<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
eSpeed, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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<PAGE>
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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2
<PAGE>
[eSpeed Logo]
September 22, 2000
Dear Stockholder:
You are cordially invited to attend our 2000 Annual Meeting of
Stockholders, which will be held at the Marriott World Trade Center Hotel, Three
World Trade Center, New York, New York, on Thursday, October 26, 2000,
commencing at 10:00 a.m. (local time). We look forward to greeting as many of
our stockholders as are able to be with us.
At the meeting, you will be asked to consider and vote upon (i) the
election of seven (7) directors; (ii) the approval of an additional investment
right in the Class A Common Stock by Williams Energy Marketing & Trading Company
and Dynegy Inc.; and (iii) such other business as may properly come before the
meeting and any adjournment thereof.
We hope you will find it convenient to attend the meeting in person.
WHETHER OR NOT YOU EXPECT TO ATTEND, TO ASSURE YOUR REPRESENTATION AT THE
MEETING AND THE PRESENCE OF A QUORUM, PLEASE COMPLETE, DATE, SIGN AND MAIL
PROMPTLY THE ENCLOSED PROXY, for which a return envelope is provided. No postage
need be affixed to the Proxy if it is mailed in the United States.
Our Annual Report for the fiscal year ended December 31, 1999 is being
mailed to you together with the enclosed proxy materials.
Sincerely,
Howard W. Lutnick
Chairman of the Board of Directors
3
<PAGE>
eSpeed, Inc.
One World Trade Center, 103rd Floor
New York, NY 10048
(212) 938-3773
Notice of Annual Meeting of Stockholders
NOTICE IS HEREBY GIVEN that our Annual Meeting of Stockholders (the "Annual
Meeting") will be held at the Marriott World Trade Center Hotel, Three World
Trade Center, New York, New York, on Thursday, October 26, 2000, commencing at
10:00 a.m. (local time), for the following purposes:
(1) To elect seven directors to hold office until the next annual
meeting and until their successors are duly elected and qualified;
(2) To approve an additional investment right in the Class A Common
Stock by Williams Energy Marketing & Trading Company and Dynegy
Inc.; and
(3) To transact such other business as may properly come before the
Annual Meeting and any adjournment thereof.
Only holders of record of the Class A Common Stock or the Class B Common Stock
at the close of business on September 18, 2000 are entitled to notice of and to
vote at the Annual Meeting and any adjournment thereof.
By Order of the Board of Directors,
STEPHEN M. MERKEL
Secretary
September 22, 2000
YOUR VOTE IS IMPORTANT.
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD
AND RETURN IT IN THE ENCLOSED ENVELOPE.
4
<PAGE>
eSpeed, Inc.
One World Trade Center, 103rd Floor
New York, NY 10048
(212) 938-3773
PROXY STATEMENT
This Proxy Statement is being furnished in connection with the
solicitation of Proxies by and on behalf of our Board of Directors to be used at
our Annual Meeting of Stockholders to be held on Thursday, October 26, 2000, and
at any adjournment thereof (the "Annual Meeting"), for the purposes set forth in
the accompanying Notice of Annual Meeting. Our Annual Report for the fiscal year
ended December 31, 1999 accompanies this Proxy Statement. This Proxy Statement
and accompanying materials are expected to be first sent or given to our
stockholders on or about September 26, 2000.
The close of business on September 18, 2000 has been fixed as the record
date (the "Record Date") for the determination of the stockholders entitled to
notice of and to vote at the Annual Meeting. Only holders of record as of that
date of shares of our Class A Common Stock, $.01 par value per share (the "Class
A Common Stock"), or of our Class B Common Stock, $.01 par value per share (the
"Class B Common Stock"), are entitled to notice of and to vote at the Annual
Meeting. The Class A Common Stock and the Class B Common Stock are sometimes
collectively referred to herein as the "Common Equity."
Each share of the Class A Common Stock entitles the holder thereof to one
vote per share on each matter presented to the stockholders for approval at the
Annual Meeting. Each share of the Class B Common Stock entitles the holder
thereof to ten votes per share on each matter presented to the stockholders for
approval at the Annual Meeting. On September 1, 2000, there were 16,160,238
shares of the Class A Common Stock and 35,685,581 shares of the Class B Common
Stock, for a total of 51,845,819 shares of the Common Equity, outstanding and
entitled to vote.
Execution of a Proxy by a stockholder will not affect such stockholder's
right to attend the Annual Meeting and to vote in person. Any stockholder who
executes a Proxy has a right to revoke it at any time before it is voted by
advising Stephen M. Merkel, our Secretary, in writing of such revocation, by
executing a later-dated Proxy which is presented to us at or prior to the Annual
Meeting, or by appearing at the Annual Meeting and voting in person. Attendance
at the Annual Meeting will not in and of itself constitute revocation of a
Proxy. We have retained D.F. King & Co., Inc. to assist in the solicitation of
Proxies.
The required quorum for the transaction of business at the Annual Meeting
is a majority of the collective voting power represented by the shares of the
Common Equity issued and outstanding on the Record Date (the "Total Voting
Power"), which shares must be present in person or represented by Proxy at the
Annual Meeting. Assuming a quorum, the nominees receiving a plurality of the
Total Voting Power present in person or by Proxy at the Annual Meeting and
entitled to vote on the election of directors will be elected as directors. The
proposal to approve an additional investment right in the Class A Common Stock
by Williams Energy Marketing & Trading Company ("WEM&T") and Dynegy Inc.
("Dynegy") (together, the "Additional Investment Right") requires the
affirmative vote of a majority of the Total Voting Power present in person or by
Proxy at the Annual Meeting and entitled to vote on such proposal.
With regard to the election of directors, votes may be cast in favor or
withheld; votes that are withheld will be counted for purposes of determining
the presence or absence of a quorum but will have no other effect. With regard
to the proposal to approve the Additional Investment Right, stockholders may
vote in favor of or against such proposal, or they may abstain. Abstentions will
be counted for purposes of determining the presence or absence of a quorum and
will have the same effect as a vote against the proposal to approve the
Additional Investment Right. Broker non-votes, if any, will be counted for
purposes of determining the presence or absence of a quorum, but will have no
effect on the election of directors or the proposal to approve the Additional
Investment Right.
Unless specified otherwise, the Proxies will be voted FOR the election of
all the nominees to serve as our directors until the next annual meeting and
until their successors are duly elected and qualified and FOR the approval of
the Additional Investment Right. In the discretion of the Proxy holders, the
Proxies will also be voted for or against such other matters as may properly
come before the Annual Meeting. Management is not aware of any other matters to
be presented for action at the Annual Meeting.
Our principal executive offices are located at One World Trade Center,
103rd Floor, New York, NY 10048, and our telephone number there is (212)
938-3773.
5
<PAGE>
PROPOSAL 1 -- ELECTION OF DIRECTORS
Our Board of Directors is comprised of seven members. The names of the seven
nominees for election as directors are set forth below. All of the nominees
are to be elected at the Annual Meeting and until their successors are duly
elected and qualified. All of the nominees listed below are expected to
serve as directors if they are elected. If any nominee should decline or be
unable to accept such nomination or to serve as a director (an event which
our Board of Directors does not now expect), our Board of Directors reserves
the right to nominate another person or to vote to reduce the size of our
Board of Directors. In the event another person is nominated, the Proxy
holders intend to vote the shares to which the Proxy relates for the
election of the person nominated by our Board of Directors. There is no
cumulative voting for directors.
<TABLE>
<CAPTION>
Director Principal Occupations During the Last
Name Age Since Five Years; Other Directorships
---- --- ----- -------------------------------
<S> <C> <C> <C>
Howard W. Lutnick 39 1999 Mr. Lutnick has been our Chairman of our Board
of Directors and Chief Executive Officer since
June 1999. Mr. Lutnick joined Cantor Fitzgerald,
L.P. (together with its affiliates, "Cantor") in
1983 and has served as President and Chief
Executive Officer of Cantor since 1991. 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 34 1999 Mr. Varacchi has been our President and Chief
Operating Officer since June 1999. Mr. Varacchi
has been an Executive Managing Director and the
Chief Operating Officer of Cantor since October
1999. From March 1998 to October 1999, he served
as Senior Managing Director and Chief
Information Officer of Cantor. Before joining
Cantor, Mr. Varacchi was Senior Vice President
and Chief Technology Officer of Greenwich
Natwest, a financial services division of
National Westminster Bank, overseeing
information technology for the company from
January 1995 to February 1998. From March 1990
to January 1995, Mr. Varacchi worked for Chase
Manhattan Bank, where he held a variety of
senior technology positions, including Head of
Global Network Systems for Private Banking. From
January 1989 to March 1990, Mr. Varacchi served
in a variety of positions with Salomon Smith
Barney, including as Head of Front Office
Systems. Mr. Varacchi is a member of the Board
of Directors of Expert Ease Software, Inc.
Douglas B. Gardner 38 1999 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.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Director Principal Occupations During the Last
Name Age Since Five Years; Other Directorships
---- --- ----- -------------------------------
<S> <C> <C> <C>
Richard C. Breeden 50 1999 Mr. Breeden has been our director since December
1999. Mr. Breeden has been Chairman of the Board
and Chief Executive Officer of Equivest Finance,
Inc., a publicly traded vacation ownership
company, since October 1997 and President since
October 1998. Mr. Breeden has served as Trustee
for the Bennett Funding Group, Inc. since 1996.
Mr. Breeden also has served as President of
Richard C. Breeden & Co., a consulting firm,
since 1996. From 1993 to 1996, Mr. Breeden
served as Chairman of the worldwide financial
services practice of Coopers & Lybrand and, from
1989 to 1993, Mr. Breeden was Chairman of the
U.S. Securities and Exchange Commission. Mr.
Breeden was a director of The Philadelphia Stock
Exchange, Inc.
Larry R. Carter 57 1999 Mr. Carter has been our director since December
1999. Mr. Carter joined Cisco Systems, a
computer technology company, in January 1995 as
Vice President, Finance and Administration and
as Chief Financial Officer and Secretary. In
July 1997, he was promoted to Senior Vice
President, Finance and Administration, Chief
Financial Officer and Secretary. From 1992 to
January 1995, Mr. Carter was Vice President and
Corporate Controller at Advanced Micro Devices.
His career also includes four years with
V.L.S.I. Technology Inc. as Vice President,
Finance and Chief Financial Officer and two
years at S.G.S. Thompson Microelectronics Inc.
as Vice President, Finance, Administration and
Chief Financial Officer. He also spent 19 years
at Motorola, Inc., where he held a variety of
financial positions, the last being Vice
President and Controller, M.O.S. Group. Mr.
Carter is on the Board of Directors of Network
Appliance, Inc., Ultratech Stepper, Inc. and
QLogic Corporation.
William J. Moran 59 1999 Mr. Moran has been our director since December
1999. 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 46 1999 Mr. Shea has been our director since December
1999. Mr. Shea has been with Cantor since 1989.
He has been Executive Managing Director since
October 1999, was Senior Managing Director in
charge of U.S. taxable fixed income securities
from 1997 to 1999, was Managing Director of the
corporate bond and U.S. government agency
securities departments from 1995 to 1997 and was
Managing Director of the corporate bond
department from 1989 to 1995.
</TABLE>
Vote Required For Approval
The seven nominees receiving a plurality of the Total Voting Power present
in person or by Proxy at the Annual Meeting and entitled to vote on the election
of directors will be elected as directors.
Recommendation of our Board of Directors
OUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE SEVEN
NOMINEES FOR DIRECTORS.
7
<PAGE>
Compensation of Directors
Directors who are also our employees do not receive additional
compensation for serving as directors. We have granted our non-employee
directors options to purchase 20,000 shares of the Class A Common Stock at an
exercise price per share equal to $22.00, which was the initial public offering
price of the Class A Common Stock on December 10, 1999. 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 are also reimbursed for out-of-pocket
expenses incurred in attending meetings of our Board of Directors or committees
of our Board of Directors.
Meetings and Committees of the Board
Our Board of Directors held no meetings and acted by written consent 12
times during the year ended December 31, 1999.
Our Board of Directors has an Audit Committee and a Compensation
Committee. The members of our Audit Committee are presently Messrs. Breeden,
Carter and Moran, all of whom are independent directors (as defined in the
applicable listing standards of the National Association of Securities Dealers,
Inc.). Our Audit Committee selects the independent auditors, consults with such
auditors and with management with regard to the adequacy of our internal
accounting controls and considers any non-audit functions to be performed by the
independent auditors. The Audit Committee did not hold any meetings or act by
written consent during the year ended December 31, 1999. Our Board of Directors
has adopted a written charter for the Audit Committee, which is attached as
Appendix A to this Proxy Statement.
The members of our Compensation Committee are presently Messrs. Breeden,
Carter and Moran, all of whom are independent directors. The Compensation
Committee is responsible for reviewing and approving all compensation
arrangements for our executive officers and for administering our stock option
and stock purchase plans.
EXECUTIVE OFFICERS
Our executive officers are appointed annually by our Board of Directors
and serve at the discretion of our Board of Directors. In September 2000,
Jeffrey G. Goldflam replaced Kevin C. Piccoli as our Senior Vice President and
Chief Financial Officer. The executive officers (other than Messrs. Goldflam and
Merkel), their respective ages and positions and certain other information with
respect to each of them are set forth herein under the section entitled
"Election of Directors."
Jeffrey G. Goldflam. Mr. Goldflam has been our Senior Vice President and
Chief Financial Officer since September 2000. From July 1995 to September 2000,
Mr. Goldflam was Executive Vice President and Chief Financial Officer of Fimat
USA, Inc., a wholly-owned subsidiary of Societe Generale Bank, a French bank,
and from August 1989 to July 1995, he was Executive Vice President
and Chief Financial Officer of Brody, White & Co., a financial services firm
that was acquired by Fimat USA, Inc. in 1995. Prior to 1989, Mr. Goldflam was
Senior Vice President, Treasurer and a member of the Board of Directors of
Thomson McKinnon Securities Inc., a financial services firm.
Stephen M. Merkel. Mr. Merkel has been our Senior Vice President, General
Counsel and Secretary since June 1999. Mr. Merkel has 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.
8
<PAGE>
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning all
compensation earned by our Chief Executive Officer and each of our other four
most highly compensated executive officers whose annual salary and bonus for the
year ended December 31, 1999 exceeded $100,000 in the aggregate (collectively,
the "Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
March 10, 1999 Compensation Awards
through December ----------------------
31, 1999 Securities
Name and Principal Position Year Compensation-Salary Underlying Options (#)
--------------------------- ---- ------------------- ----------------------
<S> <C> <C> <C>
Howard W. Lutnick......... 1999 $280,000 2,500,000
Chairman and Chief
Executive Officer
Frederick T. Varacchi..... 1999 400,000 800,000
President and Chief
Operating Officer
Douglas B. Gardner........ 1999 200,000 375,000
Vice Chairman
Kevin C. Piccoli(1)....... 1999 100,000 65,000
Senior Vice President
and Chief Financial
Officer
Stephen M. Merkel......... 1999 120,000 100,000
Senior Vice President
and General Counsel
</TABLE>
-------------
(1) In September 2000, Jeffrey G. Goldflam replaced Kevin C. Piccoli as our
Senior Vice President and Chief Financial Officer. Mr. Goldflam is paid an
annual salary equal to Mr. Piccoli's and he has been granted options to purchase
65,000 shares of the Class A Common Stock.
9
<PAGE>
The following table sets forth the options granted during 1999 and the value of
the options held on December 31, 1999 by our Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------------------------------------------------------------------
Percent
of Total
Number Options
of Granted
Shares to Exercise
Underlying Employees or Base
Options in Price Expiration Grant Date
Name Granted 1999 ($/share) Date Present Value ($)(3)
---- ------- ---- --------- ---- --------------------
<S> <C> <C> <C> <C> <C>
Howard W. Lutnick.......... 2,000,000(1) 34.9% $22.00 12/09/09 $ 29,089,173
Howard W. Lutnick.......... 500,000(2) 8.7% $22.00 12/09/04 $ 5,344,797
Frederick T. Varacchi...... 800,000(1) 13.9% $22.00 12/09/09 $ 11,635,669
Douglas B. Gardner......... 375,000(1) 6.5% $22,00 12/09/09 $ 5,454,220
Kevin C. Piccoli........... 65,000(1) 1.1% $22.00 12/09/09 $ 945,398
Stephen M. Merkel.......... 100,000(1) 1.7% $22.00 12/09/09 $ 1,454,459
</TABLE>
(1) The options vest and become exercisable in five annual installments
beginning December 10, 2000.
(2) These options are immediately vested and exercisable.
(3) The fair value of the options was estimated using a modified Black-Scholes
option pricing model and the following assumptions: risk-free interest
rate of 6%, no expected dividends, expected stock price volatility of 55
and assumed to be exercised at 80% of their original life.
The following table provides information, with respect to the Named
Executive Officers, concerning options held as of December 31, 1999.
Aggregated Option/SAR Exercises In Last Fiscal Year
and Fiscal Year-End Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options/SARs at Fiscal In-the-Money Options/ SARs at
Shares Value Year-End (#) Fiscal Year-End($)(1)
Acquired on Realized on ----------------------------- ------------------------------
Name Exercise (#) Exercise ($) Exercisable Unexercisable Exercisable Unexercisable
------------------------------------- ------------- ------------- ------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Howard W. Lutnick.................... 0 -- 500,000 2,000,000 $6,781,250 $27,125,000
Frederick T. Varacchi................ 0 -- 0 800,000 0 10,850,000
Douglas B. Gardner................... 0 -- 0 375,000 0 5,085,938
Kevin C. Piccoli..................... 0 -- 0 65,000 0 881,563
Stephen M. Merkel.................... 0 -- 0 100,000 0 1,356,250
</TABLE>
(1) Based on the last reported sales price of $35.5625 for the Class A Common
Stock on December 31, 1999.
10
<PAGE>
Compensation Committee Interlock and Insider Participation
The Compensation Committee of our Board of Directors consists of Messrs.
Breeden, Carter and Moran. All of the members of the Compensation Committee are
independent directors and are not former officers. During 1999, none of our
executive officers served as a member of the Board of Directors or on the
compensation committee of a corporation where any of its executive officers
served on our Compensation Committee or on our Board of Directors.
Report of the Compensation Committee and our 1999 Board of Directors on
Executive Compensation
The Compensation Committee reviews and recommends to our Board of
Directors for its approval the salaries and bonuses of our executive officers,
including our five executive officers - Howard W. Lutnick, Chairman of the Board
and Chief Executive Officer; Frederick T. Varacchi, President and Chief
Operating Officer; Douglas B. Gardner, Vice Chairman; Jeffrey G. Goldflam,
Senior Vice President and Chief Financial Officer; and Stephen M. Merkel, Senior
Vice President, General Counsel and Secretary. In addition, the Compensation
Committee grants stock options under our stock option plan and administers our
stock option and stock purchase plans. However, since the Compensation Committee
was established by our Board of Directors in connection with our initial public
offering in December 1999, compensation for 1999 and stock option issuances in
1999 were determined by our Board of Directors prior to our initial public
offering ("1999 Board of Directors"). Our 1999 Board of Directors consisted
solely of Howard W. Lutnick.
Compensation Philosophy
Our executive compensation program is designed to integrate compensation
with the achievement of our short and long-term business objectives and to
assist us in attracting, motivating and retaining the highest quality
executives.
Executive compensation is comprised of three components: (i) a base
salary, which is designed to attract talented employees and contribute to
motivating and rewarding individual performance; (ii) an incentive bonus of
cash, stock and/or options, which is intended to tie financial reward with the
achievement of our short-term performance objectives; and (iii) a long-term
incentive program, which is designed to promote the achievement of long-term
performance goals and to align the long-term interests of our executive officers
with those of our stockholders.
The Compensation Committee generally intends that compensation paid to our
Chief Executive Officer and the other Named Executive Officers not be subject to
the limitation on tax deductibility under Section 162(m) of the Internal Revenue
Code, as amended (the "Code"), so long as this can be achieved in a manner
consistent with the Committee's other objectives. Section 162(m) generally
eliminates a corporation's tax deduction in a given year for payments to certain
named executive officers in excess of $1 million, unless the payments result
from "qualified performance-based compensation." The Compensation Committee has
been advised that compensation paid in 1999 should not be subject to the
limitation on deductibility under Code Section 162(m).
Base Salary Compensation
The Compensation Committee believes that the retention of executives who
have developed the skills and expertise required to lead our organization is
vital to our competitive strength. The Compensation Committee further believes
that attracting other key employees who can supplement the efforts of our
existing executives is absolutely critical. To this end, it is the Compensation
Committee's policy to establish base pay at competitive levels.
Incentive Bonus Compensation
The Compensation Committee believes that compensation should vary with
corporate performance and that a significant portion of compensation should
continue to be linked to the achievement of business goals. There were no
bonuses paid to any executive officer in 1999.
Grants of Stock Options
It is the policy of the Compensation Committee to award stock options to
our executive officers and other key employees in order to align their interests
with those of our long-term investors and to help attract and retain these
persons. The options, therefore, provide value to the recipients only if and
when the market price of the Class A Common Stock increases above the option
grant price. To that end, there is ongoing review by the Compensation Committee
of the market price of the Class A Common Stock and the grant price of options.
It is the Compensation Committee's goal to preserve this incentive as an
effective tool in motivating and retaining executives.
11
<PAGE>
Options to purchase approximately 3,840,000 shares of the Class A Common
Stock were granted by our 1999 Board of Directors to our executive officers. The
Compensation Committee believes that the grant of these options, including, in
particular, with respect to our executive officers, not only provides a
meaningful long-term incentive to those individuals who have been identified as
key to our future success, but helps retain the services of these persons and
further links compensation to our overall performance.
Compensation of Our Chief Executive Officer
Compensation paid during 1999 to Mr. Lutnick was $280,000. No bonus was
paid to Mr. Lutnick in 1999. Mr. Lutnick was granted options to purchase
2,500,000 shares of the Class A Common Stock in 1999, 500,000 of which were
immediately exercisable and fully vested and 2,000,000 of which vest and become
exercisable in five annual installments beginning December 10, 2000. In the
future, the Compensation Committee will consider several factors in establishing
our Chief Executive Officer's compensation package, including market pay
practices, performance level, contributions toward achievement of strategic
goals and our overall financial and operating success.
THE COMPENSATION COMMITTEE
Richard C. Breeden
Larry R. Carter
William J. Moran
1999 BOARD OF DIRECTORS
Howard W. Lutnick
12
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
By Management. The following table sets forth certain information, as of
September 1, 2000, with respect to the beneficial ownership of our Common Equity
by: (i) each director; (ii) each of the Named Executive Officers; and (iii) all
executive officers and directors as a group. Each person listed below can be
reached at our headquarters located at One World Trade Center, 103rd Floor, New
York, NY 10048. Shares of the Class B Common Stock are convertible into shares
of the Class A Common Stock at any time in the discretion of the holder on a
one-for-one basis. Accordingly, a holder of the Class B Common Stock is deemed
to be the beneficial owner of an equal number of shares of the Class A Common
Stock for purposes of this table.
<TABLE>
<CAPTION>
Beneficial Ownership(1)
---------------------------------------------------------
Class A Common Stock Class B Common Stock
---------------------------- ---------------------------
Name Shares % Shares %
-------------------------------------------------- --------------- ---------- ---------------- ---------
<S> <C> <C> <C> <C>
Howard W. Lutnick................................. 38,960,929(2) 74.4%(3) 35,685,581(4) 100%(5)
Frederick T. Varacchi............................. -- ___ -- --
Douglas B. Gardner................................ -- ___ -- --
Kevin C. Piccoli.................................. -- ___ -- --
Stephen M. Merkel(6).............................. 2,250 * -- --
Richard C. Breeden(7)............................. 29,167 * -- --
Larry R. Carter(7)(8)............................. 52,167 * -- --
William J. Moran(7)............................... 9,667 * -- --
Joseph P. Shea.................................... -- -- -- --
All executive officers and directors as a group
(9 persons)....................................... 39,054,180 74.6%(9) 35,685,581 100%(5)
</TABLE>
-------------------
* Less than 1 %
(1) Based on information supplied by officers and directors, and filings under
Sections 13 and 16 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The share amounts in the table do not reflect shares of
the Class A Common Stock to be transferred to Messrs. Lutnick, Varacchi,
Gardner, Merkel and Shea pursuant to deferred stock transfers by Cantor
Fitzgerald, L.P. in connection with a modification of Cantor Fitzgerald,
L.P. partnership units, which transfers are subject to forfeiture in the
event of discontinued status as a limited partner or violation of certain
provisions of the Cantor Fitzgerald, L.P. partnership agreement determined
as of January 2001, July 2001 and January 2002.
(2) Consists of (1) 500,000 immediately exercisable options, (2) 8,800,000
shares of the Class B Common Stock held by Cantor Fitzgerald, L.P., (3)
26,885,581 shares of the Class B Common Stock held by Cantor Fitzgerald
Securities and (4) 2,775,348 shares of the Class A Common Stock held by
Cantor Fitzgerald Securities. Excludes 1.4 million shares of Class A
Common Stock donated by Cantor Fitzgerald Securities to a public charity
with respect to which Mr. Lutnick has the right to make non-binding
recommendations regarding other charities to which the public charity
might donate these shares. Cantor Fitzgerald, L.P. is the managing partner
of Cantor Fitzgerald Securities. CF Group Management, Inc. is the Managing
General Partner of Cantor Fitzgerald, L.P. and Mr. Lutnick is the
President and sole stockholder of CF Group Management, Inc.
(3) Percentage based on 16,160,238 shares of the Class A Common Stock and
35,685,581 shares of the Class B Common Stock outstanding on September 1,
2000 and 500,000 immediately exercisable options.
(4) Consists of (1) 8,800,000 shares of the Class B Common Stock held by
Cantor Fitzgerald, L.P. and (2) 26,885,581 shares of the Class B Common
Stock held by Cantor Fitzgerald Securities.
(5) Percentage based on 35,685,581 shares of the Class B Common Stock
outstanding on September 1, 2000.
(6) These shares are beneficially owned by Mr. Merkel's spouse.
(7) Includes 6,667 immediately exercisable options.
(8) 45,500 shares are owned by Cavallino Ventures LLC, of which Mr. Carter is
the President.
(9) Percentage based on 16,160,238 shares of the Class A Common Stock,
35,685,581 shares of the Class B Common Stock and 520,001 immediately
exercisable options outstanding on September 1, 2000.
13
<PAGE>
By Others. The following table sets forth certain information, as of
September 1, 2000, with respect to the beneficial ownership of our Common Equity
by each person or entity known to us to beneficially own more than 5% of the
Class A Common Stock, other than our officers and directors. Unless indicated
otherwise, the address of each entity listed is One World Trade Center, New
York, NY 10048, and each entity listed has sole voting and investment power over
the shares beneficially owned. Shares of the Class B Common Stock are
convertible into shares of the Class A Common Stock at any time in the
discretion of the holder on a one-for-one basis. Accordingly, a holder of the
Class B Common Stock is deemed to be the beneficial owner of an equal amount of
number of shares of the Class A Common Stock for purposes of this table.
<TABLE>
<CAPTION>
Beneficial Ownership(1)
---------------------------------------------------------------------
Class A Common Stock Class B Common Stock Common Equity
---------------------------- ------------------------ -------------
Name Shares % Shares %(2) %
-------------------------------------------------- --------------- ---------- ---------------- ------ -----
<S> <C> <C> <C> <C> <C>
Cantor Fitzgerald Securities......................... 29,660,929(3) 68.9%(4) 26,885,581 75.3% 57.2%
Cantor Fitzgerald, L.P............................... 38,460,929(5) 74.2%(6) 35,685,581(7) 100% 74.2%
CF Group Management, Inc............................. 38,460,929(8) 74.2%(6) 35,685,581(7) 100% 74.2%
Fred Alger(9)........................................ 874,200 5.4%(10) -- -- 1.7%
Essex Investment Management Company(11).............. 1,156,050 8.0%(10) -- -- 2.2%
</TABLE>
-------------------
(1) The share amounts in the table do not reflect shares of Class B Common
Stock to be transferred by Cantor Fitzgerald, L.P. to its limited
partners, including CF Group Management, Inc., pursuant to deferred stock
transfers in connection with a modification of Cantor Fitzgerald, L.P.
partnership units, which transfers are subject to forfeiture in certain
circumstances determined as of January 2001, July 2001 and January 2002.
(2) Based on 35,685,581 shares of the Class B Common Stock outstanding on
September 1, 2000.
(3) Consists of (1) 26,885,581 shares of the Class B Common Stock and (2)
2,775,348 shares of the Class A Common Stock.
(4) Percentage based on 16,160,238 shares of the Class A Common Stock and
26,885,581 shares of the Class B Common Stock outstanding on September 1,
2000.
(5) Consists of (1) 8,800,000 shares of the Class B Common Stock owned by
Cantor Fitzgerald, L.P., (2) 26,885,581 shares of the Class B Common Stock
owned by Cantor Fitzgerald Securities and (3) 2,775,348 shares of the
Class A Common Stock owned by Cantor Fitzgerald Securities. Cantor
Fitzgerald, L.P. is the managing partner of Cantor Fitzgerald Securities.
(6) Percentage based on 16,160,238 shares of the Class A Common Stock and
35,685,581 shares of the Class B Common Stock outstanding on September 1,
2000.
(7) Consists of (1) 8,800,000 shares of the Class B Common Stock owned by
Cantor Fitzgerald, L.P. and (2) 26,885,581 shares of the Class B Common
Stock owned by Cantor Fitzgerald Securities.
(8) Consists of (1) 26,885,581 shares of the Class B Common Stock held by
Cantor Fitzgerald Securities, (2) 2,775,348 shares of the Class A Common
Stock held by Cantor Fitzgerald Securities and (3) 8,800,000 shares of the
Class B Common Stock held by Cantor Fitzgerald L.P. CF Group Management,
Inc. is the Managing General Partner of Cantor Fitzgerald, L.P.
(9) Fred Alger Management, Inc. and Fred M. Alger III beneficially own the
874,200 shares of the Class A Common Stock as a group. They have shared
voting and sole dispositive power with respect to the shares. The address
of Fred Alger Management Inc. and Fred M. Alger III is One World Trade
Center, Suite 9333, New York, NY 10048. Share numbers are based on filings
under Section 13 of the Exchange Act, which may not reflect the current
share ownership status.
(10) Percentage based on 16,160,238 shares of the Class A Common Stock
outstanding on September 1, 2000.
(11) The address of Essex Investment Management Company is 125 High Street,
Boston, MA 02110. Essex Investment Management Company has sole voting
power with respect to only 943,485 shares of the Class A Common Stock.
Share numbers are based on filings under Section 13 of the Exchange Act,
which may not reflect the current share ownership status.
14
<PAGE>
PROPOSAL 2 - APPROVAL OF THE ADDITIONAL INVESTMENT RIGHT
General
On April 26, 2000, we entered into a Subscription Agreement (a
"Subscription Agreement") with each of The Williams Companies, Inc. ("Williams")
and Dynegy Inc. ("Dynegy") for the purchase by each of a Unit (the "Unit")
consisting of (i) 789,071 shares (the "Shares") of the Class A Common Stock, par
value $0.01 per share, and (ii) warrants (the "Warrants") exercisable for the
purchase of up to 666,666 shares of the Class A Common Stock, for an aggregate
purchase price for the Unit of $25.0 million. The Warrants have a per share
exercise price of $35.203125, 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. After executing its Subscription
Agreement, Williams assigned the agreement and all corresponding rights and
obligations to its affiliate, Williams Energy Marketing & Trading Company
("WEM&T").
On June 5, 2000, after receipt of all approvals required under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, we consummated
the purchase and sale of the Units to each of WEM&T and Dynegy (the "Closing").
As an inducement to WEM&T and Dynegy to invest in us, we granted each of them
registration rights with respect to the Shares and the Warrants pursuant to a
Registration Rights Agreement, dated June 5, 2000, by and among WEM&T, Dynegy
and us. The Shares are not transferable prior to the first anniversary of the
Closing.
Each of WEM&T and Dynegy agreed in its Subscription Agreement that,
subject to the satisfaction of certain conditions, it will invest $2.5 million
in at least four entities (the "Qualified Verticals") to be formed by us and
Cantor within 12 months of the Closing (subject to extension for a period not to
exceed six months under certain prescribed circumstances). We expect that each
Qualified Vertical will be jointly owned by industry market participants, us and
Cantor, and will establish a new vertical electronic and telephonic marketplace
with us in which such Qualified Vertical will broker and possibly clear
transactions for the industry market participants and other clients. The first
Qualified Vertical, TradeSpark LP, which will operate an electronic and
telephonic marketplace for North American wholesale transactions in natural gas,
electricity, coal, sulfur dioxide and nitrogen dioxide emissions allowances and
weather financial products, was formed on September 22, 2000. WEM&T is one of
the initial industry market participant owners of TradeSpark and it is
anticipated that Dynegy will become an industry market participant owner at a
later date. Products that may be traded on other Qualified Verticals include
natural gas liquids, petrochemicals, crude oil and bandwidth. Each of WEM&T and
Dynegy will not necessarily invest in the same Qualified Verticals as the other.
Each Subscription Agreement further provides that, in connection with up to four
additional Qualified Verticals (the "Additional Investment Right"), WEM&T and,
subject to certain limitations, Dynegy will be entitled to invest $25.0 million
in shares of the 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. Any shares of the
Class A Common Stock purchased pursuant to the Additional Investment Right will
be subject to a 12-month lock-up on transferability. Each Subscription Agreement
noted that the Additional Investment Right is subject to stockholder approval,
and we agreed to recommend the Additional Investment Right for approval at our
next annual meeting of stockholders. Pursuant to the Subscription Agreement,
Cantor agreed to vote the shares of our Common Equity beneficially owned by it
in favor of the Additional Investment Right.
Each Subscription Agreement also provides that, at such time as when WEM&T
and Dynegy (or their permitted affiliate assignees) have made an aggregate
equity investment in us of an amount equal to at least $100.0 million, valued on
a cost basis (and for so long as such parties maintain ownership of equity
securities having such cost basis), Cantor will use its best efforts to cause
one designee jointly selected by WEM&T and Dynegy to be nominated to our Board
of Directors and to vote its shares of our Common Equity in favor of such
designee.
Contemporaneously with the execution of the Subscription Agreements, we
entered into a stock purchase agreement (the "Stock Purchase Agreement") with
Cantor, as amended, providing for the purchase by us from Cantor (i) at the
Closing, of 789,071 shares of the Class A Common Stock, representing half of the
number of shares of the Class A Common Stock sold by us to WEM&T and Dynegy
pursuant to the Subscription Agreements, for a purchase price of $25.0 million
and (ii) of half of the number of shares to be purchased by WEM&T and Dynegy, in
the aggregate, each time an Additional Investment Right is exercised for the
same purchase price per share as is paid by WEM&T and Dynegy at the time.
Immediately following the Closing, Cantor beneficially owned approximately
77% of our outstanding voting securities, and WEM&T and Dynegy each beneficially
owned approximately 1.7% of the outstanding voting securities and each
beneficially owned approximately 4.9% of the outstanding Class A Common Stock
(in each case after giving effect to the conversion by Cantor prior to the
Closing of certain shares of the Class B Common Stock into the Class A Common
Stock as contemplated by the Stock Purchase Agreement).
The sale of the Shares and Warrants was 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.
15
<PAGE>
It is expected that the net proceeds received from us from the sale of the
Units, and any net proceeds to be received from us from the exercise of any
Additional Investment Right (if approved by the stockholders), will be used for
general working capital purposes.
We have currently reserved 5,681,314 shares of the Class A Common Stock (a
portion of which may be issued from treasury stock in connection with our
purchase of the Class A Common Stock from Cantor pursuant to the Stock Purchase
Agreement), for issuance upon exercise of the Additional Investment Right
granted to WEM&T and Dynegy (such number based upon the closing sales price of
the Class A Common Stock on the Nasdaq National Market on April 25, 2000), which
number shall be adjusted from time to time so that an adequate number of shares
are reserved at all times.
The rules of the Nasdaq National Market require stockholder approval of
the Additional Investment Right because of the potential issuance by us, in a
private offering, of the Class A Common Stock representing 20% or more of the
Class A Common Stock or voting power outstanding before the issuance at a price
less than the current market value of the stock.
Reason for the Additional Investment Right and Recommendation of our Board of
Directors
The issuance and sale of the Unit and the grant of the Additional
Investment Right were a result of arm's-length negotiations between us and each
of Williams and Dynegy, and were effected in connection with the leveraging of
our experience with financial markets to opportunities in non-financial,
business-to-business markets. Dynegy and Williams are leaders in the energy
marketplace, and we are therefore seeking to collaborate with them to create the
state-of-the-art exchanges necessary to compete successfully in
business-to-business energy verticals. The issuance and sale of the Unit and the
grant of the Additional Investment Right are intended to assist in aligning the
interest of Williams and Dynegy with those of our other stockholders and to
provide an incentive to them to ensure the profitable operation of these
verticals, thus facilitating our continued growth and financial success.
For these reasons, our Board of Directors approved the transactions
involving Dynegy and Williams described above, (and determined that the
transactions were fair to, and in the best interests of, us and our
stockholders, other than Cantor) and is recommending that the stockholders
approve the Additional Investment Right. Our Board of Directors had also
considered the opinion of UBS Warburg LLC, formerly Warburg Dillon Read LLC,
dated April 26, 2000, to the effect that, as of such date, the transaction, as
described in the Subscription Agreements and the exhibits thereto and the Stock
Purchase Agreement, was fair, from a financial point of view, to our
stockholders other than Cantor.
Due to timing constraints, stockholder approval of the Additional
Investment Right was not solicited prior to the Closing. All other aspects of
the transactions involving Dynegy and Williams will not be affected by the
outcome of the stockholders' vote on the approval of the Additional Investment
Right.
Vote Required
Approval of the Additional Investment Right requires the affirmative vote
of the majority of the Total Voting Power present in person or by Proxy and
entitled to vote on the matter at the Annual Meeting. Pursuant to the
Subscription Agreements, Cantor has agreed to vote all of its shares of the
Class A Common Stock and the Class B Common Stock beneficially owned by it,
representing 95.6% of the Total Voting Power, in favor of the approval of the
Additional Investment Right. Accordingly, the affirmative vote of Cantor will be
sufficient to approve the Additional Investment Right regardless of the vote of
our other stockholders on this proposal.
Recommendation of our Board of Directors
OUR BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE APPROVAL OF THE
ADDITIONAL INVESTMENT RIGHT.
16
<PAGE>
PERFORMANCE GRAPH
The performance graph below shows a comparison of the cumulative total
return, on a dividend reinvestment basis, measured on December 10, 1999 (the
date of our initial public offering) and on December 31, 1999 assuming $100
invested on December 10, 1999 in the Class A Common Stock, our selected peer
group, and the S&P 500. Our peer group consists of Ariba, CommerceOne,
Freemarkets, VerticalNet and Ventro, which also operate business-to-business
electronic marketplaces. The returns of each peer group company have been
weighted according to its stock market capitalization for purposes of arriving
at a peer group average.
CUMULATIVE TOTAL RETURN
AMONG eSPEED, INC., S&P 500 AND PEER GROUP
STARTING
BASIS
DESCRIPTION Dec 10, 1999 Dec 31, 1999
-------------------------------------------------------------------
ESPEED INC ($) $100.00 $161.65
S & P 500 ($) $100.00 $105.89
PEER GROUP ONLY ($) $100.00 $153.66
17
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Formation Transactions
Concurrently with our initial public offering, Cantor contributed to us
substantially all of our assets. These assets primarily consist of the
proprietary software, network distribution systems, technologies and related
contractual rights that comprise our eSpeed(SM) system. In exchange for these
assets, we issued to Cantor 43,999,900 shares of the Class B Common Stock,
representing approximately 98% of the voting power of our capital stock
outstanding at the time. Cantor converted 3,350,000 of these shares into the
shares of the Class A Common Stock which it sold in our initial public offering
in December 1999.
We entered into the agreements described below in connection with the
formation transactions and to help define the terms of our relationship with
Cantor in the future. In an effort to mitigate conflicts of interest between us
and Cantor, we and Cantor have agreed that none of these agreements may be
amended without the approval of a majority of our independent directors.
Assignment and Assumption Agreements
In December 1999, we entered into Assignment and Assumption Agreements
with Cantor pursuant to which Cantor contributed 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 issued to Cantor shares of the Class B Common Stock representing
approximately 100% of the outstanding shares of our capital stock prior to our
initial public offering and we assumed certain liabilities relating to the
assets which Cantor contributed 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. 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 provides for a perpetual term. Under the
agreement, we own and operate the electronic trading systems and are responsible
for providing electronic brokerage services, and Cantor provides voice-assisted
brokerage services, clearance, settlement and other fulfillment 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 are 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. We and Cantor have agreed to exclude the TradeSpark marketplace
from the provisions of the Joint Services Agreement in order to enable us to
enter into separate agreements with TradeSpark.
Commission Sharing Arrangement
Under this agreement, we and Cantor share revenues derived from
transactions effected in the marketplaces in which we collaborate and other
specified markets. We have agreed to collaborate with Cantor to determine the
amount of commissions to be charged to clients that 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
18
<PAGE>
pricing decision with respect to transactions that are fully electronic. We may
not make a final transaction pricing decision that results in the share of
transaction revenues received by Cantor being less than Cantor's actual cost of
providing clearance, settlement and fulfillment services and other transaction
services. In some cases, we receive the aggregate transaction revenues and pay a
service fee to Cantor. In other cases, Cantor receives the aggregate transaction
revenues and pays a service fee to us. The amount of the service fee and the
portion of the transaction revenues that we and Cantor receive are based on
several factors, including whether: (1) the marketplace is one in which we
collaborate with Cantor; (2) the transaction is fully electronic or Cantor
provides voice-assisted brokerage services; (3) the product traded is a
financial product; and (4) the product is traded on the Cantor Exchange(SM).
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 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.
Generally, 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 receives the aggregate transaction revenues and pays 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), other than in certain instances in which we receive
the aggregate transaction revenues and Cantor receives a 35%
service fee;
o we 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 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 receives the aggregate transaction revenues and pays 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 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 receive 100% of the transaction revenues and do not pay Cantor
a service fee, if the product is not a financial product and we
provide electronic brokerage services.
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 receive 2.5% of the transaction revenues.
In addition, if the electronic marketplace is collaborative with Cantor
and the transactions relate to a gaming business, we receive a service fee equal
to 25% of the net trading 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,
19
<PAGE>
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.
System Services
We also provide to Cantor technology support services, including (1)
systems administration, (2) internal network support, (3) support and
procurement for desktops of end-user equipment, (4) operations and disaster
recovery services, (5) voice and data communications, (6) support and
development of systems for clearance, settlement and other fulfillment services,
(7) systems support for Cantor brokers, (8) electronic applications systems and
network support and development for the unrelated dealer businesses with respect
to which we do not collaborate with Cantor and (9) provision and/or
implementation of existing electronic applications systems, including
improvements and upgrades thereto, and use of the related intellectual property
rights, having application in a gaming business. Cantor pays to us an amount
equal to the direct and indirect costs, including overhead, that we incur in
performing these services. We do not receive service fees and we are otherwise
not 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 and (4) 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 our 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 servicemarks "Cantor
Exchange(SM)," "Interactive Matching(SM)" and "CX(SM)".
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 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.
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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 other 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 other 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 other
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 other
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.
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 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
acquirer 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
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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 provides certain administrative and
management services to us. Cantor makes available to us some of its
administrative and other staff, including its internal audit, treasury, legal,
tax, human resources, corporate development and accounting staffs. Members of
these staffs arrange for our insurance coverage and provide a wide array of
services, including administration of our personnel and payroll operations,
benefits administration, internal audits, facilities management, promotional
sales and marketing, legal, risk management, accounting and tax preparation and
other services. We reimburse Cantor for the actual costs incurred by Cantor,
plus other reasonable costs, including reasonably allocated overhead and any
applicable taxes. We have also entered into arrangements with Cantor under which
we have the right to use certain assets, principally computer equipment, from
Cantor 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. Under the Administrative Services Agreement, we provide
sales, marketing and public relations services to Cantor. Cantor reimburses us
for the actual costs incurred by us, plus other reasonable costs, including
reasonably allocated overhead. The Administrative Services Agreement has a
three-year term which will renew automatically for successive one-year terms
unless canceled by either us or Cantor upon six months' prior notice; provided,
however, that our right to use our New York space expires at the time that
Cantor's lease expires in 2006 and our right to use our London office space
expires at the earlier of (1) the time Cantor's lease expires in 2016 or (2)
until Cantor ceases to be an affiliate of ours and Cantor asks us to vacate.
Registration Rights Agreement
Pursuant to the Registration Rights Agreement entered into by Cantor and
us, Cantor has received piggyback and demand registration rights.
The piggyback registration rights allow Cantor to register the shares of
the 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 the 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 the Class A Common Stock to be used
as consideration for acquisitions of additional businesses; and
o registrations relating to employee benefit plans.
Cantor also has the right, on three occasions, to require that we register
under the Securities Act any or all of the shares of the 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 our initial public 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 Agreement.
We have agreed to pay all costs of one demand and all piggyback
registrations, other than underwriting discounts and commissions. All of these
registration rights are subject to conditions and limitations, including (1) the
right of underwriters of an offering to limit the number of shares included in
that registration; (2) our right not to effect any demand registration within
six months of a public offering of our securities; and (3) that Cantor agrees to
refrain from selling its shares during the period from 15 days prior to and 90
days after the effective date of any registration statement for the offering of
our securities.
Potential Conflicts of Interest and Competition with Cantor
Various conflicts of interest between us and Cantor may arise in the
future in a number of areas relating to our past and ongoing relationships,
including potential acquisitions of businesses or properties, the election of
new directors, payment of dividends, incurrence of indebtedness, tax matters,
financial commitments, marketing functions, indemnity arrangements, service
arrangements, issuances of our capital stock, sales or distributions by Cantor
of its shares of our common stock and the exercise by Cantor of control over our
management and affairs. A majority of our directors and officers also serve as
directors and/or officers of Cantor. Simultaneous service as an eSpeed director
or officer and service as a director or officer, or status as a partner, of
Cantor could create or appear to create potential conflicts of interest when
such directors, officers and/or partners are faced with decisions that could
have different implications for us and for Cantor. Mr. Lutnick, our Chairman and
Chief Executive Officer, is the sole stockholder of the managing general partner
of Cantor. As a result, Mr. Lutnick controls Cantor. Cantor owns shares of the
Class A Common Stock and the Class B Common Stock representing approximately
95.6% of the
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Total Voting Power. 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.
Consulting Services
For consulting services provided to us and Cantor by Martin J. Wygod in
connection with our initial public offering, we have issued to Martin J. Wygod
or his designees warrants to purchase 135,000 shares of the Class A Common
Stock. 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 the Class A Common Stock issued or issuable
upon exercise of the warrants and are substantially similar to the piggyback
registration rights granted to Cantor. Mr. Wygod also has the right, on one
occasion, to require that we register under the Securities Act of 1933 a
minimum of 75% of the aggregate number of shares of the 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.
TradeSpark
Please see Proposal 2 - Approval of the Additional Investment Right for a
description of a related party transaction involving Williams, Dynegy, Cantor
and us. A limited partnership named TradeSpark, LP ("TradeSpark"), the first
Qualified Vertical, was formed on September 22, 2000 to operate an electronic
and telephonic marketplace for North American wholesale transactions in natural
gas, electricity, coal, sulfur dioxide and nitrogen dioxide emissions allowances
and weather financial products. On that date, we made a cash investment in
TradeSpark of $2.0 million in exchange for a 5% interest in TradeSpark, and
Cantor made a cash investment of $4.25 million in TradeSpark and agreed to
contribute to TradeSpark certain assets relating to its voice brokerage business
in certain energy products in exchange for a 28.33% interest in TradeSpark. We
and Cantor also executed an amendment to the Joint Services Agreement in order
to enable each of us to engage in this business transaction. The remaining
66.67% interest in TradeSpark was purchased by energy industry market
participants ("EIPs"). In connection with such investment, we entered into a
perpetual technology services agreement with TradeSpark pursuant to which we
will provide the technology infrastructure for the transactional and technology
related elements of the TradeSpark marketplace as well as certain other services
to TradeSpark in exchange for specified percentages of transaction revenues from
the marketplace. Cantor also entered into an administrative services agreement
with TradeSpark pursuant to which it will provide administrative services to
TradeSpark at cost. We and Cantor each received representation rights on the
management committee of TradeSpark in proportion to our ownership interests in
TradeSpark.
In order to provide incentives to the EIPs to trade on the TradeSpark
electronic marketplace, which will result in revenues to us under the TradeSpark
technology services agreement, we issued 5,500,000 shares of our Series A
Redeemable Convertible Preferred Stock ("Series A Preferred Stock") and
2,500,000 shares of our Series B Redeemable Convertible Preferred Stock ("Series
B Preferred Stock") to a limited liability company newly-formed by the EIPs
("EIP Holdings") to hold their investments in TradeSpark and the Series A and B
Preferred Stock. The Series A Preferred Stock is convertible, at the option of
the EIPs, into 10 year warrants ("Series A Warrants") to purchase up to
5,500,000 shares of Class A Common Stock at an excercise price of $27.94 per
share. The Series B Preferred Stock is convertible, at the option of the EIPs,
into 10 year warrants ("Series B Warrants") to purchase up to 2,500,000 shares
of Class A Common Stock at an exercise price of $27.94 per share. Full
convertibility of the Series A and B Preferred Stock into Series A and B
Warrants, respectively, is subject to satisfaction of certain revenue thresholds
and other conditions. If the conditions to full conversion are not satisfied,
each share of Series A and B Preferred Stock which is not so convertible may be
redeemed at our option, or converted at the option of the holder, for or into
1/100th of a share of Class A Common Stock. The Series A and B Warrants are
exercisable immediately upon issuance. We granted the EIPs certain demand,
piggyback and shelf registration rights with respect to the shares of Class A
Common Stock issuable upon exercise of the Series A and B Warrants.
In connection with its deliberations on our investment in TradeSpark
and the issuance of the Series A and B Preferred Stock, our Board of Directors
received an opinion from UBS Warburg LLC, dated September 20, 2000, to the
effect that, as of such date, the transaction among us, Cantor, EIP Holdings and
the EIPs in connection with the formation of TradeSpark was fair, from a
financial point of view, subject to the assumptions and qualifications stated
therein, to our stockholders, other than Cantor and other than any EIP that is
our stockholder.
Municipal Partners
On July 21, 2000, Cantor acquired the brokerage business of Municipal
Partners, Inc. ("MPI") pursuant to an Asset Purchase Agreement by and among us,
Cantor, MPI and the individuals signatory thereto for a cash payment of
$1,500,000. In connection therewith, we issued to MPI's stockholders 28,374
shares of the Class A Common Stock (the "Restricted Stock") having a value at
the date of issuance of $1,250,000 based on the average of the daily
volume-weighted closing sales price of the Class A Common Stock as reported on
the Nasdaq National Market for the 10 days preceding July 21, 2000. The
Restricted Stock is subject to a lock-up, which will be released as to 1/3 of
the shares on each of April 1, 2001, July 21, 2001 and July 21, 2002. Although
the purchased assets are owned by Cantor, we are entitled to 100% of the
revenues generated from any fully electronic transaction effected in a
marketplace utilizing our eSpeed(SM) system pursuant to the Joint Services
Agreement. In addition, in order to provide incentives to promote the use of our
eSpeed(SM) trading platform in connection with the purchased business, we
granted an aggregate of 28,374 restricted shares of the Class A Common Stock
(the "Additional Stock") pursuant to our long-term incentive plan for an
aggregate of $1,250,000 to certain employees and shareholders of MPI that joined
Cantor (the "Holders") in exchange for interest-bearing promissory notes (the
"Notes") in the same aggregate principal amount. The Additional Stock may be
redeemed, at our option, by cancellation of the related Note if we do not
receive $3,000,000 in electronic transaction revenues generated by Cantor's
municipal bond brokerage business for any consecutive twelve-month period during
the three years following the closing on July 21, 2000. The Holders were granted
piggyback registration rights with respect to the Additional Stock.
Insider Compensation
Joseph Shea, one of our directors, will receive a total of $250,000 from
us in fiscal year 2000 as compensation for his services as one of our employees.
Indemnification by Cantor
Although we do not expect to incur any losses with respect to pending
lawsuits or supplemental allegations surrounding Cantor's limited partnership
agreement, Cantor has agreed to indemnify us with respect to any liabilities we
incur as a result of such lawsuits or allegations.
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Reverse Repurchase Agreements
We purchase overnight U.S. Treasury securities under agreements to resell
with Cantor. At June 30, 2000, the overnight securities totaled $147,141,828,
including accrued interest. The securities collateralizing the resell agreements
are held under a custodial arrangement with a third party bank.
INDEPENDENT AUDITORS
Upon the recommendation of the Audit Committee, our Board of Directors
selected Deloitte & Touche LLP as our independent auditors for the fiscal year
ending December 31, 2000. One or more representatives of Deloitte & Touche LLP
are expected to attend our Annual Meeting to respond to appropriate questions.
They will have an opportunity to make a statement if they so desire. Material
non-audit services will be approved by the Audit Committee prior to the
rendering of such services after due consideration of the effect of the
performance thereof on the independence of the auditors.
EXPENSES OF SOLICITATION
The total cost of the Proxy solicitation will be borne by us. In addition
to the mails, Proxies may be solicited by our directors and officers by personal
interviews, telephone and telegraph. We have retained D.F. King & Co., Inc., New
York, New York, to assist in the solicitation of Proxies for a fee estimated to
be $5,000 plus reimbursement of out-of-pocket expenses. It is anticipated that
banks, brokerage houses and other custodians, nominees and fiduciaries will
forward soliciting material to the beneficial owners of shares of Common Equity
entitled to vote at our Annual Meeting and that such persons will be reimbursed
for their out-of-pocket expenses incurred in this connection.
STOCKHOLDER PROPOSALS
We intend to hold our 2001 Annual Meeting of Stockholders in or around
June 2001. Stockholders are hereby notified that, if they intend to submit
proposals for inclusion in our Proxy Statement and Proxy for our 2001 Annual
Meeting of Stockholders, such proposals must be received by us no later than
February 28, 2001 and must otherwise be in compliance with applicable Securities
and Exchange Commission regulations.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act, requires our officers, directors and
persons who beneficially own more than 10% of the Class A Common Stock to file
reports of ownership of such securities with the Securities and Exchange
Commission. Such officers, directors and 10% stockholders are also required by
Securities and Exchange Commission regulations to furnish us with copies of all
Section 16(a) forms they file.
Based solely on a review of the copies of the forms furnished to us, we
believe that for the fiscal year ended December 31, 1999 our officers, directors
and 10% stockholders filed all required Section 16(a) forms on a timely basis,
except for (1) an untimely filing by Mr. Merkel of a Form 4 to reflect shares of
the Class A Common Stock purchased by his spouse at the time of our initial
public offering and (2) an untimely filing by Mr. Moran of an amendment to his
Form 3 to reflect shares purchased by him at the time of our initial public
offering.
MISCELLANEOUS
Our Board of Directors knows of no other business to be presented at our
Annual Meeting. If, however, other matters properly do come before our Annual
Meeting, it is intended that the Proxies in the accompanying form will be voted
thereon in accordance with the judgment of the person or persons holding such
Proxies.
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STOCKHOLDERS ARE URGED TO COMPLETE, DATE, SIGN AND MAIL PROMPTLY THE ENCLOSED
PROXY IN THE ENVELOPE PROVIDED. PROMPT RESPONSE WILL GREATLY FACILITATE
ARRANGEMENTS FOR THE ANNUAL MEETING, AND YOUR COOPERATION WILL BE APPRECIATED.
By Order of the Board of Directors,
STEPHEN M. MERKEL
Secretary
New York, NY
September 22, 2000
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Appendix A
eSpeed, Inc.
Audit Committee Charter
Purpose and Role
The Audit Committee is a committee of the Board of Directors consisting solely
of independent directors, as defined in NASD Rule 4200(a)(14). Its primary
function is to assist the Board in fulfilling its oversight responsibilities by
reviewing the financial information which will be provided to the stockholders
and others, the systems of internal controls which management and the Board of
Directors have established, and the audit process.
Consistent with this function, the Audit Committee should encourage continuous
improvement of, and should foster adherence to, the Company's policies,
procedures and practices at all levels.
The Audit Committee's primary duties and responsibilities are to:
- Serve as an independent and objective party to monitor the Company's
financial reporting process and internal control system;
- Review and appraise the audit efforts of the Company's independent auditors
and internal audit department; and
- Provide an open avenue of communication between the independent auditors, the
internal audits department, senior management and the Board of Directors.
The Audit Committee will primarily fulfill these responsibilities by carrying
out the activities listed below.
Duties and Responsibilities
In order to fulfill its duties and responsibilities, the Audit Committee shall:
1. Meet at least four times a year or more frequently as circumstances
require. The Committee may ask members of management or others to attend
the meetings and provide pertinent information as necessary.
2. Review and update the Committee's charter periodically, at least annually,
as conditions dictate.
3. Recommend to the Board of Directors the appointment of or appoint the
independent auditors, which shall be accountable to the Board and the
Committee as representatives of the Company's stockholders, consider the
auditors' independence and effectiveness, approve the fees and other
compensation to be paid to the independent auditors, and, where
appropriate, recommend to the Board the replacement of or replace the
outside auditors.
4. Evaluate the performance of the independent auditors and approve any
proposed discharge of the independent auditor when circumstances warrant.
5. Periodically assess the independence of the independent auditors and review
the level of any management consulting or other services provided by the
independent auditors, including, without limitation, (a) requiring the
receipt from the independent auditors of a formal written statement
delineating all relationships between the auditors and the Company,
consistent with Independence Standards Board Standard 1, (b) actively
engaging in a dialogue with the independent auditors with respect to any
disclosed relationships or services that may impact the objectivity and
independence of the auditors and (c) taking, or recommending that the full
Board take, appropriate action to oversee the independence of the outside
auditors.
6. Discuss with management and the independent auditors, the rationale for
employing audit firms other than the principal independent auditors and
review the level of any non-audit fees incurred.
7. Review and concur with the appointment, replacement, re-assignment or
dismissal of the senior internal auditing executive.
<PAGE>
8. Review the annual audited financial statements with management, including
major issues regarding accounting and auditing principles and practices as
well as the adequacy of internal controls that could significantly affect
the Company's financial statements.
9. Periodically consult with management and the independent auditors about
significant financial risk exposures within the business, and assess the
steps taken to monitor and control such exposures to the Company.
10. Consider and review with management and the independent auditors, the
adequacy of the Company's internal controls (including computerized
information system controls and security) and the integrity of the
Company's financial reporting processes, both internal and external.
11. Review the regular internal reports to management prepared by the internal
auditing department and management's response. Consider the extent to which
any changes or improvements identified in the accounting practices and/or
internal controls have been implemented.
12. Review any management letters and/or other reports issued by the
independent auditors and consider management's response. Consider the
extent to which any changes or improvements identified in the accounting
practices and/or internal controls have been implemented.
13. Review the results of any audits or inspections conducted by the NASD or
SEC and consider management's response. Consider the extent to which any
findings or recommendations identified in the reviews have been addressed
by management.
14. Review, in consultation with the independent auditors and the internal
auditor, the annual audit scope and plan. Assess the coordination of audit
effort to ensure completeness of coverage, reduction of redundant effort
and the effective use of resources.
15. Following completion of the annual audit, review separately with management
and the independent auditors:
15.1. the Company's annual financial statements and related footnotes;
15.2. the audit report and opinion issued by the independent auditors;
15.3. any significant difficulties encountered during the course of the
audit, including any restrictions in the scope of work or access to
required information;
15.4. any significant changes or modifications required in the independent
auditors' audit plan;
15.5. any serious difficulties or disputes with management encountered
during the course of the audit or preparation of the financial
statements; and
15.6. any other matters related to the conduct of the audit, which are to
be communicated to the Committee under generally accepted auditing
standards.
16. Review an analysis prepared by management and the independent auditors of
significant financial reporting issues and judgments made in connection
with the preparation of the Company's financial statements. Consider the
quality and appropriateness of the Company's accounting principles as
applied in its financial reporting.
17. Review major changes to the Company's accounting principles and practices
as suggested by the independent auditors or management.
18. Review all SEC filings and other published documents containing financial
data about the Company for reasonableness and consistency.
19. Review with financial management and the independent auditors the Quarterly
Report on Form 10-Q prior to its filing or prior to the release of
earnings.
20. Review the policies and procedures with respect to officers' expense
accounts and perquisites, including their use of corporate assets, and
consider the results of any review of these areas by the independent
auditors or internal audit department.
<PAGE>
21. Review management's monitoring of the Company's compliance with its code of
conduct, and ensure that management has the proper review system in place
to review that the Company's financial statements, reports and other
financial information disseminated to government agencies and the public,
satisfies all legal requirements.
22. Obtain reports from management and the independent auditors, showing that
the Company's foreign affiliate and subsidiary entities are in conformity
with applicable legal requirements and the Company's code of conduct.
23. Periodically meet with the independent auditors, the internal audit
department and senior management in separate executive sessions to discuss
any matters that the Committee or these groups believe should be discussed
privately.
24. Review with the Company's General Counsel at an executive session any legal
or regulatory matters that may have a material impact on the financial
statements, related Company compliance policies, and/or programs and
reports received from regulators.
25. Report Committee actions to the Board of Directors with such
recommendations, as the Committee may deem appropriate.
26. Prepare a letter for inclusion within the annual report that describes the
Committee's composition and responsibilities and how they were discharged.
27. Perform such other functions as assigned by law, the Company's charter or
bylaws, or the Board of Directors.
While the Audit Committee has the responsibilities and powers set forth in this
Charter, it is not the duty of the Audit Committee to plan or conduct audits or
to determine that the Company's financial statements are complete and accurate
and are prepared in accordance with generally accepted accounting principles.
This is the responsibility of management and the independent auditors.
Nor is it the duty of the Audit Committee to resolve disagreements, if any,
between management and the independent auditors, or to assure compliance with
laws and regulations and the Company's code of conduct.
<PAGE>
eSPEED, INC.
Annual Meeting of Stockholders - October 26, 2000
The undersigned hereby appoints Howard W. Lutnick and Frederick T. Varacchi, and
each of them, proxies, with full power of substitution, to appear on behalf of
the undersigned and to vote all shares of Class A Common Stock (par value $.01)
and Class B Common Stock (par value $.01) of eSpeed, Inc. (the "Company") that
the undersigned is entitled to vote at the Annual Meeting of Stockholders of the
Company to be held at the Marriott World Trade Center Hotel, Three World Trade
Center, New York, New York on Thursday, October 26, 2000, commencing at 10:00
a.m. (local time), and at any adjournment thereof.
WHEN PROPERLY EXECUTED, THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO
INSTRUCTIONS ARE SPECIFIED, THIS PROXY WILL BE VOTED FOR THE ELECTION OF THE
LISTED NOMINEES AS DIRECTORS AND FOR THE APPROVAL OF THE ADDITIONAL INVESTMENT
RIGHT.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
Please mark box [X] in blue or black ink.
1. Election of FOR all nominees listed below / /
Directors:
WITHHOLD AUTHORITY to vote / /
for the nominees listed below
Nominees: HOWARD W. LUTNICK, FREDERICK T. VARACCHI, DOUGLAS B. GARDNER, RICHARD
C. BREEDEN, LARRY R. CARTER, WILLIAM J. MORAN AND JOSEPH P. SHEA
(Instructions: To withhold authority to vote for any one or more nominees, mark
the "WITHHOLD AUTHORITY" box and write the name of the nominee or nominees in
the space provided below.)
-----------------------------------
2. Approval of the Additional Investment Right: FOR / /
AGAINST / /
ABSTAIN / /
(Continued and to be signed on reverse side)
In their discretion, the proxies are authorized to vote upon such other business
as may properly come before the Annual Meeting and any adjournment thereof.
Please sign exactly as your name appears on
the left. When signing as an attorney,
executor, administrator, trustee or guardian,
please give your full title. If shares are
held jointly, each holder should sign.
PLEASE CHECK HERE IF YOU PLAN TO ATTEND THE
ANNUAL MEETING [ ]
Dated: __________________________, 2000
---------------------------------------
Signature
---------------------------------------
Signature
Please sign, date and return the proxy card using the enclosed envelope.
29
