contracts costing approximately
$500,000 per month in the aggregate.
Communications and client networks
Communications costs were $1,849,332 for the six months ended June 30,
2000 as compared to $1,324,240 for the period from March 10, 1999 to June 25,
1999, an increase of 40%. Communications costs included 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. The increase in costs was attributable to the associated
increase in the breadth of our network.
Fulfillment services fees
-21-
<PAGE>
Under the Joint Service Agreement, we are required to pay to Cantor a
fulfillment services fee of 20%, 35%, or 55%, depending on the type of
transaction, of commissions paid by clients related to fully electronic
transactions. For the six months ended June 30, 2000, these costs were
$12,232,756 as compared to $430,532 for the period from March 10, 1999 to June
25, 1999, an increase of 2741%, principally as a result of our increased fully
electronic revenues.
Administrative fees
Under an Administrative Services Agreement with Cantor, 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 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 March 10, 1999. Administrative fees amounted to $3,312,579
for the six months ended June 30, 2000 as compared to administrative fees of
$554,967 for the period March 10, 1999 to June 25, 1999, an increase of 497%,
principally as a result of our increased business activity.
Marketing expenses
We incurred marketing expenses of $4,799,565 during the six months ended
June 30, 2000, as compared to nominal marketing expenses during the period from
March 10, 1999 to June 25, 1999, principally as a result of a national
advertising campaign launched by us during the three months ended June 30, 2000.
Other expenses
Other expenses for the six months ended June 30, 2000, were $4,470,088
as compared to other expenses of $515,269 for the period from March 10, 1999 to
June 25, 1999, an increase of 768%, principally as a result of our increased
business activity. These expenses consisted primarily of recruitment fees,
travel, promotional and entertainment expenditures.
Non-cash Business Partner Warrants
In June 2000, Dynegy and Williams each purchased 789,071 shares of our
Class A common stock for a purchase price of $25,000,000, for a total of
$50,000,000. Pursuant to a stock purchase agreement with Cantor, we purchased
from Cantor 789,071 shares of our Class A common stock for a purchase price of
$25,000,000. As a result, our capital increased by a net amount of $25,000,000.
Additionally, each of Dynegy and Williams received warrants to purchase an
additional 666,666 shares of Class A common stock at an exercise price of
$35.203125 per share. As a result of the issuance of the warrants, we recorded a
non-cash, non-operating charge against earnings of $29,805,305 to reflect the
cost of the warrants.
Net Loss
Excluding a non-cash charge for business partner warrants issued to
Dynegy and Williams in June 2000, our net loss was $14,147,754 for the six
months ended June 30, 2000. Including the non-cash
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charge, we incurred a net loss of $43,953,059 for the three months ended June
30, 2000. The business partner warrants are discussed in more detail in Note 9
to the Notes to Consolidated Financial Statements (unaudited) contained
elsewhere in this report. Other than the non-cash charge, the losses primarily
resulted from expenditures on our technology and infrastructure incurred in
building our revenue base.
Liquidity and Capital Resources
Our cash flows are comprised of transaction revenues and systems
services fees from Cantor, various fees paid to Cantor, occupancy costs and
other expenses paid by Cantor on our behalf and investment income. In its
capacity as a fulfillment service provider, Cantor processes and settles
transactions and, as such, collects and pays the funds necessary to clear
transactions with the counterparty. In doing so, Cantor receives our portion of
the transaction fee and, in accordance with the Joint Services Agreement, remits
the gross amount owed to us. Under the Administrative Services Agreement and the
Joint Services Agreement, any net receivable or payable is 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.
Although we have no material commitments for capital expenditures, we
anticipate that we will experience an increase in our capital expenditures and
lease commitments consistent with our anticipated growth in operations,
infrastructure and personnel. We currently anticipate that we will continue to
experience significant growth in our operating expenses for the foreseeable
future and that our operating expenses will be a material use of our cash
resources.
Under the current operating structure, our cash flows from operations,
the net proceeds from our initial public offering and the $25,000,000 received
from the Dynegy and Williams investments (net of our buy back of shares from
Cantor) should be sufficient to fund our current working capital and current
capital expenditure requirements for at least the next 12 months. However, we
believe that there are a significant number of capital intensive opportunities
for us to maximize our growth and strategic position, including, among other
things, strategic alliances and joint ventures potentially involving all types
and combinations of equity, debt, acquisition, recapitalization and
reorganization alternatives. We are continually considering such options and
their effect on our liquidity and capital resources.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
We have invested $147,141,828 of our excess cash in securities purchased
under reverse repurchase agreements which are fully collateralized by U.S.
Government securities held in a custodial account at The Chase Manhattan Bank.
These reverse repurchase agreements have an overnight maturity and, as such, are
highly liquid. We do not use derivative financial instruments, derivative
commodity instruments or other market risk sensitive instruments, positions or
transactions. Accordingly, we believe that we are not subject to any material
risks arising from changes in interest rates, foreign currency exchange rates,
commodity prices, equity prices or other market changes that affect market risk
sensitive instruments. Our policy is to invest our excess cash in a manner that
provides us with the appropriate level of liquidity to enable us to meet our
current obligations, primarily accounts payable, capital expenditures and
payroll, recognizing that we do not currently have outside bank funding.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
The information required by this Item is incorporated by reference to
Note 4 of the Notes to Consolidated Financial Statements (unaudited) contained
elsewhere in this report.
ITEM 2. Changes in Securities and Use of Proceeds.
(c) On June 5, 2000, we sold to each of Williams and Dynegy a Unit
consisting of (i) 789,071 shares (the "Shares") of our Class A common stock and
(ii) warrants (the "Warrants") exercisable for the purchase of up to 666,666
shares of Class A common stock, for an aggregate purchase price for the Unit of
$25,000,000. The Warrants have a per share exercise price of $35.203125, have a
ten year term and will be exercisable during the last 4 1/2 years of the term,
subject to acceleration under certain prescribed circumstances relating to the
formation of, and investment by the warrant holder in, certain electronic
marketplaces. The sale of the Shares and Warrants were exempt from registration
under the Securities Act of 1933 in reliance on Section 4(2) of such Act, as a
transaction by an issuer not involving a public offering. The transactions were
privately negotiated and did not include any general solicitation or
advertising. Each purchaser represented that it was acquiring the Shares and
Warrants without a view to distribution and was afforded an opportunity to
review all publicly filed documents and to ask questions and receive answers
from our officers.
(d) The effective date of our registration statement (Registration No.
333-87475) filed on Form S-1 relating to our initial public offering of Class A
common stock was December 9, 1999. In our initial public offering, we sold
7,000,000 shares of Class A common stock at a price of $22.00 per share and CFS,
the selling stockholder, sold 3,350,000 shares of Class A common stock at a
price of $22.00 per share. Our initial public offering was managed on behalf of
the underwriters by Warburg Dillon Read LLC, Hambrecht & Quist, Thomas Weisel
Partners LLC and Cantor Fitzgerald & Co. The offering commenced on December 10,
1999 and closed on December 15, 1999. Proceeds to us from our initial public
offering, after deduction of the underwriting discounts and commissions of
approximately $10.0 million and offering costs of $4.4 million, totaled
approximately $139.6 million. None of the expenses incurred in our initial
public offering were direct or indirect payments to our directors, officers,
general partners or their associates, to persons owning 10% or more of any class
of our equity securities or to our affiliates. Of the $139.6 million raised,
approximately $17.5 million has been used for working capital purposes and the
balance of $122.1 million has been invested in reverse repurchase agreements
which are fully collateralized by U.S. Government Securities held in a custodial
account at a third-party bank. Over the foreseeable future, we intend to use the
amount invested in the reverse repurchase agreements as follows:
o Approximately $25 million will be invested in hardware and
software for entry into new product segments, expansion of our
current markets and an increase in communication links to our
clients;
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o Approximately $25 million will be for hiring of technology and
other professionals to develop new markets in both financial and
non-financial sectors;
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; and
o The balance of the net proceeds will be used for working capital
and general corporate purposes, including possible acquisitions
and strategic alliances.
Of the amount of proceeds spent through June 30, 2000, approximately
$17.5 million has been paid to Cantor under the Administrative Services
Agreement between Cantor and us.
The occurrence of unforeseen events, opportunities or changed business
conditions, however, could cause us to use the net proceeds of our initial
public offering in a manner other than as described above.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit Number Description
-------------- -----------
10.9 -- Registration Rights Agreement, dated as of June
5, 2000 among eSpeed, Inc., Williams Energy
Marketing & Trading Company and Dynegy, Inc.
10.10 -- Stock Purchase Agreement, dated April 26, 2000,
between eSpeed, Inc. and Cantor Fitzgerald
Securities
10.11 -- Amendment to Stock Purchase Agreement, dated
June 2, 2000, among eSpeed, Inc., Cantor
Fitzgerald Securities and Cantor Fitzgerald,
L.P.
10.12 -- Warrant issued to Dynegy, Inc.
10.13 -- Warrant issued to Williams Energy Marketing &
Trading Company
10.14* -- Subscription Agreement, dated April 26, 2000,
among Dynegy, Inc., eSpeed, Inc. and Cantor
Fitzgerald, L.P.
10.15* -- Subscription Agreement, dated April 26, 2000,
among The Williams Companies, Inc., eSpeed,
Inc. and Cantor Fitzgerald, L.P.
27 -- Financial Data Schedule
(b) Reports on Form 8-K
None.
* The Company has requested confidential treatment as to certain portions of
this exhibit, which portions have been omitted and filed separately with the
Securities and Exchange Commission.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
eSpeed, Inc.
(Registrant)
Date: August 14, 2000 /s/ Howard W. Lutnick
---------------------
Howard W. Lutnick
Chairman and Chief Executive Officer
Date: August 14, 2000 /s/ Kevin C. Piccoli
--------------------
Kevin C. Piccoli
Senior Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
10.9 -- Registration Rights Agreement, dated as of June
5, 2000 among eSpeed, Inc., Williams Energy
Marketing & Trading Company and Dynegy, Inc.
10.10 -- Stock Purchase Agreement, dated April 26, 2000,
between eSpeed, Inc. and Cantor Fitzgerald
Securities
10.11 -- Amendment to Stock Purchase Agreement, dated
June 2, 2000, among eSpeed, Inc., Cantor
Fitzgerald Securities and Cantor Fitzgerald,
L.P.
10.12 -- Warrant issued to Dynegy, Inc.
10.13 -- Warrant issued to Williams Energy Marketing &
Trading Company
10.14* -- Subscription Agreement, dated April 26, 2000,
among Dynegy, Inc., eSpeed, Inc. and Cantor
Fitzgerald, L.P.
10.15* -- Subscription Agreement, dated April 26, 2000,
among The Williams Companies, Inc., eSpeed,
Inc. and Cantor Fitzgerald, L.P.
27 -- Financial Data Schedule
* The Company has requested confidential treatment as to certain portions of
this exhibit, which portions have been omitted and filed separately with the
Securities and Exchange Commission.
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