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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-28191
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eSpeed, Inc.
(Exact name of Registrant as Specified in Its Charter)
Delaware 13-4063515
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation) No.)
One World Trade Center, 103rd Floor, New York, NY 10048
(Address of Principal Executive Offices) (Zip Code)
(212) 938-3773
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on which Registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $. 01 par value
(Title of Class)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of voting common equity held by non-affiliates
of the registrant, based upon the closing price of the Class A common stock on
March 15, 2000 as reported on the Nasdaq National Market, was approximately
$719,372,500.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at March 15, 2000
Class A Common Stock, par value $.01 per share 10,350,000 shares
Class B Common Stock, par value $.01 per share 40,650,000 shares
DOCUMENTS INCORPORATED BY REFERENCE.
None.
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eSPEED, INC.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
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PART I
ITEM 1 BUSINESS.............................................................1
ITEM 2 PROPERTIES..........................................................38
ITEM 3 LEGAL PROCEEDINGS...................................................38
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................41
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS....................................42
ITEM 6 SELECTED FINANCIAL DATA.............................................45
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................46
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK................................................53
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................54
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................................71
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................72
ITEM 11 EXECUTIVE COMPENSATION.............................................76
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.......................................................82
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................84
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K...........................................95
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PART I
ITEM 1. BUSINESS
The information in this report contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
are based upon current expectations that involve risks and uncertainties. Any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. For example, words such as "may,"
"will," "should," "estimates," "predicts," "potential," "continue," "strategy,"
"believes," "anticipates," "plans," "expects," "intends" and similar expressions
are intended to identify forward-looking statements. Our actual results and the
timing of certain events may differ significantly from the results discussed in
the forward-looking statements. Factors that might cause or contribute to such a
discrepancy include, but are not limited to, those discussed elsewhere in this
report in the section entitled "Risk Factors."
Overview of Our Business
eSpeed, Inc. is a leading provider of business-to-business electronic
marketplace solutions for the trading of products via the Internet or over our
global privately managed private network. Our eSpeed(((Service Mark))) system is
an end-to-end marketplace and trading community solution, which includes
real-time and auction-based transaction processing, risk management tools and
back-end processing and billing systems available to our clients. Our system is
designed to enable market participants to transact business instantaneously,
more effectively and at lower cost than traditional trading methods. Our
revenues are driven by trading activity and volumes in the marketplaces we
operate.
Our eSpeed((((Service Mark)))) system employs our international high speed
private electronic network and proprietary transaction processing software,
enabling significant capacity for fully electronic trading by our clients. We
believe these components form one of the most robust large scale, instantaneous,
mission critical trading systems in the world. Our network is internationally
distributed and permits market participants to view information and execute
trades in a fraction of a second from locations around the globe. Our system
operates and accesses a fully regulated U.S. futures exchange currently known as
the Cantor Exchange((((Service Mark)))). This exchange is the first fully
electronic futures exchange in the U.S. and will serve as our platform for the
electronic trading of a broad range of futures contracts globally.
Our eSpeed((((Service Mark)))) system includes our proprietary trading
application engine, which currently processes 150 transactions per second per
tradable instrument, our proprietary credit and risk module, which provides
real-time credit analysis and oversight, and our back-office and clearance
modules, which provide straight-through processing. Our eSpeed((((Service
Mark)))) system is accessible to our clients in four ways: through our
proprietary application programming interface (or API), through a dedicated
software application, via the Internet through a browser interface or Java
applet, or through front-end trading systems developed by third-party software
companies.
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Our objective is to create the leading business-to-business marketplace
trading solution. Our strategy is to leverage the scale and extendibility of our
system, our leading marketplace development expertise and our proprietary
futures exchange across markets.
Recent Events
We commenced operations in March 1999 as a division of Cantor Fitzgerald
(Cantor). Cantor currently operates with us the largest wholesale marketplace
for U.S. Treasury securities and leading marketplaces for many other global
fixed-income securities and financial instruments. Cantor also operates in other
non-financial markets, such as energy, commodities and acid rain emissions. Over
the past 25 years, Cantor has been a leading intermediary for the fixed income
markets. In 1972, Cantor developed the world's first screen-based marketplace
for the trading of U.S. government securities. Since the early 1990s, Cantor has
developed systems to promote fully electronic marketplaces. Since 1996, Cantor
has invested more than $200 million in information technology, including the
development of proprietary electronic transaction processing software, network
distribution systems and related contractual rights that comprise our
eSpeed((((Service Mark)))) system. In connection with the initial public
offering of our Class A common stock in December 1999, Cantor contributed to us
this proprietary software, network distribution systems, technologies and
related contractual rights.
We began marketing our eSpeed((((Service Mark)))) system throughout 1999
and, through our relationship with Cantor, we focused primarily on the financial
services industry and, in particular, fixed income products (which we refer to
as the Interest Rate Vertical). We now operate the largest global electronic
marketplace for U.S. Treasury securities, transacting billions of dollars daily,
and we operate leading global electronic marketplaces for other fixed income
securities and financial instruments. Most of the largest financial institutions
currently use our marketplaces to trade a wide range of global fixed income
securities, futures, options and other financial instruments. These financial
instruments include government securities denominated in U.S. dollars, Euros,
Yen, British Pounds Sterling, Canadian dollars and currencies of emerging market
countries, as the well as securities of U.S. agencies, municipal securities,
Eurobonds, corporate bonds and other global fixed income securities and U.S.
Treasury futures.
Within the Interest Rate Vertical, we believe we operate the only
electronic marketplaces used for trading multiple securities in multiple
currencies, and on a global basis provide a fully registered futures exchange.
Over 500 institutions worldwide participate in the Interest Rate Vertical,
including the 25 largest bond trading firms in the world, as identified by
Euromoney Magazine. Most of these institutions use our proprietary eSpeed screen
displays and/or trading platforms, which allow us to deliver information and
execute transactions instantaneously through the computer security barriers that
permit or exclude entry into the internal networks of these institutions. We
have devoted significant resources to developing client arrangements, providing
point-to-point communication links and creating proprietary software to
establish connectivity through these security barriers in order to deliver data
and execute transactions for our clients on a secure basis.
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Industry Background
Growth of the Internet and Business-to-Business Electronic Commerce. The
Internet has emerged as the fastest growing communications medium in history.
With over 165 million users at the end of 1998, growing to 623 million users by
2002, as estimated by IDC, the Internet is dramatically changing how businesses
and individuals communicate and share information. The Internet has created new
opportunities for conducting commerce, such as business-to-consumer and
person-to-person electronic commerce. Recently, the widespread adoption of
intranets and the acceptance of the Internet as a business communications
platform has created a foundation for business-to-business electronic commerce
that will enable organizations to streamline complex processes, lower costs and
improve productivity. With this foundation, Internet-based business-to-business
electronic commerce is poised for rapid growth and is expected to represent a
significantly larger opportunity than business-to-consumer or person-to-person
electronic commerce. According to Forrester Research, business-to-business
electronic commerce is expected to grow from $43 billion in 1998 to $1.3
trillion in 2003, accounting for more than 90% of the dollar value of electronic
commerce in the United States. This market is expected to create a substantial
demand for Internet-based electronic commerce applications.
Electronic Marketplaces. Electronic marketplaces have emerged as major
interactive mediums for business-to-business transactions, including auctions
and exchange-like trading mechanisms. In an electronic marketplace,
substantially all of the participants' actions are facilitated through an
electronic medium, such as a private electronic network or the Internet, which
effectively eliminates the need for actual face-to-face or voice-to-voice
participant interaction and saves time and money thereby creating enormous
efficiencies.
Our Trading Services and Technology Platform
In our electronic marketplaces, participants may either electronically
execute trades themselves or call brokers/terminal operators who then input
trade orders into the eSpeed system for them. In a fully electronic trade, all
stages of the trade occur electronically. The participant inputs its buy or sell
order instructions directly into our electronic trading system, using a
web-browser, a keyboard, an application programming interface or other software.
The system provides to the participant, normally within 300 milliseconds, an
on-screen confirmation that the participant's order has been accepted.
Instantaneously, once a trade is executed, the participant receives an on-screen
trade confirmation. Simultaneously, an electronic confirmation can be sent to
the participant's back office and risk system, enabling risk management
capabilities and straight-through processing for the participant. A
broker/terminal operator assisted trade is executed in substantially the same
manner as an electronic trade, except that the participant telephones a
broker/terminal operator who then inputs the participant's order into our
electronic marketplace system.
Over time, we expect fully electronic trading to become the predominant
trading method in our marketplaces. However, through our affiliation with
Cantor, we have the ability to offer to our clients broker/terminal operator
trading capabilities, thereby providing instantaneous back-up and marketplace
access. Unlike most traditional exchanges that have created side-by-side
competitive markets for voice and electronic access and, as a result, have
created separate pools
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of liquidity, our markets permit access to fully electronic and broker/terminal
operator orders to be all transacted within our eSpeed system in one liquidity
pool, seamlessly.
Our electronic marketplaces operate on our proven technology platform that
emphasizes scalability, performance and reliability. Our technology platform
consists of:
o our proprietary, internally developed real-time global network
distribution system;
o our proprietary transaction processing software, which includes order
matching auction engines, fully integrated credit and risk management
systems, pricing engines and associated middle and back office operations
systems;
o client interfaces ranging from Windows, Java, UNIX, our proprietary static
library API and proprietary vendor access; and
o customized inventory distribution and auction protocols designed to be
used by our clients in their distribution and trading systems.
Together, these components enable participants in our marketplaces to
trade almost every commodity in real-time efficiently, with straight-through
processing capabilities and certainty of execution.
Network Distribution System. Our eSpeed((((Service Mark)))) system
contains a proprietary hub and spoke digital network. This network uses Cisco
Systems network architecture and is operated by certified Cisco engineers. Our
network's high speed points of presence comprise the major financial hubs of the
world, including New York, London, Tokyo, Frankfurt, Paris, Milan, Chicago, Los
Angeles and Toronto. Altogether, we manage 22 hubs linked by over 50,000 miles
of cable, over 800 Cisco routers and switches and over an aggregate of 550 high
capacity Sun servers, Compaq Alpha super servers and Windows NT servers. The
redundant structure of the system provides multiple backup paths and re-routing
of data transmission if one spoke of a hub fails. This instantaneous backup is
critical to maintaining our clients' connectivity. We believe we operate one of
the largest and most robust interactive trading network distribution systems
currently in operation.
Our distribution system accepts orders and postings instantaneously and
distributes responses, generally in 300 milliseconds. The network can transport
150 million bits of information per second around the world and is currently
running at approximately 12% of capacity.
In addition to our own network system, we also distribute encrypted data
and receive trading information from clients using the services of multiple,
major Internet service providers throughout the world. These connections enable
us to offer Internet-based trading to our global clients which is completely
integrated with our private network.
Transaction Processing Software. Most of our software applications have
been developed internally and are central to the success of our
eSpeed((((Service Mark)))) system. Our order-matching auction and trading
engines operate in real-time, facilitating efficient interaction between buyers
and sellers. Our credit and risk management systems monitor and regulate these
buyers and
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sellers, limiting market and credit risk. Our pricing engines provide prices for
illiquid financial products through multiple trades in other related financial
instruments. These critical applications work together seamlessly and are
supported by middle and back office software that verifies, confirms, reports,
stores, tracks and, if applicable, clears each trade.
o eSpeed Trading Engines. Our auction and trading engines use
Interactive Matching((Service Mark)), our proprietary rules-based
method, to process in excess of 150 transactions per second per
auction, instrument or product. These engines were developed to
support trading of the largest capital markets in the world, such as
government bonds and futures contracts, and the more diverse,
fragmented and database intensive markets, such as U.S. municipal
bonds (with over 1.7 million different issues), corporate bonds and
Eurobonds. These trading engines are designed to be modular and
flexible to allow modification in order to apply them to other
markets and auction types. In Europe, for example, we have added a
component that allows us to process trading and auctions in multiple
currencies simultaneously. Our trading engines have embedded
security features and an added messaging layer to provide security
from unauthorized use. In addition, we use encryption to protect our
clients that trade over the Internet. When used together, our
trading engines can trade a wide range of instruments and products
and facilitate trade in auctions and markets. Our systems have
handled trades ranging in size from $100 to billions of dollars.
We believe our marketplace expertise and rules based systems provide
incentives for clients to actively participate in our marketplaces.
For example, Interactive Matching provides incentives to participate
in our marketplaces by encouraging participants to expose their
orders to the market by providing them priority in an interactive
marketplace. In standard auctions, the incentive is for participants
to wait until the last moment to make a bid or offer. Our priority
rules encourage trading activity by giving the last successful
active participant a time-based right of first refusal on the next
sale/purchase. In addition, in many markets we have structured our
pricing policy to provide that the party that provides auction
products for the market or creates liquidity by inputting a price to
buy or sell pays less commission (or no commission) than the
participant that consummates the trade by acting on that price. With
our pricing policies and proprietary priority rules, our system is
designed to increase activity and to draw participants into the
market. This proprietary rules-based system is easily adaptable and,
as part of our business strategy, we intend to apply it across other
non-financial markets for a multiple of products and services.
o eSpeed Credit Master - Credit and Risk Management Systems. Our
credit and risk management systems are critical to the operation of
our electronic marketplaces. Our proprietary credit and risk
management systems (1) continuously monitor trades of our clients to
ensure that they have not exceeded their credit limits, (2)
automatically prevent further trading once a client has reached a
pre-determined credit limit, and (3) evaluate trade transactions and
calculate both individual positions and risk exposure across various
products and credit limits. These systems can also be made available
to our global clients to enable them to monitor the position of
their traders and integrated with our private label systems so they
can monitor the credit of their clients who participate in our
marketplaces. These systems store client data relevant to credit
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and risk management, such as financial statements, credit documents,
contacts and internal analyses. These systems also enable our
clients to make our electronic marketplaces available to their
clients while maintaining control of their trading activity and
risk.
o eSpeed Pricing Engines and Analytics. We have internally developed a
number of sophisticated, analytical software tools that permit us to
price products that trade in less liquid markets and for which
current pricing information is not readily available. For example,
our MOLE((Service Mark)) system (Multiple Order Link Engine) is a
computer application that enables us to link multiple markets, offer
prices and create and enhance marketplaces for products that have
limited liquidity. For example, in the Interest Rate Vertical, MOLE
currently uses data from existing cash and futures markets to
calculate pricing for transactions where no market prices currently
exist, thereby enabling liquidity.
o eSpeed Back-Office - Middle and Back-Office Applications. Our middle
and back office applications support clearance, settlement, tracking
and reporting of trades and provide links to outside clearing
entities. In the financial markets, we outsource our fulfillment
services to Cantor, where both parties to a trade send either cash
or a security to Cantor and Cantor settles the trade and sends each
party the cash or security due. Our reporting and accounting systems
are designed to ensure that all charges and commissions for a trade
are tracked and recorded. Our accounting systems are designed to
ensure that books and records are kept in accordance with regulatory
guidelines and accounting standards.
o Client Interfaces. Our systems can be accessed by our clients in
four ways:
o using our eSpeed((Service Mark)) proprietary front end trading
software;
o using our application programming interface to write their own
software linking their networks and software applications
directly to our systems;
o through the Web via a browser, or using a downloaded java
application or dedicated proprietary software application via
the Internet, both for wholesale clients and for retail
clients who participate in our marketplaces; and
o through software developed in alliances with third-party
vendors such as QV Trading and SunGard/ASC. Our application
programming interface enables clients to conduct computer
price updating, program trading and straight-through
processing.
o eSpeed Private Label Products. We enable our clients to serve their
customers more effectively be supplying them with a private label
version of our eSpeed((Service Mark)) system, which incorporates the
functionality of our eSpeed((Service Mark)) system but allows them
to place their branding on the system for distribution to their
customers, whether via the Web or via a private network. These
products encompass our strategy to enable our clients to better
serve their institutional clients, as well as allowing us to enable
online and
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traditional retail brokers to provide their clients with
instantaneous access to a broad range of financial instruments:
o our Private Label products for the institutional market will
enable our clients to create their own customized versions of
our eSpeed((Service Mark)) system to enable them to transact
with their customers in an efficient manner utilizing a
co-branded version of our eSpeed((Service Mark)) system. Our
customers will use the system to allow more efficient
distribution of a wide variety of instruments that these
dealers will support, enabling them to transact more cost
effectively with their clients, and ensuring that they have a
turnkey e-commerce solution for their own marketing efforts.
We will enable these clients to deliver a customized
e-commerce solution to their customers, quickly, efficiently
and cost effectively.
o our Private Label products for the retail marketplace will
enable online and traditional retail brokers to provide their
clients with instantaneous access to previously unavailable
wholesale marketplaces for the retail trading of fixed income
instruments, futures, options and other financial instruments.
While retail investors generally have been able to buy and
sell equity securities at the same prices and spreads as
wholesale market participants and institutional investors,
this has not been the case with fixed income securities,
futures, options and other financial instruments. We believe
our eSpeed((Service Mark)) system will expand marketplaces
and/or retail volume and enhance execution for individual
retail investors.
Benefits of Our eSpeed((Service Mark)) System
The benefits of our eSpeed((Service Mark)) system include the following:
Instantaneous Price Dissemination and Auction and Trade Execution. Our
eSpeed((Service Mark)) system provides our clients with the ability to access
pricing and other information, operate auctions and execute trades
instantaneously, as opposed to traditional trading methods which provide less
timely information, non-real-time auctions and less efficient trade execution.
Lower Transaction Costs. Our eSpeed((Service Mark)) system streamlines the
entire trading process by eliminating the significant layers of manual
intervention that currently exist at both the front-end of the process,
including order entry, matching and postings functions, as well as at the middle
and back-end of the process (clearance, settlement, tracking and reporting
functions), resulting in significantly lower transaction costs for our clients.
Multiple Product Program Trading. Our eSpeed((Service Mark)) system
provides our clients with the ability to execute sophisticated and complex
transactions and trading strategies, including the trading of multiple products
across multiple markets simultaneously.
Greater Accuracy and Decreased Probability of Erroneous Trades. Our
eSpeed((Service Mark)) system includes verification mechanisms at various stages
of the execution process, which result in significantly reduced manual
intervention, decreased probability of erroneous trades and more accurate
execution for clients.
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Integrated Compliance and Credit Risk Functions. Our eSpeed((Service
Mark)) system includes a comprehensive range of compliance and credit risk
management components that perform several critical functions, including: (1)
continuously monitoring trading activity to ensure that clients are staying
within credit limits; (2) automatically preventing further trades once credit
limits have been exceeded; and (3) evaluating and calculating positions and risk
exposure across various products and credit limits. These risk, credit and
compliance tools are highly sophisticated and can be customized for our clients
and integrated into their information technology platforms.
Highly Efficient Pricing on Illiquid Securities. Our MOLE((Service Mark))
system enables us to provide prices for illiquid products through multiple
trades in other related products. These multi-variable trades are extremely
difficult to execute in traditional markets due to their complexity and the slow
speed of manual execution.
Ability to Automate Back-Office Functions. Our eSpeed((Service Mark))
system automates previously paper and telephone-based transaction processing,
confirmation and other functions, substantially improving and reducing the cost
of client back-offices, and enabling straight-through processing.
Private Label Products. Our private label initiative will allow our
clients to better serve their customers by enabling them to deliver an
e-commerce solution quickly, efficiently and cost effectively. We believe we not
only enhance the overall liquidity and efficiency of the market but also
maintain a stronger client relationship.
Leveraging Our eSpeed((Service Mark)) System Horizontally to Expand to
Additional Non-Financial Marketplaces (Vertical Markets).
Because of the scale of our system and its ease of adaptability, we
believe our eSpeed((Service Mark)) system and Interactive Matching((Service
Mark)) have applications across a broad range of products, including any
business-to-business marketplace involving multiple buyers and sellers. We are
well positioned to leverage the significant costs and efforts that have been
incurred developing our eSpeed((Service Mark)) system to quickly create
electronic markets in a wide range of products.
We expect to extend our marketplaces to include additional financial and
non-financial products, including energy, telecommunications products, including
bandwidth and telephone minutes, and bulk commodity chemicals, electronic
components and other decentralized or illiquid markets, through a variety of
approaches, together with Cantor as well as with other strategic partners.
Initially, we will focus our expansion efforts on the securities and
financial instruments traded by Cantor that have not yet been converted to
electronic trading. We plan to significantly expand the types of securities and
financial products traded in the Interest Rate Vertical marketplaces. Our goal
is to include in our electronic marketplaces the full range of fixed income
securities, futures, options and other securities and financial products that
are currently traded in today's markets worldwide.
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The Interest Rate Vertical
Wholesale Fixed Income Securities Trading. The global fixed income
securities market is the largest financial market in the world. In the United
States alone, there are over $13 trillion of fixed income securities
outstanding, and in the U.S. Government Securities market alone, there is
reported to be approximately $200 billion a day in trading just among the
primary dealers and their clients. Other fixed income instruments are traded
widely, and in Europe, Asia and the emerging markets, there is another
approximately $13 trillion of fixed income securities outstanding, with an
average daily trading volume of approximately $300 billion. In Europe, the
creation of the Euro has manifested a market second only to the United States in
breadth. We expect continued significant growth in these fixed income markets as
the issue of currency translation is removed as an obstacle to the development
of a large unified Pan-European market for securities.
Futures and Options Trading. Futures and options trading is a leading
financial activity throughout the world, with contracts traded on a wide variety
of financial instruments, commodities and indexes. In 1998, over 1.5 billion
futures contracts were traded in the world's futures markets, and over 750
million options contracts were traded on a variety of exchanges. Futures and
options provide several important economic benefits, including the ability to
shift or otherwise manage market risk. In part because these markets provide the
opportunity for leveraged investments, they attract large pools of risk capital.
Currently, most futures trading is still being done on open outcry exchanges,
but there has been a significant movement towards the conversion of these
markets to electronic trading. To date, we believe the most successful
initiatives have been made in Europe. We believe that there is significant
opportunity in the continued conversion of these markets to electronic networks,
such as our own.
Interest Rate Vertical. The Interest Rate Vertical includes many of the
largest Cantor marketplaces, including U.S. Treasury and European government
securities, global fixed income securities, futures, options and other financial
products. We intend to convert most of Cantor's remaining marketplaces to our
electronic trading platform by the end of 2000. Today, together with Cantor, our
systems execute in excess of $45 trillion in transaction volume annually and are
major facilitators and, in some cases, providers, of liquidity in numerous
financial products through our offices in the United States, Canada, Europe and
Asia. We share with Cantor a portion of the transaction-based revenues paid by
financial market participants for trades using our electronic marketplaces.
Cantor and most of the largest financial institutions in the world are currently
our primary clients. Our eSpeed((Service Mark)) system provides the only way to
electronically access Cantor's marketplaces. Consequently, we believe that
clients will be strongly motivated to use our interactive electronic
marketplaces.
Traditional Trading Methods for Financial Marketplaces. In both the fixed
income and futures markets, trading practices historically have centered on a
method of trading known as open outcry, where all trading activity is focused on
a central physical location, or pit. This method of trading can create
significant value for the market participants in the pit, who often have access
to better and more timely market information than other market participants. All
other market participants have to access the market through this central
location. Additionally, in order to access the pit, individuals and
institutional traders must send their orders through several layers of
middlemen, who assist in handling such orders. This process is inefficient. In
today's
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heavily regulated open outcry U.S. futures markets, for example, an
order can be routed through multiple people during its execution, adding
significant costs to the transaction. Virtually all U.S. futures exchanges are
controlled by their members and floor traders. Professional broker-dealers,
traders, institutional traders and individuals currently must trade with these
floor members, who are the market makers. These factors result in higher direct
and indirect costs of trade execution.
Traditional Order Execution
Limitation of Traditional Trading Methods. While traditional financial
markets facilitate large volume trading, they have significant shortcomings such
as the following:
o limited direct access and, therefore, many investors may not receive
efficient pricing;
o high transaction costs due to the number of people involved in an
open outcry system;
o slow execution;
o program trading, especially programs designed to automatically and
simultaneously execute multiple trades in different, but related,
financial products, is difficult to implement because of the current
manual nature of these markets;
o significant expense is also incurred in processing, confirming,
clearing and implementing compliance programs designed to monitor
and manage the exposure of individual professionals, as well as the
entire enterprise;
o paper and telephone-based trading produces delayed information and
results in compliance programs that are expensive to manage and can
be circumvented.
Therefore, institutions bear increased risk. These factors impede trading by
limiting volume and liquidity.
Emergence of Electronic Exchanges. Many financial exchanges worldwide,
including certain exchanges in France, Germany, Japan, Sweden, Switzerland and
the United Kingdom, are now partially or completely electronic. In the United
States, however, trading in many types of financial instruments continues to be
conducted primarily on open outcry exchanges. Recently, many exchanges have
introduced side-by-side markets for voice and electronic access and, as a
result, have created separate pools of liquidity. Moreover, substantially all of
the electronic trading systems introduced internationally and in the United
States have been implemented on a regional basis. Most of these systems provide
limited market liquidity and are designed to accommodate trading in one or a
limited number of securities and financial products, typically equity
securities. We believe that wholesale market participants and institutions will
ultimately look for a limited number of marketplaces to meet most of their
trading needs. This is because market participants will not want to work with
multiple trading platforms and connect their information technology platforms
and compliance programs to a large number of disparate systems. We believe the
trend toward electronic trading will continue and will ultimately result in a
majority of markets worldwide becoming fully electronic.
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In addition, recently there has been considerable discussion regarding the
move toward the demutualization of exchanges. Exchanges have historically been
operated on a not-for-profit basis for the benefit of their respective members,
and this governance structure has limited their ability to adopt new
technologies and respond quickly to market changes. In response to technological
advances in trading systems, many exchanges are contemplating the reorganization
of their ownership and management structures and are seeking to form alliances
with strategic partners. These developments have created, and are expected to
continue to create, opportunities for strategic acquisitions and alliances.
Online Trading. Favorable investing environments and advances in
technology have led to the rapid development of online and traditional retail
brokerage businesses. Technological advances have created new and inexpensive
means for individual investors to directly access markets online and participate
in the securities markets. According to International Data Corporation, the
number of online brokerage accounts grew from approximately 1.5 million at the
end of 1996 to over 6.4 million at the end of 1998, representing $324.0 billion
in assets and over 300,000 trades per day, primarily in equity securities.
International Data Corporation also estimates that, by 2002, 30% of investors
will trade online, and there will be over 24 million online accounts, a 275%
increase from 1998. Despite the growth in online accounts and access to public
equity markets, there has been very limited access for retail Internet trading
in fixed income securities, futures, options and other wholesale financial
instruments at cost-effective pricing and spreads. We believe that the emergence
of electronic marketplaces which promote greater liquidity, enhanced access and
more efficient pricing will increase trading among retail investors.
Our Interest Rate Vertical Marketplace Solution
Our private electronic network for wholesale financial markets is
connected to most of the largest financial institutions worldwide. We have
installed in the offices of our existing client base, comprising more than 500
leading dealers, banks and other financial institutions, the technology
infrastructure necessary to provide price information and trade execution on an
instantaneous basis in a broad range of securities and financial instruments. We
believe our eSpeed((Service Mark)) system enables us to introduce and distribute
a broad mix of financial products and services more quickly, cost effectively
and seamlessly than competitors.
Our eSpeed((Service Mark)) system:
o has a flexible design which allows us to quickly and easily add new
financial instruments in multiple currencies and trading models;
o uses a network distribution system, which we believe is one of the
most robust systems in operation, and which enables us to provide
access to a broad mix of accurate, instantaneous market data and
fast and highly reliable trade execution;
o is designed to minimize the need for human intermediaries in the
trading process by providing clients with multiple methods of
accessing our marketplaces and executing trades directly; and
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o uses Interactive Matching((Service Mark)), our proprietary,
rules-based trading method that interactively executes buy and sell
orders from multiple market participants.
These system features enable us to operate what we believe is the only
integrated trading network engaged in electronic trading in multiple products
and marketplaces on a global basis.
We believe our eSpeed((Service Mark)) system provides us with significant
competitive advantages over existing electronic trading systems and new entrants
seeking to develop and introduce limited electronic trading systems to the
global securities and financial instruments marketplaces. We also believe that
the time and expense required to develop and install electronic trading networks
will serve as a significant barrier to entry to many other potential
competitors.
Our Growth Strategy
Our objective is to be the leading provider of interactive electronic
marketplaces in the world. We believe we can extend our expertise in the
creation of instantaneous electronic marketplaces to a broad range of financial
and non-financial products and services. Our growth strategy to achieve this
objective includes the following key elements:
Focus Exclusively on Developing and Operating Interactive Electronic
Marketplaces. We intend to capitalize on the trend toward the increased use of
electronic trading platforms by focusing our business exclusively on the
development and operation of interactive electronic marketplaces worldwide. We
believe this operational focus provides us with a significant advantage over
competitors that have multiple and sometimes conflicting business objectives,
rigid business practices and cumbersome ownership structures that may impede
their ability to efficiently develop and implement electronic trading platforms
of their own.
Leverage Our eSpeed((Service Mark)) System for Use in Other
Business-to-Business and Consumer Markets. Because of the scale of our system
and its ease of adaptability, we believe our eSpeed((Service Mark)) system and
Interactive Matching((Service Mark)) have applications across a broad range of
products, including Internet-based marketplaces for a wide array of goods and
services, particularly those involving multiple buyers and sellers. We are well
positioned to leverage the significant costs and efforts that have been incurred
developing our eSpeed((Service Mark)) system to quickly create electronic
markets in a wide range of products.
Expand the Number of Financial and Non-Financial Products in Our
Electronic Marketplaces. Our electronic marketplaces currently handle the
trading of financial products which have among the highest average annual
trading volumes of all financial products, including U.S. government securities,
U.S. Treasury futures, non-U.S. G-7 government bonds, Eurobonds, corporate
bonds, agency securities, U.K. gilts, emerging markets securities, U.S.,
European and other repurchase agreements and municipal bonds. We plan to
significantly expand the types of securities and financial products traded in
our marketplaces. Our goal is to include in our electronic marketplaces the full
range of fixed income securities, futures, options and other securities and
financial products that are currently traded in today's markets worldwide.
Initially, we will focus our expansion efforts on the securities and financial
instruments traded by Cantor that have not yet been converted to electronic
trading. We expect to further extend our marketplaces to include additional
financial and non-financial products, including energy,
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communications, including bandwidth and telephone minutes and other
decentralized or illiquid markets, through a variety of approaches together with
Cantor or other strategic partners.
Convert Existing Clients to Fully Electronic Trading. Currently, less than
4% of the trades executed daily in our marketplaces, representing more than $6
billion in volume, are executed on a fully electronic basis without the
assistance of a broker. We intend to continue to convert substantially all of
Cantor's clients to a fully electronic trading environment. We believe the ease
of use, low price and efficient execution that our electronic marketplaces
afford will encourage clients to convert their trading to fully electronic
trading. We have a team of over 30 persons dedicated to enhancing client
awareness of the advantages of electronic trading and providing client support
in converting trading activity to a fully electronic trading format, and we
intend to increase that number. We also expect to leverage Cantor's historical
client relationships in connection with these efforts.
Leverage Existing eSpeed((Service Mark)) System Connectivity to Deploy New
Products and Services. Our eSpeed((Service Mark)) system provides connectivity
to, and the opportunity to electronically interact with, a global client base
that includes dealers, banks and financial institutions at hundreds of sites
around the globe. As a result, a significant number of our major clients
currently have installed the hardware necessary to trade on a fully electronic
basis. Utilizing the existing infrastructure and flexible architecture of this
system, we will be able to install with relative ease and at marginal
incremental cost, the components that will enable a client to electronically
trade in additional types of securities and financial products. We expect access
to this existing global private trading network to enable us to introduce and
distribute a broad mix of electronic trading products and services, more
quickly, cost effectively and seamlessly than competitors without access to such
a network.
Creating Online Retail Broker Access to Wholesale Markets for Fixed Income
Securities and Other Financial Products. We intend to create retail
marketplaces, where appropriate, to enable online and traditional retail brokers
to provide their clients with instantaneous access to previously unavailable
wholesale marketplaces for retail trading of fixed income securities, futures,
options and other financial instruments. While retail investors generally have
been able to buy and sell equity securities at the same prices and spreads as
wholesale market participants and institutional investors, this has not been the
case with fixed income securities, futures, options and other financial
instruments. We believe our eSpeed((Service Mark)) system will expand
marketplaces and/or retail volume and enhance execution for individual retail
investors.
Pursue Acquisitions and Strategic Alliances. We intend to capitalize on
the highly fragmented nature of the financial marketplaces and the trends toward
exchange demutualization and consolidation among regional and global market
participants. We expect to pursue an acquisition-based growth program that will
enable us (1) to acquire complementary technologies and service capabilities in
a cost-effective manner and (2) to broaden our product base and the securities
markets in which we provide our electronic trading services. We will seek to
enter into joint ventures and other strategic alliances to create additional
liquidity in the global financial products markets and to attract new trading
participants to those markets. We believe the flexibility afforded by our
corporate governance structure will enable us to implement these strategies, as
well as to anticipate and respond to developments and trends in the global
financial markets, more efficiently than competitors, such as exchanges, which
have broadly dispersed
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memberships and cumbersome management structures. Additionally, in connection
with our strategy for non-financial marketplaces, we may pursue acquisitions and
strategic alliances to allow us to enter these markets quickly. We also may
pursue acquisitions which may add functionality to our technology offerings.
Sales and Marketing
We expect to promote our electronic marketplaces and brokerage-related
services to Cantor's existing clients and new clients through a combination of
sales, advertising, marketing and co-marketing campaigns. We also expect to
leverage the historical client relationships of Cantor's employees under our
Joint Services Agreement with Cantor. We intend to build and enhance the eSpeed
brand name recognition through a sales, advertising and marketing campaign. We
expect to market to retail clients through a variety of campaigns, including
co-marketing campaigns with our online and traditional retail brokers. We intend
to design our sales, marketing and advertising campaigns to promote brand
awareness and educate the marketplace regarding the nature of our electronic
marketplaces, products and services and the advantages associated with the
automation of trading activities, such as enhanced instantaneous information
flow, price transparency and more direct and cost-effective market access, tight
spreads and instantaneous trade execution.
Our Clients
Clients in our marketplaces include banks, dealers, brokers and other
wholesale market participants, over 500 of which currently participate in our
electronic marketplaces, including the 25 largest bond trading firms in the
world, as identified by Euromoney Magazine. Through our eSpeed((Service Mark))
system, we expect to enable retail brokerage firms to expand their businesses by
providing them with the ability to offer their individual clients the option of
trading bonds and futures electronically in the same way they trade equity
securities, and we expect to include other marketplaces previously unavailable
to retail investors, or not available to them at reasonable spreads or
commissions. We intend to provide to wholesale and retail investors and to
Cantor access to our electronic marketplaces and brokerage-related services
supported by our eSpeed((Service Mark)) system. We expect that a significant
portion of our clients who use brokers will migrate to fully electronic access
over the coming years. We also intend to provide to third parties and to Cantor
the infrastructure, including systems administration, internal network support
and operations and disaster recovery services, that is critical to providing
fully electronic marketplaces for trading in a wide range of financial products.
Other than Cantor, no client of ours accounts for more than 10% of our revenues.
Strategic Alliances
In 1997, Cantor entered into an agreement with the New York Cotton
Exchange, which, upon merging with the Coffee, Sugar & Cocoa Exchange, became
known as the New York Board of Trade. The agreement sets forth the terms and
conditions pursuant to which Cantor operates an electronic marketplace, called
the Cantor Exchange, for futures contracts cleared by and under the regulatory
supervision of the New York Board of Trade. Cantor has assigned to us all of its
rights and obligations under its agreement with a subsidiary of the New York
Board of Trade to jointly operate the Cantor Exchange. Under the agreement, the
New York Board of
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Trade, through its subsidiaries, provides clearing and regulatory services and
we provide electronic execution and related services for the Cantor Exchange.
Pursuant to the agreement, neither we nor our affiliates will during the
term of the agreement establish in the United States an electronic market for
trading futures contracts or options on futures contracts on cotton, cheese,
coffee, sugar, cocoa, milk or frozen orange juice. We have agreed that within
the United States we will exclusively operate for the Cantor Exchange markets
for U.S. Treasury futures and other products so designated by the Cantor
Exchange. We and our affiliates may establish any electronic market that is
located physically outside the United States for such products if the New York
Board of Trade is not capable of providing regulatory or clearing services with
respect to such products.
Software Development
We devote substantial efforts to the development and improvement of our
electronic marketplaces. We will work with our clients to identify their
specific needs and make modifications to our software, network distribution
systems and technologies which are responsive to those needs. We are pursuing a
four-pronged approach to our research and development efforts: (1) internal
development; (2) strategic partnering; (3) acquisitions; and (4) licensing. We
have approximately 200 persons involved in our internal software development
efforts. Our technology team's objective will be to develop new products and
services that employ proven technology designed to provide superior electronic
trade execution and marketplace services to our clients. We will also focus our
efforts on enhancing our Web site and Internet screen interface to facilitate
real-time markets, comply with the standard Internet security protocol and
future security protocols and migrate transactions to the public networks in
order to capitalize on the development of new commercial marketplaces. We are
continuing to develop new marketplaces and products using our internally
developed application software having open architecture and standards. In
addition, we have forged strategic alliances with organizations such as
Sungard/ASC and QV Trading through which we will work to develop sophisticated,
front-end trading applications and products. We expect to license products from
and to companies when it is cost effective or profitable to do so.
Competition
The development and operation of electronic trading marketplaces are
evolving. As a result, competition in these marketplaces is currently very
fragmented. We expect to face competition from a number of different sources
varying in size, business objectives and strategy.
In the Interest Rate Vertical, our eSpeed((Service Mark)) system currently
competes, and we expect it to compete, directly and indirectly, with:
o traditional trading methods, including manual buy/sell order input
by registered brokers in response to telephone originated requests
and execution of trades in open outcry trading pits on exchange
floors, such as the Chicago Board of Trade, the Chicago Mercantile
Exchange and other exchanges and over-the-counter markets;
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o products developed and used by exchanges and financial services
firms, such as Liberty Brokerage Investment Corporation and
Garban-Intercapital plc, seeking to act as market intermediaries;
o automated trade execution services developed by third party vendors
for commercialization in a wide range of financial products markets;
o products and services of market data, information and communication
vendors, such as Reuters Group plc, Bloomberg L.P. and Bridge
Information Systems Inc., that have created electronic networks
which link them to most major financial institutions and that have
attempted, in some cases, to expand their networks to include
trading platforms; and
o consortia comprised of leading financial institutions and service
providers, such as BrokerTec Global LLC, which has announced its
intention to explore the development of electronic trading networks,
and EuroMTS.
In the business-to-business sector in general, we compete, directly and
indirectly, with:
o business-to-business marketplace infrastructure companies like Ariba
and CommerceOne, as well as with other Internet-based marketplace
trading and infrastructure platforms; and
o Niche market Internet-based trading systems, including AltraEnergy
Trading and HoustonStreet.
The electronic trading services we provide our wholesale clients enable
them to expand the range of services they provide to their ultimate customers,
which are also potential participants in our electronic marketplaces. We intend
to structure our relationships with our clients and conduct our operations to
mitigate the potential for this competition. We do not intend to use the access
to the customer base of our wholesale clients that we obtain in providing our
electronic trading services to compete with these wholesale clients in other
securities and financial instrument transactions.
We believe our electronic marketplaces will compete primarily on the basis
of speed, efficiency, price and ability to provide access to liquidity to market
participants.
Our Intellectual Property
We have adopted a comprehensive intellectual property protection program
to protect our proprietary technology. We currently have licenses covering four
of Cantor's patents in the United States. One patent relates to a data
processing system and method for electronically trading select items such as
fixed income instruments. Two patents relate to a fixed income portfolio index
processor. One patent relates to a system for shared remote access of multiple
application programs by one or more computers. Foreign counterpart applications
for some of these U.S. patents have been filed. The licenses are exclusive,
except in the event that we do not
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seek to or are unable to provide to Cantor any requested services covered by the
patents and Cantor elects not to require us to do so.
We also have an agreement to license several pending U.S. patent
applications relating to various other aspects of our electronic trading
systems, including both functional and design aspects. Additional patent
applications likely will be filed in the near future to further protect our
proprietary technology.
We cannot at this time determine the significance of any of the foregoing
patents, or future patents, if issued, to our business. We can give no assurance
that any of the foregoing patents is valid and enforceable, or that any of these
patents would not be infringed by a third party competing or seeking to compete
with our business.
Regulation
The securities industry and financial markets in the United States and
elsewhere are subject to extensive regulation. As a service provider to the
securities industry and financial markets, and as a registered broker-dealer,
our business activities fall within the scope of these regulations.
Regulation of the U.S. Securities Industry and Broker-Dealers.
As a matter of public policy, regulatory bodies in the United States and
the rest of the world are charged with safeguarding the integrity of the
securities and other financial markets and with protecting the interests of
investors participating in those markets. In the United States, the Securities
and Exchange Commission is the federal agency responsible for the administration
of the federal securities laws. Our regulated U.S. subsidiaries, eSpeed
Securities, Inc. and eSpeed Government Securities, Inc., are registered with the
Securities and Exchange Commission as broker-dealers. They are also members of
the National Association of Securities Dealers, Inc., a self regulatory body to
which most broker-dealers belong. Certain self-regulatory organizations, such as
the National Association of Securities Dealers, Inc., adopt rules and examine
broker-dealers and require strict compliance with their rules and regulations.
The Securities and Exchange Commission and self-regulatory organization rules
cover many aspects of a broker-dealer's business, including capital structure
and withdrawals, sales methods, trade practices among broker-dealers, use and
safekeeping of customer's funds and securities, record-keeping, the financing of
clients' purchases, broker-dealer and employee registration and the conduct of
directors, officers and employees. In connection with a violation of these
rules, the Securities and Exchange Commission, self-regulatory organizations and
state securities commissions may conduct administrative proceedings which can
result in censure, fine, the issuance of cease-and-desist orders or the
suspension or expulsion of a broker-dealer, its officers or employees.
Effect of Net Capital Requirements. The Securities and Exchange Commission
and the National Association of Securities Dealers, Inc. impose rules that
require notification when net capital falls below certain predefined criteria,
dictate the ratio of debt to equity in the regulatory capital composition of a
broker-dealer and constrain the ability of a broker-dealer to expand its
business under certain circumstances. Additionally, the Uniform Net Capital Rule
and the National Association of Securities Dealers, Inc. rules impose certain
requirements that may have
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the effect of prohibiting a broker-dealer from distributing or withdrawing
capital and requiring prior notice to the Securities and Exchange Commission and
the National Association of Securities Dealers, Inc. for certain withdrawals of
capital.
Through our broker-dealer subsidiary, eSpeed Government Securities, Inc.,
we are subject to SEC broker-dealer regulation under Section 15C of the
Securities Exchange Act of 1934, which requires the maintenance of minimum
liquid capital, as defined. At December 31, 1999, eSpeed Government Securities,
Inc.'s liquid capital of $1,536,699 was in excess of minimum requirements by
$1,511,699. Additionally, our other broker-dealer subsidiary, eSpeed Securities,
Inc., is subject to SEC broker-dealer regulation under Rule 17a-5 of the
Securities Exchange Act of 1934, which requires the maintenance of minimum net
capital and requires that the ratio of aggregate indebtedness to net capital,
both as defined, shall not exceed 8 to 1. At December 31, 1999, eSpeed
Securities, Inc. had net capital of $1,048,849, which was $572,325 in excess of
its required capital of $476,524. eSpeed Securities, Inc.'s net capital ratio
was 3.63 to 1.
Application of Exchange Act to Internet Business. The Securities Exchange
Act of 1934 governs, among other things, the operation of the financial products
markets and broker-dealers. When enacted, the Securities Exchange Act of 1934
did not contemplate the conduct of a securities business throughout the
Internet. Although the Securities and Exchange Commission, in releases and
no-actions letters, has provided guidance on various issues related to the
conduct of a securities business through the Internet, the application of the
laws to the conduct of a securities business through the Internet continues to
evolve. Uncertainty regarding these issues may adversely affect the viability
and profitability of our business.
Financial Futures and Options. Financial futures and options in financial
futures are subject to regulation by the Commodity Futures Trading Commission
under the Commodity Exchange Act, and exchanges that provide facilities for the
trading of those products are also subject to Commodity Futures Trading
Commission regulation. As a service provider to the Cantor Exchange((Service
Mark)), a futures exchange that is a designated contract market under the
Commodity Exchange Act, we could be adversely affected by changes in laws or
regulations governing the products or clients of the Cantor Exchange((Service
Mark)).
Exchange Regulation. Securities exchanges must register with the
Securities and Exchange Commission and comply with various requirements of the
Securities Exchange Act of 1934. Effective April 1999, new rules expanded the
scope of exchange regulation to include many brokerage matching and execution
systems, such as the matching systems that we support. The new rules impose
various requirements relating to fair access, capacity, security, record-keeping
and reporting. Our subsidiaries expect to comply with these requirements.
Although we do not expect the compliance costs to be significant, our
subsidiaries could encounter unforeseen expenses associated with operation of
these rules.
Regulation of the Non-U.S. Securities Industries and Investment Service
Providers.
The securities industry and financial markets in the European Union and
elsewhere are subject to extensive regulation. As the owner and operator of
electronic marketplaces for the securities industry and financial markets, our
business activities may fall within the scope of
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those regulations depending upon the extent to which we are characterized as
providing a regulated investment service.
The securities industry in the member states of the European Union is
extensively regulated by agencies in each member state. European Union measures
provide for the mutual recognition of regulatory agencies and of prudential
supervision making possible the grant of a single authorization for the provider
of investment services which, broadly, is valid throughout the European Union.
As an investment service provider in the United Kingdom, our principal regulator
would be the Securities and Futures Authority. The conduct of an investment
business is also regulated by agencies in each of the other member states in
which we may provide investment services. The provision of investment services
is also regulated by other agencies in other jurisdictions in which we operate
such as the Securities and Futures Commission in Hong Kong and the local
government agency delegated by the Japanese Financial Supervisory Agency in
Japan.
As a matter of public policy, regulatory bodies in the European Union and
the rest of the world are charged with safeguarding the integrity of the
securities and other financial markets and with protecting the interests of
investors participating in those markets. We are seeking authorization from the
Securities and Futures Authority to provide investment services in the United
Kingdom and we intend to exercise our rights under the European Union Investment
Services Directive to provide such investment services throughout the European
Union. Similar authorization applications will be made in other jurisdictions,
such as Hong Kong and Japan, where such authorization is necessary to operate an
electronic marketplace.
The Securities and Futures Authority and other regulatory agencies in the
European Union may conduct administrative proceedings which can result in
censure, fine, the prevention of activities or the suspension or expulsion of an
investment services provider. The applicable investment service regulations
cover minimum financial resource requirements and conduct of business rules for
all authorized investment businesses.
Investment exchanges may be operated and authorized as investment
businesses in the European Union, subject to the provision of the Investment
Services Directive. Alternatively, investment exchanges can obtain authorization
as an investment exchange from each member state in the European Union in
accordance with the applicable regulations of that member state.
Changes in Existing Laws and Rules. Additional legislation or regulation,
changes in existing laws and rules or changes in the interpretation or
enforcement of existing laws and rules, either in the United States or
elsewhere, may directly affect our mode of operation and our profitability.
Employees
As of December 31, 1999, we had 370 employees, five of whom are our
executive officers. None of these employees is represented by a union. We
believe that we have good relations with our employees.
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RISK FACTORS
An investment in our company involves a high degree of risk. You should
carefully consider the risks below, together with the other information
contained in this report, before you decide to invest in our company. If any of
the following risks occur, our business, results of operations and financial
condition could be harmed, the trading price of our Class A common stock could
decline, and you could lose all or part of your investment.
RISKS RELATED TO OUR COMPANY AND OUR BUSINESS
Because we have a limited operating history, you may not be able to accurately
evaluate eSpeed.
We are a recently formed company. We have had limited operations to date
and, as a result, we have a limited operating history upon which to evaluate the
merits of investing in our Class A common stock. As an early stage company, we
are subject to risks, expenses and difficulties associated with implementing our
business plan that are not typically encountered by more mature companies. In
particular, our prospects are subject to risks, expenses and uncertainties
encountered by companies in the new and rapidly evolving market for electronic
commerce products and services. These risks include our failure or inability to:
o provide services to our clients that are reliable and cost-effective;
o expand our sales structure and marketing programs;
o increase awareness of our brand or market positioning; and
o respond to technological developments or service offerings by competitors.
We may not be able to implement our business plan successfully, or at all.
Because we have a history of losses, we expect to continue to incur losses and
generate negative cash flow from operations for the foreseeable future.
Since our inception, we have incurred substantial costs to develop our
technology and infrastructure. As a result, from our inception through December
31, 1999, we have sustained cumulative net losses of approximately $12.6
million. We expect that we will continue to incur losses and generate negative
cash flow from operations for the foreseeable future as we continue to develop
our systems and infrastructure and expand our brand recognition and client base
through increased marketing efforts.
If we do not expand the use of our electronic systems, or if our and Cantor's
clients do not use our marketplaces or services, our revenues and profitability
will be adversely affected.
The use of electronic marketplaces is relatively new. The success of our
business plan depends, in part, on our ability to maintain and expand the
network of brokers, dealers, banks and other financial institutions that will
use our interactive electronic marketplaces. We cannot assure you that we will
be able to continue to expand our marketplaces, or that we will be able to
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retain the current participants in our marketplaces. None of our agreements with
market participants require them to use our electronic marketplaces.
If we are unable to enter into marketing and strategic alliances, we may not
generate increased trading in our electronic marketplaces.
We expect to enter into strategic alliances with other market
participants, such as retail brokers, exchanges, market makers, clearinghouses
and technology companies, in order to increase client access to and use of our
electronic marketplaces. We cannot assure you that we will be able to enter into
these strategic alliances on terms that are favorable to us, or at all. The
success of these relationships will depend on the amount of increased trading in
our electronic marketplaces by the clients of these strategic alliance partners.
These arrangements may not generate the expected number of new clients or
increased trading volume we are seeking.
To increase awareness of our electronic marketplaces, we may need to incur
significant marketing expenses.
To successfully execute our business plan, we must build awareness and
understanding of our electronic marketplace services, brand and the adaptability
of our electronic marketplaces for non-financial products. In order to build
this awareness, our marketing efforts must succeed and we must provide
high-quality services. These efforts will require us to incur significant
expenses. We cannot assure you that our marketing efforts will be successful or
that the allocation of funds to these marketing efforts will be the most
effective use of those funds.
If we experience computer systems failures or capacity constraints, our ability
to conduct our operations could be harmed.
We internally support and maintain many of our computer systems and
networks. Our failure to monitor or maintain these systems and networks or, if
necessary, to find a replacement for this technology in a timely and
cost-effective manner, would have a material adverse effect on our ability to
conduct our operations.
We also rely and expect to rely on third parties for various computer and
communications systems, such as telephone companies, online service providers,
data processors, clearance organizations and software and hardware vendors. Our
systems, or those of our third party providers, may fail or operate slowly,
causing one or more of the following:
o unanticipated disruptions in service to our clients;
o slower response times;
o delays in our clients' trade execution;
o failed settlement by clients to whom we provide services to
facilitate settlement operations;
o decreased client service satisfaction;
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o incomplete or inaccurate accounting, recording or processing of
trades;
o financial losses;
o litigation or other client claims; and
o regulatory sanctions.
We cannot assure you that we will not experience systems failures from
power or telecommunications failure, acts of God or war, human error, natural
disasters, fire, power loss, sabotage, hardware or software malfunctions or
defects, computer viruses, intentional acts of vandalism and similar events. The
assets acquired by us from Cantor in the formation transactions have been
acquired by us "as is." Although Cantor used in its business the systems and
technology it transferred to us in connection with the formation transactions,
there can be no assurance that such systems and technology were or are entirely
free from defects. To the extent any defects are discovered, we will not have
any recourse against Cantor. Any system failure that causes an interruption in
service or decreases the responsiveness of our service, including failures
caused by client error or misuse of our systems, could damage our reputation,
business and brand name.
If we do not effectively manage our growth, our existing personnel and systems
may be strained and our business may not operate efficiently.
In order to execute our business plan, we must grow significantly. This
growth will place significant strain on our personnel, management systems and
resources. We expect that the number of our employees, including technical and
management-level employees, will continue to increase for the foreseeable
future. We must continue to improve our operational and financial systems and
managerial controls and procedures, and we will need to continue to expand,
train and manage our technical workforce. We must also maintain close
coordination among our technical, compliance, accounting, finance and marketing
and sales organizations. We cannot assure you that we will manage our growth
effectively, and failure to do so could result in our business operating
inefficiently.
If we are unable to keep up with rapid technological changes, we may not be able
to compete effectively.
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality, accessibility and features of our proprietary
software, network distribution systems and technologies. The financial services
and e-commerce industries are characterized by rapid technological change,
changes in use and client requirements and preferences, frequent product and
service introductions embodying new technologies and the emergence of new
industry standards and practices that could render our existing proprietary
technology and systems obsolete. Our success will depend, in part, on our
ability to:
o develop and license leading technologies useful in our business;
o enhance our existing services;
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o develop new services and technologies that address the increasingly
sophisticated and varied needs of our existing and prospective
clients; and
o respond to technological advances and emerging industry standards
and practices on a cost-effective and timely basis.
The development of proprietary electronic trading technology entails
significant technical, financial and business risks. Further, the adoption of
new Internet, networking or telecommunications technologies may require us to
devote substantial resources to modify and adapt our services. We cannot assure
you that we will successfully implement new technologies or adapt our
proprietary technology and transaction-processing systems to client requirements
or emerging industry standards. We cannot assure you that we will be able to
respond in a timely manner to changing market conditions or client requirements.
If we were to lose the services of members of management and employees who
possess specialized market knowledge and technology skills, we may not be able
to manage our operations effectively or develop new electronic marketplaces.
Our future success depends, in significant part, on the continued service
of Howard Lutnick, our Chairman and Chief Executive Officer, Frederick Varacchi,
our President and Chief Operating Officer, and our other executive officers and
managers and sales and technical personnel who possess extensive financial
markets knowledge and technology skills. We cannot assure you that we would be
able to find an appropriate replacement for Mr. Lutnick or Mr. Varacchi if the
need should arise. Any loss or interruption of Mr. Lutnick's or Mr. Varacchi's
services could result in our inability to manage our operations effectively
and/or develop new electronic marketplaces. We have not entered into employment
agreements with and we do not have "key person" life insurance policies on any
of our officers or other personnel. All of the members of our senior management
team are also officers, partners or key employees of Cantor. As a result, they
dedicate only a portion of their professional efforts to our business and
operations. We cannot assure you that the time these persons devote to our
business and operations in the future will be adequate and that we will not
experience an adverse effect on our operations due to the demands placed on our
management team by their other professional obligations. We intend to strive to
provide high quality services that will allow us to establish and maintain
long-term relationships with our clients. Our ability to do so will depend, in
large part, upon the individual employees who represent us in our dealings with
clients. The market for qualified programmers, technicians and sales persons is
extremely competitive and has grown more so in recent periods as electronic
commerce has experienced growth. We cannot assure you that we will be successful
in our efforts to recruit and retain the required personnel.
If Cantor or we are unable to protect the intellectual property rights we
license from Cantor or own, our ability to operate electronic trading
marketplaces may be materially adversely affected.
Our business is dependent on proprietary technology and other intellectual
property rights. We license our patented technology from Cantor. The license
arrangement is exclusive, except in the event that (1) we are unwilling to
provide to Cantor any requested services covered by the patents with respect to
a marketplace and Cantor elects not to require us to do so, or we
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are unable to provide such services or (2) we do not exercise our right of first
refusal to provide to Cantor electronic brokerage services with respect to a
marketplace, in which case Cantor retains a limited right to use the patents and
patent applications solely in connection with the operation of that marketplace.
We cannot guarantee that the concepts which are the subject of the patents and
patent applications covered by the license from Cantor are patentable or that
issued patents are or will be valid and enforceable. Where patents are granted
in the U.S., we can give no assurance that equivalent patents will be granted in
Europe or elsewhere, as a result of differences in local laws affecting
patentability and validity. Moreover, we cannot guarantee that Cantor's issued
patents are valid and enforceable, or that third parties competing or intending
to compete with us will not infringe any of these patents. Despite precautions
we or Cantor has taken or may take to protect our intellectual property rights,
it is possible that third parties may copy or otherwise obtain and use our
proprietary technology without authorization. It is also possible that third
parties may independently develop technologies similar to ours. It may be
difficult for us to monitor unauthorized use of our proprietary technology and
intellectual property rights. We cannot assure you that the steps we have taken
will prevent misappropriation of our technology or intellectual property rights.
We intend to use our eSpeed service mark for the services described herein
and have applied to register that service mark in a number of jurisdictions
around the world. Although several existing third party registrations and
applications for trademarks consisting of designations similar to ours in
certain European countries have recently come to light, they are for goods and
services that are different from those being offered under our eSpeed service
mark. Although we are not presently aware of any third party objections to our
use or registration of our eSpeed service mark in these countries, and believe
we could defend against any third party claims asserted in these countries, such
registrations and applications could potentially affect the registration, and/or
limit our use, of our eSpeed service mark in these European countries, thereby
requiring us to adopt and use another service mark for our services in such
countries.
If it becomes necessary to protect or defend our intellectual property rights,
we may have to resort to costly litigation.
We may have to resort to litigation to enforce our intellectual property
rights, protect our trade secrets, determine the validity and scope of the
proprietary rights of others or defend ourselves from claims of infringement,
invalidity or unenforceability. We may incur substantial costs and diversion of
resources as a result of litigation, even if we win. In the event we do not win,
we may have to enter into royalty or licensing agreements. We cannot assure you
that an agreement would be available to us on reasonable terms, if at all.
One of the patents we license from Cantor and which relates to Interactive
Matching((Service Mark)) is currently the subject of litigation involving
Liberty Brokerage Investment Corporation and Liberty Brokerage Inc. This patent
is exclusively licensed to us subject to certain conditions. We have assumed
responsibility for defending this suit on behalf of Cantor and its affiliates.
We have also agreed to indemnify Cantor with respect to all costs arising in
connection with or relating to this lawsuit, including any damages or judgments.
We cannot assure you that any of the patents owned or licensed by us will be
upheld by a court as valid and/or enforceable.
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If our software licenses from third parties are terminated, our ability to
operate our business may be materially adversely affected.
We license software from third parties, much of which is integral to our
systems and our business. The licenses are terminable if we breach our
obligations under the license agreements. If any of these relationships were
terminated or if any of these third parties were to cease doing business, we may
be forced to spend significant time and money to replace the licensed software.
However, we cannot assure you that the necessary replacements will be available
on reasonable terms, if at all.
If the strength of our domain names is diluted, the value of our proprietary
rights may decrease.
We own many Internet domain names including "www.espeed.com." The
regulation of domain names in the United States and in foreign countries may
change and the strength of our names could be diluted. We may not be able to
prevent third parties from acquiring domain names that infringe or otherwise
decrease the value of our trademarks and other proprietary rights.
If we infringe on patent rights or copyrights of others, we could become
involved in costly litigation.
Patents or copyrights of third parties may have an important bearing on
our ability to offer certain of our products and services. We cannot assure you
that we are or will be aware of all patents or copyrights containing claims that
may pose a risk of infringement by our products and services. In addition,
patent applications in the United States are generally confidential until a
patent is issued. As a result, we cannot evaluate the extent to which our
products and services may be covered or asserted to be covered by claims
contained in pending patent applications. In general, if one or more of our
products or services were to infringe patents held by others, we may be required
to stop developing or marketing the products or services, to obtain licenses to
develop and market the services from the holders of the patents or to redesign
the products or services in such a way as to avoid infringing on the patent
claims, which could limit the manner in which we conduct our operations.
Due to intense competition in our industry, our market share and financial
performance could suffer.
The electronic trading and Internet-based financial services markets are
highly competitive and many of our competitors are more established and have
greater financial resources than us. We expect that competition will intensify
in the future. Many of our competitors also have greater market presence,
engineering and marketing capabilities and technological and personnel resources
than we do. As a result, as compared to us, our competitors may:
o develop and expand their network infrastructures and service
offerings more efficiently or more quickly;
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o adapt more swiftly to new or emerging technologies and changes in
client requirements;
o take advantage of acquisitions and other opportunities more
effectively;
o devote greater resources to the marketing and sale of their products
and services; and
o more effectively leverage existing relationships with clients and
strategic partners or exploit more recognized brand names to market
and sell their services.
Our current and prospective competitors are numerous and include:
o Interdealer brokerage firms, including Liberty Brokerage Investment
Corporation and Garban-Intercapital plc.
o Technology companies and market data and information vendors,
including Reuters Group plc, Bloomberg L.P. and Bridge Information
Systems, Inc.;
o Securities or futures exchanges or similar entities, including the
Chicago Board of Trade, the Chicago Mercantile Exchange, the Chicago
Board of Options Exchange, Eurex, the New York Stock Exchange and
the Nasdaq National Market;
o Electronic communications networks, crossing systems and similar
entities such as Investment Technology Group and Optimark
Technologies Inc.; and
o Consortia such as BrokerTec Global LLC and EuroMTS.
We believe that we may also face competition from large computer software
companies, media and technology companies and some securities brokerage firms
that are currently our clients. In addition, Market Data Corporation, which is
controlled by Iris Cantor and Rodney Fisher, has technology for electronic
trading systems that, if provided to our competitors in the wholesale market,
will be of substantial assistance to them in competing with us. Iris Cantor and
Rod Fisher are limited partners of Cantor.
The number of businesses providing Internet-based financial services is
rapidly growing, and other companies, in addition to those named above, have
entered into or are forming joint ventures or consortia to provide services
similar to those provided by us. Others may acquire the capabilities necessary
to compete with us through acquisitions.
In the event we extend the application of our Interactive
Matching((Service Mark)) technology to conducting or facilitating auctions of
consumer goods and services over the Internet, we expect to compete with both
online and traditional sellers of these products and services. The market for
selling products and services over the Internet is new, rapidly evolving and
intensely competitive. Current and new competitors can launch new sites at a
relatively low cost. We expect we will potentially compete with a variety of
companies with respect to each product or service we offer. We may face
competition from e-Bay, priceline.com, Amazon.com and a number of other large
Internet companies that have expertise in developing online commerce and in
facilitating Internet
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traffic, including America Online, Microsoft and Yahoo!, which could choose to
compete with us either directly or indirectly through affiliations with other
e-commerce companies. We cannot assure you that we will be able to compete
effectively with such companies.
Because some of our clients may develop electronic trading networks, we could
compete with them in aspects of our business.
Consortia owned by some of our clients have announced their intention to
explore the development of electronic trading networks. BrokerTec Global LLC, a
proposed electronic inter-dealer fixed income broker whose members include
Citigroup, Credit Suisse First Boston, Deutsche Bank AG, Goldman Sachs Group,
Lehman Brothers, Merrill Lynch & Co., Dresdner Kleinwort Benson, ABN-AMRO and
Morgan Stanley Dean Witter, has announced its intention to develop or acquire a
facility for electronic trading of U.S. Treasury securities, Euro-denominated
sovereign debt and other fixed income securities and futures-related products.
All of the members of BrokerTec Global LLC are currently clients of Cantor and
ours. Consortia such as BrokerTec Global LLC may compete with us and our
electronic marketplaces in the future. We currently compete with a similar
consortium called EuroMTS in Europe. The members of EuroMTS include the leading
fixed income dealers in European government securities, as well as clients of
Cantor and ours. Additionally, in the non-financial business-to-business
marketplaces, we compete with Ariba, CommerceOne, AltraEnergy Trading and
HoustonStreet, as well as with other Internet-based trading and infrastructure
platforms.
If we experience low trading volume in securities and financial products, our
profitability could suffer.
We have experienced significant fluctuations in the aggregate trading
volume of securities and financial products being traded in our marketplaces. We
expect that fluctuations in the trading volume of securities and financial
products traded in our marketplaces will occur in the future from time to time
and have a direct impact on our future operating results. This may cause
significant fluctuations in our profitability when the trading volumes are low.
If adverse economic and political conditions occur, substantial declines in the
U.S. and global financial services markets may result and our profitability
could suffer.
The global financial services business is, by its nature, risky and
volatile and is directly affected by many national and international factors
that are beyond our control. Any one of these factors may cause a substantial
decline in the U.S. and global financial services markets, resulting in reduced
trading volume and turnover. These events could materially adversely affect our
profitability. These factors include:
o economic and political conditions in the United States and elsewhere
in the world;
o concerns over inflation and wavering institutional/consumer
confidence levels;
o the availability of cash for investment by mutual funds and other
wholesale and retail investors;
o rising interest rates;
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o fluctuating exchange rates;
o legislative and regulatory changes; and
o currency values.
In the past several years, the U.S. financial markets have achieved
historic highs. We do not believe these strong markets can continue
indefinitely. Our revenues and profitability are likely to decline significantly
during periods of stagnant economic conditions or low trading volume in the U.S.
and global financial markets.
Because we expect to continue to expand our operations outside North America, we
may face special economic and regulatory challenges that we may not be able to
meet.
We operate electronic marketplaces throughout Europe and Asia and we plan
to further expand our operations throughout these regions in the future. There
are certain risks inherent in doing business in international markets,
particularly in the regulated brokerage industry. These risks include:
o less developed automation in exchanges, depositories and national
clearing systems;
o unexpected changes in regulatory requirements, tariffs and other
trade barriers;
o difficulties in staffing and managing foreign operations;
o fluctuations in currency exchange rates;
o reduced protection for intellectual property rights;
o seasonal reductions in business activity during the summer months;
and
o potentially adverse tax consequences.
We are required to comply with the laws and regulations of foreign
governmental and regulatory authorities of each country in which we conduct
business. These may include laws, rules and regulations relating to any aspect
of the securities business, including sales methods, trade practices among
broker-dealers, use and safekeeping of clients' funds and securities, capital
structure, record-keeping, the financing of clients' purchases, broker-dealer
and employee registration requirements and the conduct of directors, officers
and employees. Any failure to develop effective compliance and reporting systems
could result in regulatory penalties in the applicable jurisdiction.
The growth of the Internet as a means of conducting international business
has also raised many legal issues regarding, among other things, the
circumstances in which countries or other jurisdictions have the right to
regulate Internet services that may be available to their citizens from service
providers located elsewhere. In many cases, there are no laws, regulations,
judicial decisions or governmental interpretations that clearly resolve these
issues. This uncertainty may adversely affect our ability to use the Internet to
expand our international operations, and creates
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the risk that we could be subject to disciplinary sanctions or other penalties
for failure to comply with applicable laws or regulations.
If we enter new markets, we may not be able to successfully adapt our technology
and marketing strategy for use in those markets.
We intend to leverage our eSpeed((Service Mark)) system and Cantor's
relationships to enter new markets. We cannot assure you that we will be able to
successfully adapt our proprietary software, electronic distribution networks
and technology for use in other markets. Even if we do adapt our software,
networks and technology, we cannot assure you that we will be able to attract
clients and compete successfully in any such new markets. We cannot assure you
that our marketing efforts or our pursuit of any of these opportunities will be
successful. If these efforts are not successful, we could suffer losses while
developing new marketplaces or realize less than expected earnings, which in
turn could result in a decrease in the market value of our Class A common stock.
Furthermore, these efforts may divert management attention or inefficiently
utilize our resources. We intend to create electronic marketplaces for many
financial products by the end of 2000, but there is no guarantee that we will be
able to do so.
If we acquire other companies, we may not be able to integrate their operations
effectively.
Our business strategy contemplates expansion through the acquisition of
exchanges and other companies providing services or having technologies and
operations that are complementary to ours. Acquisitions entail numerous risks,
including:
o difficulties in the assimilation of acquired operations and
products;
o diversion of management's attention from other business concerns;
o assumption of unknown material liabilities of acquired companies;
o amortization of acquired intangible assets, which would reduce
future reported earnings; and
o potential loss of clients or key employees of acquired companies.
We cannot assure you that we will be able to integrate successfully any
operations, personnel, services or products that might be acquired in the
future, and our failure to do so could adversely affect our profitability and
the value of our Class A common stock.
Because our business is subject to extensive government and other regulation, we
may face restrictions with respect to the way we conduct our operations.
The Securities and Exchange Commission, National Association of Securities
Dealers, Inc., Commodity Futures Trading Commission and other agencies
extensively regulate the U.S. securities industry. Our international operations
may be subject to similar regulations in specific jurisdictions. Our U.S.
subsidiaries are required to comply strictly with the rules and regulations of
these agencies. As a matter of public policy, these regulatory bodies are
responsible for safeguarding the integrity of the securities and other financial
markets and protecting the
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interests of investors in those markets. Most aspects of our U.S. broker-dealer
subsidiaries are highly regulated, including:
o the way we deal with our clients;
o our capital requirements;
o our financial and Securities and Exchange Commission reporting
practices;
o required record keeping and record retention procedures;
o the licensing of our employees; and
o the conduct of our directors, officers, employees and affiliates.
If we fail to comply with any of these laws, rules or regulations, we may
be subject to censure, fines, cease-and-desist orders, suspension of our
business, suspensions of personnel or other sanctions, including revocation of
registration as a broker-dealer. Changes in laws or regulations or in
governmental policies could have a material adverse effect on the conduct of our
business. These agencies have broad powers to investigate and enforce compliance
and punish non-compliance with their rules and regulations. We cannot assure you
that we and/or our directors, officers and employees will be able to fully
comply with, and will not be subject to, claims or actions by these agencies.
The consumer products and services we anticipate offering through our
electronic marketplaces are likely to be regulated by federal and state
governments. Our ability to provide such services will be affected by these
regulations. The implementation of unfavorable regulations or unfavorable
interpretations of existing regulations by courts or regulatory bodies could
require us to incur significant compliance costs or cause the development of
affected markets to become impractical.
Because we are subject to risks associated with net capital requirements, we may
not be able to engage in operations that require significant capital.
The Securities and Exchange Commission, Commodity Futures Trading
Commission and various other regulatory agencies have stringent rules and
regulations with respect to the maintenance of specific levels of net capital by
broker-dealers. Net capital, which is assets minus liabilities, is the net worth
of a broker or dealer, less deductions for certain types of assets. If a firm
fails to maintain the required net capital, it may be subject to suspension or
revocation of registration by the Securities and Exchange Commission or
Commodity Futures Trading Commission, and suspension or expulsion by these
regulators could ultimately lead to the firm's liquidation. If these net capital
rules are changed or expanded, or if there is an unusually large charge against
net capital, operations that require the intensive use of capital would be
limited. Also, our ability to withdraw capital from broker-dealer subsidiaries
could be restricted, which in turn could limit our ability to pay dividends,
repay debt and redeem or purchase shares of our outstanding stock. A large
operating loss or charge against net capital could adversely affect our
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ability to expand or even maintain our present levels of business, which could
have a material adverse effect on our business.
Because we intend to offer access to some of our marketplaces to online retail
brokers, we are subject to risks relating to uncertainty in the regulation of
the Internet.
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. However, laws and regulations may be
adopted in the future that address issues such as user privacy, pricing,
taxation and the characteristics and quality of products and services. For
example, the Telecommunications Act sought to prohibit transmitting various
types of information and content over the Internet. Several telecommunications
companies have petitioned the Federal Communications Commission to regulate
Internet service providers and online service providers in a manner similar to
long distance telephone carriers and to impose access fees on those companies.
This could increase the cost of transmitting data over the Internet. Moreover,
it may take years to determine the extent to which existing laws relating to
issues such as property ownership, libel and personal privacy are applicable to
the Internet. Any new laws or regulations relating to the Internet could
adversely affect our business.
Because brokerage services involve substantial risks of liability, we may become
subject to risks of litigation.
Many aspects of our business, and the businesses of our clients, involve
substantial risks of liability. Dissatisfied clients frequently make claims
regarding quality of trade execution, improperly settled trades, mismanagement
or even fraud against their service providers. We and our clients may become
subject to these claims as the result of failures or malfunctions of systems and
services provided by us and may seek recourse against us. We could incur
significant legal expenses defending claims, even those without merit. An
adverse resolution of any lawsuits or claims against us could result in our
obligation to pay substantial damages.
In addition, we may also become subject to legal proceedings and claims
against Cantor and its affiliates as a result of the formation transactions.
Although Cantor has agreed to indemnify us against claims or liabilities arising
from our assets or operations prior to the formation transactions, we cannot
assure you that such claims or litigation will not harm our business.
If we cannot deter employee misconduct, we may be harmed.
There have been a number of highly publicized cases involving fraud or
other misconduct by employees in the financial services industry in recent
years, and we run the risk that employee misconduct could occur. Misconduct by
employees could include hiding unauthorized or unsuccessful activities from us.
In either case, this type of conduct could result in unknown and unmanaged risks
or losses. Employee misconduct could also involve the improper use of
confidential information, which could result in regulatory sanctions and serious
reputational harm. It is not always possible to deter employee misconduct, and
the precautions we take to prevent and detect this activity may not be effective
in all cases.
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Because our business is developing, we cannot predict our future capital needs
or our ability to secure additional financing.
We anticipate, based on management's experience and current industry
trends, that our existing cash resources, combined with the net proceeds we
received from our initial public offering, will be sufficient to meet our
anticipated working capital and capital expenditure requirements for at least
the next 12 months. However, we believe that there are a significant number of
capital intensive opportunities for us to maximize our growth and strategic
position, including, among other things, acquisitions, joint ventures, strategic
alliances or other investments. We are currently considering such options and
their effect on our capital requirements. We may need to raise additional funds
to:
o increase the regulatory net capital necessary to support our
operations;
o support more rapid growth in our business;
o develop new or enhanced services and products;
o respond to competitive pressures;
o acquire complementary technologies;
o enter into strategic alliances;
o acquire companies with marketplace or other specific domain
expertise; and
o respond to unanticipated requirements.
We cannot assure you that we will be able to obtain additional financing
when needed on terms that are acceptable, if at all.
The market price of our Class A common stock may fluctuate.
The price of our Class A common stock may fluctuate widely, depending upon
many factors, including our perceived prospects, and the prospects of the
financial industries in general, differences between our actual financial and
operating results and those expected by investors and analysts, changes in
analysts' recommendations or projections, changes in general valuations for
Internet and e-commerce-related companies, changes in general economic or market
conditions and broad market fluctuations.
Future sales of our shares could adversely affect the market price of our
Class A common stock.
If our existing stockholders sell a large number of shares, or if we issue
a large number of shares of our common stock in connection with future
acquisitions, strategic alliances or otherwise, the market price of our Class A
common stock could decline significantly. Moreover, the perception in the public
market that these stockholders might sell shares of Class A common stock could
depress the market price of our Class A common stock.
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Although we and our directors, executive officers and holders of common
stock and securities convertible into or exercisable or exchangeable for common
stock issued prior to our initial public offering in December 1999 have agreed
pursuant to certain "lock-up" agreements with the underwriters that we and they
will not offer, sell, contract to sell, pledge, grant any option to sell, or
otherwise dispose of, directly or indirectly, any shares of common stock or
securities convertible into or exercisable or exchangeable for common stock,
subject to certain exceptions, before June 7, 2000 without the prior written
consent of Warburg Dillon Read LLC, we and these persons may be released of this
obligation by Warburg Dillon Read LLC in its sole discretion in whole or in part
at any time with or without notice.
We may decide to register an additional 5,000,000 shares of our Class A
common stock under the Securities Act of 1933 for use by us as consideration for
future acquisitions. Upon such registration, these shares generally will be
freely tradable after issuance, unless the resale thereof is contractually
restricted or unless the holders thereof are subject to the restrictions on
resale provided in Rule 145 under the Securities Act. In any event, any
registered shares so issued will be subject to contractual restrictions and,
thus, will not be freely tradable before June 7, 2000.
We intend to initially register 20%, or approximately 10,000,000 shares of
Class A common stock, of the total outstanding shares of our common stock, which
are reserved for issuance upon exercise of options granted under our stock
option plan. If we increase our total outstanding shares of common stock, we
will register additional shares of Class A common stock so that the stock
available for issuance under our stock option plan will be registered. Once we
register these shares, they can be sold in the public market upon issuance,
subject to restrictions under the securities laws applicable to resales by
affiliates. We also plan to register the shares of Class A common stock issuable
under our stock purchase plan.
RISKS RELATED TO OUR RELATIONSHIP WITH CANTOR
Because we depend on Cantor's business, events which impact Cantor's operating
results may have a material adverse effect on our revenues.
We recognized over 66% of our revenues for the period from March 10, 1999
to December 31, 1999 from transactions in which we received amounts based on
fixed percentages of commissions paid to Cantor. Consequently, any reductions in
the amount of commissions paid to Cantor, including events which impact Cantor's
business or operating results, could have a material adverse effect on our most
significant source of revenues.
In addition, fees paid to us by Cantor for system services represented
32.6% of our revenues for the period from March 10, 1999 to December 31, 1999.
These fee revenues are remitted to us on a monthly basis.
We are a general creditor of Cantor to the extent that there are
transaction revenues and system service fees owing to us from Cantor. Events
that negatively impact Cantor's financial position and ability to remit our
share of transaction revenues and system service fees could have a material
adverse effect on our revenues.
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Conflicts of interest and competition with Cantor may arise.
Various conflicts of interest between us and Cantor may arise in the
future in a number of areas relating to our past and ongoing relationships,
including competitive business activities, potential acquisitions of businesses
or properties, the election of new directors, payment of dividends, incurrence
of indebtedness, tax matters, financial commitments, marketing functions,
indemnity arrangements, service arrangements, issuances of our capital stock,
sales or distributions by Cantor of its shares of our common stock and the
exercise by Cantor of control over our management and affairs. Our Joint
Services Agreement with Cantor provides that in some circumstances Cantor can
unilaterally determine the commissions that will be charged to clients for
effecting trades in marketplaces in which we collaborate with Cantor. The
determination of the nature of commissions charged to clients does not affect
the allocation of revenues that Cantor and we share with respect to those
transactions. However, in circumstances in which Cantor determines to charge
clients lower commissions, the amount that we receive in respect of our share of
the commissions will correspondingly be decreased. A majority of our directors
and officers 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 all of the outstanding shares of our Class B common stock,
representing approximately 98% of the combined voting power of all classes of
our voting stock. Mr. Lutnick's simultaneous service as our Chairman and Chief
Executive Officer and his control of Cantor could create or appear to create
potential conflicts of interest when Mr. Lutnick is faced with decisions that
could have different implications for us and for Cantor.
Because our Joint Services Agreement with Cantor has a perpetual term and
contains non-competition provisions and restrictions on our ability to pursue
strategic transactions, this agreement may become burdensome to our business.
As part of the formation transactions, Cantor contributed substantially
all of our assets to us. Although Cantor has agreed, subject to certain
conditions, not to compete with us in providing electronic brokerage services,
Cantor is currently engaged in securities transaction and other financial
instruments execution and processing operations and other activities that are
related to the electronic trading services we provide. Our Joint Services
Agreement obligates us to perform technology support and other services for
Cantor at cost, whether or not related to our electronic brokerage services,
sets forth the ongoing revenue sharing arrangements between Cantor and us and
subjects us and Cantor to non-competition obligations. The Joint Services
Agreement precludes us from entering into lines of business in which Cantor now
or in the future may engage, or providing, or assisting any third party in
providing, voice-assisted brokerage services, clearance, settlement and
fulfillment services and related services, except under the limited
circumstances described in Item 13 under "Joint Services
Agreement--Non-competition and Market Opportunity Provisions." Although we
believe Cantor has no plans to form, acquire or commence any other operations
similar to ours, the Joint Services Agreement permits Cantor to perform, in
limited circumstances, electronic brokerage operations. In addition, the Joint
Services Agreement imposes limitations on our ability to pursue strategic
alliances, joint
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ventures, partnerships, business combinations, acquisitions and similar
transactions. Because the Joint Services Agreement has a perpetual term, even in
the event of a breach by one of the parties, and does not provide for
modification under its terms, this agreement may become burdensome for us, may
distract us from focusing on our internal operations, may deter or discourage a
takeover of our company and may limit our ability to expand our operations.
Because agreements between us and Cantor are not the result of arm's-length
negotiations, we may receive lower commissions from, and pay higher service fees
to, Cantor than we would with respect to third party service providers.
In connection with the formation transactions, we entered into Assignment
and Assumption Agreements, an Administrative Services Agreement, a Joint
Services Agreement and several other agreements with Cantor relating to the
provision of services to each other and third parties. These agreements are not
the result of arm's length negotiations because Cantor owns and controls us. As
a result, the prices charged to us or by us for services provided under the
agreements may be higher or lower than prices that may be charged by third
parties and the terms of these agreements may be generally less favorable to us
than those that we could have negotiated with third parties.
Because we depend on services and access to operating assets provided by third
parties to Cantor, we may not have recourse against those third parties.
Many of the assets and services provided by Cantor under the terms of the
Administrative Services Agreement are leased or provided to Cantor by third
party vendors. As a result, in the event of a dispute between Cantor and a
third-party vendor, we could lose access to, or the right to use, as applicable,
office space, personnel, corporate services and operating assets. In such a
case, we would have no recourse with respect to the third party vendor. Our
inability to use these services and operating assets for any reason, including
any termination of the Administrative Services Agreement between us and Cantor
or the agreements between Cantor and third party vendors, could result in
serious interruptions of our operations.
Our reputation may be affected by actions taken by Cantor and entities that are
related to Cantor.
Cantor currently is our most significant client. Cantor holds direct and
indirect ownership and management interests in numerous other entities that
engage in a broad range of financial services and securities-related activities.
Actions taken by, and events involving, Cantor or these related companies which
are perceived negatively by the securities markets, or the public generally,
could have a material adverse effect on us and could affect the price of our
Class A common stock. In addition, events which negatively affect the financial
condition of Cantor may negatively affect us. These events could cause Cantor to
lose clients that may trade in our marketplaces, could impair Cantor's ability
to perform its obligations under the Joint Services Agreement and other
agreements Cantor enters into with us and could cause Cantor to liquidate
investments, including by selling or otherwise transferring shares of our common
stock.
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If we become subject to litigation and other legal proceedings, we may be
harmed.
From time to time, we and Cantor may become involved in litigation and
other legal proceedings relating to claims arising from our and their operations
in the normal course of business. Cantor is currently subject to a number of
legal proceedings that could affect us. We cannot assure you that these or other
litigation or legal proceedings will not materially affect our ability to
conduct our business in the manner that we expect or otherwise adversely affect
us.
RISKS RELATED TO E-COMMERCE AND THE INTERNET
If electronic marketplaces for securities and financial products do not continue
to grow, we will not be able to achieve our business objectives.
The success of our business plan depends on our ability to create
interactive electronic marketplaces in a wide range of securities and financial
products. Historically, securities and commodities markets operated through an
open outcry format in which buyers and sellers traded securities in pits through
verbal communication. These open outcry markets have recently begun to be
supplanted with new systems that match buyers and sellers electronically. The
utilization of our interactive electronic marketplaces depends on the continued
acceptance and utilization of these electronic securities and commodities
markets. We cannot assure you that the growth and acceptance of the use of
electronic markets will continue.
If e-commerce and Internet usage does not continue to grow, we will not be able
to achieve our business objectives.
As part of our business strategy, we expect to do business with online and
traditional retail brokers. We expect to enable these firms to provide to their
clients access, where appropriate, to trading in fixed income securities and
futures and other wholesale financial products markets through the Internet.
Our strategic and financial objectives would be adversely impacted if
Internet usage does not continue to grow. Consumer use of the Internet as a
medium of commerce is a recent phenomenon and is subject to a high level of
uncertainty. Internet usage may be inhibited for a number of reasons, including:
o access costs;
o inadequate network infrastructure;
o security concerns;
o uncertainty of legal, regulatory and tax issues concerning the use
of the Internet;
o concerns regarding ease of use, accessibility and reliability;
o inconsistent quality of service; and
o lack of availability of cost-effective, high-speed service.
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If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it, or the Internet's performance and reliability
may decline. Similarly, Web sites have experienced interruptions in their
service as a result of outages and other delays occurring throughout the
Internet network infrastructure. If these outages or delays occur frequently,
use of the Internet as a commercial or business medium could grow more slowly or
decline. Even if Internet usage continues to grow, online trading in the
wholesale securities markets, and in particular the fixed income securities and
futures markets, may not be accepted by retail customers. This could negatively
affect the growth of our business.
Our networks and those of our third-party service providers may be vulnerable to
security risks, which could make our clients hesitant to use our electronic
marketplaces.
We expect the secure transmission of confidential information over public
networks to be a critical element of our operations. Our networks and those of
our third party-service providers, including Cantor and associated clearing
corporations, and our clients may be vulnerable to unauthorized access, computer
viruses and other security problems. Persons who circumvent security measures
could wrongfully use our information or cause interruptions or malfunctions in
our operations, which could make our clients hesitant to use our electronic
marketplaces. We may be required to expend significant resources to protect
against the threat of security breaches or to alleviate problems, including
reputational harm and litigation, caused by any breaches. Although we intend to
continue to implement industry-standard security measures, we cannot assure you
that those measures will be sufficient.
RISKS RELATED TO OUR CAPITAL STRUCTURE
Because the voting control of our common stock is concentrated among the holders
of our Class B common stock, the market price of our Class A common stock may be
adversely affected by disparate voting rights.
Cantor beneficially owns all of our outstanding Class B common stock,
representing approximately 98% of the combined voting power of all classes of
our voting stock. As long as Cantor beneficially owns a majority of the combined
voting power of our common stock, it will have the ability, without the consent
of the public stockholders, to elect all of the members of our board of
directors and to control our management and affairs. In addition, it will be
able to determine the outcome of matters submitted to a vote of our stockholders
for approval and will be able to cause or prevent a change in control of our
company. In certain circumstances, the Class B common stock issued to Cantor
upon consummation of the formation transactions may be transferred without
conversion to Class A common stock.
The holders of our Class A common stock and Class B common stock have
substantially identical rights, except that holders of our Class A common stock
are entitled to one vote per share, while holders of our Class B common stock
are entitled to 10 votes per share on all matters to be voted on by stockholders
in general. This differential in the voting rights and our ability to issue
additional Class B common stock could adversely affect the market price of our
Class A common stock.
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Delaware law and our charter may make a takeover of our company more difficult.
Provisions of Delaware law, such as its business combination statute, may
have the effect of delaying, deferring or preventing a change in control of our
company. In addition, our Amended and Restated Certificate of Incorporation
authorizes the issuance of preferred stock, which our board of directors can
create and issue without prior stockholder approval and with rights senior to
those of our common stock, as well as additional shares of our Class B common
stock. Our Amended and Restated Certificate of Incorporation and our Amended and
Restated By-Laws include provisions which restrict the ability of our
stockholders to take action by written consent and provide for advance notice
for stockholder proposals and director nominations. These provisions may have
the effect of delaying or preventing changes of control or management of our
company, even if such transactions would have significant benefits to our
stockholders. As a result, these provisions could limit the price some investors
might be willing to pay in the future for shares of our Class A common stock.
Delaware law may protect decisions of our board of directors that have a
different effect on holders of our Class A and Class B common stock.
Stockholders may not be able to challenge decisions that have an adverse
effect upon holders of the Class A common stock if our board of directors acts
in a disinterested, informed manner with respect to these decisions, in good
faith and in the belief that it is acting in the best interests of our
stockholders. Delaware law generally provides that a board of directors owes an
equal duty to all stockholders, regardless of class or series, and does not have
separate or additional duties to either group of stockholders, subject to
applicable provisions set forth in a company's charter.
Item 2. Properties
Our principal executive offices are located at One World Trade Center, New
York, New York. Our principal executive offices occupy approximately 50,000
square feet of leased space, which we occupy pursuant to the Administrative
Services Agreement with Cantor. Our right to use this space expires at the time
that Cantor's lease expires in 2012. We will pay Cantor approximately $1.25
million annually for use of this space. Our largest presence outside of New York
is in London, where we have the right to use approximately 15,000 square feet of
Cantor's existing office space. Our right to use this space expires at the
earlier of (1) the time that Cantor's lease expires in 2016 or (2) when Cantor
ceases to be an affiliate of ours and Cantor asks us to vacate. We will pay
Cantor approximately $900,000 annually for use of this space. We believe our
facilities are adequate for our reasonably foreseeable future needs.
ITEM 3. LEGAL PROCEEDINGS
On June 21, 1999, Cantor and its affiliate CFPH, LLC, brought suit against
Liberty Brokerage Investment Corporation and Liberty Brokerage Inc. in the
United States District Court for the District of Delaware for infringement of
the Fraser et al. U.S. patent 5,905,974, entitled "Automated Auction Protocol
Processor." Cantor alleged in the complaint that Liberty was infringing the `974
patent by making, using, selling and/or offering for sale systems and methods
that embody or use the inventions claimed in the `974 patent. On August 10,
1999, Cantor and
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CFPH, L.L.C. voluntarily dismissed the suit without prejudice. Subsequently,
on August 10, 1999, Liberty filed an action for declaratory judgment in the
United States District Court for the District of Delaware against Cantor and two
of its affiliates, Cantor Fitzgerald Securities and CFPH, LLC, claiming that the
`974 patent was invalid, unenforceable and not infringed by Liberty. On October
12, 1999, Cantor, Cantor Fitzgerald Securities and CFPH, LLC moved (1) to
dismiss all claims against Cantor Fitzgerald Securities for failure to state a
claim upon which relief can be granted and (2) to dismiss the action as against
Cantor, Cantor Fitzgerald Securities and CFPH, LLC for lack of an actual case or
controversy within the meaning of 28 U.S.C. Section 2201. On November 22, 1999,
the Court granted the motion to dismiss the action as against Cantor Fitzgerald
Securities, and denied the motion to dismiss the action as against Cantor and
its affiliate CFPH, LLC. On January 5, 2000, Liberty filed an Amended Complaint
naming us as a defendant. On January 19, 2000, Cantor and CFPH, LLC filed a
Second Renewed Motion to Dismiss the action. On March 8, 2000, oral arguments
took place on the Second Renewed Motion to Dismiss. No decision has been
rendered. We have assumed responsibility for defending this suit on behalf of
Cantor and its affiliates and the risk of loss associated with it.
In February 1998, Market Data Corporation contracted with Chicago Board
Brokerage (a company controlled by the Chicago Board of Trade and Prebon Yamane)
to provide the technology for an electronic trading system to compete with
Cantor's United States Treasury brokerage business. Market Data Corporation is
controlled by Iris Cantor and Rodney Fisher, her nephew-in-law. Iris Cantor, a
company under the control of Iris Cantor referred to herein as CFI, and Rodney
Fisher are limited partners of Cantor Fitzgerald, L.P.
In April 1998, Cantor Fitzgerald, L.P. filed a complaint in the Delaware
Court of Chancery against Market Data Corporation, Iris Cantor, CFI, Rodney
Fisher and Chicago Board Brokerage seeking an injunction and other remedies. The
complaint alleges that Iris Cantor, CFI and Rodney Fisher violated certain
duties, including fiduciary duties under Cantor's partnership agreement due to
their competition with Cantor Fitzgerald, L.P. with respect to the electronic
trading system mentioned above. The complaint further alleges that Market Data
Corporation and Chicago Board Brokerage tortiously interfered with Cantor's
partnership agreement and aided and abetted Iris Cantor's, CFI's and Rodney
Fisher's breaches of fiduciary duty. Iris Cantor, CFI and Rodney Fisher
counterclaimed seeking, among other things, (1) to reform agreements they have
with Cantor Fitzgerald, L.P. and (2) a declaration that Cantor Fitzgerald, L.P.
breached the implied covenant of good faith and fair dealing. Cantor has agreed
to indemnify us for any liabilities that we incur with respect to any current or
future litigation involving (1) Market Data Corporation, (2) Iris Cantor, (3)
CFI or (4) Rodney Fisher.
Cantor Fitzgerald, L.P. settled its dispute with Chicago Board Brokerage
in April 1999, and Chicago Board Brokerage subsequently announced it was
disbanding its operations. On March 17, 2000, the Delaware Court of Chancery
ruled in favor of Cantor Fitzgerald, L.P., finding that Iris Cantor, CFI and
Rodney Fisher had breached the Partnership Agreement of Cantor Fitzgerald, L.P.,
and that Market Data Corporation had aided and abetted that breach. The court
awarded Cantor Fitzgerald, L.P. declaratory judgment relief and court costs and
attorneys' fees. Counsel for the defendants have expressed their intentions to
appeal this result. We believe Market Data Corporation's technology for
electronic trading systems would be of substantial assistance to competitors in
the wholesale market if provided to them.
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Two related actions are pending in New York. In a case pending in the
Supreme Court of New York, New York County, plaintiff Cantor Fitzgerald, L.P.
alleges, among other things, that defendants Market Data Corporation, CFI, Iris
Cantor and Rodney Fisher misused confidential information of Cantor Fitzgerald,
L.P. in connection with the above mentioned provision of technology to Chicago
Board Brokerage. In a case pending in the United States District Court for the
Southern District of New York, CFI and Iris Cantor allege, among other things,
that certain senior officers of Cantor Fitzgerald, L.P. breached fiduciary
duties they owed to CFI. The allegations in this lawsuit relate to several of
the same events underlying the court proceedings in Delaware. Neither of these
two cases has been pursued during the pendency of the court proceedings in
Delaware.
In addition to the allegations set forth in the pending lawsuits, Cantor
has received correspondence from the attorneys representing Iris Cantor, CFI,
Market Data Corporation and Rodney Fisher in the proceedings in Delaware,
expressing a purported concern that Cantor and/or certain of its partners may be
in breach of Cantor's partnership agreement (including, among other things, the
partnership agreement's provisions relating to competition with the partnership)
and the general partnership agreement of Cantor Fitzgerald Securities with
respect to our initial public offering. Generally, these attorneys have alleged
that various purported conflicts of interest will exist arising from the fact
that certain of our directors and officers will simultaneously hold positions
with Cantor Fitzgerald, L.P. Moreover, these attorneys have asserted that our
business plan may not be consistent with certain purported rights of Market Data
Corporation (including purported intellectual property rights) and other parties
and they requested more information regarding our initial public offering.
Although we do not expect to incur any losses with respect to the pending
lawsuits or supplemental allegations surrounding Cantor's partnership agreement,
Cantor has agreed to indemnify us with respect to any liabilities we incur as a
result of such lawsuits or allegations.
Cantor and Reuters were parties to a confidential arbitration under the
auspices of the American Arbitration Association in New York, New York, which
began in June 1995 with respect to a January 1993 agreement among Reuters,
Cantor and Market Data Corporation. The agreement executed in 1993 involved,
among other things, the delivery by Cantor of certain market data arising out of
non-United States government bond and U.S. municipal bond interdealer brokerage
transactions for transmittal over Reuters' network. The agreement also
contemplated the joint development by Cantor and Reuters of an electronic
trading system for certain transactions in non-United States government bonds.
Cantor and Reuters did not develop this electronic trading system. In the
arbitration, Reuters alleged that Cantor materially breached the agreement
primarily by failing to provide non-screen, voice brokerage data concerning
non-United States government bonds and U.S. municipal bonds that Reuters
contends are subject to the agreement and fraud. Reuters sought to recover from
Cantor amounts representing past payments for market data, the reimbursement of
attorneys' fees and other damages. Cantor denied Reuters' allegations that there
had been any material breach of this agreement or fraud, and asserted a breach
of contract claim and various other counterclaims against Reuters, including
claims for Reuters' failure since February 1997 to pay any of the money due
Cantor for data under this agreement. In February 1997, Reuters unilaterally
ceased making such payments to Cantor in connection with the dispute and in
November 1999 stopped distributing Cantor's market data that was provided to
Reuters.
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On December 30, 1999, Cantor entered into a new agreement with Reuters
pursuant to which Cantor and Reuters settled outstanding disputes and terminated
the 1993 agreement. We cannot assure you that Market Data Corporation will not
seek to assert claims against us or Cantor relating to our activities with
respect to the 1993 agreement or the arbitration. Cantor has agreed to indemnify
us with respect to any claims that may be asserted by Market Data Corporation or
Reuters relating to the 1993 agreement or arising out of the arbitration.
On May 5, 1999, Cantor Fitzgerald, L.P., The Board of Trade of the City of
Chicago, The New York Mercantile Exchange and The Chicago Mercantile Exchange
were sued by Electronic Trading Systems Corporation in the United States
District Court for the Northern District of Texas (Dallas Division) for alleged
infringement of Wagner United States patent 4,903,201, entitled "Automated
Futures Trade Exchange." The patent relates to a system and method for
implementing an electronic, computer-automated futures exchange. On July 1,
1999, Cantor answered the complaint, asserting, among other things, that the
`201 patent was invalid and not infringed by Cantor and that Cantor was not the
real party in interest. Although not identified by the complaint, Cantor
believes that the system being charged with infringement is a version of the
electronic trading system used by the Cantor Exchange((Service Mark)), which
Cantor contributed to us in December 1999. Electronic Trading Systems
Corporation executed a Covenant Not to Sue, Release and Settlement Agreement,
dated February 18, 2000, pursuant to which it agreed not to sue Cantor
Fitzgerald, L.P. or any of its affiliates or successors, including us, or any
customers, for infringement of the `201 patent by the Cantor Exchange((Service
Mark)). On March 22, 2000, counsel to the parties filed with the court a Joint
Stipulation and (proposed) Order of Dismissal requesting that Cantor Fitzgerald,
L.P. be dismissed from the case without prejudice by Electronic Trading Systems
Corporation. On March 23, 2000, the Court signed an Agreed Order of Dismissal
and on March 24, 2000 Cantor Fitzgerald, L.P. was dismissed from the case.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Price Range of Class A Common Stock
Our Class A common stock, $.01 par value, began trading on the Nasdaq
National Market under the symbol "ESPD" on December 10, 1999. There is no public
trading market for the Company's Class B common stock, $.01 par value. The
following table sets forth the high and low sales price of our Class A common
stock for the fourth quarter of 1999 from December 10, 1999.
Year Ended December 31, 1999 High Low
- ---------------------------- ---- ---
Fourth Quarter (from December 10, 1999) $63.75 $30.00
The number of stockholders of record of our Class A common stock as of
March 15, 2000 was 24, although we believe that there is a larger number of
beneficial owners. As of March 15, 2000, there were two stockholders of record
of our Class B common stock. On March 15, 2000, the last reported sale price of
our Class A common stock on the Nasdaq National Market was $70.00.
Rights of Common Stock
Holders of Class A common stock generally have the same rights as holders
of Class B common stock, except that holders of Class A common stock have one
vote per share and holders of Class B common stock have 10 votes per share on
all matters submitted to a vote of stockholders. Generally, all matters to be
voted on by stockholders must be approved by a majority or, in the case of
election of directors, by a plurality of the votes entitled to be cast by
holders of all shares of Class A common stock and Class B common stock present
in person or represented by proxy, voting together as a single class, subject to
any voting rights granted to holders of any preferred stock, except that (i)
amendments to our Amended and Restated Certificate of Incorporation that would
change the powers, preferences or special rights of the Class A common stock or
the Class B common stock so as to affect them adversely also must be approved by
a majority of the votes entitled to be cast by the holders of the shares
affected by the amendment, voting as a separate class, and (ii) any amendment to
our Amended and Restated Certificate of Incorporation to increase the authorized
shares of Class B common stock. Each share of Class B common stock is
convertible at any time, at the option of the holder, into one share of Class A
common stock. Each share of Class B common stock will automatically convert into
a share of Class A common stock upon any transfer, with limited exceptions.
Dividend Policy
We intend to retain our future earnings, if any, to help finance the
growth and development of our business. We have never paid a cash dividend, and
we do not expect to pay any cash dividends on our common stock in the
foreseeable future.
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In the event we decide to declare dividends on our common stock in the
future, such declaration will be subject to the discretion of our board of
directors. Our board of directors may take into account such matters as general
business conditions, our financial results, capital requirements, contractual,
legal and regulatory restrictions on the payment of dividends by us to our
stockholders or by our subsidiaries to us and any such other factors as our
board of directors may deem relevant.
Recent Sale of Unregistered Securities
In exchange for assets contributed to us pursuant to the Assignment and
Assumption Agreement, on December 9, 1999, we issued 43,999,900 shares of Class
B common stock to Cantor Fitzgerald, L.P. and certain of its affiliates. The
sale of these securities was deemed to be exempt from registration under the
Securities Act of 1933 in reliance on Section 4(2) of the Securities Act of
1933, as a transaction by an issuer not involving a public offering.
Use of Proceeds of Initial Public Offering
The effective date of our registration statement (Registration No.
333-87475) filed on Form S-1 relating to our initial public offering of Class A
common stock was December 9, 1999. In our initial public offering, we sold
7,000,000 shares of Class A common stock at a price of $22.00 per share and
Cantor Fitzgerald Securities, the selling stockholder, sold 3,350,000 shares of
Class A common stock at a price of $22.00 per share. Our initial public offering
was managed on behalf of the underwriters by Warburg Dillon Read LLC, Hambrecht
& Quist, Thomas Weisel Partners LLC and Cantor Fitzgerald & Co. The offering
commenced on December 10, 1999 and closed on December 15, 1999. Proceeds to us
from our initial public offering, after deduction of the underwriting discounts
and commissions of approximately $10.0 million and offering costs of $4.4
million, totaled approximately $139.6 million. None of the expenses incurred in
our initial public offering were direct or indirect payments to our directors,
officers, general partners or their associates, to persons owning 10% or more of
any class of our equity securities or to our affiliates. Of the $139.6 million
raised, approximately $5.0 million has been used for working capital purposes
and the balance of $134.6 million has been invested in reverse repurchase
agreements which are fully collateralized by U.S. Government Securities held in
a custodial account at a third-party bank. We intend to use the amount invested
in the reverse repurchase agreements as follows:
o Approximately $25 million will be invested in hardware and software
for entry into new product segments, expansion of our current
markets and an increase in communication links to our clients;
o Approximately $25 million will be for hiring of technology and other
professionals to develop new markets in both financial and
non-financial sectors;
o Approximately $25 million will be for marketing to current and new
institutional clients and to promote general awareness and
acceptance of the retail trading of fixed income securities and
other financial instruments; and
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o The balance of the net proceeds will be used for working capital and
general corporate purposes, including possible acquisitions and
strategic alliances.
Of the amount of proceeds spent through December 31, 1999, approximately
$5.0 million has been paid to Cantor under the Administrative Services Agreement
between us and Cantor.
The occurrence of unforeseen events, opportunities or changed business
conditions, however, could cause us to use the net proceeds of our initial
public offering in a manner other than as described above.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for eSpeed should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and with our audited financial statements, related
notes and other financial information beginning on page 54.
For the period from
March 10, 1999
(date of commencement
of operations) to
December 31, 1999
----------------------
Statement of Operations Data:
Total revenues........................................ $ 38,188,925
Expenses:
Compensation and employee benefits................. 21,502,326
Occupancy and equipment............................ 10,292,349
Professional and consulting fees................... 5,148,796
Communications and client networks................. 3,355,070
Fulfillment services fees paid to affiliates....... 3,527,945
Administrative fees paid to affiliates............. 1,662,058
Options granted to Cantor employees(1)............. 2,850,073
Other.............................................. 2,649,110
---------------
Total expenses..................................... 50,987,727
---------------
Loss before benefit for income taxes.................. (12,798,802)
Income tax benefit.................................... 211,889
---------------
Net loss.............................................. $ (12,586,913)
===============
Per Share Data:
Net loss........................................... $ (12,586,913)
Basic and diluted net loss per share............... $ (0.28)
Weighted average shares of common stock outstanding 44,495,000
Statement of Financial Condition: December 31, 1999
-----------------
Cash and cash equivalents............................. $ 201,001
Total assets.......................................... 144,327,089
Total liabilities..................................... 8,815,276
Total stockholders' equity............................ 135,511,813
- ---------------------
(1) Options granted to Cantor employees represent a one-time, non-cash charge
due to option grants we made to Cantor employees exercisable at the initial
public offering price of $22 per share.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
The following discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors.
The following discussion is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and our financial statements and
the notes thereto appearing elsewhere in this filing.
Overview
eSpeed, Inc. was incorporated on June 3, 1999 as a Delaware corporation.
Our wholly-owned subsidiaries are eSpeed Securities, Inc., eSpeed Government
Securities, Inc., eSpeed Markets, Inc. and eSpeed Securities International
Limited. Prior to our initial public offering, we were a wholly-owned subsidiary
of, and we conducted our operations as a division of, Cantor Fitzgerald
Securities, which in turn is a 99.5%-owned subsidiary of Cantor Fitzgerald, L.P.
We commenced operations as a division of Cantor on March 10, 1999, the date the
first fully electronic transaction using our eSpeed((Service Mark)) system was
executed. Cantor has been developing systems to promote fully electronic
marketplaces since the early 1990s. Since January 1996, Cantor has used our
eSpeed((Service Mark)) system internally to conduct electronic trading.
Concurrent with our initial public offering in December 1999, Cantor
contributed to us, and we acquired from Cantor, certain of our assets. These
assets primarily consist of proprietary software, network distribution systems,
technologies and other related contractual rights that comprise our
eSpeed((Service Mark)) system.
As of December 31, 1999, we had an accumulated net loss of $12,586,913.
This loss primarily resulted from expenditures on our technology and
infrastructure incurred in building our revenue base. We expect that we will
continue to incur losses and generate negative cash flow from operations for the
foreseeable future as we continue to develop our systems and infrastructure and
expand our brand recognition and client base through increased marketing
efforts. In light of the rapidly changing nature of our business and our limited
operating history, we believe that period-to-period comparisons of our operating
results will not necessarily be meaningful and should not be relied upon as an
indication of future performance.
In September 1999, our board of directors changed our fiscal year from the
last Friday of March to December 31.
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Results of Operations
The following table sets forth statement of operations data for the period
from March 10, 1999 (date of commencement of operations) to December 31, 1999.
Period from March 10, 1999 (date of commencement
of operations) to December 31, 1999
- --------------------------------------------------------------------------------
Revenues:
Transaction Revenues:
Fully electronic transactions.................................. $ 10,079,842
Voice-assisted brokerage transactions.......................... 11,777,306
Screen assisted open outcry transactions....................... 3,524,399
-------------
Total transaction revenues............................... 25,381,547
Interest income................................................... 347,804
System services fees.............................................. 12,459,574
-------------
Total revenues........................................... 38,188,925
-------------
Expenses:
Compensation and employee benefits............................. 21,502,326
Occupancy and equipment........................................ 10,292,349
Professional and consulting fees............................... 5,148,796
Communications and client networks............................. 3,355,070
Fulfillment services fees...................................... 3,527,945
Administrative fees............................................ 1,662,058
Options granted to Cantor employees............................ 2,850,073
Other.......................................................... 2,649,110
-------------
Total expenses........................................... 50,987,727
-------------
Loss before benefit for income taxes.............................. $(12,798,802)
=============
Revenues
Transaction Revenues
We operate interactive electronic marketplaces. We have entered into a
Joint Services Agreement with Cantor under which we and Cantor agreed to
collaborate to provide brokerage and related services to clients in multiple
electronic markets for transactions in securities and other financial products.
In addition, we may, in our discretion, collaborate on operating markets for
non-financial products. Under the Joint Services Agreement, we own and operate
the electronic trading systems and are responsible for providing electronic
brokerage services, and Cantor provides voice-assisted brokerage services,
fulfillment services such as clearance and settlement, and related services such
as credit and risk management services, oversight of client suitability and
regulatory compliance, sales positioning of products and other services
customary to marketplace intermediary operations. Under this agreement, we and
Cantor have agreed to share revenues derived from transactions effected in the
marketplaces in which we collaborate and other specified markets.
47
<PAGE>
Generally, if the transactions:
o are effected in a marketplace in which we collaborate with Cantor,
are fully electronic transactions and relate to financial products,
such as fixed income securities, futures contracts, derivatives and
commodities, that are not traded on the Cantor Exchange((Service
Mark)), or products that are traded on the Cantor Exchange((Service
Mark)), then we receive the aggregate transaction revenues and pay
to Cantor service fees equal to 35% and 20% of the transaction
revenues, respectively.
o are effected in a marketplace in which we collaborate with Cantor,
involve voice-assisted brokerage services that Cantor provides and
the transactions relate to (1) financial products that are not
traded on the Cantor Exchange((Service Mark)), or (2) products that
are traded on the Cantor Exchange((Service Mark)), then, in the case
of a transaction described in (1), Cantor receives the aggregate
transaction revenues and pays to us a service fee equal to 7% of the
transaction revenues, and, in the case of a transaction described in
(2), we receive the aggregate transaction revenues and pay to Cantor
a service fee equal to 55% of the transaction revenues.
o are effected in a marketplace in which we do not collaborate with
Cantor, but in which we do provide electronic brokerage services,
and (1) the transaction relates to a financial product, then we will
receive the aggregate transaction revenues and pay to Cantor a
fulfillment service fee equal to 20% of the transaction and data
revenues paid to or received by us or (2) the transaction relates to
a non-financial product, then we will receive all of the transaction
revenues.
o are not effected through an electronic marketplace, but are
electronically assisted, such as screen-assisted open outcry
transactions, then Cantor receives the aggregate transaction
revenues and pays to us a service fee equal to 2.5% of the
transaction revenues.
We are pursuing an aggressive strategy to convert most of Cantor's
financial marketplace products to our eSpeed((Service Mark)) system and, with
the assistance of Cantor, to continue to create new markets and convert new
clients to our eSpeed((Service Mark)) system. Other than Cantor, no client of
ours accounted for more than 10% of our transaction revenues from our date of
inception through December 31, 1999.
The process of converting these marketplaces includes modifying existing
Cantor trading systems to allow for transactions to be entered directly from a
client location, signing an agreement with the client, installing the hardware
and software at the client location and establishing communication lines between
us and the client.
From March 10, 1999 to December 31, 1999, we earned $25,381,547 in
transaction revenues from the U.S. fixed income marketplaces, as these
marketplaces were the first converted to our eSpeed((Service Mark)) system. It
is anticipated that as more marketplaces are converted to our eSpeed((Service
Mark)) system and more clients are added to our eSpeed((Service Mark)) system,
more of our income will be generated from marketplaces around the world. Our
revenues are currently highly dependent on transaction volume in the fixed
income markets globally. Accordingly, revenues are
48
<PAGE>
dependent on the volume of transactions in marketplaces that we operate,
which can be affected by, among other things, economic and political conditions
in the United States and elsewhere in the world, concerns over inflation and
wavering institutional/consumer confidence levels, the availability of cash for
investment by mutual funds and other wholesale and retail investors, rising
interest rates, fluctuating exchange rates, legislative and regulatory changes
and currency values.
Interest Income
The proceeds of our initial public offering have been invested by us in
reverse repurchase agreements which are fully collateralized by U.S. Government
securities held in a custodial account at The Chase Manhattan Bank. From
December 15, 1999 to December 31, 1999, these investments generated interest
income of $347,804 at an average interest rate of 5.2%.
System Services Fees
We have agreed to provide to Cantor technology support services at cost,
including (1) systems administration, (2) internal network support, (3) support
and procurement for desktops of end-user equipment, (4) operations and disaster
recovery services, (5) voice and data communications, (6) support and
development of systems for clearance and settlement services, (7) systems
support for Cantor brokers, (8) electronic applications systems and network
support for Cantor's unrelated dealer businesses with respect to which we will
not collaborate with Cantor and (9) provision and/or implementation of existing
electronic applications systems, including improvements and upgrades thereto,
and use of the related intellectual property rights, having potential
application in a gaming business. System service fees revenues from Cantor from
March 10, 1999 to December 31, 1999 were $12,459,574 and represented 32.6% of
total revenues for that period.
Expenses
Compensation and employee benefits
At December 31, 1999, we had approximately 370 professionals,
substantially all of whom are full time employees located predominantly in New
York and London. Compensation costs include salary, bonus accruals, payroll
taxes and costs of employer-provided medical benefits for our employees. We
intend to hire additional technical, sales and marketing, product development
and administrative personnel, including personnel from Cantor, in order to
expand our business. As a result, we anticipate that compensation expense may
increase significantly in subsequent periods. We have granted 292,005 stock
options to certain employees of Cantor and a consultant at an exercise price per
share of $22, resulting in a one-time, non-cash charge to us of $2,850,073 for
the fourth quarter of 1999.
Occupancy and equipment
Occupancy and equipment costs of $10,292,349 for the period from March 10,
1999 to December 31, 1999 included depreciation on computer and communications
equipment and amortization of software owned by us, lease costs of other fixed
assets leased by us from Cantor and a charge for premises costs from Cantor.
Fixed assets are reflected as if they were
49
<PAGE>
contributed to us by Cantor in a non-cash transaction effective March 10, 1999
at their then current net book value (cost less accumulated depreciation) of
$7,370,560. Cantor leases from third parties under operating lease arrangements
certain computer related fixed assets that we have the right to use at rates
intended to equal costs incurred by Cantor. Our equipment expenses should
increase as we continue to invest in technology and related equipment. Occupancy
expenditures are comprised of our rent and facilities costs of our New York and
London offices.
Professional and consulting fees
Professional and consulting fees of $5,148,796 for the period from March
10, 1999 to December 31, 1999 consisted primarily of consultant costs paid to
outside computer professionals who perform specialized enhancement activities
for us. We currently have approximately 20 contracted consultants and additional
outside service providers working under short-term contracts costing
approximately $500,000 per month in the aggregate. The costs of professional
legal counsel engaged to defend the patents used in our business amounted to
approximately $482,000 for the period from March 10, 1999 to December 31, 1999.
Our professional and consulting expenses will likely increase over the
foreseeable future.
Communications and client networks
Communications costs of $3,355,070 for the period from March 10, 1999 to
December 31, 1999 included the costs of local and wide area network
infrastructure, the cost of establishing the client network linking clients to
us, data and telephone lines, data and telephone usage and other related costs.
We expect such costs to increase as we continue to expand into new marketplaces
and geographic locations and establish additional communication links with
clients. However, certain communications costs are decreasing globally due to
increased competition in the communications industry. This may or may not result
in a decrease in our communications costs.
Fulfillment services fees
Under the Joint Services Agreement, we are required to pay to Cantor a
fulfillment services fee of 20%, 35% or 55%, depending on the type of
transaction, of commissions paid by clients related to fully electronic
transactions. As we continue to sign up new clients, in conjunction with Cantor,
and the volume of business processed in the fully electronic brokerage channel
increases, this expense will likely increase commensurately with our revenues.
Administrative fees
Under an Administrative Services Agreement with Cantor, Cantor agreed to
provide various administrative services to us, including, but not limited to,
accounting, tax, legal and human resources, and we agreed to provide sales and
marketing services at cost to Cantor. We are required to reimburse Cantor for
its costs of providing these services plus an allocation of overhead. We have
provided for the cost of such services in our financial statements under the
terms set forth in the Administrative Services Agreement as if it was effective
for the period from March 10, 1999 to December 31, 1999. This amount was
$1,662,058 for the period from March 10, 1999 to December 31, 1999. As we expand
our business, the services provided by
50
<PAGE>
Cantor, and accordingly the expense, will likely also increase. As circumstances
warrant, we will consider adding employees to take over these services from
Cantor.
Other expenses
Other expenses of $2,649,110 for the period from March 10, 1999 to
December 31, 1999 consisted primarily of travel, promotional and entertainment
expenditures. We expect that these expenses will also continue to increase over
the foreseeable future as we seek to expand our business. While we have no
obligation under the Joint Services Agreement to do so, we intend to use
approximately $25 million of the proceeds received by us from our initial public
offering for sales, marketing and advertising expenses related to our
marketplaces.
Quarterly Results of Operations
The following table sets forth, by quarter, statement of operations data
for the period from March 10, 1999 (date of commencement of operations) to
December 31, 1999. Results of any period are not necessarily indicative of
results for a full year.
<TABLE>
<CAPTION>
March 10 to March Quarter Ended Quarter Ended Quarter Ended
26, 1999 June 25, 1999 September 24, 1999 December 31, 1999
----------------- ------------- ------------------ -----------------
Revenues:
Transaction Revenues:
<S> <C> <C> <C> <C>
Fully electronic transactions.................... $ 76,621 $ 1,153,471 $ 2,590,715 $ 6,259,035
Voice-assisted brokerage transactions............ 664,597 3,900,345 3,817,144 3,395,220
Screen assisted open outcry transactions......... 379,316 1,376,962 1,075,426 692,695
----------- ------------ ------------ ------------
Total transaction revenues............ 1,120,534 6,430,778 7,483,285 10,346,950
Interest income....................................... 347,804
System services fees.................................. 827,716 4,138,578 4,138,578 3,354,702
----------- ------------ ------------ ------------
Total revenues........................ 1,948,250 10,569,356 11,621,863 14,049,456
----------- ------------ ------------ ------------
Expenses:
Compensation and employee benefits.............. 1,267,838 6,403,446 7,033,656 6,797,386
Occupancy and equipment......................... 676,023 2,854,350 3,102,063 3,659,913
Professional and consulting fees................ 185,985 1,596,097 1,833,266 1,533,448
Communications and client networks.............. 221,159 1,103,081 1,121,552 909,278
Fulfillment services fees....................... 26,817 403,715 906,750 2,190,663
Administrative fees............................. 93,701 461,266 512,233 594,858
Options granted to Cantor employees............. 2,850,073
Other........................................... 15,235 500,034 606,850 1,526,991
----------- ------------ ------------ ------------
Total expenses........................ 2,486,758 13,321,989 15,116,370 20,062,610
----------- ------------ ------------ ------------
Loss before benefit for income taxes.................. $ (538,508) $ (2,752,633) $ (3,494,507) $ (6,013,154)
----------- ------------ ------------ ------------
</TABLE>
Liquidity and Capital Resources
Before our initial public offering, we relied on Cantor to provide
financing and cash flow for our operations. Proceeds to us from our initial
public offering were approximately
51
<PAGE>
$139.6 million. Since our initial public offering, we have relied on our cash
flow from operations and the proceeds from our initial public offering to
provide for our cash needs.
Our cash flow is comprised of transaction revenues and system services
fees from Cantor, charges from Cantor of various fees, occupancy costs and other
expenses paid by Cantor on our behalf and investment income. In acting in its
capacity as a fulfillment services provider, Cantor processes and settles the
transaction and, as such, collects and pays the funds necessary to clear the
transaction with the counterparty. In doing so, Cantor receives our portion of
the transaction fee and, in accordance with the Joint Services Agreement, remits
the gross amount owed to us. Under the Administrative Services Agreement and the
Joint Services Agreement, any net receivable or payable will be settled monthly
at the discretion of the parties.
Our ability to withdraw capital from our regulated broker-dealer
subsidiaries could be restricted, which in turn could limit our ability to pay
dividends, repay debt and redeem or purchase shares of our outstanding stock.
Although we have no material commitments for capital expenditures, we
anticipate that we will experience a substantial increase in our capital
expenditures and lease commitments consistent with our anticipated growth in
operations, infrastructure and personnel. We currently anticipate that we will
continue to experience significant growth in our operating expenses for the
foreseeable future and that our operating expenses will be a material use of our
cash resources.
Under the current operating structure, our cash flow from operations and
the net proceeds from our initial public offering should be sufficient to fund
our current working capital and current capital expenditure requirements for at
least the next 12 months. However, we believe that there are a significant
number of capital intensive opportunities for us to maximize our growth and
strategic position, including, among other things, acquisitions, joint ventures,
strategic alliances or other investments. We are currently considering such
options and their effect on our capital requirements.
Impact of the Year 2000
The year 2000 computer problem refers to the potential for system and
processing failures of date related data as a result of computer controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that have time sensitive software may recognize a
date represented as 00 as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions in operations,
including, among other things, a temporary inability to process transactions,
send transmissions to clearing agents or engage in similar normal business
activities.
As a result of the work performed by us and Cantor, we experienced no
adverse impact from a Year 2000 problem. Our and Cantor's combined costs
associated with upgrades to hardware and software, testing and remediating our
systems were approximately $9.2 million through December 31, 1999.
52
<PAGE>
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have invested $134,644,521 of our excess cash in securities purchased
under reverse repurchase agreements which are fully collateralized by U.S.
Government securities held in a custodial account at The Chase Manhattan Bank.
These reverse repurchase agreements have an overnight maturity and, as such, are
highly liquid. We do not use derivative financial instruments, derivative
commodity instruments or other market risk sensitive instruments, positions or
transactions. Accordingly, we believe that we are not subject to any material
risks arising from changes in interest rates, foreign currency exchange rates,
commodity prices, equity prices or other market changes that affect market risk
sensitive instruments. Our policy is to invest our excess cash in a manner to
provide us with the appropriate level of liquidity to enable us to meet our
current obligations, primarily accounts payable, capital expenditures and
payroll, recognizing that we do not currently have outside bank funding.
53
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
eSpeed, Inc. and Subsidiaries
CONSOLIDATED FINANCIAL STATEMENTS
Page No.
--------
Independent Auditors' Report.......................................... 55
Consolidated Statement of Financial Condition......................... 56
Consolidated Statement of Operations.................................. 57
Consolidated Statement of Cash Flow................................... 58
Consolidated Statement of Changes in Stockholders' Equity............. 59
Notes to Consolidated Financial Statements............................ 60
54
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of eSpeed, Inc.:
We have audited the accompanying consolidated statement of financial condition
of eSpeed, Inc. and Subsidiaries (the "Company") as of December 31, 1999, and
the related statements of operations, cash flows and changes in stockholders'
equity for the period from March 10, 1999 (date of commencement of operations)
to December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1999,
and the results of their operations and their cash flows for the period from
March 10, 1999 (date of commencement of operations) to December 31, 1999, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
March 24, 2000
55
<PAGE>
eSpeed, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
December 31, 1999
<TABLE>
<CAPTION>
Assets
<S> <C>
Cash...................................................................................... $ 201,001
Securities purchased under agreements to resell........................................... 134,644,521
---------------
Fixed assets, at cost..................................................................... 12,556,627
Less accumulated depreciation and amortization............................................ (3,086,555)
---------------
Fixed assets, net......................................................................... 9,470,072
Prepaid expenses, principally computer maintenance agreements............................. 11,495
---------------
Total assets.............................................................................. $ 144,327,089
===============
Liabilities and Stockholders' Equity
Liabilities
Payable to affiliates, net................................................................ $ 6,743,929
Accounts payable and accrued liabilities.................................................. 2,071,347
---------------
Total liabilities......................................................................... 8,815,276
---------------
Stockholders' Equity
Preferred stock, par value $.01 per share; 50,000,000 shares authorized, no
shares issued or outstanding.
- - Class A common stock, par value $.01 per share; 200,000,000 shares
authorized; 10,350,000 shares issued and outstanding................................... 103,500
Class B common stock, par value $.01 per share; 100,000,000 shares
authorized; 40,650,000 shares issued and outstanding................................... 406,500
Additional paid in capital................................................................ 147,588,726
Accumulated deficit....................................................................... (12,586,913)
---------------
Total stockholders' equity................................................................ 135,511,813
---------------
Total liabilities and stockholders' equity................................................ $ 144,327,089
===============
</TABLE>
See notes to consolidated financial statements
56
<PAGE>
eSpeed, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF OPERATIONS
December 31, 1999
Revenues:
Transaction revenues......................................... $ 25,381,547
Interest income.............................................. 347,804
System service fees from affiliates.......................... 12,459,574
--------------
Total revenues............................................... 38,188,925
--------------
Expenses:
Compensation and employee benefits........................... 21,502,326
Occupancy and equipment...................................... 10,292,349
Professional and consulting fees............................. 5,148,796
Communications and client networks........................... 3,355,070
Fulfillment fees paid to affiliates.......................... 3,527,945
Administrative fees paid to affiliates....................... 1,662,058
Options granted to Cantor employees.......................... 2,850,073
Other........................................................ 2,649,110
--------------
Total expenses............................................... 50,987,727
--------------
Loss before benefit for income taxes......................... (12,798,802)
---------------
Income Taxes:
Federal...................................................... --
State and local.............................................. 211,889
Total taxes.................................................. 211,889
--------------
Net loss..................................................... $ (12,586,913)
===============
Per Share Data:
Basic and diluted net loss per share......................... $ (0.28)
Weighted average shares of common stock outstanding.......... 44,495,000
See notes to consolidated financial statements
57
<PAGE>
eSpeed, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOW
December 31, 1999
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net loss .................................................................. $ (12,586,913)
Non-cash item included in net loss:
Depreciation and amortization .......................................... 3,086,555
Issuance of stock options .............................................. 2,850,073
Decrease in operating assets:
Prepaid expenses ....................................................... 1,190,728
Increase (decrease) in operating liabilities:
Payable to affiliates, net ............................................. 6,743,929
Accrued compensation and benefits ...................................... (1,490,836)
Accounts payable and accrued liabilities ............................... 444,699
-------------
Cash provided by operating activities ............................... 238,235
-------------
Cash flows from investing activities:
Acquisitions of fixed assets .............................................. (2,717,462)
Capitalization of software development costs .............................. (2,468,605)
Increase in securities purchased under agreements to resell................ (134,644,521)
-------------
Cash used in investing activities ................................... (139,830,588)
-------------
Cash flows from financing activities:
Capital contribution ...................................................... 200,000
Proceeds from initial public offering, net ................................ 143,990,000
Payment of offering costs ................................................. (4,396,646)
-------------
Cash provided by financing activities ............................... 139,793,354
-------------
Net increase in cash ......................................................... 201,001
Cash balance, beginning of period ............................................ --
-------------
Cash balance, end of period .................................................. $ 201,001
-------------
Supplemental disclosure of non-cash financing activities:
Effective March 10, 1999, the Company received an initial capital contribution
as follows:
Fixed assets .............................................................. $ 7,370,560
Prepaid expenses .......................................................... 1,202,223
Accrued compensation and benefits ......................................... (1,490,836)
Accounts payable and accrued expenses ..................................... (1,626,648)
-------------
Total non-cash capital contributed $ 5,455,299
=============
</TABLE>
See notes to consolidated financial statements
58
<PAGE>
<TABLE>
<CAPTION>
Total
Common Stock Common Stock Additional Paid in Accumulated Stockholders'
Class A Class B Capital Deficit Equity
<S> <C> <C> <C> <C> <C>
Balance, March 10, 1999 ......................... $ -- $ -- $ -- $ -- $ --
Cash capital contribution (100 Shares) .......... 1 199,999 200,000
Non-cash capital contribution (43,999,900 Shares) 439,999 5,015,300 5,455,299
Conversion of Class B common stock to Class A
common stock (3,350,000 Shares) .............. 33,500 (33,500) --
Initial public offering of Class A common
stock (7,000,000 Shares) ..................... 70,000 143,920,000 143,990,000
Costs of initial public offering ................ (5,749,481) (5,749,481)
Issuance of options ............................. 2,850,073 2,850,073
Issuance of warrant ............................. 1,352,835 1,352,835
Net loss ........................................ (12,586,913) (12,586,913)
--------- --------- ------------- ------------- ------------
Balance, December 31, 1999 ...................... $ 103,500 $ 406,500 $ 147,588,726 $ (12,586,913) $135,511,813
========= ========= ============= ============= ============
</TABLE>
See notes to consolidated financial statements
59
<PAGE>
eSpeed, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from March 10, 1999 (date of commencement of operations)
to December 31, 1999
1. Organization and Formation Transaction
eSpeed, Inc. (eSpeed or, together with its wholly owned subsidiaries, the
Company) is a majority owned subsidiary of Cantor Fitzgerald Securities (CFS),
which in turn is a 99.5% owned subsidiary of Cantor Fitzgerald, L.P. (CFLP, or
together with its subsidiaries, Cantor). eSpeed commenced operations on March
10, 1999 as a division of CFS. eSpeed is a Delaware corporation that was
incorporated on June 3, 1999. The Company engages in the business of operating
interactive business-to-business vertical electronic marketplaces designed to
enable market participants to trade financial and non-financial products more
efficiently and at a lower cost that traditional trading environments permit.
In December 1999, the Company completed its initial public offering (the
Offering) of 10,350,000 shares of Class A common stock at $22 per share, of
which 7 million shares were sold by the Company, raising approximately $144
million in proceeds before Offering expenses. The remaining shares were sold by
CFS.
The accompanying financial statements include activities of the Company
while operating as a division of CFS from March 10, 1999 to the Offering. The
formation transactions include the initial capital contribution of net assets of
$5,455,299. This contribution includes fixed assets with a net book value of
$7,370,560 and prepaid expenses of $1,202,223, and the assumption of liabilities
consisting of accrued compensation, accounts payable and other liabilities of
$3,117,484. In exchange for the contribution of net assets, the Company issued
Cantor 43,999,900 shares of Class B common stock. Immediately thereafter, Cantor
converted 3,350,000 shares of Class B common stock to Class A common stock and
sold them in the Offering.
2. Summary of Significant Accounting Policies
Use of Estimates: The preparation of the consolidated financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of the assets
and liabilities, revenues and expenses, and the disclosure of contingent assets
and liabilities in the consolidated financial statements. Estimates, by their
nature, are based on judgment and available information. As such, actual results
could differ from the estimates included in these consolidated financial
statements.
Transaction Revenues: Securities transactions and the related transaction
revenues are recorded on a trade date basis.
Fixed Assets: Fixed assets, which comprise computer and communication
equipment and software, are depreciated over their estimated economic useful
lives of three to five years using an accelerated method. Internal and external
direct costs of application development and of obtaining software for internal
use are capitalized and amortized over their estimated economic useful life of
three years on a straight-line basis.
Securities Purchased under Agreements to Resell: Securities purchased
under agreements to resell (Resale, or Reverse Repurchase, Agreements) are
accounted for as
60
<PAGE>
eSpeed, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from March 10, 1999 (date of commencement of operations)
to December 31, 1999
collateralized investment transactions. It is the policy of the Company to
obtain possession of the collateral with a market value equal to or in excess of
the principal amount loaned. Collateral is valued daily and the Company may
require counter-parties to deposit additional collateral or return amounts
loaned when appropriate. The Company generally does not report assets received
as collateral in Resale Agreements because the debtor typically has the right to
substitute or redeem the collateral on short notice.
Stock Options: Awards to employees of options to purchase the Class A
common stock of the Company are accounted for under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees". No expense is
recognized for awards under non-compensatory plans. Options granted to
non-employees are accounted for under the Financial Accounting Standards Board's
Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for
Stock-Based Compensation", where the options granted are recognized based on the
fair value of the options at the time of the grant.
New Accounting Pronouncements: In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The statement, as amended, is
effective for fiscal years beginning after June 15, 2000. The Company has
evaluated the impact of adopting SFAS No. 133 and believes it will not have a
material effect on its financial statements.
3. Fixed Assets
Fixed assets consist of the following: December 31, 1999
----------------
Computer and communication equipment....................... $ 9,544,265
Software, including software development costs............. 3,012,362
---------------
12,556,627
Less accumulated depreciation and amortization............. (3,086,555)
---------------
Fixed assets, net.......................................... $ 9,470,072
===============
4. Income Taxes
Through December 9, 1999, the Company operated as a division of CFS, which
is a New York partnership. Under applicable federal and state income tax laws,
the taxable income or loss of a partnership is allocated to each partner based
upon their ownership interest. CFS is, however, subject to the Unincorporated
Business Tax (UBT) of the City of New York, and the benefit for income taxes
represents a reduction in UBT. The loss generated by the Company while it
operated as a division of CFS will be used as a reduction of the taxable income
of CFS and, as such, the Company will be reimbursed for such tax and has
recognized the tax benefit as an offset to payable to affiliates.
61
<PAGE>
eSpeed, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from March 10, 1999 (date of commencement of operations)
to December 31, 1999
Since the commencement date of the Offering, December 10, 1999, the
Company has been subject to income tax as a corporation. The net operating
losses from that date, in the amount of $4,409,883 will be available on a carry
forward basis through 2014 to offset future operating income of the Company.
5. Commitments and Contingencies
Leases: Under an administrative services agreement, eSpeed is obligated
for minimum rental payments under various non-cancelable leases with third
parties, principally for office space and computer equipment, expiring at
various dates through 2014 as follows:
For the Period Ending December 31:
- ---------------------------------
2000....................................................... $ 4,435,118
2001....................................................... 4,273,899
2002....................................................... 4,193,291
2003....................................................... 4,152,367
2004....................................................... 4,115,995
Thereafter................................................. 20,352,341
---------------
Total...................................................... $ 41,523,011
===============
Rental expense under the above and under all other operating leases
amounted to $3,738,303 for the period ended December 31, 1999.
Legal Matters: On June 21, 1999, Cantor and its affiliate CFPH, LLC,
brought suit against Liberty Brokerage Investment Corporation and Liberty
Brokerage Inc. in the United States District Court for the District of Delaware
for infringement of the Fraser et al. U.S. patent 5,905,974, entitled "Automated
Auction Protocol Processor." Cantor alleged in the complaint that Liberty was
infringing the `974 patent by making, using, selling and/or offering for sale
systems and methods that embody or use the inventions claimed in the `974
patent. On August 10, 1999, Cantor and CFPH, L.L.C. voluntarily dismissed the
suit without prejudice. Subsequently, on August 10, 1999, Liberty filed an
action for declaratory judgment in the United States District Court for the
District of Delaware against Cantor and two of its affiliates, Cantor Fitzgerald
Securities and CFPH, LLC, claiming that the `974 patent was invalid,
unenforceable and not infringed by Liberty. On October 12, 1999, Cantor, Cantor
Fitzgerald Securities and CFPH, LLC moved (1) to dismiss all claims against
Cantor Fitzgerald Securities for failure to state a claim upon which relief can
be granted and (2) to dismiss the action as against Cantor, Cantor Fitzgerald
Securities and CFPH, LLC for lack of an actual case or controversy within the
meaning of 28 U.S.C. Section 2201. On November 22, 1999, the Court granted the
motion to dismiss the action as against Cantor Fitzgerald Securities, and denied
the motion to dismiss the action as against Cantor and its affiliate CFPH, LLC.
On January 5, 2000, Liberty filed an Amended Complaint naming the Company as a
defendant. On January 19, 2000, Cantor and CFPH, LLC filed a Second Renewed
Motion to Dismiss the action. On March 8, 2000, oral
62
<PAGE>
eSpeed, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from March 10, 1999 (date of commencement of operations)
to December 31, 1999
arguments took place on the Second Renewed Motion to Dismiss. No decision has
been rendered. The Company has assumed responsibility for defending this suit on
behalf of Cantor and its affiliates and the risk of loss associated with it.
In February 1998, Market Data Corporation contracted with Chicago Board
Brokerage (a company controlled by the Chicago Board of Trade and Prebon Yamane)
to provide the technology for an electronic trading system to compete with
Cantor's United States Treasury brokerage business. Market Data Corporation is
controlled by Iris Cantor and Rodney Fisher, her nephew-in-law. Iris Cantor, a
company under the control of Iris Cantor referred to herein as CFI, and Rodney
Fisher are limited partners of Cantor Fitzgerald, L.P.
In April 1998, Cantor Fitzgerald, L.P. filed a complaint in the Delaware
Court of Chancery against Market Data Corporation, Iris Cantor, CFI, Rodney
Fisher and Chicago Board Brokerage seeking an injunction and other remedies. The
complaint alleges that Iris Cantor, CFI and Rodney Fisher violated certain
duties, including fiduciary duties under Cantor's partnership agreement due to
their competition with Cantor Fitzgerald, L.P. with respect to the electronic
trading system mentioned above. The complaint further alleges that Market Data
Corporation and Chicago Board Brokerage tortuously interfered with Cantor's
partnership agreement and aided and abetted Iris Cantor's, CFI's and Rodney
Fisher's breaches of fiduciary duty. Iris Cantor, CFI and Rodney Fisher
counterclaimed seeking, among other things, (1) to reform agreements they have
with Cantor Fitzgerald, L.P. and (2) a declaration that Cantor Fitzgerald, L.P.
breached the implied covenant of good faith and fair dealing. Cantor has agreed
to indemnify the Company for any liabilities that the Company incurs with
respect to any current or future litigation involving (1) Market Data
Corporation, (2) Iris Cantor, (3) CFI or (4) Rodney Fisher.
Cantor Fitzgerald, L.P. settled its dispute with Chicago Board Brokerage
in April 1999 and Chicago Board Brokerage subsequently announced it was
disbanding its operations. On March 17, 2000, the Delaware Court of Chancery
ruled in favor of Cantor Fitzgerald, L.P., finding that Iris Cantor, CFI and
Rodney Fisher had breached the Partnership Agreement of Cantor Fitzgerald, L.P.,
and that Market Data Corporation had aided and abetted that breach. The court
awarded Cantor Fitzgerald, L.P. declaratory judgment relief and court costs and
attorneys' fees. Counsel for the defendants have expressed their intentions to
appeal this result. The Company believes Market Data Corporation's technology
for electronic trading systems will be of substantial assistance to competitors
in the wholesale market if provided to them.
Two related actions are pending in New York. In a case pending in the
Supreme Court of New York, New York County, plaintiff Cantor Fitzgerald, L.P.
alleges, among other things, that defendants Market Data Corporation, CFI, Iris
Cantor and Rodney Fisher misused confidential information of Cantor Fitzgerald,
L.P. in connection with the above mentioned provision of technology to Chicago
Board Brokerage. In a case pending in the United States District Court for the
Southern District of New York, CFI and Iris Cantor allege, among other things,
that certain senior officers of Cantor Fitzgerald, L.P. breached fiduciary
duties they owed to CFI. The allegations in this lawsuit relate to several of
the same events underlying the court proceedings in
63
<PAGE>
eSpeed, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from March 10, 1999 (date of commencement of operations)
to December 31, 1999
Delaware. Neither of these two cases has been pursued during the pending of the
court proceedings in Delaware.
In addition to the allegations set forth in the pending lawsuits, Cantor
has received correspondence from the attorneys representing Iris Cantor, CFI,
Market Data Corporation and Rodney Fisher in the proceedings in Delaware,
expressing a purported concern that Cantor and/or certain of its partners may be
in breach of Cantor's partnership agreement (including, among other things, the
partnership agreement's provisions relating to competition with the partnership)
and the general partnership agreement of Cantor Fitzgerald Securities with
respect to the Company's initial public offering. Generally, these attorneys
have alleged that various purported conflicts of interest will exist arising
from the fact that certain of the Company's directors and officers will
simultaneously hold positions with Cantor Fitzgerald, L.P. Moreover, these
attorneys have asserted that the Company's business plan may not be consistent
with certain purported rights of Market Data Corporation (including purported
intellectual property rights) and other parties and they requested more
information regarding the Company's initial public offering.
Although the Company does not expect to incur any losses with respect to
the pending lawsuits or supplemental allegations surrounding Cantor's
partnership agreement, Cantor has agreed to indemnify the Company with respect
to any liabilities the Company incurs as a result of such lawsuits or
allegations.
Cantor and Reuters were parties to a confidential arbitration under the
auspices of the American Arbitration Association in New York, New York, which
began in June 1995 with respect to a January 1993 agreement among Reuters,
Cantor and Market Data Corporation. The agreement executed in 1993 involved,
among other things, the delivery by Cantor of certain market data arising out of
non-United States government bond and U.S. municipal bond interdealer brokerage
transactions for transmittal over Reuters' network. The agreement also
contemplated the joint development by Cantor and Reuters of an electronic
trading system for certain transactions in non-United States government bonds.
Cantor and Reuters did not develop this electronic trading system. In the
arbitration, Reuters alleged that Cantor materially breached the agreement
primarily by failing to provide non-screen, voice brokerage data concerning
non-United States government bonds and U.S. municipal bonds that Reuters
contends are subject to the agreement and fraud. Reuters sought to recover from
Cantor amounts representing past payments for market data, the reimbursement of
attorneys' fees and other damages. Cantor denied Reuters' allegations that there
had been any material breach of this agreement or fraud, and asserted a breach
of contract claim and various other counterclaims against Reuters, including
claims for Reuters' failure since February 1997 to pay any of the money due
Cantor for data under this agreement. In February 1997, Reuters unilaterally
ceased making such payments to Cantor in connection with the dispute and in
November 1999 stopped distributing Cantor's market data that was provided to
Reuters.
On December 30, 1999, Cantor entered into a new agreement with Reuters
pursuant to which Cantor and Reuters settled outstanding disputes and terminated
the 1993 agreement. The Company cannot assure you that Market Data Corporation
will not seek to assert claims against
64
<PAGE>
eSpeed, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from March 10, 1999 (date of commencement of operations)
to December 31, 1999
the Company or Cantor relating to our activities with respect to the 1993
agreement or the arbitration. Cantor has agreed to indemnify the Company with
respect to any claims that may be asserted by Market Data Corporation or Reuters
relating to the 1993 agreement or arising out of the arbitration.
On May 5, 1999, Cantor, The Board of Trade of the City of Chicago, The New
York Mercantile Exchange and The Chicago Mercantile Exchange, were sued by
Electronic Trading Systems, Inc. in the United States District Court for the
Northern District of Texas (Dallas Division) for alleged infringement of Wagner
United States patent 4,903,201, entitled "Automated Futures Trade Exchange". The
patent relates to a system and method for implementing an electronic,
computer-automated futures exchange. On July 1, 1999, Cantor answered the
complaint, asserting, among other things, that the `201 patent was invalid and
not infringed by Cantor and that Cantor was not the real party in interest.
Although not identified by the complaint, Cantor believes that the system being
charged with infringement is a version of the electronic trading system used by
the Cantor Exchange((Service Mark)), which Cantor contributed to the Company in
December 1999. Electronic Trading Systems Corporation executed a Covenant Not to
Sue, Release and Settlement Agreement, dated February 18, 2000, pursuant to
which it agreed not to sue Cantor Fitzgerald, L.P. or any of its affiliates or
successors, including the Company, or any customers, for infringement of the
`201 patent by the Cantor Exchange((Service Mark)). On March 22, 2000, counsel
to the parties filed with the court a Joint Stipulation and (proposed) Order of
Dismissal requesting that Cantor Fitzgerald, L.P. be dismissed from the case
without prejudice by Electronic Trading Systems Corporation. On March 23, 2000,
the Court signed an Agreed Order of Dismissal and on March 24, 2000 Cantor
Fitzgerald, L.P. was dismissed from the case.
Although the ultimate outcome of these actions cannot be ascertained at
this time and the results of legal proceedings cannot be predicted with
certainty, it is the opinion of management that the resolution of these matters
will not have a material adverse effect on the financial condition or results of
operations of the Company.
Risks and Uncertainties: The majority of the Company's revenues consist of
fees earned from Cantor in connection with its interactive electronic
business-to-business vertical marketplaces. Revenues for these services are
transaction based. As a result, the Company's revenues could vary based on the
transaction volume of financial markets around the world.
6. Related Party Transactions
At December 31, 1999, the Company had overnight Resale Agreements with CFS
totaling $134,644,521, including accrued interest. Under the terms of the
agreement, the securities collateralizing the Resale Agreements are held under a
custodial arrangement with a third party bank.
Under a Joint Services Agreement among the Company and Cantor, the Company
earns transaction revenue equal to a percentage of Cantor's commission revenue
on customer transactions for services provided by the Company. The percentage of
the transaction revenues range from 2.5% to 100%, depending on the type of
electronic services provided for the
65
<PAGE>
eSpeed, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from March 10, 1999 (date of commencement of operations)
to December 31, 1999
transaction. Revenues from such transactions during the period ended December
31, 1999 totaled $25,381,547.
On certain transactions (those where the Company receives 100% of the
commission revenue share), Cantor provides the Company with fulfillment services
for which Cantor is paid a fee of 20% or 35% of the transaction revenue earned
on the transaction. Charges to the Company from Cantor for such fulfillment
services during the period ended December 31, 1999 totaled $3,527,945.
Under the Administrative Services Agreement, the Company provides network,
data center and server administration support and other technology services to
Cantor. The Company charges Cantor for these services commensurate with its
costs of providing these services. System services fees received from Cantor
during the period ended December 31, 1999 totaled $12,459,574.
Under an Administrative Services Agreement, Cantor provides various
administrative services to the Company, including accounting, tax, sales and
marketing, legal and facilities management. The Company is required to reimburse
Cantor for the cost of providing such services. The costs represent the direct
and indirect costs of providing such services and are determined based upon the
time incurred by the individual performing such services. Management believes
that this allocation methodology is reasonable. The Administrative Service
Agreement has a three-year term which will renew automatically for successive
one-year terms unless cancelled upon six month's prior notice by either the
Company or Cantor. The Company incurred administrative fees for such services
during the period ended December 31, 1999 totaling $1,662,058.
7. Capitalization
The rights of holders of shares of Class A and Class B common stock are
substantially identical, except that holders of Class B common stock are
entitled to 10 votes per share, while holders of Class A common stock are
entitled to one vote per share. Additionally, each share of Class B common stock
is convertible at any time, at the option of the holder, into one share of Class
A common stock.
8. Regulatory Capital Requirements
Through its subsidiary, eSpeed Government Securities, Inc., the Company is
subject to Securities and Exchange Commission (SEC) broker-dealer regulation
under Section 15C of the Securities Exchange Act of 1934, which requires the
maintenance of minimum liquid capital, as defined. At December 31, 1999, eSpeed
Government Securities, Inc.'s liquid capital of $1,536,699 was in excess of
minimum requirements by $1,511,699.
Additionally, the Company's subsidiary, eSpeed Securities, Inc., is
subject to SEC broker-dealer regulation under Rule 17a-5 of the Securities
Exchange Act of 1934 which requires the maintenance of minimum net capital and
requires that the ratio of aggregate
66
<PAGE>
eSpeed, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from March 10, 1999 (date of commencement of operations)
to December 31, 1999
indebtedness to net capital, both as defined, shall not exceed 8 to 1. At
December 31, 1999, eSpeed Securities, Inc. had net capital of $1,048,849, which
was $572,325 in excess of its required net capital of $476,524, and eSpeed
Securities, Inc.'s net capital ratio was 3.63 to 1.
9. Deferred Compensation Plan
Employees of the Company are eligible to participate in the Cantor
Fitzgerald Deferral Plan (the Plan), which is a deferred-salary plan sponsored
by CFLP, whereby an eligible employee may elect to defer a portion of his salary
by directing the Company to contribute to the Plan. The Plan is available to all
employees of the Company meeting certain eligibility requirements and is subject
to the provisions of the Employee Retirement Income Security Act of 1974. While
the Company has the option to contribute to the Plan on behalf of its
participants, no such contribution was made during the period ended December 31,
1999. The administration of the Plan is performed by CFLP. The Company pays its
proportionate share of such administrative costs under the Administrative
Services Agreement.
10. Long-Term Incentive Plan
The Company has adopted a Long-Term Incentive Plan (the LT Plan) which
will provide for awards in the form of 1) either incentive stock options or
non-qualified stock options (NQSOs); 2) stock appreciation rights; 3) restricted
or deferred stock; 4) dividend equivalents; 5) bonus shares and awards in lieu
of obligations to pay cash compensation; and 6) other awards, the value of which
is based in whole or in part upon the value of eSpeed's common stock.
The Compensation Committee of the Board of Directors administers the LT
Plan and is generally empowered to select the individuals who will receive the
awards and the terms and conditions of those awards.
The LT Plan also authorizes the automatic grant of NQSOs to non-employee
directors upon initial election as a director and additional grants at each
annual meeting thereafter. These options will have an exercise price equal to
the fair market value of the Class A common stock on the date of grant.
11. Stock Purchase Plan
The Company has adopted a Stock Purchase Plan to permit eligible,
including employees of Cantor, employees to purchase shares of eSpeed common
stock at a discount. At the end of each purchase period, as defined, accumulated
payroll deductions will be used to purchase stock at a price determined by a
Stock Purchase Plan Administrative Committee, which will generally not be less
than 85% of the lowest market price at various defined dates during the purchase
period. The Company has reserved 425,000 shares of Class A common stock for
issuance under the Stock Purchase Plan.
67
<PAGE>
eSpeed, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from March 10, 1999 (date of commencement of operations)
to December 31, 1999
12. Options and Warrants
In connection and concurrent with the Offering, the Company issued options
under the LT Plan to employees of Cantor, outside directors of the Company, and
employees of the Company. In addition, the Company issued a warrant to a
consultant. The options and warrants have contractual expiration dates of either
five or ten years from the grant date, and give the holder the right to purchase
shares of the Company's Class A common stock at the initial public offering
price of $22. No options or warrants were exercised or expired and 24,900
options were forfeited during the period ended December 31, 1999.
The fair value of the options and warrants 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 expected lives ranging from three to eight years from the grant date.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options or warrants.
The Company issued 135,000 warrants to a consultant in connection with the
Offering. The grant date estimated fair value of $1,352,835 has been recorded as
an increase to additional paid in capital and as an increase in Offering costs
which have been charged against additional paid in capital. Accordingly, the
issuance of the warrants resulted in no net change in additional paid in
capital. The warrants are exercisable commencing on the one-year anniversary of
the Offering.
The Company issued 282,005 vested options to Cantor employees that are
exercisable on the first anniversary of the Offering and issued 10,000
immediately exercisable options to a consultant. The estimated fair value of the
options at the time of the Offering resulted in a one-time non-cash charge to
the Company of $2,850,073.
The Company also issued 6,227,445 options to employees and outside
directors of the Company, of which 500,000 are immediately exercisable. The
remaining options vest as follows: 3,915,000 spread ratably over the five
successive anniversaries of the Offering, 1,752,445 spread ratably over the four
successive anniversaries of the Offering, and 60,000 spread ratably over the
three successive six month anniversaries of the Offering. The options had an
estimated fair value of $82,758,567 as of the grant date. Had the Company
accounted for these options in its stock based compensation plan based on the
fair value of awards at grant date in a manner consistent with the methodology
of SFAS 123, the Company's net loss and loss per common share would have
increased by $6,642,591 and $0.15, respectively.
68
<PAGE>
eSpeed, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from March 10, 1999 (date of commencement of operations)
to December 31, 1999
As of December 31, 1999, the weighted average remaining contractual life
of options and warrants outstanding was approximately 9-1/4 years; and options
for 510,000 shares were currently exercisable.
13. Segment and Geographic Data
Segment Information: The Company currently operates its business in one
segment, that of operating interactive electronic business-to-business vertical
marketplaces for the trading of financial and non-financial products. This
segment comprised approximately 66% of revenues for the period ended December
31, 1999. The remainder of the Company's revenues was derived from system
services fees received from Cantor and interest income.
Geographic Information: The Company operates in the Americas, Europe, and
Asia. Revenue attribution for purposes of preparing geographic data is
principally based upon the marketplace where the financial product is traded,
which, as a result of regulatory jurisdiction constraints in most circumstances,
is also representative of the location of the client generating the transaction
resulting in commissionable revenue. The information that follows, in
management's judgement, provides a reasonable representation of the activities
of each region as of and for the period ended December 31, 1999:
TRANSACTION REVENUES
Europe................................................... $ 5,392,923
Asia..................................................... 450,457
-----------------
Total Non-Americas....................................... 5,843,380
Americas................................................. 19,538,167
-----------------
TOTAL.................................................... 25,381,547
=================
AVERAGE LONG-LIVED ASSETS
Europe................................................... $ 2,257,914
Asia..................................................... 925,790
-----------------
Total Non-Americas....................................... 3,183,704
Americas................................................. 5,236,613
-----------------
TOTAL.................................................... $ 8,420,317
=================
69
<PAGE>
eSpeed, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from March 10, 1999 (date of commencement of operations)
to December 31, 1999
Quarterly Information (Unaudited)
The unaudited quarterly results of operations of the Company for 1999 are
prepared in accordance with generally accepted accounting principles. The
information presented reflects all adjustments (which consist of normal
recurring accruals) that are, in management's opinion, necessary for the fair
presentation of results of operations for the periods presented. Results of any
period are not necessarily indicative of results for a full year.
<TABLE>
<CAPTION> Quarter Ended
March 10 ------------------------------------------------------
through June 25, September December 31,
26, 1999 1999 24, 1999 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenues ......................... $ 1,948,250 $ 10,569,356 $ 11,621,863 $ 14,049,456
Total expenses ......................... 2,486,758 13,321,989 15,116,370 20,062,610
------------ ------------ ------------ ------------
Loss before provision for income taxes.. (538,508) (2,752,633) (3,494,507) (6,013,154)
Income tax benefit ..................... 13,470 68,849 89,488 40,082
------------ ------------ ------------ ------------
Net loss ............................... $ (525,038) $ (2,683,784) $ (3,405,019) $ (5,973,072)
============ ============ ============ ============
Net loss per share ..................... $ (0.01) $ (0.06) $ (0.08) $ (0.13)
============ ============ ============ ============
</TABLE>
70
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
71
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides information regarding our directors and executive
officers:
Name Age Title
- ---- --- -----
Howard W. Lutnick................... 38 Chairman of the Board and
Chief Executive Officer
Frederick T. Varacchi............... 34 President and Chief
Operating Officer;
Director
Douglas B. Gardner.................. 38 Vice Chairman; Director
Kevin C. Piccoli.................... 42 Senior Vice President and
Chief Financial Officer
Stephen M. Merkel................... 41 Senior Vice President,
General Counsel and
Secretary
Richard C. Breeden.................. 50 Director(1)
Larry R. Carter..................... 56 Director(1)
William J. Moran.................... 58 Director(1)
Joseph P. Shea...................... 45 Director
- -----------
(1) Non-employee director.
Howard W. Lutnick. Mr. Lutnick has been our Chairman of the Board of
Directors and Chief Executive Officer since June 1999. Mr. Lutnick joined Cantor
in 1983 and has served as President and Chief Executive Officer of Cantor since
1991. He directs all facets of eSpeed's and Cantor's worldwide operations. Mr.
Lutnick's company, CF Group Management, Inc., is the managing general partner of
Cantor. Mr. Lutnick serves as co-chairman of the Cantor Exchange((Service
Mark)). Mr. Lutnick is a member of the Executive Committee of the Intrepid
Museum Foundation's Board of Trustees, the Zachary and Elizabeth M. Fisher
Center for Alzheimer's Disease Research at Rockefeller University, the Board of
Managers of Haverford College, the Board of Directors of City Harvest and the
Board of Directors of New York City Public/Private Initiatives, Inc.
Frederick T. Varacchi. Mr. Varacchi has been our President and Chief
Operating Officer since June 1999. Mr. Varacchi has been an Executive Managing
Director and the Chief Operating Officer of Cantor since October 1999. From
March 1998 to October 1999, he served as Senior Managing Director and Chief
Information Officer of Cantor. Before joining Cantor, Mr. Varacchi was Senior
Vice President and Chief Technology Officer of Greenwich/Natwest Capital
Markets, overseeing information technology for the company from January 1995 to
February 1998. From March 1990 to January 1995, Mr. Varacchi worked for Chase
Manhattan Bank, where he held a variety of senior technology positions,
including Head of Global Network Systems for Private Banking. From January 1989
to March 1990, Mr. Varacchi served in a variety of positions with Salomon Smith
Barney, including as Head of Front Office Systems. Mr.
72
<PAGE>
Varacchi is a member of the Board of Directors of Expert Ease Software and QV
Trading Systems Inc.
Douglas B. Gardner. Mr. Gardner has been our Vice Chairman since June
1999. Mr. Gardner has been an Executive Managing Director of Cantor since
October 1999. He previously served as Senior Managing Director and Chief
Administrative Officer of Cantor from January 1994 to October 1999, where he was
responsible for overseeing all worldwide finance and support related functions.
Mr. Gardner serves as a director and is on the executive and finance committees
of the Cantor Exchange((Service Mark)). 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.
Kevin C. Piccoli. Mr. Piccoli has been our Senior Vice President and Chief
Financial Officer since September 1999. He has been a Managing Director of
Cantor since October 1999 and Senior Vice President and Chief Financial Officer
of Cantor, responsible for its global accounting, regulatory, management
reporting and treasury functions, since July 1999. Prior to joining Cantor, he
was a Managing Director and Chief Financial Officer at Greenwich Capital
Holdings, Inc., a subsidiary of National Westminster Bank, from April 1992 to
July 1999. Mr. Piccoli's responsibilities at Greenwich included global
accounting, tax and regulatory reporting. Prior to joining Greenwich in April
1992, Mr. Piccoli was an audit partner at Coopers & Lybrand.
Stephen M. Merkel. Mr. Merkel has been our Senior Vice President, General
Counsel and Secretary since June 1999. Mr. Merkel has also been Senior Vice
President, General Counsel and Secretary of Cantor since 1993, where he is
responsible for Cantor's legal, compliance, tax, risk and credit departments.
Mr. Merkel serves as a director and Secretary of the Cantor Exchange((Service
Mark)). Prior to joining Cantor, Mr. Merkel was Vice President and Assistant
General Counsel of Goldman Sachs & Co. from February 1990 to May 1993. From
September 1985 to January 1990, Mr. Merkel was associated with the law firm of
Paul, Weiss, Rifkind, Wharton & Garrison.
Richard C. Breeden. Mr. Breeden has been our director since December 1999.
Mr. Breeden has been Chairman of the Board and Chief Executive Officer of
Equivest Finance, Inc., a publicly traded vacation ownership company, since
October 1997 and President since October 1998. Mr. Breeden has served as Trustee
for the Bennett Funding Group, Inc. since 1996. Mr. Breeden also has served as
President of Richard C. Breeden & Co., a consulting firm, since 1996. From 1993
to 1996, Mr. Breeden served as Chairman of the worldwide financial services
practice of Coopers & Lybrand and, from 1989 to 1993, Mr. Breeden was Chairman
of the U.S. Securities and Exchange Commission. Mr. Breeden was a director of
The Philadelphia Stock Exchange, Inc.
Larry R. Carter. Mr. Carter has been our director since December 1999. Mr.
Carter joined Cisco Systems 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
73
<PAGE>
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. 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. Mr. Shea has been our director since December 1999. Mr.
Shea has been with Cantor since 1989. He has been Executive Managing Director
since October 1999, was Senior Managing Director in charge of U.S. taxable fixed
income securities from 1997 to 1999, was Managing Director of the corporate bond
and U.S. government agency securities departments from 1995 to 1997 and was
Managing Director of the corporate bond department from 1989 to 1995.
Committees of the Board
The members of the Audit Committee are Messrs. Breeden, Carter and Moran,
all of whom are non-employee directors. The Audit Committee is responsible for
recommending to the board of directors the engagement of our independent
auditors and reviewing with our independent auditors the conduct and results of
the audits, our internal accounting controls, audit practices and the
professional services furnished by our independent auditors.
The members of the Compensation Committee are Messrs. Breeden, Carter and
Moran, all of whom are non-employee directors. The Compensation Committee is
responsible for reviewing and approving all compensation agreements for our
officers and for administering our stock option plan and our stock purchase
plan.
The Audit Committee and the Compensation Committee were each formed upon
the closing of the initial public offering in December 1999. Neither committee
met during the year ended December 31, 1999.
Compensation of Directors
Directors who are also our employees do not receive additional
compensation for serving as directors. We have granted our initial non-employee
directors options to purchase 20,000 shares of our common stock at an exercise
price per share equal to $22.00, which was the initial public offering price of
our 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.
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, our directors, executive
officers and any person holding more than 10% of our Class A common stock are
required to file initial forms of ownership of our Class A common stock and
reports of changes in that ownership at the Securities and Exchange Commission.
Specific due dates for these forms have been established, and we are required to
disclose in this report any failure to file by these dates.
Based solely on our review of the copies of such forms received by it with
respect to fiscal 1999, or written representations from certain reporting
persons, to the best of our knowledge, all reports were filed on a timely basis,
except for Mr. Moran's Form 3, which was amended to report inadvertently omitted
information, and Mr. Merkel's Form 4, which was filed late.
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ITEM 11. EXECUTIVE COMPENSATION
The following table provides certain summary information concerning all
compensation earned by our Chief Executive Officer and each of the other four
most highly compensated executive officers (collectively, the "Named Executive
Officers") whose annual salary and bonus for the year ended December 31, 1999
exceeded $100,000 in the aggregate.
Summary Compensation Table
<TABLE>
<CAPTION>
March 10, 1999 Long-Term
through December Compensation Awards
31, 1999 Securities Underlying
Name and Principal Position Year Compensation-Salary Options (#)
- --------------------------- ---- ------------------- ---------------------
<S> <C> <C> <C>
Howard W. Lutnick......... 1999 $280,000 2,500,000
Chairman and Chief
Executive Officer
Frederick T. Varacchi..... 1999 400,000 800,000
President and Chief
Operating Officer
Douglas B. Gardner........ 1999 200,000 375,000
Vice Chairman
Kevin C. Piccoli.......... 1999 100,000 65,000
Senior Vice President
and Chief Financial
Officer
Stephen M. Merkel......... 1999 120,000 100,000
Senior Vice President
and General Counsel
</TABLE>
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The following table sets forth the options granted during 1999 and the value of
the options held on December 31, 1999 by our Named Executive Officers:
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
--------------------------------------------------------------------------------------------------------------------------------
Number of
Shares Percent of Total
Underlying Options Granted Exercise or Base Grant Date Present
Options to Employees in Price Expiration Value ($)(3)
Name Granted 1999 ($/share) Date
-------------------------- ----------- ---------------- ---------------- ---------- ------------------
<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.
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The following table provides information, with respect to the Named
Executive Officers, concerning options held as of December 31, 1999.
Aggregated Option/Exercises In Last Fiscal Year
and Fiscal Year-End Option/Values
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options/SARs at Fiscal Options/ SARs at Fiscal
Shares Acquired Value Realized Year-End (#) Year-End($)(1)
Name on Exercise (#) on Exercise ($) 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 price of $35.5625 for the Class A common stock on
December 31, 1999.
Compensation Committee Interlock and Insider Participation
The Compensation Committee of the board of directors consists of Messrs.
Breeden, Carter and Moran. All of the members of the Compensation Committee are
non-employee directors and are not former officers. During 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.
1999 Long-Term Incentive Plan
In December 1999, our board of directors and stockholder approved the
adoption of our 1999 Long-Term Incentive Plan. The purpose of the plan is to
allow us to attract, retain and award present and prospective officers,
employees, directors, consultants and certain other individuals (including
employees of Cantor) and to compensate them in a way that provides additional
incentives and enables such individuals to increase their ownership interests in
our Class A common stock. Individual awards under the plan may take the form of:
o either incentive stock options or non-qualified stock options;
o stock appreciation rights;
o restricted or deferred stock;
o dividend equivalents;
o bonus shares and awards in lieu of our obligations to pay cash
compensation; and
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o other awards, the value of which is based in whole or in part upon
the value of our Class A common stock.
The plan is generally administered by the Compensation Committee, except
that our board will perform the committee's functions under the plan for
purposes of grants of awards to non-employee directors, and may perform any
other function of the committee as well. The Compensation Committee generally is
empowered to select the individuals who will receive awards and the terms and
conditions of those awards, including the number of shares subject to the award
exercise prices for options and other exercisable awards, vesting and forfeiture
conditions (if any), performance conditions, the extent to which awards may be
transferable and periods during which awards will remain outstanding. Awards may
be settled in cash, shares, other awards or other property, as determined by the
Compensation Committee. In January 2000, our board delegated its authority to
grant awards under the plan, other than grants to executive officers and
directors, to a combination of either (i) Mr. Lutnick and Mr. Varacchi or (ii)
Mr. Lutnick and Mr. Gardner, provided that the Compensation Committee will
review such grants on a quarterly basis.
The maximum number of shares of our Class A common stock that may be
subject to outstanding awards under the plan will not exceed 20% of the
aggregate number of shares of all classes of common stock outstanding determined
immediately after each award is granted. The number of shares deliverable upon
exercise of incentive stock options is limited to 10,000,000 shares of Class A
common stock.
In connection with our initial public offering on December 10, 1999,
options in the form of non-qualified stock options to purchase a total of
6,227,445 shares of Class A common stock had been granted to our directors,
executive officers and other employees as follows: 20,000 shares to each of our
three initial non-employee directors, 250,000 shares to Joseph Shea, 2,500,000
shares to Howard Lutnick, 800,000 shares to Frederick Varacchi, 375,000 shares
to Douglas Gardner, 100,000 shares to Stephen Merkel, 65,000 shares to Kevin
Piccoli, 2,077,445 shares to our other employees and other persons eligible to
receive options under our plan. In addition, options to purchase 282,005 shares
to employees of Cantor and 10,000 shares to a consultant were also issued in
connection with our initial public offering. Each of the above options has an
exercise price per share equal to the initial public offering price. Except as
to Mr. Lutnick, all options are non-transferable. As to Mr. Lutnick, the options
to purchase 500,000 shares are immediately exercisable and are transferable to
members of his family (or a trust established for the benefit of his family) in
order to facilitate his estate planning. In addition, the options issued to the
consultant are exercisable immediately. The options granted to our executive
officers vest over a period of five years and the options granted to all other
employees vest over a period of four years. All options and expire on the
earlier of 10 years after the date of grant or in connection with a termination
of employment. However, Mr. Lutnick's immediately exercisable options and the
options granted to Cantor employees expire five years after the date of grant
and generally do not terminate in connection with a termination of employment.
All options generally shall vest and become exercisable upon a change in control
of eSpeed, except that as to Messrs. Varacchi, Gardner, Merkel, Piccoli, Shea
and Lee Amaitis (the "Covered Employees"), their options shall vest but continue
to become exercisable in accordance with their original vesting schedule
(regardless of whether their employment with eSpeed continues).
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<PAGE>
However, if, following the change in control of eSpeed, Mr. Lutnick at any time
ceases to be eSpeed's chairman and chief executive officer (other than by reason
of his death or disability), all then-unexercisable options held by the Covered
Employees shall become fully exercisable as of such date.
The plan will remain in effect until terminated by our board. The plan may
be amended by our board without the consent of our stockholders, except that any
amendment, although effective when made, will be subject to stockholder approval
if required by any Federal or state law or regulation or by the rules of any
stock exchange or automated quotation system on which our common stock may then
be listed or quoted.
The number of shares reserved or deliverable under the plan and the number
of shares subject to outstanding awards are subject to adjustment in the event
of stock splits, stock dividends and other extraordinary corporate events.
We generally will be entitled to a tax deduction equal to the amount of
compensation realized by a participant through awards under the plan, except (1)
no deduction is permitted in connection with incentive stock options if the
participant holds the shares acquired upon exercise for the required holding
periods; and (2) deductions for some awards could be limited under the $1.0
million deductibility cap of Section 162(m) of the Internal Revenue Code. This
limitation, however, should not apply to awards granted under the plan during a
grace period of approximately three years following our initial public offering
in December 1999 , and should not apply to certain options, stock appreciation
rights and performance-based awards granted thereafter if we comply with certain
requirements under Section 162(m).
Stock Purchase Plan
In November 1999, our board of directors and stockholder approved the
adoption of our Stock Purchase Plan. The Stock Purchase Plan will permit our
eligible employees to purchase shares of our common stock at a discount.
Employees who elect to participate will have amounts withheld through payroll
deductions during purchase periods. At the end of each purchase period,
accumulated payroll deductions will be used to purchase stock at a price
determined by the administrative committee that administers the Stock Purchase
Plan, but which will not be less than 85% of the lower of the market price at
the beginning of the purchase period or the end of the purchase period,
including interim dates, as may be determined by the administrative committee.
Our Class A common stock that is purchased under the Stock Purchase Plan may be
subject to a holding period. We have reserved 425,000 shares of our Class A
common stock for issuance under the Stock Purchase Plan.
The Stock Purchase Plan will remain in effect until terminated by our
board or until no shares of our Class A common stock are available for issuance
under the Stock Purchase Plan. The Stock Purchase Plan may be amended by our
board without the consent of our stockholders, except that any amendment,
although effective when made, will be subject to stockholder approval if
required by any federal or state law or regulation or by the rules of any stock
exchange or automated quotation system on which our common stock may then be
listed or quoted.
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The Stock Purchase Plan is intended to qualify under Section 423 of the
Internal Revenue Code, and as such, we will not be entitled to any tax deduction
where a participant holds the purchased shares for the longer of two years from
the beginning of the purchase period, or one year from the end of the purchase
period.
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
By Management. The following table sets forth certain information, as of
March 15, 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 Class B common stock are convertible into shares of
Class A common stock at any time in the discretion of the holder on a
one-for-one basis. Accordingly, a holder of Class B common stock is deemed to be
the beneficial owner of an equal amount of number of shares of Class A common
stock for purposes of this table.
<TABLE>
<CAPTION>
Beneficial Ownership(1)
-------------------------------------------------------------
Class A Common Stock Class B Common Stock
--------------------------- -------------------------
Name Shares % Shares %
- ---------------------------------------- ------------- -------- -------------- -----
<S> <C> <C> <C> <C>
Howard W. Lutnick....................... 41,150,000(2) 79.9% 40,650,000(3) 100%
Frederick T. Varacchi................... -- -- -- --
Douglas B. Gardner...................... -- -- -- --
Kevin C. Piccoli........................ -- -- -- --
Stephen M. Merkel(4).................... 2,250 * -- --
Richard C. Breeden...................... 22,500 * -- --
Larry R. Carter(5)...................... 45,500 * -- --
William J. Moran........................ 3,000 * -- --
Joseph P. Shea.......................... -- -- -- --
All executive officers and
directors as a group (9 persons)....... 41,223,250 80.0% 40,650,000 100%
</TABLE>
- -------------------
* Less than 1 %
(1) Based upon information supplied by officers and directors, and filings
under Sections 13 and 16 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
(2) Consists of (1) 500,000 immediately exercisable options, (2) 8,800,000
shares of Class B common stock held by Cantor Fitzgerald, L.P., which
shares are immediately convertible into shares of Class A common stock,
and (3) 31,850,000 shares of Class B common stock held by Cantor
Fitzgerald Securities, which shares are immediately convertible into Class
A common stock. Cantor Fitzgerald, L.P. is the managing partner of Cantor
Fitzgerald Securities. CF Group Management, Inc. is the Managing General
Partner of Cantor Fitzgerald, L.P. and Mr. Lutnick is the President and
sole stockholder of CF Group Management, Inc.
(3) Consists of (1) 8,800,000 shares of Class B common stock held by Cantor
Fitzgerald, L.P., which shares are immediately convertible into shares of
Class A common stock, and (2) 31,850,000 shares of Class B common stock
held by Cantor Fitzgerald Securities, which shares are immediately
convertible into Class A common stock. Cantor Fitzgerald, L.P. is the
managing partner of Cantor Fitzgerald Securities. CF Group Management,
Inc. is the Managing General Partner of Cantor Fitzgerald, L.P. and Mr.
Lutnick is the President and sole stockholder of CF Group Management, Inc.
(4) These shares are beneficially owned by Mr. Merkel's spouse.
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<PAGE>
(5) The shares are owned by Cavallino Ventures LLC, of which Mr. Carter is the
President.
By Others. The following table sets forth certain information, as of March
15, 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 our Class A
common stock and Class B common stock, other than our officers and directors.
Unless indicated otherwise, the address of each entity listed is One World Trade
Center, New York, NY 10048, and each entity listed has sole voting and
investment powers over the shares beneficially owned. Shares of Class B common
stock are convertible into shares of Class A common stock at any time in the
discretion of the holder on a one-for-one basis. Accordingly, a holder of Class
B common stock is deemed to be the beneficial owner of an equal amount of number
of shares of Class A common stock for purposes of this table.
<TABLE>
<CAPTION>
Beneficial Ownership(1)
-----------------------------------------------------------
Class A Common Stock Class B Common Stock
--------------------------- ------------------------
Name Shares % Shares %(2)
- ------------------------------------------------------------- ------------ ------- ------------ -----
<S> <C> <C> <C> <C>
Cantor Fitzgerald Securities................................. 31,850,000(3) 75.5%(4) 31,850,000 78.35%
Cantor Fitzgerald, L.P....................................... 40,650,000(5) 79.7%(6) 40,650,000(5) 100%
CF Group Management, Inc..................................... 40,650,000(7) 79.7%(6) 40,650,000(7) 100%
Fred Alger(8)................................................ 874,200 8.5%(9) -- --
Essex Investment Management Company(10)...................... 1,291,405 12.5%(9) -- --
Nicholas Applegate Capital Management(11).................... 703,011 6.8%(9) -- --
- -------------------
</TABLE>
(1) Based upon filings under Section 13 of the Exchange Act.
(2) Based on 40,650,000 shares of Class B common stock outstanding on March
15, 2000.
(3) Consists of 31,850,000 shares of Class B common stock which are
immediately convertible into shares of Class A common stock.
(4) Percentage based on 10,350,000 shares of Class A common stock outstanding
on March 15, 2000 and 31,850,000 shares of Class B common stock
immediately convertible into Class A common stock.
(5) Consists of 8,800,000 shares of Class B common stock owned by Cantor
Fitzgerald, L.P. and 31,850,000 shares of Class B common stock owned by
Cantor Fitzgerald Securities, which shares are immediately convertible
into Class A common stock. Cantor Fitzgerald, L.P. is the managing partner
of Cantor Fitzgerald Securities.
(6) Percentage based on 10,350,000 shares of Class A common stock outstanding
on March 15, 2000 and 40,650,000 shares of Class B common stock
immediately convertible into Class A common stock.
(7) Includes 31,850,000 shares of Class B common stock held by Cantor
Fitzgerald Securities and 8,800,000 shares of Class B common stock held by
Cantor Fitzgerald L.P., which shares are immediately convertible into
Class A common stock. CF Group Management, Inc. is the Managing General
Partner of Cantor Fitzgerald, L.P.
(8) Fred Alger Management, Inc. and Fred M. Alger III beneficially own the
874,200 shares of 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.
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<PAGE>
(9) Percentage based on 10,350,000 shares of Class A common stock outstanding
on March 15, 2000.
(10) 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 Class A common stock.
(11) The address of Nicholas Applegate Capital Management is 600 West Broadway,
29th Floor, San Diego, CA 92101. Nicholas Applegate Capital Management has
sole voting power with respect to only 550,917 shares of Class A common
stock.
ITEM 13. 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 proprietary
software, network distribution systems, technologies and related contractual
rights that comprise our eSpeed((Service Mark)) system. In exchange for these
assets, we issued to Cantor 43,999,900 shares of our Class B common stock,
representing approximately 98% of the voting power of our outstanding capital
stock. Cantor converted 3,350,000 of these shares into shares of the Class A
common stock which it sold in our initial public offering.
Cantor conceived of and has been developing systems to promote fully
electronic marketplaces since the early 1990's. Since 1996, Cantor has invested
more than $200 million in information technology, which culminated in the
development of our eSpeed((Service Mark)) system. Cantor's technology
initiatives during this period included software development, infrastructure and
maintenance associated with operating Cantor's entire global securities
business. The evolutionary process which led to the development of our
eSpeed((Service Mark)) system was a combination of the development of Cantor's
brokerage, trading, clearance, settlement, analytical pricing and related
systems and was impacted by the continual improvement in computer processing and
the changing trading environment. Accordingly, it is difficult to separately
quantify development or other systems costs associated with the ultimate
development of our eSpeed((Service Mark)) system as it emanated in part from all
of the information technology initiatives of Cantor.
Since January 1996, Cantor has used our eSpeed((Service Mark)) system
internally to conduct electronic trading. In March 1999, the first fully
electronic transaction using our eSpeed((Service Mark)) system was executed by a
client.
Cantor has previously entered into contractual agreements or other
arrangements with many of the participants that trade in our electronic
marketplaces. These agreements and arrangements provide the general terms and
conditions, including those relating to warranties and allocations of liability,
under which those participants may electronically execute trades in our
marketplaces; none of these participants are obligated to use our marketplaces
under these agreements. We have the rights and obligations under many of these
arrangements as they relate to operating our eSpeed((Service Mark)) system.
Certain of our subsidiaries have been registered as broker-dealers with the
National Association of Securities Dealers, Inc. We also intend to obtain any
foreign regulatory approvals for our foreign subsidiaries that are necessary or
advisable. As we receive the regulatory approvals and licenses necessary to
operate our electronic marketplaces
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globally and increase client awareness of our electronic marketplaces, we intend
to enter directly into tri-party agreements and other arrangements with clients
and Cantor. We assist market participants, including Cantor, in participating in
the electronic marketplaces that are created and supported by our
eSpeed((Service Mark)) system. We share with Cantor a portion of the
transaction-based revenues paid by market participants for transactions effected
through our electronic marketplaces or which are otherwise electronically
assisted. Cantor and many of the largest financial institutions in the world are
currently our primary clients.
Cantor operates its equity dealing business, money market and securities
lending business, matched book repurchase agreement business, investment
advisory business and other specified businesses, including those in which
Cantor acts as a dealer. These businesses are carried out in over 10 locations
around the world. We do not share in any revenues generated by these businesses,
other than service fees we may become entitled to receive in connection with
hardware maintenance and other systems support development services we may
provide to Cantor. Cantor also provides voice brokerage services, clearance,
settlement and fulfillment services and other related services in connection
with our electronic marketplaces. Accordingly, upon conversion of Cantor's
marketplaces to our eSpeed((Service Mark)) platform, orders for financial
instruments will continue to be received and executed by Cantor brokers over the
telephone, and this method of order entry by Cantor into our electronic trading
platform is contemplated to continue for the foreseeable future. It is
anticipated that a significant percentage of orders and revenues will continue
to be recorded by Cantor, and a sharing of commissions (as described below under
"Joint Services Agreement") with us will occur. Since it is not possible to
predict the level of acceptance by clients, and individual traders located
within each client, of fully electronic order entry processing, we anticipate
that each marketplace product will experience widely varying direct electronic
usage rates by clients and their trading personnel.
We entered into the agreements described below in connection with the
formation transactions and to help define the terms of our relationship with
Cantor in the future. In an effort to mitigate conflicts of interest between us
and Cantor, we and Cantor have agreed that none of these agreements may be
amended without the approval of a majority of our disinterested directors.
Assignment and Assumption Agreements
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((Service Mark)) system. In consideration for the contribution of these
assets, rights and interests, we issued to Cantor shares of our 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, except that we will assume the defense of and
indemnify Cantor with respect to any liabilities arising out of the patent
litigation involving Liberty Brokerage. We have agreed to indemnify
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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 will provide
voice-assisted brokerage services, clearance, settlement and fulfillment
services and related services, such as credit and risk management services,
oversight of client suitability and regulatory compliance, sales positioning of
products and other services customary to brokerage operations.
All information and data (other than information relating to bids, offers
or trades or other information that is input into, created by or otherwise
resides on an electronic trading system for financial products) created,
developed, used in connection with or relating to the operation of and effecting
of transactions in any marketplace 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.
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 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
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<PAGE>
service fee and the portion of the transaction revenues that we and Cantor
receive is based on several factors, including whether: (1) the marketplace is
one in which we collaborate with Cantor; (2) the transaction is fully electronic
or Cantor provides voice-assisted brokerage services; (3) the product traded is
a financial product; and (4) the product is traded on the Cantor
Exchange((Service Mark)). 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((Service Mark));
o 20% of the transaction revenues, if the product is traded on the
Cantor Exchange((Service Mark));
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((Service Mark)).
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((Service Mark)) other than in certain instances in which we
receive the aggregate transaction revenues and Cantor receiving 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((Service Mark)); 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((Service Mark)).
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;
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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 service.
Electronically Assisted Transactions in Non-Electronic Marketplaces.
If a transaction is not effected in an electronic marketplace, but is
electronically assisted, such as a screen assisted open outcry
transaction, we receive 2.5% of the transaction revenues.
In the event that Cantor's direct costs payable to third parties for
providing clearance, settlement and fulfillment services with respect to a
transaction in a collaborative marketplace with respect to any financial product
for any month exceed the direct costs incurred by Cantor to clear and settle a
cash transaction in United States Treasury securities for such month, the cost
of the excess is borne pro rata by Cantor and us in the same proportion as the
transaction revenues and service fees for such transaction are to be shared.
In the event that a client does not pay, or pays only a portion of, the
transaction revenues relating to a transaction, then we and Cantor each bear our
respective share of the loss based on the percentage of the transaction revenues
we would otherwise have been entitled to receive with respect to such
transaction.
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 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 potential 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 or are otherwise
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,
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providing the services of a specialist or market maker or providing trading or
arbitrage operations, (4) activities wherever located that would, if conducted
in the United Kingdom, be subject to the United Kingdom Gaming Act of 1963 or
activities wherever located currently or in the future involving betting,
gambling, odds making, lotteries, gaming, wagering, staking, drawing or casting
losts and similar or related activities and (5) any business not involving
operating a marketplace.
Intellectual Property
Cantor has granted to us a license covering Cantor's patents and patent
applications that relate to the eSpeed((Service Mark)) system. The license is
perpetual, irrevocable, world-wide and royalty free and is exclusive, except in
the event that (1) we are unwilling to provide to Cantor any requested services
covered by the patents with respect to a marketplace and Cantor elects not to
require us to do so, or we are unable to provide such services or (2) we do not
exercise our right of first refusal to provide to Cantor electronic brokerage
services with respect to a marketplace, in which events Cantor will have a
limited right to use the patents and patent applications solely in connection
with the operation of that marketplace. Cantor will cooperate with us, at our
expense, in any attempt by us to prevent any third party infringement of our
patent rights under the license.
Cantor has also granted to us a non-exclusive, perpetual, irrevocable
worldwide, royalty-free right and license to use the trademarks "Cantor
Exchange," "Interactive Matching" and "CX".
Non-competition and Market Opportunity Provisions
The Joint Services Agreement imposes the following performance obligations
on us and restricts our ability to compete with Cantor and Cantor's ability to
compete with us in the following circumstances:
o If Cantor wishes to create a new financial product marketplace, Cantor may
require us to provide electronic brokerage services with respect to that
marketplace. We must use our commercially reasonable efforts to develop an
electronic trading system for that marketplace within a specified time
period. If, after diligent effort, we are unable to do so, we have no
liability to Cantor for our failure and Cantor may create and operate the
marketplace in any manner that Cantor deems to be acceptable. Cantor's
proposal to create a new marketplace must be commercially reasonable and
Cantor must diligently pursue the development of the marketplace and cause
the new marketplace to become operational within a specified time period.
o If Cantor wishes to create a new financial product marketplace and Cantor
does not require us to develop an electronic trading system for that
marketplace as described in the preceding paragraph, Cantor must, in any
event, notify us of its intention to create the new marketplace. We will
have a right of first refusal to provide electronic brokerage services
with respect to that marketplace. We must use commercially reasonable
efforts to develop and put into operation an electronic trading system for
the marketplace within a specified time period. If
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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.
o If Cantor wishes to create a new electronic marketplace for a product that
is not a financial product, Cantor must notify us of its intention to do
so. We will have the opportunity to offer to provide the electronic
brokerage services with respect to the new marketplace. If Cantor rejects
our offer, Cantor may operate the marketplace in any manner that Cantor
deems to be acceptable.
o If we wish to create a new electronic marketplace for a financial product,
we must notify Cantor of our intention to do so. Cantor will have a right
of first refusal to provide the applicable voice-assisted brokerage
services, clearance, settlement and fulfillment services and/or related
services for that marketplace. If Cantor (1) elects not to provide such
services or (2) fails to notify us within a specified time period that it
will provide such services, we may provide or otherwise obtain those
services for that marketplace in any manner that we deem to be acceptable.
o If we wish to create a new electronic marketplace for a product that is
not a financial product, we must notify Cantor of our intention to do so.
Cantor will have the opportunity to offer to provide the applicable
voice-assisted brokerage services, clearance, settlement and fulfillment
services and/or related services for that marketplace. If we reject
Cantor's offer, we may create and operate the marketplace in any manner
that we deem to be acceptable.
o Subject to the exceptions described below, we may not directly or
indirectly: (1) engage in any activities competitive with a business
activity conducted by Cantor now or in the future; or (2) provide or
assist any other person in providing voice-assisted brokerage services,
clearance, settlement and fulfillment services and/or related services. We
are permitted to engage in these activities:
o in collaboration with Cantor;
o with respect to a new marketplace involving a financial product,
after Cantor has indicated that it is unable or unwilling to provide
such voice-assisted brokerage services, clearance, settlement and
fulfillment services and/or related services with respect to that
marketplace;
o with respect to a new marketplace involving a product that is not a
financial product, after having considered in good faith any
proposal submitted by Cantor relating to the provision of those
services; or
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o with respect to an unrelated dealer business in which we develop and
operate a fully electronic marketplace.
o Subject to the exceptions described below, Cantor may not directly
or indirectly provide or assist any other person in providing
electronic brokerage services. Cantor is permitted to engage in
these activities:
o in collaboration with us; or
o with respect to a new marketplace, after (1) we have indicated that
we are unable to develop an electronic trading system for that new
marketplace within a specified time period or (2) we have declined
to exercise our right of first refusal or have exercised our right
of first refusal but are unable to develop an electronic trading
system within a specified time period.
o The unrelated dealer businesses retained by Cantor are expressly excluded
from our rights of first refusal and the restrictions on Cantor's ability
to compete with us. However, we may create fully electronic marketplaces
in unrelated dealer businesses.
We and Cantor are entitled to pursue and may enter into alliance opportunities,
including strategic alliances, joint ventures, partnerships or similar
arrangements, with third parties and consummate business combinations with third
parties on the following basis only. If an alliance opportunity (1) relates to a
person that directly or indirectly provides voice-assisted brokerage services
and engages in business operations that do not involve electronic brokerage
services, then Cantor is entitled to pursue and consummate a transaction 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 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
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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((Service Mark))
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
Class A common stock issued or issuable to it in connection with the conversion
of its Class B common stock whenever we propose to register any shares of Class
A common stock for our own or another's account under the Securities Act for a
public offering, other than:
o any shelf registration of shares of Class A common stock to be used
as consideration for acquisitions of additional businesses; and
o registrations relating to employee benefit plans.
Cantor also has the right, on three occasions, to require that we register
under the Securities Act any or all of the shares of Class A common stock issued
or issuable to it in connection with the conversion of its Class B common stock.
No more than one of these registrations may be demanded within the first year
after the closing of 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
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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 all of the
outstanding shares of our Class B common stock, representing approximately 98%
of the combined voting power of all classes of our voting stock. Mr. Lutnick's
simultaneous service as our Chairman and Chief Executive Officer and his control
of Cantor could create or appear to create potential conflicts of interest when
Mr. Lutnick is faced with decisions that could have different implications for
us and for Cantor.
Our relationship with Cantor may result in agreements that are not the
result of arm's-length negotiations. As a result, the prices charged to us or by
us for services provided under agreements with Cantor may be higher or lower
than prices that may be charged by third parties and the terms of these
agreements may be more or less favorable to us than those that we could have
negotiated with third parties. However, we intend that transactions between us
and Cantor and/or its other affiliates will be subject to the approval of a
majority of our independent directors.
In addition, Cantor can compete with us under certain circumstances.
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 our 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
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Class A common stock issued or issuable upon exercise of the warrants and will
be substantially similar to the piggyback registration rights to be granted to
Cantor. Mr. Wygod also has the right, on one occasion, to require that we
register under the Securities Act of 1933, a minimum of 75% of the aggregate
number of shares of Class A common stock underlying the warrants. The demand
registration right is only available when we are eligible to use Form S-3 to
register the shares.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K:
(a)(1) Financial Statements. See index to Financial Statements on page 54.
(a)(2) All other schedules are omitted because they are not applicable, not
required or the required information is in the Financial Statements or the Notes
thereto.
(a)(3) The following Exhibits are filed as part of this Report as required by
Regulation S-K. The Exhibits designated by an asterisk (*) are management
contracts and compensation plans and arrangements required to be filed as
Exhibits to this Report.
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
2.1 -- Assignment and Assumption Agreement, dated as of December 9, 1999, by and among Cantor
Fitzgerald, L.P., Cantor Fitzgerald Securities, CFFE, LLC, Cantor Fitzgerald L.L.C., CFPH,
LLC Cantor Fitzgerald & Co. and eSpeed, Inc.
2.2 -- Assignment and Assumption Agreement, dated as of, December 9, 1999 by and among Cantor Fitzgerald
International, eSpeed Securities International Limited and Cantor Fitzgerald International Holdings, L.P.
3.1 -- Amended and Restated Certificate of Incorporation of eSpeed, Inc. (Incorporated by reference
to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (Reg. No. 333-87475).
3.2 -- Amended and Restated By-Laws of eSpeed, Inc. (Incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement on Form S-1 (Reg. No. 333-87475)).
4.1 -- Specimen Class A Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-1 (Reg. No. 333-87475)).
10.1* -- Long-Term Incentive Plan of eSpeed, Inc. (Incorporated by reference to Exhibit 10.1 to the
Registrant's Registration Statement on Form S-1 (Reg. No. 333-87475)).
10.2* -- eSpeed, Inc. Stock Purchase Plan. (Incorporated by reference to Exhibit 10.2 to the
Registrant's Registration Statement on Form S-1 (Reg. No. 333-87475)).
10.3 -- Joint Services Agreement, dated as of December 15, 1999, by and among Cantor Fitzgerald,
L.P., Cantor Fitzgerald International, Cantor Fitzgerald Gilts, Cantor Fitzgerald Securities,
Cantor Fitzgerald & Co., Cantor Fitzgerald Partners, eSpeed, Inc., eSpeed Securities, Inc.,
eSpeed Government Securities, Inc., eSpeed Securities International Limited and eSpeed
Markets, Inc.
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10.4 -- Amendment No. 1 to Joint Services Agreement, dated as of January 1, 2000, by and among Cantor
Fitzgerald L.P., Cantor Fitzgerald International, Cantor Fitzgerald Gilts, Cantor Fitzgerald
Securities, Cantor Fitzgerald & Co., Cantor Fitzgerald Partners, eSpeed Inc., eSpeed
Securities, Inc., eSpeed Government Securities, eSpeed Securities International Limited and
eSpeed Markets, Inc.
10.5 -- Administrative Services Agreement, dated as of December 15, 1999, by and among Cantor
Fitzgerald, L.P., Cantor Fitzgerald International, Cantor Fitzgerald Gilts, Cantor Fitzgerald
Securities, Cantor Fitzgerald & Co., Cantor Fitzgerald Partners, eSpeed, Inc., eSpeed
Securities, Inc., eSpeed Government Securities, Inc., eSpeed Securities International Limited
and eSpeed Markets, Inc.
10.6 -- Registration Rights Agreement, dated as of December 9, 1999, by and among eSpeed and the
Investors named therein.
10.7 -- Sublease Agreement, dated as of December 15, 1999, between Cantor Fitzgerald Securities and
eSpeed, Inc.
10.8 -- Warrants issued to Martin J. Wygod and a related trust.
21 -- List of subsidiaries of eSpeed, Inc. (Incorporated by reference to Exhibit 21 to the
Registrant's Registration Statement on Form S-1 (Reg. No. 333-87475)).
27 -- Financial Data Schedule.
(b) Reports on Form 8-K.
We did not file any Form 8-K Current Reports during the last
quarter of the fiscal year ended December 31, 1999.
</TABLE>
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
eSPEED, INC.
/s/ Howard W. Lutnick
----------------------
Howard W. Lutnick
Chairman of the Board and
Chief Executive Officer
Dated: March 27, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chairman of the Board and Chief Executive Officer
/s/ Howard W. Lutnick (Principal Executive Officer) March 27, 2000
- ---------------------------------------
Howard W. Lutnick
/s/ Frederick T. Varacchi President and Chief Operating Officer March 28, 2000
- ---------------------------------------
Frederick T. Varacchi
/s/ Douglas B. Gardner Vice Chairman March 28, 2000
- ---------------------------------------
Douglas B. Gardner
Senior Vice President and Chief Financial Officer
/s/ Kevin C. Piccoli (Principal Financial and Accounting Officer) March 27, 2000
- ---------------------------------------
Kevin C. Piccoli
/s/ Richard C. Breeden Director March 28, 2000
- ---------------------------------------
Richard C. Breeden
/s/ Larry R. Carter Director March 28, 2000
- ---------------------------------------
Larry R. Carter
/s/ William J. Moran Director March 27, 2000
- ---------------------------------------
William J. Moran
/s/ Joseph P. Shea Director March 28, 2000
- ---------------------------------------
Joseph P. Shea
</TABLE>
<PAGE>
ASSIGNMENT AND ASSUMPTION AGREEMENT
THIS AGREEMENT is made and entered into as of December 9, 1999, among
Cantor Fitzgerald, L.P., a Delaware limited partnership ("CFLP"), Cantor
Fitzgerald Securities, a New York general partnership ("CFS"), CFFE, LLC, a
Delaware limited liability company ("CFFE"), Cantor Fitzgerald L.L.C., a
Delaware limited liability company ("CF"), CFPH, LLC, a Delaware limited
liability company ("CFPH"), and Cantor Fitzgerald & Co., a New York general
partnership ("CF&Co" and, together with CFLP, CFS, CFFE, CF, and CFPH, the
"Assignors"), and eSpeed, Inc., a Delaware corporation ("Assignee").
W I T N E S S E T H:
WHEREAS, Assignee is a recently-formed company that has been organized to
engage in the business of operating interactive electronic marketplaces in
accordance with the (i) Joint Services Agreement (as hereinafter defined) and
(ii) Administrative Services Agreement (as hereinafter defined) (the
"Business"), initially to be used principally by financial and wholesale market
participants to trade in fixed income securities, futures, options and other
financial instruments and including the eSpeed system described in the final
prospectus filed by Assignee (the "Prospectus") relating to Assignee's initial
public offering.
WHEREAS, each of CFLP, CFS and CF&Co currently operate the Business and
each Assignor owns or has the right to use the Assets (as hereinafter defined)
used to operate the Business, including, without limitation, certain hardware,
software, technologies, systems and other intellectual property and agreements
that are principally used in the Business.
WHEREAS, Assignee desires to acquire such assets from the Assignors in
exchange for the issuance to each Assignor of the number of shares of Class B
Common Stock, par value $.01, of Assignee (the "Class B Shares") set out
opposite the name of such Assignor on Schedule 1.04 hereto, being 43,999,900
Class B Shares in the aggregate for all of the Assignors (the "Consideration").
WHEREAS, each Assignor has determined that its share of the Consideration
represents valuable and fair consideration for the transfer of its portion of
such assets to Assignee and has determined that it is in its best interest to
transfer its portion of such assets to Assignee in return for the Consideration.
NOW THEREFORE, in consideration of the mutual representations, warranties,
covenants and agreements contained herein, and upon the terms and conditions
hereinafter set forth, the parties hereby agree as follows:
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ARTICLE I
TERMS OF ASSIGNMENT
1.01. Assignment. On the terms and subject to the conditions in this
Agreement and for the Consideration specified herein, at the Closing (as
hereinafter defined), the Assignors shall sell, transfer, convey, assign and
deliver to Assignee, and Assignee shall purchase, acquire and accept from the
Assignors, free and clear of all mortgages, pledges, assessments, security
interests, conditional sale or title retention contracts, leases, liens, adverse
claims, Taxes (as hereinafter defined), levies, charges, options, rights of
first refusal, transfer restrictions or other encumbrances of any nature, or any
contracts, agreements or understandings to grant any of the foregoing
(collectively, "Liens"), all of the Assignors' right, title and interest in, to
and under the following assets and rights, including, but not limited to, the
assets and rights identified on Schedule 1.01, in each case to the extent used
or held for use principally in the Business, but excluding the Excluded Assets
(as hereinafter defined) (the "Assignment"):
(a) all machinery, equipment, computers, network servers, monitors,
servers and other related items of tangible personal property of the Assignors,
principally used in the Business (the "Equipment");
(b) all fictional business names, trade names, d/b/a names, logos,
Internet domain names (including, without limitation, www.eSpeed.com),
trademarks, service marks (including, without limitation, eSpeed(sm)), trade
dress and any and all federal, state, local and foreign applications,
registrations and renewals therefor, and all the goodwill associated therewith
principally used in the Business (collectively, "Marks"); all copyrights in both
published works and unpublished works, and in online works such as Internet web
sites, and any federal or foreign applications, registrations and renewals
therefor principally used in the Business (collectively, "Copyrights"); all
rights in any and all licensed or proprietary computer software, firmware,
middleware, programs, systems applications, databases and files (in whatever
form or medium), including all material documentation, relating thereto, and all
source and object codes relating thereto principally used in the Business
(collectively, "Computer Software and Files"); all know-how, trade secrets,
confidential information, competitively sensitive and proprietary information
(including but not limited to internal pricing information, supplier
information, telephone and telefax numbers, and e-mail addresses), technical
information, data, process technology, drawings and blue prints principally used
in the Business, other than the Information (as hereinafter defined)
(collectively, "Trade Secrets"); and the right to sue for past infringement, if
any, in connection with any of the foregoing, including, but not limited to, the
intellectual property disclosed in Schedule 1.01(b) hereto (collectively, the
"Intellectual Property");
(c) all agreements and arrangements permitting any Assignor to use
intellectual property, equipment and computer equipment owned by third parties,
or permitting third party use of intellectual property, equipment or computer
equipment owned by any Assignor,
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or for the processing, use, licensing, leasing, storage, or retrieval of
software, data and information principally used by, and related to, the Business
(collectively, "Intellectual Property, Equipment and Computer Agreements");
(d) any and all accounting business information, management information
and internal reporting data and related books and records (in whatever form or
medium maintained), including but not limited to advertising, marketing and
sales programs, business, marketing and strategic plans, research and
development reports and records, and advertising copy (including radio and
television scripts), creative materials, production agreements, and all other
promotional brochures, flyers, inserts and other materials used principally in
connection with the Business (collectively, the "Marketing Materials");
(e) all computer tapes, discs and other media which are used to store
Intellectual Property (the "Computer Equipment");
(f) all agreements, contracts, instruments and other documents to which
any Assignor is a party that are listed in Schedule 2.07 (the "Assigned
Contracts");
(g) all claims of any Assignor against third parties relating to the
Assets (as hereinafter defined), whether choate or inchoate, known or unknown or
contingent or non-contingent;
(h) to the extent transferable, any and all Permits (as hereinafter
defined) used exclusively in connection with the Business;
(i) all capital stock of eSpeed Securities International Limited, a
limited company registered in England under number 3809189; and
all as the same shall exist on the Closing Date (items (a) through (i)
being, collectively, the "Assets").
1.02. Excluded Assets. Notwithstanding anything in this Agreement to the
contrary, all assets, properties and rights of the Assignors other than those
set forth in Section 1.01 (including Schedule 1.01), including without
limitation, the following assets, properties and rights of the Assignors (the
"Excluded Assets"), shall be excluded from and shall not constitute part of the
Assets, and Assignee shall have no rights, title or interest in or duties or
obligations of any nature whatsoever with respect thereto by virtue of the
consummation of the transactions contemplated by this Agreement:
(a) all contracts and other agreements to which any Assignor is a party,
other than those described in Section 1.01 above (the "Excluded Contracts");
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(b) all rights of the Assignors in and to the trademarks, service marks,
and any applications, registrations and renewals therefor, and all the goodwill
associated therewith, licensed by any Assignor and (x) which are subject to the
Mutual Confidentiality Agreement ("Mutual Confidentiality Agreement"), dated
March 19, 1993, between CFLP and Market Data Corporation ("MDC") or (y) which
are listed (by country and trademark) on Schedule 1.02(b) hereto (collectively,
the "Excluded Marks");
(c) all rights of the Assignors in, to or under, as applicable, the (x)
MDC Mortgage- Backed Securities Broker System, MDC Odd Lots Broker System, MDC
Options System, MDC OTR Broker System and MDC Buyside Terminal System
(collectively, the "MDC Broker System"), including all documentation relating
thereto and all source and object codes relating thereto and (y) Mutual
Confidentiality Agreement (together, the "Excluded Software");
(d) any and all Confidential Information as defined in the Mutual
Confidentiality Agreement;
(e) all rights of the Assignors in the Internet domain name "cantor.com"
and in and to the Internet web site accessed via such domain name, including,
but not limited to, all copyrights in all materials on such site and the
software underlying such site, all trademarks, service marks, trade names and
goodwill associated therewith, all proprietary computer software, programs,
applications, databases, files (in whatever form or medium) and all proprietary
information related thereto;
(f) all rights of the Assignors in, to and under the Data Purchase
Agreement, Data Product Agency and Electronic Trading System Agreement, dated
January 22, 1993, among CFLP, Reuters Limited ("Reuters") and MDC, as amended,
and all other agreements between CFLP, Reuters and/or MDC or related thereto, as
set forth in Schedule 1.02(f) hereto (the "Reuters Agreement");
(g) all rights of the Assignors with respect to the (x) Agreement, dated
February 23, 1990, between Telerate, Inc. ("Telerate") and CFS, as amended, and
(y) Master Optional Services Agreement, dated February 23, 1990, between
Telerate and MDC, as amended, and all other agreements between the Assignors,
Telerate and/or MDC or related thereto, as set forth in Schedule 1.02(g) hereto
(the "Telerate Agreement");
(h) all right, title and interest with respect to information relating to
bids, offers or trades or any other information on Financial Products (as
defined in the Joint Services Agreement (as hereinafter defined)) created or
received by Assignors or any of their affiliates in a brokerage capacity,
including, but not limited to, information licensed, sold, transferred or
permitted to be published or displayed by Assignors pursuant to the Reuters
Agreement and the Telerate Agreement (the "Information");
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(i) all advertising, marketing and sales programs, advertising copy
(including radio and television scripts), creative materials, production
agreements, broadcasting rights, broadcasting and advertising time, space,
allowances and credits and other promotional brochures, flyers, inserts and
other materials used solely in connection with an Excluded Contract;
(j) Fraser et. al. U.S. Patent 5,905,974, entitled "Automated Auction
Protocol Processor" (the "Fraser Patent") and all filed patent applications;
(k) any assets, properties, rights and interests relating to the Excluded
Liabilities (as hereinafter defined); and
(l) all rights of the Assignors under this Agreement and the documents and
instruments delivered to the Assignors pursuant to this Agreement.
Each Assignor shall bear and pay all of the costs and expenses of the
assignment of its portion of the Assets, except for sales, transfer or other
similar taxes, which shall be borne and paid by Assignee.
1.03. Assumption of Liabilities. Effective as of the Closing Date,
Assignee will assume and agree to pay, perform and discharge, as and when due,
and indemnify and hold each Assignor harmless from and against, (x) each
liability listed in Schedule 1.03, (y) each obligation of each Assignor to be
performed after the Closing Date with respect to the Assets and the Assigned
Contracts and (z) each other liability of each Assignor thereunder (including
liabilities for any breach of a representation, warranty or covenant, or for any
claims for indemnification contained therein), to the extent and only to the
extent that such liability is due to the actions of Assignee (or any of
Assignee's affiliates, representatives or agents) after the Closing Date
(collectively, the "Assumed Liabilities"). Assignee shall not assume, and shall
not be obligated to pay, perform or discharge, any liability or obligation of
any Assignor other than the Assumed Liabilities (whether or not related to the
Assets or Business) (collectively, the "Excluded Liabilities"), and shall not be
obligated for any other claim, loss or liability relating to any act, omission
or breach by any Assignor with respect to the Business, the Assets or the
Assigned Contracts, or for any claim, loss or liability related to the Excluded
Assets or the Excluded Liabilities, all of which, the Assignors shall remain
obligated to pay, perform and discharge and to indemnify and hold Assignee
harmless against. Without limiting the foregoing, among other things, all
liabilities arising from the matters described in the Prospectus under the
caption "Legal Proceedings" shall be Excluded Liabilities except to the extent
expressly assumed as provided on Schedule 1.03.
1.04. Consideration. In consideration of the Assignment, in addition to
the assumption of the Assumed Liabilities as provided in Section 1.03, Assignee
shall issue to each Assignor the number of Class B Shares set out opposite the
name of such Assignor on Schedule 1.04 hereto, being 43,999,900 Class B Shares
in the aggregate for all of the Assignors.
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1.05. The Closing.
(a) Date and Place. The closing of the transactions contemplated hereby
(the "Closing") shall take place at the New York offices of the Assignors, on
the 105th Floor of One World Trade Center, New York, New York 10048, on the date
the Assignors so elect, which date shall be no later than the fourth business
day following the date that all of the conditions to Closing provided in
Articles VI and VII hereof shall have been satisfied, or at such other time
and/or place and/or on such other date as the parties may mutually agree (the
"Closing Date").
(b) Documents to be Delivered by the Assignors. To the extent applicable,
at the Closing, each Assignor shall deliver to Assignee;
(i) a duly executed counterpart to the Joint Services Agreement (the
"Joint Services Agreement") substantially in the form of Exhibit A hereto;
(ii) a duly executed counterpart of the Administrative Services
Agreement (the "Administrative Services Agreement") substantially in the form of
Exhibit B hereto;
(iii) a duly executed counterpart of the General Assignment,
Assumption and Bill of Sale (the "Bill of Sale") substantially in the form of
Exhibit C hereto;
(iv) a duly executed counterpart of the Registration Rights
Agreement (the "Registration Rights Agreement") substantially in the form of
Exhibit D hereto;
(v) a duly executed counterpart of the Sublease Agreement
substantially in the form of Exhibit E hereto (the "Sublease Agreement" and,
together with the Joint Services Agreement, the Administrative Services
Agreement, the Bill of Sale and the Registration Rights Agreement, the
"Additional Agreements"); and
(vi) such other duly executed documents or instruments to effect the
transfer of the Assets and the other transactions contemplated hereby, and in
such form, as Assignee may reasonably request.
(c) Documents to be Delivered by Assignee. At the Closing, Assignee shall
execute and deliver to the Assignors:
(i) a duly executed counterpart of the Joint Services Agreement;
(ii) a duly executed counterpart of the Administrative Services
Agreement;
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(iii) a duly executed counterpart of the Bill of Sale for the Assets
transferred by such Assignor;
(iv) a duly executed counterpart of the Registration Rights
Agreement;
(v) a duly executed counterpart of the Sublease Agreement; and
(vi) such other duly executed documents or instruments to effect the
transfer of the Assets, the assumption of the Assumed Liabilities and the other
transactions contemplated hereby, and in such form, as any Assignor may
reasonably request.
1.06. Section 351 Transaction. Each party hereto acknowledges and agrees
that the assignment of the Assets is intended to be treated for federal income
tax purposes and relevant state and local tax purposes as an element of a
tax-free transaction described in Section 351 of the Internal Revenue Code. No
party hereto shall take, or cause or permit to be taken, any position that is
inconsistent with such treatment in any tax return or filing or in any tax
proceeding.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE ASSIGNORS
Each Assignor jointly and severally represents and warrants to Assignee as
follows, except as otherwise disclosed in the disclosure schedules to this
Agreement (the "Disclosure Schedules"), which Disclosure Schedules specifically
reference the particular Sections hereof to which they relate:
2.01. Organization and Good Standing. Each Assignor is duly organized,
validly existing and in good standing under the laws of the state of its
organization and is duly qualified to do business and, except as would not
singly or in the aggregate have a Material Adverse Effect, is in good standing
in each jurisdiction in which the ownership, use or leasing of its assets or the
conduct or nature of its business makes such qualification necessary. "Material
Adverse Effect" means any event, change, changes, effect or effects that
individually or in the aggregate are materially adverse to (x) the ownership,
use, operation or value of the Assets, (y) the condition (financial or other) or
results of operations of, or prospects for, the Business or (z) the ability to
consummate the transactions contemplated by this Agreement, the Joint Services
Agreement or the Administrative Services Agreement.
2.02. Authority. Each Assignor has the requisite corporate power and
authority to execute and deliver this Agreement and the Additional Agreements to
which it is a party, to perform its obligations hereunder and thereunder and to
consummate the transactions contemplated hereby and thereby. The execution and
delivery by each Assignor of this
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Agreement and the Additional Agreements to which it is a party and the
consummation by each Assignor of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate, stockholder,
member or partner action, and no other corporate, partner or member proceedings
on the part of any Assignor or any affiliate of any Assignor, respectively, are
necessary to authorize the execution and delivery by an Assignor of this
Agreement or the Additional Agreements to which that Assignor is a party or to
consummate the transactions contemplated hereby and thereby. This Agreement has
been, and at the Closing the Additional Agreements to which each Assignor is a
party will be, duly executed and delivered by each Assignor that is a party
thereto and constitutes or will constitute, as applicable, legal, valid and
binding obligations of each Assignor enforceable against such Assignor in
accordance with their respective terms.
2.03. No Conflict; Required Filings and Consents.
(a) The execution, delivery and performance by each Assignor of this
Agreement and the Additional Agreements to which it is a party do not, and the
consummation of the transactions contemplated hereby and thereby will not, (i)
conflict with or violate the partnership agreement, Certificate of Limited
Liability Company, limited liability company operating agreement, By-Laws or
similar organizational or governing document of any Assignor or any affiliate
thereof, as the case may be; (ii) conflict with or violate any federal, state,
local or foreign laws, rules, statutes, ordinances, regulations, judgments,
settlement agreements, orders or decrees or arbitration proceedings or
pronouncements (collectively "Laws") applicable to any Assignor or any affiliate
thereof, the Business or the Assets or by which any Assignor or any affiliate
thereof, the Business or the Assets are bound or affected; or (iii) result in
any material breach of or constitute a material default (or an event that with
notice or lapse of time or both would become a material default) under, or give
to any other person any right of termination, amendment, acceleration or
cancellation of, or result in the creation of a Lien on any of the Assets
pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which any
Assignor or any affiliate thereof is a party or by which any Assignor or any
affiliate thereof, the Business or the Assets are bound or affected.
(b) The execution, delivery and performance by each Assignor of this
Agreement and the Additional Agreements to which it is a party do not and the
consummation of the transactions contemplated hereby and thereby do not require
any Assignors or any of its affiliates to seek, obtain or receive any consent,
approval, authorization or permit from, or make any filing with or notification
to, any governmental agency, authority or court or any other person, body or
committee, except for any consents, approvals, any authorizations or permits as
have been obtained or filings or notifications as has been made or as would not
singly or in the aggregate, if not obtained or made, have a Material Adverse
Effect.
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2.04. Permits; Compliance with the Law. Each Assignor is in possession of
all franchises, grants, authorizations, licenses, permits, easements, variances,
exemptions, consents, certificates, approvals and orders necessary for it to own
and use the Assets as presently owned and used and to carry on the Business as
it is now being conducted (the "Permits"), except for those Permits the failure
of which to obtain or maintain would not result in a Material Adverse Effect,
and no suspension, revocation, cancellation or refusal to review any of the
Permits has occurred, or to the knowledge of any Assignor, is threatened or
anticipated. Each of the Permits is listed on Schedule 2.04. Each Assignor has
conducted and is conducting the Business, and has owned, used and operated and
owns, uses and operates the Assets in compliance with, and not in violation of,
(i) any Law applicable to it or by which it, the Business or the Assets is bound
or affected or (ii) any of the Permits (except in either case for any such
violations as, singly or in the aggregate, would not have a Material Adverse
Effect).
2.05. Title to Assets. Each Assignor owns, free and clear of any Liens,
and has the full right to sell, assign and convey, all of the Assets, and at the
Closing will convey the Assets to Assignee, free and clear of any Liens.
2.06. Absence of Litigation. Except as would not singly or in the
aggregate have a Material Adverse Effect or is disclosed in the Prospectus,
there is no pending or threatened, nor has there been at any time during the
twelve months preceding the date hereof any, claim, complaint, action, suit,
litigation, proceeding or arbitration or, to each Assignor's knowledge, any
inquiry or investigation of any kind by any state attorney general, consumer
protection agency or other governmental or self-regulatory agency, or any other
person or entity which seeks to enjoin, delay or restrict any of the
transactions contemplated by this Agreement, the Additional Agreements or which
involves the Business or any of the Assets. Except as would not singly or in the
aggregate have a Material Adverse Effect, none of the Assignors nor any
affiliate of the Assignors are subject to any judgment, order, writ, injunction,
decree or award which relates to any of the Assets or to the Business.
2.07. Contracts; No Default; Etc. Schedule 2.07 of the Disclosure Schedule
lists each Assigned Contract. Correct and complete copies of each Assigned
Contract, together with all amendments, supplements and other instruments
(including side letters) thereto effecting a modification or waiver of the terms
thereof, have been delivered to Assignee. Each Assigned Contract is valid,
subsisting and, to each Assignor's knowledge, enforceable in accordance with its
terms, save only that such enforceability may be affected by bankruptcy,
insolvency, fraudulent conveyance, moratorium and similar laws affecting the
rights of creditors generally and by general principles of equity (whether
considered in a proceeding at law or in equity). Each such Assigned Contract is
in full force and effect, no written notice of termination or non-renewal of any
Assigned Contract has been given to any Assignor or, to the knowledge of any
Assignor, is anticipated, and there is no material default (or any event known
to any Assignor which, with the giving of notice or lapse of time or both, would
constitute a material default) by any Assignor or, to the knowledge of any
Assignor, by any other party to any
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such Assigned Contract, in the due timely payment or performance of any
obligation to be performed or paid under any Assigned Contract.
2.08. Intellectual Property and Computer Assets.
(a) Except as would not singly or in the aggregate have a Material Adverse
Effect, each Assignor owns all right, title and interest in, or has valid and
subsisting license rights sufficient to use and to continue to use, all
Intellectual Property principally used in the conduct of the Business as
currently conducted by each Assignor. All Intellectual Property necessary for
the conduct of the Business as described in the Prospectus (other than the
intellectual property included in the Excluded Assets) is being transferred or
licensed to Assignee hereunder. Except as would not singly or in the aggregate
have a Material Adverse Effect, all Intellectual Property is free and clear of
any and all Liens.
(b) Schedule 2.08(b) lists all of each Assignor's United States and
foreign registrations and applications issued by, filed with or recorded by any
governmental regulatory authority with respect to the Intellectual Property.
Except as singly or in the aggregate would not have a Material Adverse Effect,
all of such registrations and applications are valid and in full force and
effect and all necessary actions to maintain the registrations or applications
for registration of such Intellectual Property have been taken or instructions
have been given that such actions be taken, and such actions will be taken as of
the date of this Agreement.
(c) Except as singly or in the aggregate would not have a Material Adverse
Effect, all Computer Software and Files and Computer Equipment, to each
Assignor's knowledge, are "Year 2000 Compliant." For purposes of this Agreement,
"Year 2000 Compliant" means that the Computer Software and Files and Computer
Equipment will (A) consistently and accurately process date and time information
and data with values before, during and after January 1, 2000, including but not
limited to, accepting date input, providing date output, and performing
calculations on dates; and (B) function accurately and in accordance with its
specifications without an adverse change in performance resulting from
processing time data with values before, during and after January 1, 2000.
2.09. Taxes. Each Assignor has duly and timely filed all material returns,
reports or statements (including information statements) ("Tax Returns")
required to have been filed with respect to all federal, state, local or foreign
net or gross income, gross receipts, net proceeds, sales, use, ad valorem,
transfer, value added, franchise, bank shares, withholding, payroll, employment,
disability, excise, property, alternative or add-on minimum, environmental or
other taxes, assessments, duties, fees, levies or other governmental charges of
any nature whatsoever, together with any interest, penalties, additions to tax
or additional amounts with respect thereto ("Taxes"); each such Tax Return
correctly and completely reflects the income, franchise or other Tax liability
and all other information required to be reported thereon; and all Taxes due and
payable by each Assignor, whether or not shown on
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any Tax Return, have been paid, other than those that are the subject of a bona
fide dispute and are being contested by an Assignor in appropriate proceedings.
Notwithstanding anything to the contrary herein, the representations and
warranties in this Section 2.09 are limited to matters that (i) include, relate
to or otherwise affect the Business or the Assets, (ii) could result in the
imposition of a Lien on, or the assertion of a claim against, the Assignee, the
Business or the Assets or (iii) could affect the tax position of Assignee with
respect to the Business or the Assets after the Closing Date.
2.10. Undisclosed Liabilities. Except as singly or in the aggregate would
not have a Material Adverse Effect, there are no claims, losses, obligations or
liabilities of, relating to or affecting the Assignors or any of the Assets.
2.11. Investment Representation. Each Assignor represents, warrants and
agrees that it is acquiring the Class B Shares for its own account and not with
a view to the resale or distribution thereof or any interest therein, except in
compliance with the registration requirements of applicable securities laws or
pursuant to an exemption therefrom. Any certificates evidencing the Class B
Shares may contain a legend, in customary form, to such effect.
2.12. Entire Business. The Assets, together with the services to be
provided by one or more of the Assignors pursuant to the (i) Administrative
Services Agreement and (ii) Joint Services Agreement, constitute all the assets,
properties and rights necessary for Assignee to conduct the Business in all
material respects as described in the Prospectus.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ASSIGNEE
Assignee hereby represents and warrants to the Assignors as follows:
3.01. Organization and Good Standing. Assignee is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Assignee has the requisite power and authority to execute, deliver and
perform this Agreement and to consummate the transactions contemplated hereby.
3.02. Authority; Binding Effect. Assignee has taken all necessary
corporate actions to authorize, execute and deliver this Agreement and to
perform all of its obligations under, and to consummate the transactions
contemplated by, this Agreement. This Agreement has been duly and validly
executed by Assignee. This Agreement constitutes the valid and binding
obligation of Assignee, enforceable against Assignee in accordance with its
terms, subject to the effect of reorganization, bankruptcy, insolvency,
moratorium, reorganization, fraudulent conveyance and other similar laws
relating to or affecting creditors' rights generally and court
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decisions with respect thereto, and subject to the application of equitable
principles and the discretion of the court (regardless of whether the
enforceability is considered in a proceeding in equity or at law).
ARTICLE IV
COVENANTS
4.01. Assignment of Contracts. Each Assignor will give any notices to
third parties, and will use its reasonable best efforts to obtain any third
party consents, that Assignee may request in connection with the transaction
contemplated by this Agreement, including, but not limited to, those consents
listed on Schedule 4.01. Each party to this Agreement will give notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental agencies
in connection with, the transactions contemplated by this Agreement.
4.02. Further Assurances. Each party hereto shall execute, deliver, file
and record, or cause to be executed, delivered, filed and recorded, such further
agreements, instruments and other documents and take, or cause to be taken, such
further actions, as the other party may reasonably request as being necessary or
advisable to effect or evidence the transactions contemplated by this Agreement.
4.03. Termination of Non-Exclusive Patent License. CFLP and CFPH shall
terminate and cause its affiliates to terminate before the Closing Date Section
4 of a certain Assignment and License of Patent Rights, effective as of June 16,
1999, among CFLP, CFS and CFPH, whereby CFLP and CFPH granted a non-exclusive,
worldwide, non-transferable license to CFS for "CFS Patents" as that term is
defined therein.
4.04. Compliance with Laws. Each party hereto agrees to comply with
all applicable Laws relating to the conduct of its business(es).
4.05. Stock Issuance. Each of CFFE, CF, CFPH and CF&Co agrees to
transfer all of the Consideration issued to each of them, respectively, to CFS
and CFLP in such proportion between CFS and CFLP as set forth on Schedule 4.05.
ARTICLE V
INDEMNIFICATION
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5.01. Assignors' Indemnification Obligations. Subject to the terms and
conditions of this Article V, each Assignor agrees, jointly and severally, to
defend, indemnify and hold Assignee, its affiliates and assigns, and its
respective officers, directors, agents, attorneys, employees and representatives
harmless from and against any and all liabilities, losses, costs, damages,
expenses, penalties, deficiencies, fines and Taxes, including, without
limitation, reasonable legal and other expenses (collectively, "Damages"),
directly or indirectly arising out of, resulting from or relating to:
(a) any breach of any representation, warranty, covenant, agreement or
obligation of any Assignor contained in this Agreement;
(b) any Excluded Liability;
(c) the conduct of the Business, and the ownership, use and operation of
the Assets, on or prior to the Closing Date;
(d) the use, operation or ownership of the Excluded Assets prior to or
after the Closing including, without limitation, the Excluded Software; and
(e) (i) any claim by any employee of any Assignor not hired by Assignee
with respect to his or her employment by any Assignor before or after the
Closing, including any group insurance claims, workers' compensation claims or
liabilities arising out of any accident, illness or other event occurring before
or after the Closing and other claims with respect to pension, retirement and/or
welfare benefits as they relate to such employee's services for any Assignor,
and (ii) any contractual claims by any person who was an employee of any
Assignor prior to the Closing and arising out of the consummation of the
transactions contemplated by this Agreement.
(f) any claim for any breach by any Assignor of any covenant or obligation
contained in the Agreement of Limited Partnership of Cantor Fitzgerald, L.P., as
amended;
(g) any claim for any breach by any Assignor of any covenant or obligation
contained in the (i) Cantor Fitzgerald Securities General Partnership Agreement,
entered into September 25, 1992, by and between CFLP and Cantor Fitzgerald
Incorporated, and (ii) Agreement to Admit CF Group Management, Inc. as a New
Partner of Cantor Fitzgerald Securities, entered into as of July 2, 1996, by and
between CFLP and CF Group Management, Inc.
5.02. Assignee's Indemnification Obligations. Subject to the terms and
conditions of this Article V, Assignee agrees to defend, indemnify and hold each
Assignor, its affiliates and their respective officers, directors, agents,
attorneys, employees and representatives harmless from and against any and all
Damages directly or indirectly arising out of, resulting from or relating to:
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(a) any breach of any representation, warranty, covenant, agreement or
obligation of Assignee contained in this Agreement;
(b) any Assumed Liability (including, without limitation, any failure by
Assignee to perform pursuant hereto the obligations to be performed by it after
the Closing under any Assigned Contracts or the use, operation or ownership of
the Assets or operation of the Business after the Closing); and
(c) any claim by any employee of Assignor hired by Assignee with respect
to his or her employment by Assignee or termination of such employment after the
Closing (except to the extent covered by Section 5.01 (e)(ii)), including any
group insurance claims, workers' compensation claims or liabilities arising out
of any accident, illness or other event occurring after the Closing and other
claims with respect to pension, retirement and/or welfare benefits as they
relate to such employee's services for Assignee after the Closing.
5.03. Claims for Indemnification; Defense of Indemnified Claims. For
purposes of this Section, the party entitled to indemnification shall be
referred to as the Indemnified Party and the party required to indemnify shall
be referred to as the Indemnifying Party. In the event that the Indemnifying
Party shall be obligated to the Indemnified Party pursuant to this Article V or
in the event that a suit, action, investigation, claim or proceeding is begun,
made or instituted as a result of which the Indemnifying Party may become
obligated to the Indemnified Party hereunder, the Indemnified Party shall give
prompt written notice to the Indemnifying Party of the occurrence of such event,
specifying the basis for such claim or demand, and the amount or estimated
amount thereof to the extent then determinable (which estimate shall not be
conclusive of the final amount of such claim or demand); provided, however, that
the failure to give such notice shall not constitute a waiver of the right to
indemnification hereunder, except to the extent that the Indemnifying Party is
actually prejudiced in a material respect thereby. The Indemnifying Party agrees
to defend, contest or otherwise protect against any such suit, action,
investigation, claim or proceeding at the Indemnifying Party's own cost and
expense with counsel of its own choice, who shall be, however, reasonably
acceptable to the Indemnified Party. The Indemnifying Party may not make any
compromise or settlement without the prior written consent of the Indemnified
Party (which will not be unreasonably withheld or delayed) and the Indemnified
Party shall receive a full and unconditional release reasonably satisfactory to
it pursuant to such compromise or settlement. The Indemnified Party shall have
the right but not the obligation to participate at its own expense in the
defense thereof by counsel of its own choice. If requested by the Indemnifying
Party, the Indemnified Party shall (at the Indemnifying Party's expense) (i)
cooperate with the Indemnifying Party and its counsel in contesting any claim or
demand which the Indemnifying Party defends, (ii) provide the Indemnifying Party
with reasonable access during normal business hours to its books and records to
the extent that such books and records relate to the condition or operation of
the Business and are requested by the Indemnifying Party to perform its
indemnification obligations hereunder, and to make
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copies of such books and records, and (iii) make personnel available to assist
in locating any books and records relating to the Business or whose assistance,
participation or testimony is reasonably required in anticipation of,
preparation for, or the prosecution and defense of, any claim subject to this
Article V. In the event that the Indemnifying Party fails timely to defend,
contest or otherwise protect the Indemnified Party against any such suit,
action, investigation, claim or proceeding, the Indemnified Party shall have the
right to defend, contest or otherwise protect the Indemnified Party against the
same and may make any compromise or settlement thereof and recover the entire
cost thereof from the Indemnifying Party, including, without limitation,
reasonable attorneys' fees, disbursements and all amounts paid as a result of
such suit, action, investigation, claim or proceeding or compromise or
settlement thereof.
5.04. Payments; Non-Exclusivity. Any amounts due an Indemnified Party
under this Article V shall be due and payable by the Indemnifying Party within
fifteen (15) business days after (x) in the case of a claim which does not
involve any third party, receipt of written demand therefor and (y) in the case
of a claim which involves a third party, the final disposition of such claim or
demand, provided legal and other out-of-pocket costs and expenses are reimbursed
currently within fifteen (15) business days after demand therefor. The remedies
conferred in this Article V are intended to be without prejudice to any other
rights or remedies available at law or equity to the Indemnified Parties, now or
hereafter.
ARTICLE VI
CONDITIONS TO ASSIGNEE'S OBLIGATIONS
The obligation of Assignee to consummate the transactions contemplated
hereby is subject to the fulfillment at or prior to the Closing of the following
conditions, any or all of which may be waived in whole or in part by Assignee to
the extent permitted by applicable law:
6.01. Representations, Warranties and Covenants of the Assignors. The
Assignors shall have complied in all material respects with all of their
agreements and covenants contained herein (including the obligations of the
Assignors to deliver the documents specified in Section 1.05) to be performed at
or prior to the Closing Date, and all of the representations and warranties of
the Assignors contained herein shall be true in all material respects on and as
of the Closing Date with the same effect as though made on and as of the Closing
Date, except to the extent that such representations and warranties were made as
of a specified date and, as to such representations and warranties, the same
shall continue on the Closing Date to have been true in all material respects as
of the specified date.
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6.02. Other Consents and Filings. All material approvals and consents of
or filings with governmental or regulatory authorities, and all material
approvals and consents of any other persons (including, without limitation, all
third party consents under each of the Assigned Contracts), required to permit
the consummation of all of the transactions contemplated hereby shall have been
obtained or made, as the case may be, to the reasonable satisfaction of
Assignee; provided, however, that it shall not be a condition to Assignee's
obligation to close the transactions contemplated hereby if the failure to
obtain any such approvals, consents or filings would not be material to the
Business or the Assets. For purposes of this Section 6.02, it is understood and
agreed that the failure to obtain any of the approvals, consents and filings
listed on Schedule 6.02 shall be deemed to be material to the Business or the
Assets.
6.03. Absence of Litigation. No proceeding, action, suit, investigation,
litigation or claim challenging the legality of, or seeking to restrain,
prohibit or modify the transactions contemplated by this Agreement or the
Additional Agreements shall have been instituted and not settled or otherwise
terminated.
6.04. Initial Public Offering of Assignee's Class A Common Stock. The
Registration Statement on Form S-1 registering shares of Assignee's Class A
Common Stock, par value $.01 per share (the "Class A Common Stock"), shall have
been declared effective by the Securities and Exchange Commission and Assignee
shall have completed its initial public offering of its Class A Common Stock
concurrently with the Closing of the transactions contemplated hereby.
6.05. No Prohibition. No law, statute, rule or regulation or injunction,
order, judgment, ruling, decree or settlement of any court or administrative
agency shall be in effect which prohibits Assignee from consummating the
transactions contemplated hereby or operating any Asset after the Closing Date.
ARTICLE VII
CONDITIONS TO THE ASSIGNORS' OBLIGATIONS
The obligations of the Assignors to consummate the transactions
contemplated hereby shall be subject to the satisfaction (or waiver by the
Assignors) on or prior to the Closing Date of all of the following conditions:
7.01. Representations, Warranties and Covenants of Assignee. Assignee
shall have complied in all material respects with all of its agreements and
covenants contained herein (including the obligation of Assignee to deliver the
documents specified in Section 1.05) to be performed at or prior to the Closing
Date, and all of the representations and warranties of Assignee contained herein
shall be true in all material respects on and as of the Closing Date
16
<PAGE>
with the same effect as though made on and as of the Closing Date, except to the
extent that such representations and warranties were made as of a specified date
and, as to such representations and warranties, the same shall continue on the
Closing Date to have been true in all material respects as of the specified
date.
7.02. Initial Public Offering of Assignee's Class A Common Stock. The
Registration Statement on Form S-1 registering shares of Assignee's Class A
Common Stock shall have been declared effective by the Securities and Exchange
Commission and Assignee shall have completed its initial public offering of its
Class A Common Stock concurrently with the Closing of the transactions
contemplated hereby.
7.03. No Prohibition. No law, statute, rule or regulation or injunction,
order, judgment, ruling, decree or settlement of any court or administrative
agency shall be in effect which prohibits any Assignor from consummating the
transactions contemplated hereby.
ARTICLE VIII
TERMINATION PRIOR TO CLOSING
8.01. Termination. This Agreement may be terminated at any time prior to
the Closing:
(a) By the mutual written consent of Assignee and the Assignors; or
(b) By either the Assignors or Assignee in writing, without liability to
the terminating party on account of such termination (provided that the
terminating party is not otherwise in breach of this Agreement), if there shall
have been a material breach by the other party of its representations,
warranties, covenants or agreements contained herein, the non- breaching party
has notified the breaching party of the breach, and the breach has continued
without cure for a period of 30 days after such notice of breach.
8.02. Effect on Obligations. Termination of this Agreement pursuant to
this Article shall terminate all obligations of the parties hereunder; provided,
however, that termination pursuant to paragraph (b) of Section 8.01 shall not
relieve any party that breached its covenants or agreements contained herein or
in any related agreement from any liability to the other party hereto by reason
of such breach.
17
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ARTICLE IX
MISCELLANEOUS
9.01. Joint and Several Liability. All obligations, covenants, agreements,
promises and liabilities of the Assignors hereunder shall be joint and several
obligations of all Assignors in all respects.
9.02. Successors and Assigns. This Agreement shall not be assignable by
Assignee without the prior written consent of the Assignors. The terms and
conditions of this Agreement shall inure to the benefit of and be binding upon
the respective successors and permitted assigns of the parties hereto.
9.03. Headings. The headings of the Articles, Sections and paragraphs of
this Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction hereof.
9.04. Modification and Waiver. No amendment, modification, alteration or
waiver of the terms or provisions of this Agreement shall be binding unless the
same shall be in writing and duly executed by the parties hereto; provided,
however, that each amendment, modification, alteration or waiver hereof or
hereunder must be approved by a majority of the outside directors of Assignee.
For purposes of this Agreement, an outside director shall mean a director who is
not an employee, partner or affiliate (other than solely by reason of being an
eSpeed director) of Assignee, CFLP or any of their respective affiliates. No
waiver of any of the provisions of this Agreement shall be deemed to or shall
constitute a waiver of any other provision hereof (whether or not similar). No
delay on the part of any party in exercising any right, power of privilege
hereunder shall operate as a waiver thereof.
9.05. Broker's Fees. Each party represents and warrants that no broker,
finder or investment banker is entitled to any brokerage, finder's or other fee
or commission in connection with the transactions contemplated hereby.
9.06. Expenses. Each Assignor and Assignee shall pay its own costs and
expenses incurred in connection with the preparation and execution and delivery
of this Agreement, including, without limiting the generality of the foregoing,
fees and expenses of financial consultants, accountants and counsel provided
that Assignee shall bear the cost of any sales, transfer and similar taxes in
connection with any transfer of assets pursuant to this Agreement. The
obligation to pay expenses pursuant to this Section 9.06 shall not in any way
limit or expand any obligation of any Assignor or Assignee to bear and pay costs
and expenses relating to the actual assignment of Assets pursuant to Section
1.01.
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<PAGE>
9.07. Notices. Any notice, request, instruction or other document to be
given hereunder by either party hereto to the other party shall be in writing
and delivered personally or sent by electronic facsimile transmission, cable,
telegram, telex or other standard forms of written telecommunications, by
overnight courier or by registered or certified mail, postage prepaid,
If to the Assignors to:
Cantor Fitzgerald, L.P.
One World Trade Center, 105th Floor
New York, NY 10048
Attention: President
Telecopier Number: 212-938-4116
With copies to:
Cantor Fitzgerald, L.P.
One World Trade Center, 105th Floor
New York, NY 10048
Attention: General Counsel
Telecopier Number: 212-938-3620
If to Assignee to:
eSpeed, Inc.
One World Trade Center, 103rd Floor
New York, NY 10048
Attention: President
Telecopier Number: 212-938-4614
or at such other address for a party as shall be specified by like notice. Any
notice which is delivered personally or by a form of written telecommunications
in the manner provided herein shall be deemed to have been duly given to the
party to whom it is directed upon the actual receipt by such party. Any notice
which is addressed and sent in the manner herein provided shall be conclusively
presumed to have been duly given to the party to which it is addressed at the
close of business, local time of the recipient, on the first day, if mailed by
overnight courier, and otherwise on the third day, after the day it is so sent.
9.08. Governing Law. This Agreement shall be construed in accordance with
and governed by the laws of the State of New York applicable to agreements made
and to be performed wholly within such jurisdiction. EACH OF THE PARTIES HERETO
HEREBY IRREVOCABLY AND UNCONDITIONALLY CONSENTS TO SUBMIT TO THE EXCLUSIVE
JURISDICTION OF THE COURTS OF THE STATE OF
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<PAGE>
NEW YORK AND OF THE UNITED STATES OF AMERICA IN EACH CASE LOCATED IN THE COUNTY
OF NEW YORK FOR ANY LITIGATION ARISING OUT OF OR RELATING TO THIS AGREEMENT AND
THE TRANSACTIONS CONTEMPLATED HEREBY (AND AGREES NOT TO COMMENCE ANY LITIGATION
RELATING THERETO EXCEPT IN SUCH COURTS), AND FURTHER AGREES THAT SERVICE OF ANY
PROCESS, SUMMONS, NOTICE OR DOCUMENT BY U.S. REGISTERED MAIL TO ITS RESPECTIVE
ADDRESS SET FORTH IN SECTION 9.07 SHALL BE EFFECTIVE SERVICE OF PROCESS FOR ANY
LITIGATION BROUGHT AGAINST IT IN ANY SUCH COURT. EACH OF THE PARTIES HERETO
HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY OBJECTION TO THE LAYING OF
VENUE OF ANY LITIGATION ARISING OUT OF THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY IN THE COURTS OF THE STATE OF NEW YORK OR THE UNITED STATES
OF AMERICA LOCATED IN THE COUNTY OF NEW YORK, AND HEREBY FURTHER IRREVOCABLY AND
UNCONDITIONALLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT
ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM.
9.09. Other Covenants. Subject to Section 6.02, the extent that any
consents needed to assign to Assignee any of the Assets have not been obtained
on or prior to the Closing Date, this Agreement shall not constitute an
assignment or attempted assignment thereof if such assignment or attempted
assignment would constitute a breach thereof. If any such consent shall not be
obtained on or prior to the Closing Date, then (i) each of Assignee and the
applicable Assignor, if required under applicable law, shall use its reasonable
best efforts in good faith to obtain such consent as promptly as practicable
thereafter (provided that reasonable best efforts shall not include the payment
of monies to any third party) and (ii) until such consent is obtained, the
parties shall use reasonable efforts in good faith to cooperate and to cause
each of their respective affiliates to cooperate, in any lawful arrangement
(including licensing, subleasing or subcontracting if permitted) designed to
provide to Assignee the operational and economic benefits under any such Assets.
9.10. Disclosure Schedules and Exhibits; Entire Agreement. The Disclosure
Schedules, and all exhibits and attachments to the Disclosure Schedules, an all
exhibits to, and documents expressly incorporated into this Agreement, and any
other attachments to this Agreement are hereby incorporated into this Agreement
and are made a part hereof as if set out in full in this Agreement. This
Agreement (and the agreements, certificates and other documents delivered
hereunder), unless otherwise provided herein, supersedes all other prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof and constitutes the entire agreement among
the parties hereto with respect to the subject matter hereof.
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<PAGE>
9.11. Survival of Representations and Warranties. All of the
representations and warranties of the Assignors and Assignee contained in this
Agreement shall survive the Closing (even if the damaged party knew or had
reason to know of any misrepresentation or breach of warranty at the time of
Closing) and continue in full force and effect for ten (10) years thereafter
(subject to any applicable statutes of limitations).
9.12. Invalid Provisions. If any provision of this Agreement is held to be
illegal, invalid or unenforceable, and if the rights or obligations of any party
hereto under this Agreement will not be materially and adversely affected
thereby, (a) such provision will be fully severable, (b) this Agreement will be
construed and enforced as if such illegal, invalid or unenforceable provision
had never comprised a part hereof, (c) the remaining provisions of this
Agreement will remain in full force and effect and will not be affected by the
illegal, invalid or unenforceable provision or by its severance herefrom and (d)
in lieu of such illegal, invalid or unenforceable provision, there will be added
automatically as a part of this Agreement a legal, valid and enforceable
provision as similar in terms to such illegal, invalid or unenforceable
provision as may be possible.
9.13. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original,
and all of which shall constitute the same instrument.
[Signature Pages Follow]
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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed on its behalf as of the date first above written.
ASSIGNORS:
CANTOR FITZGERALD, L.P.
By:/s/ Howard W. Lutnick
-----------------------------------
Name: Howard W. Lutnick
Title: Chairman
CANTOR FITZGERALD SECURITIES
By:/s/ Howard W. Lutnick
-----------------------------------
Name: Howard W. Lutnick
Title: President
CANTOR FITZGERALD & CO.
By:/s/ Howard W. Lutnick
-----------------------------------
Name: Howard W. Lutnick
Title: President and Chief Executive
Officer
CFFE, LLC
By:/s/ Howard W. Lutnick
-----------------------------------
Name: Howard W. Lutnick
Title: President and Chief Executive
Officer
CANTOR FITZGERALD L.L.C.
By:/s/ Howard W. Lutnick
-----------------------------------
Name: Howard W. Lutnick
Title: President and Executive
Managing Director
[Signature Page to Assignment and Assumption Agreement]
<PAGE>
CFPH, LLC
By:/s/ Howard W. Lutnick
-----------------------------------
Name: Howard W. Lutnick
Title: President and Chief Executive
Officer
ASSIGNEE:
eSPEED, INC.
By:/s/ Howard W. Lutnick
-----------------------------------
Name: Howard W. Lutnick
Title: Chief Executive Officer
A-1
<PAGE>
================================================================================
UK ASSIGNMENT AND ASSUMPTION AGREEMENT
among
CANTOR FITZGERALD INTERNATIONAL
CANTOR FITZGERALD INTERNATIONAL HOLDINGS L.P.
eSPEED SECURITIES INTERNATIONAL LIMITED
Dated as of the 9th of December 1999
================================================================================
<PAGE>
ASSIGNMENT AND ASSUMPTION AGREEMENT
THIS AGREEMENT is made and entered into as of this 9th day of December,
1999 between Cantor Fitzgerald International an unlimited company registered in
England under number 1976691 (the "Assignor"), eSpeed Securities International
Limited a limited company registered in England under number 3809189 (the
"Assignee") and Cantor Fitzgerald International Holdings L.P. a Delaware limited
partnership ("CFIHLP").
W I T N E S S E T H:
WHEREAS, the Assignor is, among other things, engaged in the business of
operating interactive electronic marketplaces, used principally by financial and
wholesale market participants to trade in fixed income securities, futures,
options and other financial instruments (the "Business").
WHEREAS, the Assignee is a recently formed company that has been set up to
acquire, and subsequently to operate, the Business in accordance with (i) the
Joint Service Agreement (as hereinafter defined) and (ii) the Administrative
Services Agreement (as hereinafter defined) as a separate legal entity.
WHEREAS, the Assignor, among other things, owns, or has the right to use,
certain hardware, software, technologies, systems and other intellectual
property and agreements that are used in the Business.
WHEREAS, the Assignor and the Assignee have agreed among other things
having had regard to a letter from Ernst & Young on the subject, that the value
at the date hereof of the Business to be transferred by the Assignor to the
Assignee (net of the Assumed Liabilities set out in Schedule 1.3) is $4,676,008
(the "Business Value").
WHEREAS, the Assignor proposes to reduce its authorised share capital from
pounds 95,000,000 divided into 75,000,000 Ordinary Shares of pounds 1 each
("Ordinary Shares") and 2,000,000 Preference Shares of pounds 10 each by such an
amount (the "Reduction Amount") as is equal to the product of multiplying the
Business Value, translated to pounds sterling at the closing mid-point spot
exchange rate on the business day (being any day other than a Saturday or a
Sunday on which banks are open for normal banking business in London)
immediately preceding that on which the reduction takes effect, as shown in the
Financial Times published on the day on which the reduction takes effect,
rounding up the resulting amount to the nearest pound), by a fraction of which
the numerator is 74,225,453 and the denominator is 73,730,194, (rounding up the
resulting amount to the nearest pound), the reduced amount of authorised share
capital being divided into such number of Ordinary Shares as is equal to
75,000,000 less the number (the "Reduction Number") of pounds comprised in the
Reduction Amount and 2,000,000 Preference Shares of pounds 10 each, and such
reduction be given effect by:
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(a) cancelling and extinguishing such number of Ordinary Shares
registered in the name of CFIHLP as is equal to such number of
pounds sterling as are comprised in the Business Value translated
into pounds sterling as aforesaid on terms that such capital shall
not be repaid in cash but shall be given effect by the transfer by
the Assignor to the Assignee of the Business and by the issue by the
Assignee of 4,676,008 shares of $1 each (the "Shares"), credited as
fully paid, to CFIHLP with the consent of CFIHLP (as its execution
of this Agreement hereby acknowledges); and
(b) cancelling and extinguishing such number of Ordinary Shares
registered in the name of CFIHLP, LLC (a Delaware limited liability
company) as is equal to the Reduction Number less the number of
Ordinary Shares determined under paragraph (a) above on terms that
the Assignor shall repay in cash to CFIHLP, LLC the amount paid up
or credited as paid up thereon.
NOW THEREFORE, in consideration of the mutual representations, warranties,
covenants and agreements contained herein, and upon the terms and conditions
hereinafter set forth, the parties hereby agree as follows:
ARTICLE 1
TERMS OF ASSIGNMENT
1.1. Assignment. On the terms and subject to the conditions in this
Agreement and for the consideration specified herein, at the Closing (as defined
in Section 1.5 below), the Assignor shall transfer, convey, assign and deliver
to the Assignee, and the Assignee shall acquire and accept from the Assignor
free and clear of all mortgages, pledges, assessments, security interests,
conditional sale or title retention contracts, leases, liens, adverse claims,
Taxes (as hereinafter defined), levies, charges, options, rights of first
refusal, transfer restrictions or other encumbrances of any nature, or any
contracts, agreements or understandings to grant any of the foregoing
(collectively, "Liens"), all of the Assignor's right, title and interest in, to
and under the Business, and to each of the following assets and rights,
including, but not limited to, the assets and rights identified in Schedule 1.1,
in each case to the extent used or held for use principally in the Business, but
excluding the Excluded Assets (as hereinafter defined) (the "Assignment"):
(a) all machinery, equipment, computers, network servers, monitors,
servers and other related items of tangible personal property of the
Assignor, principally used in the Business (the "Equipment");
(b) all fictional business names, trade names, d/b/a names, logos,
Internet domain names (including, without limitation, www.espeed.co.uk),
trademarks, service marks (including, without limitation, eSpeed), trade
dress and any and all UK and foreign
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<PAGE>
applications, registrations and renewals therefor, and all the goodwill
associated therewith principally used in the Business (if any)
(collectively, "Marks"); all copyrights in both published works and
unpublished works, and in online works such as Internet web sites, and any
UK or foreign applications, registrations and renewals therefor
principally used in the Business (if any) (collectively, "Copyrights");
all rights in any and all licensed or proprietary computer software,
firmware, middleware, programmes, systems applications, databases and
files (in whatever form or medium), including all material documentation,
relating thereto, and all source and object codes relating thereto
principally used in the Business (if any) (collectively, "Computer
Software and Files"); all know-how, trade secrets, confidential
information, competitively sensitive and proprietary information
(including but not limited to internal pricing information, supplier
information, telephone and telefax numbers, and e-mail addresses),
technical information, data, process technology, drawings and blue prints
principally used in the Business, other than the Information (as
hereinafter defined) (collectively, "Trade Secrets"); and the right to sue
for past infringement, if any, in connection with any of the foregoing,
including, but not limited to, the intellectual property disclosed in
Schedule 1.1 part B hereto (collectively, the "Intellectual Property");
(c) to the extent allowed, all agreements and arrangements permitting the
Assignor to use the intellectual property, equipment and computer
equipment (as hereinafter defined) owned by third parties, or permitting
third party use of intellectual property, equipment or computer equipment
owned by the Assignor, or for the processing, use, licensing, leasing,
storage, or retrieval of software, data and information principally used
by, and related to, the Business (collectively, "Intellectual Property,
Equipment and Computer Agreements");
(d) any and all accounting business information, management information
and internal reporting data and related books and records (in whatever
form or medium maintained), including but not limited to advertising,
marketing and sales programs, business, marketing and strategic plans,
research and development reports and records, and advertising copy
(including radio and television scripts), creative materials, production
agreements, and all other promotional brochures, flyers, inserts and other
materials used principally in connection with the Business (collectively,
the "Marketing Materials");
(e) all computer tapes, discs and other media which are used to store
Intellectual Property (if any) (the "Computer Equipment");
(f) subject to the provisions of Article 5, all agreements, contracts,
instruments and other documents to which the Assignor is a party that are
listed in Schedule 1.1 part C (the "Assigned Contracts");
(g) all claims of the Assignor against third parties relating to the
Transferred Assets (as hereinafter defined), whether choate or inchoate,
known or unknown or contingent or non-contingent;
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<PAGE>
(h) to the extent transferable, any and all Permits (as hereinafter
defined) used exclusively in connection with the Business; and
(i) prepaid rent and rates valued at US$321,439,
all as the same shall exist on the Closing Date (items (a) through (h)
being, collectively, the "Transferred Assets").
1.2. Excluded Assets. Notwithstanding anything in this Agreement to the
contrary, all assets, properties and rights of the Assignor other than those set
forth in Section 1.1, (including Schedule 1.1) including without limitation, the
following assets, properties and rights of the Assignor (the "Excluded Assets"),
shall be excluded from and shall not constitute part of the Transferred Assets,
and the Assignee shall have no rights, title or interest in or duties or
obligations of any nature whatsoever with respect thereto by virtue of the
consummation of the transactions contemplated by this Agreement:
(a) all contracts and other agreements to which the Assignor is a party,
other than those described in Section 1.1 above (the "Excluded
Contracts");
(b) all rights of the Assignor in and to the trademarks (including
"ESBX"), service marks, and any applications, registrations and renewals
therefor, and all the goodwill associated therewith, licensed by the
Assignor other than those described in Section 1.1(b) (the "Excluded
Marks");
(c) all rights of the Assignor in and to software other than those
described in Section 1.1(b) (the "Excluded Software");
(d) any and all confidential information other than is comprised in the
Trade Secrets;
(e) all rights of the Assignor in the Internet domain names "ci.co.uk",
"cantorindex.co.uk", "cantor-index.co.uk", "cantor-e-speed.co.uk",
"cantorespeed.co.uk", "cantor-espeed.co.uk", "cantore-speed.co.uk",
"cindex.co.uk", "c-index.co.uk", "cfindex.co.uk" and "e-index.co.uk" and
in and to the Internet web site accessed via such domain name, including,
but not limited to, all copyrights in all materials on such sites and the
software underlying such site, all trademarks, service marks, trade names
and goodwill associated therewith, all proprietary computer software,
programmes, applications, databases, files (in whatever form or medium)
and all proprietary information related thereto, in each case only to the
extent that the foregoing is not otherwise required to be listed in
Schedule 3.8(b) hereto;
(f) all rights of the Assignor in, to and under the Data Purchase
Agreement, Data Product Agency and Electronic Trading System Agreement,
dated January 22, 1993, among Cantor Fitzgerald, LP, Reuters Limited
("Reuters") and Market Data Corporation ("MDC"), as amended, and all other
agreements between Cantor Fitzgerald LP, Reuters
4
<PAGE>
and/or MDC or related thereto, as set forth in Schedule 1.2(f) hereto (the
"Reuters Agreement");
(g) all rights of the Assignor with respect to the (i) Agreement, dated
February 23, 1990, between Telerate, Inc. ("Telerate") and CFS, as
amended, and (ii) Master Optional Services Agreement, dated February 23,
1990, between Telerate and MDC, as amended, and all other agreements
between the Assignor, Telerate and/or MDC or related thereto, as set forth
in Schedule 1.2(g) hereto (the "Telerate Agreement");
(h) all right, title and interest with respect to information relating to
bids, offers or trades or any other information on Financial Products (as
defined in the Joint Services Agreement (as hereinafter defined)) created
or received by the Assignor or any of its affiliates (other than the
Assignee) in a brokerage capacity, including, but not limited to,
information licensed, sold, transferred or permitted to be published or
displayed by the Assignor pursuant to the Reuters Agreement and the
Telerate Agreement (the "Information");
(i) all advertising, marketing and sales programs, advertising copy
(including radio and television scripts), creative materials, production
agreements, broadcasting rights, broadcasting and advertising time, space,
allowances and credits and other promotional brochures, flyers, inserts
and other materials used solely in connection with an Excluded Contract
(if any);
(j) any assets, properties, rights and interests relating to the Excluded
Liabilities (as hereinafter defined); and
(k) all rights of the Assignor under this Agreement and the documents and
instruments delivered to the Assignor pursuant to this Agreement.
The Assignor shall bear and pay all of the costs and expenses of the
Assignment except for stamp duty, stamp duty reserve or other similar taxes,
which shall be borne and paid by the Assignee.
1.3. Assumption of Liabilities. Effective as of the Closing Date, the
Assignee will assume and agree to pay, perform and discharge, as and when due,
and indemnify and hold the Assignor harmless from and against, (i) each
liability listed in Schedule 1.3 being liabilities relating to the Business (ii)
each obligation of the Assignor to be performed after the Closing Date with
respect to the Transferred Assets and the Assigned Contracts and (iii) each
other liability of the Assignor thereunder (including liabilities for any breach
of a representation, warranty or covenant, or for any claims for indemnification
contained therein), to the extent and only to the extent that such liability is
due to the actions of the Assignee (or any of the Assignee's affiliates (other
than the Assignor), representatives or agents) after the Closing Date
(collectively, the "Assumed Liabilities"). The Assignee shall not assume, and
shall not be obligated to pay, perform or discharge, any liability or obligation
of the Assignor other than the
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Assumed Liabilities (whether or not related to the Transferred Assets or
Business) (collectively, the "Excluded Liabilities"), and shall not be obligated
for any other claim, loss or liability relating to any act, omission or breach
by the Assignor with respect to the Business, the Transferred Assets or the
Assigned Contracts, for any claim, loss or liability related to the Excluded
Assets or the Excluded Liabilities, all of which, the Assignor shall remain
obligated to pay, perform and discharge and to indemnify and hold the Assignee
harmless against. Without limiting the foregoing, among other things, all
liabilities arising from the matters described in the prospectus attached hereto
(the "Prospectus") under the caption "Legal Proceedings", shall be Excluded
Liabilities except to the extent expressly assumed as provided in Schedule 1.3.
1.4. Consideration. In consideration of the Assignment, in addition to the
assumption of the Assumed Liabilities as provided in Section 1.3, the Assignee
shall issue to CFIHLP the Shares credited as fully paid.
1.5. The Closing.
(a) Date and Place. The closing of the transactions contemplated hereby
(the "Closing") shall take place at the London offices of the Assignor,
One America Square, London EC3N, (or such other place as the Assignor and
the Assignee shall agree) on the date the Assignor so elects, which date
shall be no later than the fourth business day following the date that all
of the conditions to Closing provided in Articles 7 and 8 hereof shall
have been satisfied, or at such other time and/or place and/or on such
other date as the parties may mutually agree (the "Closing Date").
(b) Documents to be delivered and actions to be taken by the Assignor. At
the Closing, the Assignor shall:
(i) deliver to the Assignee a duly executed counterpart to the Joint
Services Agreement (the "Joint Services Agreement") substantially in
the form of Exhibit A hereto;
(ii) deliver to the Assignee a duly executed counterpart to the
Administrative Services Agreement (the "Administrative Services
Agreement") substantially in the form of Exhibit B hereof (together
the Joint Services Agreement and the Administrative Services
Agreement being referred to hereinafter as the "Additional
Agreements");
(iii) make available for collection by the Assignee at the normal
location at which they are held, used or stored and/or give physical
possession to the Assignee or as it may direct of such of the
Transferred Assets as are transferable by delivery;
(iv) effect the capital reduction referred to in the Recitals
hereto;
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(v) deliver to the Assignee all documents of title or other records
establishing title to those Transferred Assets;
(vi) (if requested by the Assignee so to do) deliver to the Assignee
duly executed assignments, transfers or other assurances of and
otherwise vest in the Assignee such other of the Transferred Assets
as are not transferable by delivery, such assignments, transfers or
assurances to be prepared by and at the cost of the Assignor in such
form as the Assignee shall reasonably require and to have been
approved by the Assignor before Closing;
(vii) deliver to the Assignee the originals of all documents in the
Assignor's possession constituting or evidencing the Assigned
Contracts and the Employment Agreements or relating to all equipment
and items which are not owned by the Assignor but are used by it,
otherwise than by way of supply, in the Business at the Closing Date
including without limitation items on loan, lease, licence, or hire
purchase or of which the Assignor is for any reason bailee and items
supplied to the Assignor under a valid retention of title clause or
other terms effective to prevent, or delay, title passing to the
Assignor, together with consents to assignments and/or novation
agreements as may be required to transfer to the Assignee such of
the Assigned Contracts as have been deemed by the Assignee prior to
Closing to be key contracts, duly executed by all parties to them
other than the Assignee;
(viii) deliver to the Assignee all records necessary to enable the
Assignee to carry on the Business, with the exception of the
statutory books of the Assignor;
(ix) give possession to the Assignee of, or otherwise make available
to it, in such form as the Assignee may reasonably require, the
Trade Secrets;
(x) deliver to the Assignee releases of any interests by way of
security (howsoever arising) to which any of the Transferred Assets
or Assigned Contracts are subject (other than floating charges),
duly executed by those entitled to the benefit of such interests;
(xi) deliver to the Assignee a certificate in an agreed form dated
as at the Closing Date from each holder of a floating charge over
assets of the Assignor (if any) to the effect that such floating
charge has not crystallised at that time accompanied by an
acknowledgement by such holder that it consents to the transfer of
the Business and to such assets being transferred to the Assignee
upon such transfer free of such charge and of any other charge which
by virtue of such charge might otherwise attach to them in
consequence of such transfer; and
(xii) execute and deliver to the Assignee such other documents or
instruments to effect the transfer of the Transferred Assets, the
assumption of the Assumed
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Liabilities and the other transactions contemplated hereby, and in
such form, as the Assignee may reasonably request.
(c) Documents to be delivered by the Assignee. At Closing, the Assignee
shall execute and deliver to the Assignor (or as it shall direct):
(i) where relevant executed counterparts of the agreements delivered
by the Assignor under Section 1.5(b);
(ii) such other documents or instruments to effect the transfer of
the Transferred Assets, the assumption of the Assumed Liabilities
and the other transactions contemplated hereby, and in such form, as
the Assignor may reasonably request; and
(iii) a share certificate for the Shares in the name of CFIHLP.
1.6. Definition of Taxes In this agreement Taxes means any form of
taxation, whenever created or unpaid and whether of the United Kingdom or
elsewhere (and without limitation includes income tax, P.A.Y.E., corporation
tax, capital gains tax, capital transfer tax, inheritance tax, stamp duty, stamp
duty reserve tax, value added tax, development land tax, petroleum revenue tax,
withholding tax, rates, Customs and Excise duties, National Insurance
contributions, Social Security and other similar liabilities or contributions)
and generally any amount payable to the revenue, customs or fiscal authorities,
whether of the United Kingdom or elsewhere and all interest and/or penalties
related to or arising in respect thereof.
ARTICLE 2
EMPLOYEES
2.1. Transfer Regulations. The Assignor and the Assignee acknowledge and
agree that the Transfer of Undertakings (Protection of Employment) Regulations
1981 (the "Transfer Regulations") apply to this Agreement and the transfer of
the Business effected by this Agreement is a "relevant transfer" within the
meaning of those regulations and that in accordance with the Transfer
Regulations:
(a) the contracts of employment between the Assignor and the persons
listed in Schedule 2.1 (the "Employees") (save insofar as such contracts
relate to any occupational pension scheme or to any Employee who informs
the Assignor or the Assignee that he objects to becoming employed by the
Assignee under Regulation 5(4A) of the Transfer Regulations) will have
effect after Closing as if originally made between the Assignee and the
Employees;
(b) on Closing all the Assignor's rights, powers, duties and liabilities
under or in connection with each such contract will be transferred to the
Assignee;
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(c) anything done before Closing by or in relation to the Assignor in
respect of each such contract or any Employee will be deemed to have been
done by or in relation to the Assignee; and
(d) Action to be taken by CFIHLP At Closing CFIHLP shall take such actions
and do such things as are reasonably within it power to procure the
effecting of the capital reduction of the Assignor referred to in the
Recitals hereto.
2.2. Apportionment of rights and liabilities. Without prejudice to the
rights and obligations acquired by the Employees as against the Assignee in
consequence of the Transfer Regulations, the Assignor and the Assignee agree
that as between themselves all rights and liabilities, arising or payable, under
or in respect of or in connection with the Employment Agreements (as defined in
Section 2.4 below) or otherwise in respect of the Employees (including all such
rights and liabilities as are transferred or otherwise attach to the Assignee
pursuant to the Transfer Regulations) shall be apportioned as follows:
(a) all rights and liabilities arising or payable on or before the Closing
Date shall belong to the Assignor; and
(b) all rights and liabilities arising or payable after the Closing Date
shall belong to the Assignee.
2.3. Regulation 10 Information. The Assignee shall promptly provide to the
Assignor in writing such information as will enable the Assignor to carry out
its duties under Regulation 10 of the Transfer Regulations.
2.4. Employment Agreements not transferred. If for any reason the contract
or other terms or conditions of employment under which the Employees are for the
time being employed by the Assignor in the Business (the "Employment
Agreements") of any of the Employees is not automatically transferred to the
Assignee pursuant to the Transfer Regulations, the Assignee shall offer to
employ such Employee on terms and conditions no less advantageous to the
Employee than the terms on which he would have been employed had his Employment
Agreement been so transferred.
2.5. Persons other than the Employees. The Assignor and the Assignee
intend that the Transfer Regulations shall apply only to the Employees and
accordingly if any contract of employment (whether oral or written, express or
implied) has been or is at any time entered into by the Assignor in respect of
any person who is not an Employee without the prior consent of the Assignee and
such contract shall have effect or shall be alleged by the person so employed
under it to have effect as if originally made between the Assignee and such
person pursuant to the provisions of Regulation 5 of the Transfer Regulations,
then:
(a) the Assignee may, upon becoming aware of the application of Regulation
5 to such contract or any claim to that effect by the person employed
under it, terminate such
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contract forthwith;
(b) the Assignee shall promptly inform the Assignor of any such claim and
keep the Assignor advised of any action taken by the Assignee in respect
of it; and
(c) the Assignor shall fully indemnify the Assignee against any sums
payable to or for the benefit of such person in respect of his employment
with the Assignor and/or the Assignee and against all other liabilities
whatsoever arising under or in relation to such contract or its
termination and any obligation or liability of whatsoever nature (whether
arising before or after Closing) in relation to or in connection with the
employment of such person in the Business.
2.6. Settlement of Claims. Without prejudice to Section 2.5(c) the
Assignee shall be entitled to settle any claim brought against it after Closing,
by any such person as is described in Section 2.5 provided that such claim is
reasonable and that it has consulted with the Assignor before making such
settlement.
2.7. Joint Letter. On such date as the Assignor and the Assignee may agree
in writing, but in any event by not later than the first business day following
Closing, the Assignor and the Assignee shall join in delivering to each of the
Employees a joint letter from the Assignor and the Assignee in an agreed form.
Such letter shall be handed personally to those Employees who are present for
work on the date selected for such delivery and shall be despatched on that date
by first-class post to those Employees who are not so present.
2.8. Pension Arrangements. The Assignor and the Assignee shall procure
that as from Closing the pension arrangements in respect of the Employees shall
be dealt with in such a way as to ensure that the Employees rights are not
prejudiced by the Assignment.
2.9. Objections to the transfer. If any Employee informs the Assignor or
the Assignee that he objects to the transfer of his employment to the Assignee
under this Agreement pursuant to the Transfer Regulations, the Assignor or the
Assignee (as the case may be) shall notify the other forthwith. If the relevant
employee shall refuse to withdraw such objections, such person shall be deemed
not to be an Employee.
2.10. New employees. If the Assignor shall take any person into its
employment in connection with the Business between the date of this Agreement
and Closing, then, provided the Assignee's written consent thereto shall have
been obtained (but not otherwise), such person shall be deemed to be an
Employee.
2.11. Dismissals. If any person employed in connection with the Business
shall be dismissed or his employment shall otherwise terminate in any way
between the date of this Agreement and Closing, then, without prejudice to the
Assignee's rights in respect of such dismissal or termination, such person shall
be deemed not to be an Employee.
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2.12. Amendments to Schedule 2.1. On any person being deemed to be an
Employee or not to be an Employee pursuant to Sections 2.10 or 2.11, Schedule
2.1 shall be deemed to be amended accordingly.
2.13. Indemnity. The Assignor will indemnify the Assignee against any
loss, cost, damage or expense suffered or incurred by reason of any proceeding,
claim or demand by any Employee (or, where applicable, their employee
representatives):
(a) in relation to the employment or termination of employment of any
Employee during the period ending on Closing (save for any proceeding,
claim or demand arising from any act or omission of the Assignee)
including for the avoidance of doubt liability for personal injuries,
breach of contract and infringement of any relevant statutory provision;
(b) in relation to the breach by the Assignor prior to Closing of any
collective agreement or other custom, practice or arrangement (whether or
not legally binding) with a trade union or staff association in respect of
any Employee (but only in respect of the period ending on Closing);
(c) in relation to the operation of the Transfer Regulations upon the
contract of employment of any employee of the Assignor whose name is not
listed in Schedule 2.1; or
(d) to the extent that it arises from any failure by the Assignor to
comply with its obligations under Regulation 10 of the Transfer
Regulations or section 188 of the Trade Union and Labour Regulations
Consolidation Act 1992 in respect of any Employee.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE ASSIGNOR
The Assignor hereby represents and warrants to the Assignee with respect
to itself as follows except as otherwise disclosed in Schedules 3.3, 3.4, 3.5,
3.6, 3.8(b) and 3.9 to this Agreement (the "Disclosure Schedules"), which
Disclosures Schedule specifically reference the particular sections hereof to
which they relate:
3.1. Organisation and Good Standing. The Assignor is duly organised,
validly existing and in good standing under the laws of England and Wales and is
duly qualified to do business and, except as would not singly or in the
aggregate have a Material Adverse Effect, is in good standing in each
jurisdiction in which the ownership, use or leasing of its assets or the conduct
or nature of its business makes such qualification necessary. "Material Adverse
Effect" means any event, change, changes, effect or effects that individually or
in the aggregate are
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materially adverse to (x) the ownership, use, operation or value of the
Transferred Assets or (y) the condition (financial or other) or results of
operations of, or prospects for, the Business.
3.2. Authority. The Assignor has the requisite corporate power and
authority to execute and deliver this Agreement and the Additional Agreements,
to perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby. The execution and delivery by the
Assignor of this Agreement and the Additional Agreements and the consummation by
the Assignor of the transactions contemplated hereby and thereby have been duly
authorized by all necessary corporate, stockholder, member or partner action,
and no other corporate, partner or member proceedings on the part of the
Assignor or any affiliate of the Assignor (other than the Assignee),
respectively, are necessary to authorize the execution and delivery by the
Assignor of this Agreement or the Additional Agreements or to consummate the
transactions contemplated hereby and thereby. This Agreement has been, and at
the Closing the Additional Agreements will be, duly executed and delivered by
the Assignor and constitutes or will constitute, as applicable, legal, valid and
binding obligations of the Assignor enforceable against the Assignor in
accordance with their respective terms.
3.3. No Conflict; Required Filings and Consents.
(a) The execution, delivery and performance by the Assignor of this
Agreement and the Additional Agreements do not, and the consummation of
the transactions contemplated hereby and thereby will not, (i) conflict
with or violate the certificate of incorporation, Memorandum or Articles
of Association or similar organisational or governing document of the
Assignor, or any affiliate thereof as the case may be; (ii) conflict with
or violate any local or foreign laws, rules, statutes, ordinances,
regulations, judgments, settlement agreements, orders or decrees or
arbitration proceedings or pronouncements (collectively "Laws") applicable
to the Assignor or any affiliate thereof, the Business or the Transferred
Assets or by which the Assignor or any affiliate thereof, the Business or
the Transferred Assets are bound or affected; or (iii) result in any
material breach of or constitute a material default (or an event that with
notice or lapse of time or both would become a material default) under, or
give to any other person any right of termination, amendment, acceleration
or cancellation of, or result in the creation of a Lien on any of the
Transferred Assets pursuant to, any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument
or obligation to which the Assignor or any affiliate thereof is a party or
by which the Assignor or any affiliate thereof, the Business or the
Transferred Assets are bound or affected; and
(b) The execution, delivery and performance by the Assignor of this
Agreement and the Additional Agreements do not and the consummation of the
transactions contemplated hereby and thereby do not require the Assignor
or any of its affiliates to seek, obtain or receive any consent, approval,
authorisation or permit from, or make any filing with or notification to,
any governmental agency, authority or court or any other person, body or
committee except for any consents, approvals any authorisations or permits
as have been
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obtained or filings or notifications as have been made, or as would not
singly or in the aggregate if not obtained or made, have a Material
Adverse Effect.
3.4. Permits; Compliance with the Law. The Assignor is in possession of
all franchises, grants, authorisations, licences, permits, easements, variances,
exemptions, consents, certificates, approvals and orders necessary for it to own
and use the Transferred Assets as presently owned and used and to carry on the
Business as it is now being conducted (the "Permits"), except for those Permits
the failure of which to obtain or maintain would not result in a Material
Adverse Effect, and no suspension, revocation, cancellation or refusal to review
any of the Permits has occurred, or to the knowledge of the Assignor, is
threatened or anticipated. Each of the Permits is listed in Schedule 3.4. The
Assignor has conducted and is conducting the Business, and has owned, used and
operated and owns, uses and operates the Transferred Assets in compliance with,
and not in violation of, (i) any Law applicable to it or by which it, the
Business or the Transferred Assets is bound or affected or (ii) any of the
Permits (except in either case for any such violations as, singly or in the
aggregate, would not have a Material Adverse Effect).
3.5. Title to Transferred Assets. The Assignor owns, free and clear of any
Liens, and has the full right to sell, assign and convey, all of the Transferred
Assets, and at Closing will convey the Transferred Assets to the Assignee, free
and clear of any Liens.
3.6. Absence of Litigation. Except as would not singly or in the aggregate
have a Material Adverse Effect, or is disclosed in the Prospectus, there is no
pending or threatened, nor has there been at any time during the twelve months
preceding the date hereof any, claim, complaint, action, suit, litigation,
proceeding or arbitration or, to the Assignor's knowledge, any inquiry or
investigation of any kind by any consumer protection agency or other
governmental or self-regulatory agency, or any other person or entity which
seeks to enjoin, delay or restrict any of the transactions contemplated by this
Agreement or the Additional Agreements or which involves the Business or any of
the Transferred Assets. Except as would singly or in the aggregate have a
Material Adverse Effect, neither the Assignor nor any affiliate of the Assignor
are subject to any judgment, order, writ, injunction, decree or award which
relates to any of the Transferred Assets or to the Business.
3.7. Contracts; No Default; Etc. Schedule 1.1 part C lists each Assigned
Contract. Correct and complete copies of each Assigned Contract, together with
all amendments, supplements and other instruments (including side letters)
thereto effecting a modification or waiver of the terms thereof, have been
delivered to the Assignee. Each Assigned Contract is valid, subsisting and, to
the Assignor's knowledge, enforceable in accordance with its terms, save only
that such enforceability may be affected by bankruptcy, insolvency, fraudulent
conveyance, moratorium and similar laws affecting the rights of creditors
generally and by general principles of equity (whether considered in a
proceeding at law or in equity). Each such Assigned Contract is in full force
and effect, no written notice of termination or non-renewal of any Assigned
Contract has been given to the Assignor or, to the knowledge of the Assignor, is
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anticipated, and there is no material default (or any event known to the
Assignor which, with the giving of notice or lapse of time or both, would
constitute a material default) by the Assignor or, to the knowledge of the
Assignor, by any other party to any such Assigned Contract, in the due timely
payment or performance of any obligation to be performed or paid under any
Assigned Contract.
3.8. Intellectual Property and Computer Assets.
(a) Except as would not singly or in the aggregate have a Material Adverse
Effect, the Assignor (or an affiliate of the Assignor) owns all right,
title and interest in, or has valid and subsisting licence rights
sufficient to use and to continue to use, all Intellectual Property
principally used in the conduct of the Business as currently conducted by
the Assignor. All Intellectual Property necessary for the conduct of the
Business as described in the Prospectus (other than the intellectual
property included in the Excluded Assets) is being transferred to the
Assignee hereunder. Except as would not singly or in the aggregate have a
Material Adverse Effect, all Intellectual Property is free and clear of
any and all Liens.
(b) Schedule 3.8(b) lists all of the Assignor's UK and foreign
registrations and applications issued by, filed with or recorded by any
governmental regulatory authority with respect to the Intellectual
Property (if any). Except as singly or in the aggregate would not have a
Materially Adverse Effect, all of such registrations and applications are
valid and in full force and effect and all necessary actions to maintain
the registrations or applications for registration of such Intellectual
Property have been taken or instructions have been given that such actions
be taken, and such actions will be taken as of the date of this Agreement.
3.9. Undisclosed Liabilities. Except as singly or in the aggregate, would
not have a Materially Adverse Effect of the Disclosure Schedules, there are no
claims, losses, obligations or liabilities of, relating to or affecting the
Assignor or any of the Transferred Assets.
3.10. Entire Business. The Transferred Assets, together with the services
to be provided by the Assignor or its affiliates pursuant to the (i)
Administrative Services Agreement and (ii) Joint Services Agreement, constitute
all the assets, properties and rights necessary for the Assignee to conduct the
Business in all material respects as described in the Prospectus.
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ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE ASSIGNEE
The Assignee hereby represents and warrants to the Assignor as follows:
4.1. Organisation and Good Standing. The Assignee is a limited liability
company duly organised, validly existing and in good standing under the laws of
England and Wales. The Assignee has the requisite power and authority to
execute, deliver and perform this Agreement and to consummate the transactions
contemplated hereby.
4.2. Authority; Binding Effect. The Assignee has taken all necessary
corporate actions to authorise, execute and deliver this Agreement and to
perform all of its obligations under, and to consummate the transactions
contemplated by, this Agreement. This Agreement has been duly and validly
executed by the Assignee. This Agreement constitutes the valid and binding
obligation of the Assignee, enforceable against the Assignee in accordance with
its terms, subject to the effect of reorganisation, bankruptcy, insolvency,
moratorium, fraudulent conveyance and other similar laws relating to or
affecting creditors' rights generally and court decisions with respect thereto,
and subject to the application of equitable principles and the discretion of the
court (regardless of whether the enforceability is considered in a proceeding in
equity or at law).
ARTICLE 5
ASSIGNED CONTRACTS
5.1. Novation; Assignment. The Assignor and the Assignee shall, to the
extent possible, arrange for the Assigned Contracts to be novated. To the extent
that the Assignor and the Assignee agree that any particular Assigned Contract
should not be novated, then, as regards those particular Assigned Contracts, the
Assignor hereby assigns with effect from Closing, to the Assignee all of those
particular Assigned Contracts which are capable of assignment and (i) which do
not require the consent of the other parties thereto to any such assignment or
(ii) for which consent to assignment has been obtained from the other parties
thereto prior to Closing.
5.2. Assigned Contract not Novated or Assigned. All other Assigned
Contracts shall as from Closing (pending an assignment or novation thereof) be
held by the Assignor on trust for the Assignee absolutely. Insofar as such
Assigned Contracts:
(a) are not assignable or cannot be assigned without consent or without
such assignment constituting an event of default or termination, the
Assignor shall at the option of the Assignee:
(i) use all reasonable endeavours to procure that any requisite
consent is obtained;
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or
(ii) use all reasonable endeavours to procure that the Assignee be
granted corresponding rights (and for this purpose shall do all such
acts and things and make all such representations as the Assignee
may reasonably require) and, subject thereto, that the existing
arrangements be terminated; or
(iii) use all reasonable endeavours to procure that all relevant
third parties waive the relevant provisions; or
(iv) execute (or procure there to be executed) a declaration of
trust for the benefit of and in favour of the Assignee; or
(v) otherwise deal with the same as the Assignee may reasonably
direct; or
(b) cannot effectively be transferred to, or the obligations thereunder
cannot effectively be assumed by, the Assignee except by an agreement of
novation with one or more third party:
(i) each of the Assignor and the Assignee shall use their respective
reasonable endeavours to procure that the same be novated; and
(ii) unless and until any such novation is entered into, the
Assignor shall do or procure to be done all such acts and things in
relation thereto as the Assignee may reasonably require.
5.3. Receivables and outgoings; rights and liabilities. In respect of each
of the Assigned Contracts:
(a) as between the Assignor and the Assignee the Assigned Contract shall
be deemed to have been duly transferred to the Assignee as from the
Closing Date;
(b) responsibility for the collection of receivables and the discharge of
outgoings payable under the Assigned Contracts and the respective
obligations of the Assignor and the Assignee to account to or reimburse
each other with respect to receivables so collected and outgoings so
discharged shall be determined in accordance with the Joint Services
Agreement.
(c) as regards all rights under the Assigned Contracts other than
receivables and all liabilities under the Assigned Contracts other than
outgoings:
(i) the Assignor shall exercise all such rights and discharge all
such liabilities which fall due on or before the Closing Date and
the Assignee shall exercise all such rights and discharge all such
liabilities which fall due after the Closing Date; and
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(ii) the Assignor shall account to the Assignee for the benefit of
all such rights exercised by the Assignor to the extent that they
arise after the Closing Date and the Assignee shall account to the
Assignor for the benefit of all such rights exercised by the
Assignee to the extent that they arise on or before the Closing
Date.
5.4. Matters arising prior to Closing. Nothing in this Agreement:
(a) shall require the Assignee to perform any obligation falling due for
performance, or which should have been performed, prior to Closing;
(b) shall make the Assignee liable for any act, neglect, default or
omission in respect of any of the Assigned Contracts committed by the
Assignor, or occurring, prior to Closing; or
(c) shall impose any obligation on the Assignee for or in respect of any
service performed by the Assignor prior to Closing.
5.5. Mutual Indemnities. The Assignor shall fully indemnify the Assignee
against all liabilities under the Assigned Contracts to the extent that they
arise on or before Closing and, subject to Sections 5.6 and 5.7, the Assignee
shall fully indemnify the Assignor against all liabilities under the Assigned
Contracts to the extent that they arise after Closing.
5.6. Rescission or termination by a third party. If the other parties to
an Assigned Contract shall rescind or terminate or purport to rescind or
terminate the Assigned Contract or shall make any other claim on the ground that
the transfer or purported transfer of the Assigned Contract by the Assignor to
the Assignee constitutes a breach of, or event of default under, the Assigned
Contract the Assignor shall fully indemnify the Assignee against all damages or
other compensation sought by such other party or parties under any such claim.
5.7. Liabilities arising as a result of Closing. Notwithstanding anything
in the previous provisions of this Article 5, the Assignor shall be liable for
and shall discharge at its own expense and for its own account and fully
indemnify the Assignee against all liabilities which arise in respect of any of
the Assigned Contracts in consequence of the execution or Closing of this
Agreement and for the purposes of this Article 5 all such liabilities shall be
deemed to arise on or before the Closing Date.
5.8. Benefit of warranties. The Assignor shall at the request of the
Assignee and at the Assignee's expense use its reasonable endeavours to extend
to the Assignee and enforce on its behalf the benefit of any warranties, express
or implied, given to the Assignor in respect of the goods or services supplied
under any of the Assigned Contracts which are supply contracts.
5.9. Other contracts. The Assignor undertakes to perform any contract or
other of its obligation relating to the Business which the Assignee is not by
this Agreement required to perform. The Assignor shall remain solely responsible
for all contracts to which it is a party
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which are not Assigned Contracts.
5.10. Right of the Assignee to treat Assigned Contracts as excluded. If
any of the Assigned Contracts which has not been assigned to the Assignee at
Closing has not been novated, assigned or otherwise transferred to the Assignee
within a period of 90 days after Closing, the Assignee may by notice in writing
given to the Assignor elect to treat such Assigned Contract as excluded from the
transfer referred to in Article 1 and as from receipt by the Assignor of such
notice:
(a) neither the Assignor nor the Assignee shall have any further
obligation to the other with regard to the transfer to the Assignee of
that Assigned Contract;
(b) the Assignor and the Assignee shall be released from their obligations
to each other with respect to that Assigned Contract and the Assignor
shall reimburse the Assignee, and shall fully indemnify it against, all
payments made or costs incurred by the Assignee in prior performance of
those obligations after making due allowance for any payments or other
benefits under the Assigned Contract which have been received by the
Assignee; and
(c) the Assignor shall procure that the Assigned Contract is terminated as
soon as practicable and the Assignor shall be solely liable for, and shall
fully indemnify and keep the Assignee indemnified against, all
liabilities, claims, expenses, losses or damages arising under the
Assigned Contract or in respect of its termination and the release of the
Assignor from all further obligations under it.
5.11. Third Party consents. At its own expense the Assignor will give any
notices to third parties, and will use its reasonable efforts to obtain any
third party consents, that the Assignee may request in connection with the
transaction contemplated by this Agreement, including, but not limited to, those
consents listed in Schedule 5.11. Each party to this Agreement will give notices
to, make any filings with, and use its reasonable best efforts to obtain any
authorisations, consents, and approvals of governments and governmental agencies
in connection with, the transactions contemplated by this Agreement.
ARTICLE 6
INDEMNIFICATION
6.1. The Assignor's Indemnification Obligations. Subject to the terms and
conditions of this Article 6, the Assignor agrees to defend, indemnify and hold
the Assignee, its affiliates and assigns and their respective officers,
directors, agents, attorneys, employees and representatives harmless from and
against any and all liabilities, losses, costs, damages, expenses, penalties,
deficiencies, fines and Taxes, including, without limitation, reasonable legal
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and other expenses (collectively, "Damages"), directly or indirectly arising out
of, resulting from or relating to:
(a) any breach of any representation, warranty, covenant, agreement or
obligation of the Assignor contained in this Agreement;
(b) any Excluded Liability;
(c) the conduct of the Business, and the ownership, use and operation of
the Transferred Assets, on or prior to the Closing Date; and
(d) the use, operation or ownership of the Excluded Assets prior to or
after Closing including, without limitation, the Excluded Software.
6.2. The Assignee's Indemnification Obligations. Subject to the terms and
conditions of this Article 6, the Assignee agrees to defend, indemnify and hold
the Assignor, its affiliates, officers, directors, agents, attorneys, employees
and representatives harmless from and against any and all Damages directly or
indirectly arising out of, resulting from or relating to:
(a) any breach of any representation, warranty, covenant, agreement or
obligation of the Assignee contained in this Agreement; or
(b) any Assumed Liability (including, without limitation, any failure by
the Assignee to perform pursuant hereto the obligations to be performed by
it after the Closing under any Assigned Contracts or the use, operation or
ownership of the Transferred Assets or operation of the Business after
Closing).
6.3. Claims for Indemnification; Defence of Indemnified Claims. For
purposes of this Section, the party entitled to indemnification shall be
referred to as the Indemnified Party and the party required to indemnify shall
be referred to as the Indemnifying Party. In the event that the Indemnifying
Party shall be obligated to the Indemnified Party pursuant to this Article 6 or
in the event that a suit, action, investigation, claim or proceeding is begun,
made or instituted as a result of which the Indemnifying Party may become
obligated to the Indemnified Party hereunder, the Indemnified Party shall give
prompt written notice to the Indemnifying Party of the occurrence of such event,
specifying the basis for such claim or demand, and the amount or estimated
amount thereof to the extent then determinable (which estimate shall not be
conclusive of the final amount of such claim or demand); provided, however, that
the failure to give such notice shall not constitute a waiver of the right to
indemnification hereunder, except to the extent that the Indemnifying Party is
actually prejudiced in a material respect thereby. The Indemnifying Party agrees
to defend, contest or otherwise protect against any such suit, action,
investigation, claim or proceeding at the Indemnifying Party's own cost and
expense with counsel of its own choice, who shall be, however, reasonably
acceptable to the Indemnified Party. The Indemnifying Party may not make any
compromise or settlement without the prior written consent of the Indemnified
Party (which will not be unreasonably withheld or delayed) and the
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Indemnified Party shall receive a full and unconditional release reasonably
satisfactory to it pursuant to such compromise or settlement. The Indemnified
Party shall have the right but not the obligation to participate at its own
expense in the defence thereof by counsel of its own choice. If requested by the
Indemnifying Party, the Indemnified Party shall (at the Indemnifying Party's
expense) (i) cooperate with the Indemnifying Party and its counsel in contesting
any claim or demand which the Indemnifying Party defends, (ii) provide the
Indemnifying Party with reasonable access during normal business hours to its
books and records to the extent that such books and records relate to the
condition or operation of the Business and are requested by the Indemnifying
Party to perform its indemnification obligations hereunder, and to make copies
of such books and records, and (iii) make personnel available to assist in
locating any books and records relating to the Business or whose assistance,
participation or testimony is reasonably required in anticipation of,
preparation for, or the prosecution and defence of, any claim subject to this
Article 6. In the event that the Indemnifying Party fails timely to defend,
contest or otherwise protect the Indemnified Party against any such suit,
action, investigation, claim or proceeding, the Indemnified Party shall have the
right to defend, contest or otherwise protect the Indemnified Party against the
same and may make any compromise or settlement thereof and recover the entire
cost thereof from the Indemnifying Party, including, without limitation,
reasonable attorneys' fees, disbursements and all amounts paid as a result of
such suit, action, investigation, claim or proceeding or compromise or
settlement thereof.
6.4. Payments; Non-Exclusivity Payments; Non-Exclusivity. Any amounts due
to an Indemnified Party under this Article 6 shall be due and payable by the
Indemnifying Party within fifteen (15) business days after (i) in the case of a
claim which does not involve any third party, receipt of written demand therefor
and (ii) in the case of a claim which involves a third party, the final
disposition of such claim or demand, provided legal and other out-of-pocket
costs and expenses are reimbursed currently within fifteen (15) business days
after demand therefor. The remedies conferred in this Article 6 are intended to
be without prejudice to any other rights or remedies available at law or equity
to the Indemnified Parties, now or hereafter.
ARTICLE 7
CONDITIONS TO THE ASSIGNEE'S OBLIGATIONS
The obligations of the Assignee to consummate the transactions
contemplated hereby shall be subject to the fulfillment on or prior to the
Closing Date of the following conditions any, or all of which may be waived in
whole or in part by the Assignee to the extent permitted by applicable law:
7.1. Representations, Warranties and Covenants of the Assignor. The
Assignor shall have complied in all material respects with all of its agreements
and covenants contained herein (including the obligations of the Assignor to
deliver the documents specified in Section 1.5) to be performed at or prior to
the Closing Date, and all of the representations and warranties of the
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Assignor contained herein shall be true in all material respects on and as of
the Closing Date with the same effect as though made on and as of the Closing
Date, except to the extent that such representations and warranties were made as
of a specified date and, as to such representations and warranties, the same
shall continue on the Closing Date to have been true in all material respects as
of the specified date.
7.2. Other Consents and Filings. All material approvals and consents of or
filings with governmental or regulatory authorities, and all material approvals
and consents of any other persons (including, without limitation, all third
party consents under each of the Assigned Contracts), required to permit the
consummation of all of the transactions contemplated hereby shall have been
obtained or made, as the case may be, to the reasonable satisfaction of the
Assignee; provided, however, that it shall not be a condition to Assignee's
obligation to close the transactions contemplated hereby if the failure to
obtain any such approvals, consents or filings would not be material to the
Business or the Transferred Assets. For purposes of this Section 7.2, it is
understood and agreed that the failure to obtain any of the approvals, consents
and filings listed in Schedule 7.2 shall be deemed to be material to the
Business or the Transferred Assets.
7.3. Absence of Litigation. No proceeding, action, suit, investigation,
litigation or claim challenging the legality of, or seeking to restrain,
prohibit or modify the transactions contemplated by this Agreement or the
Additional Agreements shall have been instituted and not settled or otherwise
terminated.
7.4. No Prohibition. No law, statute, rule or regulation or injunction,
order, judgment, ruling, decree or settlement of any court or administrative
agency shall be in effect which prohibits the Assignee from consummating the
transactions contemplated hereby or operating any Transferred Asset after the
Closing Date.
ARTICLE 8
CONDITIONS TO THE ASSIGNOR'S OBLIGATIONS
The obligations of the Assignor to consummate the transactions
contemplated hereby shall be subject to the satisfaction (or waiver by the
Assignor) on or prior to the Closing Date of all of the following conditions:
8.1. Representations, Warranties and Covenants of the Assignee. The
Assignee shall have complied in all material respects with all of its agreements
and covenants contained herein (including the obligation of the Assignee to
deliver the documents specified in Section 1.5) to be performed at or prior to
the Closing Date, and all of the representations and warranties of the Assignee
contained herein shall be true in all material respects on and as of the Closing
Date with the same effect as though made on and as of the Closing Date, except
to the extent that such
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representations and warranties were made as of a specified date and, as to such
representations and warranties, the same shall continue on the Closing Date to
have been true in all material respects as of the specified date.
8.2. No Prohibition. No law, statute, rule or regulation or injunction,
order, judgment, ruling, decree or settlement of any court or administrative
agency shall be in effect which prohibits the Assignor from consummating the
transactions contemplated hereby.
ARTICLE 9
TERMINATION PRIOR TO CLOSING
9.1. Termination. This Agreement may be terminated at any time prior to
the Closing:
(a) by the mutual written consent of the Assignee and the Assignor; or
(b) by either the Assignor or the Assignee in writing, without liability
to the terminating party on account of such termination (provided that the
terminating party is not otherwise in breach of this Agreement), if there
shall have been a material breach by the other party of its
representations, warranties, covenants or agreements contained herein, the
non-breaching party has notified the breaching party of the breach, and
the breach has continued without cure for a period of 30 days after such
notice of breach.
9.2. Effect on Obligations. Termination of this Agreement pursuant to this
Article shall terminate all obligations of the parties hereunder; provided,
however, that termination pursuant to paragraph (b) of Section 9.1 shall not
relieve any party that breached its covenants or agreements contained herein or
in any related agreement from any liability to the other party hereto by reason
of such breach.
ARTICLE 10
MISCELLANEOUS
10.1. Successors and Assigns. This Agreement shall not be assignable by
the Assignee without the prior written consent of the Assignor. The terms and
conditions of this Agreement shall inure to the benefit of and be binding upon
the respective successors and permitted assigns of the parties hereto.
10.2. Headings. The headings of the Articles and Sections of this
Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction hereof.
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10.3. Modification and Waiver. No amendment, modification or alteration of
the terms or provisions of this Agreement shall be binding unless the same shall
be in writing and duly executed by the parties hereto; provided, however, that
each amendment, modification, alteration or waiver hereof or hereunder must be
approved by a majority of the outside directors of eSpeed, Inc.. For purposes of
this Agreement, an outside director shall mean a director who is not an
employee, partner or affiliate (other than solely by reason of being an eSpeed,
Inc. director) of eSpeed, Inc., Cantor Fitzgerald, L.P. or any of their
respective affiliates. No waiver of any of the provisions of this Agreement
shall be deemed to or shall constitute a waiver of any other provision hereof
(whether or not similar). No delay on the part of any party in exercising any
right, power of privilege hereunder shall operate as a waiver thereof.
10.4. Broker's Fees. Each party represents and warrants that no broker,
finder or investment banker is entitled to any brokerage, finder's or other fee
or commission in connection with the transactions contemplated hereby.
10.5. Expenses. The Assignor and the Assignee shall pay its own costs and
expenses incurred in connection with the preparation and execution and delivery
of this Agreement, including, without limiting the generality of the foregoing,
fees and expenses of financial consultants, accountants and counsel provided
that the Assignee shall bear the cost of any stamp duty, stamp duty reserve and
similar taxes in connection with any transfer of assets pursuant to this
Agreement. The obligation to pay expenses pursuant to this Section 10.5 shall
not in any way limit or expand any obligation of the Assignor or the Assignee to
bear and pay costs and expenses relating to the actual assignment of Transferred
Assets pursuant to Section 1.1.
10.6. Notices. Any notice, request, instruction or other document to be
given hereunder by either party hereto to the other party shall be in writing
and delivered personally or sent by electronic facsimile transmission, by
overnight courier or by registered or certified mail, postage prepaid,
If to the Assignor to:
Cantor Fitzgerald International
One America Square
London EC3N 2LS
Attention: General Counsel
Fax Number: 0171 894 7553
If to the Assignee to:
eSpeed Securities International Limited
One America Square
London EC3N 2LS
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Attention: General Counsel
Fax Number: 0171 894 7553
If to CFIHLP:
One World Trade Center, 105 Floor
New York, NY 10048
Attention: General Counsel
Fax Number: + 212 938 3620
or at such other address for a party as shall be specified by like notice. Any
notice which is delivered personally or by a form of written telecommunications
in the manner provided herein shall be deemed to have been duly given to the
party to whom it is directed upon the actual receipt by such party. Any notice
which is addressed and sent in the manner herein provided shall be conclusively
presumed to have been duly given to the party to which it is addressed at the
close of business, local time of the recipient, on the first day, if mailed by
overnight courier, and otherwise on the third day, after the day it is so sent.
10.7. Governing Law. This Agreement shall be construed in accordance with
and governed by the laws of England applicable to agreements made and to be
performed wholly within such jurisdiction. Each of the parties hereto hereby
irrevocably and unconditionally consents to submit to the exclusive jurisdiction
of the High Court of Justice in England for any litigation arising out of or
relating to this agreement and the transactions contemplated hereby (and agrees
not to commence any litigation relating thereto except in such courts), and
further agrees that service of any process, summons, notice or document by
registered mail to its respective address set forth in section 10.6 shall be
effective service of process for any litigation brought against it in such
court. Each of the parties hereto hereby irrevocably and unconditionally waives
any objection to the laying of venue of any litigation arising out of this
agreement or the transactions contemplated hereby in the High Court of Justice
in England, and hereby further irrevocably and unconditionally waives and agrees
not to plead or claim in any such court that any such litigation brought in any
such court has been brought in an inconvenient forum.
10.8. Other Covenants. Subject to Section 7.2, to the extent that any
consents needed to assign to the Assignee any of the Transferred Assets have not
been obtained on or prior to the Closing Date, this Agreement shall not
constitute an assignment or attempted assignment thereof if such assignment or
attempted assignment would constitute a breach thereof. If any such consent
shall not be obtained on or prior to the Closing Date, then (i) the Assignee and
the Assignor, if required under applicable law, shall use their reasonable best
efforts in good faith to obtain such consent as promptly as practicable
thereafter (provided that reasonable best efforts shall not include the payment
of monies to any third party) and (ii) until such consent is obtained, the
parties shall use reasonable efforts in good faith to cooperate and to cause
each of their
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respective affiliates to cooperate, in any lawful arrangement (including
licensing, subleasing or subcontracting if permitted) designed to provide to the
Assignee the operational and economic benefits under any such Transferred
Assets.
10.9. Disclosure Schedule and Exhibits; Entire Agreement. The Disclosure
Schedules, and all exhibits and attachments to the Disclosure Schedules, an all
exhibits to, and documents expressly incorporated into this Agreement, and any
other attachments to this Agreement are hereby incorporated into this Agreement
and are made a part hereof as if set out in full in this Agreement. This
Agreement (and the agreements, certificates and other documents delivered
hereunder), unless otherwise provided herein, supersedes all other prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof and constitutes the entire agreement among
the parties hereto with respect to the subject matter hereof.
10.10. Further Assurances. At its own expense each party hereto shall
execute, deliver, file and record, or cause to be executed, delivered, filed and
recorded, such further agreements, instruments and other documents and take, or
cause to be taken, such further actions, as the other party may reasonably
request as being necessary or advisable to effect or evidence the transactions
contemplated by this Agreement. Furthermore, each party hereto agrees to comply
with all applicable laws relating to the conduct of its business.
10.11. Survival of Representations and Warranties. All of the
representations and warranties of the Assignor and the Assignee contained in
this Agreement shall survive Closing (even if the damaged party knew or had
reason to know of any misrepresentation or breach of warranty at the time of
Closing) and continue in full force and effect for ten (10) years thereafter
(subject to any applicable statutes of limitations).
10.12. Invalid Provisions. If any provision of this Agreement is held to
be illegal, invalid or unenforceable, and if the rights or obligations of any
party hereto under this Agreement will not be materially and adversely affected
thereby, (i) such provision will be fully severable, (ii) this Agreement will be
construed and enforced as if such illegal, invalid or unenforceable provision
had never comprised a part hereof, (iii) the remaining provisions of this
Agreement will remain in full force and effect and will not be affected by the
illegal, invalid or unenforceable provision or by its severance herefrom and
(iv) in lieu of such illegal, invalid or unenforceable provision, there will be
added automatically as a part of this Agreement a legal, valid and enforceable
provision as similar in terms to such illegal, invalid or unenforceable
provision as may be possible.
10.13. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original,
and all of which shall constitute the same instrument.
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IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed on its behalf as of the date first above written.
SIGNED by ) Lee Amaitis
for and on behalf of ) Chief Executive Officer and President
CANTOR FITZGERALD )
INTERNATIONAL )
SIGNED by ) Lee Amaitis
for and on behalf of ) Director
eSPEED SECURITIES )
INTERNATIONAL LIMITED )
SIGNED by ) Douglas B. Gardner
for and on behalf of ) Senior Managing Director
CANTOR FITZGERALD )
INTERNATIONAL HOLDINGS L.P. )
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================================================================================
JOINT SERVICES AGREEMENT
among
CANTOR FITZGERALD, L.P.,
CANTOR FITZGERALD SECURITIES,
CANTOR FITZGERALD & CO.,
CFPH, L.L.C.,
CANTOR FITZGERALD PARTNERS,
CANTOR FITZGERALD INTERNATIONAL,
CANTOR FITZGERALD GILTS,
eSPEED, INC.,
eSPEED SECURITIES, INC.,
eSPEED GOVERNMENT SECURITIES, INC.,
eSPEED MARKETS, INC.
and
eSPEED SECURITIES INTERNATIONAL LIMITED
Dated as of December 15, 1999
================================================================================
<PAGE>
JOINT SERVICES AGREEMENT
This JOINT SERVICES AGREEMENT is made and entered into as of December 15,
1999, among Cantor Fitzgerald, L.P., a Delaware limited partnership ("CFLP"),
Cantor Fitzgerald International, an English unlimited liability company ("CF
International"), Cantor Fitzgerald Gilts, an English unlimited liability company
("CF Gilts"), Cantor Fitzgerald Securities, a New York general partnership
("CFS"), Cantor Fitzgerald & Co., a New York general partnership ("CF&Co"),
CFPH, L.L.C., a Delaware limited liability company ("CFPH"), and Cantor
Fitzgerald Partners, a New York general partnership ("CFP" and, together with
CFLP, CF International, CF Gilts, CFS, CF&Co and CFPH, the "Executing Cantor
Parties" and, together with the other Executing Cantor Parties and each
subsidiary of CFLP that becomes a party to this Agreement, the "Cantor
Parties"), on the one hand, and eSpeed, Inc., a Delaware corporation ("eSpeed"),
eSpeed Securities, Inc., a Delaware corporation and a wholly-owned subsidiary of
eSpeed ("eSpeed Securities"), eSpeed Government Securities, Inc., a Delaware
corporation and a wholly-owned subsidiary of eSpeed ("eSpeed GS"), eSpeed
Securities International, Limited, a U.K. private limited company and a
wholly-owned subsidiary of eSpeed ("eSpeed International"), and eSpeed Markets,
Inc., a Delaware corporation and a wholly-owned subsidiary of eSpeed ("eSpeed
Markets" and, together with eSpeed, eSpeed Securities, eSpeed GS and eSpeed
International, the "Executing eSpeed Parties" and, together with the other
Executing eSpeed Parties and each subsidiary of eSpeed that becomes a party to
this Agreement, the "eSpeed Parties"), on the other hand. All capitalized terms
used in this Agreement and not otherwise defined shall have the meanings
ascribed to such terms in Section 1 of this Agreement. Each subsidiary of CFLP
and eSpeed will automatically become a party to this Agreement, unless it
becomes a party to a substantially identical separate agreement.
W I T N E S S E T H:
WHEREAS, the Executing Cantor Parties are engaged in, among other things,
the business of creating, developing and operating Marketplaces in and through
which buyers and sellers of fixed- income securities, futures contracts,
commodities and other Financial Products may effect transactions in those
Financial Products;
WHEREAS, certain of the Marketplaces operated by the Executing Cantor
Parties are Electronic Marketplaces;
WHEREAS, pursuant to an Assignment and Assumption Agreement of even date
herewith, certain of the Executing Cantor Parties are contributing to eSpeed
their Electronic Trading Systems assets;
WHEREAS, from and after the Closing, the eSpeed Parties and the Cantor
Parties wish to collaborate in providing brokerage services to customers through
the existing Electronic Marketplaces, and in creating and developing Electronic
Marketplaces for new Financial Products and other Products; and
WHEREAS, from and after the Closing, the eSpeed Parties wish to provide
Ancillary IT Services to the Cantor Parties in consideration for the fees herein
provided;
<PAGE>
NOW, THEREFORE, in consideration of the premises contained herein, it is
agreed as follows:
1. Defined Terms. For purposes of this Agreement, the following terms have
the meanings specified or referred to in this Section 1:
"Ancillary IT Services" means technology support services,
including, but not limited to, (i) systems administration, (ii) internal network
support, (iii) support and procurement for desktops of end-user equipment, (iv)
operations and disaster recovery services, (v) voice and data communications,
(vi) support and development of systems for Clearance, Settlement and
Fulfillment Services, (vii) systems support for Cantor Party brokers, (viii)
electronic applications systems and network support and development for
Unrelated Dealer Businesses and (ix) provision and/or implementation of existing
electronic applications systems, including all improvements and upgrades
thereto, and use of the related intellectual property rights, having potential
application in a Gaming Business (as defined under "Unrelated Dealer Business"
below).
"Cantor Exchange" means Cantor Financial Futures Exchange, Inc. and
any successor thereto or to the operations thereof.
"Cantor Services" means any one of, or any combination of, Voice
Assisted Brokerage Services, Clearance, Settlement and Fulfillment Services and
Related Services.
"Clearance, Settlement and Fulfillment Services" means all such
services as are necessary to clear, settle and fulfill, or arrange settlement or
fulfillment as a name give-up or other intermediary of, in accordance with
customary market practice and taking into account applicable regulatory
requirements, a purchase and sale of a particular Product, including, but not
limited to, collection of money; arrangement of delivery of Products; receipt,
delivery and maintenance of margin and collateral, if appropriate; dealing with
issues relating to failures to receive or deliver payments or Products; and
collection and payment of transfer or similar taxes, to the extent applicable to
such Product. Clearance, Settlement and Fulfillment Services may include, but
are not limited to, acting as a riskless principal or other intermediary between
the buyer and the seller of a Product.
"Closing" means the Closing under the Assignment and Assumption
Agreement.
"Collaborative Marketplace" means an Electronic Marketplace that is
operated by a Cantor Party and an eSpeed Party in collaboration pursuant to
Section 3 of this Agreement. All Marketplaces shall be Collaborative
Marketplaces, unless otherwise determined in accordance with this Agreement.
"Electronic Brokerage Services" means the effecting of transactions
in, and purchases and sales of, a Product on an Electronic Marketplace in and
through the operation of an Electronic Trading System. Electronic Brokerage
Services include, but are not limited to, the provision and operation of network
distribution systems, transaction processing systems and customer interface
systems, in each case that are related to the effecting of transactions in, and
purchases and sales of, a Product on an Electronic Marketplace. Electronic
Brokerage Services do not include Voice Assisted Brokerage Services, Clearance,
Settlement and Fulfillment Services, Information Services or Related Services.
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"Electronic Marketplace" means a Marketplace on which transactions
in, and purchases and sales of, Products may be effected in whole or in part
electronically, but does not include a Marketplace that is merely electronically
assisted, such as screen assisted open outcry.
"Electronic Trading System" means, as to any Electronic Marketplace,
the hardware, software, network infrastructure and other similar assets that are
used to effect purchases and sales in that Electronic Marketplace.
"eSpeed Marketplace" means a Marketplace (i) in which an eSpeed
Party renders Electronic Brokerage Services and (ii) that is not a Collaborative
Marketplace.
"Financial Product" means any financial asset or financial
instrument, any intangible commodity or any tangible fungible commodity,
including, but not limited to, any security, futures contract, foreign exchange
transaction, swap transaction, credit derivative, repurchase or reverse
repurchase obligation, currency or swap (as currently defined in the Federal
Bankruptcy Code of 1978) or any option or derivative on any of the foregoing.
"Information" means information relating to bids, offers or trades,
or any other information, that is input into, created by or otherwise resides on
an Electronic Trading System.
"Information Services" means the provision of Information to a
Person with respect to a Marketplace as a separate service not in connection
with transactions by such Person on such Marketplace. Information Services shall
not include the provision of Information to purchasers and sellers of a Product
incident to the provision of Electronic Brokerage Services and/or Voice Assisted
Brokerage Services to such customers.
"Marketplace" means a marketplace operated or to be operated by the
Cantor Parties and/or the eSpeed Parties in and through which buyers and sellers
of a Product may effect transactions in the Product.
"New Market Notice" means, with respect to a Marketplace, a written
notice describing with reasonable specificity the anticipated nature, general
level of volume and trading needs of that Marketplace.
"Person" means any corporation, general or limited partnership,
limited liability company, joint venture, estate, trust, association,
organization or other entity or governmental or regulatory authority or agency.
"Product" means any tangible or intangible asset or good.
"Product or Pricing Decisions" means, as to an Electronic
Marketplace for a particular Product, (i) the definition of the Product, (ii)
the hours of operation of the Marketplace, (iii) the rules relating to trading
priority, incentives and other trading related issues and (iv) the rates and
schedules of commissions and other Transaction Revenues for the Marketplace,
including any variation thereof for particular customers or classes of
customers.
"Related Services" includes (i) credit and risk management services,
(ii) services related to sales positioning of Products, (iii) oversight of
customer suitability and regulatory compliance and (iv) such other services
customary to brokerage operations as are agreed to by CFLP and eSpeed.
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"Transaction Revenues" means the standard fees, commissions,
spreads, markups or other similar standard amounts received from a customer in
connection with effecting transactions in a Marketplace.
"Unrelated Dealer Businesses" means (i) the equity businesses of the
Cantor Parties as they may exist from time to time, (ii) the money market
instruments and securities lending divisions of the Cantor Parties as they may
exist from time to time, (iii) any business or portion thereof or activity in
which a Cantor Party 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, (iv) activities wherever located that would, if conducted
in the United Kingdom, be subject to the United Kingdom Gaming Act of 1963 or
activities wherever located currently or in the future involving betting,
gambling, odds making, lotteries, gaming, wagering, staking, drawing or casting
lots and similar or related activities (each a "Gaming Business") and (v) any
business not involving operating a Marketplace.
"Voice Assisted Brokerage Services" means the effecting of
transactions in, and purchases and sales of, a Product on an Electronic
Marketplace in and through a broker or other human intermediary, in each case
who is an employee of, or providing services to, a Cantor Party. Voice Assisted
Brokerage Services include the entry of an order by a broker or other human
intermediary into the Electronic Trading System.
2. Term. The term of this Agreement shall commence as of the Closing and
shall be in effect perpetually, unless sooner ended by the mutual agreement, in
writing, of CFLP and eSpeed (the "Term").
3. Joint Services in Collaborative Marketplaces.
(a) Subject to the terms and conditions stated herein, the Cantor
Parties and the eSpeed Parties intend to collaborate in providing brokerage
services to customers in and through Electronic Marketplaces. In any case in
which the Cantor Parties and the eSpeed Parties do so collaborate, the
Marketplace shall be a Collaborative Marketplace and the respective authority,
responsibilities and obligations of the parties shall be governed by this
Section 3.
(b) The parties agree that the Electronic Marketplaces that are
managed by the Cantor Parties prior to the date hereof, all of which are listed
by Product on Annex A hereto, shall be Collaborative Marketplaces governed by
this Section 3. The determination as to whether a Marketplace that is created
after the date hereof is to be a Collaborative Marketplace governed by this
Section 3 shall be made in accordance with Section 7 of this Agreement.
(c) In the case of each Collaborative Marketplace, any Product or
Pricing Decision shall be made jointly by the Cantor Parties and the eSpeed
Parties. If the parties are unable to agree on a particular Product or Pricing
Decision after good faith efforts to do so, then the final Product or Pricing
Decision shall be made by (i) a Cantor Party, in the case of a Marketplace or
the portion thereof in which or for which a Cantor Party provides any Voice
Assisted Brokerage Services, and (ii) an eSpeed Party, in the case of a fully
electronic Marketplace (that is, a Marketplace in which no Cantor Party provides
Voice Assisted Brokerage Services) or the portion of a Marketplace that is fully
electronic; provided, however, that no Product and Pricing Decision made by an
eSpeed Party with respect to a fully electronic Marketplace shall result in the
Cantor Party's share of Transaction Revenues for the transactions effected in
the Marketplace being less than the amount necessary to
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cover the Cantor Party's actual costs of providing Cantor Services in connection
with such Marketplace.
(d) In the case of each Collaborative Marketplace, the applicable
eSpeed Party (i) shall own and operate the Electronic Trading System associated
with the Electronic Marketplace, (ii) shall be responsible, as between the
parties, for the provision of Electronic Brokerage Services to customers and
(iii) except as provided above with respect to Product or Pricing Decisions,
shall have reasonable discretion as to the manner and means of operating the
Electronic Trading System and providing Electronic Brokerage Services to
customers and Cantor brokers in connection therewith.
(e) In the case of each Collaborative Marketplace, the applicable
Cantor Party (i) shall be responsible, as between the parties, for the provision
of Cantor Services to customers and (ii) except as provided above with respect
to Product or Pricing Decisions, shall have reasonable discretion as to the
manner and means of providing the Cantor Services. The applicable Cantor Party
shall be responsible for maintenance of books and records and compliance with
applicable securities laws, rules and regulations, as determined by the
applicable Cantor Party. CFP and CF & Co shall be responsible for compliance
with the reporting requirements under Regulation ATS and related provisions of
the Securities Exchange Act of 1934, as amended. In that regard, CFP and CF & Co
each will be the broker for all transactions in the respective matching systems,
and each will determine the various non-discretionary parameters under which
transactions match in their respective systems. eSpeed Securities and eSpeed GS
shall cooperate with CFP and CF & Co in all regulatory compliance matters and,
if applicable, in complying with Regulation ATS.
(f) Without limiting the authority of the parties in their
respective areas of responsibility pursuant to paragraphs (d) and (e), the
parties recognize the importance of providing an integrated and seamless service
to customers. Accordingly, the parties shall consult diligently and in good
faith, as and as often as necessary, to ensure that their respective services
are properly integrated.
(g) All information and data, other than Information, created,
developed, used in connection with or relating to the operation of and effecting
of transactions in any Marketplace ("Data") shall constitute the sole property
of the Cantor Parties or the eSpeed Parties, as applicable, on the following
basis: (i) if the Data relate to Financial Products, the Data shall belong
solely to the Cantor Parties, (ii) if the Data relate to a Collaborative
Marketplace in which only Products that are not Financial Products are traded,
the ownership of the Data shall be determined by the Cantor Parties and the
eSpeed Parties on a case-by-case basis based on good faith negotiations, (iii)
if the Data relate to an eSpeed Marketplace in which only Products that are not
Financial Products are traded, the Data shall belong solely to the eSpeed
Parties and (iv) if the Data relate to a non-Collaborative Marketplace that is
not an eSpeed Marketplace and in which Financial Products are traded, the Data
shall belong solely to the Cantor Parties. All Information relating to Financial
Products transmitted and disseminated on or through the Electronic Marketplace
shall be the sole property of the Cantor Parties and, as between the parties,
the Cantor Parties shall have the sole and exclusive right to use, publish and
be compensated for Information Services in connection with or relating to such
Information; provided, however, in the case of each Collaborative Marketplace,
that the eSpeed Parties shall have the right (without any obligation to pay the
Cantor Parties therefor) to use such Information in connection with the
execution of transactions in the applicable Collaborative Marketplace.
(h) To such extent as is consistent with the Cantor Parties' own
businesses of providing Electronic Brokerage Services in Marketplaces that are
not Collaborative Marketplaces, the
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Cantor Parties shall promote and market eSpeed Marketplaces for effecting
transactions in Financial Products, and shall refer customers and prospective
customers to the applicable eSpeed Parties in an effort to cause such customers
to effect transactions in Financial Products in eSpeed Marketplaces.
4. Sharing of Transaction Revenues. The Cantor Parties and the eSpeed
Parties agree to share Transaction Revenues with regard to transactions effected
through Marketplaces in the following manner:
(a) If (i) the Electronic Marketplace is a Collaborative
Marketplace, (ii) the transaction relates to a Financial Product (other than a
Financial Product that is traded on the Cantor Exchange) and (iii) no Cantor
Party provides Voice Assisted Brokerage Services in connection with the
transaction to which the Transaction Revenues relate (that is, the transaction
is fully electronic), then the applicable eSpeed Party will receive the
aggregate Transaction Revenues and will pay to the applicable Cantor Party a
service fee equal to 35% of the Transaction Revenues.
(b) If (i) the Electronic Marketplace is a Collaborative
Marketplace, (ii) the transaction relates to a Financial Product (other than a
Financial Product that is traded on the Cantor Exchange) and (iii) a Cantor
Party provides Voice Assisted Brokerage Services in connection with the
transaction to which the Transaction Revenues relate, then the applicable Cantor
Party will receive the aggregate Transaction Revenues and will pay to the
applicable eSpeed Party a service fee equal to 7% of the Transaction Revenues.
(c) If (i) the Electronic Marketplace is a Collaborative
Marketplace, (ii) the transaction relates to a Product that is traded on the
Cantor Exchange and (iii) no Cantor Party provides Voice Assisted Brokerage
Services in connection with the transaction to which the Transaction Revenues
relate (that is, the transaction is fully electronic), then the applicable
eSpeed Party will receive the aggregate Transaction Revenues and will pay to the
applicable Cantor Party a service fee equal to 20% of the Transaction Revenues.
(d) If (i) the Electronic Marketplace is a Collaborative
Marketplace, (ii) the transaction relates to a Product that is traded on the
Cantor Exchange and (iii) a Cantor Party provides Voice Assisted Brokerage
Services in connection with the transaction to which the Transaction Revenues
relate, then the applicable eSpeed Party will receive the aggregate Transaction
Revenues and will pay to the applicable Cantor Party a service fee equal to 55%
of the Transaction Revenues.
(e) If (i) the Electronic Marketplace is a Collaborative Marketplace
and (ii) the transaction relates to a Product that (x) is not a Financial
Product and (y) is not traded on the Cantor Exchange, then the applicable Cantor
Party and the applicable eSpeed Party will share Transaction Revenues in such
manner as they shall agree.
(f) If (i) the Electronic Marketplace is an eSpeed Marketplace and
(ii) the transaction relates to a Financial Product, then the applicable eSpeed
Party will receive the aggregate Transaction Revenues and will pay to CFLP a
service fee equal to 20% of the Transaction Revenues.
(g) If (i) the Electronic Marketplace is an eSpeed Marketplace and
(ii) the transaction relates to a Product other than a Financial Product, then
the applicable eSpeed Party will receive and retain all of the Transaction
Revenues.
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(h) If (i) a transaction is effected in an Electronic Marketplace
that is not a Collaborative Marketplace and is not an eSpeed Marketplace, but
that is a Marketplace in which Cantor provides Electronic Brokerage Services,
and (ii) the transaction relates to a Financial Product, then the applicable
Cantor Party will receive the aggregate Transaction Revenues and pay to eSpeed a
service fee equal to 30% of the amount eSpeed would have received pursuant to
Section 4 (a) or 4 (b) of this Agreement if the Marketplace had been a
Collaborative Marketplace. For purposes of this paragraph (h), the Transaction
Revenues shall be reduced by the costs incurred or paid by a Cantor Party to a
third party to provide or arrange for the provision of Electronic Brokerage
Services.
(i) If a transaction (i) is not effected through an Electronic
Marketplace, but (ii) is electronically assisted (by way of example, but not
limited to, a screen-assisted open outcry transaction), then the applicable
Cantor Party will receive the aggregate Transaction Revenues and will pay to the
applicable eSpeed Party 2.5% of the Transaction Revenues.
(j) Notwithstanding the foregoing, in the event that a Cantor
Party's direct costs payable to third parties (other than the Cantor Parties and
their affiliates) for providing Clearance, Settlement and Fulfillment Services
with respect to transactions in a Collaborative Marketplace with respect to any
Financial Product for any month exceed the direct costs incurred by the Cantor
Parties to clear and settle cash transactions in United States Treasury
securities for such month, the cost of such excess shall be borne pro rata by
the applicable Cantor Party and the applicable eSpeed Party in the same
proportion as the Transaction Revenues and service fees for such transactions
are to be shared.
(k) For any month, for any Product for which sales and purchases
during such month are effected both through fully electronic transactions and
through voice-brokered transactions, Transaction Revenues earned with respect to
such Product shall be allocated between fully electronic transactions and
voice-brokered transactions as follows: the amount of Transaction Revenues
attributable to fully electronic transactions or voice-brokered transactions, as
the case may be, for such Product during such month in a Marketplace shall be
equal to (x) total Transaction Revenues for such Product for such month in such
Marketplace multiplied by (y) a fraction, the numerator of which is the notional
volume (by currency) of all transactions in such specific Product type for such
month in such Marketplace effected by fully electronic transactions or
voice-brokered transactions, as the case may be, and the denominator of which is
the notional volume (by currency) of all transactions in such specific Product
type for such month in such Marketplace.
(l) In the event that a customer does not pay, or pays only a
portion of, the Transaction Revenues relating to a transaction described in
paragraphs (a) through (i) above (a "Loss Event"), then the relevant Cantor
Party and the relevant eSpeed Party each shall bear its respective share of the
loss arising from the Loss Event in the same proportion as the Transaction
Revenues and service fees for such transaction are to be shared.
(m) All amounts due and payable to a Cantor Party or an eSpeed Party
by the other pursuant to this Section 4 shall be paid in the manner specified in
Section 12 of this Agreement.
(n) In the event that any tax is imposed on Transaction Revenues
with respect to a transaction (other than a Tax on net income), the cost of such
tax will be borne by the applicable eSpeed Party and the applicable Cantor Party
in the same proportion as the Transaction Revenues and service fees for such
transaction are to be shared.
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5. Ancillary IT Services.
(a) During the Term, the eSpeed Parties shall provide Ancillary IT
Services to the Cantor Parties.
(b) CFLP shall pay to eSpeed in consideration for the Ancillary IT
Services an amount equal to the direct and indirect costs, including overhead,
that the eSpeed Parties incur in performing those services.
6. Representations and Warranties.
(a) Organization and Good Standing.
(i) Each Executing Cantor Party is duly organized, validly
existing and in good standing under the laws of the state of its
incorporation or organization, as the case may be. Each Executing Cantor
Party has the requisite power and authority to execute, deliver and
perform this Agreement and to consummate the transactions contemplated
hereby.
(ii) Each Executing eSpeed Party is duly organized, validly
existing and in good standing under the laws of the state or other
jurisdiction of its incorporation or organization, as the case may be.
Each Executing eSpeed Party has the requisite power and authority to
execute, deliver and perform this Agreement and to consummate the
transactions contemplated hereby.
(b) Authority; Binding Effect; No Conflicts.
(i) Each Executing Cantor Party has taken all necessary
actions to authorize the execution and delivery of this Agreement and to
perform all of its obligations under, and to consummate the transactions
contemplated by, this Agreement. This Agreement has been duly and validly
executed by each of the Executing Cantor Parties. This Agreement
constitutes the valid and binding obligation of each of the Executing
Cantor Parties enforceable against each of the Executing Cantor Parties in
accordance with its terms, subject to the effect of reorganization,
bankruptcy, insolvency, moratorium, fraudulent conveyance and other
similar laws relating to or affecting creditors' rights generally and
court decisions with respect thereto, and subject to the application of
equitable principles and the discretion of the court (regardless of
whether the enforceability is considered in a proceeding in equity or at
law). The execution, delivery and performance by each of the Executing
Cantor Parties of this Agreement shall not, with or without the giving of
notice or the lapse of time or both, (x) violate any provision of any
federal, state, local or foreign law, statute, rule or regulation to which
any of the Executing Cantor Parties is subject, (y) violate any
injunction, order, judgment, ruling, decree or settlement applicable to
any of the Executing Cantor Parties or (z) conflict with, or result in a
breach or violation of, any provision of the certificate of incorporation,
by-laws, partnership agreement or similar governing document of any of the
Executing Cantor Parties or any lease, contract, agreement, instrument,
undertaking or covenant by which any of the Executing Cantor Parties is
bound.
(ii) Each of the Executing eSpeed Parties has taken all necessary
corporate actions to authorize, execute and deliver this Agreement and to
perform all of its obligations under, and to consummate the transactions
contemplated by, this Agreement. This Agreement has
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been duly and validly executed by each of the Executing eSpeed Parties.
This Agreement constitutes the valid and binding obligation of each of the
Executing eSpeed Parties enforceable against each of the Executing eSpeed
Parties in accordance with its terms, subject to the effect of
reorganization, bankruptcy, insolvency, moratorium, reorganization,
fraudulent conveyance and other similar laws relating to or affecting
creditors' rights generally and court decisions with respect thereto, and
subject to the application of equitable principles and the discretion of
the court (regardless of whether the enforceability is considered in a
proceeding in equity or at law). The execution, delivery and performance
by each of the Executing eSpeed Parties of this Agreement and the
consummation by each of the Executing eSpeed Parties of the transactions
contemplated hereby will not, with or without the giving of notice or the
lapse of time or both, (x) violate any provision of any federal, state or
local law, statute, rule or regulation to which any of the Executing
eSpeed Parties is subject, (y) violate any injunction, order, judgment,
ruling, decree or settlement applicable to any of the Executing eSpeed
Parties, or (z) conflict with, or result in a breach or violation of, any
provision of the certificate of incorporation or by-laws of any of the
Executing eSpeed Parties or any lease, contract, agreement, instrument,
undertaking or covenant by which any of the Executing eSpeed Parties is
bound.
(c) Litigation; No Undisclosed Liabilities. Except as disclosed in
the Prospectus relating to eSpeed's initial public offering, there is no
litigation pending or, to CFLP's knowledge, threatened, which questions the
validity or enforceability of this Agreement or seeks to enjoin the consummation
of any of the transactions contemplated hereby.
7. New Marketplaces; Non-competition; Strategic Alliances.
(a) If a Cantor Party wishes to create a new Marketplace for a
Financial Product, then such Cantor Party may, by providing a New Market Notice
to eSpeed, require eSpeed to provide, or cause another eSpeed Party to provide,
Electronic Brokerage Services with respect to that Marketplace. In such a case,
eSpeed shall use commercially reasonable efforts to develop an Electronic
Trading System for, and to render Electronic Brokerage Services with respect to,
that Marketplace under the terms of this Agreement. If eSpeed is able to develop
and put into operation an Electronic Trading System for the Marketplace within
180 days, then the Marketplace shall be a Collaborative Marketplace and the
operation thereof shall be subject to the provisions of Section 3 of this
Agreement. If, after diligent effort, eSpeed is unable to develop and put into
operation an Electronic Trading System for the Marketplace within 180 days, then
(i) eSpeed shall have no liability to any Cantor Party for its failure to
provide an Electronic Trading System, (ii) the Cantor Party may create and
operate the Marketplace in any manner that the Cantor Party deems to be
acceptable and (iii) the Marketplace shall not be a Collaborative Marketplace.
CFLP agrees that its proposal to create a new Marketplace and the requirements
relating thereto will be commercially reasonable in scope and that CFLP or
another Cantor Party will diligently pursue the development of such Marketplace
in a meaningful way and that failure to do so within two years of the provision
of the New Market Notice will cause any rights of the eSpeed Parties and the
Cantor Parties in this Section 7 and Section 8 of this Agreement to revert to
their original status.
(b) If a Cantor Party wishes to create a new Marketplace for a
Financial Product that will involve the provision of Electronic Brokerage
Services and the Cantor Party does not require eSpeed to operate an Electronic
Trading System and to provide Electronic Brokerage Services for that Marketplace
pursuant to paragraph (a) of this Section 7, then the Cantor Party shall provide
to eSpeed a New Market Notice relating thereto and eSpeed shall have a right of
first refusal to provide
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Electronic Brokerage Services with respect to that Marketplace under the terms
of this Agreement. If eSpeed notifies the Cantor Party that it wishes to provide
Electronic Brokerage Services with respect to the new Marketplace, then eSpeed
shall use commercially reasonable efforts to develop and put into operation an
Electronic Trading System for the Marketplace within 180 days. If eSpeed is able
to develop and put into operation an Electronic Trading System for the
Marketplace within 180 days, then the Marketplace shall be a Collaborative
Marketplace and the operation thereof shall be subject to Section 3 of this
Agreement. If, after diligent effort, eSpeed is unable to develop and put into
operation an Electronic Trading System for the Marketplace within 180 days, or
eSpeed notifies the Cantor Party that it does not wish to provide Electronic
Brokerage Services with respect to the new Marketplace, then (i) the applicable
Cantor Party may provide or obtain from a third party Electronic Brokerage
Services for that Marketplace in any manner that the Cantor Party deems to be
acceptable and (ii) the Marketplace shall not be a Collaborative Marketplace.
CFLP agrees that its proposal to create a new Marketplace and the requirements
relating thereto will be commercially reasonable in scope and that CFLP or
another Cantor Party will diligently pursue the development of such Marketplace
in a meaningful way and that failure to do so within two years of the provision
of the New Market Notice will cause any rights of the eSpeed Parties and the
Cantor Parties in this Section 7 and Section 8 of this Agreement to revert to
their original status.
(c) If a Cantor Party wishes to create a new Electronic Marketplace
for a Product that is not a Financial Product, then the Cantor Party shall
provide to eSpeed a New Market Notice relating thereto. eSpeed or another eSpeed
Party shall have the opportunity to offer to provide Electronic Brokerage
Services with respect to the new Marketplace, which offer the Cantor Party shall
review and negotiate in good faith, but may accept or reject in its reasonable
discretion. If the Cantor Party accepts the eSpeed Party's negotiated terms of
proposed offer to provide Electronic Brokerage Services, then the Marketplace
shall be a Collaborative Marketplace and the operation thereof shall be subject
to Section 3 of this Agreement on such terms as the applicable Cantor Party and
the applicable eSpeed Party shall agree. If the Cantor Party rejects the eSpeed
Party's negotiated terms of proposed offer to provide Electronic Brokerage
Services, then (i) the Marketplace shall not be a Collaborative Marketplace and
(ii) the Cantor Party may create and operate the Marketplace in any manner that
the Cantor Party deems to be acceptable.
(d) If an eSpeed Party wishes to create a new Electronic Marketplace
for a Financial Product, then the eSpeed Party shall provide to CFLP a New
Market Notice relating thereto and CFLP or another Cantor Party shall have a
right of first refusal to provide the applicable Cantor Services with respect to
that Marketplace under the terms of this Agreement. If, within 30 days of
receiving the New Market Notice, CFLP or another Cantor Party notifies the
eSpeed Party that it wishes to provide such Cantor Services with respect to the
new Marketplace, then the Marketplace shall be a Collaborative Marketplace and
the operation thereof shall be subject to Section 3 of this Agreement. If (i)
CFLP notifies the eSpeed Party that it does not wish to provide such Cantor
Services or (ii) CFLP fails to notify the eSpeed Party within the 30-day time
period that it wishes to provide such Cantor Services with respect to the new
Marketplace, then the eSpeed Party may provide or obtain from a third party
those services for that Marketplace in any manner that the eSpeed Party deems to
be acceptable, and the Marketplace shall be an eSpeed Marketplace for purposes
of this Agreement.
(e) If an eSpeed Party wishes to create a new Electronic Marketplace
for a Product that is not a Financial Product, then the eSpeed Party shall
provide to CFLP a New Market Notice relating thereto. CFLP or another Cantor
Party shall have the opportunity to offer to provide Cantor Services with
respect to the new Marketplace if, within 30 days of receiving the New Market
Notice,
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CFLP or another Cantor Party notifies the eSpeed Party that it wishes to provide
such Cantor Services with respect to the new Marketplace. The eSpeed Party shall
review and negotiate the offer of CFLP or the other CFLP Party in good faith,
but may accept or reject that offer in its reasonable discretion. If the eSpeed
Party accepts a Cantor Party's negotiated terms of proposed offer to provide
Cantor Services, then the Marketplace shall be a Collaborative Marketplace and
the operation thereof shall be subject to Section 3 of this Agreement on such
terms as the applicable Cantor Party and the applicable eSpeed Party shall
agree. If the eSpeed Party rejects the Cantor Party's negotiated terms of
proposed offer to provide Cantor Services, then (i) the Marketplace shall not be
a Collaborative Marketplace and (ii) the eSpeed Party may create and operate the
Marketplace in any manner that the eSpeed Party deems to be acceptable.
(f) No eSpeed Party shall, directly, indirectly or in connection
with a third Person, engage in any activities competitive with a business
activity now or hereafter conducted by a Cantor Party or provide or assist any
other Person in providing any Cantor Service, other than (i) in collaboration
with a Cantor Party pursuant to Section 3 of this Agreement, (ii) with respect
to a new Marketplace involving a Financial Product, after CFLP (x) has indicated
that it is unable or unwilling to provide such Cantor Service or (y) fails to
indicate to the eSpeed Party within the prescribed 30-day period that it does
wish to provide such Cantor Service with respect to that Marketplace in
accordance with paragraph (d) of this Section 7, (iii) with respect to a new
Marketplace involving a Product that is not a Financial Product in accordance
with paragraph (c) or paragraph (e) of this Section 7 or (iv) with respect to an
Unrelated Dealer Business in which an eSpeed Party develops and operates a fully
electronic Marketplace.
(g) No Cantor Party shall, directly, indirectly or in connection
with a third Person, provide or assist any other Person in providing Electronic
Brokerage Services, other than (i) in collaboration with eSpeed pursuant to
Section 3 of this Agreement, (ii) with respect to a new Marketplace, after
eSpeed (x) has indicated that it is unable to develop and put into operation an
Electronic Trading System with respect to that new Marketplace in accordance
with paragraph (a) of this Section 7 or (y) has declined to exercise its right
of first refusal or is unable to develop and put into operation an Electronic
Trading System with respect to that new Marketplace in accordance with paragraph
(b) of this Section 7, including, without limitation, the time period specified
therein, or (iii) with respect to an Unrelated Dealer Business.
(h) Notwithstanding the foregoing and anything to the contrary in
this Section 7, the Unrelated Dealer Businesses are expressly excluded from
eSpeed's rights of first refusal under paragraph (b) and the conduct by any
Cantor Party either directly, or indirectly with or through another Person, of
any of the Unrelated Dealer Businesses shall not be deemed to be a violation of
this Section 7.
(i) The Cantor Parties and the eSpeed Parties shall be entitled to
and may enter into strategic alliances, joint ventures, partnerships or similar
arrangements with Persons and consummate Business Combinations with Persons (all
of the foregoing, collectively, "Alliance Opportunities") on the following basis
only. If an Alliance Opportunity (i) relates to a Person that directly or
indirectly provides Cantor Services and engages in business operations that do
not involve Electronic Brokerage Services, then any Cantor Party shall be
entitled to consummate a transaction with respect to such an Alliance
Opportunity, (ii) relates to a Person that directly or indirectly provides
Electronic Brokerage Services and engages in business operation that do not
involve any Cantor Service, then any eSpeed Party shall be entitled to
consummate a transaction with respect to such an Alliance Opportunity and (iii)
is an Alliance Opportunity with respect to a Person other than
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those described in clauses (i) and (ii) above, then the Cantor Parties and the
eSpeed Parties shall cooperate to jointly pursue and consummate a transaction
with respect to such Alliance Opportunity on mutually agreeable terms. For
purposes of this paragraph, a "Business Combination" shall mean, with respect to
any Person, a transaction initiated by and/or in which a Cantor Party or an
eSpeed Party is the acquiror involving (i) a merger, consolidation, amalgamation
or combination, (ii) 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, (iii) any tender offer (including without
limitation a self-tender), exchange offer, recapitalization, liquidation,
dissolution or similar transaction, (iv) any sale, dividend or other disposition
of a significant portion of the assets and properties of the Person (even if
less than all or substantially all of such assets or properties), and (v)
entering into of any agreement or understanding, or the granting of any rights
or options, with respect to any of the foregoing.
8. Exclusive Patent Licenses.
(a) Subject to the second following sentence, CFLP and CFPH hereby
grant to eSpeed an exclusive, perpetual, irrevocable, worldwide, royalty-free
right and license, with the right to sublicense to its subsidiaries and
affiliates, under all patents and patent applications of CFLP and CFPH related
to Electronic Marketplaces, now known and existing, including all provisionals,
divisionals, continuations, continuations-in-part, reissues and extensions
derived therefrom, as well as all foreign patents and patent applications now
known or pending and other counterparts thereof (the "Patent Rights"). The
Cantor Parties agree to take all commercially reasonable actions requested by
the eSpeed Parties, at the sole expense of the eSpeed Parties, to cause the
Patent Rights to remain in full force and effect to the extent permitted by law.
In the event that eSpeed (x) has indicated that it is unable to develop and put
into operation an Electronic Trading System with respect to a new Marketplace in
accordance with paragraph (a) of Section 7 or (y) has declined to exercise its
right of first refusal with respect to a new Marketplace in accordance with
paragraph (b) of Section 7, then the Cantor Parties shall have a limited right
to use the Patent Rights solely in connection with the operation of that new
Marketplace. The Cantor Parties shall cooperate with eSpeed, at eSpeed's sole
expense, in any attempt by eSpeed to prevent or otherwise seek remedies or
damages which, in any case, shall inure to eSpeed for any third party
infringement of the Patent Rights that are the subject of the license granted to
eSpeed pursuant to this Section 8 or to defend against any third party claim
relating to the Patent Rights.
(b) CFS hereby grants to eSpeed a non-exclusive, perpetual,
irrevocable, worldwide, royalty-free right and license, with the right to
sublicense to its subsidiaries and affiliates, to use the trademarks "Cantor
Exchange," "Interactive Matching," and "CX" (collectively, the "Trademark
Rights"), in all media now known or hereinafter developed, in connection with
Electronic Marketplaces. The Cantor Parties agree to take all commercially
reasonable actions requested by the eSpeed Parties, at the sole expense of the
eSpeed Parties, to cause the Trademark Rights to remain in full force and effect
to the extent permitted by law. The eSpeed Parties acknowledge that CFS owns the
Trademark Rights, including all goodwill now or hereafter associated therewith,
and that all goodwill and improved reputation generated by the eSpeed Parties'
use of the Trademark Rights shall inure to the benefit of CFS. In order to
preserve the inherent value of the Trademark Rights, the eSpeed Parties agree to
use reasonable efforts to ensure that the products and services in connection
with which the eSpeed Parties use the Trademark Rights shall be at least equal
to the standard prevailing in the operation of the Electronic Marketplaces
immediately prior to the date of the Agreement.
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<PAGE>
9. Indemnification.
(a) CFLP's Indemnification Obligations. Subject to the terms and
conditions of this Section 9, CFLP agrees to defend, indemnify and hold eSpeed,
the other eSpeed Parties and their respective officers, directors, affiliates,
agents, attorneys, employees and representatives harmless from and against any
and all liabilities, losses, costs, damages, expenses, penalties, fines and
taxes, including, without limitation, reasonable legal and other expenses
(collectively, "Damages"), directly or indirectly arising out of, resulting from
or relating to:
(i) any breach of any covenant, agreement or obligation of any
Cantor Party contained in this Agreement; and
(ii) any liability resulting from CFLP broker errors and
errors arising in connection with the provision by any Cantor Party of
Clearance, Settlement and Fulfillment Services.
(b) eSpeed's Indemnification Obligations. Subject to the terms and
conditions of this Section 9, eSpeed agrees to defend, indemnify and hold CFLP,
the other Cantor Parties and their respective officers, directors, affiliates,
agents, attorneys, employees and representatives harmless from and against any
and all Damages directly or indirectly arising out of, resulting from or
relating to:
(i) any breach of any covenant, agreement or obligation of any
eSpeed Party contained in this Agreement;
(ii) any liability resulting from failures of eSpeed's
technology and errors caused by the technology of the Electronic
Marketplaces; and
(iii) any liability resulting from any claims asserted against
Cantor with respect to an eSpeed Party's exercise of its Patent Rights.
(c) Claims for Indemnification; Defense of Indemnified Claims. For
purposes of this Section, the party entitled to indemnification shall be
referred to as the "Indemnified Party" and the party required to indemnify shall
be referred to as the "Indemnifying Party." In the event that the Indemnifying
Party shall be obligated to the Indemnified Party pursuant to this Section 9 or
in the event that a suit, action, investigation, claim or proceeding is begun,
made or instituted as a result of which the Indemnifying Party may become
obligated to the Indemnified Party hereunder, the Indemnified Party shall give
prompt written notice to the Indemnifying Party of the occurrence of such event,
specifying the basis for such claim or demand, and the amount or estimated
amount thereof to the extent then determinable (which estimate shall not be
conclusive of the final amount of such claim or demand); provided, however, that
the failure to give such notice shall not constitute a waiver of the right to
indemnification hereunder unless the Indemnifying Party is actually prejudiced
in a material respect thereby. The Indemnifying Party agrees to defend, contest
or otherwise protect the Indemnified Party against any such suit, action,
investigation, claim or proceeding at the Indemnifying Party's own cost and
expense with counsel of its own choice, who shall be, however, reasonably
acceptable to the Indemnified Party. The Indemnifying Party may not make any
compromise or settlement without the prior written consent of the Indemnified
Party (which will not be unreasonably withheld or delayed) and the Indemnified
Party shall receive a full and unconditional release reasonably satisfactory to
it pursuant to such compromise or settlement. The Indemnified Party shall have
the right but not the obligation to participate at its own expense in the
defense thereof
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<PAGE>
by counsel of its own choice. If requested by the Indemnifying Party, the
Indemnified Party shall (at the Indemnifying Party's expense) (i) cooperate with
the Indemnifying Party and its counsel in contesting any claim or demand which
the Indemnifying Party defends, (ii) provide the Indemnifying Party with
reasonable access during normal business hours to its books and records to the
extent they relate to the condition or operation of a Marketplace and are
requested by the Indemnifying Party to perform its indemnification obligations
hereunder, and to make copies of such books and records, and (iii) make
personnel available to assist in locating any books and records relating to a
Marketplace or whose assistance, participation or testimony is reasonably
required in anticipation of, preparation for or the prosecution and defense of,
any claim subject to this Section 9. In the event that the Indemnifying Party
fails timely to defend, contest or otherwise protect the Indemnified Party
against any such suit, action, investigation, claim or proceeding, the
Indemnified Party shall have the right to defend, contest or otherwise protect
the Indemnified Party against the same and may make any compromise or settlement
thereof and recover the entire cost thereof from the Indemnifying Party,
including, without limitation, reasonable attorneys' fees, disbursements and all
amounts paid as a result of such suit, action, investigation, claim or
proceeding or compromise or settlement thereof.
(d) Payments; Non-Exclusivity. Any amounts due an Indemnified Party
under this Section 9 shall be due and payable by the Indemnifying Party within
fifteen (15) business days after (x) in the case of a claim which does not
involve any third party, receipt of written demand therefor and (y) in the case
of a claim which involves a third party, the final disposition of such claim or
demand, provided that reasonable legal and other out-of-pocket costs and
expenses are reimbursed currently within 15 business days after demand therefor.
The remedies conferred in this Section 9 are intended to be without prejudice to
any other rights or remedies available at law or equity to the Indemnified
Parties, now or hereafter.
10. Relationship of the Parties. The relationship of the Cantor Parties on
the one hand and the eSpeed Parties on the other hand is that of independent
contractors. Pursuant to this Agreement, the Cantor Parties and the eSpeed
Parties intend to render separate but related services to customers and to
divide certain of the revenues arising from those services, but the parties do
not intend to share profits or losses or to enter into or create any
partnership, and no partnership or other like arrangement shall be deemed to be
created hereby. None of the Cantor Parties or eSpeed Parties shall have any
claim against the others or right of contribution with respect to any uninsured
loss incurred by any of them nor shall any of them have a claim or right against
the others with respect to any loss that is deemed to be included within the
deductible, retention or self-insured portion of any insured risk.
11. Audit. eSpeed may request a review, by those certified public
accountants who examine CFLP's books and records, of CFLP's allocation of
Transaction Revenues to eSpeed to determine whether such allocation was based
upon the procedures set forth herein. Such a review is to be conducted at
eSpeed's expense. CFLP may request a review, by those certified public
accountants who examine eSpeed's books and records, of eSpeed's allocation of
Transaction Revenues to CFLP to determine whether such allocation was based upon
the procedures set forth herein. Such a review is to be conducted at CFLP's
expense.
12. Invoicing and Billing; Payment of Service Fees. Each of eSpeed and
CFLP shall pay to the other, within 30 days of the end of each calendar month,
the amounts due and received to the Cantor Parties or the eSpeed Parties, as the
case may be (determined in the manner provided in Section 4 of this Agreement),
during that calendar month. eSpeed shall invoice CFLP for charges for Ancillary
IT Services provided pursuant hereto on a monthly basis as incurred, such
invoices to be
14
<PAGE>
delivered to CFLP by eSpeed within 15 days after the end of each calendar month.
CFLP shall pay to eSpeed the aggregate charge for Ancillary IT Services provided
under this Agreement in arrears within 30 days after the end of each calendar
month. Amounts due by one party to another under this Agreement shall be settled
against amounts due by the second party to the first under this or any other
agreement. All payments to be made pursuant to this Agreement shall be exclusive
of United Kingdom Value Added Tax which, if applicable to any payments
hereunder, shall be added to the amount of, and be paid in addition to, such
payments.
13. Documentation. All Transaction Revenues, service fees, fees for
Ancillary IT services and other benefits hereunder shall be substantiated by and
payments thereof shall be preceded or accompanied by, as applicable, appropriate
schedules, invoices or other documentation.
14. Force Majeure. Any failure or omission by a party in the performance
of any obligation under this Agreement shall not be deemed a breach of this
Agreement or create any liability if the same arises from any cause or causes
beyond the control of such party, including, but not limited to, the following,
which, for purposes of this Agreement shall be regarded as beyond the control of
each of the parties hereto: acts of God, fire, storm, flood, earthquake,
governmental regulation or direction, acts of the public enemy, war, rebellion,
insurrection, riot, invasion, strike or lockout; provided, however, that such
party shall resume the performance whenever such causes are removed.
15. Post-Termination Payments. Notwithstanding any provision herein to the
contrary, all payment obligations hereof shall survive the happening of any
termination of this Agreement until all amounts due hereunder have been paid.
16. Confidentiality.
(a) CFLP and its affiliates agree to treat as confidential and not
to disclose to any person (other than to CFLP employees who have a need to know
the same for purposes of CFLP's performing its obligations hereunder) or use the
same for its own benefit or for any purpose other than performing its
obligations hereunder, all confidential or proprietary information, trade
secrets, information related to, and all subject matter covered by, any pending
patent applications, data, plans, strategies, projections, budgets, reports,
research, financial information, files, reports, software, agreements and other
materials and information (individually and collectively, "Confidential
Information") it receives, obtains or learns about eSpeed and its affiliates, an
Electronic Marketplace or any other program, service, software or system eSpeed
and/or CFLP develops in connection with this Agreement. CFLP shall notify those
of its employees who perform services for eSpeed and its affiliates of this
covenant and shall, to the extent practical, secure their agreement to abide by
its terms.
(b) eSpeed and its affiliates agree, during the term of this
Agreement, to treat as confidential and not to disclose to any person (other
than to eSpeed employees who have a need to know the same for purposes of
eSpeed's performing its obligations hereunder) or use the same for its own
benefit or for any purpose other than performing its obligations hereunder, all
Confidential Information it receives, obtains or learns about CFLP and its
affiliates or any other program, service, software or system CFLP and/or eSpeed
develops in connection with this Agreement. eSpeed shall notify those of its
employees who perform services under this Agreement of this covenant and shall,
to the extent practical, secure their agreement to abide by its terms.
(c) Notwithstanding the foregoing, neither party shall be obligated
with respect to confidential or proprietary information that it can document:
(i) is or has become readily publicly
15
<PAGE>
available through no fault of its own or that of its affiliates, employees or
agents; or (ii) is received from a third party lawfully in possession of such
information and lawfully empowered to freely disclose such information to it; or
(iii) was lawfully in its possession, without restriction, after the date
hereof.
17. Miscellaneous.
(a) This Agreement and all the covenants herein contained shall be
binding upon the parties hereto, their respective heirs, successors, legal
representatives and assigns. No party shall have the right to assign all or any
portion of its rights, obligations or interests in this Agreement or any monies
which may be due pursuant hereto without the prior written consent of the other
affected parties and which consent may not be unreasonably withheld.
(b) No waiver by any party hereto of any of its rights under this
Agreement shall be effective unless in writing and signed by an officer of the
party waiving such right. No waiver of any breach of this Agreement shall
constitute a waiver of any subsequent breach, whether or not of the same nature.
This Agreement may not be modified except by a writing signed by officers of
each of the parties hereto; provided, however, that each amendment, modification
and/or waiver hereof or hereunder must be approved by a majority of the outside
directors of eSpeed or the applicable eSpeed Party. For purposes of this
Agreement, an outside director shall mean a director who is not an employee,
partner or affiliate (other than solely by reason of being an eSpeed director)
of eSpeed, CFLP or any of their respective affiliates.
(c) This Agreement constitutes the entire Agreement of the parties
with respect to the services and benefits described herein, and cancels and
supersedes any and all prior written or oral contracts or negotiations between
the parties with respect to the subject matter hereof.
(d) This Agreement shall be strictly construed as independent from
any other agreement or relationship between the parties.
(e) This Agreement is made pursuant to and shall be governed and
construed in accordance with the laws of the State of New York, without regard
to the principles of conflict of laws thereof.
(f) The descriptive headings of the several sections hereof are
inserted for convenience only and shall not control or affect the meaning or
construction of any of the provisions hereof.
(g) Any notice, request or other communication required or permitted
in this Agreement shall be in writing and shall be sufficiently given if
personally delivered or if sent by registered or certified mail, postage
prepaid, addressed as follows:
(i) If to a Cantor Party:
One World Trade Center, 105th Floor
New York, NY 10048
Attention: General Counsel
Facsimile: (212) 938-3620
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<PAGE>
(ii) If to an eSpeed Party:
One World Trade Center, 103rd Floor
New York, NY 10048
Attention: General Counsel
Facsimile: (212) 938-3620
The address of any party hereto may be changed on notice to the
other parties hereto duly served in accordance with the foregoing
provisions.
[Signature Pages to Follow]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed or caused this Joint
Services Agreement to be executed in their respective names by their respective
officers thereunto duly authorized, as of the date first written above.
CANTOR FITZGERALD, L.P.
By: CF Group Management, Inc.,
its Managing General Partner
By:/s/ Howard W. Lutnick
--------------------------------------
Name: Howard W. Lutnick
Title: Chairman
CANTOR FITZGERALD SECURITIES
By: Cantor Fitzgerald, L.P.
its Managing General Partner
By: CF Group Management, Inc.
its Managing General Partner
By:/s/ Howard W. Lutnick
--------------------------------------
Name: Howard W. Lutnick
Title: President
CANTOR FITZGERALD & CO.
By: Cantor Fitzgerald Securities
its Managing General Partner
By: Cantor Fitzgerald, L.P.
its Managing General Partner
By: CF Group Management, Inc.
its Managing General Partner
By:/s/ Howard W. Lutnick
--------------------------------------
Name: Howard W. Lutnick
Title: President and Chief Executive
Officer
CFPH, L.L.C.
By:/s/ Howard W. Lutnick
--------------------------------------
Name: Howard W. Lutnick
Title: President and Chief Executive
Officer
[Signature Page for Joint Services Agreement]
<PAGE>
CANTOR FITZGERALD PARTNERS
By: Cantor Fitzgerald Securities
its Managing General Partner
By: Cantor Fitzgerald, L.P.
its Managing General Partner
By: CF Group Management, Inc.
its Managing General Partner
By:/s/ Howard W. Lutnick
--------------------------------------
Name: Howard W. Lutnick
Title: President
CANTOR FITZGERALD INTERNATIONAL
By:/s/ Howard W. Lutnick
--------------------------------------
Name: Howard W. Lutnick
Title: Chairman
CANTOR FITZGERALD GILTS
By:/s/ Howard W. Lutnick
--------------------------------------
Name: Howard W. Lutnick
Title: Chairman
eSPEED, INC.
By:/s/ Douglas B. Gardner
--------------------------------------
Name: Douglas B. Gardner
Title: Vice Chairman
eSPEED SECURITIES, INC.
By:/s/ Douglas B. Gardner
--------------------------------------
Name: Douglas B. Gardner
Title: Vice President and Chief
Administrative Officer
[Signature Page for Joint Services Agreement]
<PAGE>
eSPEED GOVERNMENT SECURITIES, INC.
By:/s/ Douglas B. Gardner
--------------------------------------
Name: Douglas B. Gardner
Title: Vice President and Chief
Administrative Officer
eSPEED MARKETS, INC.
By:/s/ Douglas B. Gardner
--------------------------------------
Name: Douglas B. Gardner
Title: Vice President and Chief
Administrative Officer
eSPEED SECURITIES INTERNATIONAL LIMITED
By:/s/ Douglas B. Gardner
--------------------------------------
Name: Douglas B. Gardner
Title: Director
[Signature Page for Joint Services Agreement]
<PAGE>
ANNEX A
o U.S. Government Securities
o United Kingdom and European Government Bonds
o Eurobonds
o Corporate Bonds
o U.S. Agency Securities
o Emerging Market Government Bonds and Emerging Market Eurobonds
o Global Repurchase Agreements and Reverse Repurchase Agreements (U.S.,
Europe and Emerging Market Countries)
o U.S. Municipal Bonds
o U.S. Treasury Futures
<PAGE>
AMENDMENT NO. 1 TO THE JOINT SERVICES AGREEMENT,
DATED AS OF DECEMBER 15, 1999,
AMONG CANTOR FITZGERALD, L.P., CANTOR FITZGERALD SECURITIES, CANTOR FITZGERALD &
CO., CFPH, L.L.C., CANTOR FITZGERALD PARTNERS, CANTOR FITZGERALD INTERNATIONAL,
CANTOR FITZGERALD GILTS, eSPEED, INC., eSPEED SECURITIES, INC., eSPEED
GOVERNMENT SECURITIES, INC., eSPEED MARKETS, INC. AND eSPEED SECURITIES
INTERNATIONAL LIMITED
THIS AMENDMENT No. 1 dated as of January 1, 2000 among Cantor Fitzgerald,
L.P., Cantor Fitzgerald Securities, Cantor Fitzgerald & Co., CFPH, L.L.C.,
Cantor Fitzgerald Partners, Cantor Fitzgerald International, Cantor Fitzgerald
Gilts, eSpeed, Inc., eSpeed Securities, Inc., eSpeed Government Securities,
Inc., eSpeed Markets, Inc. and eSpeed Securities International Limited amends
the agreement dated as of December 15, 1999 among the parties hereto (the "Joint
Services Agreement"). All the terms of the Joint Services Agreement are
incorporated herein by reference, except as otherwise stated herein. Capitalized
terms used herein that are not defined herein shall have the meanings ascribed
to them in the Joint Services Agreement.
For good and valuable consideration, the adequacy and receipt of which are
hereby acknowledged, the parties hereto agree as follows:
Paragraph 4 shall be amended to insert the following as subsection (b), and
subsections (b) through (n) shall be renumbered accordingly as (c) through (o):
"(b) If (i) the Electronic Marketplace is a Collaborative Marketplace,
(ii) the transaction relates to U.S. Treasury securities and U.S.
federally-sponsored agency securities involving that certain eSpeed business
unit to which the employees listed on Schedule I hereto have been currently
assigned, and (iii) a Cantor Party provides Voice Assisted Brokerage Services
through any of the employees listed on Schedule I or their replacements in
connection with the transaction to which the Transaction Revenues relate, then
the applicable eSpeed Party will receive the aggregate Transaction Revenues and
will pay to the applicable Cantor Party a service fee equal to 35% of the
Transaction Revenues.
1
<PAGE>
IN WITNESS WHEREOF, the parties have executed or caused this Amendment No.
1 to the Joint Services Agreements to be executed in their respective names by
their respective officers thereunto duly authorized, as of the date first
written above.
CANTOR FITZGERALD, L.P.
By: CF Group Management, Inc.,
its Managing General Partner
By: /s/ Howard W. Lutnick
------------------------------------
Name: Howard W. Lutnick
Title: President
CANTOR FITZGERALD SECURITIES
By: Cantor Fitzgerald, L.P.
its Managing General Partner
By: CF Group Management, Inc.
its Managing General Partner
By: /s/ Howard W. Lutnick
------------------------------------
Name: Howard W. Lutnick
Title: President
CANTOR FITZGERALD & CO.
By: Cantor Fitzgerald Securities
its Managing General Partner
By: Cantor Fitzgerald, L.P.
its Managing General Partner
By: CF Group Management, Inc.
its Managing General Partner
By: /s/ Howard W. Lutnick
------------------------------------
Name: Howard W. Lutnick
Title: President
2
<PAGE>
CFPH, L.L.C.
By: /s/ Howard W. Lutnick
------------------------------------
Name: Howard W. Lutnick
Title: President and
Chief Executive Officer
CANTOR FITZGERALD & CO.
By: Cantor Fitzgerald Securities
its Managing General Partner
By: Cantor Fitzgerald, L.P.
its Managing General Partner
By: CF Group Management, Inc.
its Managing General Partner
By: /s/ Howard W. Lutnick
------------------------------------
Name: Howard W. Lutnick
Title: President
CANTOR FITZGERALD
INTERNATIONAL
By: /s/ Howard W. Lutnick
------------------------------------
Name: Howard W. Lutnick
Title: Chairman
CANTOR FITZGERALD GILTS
By: /s/ Howard W. Lutnick
------------------------------------
Name: Howard W. Lutnick
Title: Chairman
eSPEED, INC.
By: /s/ Howard W. Lutnick
------------------------------------
Name: Howard W. Lutnick
Title: Chairman and
Chief Executive Officer
3
<PAGE>
eSPEED SECURITIES, INC.
By: /s/ Howard W. Lutnick
------------------------------------
Name: Howard W. Lutnick
Title: President and
Chief Executive Officer
eSPEED GOVERNMENT
SECURITIES, INC.
By: /s/ Howard W. Lutnick
------------------------------------
Name: Howard W. Lutnick
Title: President and
Chief Executive Officer
eSPEED MARKETS, INC.
By: /s/ Howard W. Lutnick
------------------------------------
Name: Howard W. Lutnick
Title: Chairman and
Chief Executive Officer
eSPEED SECURITIES INTERNATIONAL
LIMITED
By: /s/ Howard W. Lutnick
------------------------------------
Name: Howard W. Lutnick
Title: Director
4
<PAGE>
================================================================================
ADMINISTRATIVE SERVICES AGREEMENT
among
CANTOR FITZGERALD, L.P.,
CANTOR FITZGERALD INTERNATIONAL,
eSPEED, INC.,
eSPEED SECURITIES, INC.,
eSPEED GOVERNMENT SECURITIES, INC.,
eSPEED MARKETS, INC.
and
eSPEED SECURITIES INTERNATIONAL LIMITED
Dated as of December 15, 1999
================================================================================
<PAGE>
ADMINISTRATIVE SERVICES AGREEMENT
This ADMINISTRATIVE SERVICES AGREEMENT is made and entered into as of
December 15, 1999, among CANTOR FITZGERALD, L.P., a Delaware limited partnership
("Cantor Fitzgerald"), Cantor Fitzgerald International, an English unlimited
liability company ("CF International"), eSPEED, INC., a Delaware corporation
("Parent"), eSPEED SECURITIES, INC., a Delaware corporation and a wholly-owned
subsidiary of eSpeed ("eSpeed Securities"), eSPEED GOVERNMENT SECURITIES, INC.,
a Delaware corporation and a wholly-owned subsidiary of eSpeed ("eSpeed GS"),
eSPEED MARKETS, INC., a Delaware corporation and a wholly-owned subsidiary of
eSpeed ("eSpeed Markets") and eSPEED SECURITIES INTERNATIONAL LIMITED, a limited
company registered in England and Wales and a wholly-owned subsidiary of eSpeed
("eSpeed International"). References hereinafter to (i) "eSpeed" shall mean
Parent and/or one or more of eSpeed Securities, eSpeed GS, eSpeed Markets,
eSpeed International and any other subsidiary of Parent that becomes a party to
this Agreement in accordance with Section 17(j) and (ii) "Cantor" shall mean
Cantor Fitzgerald, CF International, and any other subsidiary or affiliate of
Cantor Fitzgerald that becomes a party to this Agreement in accordance with
Section 17(j).
W I T N E S S E T H:
WHEREAS, Parent is a recently formed company, the capital stock of which
is owned by affiliates of Cantor;
WHEREAS, Cantor Fitzgerald and/or its affiliates currently provide(s)
certain services, including office space, personnel and corporate services, such
as cash management, internal audit, facilities management, promotional sales and
marketing, legal, payroll, benefits administration and other administrative
services and insurance services, to various financial services and securities
firms in which Cantor has an ownership or management interest;
WHEREAS, Cantor is willing to provide or arrange for the provision of
similar services to eSpeed, all upon the terms and conditions set forth herein;
WHEREAS, in the absence of obtaining such services from Cantor, eSpeed
would require additional staff and would need to enhance its existing
administrative infrastructure sooner than desirable;
WHEREAS, eSpeed will conduct directly much of its own sales and marketing
functions, and will provide certain sales and marketing services to Cantor upon
the terms and conditions set forth herein; and
WHEREAS, each of the parties hereto acknowledges that greater efficiencies
and reduced costs are expected to be achieved from the economies of scale
associated with the
<PAGE>
provision of such services by Cantor to eSpeed and by eSpeed to Cantor in the
manner provided herein during the term hereof;
NOW, THEREFORE, in consideration of the premises contained herein, it is
agreed as follows (capitalized terms used and not defined herein have the
meanings ascribed thereto in the Assignment and Assumption Agreement (for the
transfer of certain assets in the United States of America), dated as of
December 9, 1999):
1. Term. The term of this Agreement shall commence at the Closing and
shall remain in effect for a three-year period (the "Initial Term"). Thereafter,
this Agreement shall be renewed automatically for successive one-year terms (the
"Extended Term"), unless any party shall give written notice to the other
parties of its desire to terminate this Agreement at least six months before the
end of any such year ending during the Extended Term, in which event this
Agreement shall end with respect to the terminating party, on the last day of
such year. This Agreement may be terminated by a party as provided herein or, as
provided in Section 14, with respect to a particular service or group of
services only, in which case it shall remain in full force and effect with
respect to the other services described herein. Notwithstanding the foregoing,
the term of this Agreement with respect to any space made available to eSpeed by
Cantor, as the case may be, pursuant to Annex A and Annex B hereto shall be
coterminous with the term of Cantor's lease with respect to such space,
including any extension thereof. The Initial Term and the Extended Term are
referred to herein as the "Term".
2. Insurance. During the Term hereof and upon the terms and conditions set
forth herein, Cantor agrees to obtain for eSpeed the following insurance (i) in
the United States of America (which insurance policy and amount provided below
may be a single policy and an amount for eSpeed and Cantor combined), except as
otherwise agreed by eSpeed and Cantor, and subject to Section 14 hereof, and
(ii) or such insurance as is equivalent thereto in other jurisdictions, and in
such amounts as Cantor and eSpeed shall agree:
(a) Property and casualty insurance, including insurance against all
risks, except for standard policy exclusions, terms and conditions, for
all buildings, fixtures, boilers and other mechanical systems, electronic
data processing equipment and other equipment located at any eSpeed
facility in an amount not less than $40 million or such greater amount as
may be agreed from time to time;
(b) General liability insurance in an amount not less than $20
million;
(c) Officer and director liability insurance in an amount and having
the terms and conditions that are typical for a newly-public company in
eSpeed's industry;
(d) Business interruption insurance in the amount of $25 million;
2
<PAGE>
(e) Fidelity bond, if necessary, of not less than $25 million; and
(f) Such other insurance as eSpeed and Cantor shall agree.
3. Services. During the Term hereof and upon the terms and conditions set
forth herein,
(a) Cantor agrees to provide or, at Cantor's discretion, to arrange
for third parties to provide, to eSpeed the following services:
(1) Administration and Benefits Services. Cantor shall
administer each of the benefits and services referred to
in Section 2 hereof and this Section 3.
(2) Employee Benefits, Human Resources and Payroll Services.
Employees of eSpeed shall be entitled to participate in
all employee benefit plans of Cantor to the extent
permitted under applicable law. Cantor shall provide
certain human resources services, which shall include
interviewing prospective employees of eSpeed,
maintaining employee personnel records, administering
and disseminating information to employees of eSpeed
regarding fringe benefits, monitoring EEOC and
affirmative action compliance, training employees,
administering and monitoring worker's compensation,
monitoring labor relations, analyzing unemployment
compensation costs and assisting in the establishment of
procedures for hiring, promoting and terminating
employees. In addition, Cantor shall provide certain
payroll services, which shall include preparation of
payroll checks for eSpeed employees and maintenance of
employee payroll records, and making provision for the
associated payroll for payments and similar charges.
(3) Financial and Operations Services. Cantor shall assist
eSpeed in establishing and maintaining bank accounts,
investing short-term funds, credit analysis, obtaining
lines of credit, purchasing capital improvements
(including supplies and equipment), providing technical
advice as requested on commercial contracts and
client/business development. In addition, Cantor shall
assist eSpeed on all matters relating to acquisitions
and mergers and other corporate expansion (including the
leasing, purchasing and selling of real property and
complementary businesses).
3
<PAGE>
(4) Internal Auditing Services. Cantor shall provide
internal auditing of corporate records and supply the
relevant resulting audit reports directly to eSpeed's
Board of Directors and external auditors as requested by
eSpeed from time to time.
(5) Legal Related Services. Cantor shall make available its
in-house counsel and staff to provide legal advice and
related services of a type currently provided by such
persons to Cantor. Upon request, Cantor shall consult
with eSpeed management on the legal impact of proposed
transactions and on general collection matters. Cantor
shall also advise and assist eSpeed with respect to
compliance with regulatory matters and intellectual
property matters. Cantor may, in its discretion, engage
outside counsel and any other outside consultants to
assist in the provision of legal and related services to
eSpeed.
(6) Risk Management. Cantor shall assist eSpeed executives
in attempting to obtain insurance programs and
maintaining contacts and relationships with insurance
brokers and insurance carriers, other than the insurance
specifically provided for in Section 2 hereof.
(7) Accounting Services. Cantor's accounting department
shall assist eSpeed's accounting departments and provide
such general and specific accounting services, including
management accounting services, assistance in the
preparation of financial and regulatory statements,
filings, such as Forms 10-K, 10-Q and 8-K, proxy
statements and annual reports to stockholders, as the
parties may, from time to time, agree.
(8) General Tax Services. Cantor shall advise and assist
eSpeed in (i) preparing and filing all tax returns for
eSpeed, including federal, state and local corporate
income taxes, state franchise taxes, local property
taxes, state and local withholding taxes, value added
tax quarterly returns and unemployment compensation
taxes, (ii) preparing for discussions, meetings and
proceedings with tax authorities, and (iii) general tax
advice.
(9) Space. Cantor shall make certain office space available
to eSpeed at the cost and terms specified in Annex A and
Annex B hereto.
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<PAGE>
(10) Personnel. Cantor shall make available to eSpeed the
services of those individuals identified by each of them
and at each of their reasonable request.
(11) Communication Facilities. Cantor or eSpeed shall provide
access for the requesting party to any communication
facilities (leased telephone lines or other data
transmission lines, or other property owned or leased by
Cantor or eSpeed, as the case may be, for any similar
purpose).
(12) Facilities Management. Cantor shall provide facilities,
management, maintenance and support services.
(13) Promotional Sales and Marketing. Cantor shall provide
promotional sales and marketing services to eSpeed.
(14) Miscellaneous. Cantor shall provide such other
miscellaneous services to eSpeed as the parties may
reasonably agree.
(b) eSpeed agrees to provide or, at eSpeed's discretion, to arrange
for third parties to provide, to Cantor the following services:
(1) Sales, Marketing and Public Relations. eSpeed shall
maintain its own sales, marketing and public relations
department and shall provide such sales, marketing and
public relations services to Cantor as Cantor may from
time to time request.
(2) Miscellaneous. eSpeed shall provide such other
miscellaneous services to Cantor as the parties may
agree.
4. Authority. Notwithstanding anything to the contrary contained in
Section 3 hereof, the parties hereto acknowledge and agree that each party shall
provide the services set forth in Section 3 of this Agreement subject to the
ultimate authority of eSpeed to control its own business and affairs. Each party
acknowledges that the services provided hereunder by Cantor are intended to be
administrative, technical and ministerial and are not intended to set policy for
eSpeed.
5. Charges for Insurance. The insurance provided for in Section 2 shall be
invoiced to and paid by eSpeed as follows:
5
<PAGE>
The premiums for each of the insurance policies described in Section 2
shall be allocated to eSpeed by Cantor and shall be determined by
multiplying Cantor's total actual insurance premiums for each such
coverage by a fraction, (i) in the case of general liability or business
interruption insurance, the numerator of which is the aggregate
consolidated net revenues (determined in accordance with Generally
Accepted Accounting Principles of the United States of America) of eSpeed
and the denominator of which is the aggregate consolidated net revenues of
Cantor plus any consolidated eSpeed net revenues not included in Cantor's
consolidated net revenues, excluding the revenues from any division or
subsidiary which does not benefit from or which is not covered by the
insurance to which these premiums relate, (ii) in the case of property and
casualty insurance, the numerator of which is the number of employees of
eSpeed and the denominator of which is the number of employees of eSpeed
and Cantor's affiliates, and (iii) in the case of all others as mutually
agreed to by eSpeed and Cantor.
6. Charges for Services. In consideration for providing the financial,
administrative, sales and marketing, and operational services provided for in
Section 3 hereof, each party receiving services shall pay to the providing party
the actual costs of such services, determined as follows:
Each providing party shall charge the receipent party for such receipent
party's appropriate share of the aggregate cost actually incurred in
connection with the provision of such services in an amount equal to the
direct cost that the providing party incurs in performing those services
plus a reasonable allocation of other costs determined in a consistent and
fair manner so as to cover such providing party's appropriate costs or in
such other manner the parties shall agree. The providing party shall not
charge the recipient party any portion of any tax for which the providing
party receives a rebate or credit, or to which the providing party is
entitled to a rebate or credit.
7. Other Benefits and Services. From time to time, Cantor and eSpeed may
agree to assist each other in the purchase of other benefits or services or in
the purchase by eSpeed from or through Cantor of other benefits or services. In
such event, the parties shall agree upon a mutually satisfactory basis of
allocation of costs.
8. Exculpation and Indemnity; Other Interests.
(a) Cantor (including its partners, officers, directors and
employees) shall not be liable to eSpeed or the stockholders of Parent for
any acts or omissions taken or not taken in good faith on behalf of eSpeed
and in a manner reasonably believed by Cantor to be within the scope of
the authority granted to it by this Agreement and in the best interests of
eSpeed, except for acts or omissions constituting fraud or willful
6
<PAGE>
misconduct in the performance of Cantor's duties under this Agreement.
Notwithstanding the foregoing, Cantor shall be liable to eSpeed for any
losses incurred by eSpeed in connection with the provision of Cantor's
services hereunder to the extent Cantor is entitled to be reimbursed by an
unaffiliated third party for any such liability. eSpeed shall indemnify,
defend and hold harmless Cantor (and its partners, officers, directors and
employees) from and against any and all claims or liabilities of any
nature whatsoever (including consequential damages and reasonable
attorney's fees) arising out of or in connection with any claim against
Cantor under or otherwise in respect of this Agreement, except where
attributable to the fraud or willful misconduct of Cantor.
(b) eSpeed (including its officers, directors and employees) shall
not be liable to Cantor or the partners of Cantor for any acts or
omissions taken or not taken in good faith on behalf of Cantor and in a
manner reasonably believed by eSpeed to be within the scope of the
authority granted to it by this Agreement and in the best interests of
Cantor, except for acts or omissions constituting fraud or willful
misconduct in the performance of eSpeed's duties under this Agreement.
Notwithstanding the foregoing, eSpeed shall be liable to Cantor for any
losses incurred by Cantor in connection with the provision of eSpeed's
services hereunder to the extent eSpeed is entitled to be reimbursed by an
unaffiliated third party for any such liability. Cantor shall indemnify,
defend and hold harmless eSpeed (and its stockholders, officers, directors
and employees) from and against any and all claims or liabilities of any
nature whatsoever (including consequential damages and reasonable
attorney's fees) arising out of or in connection with any claim against
eSpeed under or otherwise in respect of this Agreement, except where
attributable to the fraud or willful misconduct of eSpeed.
(c) Nothing in this agreement shall prevent Cantor and its
affiliates from engaging in or possessing an interest in other business
ventures of any nature or description, independently or with others,
whether currently existing or hereafter created, and none of eSpeed or any
of their respective stockholders shall have any rights in or to such
independent ventures or to the income or profits derived therefrom.
9. Relationship of the Parties. The relationship of Cantor Fitzgerald and
CF International, and Parent, eSpeed Securities, eSpeed GS, eSpeed Markets and
eSpeed International shall be that of contracting parties, and no partnership,
joint venture or other arrangement shall be deemed to be created hereby. Except
as expressly provided herein, none of Cantor Fitzgerald, CF International,
Parent, eSpeed Securities, eSpeed GS, eSpeed Markets or eSpeed International
shall have any claim against the others or right of contribution with respect to
any uninsured loss incurred by any of them nor shall any of them have a claim or
right against the others with respect to any loss that is deemed to be included
within the deductible, retention or self-insured portion of any insured risk.
7
<PAGE>
10. Audit. Any party hereto may request a review, by those certified
public accountants who examine Cantor's or eSpeed's books and records, of the
other party's cost allocation to the requesting party to determine whether such
allocation is proper under the procedures set forth herein. Such a review is to
be conducted at the requesting party's expense.
11. Documentation. Each party's charges to the other for all services and
benefits hereunder shall be substantiated by appropriate schedules, invoices or
other documentation.
12. Actual Cost. Any charges to the recipient for services or benefits
provided by Cantor or eSpeed, as the case may be, or by third parties pursuant
to Section 2 or 3 hereof shall be based upon rates not intended to provide a
profit to Cantor or eSpeed.
(a) Each recipient party shall pay to the relevant providing party
the aggregate charge for services provided under this Agreement in arrears
within 30 days after each calendar month. Amounts due by any one recipient
party to any one providing party under the Agreement shall be set off
against amounts due by the second party to the first under this or any
other Agreement.
(b) Any value added or other turnover taxes required to be charged
in respect of services provided by a party to another party shall be
charged in addition to any charges otherwise due hereunder, and shall be
included in the relevant invoice.
13. Invoicing and Billing. Each party shall invoice the other for charges
for services provided pursuant hereto on a monthly basis as incurred, such
invoices to be delivered to the other within 15 days after the end of each
calendar month. Such invoices may include third party charges incurred in
providing services pursuant to Section 2 or 3 hereof or, at the invoicing
party's option, services provided by one or more third parties may be invoiced
directly to the recipient of those services. Each party shall pay to the other
the aggregate charge for services provided under this Agreement in arrears
within 30 days after the end of each calendar month. Amounts due by one party to
another under this Agreement shall be netted against amounts due by the second
party to the first under this or any other agreement.
14. Services by Third Parties. Except with respect to space made available
to eSpeed pursuant to Annex A and Annex B, eSpeed (and Cantor, with respect to
sales, marketing and public relations services) may, without cause, procure any
of the services or benefits specified in Section 2 and/or Section 3 hereof from
a third party or may provide such services or benefits for itself. Cantor (or
eSpeed) shall discontinue providing such services or benefits upon written
notice by the discontinuing party, delivered at least three months before the
requested termination date.
8
<PAGE>
15. Excused Performance. Cantor (and eSpeed, with respect to sales and
marketing services) does not warrant that any of the services or benefits herein
agreed to be provided shall be free of interruption caused by Acts of God,
strikes, lockouts, accidents, inability to obtain third-party cooperation or
other causes beyond Cantor's (or eSpeed's) control. No such interruption of
services or benefits shall be deemed to constitute a breach of any kind
whatsoever.
16. Post-Termination of Payments. Notwithstanding any provision herein to
the contrary, all payment obligations hereof shall survive the happening of any
event causing termination of this Agreement until all amounts due hereunder have
been paid.
17. Miscellaneous.
(a) This Agreement and all the covenants herein contained shall be
binding upon the parties hereto, their respective heirs, successors, legal
representatives and assigns. No party shall have the right to assign all
or any portion of its obligations or interests in this Agreement or any
monies which may be due pursuant hereto without the prior written consent
of the other parties.
(b) The rule known as the eiusdem generis rule shall not apply and
accordingly:
(1) general words introduced by the words and phrases such
as "include", "including", "other" and "in particular"
shall not be given a restrictive meaning or limit the
generality of any preceding words or be construed as
being limited to the same class as the preceding words
where a wider construction is possible; and
(2) general words shall not be given a restrictive meaning
by reason of the fact that such words are followed by
particular examples intended to be embraced by the
general words, and references to writing includes any
method of reproducing words in a legible and
non-transitory form.
(c) No waiver by any party hereto of any of its rights under this
Agreement shall be effective unless in writing and signed by an officer of
the party waiving such right. No waiver of any breach of this Agreement
shall constitute a waiver of any subsequent breach, whether or not of the
same nature. This Agreement may not be modified or amended except (i) by a
writing signed by officers of each of the parties hereto and (ii) such
modification or amendment is approved by a majority of the outside
directors of the Board of Directors of Parent. For purposes of this
Agreement,
9
<PAGE>
an outside director shall mean a director who is not an employee, partner
or affiliate (other than solely by reason of being a director of eSpeed)
of Parent, Cantor Fitzgerald or any of their respective affiliates.
(d) This Agreement constitutes the entire Agreement of the parties
with respect to the services and benefits described herein, and cancels
and supersedes any and all prior written or oral contracts or negotiations
between the parties with respect to the subject matter hereof.
(e) This Agreement shall be strictly construed as independent from
any other agreement or relationship between the parties.
(f) This Agreement is made pursuant to and shall be governed and
construed in accordance with the laws of the State of New York, without
regard to the principles of conflict of laws thereof.
(g) The descriptive headings of the several sections hereof are
inserted for convenience only and shall not control or affect the meaning
or construction of any of the provisions hereof.
(h) Any notice, request or other communication required or permitted
in this Agreement shall be in writing and shall be sufficiently given if
personally delivered or if sent by registered or certified mail, postage
prepaid, addressed as follows:
(i) If to Cantor Fitzgerald:
One World Trade Center, 105th Floor
New York, NY 10048
Attention: General Counsel
Facsimile: (212) 938-3620
(ii) If to CF International:
One America Square
London, United Kingdom EC3N 2LS
Attention: Managing Director
Facsimile: (011) 44-171-894-7225
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<PAGE>
(iii) If to Parent:
One World Trade Center, 103rd Floor
New York, NY 10048
Attention: General Counsel
Facsimile: (212) 938-2464
(iv) If to eSpeed Securities:
One World Trade Center, 103rd Floor
New York, NY 10048
Attention: General Counsel
Facsimile: (212) 938-2464
(v) If to eSpeed GS:
One World Trade Center, 103rd Floor
New York, NY 10048
Attention: General Counsel
Facsimile: (212) 938-2464
(vi) If to eSpeed Markets:
One World Trade Center, 103rd Floor
New York, NY 10048
Attention: General Counsel
Facsimile: (212) 938-2464
(vii) If to eSpeed Securities International:
One America Square
London, United Kingdom EC3N 2LS
Attention: Managing Director
Facsimile: (011) 44-171-894-7225
The address of any party hereto may be changed on notice to the
other parties hereto duly served in accordance with the foregoing
provisions.
(i) The parties of this Agreement understand and agree that any or
all of the obligations of Cantor set forth herein may be performed by
Cantor Fitzgerald or any of its subsidiaries, other than Parent or any of
Parent's subsidiaries. In addition, Cantor
11
<PAGE>
Fitzgerald may cause any or all of the benefits due to Cantor to be
received by any of its subsidiaries, other than Parent or any of Parent's
subsidiaries.
(j) Any subsidiary of Parent and/or Cantor Fitzgerald may become a
party to this Agreement by signing a counterpart of this Agreement and
agreeing to be bound by all of the terms and conditions of this Agreement
as of the date of its signature of such counterpart.
(k) In the event eSpeed uses assets that are subject to an operating
lease between Cantor and a third party to provide services hereunder,
eSpeed shall comply with the terms and conditions of such operating lease.
[Signature Pages Follow]
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed or caused this
Administrative Services Agreement to be executed in their respective names by
their respective officers thereunto duly authorized, as of the date first
written above.
CANTOR FITZGERALD, L.P.
By: CF Group Management, Inc.
Its General Partner
By: /s/ Howard W. Lutnick
-------------------------------------
Name: Howard W. Lutnick
Title: Chairman
CANTOR FITZGERALD INTERNATIONAL
By: /s/ Howard W. Lutnick
-------------------------------------
Name: Howard W. Lutnick
Title: Chairman
eSPEED, INC.
By: /s/ Douglas B. Gardner
-------------------------------------
Name: Douglas B. Gardner
Title: Vice Chairman
eSPEED SECURITIES, INC.
By: /s/ Douglas B. Gardner
-------------------------------------
Name: Douglas B. Gardner
Title: Vice President and Chief
Administrative Officer
eSPEED GOVERNMENT SECURITIES, INC.
By: /s/ Douglas B. Gardner
-------------------------------------
Name: Douglas B. Gardner
Title: Vice President and Chief
Administrative Officer
eSPEED MARKETS, INC.
By: /s/ Douglas B. Gardner
-------------------------------------
Name: Douglas B. Gardner
Title: Vice President and Chief
Administrative Officer
[Signature Page for Administrative Services Agreement]
<PAGE>
eSPEED SECURITIES
INTERNATIONAL LIMITED
By: /s/ Douglas B. Gardner
-------------------------------------
Name: Douglas B. Gardner
Title: Director
[Signature Page for Administrative Services Agreement]
<PAGE>
ANNEX A
Space Sharing
(a) License to Use Space. During the term of this Agreement, Cantor shall
permit eSpeed to use a portion of Cantor's (or any of its subsidiaries' or
affiliates') offices ("Cantor Offices") for the purposes permitted under the
lease agreements pursuant to which either Cantor or such subsidiary or affiliate
leases such offices (to the extent such offices are leased), subject to the
terms and conditions set forth in this Agreement for a term coterminous with
respect to any respective lease. The space to be used by eSpeed shall be
initially as shown below, but may be expanded or contracted if and as mutually
agreed by the parties from time to time.
(b) Consideration. So long as eSpeed uses any portion of Cantor Offices,
eSpeed shall pay to Cantor on the first day of each calendar month with respect
to each such Cantor Office an amount equal to the product of (X) the average
rate per square foot then being paid by Cantor (or any of its affiliates) for
the specific Cantor Office, and (Y) the number of square feet agreed to pursuant
to paragraph (a) above, in each case determined in the same manner as rent is
computed under the relevant lease, or if the office(s) are owned by Cantor, in
an amount and in the same manner as the parties agree is customary for
commercial leases of similar offices. Payments for any partial calendar month
shall be prorated on a per diem basis.
(c) Compliance with Leases. eSpeed hereby agrees not to take any action or
fail to take any action in connection with its use of a portion of Cantor
Offices a result of which would be Cantor's violation of any of the terms and
conditions of any lease or other restriction on Cantor's use of such offices.
eSpeed agrees to comply with the terms and provisions of any such lease in
connection with such Cantor Office in which it or they use space.
Initial Square Footage to be used by eSpeed
1. Toronto 320
2. Montreal 8
3. Milan 600
4. Frankfurt 350
5. Tokyo 600
6. Hong Kong 225
7. Singapore 8
<PAGE>
ANNEX B (London)
Space Sharing for One America Square, London
(a) License to share space. During the term of this Agreement, and for so
long only as eSpeed remains a company which is within the same group as CF
International, eSpeed may share with CF International the occupation of the
whole or any part of CF International's premises at One America Square ("CF
International's Offices") for the purposes permitted under the tenancies
pursuant to which CF International leases the CF International Offices, subject
to the terms set out in this Annex B. The space to be shared by eSpeed and CF
International shall be initially as shown below, but may be expanded or
contracted if and as mutually agreed by the parties from time to time. At the
request of CF International, eSpeed shall vacate the CF International Offices
immediately upon ceasing to belong to the same group as CF International. In
this Annex B, a company is any body corporate and two companies are within the
same group as one another if one company is the holding company of another or if
both are subsidiaries of the same holding company ("holding company" and
"subsidiary" having the meanings given to them by Section 736 UK Companies Act
1985).
(b) Consideration. So long as eSpeed shares any part of the CF
International Offices, eSpeed shall pay to Cantor, on behalf of CF
International, on the first day of each calendar month with respect to each such
CF International Office an amount equal to the product of (X) the average rate
per square foot then being paid by CF International for the specific CF
International Office (such amount to include rent and any service charge,
insurance charge, rates and other outgoings of CF International) and (Y) the
number of square feet agreed pursuant to paragraph (a) above. Payments for any
partial calendar month shall be prorated on a daily basis.
(c) Compliance with leases. eSpeed hereby agrees not to take any action or
fail to take any action in connection with its sharing of any part of the CF
International Offices as a result of which would be CF International's breach of
any of the terms and conditions of any lease or other restriction or obligation
affecting CF International's use of such offices. eSpeed agrees to comply with
the terms and provisions of any such leases of the CF International Offices in
which it shares space. There is no intention to create between eSpeed, Cantor
and/or CF International the relationship of lessor and lessee in relation to the
CF International Offices.
Initial Square Footage to be used by eSpeed
TOTAL 16,000
======
<PAGE>
================================================================================
REGISTRATION RIGHTS AGREEMENT
between
eSpeed, INC.
and
THE INVESTORS NAMED HEREIN
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
RECITALS.......................................................................1
ARTICLE I
DEMAND REGISTRATIONS.....................................................1
1.1 Requests for Registration..........................................1
1.2 Number of Demand Registrations; Expenses...........................2
1.3 Effective Registration Statement...................................2
1.4 Priority on Demand Registrations...................................2
1.5 Subsequent Registration Rights.....................................2
ARTICLE II
PIGGYBACK REGISTRATIONS..................................................3
2.1 Right to Piggyback.................................................3
2.2 Piggyback Expenses.................................................3
2.3 Priority on Primary Registrations..................................3
2.4 Priority on Secondary Registrations................................3
ARTICLE III
HOLDBACK AGREEMENTS......................................................4
ARTICLE IV
REGISTRATION PROCEDURES..................................................4
ARTICLE V
REGISTRATION EXPENSES....................................................6
5.1 Registration Expenses..............................................6
5.2 Sellers' Expenses..................................................7
ARTICLE VI
UNDERWRITTEN OFFERINGS...................................................7
6.1 Demand Underwritten Offerings......................................7
6.2 Incidental Underwritten Offerings..................................7
ARTICLE VII
INDEMNIFICATION..........................................................7
7.1 Company's Indemnification Obligations..............................7
7.2 Holder's Indemnification Obligations...............................8
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<PAGE>
7.3 Notices; Defense; Settlement.......................................9
7.4 Indemnity Provision...............................................10
7.5 Contribution Based on Relative Fault..............................10
7.6 Payments..........................................................11
ARTICLE VIII
PARTICIPATION IN UNDERWRITTEN REGISTRATIONS.............................11
ARTICLE IX
DEFINITIONS.............................................................11
9.1 Terms.............................................................11
9.2 Defined Terms in Corresponding Sections...........................13
ARTICLE X
MISCELLANEOUS...........................................................13
10.1 Remedies..........................................................13
10.2 Amendments and Waivers............................................14
10.3 Successors and Assigns............................................14
10.4 Notices...........................................................14
10.5 Headings..........................................................15
10.6 Gender............................................................15
10.7 Invalid Provisions................................................15
10.8 Governing Law.....................................................15
10.9 Counterparts......................................................15
10.10 Deferral.........................................................15
10.11 Additional Investors..............................................16
ARTICLE XI
RULE 144 REPORTING......................................................16
ii
<PAGE>
REGISTRATION RIGHTS AGREEMENT (this "Agreement") dated as of
December 9, 1999 between eSpeed, Inc., a Delaware corporation (the "Company"),
and the other parties that have executed the signature pages hereto (the
"Initial Investors") or otherwise execute a joinder agreement and become a party
hereto (collectively, the "Investors").
RECITALS
WHEREAS, the Company and the Initial Investors have entered into an
Assignment and Assumption Agreement, dated as of the date hereof, pursuant to
which the Company issued certain securities to each of the Initial Investors;
NOW THEREFORE, in consideration of the mutual covenants and
agreements and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
ARTICLE I
DEMAND REGISTRATIONS
1.1 Requests for Registration. Subject to Sections 1.2 and 1.3
hereof, the Required Investors may request, in writing, registration under the
Securities Act of all or part of their Registrable Securities. Within twenty
(20) days after receipt of any such request, the Company will give notice of
such request to all other Investors. Thereafter, the Company will use all
reasonable efforts to effect the registration under the Securities Act (i) on
Form S-1 or any similar long-form registration statement (a "Long-Form
Registration") or (ii) on Form S-3 or any similar short-form registration
statement (a "Short-Form Registration") if the Company qualifies to effect a
Short Form Registration, and will include in such registration all Registrable
Securities with respect to which the Company has received written requests for
inclusion therein within twenty (20) days after the receipt of the Company's
notice, subject to the provisions of Section 1.4. All registrations requested
pursuant to this Section 1.1 are referred to herein as "Demand Registrations".
The Company shall not be required to effect any Demand Registration requested by
a Required Investor if either (a) within the six (6) months preceding the
receipt by the Company of such request, the Company has filed a registration
statement to which the Piggyback Registration rights set forth in Article II
hereof apply or (b) such Required Investor may sell all of the Registrable
Securities requested to be included in such Demand Registration without
registration under the Securities Act, pursuant to the exemption provided by (i)
Rule 144(k) under the Securities Act, as such rule may be amended from time to
time, or (ii) any similar rule or regulation hereafter adopted by the
Commission.
1.2 Number of Demand Registrations; Expenses. Subject to Sections
1.1 and 1.3 hereof, the Required Investors shall be entitled to an aggregate of
three (3) Demand
<PAGE>
Registrations, with no more than one (1) of such Demand Registrations being a
Long-Form Registration; provided, however, that the Company need not effect any
requested Demand Registration unless the expected proceeds of such registration
exceed $1,000,000. The Company will pay all Registration Expenses in connection
with any Demand Registration, including any Registration Statement that is not
deemed to be effected pursuant to the provisions of Section 1.3 hereof.
1.3 Effective Registration Statement. A registration requested
pursuant to Section 1.1 of this Agreement shall not be deemed to have been
effected (i) unless a Registration Statement with respect thereto has been
declared effective by the Commission, (ii) if after it has become effective,
such registration is interfered with by any stop order, injunction or other
order or requirement of the Commission or other governmental agency or court for
any reason, and, as a result thereof, the Registrable Securities covered thereby
have not been sold or (iii) the Registration Statement does not remain effective
for a period of at least 180 days beyond the effective date thereof or, with
respect to an underwritten offering of Registrable Securities, until ninety (90)
days after the commencement of the distribution by the holders of the
Registrable Securities included in such Registration Statement. If a
registration requested pursuant to this Article I is deemed not to have been
effected as provided in this Section 1.3, then the Company shall continue to be
obligated to effect the number of Demand Registrations set forth in Section 1.2
without giving effect to such requested registration.
1.4 Priority on Demand Registrations. If the Company includes in any
underwritten Demand Registration any securities which are not Registrable
Securities and the managing underwriters advise the Company in writing that in
their opinion the number of Registrable Securities and other shares of Common
Stock proposed to be included exceeds the number of Registrable Securities and
other securities which can be sold in such offering, the Company will first
include in such registration, to the exclusion of any other securities, the
number of Registrable Securities requested to be included which, in the opinion
of such underwriters, can be sold, pro rata among the Investors on the basis of
the amount of Registrable Securities requested to be offered thereby.
1.5 Subsequent Registration Rights. From and after the date of this
Agreement, in the event the Company shall, without the written consent of a
majority of the holders of Registrable Securities, enter into any agreement with
holders or a prospective holder of any securities of the Company giving such
holder or prospective holder registration rights the terms of which are more
favorable in the aggregate than the registration rights granted to the holders
of Registrable Securities hereunder, the Company shall notify the holders of
Registrable Securities of such more favorable terms and this agreement shall be
modified to reflect such terms.
2
<PAGE>
ARTICLE II
PIGGYBACK REGISTRATIONS
2.1 Right to Piggyback. Following the closing of the Public
Offering, whenever the Company proposes to register any of its equity securities
under the Securities Act (other than pursuant to a Demand Registration and other
than for use in a Rule 145 transaction or for registrations for employee plans)
and the registration form to be used may be used for the registration of
Registrable Securities (a "Piggyback Registration"), the Company will give
notice to all Investors of its intention to effect such a registration and will
include in such registration all Registrable Securities with respect to which
the Company has received written requests for inclusion therein within fifteen
(15) days after the receipt of the Company's notice, subject to the provisions
of Section 2.3 and 2.4 hereof. Such requests for inclusion shall specify the
number of Registrable Securities intended to be disposed of and the intended
method of distribution thereof.
2.2 Piggyback Expenses. The Registration Expenses of the Investors
will be paid by the Company in all Piggyback Registrations.
2.3 Priority on Primary Registrations. If a Piggyback Registration
is an underwritten primary registration on behalf of the Company, and the
managing underwriters advise the Company that in their opinion the number of
securities requested to be included in such registration exceeds the number
which can be sold in such offering, the Company will include in such
registration (i) first, the securities the Company proposes to sell, (ii)
second, that number of the Registrable Securities proposed to be included in
such registration, pro rata among the respective holders thereof based upon the
total number of shares which such holders proposed to include in such
registration and (iii) that number of other shares of Common Stock proposed to
be included in such registration, pro rata among the respective holders thereof
based upon the total number of shares which such holders propose to include in
such registration.
2.4 Priority on Secondary Registrations. If a Piggyback Registration
is not a Demand Registration pursuant to Article I hereof but is an underwritten
secondary registration on behalf of holders (other than the Investors) of the
Company's securities, and the managing underwriters advise the Company that in
their opinion the number of securities requested to be included in such
registration exceeds the number which can be sold in such offering, the Company
will include in such registration (i) first, the number of shares of Common
Stock requested to be included by holders and (ii) second, the Registrable
Securities requested to be included in such registration by the Investors pro
rata based upon the number of shares which such Investors requested to be
included.
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ARTICLE III
HOLDBACK AGREEMENTS
Holdback Obligations. Each holder of Registrable Securities agrees
not to effect any public sale or distribution of equity securities of the
Company, or any securities convertible, exchangeable or exercisable for or into
such securities, during the seven (7) days prior to, and the 90-day period
beginning on, the effective date of any underwritten Demand Registration (except
as part of such underwritten registration), unless (i) the managing underwriters
of the registered public offering otherwise agree or (ii) the executive
officers, directors and 10% stockholders of the Company shall not be similarly
restricted.
ARTICLE IV
REGISTRATION PROCEDURES
Whenever holders of Registrable Securities have requested that any
Registrable Securities be registered pursuant to this Agreement, the Company
will use reasonable efforts to effect the registration and the sale of such
Registrable Securities in accordance with the intended method of disposition
thereof as quickly as possible, and pursuant thereto the Company will as
expeditiously as reasonably possible:
(a) prepare and file with the Commission a Registration Statement
with respect to such Registrable Securities and use all reasonable efforts to
cause such Registration Statement to become and remain effective until the
completion of the distribution contemplated thereby; provided, that as promptly
as practicable before filing a Registration Statement or Prospectus or any
amendments or supplements thereto, the Company will (i) furnish to counsel
selected by the holders of Registrable Securities copies of all such documents
proposed to be filed and (ii) notify each holder of Registrable Securities
covered by such Registration Statement of (x) any request by the Commission to
amend such Registration Statement or amend or supplement any Prospectus, or (y)
any stop order issued or threatened by the Commission, and take all reasonable
actions required to prevent the entry of such stop order or to promptly remove
it if entered;
(b) (i) prepare and file with the Commission such amendments and
supplements to such Registration Statement and the Prospectus used in connection
therewith as may be necessary to keep such Registration Statement effective
until all Registrable Securities covered by such Registration Statement are sold
in accordance with the intended plan of distribution set forth in such
Registration Statement and (ii) comply with the provisions of the Securities Act
with respect to the disposition of all securities covered by such Registration
Statement during such period in accordance with the intended methods of
disposition by the sellers thereof set forth in such Registration Statement;
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(c) furnish to each seller of Registrable Securities, without
charge, such number of conformed copies of such Registration Statement, each
amendment and supplement thereto, the Prospectus included in such Registration
Statement (including each preliminary Prospectus and, in each case including all
exhibits) and such other documents as such seller may reasonably request in
order to facilitate the disposition of the Registrable Securities owned by such
seller;
(d) use all reasonable efforts to register or qualify such
Registrable Securities under such other securities or blue sky laws of such
jurisdictions in the United States as any seller thereof shall reasonably
request, to keep such registration or qualification in effect for so long as
such Registration Statement remains in effect and do any and all other acts and
things which may be reasonably necessary or advisable to enable such seller to
consummate the disposition in such jurisdictions of the Registrable Securities
owned by such seller; provided, however, that the Company will not be required
to (i) qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this clause (d), (ii) subject itself to
taxation in any such jurisdiction or (iii) consent to general service of process
in any such jurisdiction;
(e) use all reasonable efforts (if the offering is underwritten) to
furnish to each seller of Registrable Securities a signed copy, addressed to
such seller (and the underwriters, if any) of an opinion of counsel for the
Company or special counsel to the selling stockholders, dated the effective date
of such Registration Statement (and, if such Registration Statement includes an
underwritten public offering, dated the date of the closing under the
underwriting agreement), covering substantially the same matters with respect to
such Registration Statement (and the Prospectus included therein) as are
customarily covered in opinions of issuer's counsel delivered to the
underwriters in underwritten public offerings, and such other legal matters as
the seller (or the underwriters, if any) may reasonably request;
(f) notify each seller of Registrable Securities, at a time when a
Prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event known to the Company as a result of which the
Prospectus included in such Registration Statement, as then in effect, contains
an untrue statement of a material fact or omits to state any fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and, at the request of
any such seller, the Company will prepare and furnish such seller a reasonable
number of copies of a supplement to or an amendment of such Prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such Registrable
Securities, such Prospectus shall not include an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading;
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(g) cause all such Registrable Securities to be listed on each
securities exchange and quotation system on which similar securities issued by
the Company are then listed and, if such securities are not then listed on a
national securities exchange or the Nasdaq Stock Market, cause them to be so
listed or qualified; provided, that the Company then meets or is reasonably
capable of meeting the eligibility requirements for such an exchange or system
and such exchange or system is reasonably satisfactory to the managing
underwriters, and to enter into such customary agreements as may be required in
furtherance thereof, including, without limitation, listing applications and
indemnification agreements in customary form;
(h) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such Registration Statement;
(i) make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to such
Registration Statement and any attorney, accountant or other agent retained by
any such seller or underwriter, all financial and other records, pertinent
corporate documents and properties of the Company, and cause the Company's
officers, directors, employees and independent accountants to supply all
information reasonably requested by any such seller, underwriter, attorney,
accountant or agent in connection with such Registration Statement to enable
them to conduct a reasonable investigation within the meaning of the Securities
Act;
(j) subject to other provisions hereof, use all reasonable efforts
to cause such Registrable Securities covered by such Registration Statement to
be registered with or approved by such other governmental agencies or
authorities or self-regulatory organizations as may be necessary to enable the
sellers thereof to consummate the disposition of such Registrable Securities;
and
(k) promptly notify the holders of the Registrable Securities of the
issuance of any stop order by the Commission or the issuance by any state
securities commission or other regulatory authority of any order suspending the
qualification or exemption from qualification of any of the Registrable
Securities under state securities or "blue sky" laws, and use every reasonable
effort to obtain the lifting at the earliest possible time of any stop order
suspending the effectiveness of any Registration Statement or of any order
preventing or suspending the use of any preliminary Prospectus.
ARTICLE V
REGISTRATION EXPENSES
5.1 Registration Expenses. All registration and filing fees, fees
and expenses of compliance with securities or blue sky laws (including the fees
and expenses of counsel in connection with blue sky qualifications of the
Registrable Securities), printing expenses, listing fees for securities to be
registered on a national securities exchange or the Nasdaq Stock Market
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and all independent certified public accountants, underwriters (excluding
discounts and commissions) and other Persons retained by the Company and
reasonable fees and expenses of one counsel to the holders representing more
than 50% of the Registrable Securities registered in connection with the subject
registration (all such expenses being herein called "Registration Expenses"),
will be borne as provided in Sections 1.2 and 2.2 of this Agreement.
5.2 Sellers' Expenses. The Company shall have no obligation to pay
any underwriting discounts or commissions attributable to the sale of Registered
Securities, which expenses will be borne by all sellers of securities included
in such registration in proportion to the aggregate selling price of the
securities to be so registered.
ARTICLE VI
UNDERWRITTEN OFFERINGS
6.1 Underwriting Agreement. If requested by the underwriters for any
underwritten offering of Registrable Securities pursuant to a Demand
Registration, the Company will enter into an underwriting agreement with such
underwriters for such offering, such agreement to contain such representations
and warranties by the Company and such other terms as are generally included in
agreements of this type, including, without limitation, indemnities customarily
included in such agreements. The holders of the Registrable Securities will
cooperate in good faith with the Company in the negotiation of the underwriting
agreement.
6.2 Obligations of Participants in Underwritten Offerings. No Person
may participate in any underwritten registration hereunder unless such Person
(i) agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Person or Persons entitled hereunder
to approve such arrangements and (ii) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements, escrow agreements and
other documents required under the terms of such underwriting arrangements and
consistent with the provisions of this Agreement.
ARTICLE VII
INDEMNIFICATION
7.1 Company's Indemnification Obligations. The Company agrees to
indemnify and hold harmless each of the holders of any Registrable Securities
covered by any Registration Statement referred to herein and each other Person,
if any, who controls such holder within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act (collectively, the "Holder
Indemnitees"), as follows:
(i) against any and all loss, liability, claim, damage or
expense arising out of or based upon an untrue statement or alleged
untrue statement of a material
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fact contained in any Registration Statement (or any amendment or
supplement thereto), including all documents incorporated therein by
reference, or in any preliminary Prospectus or Prospectus (or any
amendment or supplement thereto) or the omission or alleged omission
therefrom of a material fact required to be stated therein or
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense to the extent of the aggregate amount paid in settlement of
any litigation, investigation or proceeding by any governmental
agency or body, commenced or threatened, or of any claim based upon
any such untrue statement or omission or any such alleged untrue
statement or omission, if such settlement is effected with the
written consent of the Company; and
(iii) against any and all expense incurred by them in
connection with investigating, preparing or defending against any
litigation, or investigation or proceeding by any governmental
agency or body, commenced or threatened, or any claim based upon any
such untrue statement or omission or any such alleged untrue
statement or omission, to the extent that any such expense is not
paid under clause (i) or (ii) above;
provided, that this indemnity does not apply to any loss, liability, claim,
damage or expense to the extent arising out of an untrue statement or alleged
untrue statement or omission or alleged omission made in reliance upon and in
conformity with information furnished to the Company by or on behalf of any
holder expressly for use in the preparation of any Registration Statement (or
any amendment or supplement thereto), including all documents incorporated
therein by reference, or in any preliminary Prospectus or Prospectus (or any
amendment or supplement thereto); and provided further, that the Company will
not be liable to any holder or any other Holder Indemnitee under the indemnity
agreement in this Section 7.1 with respect to any preliminary Prospectus or the
final Prospectus or the final Prospectus as amended or supplemented, as the case
may be, to the extent that any such loss, liability, claim, damage or expense of
such Holder Indemnitee results from the fact that such holder sold Registrable
Securities to a Person to whom there was not sent or given, at or prior to the
written confirmation of such sale, a copy of the final Prospectus or of the
final Prospectus as then amended or supplemented, whichever is most recent, if
the Company has previously and timely furnished copies thereof to such holder.
7.2 Holder's Indemnification Obligations. In connection with any
Registration Statement in which a holder of Registrable Securities is
participating, each such holder agrees to indemnify and hold harmless (in the
same manner and to the same extent as set forth in Section 7.1 of this
Agreement) the Company and each Person, if any, who controls the Company within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act with respect to any statement or alleged statement in or omission or alleged
omission from
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such Registration Statement, any preliminary, final or summary Prospectus
contained therein, or any amendment or supplement thereto, if such statement or
alleged statement or omission or alleged omission was made about such holder in
reliance upon and in conformity with information furnished to the Company by or
on behalf of such holder. The obligations of each holder pursuant to this
Section 7.2 are to be several and not joint; provided, that, with respect to
each claim pursuant to this Section 7.2, each such holder's maximum liability
under this Section shall be limited to an amount equal to the net proceeds
actually received by such holder (after deducting any underwriting discount and
expenses) from the sale of Registrable Securities being sold pursuant to such
Registration Statement or Prospectus by such holder.
7.3 Notices; Defense; Settlement. Promptly after receipt by an
indemnified party hereunder of written notice of the commencement of any action
or proceeding involving a claim referred to in Section 7.1 or Section 7.2 of
this Agreement, such indemnified party will, if a claim in respect thereof is to
be made against an indemnifying party, give written notice to the latter of the
commencement of such action; provided, that the failure of any indemnified party
to give notice as provided herein shall not relieve the indemnifying party of
its obligations under Section 7.1 or Section 7.2 of this Agreement except to the
extent that the indemnifying party is actually prejudiced by such failure to
give notice. In case any such action is brought against an indemnified party,
the indemnifying party will be entitled to participate in and to assume the
defense thereof, jointly with any other indemnifying party similarly notified,
to the extent that it may wish, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party for any legal or
other expenses subsequently incurred by the latter in connection with the
defense thereof, unless in such indemnified party's reasonable judgment a
conflict of interest between such indemnified and indemnifying parties may exist
in respect of such claim, in which case the indemnifying party shall not be
liable for the fees and expenses of (i) more than one counsel for all holders of
Registrable Securities, selected by the Required Investors or (ii) more than one
counsel for the Company in connection with any one action or separate but
similar or related actions. An indemnifying party who is not entitled to, or
elects not to, assume the defense of a claim will not be obligated to pay the
fees and expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim, in which event the indemnifying party shall be obligated to pay the fees
and expenses of such additional counsel or counsels. The indemnifying party will
not, without the prior written consent of each indemnified party, settle or
compromise or consent to the entry of any judgment in any pending or threatened
claim, action, suit or proceeding in respect of which indemnification may be
sought hereunder (whether or not such indemnified party or any Person who
controls such indemnified party is a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of such indemnified party from all liability arising out
of such claim, action, suit or proceeding. Notwithstanding anything to the
contrary set forth herein, and without
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limiting any of the rights set forth above, in any event any party will have the
right to retain, at its own expense, counsel with respect to the defense of a
claim.
7.4 Indemnity Provision. The Company and each holder of Registrable
Securities requesting registration shall provide for the foregoing indemnity
(with appropriate modifications) in any underwriting agreement with respect to
any required registration or other qualification of securities under any Federal
or state law or regulation of any governmental authority other than the
Securities Act.
7.5 Contribution Based on Relative Fault. If the indemnification
provided for in Sections 7.1 and 7.2 of this Agreement is unavailable or
insufficient to hold harmless an indemnified party under such Sections, then
each indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of the losses, claims, damages or liabilities
referred to in Section 7.1 or Section 7.2 of this Agreement in such proportion
as is appropriate to reflect the relative fault of the indemnifying party on the
one hand, and the indemnified party on the other, in connection with statements
or omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations, including,
without limitation, the relative benefits received by each party from the
offering of the securities covered by such Registration Statement, the parties'
relative knowledge and access to information concerning the matter with respect
to which the claim was asserted and the opportunity to correct and prevent any
statement or omission. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the indemnifying party or the indemnified party and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statements or omission. The parties hereto agree
that it would not be just and equitable if contributions pursuant to this
Section 7.5 were to be determined by pro rata or per capita allocation (even if
the underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable considerations
referred to in the first sentence of this Section 7.5. The amount paid by an
indemnified party as a result of the losses, claims, damages or liabilities
referred to in the first sentence of this Section 7.5 shall be deemed to include
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any action or claim (which shall be
limited as provided in Section 7.3 of this Agreement if the indemnifying party
has assumed the defense of any such action in accordance with the provisions
thereof) which is the subject of this Section 7.5. Promptly after receipt by an
indemnified party under this Section 7.5 of notice of the commencement of any
action against such party in respect of which a claim for contribution may be
made against an indemnifying party under this Section 7.5, such indemnified
party shall notify the indemnifying party in writing of the commencement thereof
if the notice specified in Section 7.3 of this Agreement has not been given with
respect to such action; provided, that the omission to so notify the
indemnifying party shall not relieve the indemnifying party from any liability
which it may otherwise have to any indemnified party under this Section 7.5,
except to the extent that the indemnifying party is actually prejudiced by such
failure to give notice. The Company
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and each holder of Registrable Securities agrees with each other and the
underwriters of the Registrable Securities, if requested by such underwriters,
that (i) the underwriters' portion of such contribution shall not exceed the
underwriting discount and (ii) that the amount of such contribution shall not
exceed an amount equal to the net proceeds actually received by such
indemnifying party from the sale of Registrable Securities in the offering to
which the losses, liabilities, claims, damages or expenses of the indemnified
parties relate. No Person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.
7.6 Payments. The indemnification required by this Article VII shall
be made by periodic payments of the amount thereof during the course of the
investigation or defense, as and when bills are received or expense, loss,
damage or liability is incurred.
ARTICLE VIII
DEFINITIONS
8.1 Terms. As used in this Agreement, the following defined terms
shall have the meanings set forth below:
"Business Day" means a day other than Saturday, Sunday or any day on
which banks located in the State of New York are authorized or obligated to
close.
"Class A Common Stock" means the Class A Common Stock, par value
$.01 per share, of the Company and any securities into which the Class A Common
Stock shall have been changed or any securities resulting from any
reclassification or recapitalization of the Class A Common Stock.
"Class B Common Stock" means the Class B Common Stock, par value
$.01 per share, of the Company and any securities into which the Class B Common
Stock shall have been changed or any securities resulting from any
reclassification or recapitalization of the Class B Common Stock.
"Commission" means the U.S. Securities and Exchange Commission.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any similar Federal statute then in effect, and any reference to a
particular section thereof shall include a reference to the equivalent section,
if any, of any such similar Federal statute, and the rules and regulations
thereunder.
"Person" means any individual, corporation, partnership,
association, trust or other entity or organization, including a government or
political subdivision or an agency or instrumentality thereof.
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"Prospectus" means the Prospectus included in any Registration
Statement (including without limitation, a Prospectus that disclosed information
previously omitted from a Prospectus filed as part of an effective Registration
Statement in reliance upon Rule 430A promulgated under the Securities Act), as
amended or supplemented by any Prospectus supplement, with respect to the terms
of the offering of any portion of the securities covered by such Registration
Statement, and all other amendments and supplements to the Prospectus, including
post-effective amendments, and all material incorporated by reference or deemed
to be incorporated by reference in such Prospectus.
"Public Offering" means the consummation of the initial underwritten
public offering of Class A Common Stock registered under the Securities Act of
1933, as amended.
"Registrable Securities" means (i) the Class A Common Stock issued
or issuable at any time to an Initial Investor, including, without limitation,
in connection with the conversion of any Class B Common Stock into Class A
Common Stock or the exercise of any warrant or option to purchase any Class A
Common Stock and (ii) any securities issued or issuable with respect to such
shares of Class A Common Stock in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. Registrable
Securities will continue to maintain their status as Registrable Securities in
the hands of any transferee from an Initial Investor provided such transferee
executes a joinder agreement described by Section 9.11. As to any particular
Registrable Securities, such securities will cease to be Registrable Securities
when they have been (x) effectively registered under the Securities Act and
disposed of in accordance with the registration statement covering them or (y)
publicly resold pursuant to Rule 144 (or any similar rule then in force) under
the Securities Act and, in each case, new certificates for them not bearing a
restrictive Securities Act legend have been delivered by the Company and can be
sold without complying with the registration requirements of the Securities Act.
"Registration Statement" means any Registration Statement of the
Company which covers any of the Registrable Securities pursuant to the
provisions of this Agreement, including the Prospectus, amendments and
supplements to such Registration Statement, including post-effective amendments,
all exhibits and all material incorporated by reference in such Registration
Statement.
"Required Investors" means, as of the date of any determination
thereof, the holders of Registrable Securities representing an aggregate of not
less than 25% (by number of shares) of all Registrable Securities.
"Securities Act" means the Securities Act of 1933, as amended, or
any similar Federal statute then in effect, and any reference to a particular
section thereof shall include a reference to a comparable section, if any, of
any such similar Federal statute, and the rules and regulations thereunder.
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8.2 Defined Terms in Corresponding Sections. The following defined
terms, when used in this Agreement, shall have the meaning ascribed to them in
the corresponding Sections of this Agreement listed below:
"Agreement" -- Preamble
"Company" -- Preamble
"Demand Registrations" -- Section 1.1
"Holder Indemnitees" -- Section 7.1
"Long-Form Registration" -- Section 1.1
"Piggyback Registration" -- Section 2.1
"Registration Expenses" -- Section 5.1
"Short-Form Registration" -- Section 1.1
"Initial Investors" -- Preamble
"Investors" -- Preamble
ARTICLE IX
MISCELLANEOUS
9.1 Remedies. In the event of a breach by any party to this
Agreement of its obligations under this Agreement, any party injured by such
breach, in addition to being entitled to exercise all rights granted by law,
including recovery of damages, will be entitled to specific performance of its
rights under this Agreement. The parties agree that the provisions of this
Agreement shall be specifically enforceable, it being agreed by the parties that
the remedy at law, including monetary damages, for breach of any such provision
will be inadequate compensation for any loss and that any defense in any action
for specific performance that a remedy at law would be adequate is waived.
9.2 Amendments and Waivers. Except as otherwise provided herein, no
modification, amendment or waiver of any provision of this Agreement will be
effective against the Company or any holder of Registrable Securities, unless
such modification, amendment or waiver is approved in writing by the Company and
the Investors representing a majority of the Registrable Securities then
outstanding. The failure of any party to enforce any of the provisions of this
Agreement will in no way be construed as a waiver of such provisions and will
not affect the right of such party thereafter to enforce each and every
provision of this Agreement in accordance with its terms.
9.3 Successors and Assigns. All covenants and agreements in this
Agreement by or on behalf of any of the parties hereto will bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not.
9.4 Notices. All notices, requests and other communications
hereunder must be in writing and will be deemed to have been duly given only if
delivered personally against
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written receipt or by facsimile transmission or mailed by pre-paid registered or
certified mail, return receipt requested or mailed by overnight courier prepaid
to the parties at the following addresses or facsimile numbers:
If to the Company, to:
eSpeed, Inc.
One World Trade Center
103rd Floor
New York, NY 10023
Facsimile No.: (212) 262-1079
Attn.: Stephen M. Merkel
with a copy to:
Morgan, Lewis & Bockius LLP
101 Park Avenue
New York, New York 10178
Facsimile No.: (212) 309-6273
Attn.: Christopher T. Jensen
If to any Investor, to:
The last address (or facsimile number) for such Person set
forth in the records of the Company.
All such notices, requests and other communications will (i) if delivered
personally to the address as provided in this Section 9.4, be deemed given upon
delivery, (ii) if delivered by facsimile transmission to the facsimile number as
provided in this Section 9.4, be deemed given upon receipt of confirmation,
(iii) if delivered by mail in the manner described above to the address as
provided in this Section 9.4, be deemed given on the earlier of the third full
Business Day following the day of mailing or upon receipt, and (iv) if delivered
by overnight courier to the address provided in this Section 9.4, be deemed
given on the earlier of the first Business Day following the date sent by such
overnight courier or upon receipt. Any party from time to time may change its
address, facsimile number or other information for the purpose of notices to
that party by giving notice specifying such change to the other parties hereto.
9.5 Headings. The headings used in this Agreement have been inserted
for convenience of reference only and do not define or limit the provisions
hereof.
9.6 Gender. Whenever the pronouns "he" or "his" are used herein they
shall also be deemed to mean "she" or "hers" or "it" or "its" whenever
applicable. Words in the
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singular shall be read and construed as though in the plural and words in the
plural shall be construed as though in the singular in all cases where they
would so apply.
9.7 Invalid Provisions. If any provision of this Agreement is held
to be illegal, invalid or unenforceable under any present or future law, and if
the rights or obligations of any party hereto under this Agreement will not be
materially and adversely affected thereby, (i) such provision will be fully
severable, (ii) this Agreement will be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part hereof,
(iii) the remaining provisions of this Agreement will remain in full force and
effect and will not be affected by the illegal, invalid or unenforceable
provision or by its severance herefrom and (iv) in lieu of such illegal, invalid
or unenforceable provision, there will be added automatically as a part of this
Agreement a legal, valid and enforceable provision as similar in terms to such
illegal, invalid or unenforceable provision as may be possible.
9.8 Governing Law. This Agreement shall be governed by and construed
in accordance with the domestic laws of the State of New York; provided,
however, that all provisions of this Agreement within the purview of the General
Corporation Law of the State of Delaware shall be governed by such law.
9.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
9.10 Deferral. Notwithstanding the provisions of Articles I and II,
the Company's obligations to file a Registration Statement, or cause such
Registration Statement to become and remain effective, shall be suspended for a
period not to exceed 90 consecutive days if there exists at the time material
non-public information relating to the Company that, in the reasonable opinion
of the Company's board of directors or counsel, should not be disclosed;
provided further, that the Company may not invoke the foregoing provision more
than two (2) times in any twelve (12) month period.
9.11 Additional Investors. Any transferee of Registrable Securities
from an Initial Investor shall be entitled to the benefits of this Agreement
upon execution by such transferee of a joinder agreement in form reasonably
satisfactory to the Company stating that such transferee agrees to be bound by
the terms hereof as an "Investor."
ARTICLE X
RULE 144 REPORTING
The Company hereby agrees as follows:
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(a) The Company shall use commercially reasonable efforts to
make and keep public information available, as those terms are understood and
defined in Rule 144 under the Securities Act, at all times from and after 90
days following the effective date of the first Public Offering.
(b) The Company shall use commercially reasonable efforts to
file with the Commission in a timely manner all reports and other documents as
the Commission may prescribe under Section 13(a) or 15(d) of the Exchange Act at
any time after the Company has become subject to such reporting requirements of
the Exchange Act.
(c) The Company shall furnish to each holder of Registrable
Securities forthwith upon request (i) a written statement by the Company as to
its compliance with the reporting requirements of Rule 144 (at any time from and
after 90 days following the effective date of the first Public Offering), and of
the Securities Act and the Exchange Act (at any time after it has become subject
to such reporting requirements), (ii) a copy of the most recent annual or
quarterly report of the Company, and (iii) such other reports and documents so
filed as a holder may reasonably request to avail itself of any rule or
regulation of the Commission allowing a holder of Registrable Securities to sell
any such securities without registration.
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IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date first above written.
COMPANY:
eSPEED, INC.
By: /s/ Douglas B. Gardner
------------------------------------
Name: Douglas B. Gardner
Title: Vice Chairman
INVESTORS:
CANTOR FITZGERALD SECURITIES
By: /s/ Howard W. Lutnick
------------------------------------
Name: Howard W. Lutnick
Title: President
CANTOR FITZGERALD, L.P.
By: CF GROUP MANAGEMENT,
INC., its managing partner
By: /s/ Howard W. Lutnick
------------------------------------
Name: Howard W. Lutnick
Title: President
[Signature Page to Registration Rights Agreement]
<PAGE>
SUBLEASE
SUBLEASE AGREEMENT dated as of December 15, 1999 between CANTOR FITZGERALD
SECURITIES, a New York general partnership having an office at One World Trade
Center, New York, New York 10048 (hereinafter referred to as "Tenant") and
eSPEED, INC., a Delaware corporation, having an office at One World Trade
Center, New York, New York 10048 (hereinafter referred to as "Subtenant"):
W I T N E S S E T H
WHEREAS, Tenant has leased certain space, more particularly described in
the "Lease" (as hereinafter defined) (the "Demised Premises") located in the
building known as One World Trade Center, New York, New York (the "Building"),
pursuant to the provisions of a lease dated October 12, 1978, as amended (the
"Lease") between The Port Authority of New York and New Jersey ("Landlord") and
Tenant's predecessor-in-interest; and
WHEREAS, Subtenant is an affiliate of Tenant (with Tenant owning in excess
of 50% of the outstanding shares of Subtenant); and
WHEREAS, Subtenant, and its wholly owned subsidiaries, have been formed to
provide certain services formerly provided by a division of Tenant in portions
of the Demised Premises; and
WHEREAS, Subtenant desires to sublease from Tenant such portions of the
Demised Premises consisting of the entire rentable area of the 103rd floor of
the Building (which space is hereinafter called the "Space").
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
1. Term, Rent, Late Charges.
a. Tenant hereby sublets the Space to Subtenant, and Subtenant
hereby hires the same from Tenant, for the term (the "Term") commencing on the
date hereof (the "Commencement Date"), and ending on March 15, 2012 (the
"Expiration Date"), subject to the provisions of paragraph 9 hereof (unless
sooner terminated pursuant to the terms hereof).
b. During the Term, Subtenant shall pay to Tenant, on the first day
of each calendar month, an amount equal to the product obtained by multiplying
(x) the rate per rentable square foot then being paid by Tenant for rent and all
items of additional rent with respect to the Space pursuant to the Lease, by (y)
the number of rentable square feet constituting the Space, which, for all
purposes, the parties agree is 50,395. Subtenant agrees to pay such rent as
provided herein, without any set-off or deduction whatsoever, except as
otherwise expressly provided herein. To the extent that Tenant shall be entitled
to an abatement of rent and/or additional rent accruing under the Lease during
the Term, and arising from a condition which, if Subtenant were the tenant under
the Lease, and assuming the Space were the only space demised hereunder, would
have entitled Subtenant to such an abatement, then Subtenant shall be entitled
to an abatement of rent and/or additional rent hereunder to the extent of the
lesser of (x) the amount of the abatement to which Tenant is entitled, or (y)
the rent and additional rent payable by Subtenant hereunder during the period of
such abatement. Payments for any partial calendar month shall be prorated on a
per diem basis.
2. Use. Subtenant shall use and occupy the Space only as offices and
trading facilities, for providing to institutional and retail broker-dealer,
other financial services firms and other sellers of goods or services direct,
electronic access to certain proprietary hardware, software, trading
technologies and systems designed to enable such firms to electronically match,
execute and settle trades in a wide variety of fixed income, futures products
and other products, subject, in any event, to the provisions of the Lease.
Subtenant acknowledges that the Space may be used only for uses which the
Landlord determines, acting in a non-arbitrary and non-capricious manner, are in
accordance with Chapter 5 of Title 17 of the Unconsolidated Laws of the State of
New York.
<PAGE>
3. Incorporation of the Lease, Quiet Enjoyment. This Sublease is expressly
made subject and subordinate to the terms and conditions of the Lease and to any
and all mortgages and/or ground leases to which the Lease may be or become
subject and subordinate. Subtenant hereby agrees to perform all obligations of
Tenant under the Lease and to comply with and abide by the terms and conditions
thereof, insofar as the same relate to the Space and to Subtenant's use and
occupancy thereof arising and accruing during the Term, except for the payment
of Tenant's rent and additional rent owing thereunder, other than as set forth
in paragraph 1.b hereof. Tenant agrees that Subtenant, upon paying all rent and
other charges to be paid by it hereunder, and observing the covenants and
conditions hereof on its part to be performed, shall peaceably and quietly enjoy
the Space, subject, nevertheless, to the terms and conditions of the Lease.
Subtenant shall be entitled to and shall receive, and Tenant shall cooperate
with Subtenant at its request in securing for Subtenant, all of the rights,
privileges, elections, benefits and services available to Tenant under the
Lease, insofar as the same relate to the Space and Subtenant's use and occupancy
thereof, except that Subtenant shall not be entitled to any portion of the
construction contribution provided for under the Lease with respect to the
Space. However, Tenant will not be liable to Subtenant for any failure of
Landlord in providing such rights, privileges, elections, benefits and services.
4. Assignment and Subletting. Subtenant will not assign this Sublease or
allow the same to be transferred by operation of law or otherwise, and will not
further sublet the Space or any part thereof, or allow the Space, or any part
thereof, to be used by others, except with the prior written consent of Tenant
and Landlord in accordance with the provisions of the Lease. Any attempted
assignment or subletting which is contrary to the provisions of this paragraph
shall be void. Notwithstanding the foregoing, Tenant acknowledges that portions
of the Space shall be used by eSpeed Securities, Inc., eSpeed Markets, Inc. and
eSpeed Government Securities, Inc. for the uses contemplated by, and subject to
the provisions of, paragraph 2 hereof. Subtenant represents and warrants to
Tenant that each of such entities is a wholly owned subsidiary of Subtenant. In
reliance upon such representation, Tenant hereby approves such use, so long as
such entities shall remain wholly owned subsidiaries of Subtenant.
5. Alterations. Subtenant has examined the Space and agrees to accept the
Space in its existing condition and state of repair. Any alterations or
remodeling that Subtenant may desire to effect shall be subject to the prior
written consent of Tenant and Landlord in accordance with the provisions of the
Lease, and shall be at the sole expense of Subtenant.
6. Fixtures and Installations. All alterations, decorations, installations
and improvements made in the Space, including all paneling, partitioning and the
like, made by either Tenant or Subtenant, shall become the property of Tenant
and shall remain upon and be surrendered with the Space as part thereof at the
end of the term hereof. Trade fixtures, furnishings, decorations which are not
an integral part of the Space and all items of Subtenant's personal property
(collectively, "Subtenant's Property"), shall remain the property of Subtenant,
and shall be removed from the Space by and at the expense of Subtenant prior to
the expiration or other termination of the Term. Any repairs that may be
necessitated by the removal of Subtenant's Property shall be promptly made by
and at the expense of Subtenant.
7. Signs. Tenant shall cooperate with Subtenant with respect to requesting
that Landlord place Subtenant's name in any building directory serving the
Building. Any expense incurred with respect to such request or listing shall be
paid by Subtenant. No signs may be put on or in any window nor on the exterior
of the Building. Any signs or lettering in the public corridors or on the doors
must be submitted to Tenant and Landlord for approval before installation.
Tenant agrees that so long as Landlord shall approve such installation, Tenant
shall not unreasonably withhold or delay its consent to same.
8. End of Term, Holdover.
a. Upon the expiration or other termination of the Term, Subtenant
shall quit and surrender to Tenant the Space, broom clean, in good order and
condition, ordinary wear and tear and damage by casualty excepted, and otherwise
in the condition required under the Lease, and Subtenant shall remove all of
Subtenant's Property, and shall repair all damage to the Building occasioned by
such removal. Any property not removed from
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the Space shall be deemed abandoned by Subtenant and may be disposed of in any
manner deemed appropriate by the Tenant.
b. In no event shall Subtenant have any right to remain in
possession of any part of the Space after the expiration or other termination of
this Sublease, and Subtenant agrees and understands that (i) it is affirmatively
obligated to surrender possession of the Space to Tenant on or before the
expiration or other termination of this Sublease, and (ii) any such continued
occupation of the Space beyond such date may cause Tenant to sustain
consequential damages. Subtenant shall be subject not only to summary
proceedings, but also to all costs, losses and damages (consequential or
otherwise) related thereto, including, without limitation, any damages arising
out of any lost opportunities (and/or new subleases) by Tenant to re-let the
Space or any part thereof, in addition to any other remedy provided in this
Sublease (as if the same had not expired or terminated) or at law. All damages
to Tenant by reason of such holding over by Subtenant may be the subject of a
separate action and need not be asserted by Tenant in any summary proceedings
against Subtenant.
c. The aforesaid provisions of this paragraph 8 shall survive the
expiration or sooner termination of this Sublease.
9. Early Termination. Tenant and Subtenant acknowledge and agree that the
parties intend that the Term of this Sublease shall end one (1) day prior to the
term of the Lease, which day is set forth as the Expiration Date in paragraph
1.a hereof. Subtenant further acknowledges that Tenant has an option (the "Early
Termination Option"), as set forth in the Lease, to cancel the Lease prior to
the expiration date thereof (which date may be earlier than the Expiration Date
hereunder). Anything contained herein to the contrary notwithstanding
(including, without limitation, the provisions of paragraphs 1.a and 15.f
hereof), Subtenant agrees that in the event Tenant shall exercise its Early
Termination Option under the Lease, and as a result thereof, the Lease shall
terminate prior to the Expiration Date hereunder, then the Expiration Date
hereunder shall be one (1) day prior to the date on which the Lease shall
terminate, and this Sublease shall terminate and expire on such date with the
same force and effect as if such date were the Expiration Date originally
provided for herein. Tenant shall send Subtenant a copy of Tenant's notice
exercising the Early Termination Option simultaneously with Tenant sending such
notice to the Landlord. Subtenant further agrees that Tenant shall have no
liability to Subtenant by reason of Tenant's exercise of the Early Termination
Option and the early termination of this Sublease as a result thereof.
10. Choice of Laws, Jurisdiction. This Sublease shall be construed in
accordance with the laws of the State of New York. Each party hereby consents to
the jurisdiction and venue of the courts of the State of New York and the United
States District Court for the Southern District of New York in connection with
any claim or controversy arising out of or relating to this Agreement.
11. Indemnity, Insurance.
a. Unless caused by Tenant's negligent acts, or the negligent acts
of Tenant's employees, agents, representatives and contractors, Tenant shall not
be liable for any damage to persons or property sustained by Subtenant and
others by reason of Subtenant's use and occupancy of the Space. Subtenant agrees
to indemnify and save Tenant harmless from and against any and all claims
arising from Subtenant's use and occupancy of the Space, and will carry
liability insurance for bodily injury, death and property damage having limits
in the amount of $3,000,000 combined single limit, naming Tenant and Landlord as
additional insureds. At or before the Commencement Date, Subtenant will furnish
Tenant with a certificate evidencing such insurance coverage for the benefit of
Subtenant, Tenant and Landlord, as their respective interests may appear.
b. Neither Tenant nor its agents shall be liable for any damage to
property of Subtenant or of others entrusted to employees of the Building or of
Tenant, nor for the loss of or damage to any property of Subtenant by theft or
otherwise. Neither Tenant nor its agents shall be liable for any injury or
damage to persons, property or business resulting from fire, explosion, falling
plaster, steam, gas, electricity, electrical disturbance,
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water, rain or snow or leaks from any part of the Building or from the pipes,
appliances or plumbing works or from the roof, street or subsurface or from any
other place or by dampness or by any other cause of whatsoever nature, unless
caused by or due to the negligence of Tenant, its agents, servants,
representatives, contractors or employees; nor shall Tenant or its agents be
liable for any such damage caused by Landlord, other tenants or persons in the
Building or caused by operations in construction of any private, public or quasi
public work; nor shall Tenant be liable for any latent defect in the Space or in
the Building. Subtenant shall reimburse and compensate Tenant as additional rent
for all expenditures made by, or damages or fines sustained or incurred by
Tenant due to, non- performance or non-compliance with or breach or failure to
observe any term, covenant or condition of this Sublease upon Subtenant's part
to be kept, observed, performed or complied with. Subtenant shall give immediate
notice to Tenant in case of fire or accidents in the Space or in the Building or
of defects therein or in any fixtures or equipment. Each party shall give the
other party copies of any notices received from Landlord with respect to the
Space during the Term, promptly upon such party's receipt of such notices.
12. Casualty/Condemnation. With respect to the Space, Subtenant shall have
the same rights and obligations as Tenant under the Lease, as if the Space were
the only space demised to Tenant thereunder, in the case of damage to or
destruction of the Space by fire or other causes or in the case of condemnation.
13. Default. Any material violation by Subtenant of any of the terms,
provisions, covenants or conditions of the Lease, or of any rules or regulations
promulgated and enforced by Landlord, which violation continues beyond any
applicable grace or notice period provided for the cure thereof, shall
constitute a violation of this Sublease. In the event of any such violation or
of any default in the payment of rent or any other material violation of this
Sublease, Tenant, after giving Subtenant ten (10) days' prior written notice of
any payment default and twenty (20) days' written notice for nonpayment
defaults, shall have and may exercise against Subtenant all the rights and
remedies available to the Landlord under the Lease, as though the same were
expressly reiterated herein as the rights of Tenant, unless within the
applicable cure period Subtenant has cured the specified default or violation or
if the specified default or violation is of such a nature that it cannot be
cured within said period, Subtenant has commenced the curing thereof within said
period, and diligently prosecutes such curing to completion. No waiver of any
such violation by either Tenant or its Landlord shall be deemed a waiver of the
term, provisions, covenant, condition, rule or regulation in question or any
other subsequent violation.
14. Notices. All payments and notices made or given hereunder shall be
deemed sufficiently made or given if sent by registered or certified mail,
return receipt requested, or by recognized overnight courier as follows:
To Tenant: Cantor Fitzgerald Securities
One World Trade Center
New York, NY 10048
Attn: Douglas B. Gardner
To Subtenant: eSpeed, Inc.
One World Trade Center
103rd Floor
New York, NY 10048
Attn: General Counsel
or to such other address as may be specified by either party hereto by written
notice to the other party hereto.
15. Miscellaneous.
a. The term "Tenant" as used in this Sublease means only the person
to whom Subtenant is required by law to attorn, so that, for example, in the
event of any assignment by Tenant of the Lease, Tenant shall be and hereby is
freed and relieved of all terms, covenants, conditions, provisions and agreement
of the Tenant
4
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thereafter accruing and it shall be deemed and construed, without further
agreement between the parties hereto, or their successors and interests, or
between the parties hereto and the Assignee, that the Assignee has assumed and
agreed to carry out any and all covenants and obligations of Tenant thereafter
accruing hereunder.
b. Subtenant shall look solely to the estate and property of Tenant
in the Lease for the satisfaction of Subtenant's remedies for the collection of
a judgment (or other judicial process) requiring the payment of money by Tenant
in the event of any default or breach by Tenant with respect to any of the
terms, covenants and/or conditions of this Sublease to be observed and/or
performed by Tenant, and no other property or assets of such Tenant shall be
subject to levy, execution or other enforcement procedure for the satisfaction
of Subtenant's remedies.
c. With respect to any provision of this Sublease which provides for
Tenant's approval and/or consent, Subtenant, in no event, shall be entitled to
make, nor shall Subtenant make any claim, and Subtenant hereby waives any claim,
for money damages, nor shall Subtenant claim any money damages by way of
set-off, counterclaim or defense, based upon any claim or assertion by Subtenant
that Tenant has unreasonably withheld or unreasonably delayed any such consent
or approval.
d. Any obligation of Tenant which is contained in this Sublease may
be observed or performed by Tenant using reasonable efforts to cause the
Landlord under the Lease to observe and/or perform the same. In the event of a
default by Landlord in the observance and/or performance of any of its
obligations under the Lease relating to the Space, or the use thereof by
Subtenant, Tenant agrees that it shall, upon notice from Subtenant, make demand
upon Landlord to perform its obligations under the Lease and, provided that
Subtenant specifically agrees to pay its pro-rata share (based on the ratio of
the affected area of the Space to the affected area of the entire Demised
Premises), of all costs and expenses of Tenant, Tenant shall take all
appropriate action (including commencement and prosecution of appropriate legal
proceedings, provided Subtenant agrees to indemnify [on a pro-rata basis, as
provided above] Tenant for any loss, damages, costs and expenses, including
reasonable attorneys' fees and disbursements, that Tenant may incur as a result
of commencing such legal proceedings) to enforce the Lease. Tenant shall pay the
rent and additional rent due under the Lease, and perform all other covenants of
Tenant thereunder.
e. Tenant shall promptly deliver to Subtenant all written notices of
default, and notices relating in any material way to the Space, that Tenant
receives from Landlord under the Lease.
f. Tenant hereby represents, warrants and covenants to Subtenant
that: (i) Tenant has provided Subtenant with a true, correct and complete copy
of the Lease, as amended, and the Lease represents the entire agreement between
Tenant and Landlord with respect to the Lease of the Demised Premises, (ii) the
Lease is in full force and effect, (iii) neither Landlord nor Tenant has
exercised any option or right to (x) cancel or terminate the Lease or shorten
the term thereof or (y) reduce or relocate the Demised Premises (except as set
forth in the Lease), (iv) the expiration date of the Lease is March 16, 2012,
and (v) Tenant agrees that it shall not amend, terminate, modify, waive,
surrender the Lease, without the prior written consent of Subtenant (except as
contemplated in paragraph 9 hereof), if such amendment, termination,
modification, waiver or surrender shall adversely affect Subtenant's rights and
privileges under this Sublease.
16. Broker. Tenant and Subtenant each, as indemnitor, warrants and
represents to the other, as indemnitee, that insofar as indemnitor knows, no
brokers negotiated this Sublease or are entitled to a commission in connection
therewith. Indemnitor does hereby agree to indemnify, defend and hold
indemnitee, harmless of and from any claim, damages, judgment, cost and/or
expense (including, without limitation, reasonable attorneys' fees and
disbursements) incurred by the indemnitee by reason of any claim of any broker,
person or entity who claims to have dealt with the indemnitor in connection with
the Space or this Agreement.
17. Landlord's Consent. Simultaneously with the execution hereof, Tenant
and Subtenant are executing a Consent to Sublease Agreement substantially in the
form annexed hereto as Exhibit 1, which, pursuant to
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the terms of the Lease, is a condition to obtaining the consent of the Landlord
to this Sublease. Tenant shall promptly deliver such Consent to Sublease
Agreement to Landlord for its signature, and shall deliver a fully executed copy
thereof to Subtenant promptly upon receipt by Tenant of same from Landlord.
Subtenant acknowledges that pursuant to the terms of the Lease, Landlord is
required to grant its consent to this Sublease by reason of the fact that
Subtenant is and maintains a relationship with Tenant, as more fully described
in paragraph 2 of that certain Supplemental No. 2 to the Lease. Subtenant
further acknowledges that if at any time during the Term, such required
relationship is no longer in effect, the Landlord shall have the right, inter
alia, to revoke its consent to this Sublease, in which event this Sublease shall
immediately terminate and expire and Subtenant shall immediately vacate the
Space and surrender same to Tenant. Subtenant agrees that Tenant shall have no
liability to Subtenant for any damages, losses, liability or expense in the
event of any such termination.
18. Entire Agreement. Except only as to references to the Lease contained
herein, this Agreement contains the entire agreement of the parties relating to
the subject matter hereof and supersedes all prior negotiations, conversations,
correspondence and agreements. There are no representations or warranties not
set forth herein. No waiver or modification hereof shall be valid or effective
unless in writing signed by the party or parties thereby affected.
19. Successors and Assigns. This Sublease shall bind and inure to the
benefit of the parties hereto and their successors and assigns.
[Signature Page Follows]
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IN WITNESS WHEREOF, the parties hereto have caused this Sublease to be
duly executed as of the day and year first above written.
TENANT: Cantor Fitzgerald Securities
By: /s/ Howard W. Lutnick
------------------------------------
Name: Howard W. Lutnick
Title: President
SUBTENANT: eSpeed, Inc.
By: /s/ Douglas B. Gardner
------------------------------------
Name: Douglas B. Gardner
Title: Vice Chairman
[Signature Page to New York Sublease]
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WARRANT AGREEMENT
THIS WARRANT AGREEMENT, dated as of December 9, 1999 by and between
eSpeed, Inc., a Delaware corporation (the "Company"), and Martin J. Wygod (the
"Grantee").
In accordance with the letter agreement dated as of November 1, 1999 by and
between the Company and the Grantee, and in consideration for the services
rendered pursuant thereto, the Company hereby grants to the Grantee a warrant
(the "Warrant") to purchase shares of the Company's Class A Common Stock (the
"Shares") on the following terms and conditions:
1. Number of Shares. The number of Shares subject to the Warrant shall equal
110,000.
2. Exercise Price. The exercise price per Share subject to the Warrant shall
equal $22.00.
3. Exercisability/Termination. The Warrant shall be fully exercisable only
during the four year period commencing on the first anniversary hereof and
ending on the fifth anniversary hereof, at which time any unexercised
portion of the Warrant shall terminate. Notwithstanding the foregoing, the
Warrant shall terminate upon the consummation of any transaction whereby
the Company (or any successor to the Company or substantially all of its
business) becomes a wholly-owned subsidiary of any corporation or other
entity, unless such other corporation or entity shall continue or assume
the Warrant (in which case such other corporation or entity shall be
treated as the Company for all purposes hereunder, and shall make
appropriate adjustment pursuant to paragraph 5 below in the number and
kind of shares of stock subject thereto and the exercise price per share
thereof to reflect consummation of such transaction). If the Warrant is
not to be so assumed, the Company shall notify the Grantee of consummation
of such transaction at least ten days in advance thereof.
4. Exercise Procedures. The Grantee shall exercise the Warrant by delivery of
written notice to the Company setting forth the number of Shares with
respect to which the Warrant is to be exercised, together with a certified
check or bank draft payable to the order of the Company for an amount
equal to the sum of the exercise price for such Shares.
5. Adjustment Upon Changes in Capitalization. In the event any
recapitalization, forward or reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase, or exchange of Shares or
other securities, any special and nonrecurring dividend or distribution
(whether in the form of cash, securities or other property), liquidation,
dissolution, or other similar transactions or events, affects the Shares
such that an adjustment is, in the sole discretion of the Company,
appropriate in order to prevent dilution or enlargement of the rights of
the Grantee, then the Company shall equitably adjust (i) the number and
kind of Shares that may be delivered or deliverable in respect of the
Warrant, and/or (ii) the exercise
<PAGE>
price. In addition, the Company is authorized to make adjustments in the
terms and conditions of, and the criteria included in, the Warrant
(including, without limitation, cancellation of the Warrant in exchange
for its in-the-money value, if any, or substitution of the Warrant using
stock of a successor or other entity) in recognition of unusual or
nonrecurring events (including, without limitation, an event described in
the preceding sentence) affecting the Company or any subsidiary of the
Company or the financial statements of the Company or any subsidiary of
the Company, or in response to changes in applicable laws, regulations, or
accounting principles.
6. Restrictions on Issuing Stock. The Company shall not be obligated to issue
or deliver Shares upon exercise of the Warrant or take any other action in
a transaction subject to the requirements of any applicable securities
law, any requirement under any listing agreement between the Company and
any national securities exchange or automated quotation system or any
other law, regulation or contractual obligation of the Company until the
Company is satisfied that such laws, regulations, and other obligations of
the Company have been complied with in full. Certificates representing
Shares issued pursuant to exercise of the Warrant will be subject to such
stop-transfer orders and other restrictions as may be applicable under
such laws, regulations and other obligations of the Company, including any
requirement that a legend or legends be placed thereon.
7. Limitations on Transferability. The Warrant will not be transferable by
the Grantee except by will or the laws of descent and distribution or to a
beneficiary in the event of the Grantee's death, shall not be pledged,
mortgaged, hypothecated or otherwise encumbered, or otherwise subject to
the claims of creditors; provided, however, that the Warrant or any
portion thereof may be transferred by the Grantee to (a) trusts
established for the benefit of his children, stepchildren and
grandchildren or (b) charities. Any such transferee shall be bound by the
terms of this Agreement.
8. Taxes. The Grantee shall be responsible for the payment of all income,
social security taxes and Medicare taxes related to the exercise of the
Warrant, and shall indemnify the Company against any liability it may
incur with respect to such taxes, including by reason of the Company not
withholding any such taxes on behalf of the Grantee.
9. No Stockholder Rights. The Warrant shall not confer on the Grantee any of
the rights of a stockholder of the Company unless and until Shares are
duly issued or transferred and delivered to the Grantee upon exercise of
the Warrant.
10. Piggyback Registration Rights. If the Company intends to register
securities of any of its shareholders for an offering to the public while
the Warrant is exercisable, the Company shall notify the Grantee of its
intention to do so and, subject to such limitations as shall affect all
selling shareholders equally and as may be imposed by any underwriter of
such offering or by law, the Grantee may irrevocably elect to participate
in such offering on a pari passu basis
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with any other selling shareholders (other than the Investors (as defined
in the Registration Rights Agreement dated as of date of the closing of
the Company's initial public offering, between the Company and the
Investors) who shall have priority over the Grantee on any cutback) based
on the relative number of shares owned and options or warrants vested of
each of such other selling shareholders (and its affiliates and permitted
assigns) and the Grantee (the "Pari Passu Percentage"). Such participation
shall be under the same terms and conditions as may apply to such other
shareholders, provided that the Grantee shall not have any rights to
select the underwriter or similar matters given to the other shareholders.
The Grantee shall make any election within 30 days of receipt of such
notice of intent to register by a writing given to the Secretary of the
Company, which writing shall indicate his irrevocable election to sell in
the intended offering, the number of Shares he wishes to sell and the
portion thereof to be included by him. The Grantee's notice may not be for
less than 50% of the number of Shares of the Grantee. The Grantee shall be
responsible for delivery of the Shares covered by the notice on a timely
basis. The Company shall only have to give notice of intent to register
under this paragraph to the Grantee and any notice of intent to
participate shall only be valid if received from the Grantee (or in the
event of his death, his executor). The Company may at any time abandon any
offering. The Company or the underwriter may at any time cutback
(including, without limitation, limiting the amount to the extent a prior
amount had not been specified) on the number of shares in any offering in
which the Company is offering shares and the underwriter may at any time
cutback (including, without limitation, limiting the amount to the extent
a prior amount had not been specified) on the number of shares to be
offered by shareholders in any offering in which the Company is not also
offering shares. In either such case the Grantee's Shares to be offered
shall be proportionately reduced so that the amounts offered by the
Grantee and by other shareholders (and their affiliates and permitted
assigns) satisfy the Pari Passu Percentage. The Grantee shall have no
right to participate in any offering by the Company that does not include
any shares owned by other shareholders and the provision of this paragraph
shall not apply to any registration on Form S-8, or otherwise with regard
to securities of compensatory plans of the Company, or any registration
relating to business acquisitions on Form S-1 or Form S-4. The Grantee
shall sign such underwriting and other agreements in the same forms as
signed by the other participating shareholders.
11. Demand Registration Right. Subject to the Company's qualification to use a
Form S-3, from and after the date that is one year after the date hereof,
the Grantee may request, in writing, registration (the "Demand
Registration") under the Securities Act of 1933, as amended (the
"Securities Act"), of all or a portion of the Shares and the Shares
underlying the warrant granted on the date hereof to Pamela S. Wygod,
Trustee under the Trust Agreement dated 12/30/87 for the benefit of Adam
Yellin ("the "Other Shares") on Form S-3; provided, however, that such
request must include at least 75% of the aggregate of the Shares and the
Other Shares. Thereafter, the Company will use all reasonable efforts to
effect the Demand Registration under the Securities Act within thirty (30)
days after the receipt of the request. The Company shall not be required
to effect the Demand Registration requested by the
3
<PAGE>
Grantee if either (a) within the six (6) months preceding the receipt by
the Company of such request, the Company has filed a registration
statement to which the Piggyback Registration rights set forth in Section
10 hereof apply or (b) such Grantee may sell the Shares and the Other
Shares requested to be included in the Demand Registration without
registration under the Securities Act, pursuant to the exemption provided
by (i) Rule 144 under the Securities Act, as such rule may be amended from
time to time, or (ii) any similar rule or registration adopted by the
Commission. The Granter shall be entitle to no more than one (1) Demand
Registration. The Company agrees to keep the Demand Registration effective
for a period of sixty (60) days beyond the effective date.
12. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
4
<PAGE>
IN WITNESS WHEREOF, this Warrant Agreement has been executed and
delivered by the parties hereto on the date first written above.
eSPEED, INC.
By /s/ Douglas B. Gardner
-------------------------------------
Name: Douglas B. Gardner
Title: Vice Chairman
GRANTEE:
/s/ Martin J. Wygod
----------------------------------------
Martin J. Wygod
5
<PAGE>
WARRANT AGREEMENT
THIS WARRANT AGREEMENT, dated as of December 9, 1999 by and between
eSpeed, Inc., a Delaware corporation (the "Company"), and Pamela S. Wygod,
Trustee under the Trust Agreement dated 12/30/87 for the benefit of Adam Yellin
(the "Grantee").
In accordance with the letter agreement dated as of November 1, 1999 by and
between the Company and the Grantee, and in consideration for the services
rendered pursuant thereto, the Company hereby grants to the Grantee a warrant
(the "Warrant") to purchase shares of the Company's Class A Common Stock (the
"Shares") on the following terms and conditions:
1. Number of Shares. The number of Shares subject to the Warrant shall equal
25,000.
13. Exercise Price. The exercise price per Share subject to the Warrant shall
equal $ 22.00.
14. Exercisability/Termination. The Warrant shall be fully exercisable only
during the four year period commencing on the first anniversary hereof and
ending on the fifth anniversary hereof, at which time any unexercised
portion of the Warrant shall terminate. Notwithstanding the foregoing, the
Warrant shall terminate upon the consummation of any transaction whereby
the Company (or any successor to the Company or substantially all of its
business) becomes a wholly-owned subsidiary of any corporation or other
entity, unless such other corporation or entity shall continue or assume
the Warrant (in which case such other corporation or entity shall be
treated as the Company for all purposes hereunder, and shall make
appropriate adjustment pursuant to paragraph 5 below in the number and
kind of shares of stock subject thereto and the exercise price per share
thereof to reflect consummation of such transaction). If the Warrant is
not to be so assumed, the Company shall notify the Grantee of consummation
of such transaction at least ten days in advance thereof.
15. Exercise Procedures. The Grantee shall exercise the Warrant by delivery of
written notice to the Company setting forth the number of Shares with
respect to which the Warrant is to be exercised, together with a certified
check or bank draft payable to the order of the Company for an amount
equal to the sum of the exercise price for such Shares.
16. Adjustment Upon Changes in Capitalization. In the event any
recapitalization, forward or reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase, or exchange of Shares or
other securities, any special and nonrecurring dividend or distribution
(whether in the form of cash, securities or other property), liquidation,
dissolution, or other similar transactions or events, affects the Shares
such that an adjustment is, in the sole discretion of the Company,
appropriate in order to prevent dilution or enlargement of the rights of
the Grantee, then the Company shall equitably adjust (i) the number and
kind of Shares that may be delivered or deliverable in respect of the
Warrant, and/or (ii) the exercise price. In addition, the Company is
authorized to make adjustments in the terms and
<PAGE>
conditions of, and the criteria included in, the Warrant (including,
without limitation, cancellation of the Warrant in exchange for its
in-the-money value, if any, or substitution of the Warrant using stock of
a successor or other entity) in recognition of unusual or nonrecurring
events (including, without limitation, an event described in the preceding
sentence) affecting the Company or any subsidiary of the Company or the
financial statements of the Company or any subsidiary of the Company, or
in response to changes in applicable laws, regulations, or accounting
principles.
17. Restrictions on Issuing Stock. The Company shall not be obligated to issue
or deliver Shares upon exercise of the Warrant or take any other action in
a transaction subject to the requirements of any applicable securities
law, any requirement under any listing agreement between the Company and
any national securities exchange or automated quotation system or any
other law, regulation or contractual obligation of the Company until the
Company is satisfied that such laws, regulations, and other obligations of
the Company have been complied with in full. Certificates representing
Shares issued pursuant to exercise of the Warrant will be subject to such
stop-transfer orders and other restrictions as may be applicable under
such laws, regulations and other obligations of the Company, including any
requirement that a legend or legends be placed thereon.
18. Limitations on Transferability. The Warrant will not be transferable by
the Grantee except by will or the laws of descent and distribution or to a
beneficiary in the event of the Grantee's death, shall not be pledged,
mortgaged, hypothecated or otherwise encumbered, or otherwise subject to
the claims of creditors; provided, however, that the Warrant or any
portion thereof may be transferred by the Grantee to (a) trusts
established for the benefit of his children, stepchildren and
grandchildren or (b) charities. Any such transferee shall be bound by the
terms of this Agreement.
19. Taxes. The Grantee shall be responsible for the payment of all income,
social security taxes and Medicare taxes related to the exercise of the
Warrant, and shall indemnify the Company against any liability it may
incur with respect to such taxes, including by reason of the Company not
withholding any such taxes on behalf of the Grantee.
20. No Stockholder Rights. The Warrant shall not confer on the Grantee any of
the rights of a stockholder of the Company unless and until Shares are
duly issued or transferred and delivered to the Grantee upon exercise of
the Warrant.
21. Piggyback Registration Rights. If the Company intends to register
securities of any of its shareholders for an offering to the public while
the Warrant is exercisable, the Company shall notify the Grantee of its
intention to do so and, subject to such limitations as shall affect all
selling shareholders equally and as may be imposed by any underwriter of
such offering or by law, the Grantee may irrevocably elect to participate
in such offering on a pari passu basis with any other selling shareholders
(other than the Investors (as defined in the Registration
2
<PAGE>
Rights Agreement dated as of the date of the closing of the Company's
initial public offering, between the Company and the Investors) who shall
have priority over the Grantee on any cutback) based on the relative
number of shares owned and options or warrants vested of each of such
other selling shareholders (and its affiliates and permitted assigns) and
the Grantee (the "Pari Passu Percentage"). Such participation shall be
under the same terms and conditions as may apply to such other
shareholders, provided that the Grantee shall not have any rights to
select the underwriter or similar matters given to the other shareholders.
The Grantee shall make any election within 30 days of receipt of such
notice of intent to register by a writing given to the Secretary of the
Company, which writing shall indicate his irrevocable election to sell in
the intended offering, the number of Shares he wishes to sell and the
portion thereof to be included by him. The Grantee's notice may not be for
less than 50% of the number of Shares of the Grantee. The Grantee shall be
responsible for delivery of the Shares covered by the notice on a timely
basis. The Company shall only have to give notice of intent to register
under this paragraph to the Grantee and any notice of intent to
participate shall only be valid if received from the Grantee (or in the
event of his death, his executor). The Company may at any time abandon any
offering. The Company or the underwriter may at any time cutback
(including, without limitation, limiting the amount to the extent a prior
amount had not been specified) on the number of shares in any offering in
which the Company is offering shares and the underwriter may at any time
cutback (including, without limitation, limiting the amount to the extent
a prior amount had not been specified) on the number of shares to be
offered by shareholders in any offering in which the Company is not also
offering shares. In either such case the Grantee's Shares to be offered
shall be proportionately reduced so that the amounts offered by the
Grantee and by other shareholders (and their affiliates and permitted
assigns) satisfy the Pari Passu Percentage. The Grantee shall have no
right to participate in any offering by the Company that does not include
any shares owned by other shareholders and the provision of this paragraph
shall not apply to any registration on Form S-8, or otherwise with regard
to securities of compensatory plans of the Company, or any registration
relating to business acquisitions on Form S-1 or Form S-4. The Grantee
shall sign such underwriting and other agreements in the same forms as
signed by the other participating shareholders.
22. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
3
<PAGE>
IN WITNESS WHEREOF, this Warrant Agreement has been executed and
delivered by the parties hereto on the date first written above.
eSPEED, INC.
By /s/ Douglas B. Gardner
-------------------------------------
Name: Douglas B. Gardner
Title: Vice Chairman
GRANTEE:
/s/ Pamela S. Wygod
----------------------------------------
Pamela S. Wygod
4
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> MAR-10-1999
<PERIOD-END> DEC-31-1999
<CASH> 201,001
<SECURITIES> 0
<RECEIVABLES> 134,644,521
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 134,857,017
<PP&E> 12,556,627
<DEPRECIATION> (3,086,555)
<TOTAL-ASSETS> 144,327,089
<CURRENT-LIABILITIES> 8,815,276
<BONDS> 0
0
0
<COMMON> 510,000
<OTHER-SE> 135,001,813
<TOTAL-LIABILITY-AND-EQUITY> 144,327,089
<SALES> 25,381,547
<TOTAL-REVENUES> 38,188,925
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 50,987,727
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (12,798,802)
<INCOME-TAX> (211,889)
<INCOME-CONTINUING> (12,586,913)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,586,913)
<EPS-BASIC> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
