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Rule 424(b)(5)
Reg. No. 333-52154
PROSPECTUS
430,000 Shares
Class A common stock
eSPEED, INC.
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This prospectus relates to the issuance and sale pursuant to our
Long-Term Incentive Plan of up to 430,000 shares of our Class A common stock to
employees of our affiliates who may not be eligible to be covered under a Form
S-8 registration statement. Our principal executive offices are located at One
World Trade Center, 103rd Floor, New York, New York 10048 and our telephone
number is (212) 938-3773.
Our Class A common stock is listed on the Nasdaq National Market under
the symbol "ESPD". On January 2, 2001, the last reported sale price of our
Class A common stock on the Nasdaq National Market was $14 15/16 per share.
This investment involves risk. Please consider carefully the risk
factors beginning on page 10.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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The date of this prospectus is January 3, 2001
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WHERE YOU CAN GET MORE INFORMATION
We have filed with the Securities and Exchange Commission (the "SEC") a
registration statement (of which this prospectus forms a part) on Form S-3 with
respect to the Class A common stock being offered by this prospectus. This
prospectus does not contain all of the information set forth in the registration
statement and the exhibits and schedules thereto. For further information with
respect to us and the shares of Class A common stock offered hereby, reference
is made to the registration statement, including the exhibits and schedules
thereto. Statements contained in this prospectus as to the contents of any
contract or other document referred to herein are not necessarily complete and,
where any contract is an exhibit to the registration statement, each statement
with respect to the contract is qualified in all respects by the provisions of
the relevant exhibit to which reference is hereby made. You may read and copy
any document we file at the Public Reference Section of the SEC, 450 Fifth
Street, NW, Room 1024, Washington, D.C. 20549, and the SEC's Regional Offices
located at 500 West Madison Street, Suite 1400, Chicago, IL 60661, and 7 World
Trade Center, 13th Floor, New York, NY 10048. You may call the SEC at
800-SEC-0330 for further information about the operation of the public reference
rooms.
We are subject to the information and reporting requirements of the
Securities Exchange Act of 1934 and, in accordance therewith, file periodic
reports, proxy statements and other information with the SEC. Such reports,
proxy and information statements and other information may also be inspected at
the National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
The SEC maintains a World Wide Web site that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the SEC. The address of the SEC's Web site is
http://www.sec.gov.
DOCUMENTS INCORPORATED BY REFERENCE
SEC rules allow us to include some of the information required to be in
the registration statements by incorporating that information by reference to
other documents we file with them. That means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is an important part of this prospectus, and
information that we file later with the SEC (before the termination of this
offering) automatically will update and supersede this information. We
incorporate by reference the documents listed below and any future filings made
by us with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 until all of the securities covered by this prospectus are
sold:
o Annual Report on Form 10-K for the fiscal year ended December 31, 1999
filed with the SEC on March 29, 2000;
o Quarterly Report on Form 10-Q for the quarter ended March 31, 2000
filed with the SEC on May 11, 2000;
o Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 filed
with the SEC on August 14, 2000;
o Quarterly Report on Form 10-Q for the quarter ended September 30, 2000
filed with the SEC on November 13, 2000; and
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o The description of our Class A common stock contained in our
registration statement on Form 8-A (File No. 000-28191) filed with the
SEC on November 17, 1999, including any amendment or report filed for
the purpose of updating this description.
You may request a copy of these filings, which we will provide to you
at no cost, by writing or calling us at the following address: eSpeed, Inc., One
World Trade Center, 103rd Floor, New York, New York 10048, telephone: (212)
938-3773, Attention: Secretary.
This prospectus may contain information that updates, modifies or is
contrary to information in one or more of the documents incorporated by
reference in this prospectus. Reports which we file with the SEC after the date
of this prospectus may also contain information that updates, modifies or is
contrary to information in this prospectus or in documents incorporated by
reference in this prospectus. Investors should review these reports as they may
disclose a change in the business, prospects, financial condition or our other
affairs after the date of this prospectus.
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GENERAL INFORMATION ABOUT OUR LONG-TERM INCENTIVE PLAN
OVERVIEW
Our Long-Term Incentive Plan (the "Plan") was adopted by our board of
directors and became effective in December 1999. The Plan authorizes the grant
of options to purchase shares of our Class A common stock, and grants of certain
other awards relating to our Class A common stock, to our directors, officers,
employees, consultants and service providers and to those of our affiliates,
including Cantor Fitzgerald, L.P., which beneficially owns approximately 74.1%
of our voting stock, and its subsidiaries other than eSpeed (collectively,
"Cantor"). In addition to options, stock appreciation rights ("SARs"), including
limited SARs, restricted stock, deferred stock, Class A common stock granted as
a bonus or in lieu of other awards, and other stock-based awards may be granted
under the Plan (collectively "Awards"). The Plan is neither subject to the
provisions of the Employee Retirement Income Security Act of 1974, as amended,
nor qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code").
The following description of the Plan is intended to outline for you
and help you to better understand the provisions of the Plan. It does not
purport to be a complete statement of the Plan or its operation and is qualified
in its entirety by reference to the provisions of the Plan, which are attached
as Annex A. All capitalized terms below not defined elsewhere in this summary
have the meanings set forth in the Plan.
Eligibility. Our directors, officers and employees or directors,
officers and employees of our affiliates and persons who provide consulting or
other services to us or our affiliates, are eligible to be granted Awards under
the Plan.
Purpose. The purpose of the Plan is to advance our interests and the
interests of our stockholders by providing a means to attract, retain and reward
eligible employees and consultants and to enable such persons to acquire or
increase a proprietary interest in us, thereby promoting a closer identity of
interests between such persons and our stockholders.
Administration. Our board of directors has designated the Compensation
Committee of the board of directors to administer the Plan (the "Committee").
Subject to the express provisions of the Plan, the Committee has full authority,
among other things, (i) to select participants to whom Awards will be granted,
and (ii) to determine (x) the type and number of Awards to be granted to each
participant, (y) the number of shares of Class A common stock to which an Award
will relate, and (z) all other terms and conditions of Awards and matters
relating to Awards (including forfeiture conditions and terms of any mandatory
or elective deferral). In addition, the Committee may prescribe the form of
Award agreements, adopt rules and regulations under the Plan, interpret the Plan
and Award agreements, and make all other decisions under the Plan. The Committee
may delegate to our officers its authority to perform such functions as the
Committee may determine.
Limitation on Awards. The number of shares of Class A common stock that
may be subject to outstanding Awards granted under the Plan, determined
immediately after the grant of any Award, may not exceed 20% of the total number
of shares of all classes of our outstanding common stock on the date of the
grant. Subject to the adjustment due to certain events (see "Changes in Class A
common stock" below), the number of shares of Class A common stock that may be
delivered upon the exercise of ISOs (as defined in "Options" below) may not
exceed 10,000,000 shares.
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Options. The terms of each option are determined by the Committee, not
inconsistent with the terms of the Plan, and are set forth in a grant
certificate or agreement that evidences the grant of an option. Although for
U.S. tax purposes options may be granted as either non-qualified options or
incentive stock options intended to qualify for certain favorable tax treatment,
the Code does not permit ISOs to be awarded to Cantor employees who are not
otherwise employed by eSpeed or any of its subsidiaries.
Other Awards. Generally, Awards made under the Plan will be in the form
of stock options. However, the Committee has the authority to grant the
following other types of Awards:
/ / SARs. SARs entitle the participant to receive the excess of
the fair market value of a share on the date of exercise or
other specified date over the grant price of the SAR. The
grant price of an SAR is determined by the Committee; such
price generally may not be less than 100% of the fair market
value of the stock at the date of grant. The maximum term,
methods of exercise and settlement and other terms of SARs
will be determined by the Committee. In addition, "Limited
SARs" may also be granted, which are exercisable only in the
event of a "change in control" (as defined in the Plan), on
such terms as the Committee may determine.
/ / Restricted Stock. Restricted stock is an Award of shares that
may not be transferred and that may be forfeited in the event
of certain terminations of employment prior to the end of a
restriction period. The restriction period is established by
the Committee. Such an Award would entitle the participant to
all of the rights of a stockholder of the issuer, including
the right to vote the shares and the right to receive any
dividends thereon, unless otherwise determined by the
Committee.
/ / Deferred Stock. An Award of deferred stock confers upon a
participant the right to receive shares at the end of a
specified deferral period, subject to possible forfeiture of
the Award in the event of certain terminations of employment
prior to the end of a specified restriction period (which need
not be the same as the deferral period). Deferred stock awards
carry no voting or dividend rights or other rights associated
with stock ownership, although dividend equivalents may be
granted to provide for payments equivalent to dividends.
/ / Other Stock-Based Awards, Bonus Stock and Awards in Lieu of
Cash Obligations. The Plan authorizes the Committee to grant
Awards that are denominated or payable in, valued in whole or
in part by reference to, or otherwise based on or related to
Class A common stock. The Committee determines the terms and
conditions of such Awards, including consideration to be paid
to exercise Awards in the nature of purchase rights, the
period during which Awards will be outstanding and forfeiture
conditions and restrictions on Awards. In addition, the
Committee is authorized to grant shares as a bonus free of
restrictions, or to grant shares or other Awards in lieu of
issuer obligations to pay cash or deliver other property under
other plans or compensatory arrangements, subject to such
terms as the Committee may specify.
Change in Control. Except as set forth in an Award Agreement, all
conditions and/or restrictions relating to the continued performance of services
with respect to the exercisability or full enjoyment of an Award will lapse
immediately prior to a "change in control" (as defined in the Plan).
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Non-Transferability. Awards granted under the Plan are generally
nontransferable, except by will or the laws of descent and distribution or to a
beneficiary in the event of a participant's death and, if the Award carries a
right to exercise, such right may be exercised only by the participant or his
guardian or legal representative, may not be pledged, mortgaged or otherwise
encumbered, and, in the case of ISOs (and SARs in tandem therewith), may be
exercisable during the lifetime of a participant only by such participant or his
guardian or legal representative.
Changes in Class A common stock. The Committee is authorized to adjust
the number and kind of shares (i) available under the Plan, and (ii) subject to
outstanding Awards (including adjustments to exercise prices of options and
other affected terms of Awards) in the event that a dividend or other
distribution (whether in cash, securities, or other property), recapitalization,
forward or reverse split, reorganization, merger, consolidation, spin-off,
combination, repurchase or share exchange, liquidation or dissolution, or other
similar corporate transaction or event affects the Class A common stock such
that the Committee determines that an adjustment is appropriate in order to
prevent dilution or enlargement of the rights of participants under the Plan.
The Committee is also authorized to adjust the terms and conditions of Awards
(including cancellation of unexercised or outstanding Awards) in response to
these or other nonrecurring or unusual events or to changes in applicable laws,
regulations, or accounting principles.
Amendments to the Plan and Outstanding Awards. Our board of directors
may amend or terminate the Plan or the Committee's authority to grant Awards
without the consent of stockholders or participants, except stockholder approval
must be obtained if required by law or regulation or under the rules of any
stock exchange or automated quotation system on which the Class A common stock
is then listed or quoted, and our board of directors may, in its discretion,
seek stockholder approval in any circumstance in which it deems such approval
advisable. In a similar manner, the Committee may waive any conditions or rights
under, or amend or terminate, any Award previously granted and any Award
agreement. In either case, however, no amendment or termination of the Plan or
an Award (except as permitted under the Plan) may materially impair the rights
of a participant under an outstanding Award without the consent of the
participant.
Other Plan Provisions. No participant will have any rights of a
stockholder with respect to any shares of Class A common stock covered by an
option until such participant has exercised the option, paid the option exercise
price and been issued such shares. The grant of an Award under the Plan shall
not be construed as conferring upon any participant a right to remain in our
employ or our affiliates' employ or restrict our right or the rights of our
affiliates to terminate the employee.
TAX INFORMATION
The following is a general description of the material tax consequences
of stock options granted under the Plan. It does not purport to be complete. The
following tax analysis is intended to summarize certain relevant income tax
consequences of the Plan in effect as of the date of this description.
Legislation may be enacted and regulations may be issued in the future which
create different tax consequences. In view of the individual nature of tax
consequences, participants are urged to consult their own tax advisors regarding
the application of the tax laws to their particular situations.
United States
There are no federal income tax consequences to participants upon the
grant or vesting of an option under the Plan. Generally, upon the exercise of a
stock option, a participant will recognize ordinary compensation income in an
amount equal to the excess of the fair market value of the Class A
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common stock received at the time of exercise over the exercise price of the
option (the "Discounted Value"). Payroll withholding (including withholding for
FICA taxes) on the Discounted Value is required. To the extent that a
participant simultaneously sells any of the shares received upon exercise, no
further gain or loss will be recognized. If the participant holds and later
sells such shares, any additional gain (or loss) over (or below) the fair market
value of the shares on the day of exercise will be a capital gain (or loss). The
holding period for the purposes of determining whether such capital gain or loss
will generally be measured starting with the date of exercise of the option. At
present, capital gain on the sale of property held for more than one year is
taxable at a maximum rate of 20%, and capital gain on the sale of property held
for one year or less is taxable at ordinary income rates.
If a participant were to pay the exercise price of an option by
surrender of shares, the participant would not realize additional gain or loss
because of the surrender, but (i) the number of new shares received equal to the
number of shares surrendered will retain the existing tax basis and holding
period of the surrendered shares; (ii) the amount of both the ordinary
compensation income to be recognized by the participant and the deduction to be
taken by us or our affiliates will be equal to the fair market value of the
additional shares received (less any cash paid upon such exercise), and the
participant's tax basis in these additional shares will be equal to their fair
market value; and (iii) the participant's holding period for the additional
shares received will generally be measured starting with the date of exercise
for capital gain purposes.
United Kingdom
There are no income tax consequences to participants who are "resident"
or "ordinarily resident" individuals upon the grant or vesting of an option
under the Plan. As all options granted under the Plan are unapproved options, at
the time of exercise, the participant will recognize taxable income (at the
employee's marginal rate) on the Discounted Value. The employer and the
participant are liable for social security contributions on the Discounted Value
at rates of 12.2% and 10%, respectively, up to current annual salary of
(pound)27,820 (limit on employee contribution only). Withholding of income tax
and social security contributions on the Discounted Value are required by the
employer. The employer is required to make a report to Inland Revenue reflecting
the Discounted Value recognized by each participant and identifying the
participants involved. In addition, the subscription for Class A common stock
must be reported by the employer on its P11D (annual benefit statements), P35
(employer's annual return) and P14 (individual end of year returns) reportings.
France
Upon the grant and vesting of options, a participant will not recognize
taxable income. The participant will recognize taxable income upon exercise if
the option price is less than 95% of the fair market value of the shares on the
date of grant. If a sale of the shares occurs within five years of the date of
grant, (i) the Discounted Value will be taxed as salary at progressive rates up
to 54% and (ii) the sale gain (the difference between the sales price and fair
market value of the shares on the date of exercise) will be taxed as capital
gain at 26% (if the gross sales proceeds exceed the annual ceiling of FF
50,000). The participant is liable for social security taxes, including CSG and
CRDS surtaxes, up to 22% and the employer is liable for the contributions
(40-45%) due on earned income. If a sale occurs after the five-year holding
period, (i) the Discounted Value will be taxed at a flat rate of 40% or, at the
taxpayer's election, the progressive rates if the participant's marginal rate of
taxation is lower than 30% and (ii) the sale gain will be taxed as capital gain
at 26% (if the gross sales proceeds exceed the annual ceiling of FF 50,000).
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Germany
Upon the grant and vesting of options, a participant will not recognize
taxable income. Upon exercise, the participant will recognize taxable income on
the Discounted Value at marginal tax rates, including applicable surcharges (up
to 53.805%). If the shares are sold within one year of exercise, ordinary income
tax is charged on the sale gain (the difference between the sales price and fair
market value of the shares on the date of exercise). However, if the sale gain
is less than DM999 per year or the sale occurs more than one year after
exercise, the sale gain is not subject to tax. The employer and the participant
are liable for social, unemployment, health and old age medicare taxes on the
exercise gain up to certain salary levels.
Hong Kong
Upon the grant and vesting of options, a participant will not recognize
taxable income. Upon exercise, the participant will recognize taxable income on
the Discounted Value. Upon an assignment or release of the option, the
participant will recognize taxable income on the difference between the value of
consideration received for the assignment or release and the option price. Upon
a sale of the shares, there will be no capital gains tax or social tax owed.
Italy
Upon the grant and vesting of options, a participant will not recognize
taxable income. Upon exercise, if the requirements for tax exemption are not
met, the participant will recognize taxable income on the exercise gain (the
difference between the average settlement price during the last month listed on
the stock exchange or traded over-the-counter, or the proportionate value of the
net worth, and the option price which is either the fair market value of the
shares or the issue price). In general, the exercise gain may be exempt from tax
(i) if, in the case of options granted after January 15, 2000, the option price
equals or exceeds the fair market value of the shares on the date of grant, the
number of voting shares acquired by the participant does not exceed 10% of the
capital of the employer, and the shares are issued by the employer or an
employer-related company; or (ii) if, in the case of options granted on or
before January 15, 2000, the shares are newly issued (i.e., not treasury
shares), and are issued by the employer or an employer-related company. Upon a
sale of the shares, the amount of sale gain will be the difference between the
sales price and the participant's basis in the shares, such basis to be equal to
(i) the option price, if no taxable income was recognized upon exercise, or (ii)
the fair market value on the date of exercise, if taxable income was recognized
upon exercise. The sale gain will be taxed at 12.5%, but will increase to 27% if
the number of shares sold exceeds 2% of the employer's share capital (in the
case of voting shares) or over 5% (in the case of non-voting shares). The
participant is subject to social tax contributions only if the exercise gain was
taxable.
Japan
Upon the grant and vesting of options, a participant will not recognize
taxable income. Upon exercise, the participant will recognize taxable income on
the Discounted Value (the difference between the fair market value on the date
of exercise and the option price) at marginal income tax rates. In general, the
sale gain is taxed at a capital gains rate of 26%. However, if shares are listed
and sold through a securities firm, the participant can elect to have tax
withheld at the lower of (i) 1.05% of the gross sales proceeds, or (ii) 26% of
the gain. In general, there are no applicable social taxes.
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Other Jurisdictions
Participants who are taxpayers in state, local or non-U.S jurisdictions
other than those specified above should consult with their personal tax adviser.
As a general rule, the difference between the value of the Class A common stock
received at the time of an exercise of an option (which, in some jurisdictions,
may be other than the trading price at such time) over the exercise price will
be taxable, and any additional gain on a subsequent sale will attract a further
tax, although this may not be true in all jurisdictions.
Employer Deduction
As a general rule, a participant's employer will be entitled to a
deduction against its taxable income equal to the difference between the fair
market value of the Class A common stock received at the time of exercise over
the exercise price of the option, although this may not be true in all
jurisdictions.
Withholding Taxes
We or any of our affiliates is authorized to satisfy any tax
withholding obligation that may arise with respect to the purchase or
disposition of Class A common stock under the Plan through any means we or any
of our affiliates deems appropriate. Income tax liability is the responsibility
of the participant.
RESTRICTIONS ON RESALE
The federal securities laws prohibit sales of shares of Class A common
stock by persons who possess material, non-public information about us.
Therefore, shares acquired under the Plan should not be resold by a participant
or other person who possesses such information. We have also imposed procedures
relating to the sale of shares of Class A common stock by any participant. Under
these procedures, sales generally may be made only during specified "window
periods", and in all cases are subject to our employee trading policies,
including the requirement of prior approval.
GENERAL INFORMATION ABOUT OUR COMPANY
OVERVIEW OF OUR BUSINESS
We are a leading provider of business-to-business electronic
marketplace solutions for the trading of products via the Internet or over our
global privately managed network. Our eSpeed(Servicemark) system enables us to
operate an integrated trading network engaged in electronic trading in multiple
products and marketplaces on a global basis. Today, our global systems execute
in excess of $45 trillion in annual transaction volume in over 40 financial
marketplaces. Our existing client base comprises more than 500 leading dealers,
banks, other financial institutions and energy and other trading companies,
including the 25 largest bond trading firms in the world. We have offices in the
U.S., Canada, Europe and Asia.
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Our eSpeed(Servicemark) 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
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 a fully
regulated U.S. futures exchange currently known as the Cantor
Exchange(Servicemark), the first fully electronic futures exchange in the U.S.
Our eSpeed(Servicemark) 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(Servicemark)
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.
Our revenues are primarily driven by trading activity and volumes in
the marketplaces we operate. eSpeed Online(Servicemark) offers
business-to-business or business-to-consumer connections to our marketplaces and
gives our clients the ability to execute retail, small and "odd-lot" orders with
our business-to-business markets. eSpeed Private Label(Servicemark) enables our
clients through licensing agreements to create a customized version of our
eSpeed(Servicemark) system for the dissemination of their products to their
customers, quickly and easily.
Our objective is to provide our global trading solutions to leading
business-to-business marketplaces across various industry verticals, including
financial products, energy and bandwidth, by deploying our suite of products and
our marketplace expertise. We believe our proven eSpeed suite of products
enables us to introduce and distribute a broad mix of financial products and
services more quickly, cost effectively and seamlessly than our competitors.
RISK FACTORS
The purchase of our Class A common stock involves substantial
investment risks. You should carefully consider the following risk factors,
together with the other information in this prospectus, before purchasing our
Class A common stock. If any of the following risks actually occurs, our
business, financial condition or results of operations could be materially
adversely affected, the trading price of our Class A common stock could decline
and you may lose all or part of your investment.
RISKS RELATED TO OUR COMPANY AND OUR BUSINESS
Because we have a limited operating history, you may not be able to accurately
evaluate us.
We have had limited operations to date and, as a result, we have a
limited operating history upon which to evaluate the merits of investing in our
Class A common stock. As an early stage company, we are subject to risks,
expenses and difficulties associated with implementing our business plan that
are not typically encountered by more mature companies. In particular, our
prospects are subject to risks, expenses and uncertainties encountered by
companies in the new and rapidly evolving market for electronic commerce
products and services. These risks include our failure or inability to:
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o provide services to our clients that are reliable and
cost-effective;
o expand our sales structure and marketing programs;
o increase awareness of our brand or market positioning;
o respond to technological developments or service offerings by
competitors; and
o expand into other non-financial markets.
We may not be able to implement our business plan successfully, or at all.
Because we have a history of losses, we expect to continue to incur losses and
generate negative cash flow from operations for the foreseeable future.
Since our inception, we have incurred substantial costs to develop our
technology and infrastructure. As a result, from our inception through September
30, 2000, we have sustained cumulative net losses of approximately $67.8
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 and non-financial
institutions that will use our interactive electronic marketplaces. We cannot
assure you that we will be able to continue to expand our vertical marketplaces,
or that we will be able to retain the current participants in our marketplaces.
None of our agreements with market participants require them to use our
electronic marketplaces.
If we are unable to enter into additional marketing and strategic alliances or
our current strategic alliances are not successful, we may not generate
increased trading in our electronic marketplaces.
We expect to continue to enter into strategic alliances with other
market participants, such as retail brokers, exchanges, energy companies,
communication companies, market makers, consortia, clearinghouses, major market
participants and technology companies, in order to increase client access to and
use of our electronic marketplaces. We cannot assure you that we will be able to
continue to enter into these strategic alliances on terms that are favorable to
us, or at all. In addition, we cannot assure you that our current strategic
alliances, such as TradeSpark, will be successful. The success of our current
and future relationships will depend on the level of increased trading in our
electronic marketplaces by the customers of these strategic alliance partners.
These arrangements may not generate the 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, products, brand and the
adaptability of our electronic marketplaces for
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non-financial vertical markets. In order to build this awareness, our marketing
efforts must succeed and we must provide high quality services. These efforts
may require us to incur significant expenses. We cannot assure you that our
marketing efforts will be successful or that the allocation of funds to these
marketing efforts will be the most effective use of those funds.
If we experience computer systems failures or capacity constraints, our ability
to conduct our operations could be harmed.
We internally support and maintain many of our computer systems and
networks. Our failure to monitor or maintain these systems and networks or, if
necessary, to find a replacement for this technology in a timely and
cost-effective manner would have a material adverse effect on our ability to
conduct our operations.
We also rely and expect to rely on third parties for various computer
and communications systems, such as telephone companies, online service
providers, data processors, clearance organizations and software and hardware
vendors. Our systems, or those of our third-party providers, may fail or operate
slowly, causing one or more of the following:
o unanticipated disruptions in service to our clients;
o slower response times;
o delays in our clients' trade execution;
o failed settlement of trades;
o incomplete or inaccurate accounting, recording or processing of
trades;
o financial losses;
o litigation or other client claims; and
o regulatory sanctions.
We cannot assure you that we will not experience systems failures from
power or telecommunications failure, acts of God or war, human error, natural
disasters, fire, power loss, sabotage, hardware or software malfunctions or
defects, computer viruses, intentional acts of vandalism and similar events. 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.
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If we do not effectively manage our growth, our existing personnel and systems
may be strained and our business may not operate efficiently.
In order to execute our business plan, we must grow significantly. This
growth will place significant strain on our personnel, management systems and
resources. We expect that the number of our employees, including technical and
management-level employees, may continue to increase for the foreseeable future.
We must continue to improve our operational and financial systems and managerial
controls and procedures, and we will need to continue to expand, train and
manage our technical workforce. We must also maintain close coordination among
our technical, compliance, accounting, finance 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;
o develop new services and technologies that address the
increasingly sophisticated and varied needs of our existing and
prospective clients; and
o respond to technological advances and emerging industry standards
and practices on a cost-effective and timely basis.
The development of proprietary electronic trading technology entails
significant technical, financial and business risks. Further, the adoption of
new Internet, networking or telecommunications technologies may require us to
devote substantial resources to modify and adapt our services. We cannot assure
you that we will successfully implement new technologies or adapt our
proprietary technology and transaction-processing systems to client requirements
or emerging industry standards. We cannot assure you that we will be able to
respond in a timely manner to changing market conditions or client requirements.
If we were to lose the services of members of management and employees who
possess specialized market knowledge and technology skills, we may not be able
to manage our operations effectively or develop new electronic marketplaces.
Our future success depends, in significant part, on the continued
service of Howard Lutnick, our Chairman and Chief Executive Officer, Frederick
Varacchi, our President and Chief Operating Officer, and our other executive
officers and managers and sales and technical personnel who possess extensive
knowledge and technology skills in our markets. We cannot assure you that we
would be able to find an
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appropriate replacement for Mr. Lutnick or Mr. Varacchi if the need should
arise. Any loss or interruption of Mr. Lutnick's or Mr. Varacchi's services
could result in our inability to manage our operations effectively and/or
develop new electronic marketplaces. We have not entered into employment
agreements with and we do not have "key person" life insurance policies on any
of our executive officers or other personnel. All of the members of our senior
management team are also officers or key employees of Cantor. As a result, they
dedicate only a portion of their professional efforts to our business and
operations. We cannot assure you that the time these persons devote to our
business and operations in the future will be adequate and that we will not
experience an adverse effect on our operations due to the demands placed on our
management team by their other professional obligations. We intend to strive to
provide high quality services that will allow us to establish and maintain
long-term relationships with our clients. Our ability to do so will depend, in
large part, upon the individual employees who represent us in our dealings with
clients. The market for qualified programmers, technicians and sales persons is
extremely competitive and has grown more so in recent periods as electronic
commerce has experienced growth. We cannot assure you that we will be successful
in our efforts to recruit and retain the required personnel.
If Cantor or we are unable to protect the intellectual property rights we
license from Cantor or own, our ability to operate electronic marketplaces may
be materially adversely affected.
Our business is dependent on proprietary technology and other
intellectual property rights. We license our patented technology from Cantor.
The license arrangement is exclusive, except in the event that (1) we are
unwilling to provide to Cantor any requested services covered by the patents
with respect to a marketplace and Cantor elects not to require us to do so, or
we are unable to provide such services or (2) we do not exercise our right of
first refusal to provide to Cantor electronic brokerage services with respect to
a marketplace, in which case Cantor retains a limited right to use the patents
and patent applications solely in connection with the operation of that
marketplace. We cannot guarantee that the concepts which are the subject of the
patents and patent applications covered by the license from Cantor are
patentable or that issued patents are or will be valid and enforceable. Where
patents are granted in the U.S., we can give no assurance that equivalent
patents will be granted in Europe or elsewhere, as a result of differences in
local laws affecting patentability and validity. Moreover, we cannot guarantee
that Cantor's issued patents are valid and enforceable, or that third parties
competing or intending to compete with us will not infringe any of these
patents. Despite precautions we or Cantor has taken or may take to protect our
intellectual property rights, it is possible that third parties may copy or
otherwise obtain and use our proprietary technology without authorization. It is
also possible that third parties may independently develop technologies similar
to ours. It may be difficult for us to monitor unauthorized use of our
proprietary technology and intellectual property rights. We cannot assure you
that the steps we have taken will prevent misappropriation of our technology or
intellectual property rights.
We 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 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 countries, thereby requiring
us to adopt and use another service mark for our services in such countries.
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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.
If our software licenses from third parties are terminated, our ability to
operate our business may be materially adversely affected.
We license software from third parties, much of which is integral to
our systems and our business. The licenses are terminable if we breach our
obligations under the license agreements. If any of these relationships were
terminated or if any of these third parties were to cease doing business, we may
be forced to spend significant time and money to replace the licensed software.
However, we cannot assure you that the necessary replacements will be available
on reasonable terms, if at all.
If the strength of our domain names is diluted, the value of our proprietary
rights may decrease.
We own many Internet domain names, including "www.espeed.com." The
regulation of domain names in the U.S. and in foreign countries may change and
the strength of our names could be diluted. We may not be able to prevent third
parties from acquiring domain names that infringe or otherwise decrease the
value of our trademarks and other proprietary rights.
If we infringe on patent rights or copyrights of others, we could become
involved in costly litigation.
Patents or copyrights of third parties may have an important bearing on
our ability to offer certain of our products and services. We cannot assure you
that we are or will be aware of all patents or copyrights containing claims that
may pose a risk of infringement by our products and services. In addition,
patent applications in the U.S. are generally confidential until a patent is
issued. As a result, we cannot evaluate the extent to which our products and
services may be covered or asserted to be covered by claims contained in pending
patent applications. In general, if one or more of our products or services were
to infringe patents held by others, we may be required to stop developing or
marketing the products or services, to obtain licenses to develop and market the
services from the holders of the patents or to redesign the products or services
in such a way as to avoid infringing on the patent claims, which could limit the
manner in which we conduct our operations.
Due to intense competition in the financial vertical market, 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:
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o develop and expand their network infrastructures and service
offerings more efficiently or more quickly;
o adapt more swiftly to new or emerging technologies and changes in
client requirements;
o take advantage of acquisitions and other opportunities more
effectively;
o devote greater resources to the marketing and sale of their
products and services; and
o more effectively leverage existing relationships with clients and
strategic partners or exploit more recognized brand names to
market and sell their services.
Our current and prospective competitors in the financial vertical market
are numerous and include:
o Interdealer brokerage firms, including Tullet & Tokyo Liberty plc
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, 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.;
o Software companies such as OM Gruppen; and
o Consortia such as BrokerTec Global LLC and EuroMTS.
In the business-to-business sector in general, we compete with
business-to-business marketplace infrastructure companies like Ariba and
CommerceOne, as well as with other Internet-based marketplace trading and
infrastructure platforms. In the energy business-to-business sector, we compete
with niche market Internet-based trading systems, including AltraEnergy Trading,
InterContinental Exchange, OM Gruppen and HoustonStreet.
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.
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In the event we extend the application of our Interactive
Matching(Servicemark) technology to conducting or facilitating auctions of
consumer goods and services over the Internet, we expect to compete with both
online and traditional sellers of these products and services. The market for
selling products and services over the Internet is new, rapidly evolving and
intensely competitive. Current and new competitors can launch new sites at a
relatively low cost. We expect we will potentially compete with a variety of
companies with respect to each product or service we offer. We may face
competition from e-Bay, priceline.com, Amazon.com and a number of other large
Internet companies that have expertise in developing online commerce and in
facilitating Internet traffic, including America Online, Microsoft and Yahoo!,
which could choose to compete with us either directly or indirectly through
affiliations with other e-commerce companies. We cannot assure you that we will
be able to compete effectively with such companies.
Because some of our clients may develop electronic trading networks, we could
compete with them in aspects of our business.
Consortia owned by some of our clients have announced their intention
to explore the development of electronic trading networks. BrokerTec Global LLC,
an electronic inter-dealer fixed income broker whose members include many of the
largest financial services institutions, has opened a facility for electronic
trading of certain fixed income securities and may develop or acquire a facility
for electronic training of other fixed income securities and futures-related
products in the future. 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, which are
clients of Cantor and ours.
If we experience low trading volume in securities and financial products, our
profitability could suffer.
We have experienced significant fluctuations in the aggregate trading
volume of securities and financial products being traded in our marketplaces. We
expect that fluctuations in the trading volume of securities and financial
products traded in our marketplaces will occur in the future from time to time
and have a direct impact on our future operating results. This may cause
significant fluctuations in our profitability when the trading volumes are low.
If adverse economic and political conditions occur, substantial declines in the
U.S. and global financial services markets may result and our profitability
could suffer.
The global financial services business is, by its nature, risky and
volatile and is directly affected by many national and international factors
that are beyond our control. Any one of these factors may cause a substantial
decline in the U.S. and global financial services markets, resulting in reduced
trading volume and turnover. These events could materially adversely affect our
profitability. These factors include:
o economic and political conditions in the U.S. and elsewhere in
the world;
o concerns over inflation and wavering institutional/consumer
confidence levels;
o the availability of cash for investment by mutual funds and other
wholesale and retail investors;
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o rising interest rates;
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 the risk that we could be
subject to disciplinary sanctions or other penalties for failure to comply with
applicable laws or regulations.
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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(Servicemark) 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
vertical markets and extend into others, but there is no guarantee that we will
be able to do so.
If we acquire other companies, we may not be able to integrate their operations
effectively.
Our business strategy contemplates expansion through the acquisition of
exchanges and other companies providing services or having technologies and
operations that are complementary to ours. Acquisitions entail numerous risks,
including:
o difficulties in the assimilation of acquired operations and
products;
o diversion of management's attention from other business concerns;
o assumption of unknown material liabilities of acquired companies;
o amortization of acquired intangible assets, which would reduce
future reported earnings; and
o potential loss of clients or key employees of acquired companies.
We cannot assure you that we will be able to integrate successfully any
operations, personnel, services or products that might be acquired in the
future, and our failure to do so could adversely affect our profitability and
the value of our Class A common stock.
Because our business is subject to extensive government and other regulation, we
may face restrictions with respect to the way we conduct our operations.
The SEC, NASD Regulation, Inc., Commodity Futures Trading Commission
and other agencies extensively regulate the U.S. financial industry. Our
international operations may be subject to similar regulations in specific
jurisdictions. Certain of our U.S. subsidiaries are required to comply strictly
with the rules and regulations of these agencies. As a matter of public policy,
these regulatory bodies are responsible for safeguarding the integrity of the
securities and other financial markets and protecting the interests of investors
in those markets. Most aspects of our U.S. broker-dealer subsidiaries are highly
regulated, including:
o the way we deal with our clients;
o our capital requirements;
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o our financial and SEC 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.
Our activities in the Energy Vertical may be subject to regulation by
the Federal Energy Regulatory Commission under the Federal Power Act. It is
possible that TradeSpark will be considered a public utility under the Federal
Power Act and will therefore be subject to regulatory burdens with respect
thereto.
The consumer products and services we anticipate offering through our
electronic marketplaces are likely to be regulated by federal, state and foreign
governments. Our ability to provide such services will be affected by these
regulations. In addition, as we expand our business to other vertical markets,
it is likely that we will be subject to additional federal, state and foreign
regulations. The implementation of unfavorable regulations or unfavorable
interpretations of existing regulations by courts or regulatory bodies could
require us to incur significant compliance costs or cause the development of
affected markets to become impractical.
Because we are subject to risks associated with net capital requirements, we may
not be able to engage in operations that require significant capital.
The SEC, Commodity Futures Trading Commission and various other
regulatory agencies have stringent rules and regulations with respect to the
maintenance of specific levels of net capital by broker-dealers. Net capital,
which is assets minus liabilities, is the net worth of a broker or dealer, less
deductions for certain types of assets. If a firm fails to maintain the required
net capital, it may be subject to suspension or revocation of registration by
the Securities and Exchange Commission or Commodity Futures Trading Commission,
and suspension or expulsion by these regulators could ultimately lead to the
firm's liquidation. If these net capital rules are changed or expanded, or if
there is an unusually large charge against net capital, operations that require
the intensive use of capital would be limited. Also, our ability to withdraw
capital from broker-dealer subsidiaries could be restricted, which in turn could
limit our ability to pay dividends, repay debt and redeem or purchase shares of
our outstanding stock. A large operating loss or charge against net capital
could adversely affect our ability to expand or even maintain our present levels
of business, which could have a material adverse effect on our business. In
addition, we may be subject to net capital requirements in foreign
jurisdictions.
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Because we intend to offer access to some of our marketplaces to online retail
brokers and others, we are subject to risks relating to uncertainty in the
regulation of the Internet.
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. However, laws and regulations may be
adopted in the future that address issues such as user privacy, pricing,
taxation and the characteristics and quality of products and services. For
example, the Telecommunications Act sought to prohibit transmitting various
types of information and content over the Internet. Several telecommunications
companies have petitioned the Federal Communications Commission to regulate
Internet service providers and other online service providers in a manner
similar to long distance telephone carriers and to impose access fees on those
companies. This could increase the cost of transmitting data over the Internet.
Moreover, it may take years to determine the extent to which existing laws
relating to issues such as property ownership, libel and personal privacy are
applicable to the Internet. Any new laws or regulations relating to the Internet
could adversely affect our business.
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.
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
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opportunities for us to maximize our growth and strategic position, including,
among other things, acquisitions, joint ventures, strategic alliances or other
investments. As a result, 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 market price of our Class A common stock may fluctuate widely,
depending upon many factors, including our perceived prospects, and the
prospects of the financial and other business-to-business marketplaces in
general, differences between our actual financial and operating results and
those expected by investors and analysts, changes in analysts' recommendations
or projections, changes in general valuations for Internet and
e-commerce-related companies, changes in general economic or market conditions
and broad market fluctuations.
Future sales of our shares also could adversely affect the market price
of our Class A common stock. If our existing stockholders sell a large number of
shares, or if we issue a large number of shares of our Class A 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.
We have registered under the Securities Act on Form S-8 10,200,000
shares of our Class A common stock, which are reserved for issuance upon
exercise of options granted under the Plan. If we increase our total outstanding
shares of Class A common stock, we will register additional shares of Class A
common stock so that the stock available for issuance under the Plan will be
registered. We also have registered under the Securities Act on Form S-8 425,000
shares of our Class A common stock issuable under our Employee Stock Purchase
Plan, 1,000,000 shares of our Class A common stock issuable under our
Non-Qualified Employee Stock Purchase Plan and 500,000 shares of our Class A
common stock issuable under our Deferral Plan for Employees of Cantor Fitzgerald
and its Affiliates. We also are in the process of registering under the
Securities Act on Form S-3 500,000 shares of our Class A common stock issuable
under our Non-Qualified Employee Stock Purchase Plan to employees of Cantor who
may not be
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eligible to be covered under a Form S-8 registration statement. Once registered,
all of these shares can be sold in the public market upon issuance, subject to
restrictions under the securities laws applicable to resales by affiliates. We
may register additional shares of Class A common stock pursuant to other
employee benefit plans.
RISKS RELATED TO OUR RELATIONSHIP WITH CANTOR
Because we currently 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 and over 81% for the nine months ended September 30,
2000 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
and over 10% for the nine months ended September 30, 2000. 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.
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 Class A 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 Class A common
stock, representing approximately 96.4% 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.
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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 certain limited
circumstances in the Joint Services Agreement. Although we believe Cantor has no
plans to form, acquire or commence any other operations similar to ours, the
Joint Services Agreement permits Cantor to perform, in limited circumstances,
electronic brokerage operations. In addition, the Joint Services Agreement
imposes limitations on our ability to pursue strategic alliances, joint
ventures, partnerships, business combinations, acquisitions and similar
transactions. Because the Joint Services Agreement has a perpetual term, even in
the event of a breach by one of the parties, and does not provide for
modification under its terms, this agreement may become burdensome for us, may
distract us from focusing on our internal operations, may deter or discourage a
takeover of our company and may limit our ability to expand our operations.
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.
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Our reputation may be affected by actions taken by Cantor and entities that are
related to Cantor.
Cantor currently is our most significant client. Cantor holds direct
and indirect ownership and management interests in numerous other entities that
engage in a broad range of financial services and securities-related activities.
Actions taken by, and events involving, Cantor or these related companies which
are perceived negatively by the securities markets, or the public generally,
could have a material adverse effect on us and could affect the price of our
Class A common stock. In addition, events which negatively affect the financial
condition of Cantor may negatively affect us. These events could cause Cantor to
lose clients that may trade in our marketplaces, could impair Cantor's ability
to perform its obligations under the Joint Services Agreement, the
Administrative Services Agreement and other agreements Cantor enters into with
us and could cause Cantor to liquidate investments, including by selling or
otherwise transferring shares of our Class A common stock.
If we become subject to litigation and other legal proceedings, we may be
harmed.
From time to time, we and Cantor may become involved in litigation and
other legal proceedings relating to claims arising from our and their operations
in the normal course of business. Cantor is currently subject to a number of
legal proceedings that could affect us. We cannot assure you that these or other
litigation or legal proceedings will not materially affect our ability to
conduct our business in the manner that we expect or otherwise adversely affect
us.
RISKS RELATED TO E-COMMERCE AND THE INTERNET
If electronic marketplaces for securities and financial and non-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
and non-financial products. Historically, securities and commodities markets
operated through an open outcry format which have recently begun to be
supplanted by new systems that match buyers and sellers electronically.
Currently, the energy markets we participate in through TradeSpark operate
through phone-based and bulletin-board formats. The utilization of our
interactive electronic marketplaces depends on the continued acceptance and
utilization of these electronic markets for securities and financial and
non-financial products. We cannot assure you that the growth and acceptance of
the use of electronic markets will continue.
If e-commerce and Internet usage does not continue to grow, we will not be able
to achieve our business objectives.
Our strategic and financial objectives would be adversely impacted if
Internet usage does not continue to grow. Business-to-business use of the
Internet as a medium of commerce is a recent phenomenon and is subject to a high
level of uncertainty. Internet usage may be inhibited for a number of reasons,
including:
o access costs;
o inadequate network infrastructure;
o security concerns;
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o uncertainty of legal, regulatory and tax issues concerning the
use of the Internet;
o concerns regarding ease of use, accessibility and reliability;
o inconsistent quality of service; and
o lack of availability of cost-effective, high-speed service.
If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it, or the Internet's performance and reliability
may decline. Similarly, Web sites have experienced interruptions in their
service as a result of outages and other delays occurring throughout the
Internet network infrastructure. If these outages or delays occur frequently,
use of the Internet as a commercial or business medium could grow more slowly or
decline. Even if Internet usage continues to grow, online trading in the
wholesale securities markets, and in particular the fixed income securities and
futures markets, may not be accepted by retail customers. This could negatively
affect the growth of our business.
Our networks and those of our third party service providers may be vulnerable to
security risks, which could make our clients hesitant to use our electronic
marketplaces.
We expect the secure transmission of confidential information over
public networks to be a critical element of our operations. Our networks and
those of our third party service providers, including Cantor and associated
clearing corporations, and our clients may be vulnerable to unauthorized access,
computer viruses and other security problems. Persons who circumvent security
measures could wrongfully use our information or cause interruptions or
malfunctions in our operations, which could make our clients hesitant to use our
electronic marketplaces. We may be required to expend significant resources to
protect against the threat of security breaches or to alleviate problems,
including reputational harm and litigation, caused by any breaches. Although we
intend to continue to implement industry-standard security measures, we cannot
assure you that those measures will be sufficient.
RISKS RELATED TO OUR CAPITAL STRUCTURE
Because the voting control of our Class A 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 approximately 96.4% of the combined voting
power of all classes of our voting stock. As long as Cantor beneficially owns a
majority of the combined voting power of our common stock, it will have the
ability, without the consent of the public stockholders, to elect all of the
members of our board of directors and to control our management and affairs. In
addition, it will be able to determine the outcome of matters submitted to a
vote of our stockholders for approval and will be able to cause or prevent a
change in control of our company. In certain circumstances, the shares of our
Class B common stock issued to Cantor upon consummation of the formation
transactions may be transferred without conversion to our Class A common stock.
The holders of our Class A common stock and Class B common stock have
substantially identical rights, except that holders of our Class A common stock
are entitled to one vote per share, while holders of our Class B common stock
are entitled to ten (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
and dilute your percentage of ownership of our Class A common stock.
Provisions of Delaware law, such as its business combination statute,
may have the effect of delaying, deferring or preventing a change in control of
our company. In addition, our Amended and Restated Certificate of Incorporation
authorizes the issuance of preferred stock, which our board of directors can
create and issue without prior stockholder approval and with rights senior to
those of our Class A common stock, as well as additional shares of our Class B
common stock and warrants to purchase our Class A common stock. Any such
issuances would make a takeover of our company more difficult and dilute your
percentage ownership of our Class A common stock. Our Amended and Restated
Certificate of Incorporation and our Second Amended and Restated By-Laws include
provisions which restrict the ability of our stockholders to take action by
written consent and provide for advance notice for stockholder proposals and
director nominations. These provisions may have the effect of delaying or
preventing changes of control or management of our company, even if such
transactions would have significant benefits to our stockholders. As a result,
these provisions could limit the price some investors might be willing to pay in
the future for shares of our Class A common stock.
Delaware law may protect decisions of our board of directors that have a
different effect on holders of our Class A and Class B common stock.
Stockholders may not be able to challenge decisions that have an
adverse effect upon holders of our Class A common stock if our board of
directors acts in a disinterested, informed manner with respect to these
decisions, in good faith and in the belief that it is acting in the best
interests of our stockholders. Delaware law generally provides that a board of
directors owes an equal duty to all stockholders, regardless of class or series,
and does not have separate or additional duties to either group of stockholders,
subject to applicable provisions set forth in a company's charter.
FORWARD-LOOKING STATEMENTS
The information in this prospectus contains forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements are based upon
current expectations that involve risks and uncertainties. Any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. For example, words such as "may," "will," "should,"
"estimates," "predicts," "potential," "continue," "strategy," "believes,"
"anticipates," "plans," "expects," "intends" and similar expressions are
intended to identify forward-looking statements. Our actual results and the
timing of certain events may differ significantly from the results discussed in
the forward-looking statements. Factors that might cause or contribute to such a
discrepancy include, but are not limited to, those discussed elsewhere in this
prospectus in the section entitled "Risk Factors."
USE OF PROCEEDS
Any proceeds that we receive from the sale of shares offered by this
prospectus will be used for working capital and general corporate purposes.
EXPERTS
The financial statements as of December 31, 1999 have been audited by
Deloitte & Touche LLP, independent auditors, whose report is incorporated herein
by reference to our Annual Report on
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Form 10-K for our fiscal year ended December 31, 1999. These financial
statements are incorporated herein by reference in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of Class A common stock offered by this
prospectus is being passed upon by Morgan, Lewis & Bockius LLP, New York, New
York.
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Annex A
eSPEED, INC.
1999 LONG-TERM INCENTIVE PLAN
1. Purpose. The purpose of this 1999 Long-Term Incentive Plan (the
"Plan") of eSpeed, Inc., a Delaware corporation (the "Company"), is to advance
the interests of the Company and its stockholders by providing a means to
attract, retain, motivate and reward directors, officers, employees and
consultants of and service providers to the Company and its affiliates and to
enable such persons to acquire or increase a proprietary interest in the
Company, thereby promoting a closer identity of interests between such persons
and the Company's stockholders.
2. Definitions. The definitions of awards under the Plan, including
Options, SARs (including Limited SARs), Restricted Stock, Deferred Stock, Stock
granted as a bonus or in lieu of other awards, Dividend Equivalents and Other
Stock-Based Awards as are set forth in Section 6 of the Plan. Such awards,
together with any other right or interest granted to a Participant under the
Plan, are termed "Awards". For purposes of the Plan, the following additional
terms shall be defined as set forth below:
(a) "Award Agreement" means any written agreement, contract, notice or
other instrument or document evidencing an Award.
(b) "Beneficiary" shall mean the person, persons, trust or trusts
which have been designated by a Participant in his or her most recent
written beneficiary designation filed with the Committee to receive the
benefits specified under the Plan upon such Participant's death or, if
there is no designated Beneficiary or surviving designated Beneficiary,
then the person, persons, trust or trusts entitled by will or the laws of
descent and distribution to receive such benefits.
(c) "Board" means the Board of Directors of the Company.
(d) A "Change in Control" shall be deemed to have occurred if:
(i) the date of the acquisition by any "person" (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Exchange Act), excluding the Company,
its Parent or any Subsidiary or any employee benefit plan sponsored by any
of the foregoing, of beneficial ownership (within the meaning of Rule 13d-3
under the Exchange Act) of shares of common stock of the Company
representing 30% of either (x) the total number of the then outstanding
shares of common stock, or (y) the total voting power with respect to the
election of directors; or
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(ii) the date the individuals who constitute the Board upon the
completion of the Initial Public Offering (the "Incumbent Board") cease for
any reason to constitute at least a majority of the members of the Board,
provided that any individual becoming a director subsequent to the
effective date of this Agreement whose election, or nomination for election
by the Company's stockholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board (other than
any individual whose nomination for election to Board membership was not
endorsed by the Company's management prior to, or at the time of, such
individual's initial nomination for election) shall be, for purposes of
this Agreement, considered as though such person were a member of the
Incumbent Board; or
(iii) the consummation of a merger, consolidation, recapitalization,
reorganization, sale or disposition of all or a substantial portion of the
Company's assets, a reverse stock split of outstanding voting securities,
the issuance of shares of stock of the Company in connection with the
acquisition of the stock or assets of another entity, provided, however,
that a Change in Control shall not occur under this clause (iii) if
consummation of the transaction would result in at least 70% of the total
voting power represented by the voting securities of the Company (or, if
not the Company, the entity that succeeds to all or substantially all of
the Company's business) outstanding immediately after such transaction
being beneficially owned (within the meaning of Rule 13d-3 promulgated
pursuant to the Exchange Act) by at least 75% of the holders of outstanding
voting securities of the Company immediately prior to the transaction, with
the voting power of each such continuing holder relative to other such
continuing holders not substantially altered in the transaction.
(e) "Code" means the Internal Revenue Code of 1986, as amended from
time to time. References to any provision of the Code shall be deemed to
include regulations thereunder and successor provisions and regulations
thereto.
(f) "Committee" means the committee appointed by the Board to
administer the Plan, or if no committee is appointed, the Board.
(g) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time. References to any provision of the Exchange Act
shall be deemed to include rules thereunder and successor provisions and
rules thereto.
(h) "Fair Market Value" means, with respect to Stock, Awards, or other
property, the fair market value of such Stock, Awards, or other property
determined by such methods or procedures as shall be established from time
to time by the Committee, provided, however, that (i) if the Stock is
listed on a national securities exchange or quoted in an interdealer
quotation system, the Fair Market Value of such Stock on a given date shall
be based upon the last sales price or, if unavailable, the average of the
closing bid and asked prices per share of the Stock at the end of regular
trading on such date (or, if there was no trading or quotation in the Stock
on such date, on the next preceding date on which there was trading or
quotation) as provided by one of such organizations, (ii) the "fair market
value" of Stock on the date on which shares of Stock are first issued and
sold pursuant to a registration
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statement filed with and declared effective by the Securities and Exchange
Commission shall be the Initial Public Offering price of the shares so
issued and sold, as set forth in the first final prospectus used in such
offering and (iii) the "fair market value" of Stock prior to the date of
the Initial Public Offering shall be as determined by the Board.
(i) "Initial Public Offering" shall mean an initial public offering of
shares of Stock in a firm commitment underwriting registered with the
Securities and Exchange Commission in compliance with the provisions of the
1933 Act.
(j) "ISO" means any Option intended to be and designated as an
incentive stock option within the meaning of Section 422 of the Code.
(k) "Parent" means any "person" (within the meaning of Section
13(d)(3) or 14(d)(2) of the Exchange Act) that controls the Company, either
directly or indirectly through one or more intermediaries.
(l) "Participant" means a person who, at a time when eligible under
Section 5 hereof, has been granted an Award under the Plan.
(m) "Rule 16b-3" means Rule 16b-3, as from time to time in effect
and applicable to the Plan and Participants, promulgated by the Securities
and Exchange Commission under Section 16 of the Exchange Act.
(n) "Stock" means the Company's Class A Common Stock, and such other
securities as may be substituted for Stock pursuant to Section 4.
(o) "Subsidiary" means each entity that is controlled by the Company
or a Parent, either directly or indirectly through one or more
intermediaries.
3. Administration.
(a) Authority of the Committee. Except as otherwise provided below, the
Plan shall be administered by the Committee. The Committee shall have full and
final authority to take the following actions, in each case subject to and
consistent with the provisions of the Plan:
(i) to select persons to whom Awards may be granted;
(ii) to determine the type or types of Awards to be granted to each
such person;
(iii) to determine the number of Awards to be granted, the number of
shares of Stock to which an Award will relate, the terms and conditions of
any Award granted under the Plan (including, but not limited to, any
exercise price, grant price or purchase price, any restriction or
condition, any schedule for lapse of restrictions or conditions relating to
transferability or forfeiture, exercisability or settlement of an Award,
and waivers or accelerations thereof, performance conditions relating to an
Award, based in
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each case on such considerations as the Committee shall determine), and all
other matters to be determined in connection with an Award;
(iv) to determine whether, to what extent and under what circumstances
an Award may be settled, or the exercise price of an Award may be paid, in
cash, Stock, other Awards, or other property, or an Award may be canceled,
forfeited, or surrendered;
(v) to determine whether, to what extent and under what circumstances
cash, Stock, other Awards or other property payable with respect to an
Award will be deferred either automatically, at the election of the
Committee or at the election of the Participant;
(vi) to determine the restrictions, if any, to which Stock received
upon exercise or settlement of an Award shall be subject (including
lock-ups and other transfer restrictions), may condition the delivery of
such Stock upon the execution by the Participant of any agreement providing
for such restrictions;
(vii) to prescribe the form of each Award Agreement, which need not be
identical for each Participant;
(viii) to adopt, amend, suspend, waive and rescind such rules and
regulations and appoint such agents as the Committee may deem necessary or
advisable to administer the Plan;
(ix) to correct any defect or supply any omission or reconcile any
inconsistency in the Plan and to construe and interpret the Plan and any
Award, rules and regulations, Award Agreement or other instrument
hereunder; and
(x) to make all other decisions and determinations as may be required
under the terms of the Plan or as the Committee may deem necessary or
advisable for the administration of the Plan.
Other provisions of the Plan notwithstanding, the Board shall perform the
functions of the Committee for purposes of granting awards to directors who
serve on the Committee, and the Board may perform any function of the Committee
under the Plan for any other purpose, including without limitation for the
purpose of ensuring that transactions under the Plan by Participants who are
then subject to Section 16 of the Exchange Act in respect of the Company are
exempt under Rule 16b-3. In any case in which the Board is performing a function
of the Committee under the Plan, each reference to the Committee herein shall be
deemed to refer to the Board, except where the context otherwise requires.
(b) Manner of Exercise of Committee Authority. Any action of the Committee
with respect to the Plan shall be final, conclusive and binding on all persons,
including the Company, its Parent and Subsidiaries, Participants, any person
claiming any rights under the Plan from or through any Participant and
stockholders, except to the extent the Committee may subsequently modify, or
take further action not consistent with, its prior action. If not specified in
the Plan, the
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time at which the Committee must or may make any determination shall be
determined by the Committee, and any such determination may thereafter be
modified by the Committee (subject to Section 8(e)). The express grant of any
specific power to the Committee, and the taking of any action by the Committee,
shall not be construed as limiting any power or authority of the Committee. The
Committee may delegate to officers or managers of the Company, its Parent or
Subsidiaries the authority, subject to such terms as the Committee shall
determine, to perform such functions as the Committee may determine, to the
extent permitted under applicable law.
(c) Limitation of Liability; Indemnification. Each member of the Committee
shall be entitled to, in good faith, rely or act upon any report or other
information furnished to him by any officer or other employee of the Company,
its Parent or Subsidiaries, the Company's independent certified public
accountants or any executive compensation consultant, legal counsel or other
professional retained by the Company to assist in the administration of the
Plan. No member of the Committee, or any officer or employee of the Company
acting on behalf of the Committee, shall be personally liable for any action,
determination or interpretation taken or made in good faith with respect to the
Plan, and all members of the Committee and any officer or employee of the
Company acting on its behalf shall, to the extent permitted by law, be fully
indemnified and protected by the Company with respect to any such action,
determination or interpretation.
4. Stock Subject to Plan.
(a) Amount of Stock Reserved. The total number of shares of Stock that may
be subject to outstanding Awards, determined immediately after the grant of any
Award, shall not exceed 20% of the total number of shares of all classes of the
Company's common stock outstanding at the effective time of such grant. In no
event shall the number of shares of Stock delivered upon the exercise of ISOs
exceed 10,000,000; provided, however, that shares subject to ISOs shall not be
deemed delivered if such ISOs are forfeited, expire or otherwise terminate
without delivery of shares to the Participant. If an Award valued by reference
to Stock may only be settled in cash, the number of shares to which such Award
relates shall be deemed to be Stock subject to such Award for purposes of this
Section 4(a). Any shares of Stock delivered pursuant to an Award may consist, in
whole or in part, of authorized and unissued shares, treasury shares or shares
acquired in the market on a Participant's behalf.
(b) Adjustments. In the event that the Committee shall determine that any
recapitalization, forward or reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase or exchange of Stock or other
securities, Stock dividend or other special, large and non-recurring dividend or
distribution (whether in the form of cash, securities or other property),
liquidation, dissolution, or other similar corporate transaction or event,
affects the Stock such that an adjustment is appropriate in order to prevent
dilution or enlargement of the rights of Participants under the Plan, then the
Committee shall, in such manner as it may deem equitable, adjust any or all of
(i) the number and kind of shares of Stock reserved and available for Awards
under Section 4(a), including shares reserved for ISOs, (ii) the number and kind
of shares of outstanding Restricted Stock or other outstanding Awards in
connection with which shares have been issued, (iii) the number and kind of
shares that may be issued in respect of other outstanding Awards and (iv) the
exercise price, grant price or purchase price relating to any
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Award (or, if deemed appropriate, the Committee may make provision for a cash
payment with respect to any outstanding Award). In addition, the Committee is
authorized to make adjustments in the terms and conditions of, and the criteria
included in, Awards (including, without limitation, cancellation of unexercised
or outstanding Awards, or substitution of Awards using stock of a successor or
other entity) in recognition of unusual or nonrecurring events (including,
without limitation, events described in the preceding sentence and events
constituting a Change in Control) affecting the Company, its Parent or any
Subsidiary or the financial statements of the Company, its Parent or any
Subsidiary, or in response to changes in applicable laws, regulations, or
accounting principles.
5. Eligibility. Directors, officers and employees of the Company or its
Parent or any Subsidiary, and persons who provide consulting or other services
to the Company, its Parent or any Subsidiary deemed by the Committee to be of
substantial value to the Company or its Parent and Subsidiaries, are eligible to
be granted Awards under the Plan. In addition, persons who have been offered
employment by, or agreed to become a director of, the Company, its Parent or any
Subsidiary, and persons employed by an entity that the Committee reasonably
expects to become a Subsidiary of the Company, are eligible to be granted an
Award under the Plan.
6. Specific Terms of Awards.
(a) General. Awards may be granted on the terms and conditions set forth in
this Section 6. In addition, the Committee may impose on any Award or the
exercise thereof such additional terms and conditions, not inconsistent with the
provisions of the Plan, as the Committee shall determine, including terms
requiring forfeiture of Awards in the event of termination of employment or
service of the Participant. Except as expressly provided by the Committee
(including for purposes of complying with the requirements of the Delaware
General Corporation Law relating to lawful consideration for the issuance of
shares), no consideration other than services will be required as consideration
for the grant (but not the exercise) of any Award.
(b) Options. The Committee is authorized to grant options to purchase Stock
(including "reload" options automatically granted to offset specified exercises
of Options) on the following terms and conditions ("Options"):
(i) Exercise Price. The exercise price per share of Stock purchasable
under an Option shall be determined by the Committee.
(ii) Time and Method of Exercise. The Committee shall determine the
time or times at which an Option may be exercised in whole or in part, the
methods by which such exercise price may be paid or deemed to be paid, the
form of such payment, including, without limitation, cash, Stock, other
Awards or awards granted under other Company plans or other property
(including notes or other contractual obligations of Participants to make
payment on a deferred basis, such as through "cashless exercise"
arrangements, to the extent permitted by applicable law), and the methods
by which Stock will be delivered or deemed to be delivered to Participants.
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(iii) Termination of Employment. The Committee shall determine the
period, if any, during which Options shall be exercisable following a
Participants termination of his employment relationship with the Company,
its Parent or any Subsidiary. For this purpose, any sale of a Subsidiary of
the Company pursuant to which it ceases to be a Subsidiary of the Company
shall be deemed to be a termination of employment by any Participant
employed by such Subsidiary. Unless otherwise determined by the Committee,
(i) during any period that an Option is exercisable following termination
of employment, it shall be exercisable only to the extent it was
exercisable upon such termination of employment, and (ii) if such
termination of employment is for cause, as determined in the discretion of
the Committee, all Options held by the Participant shall immediately
terminate.
(iv) Sale of the Company. 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, all
Options outstanding under the Plan shall terminate (after taking into
account any accelerated vested pursuant to Section 7(f)), unless such other
corporation shall continue or assume the Plan as it relates to Options then
outstanding (in which case such other corporation shall be treated as the
Company for all purposes hereunder, and, pursuant to Section 4(b), the
Committee of such other corporation shall make appropriate adjustment 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 Plan is not to be so assumed, the Company shall notify the Participant
of consummation of such transaction at least ten days in advance thereof.
(v) Options Providing Favorable Tax Treatment. The Committee may grant
Options that may afford a Participant with favorable treatment under the
tax laws applicable to such Participant, including, but not limited to
ISOs. If Stock acquired by exercise of an ISO is sold or otherwise disposed
of within two years after the date of grant of the ISO or within one year
after the transfer of such Stock to the Participant, the holder of the
Stock immediately prior to the disposition shall promptly notify the
Company in writing of the date and terms of the disposition and shall
provide such other information regarding the disposition as the Company may
reasonably require in order to secure any deduction then available against
the Company's or any other corporation's taxable income. The Company may
impose such procedures as it determines may be necessary to ensure that
such notification is made. Each Option granted as an ISO shall be
designated as such in the Award Agreement relating to such Option.
(c) Stock Appreciation Rights. The Committee is authorized to grant stock
appreciation rights on the following terms and conditions ("SARs"):
(i) Right to Payment. An SAR shall confer on the Participant to whom
it is granted a right to receive, upon exercise thereof, the excess of (A)
the Fair Market Value of one share of Stock on the date of exercise (or, if
the Committee shall so determine in the case of any such right other than
one related to an ISO, the Fair Market Value of one share at any time
during a specified period before or after the date of exercise), over (B)
the grant price of the SAR as determined by the Committee as of the
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date of grant of the SAR, which, except as provided in Section 7(a), shall
be not less than the Fair Market Value of one share of Stock on the date of
grant.
(ii) Other Terms. The Committee shall determine the time or times at
which an SAR may be exercised in whole or in part, the method of exercise,
method of settlement, form of consideration payable in settlement, method
by which Stock will be delivered or deemed to be delivered to Participants,
whether or not an SAR shall be in tandem with any other Award, and any
other terms and conditions of any SAR. Limited SARs that may only be
exercised upon the occurrence of a Change in Control may be granted on such
terms, not inconsistent with this Section 6(c), as the Committee may
determine. Limited SARs may be either freestanding or in tandem with other
Awards.
(d) Restricted Stock. The Committee is authorized to grant Stock that is
subject to restrictions based on continued employment on the following terms and
conditions ("Restricted Stock"):
(i) Grant and Restrictions. Restricted Stock shall be subject to such
restrictions on transferability and other restrictions, if any, as the
Committee may impose, which restrictions may lapse separately or in
combination at such times, under such circumstances, in such installments,
or otherwise, as the Committee may determine. Except to the extent
restricted under the terms of the Plan and any Award Agreement relating to
the Restricted Stock, a Participant granted Restricted Stock shall have all
of the rights of a stockholder including, without limitation, the right to
vote Restricted Stock or the right to receive dividends thereon.
(ii) Forfeiture. Except as otherwise determined by the Committee, upon
termination of employment or service (as determined under criteria
established by the Committee) during the applicable restriction period,
Restricted Stock that is at that time subject to restrictions shall be
forfeited and reacquired by the Company; provided, however, that the
Committee may provide, by rule or regulation or in any Award Agreement, or
may determine in any individual case, that restrictions or forfeiture
conditions relating to Restricted Stock will be waived in whole or in part
in the event of termination resulting from specified causes.
(iii) Certificates for Stock. Restricted Stock granted under the Plan
may be evidenced in such manner as the Committee shall determine. If
certificates representing Restricted Stock are registered in the name of
the Participant, such certificates may bear an appropriate legend referring
to the terms, conditions, and restrictions applicable to such Restricted
Stock, the Company may retain physical possession of the certificate, in
which case the Participant shall be required to have delivered a stock
power to the Company, endorsed in blank, relating to the Restricted Stock.
(iv) Dividends. Dividends paid on Restricted Stock shall be either
paid at the dividend payment date in cash or in shares of unrestricted
Stock having a Fair Market Value equal to the amount of such dividends, or
the payment of such dividends shall be deferred and/or the amount or value
thereof automatically reinvested in additional
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Restricted Stock, other Awards, or other investment vehicles, as the
Committee shall determine or permit the Participant to elect. Stock
distributed in connection with a Stock split or Stock dividend, and other
property distributed as a dividend, shall be subject to restrictions and a
risk of forfeiture to the same extent as the Restricted Stock with respect
to which such Stock or other property has been distributed, unless
otherwise determined by the Committee.
(e) Deferred Stock. The Committee is authorized to grant units representing
the right to receive Stock at a future date subject to the following terms and
conditions ("Deferred Stock"):
(i) Award and Restrictions. Delivery of Stock will occur upon
expiration of the deferral period specified for an Award of Deferred Stock
by the Committee (or, if permitted by the Committee, as elected by the
Participant). In addition, Deferred Stock shall be subject to such
restrictions as the Committee may impose, if any, which restrictions may
lapse at the expiration of the deferral period or at earlier specified
times, separately or in combination, in installments or otherwise, as the
Committee may determine.
(ii) Forfeiture. Except as otherwise determined by the Committee, upon
termination of employment or service (as determined under criteria
established by the Committee) during the applicable deferral period or
portion thereof to which forfeiture conditions apply (as provided in the
Award Agreement evidencing the Deferred Stock), all Deferred Stock that is
at that time subject to such forfeiture conditions shall be forfeited;
provided, however, that the Committee may provide, by rule or regulation or
in any Award Agreement, or may determine in any individual case, that
restrictions or forfeiture conditions relating to Deferred Stock will be
waived in whole or in part in the event of termination resulting from
specified causes.
(f) Bonus Stock and Awards in Lieu of Cash Obligations. The Committee is
authorized to grant Stock as a bonus, or to grant Stock or other Awards in lieu
of Company obligations to pay cash under other plans or compensatory
arrangements.
(g) Dividend Equivalents. The Committee is authorized to grant awards
entitling the Participant to receive cash, Stock, other Awards or other property
equal in value to dividends paid with respect to a specified number of shares of
Stock ("Dividend Equivalents"). Dividend Equivalents may be awarded on a
free-standing basis or in connection with another Award. The Committee may
provide that Dividend Equivalents shall be paid or distributed when accrued or
shall be deemed to have been reinvested in additional Stock, Awards or other
investment vehicles, and subject to such restrictions on transferability and
risks of forfeiture, as the Committee may specify.
(h) Other Stock-Based Awards. The Committee is authorized, subject to
limitations under applicable law, to grant such other Awards that may be
denominated or payable in, valued in whole or in part by reference to, or
otherwise based on, or related to, Stock and factors that may influence the
value of Stock, as deemed by the Committee to be consistent with the purposes of
the Plan, including, without limitation, convertible or exchangeable debt
securities,
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other rights convertible or exchangeable into Stock, purchase rights for Stock,
Awards with value and payment contingent upon performance of the Company or any
other factors designated by the Committee and Awards valued by reference to the
book value of Stock or the value of securities of or the performance of
specified Subsidiaries ("Other Stock Based Awards"). The Committee shall
determine the terms and conditions of such Awards. Stock issued pursuant to an
Award in the nature of a purchase right granted under this Section 6(h) shall be
purchased for such consideration, paid for at such times, by such methods, and
in such forms, including, without limitation, cash, Stock, other Awards, or
other property, as the Committee shall determine. Cash awards, as an element of
or supplement to any other Award under the Plan, may be granted pursuant to this
Section 6(h).
7. Certain Provisions Applicable to Awards.
(a) Stand-Alone, Additional, Tandem, and Substitute Awards. Awards granted
under the Plan may, in the discretion of the Committee, be granted either alone
or in addition to, in tandem with or in substitution for any other Award granted
under the Plan or any award granted under any other plan of the Company, its
Parent or Subsidiaries or any business entity to be acquired by the Company or a
Subsidiary, or any other right of a Participant to receive payment from the
Company its Parent or Subsidiaries. Awards granted in addition to or in tandem
with other Awards or awards may be granted either as of the same time as or a
different time from the grant of such other Awards or awards.
(b) Term of Awards. The term of each Award shall be for such period as may
be determined by the Committee; provided, however, that (i) in no event shall
the term of any ISO or an SAR granted in tandem therewith exceed a period of ten
years from the date of its grant (or such shorter period as may be applicable
under Section 422 of the Code), and (ii) the term of any Option granted to a
resident of the United Kingdom shall not exceed a period of ten years from the
date of its grant.
(c) Form of Payment Under Awards. Subject to the terms of the Plan and any
applicable Award Agreement, payments to be made by the Company, its Parent or
Subsidiaries upon the grant, exercise or settlement of an Award may be made in
such forms as the Committee shall determine, including, without limitation,
cash, Stock, other Awards or other property, and may be made in a single payment
or transfer, in installments or on a deferred basis. Such payments may include,
without limitation, provisions for the payment or crediting of reasonable
interest on installment or deferred payments or the grant or crediting of
Dividend Equivalents in respect of installment or deferred payments denominated
in Stock.
(d) Rule 16b-3 Compliance.
(i) Six-Month Holding Period. Unless a Participant could otherwise
dispose of equity securities, including derivative securities, acquired
under the Plan without incurring liability under Section 16(b) of the
Exchange Act, equity securities acquired under the Plan must be held for a
period of six months following the date of such acquisition, provided that
this condition shall be satisfied with respect to a derivative security
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if at least six months elapse from the date of acquisition of the
derivative security to the date of disposition of the derivative security
(other than upon exercise or conversion) or its underlying equity security.
(ii) Other Compliance Provisions. With respect to a Participant who is
then subject to Section 16 of the Exchange Act in respect of the Company,
the Committee shall implement transactions under the Plan and administer
the Plan in a manner that will ensure that each transaction by such a
Participant is exempt from liability under Rule 16b-3, except that such a
Participant may be permitted to engage in a non-exempt transaction under
the Plan if written notice has been given to the Participant regarding the
non-exempt nature of such transaction. The Committee may authorize the
Company to repurchase any Award or shares of Stock resulting from any Award
in order to prevent a Participant who is subject to Section 16 of the
Exchange Act from incurring liability under Section 16(b). Unless otherwise
specified by the Participant, equity securities, including derivative
securities, acquired under the Plan which are disposed of by a Participant
shall be deemed to be disposed of in the order acquired by the Participant.
(e) Loan Provisions. With the consent of the Committee, and subject at all
times to, and only to the extent, if any, permitted under and in accordance
with, laws and regulations and other binding obligations or provisions
applicable to the Company, the Company may make, guarantee or arrange for a loan
or loans to a Participant with respect to the exercise of any Option or other
payment in connection with any Award, including the payment by a Participant of
any or all federal, state or local income or other taxes due in connection with
any Award. Subject to such limitations, the Committee shall have full authority
to decide whether to make a loan or loans hereunder and to determine the amount,
terms and provisions of any such loan or loans, including the interest rate to
be charged in respect of any such loan or loans, whether the loan or loans are
to be with or without recourse against the borrower, the terms on which the loan
is to be repaid and conditions, if any, under which the loan or loans may be
forgiven.
(f) Acceleration upon a Change of Control. Notwithstanding anything
contained herein to the contrary, except as set forth in an Award Agreement, all
conditions and/or restrictions relating to the continued performance of services
and/or the achievement of performance objectives with respect to the
exercisability or full enjoyment of an Award shall lapse immediately prior to a
Change in Control.
8. General Provisions.
(a) Compliance With Laws and Obligations. The Company shall not be
obligated to issue or deliver Stock in connection with any Award or take any
other action under the Plan 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 of
Stock issued under the Plan 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.
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(b) Limitations on Transferability. Awards and other rights under the Plan
will not be transferable by a Participant except by will or the laws of descent
and distribution or to a Beneficiary in the event of the Participant's death,
shall not be pledged, mortgaged, hypothecated or otherwise encumbered, or
otherwise subject to the claims of creditors, and, in the case of ISOs and SARs
in tandem therewith, shall be exercisable during the lifetime of a Participant
only by such Participant or his guardian or legal representative; provided,
however, that such Awards and other rights (other than ISOs and SARs in tandem
therewith) may be transferred to one or more transferees during the lifetime of
the Participant to the extent and on such terms as then may be permitted by the
Committee.
(c) No Right to Continued Employment or Service. Neither the Plan nor any
action taken hereunder shall be construed as giving any employee, director or
other person the right to be retained in the employ or service of the Company,
its Parent or any Subsidiary, nor shall it interfere in any way with the right
of the Company, its Parent or any Subsidiary to terminate any employee's
employment or other person's service at any time or with the right of the Board
or stockholders to remove any director.
(d) Taxes. The Company, its Parent and Subsidiaries are authorized to
withhold from any Award granted or to be settled, any delivery of Stock in
connection with an Award, any other payment relating to an Award or any payroll
or other payment to a Participant amounts of withholding and other taxes due or
potentially payable in connection with any transaction involving an Award, and
to take such other action as the Committee may deem advisable to enable the
Company, its Parent and Subsidiaries and Participants to satisfy obligations for
the payment of withholding taxes and other tax obligations relating to any
Award. This authority shall include authority to withhold or receive Stock or
other property and to make cash payments in respect thereof in satisfaction of a
Participant's tax obligations.
(e) Changes to the Plan and Awards. The Board may amend, alter, suspend,
discontinue or terminate the Plan or the Committee's authority to grant Awards
under the Plan without the consent of stockholders or Participants, except that
any such action shall be subject to the approval of the Company's stockholders
at or before the next annual meeting of stockholders for which the record date
is after such Board action if such stockholder approval is required by any
federal or state law or regulation or the rules of any stock exchange or
automated quotation system on which the Stock may then be listed or quoted, and
the Board may otherwise, in its discretion, determine to submit other such
changes to the Plan to stockholders for approval; provided, however, that,
without the consent of an affected Participant, no such action may materially
impair the rights of such Participant under any Award theretofore granted to him
(as such rights are set forth in the Plan and the Award Agreement). The
Committee may waive any conditions or rights under, or amend, alter, suspend,
discontinue, or terminate, any Award theretofore granted and any Award Agreement
relating thereto; provided, however, that, without the consent of an affected
Participant, no such action may materially impair the rights of such Participant
under such Award (as such rights are set forth in the Plan and the Award
Agreement). Notwithstanding the foregoing, the Board or the Committee may take
any action (including actions affecting or terminating outstanding Awards) to
the extent necessary for a business combination in which the Company is a party
to be accounted for under the pooling-of-interests
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method of accounting under Accounting Principles Board Opinion No. 16 (or any
successor thereto). The Board or the Committee shall also have the authority to
establish separate sub-plans under the Plan with respect to Participants
resident in a particular jurisdiction (the terms of which shall not be
inconsistent with those of the Plan) if necessary or desirable to comply with
the applicable laws of such jurisdiction.
(f) No Rights to Awards; No Stockholder Rights. No person shall have any
claim to be granted any Award under the Plan, and there is no obligation for
uniformity of treatment of Participants and employees. No Award shall confer on
any Participant any of the rights of a stockholder of the Company unless and
until Stock is duly issued or transferred and delivered to the Participant in
accordance with the terms of the Award or, in the case of an Option, the Option
is duly exercised.
(g) Unfunded Status of Awards; Creation of Trusts. The Plan is intended to
constitute an "unfunded" plan for incentive and deferred compensation. With
respect to any payments not yet made to a Participant pursuant to an Award,
nothing contained in the Plan or any Award shall give any such Participant any
rights that are greater than those of a general creditor of the Company;
provided, however, that the Committee may authorize the creation of trusts or
make other arrangements to meet the Company's obligations under the Plan to
deliver cash, Stock, other Awards, or other property pursuant to any Award,
which trusts or other arrangements shall be consistent with the "unfunded"
status of the Plan unless the Committee otherwise determines with the consent of
each affected Participant.
(h) Nonexclusivity of the Plan. Neither the adoption of the Plan by the
Board nor any submission of the Plan or amendments thereto to the stockholders
of the Company for approval shall be construed as creating any limitations on
the power of the Board to adopt such other compensatory arrangements as it may
deem desirable, including, without limitation, the granting of stock options
otherwise than under the Plan, and such arrangements may be either applicable
generally or only in specific cases.
(i) No Fractional Shares. No fractional shares of Stock shall be issued or
delivered pursuant to the Plan or any Award. The Committee shall determine
whether cash, other Awards, or other property shall be issued or paid in lieu of
such fractional shares or whether such fractional shares or any rights thereto
shall be forfeited or otherwise eliminated.
(j) Governing Law. The validity, construction and effect of the Plan, any
rules and regulations relating to the Plan and any Award Agreement shall be
determined in accordance with the laws of the State of Delaware, without giving
effect to principles of conflicts of laws, and applicable federal law.
(k) Effective Date; Plan Termination. The Plan shall become effective as of
the date of its adoption by the Board, and shall continue in effect until
terminated by the Board.
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No person has been authorized to give any information or to make any
representations other than those contained in, or incorporated by reference
into, this prospectus and, if given or made, such information or representations
must not be relied upon as having been authorized. This prospectus does not
constitute an offer to sell or the solicitation of an offer to buy any
securities other than the securities described in this prospectus or an offer to
sell or the solicitation of an offer to buy such securities in any circumstances
in which such offer or solicitation is unlawful. Neither the delivery of this
prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that the information contained herein or therein is correct as
of any time subsequent to the date of such information.
TABLE OF CONTENTS
PROSPECTUS
Page
WHERE YOU CAN GET MORE INFORMATION......................2
DOCUMENTS INCORPORATED BY REFERENCE.....................2
GENERAL INFORMATION ABOUT OUR LONG-TERM INCENTIVE PLAN..4
GENERAL INFORMATION ABOUT OUR COMPANY...................9
RISK FACTORS...........................................10
FORWARD-LOOKING STATEMENTS.............................27
USE OF PROCEEDS........................................27
EXPERTS................................................27
LEGAL MATTERS..........................................28
Annex A...............................................A-I
eSPEED, INC.
Class A common stock
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PROSPECTUS
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January 3, 2001
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