AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 8, 1999
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DELAWARE 7379 13-4063515
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE NUMBER)
ORGANIZATION)
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Copies to:
CHRISTOPHER T. JENSEN, ESQ. FREDERICK W. KANNER, ESQ.
MORGAN, LEWIS & BOCKIUS LLP DEWEY BALLANTINE LLP
101 PARK AVENUE 1301 AVENUE OF THE AMERICAS
NEW YORK, NY 10178 NEW YORK, NY 10019
(212) 309-6000 (212) 259-8000
FAX: (212) 309-6273 FAX: (212) 259-6333
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / /
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /
We will amend and complete the information in this prospectus. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and we are not soliciting offers to buy these securities, in any state where the offer or sale is not permitted or legal.
PRELIMINARY PROSPECTUS Subject to Completion, dated December 8, 1999
[eSPEED Logo]
We operate global interactive electronic marketplaces designed to enable market participants to trade financial instruments and other products instantaneously, more effectively and at a lower cost than traditional trading methods. Of the 8,500,000 shares of Class A common stock offered by this prospectus, we are offering 6,000,000 shares and the selling stockholder, Cantor Fitzgerald Securities, is offering 2,500,000 shares. We will not receive any proceeds from the sale by the selling stockholder of shares of our Class A common stock.
No public market currently exists for our Class A common stock. We estimate that the initial public offering price per share will be between $17.00 and $19.00. We have applied to have our Class A common stock approved for quotation on the Nasdaq National Market under the symbol "ESPD." See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price.
INVESTING IN OUR CLASS A COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5 TO READ ABOUT CERTAIN RISKS YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR CLASS A COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PER SHARE TOTAL
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Public offering price......................................................... $ $
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Underwriting discounts and commissions........................................ $ $
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Proceeds, before expenses, to us.............................................. $ $
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Proceeds to the selling stockholder........................................... $ $
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We and the selling stockholder have granted the underwriters a 30-day option to purchase up to an additional 1,000,000 and 275,000 shares, respectively, of Class A common stock to cover over-allotments at the initial public offering price per share less the underwriting discounts and commissions. If the option is exercised in full, the total underwriting discounts and commissions will be $ , the total proceeds, before expenses, to us will be $ and the total proceeds to the selling stockholder will be $ .
The underwriters expect to deliver the shares of Class A common stock in New York, New York on , 1999.
WARBURG DILLON READ LLC
HAMBRECHT & QUIST
THOMAS WEISEL PARTNERS LLC
CANTOR FITZGERALD & CO.
The date of this prospectus is , 1999.
TABLE OF CONTENTS
PAGE
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Prospectus Summary......................................................................................... 1
Risk Factors............................................................................................... 5
Forward-Looking Statements................................................................................. 20
Use of Proceeds............................................................................................ 20
Dividend Policy............................................................................................ 20
Dilution................................................................................................... 21
Capitalization............................................................................................. 22
Selected Financial Data.................................................................................... 23
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 24
Business................................................................................................... 30
Management................................................................................................. 50
Relationship with Cantor................................................................................... 54
Principal and Selling Stockholders......................................................................... 61
Description of Capital Stock............................................................................... 62
Shares Eligible for Future Sale............................................................................ 65
Underwriting............................................................................................... 66
Legal Matters.............................................................................................. 68
Experts.................................................................................................... 68
Where You Can Find More Information........................................................................ 69
Index to Financial Statements.............................................................................. F-1
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eSPEED (SM) is a service mark of eSpeed, and INTERACTIVE MATCHING (SM) and CANTOR EXCHANGE (SM) are service marks licensed by eSpeed.
Unless otherwise indicated, all information in this prospectus assumes that the underwriters' over-allotment option will not be exercised.
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. It may not contain all of the information that is important to you. To understand this offering fully, you should read carefully the entire prospectus, including the risk factors and the financial statements. Unless otherwise indicated, the information in this prospectus assumes that the contribution of assets to us by Cantor Fitzgerald, L.P. and its affiliates which is described below has taken place.
OVERVIEW OF OUR BUSINESS
We operate global interactive electronic marketplaces that enable the trading of financial instruments and other products instantaneously, more effectively and at lower cost than traditional trading methods. Our marketplaces are currently used by most of the largest financial institutions and wholesale market participants to trade in a wide range of global financial instruments, including government securities denominated in U.S. dollars, Euros, Yen, British Pounds Sterling, Canadian dollars and currencies of emerging market countries, as well as securities of U.S. agencies, municipal securities, Eurobonds, corporate bonds and other global fixed income securities and U.S. Treasury futures. We operate the largest global electronic marketplace for U.S. Treasury securities and leading global electronic marketplaces for other fixed income securities and financial instruments. We also operate a U.S. Treasury futures exchange marketplace that is known as the CANTOR EXCHANGE (SM), the first fully electronic futures exchange for the trading of U.S. Treasury futures. Our current marketplaces process financial instrument transactions of over $150 billion per day, of which more than $6 billion are wholly-electronic orders. Our revenues are driven by trading activity and volume in our marketplaces. We commenced operations in March 1999 as a division of Cantor Fitzgerald and have not yet made a profit.
We believe we operate the only electronic marketplaces used for trading in multiple instruments on a global basis. Over 500 institutions worldwide participate in our marketplaces, including all of the 25 largest bond trading firms in the world, as identified by Euromoney Magazine. Most of these institutions use our proprietary screen displays and/or trading platforms, which allow us to deliver information and execute transactions instantaneously, on a secure basis through their computer network security barriers.
OUR INDUSTRY
Traditional trading methods are relatively slow, expensive and limited. In both the fixed income and futures markets, trading practices historically have centered around a method of trading known as open outcry, where trading activity is focused on a central location, or pit. Market participants in the pit often have access to better and more timely market information than outsiders. In order to access the pit, individuals and institutional traders must send their orders through several layers of middlemen. Transaction costs are high due to the number of people involved in an open outcry system and execution can be slow. Program trading is difficult or impossible to implement because of the current manual nature of these markets, especially programs designed to automatically and simultaneously execute multiple trades in different, but related, financial products. Processing, confirming and clearing paper-based trades are also very time consuming and expensive. Paper and telephone-based trading produces delayed information and results in compliance programs that are expensive to manage and can be circumvented. Because of these impediments, non-electronic trading methods limit trading volume and liquidity.
OUR ELECTRONIC MARKETPLACE SOLUTION
Our interactive electronic marketplaces are powered by our eSPEED (SM) system, which employs our private, instantaneous, electronic network and proprietary transaction processing software. Our eSPEED (SM) system has a flexible design which allows us to quickly and easily add new financial instruments in multiple currencies and trading models. It uses our network distribution system, which we believe is one of the most robust systems in operation, enabling us to provide access to accurate market information and instantaneous trade execution. The system is designed to minimize the need for human intermediaries in the trading process by providing clients with multiple methods of accessing our marketplaces and executing trades directly, utilizing INTERACTIVE MATCHING (SM), our proprietary, rules-based trading method that interactively executes buy and sell orders from multiple market participants.
The benefits of our eSPEED (SM) system include the following:
o instantaneous price dissemination and trade execution;
o lower transaction costs;
o multiple product program trading;
o greater accuracy and decreased probability of erroneous trades;
o integrated compliance and credit risk functions;
o highly efficient pricing on illiquid securities; and
o ability to automate back-office functions.
OUR GROWTH STRATEGY
Our objective is to be the leading provider of interactive electronic marketplaces worldwide. Our growth strategy to achieve this objective includes:
o focusing exclusively on developing and operating interactive electronic marketplaces;
o expanding the number of financial and non-financial products in our electronic marketplaces;
o converting clients to fully electronic trading;
o leveraging existing eSPEED (SM) system connectivity to deploy new products and services;
o enabling online retail broker access to wholesale marketplaces, where appropriate, for fixed income securities and other financial products so as to allow bonds and other financial instruments to trade online similar to stocks;
o pursuing acquisitions and strategic alliances; and
o leveraging our eSPEED (SM) system for use in non-financial, business-to-business and consumer marketplaces.
OUR HISTORY
We commenced operations in March 1999 as a division of Cantor Fitzgerald. Over the past 25 years, Cantor has been a leading global broker-dealer of fixed income securities. In 1972, Cantor developed the world's first screen-based brokerage market in U.S. government securities. Since the early 1990s, Cantor has been developing systems to promote fully electronic marketplaces. Since 1996, Cantor has invested more than $200 million in information technology, including the development of proprietary electronic transaction processing software, network distribution systems and related contractual rights, which culminated in the development of our eSPEED (SM) system.
Today, Cantor executes in excess of $45 trillion in transaction volume annually and is a major facilitator of liquidity in numerous financial products through its offices in the United States, Canada, Europe and Asia. Our eSPEED (SM) system provides the only way to electronically access Cantor's marketplaces. Consequently, we believe that clients will be strongly motivated to use our interactive electronic marketplaces. We share with Cantor a portion of the transaction-based revenues paid by financial market participants for trades using our electronic marketplaces. Cantor and most of the largest financial institutions in the world are currently our primary clients. See "Relationship with Cantor--Joint Services Agreement."
Concurrent with this offering, Cantor is contributing to us substantially all of our assets, including the eSPEED (SM) system. In exchange for these assets, we are issuing to Cantor common stock that will represent over 98% of the voting power of our outstanding capital stock after this offering. We believe our relationship with Cantor is a significant competitive advantage.
HOW TO CONTACT US
Our executive offices are located at One World Trade Center, 103rd Floor, New York, New York 10048. Our telephone number is (212) 938-3773. Our Web site is http://www.espeed.com and our e-mail address is info@espeed.com. We are a Delaware corporation.
THIS OFFERING
Class A common stock offered by:
eSpeed.................................. 6,000,000 shares
The selling stockholder................. 2,500,000 shares
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Total................................ 8,500,000 shares
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Common stock to be outstanding after this
offering................................ 8,500,000 shares of Class A common stock and 41,500,000 shares of
Class B common stock (1)(2)
Use of proceeds........................... We intend to use the net proceeds from this offering for
(1) investment in hardware and software for entry into existing and
new marketplaces, (2) hiring technology and other professionals to
develop new products, (3) sales, marketing and advertising and
(4) working capital and general corporate purposes, including
possible acquisitions. See "Use of Proceeds" and "Relationship with
Cantor."
Voting rights............................. The rights of holders of shares of common stock are substantially
identical, except that holders of Class B common stock will be
entitled to 10 votes per share, while holders of Class A common stock
will be entitled to one vote per share. See "Description of Capital
Stock."
Nasdaq National Market symbol............. ESPD
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(1) Excludes 7,500,000 shares of Class A common stock reserved for issuance upon exercise of options granted under our stock option plan in connection with this offering at an exercise price per share equal to the initial public offering price.
(2) Excludes 127,500 shares of Class A common stock reserved for issuance upon exercise of warrants we expect to grant upon completion of this offering. These warrants will have an exercise price per share equal to the initial public offering price.
SUMMARY CONSOLIDATED FINANCIAL DATA
FOR THE PERIOD FROM MARCH 10, 1999
(DATE OF COMMENCEMENT OF OPERATIONS)
TO SEPTEMBER 24, 1999
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STATEMENT OF OPERATIONS DATA: (1)
Total revenues.............................................. $ 24,139,469
Total expenses.............................................. 30,925,117
Loss before benefit for income taxes........................ (6,785,648)
Net loss.................................................... (6,613,841)
PRO FORMA DATA: (2)
Pro forma net loss.......................................... $ (6,785,648)
Basic and diluted pro forma net loss per share.............. $ (0.15)
Shares outstanding.......................................... 44,000,000
SEPTEMBER 24, 1999
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ACTUAL AS ADJUSTED (3)
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STATEMENT OF FINANCIAL CONDITION DATA:
Cash........................................................ $ 200,000 $ 98,730,000
Total assets................................................ 10,798,264 109,328,264
Total liabilities........................................... 11,756,806 11,756,806
Total stockholder's equity.................................. (958,542) 97,571,458
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(2) Pro forma data present the net loss and net loss per share data as if we were subject to income tax as a corporation. The tax benefit for state and local tax, which is available to us as a division of Cantor, is not available to us as a corporation because of our net operating loss position. The determination of shares outstanding and loss per share data reflects the effect of the consummation of the formation transactions as discussed in "Relationship with Cantor--The Formation Transactions" as if those events had taken place at the beginning of the period.
(3) Reflects the sale of the 6,000,000 shares of Class A common stock offered by us hereby, at an assumed public offering price of $18.00 per share, after deducting the estimated offering expenses and underwriting discounts and commissions payable by us.
__________________________________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 occur, our business, financial condition or results of operations could be materially adversely affected, the trading price of our Class A common stock could decline and you may lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, YOU MAY NOT BE ABLE TO ACCURATELY EVALUATE eSPEED.
We are a recently formed company. We have had limited operations to date and, as a result, we have a limited operating history upon which to evaluate the merits of investing in our Class A common stock. As an early stage company, we are subject to risks, expenses and difficulties associated with implementing our business plan that are not typically encountered by more mature companies. In particular, our prospects are subject to risks, expenses and uncertainties encountered by companies in the new and rapidly evolving market for electronic commerce products and services. These risks include our failure or inability to:
o provide services to our clients that are reliable and cost-effective;
o expand our sales structure and marketing programs;
o increase awareness of our brand or market positioning; and
o respond to technological developments or service offerings by competitors.
We may not be able to implement our business plan successfully, or at all.
BECAUSE WE HAVE A HISTORY OF LOSSES, WE EXPECT TO CONTINUE TO INCUR LOSSES AND GENERATE NEGATIVE CASH FLOW FROM OPERATIONS FOR THE FORESEEABLE FUTURE.
Since our inception, we have incurred substantial costs to develop our technology and infrastructure. As a result, from our inception through September 24, 1999, we have sustained cumulative net losses of $6.6 million or $6.8 million on a pro forma basis. We expect that we will continue to incur losses and generate negative cash flow from operations for the foreseeable future as we continue to develop our systems and infrastructure and expand our brand recognition and client base through increased marketing efforts.
IF WE DO NOT EXPAND THE USE OF OUR ELECTRONIC SYSTEMS, OR IF OUR AND CANTOR'S CLIENTS DO NOT UTILIZE OUR MARKETPLACES OR SERVICES, OUR REVENUES AND PROFITABILITY WILL BE ADVERSELY AFFECTED.
The use of electronic marketplaces is relatively new. The success of our business plan depends, in part, on our ability to maintain and expand the network of brokers, dealers, banks and other financial institutions which will utilize our interactive electronic marketplaces. We cannot assure you that we will be able to continue to expand our marketplaces, or that we will be able to retain the current participants in our marketplaces. None of our agreements with market participants require them to use our electronic marketplaces.
IF WE ARE UNABLE TO ENTER INTO MARKETING AND STRATEGIC ALLIANCES, WE MAY NOT GENERATE INCREASED TRADING IN OUR ELECTRONIC MARKETPLACES.
We expect to enter into strategic alliances with other market participants, such as retail brokers, exchanges, market makers, clearinghouses and technology companies, in order to increase client access to and use of our electronic marketplaces. We cannot assure you that we will be able to enter into these strategic alliances on terms that are favorable to us, or at all. The success of these relationships will depend on the amount of increased trading in our electronic marketplaces by the clients of these strategic alliance partners. These arrangements may not generate the expected number of new clients or increased trading volume we are seeking.
TO INCREASE AWARENESS OF OUR ELECTRONIC MARKETPLACES, WE MAY NEED TO INCUR
SIGNIFICANT MARKETING EXPENSES.
To successfully execute our business plan, we must build awareness and understanding of our electronic marketplace services, brand and the adaptability of our electronic marketplaces for non-financial products. In order to build this awareness, our marketing efforts must succeed and we must provide high-quality services. These efforts will require us to incur significant expenses. We cannot assure you that our marketing efforts will be successful or that the allocation of funds to these marketing efforts will be the most effective use of those funds.
IF WE EXPERIENCE COMPUTER SYSTEMS FAILURES OR CAPACITY CONSTRAINTS, OUR ABILITY TO CONDUCT OUR OPERATIONS COULD BE HARMED.
We internally support and maintain many of our computer systems and networks. Our failure to monitor or maintain these systems and networks or, if necessary, to find a replacement for this technology in a timely and cost-effective manner, would have a material adverse effect on our ability to conduct our operations.
We also rely and expect to rely on third parties for various computer and communications systems, such as telephone companies, online service providers, data processors, clearance organizations and software and hardware vendors. Our systems, or those of our third party providers, may fail or operate slowly, causing one or more of the following:
o unanticipated disruptions in service to our clients;
o slower response times;
o delays in our clients' trade execution;
o failed settlement by clients to whom we provide services to facilitate settlement operations;
o decreased client service satisfaction;
o incomplete or inaccurate accounting, recording or processing of trades;
o financial losses;
o litigation or other client claims; and
o regulatory sanctions.
We cannot assure you that we will not experience systems failures from power or telecommunications failure, acts of God or war, human error, natural disasters, fire, power loss, sabotage, hardware or software malfunctions or defects, computer viruses, intentional acts of vandalism and similar events. The assets acquired by us from Cantor in the formation transactions have been acquired by us "as is." Although Cantor has been using the systems and technology being transferred to us in its business, there can be no assurance that such systems and technology are entirely free from defects. To the extent any defects are discovered, we will not have any recourse against Cantor. Any system failure that causes an interruption in service or decreases the responsiveness of our service, including failures caused by client error or misuse of our systems, could damage our reputation, business and brand name.
IF WE DO NOT EFFECTIVELY MANAGE OUR GROWTH, OUR EXISTING PERSONNEL AND SYSTEMS MAY BE STRAINED AND OUR BUSINESS MAY NOT OPERATE EFFICIENTLY.
In order to execute our business plan, we must grow significantly. This growth will place significant strain on our personnel, management systems and resources. We expect that the number of our employees, including technical and management-level employees, will continue to increase for the foreseeable future. We must continue to improve our operational and financial systems and managerial controls and procedures, and we will need to continue to expand, train and manage our technical workforce. We must also maintain close coordination among our technical, compliance, accounting, finance and marketing and sales organizations. We cannot assure you that we will manage our growth effectively, and failure to do so could result in our business operating inefficiently.
IF WE ARE UNABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGES, WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
To remain competitive, we must continue to enhance and improve the responsiveness, functionality, accessibility and features of our proprietary software, network distribution systems and technologies. The financial services and e-commerce industries are characterized by rapid technological change, changes in use and client requirements and preferences, frequent product and service introductions embodying new technologies and the emergence of new industry standards and practices that could render our existing proprietary technology and systems obsolete. Our success will depend, in part, on our ability to:
o develop and license leading technologies useful in our business;
o enhance our existing services;
o develop new services and technologies that address the increasingly sophisticated and varied needs of our existing and prospective clients; and
o respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.
The development of proprietary electronic trading technology entails significant technical, financial and business risks. Further, the adoption of new Internet, networking or telecommunications technologies may require us to devote substantial resources to modify and adapt our services. We cannot assure you that we will successfully implement new technologies or adapt our proprietary technology and transaction-processing systems to client requirements or emerging industry standards. We cannot assure you that we will be able to respond in a timely manner to changing market conditions or client requirements.
IF WE WERE TO LOSE THE SERVICES OF MEMBERS OF MANAGEMENT AND EMPLOYEES WHO POSSESS SPECIALIZED MARKET KNOWLEDGE AND TECHNOLOGY SKILLS, WE MAY NOT BE ABLE TO MANAGE OUR OPERATIONS EFFECTIVELY OR DEVELOP NEW ELECTRONIC MARKETPLACES.
Our future success depends, in significant part, on the continued service of Howard Lutnick, our Chairman and Chief Executive Officer, Frederick Varacchi, our President and Chief Operating Officer, and our other executive officers and managers and sales and technical personnel who possess extensive financial markets knowledge and technology skills. We cannot assure you that we would be able to find an appropriate replacement for Mr. Lutnick or Mr. Varacchi if the need should arise. Any loss or interruption of Mr. Lutnick's or Mr. Varacchi's services could result in our inability to manage our operations effectively and/or develop new electronic marketplaces. We have not entered into employment agreements with and we do not have "key person" life insurance policies on any of our officers or other personnel. All of the members of our senior management team are also officers, partners or key employees of Cantor. As a result, they dedicate only a portion of their professional efforts to our business and operations. We cannot assure you that the time these persons devote to our business and operations in the future will be adequate and that we will not experience an adverse effect on our operations due to the demands placed on our management team by their other professional obligations. We intend to strive to provide high quality services that will allow us to establish and maintain long-term relationships with our clients. Our ability to do so will depend, in large part, upon the individual employees who represent us in our dealings with clients. The market for qualified programmers, technicians and sales persons is extremely competitive and has grown more so in recent periods as electronic commerce has experienced growth. We cannot assure you that we will be successful in our efforts to recruit and retain the required personnel.
IF CANTOR OR WE ARE UNABLE TO PROTECT THE INTELLECTUAL PROPERTY RIGHTS WE LICENSE FROM CANTOR OR OWN, OUR ABILITY TO OPERATE ELECTRONIC TRADING MARKETPLACES MAY BE MATERIALLY ADVERSELY AFFECTED.
Our business is dependent on proprietary technology and other intellectual property rights. We license our patented technology from Cantor. The license arrangement is exclusive, except in the event that (1) we are unwilling to provide to Cantor any requested services covered by the patents with respect to a marketplace and Cantor elects not to require us to do so, or we are unable to provide such services or (2) we do not exercise our right of first refusal to provide to Cantor electronic brokerage services with respect to a marketplace, in which case Cantor retains a limited right to use the patents and patent applications solely in connection with the operation of that marketplace. We cannot guarantee that the concepts which are the
subject of the patents and patent applications covered by the license from Cantor are patentable or that issued patents are or will be valid and enforceable. Where patents are granted in the U.S., we can give no assurance that equivalent patents will be granted in Europe or elsewhere, as a result of differences in local laws affecting patentability and validity. Moreover, we cannot guarantee that Cantor's issued patents are valid and enforceable, or that third parties competing or intending to compete with us will not infringe any of these patents. Despite precautions we or Cantor has taken or may take to protect our intellectual property rights, it is possible that third parties may copy or otherwise obtain and use our proprietary technology without authorization. It is also possible that third parties may independently develop technologies similar to ours. It may be difficult for us to monitor unauthorized use of our proprietary technology and intellectual property rights. We cannot assure you that the steps we have taken will prevent misappropriation of our technology or intellectual property rights.
We intend to use our eSPEED (SM) service mark for the services described herein and have applied to register that service mark in a number of jurisdictions around the world. Although several existing third party registrations and applications for trademarks consisting of designations similar to ours in certain European countries have recently come to light, they are for goods and services that are different from those being offered under our eSPEED (SM) service mark. Although we are not presently aware of any third party objections to our use or registration of our eSPEED (SM) service mark in these countries, and believe we could defend against any third party claims asserted in these countries, such registrations and applications could potentially affect the registration, and/or limit our use, of our eSPEED (SM) service mark in these European countries, thereby requiring us to adopt and use another service mark for our services in such countries.
IF IT BECOMES NECESSARY TO PROTECT OR DEFEND OUR INTELLECTUAL PROPERTY RIGHTS, WE MAY HAVE TO RESORT TO COSTLY LITIGATION.
We may have to resort to litigation to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others, or defend ourselves from claims of infringement, invalidity or unenforceability. We may incur substantial costs and diversion of resources as a result of litigation, even if we win. In the event we do not win, we may have to enter into royalty or licensing agreements. We cannot assure you that an agreement would be available to us on reasonable terms, if at all.
One of the patents we license from Cantor and which relates to INTERACTIVE MATCHING (SM) is currently the subject of litigation involving Liberty Brokerage Investment Corporation and Liberty Brokerage Inc. This patent is exclusively licensed to us subject to certain conditions. We will assume responsibility for defending this suit on behalf of Cantor and its affiliates. If we are not successful in defending this lawsuit, it could materially adversely affect our exclusive ability to use the technology covered by the patent and our ability to compete effectively. We have also agreed to indemnify Cantor with respect to all costs arising in connection with or relating to this lawsuit, including any damages or judgments. We cannot assure you that any of the patents owned or licensed by us will be upheld by a court as valid and/or enforceable. See "Business--Our Intellectual Property" and "--Legal Proceedings."
IF OUR SOFTWARE LICENSES FROM THIRD PARTIES ARE TERMINATED, OUR ABILITY TO OPERATE OUR BUSINESS MAY BE MATERIALLY ADVERSELY AFFECTED.
We license software from third parties, much of which is integral to our systems and our business. The licenses are terminable if we breach our obligations under the license agreements. If any of these relationships were terminated or if any of these third parties were to cease doing business, we may be forced to spend significant time and money to replace the licensed software. However, we cannot assure you that the necessary replacements will be available on reasonable terms, if at all.
IF THE STRENGTH OF OUR DOMAIN NAMES IS DILUTED, THE VALUE OF OUR PROPRIETARY RIGHTS MAY DECREASE.
We own many Internet domain names including "www.espeed.com." The regulation of domain names in the United States and in foreign countries may change and the strength of our names could be diluted. We may not be able to prevent third parties from acquiring domain names that infringe or otherwise decrease the value of our trademarks and other proprietary rights.
IF WE INFRINGE ON PATENT RIGHTS OR COPYRIGHTS OF OTHERS, WE COULD BECOME INVOLVED IN COSTLY LITIGATION.
Patents or copyrights of third parties may have an important bearing on our ability to offer certain of our products and services. We cannot assure you that we are or will be aware of all patents or copyrights containing claims that may pose a risk of infringement by our products and services. In addition, patent applications in the United States are generally confidential until a patent is issued. As a result, we cannot evaluate the extent to which our products and services may be covered or asserted to be covered by claims contained in pending patent applications. In general, if one or more of our products or services were to infringe patents held by others, we may be required to stop developing or marketing the products or services, to obtain licenses to develop and market the services from the holders of the patents or to redesign the products or services in such a way as to avoid infringing on the patent claims, which could limit the manner in which we conduct our operations.
On May 5, 1999, Cantor and The Board of Trade of the City of Chicago, The New York Mercantile Exchange and The Chicago Mercantile Exchange were sued by Electronic Trading Systems, Inc. in the United States District Court for the Northern District of Texas (Dallas Division) for alleged infringement of Wagner United States patent 4,903,201, entitled "Automated Futures Trade Exchange." The patent relates to a system and method for implementing an electronic, computer-automated futures exchange and affects only the CANTOR EXCHANGE (SM). If the plaintiff is successful in this lawsuit, we may be required to obtain a license to develop and market one or more of our services, to cease developing or marketing services or to redesign those services. We cannot assure you that we would be able to obtain these licenses or that we would be able to obtain them at commercially reasonable rates or, if unable to obtain licenses, that we would be able to redesign our services to avoid infringement. Therefore, this lawsuit could materially adversely affect our ability to offer electronic trading marketplaces in the future. See "Business--Legal Proceedings."
DUE TO INTENSE COMPETITION IN OUR INDUSTRY, OUR MARKET SHARE AND FINANCIAL PERFORMANCE COULD SUFFER.
The electronic trading and Internet-based financial services markets are highly competitive and many of our competitors are more established and have greater financial resources than us. We expect that competition will intensify in the future. Many of our competitors also have greater market presence, engineering and marketing capabilities and technological and personnel resources than we do. As a result, as compared to us, our competitors may:
o develop and expand their network infrastructures and service offerings more efficiently or more quickly;
o adapt more swiftly to new or emerging technologies and changes in client requirements;
o take advantage of acquisitions and other opportunities more effectively;
o devote greater resources to the marketing and sale of their products and services; and
o more effectively leverage existing relationships with clients and strategic partners or exploit more recognized brand names to market and sell their services.
Our current and prospective competitors are numerous and include:
o Interdealer brokerage firms, including Liberty Brokerage Investment Corporation and Garban-Intercapital plc.
o Technology companies and market data and information vendors, including Reuters Group plc, Bloomberg L.P. and Bridge Information Systems, Inc.;
o Securities or futures exchanges or similar entities, including the Chicago Board of Trade, the Chicago Mercantile Exchange, the Chicago Board of Options Exchange, Eurex, the New York Stock Exchange and the Nasdaq National Market;
o Electronic communications networks, crossing systems and similar entities such as Investment Technology Group and Optimark Technologies Inc.; and
o Consortia such as BrokerTec Global LLC and EuroMTS.
We believe that we may also face competition from large computer software companies, media and technology companies and some securities brokerage firms that are currently our clients. In addition, Market Data Corporation, which is controlled by Iris Cantor and Rodney Fisher, has technology for electronic trading systems that, if provided to our competitors in the wholesale market, will be of substantial assistance to them in competing with us. Iris Cantor and Rod Fisher are limited partners of Cantor. See "Legal Proceedings."
The number of businesses providing Internet-based financial services is rapidly growing, and other companies, in addition to those named above, have entered into or are forming joint ventures or consortia to provide services similar to those provided by us. Others may acquire the capabilities necessary to compete with us through acquisitions.
In the event we extend the application of our INTERACTIVE MATCHING (SM) technology to conducting or facilitating auctions of consumer goods and services over the Internet, we expect to compete with both online and traditional sellers of these products and services. The market for selling products and services over the Internet is new, rapidly evolving and intensely competitive. Current and new competitors can launch new sites at a relatively low cost. We expect we will potentially compete with a variety of companies with respect to each product or service we offer. We may face competition from e-Bay, priceline.com, Amazon.com and a number of other large Internet companies that have expertise in developing online commerce and in facilitating Internet traffic, including America Online, Microsoft and Yahoo!, which could choose to compete with us either directly or indirectly through affiliations with other e-commerce companies. We cannot assure you that we will be able to compete effectively with such companies.
BECAUSE SOME OF OUR CLIENTS MAY DEVELOP ELECTRONIC TRADING NETWORKS, WE COULD COMPETE WITH THEM IN ASPECTS OF OUR BUSINESS.
Consortia owned by some of our clients have announced their intention to explore the development of electronic trading networks. BrokerTec Global LLC, a proposed electronic inter-dealer fixed income broker whose members include Citigroup, Credit Suisse First Boston, Deutsche Bank AG, Goldman Sachs Group, Lehman Brothers, Merrill Lynch & Co., Dresdner Kleinwort Benson, ABN-AMRO and Morgan Stanley Dean Witter, has announced its intention to develop or acquire a facility for electronic trading of U.S. Treasury securities, Euro-denominated sovereign debt and other fixed income securities and futures-related products. All of the members of BrokerTec Global LLC are currently clients of Cantor and ours. Consortia such as BrokerTec Global LLC may compete with us and our electronic marketplaces in the future. We currently compete with a similar consortium called EuroMTS in Europe. The members of EuroMTS include the leading fixed income dealers in European government securities, as well as clients of Cantor and ours.
IF WE EXPERIENCE LOW TRADING VOLUME IN SECURITIES AND FINANCIAL PRODUCTS, OUR PROFITABILITY COULD SUFFER.
We have experienced significant fluctuations in the aggregate trading volume of securities and financial products being traded in our marketplaces. We expect that fluctuations in the trading volume of securities and financial products traded in our marketplaces will occur in the future from time to time and have a direct impact on our future operating results. This may cause significant fluctuations in our profitability when the trading volumes are low.
IF ADVERSE ECONOMIC AND POLITICAL CONDITIONS OCCUR, SUBSTANTIAL DECLINES IN THE U.S. AND GLOBAL FINANCIAL SERVICES MARKETS MAY RESULT AND OUR PROFITABILITY COULD SUFFER.
The global financial services business is, by its nature, risky and volatile and is directly affected by many national and international factors that are beyond our control. Any one of these factors may cause a substantial decline in the U.S. and global financial services markets, resulting in reduced trading volume and turnover. These events could materially adversely affect our profitability. These factors include:
o economic and political conditions in the United States and elsewhere in the world;
o concerns over inflation and wavering institutional/consumer confidence levels;
o the availability of cash for investment by mutual funds and other wholesale and retail investors;
o rising interest rates;
o fluctuating exchange rates;
o legislative and regulatory changes; and
o currency values.
In the past several years, the U.S. financial markets have achieved historic highs. We do not believe these strong markets can continue indefinitely. Our revenues and profitability are likely to decline significantly during periods of stagnant economic conditions or low trading volume in the U.S. and global financial markets.
IF OUR SYSTEMS PROVE NOT TO BE YEAR 2000 COMPLIANT, WE COULD EXPERIENCE SIGNIFICANT BUSINESS INTERRUPTIONS.
With the Year 2000 approaching, many institutions around the world are reviewing and modifying their computer systems to ensure that they are Year 2000 compliant. The issue, in general terms, is that many existing computer systems and microprocessors with date functions, including those in non-information technology equipment and systems, use only two digits to identify a year in the date field with the assumption that the first two digits of the year are always "19". Consequently, on January 1, 2000, computers that are not Year 2000 compliant may read the year as 1900. Systems that calculate, compare or sort using the incorrect date may malfunction.
Because our business is dependent upon the proper functioning of our proprietary software, technologies and computer systems, a failure of our software, technologies or systems to be Year 2000 compliant would have a material adverse effect on us. If not remedied, potential risks include business interruption or shutdown, financial loss, regulatory actions, reputational harm and legal liability.
In addition, we depend upon the proper functioning of third-party computer and non-information technology systems. These parties include subcontractors, such as third-party administrators, and vendors, such as software vendors and providers of telecommunication services, quotation equipment and other utilities. If the third parties with which we interact have Year 2000 problems that are not remedied, disruptions may result, which could result in shutdowns by us and financial loss, regulatory actions, reputational harm and legal liability. Disruption or suspension of activity in the world's financial markets is also possible. In addition, uncertainty about the success of remediation efforts generally may cause many market participants to reduce the level of their market activities temporarily as they assess the effectiveness of these efforts during a "phase-in" period beginning in late 1999. This in turn could result in a general reduction in trading and other market activities. We cannot predict the impact that such reduction would have on us. Some of our contracts with our clients represent that our systems will be Year 2000 compliant. For these and other reasons, we may also be exposed to litigation with our clients as a result of Year 2000 problems. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Impact of the Year 2000."
BECAUSE WE EXPECT TO CONTINUE TO EXPAND OUR OPERATIONS OUTSIDE NORTH AMERICA, WE MAY FACE SPECIAL ECONOMIC AND REGULATORY CHALLENGES THAT WE MAY NOT BE ABLE TO MEET.
We operate electronic marketplaces throughout Europe and Asia and we plan to further expand our operations throughout these regions in the future. There are certain risks inherent in doing business in international markets, particularly in the regulated brokerage industry. These risks include:
o less developed automation in exchanges, depositories and national clearing systems;
o unexpected changes in regulatory requirements, tariffs and other trade barriers;
o difficulties in staffing and managing foreign operations;
o fluctuations in currency exchange rates;
o reduced protection for intellectual property rights;
o seasonal reductions in business activity during the summer months; and
o potentially adverse tax consequences.
We are required to comply with the laws and regulations of foreign governmental and regulatory authorities of each country in which we conduct business. These may include laws, rules and regulations relating to any aspect of the securities business, including sales methods, trade practices among broker-
dealers, use and safekeeping of clients' funds and securities, capital structure, record-keeping, the financing of clients' purchases, broker-dealer and employee registration requirements and the conduct of directors, officers and employees. Any failure to develop effective compliance and reporting systems could result in regulatory penalties in the applicable jurisdiction.
The growth of the Internet as a means of conducting international business has also raised many legal issues regarding, among other things, the circumstances in which countries or other jurisdictions have the right to regulate Internet services that may be available to their citizens from service providers located elsewhere. In many cases, there are no laws, regulations, judicial decisions or governmental interpretations that clearly resolve these issues. This uncertainty may adversely affect our ability to use the Internet to expand our international operations, and creates the risk that we could be subject to disciplinary sanctions or other penalties for failure to comply with applicable laws or regulations.
IF WE ENTER NEW MARKETS, WE MAY NOT BE ABLE TO SUCCESSFULLY ADAPT OUR TECHNOLOGY AND MARKETING STRATEGY FOR USE IN THOSE MARKETS.
We intend to leverage our eSPEED (SM) system and Cantor's relationships to enter new markets. We cannot assure you that we will be able to successfully adapt our proprietary software, electronic distribution networks and technology for use in other markets. Even if we do adapt our software, networks and technology, we cannot assure you that we will be able to attract clients and compete successfully in any such new markets. We cannot assure you that our marketing efforts or our pursuit of any of these opportunities will be successful. If these efforts are not successful, we could suffer losses while developing new marketplaces or realize less than expected earnings, which in turn could result in a decrease in the market value of our Class A common stock. Furthermore, these efforts may divert management attention or inefficiently utilize our resources. We intend to create electronic marketplaces for many financial products by the end of 2000, but there is no guarantee that we will be able to do so.
IF WE ACQUIRE OTHER COMPANIES, WE MAY NOT BE ABLE TO INTEGRATE THEIR OPERATIONS EFFECTIVELY.
Our business strategy contemplates expansion through the acquisition of exchanges and other companies providing services or having technologies and operations which are complementary to ours. Acquisitions entail numerous risks, including:
o difficulties in the assimilation of acquired operations and products;
o diversion of management's attention from other business concerns;
o assumption of unknown material liabilities of acquired companies;
o amortization of acquired intangible assets, which would reduce future reported earnings; and
o potential loss of clients or key employees of acquired companies.
We cannot assure you that we will be able to integrate successfully any operations, personnel, services or products that might be acquired in the future, and our failure to do so could adversely affect our profitability and the value of our Class A common stock.
BECAUSE OUR BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENT AND OTHER REGULATION, WE MAY FACE RESTRICTIONS WITH RESPECT TO THE WAY WE CONDUCT OUR OPERATIONS.
The Securities and Exchange Commission, National Association of Securities Dealers, Inc., Commodity Futures Trading Commission and other agencies extensively regulate the U.S. securities industry. Our international operations may be subject to similar regulations in specific jurisdictions. Our U.S. subsidiaries are required to comply strictly with the rules and regulations of these agencies. As a matter of public policy, these regulatory bodies are responsible for safeguarding the integrity of the securities and other financial markets and protecting the interests of investors in those markets. Most aspects of our U.S. broker-dealer subsidiaries are highly regulated, including:
o the way we deal with our clients;
o our capital requirements;
o our financial and Securities and Exchange Commission reporting practices;
o required record keeping and record retention procedures;
o the licensing of our employees; and
o the conduct of our directors, officers, employees and affiliates.
If we fail to comply with any of these laws, rules or regulations, we may be subject to censure, fines, cease-and-desist orders, suspension of our business, suspensions of personnel or other sanctions, including revocation of registration as a broker-dealer. Changes in laws or regulations or in governmental policies could have a material adverse effect on the conduct of our business. These agencies have broad powers to investigate and enforce compliance and punish non-compliance with their rules and regulations. We cannot assure you that we and/or our directors, officers and employees will be able to fully comply with, and will not be subject to, claims or actions by these agencies.
The consumer products and services we anticipate offering through our electronic marketplaces are likely to be regulated by federal and state governments. Our ability to provide such services will be affected by these regulations. The implementation of unfavorable regulations or unfavorable interpretations of existing regulations by courts or regulatory bodies could require us to incur significant compliance costs or cause the development of affected markets to become impractical.
BECAUSE WE ARE SUBJECT TO RISKS ASSOCIATED WITH NET CAPITAL REQUIREMENTS, WE MAY NOT BE ABLE TO ENGAGE IN OPERATIONS THAT REQUIRE SIGNIFICANT CAPITAL.
The Securities and Exchange Commission, Commodity Futures Trading Commission and various other regulatory agencies have stringent rules and regulations with respect to the maintenance of specific levels of net capital by broker-dealers. Net capital, which is assets minus liabilities, is the net worth of a broker or dealer, less deductions for certain types of assets. If a firm fails to maintain the required net capital, it may be subject to suspension or revocation of registration by the Securities and Exchange Commission or Commodity Futures Trading Commission, and suspension or expulsion by these regulators could ultimately lead to the firm's liquidation. If these net capital rules are changed or expanded, or if there is an unusually large charge against net capital, operations that require the intensive use of capital would be limited. Also, our ability to withdraw capital from broker-dealer subsidiaries could be restricted, which in turn could limit our ability to pay dividends, repay debt and redeem or purchase shares of our outstanding stock. A large operating loss or charge against net capital could adversely affect our ability to expand or even maintain our present levels of business, which could have a material adverse effect on our business.
As of September 24, 1999, if each of our regulated U.S. subsidiaries, eSpeed Securities, Inc. and eSpeed Government Securities, Inc., had been subject to the Uniform Net Capital Rule, the minimum net capital we would have had to maintain would have been $5,000 and $25,000, respectively. At that time, eSpeed Securities, Inc. and eSpeed Government Securities, Inc. had total net capital of approximately $90,000, or approximately $85,000 and $65,000, respectively, in excess of the minimum amount that would have been required. In addition, we may be subject to net capital requirements in foreign jurisdictions.
BECAUSE WE INTEND TO OFFER ACCESS TO SOME OF OUR MARKETPLACES TO ONLINE RETAIL BROKERS, WE ARE SUBJECT TO RISKS RELATING TO UNCERTAINTY IN THE REGULATION OF THE INTERNET.
There are currently few laws or regulations that specifically regulate communications or commerce on the Internet. However, laws and regulations may be adopted in the future that address issues such as user privacy, pricing, taxation and the characteristics and quality of products and services. For example, the Telecommunications Act sought to prohibit transmitting various types of information and content over the Internet. Several telecommunications companies have petitioned the Federal Communications Commission to regulate Internet service providers and online service providers in a manner similar to long distance telephone carriers and to impose access fees on those companies. This could increase the cost of transmitting data over the Internet. Moreover, it may take years to determine the extent to which existing laws relating to issues such as property ownership, libel and personal privacy are applicable to the Internet. Any new laws or regulations relating to the Internet could adversely affect our business.
BECAUSE BROKERAGE SERVICES INVOLVE SUBSTANTIAL RISKS OF LIABILITY, WE MAY BECOME SUBJECT TO RISKS OF LITIGATION.
Many aspects of our business, and the businesses of our clients, involve substantial risks of liability. Dissatisfied clients frequently make claims regarding quality of trade execution, improperly settled trades, mismanagement or even fraud against their service providers. We and our clients may become subject to these claims as the result of failures or malfunctions of systems and services provided by us and may seek recourse against us. We could incur significant legal expenses defending claims, even those without merit. An adverse resolution of any lawsuits or claims against us could result in our obligation to pay substantial damages.
In addition, we may also become subject to legal proceedings and claims against Cantor and its affiliates as a result of the formation transactions. Although Cantor has agreed to indemnify us against claims or liabilities arising from our assets or operations prior to the formation transactions, we cannot assure you that such claims or litigation will not harm our business. See "Relationship with Cantor--Assignment and Assumption Agreement."
IF WE CANNOT DETER EMPLOYEE MISCONDUCT, WE MAY BE HARMED.
There have been a number of highly publicized cases involving fraud or other misconduct by employees in the financial services industry in recent years, and we run the risk that employee misconduct could occur. Misconduct by employees could include hiding unauthorized or unsuccessful activities from us. In either case, this type of conduct could result in unknown and unmanaged risks or losses. Employee misconduct could also involve the improper use of confidential information, which could result in regulatory sanctions and serious reputational harm. It is not always possible to deter employee misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases.
BECAUSE OUR BUSINESS IS DEVELOPING, WE CANNOT PREDICT OUR FUTURE CAPITAL NEEDS OR OUR ABILITY TO SECURE ADDITIONAL FINANCING.
We anticipate, based on management's experience and current industry trends, that our existing cash resources, combined with the net proceeds we will receive from this offering, will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next 12 months. However, we may need to raise additional funds to:
o increase the regulatory net capital necessary to support our operations;
o support more rapid growth in our business;
o develop new or enhanced services and products;
o respond to competitive pressures;
o acquire complementary technologies; and
o respond to unanticipated requirements.
We cannot assure you that we will be able to obtain additional financing when needed on terms that are acceptable, if at all.
RISKS RELATED TO OUR RELATIONSHIP WITH CANTOR
BECAUSE WE DEPEND ON CANTOR'S BUSINESS, EVENTS WHICH IMPACT CANTOR'S OPERATING RESULTS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR REVENUES.
We recognized over 46% of our revenues for the period from March 10, 1999 to September 24, 1999 from transactions in which we received amounts based on fixed percentages of commissions paid to Cantor. Consequently, any reductions in the amount of commissions paid to Cantor, including events which impact Cantor's business or operating results, could have a material adverse effect on our most significant source of revenues.
In addition, fees paid to us by Cantor for system services represented 37.7% of our revenues for the period from March 10, 1999 to September 24, 1999. These fee revenues are remitted to us on a monthly basis.
We are a general creditor of Cantor to the extent that there are transaction revenues and system service fees owing to us from Cantor. Events which negatively impact Cantor's financial position and ability to remit our share of transaction revenues and system service fees could have a material adverse effect on our revenues.
CONFLICTS OF INTEREST AND COMPETITION WITH CANTOR MAY ARISE.
Various conflicts of interest between us and Cantor may arise in the future in a number of areas relating to our past and ongoing relationships, including competitive business activities, potential acquisitions of businesses or properties, the election of new directors, payment of dividends, incurrence of indebtedness, tax matters, financial commitments, marketing functions, indemnity arrangements, service arrangements, issuances of our capital stock, sales or distributions by Cantor of its shares of our common stock and the exercise by Cantor of control over our management and affairs. Our Joint Services Agreement with Cantor provides that in some circumstances Cantor can unilaterally determine the commissions that will be charged to clients for effecting trades in marketplaces in which we collaborate with Cantor. The determination of the nature of commissions charged to clients does not affect the allocation of revenues that Cantor and we share with respect to those transactions. However, in circumstances in which Cantor determines to charge clients lower commissions, the amount that we receive in respect of our share of the commissions will correspondingly be decreased. A majority of our directors and officers following this offering also serve as directors and/or officers of Cantor. Simultaneous service as an eSpeed director or officer and service as a director or officer, or status as a partner, of Cantor could create or appear to create potential conflicts of interest when such directors, officers and/or partners are faced with decisions that could have different implications for us and for Cantor. Mr. Lutnick, our Chairman and Chief Executive Officer, is the sole stockholder of the managing general partner of Cantor. As a result, Mr. Lutnick controls Cantor. Upon completion of this offering, Cantor will own all of the outstanding shares of our Class B common stock, representing approximately 98% of the combined voting power of all classes of our voting stock. Mr. Lutnick's simultaneous service as our Chairman and Chief Executive Officer and his control of Cantor could create or appear to create potential conflicts of interest when Mr. Lutnick is faced with decisions that could have different implications for us and for Cantor. See "Relationship with Cantor."
BECAUSE OUR JOINT SERVICES AGREEMENT WITH CANTOR HAS A PERPETUAL TERM AND CONTAINS NON-COMPETITION PROVISIONS AND RESTRICTIONS ON OUR ABILITY TO PURSUE STRATEGIC TRANSACTIONS, THIS AGREEMENT MAY BECOME BURDENSOME TO OUR BUSINESS.
As part of the formation transactions, Cantor will contribute substantially all of our assets to us. Although Cantor has agreed, subject to certain conditions, not to compete with us in providing electronic brokerage services, Cantor is currently engaged in financial instruments and securities transaction execution and processing operations and other activities which are related to the electronic trading services we provide. Our Joint Services Agreement obligates us to perform technology support and other services for Cantor at cost, whether or not related to our electronic brokerage services, sets forth the ongoing revenue sharing arrangements between Cantor and us and subjects us and Cantor to non-competition obligations. The Joint Services Agreement precludes us from entering into lines of business in which Cantor now or in the future may engage, or providing or assisting any third party in providing voice-assisted brokerage services, clearance, settlement and fulfillment services and related services, except under the limited circumstances described under "Relationship with Cantor--Joint Services Agreement--Non-competition Provisions." Although we believe Cantor has no plans to form, acquire or commence any other operations similar to ours, the Joint Services Agreement permits Cantor to perform, in limited circumstances, electronic brokerage operations. In addition, the Joint Services Agreement imposes limitations on our ability to pursue strategic alliances, joint ventures, partnerships, business combinations, acquisitions and similar transactions. Because the Joint Services Agreement has a perpetual term, even in the event of a breach by one of the parties, and does not provide for modification under its terms, this agreement may become burdensome for us, may
distract us from focusing on our internal operations, may deter or discourage a takeover of our company and may limit our ability to expand our operations. See "Relationship with Cantor."
BECAUSE AGREEMENTS BETWEEN US AND CANTOR ARE NOT THE RESULT OF ARM'S-LENGTH NEGOTIATIONS, WE MAY RECEIVE LOWER COMMISSIONS FROM, AND PAY HIGHER SERVICE FEES TO, CANTOR THAN WE WOULD WITH RESPECT TO THIRD PARTY SERVICE PROVIDERS.
In connection with the formation transactions, we have entered into Assignment and Assumption Agreements, an Administrative Services Agreement, a Joint Services Agreement and several other agreements with Cantor relating to the provision of services to each other and third parties. These agreements are not the result of arm's-length negotiations because Cantor owns and controls us. As a result, the prices charged to us or by us for services provided under the agreements may be higher or lower than prices that may be charged by third parties and the terms of these agreements may be generally less favorable to us than those that we could have negotiated with third parties. See "Relationship with Cantor."
BECAUSE WE DEPEND ON SERVICES AND ACCESS TO OPERATING ASSETS PROVIDED BY THIRD PARTIES TO CANTOR, WE MAY NOT HAVE RECOURSE AGAINST THOSE THIRD PARTIES.
Many of the assets and services provided by Cantor under the terms of the Administrative Services Agreement are leased or provided to Cantor by third party vendors. As a result, in the event of a dispute between Cantor and a third party vendor, we could lose access to, or the right to use, as applicable, office space, personnel, corporate services and operating assets. In such a case, we would have no recourse with respect to the third party vendor. Our inability to use these services and operating assets for any reason, including any termination of the Administrative Services Agreement between us and Cantor or the agreements between Cantor and third party vendors, could result in serious interruptions of our operations.
OUR REPUTATION MAY BE AFFECTED BY ACTIONS TAKEN BY CANTOR AND ENTITIES WHICH ARE RELATED TO CANTOR.
Initially, Cantor will be our most significant client. Cantor holds direct and indirect ownership and management interests in numerous other entities which engage in a broad range of financial services and securities-related activities. Actions taken by, and events involving, Cantor or these related companies which are perceived negatively by the securities markets, or the public generally, could have a material adverse effect on us and could affect the price of our Class A common stock. In addition, events which negatively affect the financial condition of Cantor may negatively affect us. These events could cause Cantor to lose clients that may trade in our marketplaces, could impair Cantor's ability to perform its obligations under the Joint Services Agreement and other agreements Cantor enters into with us and could cause Cantor to liquidate investments, including by selling or otherwise transferring shares of our common stock.
IF WE BECOME SUBJECT TO LITIGATION AND OTHER LEGAL PROCEEDINGS, WE MAY BE HARMED.
From time to time, we and Cantor may become involved in litigation and other legal proceedings relating to claims arising from our and their operations in the normal course of business. Cantor is currently subject to a number of legal proceedings that could affect us. See "Business--Legal Proceedings." We cannot assure you that these or other litigation or legal proceedings will not materially affect our ability to conduct our business in the manner that we expect or otherwise adversely affect us.
RISKS RELATED TO E-COMMERCE AND THE INTERNET
IF ELECTRONIC MARKETPLACES FOR SECURITIES AND FINANCIAL PRODUCTS DO NOT CONTINUE TO GROW, WE WILL NOT BE ABLE TO ACHIEVE OUR BUSINESS OBJECTIVES.
The success of our business plan depends on our ability to create interactive electronic marketplaces in a wide range of securities and financial products. Historically, securities and commodities markets operated through an open outcry format in which buyers and sellers traded securities in pits through verbal communication. These open outcry markets have recently begun to be supplanted with new systems which match buyers and sellers electronically. The utilization of our interactive electronic marketplaces depends on
the continued acceptance and utilization of these electronic securities and commodities markets. We cannot assure you that the growth and acceptance of the use of electronic markets will continue.
IF E-COMMERCE AND INTERNET USAGE DOES NOT CONTINUE TO GROW, WE WILL NOT BE ABLE TO ACHIEVE OUR BUSINESS OBJECTIVES.
As part of our business strategy, we expect to do business with online and traditional retail brokers. We expect to enable these firms to provide to their clients access, where appropriate, to trading in fixed income securities and futures and other wholesale financial products markets through the Internet.
Our strategic and financial objectives would be adversely impacted if Internet usage does not continue to grow. Consumer use of the Internet as a medium of commerce is a recent phenomenon and is subject to a high level of uncertainty. Internet usage may be inhibited for a number of reasons, including:
o access costs;
o inadequate network infrastructure;
o security concerns;
o uncertainty of legal, regulatory and tax issues concerning the use of the Internet;
o concerns regarding ease of use, accessibility and reliability;
o inconsistent quality of service; and
o lack of availability of cost-effective, high-speed service.
If Internet usage grows, the Internet infrastructure may not be able to support the demands placed on it, or the Internet's performance and reliability may decline. Similarly, Web sites have experienced interruptions in their service as a result of outages and other delays occurring throughout the Internet network infrastructure. If these outages or delays occur frequently, use of the Internet as a commercial or business medium could grow more slowly or decline. Even if Internet usage continues to grow, online trading in the wholesale securities markets, and in particular the fixed income securities and futures markets, may not be accepted by retail customers. This could negatively affect the growth of our business.
OUR NETWORKS AND THOSE OF OUR THIRD PARTY SERVICE PROVIDERS MAY BE VULNERABLE TO SECURITY RISKS, WHICH COULD MAKE OUR CLIENTS HESITANT TO USE OUR ELECTRONIC MARKETPLACES.
We expect the secure transmission of confidential information over public networks to be a critical element of our operations. Our networks and those of our third party service providers, including Cantor and associated clearing corporations, and our clients may be vulnerable to unauthorized access, computer viruses and other security problems. Persons who circumvent security measures could wrongfully use our information or cause interruptions or malfunctions in our operations, which could make our clients hesitant to use our electronic marketplaces. We may be required to expend significant resources to protect against the threat of security breaches or to alleviate problems, including reputational harm and litigation, caused by any breaches. Although we intend to continue to implement industry-standard security measures, we cannot assure you that those measures will be sufficient.
RISKS RELATED TO OUR CAPITAL STRUCTURE
BECAUSE THE VOTING CONTROL OF OUR COMMON STOCK WILL BE CONCENTRATED AMONG THE HOLDERS OF OUR CLASS B COMMON STOCK, THE MARKET PRICE OF OUR CLASS A COMMON STOCK MAY BE ADVERSELY AFFECTED BY DISPARATE VOTING RIGHTS.
After this offering, Cantor will beneficially own all of our outstanding Class B common stock, representing approximately 98% of the combined voting power of all classes of our voting stock. As long as Cantor beneficially owns a majority of the combined voting power of our common stock, it will have the ability, without the consent of the public stockholders, to elect all of the members of our board of directors and to control our management and affairs. In addition, it will be able to determine the outcome of matters submitted to a vote of our stockholders for approval and will be able to cause or prevent a change in control
of our company. In certain circumstances, the Class B common stock issued to Cantor upon consummation of the formation transactions may be transferred without conversion to Class A common stock.
The holders of our Class A common stock and Class B common stock have substantially identical rights, except that holders of our Class A common stock are entitled to one vote per share, while holders of our Class B common stock are entitled to 10 votes per share on all matters to be voted on by stockholders in general. This differential in the voting rights and our ability to issue additional Class B common stock could adversely affect the market price of our Class A common stock.
DELAWARE LAW AND OUR CHARTER MAY MAKE A TAKEOVER OF OUR COMPANY MORE DIFFICULT.
Provisions of Delaware law, such as its business combination statute, may have the effect of delaying, deferring or preventing a change in control of our company. In addition, our Amended and Restated Certificate of Incorporation authorizes the issuance of preferred stock, which our board of directors can create and issue without prior stockholder approval and with rights senior to those of our common stock, as well as additional shares of our Class B common stock. Our Amended and Restated Certificate of Incorporation and our Amended and Restated By-Laws include provisions which restrict the ability of our stockholders to take action by written consent and provide for advance notice for stockholder proposals and director nominations. These provisions may have the effect of delaying or preventing changes of control or management of our company, even if such transactions would have significant benefits to our stockholders. As a result, these provisions could limit the price some investors might be willing to pay in the future for shares of our Class A common stock.
DELAWARE LAW MAY PROTECT DECISIONS OF OUR BOARD OF DIRECTORS THAT HAVE A DIFFERENT EFFECT ON HOLDERS OF OUR CLASS A AND CLASS B COMMON STOCK.
You may not be able to challenge decisions that have an adverse effect upon holders of the Class A common stock if our board of directors acts in a disinterested, informed manner with respect to these decisions, in good faith and in the belief that it is acting in the best interests of our stockholders. Delaware law generally provides that a board of directors owes an equal duty to all stockholders, regardless of class or series, and does not have separate or additional duties to either group of stockholders, subject to applicable provisions set forth in a company's charter.
BECAUSE WE ARE A HOLDING COMPANY, WE WILL DEPEND ON OUR SUBSIDIARIES TO GENERATE REVENUES AND DISTRIBUTE CASH TO US.
We are a holding company. Our sole assets are our equity interests in our subsidiaries. We have no independent means of generating revenues. We will incur income taxes on revenues that we generate. We intend to cause our subsidiaries to distribute cash to us in amounts sufficient to cover our tax liabilities, if any. Our subsidiaries' ability to distribute cash to us will be subject to legal restrictions, including the net capital rules and the requirements that they have surplus capital or earnings available for distribution. We cannot assure you that our subsidiaries will be able to provide us with the funds necessary to satisfy our obligations or conduct our operations as contemplated by our business strategy.
RISKS RELATED TO THIS OFFERING
THERE HAS NOT BEEN ANY PRIOR PUBLIC MARKET FOR OUR CLASS A COMMON STOCK, AND WE CANNOT ASSURE YOU THAT AN ACTIVE TRADING MARKET WILL DEVELOP OR BE SUSTAINED.
Prior to this offering, there has been no public market for the Class A common stock and we cannot assure you that an active trading market will develop or be sustained. The initial public offering price of our Class A common stock will be determined through negotiation between us and the representatives of the underwriters and may not be indicative of the market price for our Class A common stock after this offering.
THE MARKET PRICE OF OUR CLASS A COMMON STOCK MAY FLUCTUATE WIDELY AND TRADE AT PRICES BELOW THE INITIAL PUBLIC OFFERING PRICE.
The price of our Class A common stock after this offering may fluctuate widely, depending upon many factors, including our perceived prospects, and the prospects of the financial industries in general, differences between our actual financial and operating results and those expected by investors and analysts, changes in analysts' recommendations or projections, changes in general valuations for Internet and e-commerce-related companies, changes in general economic or market conditions and broad market fluctuations. As a result, our Class A common stock may trade at prices significantly below the initial public offering price.
MANAGEMENT WILL HAVE DISCRETION OVER THE USE OF PROCEEDS WE RECEIVE FROM THIS OFFERING AND MAY NOT USE THE FUNDS IN A MANNER THAT YOU WOULD APPROVE.
We intend to use the majority of the net proceeds we receive from this offering for technological and product development and improvements in existing and new marketplaces, hiring technology and other personnel to develop new products, sales, marketing and advertising initiatives and working capital and general corporate purposes, including possible acquisitions. Pending application of these uses, we intend to use the net proceeds to purchase short-term marketable securities. Our management will have broad discretion with respect to the use of these funds and the determination of the timing of expenditures. We cannot assure you that management will use these funds in a manner that you would approve or that the allocations will be in the best interests of our stockholders.
YOUR SHARE OWNERSHIP IN eSPEED WILL BE IMMEDIATELY AND SUBSTANTIALLY DILUTED.
Purchasers of our Class A common stock in this offering will experience immediate and substantial dilution in net tangible book value of $16.05 per share, based on an assumed initial public offering price of $18.00 per share.
FUTURE SALES OF OUR SHARES COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR CLASS A COMMON STOCK.
If our existing stockholders sell a large number of shares, or if we issue a large number of shares of our common stock in connection with future acquisitions, strategic alliances or otherwise, the market price of our Class A common stock could decline significantly. Moreover, the perception in the public market that these stockholders might sell shares of Class A common stock could depress the market price of our Class A common stock.
Although we and our directors, executive officers and holders of common stock and securities convertible into or exercisable or exchangeable for common stock issued prior to this offering or in connection with the consummation of the formation transactions have agreed pursuant to certain "lock-up" agreements with the underwriters that we and they will not offer, sell, contract to sell, pledge, grant any option to sell, or otherwise dispose of, directly or indirectly, any shares of common stock or securities convertible into or exercisable or exchangeable for common stock, subject to certain exceptions, for a period of 180 days after the date of this prospectus without the prior written consent of Warburg Dillon Read LLC, we and these persons may be released of this obligation by Warburg Dillon Read LLC in its sole discretion in whole or in part at any time with or without notice.
We plan to register an additional 5,000,000 shares of our Class A common stock under the Securities Act within 90 days after the closing of this offering for use by us as consideration for future acquisitions. Upon such registration, these shares generally will be freely tradable after issuance, unless the resale thereof is contractually restricted or unless the holders thereof are subject to the restrictions on resale provided in Rule 145 under the Securities Act. In any event, any registered shares so issued will be subject to contractual restrictions and, thus, will not be freely tradable during the 180-day period after the date of this prospectus.
After this offering, we intend to initially register 20%, or approximately 10,000,000 shares of Class A common stock, of the total outstanding shares of our common stock, which are reserved for issuance upon exercise of options granted under our stock option plan. If we increase our total outstanding shares of common stock, we will register additional shares of Class A common stock so that the stock available for issuance under our stock option plan will be registered. Once we register these shares, they can be sold in the
public market upon issuance, subject to restrictions under the securities laws applicable to resales by affiliates. We also plan to register the shares of Class A common stock issuable under our stock purchase plan. See "Shares Eligible for Future Sale."
___________________________FORWARD-LOOKING STATEMENTS___________________________
This prospectus contains forward-looking statements that involve risks and uncertainties. Discussions containing such forward-looking statements are found in the material set forth under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as in this prospectus generally. When used in this prospectus, the words "anticipate," "believe," "expect," "estimate" and similar expressions are generally intended to identify forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors, including the risks described in "Risk Factors" and elsewhere in this prospectus.
_________________________________USE OF PROCEEDS________________________________
If we sell the Class A common stock offered by us through this prospectus at a public offering price of $18.00 per share, we estimate that we will receive net proceeds (after deducting underwriting discounts and commissions and estimated offering expenses) of $98,530,000 ($115,360,000 if the underwriters exercise their over-allotment option in full).
We intend to use the net proceeds of this offering as follows:
o approximately $25 million will be for investment in hardware and software for entry into new product segments, expansion of our current markets and an increase in communication links to our clients;
o approximately $25 million will be for hiring of technology and other professionals to develop new markets in both financial and non-financial sectors; and
o approximately $25 million will be for marketing to current and new institutional clients and to promote general awareness and acceptance of the retail trading of fixed income securities and other financial instruments.
We intend to use the remainder of the net proceeds for working capital and general corporate purposes, including possible acquisitions. We do not currently have any agreements with respect to any such acquisitions. The occurrence of unforeseen events, opportunities or changed business conditions, however, could cause us to use the proceeds of this offering in a manner other than as described in this prospectus. Pending these uses, we intend to invest the net proceeds we receive in short-term marketable securities. We believe that the net proceeds of this offering and cash flows from operations will be sufficient to fund our working capital needs and capital expenditure requirements for the foreseeable future. We will not receive any of the proceeds from the sale of shares by the selling stockholder of our Class A common stock.
_________________________________DIVIDEND POLICY________________________________
We intend to retain our future earnings, if any, to help finance the growth and development of our business. We have never paid a cash dividend and we do not expect to pay any cash dividends on our common stock in the foreseeable future.
In the event we decide to declare dividends on our common stock in the future, such declaration will be subject to the discretion of our board of directors. Our board of directors may take into account such matters as general business conditions, our financial results, capital requirements, contractual, legal and regulatory restrictions on the payment of dividends by us to our stockholders or by our subsidiaries to us and any such other factors as our board of directors may deem relevant.
____________________________________DILUTION____________________________________
The net tangible book value of our common stock, including our Class B common stock, at September 24, 1999, before adjustment for this offering, was $(958,542), or $(0.02) per share. Net tangible book value per share represents the amount of total tangible assets less total liabilities, divided by the number of shares of common stock outstanding. After giving effect to the sale of the 6,000,000 shares of Class A common stock by eSpeed in this offering, at an assumed initial public offering price of $18.00 per share (the midpoint of the range set forth on the cover page of this prospectus), our net tangible book value at September 24, 1999 would have been $97,571,458, or $1.95 per share, calculated as follows:
Assumed initial public offering price per share..................................... $18.00
Net tangible book value per share at September 24, 1999.................. $(0.02)
------
Increase in net tangible book value per share attributable to
new investors......................................................... 1.97
------
As adjusted net tangible book value per share after this offering................... 1.95
------
Dilution per share to new investors................................................. $16.05
------
------
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Assuming the underwriters' over-allotment option is exercised in full, the net tangible book value at September 24, 1999 would have been $114,401,458, or $2.24 per share, the immediate increase in net tangible book value of shares owned by existing stockholders would have been $2.26 per share, and the immediate dilution to purchasers of shares of Class A common stock in this offering would have been $15.76 per share.
The following table summarizes at September 24, 1999, after giving effect to the sale of the 6,000,000 shares of Class A common stock by eSpeed in this offering at an assumed initial public offering of $18.00 per share (the midpoint of the range set forth on the cover page of this prospectus), and the consummation of the formation transactions as discussed in "Relationship with Cantor--The Formation Transactions," (1) the number and percentage of shares of common stock issued by us, (2) the total cash and non-cash consideration paid for our common stock, and (3) the average price per share of common stock paid by our existing stockholders to us prior to this offering and by the public stockholders to us in this offering:
SHARES OF COMMON TOTAL CASH AND NON-CASH
STOCK OWNED CONSIDERATION AVERAGE
------------------------ -------------------------- PRICE PER
NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE
---------- ---------- ------------ ---------- ---------
Existing stockholders(1)....................... 44,000,000 88% $ 5,655,299 5% $ 0.13
Public stockholders(1)......................... 6,000,000 12 108,000,000 95 18.00
---------- ---- ------------ ----
Total..................................... 50,000,000 100% $113,655,299 100%
---------- ---- ------------ ----
---------- ---- ------------ ----
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The calculations in the tables set forth above do not reflect (1) an
aggregate of 10,000,000 shares of Class A common stock reserved for issuance
under our stock option plan, including 7,500,000 shares of Class A common stock
subject to options to be granted in connection with this offering and
(2) 127,500 shares of Class A common stock reserved for issuance upon exercise
of warrants we expect to grant upon completion of this offering. See
"Management--1999 Long-Term Incentive Plan" and "Underwriting."
_________________________________CAPITALIZATION_________________________________
The following table sets forth as of September 24, 1999:
o our actual capitalization after the consummation of the formation transactions described in "Relationship with Cantor--The Formation Transactions" and the conversion by the selling stockholder of 2,500,000 shares of Class B common stock into an equal number of shares of Class A common stock; and
o our capitalization on an as adjusted basis to reflect the sale of the 6,000,000 shares of Class A common stock offered by us hereby at an assumed public offering price of $18.00 per share after deducting the estimated offering expenses and underwriting discounts and commissions payable by us.
This information is qualified by, and should be read in conjunction with, the financial statements and related notes appearing at the end of this prospectus.
AS OF SEPTEMBER 24, 1999
----------------------------
ACTUAL AS ADJUSTED
------------ ------------
Cash............................................................................... $ 200,000 $ 98,730,000
---------- ------------
---------- ------------
Stockholders' equity:
Preferred stock, par value $0.01 per share; 50,000,000 shares authorized, no
shares issued or outstanding.................................................. $ -- $ --
Class A common stock, par value $0.01 per share; 200,000,000 shares authorized,
2,500,000 shares issued and outstanding, actual; and 8,500,000 shares issued
and outstanding, as adjusted.................................................. 25,000 85,000
Class B common stock, par value $0.01 per share; 100,000,000 shares authorized,
41,500,000 issued and outstanding, actual; and 41,500,000 shares issued and
outstanding, as adjusted...................................................... 415,000 415,000
Additional paid-in capital......................................................... 5,215,299 103,685,299
Accumulated deficit................................................................ (6,613,841) (6,613,841)
---------- ------------
Total stockholders' equity.................................................... (958,542) 97,571,458
---------- ------------
Total capitalization............................................................... $ (958,542) $ 97,571,458
---------- ------------
---------- ------------
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_____________________________SELECTED FINANCIAL DATA____________________________
The following selected financial data for eSpeed should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the audited financial statements, related notes and other financial information beginning on page F-1. The results of operations for the period ended September 24, 1999 are not necessarily indicative of the results that may be expected for the full year ending December 31, 1999, or any other future period.
FOR THE PERIOD
FROM MARCH 10,
1999 (DATE OF
COMMENCEMENT OF
OPERATIONS) TO
SEPTEMBER 24, 1999
------------------
STATEMENT OF OPERATIONS DATA:(1)
Total revenues................................................................................ $ 24,139,469
------------
Expenses:
Compensation and employee benefits.......................................................... 14,704,940
Occupancy and equipment..................................................................... 6,632,436
Professional and consulting fees............................................................ 3,615,348
Communications and client networks.......................................................... 2,445,792
Transaction services fees................................................................... 1,337,282
Administrative fees......................................................................... 1,067,200
Other....................................................................................... 1,122,119
------------
Total expenses.............................................................................. 30,925,117
------------
Loss before benefit for income taxes.......................................................... (6,785,648)
Income tax benefit............................................................................ 171,807
------------
Net loss...................................................................................... $ (6,613,841)
------------
------------
PRO FORMA DATA:(2)
Pro forma net loss.......................................................................... $ (6,785,648)
Basic and diluted pro forma net loss per share.............................................. $ (0.15)
Shares of common stock outstanding.......................................................... 44,000,000
FOR THE PERIOD
FROM MARCH 10,
1999 (DATE OF
COMMENCEMENT OF
OPERATIONS) TO
STATEMENT OF FINANCIAL CONDITION: SEPTEMBER 24, 1999
------------
Cash and cash equivalents..................................................................... $ 200,000
Total assets.................................................................................. 10,798,264
Total liabilities............................................................................. 11,756,806
Total stockholder's equity.................................................................... (958,542)
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(2) Pro forma data present the net loss per share data as if we were subject to income tax as a corporation. The tax benefit for state and local tax, which is available to us as a division of Cantor, is not available to us as a corporation because of our net operating loss position. The determination of shares outstanding and loss per share data reflects the effect of the consummation of the formation transactions as discussed in "Relationship with Cantor--The Formation Transactions" as if those events had taken place at the beginning of the period.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
__________________FINANCIAL CONDITION AND RESULTS OF OPERATIONS_________________
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in "Risk Factors" and elsewhere in this prospectus. The following discussion is qualified in its entirety by, and should be read in conjunction with, the more detailed information and our financial statements and the notes thereto appearing elsewhere in this prospectus.
OVERVIEW
eSpeed was incorporated on June 3, 1999 as a Delaware corporation and, following this offering, will operate primarily through its wholly-owned subsidiaries, eSpeed Securities, Inc., eSpeed Government Securities, Inc., eSpeed Markets, Inc. and eSpeed Securities International Limited. Prior to this offering, eSpeed was a wholly-owned subsidiary of, and it conducted its operations as a division of, Cantor Fitzgerald Securities, which in turn is a 99.5%-owned subsidiary of Cantor Fitzgerald, L.P. eSpeed commenced operations as a division of Cantor on March 10, 1999, the date the first fully electronic transaction using the eSPEED (SM) system was executed. Cantor has been developing systems to promote fully electronic marketplaces since the early 1990's. Since January 1996, Cantor has used the eSPEED (SM) system internally to conduct electronic trading.
Concurrent with this offering, Cantor is contributing to us, and we are acquiring from Cantor, substantially all of our assets. These assets primarily consist of proprietary software, network distribution systems, technologies and other related contractual rights that comprise our eSPEED (SM) system. See "Relationship with Cantor--The Formation Transactions."
Since commencing operations, we have relied on Cantor to provide financing and cash flow for our operations and we have incurred a net loss over this period. This loss primarily results from expenditures on our technology and infrastructure incurred in building our revenue base. Our focus for the immediate future is to enable fully electronic trading of additional financial products and to aggressively seek to migrate Cantor's existing clients to our eSPEED (SM) system.
As of September 24, 1999, we had an accumulated net loss of $6,613,841. We expect that we will continue to incur losses and generate negative cash flow from operations for the foreseeable future as we continue to develop our systems and infrastructure and expand our brand recognition and client base through increased marketing efforts. In light of the rapidly changing nature of our business and our limited operating history, we believe that period-to-period comparisons of our operating results will not necessarily be meaningful and should not be relied upon as an indication of future performance.
If we were subject to income tax as a corporation, as of September 24, 1999, the pro forma net loss would have been $6,785,648. This pro forma adjustment reflects the tax benefit for state and local tax, which is available to us as a division of Cantor, but is not available to us as a corporation. Since we paid no previous taxes to state and local governments due to our net operating loss position, we would not receive a refund.
In September 1999, our board of directors changed our fiscal year from the last Friday of March to December 31.
RESULTS OF OPERATIONS
The following table sets forth statement of operations data for the period
from March 10, 1999 (date of commencement of operations) to September 24, 1999.
(This accounting period was closed as of the last Friday of the month.)
PERIOD FROM
MARCH 10, 1999 (DATE OF
COMMENCEMENT OF OPERATIONS) TO
SEPTEMBER 24, 1999
-------------------------------
Revenues:
Transaction Revenues:
Fully electronic transactions......................................... $ 3,820,807
Voice-assisted brokerage transactions ................................ 8,382,086
Screen assisted open outcry transactions.............................. 2,831,704
-----------
Total transaction revenues..................................... 15,034,597
System services fees.................................................... 9,104,872
-----------
Total revenues................................................. 24,139,469
-----------
Expenses:
Compensation and employee benefits.................................... 14,704,940
Occupancy and equipment............................................... 6,632,436
Professional and consulting fees...................................... 3,615,348
Communications and client networks ................................... 2,445,792
Transaction services fees............................................. 1,337,282
Administrative fees................................................... 1,067,200
Other................................................................. 1,122,119
-----------
Total expenses................................................. 30,925,117
-----------
Loss before benefit for income taxes.................................... $(6,785,648)
-----------
-----------
PERIOD FROM
MARCH 10, 1999 (DATE OF
COMMENCEMENT OF OPERATIONS) TO
SEPTEMBER 24, 1999
-------------------------------
Revenues:
Transaction Revenues:
Fully electronic transactions......................................... 15.8%
Voice-assisted brokerage transactions ................................ 34.7
Screen assisted open outcry transactions.............................. 11.8
-----
Total transaction revenues..................................... 62.3
System services fees.................................................... 37.7
-----
Total revenues................................................. 100.0
-----
Expenses:
Compensation and employee benefits.................................... 60.9
Occupancy and equipment............................................... 27.5
Professional and consulting fees...................................... 15.0
Communications and client networks ................................... 10.1
Transaction services fees............................................. 5.5
Administrative fees................................................... 4.5
Other................................................................. 4.6
-----
Total expenses................................................. 128.1
-----
Loss before benefit for income taxes.................................... (28.1)%
-----
-----
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REVENUES
Transaction Revenues
We operate interactive electronic marketplaces. We have entered into a Joint Services Agreement with Cantor under which we and Cantor have agreed to collaborate to provide brokerage and related services to clients in multiple electronic markets for transactions in securities and other financial products. In addition, we may, in our discretion, collaborate on operating markets for non-financial products. Under this agreement, we will own and operate the electronic trading systems and will be responsible for providing electronic brokerage services, and Cantor will provide voice-assisted brokerage services, clearance and settlement services and related services, such as credit and risk management services, oversight of client suitability and regulatory compliance, sales positioning of products and other services customary to brokerage operations. While we have no obligation under the Joint Services Agreement to do so, we intend to use approximately $25 million of the proceeds received by us from this offering for sales, marketing and advertising expenses related to our existing marketplaces and the development of new marketplaces. Under this agreement, we and Cantor have agreed to share revenues derived from transactions effected in the marketplaces in which we collaborate and other specified markets.
If the transactions:
o are effected in a marketplace in which we collaborate with Cantor, are fully electronic transactions and relate to financial products, such as fixed income securities, futures contracts, derivatives and commodities, that are not traded on the CANTOR EXCHANGE (SM), or products that are traded on the CANTOR EXCHANGE (SM), then we will receive the aggregate transaction revenues and pay to Cantor service fees equal to 35% and 20% of the transaction revenues, respectively.
o are effected in a marketplace in which we collaborate with Cantor, involve voice-assisted brokerage services that Cantor provides and the transactions relate to (1) financial products that are not traded on the CANTOR EXCHANGE (SM), or (2) products that are traded on the CANTOR EXCHANGE (SM), then, in the case
of a transaction described in (1), Cantor will receive the aggregate transaction revenues and pay to us a service fee equal to 7% of the transaction revenues, and, in the case of a transaction described in (2), we will receive the aggregate transaction revenues and pay to Cantor a service fee equal to 55% of the transaction revenues.
o are effected in a marketplace in which we do not collaborate with Cantor, but in which we do provide electronic brokerage services, and (1) the transaction relates to a financial product, then we will receive the aggregate transaction revenues and pay to Cantor a service fee equal to 20% of the transaction and data revenues paid to or received by us or (2) the transaction relates to a non-financial product, then we will receive all of the transaction revenues.
o are not effected through an electronic marketplace, but are electronically assisted, such as screen-assisted open outcry transactions, then Cantor receives the aggregate transaction revenues and pays to us a service fee equal to 2.5% of the transaction revenues.
We are pursuing an aggressive strategy to convert most of Cantor's financial marketplace products to our eSPEED (SM) system and, with the assistance of Cantor, to continue to create new markets and aggressively convert new clients to our eSPEED (SM) system. Other than Cantor, no client of ours accounts for more than 10% of our transaction revenues.
The process of converting these marketplaces includes modifying existing Cantor trading systems to allow for transactions to be entered directly from a client location, signing an agreement with the client, installing the hardware and software at the client location and establishing communication lines between us and the client.
System Services Fees
We have agreed to provide to Cantor technology support services at cost, including (1) systems administration, (2) internal network support, (3) support and procurement for desktops of end-user equipment, (4) operations and disaster recovery services, (5) voice and data communications, (6) support and development of systems for clearance and settlement services, (7) systems support for Cantor brokers, (8) electronic applications systems and network support for the unrelated dealer businesses with respect to which we will not collaborate with Cantor and (9) provision and/or implementation of existing electronic applications systems, including improvements and upgrades thereto, and use of the related intellectual property rights, having potential application in a gaming business. These revenues are received from Cantor and represented 37.7% of revenues for the period from March 10, 1999 to September 24, 1999.
EXPENSES
Compensation and employee benefits
We currently employ approximately 330 professionals, substantially all of whom are full time employees who are located predominantly in New York and London. Compensation costs include salary, bonus accruals, payroll taxes and costs of employer-provided medical benefits for our employees. We anticipate granting approximately 300,000 stock options to certain employees of Cantor at an exercise price per share equal to the initial public offering price. This will result in an estimated, one time non-cash charge to eSpeed of approximately $4 million. We intend to hire additional technical, sales and marketing, product development and administrative personnel from within and outside Cantor in order to expand our business. As a result, we anticipate that compensation expense may increase significantly in subsequent periods.
Occupancy and equipment
Occupancy and equipment costs include depreciation on computer and communications equipment and amortization of software owned by us, lease costs of other fixed assets leased by us from Cantor and a charge for premises costs from Cantor. Fixed assets are reflected as if they were contributed to us by Cantor in a non-cash transaction effective March 10, 1999 at their then current net book value (cost less accumulated depreciation) of $7,370,560. Cantor leases from third parties under operating lease arrangements certain computer related fixed assets that we have the right to use at rates intended to equal costs incurred by
Cantor. Our equipment expenses should increase as we continue to invest in technology and related equipment.
Professional and consulting fees
Professional and consulting fees consist primarily of consultant costs paid to outside computer professionals who perform specialized enhancement activities for us. We currently have approximately 20 contracted consultants and additional outside service providers working under short-term contracts costing approximately $500,000 per month in the aggregate. The costs of professional legal counsel engaged to defend the patents used in our business amounted to approximately $344,000 for the period from March 10, 1999 to September 24, 1999. Our professional and consulting expenses will likely increase over the foreseeable future.
Communications and client networks
Communications costs include the costs of local and wide area network infrastructure, the cost of establishing the client network linking clients to us, data and telephone lines, data and telephone usage and other related costs. We expect such costs to increase as we continue to expand into new marketplaces and geographic locations and establish additional communication links with clients. However, certain communications costs are decreasing globally due to increased competition in the communications industry. This may or may not result in a decrease in our communications costs.
Transaction services fees
Under the Joint Services Agreement, we are required to pay to Cantor a transaction services fee of 20% or 35%, depending on the type of transaction, of commissions paid by clients related to fully electronic transactions. As we continue to sign up new clients, in conjunction with Cantor, and the volume of business processed in the fully electronic brokerage channel increases, this expense and associated revenues will also increase. See "Relationship with Cantor--Joint Services Agreement."
Administrative fees
An Administrative Services Agreement with Cantor has been entered into under which Cantor has agreed to provide various administrative services to us, including, but not limited to, accounting, tax, legal and human resources, and we have agreed to provide sales and marketing services at cost to Cantor. We are required to reimburse Cantor for its costs of providing these services plus an allocation of overhead. We have provided for the cost of such services in our financial statements under the terms set forth in the Administrative Services Agreement as if it was effective for the period from March 10, 1999 to September 24, 1999. This amount averaged approximately $150,000 per month for the period from March 10, 1999 to September 24, 1999. As we expand our business, the services provided by Cantor, and accordingly the expense, will likely also increase. As circumstances warrant, we will consider adding employees to take over these services from Cantor. See "Relationship with Cantor--Administrative Services Agreement."
Other expenses
Other expenses consist primarily of travel, promotional and entertainment expenditures. These expenses will also continue to increase over the foreseeable future as we seek to expand our business.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth, by quarter, statement of operations data for the period from March 10, 1999 (date of commencement of operations) to September 24, 1999. Results of any period are not necessarily indicative of results for a full year.
QUARTER ENDED YEAR TO DATE
MARCH 10 TO QUARTER ENDED SEPTEMBER 24, SEPTEMBER 24,
MARCH 26, 1999 JUNE 25, 1999 1999 1999
-------------- ------------- ------------- --------------
Revenues:
Transaction Revenues:
Fully electronic transactions................... $ 76,621 $ 1,153,471 $ 2,590,715 $ 3,820,807
Voice-assisted brokerage transactions........... 664,597 3,900,345 3,817,144 8,382,086
Screen assisted open outcry transactions........ 379,316 1,376,962 1,075,426 2,831,704
---------- ----------- ----------- ------------
Total transaction revenues................... 1,120,534 6,430,778 7,483,285 15,034,597
System services fees.............................. 827,716 4,138,578 4,138,578 9,104,872
---------- ----------- ----------- ------------
Total revenues............................... 1,948,250 10,569,356 11,621,863 24,139,469
---------- ----------- ----------- ------------
Expenses:
Compensation and employee benefits.............. 1,267,838 6,403,446 7,033,656 14,704,940
Occupancy and equipment......................... 676,023 2,854,350 3,102,063 6,632,436
Professional and consulting fees................ 185,985 1,596,097 1,833,266 3,615,348
Communications and client networks.............. 221,159 1,103,081 1,121,552 2,445,792
Transaction services fees....................... 26,817 403,715 906,750 1,337,282
Administrative fees............................. 93,701 461,266 512,233 1,067,200
Other........................................... 15,235 500,034 606,850 1,122,119
---------- ----------- ----------- ------------
Total expenses............................... 2,486,758 13,321,989 15,116,370 30,925,117
---------- ----------- ----------- ------------
Loss before benefit for income taxes.............. $ (538,508) $(2,752,633) $(3,494,507) $ (6,785,648)
---------- ----------- ----------- ------------
---------- ----------- ----------- ------------
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As of March 26, 1999, June 25, 1999 and September 24, 1999, three, 10 and 45 of our clients, respectively, had fully electronic trading capabilities through us. As of November 15, 102 of our clients had fully electronic capabilities through us.
LIQUIDITY AND CAPITAL RESOURCES
During the period from March 10, 1999 to September 24, 1999, we generated cash from operations of $3,602,564. This was attributable to offsetting the costs of funding our net loss of $6,613,841 through amounts payable to Cantor and accruals for compensation and benefits.
Our cash flow is comprised of transaction revenues and system services fees from Cantor, and charges from Cantor of various fees, occupancy costs and other expenses paid by Cantor on our behalf. In acting in its capacity as a broker, Cantor will process and settle the transaction and, as such, collect/pay the funds necessary to clear the transaction with the counterparty. In doing so, Cantor will receive our commission on the transaction, and in accordance with the Administrative Services Agreement and the Joint Services Agreement, will remit the gross amount of the commission owed to us. Under the Administrative Services Agreement and the Joint Services Agreement, any net receivable or payable will be settled monthly at the discretion of the parties.
Our ability to withdraw capital from our regulated broker-dealer subsidiaries could be restricted, which in turn could limit our ability to pay dividends, repay debt and redeem or purchase shares of our outstanding stock.
We believe that cash flows from operations and the net proceeds of this offering will be sufficient to fund our working capital needs and capital expenditure requirements for the forseeable future. In the event we consummate any acquisitions, we may need to incur indebtedness or raise public or private debt or issue
equity to help finance any such acquisitions. There is no assurance that any such financing will be obtainable on acceptable terms or at all.
IMPACT OF THE YEAR 2000
The year 2000 computer problem refers to the potential for system and processing failures of date related data as a result of computer controlled systems using two digits rather than four to define the applicable year. For example, computer programs that have time sensitive software may recognize a date represented as 00 as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions in operations, including, among other things, a temporary inability to process transactions, send transmissions to clearing agents or engage in similar normal business activities.
Our year 2000 plan is part of normal day-to-day Information Technology department efforts, using existing staff. Over 150 Information Technology employees, including 20 systems managers from eSpeed and other managers from Cantor, are responsible for addressing potential year 2000 problems, including identification, assessment, repair and testing of their respective applications and systems. Year 2000 managers meet monthly to discuss critical paths, modify priorities to adjust to unforeseen problems and review the master year 2000 project plan.
We and Cantor believe we have thoroughly tested all mission critical systems using the testing procedures and key dates that have been established for the Wall Street testing program conducted by the Securities Industry Association. In order to ensure compliance, each system must complete four levels of testing:
(1) unit testing to determine whether each individual application's functionality remained intact;
(2) integration testing to validate two or more compliant systems perform as expected;
(3) point-to-point testing to validate that clients still have expected functionality; and
(4) industry-wide testing to show functionality between other participants. In addition, all applications have participated in individual point-to-point testing as required.
We and Cantor have completed our internal information technology and non-information technology assessment and testing, and we believe that our and Cantor's internal software and hardware systems will function properly with respect to dates in the year 2000 and thereafter. Our and Cantor's contingency plan in the event of any system failure due to the year 2000 problem will be to manually process trades.
Cost
Based on our and Cantor's assessment to date, our and Cantor's combined costs associated with upgrades to hardware and software, testing and remediating our systems are approximately $9.0 million. The majority of this was incurred prior to our commencement of operations. We anticipate incurring an additional $150,000 to complete our year 2000 project activities.
Risks
Because we and Cantor are dependent, to a very substantial degree, upon the proper functioning of computer systems, the failure of any computer system to be year 2000 compliant could materially adversely affect us. Failure of this kind could, for example, cause execution of trades to be inefficient or even to fail, lead to incomplete or inaccurate accounting, recording or processing of trades or result in generation of erroneous results or adversely affect our ability to develop new products. If not remedied, potential risks include business interruption or shutdown, financial loss, regulatory actions, reputational harm and legal liability.
MARKET RISK ISSUES
In the normal course of business, we maintain no inventory of securities and, as such, we are not subject to market risk on investments.
____________________________________BUSINESS____________________________________
OVERVIEW OF OUR BUSINESS
We operate global interactive electronic marketplaces designed to enable market participants to trade financial instruments and other products instantaneously, more effectively and at lower cost than traditional trading methods. Our marketplaces are currently used by most of the largest financial institutions and wholesale market participants to trade in a wide range of global fixed income securities, futures, options and other financial instruments. These financial instruments include government securities denominated in U.S. dollars, Euros, Yen, British Pounds Sterling, Canadian dollars and currencies of emerging market countries, as well as securities of U.S. agencies, municipal securities, Eurobonds, corporate bonds and other global fixed income securities and U.S. Treasury futures. We operate the largest global electronic marketplace for U.S. Treasury securities and leading global electronic marketplaces for the other fixed income securities and financial instruments, most of which have been converted or are being converted to our eSPEED (SM) electronic trading platform. Our current marketplaces process financial instrument transactions of over $150 billion per day, of which more than $6 billion are wholly-electronic orders not involving any person as an intermediary. Our revenues are driven by trading activity and volumes in our marketplaces.
We believe we operate the only electronic marketplaces used for trading in multiple securities and financial and non-financial instruments on a global basis. We also operate a U.S. Treasury futures exchange marketplace that is known as the CANTOR EXCHANGE (SM). It is the first fully electronic futures exchange for the trading of U.S. Treasury futures and, we expect, will serve as our platform for the electronic trading of a broad range of futures contracts globally. Over 500 institutions worldwide participate in our marketplaces, including all of the 25 largest bond trading firms in the world, as identified by Euromoney Magazine. Most of these institutions use our proprietary eSPEED (SM) screen displays and/or trading platforms, which allow us to deliver information and execute transactions instantaneously through their computer security barriers that permit or exclude entry into their internal network. We have devoted significant resources to developing client arrangements, providing point-to-point communication links, and creating proprietary software to establish connectivity through these security barriers in order to deliver data and execute transactions for our clients on a secure basis.
Our interactive electronic marketplaces are powered by our eSPEED (SM) system, which employs our private, instantaneous, electronic network and proprietary transaction processing software. Our system supports execution of trades internally by Cantor and enables fully electronic trading by our clients. We believe these components form one of the most robust trading systems in the world. The network is distributed and permits market participants to view information and execute trades in a fraction of a second from locations around the globe. Our trades are processed using INTERACTIVE MATCHING (SM), our proprietary, rules-based trading method that interactively executes the orders of multiple market participants. INTERACTIVE MATCHING (SM) encourages trading by giving the successful active participant in a transaction a time-based right of first refusal on the next sale/purchase. Some of the rules employed in INTERACTIVE MATCHING (SM) provide participants that expose their orders to the market with priority in the interactive auction process. Because of its unique trading rules, we believe that INTERACTIVE MATCHING (SM) is attractive to both large and small market participants and represents a competitive advantage over other existing electronic trading systems.
Concurrent with this offering, Cantor is contributing to us the proprietary software, network distribution systems, technologies and related contractual rights that comprise our eSPEED (SM) system. We will work to provide multiple electronic markets for transactions in securities, other financial instruments and other financial and non-financial products. Cantor will continue to provide telephonic access for those clients who wish to trade via telephone. Clients dealing with Cantor who prefer the more rapid and less costly method of trading via fully electronic means will have their transactions routed through our eSPEED (SM) system. Cantor or other third parties will provide clearing and other transaction support services in trades in which we participate. Cantor currently operates the largest wholesale marketplace for U.S. Treasury securities and leading marketplaces for many other fixed income securities and financial instruments. Cantor also operates other non-financial markets, such as energy, commodities and acid rain emissions. We have converted 11 of
the largest Cantor marketplaces, including U.S. Treasury and European government securities, to our electronic trading platform. We intend to convert most of Cantor's remaining marketplaces to our electronic trading platform by the end of 2000. Cantor has been a leading global broker-dealer of fixed income securities over the past 25 years. Cantor developed the world's first screen-based brokerage market in U.S. government securities in 1972. Today, Cantor executes in excess of $45 trillion in transaction volume annually and is a major facilitator, and, in some cases, provider, of liquidity in numerous financial products through its offices in the United States, Canada, Europe and Asia. We believe our relationship with Cantor is a significant competitive advantage. Our eSPEED (SM) system provides the only way to electronically access Cantor's marketplaces. Consequently, we believe that clients will be strongly motivated to use our interactive electronic marketplaces.
OUR INDUSTRY
Our initial markets include global fixed income securities, futures, options and other financial products. However, our potential markets include any fungible products, goods or services which can be quantified and bought or sold.
Wholesale Fixed Income Securities Trading. The fixed income securities market is one of the largest financial markets in the world. In the United States alone, there are over $13 trillion of fixed income securities outstanding, and in the U.S. Government Securities market alone, there is reported to be approximately $200 billion a day in trading just among the primary dealers and their clients. Other fixed income instruments are traded widely, and in Europe, Asia and the emerging markets there are another approximately $13 trillion of fixed income securities outstanding and trading on a daily basis. In Europe, the creation of the Euro has manifested a market second only to the United States in breadth. We expect continued significant growth in these fixed income markets as the issue of currency translation is removed as an obstacle to the development of a large unified Pan-European market for securities.
Futures and Options Trading. Futures and options trading is a leading financial activity throughout the world, with contracts traded on a wide variety of financial instruments, commodities and indexes. Futures and options provide several important economic benefits, including the ability to shift or otherwise manage market risk. In part because these markets provide the opportunity for leveraged investments, they attract large pools of risk capital. In 1998, over 1.5 billion futures contracts were traded in the world's futures markets, and over 750 million options contracts were traded on a variety of exchanges. Currently, most of that trading is still being done on open outcry exchanges, but there has been a significant movement towards the conversion of these markets to electronic trading. To date, we believe the most successful initiatives have been made in Europe. We believe that there is significant opportunity in the continued conversion of these markets to electronic networks, such as our own.
Traditional Trading Methods for Financial Marketplaces. In both the fixed income and futures markets, trading practices historically have centered on a method of trading known as open outcry, where all trading activity is focused on a central physical location, or pit. This method of trading can create significant value for the market participants in the pit, who often have access to better and more timely market information than other market participants. All other market participants have to access the market through this central location. Additionally, in order to access the pit, individuals and institutional traders must send their orders through several layers of middlemen, who assist in handling such orders. This process is inefficient. In today's heavily regulated open outcry U.S. futures markets, for example, an order can be routed through multiple people during its execution, adding significant costs to the transaction. Virtually all U.S. futures exchanges are controlled by their members and floor traders. Professional broker dealers, traders, institutional traders and individuals currently must trade with these floor members, who are the market makers. These factors result in higher direct and indirect costs of trade execution.
TRADITIONAL ORDER EXECUTION
Limitation of Traditional Trading Methods. While traditional financial markets facilitate large volume trading, they have significant shortcomings. Direct access is substantially limited and, therefore, many investors may not receive efficient pricing. Transaction costs are high due to the number of people involved in an open outcry system. Execution can be slow. Program trading, especially programs designed to automatically and simultaneously execute multiple trades in different, but related, financial products, is difficult to implement because of the current manual nature of these markets. Significant expense is also incurred in processing, confirming, clearing and implementing compliance programs designed to monitor and manage the exposure of individual professionals, as well as the entire enterprise. Paper and telephone-based trading produces delayed information and results in compliance programs that are expensive to manage and can be circumvented. Therefore, institutions bear increased risk. These factors impede trading by limiting volume and liquidity.
[GRAPHIC]
*The above graphic is for illustrative purposes only and is not representative of all transactions.
Emergence of Electronic Exchanges. Many financial exchanges worldwide, including certain exchanges in France, Germany, Japan, Sweden, Switzerland and the United Kingdom, are now partially or completely electronic. In the United States, however, trading in many types of financial instruments continues to be conducted primarily on open outcry exchanges. Recently, many exchanges have introduced side-by-side markets for voice and electronic access and, as a result, have created separate pools of liquidity. Moreover, substantially all of the electronic trading systems introduced internationally and in the United States have been implemented on a regional basis. Most of these systems provide limited market liquidity and are designed to accommodate trading in one or a limited number of securities and financial products, typically equity securities. We believe that wholesale market participants and institutions will ultimately look for a limited number of marketplaces to meet most of their trading needs. This is because market participants will not want to work with multiple trading platforms and connect their information technology platforms and compliance programs to a large number of disparate systems. We believe the trend toward electronic trading will continue and will ultimately result in a majority of markets worldwide becoming fully electronic.
In addition, recently there has been considerable discussion regarding the move toward the demutualization of exchanges. Exchanges have historically been operated on a not-for-profit basis for the benefit of their respective members, and this governance structure has limited their ability to adopt new technologies and respond quickly to market changes. In response to technological advances in trading systems, many exchanges are contemplating the reorganization of their ownership and management structures and are seeking to form alliances with strategic partners. These developments have created, and are expected to continue to create, opportunities for strategic acquisitions and alliances.
Online Trading. Favorable investing environments and advances in technology have led to the rapid development of online and traditional retail brokerage businesses. Technological advances have created new and inexpensive means for individual investors to directly access markets online and participate in the securities markets. According to International Data Corporation, the number of online brokerage accounts grew from approximately 1.5 million at the end of 1996 to over 6.4 million at the end of 1998, representing $324.0 billion in assets and over 300,000 trades per day, primarily in equity securities. International Data Corporation also estimates that, by 2002, 30% of investors will trade online, and there will be over 24 million online accounts, a 275% increase from 1998. Despite the growth in online accounts and access to public equity markets, there has been very limited access for retail Internet trading in fixed income securities, futures, options and other wholesale financial instruments at cost-effective pricing and spreads. We believe that the emergence of electronic marketplaces which promote greater liquidity, enhanced access and more efficient pricing will increase trading among retail investors.
OUR ELECTRONIC MARKETPLACE SOLUTION
We operate a private electronic network for wholesale financial markets through which we are connected to most of the largest financial institutions worldwide. We have installed in the offices of our existing client base, comprising more than 500 leading dealers, banks and other financial institutions, the technology infrastructure necessary to provide price information and trade execution on an instantaneous basis in abroad range of securities and financial instruments. We believe our eSPEED (SM) system enables us to introduce and distribute a broad mix of products and services more quickly, cost effectively and seamlessly than competitors.
eSPEED INTERACTIVE MATCHING
[GRAPHIC]
*The above graphic is for illustrative purposes only and is not representative of all transactions.
OUR eSPEED (SM) system:
o has a flexible design which allows us to quickly and easily add new financial instruments in multiple currencies and trading models;
o uses a network distribution system, which we believe is one of the most robust systems in operation, and which enables us to provide access to a broad mix of accurate, instantaneous market data and fast and highly reliable trade execution;
o is designed to minimize the need for human intermediaries in the trading process by providing clients with multiple methods of accessing our marketplaces and executing trades directly; and
o uses INTERACTIVE MATCHING (SM), our proprietary, rules-based trading method that interactively executes buy and sell orders from multiple market participants.
These system features enable us to operate the only integrated trading network engaged in electronic trading in multiple products and marketplaces on a global basis.
The benefits of our eSPEED (SM) system include the following:
Instantaneous Price Dissemination and Trade Execution. Our eSPEED (SM) system provides clients with the ability to access pricing and other information and execute trades instantaneously, as opposed to traditional trading methods which provide less timely information, and less efficient trade execution.
Lower Transaction Costs. Our eSPEED (SM) system streamlines the entire trading process by eliminating the significant layers of manual intervention which currently exist at both the front-end of the process, including order entry, matching and postings functions, as well as at the middle and back-end of the process (clearance, settlement, tracking and reporting functions), resulting in significantly lower transaction costs for our clients.
Multiple Product Program Trading. Our eSPEED (SM) system provides our clients with the ability to execute sophisticated and complex transactions and trading strategies, including the trading of multiple products across multiple markets simultaneously.
Greater Accuracy and Decreased Probability of Erroneous Trades. Our eSPEED (SM) system includes verification mechanisms at various stages of the execution process, which result in significantly reduced manual intervention, decreased probability of erroneous trades and more accurate execution for clients.
Integrated Compliance and Credit Risk Functions. Our eSPEED (SM) system
includes a comprehensive range of compliance and credit risk management
components which perform several critical functions, including:
(1) continuously monitoring trading activity to ensure that clients are staying
within credit limits; (2) automatically preventing further trades once credit
limits have been exceeded; and (3) evaluating and calculating positions and risk
exposure across various products and credit limits. These risk, credit and
compliance tools are highly sophisticated and can be customized for our clients
and integrated into their information technology platforms.
Highly Efficient Pricing on Illiquid Securities. Our MOLE system enables us to provide prices for illiquid financial products through multiple trades in other related financial instruments. These multi-variable trades are extremely difficult to execute in traditional markets due to their complexity and the slow speed of manual execution.
Ability to Automate Back-Office Functions. Our eSPEED (SM) system automates previously paper and telephone-based transaction processing, confirmation and other functions, substantially improving and reducing the cost of client back-offices, and enabling straight-through processing.
Improved Access for Online Retail Brokers. Our eSPEED (SM) system enables online and traditional retail brokers to provide clients with real-time access to previously unavailable wholesale marketplaces for fixed income securities, futures, options and other financial instruments. We believe that this will increase retail interest in the trading of these financial products and further enhance the overall liquidity and efficiency of the market.
We believe our eSPEED (SM) system provides us with significant competitive advantages over existing electronic trading systems and new entrants seeking to develop and introduce limited electronic trading systems to the global securities and financial instruments marketplaces. We also believe that the time and expense required to develop and install electronic trading networks will serve as a significant barrier to entry to many other potential competitors.
OUR GROWTH STRATEGY
Our objective is to be the leading provider of interactive electronic marketplaces in the world. We believe we can extend our expertise in the creation of real-time electronic marketplaces to a broad range of financial and non-financial products and services. Our growth strategy to achieve this objective includes the following key elements:
Focus Exclusively on Developing and Operating Interactive Electronic Marketplaces. We intend to capitalize on the trend toward the increased use of electronic trading platforms by focusing our business exclusively on the development and operation of interactive electronic marketplaces worldwide. We believe this operational focus provides us with a significant advantage over competitors that have multiple and sometimes conflicting business objectives, rigid business practices and cumbersome ownership structures that may impede their ability to efficiently develop and implement electronic trading platforms of their own.
Expand the Number of Financial and Non-Financial Products in Our Electronic Marketplaces. Our electronic marketplaces currently handle the trading of financial products which have among the highest average annual trading volumes of all financial products, including U.S. government securities, U.S. Treasury futures, non-U.S. G-7 government bonds, Eurobonds, corporate bonds, agency securities, U.K. gilts, emerging markets securities, U.S., European and other repurchase agreements and municipal bonds. We plan to significantly expand the types of securities and financial products traded in our marketplaces. Our goal is to include in our electronic marketplaces the full range of fixed income securities, futures, options and other securities and financial products that are currently traded in today's markets worldwide. Initially, we will focus our expansion efforts on the securities and financial instruments traded by Cantor that have not yet been converted to electronic trading. We expect to further extend our marketplaces to include additional
financial and non-financial products through a variety of approaches together with Cantor or other strategic partners.
Convert Clients to Fully Electronic Trading. Currently, less than 4% of the trades executed in our marketplaces, representing more than $6 billion in volume, are executed on a fully electronic basis without the assistance of a broker. We intend to continue to convert substantially all of Cantor's clients to a fully electronic trading environment. We believe the ease of use, low price and efficient execution that our electronic marketplaces afford will encourage clients to convert their trading to fully electronic trading. We have a team of over 30 persons dedicated to enhancing client awareness of the advantages of electronic trading and providing client support in converting trading activity to a fully electronic trading format, and we intend to increase that number. We also expect to leverage Cantor's historical client relationships in connection with these efforts.
Leverage Existing eSPEED (SM) System Connectivity to Deploy New Products and Services. Our eSPEED (SM) system provides connectivity to, and the opportunity to electronically interact with, a global client base that includes dealers, banks and financial institutions at hundreds of sites around the globe. As a result, a significant number of our major clients currently have installed the hardware necessary to trade on a fully electronic basis. Utilizing the existing infrastructure and flexible architecture of this system, we will be able to install with relative ease and at marginal incremental cost, the components that will enable a client to electronically trade in additional types of securities and financial products. We expect access to this existing global private trading network to enable us to introduce and distribute a broad mix of electronic trading products and services, more quickly, cost effectively and seamlessly than competitors without access to such a network.
Creating Online Retail Broker Access to Wholesale Markets for Fixed Income Securities and Other Financial Products. We intend to create retail marketplaces, where appropriate, to enable online and traditional retail brokers to provide their clients with real-time access to previously unavailable wholesale marketplaces for retail trading of fixed income securities, futures, options and other financial instruments. While retail investors generally have been able to buy and sell equity securities at the same prices and spreads as wholesale market participants and institutional investors, this has not been the case with fixed income securities, futures, options and other financial instruments. We believe our eSPEED (SM) system will expand marketplaces and/or retail volume and enhance execution for individual retail investors.
Pursue Acquisitions and Strategic Alliances. We intend to capitalize on the highly fragmented nature of the financial marketplaces and the trends toward exchange demutualization and consolidation among regional and global market participants. We expect to pursue an acquisition-based growth program that will enable us (1) to acquire complementary technologies and service capabilities in a cost-effective manner and (2) to broaden our product base and the securities markets in which we provide our electronic trading services. We will seek to enter into joint ventures and other strategic alliances to create additional liquidity in the global financial products markets and to attract new trading participants to those markets. We believe the flexibility afforded by our corporate governance structure will enable us to implement these strategies, as well as to anticipate and respond to developments and trends in the global financial markets, more efficiently than competitors, such as exchanges, which have broadly dispersed memberships and cumbersome management structures.
Leverage Our eSPEED (SM) System for Use in Other Business-to-Business and Consumer Markets. We believe that our eSPEED (SM) system is easily adaptable to other products. Because of the scale of the system and its ease of adaptability, we believe our eSPEED (SM) system and INTERACTIVE MATCHING (SM) will have applications across a broad range of products, including Internet-based marketplaces for a wide array of consumer goods and services, particularly those involving multiple buyers and sellers. We are well positioned to leverage significant costs and efforts which have been incurred to develop our eSPEED (SM) system to quickly create electronic markets in a wide range of products.
OUR TRADING SERVICES AND TECHNOLOGY PLATFORM
Electronic marketplaces are emerging as significant interactive mediums for trading financial and non-financial products. In an electronic marketplace, substantially all of the participants' actions are facilitated through an electronic medium, such as a private electronic network or the Internet, which limits the need for actual face-to-face or voice-to-voice participant interaction.
In our electronic marketplaces, participants may either electronically execute trades themselves or call brokers/terminal operators who input trade orders for them. In a fully electronic trade, all stages of the trade occur electronically. The participant inputs its order instructions directly into our electronic trading system, using a keyboard, an application programming interface or other software. The system provides to the participant, normally within 300 milliseconds, an on-screen confirmation that the participant's order has been accepted. Once a trade is executed, the participant receives an on-screen trade confirmation. Simultaneously, an electronic confirmation is sent to the participant's back office system enabling straight-through processing for the participant. A broker/terminal operator assisted trade is executed in substantially the same manner as an electronic trade, except the participant telephones a broker/terminal operator who inputs the participant's order into our electronic marketplace system.
Over time, we expect electronically brokered trading to be the predominant trading method in our marketplaces. However, through our affiliation with Cantor, we intend to maintain broker/terminal operator trading capabilities. Unlike most traditional exchanges which have created side-by-side markets for voice and electronic access and, as a result, have created separate pools of liquidity, our markets operate seamlessly. Fully electronic and broker/terminal operator orders are transacted within our eSPEED (SM) system, resulting in one pool of liquidity. Retail investors will participate in our online marketplaces for financial products through their online or traditional retail broker. Retail investors will follow their retail brokers' order entry procedures. Once a retail broker confirms its client's account status, suitability and creditworthiness, our systems will route the online order to our appropriate electronic marketplace. We will receive transactional fees from retail brokers for enabling their retail clients to trade online in our marketplaces.
Our electronic marketplaces operate on a proven technology platform that emphasizes scalability, performance and reliability. Our technology platform consists of:
o a proprietary, internally developed network distribution system,
o transaction processing software which includes a proprietary order matching engine, a credit and risk management system, security pricing engines and associated middle and back office operations systems; and
o client interfaces.
Together, these components enable banks, broker-dealers, and other participants in our marketplaces to cost-effectively trade financial products on an instantaneous basis.
Network Distribution System. Our eSPEED (SM) system contains a proprietary, sophisticated, hub and spoke digital network. This network uses Cisco Systems network architecture and has points of presence in the major financial hubs of the world, including New York, London, Tokyo, Frankfurt, Paris, Milan, Chicago, Los Angeles, Toronto and Johannesburg. It is comprised of over 50,000 miles of cable and over 800 network routers and uses 200 high capacity super servers. This internally designed distribution network provides connections with over 500 financial institutions, including most of the largest financial institutions in the world. The redundant structure of the system provides backup and re-routing of data transmission if one spoke of a hub fails. This backup is critical to maintaining our clients' real-time connections to us. We believe it is one of the largest and most robust interactive network distribution systems currently in operation.
Our distribution system accepts orders and postings instantaneously and distributes responses, generally in 300 milliseconds. The network can transport 150 million bits of information per second around the world and is currently running at approximately 12% of capacity. In addition to our own network system, we also distribute encrypted data and receive trading information from clients using the services of multiple, major Internet service providers throughout the world. These connections enable us to offer Internet-based trading to our global clients.
Transaction Processing Software. Our software applications have been developed internally and are central to our eSPEED (SM) system. Our order matching trading engines operate in real-time, facilitating efficient interaction between buyers and sellers. Our credit and risk management systems monitor and regulate these buyers and sellers, limiting market and credit risk. Our pricing engines provide prices for illiquid financial products through multiple trades in other related financial instruments. These three critical applications work together seamlessly and are supported by middle and back office software that verifies, confirms, reports, stores, tracks and, if applicable, clears each trade.
o Trading Engines. Our trading engines use INTERACTIVE MATCHING (SM), our proprietary rules-based method, to process in excess of 150 transactions per second per product. These engines were developed to support trading of homogeneous products, which are products with the same underlying characteristics, such as government bonds and futures contracts, and heterogeneous products, which are products which may be similar, but which have some aspects that differentiate them from other products in the same class, such as municipal bonds, corporate bonds and Eurobonds. These trading engines are designed to be modular and flexible to allow modification in order to apply them to other markets. In Europe, for example, we have added a component that allows us to process the trading of debt in multiple currencies. Our trading engines have embedded security features and an added messaging layer to provide security from unauthorized use. In addition, we use encryption to protect our clients that trade over the Internet. When used together, our trading engines can trade a wide range of homogeneous and heterogeneous products and can handle trades ranging in size from $1,000 to billions of dollars.
We believe our systems provide incentives for clients to actively participate in our marketplaces. For example, INTERACTIVE MATCHING (SM) provides incentives to participate in our marketplaces by encouraging participants to expose their orders to the market by providing them priority in the interactive marketplace. In standard auctions, the incentive is for participants to wait until the last moment to make a bid or offer. Our priority rules encourage trading activity by giving the last successful active participant a time-based right of first refusal on the next sale/purchase. In addition, in many markets we have structured our pricing policy to provide that the party that provides market liquidity by inputting a price to buy or sell pays less commission (or no commission) than the participant that acts on that price. With our pricing policies and proprietary priority rules, our system is designed to increase activity and to draw participants into the market. This proprietary rules-based system is easily adaptable and, as part of our business strategy, we intend to apply it in other non-financial markets for a variety of products and services.
o Credit and Risk Management Systems. Our credit and risk management
systems are critical to the operation of our real-time, electronic
marketplaces. Our proprietary credit and risk management systems perform
a variety of functions: (1) they continuously monitor trades of our
clients to ensure that they have not exceeded their credit limits,
(2) they can automatically prevent further trading once a client has
reached a pre-determined credit limit, and (3) they can evaluate trade
transactions and calculate both individual positions and risk exposure
across various products and credit limits. These systems can also be made
available to our global clients to enable them to monitor the position of
their traders and their clients who participate in our marketplaces.
These systems store client data relevant to credit and risk management,
such as financial statements, credit documents, contacts and internal
analyses. These systems also enable our clients to make our electronic
marketplaces available to their clients while maintaining control of
their trading activity and risk.
o Pricing Engines. We have internally developed a number of sophisticated, analytical software tools that permit us to price financial products that trade in less liquid markets and for which current pricing information is not readily available. For example, MOLE is a computer application that enables us to offer prices and therefore create and enhance a marketplace for financial products that have limited liquidity. MOLE currently uses data from existing cash and futures markets to calculate pricing for transactions where no market prices currently exist.
o Middle and Back Office Applications. Our middle and back office applications support clearance, settlement, tracking and reporting of trades and provide links to outside entities such as the
Government Securities Clearance Corporation, National Securities Clearance Corporation, Depository Trust Company, SWIFT, Euroclear, New York Clearing Corp. and most other global clearing organizations. In the financial markets, clearance and settlement is the process by which a security and cash payment are exchanged and the trade is completed. In some markets, the cash and security are both passed to a clearing organization for settlement. In other transactions, both parties send either cash or a security to Cantor and Cantor settles the trade and sends each party the cash or security due. Our reporting and accounting systems are designed to ensure that all charges and commissions for a trade are tracked and recorded. Our accounting systems are designed to ensure that books and records are kept in accordance with regulatory guidelines and accounting standards.
Client Interfaces. Our systems can be accessed by our clients in four ways:
o using our eSPEED (SM) proprietary software;
o using our application programming interface to write their own software linking their networks and software applications directly to our systems;
o through our proprietary, real-time private distribution system and the Internet, both for wholesale clients and for retail clients who participate in our marketplaces through online and traditional retail brokers; and
o through software developed in alliances with third-party vendors such as QV Trading and SunGard/ASC. Our application programming interface enables clients to conduct computer price updating, program trading and straight-through processing.
PRODUCTS CURRENTLY TRADING ELECTRONICALLY
The following table identifies the categories of securities and financial products which are traded in our interactive electronic marketplaces, including the approximate average daily electronic and non-electronic trading volume of these financial products in all markets (including our marketplaces). References to "N/A" indicate that we have been unable to determine the market size from reliable, independent third party sources.
AVERAGE DAILY
TRADING VOLUME
(ELECTRONIC AND
WHOLESALE MARKET NON-ELECTRONIC)
FINANCIAL PRODUCTS (IN BILLIONS) DESCRIPTION
U.S. Government Securities $ 197.6 Debt obligations issued and backed by the full
faith and credit of the United States
government.
----------------------------------------------------------------------------------------------------------------
French, German and Italian $ 50.0 Debt obligations issued by the French, German
Government Bonds and Italian governments.
----------------------------------------------------------------------------------------------------------------
United Kingdom and other European N/A Debt obligations issued by the United Kingdom
Government Bonds and other European governments.
----------------------------------------------------------------------------------------------------------------
Eurobonds N/A Securities syndicated and sold internationally
that may be issued in a currency other than that
of the country of the issuer.
----------------------------------------------------------------------------------------------------------------
Corporate Bonds $ 10.0 Debt obligations issued by private corporations
that may pay interest periodically and return
the face value of the bond at maturity.
----------------------------------------------------------------------------------------------------------------
Agency Securities $ 53.3 Securities issued, or pooled, serviced and,
sometimes, guaranteed by government agencies to
finance their activities, including credit
support of home mortgages and farm credit.
----------------------------------------------------------------------------------------------------------------
Emerging Market Government Bonds and $ 16.8 Securities issued by the governments and other
Emerging Market Eurobonds issuers in countries with developing economies.
They include Brady Bonds, which are U.S. dollar
denominated bonds that may be fully or partially
collateralized by U.S. Treasury zero-coupon
bonds.
----------------------------------------------------------------------------------------------------------------
Global Repurchase Agreements and Reverse N/A Short-term sales of government securities with a
Repurchase Agreements (U.S., Europe and promise to repurchase the securities at a higher
Emerging Market Countries) price. Repos and reverse repos are typically
overnight transactions used to finance
government bonds.
----------------------------------------------------------------------------------------------------------------
Municipal Bonds $ 8.8 Debt obligations issued by state and local
governments.
----------------------------------------------------------------------------------------------------------------
Interest Rate Futures 1.1(1) Instruments that call for the delivery of
interest-bearing securities or interest rate
products or their cash equivalent at a specific
delivery (or maturity) date for an agreed upon
price (the future price) to be paid at contract
maturity. Interest rate futures exist for a
number of financial instruments, including
government securities and Eurodollar deposits.
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FUTURE ELECTRONIC PRODUCTS
The following tables identify the categories of securities and financial products which we expect to be traded in our interactive electronic marketplaces by the end of 2000, including the approximate average daily electronic and non-electronic trading volume of these financial products in all markets. References to "N/A" indicate that we have been unable to determine the market size from reliable, independent third party sources.
AVERAGE DAILY
TRADING VOLUME
(ELECTRONIC AND
WHOLESALE MARKET NON-ELECTRONIC)
FINANCIAL PRODUCTS (IN BILLIONS) DESCRIPTION
Mortgage Backed $ 73.7 Securities that represent either an ownership claim in a pool of
Securities mortgages or an obligation that is secured by a pool of
mortgages.
------------------------------------------------------------------------------------------------------------
Interest Rate Swaps $ 68.3 Contractual agreements entered into between two counterparties
under which each agrees to make periodic payments to each other
for an agreed upon time based on a notional amount of principal.
------------------------------------------------------------------------------------------------------------
Oil, Natural Gas, N/A Transactions involving the delivery or price of oil, natural
Electricity, Foreign gas, electricity or foreign currency exchange.
Exchange
------------------------------------------------------------------------------------------------------------
Canadian and Japanese N/A Debt obligations issued by the Canadian and Japanese
Government Bonds governments.
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AVERAGE DAILY
TRADING VOLUME
(ELECTRONIC AND
NON-ELECTRONIC)
(IN MILLIONS OF
FUTURES CONTRACTS) DESCRIPTION
Equity Index Futures 169,000 Instruments that call for the delivery of the cash equivalent of
a stock index at a specific delivery (or maturity) date for an
agreed upon price (the future price) to be paid at contract
maturity.
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Foreign Exchange 108,000 Instruments that call for the delivery of foreign currency at a
Futures specific delivery (or maturity) date for an agreed upon price
(the future price) to be paid at contract maturity.
------------------------------------------------------------------------------------------------------------
Energy Futures 255,000 Instruments that call for the delivery of an energy-related
asset or its cash equivalent at a specific delivery (or
maturity) date for an agreed upon price (the future price) to be
paid at contract maturity. Energy futures exist for a number of
energy-related assets, including gasoline and crude oil.
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Metal Futures 65,000 Instruments that call for the delivery of a metal or its cash
equivalent at a specific delivery (or maturity) date for an
agreed upon price (the future price) to be paid at contract
maturity. Metal futures exist for a number of metals, including
gold, silver and copper.
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Options and options on futures products data set forth below do not include over-the-counter traded products in which substantial volumes are traded on a daily basis.
AVERAGE DAILY
TRADING VOLUME
(ELECTRONIC AND
NON-ELECTRONIC)
(IN MILLIONS OF
OPTIONS AND OPTIONS ON FUTURES CONTRACTS) DESCRIPTION
Options on Interest Rate 343,000 Contractual obligations that give the holder the right
Products to buy or sell interest-bearing debt, such as Treasury
notes, certificates of deposit or securities guaranteed
by the Government National Mortgage Association, at a
specified exercise price on or before a specified
expiration date.
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Options on Equity Products 320,000 Contractual obligations that give the holder the right
to buy or sell the cash equivalent of an equity index
such as the S&P 500 at a specified exercise price on or
before a specified expiration date. An investor also
can buy or sell an option on an equity index future.
-----------------------------------------------------------------------------------------------------------
Options on Individual Equity 1,300,000 Contractual obligations that give the holder the right
Products to buy or sell an individual stock at a specified
exercise price on or before a specified expiration
date.
-----------------------------------------------------------------------------------------------------------
Options on Foreign Exchange 21,600 Contractual obligations that give the holder the right
Products to buy or sell a quantity of a foreign currency for a
specific amount of domestic currency at a specified
exercise price on or before a specified expiration
date.
-----------------------------------------------------------------------------------------------------------
Options on Energy Products 48,300 Contractual obligations that give the holder the right
to buy or sell a future contract on an energy product
such as gasoline or oil at a specified exercise price
on or before a specified expiration date.
-----------------------------------------------------------------------------------------------------------
Options on Metal Products 11,800 Contractual obligations that give the holder the right
to buy or sell a specific amount of metal such as gold
at a specified exercise price on or before a specified
expiration date.
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SALES AND MARKETING
We expect to promote our electronic marketplaces and brokerage-related services to Cantor's existing clients and new clients through a combination of sales, advertising, marketing and co-marketing campaigns. We also expect to leverage the historical client relationships of Cantor's employees under the Joint Services Agreement. We intend to build and enhance the eSPEED (SM) brand name recognition through a sales, advertising and marketing campaign. We expect to market to retail clients through a variety of campaigns, including co-marketing campaigns with our online and traditional retail brokers. We intend to design our sales, marketing and advertising campaigns to promote brand awareness and educate the marketplace regarding the nature of our electronic marketplaces, products and services and the advantages associated with the automation of trading activities, such as enhanced instantaneous information flow, price transparency and more direct and cost-effective market access, tight spreads and instantaneous trade execution.
OUR CLIENTS
Clients for our marketplaces include banks, dealers, brokers and other wholesale market participants, over 500 of which currently participate in our electronic marketplaces, including the 25 largest bond trading firms in the world, as identified by Euromoney Magazine. Through our eSPEED (SM) system, we expect to enable retail brokerage firms to expand their businesses by providing them with the ability to offer their individual clients the option of trading bonds and futures electronically in the same way they trade equity securities and we expect to include other marketplaces previously unavailable to retail investors, or not available to them at reasonable spreads or commissions. We intend to provide to wholesale and retail investors and to Cantor access to our electronic marketplaces and brokerage-related services supported by our eSPEED (SM) system. We expect that a significant portion of our clients who use brokers will migrate to fully electronic access over the coming years. We also intend to provide to third parties and to Cantor the infrastructure, including systems administration, internal network support and operations and disaster recovery services, that is critical to providing fully electronic marketplaces for trading in a wide range of financial products. Other than Cantor, no client of ours accounts for more than 10% of our revenues.
STRATEGIC ALLIANCES
In 1997, Cantor entered into an agreement with the New York Cotton Exchange, which, upon merging with the Coffee, Sugar & Cocoa Exchange, became known as the New York Board of Trade. The agreement sets forth the terms and conditions pursuant to which Cantor operates an electronic marketplace, called the CANTOR EXCHANGE (SM), for futures contracts cleared by and under the regulatory supervision of the New York Board of Trade. Cantor has assigned to us all of its rights and obligations under its agreement with a subsidiary of the New York Board of Trade to jointly operate the CANTOR EXCHANGE (SM). Under the agreement, the New York Board of Trade, through its subsidiaries, provides clearing and regulatory services and we provide electronic execution and related services for the CANTOR EXCHANGE (SM).
Pursuant to the agreement, neither we nor our affiliates shall during the term of the agreement establish in the United States an electronic market for trading futures contracts or options on futures contracts on cotton, cheese, coffee, sugar, cocoa, milk or frozen orange juice. We have agreed that within the United States we shall exclusively operate for the CANTOR EXCHANGE (SM) markets for U.S. Treasury futures and other products so designated by the CANTOR EXCHANGE (SM). We and our affiliates may establish any electronic market that is located physically outside the United States for such products if the New York Board of Trade is not capable of providing regulatory or clearing services with respect to such products.
SOFTWARE DEVELOPMENT
We devote substantial efforts to the development and improvement of our electronic marketplaces. We will work with our clients to identify their specific needs and make modifications to our software, network distribution systems and technologies which are responsive to those needs. We are pursuing a four-pronged approach to our research and development efforts: (1) internal development; (2) strategic partnering; (3) acquisitions; and (4) licensing. We have approximately 150 persons involved in our internal software development efforts. Our technology team's objective will be to develop new products and services that employ proven technology designed to provide superior electronic trade execution and marketplace services to our clients. We will also focus our efforts on enhancing our Web site and Internet screen interface to
facilitate real-time markets, comply with the standard Internet security protocol and future security protocols and migrate transactions to the public networks in order to capitalize on the development of new commercial marketplaces. We are continuing to develop new marketplaces and products using our internally developed application software having open architecture and standards. In addition, we have forged strategic alliances with organizations such as Sungard/ASC and QV Trading through which we will work to develop sophisticated, front-end trading applications and products. We expect to license products from and to companies when it is cost effective or profitable to do so.
COMPETITION
The development and operation of electronic trading marketplaces in securities and other financial instruments are evolving. As a result, competition in these marketplaces is currently very fragmented. We expect to face competition from a number of different sources varying in size, business objectives and strategy. Our eSPEED (SM) system currently competes, and we expect it to compete, directly and indirectly, with:
o traditional trading methods, including manual buy/sell order input by registered brokers in response to telephone originated requests and execution of trades in open outcry trading pits on exchange floors, such as the Chicago Board of Trade, the Chicago Mercantile Exchange and other exchanges and over-the-counter markets;
o products developed and used by exchanges and financial services firms, such as Liberty Brokerage Investment Corporation and Garban-Intercapital plc, seeking to act as market intermediaries;
o automated trade execution services developed by third party vendors for commercialization in a wide range of financial products markets;
o the products and services of market data, information and communication vendors, such as Reuters Group plc, Bloomberg L.P. and Bridge Information Systems Inc., that have created electronic networks which link them to most major financial institutions and that have attempted, in some cases, to expand their networks to include trading platforms;
o consortia comprised of leading financial institutions and service providers, such as BrokerTec Global LLC, which has announced its intention to explore the development of electronic trading networks, and EuroMTS; and
o in the event we extend the application of our INTERACTIVE MATCHING (SM) technology to conducting or facilitating real-time markets in commodity-type consumer goods and services over the Internet, both online and traditional sellers of these products and services.
The electronic trading services we provide our wholesale clients enable them to expand the range of services they provide to their ultimate clients, which are also potential participants in our electronic marketplaces. We intend to structure our relationships with our clients and conduct our operations to mitigate the potential for this competition. We do not intend to use the access to the customer base of our wholesale clients that we obtain in providing our electronic trading services to compete with these wholesale clients in other securities and financial instrument transactions.
We believe our electronic marketplaces will compete primarily on the basis of speed, efficiency, price and ability to provide access to liquidity to market participants.
OUR INTELLECTUAL PROPERTY
We have adopted a comprehensive intellectual property protection program to protect our proprietary technology. We currently have licenses covering four of Cantor's patents in the United States. One patent relates to a data processing system and method for electronically trading select items such as fixed income instruments. Two patents relate to a fixed income portfolio index processor. One patent relates to a system for shared remote access of multiple application programs by one or more computers. Foreign counterpart applications for some of these U.S. patents have been filed. The licenses are exclusive, except in the event that we do not seek to or are unable to provide to Cantor any requested services covered by the patents and Cantor elects not to require us to do so.
We also have an agreement to license several pending U.S. patent applications relating to various other aspects of our electronic trading systems, including both functional and design aspects. Additional patent applications likely will be filed in the near future to further protect our proprietary technology.
We cannot at this time determine the significance of any of the foregoing patents, or future patents, if issued, to our business. We can give no assurance that any of the foregoing patents is valid and enforceable, or that any of these patents would not be infringed by a third party competing or seeking to compete with our business.
REGULATION
The securities industry and financial markets in the United States and elsewhere are subject to extensive regulation. As a service provider to the securities industry and financial markets, and as a registered broker-dealer, our business activities fall within the scope of these regulations.
Regulation of the U.S. Securities Industry and Broker-Dealers.
As a matter of public policy, regulatory bodies in the United States and the rest of the world are charged with safeguarding the integrity of the securities and other financial markets and with protecting the interests of investors participating in those markets. In the United States, the Securities and Exchange Commission is the federal agency responsible for the administration of the federal securities laws. Our regulated U. S. subsidiaries, eSpeed Securities, Inc. and eSpeed Government Securities, Inc., are registered with the Securities and Exchange Commission as, respectively, a broker-dealer and a government securities broker. They are also members of the National Association of Securities Dealers, Inc., a self regulatory body to which most broker-dealers belong. Certain self-regulatory organizations, such as the National Association of Securities Dealers, Inc., adopt rules and examine broker-dealers and require strict compliance with their rules and regulations. The Securities and Exchange Commission and self-regulatory organization rules cover many aspects of a broker-dealer's business, including capital structure and withdrawals, sales methods, trade practices among broker-dealers, use and safekeeping of customer's funds and securities, record-keeping, the financing of clients' purchases, broker-dealer and employee registration and the conduct of directors, officers and employees. In connection with a violation of these rules, the SEC, self-regulatory organizations and state securities commissions may conduct administrative proceedings which can result in censure, fine, the issuance of cease-and-desist orders or the suspension or expulsion of a broker-dealer, its officers or employees.
Effect of Net Capital Requirements. As a registered broker-dealer and member of the National Association of Securities Dealers, Inc., eSpeed Securities, Inc. is subject to the Uniform Net Capital Rule under the Exchange Act. The Uniform Net Capital Rule specifies the minimum level of net capital a broker-dealer must maintain and also requires that at least a minimum part of its assets be kept in relatively liquid form. Government securities brokers must comply with similar net capital requirements established in rules promulgated by the U.S. Treasury Department. As of September 24, 1999, if each of our regulated U.S. subsidiaries, eSpeed Securities, Inc. and eSpeed Government Securities, Inc., had been subject to the Uniform Net Capital Rule, the minimum net capital required of each would have been $5,000 and $25,000, respectively. As of that date, each of our U.S. subsidiaries had total net capital of approximately $90,000, or $85,000 and $65,000, respectively, in excess of the minimum amount that would have been required as of that date.
The Securities and Exchange Commission and the National Association of Securities Dealers, Inc. impose rules that require notification when net capital falls below certain predefined criteria, dictate the ratio of debt to equity in the regulatory capital composition of a broker-dealer and constrain the ability of a broker-dealer to expand its business under certain circumstances. Additionally, the Uniform Net Capital Rule and the National Association of Securities Dealers, Inc. rules impose certain requirements that may have the effect of prohibiting a broker-dealer from distributing or withdrawing capital and requiring prior notice to the Securities and Exchange Commission and the National Association of Securities Dealers, Inc. for certain withdrawals of capital. Because our principal asset will be the ownership of stock in our broker-dealer subsidiaries, these rules governing net capital and restrictions on withdrawals of funds could operate to prevent us from meeting our financial obligations on a timely basis.
Application of Exchange Act to Internet Business. The Securities Exchange Act of 1934 governs, among other things, the operation of the financial products markets and broker-dealers. When enacted, the
Securities Exchange Act of 1934 did not contemplate the conduct of a securities business throughout the Internet. Although the Securities and Exchange Commission, in releases and no-actions letters, has provided guidance on various issues related to the conduct of a securities business through the Internet, the application of the laws to the conduct of a securities business through the Internet continues to evolve. Uncertainty regarding these issues may adversely affect the viability and profitability of our business.
Financial Futures and Options. Financial futures and options in financial futures are subject to regulation by the Commodity Futures Trading Commission under the Commodity Exchange Act, and exchanges that provide facilities for the trading of those products are also subject to Commodity Futures Trading Commission regulation. As a service provider to the CANTOR EXCHANGE (SM), a futures exchange that is a designated contract market under the Commodity Exchange Act, we could be adversely affected by changes in laws or regulations governing the products or clients of the CANTOR EXCHANGE (SM).
Exchange Regulation. Securities exchanges must register with the Securities and Exchange Commission and comply with various requirements of the Securities Exchange Act of 1934. Effective April 1999, new rules expanded the scope of exchange regulation to include many brokerage matching and execution systems, such as the matching systems which we support. The new rules impose various requirements relating to fair access, capacity, security, record-keeping and reporting. Our subsidiaries expect to comply with these requirements. Although we do not expect the compliance costs to be significant, our subsidiaries could encounter unforseen expenses associated with operation of these rules.
Regulation of the Non-U.S. Securities Industries and Investment Service Providers.
The securities industry and financial markets in the European Union and elsewhere are subject to extensive regulation. As the owner and operator of electronic marketplaces for the securities industry and financial markets, our business activities may fall within the scope of those regulations depending upon the extent to which we are characterized as providing a regulated investment service.
The securities industry in the member states of the European Union is extensively regulated by agencies in each member state. European Union measures provide for the mutual recognition of regulatory agencies and of prudential supervision making possible the grant of a single authorization for the provider of investment services which, broadly, is valid throughout the European Union. As an investment service provider in the United Kingdom, our principal regulator would be the Securities and Futures Authority. The conduct of an investment business is also regulated by agencies in each of the other member states in which we may provide investment services. The provision of investment services is also regulated by other agencies in other jurisdictions in which we operate such as the Securities and Futures Commission in Hong Kong and the local government agency delegated by the Japanese Financial Supervisory Agency in Japan.
As a matter of public policy, regulatory bodies in the European Union and the rest of the world are charged with safeguarding the integrity of the securities and other financial markets and with protecting the interests of investors participating in those markets. We are seeking authorization from the Securities and Futures Authority to provide investment services in the United Kingdom and we intend to exercise our rights under the European Union Investment Services Directive to provide such investment services throughout the European Union. Similar authorization applications will be made in other jurisdictions such as Hong Kong and Japan where such authorization is necessary to operate an electronic marketplace.
The Securities and Futures Authority and other regulatory agencies in the European Union may conduct administrative proceedings which can result in censure, fine, the prevention of activities or the suspension or expulsion of an investment services provider. The applicable investment service regulations cover minimum financial resource requirements and conduct of business rules for all authorized investment businesses.
Investment exchanges may be operated and authorized as investment businesses in the European Union, subject to the provision of the Investment Services Directive. Alternatively, investment exchanges can obtain authorization as an investment exchange from each member state in the European Union in accordance with the applicable regulations of that member state.
Changes in Existing Laws and Rules. Additional legislation or regulation, changes in existing laws and rules or changes in the interpretation or enforcement of existing laws and rules, either in the United States or elsewhere, may directly affect our mode of operation and our profitability.
LEGAL PROCEEDINGS
On May 5, 1999, Cantor Fitzgerald, L.P. and The Board of Trade of the City of Chicago, The New York Mercantile Exchange and The Chicago Mercantile Exchange were sued by Electronic Trading Systems Corporation in the United States District Court for the Northern District of Texas (Dallas Division) for alleged infringement of Wagner United States patent 4,903,201, entitled "Automated Futures Trade Exchange." The patent relates to a system and method for implementing an electronic, computer-automated futures exchange. On July 1, 1999, Cantor answered the complaint, asserting, among other things, that the '201 patent was invalid and not infringed by Cantor and that Cantor was not the real party in interest. Although not identified by the complaint, Cantor believes that the system being charged with infringement is a version of the electronic trading system used by the CANTOR EXCHANGE (SM), which Cantor is contributing to us in connection with this offering. If the plaintiff is successful in the lawsuit, we may be required to obtain a license to develop and market one or more of our services, to cease developing or marketing services or to redesign these services. We cannot assure you that we would be able to obtain these licenses or that we would be able to obtain them at commercially reasonable rates or, if unable to obtain licenses, that we would be able to redesign our services to avoid infringement.
On June 21, 1999, Cantor and its affiliate CFPH, LLC, brought suit against Liberty Brokerage Investment Corporation and Liberty Brokerage Inc. in the United States District Court for the District of Delaware for infringement of the Fraser et al. U.S. patent 5,905,974, entitled "Automated Auction Protocol Processor." Cantor alleged in the complaint that Liberty was infringing the '974 patent by making, using, selling and/or offering for sale systems and methods that embody or use the inventions claimed in the '974 patent. On August 10, 1999, Cantor and CFPH, L.L.C. voluntarily dismissed the suit without prejudice. Subsequently, on August 10, 1999, Liberty filed an action for declaratory judgment in the United States District Court for the District of Delaware against Cantor and two of its affiliates, Cantor Fitzgerald Securities and CFPH, LLC, claiming that the '974 patent was invalid, unenforceable and not infringed by Liberty. On October 12, 1999, Cantor, Cantor Fitzgerald Securities and CFPH, LLC moved (1) to dismiss all claims against Cantor Fitzgerald Securities for failure to state a claim upon which relief can be granted and (2) to dismiss the action as against Cantor, Cantor Fitzgerald Securities and CFPH, LLC for lack of an actual case or controversy within the meaning of 28 U.S.C. Section 2201. On November 22, 1999, the Court granted the motion to dismiss the action as against Cantor Fitzgerald Securities, and denied the motion to dismiss the action as against Cantor and its affiliate CFPH, LLC. We cannot assure you that we or Cantor will bring a claim for infringement of the '974 patent against Liberty, that the '974 patent will be found to be valid and/or enforceable or that Liberty will be found to have infringed the '974 patent. We have assumed responsibility for defending this suit on behalf of Cantor and its affiliates and the risk of loss associated with it.
In February 1998, Market Data Corporation contracted with Chicago Board Brokerage (a company controlled by the Chicago Board of Trade and Prebon Yamane) to provide the technology for an electronic trading system to compete with Cantor's United States Treasury brokerage business. Market Data Corporation is controlled by Iris Cantor and Rodney Fisher, her nephew-in-law. Iris Cantor, a company under the control of Iris Cantor referred to herein as CFI, and Rodney Fisher are limited partners of Cantor Fitzgerald, L.P.
In April 1998, Cantor Fitzgerald, L.P. filed a complaint in the Delaware Court of Chancery against Market Data Corporation, Iris Cantor, CFI, Rodney Fisher and Chicago Board Brokerage seeking an injunction and other remedies. The complaint alleges that Iris Cantor, CFI and Rodney Fisher violated certain duties, including fiduciary duties under Cantor's partnership agreement due to their competition with Cantor Fitzgerald, L.P. with respect to the electronic trading system mentioned above. The complaint further alleges that Market Data Corporation and Chicago Board Brokerage tortiously interfered with Cantor's partnership agreement and aided and abetted Iris Cantor's, CFI's and Rodney Fisher's breaches of fiduciary duty. Iris Cantor, CFI and Rodney Fisher counterclaimed seeking, among other things, (1) to reform agreements they have with Cantor Fitzgerald, L.P. and (2) a declaration that Cantor Fitzgerald, L.P. breached the implied covenant of good faith and fair dealing. Cantor has agreed to indemnify us for any liabilities that we incur with respect to any current or future litigation involving (1) Market Data Corporation, (2) Iris Cantor, (3) CFI or (4) Rodney Fisher.
On July 12, 1998, the Court of Chancery held Cantor Fitzgerald, L.P. was likely to succeed on the merits of its claims that Iris Cantor, CFI and Rodney Fisher had breached their partnership obligations to Cantor but had not shown that the defendants' conduct was likely to cause imminent irreparable harm between the date of the opinion and a final hearing. The Court of Chancery, therefore, denied Cantor Fitzgerald, L.P.'s request for preliminary injunctive relief and scheduled a final trial. Cantor Fitzgerald, L.P. settled its dispute with Chicago Board Brokerage in April 1999 and Chicago Board Brokerage subsequently announced it was disbanding its operations. The remaining parties have completed the final trial and the Court of Chancery's decision is expected following post-trial oral arguments scheduled for December 7, 1999. We believe Market Data Corporation's technology for electronic trading systems will be of substantial assistance to competitors in the wholesale market if provided to them.
Two related actions are pending in New York. In a case pending in the Supreme Court of New York, New York County, plaintiff Cantor Fitzgerald, L.P. alleges, among other things, that defendants Market Data Corporation, CFI, Iris Cantor and Rodney Fisher misused confidential information of Cantor Fitzgerald, L.P. in connection with the above mentioned provision of technology to Chicago Board Brokerage. In a case pending in the United States District Court for the Southern District of New York, CFI and Iris Cantor allege, among other things, that certain senior officers of Cantor Fitzgerald, L.P., breached fiduciary duties they owed to CFI. The allegations in this lawsuit relate to several of the same events underlying the court proceedings in Delaware. Neither of these two cases has been pursued during the pendency of the court proceedings in Delaware.
In addition to the allegations set forth in the pending lawsuits, Cantor has received correspondence from the attorneys representing Iris Cantor, CFI, Market Data Corporation and Rodney Fisher in the proceedings in Delaware, expressing a purported concern that Cantor and/or certain of its partners may be in breach of Cantor's partnership agreement (including, among other things, the partnership agreement's provisions relating to competition with the partnership) and the general partnership agreement of Cantor Fitzgerald Securities with respect to our initial public offering. Generally, these attorneys have alleged that various purported conflicts of interest will exist arising from the fact that certain of our directors and officers will simultaneously hold positions with Cantor Fitzgerald, L.P. Moreover, these attorneys have asserted that our business plan may not be consistent with certain purported rights of Market Data Corporation (including purported intellectual property rights) and other parties and they have requested more information regarding our initial public offering.
Although we do not expect to incur any losses with respect to the pending lawsuits or supplemental allegations surrounding Cantor's partnership agreement, Cantor has agreed to indemnify us with respect to any liabilities we incur as a result of such lawsuits or allegations.
Cantor and Reuters are parties to a confidential arbitration under the auspices of the American Arbitration Association in New York, New York, which began in June of 1995 with respect to a January 1993 agreement among Reuters, Cantor and Market Data Corporation. Cantor has agreed to indemnify us against all claims asserted by Reuters or Market Data Corporation relating to this agreement or arising out of the arbitration.
The agreement executed in 1993 involves, among other things, the delivery by Cantor of certain market data arising out of non-United States government bond and U.S. municipal bond interdealer brokerage transactions for transmittal over Reuters' network. The agreement also contemplated the joint development by Cantor and Reuters of an electronic trading system for certain transactions in non-United States government bonds. Cantor and Reuters did not develop this electronic trading system. In the arbitration, Reuters alleges that Cantor materially breached the agreement primarily by failing to provide non-screen, voice brokerage data concerning non-United States government bonds and U.S. municipal bonds that Reuters contends are subject to the agreement and fraud. Reuters is seeking to recover from Cantor amounts representing past payments for market data, the reimbursement of attorneys' fees and other damages. Cantor has denied Reuters' allegations that there has been any material breach of this agreement or fraud, and has asserted a breach of contract claim and various other counterclaims against Reuters, including claims for Reuters' failure since February 1997 to pay any of the money due Cantor for data under this agreement. In February 1997, Reuters unilaterally ceased making such payments to Cantor in connection with the dispute and in November 1999 stopped distributing Cantor's market data that was provided to Reuters.
Reuters has recently asserted that, in the event it prevails in the arbitration, it may be entitled to receive from Cantor, and possibly from us, revenues in respect of the sale, license, dissemination, delivery or other distribution of the data subject to this agreement. Reuters has also asserted that, if it loses the arbitration, it could still, at the conclusion of the arbitration, try to cure its multiple breaches and seek to have the agreement remain in effect. Cantor believes that it did not materially breach this agreement and believes that Reuters would not be entitled to (1) any of our revenues, even if Reuters prevailed in the arbitration or (2) cure its own breaches and cause the agreement to remain in effect, in the event Cantor prevails. As stated above, Reuters ceased making payments under this agreement in 1997 and has ceased distributing the data covered by the agreement. Cantor has notified Reuters that Cantor has terminated the agreement based on Reuters' material breaches.
Market Data Corporation recently made an application for an order directing
(1) Reuters to pay Cantor for providing the data, (2) Cantor to continue to
provide Market Data Corporation with data for transmission to Reuters, and (3)
Reuters to accept and distribute the data over Reuters' network. That
application has been denied on the basis of Market Data Corporation's failure to
demonstrate that monetary damages would be an inadequate remedy for any damages
it may suffer as a result of Reuters' and Cantor's actions. Even if any relief
were granted to Market Data Corporation, we do not believe it would have a
material adverse effect on our business.
Recently, the panel in the arbitration rendered a decision interpreting certain portions of the agreement in a manner contrary to that which Cantor believes was intended and concluded that Cantor had failed to deliver certain non-screen, voice brokerage data to Reuters that the panel concluded was required to be delivered under the agreement. Cantor maintains that it has not materially breached the agreement, that any breach was cured by Cantor, that the agreement cannot be terminated at Reuter's insistence, that Reuters has underpaid Cantor and that, by ceasing to make payments since 1997 and discontinuing the distribution of Cantor's data, Reuters has materially breached the agreement. The panel has not resolved these issues and the arbitration is still continuing.
We cannot assure you that Market Data Corporation and/or Reuters will not seek to assert claims against us or Cantor relating to our activities, either in the arbitration or in another proceeding. In any event, Cantor has agreed to indemnify us with respect to any claims asserted by Reuters or Market Data Corporation relating to the agreement or arising out of the arbitration.
EMPLOYEES
We have approximately 330 employees, five of whom are our executive officers. None of these employees is represented by a union. We believe that we have good relations with our employees.
PROPERTIES
Our principal executive offices are located at One World Trade Center, New York, New York. Our principal executive offices occupy approximately 50,000 square feet of leased space which we occupy pursuant to the Administrative Services Agreement with Cantor. Our right to use this space expires at the time that Cantor's lease expires in 2012. We will pay Cantor approximately $1.2 million annually for use of this space. Our largest presence outside of New York is in London, where we have the right to use approximately 15,000 square feet of Cantor's existing office space. Our right to use this space expires at the earlier of (1) the time that Cantor's lease expires in 2016 or (2) when Cantor ceases to be an affiliate of ours and Cantor asks us to vacate. We will pay Cantor approximately $800,000 annually for use of this space. We believe our facilities are adequate for our reasonably foreseeable future needs.
___________________________________MANAGEMENT___________________________________
The following table provides information regarding our directors, executive officers and persons who will become our directors upon the closing of this offering:
NAME AGE TITLE
------------------------------------------------ --- ------------------------------------------------
Howard W. Lutnick............................... 38 Chairman of the Board and Chief Executive
Officer
Frederick T. Varacchi........................... 33 President and Chief Operating Officer;
Director(1)
Douglas B. Gardner.............................. 38 Vice Chairman; Director(1)
Kevin C. Piccoli................................ 42 Senior Vice President and Chief Financial
Officer
Stephen M. Merkel............................... 41 Senior Vice President, General Counsel and
Secretary
Richard C. Breeden.............................. 50 Director(1)
Larry R. Carter................................. 56 Director(1)
William J. Moran................................ 58 Director(1)
Joseph P. Shea.................................. 45 Director(1)
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Our board of directors currently consists of one director, Mr. Lutnick. At the time of completion of this offering, our board of directors will consist of seven directors, three of whom will be non-employee directors.
Howard W. Lutnick. Mr. Lutnick has been our Chairman of the Board of Directors and Chief Executive Officer since June 1999. Mr. Lutnick joined Cantor in 1983 and has served as President and Chief Executive Officer of Cantor since 1991. He directs all facets of Cantor's worldwide operations. Mr. Lutnick's company, CF Group Management, Inc., is the managing general partner of Cantor. Mr. Lutnick serves as co-chairman of the CANTOR EXCHANGE (SM). Mr. Lutnick is a member of the Executive Committee of the Intrepid Museum Foundation's Board of Trustees, the Zachary and Elizabeth M. Fisher Center for Alzheimer's Disease Research at Rockefeller University, the Board of Managers of Haverford College, the Board of Directors of City Harvest and the Board of Directors of New York City Public/Private Initiatives, Inc.
Frederick T. Varacchi. Mr. Varacchi has been our President and Chief Operating Officer since June 1999. Mr. Varacchi has been an Executive Managing Director and the Chief Operating Officer of Cantor since October 1999. From March 1998 to October 1999, he served as Senior Managing Director and Chief Information Officer of Cantor. Before joining Cantor, Mr. Varacchi was Senior Vice President and Chief Technology Officer of Greenwich/Natwest Capital Markets, overseeing information technology for the company from January 1995 to February 1998. From March 1990 to January 1995, Mr. Varacchi worked for Chase Manhattan Bank, where he held a variety of senior technology positions, including Head of Global Network Systems for Private Banking. From January 1989 to March 1990, Mr. Varacchi served in a variety of positions with Salomon Smith Barney, including as Head of Front Office Systems. Mr. Varacchi is a member of the Board of Directors of Expert Ease Software and QV Trading Systems Inc.
Douglas B. Gardner. Mr. Gardner has been our Vice Chairman since June 1999. Mr. Gardner has been an Executive Managing Director of Cantor since October 1999. He previously served as Senior Managing Director and Chief Administrative Officer of Cantor from January 1994 to October 1999, where he was responsible for overseeing all worldwide finance and support related functions. Mr. Gardner serves as a director and is on the executive and finance committees of the CANTOR EXCHANGE (SM). Prior to joining Cantor, Mr. Gardner was a partner of DG Equities, a commercial and residential real estate developer and owner. From 1983 to 1985, Mr. Gardner was associated with Lehman Brothers in the High-Technology Division of its Corporate Finance Department.
Kevin C. Piccoli. Mr. Piccoli has been our Senior Vice President and Chief Financial Officer since September 1999. He has been a Managing Director of Cantor since October 1999 and Senior Vice President and Chief Financial Officer of Cantor, responsible for its global accounting, regulatory, management reporting and treasury functions, since July 1999. Prior to joining Cantor, he was a Managing Director and Chief Financial Officer at Greenwich Capital Holdings, Inc., a subsidiary of National Westminster Bank, from April 1992 to July 1999. Mr. Piccoli's responsibilities at Greenwich included global accounting, tax and regulatory reporting. Prior to joining Greenwich in April 1992, Mr. Piccoli was an audit partner at Coopers & Lybrand.
Stephen M. Merkel. Mr. Merkel has been our Senior Vice President, General Counsel and Secretary since June 1999. Mr. Merkel has also been Senior Vice President, General Counsel and Secretary of Cantor since 1993, where he is responsible for Cantor's legal, compliance, tax, risk and credit departments. Mr. Merkel serves as a director and Secretary of the CANTOR EXCHANGE (SM). Prior to joining Cantor, Mr. Merkel was Vice President and Assistant General Counsel of Goldman Sachs & Co. from February 1990 to May 1993. From September 1985 to January 1990, Mr. Merkel was associated with the law firm of Paul, Weiss, Rifkind, Wharton & Garrison.
Richard C. Breeden. Mr. Breeden will become our director upon the closing of this offering. Mr. Breeden has been Chairman of the Board and Chief Executive Officer of Equivest Finance, Inc., a publicly traded vacation ownership company, since October 1997 and President since October 1998. Mr. Breeden has served as Trustee for the Bennett Funding Group, Inc. since 1996. Mr. Breeden also has served as President of Richard C. Breeden & Co., a consulting firm, since 1996. From 1993 to 1996, Mr. Breeden served as Chairman of the worldwide financial services practice of Coopers & Lybrand and, from 1989 to 1993, Mr. Breeden was Chairman of the U.S. Securities and Exchange Commission. Mr. Breeden is a director of The Philadelphia Stock Exchange, Inc.
Larry R. Carter. Mr. Carter will become our director upon the closing of this offering. Mr. Carter joined Cisco Systems in January 1995 as Vice President, Finance and Administration and as Chief Financial Officer and Secretary. In July 1997, he was promoted to Senior Vice President, Finance and Administration, Chief Financial Officer and Secretary. From 1992 to January 1995, Mr. Carter was Vice President and Corporate Controller at Advanced Micro Devices. His career also includes four years with V.I.S.I. Technology Inc. as Vice President, Finance and Chief Financial Officer and two years at S.G.S. Thompson Microelectronics Inc. as Vice President, Finance, Administration and Chief Financial Officer. He also spent 19 years at Motorola, Inc., where he held a variety of financial positions, the last being Vice President and Controller, M.O.S. Group. Mr. Carter is on the Board of Directors of Network Appliance, Inc., Ultratech Stepper, Inc. and QLogic Corporation.
William J. Moran. Mr. Moran will become our director upon the closing of this offering. Mr. Moran joined the Chase Manhattan Corporation and the Chase Manhattan Bank in 1975 as Internal Control Executive. After several promotions, Mr. Moran was named General Auditor in 1992, Executive Vice President in 1997 and a member of the Management Committee in 1999. Before joining Chase, Mr. Moran was with the accounting firm of Peat, Marwick, Mitchell & Co. for nine years.
Joseph P. Shea. Mr. Shea will become our director upon the closing of this offering. Mr. Shea has been with Cantor since 1989. He has been Executive Managing Director since October 1999, was Senior Managing Director in charge of U.S. taxable fixed income securities from 1997 to 1999, was Managing Director of the corporate bond and U.S. government agency securities departments from 1995 to 1997 and was Managing Director of the corporate bond department from 1989 to 1995.
COMMITTEES OF THE BOARD
In connection with the closing of this offering, we will establish (1) an
Audit Committee, all of the members of which will be non-employee directors, and
(2) a Compensation Committee.
The Audit Committee will be responsible for recommending to the Board of Directors the engagement of our independent auditors and reviewing with our independent auditors the conduct and results of the audits, our internal accounting controls, audit practices and the professional services furnished by our independent auditors.
The Compensation Committee will be responsible for reviewing and approving all compensation agreements for our officers and for administering our stock option plan and our stock purchase plan.
COMPENSATION OF DIRECTORS
Directors who are also our employees will not receive additional compensation for serving as directors. We expect to grant our initial non-employee directors options to purchase 20,000 shares of our common stock at an exercise price per share equal to the initial public offering price per share. Any other options to be granted to non-employee directors will be in amounts to be determined by our board of directors. Non-employee directors also will be reimbursed for out-of-pocket expenses incurred in attending meetings of our board of directors or committees of our board of directors.
EXECUTIVE COMPENSATION
We are a recently formed company. Prior to March 1999, we did not conduct any operations. As a result, we have not previously paid any compensation to our Chief Executive Officer or other executive officers. We intend to pay or allocate for payment to Messrs. Lutnick, Varacchi, Gardner, Piccoli and Merkel a pro rata portion of their annual salaries of $350,000, $500,000, $250,000, $125,000 and $150,000, respectively, for services they provide to us during 1999.
1999 LONG-TERM INCENTIVE PLAN
In November 1999, our board of directors and stockholder approved our adoption of our 1999 Long-Term Incentive Plan. The purpose of the plan is to allow us to attract, retain and award present and prospective officers, employees, directors, consultants and certain other individuals (including employees of Cantor) and to compensate them in a way that provides additional incentives and enables such individuals to increase their ownership interests in our Class A common stock. Individual awards under the plan may take the form of:
o either incentive stock options or non-qualified stock options;
o stock appreciation rights;
o restricted or deferred stock;
o dividend equivalents;
o bonus shares and awards in lieu of our obligations to pay cash compensation; and
o other awards, the value of which is based in whole or in part upon the value of our Class A common stock.
The plan will generally be administered by a committee, which will initially be the Compensation Committee of our board, except that our board will perform the committee's functions under the plan for purposes of grants of awards to non-employee directors, and may perform any other function of the committee as well. The committee generally is empowered to select the individuals who will receive awards and the terms and conditions of those awards, including the number of shares subject to the award exercise prices for options and other exercisable awards, vesting and forfeiture conditions (if any), performance conditions, the extent to which awards may be transferable and periods during which awards will remain outstanding. Awards may be settled in cash, shares, other awards or other property, as determined by the committee.
The maximum number of shares of our Class A common stock that may be subject to outstanding awards under the plan will not exceed 20% of the aggregate number of shares of all classes of common stock outstanding determined immediately after each award is granted. The number of shares deliverable upon exercise of incentive stock options is limited to 10,000,000 shares of Class A common stock.
In connection with this offering, options in the form of non-qualified stock options to purchase a total of 7,500,000 shares of Class A common stock will be granted to our directors, executive officers and other employees as follows: 20,000 shares to each of our three initial non-employee directors, 250,000 shares to Joseph Shea, 2,500,000 shares to Howard Lutnick, 800,000 shares to Frederick Varacchi, 375,000 shares to Douglas Gardner, 100,000 shares to Stephen Merkel, 65,000 shares to Kevin Piccoli, 3,300,000 shares to our
other employees and other persons eligible to receive options under our plan and 300,000 shares to employees of Cantor. Each of the above options will have an exercise price per share equal to the initial public offering price. Except as to Mr. Lutnick, all options will be nontransferrable. As to Mr. Lutnick, 500,000 shares will be immediately exercisable and will be transferable to members of his family (or a trust established for the benefit of his family) in order to facilitate his estate planning. All options generally will be subject to vesting requirements and will expire on the earlier of 10 years after the date of grant or in connection with a termination of employment. However, Mr. Lutnick's immediately exercisable option and the options granted to Cantor employees will expire five years after the date of grant and generally will not terminate in connection with a termination of employment. All options generally shall vest and become exercisable upon a change in control of eSpeed, except that as to Messrs. Varacchi, Gardner, Merkel, Piccoli, Shea and Lee Amaitis (the "Covered Employees"), their options shall vest but continue to become exercisable in accordance with their original vesting schedule (regardless of whether their employment with eSpeed continues). However, if, following the change in control of eSpeed, Mr. Lutnick at any time ceases to be eSpeed's chairman and chief executive officer (other than by reason of his death or disability), all then-unexercisable options held by the Covered Employees shall become fully exercisable as of such date.
The plan will remain in effect until terminated by our board. The plan may be amended by our board without the consent of our stockholders, except that any amendment, although effective when made, will be subject to stockholder approval if required by any Federal or state law or regulation or by the rules of any stock exchange or automated quotation system on which our common stock may then be listed or quoted. The number of shares reserved or deliverable under the plan and the number of shares subject to outstanding awards are subject to adjustment in the event of stock splits, stock dividends and other extraordinary corporate events.
We generally will be entitled to a tax deduction equal to the amount of compensation realized by a participant through awards under the plan, except (1) no deduction is permitted in connection with incentive stock options if the participant holds the shares acquired upon exercise for the required holding periods; and (2) deductions for some awards could be limited under the $1.0 million deductibility cap of Section 162(m) of the Internal Revenue Code. This limitation, however, should not apply to awards granted under the plan during a grace period of approximately three years following this offering, and should not apply to certain options, stock appreciation rights and performance-based awards granted thereafter if we comply with certain requirements under Section 162(m).
STOCK PURCHASE PLAN
In November 1999, our board of directors and stockholder approved the adoption of our Stock Purchase Plan. The Stock Purchase Plan will permit our eligible employees to purchase shares of our common stock at a discount. Employees who elect to participate will have amounts withheld through payroll deductions during purchase periods. At the end of each purchase period, accumulated payroll deductions will be used to purchase stock at a price determined by the administrative committee that administers the Stock Purchase Plan, but which will not be less than 85% of the lower of the market price at the beginning of the purchase period or the end of the purchase period, including interim dates, as may be determined by the administrative committee. Our Class A common stock that is purchased under the Stock Purchase Plan may be subject to a holding period. We have reserved 425,000 shares of our Class A common stock for issuance under the Stock Purchase Plan.
The Stock Purchase Plan will remain in effect until terminated by our board or until no shares of our Class A common stock are available for issuance under the Stock Purchase Plan. The Stock Purchase Plan may be amended by our board without the consent of our stockholders, except that any amendment, although effective when made, will be subject to stockholder approval if required by any federal or state law or regulation or by the rules of any stock exchange or automated quotation system on which our common stock may then be listed or quoted.
The Stock Purchase Plan is intended to qualify under Section 423 of the Internal Revenue Code, and as such, we will not be entitled to any tax deduction where a participant holds the purchased shares for the longer of two years from the beginning of the purchase period, or one year from the end of the purchase period.
THE FORMATION TRANSACTIONS
Concurrently with this offering, Cantor is contributing to us, and we are acquiring from Cantor, substantially all of our assets. These assets primarily consist of proprietary software, network distribution systems, technologies and related contractual rights that comprise our eSPEED (SM) system. In exchange for these assets, we are issuing to Cantor 43,999,900 shares of our Class B common stock, representing approximately 98% of the voting power of our outstanding capital stock after this offering. Cantor has elected to convert 2,500,000 of these shares into shares of the Class A common stock which it is offering hereby.
Cantor conceived of and has been developing systems to promote fully electronic marketplaces since the early 1990's. Since 1996, Cantor has invested more than $200 million in information technology, which culminated in the development of our eSPEED (SM) system. Cantor's technology initiatives during this period included software development, infrastructure and maintenance associated with operating Cantor's entire global securities business. The evolutionary process which led to the development of the eSPEED (SM) system was a combination of the development of Cantor's brokerage, trading, clearance, settlement, analytical pricing and related systems and was impacted by the continual improvement in computer processing and the changing trading environment. Accordingly, it is difficult to separately quantify development or other systems costs associated with the ultimate development of the eSPEED (SM) system as it emanated in part from all of the information technology initiatives of Cantor.
Since January 1996, Cantor has used the eSPEED (SM) system internally to conduct electronic trading. In March 1999, the first fully electronic transaction using the eSPEED (SM) system was executed by a client.
Cantor has previously entered into contractual agreements or other arrangements with many of the participants that trade in our electronic marketplaces. These agreements and arrangements provide the general terms and conditions, including those relating to warranties and allocations of liability, under which those participants may electronically execute trades in our marketplaces; none of these participants are obligated to use our marketplaces under these agreements. We either have, or will have upon the closing of this offering, the rights and obligations under many of these agreements and arrangements as they relate to operating our eSPEED (SM) system. Certain of our subsidiaries have been registered as broker-dealers with the National Association of Securities Dealers, Inc. and the regulatory authorities of various states. We also intend to obtain any foreign regulatory approvals for our foreign subsidiaries that are necessary or advisable. As we receive the regulatory approvals and licenses necessary to operate our electronic marketplaces globally and increase client awareness of our electronic marketplaces, we intend to enter directly into tri-party agreements and other arrangements with clients and Cantor. We assist market participants, including Cantor, in participating in the electronic marketplaces that are created and supported by our eSPEED (SM) system. We share with Cantor a portion of the transaction-based revenues paid by market participants for transactions effected through our electronic marketplaces or which are otherwise electronically assisted. Cantor and many of the largest financial institutions in the world are currently our primary clients.
Following this offering, Cantor will continue to operate its equity dealing business, money market and securities lending business, matched book repurchase agreement business, investment advisory business and other specified businesses, including those in which Cantor acts as a dealer. These businesses are carried out in over 10 locations around the world. We will not share in any revenues generated by these businesses, other than service fees we may become entitled to receive in connection with hardware maintenance and other systems support development services we may provide to Cantor. Following this offering, Cantor will also continue to provide voice brokerage services, clearance, settlement and fulfillment services and other related services in connection with our electronic marketplaces. Accordingly, upon conversion of Cantor's marketplaces to our eSpeed platform, orders for financial instruments will continue to be received and executed by Cantor brokers over the telephone, and this method of order entry by Cantor into our electronic trading platform is contemplated to continue for the foreseeable future. It is anticipated that a significant percentage of orders and revenues will continue to be recorded by Cantor, and a sharing of commissions (as described below under "Joint Services Agreement") with us will occur. Since it is not possible to predict the level of acceptance by clients, and individual traders located within each client, of fully electronic order entry
processing, we anticipate that each marketplace product will experience widely varying direct electronic usage rates by clients and their trading personnel.
We entered into the agreements described below in connection with the formation transactions and to help define the terms of our relationship with Cantor in the future. In an effort to mitigate conflicts of interest between us and Cantor, we and Cantor have agreed that none of these agreements may be amended without the approval of a majority of our disinterested directors.
ASSIGNMENT AND ASSUMPTION AGREEMENTS
We have entered into Assignment and Assumption Agreements with Cantor pursuant to which Cantor is contributing to us rights and interests in the assets and contractual and other arrangements which comprise our eSPEED (SM) system. In consideration for the contribution of these assets, rights and interests, we will issue to Cantor shares of our Class B common stock representing approximately 100% of the outstanding shares of our capital stock prior to this offering and we will assume certain liabilities relating to the assets which Cantor is contributing to us. These liabilities include accrued compensation and benefits and other accrued liabilities. Under the terms of the Assignment and Assumption Agreements, Cantor has agreed to indemnify us with respect to liabilities and losses we suffer which result from the operation of, and events relating to, the assets transferred to us prior to and in connection with their transfer, except that we will assume the defense of and indemnify Cantor with respect to any liabilities arising out of the patent litigation involving Liberty Brokerage. We have agreed to indemnify Cantor with respect to liabilities and losses which they suffer which result from our ownership and operation of these assets.
JOINT SERVICES AGREEMENT
We have entered into a Joint Services Agreement with Cantor under which we and Cantor have agreed to collaborate to provide brokerage and related services to clients in multiple electronic markets for transactions in securities and other financial products. In addition, we may in our discretion collaborate on non-financial products. This agreement will be effective upon completing the formation transactions and provides for a perpetual term. Under the agreement, we will own and operate the electronic trading systems and will be responsible for providing electronic brokerage services, and Cantor will provide voice-assisted brokerage services, clearance, settlement and fulfillment services and related services, such as credit and risk management services, oversight of client suitability and regulatory compliance, sales positioning of products and other services customary to brokerage operations.
All information and data (other than information relating to bids, offers or trades or other information that is input into, created by or otherwise resides on an electronic trading system for financial products) created, developed, used in connection with or relating to the operation of and effecting of transactions in any marketplace will be the sole property of Cantor or us, as applicable, on the following basis: (1) if the data relate to financial products, the data belong solely to Cantor, (2) if the data relate to a collaborative marketplace in which only products that are non-financial products are traded, the ownership of the data will be determined by Cantor and us on a case-by-case basis through good faith negotiations, (3) if the data relate to a marketplace in which we do not collaborate with Cantor but in which we provide electronic brokerage services and only non-financial products are traded, the data belong solely to us and (4) if the data relate to a non-collaborative marketplace that is not a marketplace in which we provide electronic brokerage services and in which financial products are traded, the data belong solely to Cantor. All right, title and interest in the data relating to bids, offers or trades or other information that is input into, created by or otherwise resides on an electronic trading system for financial products belong to Cantor. We have the right to use such data only in connection with the execution of transactions in such markets.
Commission Sharing Arrangement
Under this agreement, we and Cantor have agreed to share revenues derived from transactions effected in the marketplaces in which we collaborate and other specified markets. We have agreed to collaborate with Cantor to determine the amount of commissions to be charged to clients that effect transactions in these marketplaces; however, in the event we are unable to agree with Cantor with respect to a transaction pricing decision, Cantor is entitled to make the final pricing decision with respect to transactions for which Cantor provides voice-assisted brokerage services and we are entitled to make the final pricing decision with respect to transactions that are fully electronic. We may not make a final transaction pricing decision that results in
the share of transaction revenues received by Cantor being less than Cantor's actual cost of providing clearance, settlement and fulfillment services and other transaction services. In some cases we will receive the aggregate transaction revenues and pay a service fee to Cantor. In other cases Cantor will receive the aggregate transaction revenues and pay a service fee to us. The amount of the service fee and the portion of the transaction revenues that we and Cantor receive is based on several factors, including whether: (1) the marketplace is one in which we collaborate with Cantor; (2) the transaction is fully electronic or Cantor provides voice-assisted brokerage services; (3) the product traded is a financial product; and (4) the product is traded on the CANTOR EXCHANGE (SM). Generally, we share revenues as follows:
FULLY ELECTRONIC TRANSACTIONS IN COLLABORATIVE MARKETPLACES. If a transaction is fully electronic and is effected in a marketplace in which we collaborate with Cantor, we will receive the aggregate transaction revenues and pay to Cantor a service fee equal to:
o 35% of the transaction revenues, if the product is a financial product that is not traded on the CANTOR EXCHANGE (SM);
o 20% of the transaction revenues, if the product is traded on the CANTOR EXCHANGE (SM); and
o an amount determined on a case-by-case basis, if the product is not a financial product and is not traded on the CANTOR EXCHANGE (SM).
VOICE-ASSISTED TRANSACTIONS IN COLLABORATIVE MARKETPLACES. If Cantor provides voice-assisted brokerage services with respect to a transaction that is effected in a marketplace in which we collaborate with Cantor:
o Cantor will receive the aggregate transaction revenues and pay to us a service fee equal to 7% of the transaction revenues, if the product is a financial product that is not traded on the CANTOR EXCHANGE (SM);
o we will receive the aggregate transaction revenues and pay to Cantor a service fee equal to 55% of the transaction revenues, if the product is traded on the CANTOR EXCHANGE (SM); and
o we will receive an amount determined on a case-by-case basis, if the product is not a financial product and is not traded on the CANTOR EXCHANGE (SM).
NON-COLLABORATIVE MARKETPLACES INVOLVING ELECTRONIC BROKERAGE SERVICES. If a transaction is effected in a marketplace in which we do not collaborate with Cantor:
o Cantor will receive the aggregate transaction revenues and pay to us a service fee equal to 30% of the portion of the transaction revenues we would have received had we collaborated with Cantor, if Cantor either itself or through a third party provides electronic brokerage services in that marketplace;
o we will receive the aggregate transaction revenues and pay to Cantor a service fee equal to 20% of the transaction revenues, if the product is a financial product and we provide electronic brokerage services; and
o we will receive 100% of the transaction revenues and will not pay Cantor a service fee, if the product is not a financial product and we provide electronic brokerage service.
ELECTRONICALLY ASSISTED TRANSACTIONS IN NON-ELECTRONIC MARKETPLACES. If a transaction is not effected in an electronic marketplace, but is electronically assisted, such as a screen assisted open outcry transaction, we will receive 2.5% of the transaction revenues.
In the event that Cantor's direct costs payable to third parties for providing clearance, settlement and fulfillment services with respect to a transaction in a collaborative marketplace with respect to any financial product for any month exceed the direct costs incurred by Cantor to clear and settle a cash transaction in United States Treasury securities for such month, the cost of the excess is borne pro rata by Cantor and us in the same proportion as the transaction revenues and service fees for such transaction are to be shared.
In the event that a client does not pay, or pays only a portion of, the transaction revenues relating to a transaction, then we and Cantor each bear our respective share of the loss based on the percentage of the transaction revenues we would otherwise have been entitled to receive with respect to such transaction.
System Services
We have also agreed to provide to Cantor technology support services,
including (1) systems administration, (2) internal network support, (3) support
and procurement for desktops of end-user equipment, (4) operations and disaster
recovery services, (5) voice and data communications, (6) support and
development of systems for clearance, settlement and fulfillment services,
(7) systems support for Cantor brokers, (8) electronic applications systems and
network support and development for the unrelated dealer businesses with respect
to which we will not collaborate with Cantor and (9) provision and/or
implementation of existing electronic applications systems, including
improvements and upgrades thereto, and use of the related intellectual property
rights, having potential application in a gaming business. Cantor will pay to us
an amount equal to the direct and indirect costs, including overhead, that we
incur in performing these services. We will not receive service fees or
otherwise be entitled to share in transaction revenues relating to the system
services that we provide to Cantor for unrelated dealer businesses. We have
agreed not to use confidential information, including business plans and
software, obtained from or used by Cantor in connection with the provision of
these services to parties other than Cantor. For the purposes of the Joint
Services Agreement, an unrelated dealer business means (1) Cantor's equity
businesses as they exist from time to time, (2) Cantor's money market
instruments and securities lending division, as they exist from time to time,
(3) any business or portion thereof or activity in which Cantor acts as a dealer
or otherwise takes market risk or positions, including in the process of
executing matched principal transactions, providing the services of a specialist
or market maker or providing trading or arbitrage operations, (4) activities
wherever located that would, if conducted in the United Kingdom, be subject to
the United Kingdom Gaming Act of 1963 or activities wherever located currently
or in the future involving betting, gambling, odds making, lotteries, gaming,
wagering, staking, drawing or casting losts and similar or related activites and
(5) any business not involving operating a marketplace.
Intellectual Property
Cantor has granted to us a license covering Cantor's patents and patent applications that relate to the eSPEED (SM) system. The license is perpetual, irrevocable, world-wide and royalty free and is exclusive, except in the event that (1) we are unwilling to provide to Cantor any requested services covered by the patents with respect to a marketplace and Cantor elects not to require us to do so, or we are unable to provide such services or (2) we do not exercise our right of first refusal to provide to Cantor electronic brokerage services with respect to a marketplace, in which events Cantor will have a limited right to use the patents and patent applications solely in connection with the operation of that marketplace. Cantor will cooperate with us, at our expense, in any attempt by us to prevent any third party infringement of our patent rights under the license.
Cantor has also granted to us a non-exclusive, perpetual, irrevocable worldwide, royalty-free right and license to use the trademarks "Cantor Exchange," "Interactive Matching" and "CX".
Non-competition and Market Opportunity Provisions
The Joint Services Agreement imposes the following performance obligations on us and restricts our ability to compete with Cantor and Cantor's ability to compete with us in the following circumstances:
o If Cantor wishes to create a new financial product marketplace, Cantor may require us to provide electronic brokerage services with respect to that marketplace. We must use our commercially reasonable efforts to develop an electronic trading system for that marketplace within a specified time period. If, after diligent effort, we are unable to do so, we have no liability to Cantor for our failure and Cantor may create and operate the marketplace in any manner that Cantor deems to be acceptable. Cantor's proposal to create a new marketplace must be commercially reasonable and Cantor must diligently pursue the development of the marketplace and cause the new marketplace to become operational within a specified time period.
o If Cantor wishes to create a new financial product marketplace and Cantor does not require us to develop an electronic trading system for that marketplace as described in the preceding paragraph, Cantor must, in any event, notify us of its intention to create the new marketplace. We will have a right of first refusal to provide electronic brokerage services with respect to that marketplace. We must use commercially reasonable efforts to develop and put into operation an electronic trading system for the marketplace within a specified time period. If we are able to do so, transactions in the marketplace
will be subject to the revenue sharing arrangements described above. If we are unable to do so, or we elect not to provide electronic brokerage services with respect to the new marketplace, Cantor may provide or otherwise obtain electronic brokerage services for that marketplace in any manner that Cantor deems to be acceptable. Cantor's proposal to create a new marketplace must be commercially reasonable and Cantor must diligently pursue the development of the marketplace and cause the new marketplace to become operational within a specified time period.
o If Cantor wishes to create a new electronic marketplace for a product that is not a financial product, Cantor must notify us of its intention to do so. We will have the opportunity to offer to provide the electronic brokerage services with respect to the new marketplace. If Cantor rejects our offer, Cantor may operate the marketplace in any manner that Cantor deems to be acceptable.
o If we wish to create a new electronic marketplace for a financial product, we must notify Cantor of our intention to do so. Cantor will have a right of first refusal to provide the applicable voice-assisted brokerage services, clearance, settlement and fulfillment services and/or related services for that marketplace. If Cantor (1) elects not to provide such services or (2) fails to notify us within a specified time period that it will provide such services, we may provide or otherwise obtain those services for that marketplace in any manner that we deem to be acceptable.
o If we wish to create a new electronic marketplace for a product that is not a financial product, we must notify Cantor of our intention to do so. Cantor will have the opportunity to offer to provide the applicable voice-assisted brokerage services, clearance, settlement and fulfillment services and/or related services for that marketplace. If we reject Cantor's offer, we may create and operate the marketplace in any manner that we deem to be acceptable.
o Subject to the exceptions described below, we may not directly or indirectly: (1) engage in any activities competitive with a business activity conducted by Cantor now or in the future; or (2) provide or assist any other person in providing voice-assisted brokerage services, clearance, settlement and fulfillment services and/or related services. We are permitted to engage in these activities:
o in collaboration with Cantor;
o with respect to a new marketplace involving a financial product, after Cantor has indicated that it is unable or unwilling to provide such voice-assisted brokerage services, clearance, settlement and fulfillment services and/or related services with respect to that marketplace;
o with respect to a new marketplace involving a product that is not a financial product, after having considered in good faith any proposal submitted by Cantor relating to the provision of those services; or
o with respect to an unrelated dealer business in which we develop and operate a fully electronic marketplace.
o Subject to the exceptions described below, Cantor may not directly or indirectly provide or assist any other person in providing electronic brokerage services. Cantor is permitted to engage in these activities:
o in collaboration with us;
o with respect to a new marketplace, after (1) we have indicated that we are unable to develop an electronic trading system for that new marketplace within a specified time period or (2) we have declined to exercise our right of first refusal or have exercised our right of first refusal but are unable to develop an electronic trading system within a specified time period.
o The unrelated dealer businesses retained by Cantor are expressly excluded from our rights of first refusal and the restrictions on Cantor's ability to compete with us. However, we may create fully electronic marketplaces in unrelated dealer businesses.
We and Cantor are entitled to pursue and may enter into alliance opportunities, including strategic alliances, joint ventures, partnerships or similar arrangements, with third parties and consummate business combinations with third parties on the following basis only. If an alliance opportunity (1) relates to a person that directly or indirectly provides voice-assisted brokerage services and engages in business operations that do not involve electronic brokerage services, then Cantor is entitled to pursue and consummate a transaction
with respect to that alliance opportunity, (2) relates to a person that directly or indirectly provides electronic brokerage services and engages in business operations that do not involve any voice-assisted brokerage service, then we are entitled to pursue and consummate a transaction with respect to that alliance opportunity or (3) is an alliance opportunity with respect to a person other than those described in clauses (1) and (2) above, then we and Cantor will cooperate to jointly pursue and consummate a transaction with respect to such alliance opportunity on mutually agreeable terms. A business combination includes a transaction initiated by and in which either we or Cantor is/are the acquiror involving (A) a merger, consolidation, amalgamation or combination, (B) any sale, dividend, split or other disposition of any capital stock or other equity interests (or securities convertible into or exchangeable for or options or warrants to purchase any capital stock or other equity equivalents) of the person, (C) any tender offer (including without limitation of a self-tender), exchange offer, recapitalization, dissolution or similar transaction, (D) any sale, dividend or other disposition of a significant portion of the assets and properties of the person (even if less than all or substantially all of such assets or properties), and (E) entering into any agreement or understanding, or the granting of any rights or options, with respect to any of the foregoing.
ADMINISTRATIVE SERVICES AGREEMENT
We have entered into an Administrative Services Agreement with Cantor that states the terms under which Cantor will provide certain administrative and management services to us. Cantor will make available to us some of its administrative and other staff, including its internal audit, treasury, legal, tax, human resources, corporate development and accounting staffs. Members of these staffs will arrange for our insurance coverage and will provide a wide array of services, including administration of our personnel and payroll operations, benefits administration, internal audits, facilities management, promotional sales and marketing, legal, risk management, accounting and tax preparation and other services. We will reimburse Cantor for the actual costs incurred by Cantor, plus other reasonable costs, including reasonably allocated overhead and any applicable taxes. We have also entered into arrangements with Cantor under which we have the right to use certain assets, principally computer equipment, from Cantor relating to the operation of our eSPEED (SM) system. These assets are subject to operating leases with third party leasing companies. Under this provision of the Administrative Services Agreement, we have agreed to be bound by the general terms and conditions of the operating leases relating to the assets used by us. See Note 5 of the Notes to the Consolidated Financial Statements. Under the Administrative Services Agreement, we will provide sales, marketing and public relations services to Cantor. Cantor will reimburse us for the actual costs incurred by us, plus other reasonable costs, including reasonably allocated overhead. The Administrative Services Agreement has a three-year term which will renew automatically for successive one-year terms unless canceled by either us or Cantor upon six months' prior notice; provided, however, that our right to use our New York space expires at the time that Cantor's lease expires in 2006 and our right to use our London office space expires at the earlier of (1) the time Cantor's lease expires in 2016 or (2) until Cantor ceases to be an affiliate of ours and Cantor asks us to vacate.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Registration Rights Agreement to be entered into by Cantor and us, Cantor is to receive piggyback and demand registration rights.
The piggyback registration rights allow Cantor to register the shares of Class A common stock issued or issuable to it in connection with the conversion of its Class B common stock whenever we propose to register any shares of Class A common stock for our own or another's account under the Securities Act for a public offering, other than:
o any shelf registration of shares of Class A common stock to be used as consideration for acquisitions of additional businesses; and
o registrations relating to employee benefit plans.
Cantor will also have the right, on three occasions, to require that we register under the Securities Act any or all of the shares of Class A common stock issued or issuable to it in connection with the conversion of its Class B common stock. No more than one of these registrations may be demanded within the first year after the closing of this offering. The demand and piggyback registration rights apply to Cantor and to any transferee of shares held by Cantor who agrees to be bound by the terms of the Registration Rights
Agreement. The ability of Cantor to exercise its registration rights for the period of 180 days after this offering will be restricted by the lock-up agreements described under "Shares Eligible for Future Sale."
We have agreed to pay all costs of one demand and all piggyback
registrations, other than underwriting discounts and commissions. All of these
registration rights are subject to conditions and limitations, including
(1) the right of underwriters of an offering to limit the number of shares
included in that registration; (2) our right not to effect any demand
registration within six months of a public offering of our securities, including
this offering; and (3) that Cantor agrees to refrain from selling its shares
during the period from 15 days prior to and 90 days after the effective date of
any registration statement for the offering of our securities.
POTENTIAL CONFLICTS OF INTEREST AND COMPETITION WITH CANTOR
Various conflicts of interest between us and Cantor may arise in the future in a number of areas relating to our past and ongoing relationships, including potential acquisitions of businesses or properties, the election of new directors, payment of dividends, incurrence of indebtedness, tax matters, financial commitments, marketing functions, indemnity arrangements, service arrangements, issuances of our capital stock, sales or distributions by Cantor of its shares of our common stock and the exercise by Cantor of control over our management and affairs. A majority of our directors and officers following this offering also serve as directors and/or officers of Cantor. Simultaneous service as an eSpeed director or officer and service as a director or officer, or status as a partner, of Cantor could create or appear to create potential conflicts of interest when such directors, officers and/or partners are faced with decisions that could have different implications for us and for Cantor. Mr. Lutnick, our Chairman and Chief Executive Officer, is the sole stockholder of the managing general partner of Cantor. As a result, Mr. Lutnick controls Cantor. Upon completion of this offering, Cantor will own all of the outstanding shares of our Class B common stock, representing approximately 98% of the combined voting power of all classes of our voting stock. Mr. Lutnick's simultaneous service as our Chairman and Chief Executive Officer and his control of Cantor could create or appear to create potential conflicts of interest when Mr. Lutnick is faced with decisions that could have different implications for us and for Cantor.
Our relationship with Cantor may result in agreements that are not the result of arm's length negotiations. As a result, the prices charged to us or by us for services provided under agreements with Cantor may be higher or lower than prices that may be charged by third parties and the terms of these agreements may be more or less favorable to us than those that we could have negotiated with third parties. However, we intend that transactions between us and Cantor and/or its other affiliates will be subject to the approval of a majority of our independent directors.
In addition, Cantor can compete with us under certain circumstances. See "--Joint Services Agreement--Non-competition Provisions."
CONSULTING SERVICES
For consulting services provided to us and Cantor by Martin J. Wygod in connection with this offering, we expect to issue to Martin J. Wygod or his designees warrants to purchase an aggregate number of shares of our Class A common stock equal to 1.5% of the aggregate number of shares of Class A common stock offered by this prospectus (excluding any shares purchased pursuant to the underwriters' over-allotment option). We anticipate that each of the warrants will have a five-year term and will be exercisable commencing on the first anniversary of the date of issuance at a price per share equal to the initial public offering price. We expect that the warrants will not be transferable, other than to charities and trusts established for the benefit of Mr. Wygod's children and grandchildren.
We intend to grant Mr. Wygod piggyback and demand registrations rights in connection with the warrants. The piggyback registration rights will allow Mr. Wygod to have registered the shares of Class A common stock issued or issuable upon exercise of the warrants and will be substantially similar to the piggyback registration rights to be granted to Cantor. Mr. Wygod will also have the right, on one occasion, to require that we register under the Securities Act, a minimum of 75% of the aggregate number of shares of Class A common stock underlying the warrants. The demand registration right is only available when we are eligible to use Form S-3 to register the shares.
The following table sets forth certain information regarding the beneficial ownership of our common stock as of the date of this prospectus and after giving effect to this offering by:
o each person or entity that we know beneficially owns more than 5% of our common stock;
o each of our directors and director nominees;
o each of our executive officers;
o all of our current directors, director nominees and executive officers as a group; and
o the selling stockholder.
NUMBER OF SHARES PERCENTAGE OF COMMON STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED
---------------------------------------------- ----------------------------------------
PRIOR TO OFFERING AFTER OFFERING PRIOR TO OFFERING AFTER OFFERING(3)
NAME OF BENEFICIAL ------------------ ------------------------ ------------------ ------------------
OWNER(1)(2) CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
---------------------------- ------- ------- ---------- ---------- ------- ------- ------- -------
Howard W. Lutnick(4)........ 100 100 41,500,000(6) 41,500,000(6) 100% 100% 83% 100%
Frederick T. Varacchi....... -- -- -- -- -- -- -- --
Douglas B. Gardner.......... -- -- -- -- -- -- -- --
Kevin C. Piccoli............ -- -- -- -- -- -- -- --
Stephen M. Merkel........... -- -- -- -- -- -- -- --
Richard C. Breeden.......... -- -- -- -- -- -- -- --
Larry R. Carter............. -- -- -- -- -- -- -- --
William J. Moran............ -- -- -- -- -- -- -- --
Joseph P. Shea.............. -- -- -- -- -- -- -- --
All directors, director
nominees and executive
officers as a group
(9 persons)(5)............ 100 100 41,500,000 41,500,000 100% 100% 83% 100%
SELLING STOCKHOLDER
----------------------------
Cantor Fitzgerald
Securities................ 100 100 41,500,000(6) 41,500,000(6) 100% 100% 83% 100%
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(1) The address of each holder of more than five percent of our common stock listed above is One World Trade Center, New York, NY 10048.
(2) Unless otherwise indicated, we believe that the persons named in this table have sole voting and investment power with respect to the shares of common stock shown. The amounts and percentages are based upon 100 shares of common stock outstanding as of November 1, 1999. Shares of Class B common stock are convertible into shares of Class A common stock at any time in the discretion of the holder on a one-for-one basis. Accordingly, a holder of shares of Class B common stock is deemed to be the beneficial owner of an equal number of shares of Class A common stock for purposes of this table.
(3) Assumes no exercise of the underwriters' over-allotment option.
(4) Includes shares of Class B common stock that are owned by Cantor Fitzgerald Securities, of which Cantor Fitzgerald, L.P. is the managing partner. CF Group Management, Inc. is the Managing General Partner of Cantor Fitzgerald, L.P. and Mr. Lutnick is the President and sole stockholder of CF Group Management, Inc.
(5) Includes shares of Class B common stock that are owned by Cantor Fitzgerald Securities.
(6) Includes shares of Class B common stock owned of record by Cantor Fitzgerald, L.P., the managing partner of Cantor Fitzgerald Securities.
Cantor currently intends, at some point after the one-year period following the completion of this offering, to distribute to its limited partners a portion of the shares of Class B common stock owned by Cantor. In the event of any such distribution, these shares would convert to shares of Class A common stock. The terms on which such distribution, if any, may be made have not yet been determined.
__________________________DESCRIPTION OF CAPITAL STOCK__________________________
GENERAL
Following the completion of this offering, our authorized capital stock
will consist of 200,000,000 shares of Class A common stock, $.01 par value,
100,000,000 shares of Class B common stock, $.01 par value, and 50,000,000
shares of preferred stock, $.01 par value. Upon completion of this offering
(1) we will have 8,500,000 shares of Class A common stock and 41,500,000 shares
of Class B common stock outstanding; and (2) we will have outstanding options to
purchase 7,500,000 shares of Class A common stock.
The following summary of the terms and provisions of our capital stock does not purport to be complete. You should refer to our Amended and Restated Certificate of Incorporation and our By-Laws, and to applicable law, for a complete description of the terms and provisions of our capital stock.
COMMON STOCK
The holders of Class A common stock and Class B common stock have identical voting rights except that holders of Class A common stock are entitled to one vote per share while holders of Class B common stock are entitled to 10 votes per share on all matters to be voted on by stockholders. Holders of shares of Class A common stock and Class B common stock are not entitled to cumulate their votes in the election of directors. Generally, all matters to be voted on by stockholders must be approved by a majority or, in the case of election of directors, by a plurality of the votes entitled to be cast by holders of all shares of Class A common stock and Class B common stock present in person or represented by proxy, voting together as a single class, subject to any voting rights granted to holders of any preferred stock. Amendments to our Amended and Restated Certificate of Incorporation that would nevertheless change the powers, preferences or special rights of the Class A common stock or the Class B common stock so as to affect them adversely also must be approved by a majority of the votes entitled to be cast by the holders of the shares affected by the amendment, voting as a separate class. Any amendment to our Amended and Restated Certificate of Incorporation to increase the authorized shares of any Class A common stock will be deemed not to affect adversely the powers, preferences or special rights of the Class A common stock. However, any amendment to our Amended and Restated Certificate of Incorporation to increase the authorized shares of Class B common stock or to amend, alter, change or repeal the rights of Class B common stock must be approved by a majority of the voting power of all of the outstanding shares of Class B common stock. The holders of Class A common stock and Class B common stock are entitled to such dividends as may be declared in the discretion of our board of directors out of legally available funds, subject to the preferential dividend rights of any shares of preferred stock. Holders of Class A common stock and Class B common stock have no preemptive rights to purchase shares of our stock. Our Amended and Restated Certificate of Incorporation provides that each share of Class B common stock is convertible at any time, at the option of the holder, into one share of Class A common stock. Each share of Class B common stock will automatically convert into a share of Class A common stock upon any sale, pledge or other transfer (a Transfer), whether or not for value, by the initial registered holder, other than any Transfer by the initial holder to (1) Cantor Fitzgerald, L.P., (2) any entity controlled by Cantor Fitzgerald, L.P. or by Howard Lutnick and (3) Howard Lutnick, his spouse, his estate, any of his descendants, any of his relatives, or any trust established for his benefit or for the benefit of his spouse, any of his descendants or any of his relatives. Notwithstanding anything to the contrary set forth herein, any holder of Class B common stock may pledge his, her or its shares of Class B common stock to a pledgee pursuant to a bona fide pledge of the shares as collateral security for indebtedness due to the pledgee so long as the shares are not transferred to or registered in the name of the pledgee. In the event of any pledge meeting these requirements, the pledged shares will not be converted automatically into shares of Class A common stock. If the pledged shares of Class B common stock become subject to any foreclosure, realization or other similar action by the pledgee, they will be converted automatically into shares of Class A common stock upon the occurrence of that action. The automatic conversion provisions in our Amended and Restated Certificate of Incorporation may not be amended, altered, changed or repealed without the approval of the holders of a majority of the voting power of all outstanding shares of Class A common stock.
Shares of Class A common stock and Class B common stock are not subject to any redemption provisions and shares of Class A common stock are not convertible into any other securities. All outstanding
shares of Class A common stock and Class B common stock are fully paid and nonassessable. The shares of our Class A common stock we will sell in this offering will also be fully paid and nonassessable when we receive payment for the shares.
PREFERRED STOCK
Our Amended and Restated Certificate of Incorporation provides for 50,000,000 authorized shares of preferred stock, of which none are outstanding. The existence of authorized but unissued preferred stock may enable our board of directors to render more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise. For example, if in the due exercise of its fiduciary obligations, our board of directors were to determine that a takeover proposal is not in our best interests, our board of directors could cause shares of preferred stock to be issued without stockholder approval in one or more private offerings or other transactions that might dilute the voting or other rights of the proposed acquiror or insurgent stockholder group. In this regard, the Amended and Restated Certificate of Incorporation grants our board of directors broad power to establish the rights and preferences of authorized and unissued preferred stock. The issuance of shares of preferred stock pursuant to our board of directors' authority described above could decrease the amount of earnings and assets available for distribution to holders of shares of common stock and adversely affect the rights and powers, including voting rights, of these holders and may have the effect of delaying, deterring or preventing a change in control of our company. Our board of directors currently does not intend to seek stockholder approval prior to any issuance of preferred stock, unless otherwise required by law.
WARRANTS
Upon completion of this offering, we expect to issue warrants representing the right to acquire up to 127,500 shares of Class A common stock at the initial public offering price per share. See "Relationship with Cantor--Consulting Services."
LIMITATION ON DIRECTORS' LIABILITIES
Our Amended and Restated Certificate of Incorporation limits, to the maximum extent permitted under Delaware law, the personal liability of directors and officers for monetary damages for breach of their fiduciary duties as directors and officers, except in certain circumstances involving certain wrongful acts, such as a breach of the director's duty of loyalty or acts of omission which involve intentional misconduct or a knowing violation of law.
Section 145 of the Delaware General Corporation Law permits us to indemnify officers, directors or employees against expenses, including attorney's fees, judgments, fines and amounts paid in settlement in connection with legal proceedings if the officer, director or employee acted in good faith and in a manner reasonably believed to be in or not opposed to our best interests and, with respect to any criminal act or proceeding, if he or she had no reasonable cause to believe his or her conduct was unlawful. Indemnification is not permitted as to any matter as to which the person is adjudged to be liable unless, and only to the extent that, the court in which such action or suit was brought upon application determines that, despite the adjudication of liability, but in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper. Individuals who successfully defend such an action are entitled to indemnification against expenses reasonably incurred in connection with the action.
Our Amended and Restated By-Laws require us to indemnify directors and officers against, to the fullest extent permitted by law, liabilities which they may incur under the circumstances described in the preceding paragraph.
We plan to maintain standard policies of insurance under which coverage is provided (1) to our directors and officers against loss arising from claims made by reason of breach of duty or other wrongful act and (2) to us with respect to payments which may be made by us to such officers and directors pursuant to the above indemnification provision or otherwise as a matter of law.
ANTI-TAKEOVER PROVISIONS
GENERAL
Certain provisions of the Delaware General Corporation Law and our Amended and Restated Certificate of Incorporation and our Amended and Restated By-Laws may delay, discourage or prevent a change in control of our company unless the takeover or change in control is approved by our board of directors. These provisions also may render the removal of directors and management more difficult. These provisions may discourage bids for our common stock at a premium over the market price and may adversely affect the market price and voting and other rights of the holders of our common stock.
CERTIFICATE OF INCORPORATION AND BY-LAWS
Our Amended and Restated Certificate of Incorporation provides that stockholders may act only at an annual or special meeting of stockholders and may not act by written consent, other than by unanimous written consent. Our Amended and Restated By-Laws provide that special meetings of stockholders may be called only by the Chairman of our board of directors, or in the event the Chairman of our board is unavailable, the Vice Chairman acting jointly with the President. Our Amended and Restated By-Laws require advance written notice prior to a meeting of stockholders of a proposal or director nomination which a stockholder desires to present at such a meeting, which generally must be received by our Secretary not later than 120 days prior to the first anniversary of the date of our proxy statement for the preceding year's annual meeting. In addition, our Amended and Restated Certificate of Incorporation permits us to issue additional shares of Class B common stock or "blank check" preferred stock.
All amendments to our Amended and Restated By-Laws must be approved by either the holders of a majority of the voting power of all outstanding capital stock entitled to vote or by a majority of our board of directors.
These provisions reduce our vulnerability to an unsolicited acquisition proposal and discourage certain tactics that may be used in proxy fights. However, these provisions could have the effect of discouraging others from making tender offers for shares of our common stock and, as a consequence, they also may inhibit fluctuations in the market price of our common stock that could result from actual or rumored takeover attempts. These provisions also may have the effect of preventing changes in our management.
DELAWARE ANTI-TAKEOVER LAW
We are subject to Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years following the date the person became an interested stockholder, unless the "business combination" or the transaction in which the person became an "interested stockholder" is approved in a prescribed manner. Generally, a "business combination" includes a merger, asset or stock sale or other transaction resulting in a financial benefit to the "interested stockholder." An "interested stockholder" is a person who, together with affiliates and associates, owns 15% or more of a corporation's outstanding voting stock, or was the owner of 15% or more of a corporation's outstanding voting stock at any time within the prior three years, other than "interested stockholders" prior to the time our common stock is quoted on Nasdaq. The existence of this provision would be expected to have an anti-takeover effect with respect to transactions not approved in advance by our board of directors, including discouraging takeover attempts that might result in a premium over the market price for the shares of our common stock held by stockholders.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the common stock is American Stock Transfer & Trust Company.
_________________________SHARES ELIGIBLE FOR FUTURE SALE________________________
Upon completion of this offering, we will have 8,500,000 outstanding shares of Class A common stock and 41,500,000 shares of Class B common stock. The 8,500,000 shares sold in this offering will be freely tradable without restriction under the Securities Act except for any shares purchased by our affiliates. The remaining 41,500,000 shares of Class B common stock held by existing stockholders are "restricted securities" as that term is defined in Rule 144.
These restricted shares will become eligible for sale in the public market, subject to the volume limitations under Rule 144 as described below, from time to time following this offering, commencing in September 2000. All of these restricted shares are subject to the contractual restrictions on sale described below under the caption "Lock-up Agreements."
Rule 144 makes available an exemption from the registration requirements of the Securities Act. In general, under Rule 144, a person (or persons whose shares are aggregated) who owns shares that were acquired from the issuer or an affiliate of the issuer at least one year prior to the proposed sale will be entitled to sell in any three-month period a number of shares that does not exceed the greater of:
o 1% of the then outstanding shares of the Class A common stock (approximately 85,000 shares immediately after this offering); or
o the average weekly trading volume during the four calendar weeks preceding the date on which notice of the sale is filed with the Securities and Exchange Commission.
Sales pursuant to Rule 144 are subject to certain requirements relating to manner of sale, notice and availability of current public information about us. A person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of ours at any time during the 90 days immediately preceding the sale and who owns shares that were acquired from the issuer or an affiliate of the issuer at least two years prior to the proposed sale is entitled to sell such shares pursuant to Rule 144(k) without regard to the limitations described above.
There has been no public market for our Class A common stock prior to this offering and no assurance can be given that an active public market for our Class A common stock will develop or be sustained after completion of this offering. Sales of substantial amounts of Class A common stock, or the perception that these sales could occur, could adversely affect the prevailing market price of our Class A common stock and could impair our ability to raise capital or effect acquisitions through the issuance of our Class A common stock.
We plan to register an additional 5,000,000 shares of our Class A common stock under the Securities Act within 90 days after the closing of this offering for use by us as consideration for future acquisitions. Upon registration, these shares generally will be freely tradable after issuance, unless the resale thereof is contractually restricted or unless the holders thereof are subject to the restrictions on resale provided in Rule 145 under the Securities Act. Any registered shares so issued will be subject to contractual restrictions that will prevent the shares from being freely tradable during the 180 day period after the date of this prospectus.
After this offering, we intend to initially register 20% of the total outstanding shares of our common stock, or approximately 10,000,000 shares of Class A common stock, for issuance upon exercise of options granted under our stock option plan. If we increase our total outstanding shares of common stock, we will register additional shares of Class A common stock so that the stock available for issuance under our stock option plan will be registered. We also plan to register the 425,000 shares of Class A common stock issuable under our stock purchase plan. Once we register the shares issuable under these plans, they can be sold in the public market upon issuance, subject to restrictions under the securities laws applicable to resales by affiliates.
Cantor will have piggyback and demand registration rights to have registered the shares of Class A common stock issued or issuable to it in connection with the conversion of its Class B common stock and Martin Wygod will have piggyback and demand registration rights to have registered the shares of Class A common stock issued or issuable to him or his child's trust upon exercise of the warrants to be granted to him and the trust by us. See "Relationship with Cantor--Registration Rights Agreement" and "--Consulting Services."
LOCK-UP AGREEMENTS
We and our directors, executive officers and holders of our common stock and securities convertible into or exercisable or exchangeable for common stock issued prior to this offering or upon the consummation of the formation transactions have agreed pursuant to certain "lock-up" agreements with the underwriters that, subject to certain exceptions, we and they will not offer, sell, contract to sell, pledge, grant any option to sell, or otherwise dispose of, directly or indirectly, any shares of common stock or securities convertible into or exercisable or exchangeable for common stock for a period of 180 days after the date of this prospectus without the prior written consent of Warburg Dillon Read LLC. Warburg Dillon Read LLC, in its sole discretion, may release the shares subject to the lock-up agreements in whole or in part at any time with or without notice. However, Warburg Dillon Read LLC has no current plan to do so.
__________________________________UNDERWRITING__________________________________
The selling stockholder and we have entered into an underwriting agreement with the underwriters named below. Warburg Dillon Read LLC, Hambrecht and Quist LLC and Thomas Weisel Partners LLC are acting as representatives of the underwriters.
The underwriting agreement provides for the purchase of a specific number of shares of Class A common stock by each of the underwriters. The underwriters' obligations are several, which means that each underwriter is required to purchase a specified number of shares, but is not responsible for the commitment of any other underwriter to purchase shares. Subject to the terms and conditions of the underwriting agreement, each underwriter has severally agreed to purchase the number of shares of Class A common stock set forth opposite its name below.
NAME NUMBER OF SHARES
---------------------------------------------------------- ----------------
Warburg Dillon Read LLC...................................
Hambrecht and Quist LLC...................................
Thomas Weisel Partners LLC................................
Cantor Fitzgerald & Co....................................
----------
Total........................................... 8,500,000
----------
----------
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This is a firm commitment underwriting. This means that the underwriters have agreed to purchase all of the shares offered by this prospectus, other than those covered by the over-allotment option described below, if any are purchased. Under the underwriting agreement, if an underwriter defaults in its commitment to purchase shares, the commitments of non-defaulting underwriters may be increased or the underwriting agreement may be terminated, depending on the circumstances.
The representatives have advised us that the underwriters propose to offer the shares directly to the public at the public offering price that appears on the cover page of this prospectus. In addition, the representatives may offer some of the shares to certain securities dealers at such price less a concession of $ per share to certain other dealers. The underwriters may also allow to dealers, and such dealers may reallow, a concession not in excess of $0.10 per share to certain other dealers. After the shares are released for sale to the public, the representatives may change the offering price and other selling terms at various times.
We and the selling stockholder have granted the underwriters an over-allotment option. This option, which is exercisable for up to 30 days after the date of this prospectus, permits the underwriters to purchase a maximum of 1,275,000 additional shares of our Class A common stock to cover over-allotments. If the underwriters exercise all or part of this option, they will purchase shares covered by the option at the public offering price that appears on the cover page of this prospectus, less the underwriting discount. If this option is exercised in full, the underwriters will purchase 1,000,000 shares from us and 275,000 shares from the selling stockholder. To the extent that the underwriters exercise the over-allotment option in part and not in full, the underwriters will purchase shares from us and the selling stockholder on a pro rata basis. If this option is exercised in full, the total price to the public will be $176 million, the total proceeds to us will be approximately $126 million and the total proceeds to the selling stockholder will be $50 million, at an assumed offering price of $18 per share. The underwriters have severally agreed that, to the extent the over-allotment option is exercised, each of the underwriters will purchase a number of additional shares proportionate to its initial amount reflected in the above table.
The following table provides information regarding the amount of the discount to be paid to the underwriters by us and the selling stockholder:
PAID BY US PAID BY THE SELLING STOCKHOLDER
--------------------------------------------- ---------------------------------------------
NO EXERCISE OF FULL EXERCISE OF NO EXERCISE OF FULL EXERCISE OF
OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
--------------------- --------------------- --------------------- ---------------------
Per Share................. $ $ $ $
Total..................... $ $ $ $
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We estimate that the total expenses of this offering, excluding the underwriting discount, will be approximately $2,450,000.
We and Cantor have agreed to indemnify the underwriters against specified liabilities, including liabilities under the Securities Act.
Thomas Weisel Partners LLC, one of the representatives of the underwriters, was organized and registered as a broker-dealer in December 1998. Since December 1998, Thomas Weisel Partners has been named as a lead or co-manager on 87 filed public offerings of equity securities, of which 64 have been completed, and has acted as a syndicate member in an additional 45 public offerings of equity securities. Thomas Weisel Partners does not have any material relationship with us or any of our officers, directors or other controlling persons, except with respect to its contractual relationship with us pursuant to the underwriting agreement entered into in connection with this offering.
We and our directors, executive officers and holders of our common stock and securities convertible into or exercisable or exchangeable for common stock issued prior to this offering, or upon consummation of the formation transactions, have agreed pursuant to certain "lock-up" agreements with the underwriters that, subject to certain exceptions, we and they will not offer, sell, contract to sell, pledge, grant any option to sell, or otherwise dispose of, directly or indirectly, any shares of common stock or securities convertible into or exercisable or exchangeable for common stock for a period of 180 days after the date of this prospectus without the prior written consent of Warburg Dillon Read LLC. Warburg Dillon Read LLC, in its sole discretion, may release the shares subject to the lock-up agreements in whole or in part at any time with or without notice. However, Warburg Dillon Read LLC has no current plan to do so.
At our request, the underwriters have reserved for sale at the initial public offering price up to 425,000 shares of our Class A common stock for our officers, directors, employees, clients, friends and related persons who express an interest in purchasing these shares. The number of shares of our Class A common stock available for sale to the general public will be reduced to the extent these persons purchase these reserved shares. The underwriters will offer any shares not so purchased by these persons to the general public on the same basis as the other shares in this initial public offering.
Cantor Fitzgerald & Co., a subsidiary of the selling stockholder and an indirect subsidiary of Cantor, is participating in this offering as an underwriter. Consequently, this offering is being conducted in accordance with Rule 2720 of the Conduct of Rules of the NASD, which provides that, among other things, when an NASD member participates in the underwriting of its subsidiary's equity securities, the initial public offering price can be no higher than that recommended by a "qualified independent underwriter" meeting certain standards. In accordance with this requirement, Warburg Dillon Read LLC is serving in this role and will recommend a price in compliance with the requirements of Rule 2720. In connection with this offering, Warburg Dillon Read LLC in its role as qualified independent underwriter has performed due diligence investigations and reviewed and participated in the preparation of this prospectus and the registration statement of which this prospectus forms a part. In addition, the underwriters may not confirm sales to any discretionary account without the prior specific approval of the customer.
Prior to this offering, there has been no public market for our Class A common stock. Consequently, the offering price for our Class A common stock will be determined by negotiations between us, the selling stockholder and the underwriters and is not necessarily related to our asset value, net worth or other established criteria of value. The factors considered in these negotiations, in addition to prevailing market conditions, included the history of and prospects for the industry in which we compete, an assessment of our management, our prospects, our capital structure and certain other factors as were deemed relevant.
Rules of the Securities and Exchange Commission may limit the ability of the underwriters to bid for or purchase shares before the distribution of the shares is completed. However, the underwriters may engage in the following activities in accordance with the rules:
o Stabilizing transactions--The representatives may make bids for or purchases of the shares for the purpose of pegging, fixing or maintaining the price of the shares, so long as stabilizing bids do not exceed a specified maximum.
o Over-allotments and syndicate covering transactions--The underwriters may create a short position in the shares by selling more shares than are set forth on the cover page of this prospectus. If a short position is created in connection with this offering, the representatives may engage in syndicate covering transactions by purchasing shares in the open market. The representatives may also elect to reduce any short position by exercising all or part of the over-allotment option.
o Penalty bids--If the representatives purchase shares in the open market in a stabilizing transaction or syndicate covering transaction, they may reclaim a selling concession from the underwriters and selling group members who sold those shares as part of this offering.
Stabilization and syndicate covering transactions may cause the price of the shares to be higher than it would be in the absence of these transactions. The imposition of a penalty bid might also have an effect on the price of the shares if it discourages resales of the shares.
Neither us nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the price of the shares. These transactions may occur on the Nasdaq National Market or otherwise. If these transactions are commenced, they may be discontinued without notice at any time.
We and the underwriters expect that the shares will be ready for delivery on the fourth business day following the date of this prospectus. Under Securities and Exchange Commission regulations, secondary market trades are required to settle in three business days following the trade date (commonly referred to as "T+3"), unless the parties to the trade agree to a different settlement cycle. As noted above, the shares will settle in T+3. Therefore, purchasers who wish to trade on the date of this prospectus or during the next three succeeding business days must specify an alternate settlement cycle at the time of the trade to prevent a failed settlement. Purchasers of the shares who wish to trade shares on the date of this prospectus or during the next three succeeding business days should consult their own advisors.
__________________________________LEGAL MATTERS_________________________________
Certain legal matters related to this offering will be passed upon for us and the selling stockholder by Morgan, Lewis & Bockius LLP, New York, New York and Stephen Merkel, our Senior Vice President, General Counsel and Secretary. Upon the closing of this offering, we will grant to Mr. Merkel options to acquire 100,000 shares of our Class A common stock. Certain legal matters related to this offering will be passed upon for the underwriters by Dewey Ballantine LLP, New York, New York.
_____________________________________EXPERTS____________________________________
The financial statements included in this prospectus and registration statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing in this prospectus and registration statement, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
____________________WHERE YOU CAN FIND MORE INFORMATION____________________
We have filed with the Securities and Exchange Commission a registration statement (of which this prospectus forms a part) on Form S-1 with respect to the Class A common stock being offered by this prospectus. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. For further information with respect to us and the shares of Class A common stock offered hereby, reference is made to the registration statement, including the exhibits and schedules thereto. Statements contained in this prospectus as to the contents of any contract or other document referred to herein are not necessarily complete and, where any contract is an exhibit to the registration statement, each statement with respect to the contract is qualified in all respects by the provisions of the revelant exhibit, to which reference is hereby made. You may read and copy any document we file at the Public Reference Section of the Securities and Exchange Commission, 450 Fifth Street, NW, Room 1024, Washington, D.C. 20549, and the Securities and Exchange Commission's Regional Offices located at 500 West Madison Street, Suite 1400, Chicago, IL 60661, and 7 World Trade Center, 13th Floor, New York, NY 10048. You may call the Securities and Exchange Commission at 1-800-SEC-0330 for further information about the operation of the public reference rooms.
As a result of this offering, we will become subject to the information and reporting requirements of the Securities Exchange Act of 1934 and, in accordance therewith, will file periodic reports, proxy statements and other information with the Securities and Exchange Commission. Upon approval of the Class A common stock for quotation on the Nasdaq National Market, such reports, proxy and information statements and other information may also be inspected at the National Association of Securities Dealers, Inc., 1735 K Street, NW, Washington, D.C. 20006.
The Securities and Exchange Commission maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission. The address of the Securities and Exchange Commission's Web site is http://www.sec.gov.
INDEX TO FINANCIAL STATEMENTS
eSPEED, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report................................................................................ F-2 Consolidated Statement of Financial Condition............................................................... F-3 Consolidated Statement of Operations........................................................................ F-4 Consolidated Statement of Cash Flows........................................................................ F-5 Consolidated Statement of Changes in Stockholder's Equity................................................... F-6 Notes to Consolidated Financial Statements.................................................................. F-7 |
/s/ Deloitte & Touche LLP November 15, 1999 |
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Stockholder of eSpeed, Inc.:
We have audited the accompanying consolidated statement of financial condition of eSpeed, Inc. and Subsidiaries (the "Company") as of September 24, 1999, and the related statements of operations, cash flows and changes in stockholder's equity for the period from March 10, 1999 (date of commencement of operations) to September 24, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 24, 1999, and the results of its operations and its cash flows for the period from March 10, 1999 (date of commencement of operations) to September 24, 1999, in conformity with generally accepted accounting principles.
December 7, 1999
eSPEED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 24, 1999
ASSETS
Cash............................................................................................... $ 200,000
-----------
Fixed assets, at cost.............................................................................. 10,973,124
Less accumulated depreciation and amortization..................................................... (2,021,726)
-----------
Fixed assets, net.................................................................................. 8,951,398
Prepaid expenses, principally computer maintenance agreements...................................... 1,646,866
-----------
Total assets................................................................................ $10,798,264
-----------
-----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Payable to affiliates, net......................................................................... $ 5,097,480
Accrued compensation and benefits.................................................................. 4,861,668
Accounts payable and accrued liabilities........................................................... 1,797,658
-----------
Total liabilities........................................................................... 11,756,806
-----------
Commitments and contingencies
Stockholder's equity:
Preferred stock, par value $0.01 per share; 50,000,000 shares authorized, no share issued or
outstanding................................................................................... --
Class A common stock, par value $0.01 per share; 200,000,000 shares authorized; 2,500,000 shares
issued and outstanding........................................................................ 25,000
Class B common stock, par value $0.01 per share; 100,000,000 shares authorized, 41,500,000 shares
issued and outstanding........................................................................ 415,000
Additional paid in capital......................................................................... 5,215,299
Accumulated deficit................................................................................ (6,613,841)
-----------
Total stockholder's equity......................................................................... (958,542)
-----------
Total liabilities and stockholder's equity......................................................... $10,798,264
-----------
-----------
|
See notes to consolidated financial statements.
eSPEED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MARCH 10, 1999
(DATE OF COMMENCEMENT OF OPERATIONS) TO SEPTEMBER 24, 1999
PRO FORMA
ACTUAL ADJUSTMENTS(1) (UNAUDITED)
------------ -------------- -----------
Revenues:
Transaction revenues............................................ $ 15,034,597 $ -- $15,034,597
System services fees from affiliates............................ 9,104,872 9,104,872
------------ ---------- -----------
Total revenues............................................. 24,139,469 24,139,469
------------ ---------- -----------
Expenses:
Compensation and employee benefits.............................. 14,704,940 14,704,940
Occupancy and equipment......................................... 6,632,436 6,632,436
Professional and consulting fees................................ 3,615,348 3,615,348
Communications and client networks.............................. 2,445,792 2,445,792
Transaction services fees paid to affiliates.................... 1,337,282 1,337,282
Administrative fees paid to affiliates.......................... 1,067,200 1,067,200
Other........................................................... 1,122,119 1,122,119
------------ ---------- -----------
Total expenses............................................. 30,925,117 30,925,117
------------ ---------- -----------
Loss before benefit for income taxes.............................. (6,785,648) -- (6,785,648)
------------ ---------- -----------
Income tax benefit:
Federal......................................................... -- --
State and local................................................. 171,807 (171,807) --
------------ ---------- -----------
Total tax benefit.......................................... 171,807 (171,807) --
------------ ---------- -----------
Net loss................................................... $ (6,613,841) $ (171,807) $(6,785,648)
------------ ---------- -----------
------------ ---------- -----------
Per share data:
Basic and diluted net loss per share............................ $ (0.15)
Shares of common stock outstanding.............................. 44,000,000
|
See notes to consolidated financial statements.
eSPEED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MARCH 10, 1999 (DATE OF COMMENCEMENT OF OPERATIONS) TO
SEPTEMBER 24, 1999
Cash flows from operating activities:
Net loss........................................................................... $(6,613,841)
Non-cash item included in net loss:
Depreciation and amortization................................................... 2,021,726
Increase in operating asset:
Prepaid expenses................................................................ (444,643)
Increase in operating liabilities:
Accrued compensation and benefits............................................... 3,370,832
Payable to affiliate, net....................................................... 5,097,480
Accounts payable and accrued liabilities........................................ 171,010
-----------
Cash provided by operating activities......................................... 3,602,564
-----------
Cash flows from investing activities:
Acquisitions of fixed assets....................................................... (1,999,851)
Capitalization of software development costs....................................... (1,602,713)
-----------
(3,602,564)
-----------
Cash flows from financing activities:
Capital contribution............................................................... 200,000
-----------
Net increase in cash................................................................. 200,000
Cash balance, beginning of period.................................................... --
-----------
Cash balance, end of period.......................................................... $ 200,000
-----------
-----------
Supplemental disclosure of non-cash financing activities:
Effective March 10, 1999, Cantor Fitzgerald Securities made an initial capital
contribution as follows:
Fixed assets.................................................................... $7,370,560
Prepaid expenses................................................................ 1,202,223
Accrued compensation and benefits............................................... (1,490,836)
Accounts payable and accrued expenses........................................... (1,626,648)
----------
Total non-cash capital contributed.............................................. $5,455,299
----------
----------
|
See notes to consolidated financial statements.
eSPEED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE PERIOD FROM MARCH 10, 1999 (DATE OF COMMENCEMENT OF OPERATIONS) TO
SEPTEMBER 24, 1999
COMMON STOCK ADDITIONAL TOTAL
------------------------ PAID IN ACCUMULATED STOCKHOLDER'S
CLASS A CLASS B CAPITAL DEFICIT EQUITY
---------- ---------- ---------- ----------- -------------
Balance, March 10, 1999................... $ -- $ -- $ -- $ -- $ --
Cash capital contribution............... 1 199,999 200,000
Non-cash capital contribution........... 439,999 5,015,300 5,455,299
Conversion of Class B common stock to
Class A common stock................. 25,000 (25,000) --
Net loss................................ (6,613,841) (6,613,841)
---------- ---------- ---------- ----------- -----------
Balance, September 24, 1999............... $ 25,000 $ 415,000 $5,215,299 $(6,613,841) $ (958,542)
---------- ---------- ---------- ----------- -----------
---------- ---------- ---------- ----------- -----------
|
See notes to consolidated financial statements.
eSPEED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM MARCH 10, 1999 (DATE OF COMMENCEMENT OF OPERATIONS)
TO SEPTEMBER 24, 1999
1. ORGANIZATION AND FORMATION TRANSACTION
eSpeed, Inc. (eSpeed or, together with its wholly owned subsidiaries, the Company) is a wholly owned subsidiary of Cantor Fitzgerald Securities (CFS), which in turn is a 99.5% owned subsidiary of Cantor Fitzgerald, L.P. (CFLP, or together with CFS and its subsidiaries, Cantor). eSpeed commenced operations on March 10, 1999 as a division of CFS. eSpeed is a Delaware corporation that was formed on June 3, 1999. In September 1999, the Company's Board of Directors changed eSpeed's fiscal year from the last Friday of March to December 31. The Company engages in the business of operating interactive electronic marketplaces designed to enable market participants to trade securities and other products more efficiently and at a lower cost than traditional trading environments permit.
The Company filed a registration statement on Form S-1 with the Securities and Exchange Commission for a public offering (the Offering) of Class A common stock on September 21, 1999. The number of shares to be offered and the initial offering price will be determined at a future date. On or prior to the effective date of the Offering, and upon obtaining various regulatory approvals, the formation transactions will be consummated and, as such, the accompanying financial statements reflect such transactions and the activities of eSpeed while operating as a division of CFS as the historical basis financial statements of eSpeed. The formation transactions include an initial capital contribution of net assets of $5,455,299. This contribution includes fixed assets with a net book value of $7,370,560 and prepaid expenses of $1,202,223, and the assumption of liabilities consisting of accrued compensation, accounts payable and other liabilities of $3,117,484. In exchange for the contribution of net assets, the Company issued Cantor 43,999,900 shares of Class B common stock. Immediately thereafter, Cantor converted 2,500,000 shares of Class B common stock to 2,500,000 shares of Class A common stock which will be sold in the Offering.
Upon completion of the Offering, the capitalization of eSpeed will consist of 200,000,000 shares of authorized Class A common stock, $.01 par value, 100,000,000 shares of Class B common stock, $.01 par value, and 50,000,000 shares of preferred stock, $.01 par value. The rights of holders of shares of common stock will be substantially identical, except that holders of Class B common stock will be entitled to 10 votes per share, while holders of Class A common stock will be entitled to one vote per share. Additionally, each share of Class B common stock will be convertible at any time, at the option of the holder, into one share of Class A common stock. Upon the completion of the Offering, the Company expects to issue warrants for 127,500 shares of Class A common stock. These warrants will have a five-year term and will be exercisable commencing on the first anniversary of the date of issuance at a price per share equal to the initial public offering price. These warrants will be dilutive in nature.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES--The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities in the consolidated financial statements. Estimates, by their nature, are based on judgment and available information. As such, actual results could differ from the estimates included in these consolidated financial statements.
TRANSACTION REVENUES--Securities transactions and the related transaction revenues are recorded on a trade date basis.
FIXED ASSETS--Fixed assets, which comprise computer and communication equipment and software, are depreciated over their estimated economic useful lives of three to five years using an accelerated method. Upon commencement of operations, the Company adopted Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Accordingly, internal and external
eSPEED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM MARCH 10, 1999 (DATE OF COMMENCEMENT OF OPERATIONS)
TO SEPTEMBER 24, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) direct costs of application development and of obtaining software for internal use are capitalized and amortized over their estimated economic useful lives of three years on a straight line basis.
NEW ACCOUNTING PRONOUNCEMENTS--In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The statement, as amended, is effective for fiscal years beginning after June 15, 2000. eSpeed has evaluated the impact of adopting SFAS No. 133 and believes it will not have a material effect on its financial statements.
3. FIXED ASSETS
Fixed assets consist of the following:
SEPTEMBER 24,
1999
-------------
Computer and communication equipment................................. $ 8,324,521
Software, including software development costs....................... 2,648,603
-------------
10,973,124
Less accumulated depreciation and amortization....................... (2,021,726)
-------------
Fixed assets, net.................................................... $ 8,951,398
-------------
-------------
|
4. INCOME TAXES
The Company has operated as a division of CFS, which is a New York partnership. Under applicable federal and state income tax laws, the taxable income or loss of a partnership is allocated to each partner based upon their ownership interest. CFS is, however, subject to the Unincorporated Business Tax (UBT) of the City of New York, and the benefit for income taxes represents a reduction in UBT. The loss generated by eSpeed will be used as a reduction of the taxable income of CFS and, as such, eSpeed will be reimbursed for such tax and has recognized the benefit as an offset to payable to affiliates. Upon completion of the Offering, the stand-alone operations of eSpeed will be subject to income tax as a corporation.
5. COMMITMENTS AND CONTINGENCIES
LEASES--Under an administrative services agreement, eSpeed is obligated for minimum rental payments under various non-cancelable leases with third parties, principally for office space and computer equipment, expiring at various dates through 2004 as follows:
FOR THE PERIOD ENDING DECEMBER 31:
---------------------------------------------------------------------
1999................................................................. $ 1,078,351
2000................................................................. 4,627,449
2001................................................................. 4,388,356
2002................................................................. 4,388,356
2003................................................................. 4,308,659
Thereafter........................................................... 24,569,975
-------------
Total................................................................ $ 43,361,146
-------------
-------------
|
Rental expense under the above and under all other operating leases amounted to $2,450,446 for the period ended September 24, 1999.
eSPEED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM MARCH 10, 1999 (DATE OF COMMENCEMENT OF OPERATIONS)
TO SEPTEMBER 24, 1999
5. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
LEGAL MATTERS--On May 5, 1999, Cantor, The Board of Trade of the City of
Chicago, The New York Mercantile Exchange and The Chicago Mercantile Exchange,
were sued by Electronic Trading Systems, Inc. in the United States District
Court for the Northern District of Texas (Dallas Division) for alleged
infringement of Wagner United States patent 4,903,201, entitled "Automated
Futures Trade Exchange." The patent relates to a system and method for
implementing an electronic, computer-automated futures exchange. On July 1,
1999, Cantor answered the complaint, asserting, among other things, that the
'201 patent was invalid and not infringed by Cantor and that Cantor was not the
real party in interest. Although not identified by the complaint, Cantor
believes that the system being charged with infringement is a version of the
electronic trading system used by the Cantor Exchange which Cantor is
contributing to the Company in connection with this offering. If the plaintiff
is successful in the lawsuit, the Company may be required to obtain a license to
develop and market one or more of its services, to cease developing or marketing
such services or to redesign such services. There can be no assurances that the
Company would be able to obtain such licenses or that the Company would be able
to obtain them at commercially reasonable rates, or if unable to obtain licenses
that the Company would be able to redesign its services to avoid infringement.
Cantor owns U.S. patent 5,905,974, entitled "Automated Auction Protocol
Processor." On August 10, 1999, Liberty Brokerage Investment Corporation filed
an action for declaratory judgment in the United States District Court for the
District of Delaware against Cantor, claiming that the '974 patent was invalid,
unenforceable and not infringed by Liberty. On October 12, 1999, Cantor moved
(1) to dismiss all claims against Cantor for failure to state a claim upon which
relief can be granted and (2) to dismiss the action against Cantor for lack of
an actual case or controversy within the meaning of the law. On November 22,
1999, the Court granted the motion to dismiss the action as against Cantor
Fitzgerald Securities, and denied the motion to dismiss the action as against
Cantor and its affiliate CFPH, LLC. The Company cannot be assured that the
Company or Cantor will bring a claim for infringement of the '974 patent against
Liberty, that the '974 patent will be found to be valid and/or enforceable or
that Liberty will be found to have infringed the '974 patent. The Company will
assume responsibility for defending this suit on behalf of Cantor and its
affiliates.
In February 1998, Market Data Corporation contracted with Chicago Board Brokerage (a company controlled by the Chicago Board of Trade and Prebon Yamane) to provide the technology for an electronic trading system to compete with Cantor's United States Treasury brokerage business. Market Data Corporation is controlled by Iris Cantor and Rodney Fisher, her nephew-in-law. Iris Cantor, a company under the control of Iris Cantor referred to herein as CFI, and Rodney Fisher are limited partners of Cantor Fitzgerald, L.P.
In April 1998, Cantor Fitzgerald, L.P. filed a complaint in the Delaware Court of Chancery against Market Data Corporation, Iris Cantor, CFI, Rodney Fisher and Chicago Board Brokerage seeking an injunction and other remedies. The complaint alleges that Iris Cantor, CFI and Rodney Fisher violated certain duties, including fiduciary duties under Cantor's partnership agreement due to their competition with Cantor Fitzgerald, L.P. with respect to the electronic trading system mentioned above. The complaint further alleges that Market Data Corporation and Chicago Board Brokerage tortiously interfered with Cantor's partnership agreement and aided and abetted Iris Cantor's, CFI's and Rodney Fisher's breaches of fiduciary duty. Iris Cantor, CFI and Rodney Fisher counterclaimed seeking, among other things, (1) to reform agreements they have with Cantor Fitzgerald, L.P. and (2) a declaration that Cantor Fitzgerald, L.P. breached the implied covenant of good faith and fair dealing. Cantor has agreed to indemnify the Company for any liabilities that the Company incurs with respect to any current or future litigation involving (1) Market Data Corporation, (2) Iris Cantor, (3) CFI or (4) Rodney Fisher.
On July 12, 1998, the Court of Chancery held Cantor Fitzgerald, L.P. was likely to succeed on the merits of its claims that Iris Cantor, CFI and Rodney Fisher had breached their partnership obligations to
eSPEED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM MARCH 10, 1999 (DATE OF COMMENCEMENT OF OPERATIONS)
TO SEPTEMBER 24, 1999
5. COMMITMENTS AND CONTINGENCIES--(CONTINUED) Cantor but had not shown that the defendants' conduct was likely to cause imminent irreparable harm between the date of the opinion and a final hearing. The Court of Chancery, therefore, denied Cantor Fitzgerald, L.P.'s request for preliminary injunctive relief and scheduled a final trial. Cantor Fitzgerald, L.P. settled its dispute with Chicago Board Brokerage in April 1999 and Chicago Board Brokerage subsequently announced it was disbanding its operations. The remaining parties have completed the final trial and the Court of Chancery's decision is expected following post-trial oral arguments scheduled for December 7, 1999. The Company believes Market Data Corporation's technology for electronic trading systems will be of substantial assistance to competitors in the wholesale market if provided to them.
Two related actions are pending in New York. In a case pending in the Supreme Court of New York, New York County, plaintiff Cantor Fitzgerald, L.P. alleges, among other things, that defendants Market Data Corporation, CFI, Iris Cantor and Rodney Fisher misused confidential information of Cantor Fitzgerald, L.P. in connection with the above mentioned provision of technology to Chicago Board Brokerage. In a case pending in the United States District Court for the Southern District of New York, CFI and Iris Cantor allege, among other things, that certain senior officers of Cantor Fitzgerald, L.P. breached fiduciary duties they owed to CFI. The allegations in this lawsuit relate to several of the same events underlying the court proceedings in Delaware. Neither of these two cases has been pursued during the pendency of the court proceedings in Delaware.
In addition to the allegations set forth in the pending lawsuits, Cantor has received correspondence from the attorneys representing Iris Cantor, CFI, Market Data Corporation and Rodney Fisher in the proceedings in Delaware, expressing a purported concern that Cantor and/or certain of its partners may be in breach of Cantor's partnership agreement (including, among other things, the partnership agreement's provisions relating to competition with the partnership) and the general partnership agreement of Cantor Fitzgerald Securities with respect to the Company's initial public offering. Generally, these attorneys have alleged that various purported conflicts of interest will exist arising from the fact that certain of the Company's directors and officers will simultaneously hold positions with Cantor Fitzgerald, L.P. Moreover, these attorneys have asserted that the Company's business plan may not be consistent with certain purported rights of Market Data Corporation (including purported intellectual property rights) and other parties and they have requested more information regarding the Company's initial public offering.
Although the Company does not expect to incur any losses with respect to the pending lawsuits or supplemental allegations surrounding Cantor's partnership agreement, Cantor has agreed to indemnify the Company with respect to any liabilities the Company incurs as a result of such lawsuits or allegations.
Cantor and Reuters are parties to a confidential arbitration under the auspices of the American Arbitration Association in New York, New York, which began in June of 1995 with respect to a January 1993 agreement among Reuters, Cantor and Market Data Corporation. Cantor has agreed to indemnify the Company against all claims asserted by Reuters or Market Data Corporation relating to this agreement or arising out of the arbitration.
The agreement executed in 1993 involves, among other things, the delivery by Cantor of certain market brokerage data arising out of non-United States government bond and U.S. municipal bond interdealer brokerage transactions for transmittal over Reuters' network. The agreement also contemplated the joint development by Cantor and Reuters of an electronic trading system for certain transactions in non-United States government bonds. Cantor and Reuters did not develop this electronic trading system. In the arbitration, Reuters alleges that Cantor materially breached the agreement primarily by failing to provide non- screen, voice brokerage data concerning non-United States government bonds and U.S. municipal bonds that Reuters contends are subject to the agreement and fraud. Reuters is seeking to recover from Cantor amounts representing past payments for market data, the reimbursement of attorneys' fees and other damages. Cantor
eSPEED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM MARCH 10, 1999 (DATE OF COMMENCEMENT OF OPERATIONS)
TO SEPTEMBER 24, 1999
5. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
has denied Reuters' allegations that there has been any material breach of this agreement or fraud, and has asserted a breach of contract claim and various other counterclaims against Reuters, including claims for Reuters' failure since February 1997 to pay any of the money due Cantor for data under this agreement. In February 1997, Reuters unilaterally ceased making such payments to Cantor in connection with the dispute and in November 1999 stopped distributing Cantor's market data that was provided to Reuters.
Reuters has recently asserted that, in the event it prevails in the arbitration, it may be entitled to receive from Cantor, and possibly from the Company, revenues in respect of the sale, license, dissemination, delivery or other distribution of the data subject to this agreement. Reuters has also asserted that, if it loses the arbitration, it could still, at the conclusion of the arbitration, try to cure its multiple breaches and seek to have the agreement remain in effect. Cantor believes that it did not materially breach this agreement and believes that Reuters would not be entitled to (1) any of the Company's revenues, even if Reuters prevailed in the arbitration or (2) cure its own breaches and cause the agreement to remain in effect, in the event Cantor prevails. As stated above, Reuters ceased making payments under this agreement in 1997 and has ceased distributing the data covered by the agreement. Cantor has notified Reuters that Cantor has terminated the agreement based on Reuters' material breaches.
Market Data Corporation recently made an application for an order directing
(1) Reuters to pay Cantor for providing the data, (2) Cantor to continue to
provide Market Data Corporation with data for transmission to Reuters, and (3)
Reuters to accept and distribute the data over Reuters' network. That
application has been denied on the basis of Market Data Corporation's failure to
demonstrate that monetary damages would be an inadequate remedy for any damages
it may suffer as a result of Reuters' and Cantor's actions. Even if any relief
were granted to Market Data Corporation, the Company does not believe it would
have a material adverse effect on its business.
Recently, the panel in the arbitration rendered a decision interpreting certain portions of the agreement in a manner contrary to that which Cantor believes was intended and concluded that Cantor had failed to deliver certain non-screen, voice brokerage data to Reuters that the panel concluded was required under the agreement. Cantor maintains that it has not materially breached the agreement, that any breach was cured by Cantor, that the agreement cannot be terminated at Reuter's insistence, that Reuters has underpaid Cantor and that, by ceasing to make payments since 1997 and discontinuing the distribution of Cantor's data, Reuters has materially breached the agreement. The panel has not resolved these issues and the arbitration is still continuing.
The Company cannot give any assurance that Market Data Corporation and/or Reuters will not seek to assert claims relating to the Company's activities against the Company or Cantor, either in the arbitration or in another proceeding. In any event, Cantor has agreed to indemnify the Company with respect to any claims asserted by Reuters or Market Data Corporation relating to the agreement or arising out of the arbitration.
Although the ultimate outcome of these actions cannot be ascertained at this time and the results of legal proceedings cannot be predicted with certainty, it is the opinion of management that the resolution of these matters will not have a material adverse effect on the financial condition or results of operations of the Company.
RISKS AND UNCERTAINTIES--The Company generates its revenues by providing securities trading activities to, and by executing transactions with, institutional customers of CFS and certain of its affiliates. Revenues for these services are transaction based. As a result, the Company's revenues could vary based on the transaction volume of financial markets around the world.
eSPEED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM MARCH 10, 1999 (DATE OF COMMENCEMENT OF OPERATIONS)
TO SEPTEMBER 24, 1999
6. RELATED PARTY TRANSACTIONS
The Company operates interactive electronic marketplaces. For providing these services, the Company receives a percentage of the transaction revenues ranging from 2.5% to 100% from Cantor's marketplace businesses, depending on the type of electronic services provided for the transaction. Revenues from such transactions during the period ended September 24, 1999 totaled $15,034,597.
On certain transactions (those where the Company receives 100% of the commission revenue share), CFS or its affiliate provides the Company with services for which CFS or its affiliate is paid a fee of 20% or 35% of the transaction revenue earned on the transaction. Charges to the Company from CFS and its affiliates for such transaction services during the period ended September 24, 1999 totaled $1,337,282.
The Company also provides network, data center and server administration support and other technology services to CFS and its affiliates. The Company charges CFS and its affiliates for these services commensurate with its costs of providing these services. System services fees received from CFS and its affiliates during the period ended September 24, 1999 totaled $9,104,872.
Under an administrative services agreement, CFS and its affiliates provide various administrative services to the Company, including accounting, tax, sales and marketing, legal, and facilities management. The Company is required to reimburse CFS or its affiliate for the cost of providing such services. The costs represent the direct and indirect costs of providing such services and are determined based upon the time incurred by the individual performing such services. Management believes that this allocation methodology is reasonable. The administrative services agreement has a three-year term which will renew automatically for successive one-year terms unless cancelled upon six month's prior notice by either the Company or CFS and its affiliates. The Company incurred administrative fees for such services during the period ended September 24, 1999 totaling $1,067,200.
7. REGULATORY CAPITAL REQUIREMENTS
Through its broker-dealer subsidiaries, eSpeed Government Securities, Inc. and eSpeed Securities, Inc., the Company will be subject to Securities and Exchange Commission broker-dealer regulation under Section 15C and Rule 17a-5, respectively, of the Securities Exchange Act of 1934. As such, at current business levels these subsidiaries would be required to maintain minimum net capital, as defined, of $25,000 and $5,000, respectively. In addition, eSpeed's broker-dealer subsidiary in the United Kingdom, eSpeed Securities International Limited, expects to be subject to the rules of the Securities and Futures Authority, which requires minimum net capital of approximately $50,000.
8. EMPLOYEE BENEFIT PLAN
Employees of eSpeed are eligible to participate in the Cantor Fitzgerald Deferral Plan (the Plan), which is a deferred-salary plan sponsored by CFLP, whereby an eligible employee may elect to defer a portion of his salary by directing eSpeed to contribute to the Plan. The Plan is available to all employees of eSpeed meeting certain eligibility requirements and is subject to the provisions of the Employee Retirement Income Security Act of 1974. While the Company has the option to contribute to the Plan on behalf of its participants, no such contribution was made during the period ended September 24, 1999. The administration of the Plan is performed by CFLP. The Company pays its proportionate share of such administrative costs under the Administrative Services Agreement.
9. LONG-TERM INCENTIVE PLAN
The Company intends to adopt a Long-Term Incentive Plan (the Plan) which
will provide for awards in the form of 1) either incentive stock options or
non-qualified stock options (NQSOs); 2) stock appreciation rights;
3) restricted or deferred stock; 4) dividend equivalents; 5) bonus shares and
awards in lieu of
eSPEED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM MARCH 10, 1999 (DATE OF COMMENCEMENT OF OPERATIONS)
TO SEPTEMBER 24, 1999
9. LONG-TERM INCENTIVE PLAN--(CONTINUED) obligations to pay cash compensation; and 6) other awards the value of which is based in whole or in part upon the value of eSpeed's common stock.
The Compensation Committee of the Board of Directors will administer the Plan and will generally be empowered to select the individuals who will receive the awards and the terms and conditions of those awards.
The Plan also authorizes the automatic grant of NQSOs to non-employee directors upon initial election as a director and additional grants at each annual meeting thereafter. These options will have an exercise price equal to the fair market value of the Class A common stock on the date of grant.
In connection with the Offering, the Company also intends to issue 7,200,000 stock options to certain officers, directors and employees at an exercise price equal to the initial public offering price. Additionally, the Company anticipates granting approximately 300,000 stock options to certain employees of Cantor at an exercise price equal to the initial public offering price. This will result in an estimated, one time non-cash charge to the Company of $4,000,000.
10. STOCK PURCHASE PLAN
The Company intends to adopt a Stock Purchase Plan to permit eligible employees, including employees of Cantor, to purchase shares of eSpeed common stock at a discount. At the end of each purchase period, as defined, accumulated payroll deductions will be used to purchase stock at a price determined by a Stock Purchase Plan administrative committee, which will generally not be less than 85% of the lowest market price at various defined dates during the purchase period. The Company has reserved 425,000 shares of Class A common stock for issuance under the Stock Purchase Plan.
11. SEGMENT AND GEOGRAPHIC DATA
SEGMENT INFORMATION--The Company currently operates its business in one segment, that of operating interactive electronic marketplaces for the trading of securities and other financial products. This segment comprised approximately 62% of revenues for the period ended September 24, 1999. The remainder of the Company's revenues were derived from system services fees received from CFS and its affiliates.
GEOGRAPHIC INFORMATION--The Company operates in the U.S., Europe and Asia. Revenue attribution for purposes of preparing geographic data is principally based upon the marketplace where the financial product is traded, which, as a result of regulatory jurisdiction constraints in most circumstances, is also representative of the location of the client generating the transaction resulting in commissionable revenue. The information
eSPEED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM MARCH 10, 1999 (DATE OF COMMENCEMENT OF OPERATIONS)
TO SEPTEMBER 24, 1999
11. SEGMENT AND GEOGRAPHIC DATA--(CONTINUED) that follows, in management's judgement, provides a reasonable representation of the activities of each region as of and for the period ended September 24, 1999:
Transaction revenues:
Europe....................................................................... $ 4,210,154
Asia......................................................................... 333,695
-----------
Total non-U.S............................................................. 4,543,849
U.S.......................................................................... 10,490,748
-----------
Total..................................................................... $15,034,597
-----------
-----------
|
Average long-lived assets:
Europe....................................................................... $ 2,716,108
Asia......................................................................... 1,019,523
-----------
Total non-U.S............................................................. 3,735,631
U.S.......................................................................... 4,613,005
-----------
Total..................................................................... $ 8,348,636
-----------
-----------
|
12. QUARTERLY INFORMATION (UNAUDITED)
The unaudited quarterly results of operations of the Company for 1999 are prepared in accordance with generally accepted accounting principles. The information presented reflects all adjustments (which consist of normal recurring accruals) that are, in management's opinion, necessary for the fair presentation of results of operations for the periods presented. Results of any period are not necessarily indicative of results for a full year.
MARCH 10,
1999
(DATE OF
COMMENCEMENT
OF
OPERATIONS)
TO
MARCH 26,
1999 JUNE 25, 1999 SEPT. 24, 1999
------------ ------------- --------------
Total revenues..................................................... $1,948,250 $10,569,356 $ 11,621,863
---------- ----------- ------------
Total expenses..................................................... 2,486,758 13,321,989 15,116,370
---------- ----------- ------------
Loss before provision for income taxes............................. (538,508) (2,752,633) (3,494,507)
Income tax benefit................................................. 13,470 68,849 89,488
---------- ----------- ------------
Net loss........................................................... $ (525,038) $(2,683,784) $ (3,405,019)
---------- ----------- ------------
---------- ----------- ------------
|
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES DESCRIBED IN THIS PROSPECTUS OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF SUCH INFORMATION.
8,500,000 Shares
[LOGO]
Class A Common Stock
THROUGH AND INCLUDING , 2000 (THE 25TH DAY AFTER COMMENCEMENT OF THIS OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK OFFERED BY THIS PROSPECTUS, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
WARBURG DILLON READ LLC
HAMBRECHT & QUIST
THOMAS WEISEL PARTNERS LLC
CANTOR FITZGERALD & CO.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses (other than underwriting compensation expected to be incurred) in connection with this offering. All of such amounts (except the SEC registration fee and the NASD filing fee) are estimated.
SEC registration fee............................................................ $ 70,334
Nasdaq listing fee.............................................................. 95,000
NASD filing fee................................................................. 25,800
Blue Sky fees and expenses...................................................... 10,000
Printing and engraving costs.................................................... 225,000
Legal fees and expenses......................................................... 1,500,000
Accounting fees and expenses.................................................... 400,000
Transfer Agent and Registrar fees and expenses.................................. 3,500
Miscellaneous................................................................... 120,366
----------
Total........................................................................... $2,450,000
----------
----------
|
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our By-Laws provide that we shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of the State of Delaware (the
"DGCL"), as amended from time to time, indemnify all persons whom it may
indemnify pursuant thereto.
Section 145 of the DGCL permits a corporation, under specified circumstances, to indemnify its directors, officers, employees or agents against expenses (including attorneys' fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by them in connection with any action, suit or proceeding brought by third parties by reason of the fact that they were or are directors, officers, employees or agents of the corporation, if such directors, officers, employees or agents acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reason to believe their conduct was unlawful. In a derivative action, i.e., one by or in the right of the corporation, indemnification may be made only for expenses actually and reasonably incurred by directors, officers, employees or agents in connection with the defense or settlement of an action or suit, and only with respect to a matter as to which they shall have acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made if such person shall have been adjudged liable to the corporation, unless and only to the extent that the court in which the action or suit was brought shall determine upon application that the defendant directors, officers, employees or agents are fairly and reasonably entitled to indemnity for such expenses despite such adjudication of liability.
Our Amended and Restated Certificate of Incorporation provides that our
directors will not be personally liable to us or our stockholders for monetary
damages resulting from breaches of their fiduciary duty as directors except (a)
for any breach of the duty of loyalty to us or our stockholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (c) under Section 174 of the DGCL, which makes directors
liable for unlawful dividends or unlawful stock repurchases or redemptions, or
(d) for transactions from which directors derive improper personal benefit.
The Underwriting Agreement, filed as Exhibit 1, provides that the Underwriters named therein will indemnify us and hold us harmless and each of our directors, officers or controlling persons from and against certain liabilities, including liabilities under the Securities Act. The Underwriting Agreement also provides that such Underwriters will contribute to certain liabilities of such persons under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On September 7, 1999, we issued 100 shares of common stock to Cantor Fitzgerald Securities for an aggregate purchase price of $200,000.
The sale of the above securities was deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, as a transaction by an issuer not involving a public offering.
II-1
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------ ------------------------------------------------------------------------------------------------------------
1 -- Form of Underwriting Agreement
2.1 -- Form of Assignment and Assumption Agreement, dated as of , 1999, by and among Cantor
Fitzgerald, L.P., Cantor Fitzgerald Securities, CFFE, LLC, Cantor Fitzgerald L.L.C., CFPH, LLC,
Cantor Fitzgerald & Co. and eSpeed, Inc.*
2.2 -- Form of Assignment and Assumption Agreement, dated as of , 1999 by and between Cantor
Fitzgerald International and eSpeed Securities International Limited*
3.1 -- Amended and Restated Certificate of Incorporation of eSpeed, Inc.*
3.2 -- Amended and Restated By-Laws of eSpeed, Inc.*
4.1 -- Specimen Class A Common Stock Certificate*
4.2 -- Form of Warrant to be issued to Martin J. Wygod
5 -- Opinion of Morgan, Lewis & Bockius LLP*
10.1 -- Long-Term Incentive Plan of eSpeed, Inc.
10.2 -- eSpeed, Inc. Stock Purchase Plan*
10.3 -- Form of Joint Services Agreement, dated as of , 1999, by and among Cantor Fitzgerald,
L.P., Cantor Fitzgerald International, Cantor Fitzgerald Gilts, Cantor Fitzgerald Securities, Cantor
Fitzgerald & Co., Cantor Fitzgerald Partners, eSpeed, Inc., eSpeed Securities, Inc., eSpeed Government
Securities, Inc., eSpeed International Securities Limited and eSpeed Markets, Inc.
10.4 -- Form of Administrative Services Agreement, dated as of , 1999, by and among Cantor
Fitzgerald, L.P., Cantor Fitzgerald International, Cantor Fitzgerald Gilts, Cantor Fitzgerald
Securities, Cantor Fitzgerald & Co., Cantor Fitzgerald Partners, eSpeed, Inc., eSpeed Securities,
Inc., eSpeed Government Securities, Inc., eSpeed International Securities Limited and eSpeed Markets,
Inc.*
10.5 -- Form of Registration Rights Agreement*
10.6 -- Form of Sublease Agreement, dated as of December , 1999, between Cantor Fitzgerald Securities and
eSpeed, Inc.*
21 -- List of subsidiaries of eSpeed, Inc.*
23.1 -- Consent of Deloitte & Touche LLP
23.2 -- Consent of Morgan, Lewis & Bockius LLP (contained in Exhibit 5)*
23.3 -- Consent of Richard C. Breeden*
23.4 -- Consent of Larry R. Carter*
23.5 -- Consent of Douglas B. Gardner*
23.6 -- Consent of Frederick T. Varacchi*
23.7 -- Consent of William J. Moran*
23.8 -- Consent of Joseph Shea
24 -- Powers of Attorney (included on signature page)*
27 -- Financial Data Schedule*
|
* Previously filed.
(b) Financial Statement Schedules
The financial statement schedules are omitted because they are inapplicable or the requested information is shown in the consolidated financial statements of eSpeed, Inc. or related notes thereto.
II-2
ITEM 17. UNDERTAKINGS.
The undesigned registrant hereby undertakes as follows:
(1) The undersigned will provide to the underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
(2) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance on Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it is declared effective.
(3) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to the initial bona fide offering thereof.
Insofar as indemnification arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 14 or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
II-3
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 4 TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, THE STATE OF NEW YORK, ON THE 8TH DAY OF DECEMBER, 1999.
eSpeed, Inc.
By: _________________*________________ Name: Howard W. Lutnick Title: Chairman of the Board and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT NO. 4 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE
------------------------------------------ ------------------------------------------- -------------------
* Chairman of the Board and Chief Executive December 8, 1999
------------------------------------------ Officer
Howard W. Lutnick
* President and Chief Operating Officer December 8, 1999
------------------------------------------
Frederick T. Varacchi
/s/ DOUGLAS B. GARDNER Vice Chairman December 8, 1999
------------------------------------------
Douglas B. Gardner
* Senior Vice President and Chief Financial December 8, 1999
------------------------------------------ Officer (Principal Financial and Accounting
Kevin C. Piccoli Officer)
* Senior Vice President, General Counsel and December 8, 1999
------------------------------------------ Secretary
Stephen M. Merkel
*By /s/ DOUGLAS B. GARDNER
Douglas B. Gardner, as
Attorney-in-Fact pursuant to the
Power of Attorney previously provided as
part of the Registration Statement.
|
II-4
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
---------- --------------------------------------------------------------------------------------------
1 -- Form of Underwriting Agreement
2.1 -- Form of Assignment and Assumption Agreement, dated as of , 1999, by and among
Cantor Fitzgerald, L.P., Cantor Fitzgerald Securities, CFFE, LLC, Cantor Fitzgerald
L.L.C., CFPH, LLC Cantor Fitzgerald & Co. and eSpeed, Inc.*
2.2 -- Form of Assignment and Assumption Agreement, dated as of , 1999 by and
between Cantor Fitzgerald International and eSpeed Securities International Limited*
3.1 -- Amended and Restated Certificate of Incorporation of eSpeed, Inc.*
3.2 -- Amended and Restated By-Laws of eSpeed, Inc.*
4.1 -- Specimen Class A Common Stock Certificate.*
4.2 -- Form of Warrant to be issued to Martin J. Wygod
5 -- Opinion of Morgan, Lewis & Bockius LLP*
10.1 -- Long-Term Incentive Plan of eSpeed, Inc.
10.2 -- eSpeed, Inc. Stock Purchase Plan*
10.3 -- Form of Joint Services Agreement, dated as of , 1999, by and among Cantor
Fitzgerald, L.P., Cantor Fitzgerald International, Cantor Fitzgerald Gilts, Cantor
Fitzgerald Securities, Cantor Fitzgerald & Co., Cantor Fitzgerald Partners, eSpeed,
Inc., eSpeed Securities, Inc., eSpeed Government Securities, Inc., eSpeed
International Securities Limited and eSpeed Markets, Inc.
10.4 -- Form of Administrative Services Agreement, dated as of , 1999, by and
among Cantor Fitzgerald, L.P., Cantor Fitzgerald International, Cantor Fitzgerald
Gilts, Cantor Fitzgerald Securities, Cantor Fitzgerald & Co., Cantor Fitzgerald
Partners, eSpeed, Inc., eSpeed Securities, Inc., eSpeed Government Securities, Inc.,
eSpeed International Securities Limited and eSpeed Markets, Inc.*
10.5 -- Form of Registration Rights Agreement*
10.6 -- Form of Sublease Agreement, dated as of December , 1999, between Cantor Fitzgerald
Securities and eSpeed, Inc.*
21 -- List of subsidiaries of eSpeed, Inc.*
23.1 -- Consent of Deloitte & Touche LLP
23.2 -- Consent of Morgan, Lewis & Bockius LLP (contained in Exhibit 5)*
23.3 -- Consent of Richard C. Breeden*
23.4 -- Consent of Larry R. Carter*
23.5 -- Consent of Douglas B. Gardner*
23.6 -- Consent of Frederick T. Varacchi*
23.7 -- Consent of William J. Moran*
23.8 -- Consent of Joseph P. Shea
24 -- Powers of Attorney (included on signature page)*
27 -- Financial Data Schedule*
|
* Previously filed.
8,500,000 Shares
Class A Common Stock
($.o1 Par Value)
UNDERWRITING AGREEMENT
December , 1999
UNDERWRITING AGREEMENT
December __, 1999
Warburg Dillon Read LLC
Hambrecht & Quist LLC
Thomas Weisel Partners LLC
As Representatives of the several Underwriters
named in Schedule A hereto
c/o Warburg Dillon Read LLC
299 Park Avenue
New York, New York 10171-0026
|
Ladies and Gentlemen:
eSpeed, Inc., a Delaware corporation (the "Company") and an indirect subsidiary of Cantor Fitzgerald, L.P., a Delaware limited partnership (the "Parent"), proposes to issue and sell to the underwriters named in Schedule A annexed hereto (the "Underwriters") an aggregate of 6,000,000 shares (the "Firm Shares") of its Class A Common Stock, $.01 par value (the "Common Stock"), and Cantor Fitzgerald Securities, a New York partnership (the "Selling Stockholder") and a subsidiary of the Parent, proposes to sell to the Underwriters 2,500,000 shares of Common Stock. In addition, solely for the purpose of covering over-allotments, the Company and the Selling Stockholder propose to grant to the Underwriters the option to purchase from the Company and the Selling Stockholder up to an additional 1,275,000 shares of Common Stock in the aggregate (the "Additional Shares" and, collectively with the Firm Shares, the "Shares"). Of the Additional Shares, up to 1,000,000 Shares may be sold by the Company and up to 275,000 Shares may be sold by the Selling Stockholder. The Shares are described in the Prospectus as defined below.
The Company has filed, in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations thereunder (collectively called the "Act"), with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (Reg. No. 333-87475) including a prospectus, relating to the Shares. The Company has furnished to you, for use by the Underwriters and by dealers, copies of one or more preliminary prospectuses (each thereof being herein called a "Preliminary Prospectus") relating to the Shares. Except where the context otherwise requires, the registration statement, as amended when it becomes effective, including all documents filed as a part thereof, and
including any information contained in a prospectus subsequently filed with the Commission pursuant to Rule 424(b) under the Act and deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430(A) under the Act and also including any registration statement filed pursuant to Rule 462(b) under the Act, is herein called the "Registration Statement", and the prospectus, in the form filed by the Company with the Commission pursuant to Rule 424(b) under the Act on or before the second business day after the date hereof (or such earlier time as may be required under the Act) or, if no such filing is required, the form of final prospectus included in the Registration Statement at the time it became effective, is herein called the "Prospectus".
The Company, the Selling Stockholder, the Parent and the Underwriters agree as follows:
1. Sale and Purchase. Upon the basis of the warranties, representations and covenants, and subject to the terms and conditions herein set forth, the Company agrees to sell to the respective Underwriters and each of the Underwriters, severally and not jointly, agrees to purchase from the Company that number of Firm Shares which bears the same proportion to the aggregate number of Firm Shares to be issued and sold by the Company as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule A annexed hereto bears to the aggregate number of Firm Shares to be sold by the Company and the Selling Stockholder. In addition, upon the basis of the warranties, representations and covenants and subject to the terms and conditions herein set forth, the Selling Stockholder agrees to sell to the respective Underwriters and each of the Underwriters, severally and not jointly, agrees to purchase from the Selling Stockholder that number of Firm Shares which bears the same proportion to the aggregate number of Firm Shares to be sold by the Selling Stockholder as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule A annexed hereto bears to the aggregate number of Firm Shares to be sold by the Company and the Selling Stockholder. The purchase price in respect of the Shares to be purchased by the Underwriters from the Company and the Selling Stockholder shall be $ per Share. The Company and the Selling Stockholder are advised by you that the Underwriters intend (i) to make a public offering of their respective portions of the Firm Shares as soon after the effective date of the Registration Statement as in your judgment is advisable and (ii) initially to offer the Firm Shares upon the terms set forth in the Prospectus. You may from time to time increase or decrease the public offering price after the initial public offering to such extent as you may determine.
Upon the basis of the warranties, representations and covenants, and subject to the terms and conditions herein set forth, the Company and the Selling Stockholder also hereby grant to the several Underwriters the option to purchase, and the Underwriters shall have the right to purchase, severally and not jointly, from the Company and the Selling Stockholder, ratably in accordance with the number of Firm Shares to be purchased by each of
them, all or a portion of the Additional Shares as may be necessary to cover over-allotments made in connection with the offering of the Firm Shares, at the same purchase price per share to be paid by the Underwriters to the Company and the Selling Stockholder for the Firm Shares. This option may be exercised by you on behalf of the several Underwriters at any time (but not more than once) on or before the thirtieth day following the date hereof, by written notice to the Company and the Selling Stockholder. Such notice shall set forth the aggregate number of Additional Shares as to which the option is being exercised, and the date and time when the Additional Shares are to be delivered (such date and time being herein referred to as the additional time of purchase); provided, however, that the additional time of purchase shall not be earlier than the time of purchase (as defined below) nor earlier than the second business day1 after the date on which the option shall have been exercised nor later than the tenth business day after the date on which the option shall have been exercised. To the extent that the option is exercised in part, Additional Shares shall be sold by the Company and the Selling Stockholder pro rata. The aggregate number of Additional Shares to be sold to each Underwriter shall be the number which bears the same proportion to the aggregate number of Additional Shares being purchased as the number of Firm Shares set forth opposite the name of such Underwriter on Schedule A hereto bears to the total number of Firm Shares (subject, in each case, to such adjustment as you may determine to eliminate fractional shares).
2. Payment and Delivery. Payment of the purchase price for the Firm Shares shall be made to the Company and the Selling Stockholder by Federal Funds immediately available wire transfer, against delivery of the certificates for the Firm Shares to you through the facilities of the Depository Trust Company for the respective accounts of the Underwriters. Such payment and delivery shall be made at 10:00 A.M., New York City time, on December __, 1999 (unless another time shall be agreed to by you and the Company and the Selling Stockholder or unless postponed in accordance with the provisions of Section 8 hereof). The time at which such payment and delivery are actually made is hereinafter sometimes called the time of purchase. Certificates for the Firm Shares shall be delivered to you in definitive form in such names and in such denominations as you shall specify on the second business day preceding the time of purchase. For the purpose of expediting the checking of the certificates for the Firm Shares by you, the Company and the Selling Stockholder agree to make such certificates available to you for such purpose at least one full business day preceding the time of purchase.
Payment of the purchase price for the Additional Shares shall be made at the additional time of purchase in the same manner and at the same office as the payment for the Firm Shares. Certificates for the Additional Shares shall be delivered to you in definitive form in such names and in such denominations as you shall specify no later than the second business day preceding the additional time of purchase. For the purpose of expediting the checking of the certificates for the Additional Shares by you, the Company and the Selling Stockholder agree to make such certificates available to you for such purpose at least one full business day preceding the additional time of purchase.
3. Representations and Warranties of the Company, the Parent and the Selling Stockholder.
(i) The Company and the Parent jointly and severally represent and warrant to each of the Underwriters that:
(a) none of the Company, the Selling Stockholder or the Parent has received, or has notice of, any order of the Commission preventing or suspending the use of any Preliminary Prospectus, or instituting proceedings for that purpose, and each Preliminary Prospectus, at the time of filing thereof, conformed in all material respects to the requirements of the Act; and when the Registration Statement becomes effective, the Registration Statement and the Prospectus will conform in all material respects with the provisions of the Act, and the Registration Statement will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that each of the Company and the Parent makes no warranty or representation with respect to any statement contained in or omitted from the Registration Statement or the Prospectus in reliance upon and in conformity with information concerning the Underwriters (in their capacity as such) and furnished in writing by or on behalf of any Underwriter (in its capacity as such) through you (in your capacity as representatives of the several Underwriters) to the Company expressly for use in the Registration Statement or the Prospectus; and none of the Company, the Selling Stockholder, the Parent nor any of their respective affiliates has distributed any offering material in connection with the offering or sale of the Shares other than the Registration Statement, the Preliminary Prospectus, the Prospectus or any other materials, if any, permitted by the Act;
(b) as of the date of this Agreement, the Company has an authorized capitalization as set forth under the heading entitled "Actual" in the section of the
Registration Statement and the Prospectus entitled "Capitalization" and, as of the time of purchase and the additional time of purchase, as the case may be, the Company shall have an authorized capitalization as set forth under the heading entitled "As Adjusted" in the section of the Registration Statement and the Prospectus entitled "Capitalization"; all of the issued and outstanding shares of capital stock of the Company have been duly and validly authorized and issued and are fully paid and non-assessable, have been issued in compliance in all material respects with all federal and state securities laws and were not issued in violation of any preemptive right, resale right, right of first refusal or similar right;
(c) the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, with the requisite corporate power and authority to own, lease and operate its properties and conduct its business as described in the Registration Statement;
(d) the Company is duly qualified to do business as a foreign corporation in good standing in each jurisdiction where the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to so qualify would not reasonably be expected to have a material adverse effect on the business, operations, prospects, properties, condition (financial or otherwise) or results of operation of the Company and the Subsidiaries (as hereinafter defined) taken as a whole (a "Material Adverse Effect"). The Company has no subsidiaries (as defined in the Act) other than eSpeed Securities, Inc., eSpeed Government Securities, Inc., eSpeed Securities International Limited and eSpeed Markets, Inc. (collectively, the "Subsidiaries"); the Company owns 100% of the outstanding capital stock of the Subsidiaries; other than the Subsidiaries, the Company does not own, directly or indirectly, any shares of stock or any other equity or long-term debt of any corporation or have any direct or indirect equity interest or ownership of long-term debt in any firm, partnership, joint venture, association or other entity; complete and correct copies of the certificates of incorporation and of the bylaws of the Company and the Subsidiaries and all amendments thereto have been delivered to you; each Subsidiary has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with the requisite corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement; each Subsidiary is duly qualified to do business as a foreign corporation in good standing in each jurisdiction where the ownership or leasing of the properties or the conduct of its business requires such qualification, except where the failure to so qualify would not reasonably be expected to have a Material Adverse Effect; all of the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and non-assessable and are owned by the Company subject to no security interest, other
encumbrance or adverse claims; no options, warrants or other rights to purchase, agreements or other obligations to issue or rights to convert any obligation into shares of capital stock or ownership interests in the Subsidiaries are outstanding.
(e) the Company and each of the Subsidiaries are in compliance in all material respects with the applicable laws, rules, regulations and directives, and applicable orders, issued or administered by each jurisdiction in which they conduct their respective businesses;
(f) none of the Company or any of the Subsidiaries or the Selling Stockholder or the Parent or any of their respective subsidiaries is in breach or violation of, or in default under (nor has any event occurred which with notice, lapse of time, or both would result in any breach or violation of, or constitute a default under) (each such breach, violation, default or event, a "Default Event"), (i) its respective charter or by-laws or (ii) in the performance or observance of any obligation, agreement, covenant or condition contained in any license, permit, indenture, mortgage, deed of trust, bank loan or credit agreement or other evidence of indebtedness, or any lease, contract or other agreement or instrument to which the Company, the Selling Stockholder, the Parent or any of their respective subsidiaries is a party or by which any of them or any of their properties is bound or affected or under any federal, state, local or foreign law, regulation or rule or any decree, judgment or order applicable to the Company, the Selling Stockholder, the Parent or any of their respective subsidiaries, other than such Default Events as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect (A) in the case of the Selling Stockholder and the Parent and their respective subsidiaries (other than the Company and the Subsidiaries), with respect to clause (i) and (B) in the case of the Company, the Selling Stockholder and the Parent and their respective subsidiaries, with respect to clause (ii); and the execution, delivery and performance of this Agreement, the issuance and sale of the Shares and the consummation of the transactions contemplated hereby does not constitute and will not result in a Default Event under (x) any provisions of the charter or by-laws of the Company, the Selling Stockholder or the Parent or any of their respective subsidiaries or (y) under any provision of any license, permit, indenture, mortgage, deed of trust, bank loan or credit agreement or other evidence of indebtedness, or any lease, contract or other agreement or instrument to which the Company, the Selling Stockholder or the Parent or any of their respective subsidiaries is a party or by which any of them or their respective properties may be bound or affected, or under any federal, state, local or foreign law, regulation or rule or any decree, judgment or order applicable to the Company, the Selling Stockholder, or the Parent or any of their respective subsidiaries, except for such Default Events as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect (a) in the case of the Selling Stockholder
and the Parent and their respective subsidiaries (other than the Company and the Subsidiaries), with respect to clause (x) and (b) in the case of the Company, the Selling Stockholder and the Parent and their respective subsidiaries, with respect to clause (y);
(g) this Agreement has been duly authorized, executed and delivered by each of the Company, the Selling Stockholder and the Parent and is a legal, valid and binding agreement of each of the Company, the Selling Stockholder and the Parent;
(h) the capital stock of the Company, including the Shares, conforms in all material respects to the description thereof contained in the Registration Statement and Prospectus;
(i) the Shares have been duly and validly authorized by the Company and, when issued by the Company and delivered by the Company or the Selling Stockholder, as the case may be, against payment therefor as provided herein, will be validly issued, fully paid and non-assessable;
(j) no approval, authorization, consent or order of or filing with any national, state or local governmental or regulatory commission, board, body, authority or agency is required to be obtained or made by the Company, the Selling Stockholder, the Parent or any of their respective affiliates in connection with the issuance and sale of the Shares or the consummation by the Company, the Selling Stockholder and the Parent of the transactions contemplated hereby other than registration of the Shares under the Act and under the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (collectively called the "Exchange Act"), and any necessary qualification under the securities or blue sky laws of the various jurisdictions in which the Shares are being offered by the Underwriters or under Rule 2710 and Rule 2720 of NASD Regulation, Inc. ("NASDR");
(k) except as disclosed in the Prospectus, no person has the right, contractual or otherwise, to cause the Company to issue to it, or register pursuant to the Act, any shares of capital stock of the Company upon the issue and sale of the Shares to the Underwriters hereunder, nor does any person have preemptive rights, co-sale rights, rights of first refusal or other rights to purchase any of the Shares or to underwrite the offer and sale of the Shares;
(l) Deloitte & Touche LLP, whose report on the consolidated financial statements of the Company and the Subsidiaries is filed with the Commission as part of the Registration Statement and Prospectus, are independent public accountants as required by the Act;
(m) each of the Company and the Subsidiaries has all necessary licenses, permits, authorizations, consents and approvals and has made all necessary filings required under any federal, state, local or foreign law, regulation or rule (collectively, "Permits"), and has obtained all necessary authorizations, consents and approvals from other persons (collectively, "Approvals"), in order to conduct its respective business as described in the Prospectus, other than such Permits and Approvals the failure to obtain which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect; neither the Company nor any of the Subsidiaries is in violation of, or in default under, any such license, permit, authorization, consent or approval or any federal, state, local or foreign law, regulation or rule or any decree, order or judgment applicable to the Company or any of the Subsidiaries the effect of which, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect;
(n) all legal or governmental proceedings, contracts, leases or documents of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement have been so described or filed as required;
(o) except as disclosed in the Prospectus, there are no actions, suits, claims, investigations or proceedings pending or threatened to which the Company, the Selling Stockholder or the Parent or any of their respective subsidiaries or any of their respective officers or directors is a party or of which any of their respective properties is subject at law or in equity, or before or by any federal, state, local or foreign governmental or regulatory commission, board, body, authority or agency which, if adversely decided, could reasonably be expected to result in a judgment, decree or order having a Material Adverse Effect or prevent consummation of the transactions contemplated hereby;
(p) the audited financial statements included in the Registration Statement and the Prospectus present fairly in all material respects the consolidated financial position of the Company and the Subsidiaries as of the dates indicated and the consolidated results of operations and cash flows of the Company and the Subsidiaries for the periods specified; such financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis during the periods involved; and the pro forma financial data included in the Registration Statement and the Prospectus present fairly in all material respects the information purported to be shown therein and have been prepared in conformity with the requirements of the Act;
(q) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been (i) any material adverse change, or any development with respect to the Company, the Selling Stockholder or Parent which, in the reasonable judgment of the Company or the
Parent, as the case may be, is likely to cause a material adverse change, in the business, properties or assets described or referred to in the Registration Statement, or the results of operations, condition (financial or otherwise), business, operations or prospects of the Company and the Subsidiaries taken as a whole, (ii) any transaction which is material to the Company or the Subsidiaries (other than the completion of the transactions relating to the contribution to and the acquisition by the Company and the Subsidiaries of assets from the Parent and its subsidiaries as described in the Prospectus under the caption "Relationship with Cantor - The Formation Transactions" (the "Formation Transactions")), (iii) any obligation, direct or contingent, which is material to the Company and the Subsidiaries taken as a whole, incurred by the Company or the Subsidiaries, (iv) any change in the capital stock or outstanding indebtedness of the Company or the Subsidiaries or (v) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company. Neither the Company nor the Subsidiaries has any material contingent obligation which is not disclosed in the Registration Statement.
(r) the Company has obtained agreements substantially in the forms included in Exhibit I hereto of the Parent, the Selling Stockholder and each of its other holders of Class A Common Stock and Class B Common Stock (collectively, "Common Stock") and securities convertible into or exchangeable or exercisable for Common Stock not to sell, offer to sell, contract to sell, hypothecate, grant any option to sell or otherwise dispose of, directly or indirectly, any shares of Common Stock or securities convertible into or exchangeable or exercisable for Common Stock or warrants or other rights to purchase Common Stock for a period of 180 days after the date of the Prospectus without the prior written consent of Warburg Dillon Read LLC ("WDR"), subject to such exceptions as may be set forth in Exhibit I hereto;
(s) the Company is not and, after giving effect to the offering and sale of the Shares, will not be an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended (the "Investment Company Act");
(t) any statistical and market-related data included in the Prospectus are based on or derived from sources that the Company and the Parent believe to be reliable and accurate, and the Company has obtained the written consent to the use of such data from such sources to the extent required;
(u) none of the Company, the Selling Stockholder, the Parent or any of their respective affiliates has taken, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any security of the Company in violation of the Exchange Act or any other laws to facilitate the sale or resale of the Shares;
(v) the Company and the Subsidiaries maintain insurance of the types and in amounts reasonably adequate for their respective businesses, including, but not limited to, insurance covering real and personal property owned or leased by the Company and the Subsidiaries against theft, damage, destruction, acts of vandalism and other risks customarily insured against, all of which insurance is in full force and effect, except as would not have a Material Adverse Effect;
(w) none of the Company, the Parent or any of their respective subsidiaries has sustained since the date of the latest audited financial statements included in the Prospectus any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus or other than any loss or interference which would not have a Material Adverse Effect;
(x) upon completion of the Formation Transactions, the Company and the Subsidiaries will have good title to all personal property to be owned by them as described in the Prospectus free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; and, upon completion of the Formation Transactions, any real property and buildings to be held under lease by the Company or any Subsidiary will be held by it under valid, subsisting and, with respect to the Company or such Subsidiary, enforceable leases, subleases or rights of use agreements with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company or such Subsidiary;
(y) other than as set forth in the Prospectus, or as would not reasonably be expected individually or in the aggregate to have a Material Adverse Effect, upon completion of the Formation Transactions, the Company and the Subsidiaries will own, possess, license or have other rights to use, or will be able to acquire, license or otherwise obtain rights to use, on reasonable terms, all patents, trademarks, servicemarks, trade names, copyrights, trade secrets, information, proprietary rights and processes ("Intellectual Property") necessary for their business as described in the Prospectus and, to the Company's and the Parent's knowledge, necessary in connection with the products and services under development, without, to the Company and the Parent's knowledge after due inquiry, any conflict with or infringement of the interests of others, and have taken all reasonable steps necessary to secure interests in such
Intellectual Property with respect to the business as described in the Prospectus; except as set forth in the Prospectus, neither the Company nor the Parent is aware of any options, licenses or agreements of any kind relating to the Intellectual Property of the Company or any Subsidiary that are, or upon completion of the Formation Transactions will be, outstanding and which are required to be set forth in the Prospectus, and, except as set forth in the Prospectus, upon completion of the Formation Transactions, neither the Company nor any Subsidiary will be a party to or bound by any options, licenses or agreements with respect to the Intellectual Property of any other person or entity which are required to be set forth in the Prospectus; none of the technology to be employed by the Company and the Subsidiaries upon completion of the Formation Transactions has been or will be obtained or is or will be used by the Company, the Parent or any of their respective subsidiaries in violation of any contractual obligation binding (or to be binding upon completion of the Formation Transactions) on the Company, the Parent or any of their respective subsidiaries or any of their respective directors or executive officers or, to the Company's and the Parent's knowledge, any employees of the Company, the Parent or any of their respective subsidiaries or otherwise in knowing violation after due inquiry of the rights of any persons, other than any violation which would not individually or in the aggregate have a Material Adverse Effect; except as disclosed in the Prospectus, none of the Company, the Parent or any of their respective subsidiaries has received any written communications alleging that the Company, the Parent or any of their respective subsidiaries has violated, infringed or conflicted with, or, by conducting its business as set forth in the Prospectus, would violate, infringe or conflict with any of the Intellectual Property of any other person or entity other than any such violation, infringement or conflict which would not individually or in the aggregate have a Material Adverse Effect;
(z) the Parent and the Company have reviewed the operations of the Company, the Parent and their respective subsidiaries and any third parties with which the Company, the Parent and their respective subsidiaries have a material relationship to evaluate the extent to which the business or operations of the Company and the Subsidiaries will be affected by the Year 2000 Problem (as defined below). As a result of such review, the Parent and the Company have no reason to believe, and do not believe, that the Year 2000 Problem will have a Material Adverse Effect or result in any material loss or interference with the business or operations of the Company and the Subsidiaries. The "Year 2000 Problem" means any significant risk that computer hardware or software used in the receipt, transmission, processing, manipulation, storage, retrieval, retransmission or other utilization of data or in the operation of mechanical or electrical systems of any kind will not, in the case of dates
or time periods occurring after December 31, 1999, function at least as effectively as in the case of dates or time periods occurring prior to January 1, 2000;
(aa) none of the Company, the Parent or any of their respective subsidiaries has violated any foreign, federal, state or local law or regulation relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants, nor any federal or state law relating to discrimination in the hiring, promotion or pay of employees nor any applicable federal or state wages and hours laws, nor any provisions of the Employee Retirement Income Security Act or the rules and regulations promulgated thereunder, which individually or in the aggregate might result in a Material Adverse Effect;
(bb) the Company and the Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences;
(cc) all tax returns required to be filed by the Company and each of the Subsidiaries in any jurisdiction have been filed, other than those filings being contested in good faith, and all taxes, including withholding taxes, penalties and interest, assessments, fees and other charges due pursuant to such returns or pursuant to any assessment received by the Company or any of the Subsidiaries have been paid, other than those being contested in good faith and for which adequate reserves have been provided;
(dd) each of eSpeed Securities, Inc. and eSpeed Government Securities, Inc. is registered under the Exchange Act as a broker-dealer and is a member in good standing of the National Association of Securities Dealers, Inc. and neither the Company nor any other Subsidiary is required to be so registered; and to the extent required in connection with their respective businesses, each of the Company and the Subsidiaries is also registered as a broker-dealer in each state and other jurisdiction in which such registration is required;
(ee) each of the Assignment and Assumption Agreements, the Joint Services Agreement and the Administrative Services Agreement (each as defined in the Prospectus) has been duly authorized, executed and delivered by each of the
Company, the Parent and each other party thereto and constitutes a legal, valid
and binding agreement of each of the Company, the Parent and each other party
thereto; none of the execution, delivery and performance of the Assignment and
Assumption Agreements, the Joint Services Agreement and the Administrative
Services Agreement, the consummation of the transactions contemplated thereby or
the consummation of the Formation Transactions constitute or will result in a
Default Event (i) under any provisions of the charter or by-laws of the Company,
the Selling Stockholder or the Parent or any of their respective subsidiaries or
(ii) under any provision of any license, permit, indenture, mortgage, deed of
trust, bank loan or credit agreement or other evidence of indebtedness, or any
lease, contract or other agreement or instrument to which the Company, the
Selling Stockholder or the Parent or any of their respective subsidiaries is a
party or by which any of them or their respective properties may be bound or
affected, or under any federal, state, local or foreign law, regulation or rule
or any decree, judgment or order applicable to the Company, the Selling
Stockholder or the Parent or any of their respective subsidiaries, except for
such Default Events as would not individually or in the aggregate reasonably be
expected to have a Material Adverse Effect (a) in the case of the Selling
Stockholder and the Parent and their respective subsidiaries (other than the
Company and the Subsidiaries), with respect to clause (i) and (b) in the case of
the Company, the Selling Stockholder and the Parent and their respective
subsidiaries, with respect to clause (ii), and all consents required in
connection with such transactions have been obtained other than such consents
the failure to obtain which could not individually or in the aggregate
reasonably be expected to have a Material Adverse Effect; and
(ff) the descriptions of the transactions and agreements described in the Prospectus under the caption "Relationship with Cantor" are accurate and complete in all material respects; and there are no material agreements or understandings between or among the Company, the Parent or any of their respective subsidiaries or affiliates relating to or affecting the Company or its Subsidiaries or their respective businesses other than as described in the Prospectus.
(ii) The Selling Stockholder represents and warrants to each of the Underwriters that:
(a) immediately prior to the time of purchase, the Selling Stockholder will be the lawful owner of the Shares to be sold by the Selling Stockholder hereunder and upon sale and delivery of, and payment for, the Shares to be sold by the Selling Stockholder hereunder, as provided herein, the Selling Stockholder will convey to the Underwriters good and marketable title to such Shares, free and clear of all liens, encumbrances and defects;
(b) the Selling Stockholder has not taken, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company in violation of the Exchange Act or any other laws to facilitate the sale or resale of the Shares;
(c) no approval, authorization, consent or order of any court or filing with any national, state or local governmental or regulatory commission, board, body, authority or agency is required to be obtained or made by the Selling Stockholder in connection with the sale of the Shares to be sold by Selling Stockholder or for the consummation by the Selling Stockholder of the transactions contemplated hereby other than registration of the Shares under the Act and under the Exchange Act, and any necessary qualification under the securities or blue sky laws of the various jurisdictions in which the Shares are being offered by the Underwriters or under Rule 2710 and Rule 2720 of the NASDR;
(d) this Agreement has been duly authorized, executed and delivered by the Selling Stockholder and is a legal, valid and binding agreement of the Selling Stockholder;
(e) the execution, delivery and performance of this Agreement, the sale of the Shares to be sold by the Selling Stockholder and the consummation of the transactions contemplated hereby by the Selling Stockholder does not and will not constitute a Default Event under any provisions of the charter or by-laws of the Selling Stockholder or any of its subsidiaries or under any provision of any license, permit, indenture, mortgage, deed of trust, bank loan or credit agreement or other evidence of indebtedness, or any lease, contract or other agreement or instrument to which the Selling Stockholder or any of its subsidiaries is a party or by which it or its properties may be bound or affected, or under any federal, state, local or foreign law, regulation or rule or any decree, judgment or order applicable to it or any of its subsidiaries, except for such Default Events as would not individually or in the aggregate reasonably be expected to have a material adverse effect on the ability of the Selling Stockholder to consummate the transactions contemplated hereby;
(f) the Selling Stockholder has no reason to believe that the
representations and warranties of the Company and the Parent contained in this
Section 3 are not true and correct, has reviewed the Registration Statement and
has no reason to believe that the Registration Statement contains any untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary
to make the statements therein not misleading, or that the Prospectus contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the Selling Stockholder makes no warranty or representation with respect to any statement contained in or omitted from the Registration Statement or the Prospectus in reliance upon and in conformity with information concerning the Underwriters (in their capacity as such) and furnished in writing by or on behalf of any Underwriter (in its capacity as such) through you (in your capacity as representatives of the several Underwriters) to the Company expressly for use in the Registration Statement or the Prospectus;
(g) the Selling Stockholder has not distributed any offering material in connection with the offering or sale of the Shares other than the Registration Statement, the Preliminary Prospectus, the Prospectus or any other materials, if any, permitted by the Act; and
(h) the Selling Stockholder has not received, and has no notice of, any order of the Commission preventing or suspending the use of any Preliminary Prospectus, or instituting proceedings for that purpose.
4. Certain Covenants of the Company and the Selling Stockholder.
(i) The Company hereby agrees (and, with respect to Section 4(i)(l), the Parent and the Selling Stockholder jointly and severally agree with the Company):
(a) to furnish such information as may be required and otherwise to cooperate in qualifying the Shares for offering and sale under the securities or blue sky laws of such states as you may designate and to maintain such qualifications in effect so long as required for the distribution of the Shares; provided that the Company shall not be required to qualify as a foreign corporation or to consent to the service of process under the laws of any such state (except service of process with respect to the offering and sale of the Shares); and to promptly advise you of the receipt by the Company of any notification with respect to the suspension of the qualification of the Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose;
(b) to make available to the Underwriters in New York City, as soon as practicable after the Registration Statement becomes effective, and thereafter from time to time to furnish to the Underwriters, as many copies of the Prospectus (or of the Prospectus as amended or supplemented if the Company shall have made any amendments or supplements thereto after the effective date of the Registration Statement) as the Underwriters may request for the purposes contemplated by the Act; in case any Underwriter is required to deliver a prospectus after the nine-month period
referred to in Section 10(a)(3) of the Act in connection with the sale of the Shares, the Company will prepare promptly upon request, but at the expense of such Underwriter, such amendment or amendments to the Registration Statement and such prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act;
(c) to advise you promptly and (if requested by you) to confirm such advice in writing, (i) when the Registration Statement has become effective and when any post-effective amendment thereto becomes effective and (ii) if Rule 430A under the Act is used, when the Prospectus is filed with the Commission pursuant to Rule 424(b) under the Act (which the Company agrees to file in a timely manner under such Rules);
(d) to advise you promptly, confirming such advice in writing (if requested by you), of any request by the Commission for amendments or supplements to the Registration Statement or Prospectus or for additional information with respect thereto, or of notice of institution of proceedings for, or the entry of a stop order suspending the effectiveness of the Registration Statement and, if the Commission should enter a stop order suspending the effectiveness of the Registration Statement, to make every reasonable effort to obtain the lifting or removal of such order as soon as possible; to advise you promptly of any proposal to amend or supplement the Registration Statement or Prospectus and to file no such amendment or supplement to which you shall object in writing;
(e) if necessary or appropriate, to file a registration statement pursuant to Rule 462(b) under the Act;
(f) to furnish to you and, upon request, to each of the other Underwriters
for a period of five years from the date of this Agreement (i) copies of any
reports or other communications which the Company shall send to its stockholders
or shall from time to time publish or publicly disseminate, (ii) copies of all
annual, quarterly and current reports filed with the Commission on Forms 10-K,
10-Q and 8-K, or such other similar form as may be designated by the Commission,
(iii) copies of documents or reports filed with any national securities exchange
on which any class of securities of the Company is listed, and (iv) such other
information as you may reasonably request regarding the Company or the
Subsidiaries, in each case as soon as reasonably practicable after such reports,
communications, documents or information become available;
(g) to advise the Underwriters promptly of the happening of any event known to the Company within the time during which a Prospectus relating to the
Shares is required to be delivered under the Act which, in the judgment of the Company, would require the making of any change in the Prospectus then being used so that the Prospectus would not include an untrue statement of material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they are made, not misleading, and, during such time, to prepare and furnish, at the Company's expense, to the Underwriters promptly such amendments or supplements to such Prospectus as may be necessary to reflect any such change and to furnish you a copy of such proposed amendment or supplement before filing any such amendment or supplement with the Commission;
(h) to make generally available to its security holders, and to deliver to
you, an earning statement of the Company (which will satisfy the provisions of
Section 11(a) of the Act) covering a period of twelve months beginning after the
effective date of the Registration Statement (as defined in Rule 158(c) of the
Act) as soon as is reasonably practicable after the termination of such
twelve-month period but not later than March 31, 2001;
(i) to furnish to you four signed copies of the Registration Statement, as initially filed with the Commission, and of all amendments thereto (including all exhibits thereto) and sufficient conformed copies of the foregoing (other than exhibits) for distribution of a copy to each of the other Underwriters;
(j) to furnish to you as early as reasonably practicable prior to the time
of purchase and the additional time of purchase, as the case may be, but not
later than two business days prior thereto, a copy of the latest available
unaudited interim consolidated financial statements, if any, of the Company and
the Subsidiaries which have been read by the Company's independent certified
public accountants, as stated in their letter to be furnished pursuant to
Section 6(d) hereof;
(k) to apply the net proceeds from the sale of the Shares in the manner set forth under the caption "Use of Proceeds" in the Prospectus;
(l) to pay all costs, expenses, fees and taxes (other than any transfer taxes and fees and disbursements of counsel for the Underwriters, except as set forth under Section 5 hereof and (iv) and (vi) below) in connection with (i) the preparation and filing of the Registration Statement, each Preliminary Prospectus, the Prospectus, and any amendments or supplements thereto, and the printing and furnishing of copies of each thereof to the Underwriters and to dealers (including costs of mailing and shipment), (ii) the registration, issue, sale and delivery of the Shares, (iii) the printing of this Agreement, any Agreement Among Underwriters, any dealer agreements, any Powers of Attorney and any closing documents (including compilations thereof) and
the reproduction and/or printing and furnishing of copies of each thereof to the Underwriters and (except closing documents) to dealers (including costs of mailing and shipment), (iv) the qualification of the Shares for offering and sale under state laws and the determination of their eligibility for investment under state law as aforesaid (including the legal fees and filing fees and other disbursements of counsel for the Underwriters not to exceed $10,000) and the printing and furnishing of copies of any blue sky surveys or legal investment surveys to the Underwriters and to dealers, (v) any listing of the Shares on any securities exchange or qualification of the Shares for quotation on NASDAQ (as defined herein) and any registration thereof under the Exchange Act, (vi) any filing for review of the public offering of the Shares by NASDR and (vii) the performance of the other obligations of the Company and the Selling Stockholder hereunder;
(m) for so long as the delivery of the Prospectus is required in connection with the offering or sale of the Shares, to furnish to you, before filing with the Commission, a copy of any document proposed to be filed pursuant to Section 13, 14 or 15(d) of the Exchange Act;
(n) not to sell, offer or agree to sell, contract to sell, grant any option to sell or otherwise dispose of, directly or indirectly, any shares of Common Stock or securities convertible into or exchangeable or exercisable for Common Stock or warrants or other rights to purchase Common Stock or any other securities of the Company that are substantially similar to Common Stock or permit the registration under the Act of any shares of Common Stock, except for the registration of the Shares and the sales to the Underwriters pursuant to this Agreement or on Form S-8 and except for issuances of Common Stock upon the exercise of outstanding options, warrants and debentures, for a period of 180 days after the date hereof (the "Lock-up Period"), without the prior written consent of WDR, other than shares registered and/or issued by the Company in connection with acquisitions of complementary operations or assets, provided, that the recipients thereof agree to the restrictions on transfer and disposal set forth in this paragraph for the remainder of the Lock-up Period; and
(o) to use its best efforts to cause the Common Stock to be listed for quotation on the Nasdaq Stock Market's National Market System ("NASDAQ").
(ii) The Selling Stockholder hereby agrees:
(a) to execute and deliver to the Underwriters a letter in the form contemplated by Section 3(i)(r);
(b) to advise the Underwriters promptly of the happening of any event known to the Selling Stockholder within the time during which a Prospectus relating to the Shares is required to be delivered under the Act which, in the judgment of the Selling Stockholder, would require the making of any change in the Prospectus then being used so that the Prospectus would not include an untrue statement of material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they are made, not misleading; and
(c) to pay all federal and other taxes, if any, on the transfer and sale of the Shares being sold by the Selling Stockholder to the Underwriters.
5. Reimbursement of Underwriters' Expenses. If the Shares are not delivered for any reason other than the termination of this Agreement pursuant to Section 8 hereof, the Company, the Selling Stockholder and the Parent, jointly and severally, shall, in addition to paying the amounts described in Section 4(i)(l) hereof, reimburse the Underwriters for all of their out-of-pocket expenses, including the reasonable fees and disbursements of their counsel.
6. Conditions of Underwriters' Obligations. The several obligations of the Underwriters hereunder are subject to the accuracy of the representations and warranties on the part of the Company, the Parent and the Selling Stockholder on the date hereof and at the time of purchase (and the several obligations of the Underwriters at the additional time of purchase are subject to the accuracy of the representations and warranties on the part of the Company, the Parent and the Selling Stockholder on the date hereof and at the time of purchase (unless previously waived) and at the additional time of purchase, as the case may be), the performance by the Company, the Parent and the Selling Stockholder of their obligations hereunder and to the following additional conditions precedent:
(a) You shall have received, at the time of purchase and at the additional time of purchase, as the case may be, an opinion of Morgan, Lewis & Bockius LLP, counsel for the Company, addressed to the Underwriters, and dated the time of purchase or the additional time of purchase, as the case may be, with reproduced copies for each of the other Underwriters and in form reasonably satisfactory to Dewey Ballantine LLP, counsel for the Underwriters, stating that:
(i) the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, with the requisite corporate power and authority to own, lease and operate its properties and conduct its business as described in the Registration Statement and the Prospectus, to execute and deliver this Agreement and to issue, sell and deliver the Shares as herein contemplated;
(ii) each of the Subsidiaries, other than eSpeed Securities International Limited (as to which such counsel need not opine), has been duly incorporated and is validly existing as a corporation in good standing under the laws of its respective jurisdiction of incorporation with the requisite corporate power and authority to own, lease and operate its respective properties and to conduct its respective business;
(iii) the Company and the Subsidiaries, other than eSpeed Securities International Limited (as to which such counsel need not opine), are duly qualified to do business as a foreign corporation in good standing in ______________;
(iv) this Agreement has been duly authorized, executed and delivered by the Company and is a legal, valid and binding agreement of the Company enforceable in accordance with its terms, except as enforcement of rights to indemnity and contribution hereunder may be limited by federal or state securities laws or principles of public policy and subject to the qualification that the enforceability of obligations of the Company hereunder may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors' rights generally and by general equitable principles;
(v) the Shares have been duly authorized by the Company and, when issued by the Company and delivered by the Company or the Selling Stockholder, as the case may be, to and paid for by the Underwriters in accordance with the terms hereof, will be validly issued and will be fully paid and non-assessable;
(vi) the Company has an authorized capitalization as set forth in the
Registration Statement and the Prospectus; the outstanding shares of
capital stock of the Company have been duly and validly authorized and
issued and are fully paid, nonassessable and free of statutory and, to such
counsel's knowledge, contractual preemptive rights, resale rights, rights
of first refusal and similar rights; the Shares when issued by the Company
will be free of statutory and, to such counsel's knowledge, contractual
preemptive rights; the certificates for the Shares are in proper form under
the Delaware General Corporation Law ("DGCL") and the holders of the Shares
will not be subject to personal liability by reason of being such holders;
p
(vii) the Company is the sole registered owner of _____ shares of
common stock of eSpeed Government Securities, Inc., _____ shares of
common stock of eSpeed Securities Inc., ____ shares of common stock of eSpeed Securities International Limited and ____ shares of common stock of eSpeed Markets, Inc. Such shares of capital stock (other than those of eSpeed Securities International Limited (as to which such counsel need not opine)) have been duly authorized and validly issued and are fully paid and non-assessable; such counsel has no knowledge of any other outstanding shares of capital stock of the Subsidiaries or any security interest, other encumbrance or adverse claim with respect to the shares of capital stock of the Subsidiaries owned by the Company; and such counsel has no knowledge of any options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligation into shares of capital stock or ownership interests in the Subsidiaries;
(viii) the capital stock of the Company, including the Shares, conforms in all material respects to the description thereof contained in the Registration Statement and Prospectus;
(ix) the Registration Statement and the Prospectus (except as to the financial statements and schedules and other financial, statistical and accounting data contained therein, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Act;
(x) the Registration Statement has become effective under the Act and, to such counsel's knowledge, no stop order proceedings with respect thereto are pending or threatened under the Act and any required filing of the Prospectus and any supplement thereto pursuant to Rule 424 under the Act has been made in the manner and within the time period required by such Rule 424;
(xi) no approval, authorization, consent or order of or filing with any national, state or local governmental or regulatory commission, board, body, authority or agency is required to be made or obtained by the Company in connection with the issuance and sale of the Shares and consummation by the Company of the transactions contemplated hereby other than registration of the Shares under the Act and the Exchange Act and under Rule 2710 and Rule 2720 of NASDR (except such counsel need express no opinion as to any necessary qualification under the state securities or blue sky laws of the various jurisdictions in which the Shares are being offered by the Underwriters);
(xii) the execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby do not constitute, and will not result in, a Default Event (a) under any provisions of the charter or by-laws of the Company or any of the Subsidiaries, other than eSpeed Securities International Limited (as to which such counsel need not opine), or (b) under any provision of any license, permit, indenture, mortgage, deed of trust, bank loan or credit agreement or other evidence of indebtedness, or any lease, contract or other agreement or instrument to which the Company or any of the Subsidiaries is a party or by which any of them or their respective properties may be bound or affected and which is filed as an exhibit to the Registration Statement, other than, in the case of clause (b), such Default Events as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect;
(xiii) to such counsel's knowledge, (a) none of the Company or any of
the Subsidiaries is in violation of its charter or by-laws and (b) no
Default Event exists under any license, permit, indenture, mortgage, deed
of trust, bank loan or credit agreement or other evidence of indebtedness,
or any lease, contract or other agreement or instrument to which the
Company or any of the Subsidiaries is a party or by which any of them or
their respective properties may be bound or affected and which is filed as
an exhibit to the Registration Statement, except, in the case of clause
(b), any such Default Events as would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect;
(xiv) to such counsel's knowledge, there are no contracts, licenses, agreements, leases or documents of a character which are required to be filed as exhibits to the Registration Statement or to be summarized or described in the Prospectus which have not been so filed, summarized or described as required;
(xv) to such counsel's knowledge, there are no actions, suits, claims, investigations or proceedings pending, or, to such counsel's knowledge, threatened to which the Company or any of the Subsidiaries is subject or of which any of their respective properties is subject at law or in equity or before or by any federal, state, local or foreign governmental or regulatory commission, board, body, authority or agency which are required to be described in the Prospectus but are not so described as required;
(xvi) the Company is not and, after giving effect to the offering and sale of the Shares, will not be an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the Investment Company Act;
(xvii) such counsel has read the statements in the Prospectus under the captions "Business Regulation", "Business Legal Proceedings", "Management 1999 Long-Term Incentive Plan", "Management Stock Purchase Plan", "Relationship with Cantor Assignment and Assumption Agreements", "Relationship with Cantor Joint Services Agreement", "Relationship with Cantor Administrative Services Agreement", "Description of Capital Stock" and "Shares Eligible for Future Sale", and insofar as such statements constitute summaries of legal matters, contracts, agreements, documents or proceedings referred to therein, or refer to statements of law or legal conclusions, such statements are accurate in all material respects and fairly present the information purported to be shown;
(xviii) each of the Assignment and Assumption Agreements, the Joint Services Agreement and the Administrative Services Agreement has been duly authorized, executed and delivered by the Company and each of the Subsidiaries party thereto, other than eSpeed Securities International Limited (as to which such counsel need not opine), and constitutes a legal, valid and binding agreement of the Company and each of the Subsidiaries party thereto, other than eSpeed Securities International Limited (as to which such counsel need not opine), enforceable against the Company and each such Subsidiary in accordance with its terms, subject to the qualification that the enforceability of the obligations of the Company and each of such Subsidiaries thereunder may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors' rights generally and by general equitable principles; none of the execution, delivery and performance of the Assignment and Assumption Agreements, the Joint Services Agreement and the Administrative Services Agreement, the consummation of the transactions contemplated thereby or the contribution to and the acquisition by the Company and its Subsidiaries of assets as described in the Prospectus under the caption "Relationship with Cantor -- The Formation Transactions," constitutes or will result in a Default Event (a) under any provisions of the charter or by-laws of the Company or any of the Subsidiaries, other than eSpeed Securities International Limited (as to which such counsel need not opine) or (b) under any provision of any license, permit, indenture, mortgage, deed of trust, bank loan or credit agreement or other evidence of indebtedness, or any lease, contract or other agreement or instrument to which the Company or the Subsidiaries is a party or by which any of them or their respective properties may be bound or affected and which is filed as an exhibit to the Registration
Statement, other than, in the case of clause (b), such Default Events that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; and
(xix) to the knowledge of such counsel, except as described in the Prospectus, no person is entitled to registration rights under the Act with respect to shares of capital stock or other securities of the Company.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company and the Parent, representatives of the independent public accountants of
the Company and representatives of the Underwriters at which the contents of the
Registration Statement and Prospectus were discussed and, although such counsel
is not passing upon and does not assume responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or Prospectus (except as and to the extent stated in subparagraphs
(vi), (viii) and (xvii) above), on the basis of the foregoing nothing has come
to the attention of such counsel that causes them to believe that the
Registration Statement or any amendment thereto at the time such Registration
Statement or amendment became effective contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, or that the
Prospectus or any supplement thereto at the date of such Prospectus or such
supplement, and at all times up to and including the time of purchase or
additional time of purchase, as the case may be, contained an untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading (it being understood
that such counsel need express no belief with respect to the financial
statements and schedules and other financial, statistical and accounting data
included in the Registration Statement or Prospectus).
(b) You shall have received, at the time of purchase and at the additional time of purchase, as the case may be, an opinion of Stephen M. Merkel, General Counsel of the Company and the Parent, addressed to the Underwriters, and dated the time of purchase or the additional time of purchase, as the case may be, with reproduced copies for each of the other Underwriters and in form reasonably satisfactory to Dewey Ballantine LLP, counsel for the Underwriters, stating that:
(i) this Agreement has been duly authorized, executed and delivered by each of the Parent and the Selling Stockholder and is a legal, valid and binding agreement of each of the Parent and the Selling Stockholder enforceable in accordance with its terms, except as enforcement of rights to
indemnity and contribution hereunder may be limited by federal or state securities laws or principles of public policy and subject to the qualification that the enforceability of obligations of the Parent and the Selling Stockholder hereunder may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors' rights generally and by general equitable principles;
(ii) no approval, authorization, consent or order of or filing with any national, state or local governmental or regulatory commission, board, body, authority or agency is required to be made or obtained by the Parent, the Selling Stockholder or any of their respective subsidiaries in connection with the issuance and sale of the Shares and consummation by the Parent and the Selling Stockholder of the transactions contemplated hereby other than registration of the Shares under the Act and the Exchange Act and under Rule 2710 and Rule 2720 of NASDR (except such counsel need express no opinion as to any necessary qualification under the state securities or blue sky laws of the various jurisdictions in which the Shares are being offered by the Underwriters);
(iii) the execution, delivery and performance of this Agreement by the Parent and the Selling Stockholder and the consummation by the Company, the Parent and the Selling Stockholder of the transactions contemplated hereby do not constitute, and will not result in, a Default Event (a) under any provisions of the charter or by-laws of the Company, the Parent or the Selling Stockholder or any of their respective subsidiaries or (b) under any provision of any license, permit, indenture, mortgage, deed of trust, bank loan or credit agreement or other evidence of indebtedness, or any lease, contract or other agreement or instrument to which the Company, the Parent or the Selling Stockholder or any of their respective subsidiaries is a party or by which any of them or their respective properties may be bound or affected and, in any such case, which is known to such counsel, or under any federal, state, local or foreign law, regulation or rule or any decree, judgment or order known by such counsel to be applicable to the Company, the Parent or the Selling Stockholder or any of their respective subsidiaries, other than, in the case of clause (b), such Default Events as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect;
(iv) to such counsel's knowledge, (a) none of the Company, the Parent or the Selling Stockholder or any of their respective subsidiaries is in violation of its charter or by-laws and (b) no Default Event exists under any license, permit, indenture, mortgage, deed of trust, bank loan or credit
agreement or other agreement or instrument to which the Company, the Parent or the Selling Stockholder or any of their respective subsidiaries is a party or by which any of them or their respective properties may be bound or affected and which is known to such counsel or under any federal, state, local or foreign law, regulation or rule or any decree, judgment or order known by such counsel to be applicable to the Company, the Parent or the Selling Stockholder or any of their respective subsidiaries, except in all such cases with respect to clauses (a) and (b) as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect;
(v) to such counsel's knowledge, there are no actions, suits, claims, investigations or proceedings pending or, to such counsel's knowledge, threatened to which the Parent or the Selling Stockholder or any of their respective subsidiaries is subject or of which any of their respective properties is subject at law or in equity or before or by any federal, state, local or foreign governmental or regulatory commission, board, body, authority or agency which are required to be described in the Prospectus but are not so described as required;
(vi) each of the Assignment and Assumption Agreements, the Joint Services Agreement and the Administrative Services Agreement has been duly authorized, executed and delivered by the Company, the Parent and each other party thereto and constitutes a legal, valid and binding agreement of the Company, the Parent and each other party thereto enforceable in accordance with its terms, subject to the qualification that the enforceability of the obligations of the Company, the Parent and each other party thereto thereunder may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors' rights generally and by general equitable principles; none of the execution, delivery and performance of the Assignment and Assumption Agreements, the Joint Services Agreement and the Administrative Services Agreement, the consummation of the transactions contemplated thereby or the contribution to and the acquisition by the Company of assets as described in the Prospectus under the caption "Relationship with Cantor -- The Formation Transactions," constitutes or will result in a Default Event under any provisions of the charter or by-laws of the Company, the Parent or any other party thereto or any of their respective subsidiaries or under any provision of any license, permit, indenture, mortgage, deed of trust, bank loan or credit agreement or other evidence of indebtedness, or any lease, contract or other agreement or instrument to which the Company, the Parent or any other party thereto or any of their respective subsidiaries is a party or by which any of them or their respective properties may be bound or
affected and which is known to such counsel or under any federal, state, local or foreign law, regulation or rule or any decree, judgment or order known by such counsel to be applicable to the Company, the Parent or any other party thereto or any of their respective subsidiaries, other than such Default Events that would not individually or in the aggregate reasonably be expected to have a Material Adverse Effect;
(vii) such counsel has read the statements in the Prospectus under the captions "Risk Factors -- Risks Related to Our Business -- If Cantor or we are unable to protect the intellectual property rights we license from Cantor, our ability to operate electronic trading marketplaces may be materially adversely affected", "Risk Factors -- Risks Related to Our Business -- If it becomes necessary to protect or defend our intellectual property rights, we may have to resort to costly litigation", "Risk Factors -- Risks Related to Our Business -- If our software licenses from third parties are terminated, our ability to operate our business may be materially adversely affected", "Risk Factors -- Risks Related to Our Business -- If the strength of our domain names is diluted, the value of our proprietary rights may decrease", "Risk Factors -- Risks Related to Our Business -- If we infringe on patent rights or copyrights of others, we could become involved in costly litigation", "Business Our Intellectual Property", "Business -- Regulation", "Business -- Legal Proceedings" and "Relationship with Cantor" and insofar as such statements constitute summaries of legal matters, contracts, agreements, documents or proceedings referred to therein, or refer to statements of law or legal conclusions, such statements are accurate in all material respects and fairly present the information purported to be shown;
(viii) the Selling Stockholder has full legal right and authority to sell, transfer and deliver in the manner provided in this Agreement the Shares being sold by the Selling Stockholder hereunder; and
(ix) delivery by the Selling Stockholder to the several Underwriters of certificates for the Shares being sold hereunder by the Selling Stockholder, against payment therefor as provided herein, assuming each of the Underwriters has purchased the Selling Stockholder's shares in good faith and without notice of any adverse claim, will pass good and marketable title to such Shares to the several Underwriters, free and clear of all liens, encumbrances and defects.
In addition, such counsel shall state that such counsel has participated in conferences with officers and other representatives of the Company and the Parent,
representatives of the independent public accountants of the Company and representatives of the Underwriters at which the contents of the Registration Statement and Prospectus were discussed and, although such counsel is not passing upon and does not assume responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or Prospectus (except as and to the extent stated in subparagraph (vii) above), on the basis of the foregoing nothing has come to the attention of such counsel that causes such counsel to believe that the Registration Statement or any amendment thereto at the time such Registration Statement or amendment became effective contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus or any supplement thereto at the date of such Prospectus or such supplement, and at all times up to and including the time of purchase or additional time of purchase, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no belief with respect to the financial statements and schedules and other financial, statistical and accounting data included in the Registration Statement or Prospectus).
(c) You shall have received at the time of purchase and at the additional time of purchase, as the case may be, the opinion of Norton Rose, special international counsel to the Company, dated the time of purchase or the additional time of purchase, as the case may be, stating that:
(i) eSpeed Securities International Limited has been duly incorporated and is validly existing as a corporation in good standing under the laws of England and Wales, with the requisite corporate power and authority to own, lease and operate its respective properties and to conduct its respective business; and all of the outstanding shares of capital stock of eSpeed Securities International Limited have been duly authorized and validly issued and are fully paid and non-assessable and, to the knowledge of such counsel, are owned by the Company;
(ii) eSpeed Securities International Limited is duly qualified to do business as a foreign corporation in good standing in ;
(iii) the execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby do not constitute, and will not result in, a Default Event
under any provisions of the articles and memorandum of association of eSpeed Securities International Limited;
(iv) each of the Assignment and Assumption Agreement (international version), the Joint Services Agreement and the Administrative Services Agreement has been duly authorized, executed and delivered by eSpeed Securities International Limited and constitutes a legal, valid and binding agreement of eSpeed Securities International Limited enforceable in accordance with its terms, subject to the qualification that the enforceability of the obligations of eSpeed Securities International Limited thereunder may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors' rights generally and by general equitable principles; and none of the execution, delivery and performance of the Assignment and Assumption Agreements, the Joint Services Agreement and the Administrative Services Agreement, the consummation of the transactions contemplated thereby or the contribution to and the acquisition by the Company and its Subsidiaries of assets as described in the Prospectus under the caption "Relationship with Cantor -- The Formation Transactions," constitutes or will result in a Default Event under any provisions of the charter or by-laws of eSpeed Securities International Limited; and
(v) nothing has come to such counsel's attention that causes them to believe that the statements with respect to regulatory matters (solely insofar as such statements pertain to England and Wales) included in the Prospectus, as of its date and as of the date of such opinion, contained or contains an untrue statement of material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.
(d) You shall have received from Deloitte & Touche LLP letters dated, respectively, the date of this Agreement and the time of purchase and additional time of purchase, as the case may be, and addressed to the Underwriters (with reproduced copies for each of the Underwriters) in the forms heretofore approved by WDR.
(e) You shall have received at the time of purchase and at the additional time of purchase, as the case may be, the opinion of Dewey Ballantine LLP, counsel for the Underwriters, dated the time of purchase or the additional time of purchase, as the case may be, with respect to the issuance and sale of the Shares by the Company, the Registration Statement, the Prospectus (together with any supplement thereto) and other related matters as the Underwriters may require.
(f) No amendment or supplement to the Registration Statement or Prospectus shall at any time have been filed to which you have objected or shall object in writing.
(g) The Registration Statement shall have become effective, at or before 5:30 P.M., New York City time, on the date of this Agreement, unless a later time shall be agreed to by the Company and you in writing or by telephone, confirmed in writing, and, if Rule 430A under the Act is used, the Prospectus shall have been filed with the Commission no later than 5:30 P.M., New York City time, on the second full business day after the date of this Agreement; provided, however, that the Company and you and any group of Underwriters, including you, who have agreed hereunder to purchase in the aggregate at least 50% of the Firm Shares may from time to time agree on a later date.
(h) Prior to the time of purchase or the additional time of purchase, as the case may be, (i) no stop order with respect to the effectiveness of the Registration Statement shall have been issued under the Act or proceedings initiated under Section 8(d) or 8(e) of the Act; (ii) the Registration Statement and all amendments thereto, or modifications thereof, if any, shall not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and (iii) the Prospectus and all amendments or supplements thereto, or modifications thereof, if any, shall not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they are made, not misleading.
(i) Between the time of execution of this Agreement and the time of purchase or the additional time of purchase, as the case may be, (i) no material and adverse change, financial or otherwise (other than as referred to in the Registration Statement and Prospectus), in the operations, business, condition or prospects of the Company and the Subsidiaries taken as a whole shall occur or become known and (ii) no transaction which is material and unfavorable to the Company shall have been entered into by the Company or any of the Subsidiaries.
(j) Each of the Company, the Parent and the Selling Stockholder will, at the time of purchase or additional time of purchase, as the case may be, deliver to you a certificate of the Company, the Parent or the Selling Stockholder, as the case may be, signed by two of its executive officers or partners to the effect that the representations and warranties of the Company, the Parent or the Selling Stockholder, as the case may be, as set forth in this Agreement are true and correct as of each such date, that the Company, the Parent or the Selling Stockholder, as the case may be, has performed
such of its obligations under this Agreement as are to be performed at or before
the time of purchase and at or before the additional time of purchase, as the
case may be, and the conditions set forth in paragraphs (h) and (i) of this
Section 6 have been met.
(k) You shall have received signed letters, dated the date of this Agreement, from each of the holders of Common Stock and securities convertible into or exchangeable or exercisable for Common Stock (including the Parent and the Selling Stockholder) in the form and to the effect contemplated by Section 3(i)(r).
(l) The Company, the Parent and the Selling Stockholder shall have furnished to you such other documents and certificates as to the accuracy and completeness of any statement in the Registration Statement and the Prospectus as of the time of purchase and the additional time of purchase, as the case may be, as you may reasonably request.
(m) The Shares shall have been approved for listing for quotation on NASDAQ, subject only to notice of issuance at or prior to the time of purchase or the additional time of purchase, as the case may be.
(n) The Formation Transactions shall have been completed substantially in the manner contemplated by the Prospectus.
7. Effective Date of Agreement; Termination. This Agreement shall
become effective (i) if Rule 430A under the Act is not used, when you shall have
received notification of the effectiveness of the Registration Statement, or
(ii) if Rule 430A under the Act is used, when the parties hereto have executed
and delivered this Agreement.
The obligations of the several Underwriters hereunder shall be subject to termination in the absolute discretion of you or any group of Underwriters (which may include you) which has agreed to purchase in the aggregate at least 50% of the Firm Shares, (a) if, since the time of execution of this Agreement or the respective dates as of which information is given in the Registration Statement and Prospectus, there has been any material adverse and unfavorable change, financial or otherwise (other than as referred to in the Registration Statement and Prospectus), in the operations, business, condition or prospects of the Company and the Subsidiaries taken as a whole, which would, in your judgment or in the judgment of such group of Underwriters, make it impracticable to market the Shares, or (b) if, at any time prior to the time of purchase or, with respect to the purchase of any Additional Shares, the additional time of purchase, as the case may be, trading in securities on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market shall have been suspended or limitations or minimum prices shall have been established on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market, or
if a banking moratorium shall have been declared either by the United States or New York State authorities, or if the United States shall have declared war in accordance with its constitutional processes or there shall have occurred any material outbreak or escalation of hostilities or other national or international calamity or crisis of such magnitude in its effect on the financial markets of the United States as, in your judgment or in the judgment of such group of Underwriters, to make it impracticable to market the Shares.
If any Underwriter elects to terminate this Agreement as provided in this Section 7, the Company, the Parent, the Selling Stockholder and each other Underwriter shall be notified promptly by letter or telegram from such terminating Underwriter.
If the sale to the Underwriters of the Shares, as contemplated by this Agreement, is not carried out by the Underwriters for any reason permitted under this Agreement or if such sale is not carried out because the Company, the Parent or the Selling Stockholder shall be unable to comply with any of the terms of this Agreement, the Company and the Parent shall not be under any obligation or liability under this Agreement (except to the extent provided in Sections 4(i)(1), 5 and 9 hereof), and the Underwriters shall be under no obligation or liability to the Company, the Parent and the Selling Stockholder under this Agreement (except to the extent provided in Section 9 hereof) or to one another hereunder.
8. Increase in Underwriters' Commitments. Subject to Sections 6 and 7,
if any Underwriter shall default in its obligation to purchase and pay for the
Firm Shares to be purchased by it hereunder (otherwise than for a reason
sufficient to justify the termination of this Agreement under the provisions of
Section 7 hereof) and if the number of Firm Shares which all Underwriters so
defaulting shall have agreed but failed to purchase and pay for does not exceed
10% of the total number of Firm Shares, the non-defaulting Underwriters shall
purchase and pay for (in addition to the aggregate number of Firm Shares they
are obligated to purchase pursuant to Section 1 hereof) the number of Firm
Shares agreed to be purchased by all such defaulting Underwriters, as
hereinafter provided. Such Shares shall be purchased and paid for by such
non-defaulting Underwriter or Underwriters in such amount or amounts as you may
designate with the consent of each Underwriter so designated or, in the event no
such designation is made, such Shares shall be purchased and paid for by all
non-defaulting Underwriters pro rata in proportion to the aggregate number of
Firm Shares set opposite the names of such non-defaulting Underwriters in
Schedule A.
Without relieving any defaulting Underwriter from its obligations hereunder, the Company and the Selling Stockholder agree with the non-defaulting Underwriters that they will not sell any Firm Shares hereunder unless all of the Firm Shares are purchased by the Underwriters (or by substituted Underwriters selected by you with the approval of the Company and the Selling Stockholder or selected by the Company and the Selling Stockholder with your approval).
If a new Underwriter or Underwriters are substituted by the Underwriters or by the Company and the Selling Stockholder for a defaulting Underwriter or Underwriters in accordance with the foregoing provision, the Company and the Selling Stockholder or you shall have the right to postpone the time of purchase for a period not exceeding five business days in order that any necessary changes in the Registration Statement and Prospectus and other documents may be effected.
The term Underwriter as used in this Agreement shall refer to and include any Underwriter substituted under this Section 8 with like effect as if such substituted Underwriter had originally been named in Schedule A.
If the aggregate number of Shares which the defaulting Underwriter or Underwriters agreed to purchase exceeds 10% of the total number of Shares which all Underwriters agreed to purchase hereunder, and if neither the non-defaulting Underwriters nor the Company shall make arrangements within the five business day period stated above for the purchase of all the Shares which the defaulting Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall be terminated without further act or deed and without any liability on the part of the Company, the Parent and the Selling Stockholder to any non-defaulting Underwriter and without any liability on the part of any non-defaulting Underwriter to the Company, the Parent and the Selling Stockholder. Nothing in this paragraph, and no action taken hereunder, shall relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement.
9. Indemnity and Contribution.
(a) The Company, the Parent and the Selling Stockholder jointly and severally agree to indemnify, defend and hold harmless each Underwriter, its partners, directors and officers, and any person who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, and the successors and assigns of all of the foregoing persons from and against any loss, damage, expense, liability or claim (including the reasonable cost of investigation) which, jointly or severally, any such Underwriter or any such person may incur under the Act, the Exchange Act, the common law or otherwise, insofar as such loss, damage, expense, liability or claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or in the Registration Statement as amended by any post-effective amendment thereof by the Company) or in a Prospectus (the term Prospectus for the purpose of this Section 9 being deemed to include any Preliminary Prospectus, the Prospectus and the Prospectus as amended or supplemented by the Company), or arises out of or is based upon any omission or alleged omission to state a material fact required to be stated in either such Registration Statement or Prospectus or necessary to make the statements made therein not misleading, except insofar as any such loss, damage, expense, liability or claim arises out of
or is based upon any untrue statement or alleged untrue statement of a material fact contained in and in conformity with information furnished in writing by or on behalf of any Underwriter (in its capacity as such) through you (in your capacity as representatives of the several Underwriters) to the Company expressly for use with reference to such Underwriter (in its capacity as such) in such Registration Statement or such Prospectus or arises out of or is based upon any omission or alleged omission to state a material fact in connection with such information required to be stated in such Registration Statement or such Prospectus or necessary to make such information not misleading, provided, however, that the indemnity agreement contained in this subsection (a) with respect to any Preliminary Prospectus or amended Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such loss, damage, expense, liability or claim purchased the Shares which is the subject thereof if the Prospectus corrected any such alleged untrue statement or omission and if such Underwriter failed to send or give a copy of the Prospectus to such person at or prior to the written confirmation of the sale of such Shares to such person, unless the failure is the result of noncompliance by the Company with Section 4(i)(g) hereof
If any action, suit or proceeding (together, a "Proceeding") is brought against an Underwriter or any such person in respect of which indemnity may be sought against the Company, the Parent and the Selling Stockholder pursuant to the foregoing paragraph, such Underwriter or such person shall promptly notify the Company, the Parent and the Selling Stockholder in writing of the institution of such Proceeding and the Company shall assume the defense of such Proceeding, including the employment of counsel reasonably satisfactory to such indemnified party and payment of all fees and expenses; provided, however, that the omission to so notify the Company, the Parent and the Selling Stockholder shall not relieve the Company, the Parent and the Selling Stockholder from any liability which the Company, the Parent and the Selling Stockholder may have to any Underwriter or any such person or otherwise. Such Underwriter or such person shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such Underwriter or of such person unless the employment of such counsel shall have been authorized in writing by the Company in connection with the defense of such Proceeding or the Company shall not have, within a reasonable period of time in light of the circumstances, employed counsel to have charge of the defense of such Proceeding or such indemnified party or parties shall have reasonably concluded, based on the written advice of counsel, that there may be defenses available to it or them which are different from, additional to or in conflict with those available to the Company, the Parent and the Selling Stockholder (in which case the Company shall not have the right to direct the defense of such Proceeding on behalf of the indemnified party or parties), in any of which events such fees and expenses shall be borne by the Company, the Parent and the Selling Stockholder and paid as incurred (it being understood, however, that the Company, the Parent and the Selling Stockholder shall not be liable for the expenses of more than one separate counsel (in addition to any local counsel) in
any one Proceeding or series of related Proceedings in the same jurisdiction representing the indemnified parties who are parties to such Proceeding). The Company, the Parent and the Selling Stockholder shall not be liable for any settlement of any Proceeding effected without the Company's written consent but if settled with the written consent of the Company, the Company, the Parent and the Selling Stockholder jointly and severally agree to indemnify and hold harmless any Underwriter and any such person from and against any loss or liability by reason of such settlement. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second sentence of this paragraph, then the indemnifying party agrees that it shall be liable for any settlement of any Proceeding effected without the Company's written consent if (i) such settlement is entered into more than 60 business days after receipt by the indemnifying party of the aforesaid request, (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement and (iii) such indemnified party shall have given the indemnifying party at least 30 days' prior notice of its intention to settle. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened Proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such Proceeding and does not include an admission of fault, culpability or a failure to act, by or on behalf of such indemnified party.
(b) Each Underwriter severally agrees to indemnify, defend and hold harmless the Company, its directors and officers, and any person who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, the Parent and the Selling Stockholder and the successors and assigns of all of the foregoing persons from and against any loss, damage, expense, liability or claim (including the reasonable cost of investigation) which, jointly or severally, the Company, the Parent, the Selling Stockholder or any such person may incur under the Act, the Exchange Act, the common law or otherwise, insofar as such loss, damage, expense, liability or claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in and in conformity with information furnished in writing by or on behalf of such Underwriter (in its capacity as such) through you (in your capacity as representatives of the several Underwriters) to the Company expressly for use with reference to such Underwriter (in its capacity as such) in the Registration Statement (or in the Registration Statement as amended by any post-effective amendment thereof by the Company) or in a Prospectus, or arises out of or is based upon any omission or alleged omission to state a material fact in connection with such information required to be stated in such Registration Statement or such Prospectus or necessary to make such information not misleading.
If any Proceeding is brought against the Company, the Parent, the Selling Stockholder or any such person in respect of which indemnity may be sought against any Underwriter pursuant to the foregoing paragraph, the Company, the Parent, the Selling Stockholder or such person shall promptly notify such Underwriter in writing of the institution of such Proceeding and such Underwriter shall assume the defense of such Proceeding, including the employment of counsel reasonably satisfactory to such indemnified party and payment of all fees and expenses; provided, however, that the omission to so notify such Underwriter shall not relieve such Underwriter from any liability which such Underwriter may have to the Company, the Parent, the Selling Stockholder or any such person or otherwise. The Company, the Parent, the Selling Stockholder or such person shall have the right to employ its own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of the Company, the Parent, the Selling Stockholder or such person unless the employment of such counsel shall have been authorized in writing by such Underwriter in connection with the defense of such Proceeding or such Underwriter shall not have, within a reasonable period of time in light of the circumstances, employed counsel to have charge of the defense of such Proceeding or such indemnified party or parties shall have reasonably concluded, based on the written advice of counsel, that there may be defenses available to it or them which are different from or additional to or in conflict with those available to such Underwriter (in which case such Underwriter shall not have the right to direct the defense of such Proceeding on behalf of the indemnified party or parties, but such Underwriter may employ counsel and participate in the defense thereof but the fees and expenses of such counsel shall be at the expense of such Underwriter), in any of which events such fees and expenses shall be borne by such Underwriter and paid as incurred (it being understood, however, that such Underwriter shall not be liable for the expenses of more than one separate counsel (in addition to any local counsel) in any one Proceeding or series of related Proceedings in the same jurisdiction representing the indemnified parties who are parties to such Proceeding). No Underwriter shall be liable for any settlement of any such Proceeding effected without the written consent of such Underwriter but if settled with the written consent of such Underwriter, such Underwriter agrees to indemnify and hold harmless the Company, the Parent, the Selling Stockholder and any such person from and against any loss or liability by reason of such settlement. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second sentence of this paragraph, then the indemnifying party agrees that it shall be liable for any settlement of any Proceeding effected without its written consent if (i) such settlement is entered into more than 60 business days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement and (iii) such indemnified party shall have given the indemnifying party at least 30 days' prior notice of its intention to settle. No indemnifying party shall, without the prior written consent of the indemnified party, effect
any settlement of any pending or threatened Proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such Proceeding.
(c) The Company, the Parent and the Selling Stockholder hereby confirm that at their request WDR has without compensation acted as "qualified independent underwriter" (in such capacity, the "QIU") within the meaning of Rule 2720 of the Conduct Rules of NASDR in connection with the offering of the Shares. The Company, the Parent, and the Selling Stockholder agree to indemnify and hold harmless the QIU, the directors, officers, employees and agents of the QIU and each person who controls the QIU within the meaning of either the Act or the Exchange Act against any and all losses, damages, expenses, liabilities, or claims, joint or several, to which they or any of them may become subject under the Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, damages, expenses, liabilities or claims (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement for the registration of the Shares as originally filed or in any amendment thereof, or in any Preliminary Prospectus or the Prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and agrees to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, damage, expense, liability or claim; provided, however, that none of the Company, the Parent or the Selling Stockholder will be liable in any such case to the extent that any such loss, damage, expense, liability or claim arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of the QIU (in its capacity as such) through the representatives of the several Underwriters (in their capacity as such) specifically for inclusion therein. This indemnity agreement will be in addition to any liability that the Company, the Parent and the Selling Stockholder may otherwise have.
(d) If the indemnification provided for in this Section 9 is
unavailable to an indemnified party under subsections (a), (b) and (c) of this
Section 9 in respect of any losses, damages, expenses, liabilities or claims
referred to therein, then each applicable indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, damages, expenses,
liabilities or claims (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company, the Parent and the Selling
Stockholder on the one hand and the Underwriters on the other hand from the
offering of the Shares or (ii) if the allocation provided by clause (i) above is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the
relative benefits referred to in clause (i) above but also the relative fault of the Company, the Parent and the Selling Stockholder on the one hand and of the Underwriters on the other in connection with the statements or omissions which resulted in such losses, damages, expenses, liabilities or claims, as well as any other relevant equitable considerations. The relative benefits received by the Company, the Parent and the Selling Stockholder on the one hand and the Underwriters on the other shall be deemed to be in the same respective proportions as the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Company and the Selling Stockholder and the total underwriting discounts and commissions received by the Underwriters, bear to the aggregate public offering price of the Shares. Benefits received by the QIU in its capacity as "qualified independent underwriter" shall be deemed to be equal to the compensation received by the QIU acting in such capacity. The relative fault of the Company, the Parent and the Selling Stockholder on the one hand and of the Underwriters on the other shall be determined by reference to, among other things, whether the untrue statement or alleged untrue statement of a material fact or omission or alleged omission relates to information supplied by the Company, the Parent or by the Selling Stockholder or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, damages, expenses, liabilities and claims referred to in this subsection shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with investigating, preparing to defend or defending any Proceeding.
(e) The Company, the Parent and the Selling Stockholder and the
Underwriters agree that it would not be just and equitable if contribution
pursuant to this Section 9 were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other method
of allocation that does not take account of the equitable considerations
referred to in subsection (d) above. Notwithstanding the provisions of this
Section 9, in no case shall (i) any Underwriter be required to contribute any
amount in excess of the amount by which the total price at which the Shares
underwritten by such Underwriter and distributed to the public were offered to
the public exceeds the amount of any damage which such Underwriter has otherwise
been required to pay by reason of such untrue statement or alleged untrue
statement or omission or alleged omission or (ii) the QIU in its capacity as
such be responsible for any amount in excess of the compensation received by the
QIU for acting in such capacity. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
Section 9 are several in proportion to their respective underwriting commitments
and not joint.
(f) The indemnity and contribution agreements contained in this Section
9 and the covenants, warranties and representations of the Company, the Parent
and the Selling Stockholder contained in this Agreement shall remain in full
force and effect regardless of any investigation made by or on behalf of any
Underwriter, its partners, directors or officers or any person (including each
partner, officer or director of such person) who controls any Underwriter within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, or by or
on behalf of either of the Company, the Parent or the Selling Stockholder, their
directors or officers or any person who controls any of the Company, the Parent
or the Selling Stockholder within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, and shall survive any termination of this
Agreement or the issuance and delivery of the Shares. The Company, the Parent,
the Selling Stockholder and each Underwriter agree promptly to notify each other
of the commencement of any Proceeding against it and, in the case of the
Company, the Parent or the Selling Stockholder, against any of the officers,
directors or partners of the Company, the Parent or the Selling Stockholder, as
the case may be, in connection with the issuance and sale of the Shares, or in
connection with the Registration Statement or Prospectus.
10. Directed Share Program
(a) As part of the offering contemplated by this Agreement, the Underwriters agree to reserve out of the Shares up to 425,000 Shares for sale to the employees, officers, and directors of the Company and the Parent and other parties associated with the Company and the Parent (collectively, "Participants"), as set forth in the Prospectus under the heading "Underwriting" (the "Directed Share Program"). The Shares to be sold by the Underwriters pursuant to the Directed Share Program will be sold by the Underwriters pursuant to this Agreement at the public offering price. Any Directed Shares not purchased by Participants will be offered to the public by the Underwriters as set forth in the Prospectus.
(b) With respect to Directed Shares sold outside the United States, the Company and the Parent represent and warrant to the Underwriters that (i) the Registration Statement, the Prospectus, each Preliminary Prospectus and all other materials distributed in connection with the Directed Share Program comply in all material respects, and any further amendments or supplements to any of the foregoing will comply in all material respects, with any applicable laws or regulations of foreign jurisdictions in which the Prospectus, any Preliminary Prospectus, as amended or supplemented, and any additional materials are distributed in connection with the Directed Share Program and that (ii) no authorization, approval, consent, license, order, registration or qualification of or with any government, governmental instrumentality or court, other than such as have been obtained, is necessary under the securities laws and regulations of foreign jurisdictions in which the Directed Shares are offered outside the United States. The Company and the Parent covenant with the Underwriters that the Company and the Parent will comply in all material respects with all
applicable securities and other applicable laws, rules and regulations in each foreign jurisdiction in which the Directed Shares are offered in connection with the Directed Share Program.
(c) The Company and the Parent will ensure that the Directed Shares will be restricted to the extent required by the NASD or the NASD rules from sale, transfer, assignment, pledge or hypothecation for a period of three months following the date of the effectiveness of the Registration Statement. WDR will notify the Company as to which Participants will need to be so restricted. The Company will direct the removal of such transfer restrictions upon the expiration of such period of time.
(d) The Company and the Parent agree, jointly and severally, to indemnify and hold harmless each Underwriter and the QIU, their respective partners, directors and officers, and any person who controls any Underwriter or the QIU within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, and the successors and assigns of all of the foregoing persons, from and against any loss, damage, expense, liability or claim (including the reasonable cost of investigation) related to, arising out of, or in connection with the Directed Share Program, provided that, the Company and the Parent shall not be responsible for any loss, damage, expense, liability or claim that is finally judicially determined to have resulted from the bad faith or gross negligence of the Underwriters.
11. Notices. Except as otherwise herein provided, all statements,
requests, notices and agreements shall be in writing or by telegram and, if to
the Underwriters, shall be sufficient in all respects if delivered or sent to
Warburg Dillon Read LLC, 299 Park Avenue, New York, N.Y. 10171-0026, Attention:
Syndicate Department; if to the Company, shall be sufficient in all respects if
delivered or sent to the Company at the offices of the Company at One World
Trade Center, 105th Floor, New York, New York 10048, Attention: Stephen M.
Merkel, Senior Vice President, General Counsel and Secretary; if to the Parent,
shall be sufficient in all respects if delivered or sent to the Parent at the
offices of the Parent at One World Trade Center, 105th Floor, New York, New York
10048, Attention: Stephen M. Merkel, Senior Vice President, General Counsel and
Secretary; and, if to the Selling Stockholder, shall be sufficient in all
respects if delivered or sent to the Selling Stockholder at the offices of the
Selling Stockholder at One World Trade Center, 105th Floor, New York, New York
10048, Attention: Stephen M. Merkel, Senior Vice President, General Counsel and
Secretary.
12. Governing Law; Construction. This Agreement and any claim, counterclaim or dispute of any kind or nature whatsoever arising out of or in any way relating to this Agreement ("Claim"), directly or indirectly, shall be governed by, and construed in accordance with, the laws of the State of New York. The Section headings in this Agreement
have been inserted as a matter of convenience of reference and are not a part of this Agreement.
13. Submission to Jurisdiction. Except as set forth below, no Claim may be commenced, prosecuted or continued in any court other than the courts of the State of New York located in the City and County of New York or in the United States District Court for the Southern District of New York, which courts shall have jurisdiction over the adjudication of such matters, and you, the Company, the Parent and the Selling Stockholder consent to the jurisdiction of such courts and personal service with respect thereto. The Company, the Parent and the Selling Stockholder hereby consent to personal jurisdiction, service and venue in any court in which any Claim arising out of or in any way relating to this Agreement is brought by any third party against an Underwriter or any indemnified party. Each Underwriter, the Company (on its behalf and, to the extent permitted by applicable law, on behalf of its partners and affiliates), the Parent (on its behalf and, to the extent permitted by applicable law, on behalf of its partners and affiliates) and the Selling Stockholder (on its behalf and, to the extent permitted by applicable law, on behalf of its partners and affiliates) waives all right to trial by jury in any action, proceeding or counterclaim (whether based upon contract, tort or otherwise) in any way arising out of or relating to this Agreement. The Company, the Parent and the Selling Stockholder agree that a final judgment in any such action, proceeding or counterclaim brought in any such court shall be conclusive and binding upon the Company, the Parent or the Selling Stockholder, as the case may be, and may be enforced in any other courts in the jurisdiction of which the Company, the Parent or the Selling Stockholder is or may be subject, by suit upon such judgment.
14. Parties at Interest. The Agreement herein set forth has been and is
made solely for the benefit of the Underwriters, the QIU, the Company, the
Parent and the Selling Stockholder and, to the extent provided in Section 9 and
Section 10 hereof, the controlling persons, directors and officers referred to
in such section, and their respective successors, assigns, heirs, personal
representatives and executors and administrators. No other person, partnership,
association or corporation (including a purchaser, as such purchaser, from any
of the Underwriters) shall acquire or have any right under or by virtue of this
Agreement.
15. Counterparts. This Agreement may be signed by the parties in one or more counterparts which together shall constitute one and the same agreement among the parties.
16. Successors and Assigns. This Agreement shall be binding upon the Underwriters, the Company, the Parent and the Selling Stockholder and their successors and assigns and any successor or assign of any substantial portion of the Company's, the Parent's, and the Selling Stockholder's and any of the Underwriters' respective businesses and/or assets.
17. Miscellaneous. Warburg Dillon Read LLC, an indirect, wholly owned subsidiary of UBS AG, is not a bank and is separate from any affiliated bank, including any U.S. branch or agency of Warburg Dillon Read LLC. Because Warburg Dillon Read LLC is a separately incorporated entity, it is solely responsible for its own contractual obligations and commitments, including obligations with respect to sales and purchases of securities. Securities sold, offered or recommended by Warburg Dillon Read LLC are not deposits, are not insured by the Federal Deposit Insurance Corporation, are not guaranteed by a branch or agency, and are not otherwise an obligation or responsibility of a branch or agency.
A lending affiliate of Warburg Dillon Read LLC may have lending relationships with issuers of securities underwritten or privately placed by Warburg Dillon Read LLC. To the extent required under the securities laws, prospectuses and other disclosure documents for securities underwritten or privately placed by Warburg Dillon Read LLC will disclose the existence of any such lending relationships and whether the proceeds of the issue will be used to repay debts owed to affiliates of Warburg Dillon Read LLC.
If the foregoing correctly sets forth the understanding among the Company, the Parent, the Selling Stockholder and the Underwriters, please so indicate in the space provided below for the purpose, whereupon this letter and your acceptance shall constitute a binding agreement among the Company, the Parent, the Selling Stockholder and the several Underwriters.
Very truly yours,
eSPEED, INC.
By: ---------------------
Name:
Title:
CANTOR FITZGERALD, L.P.
By: ---------------------
Name:
Title:
Accepted and agreed to as of the
date first above written
WARBURG DILLON READ LLC CANTOR FITZGERALD SECURITIES
HAMBRECHT & QUIST LLC
THOMAS WEISEL PARTNERS LLC
As Representatives of the
Several Underwriters named
in Schedule A hereto
By: ----------------------
Name:
Title:
By: WARBURG DILLON READ LLC
|
By: ________________________________
Name:
Title:
By: _________________________________
Name:
Title:
SCHEDULE A
Number of
Underwriter Firm Shares
WARBURG DILLON READ LLC
HAMBRECHT & QUIST LLC
THOMAS WEISEL PARTNERS LLC
CANTOR FITZGERALD & CO.
---------
Total......... 8,500,000
=========
|
WARRANT AGREEMENT
THIS WARRANT AGREEMENT, dated as of _______________, 1999 by and between eSpeed, Inc., a Delaware corporation (the "Company"), and Martin J. Wygod (the "Grantee").
In accordance with the letter agreement dated as of _______________ by and between the Company and the Grantee, and in consideration for the services rendered pursuant thereto, the Company hereby grants to the Grantee a warrant (the "Warrant") to purchase shares of the Company's Class A Common Stock (the "Shares") on the following terms and conditions:
1. Number of Shares. The number of Shares subject to the Warrant shall equal _________.
2. Exercise Price. The exercise price per Share subject to the Warrant shall equal $_____.
3. Exercisability/Termination. The Warrant shall be fully exercisable only during the four year period commencing on the first anniversary hereof and ending on the fifth anniversary hereof, at which time any unexercised portion of the Warrant shall terminate. Notwithstanding the foregoing, the Warrant shall terminate upon the consummation of any transaction whereby the Company (or any successor to the Company or substantially all of its business) becomes a wholly-owned subsidiary of any corporation or other entity, unless such other corporation or entity shall continue or assume the Warrant (in which case such other corporation or entity shall be treated as the Company for all purposes hereunder, and shall make appropriate adjustment pursuant to paragraph 5 below in the number and kind of shares of stock subject thereto and the exercise price per share thereof to reflect consummation of such transaction). If the Warrant is not to be so assumed, the Company shall notify the Grantee of consummation of such transaction at least ten days in advance thereof.
4. Exercise Procedures. The Grantee shall exercise the Warrant by delivery of written notice to the Company setting forth the number of Shares with respect to which the Warrant is to be exercised, together with a certified check or bank draft payable to the order of the Company for an amount equal to the sum of the exercise price for such Shares.
5. Adjustment Upon Changes in Capitalization. In the event any recapitalization, forward or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or exchange of Shares or other securities, any special and nonrecurring dividend or distribution (whether in the form of cash, securities or other property), liquidation, dissolution, or other similar transactions or events, affects the Shares such that an adjustment is, in the sole discretion of the Company, appropriate in order to prevent dilution or enlargement of the rights of the Grantee, then the Company shall equitably adjust (i) the number and kind of Shares that may be delivered or deliverable in respect of the Warrant, and/or (ii) the exercise price. In addition, the Company is authorized to make adjustments in the terms and conditions of, and the criteria included in, the Warrant (including, without limitation,
cancellation of the Warrant in exchange for its in-the-money value, if any, or substitution of the Warrant using stock of a successor or other entity) in recognition of unusual or nonrecurring events (including, without limitation, an event described in the preceding sentence) affecting the Company or any subsidiary of the Company or the financial statements of the Company or any subsidiary of the Company, or in response to changes in applicable laws, regulations, or accounting principles.
6. Restrictions on Issuing Stock. The Company shall not be obligated to issue or deliver Shares upon exercise of the Warrant or take any other action in a transaction subject to the requirements of any applicable securities law, any requirement under any listing agreement between the Company and any national securities exchange or automated quotation system or any other law, regulation or contractual obligation of the Company until the Company is satisfied that such laws, regulations, and other obligations of the Company have been complied with in full. Certificates representing Shares issued pursuant to exercise of the Warrant will be subject to such stop-transfer orders and other restrictions as may be applicable under such laws, regulations and other obligations of the Company, including any requirement that a legend or legends be placed thereon.
7. Limitations on Transferability. The Warrant will not be transferable by the Grantee except by will or the laws of descent and distribution or to a beneficiary in the event of the Grantee's death, shall not be pledged, mortgaged, hypothecated or otherwise encumbered, or otherwise subject to the claims of creditors; provided, however, that the Warrant or any portion thereof may be transferred by the Grantee to (a) trusts established for the benefit of his children, stepchildren and grandchildren or (b) charities. Any such transferee shall be bound by the terms of this Agreement.
8. Taxes. The Grantee shall be responsible for the payment of all income, social security taxes and Medicare taxes related to the exercise of the Warrant, and shall indemnify the Company against any liability it may incur with respect to such taxes, including by reason of the Company not withholding any such taxes on behalf of the Grantee.
9. No Stockholder Rights. The Warrant shall not confer on the Grantee any of the rights of a stockholder of the Company unless and until Shares are duly issued or transferred and delivered to the Grantee upon exercise of the Warrant.
10. Piggyback Registration Rights. If the Company intends to register securities of any of its shareholders for an offering to the public while the Warrant is exercisable, the Company shall notify the Grantee of its intention to do so and, subject to such limitations as shall affect all selling shareholders equally and as may be imposed by any underwriter of such offering or by law, the Grantee may irrevocably elect to participate in such offering on a pari passu basis with any other selling shareholders (other than Cantor Fitzgerald L.P. or its affiliates, who shall have priority over the Grantee on any cutback) based on the relative number of shares owned and options or warrants vested of each of such other selling shareholders (and its
affiliates and permitted assigns) and the Grantee (the "Pari Passu Percentage"). Such participation shall be under the same terms and conditions as may apply to such other shareholders, provided that the Grantee shall not have any rights to select the underwriter or similar matters given to the other shareholders. The Grantee shall make any election within 30 days of receipt of such notice of intent to register by a writing given to the Secretary of the Company, which writing shall indicate his irrevocable election to sell in the intended offering, the number of Shares he wishes to sell and the portion thereof to be included by him. The Grantee's notice may not be for less than 50% of the number of Shares of the Grantee. The Grantee shall be responsible for delivery of the Shares covered by the notice on a timely basis. The Company shall only have to give notice of intent to register under this paragraph to the Grantee and any notice of intent to participate shall only be valid if received from the Grantee (or in the event of his death, his executor). The Company may at any time abandon any offering. The Company or the underwriter may at any time cutback (including, without limitation, limiting the amount to the extent a prior amount had not been specified) on the number of shares in any offering in which the Company is offering shares and the underwriter may at any time cutback (including, without limitation, limiting the amount to the extent a prior amount had not been specified) on the number of shares to be offered by shareholders in any offering in which the Company is not also offering shares. In either such case the Grantee's Shares to be offered shall be proportionately reduced so that the amounts offered by the Grantee and by other shareholders (and their affiliates and permitted assigns) satisfy the Pari Passu Percentage. The Grantee shall have no right to participate in any offering by the Company that does not include any shares owned by other shareholders and the provision of this paragraph shall not apply to any registration on Form S-8, or otherwise with regard to securities of compensatory plans of the Company, or any registration relating to business acquisitions on Form S-1 or Form S-4. The Grantee shall sign such underwriting and other agreements in the same forms as signed by the other participating shareholders.
11. Demand Registration Right. Subject to the Company's qualification to use a Form S-3, from and after the date that is one year after the date hereof, the Grantee may request, in writing, registration (the "Demand Registration") under the Securities Act of 1933, as amended (the "Securities Act"), of all or a portion of the Shares and the Shares underlying the warrant granted on the date hereof to Pamela S. Wygod, Trustee under the Trust Agreement dated 12/30/87 for the benefit of Adam Yellin ("the "Other Shares") on Form S-3; provided, however, that such request must include at least 75% of the aggregate of the Shares and the Other Shares. Thereafter, the Company will use all reasonable efforts to effect the Demand Registration under the Securities Act within thirty (30) days after the receipt of the request. The Company shall not be required to effect the Demand Registration requested by the Grantee if either (a) within the six (6) months preceding the receipt by the Company of such request, the Company has filed a registration statement to which the Piggyback Registration rights set forth in Section 10 hereof apply or (b) such Grantee may sell the Shares and the Other Shares requested to be included in the Demand Registration without registration under the Securities Act, pursuant to the exemption provided by (i) Rule 144 under the Securities Act, as such rule may be amended from time to time, or (ii) any similar rule or registration
adopted by the Commission. The Granter shall be entitle to no more than one (1) Demand Registration. The Company agrees to keep the Demand Registration effective for a period of sixty (60) days beyond the effective date.
12. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, this Warrant Agreement has been executed and delivered by the parties hereto on the date first written above.
eSPEED, INC.
GRANTEE:
Exhibit 10.1
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
(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 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 and "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 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 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 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.
(iii) Termination of Employment. The Committee shall determine the period, if any, during which Options shall be exercisable following a Participant's 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 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 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, 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 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 other wise 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.
(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 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.
eSpeed, Inc
1999 Long-Term Incentive Plan ("the Plan")
UK Appendix
NOTE: The Company will be granting only Options under the UK Appendix. Hence, any references in the rules to any other Awards should be disregarded for the purposes of the UK Appendix.
If the Board decides to grant an Option to a Director or Employee who is a resident of the United Kingdom within the meaning of the Double Taxation Treaty between the United Kingdom and the United States of America and whose emoluments are liable to be paid under deduction of tax pursuant to Section 203 of the United Kingdom Income and Corporation Taxes Act 1988 ("the Taxes Act") and designates the Option as a UK-approved Option, the rules of the Plan shall apply with the following modifications.
1 Delete Section 2(b) in its entirety.
2 For Section 2(h) substitute:
" "Fair Market Value" means, for the purposes of the UK Appendix and
any UK-Approved Option granted hereunder, on any day the closing price
of the Common Stock on the date of calculation (or on the last
preceding trading date if Stock was not traded on such date) if the
Stock is listed on the New York Stock Exchange and shall otherwise be
the market value of the Stock determined in accordance with the
provisions of Part VIII of the United Kingdom Taxation of Chargeable
Gains Act 1992 and agreed in advance for the purposes of the UK
Appendix with the Shares Valuation Division of the Inland Revenue."
3 In Section 4(b) delete from "Stock dividend" in the third line to
"event" in the fifth line and delete from "(or," in the twelfth line
until the end of the section and insert "PROVIDED ALWAYS that no
adjustment shall be made pursuant to this section 4(b) to a UK-Approved
Option without the prior written approval of the Inland Revenue [and
that sufficient unissued stock will be reserved and available to meet
all unexercised UK-Approved Options.]
4 Insert as Section 4(c):
"(c) All stock obtained pursuant to the exercise of Options under a
UK Award will rank pari passu with other shares in the
Participating Company of the same class."
5 For Section 5 substitute:
"Eligibility and Individual Limit. Only Eligible Employees (as defined
in Section 19 of this Appendix) are eligible to be granted UK-Approved
Options. Any UK-Approved Option shall be limited and take effect so
that the aggregate Fair Market Value of the Stock which the Participant
may acquire by exercise of that Option and any Stock which he may
acquire by exercise of any other options then held by him under any
Approved Scheme shall not exceed (pound)30,000 or such other amount as
may be the limit imposed from time to time pursuant to paragraph 28 of
Schedule 9. For this purpose, the Fair Market Value of Stock shall be
calculated as at the date each option was granted or such earlier date
as may have been agreed in writing with the Inland Revenue."
|
6 In Section 6(a) after "additional" on the second line insert
"objective".
7 In Section 6(b)(1) add at the end "but shall not be less than 100 per
cent of the Fair Market Value per share of Stock on the date the Option
is granted and must be paid in cash".
8 In Section 6(b)(2) delete from "the methods" in the second line until
the end, [insert a full stop and then "Stock will be allotted within 30
days of exercise".
9 In Section 6(b)(3), insert "at the date of grant" between "shall
determine" and "the period" on the first line.
10 In Section 6(b)(4) delete from "such" on the fifth line to the end and
substitute "there is an exchange of Options pursuant to Section 7(g).
The Company shall notify the Participant of consummation of such
transaction at least 10 days in advance thereof."
11 Delete Section 7(a) in its entirety.
12 Delete Section 7(d)(1) in its entirety.
13 Delete Section 7(e) in its entirety.
14 Insert as Section 7(g):
(g) "Exchange of Options. Pursuant to the provisions of paragraph
15 of Schedule 9, it is hereby provided that if any company
("the Acquiring Company"):
(i) obtains Control (as defined for the purposes of the
UK Appendix) of a company (whether or not the
Company) whose shares are for the time being Shares
for the purposes of the UK Appendix ("a Relevant
Company") as a result of making such an offer as is
referred to in sub-paragraph 15(1)(a) of Schedule 9;
or
(ii) obtains Control (as defined for the purposes of the
UK Appendix) of a Relevant Company in pursuance of a
compromise or arrangement sanctioned by the Court
under Section 425 of the United Kingdom Companies Act
1985; or
(iii) becomes bound or entitled to acquire shares in a
Relevant Company under Sections 428 to 430F of the
said Act
any Participant may, within the appropriate period defined in
sub-paragraph 15(2) of Schedule 9, by agreement with the
Acquiring Company release his rights under the UK Appendix
("the Old Rights") in consideration of the grant to him of
rights ("the New Rights") which are equivalent for the
purposes of sub-paragraph 15(3) of Schedule 9 to the Old
Rights but relate to Stock in a different company ("the New
Company") (whether the Acquiring Company itself or some other
company falling within sub-paragraph (b) or (c) of paragraph
10 of Schedule 9). With respect to the New Rights these rules
shall be read and construed as though references to the
Company and the Stock in Section 4, 6(b)(4), 7(f) and this
7(g) were references to the New Company and to Stock in the
New Company."
15 At the end of Section 8(e) add "For as long as the Company wishes the
UK Appendix to remain an Approved Scheme, no amendment to these rules,
including the UK Appendix shall take effect without the prior approval
of the Inland Revenue".
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16 In Section 8(i) delete the final sentence beginning on the second line from "The Committee".
17 In Section 8(k) substitute "approval" for "adoption" and "Inland Revenue" for "Board" in the first place in which it appears.
18 Insert a new section as follows:
"Transferability
No UK-approved Option may be transferred, assigned or charged but following the death of the holder a UK-approved Option may be exercised by his personal representatives if so stated in the option certificate for such period as is stated therein but which shall not exceed one year from the date of death."
19 Insert a new section as follows:
"Definitions
Unless the context otherwise requires, the following words and expressions shall have the following meanings in the UK Appendix:
"Approved Scheme" means a share option scheme, not being a savings-related share option scheme, established by the Company or by any Associated Company of the Company and approved by the Inland Revenue under Schedule 9;
"Associated Company" has the meaning given by Section 416 of the Taxes Act;
"Control" has the meaning given by Section 840 of the Taxes Act;
"Eligible Employee" means any director or employee of a Participating Company who is required to devote to his duties not less than 25 hours (or, in the case of an employee who is not a director of a Participating Company, 20 hours) a week (excluding meal breaks) and is not precluded by paragraph 8 of Schedule 9 from participating in the UK Appendix;
"Inland Revenue" means the United Kingdom Board of Inland Revenue;
"Participating Company" means the Company and any other company under the Control of the Company;
"Schedule 9" means Schedule 9 to the Taxes Act;
"Stock" means the Company's Class A Common Stock which complies with paragraphs 10 to 14 of Schedule 9;
"the Taxes Act" means the United Kingdom Income and Corporation Taxes Act 1988;
"UK-approved Option" means an option to acquire Shares granted pursuant to the UK Appendix and, for the purposes of the UK Appendix, all references in the Plan to Options shall, unless the context otherwise requires, be taken as referring to UK-approved Options."
JOINT SERVICES AGREEMENT
among
CANTOR FITZGERALD, L.P.,
CANTOR FITZGERALD SECURITIES,
CANTOR FITZGERALD & CO.,
CFPH, L.L.C.,
CANTOR FITZGERALD PARTNERS,
CANTOR FITZGERALD INTERNATIONAL,
CANTOR FITZGERALD GILTS,
eSPEED, INC.,
eSPEED SECURITIES, INC.,
eSPEED GOVERNMENT SECURITIES, INC.,
eSPEED MARKETS, INC.
and
eSPEED SECURITIES INTERNATIONAL LIMITED
Dated as of December __, 1999
JOINT SERVICES AGREEMENT
This JOINT SERVICES AGREEMENT is made and entered into as of December __, 1999, among Cantor Fitzgerald, L.P., a Delaware limited partnership ("CFLP"), Cantor Fitzgerald International, an English unlimited liability company ("CF International"), Cantor Fitzgerald Gilts, an English unlimited liability company ("CF Gilts"), Cantor Fitzgerald Securities, a New York general partnership ("CFS"), Cantor Fitzgerald & Co., a New York general partnership ("CF&Co"), CFPH, L.L.C., a Delaware limited liability company ("CFPH"), and Cantor Fitzgerald Partners, a New York general partnership ("CFP" and, together with CFLP, CF International, CF Gilts, CFS, CF&Co and CFPH, the "Executing Cantor Parties" and, together with the other Executing Cantor Parties and each subsidiary of CFLP that becomes a party to this Agreement, the "Cantor Parties"), on the one hand, and eSpeed, Inc., a Delaware corporation ("eSpeed"), eSpeed Securities, Inc., a Delaware corporation and a wholly-owned subsidiary of eSpeed ("eSpeed Securities"), eSpeed Government Securities, Inc., a Delaware corporation and a wholly-owned subsidiary of eSpeed ("eSpeed GS"), eSpeed Securities International, Limited, a U.K. private limited company and a wholly-owned subsidiary of eSpeed ("eSpeed International"), and eSpeed Markets, Inc., a Delaware corporation and a wholly-owned subsidiary of eSpeed ("eSpeed Markets" and, together with eSpeed, eSpeed Securities, eSpeed GS and eSpeed International, the "Executing eSpeed Parties" and, together with the other Executing eSpeed Parties and each subsidiary of eSpeed that becomes a party to this Agreement, the "eSpeed Parties"), on the other hand. All capitalized terms used in this Agreement and not otherwise defined shall have the meanings ascribed to such terms in Section 1 of this Agreement. Each subsidiary of CFLP and eSpeed will automatically become a party to this Agreement, unless it becomes a party to a substantially identical separate agreement.
W I T N E S S E T H:
WHEREAS, the Executing Cantor Parties are engaged in, among other things, the business of creating, developing and operating Marketplaces in and through which buyers and sellers of fixed-income securities, futures contracts, commodities and other Financial Products may effect transactions in those Financial Products;
WHEREAS, certain of the Marketplaces operated by the Executing Cantor Parties are Electronic Marketplaces;
WHEREAS, pursuant to an Assignment and Assumption Agreement of even date herewith, certain of the Executing Cantor Parties are contributing to eSpeed their Electronic Trading Systems assets;
WHEREAS, from and after the Closing, the eSpeed Parties and the Cantor Parties wish to collaborate in providing brokerage services to customers through the existing Electronic Marketplaces, and in creating and developing Electronic Marketplaces for new Financial Products and other Products; and
WHEREAS, from and after the Closing, the eSpeed Parties wish to provide Ancillary IT Services to the Cantor Parties in consideration for the fees herein provided;
NOW, THEREFORE, in consideration of the premises contained herein, it is agreed as follows:
1. Defined Terms. For purposes of this Agreement, the following terms have the meanings specified or referred to in this Section 1:
"Ancillary IT Services" means technology support services, including,
but not limited to, (i) systems administration, (ii) internal network support,
(iii) support and procurement for desktops of end-user equipment, (iv)
operations and disaster recovery services, (v) voice and data communications,
(vi) support and development of systems for Clearance, Settlement and
Fulfillment Services, (vii) systems support for Cantor Party brokers, (viii)
electronic applications systems and network support and development for
Unrelated Dealer Businesses and (ix) provision and/or implementation of existing
electronic applications systems, including all improvements and upgrades
thereto, and use of the related intellectual property rights, having potential
application in a Gaming Business (as defined under "Unrelated Dealer Business"
below).
"Cantor Exchange" means Cantor Financial Futures Exchange, Inc. and any successor thereto or to the operations thereof.
"Cantor Services" means any one of, or any combination of, Voice Assisted Brokerage Services, Clearance, Settlement and Fulfillment Services and Related Services.
"Clearance, Settlement and Fulfillment Services" means all such services as are necessary to clear, settle and fulfill, or arrange settlement or fulfillment as a name give-up or other intermediary of, in accordance with customary market practice and taking into account applicable regulatory requirements, a purchase and sale of a particular Product, including, but not limited to, collection of money; arrangement of delivery of Products; receipt, delivery and maintenance of margin and collateral, if appropriate; dealing with issues relating to failures to receive or deliver payments or Products; and collection and payment of transfer or similar taxes, to the extent applicable to such Product. Clearance, Settlement and Fulfillment Services may include, but are not limited to, acting as a riskless principal or other intermediary between the buyer and the seller of a Product.
"Closing" means the Closing under the Assignment and Assumption Agreement.
"Collaborative Marketplace" means an Electronic Marketplace that is
operated by a Cantor Party and an eSpeed Party in collaboration pursuant to
Section 3 of this Agreement. All Marketplaces shall be Collaborative
Marketplaces, unless otherwise determined in accordance with this Agreement.
"Electronic Brokerage Services" means the effecting of transactions in, and purchases and sales of, a Product on an Electronic Marketplace in and through the operation of an Electronic Trading System. Electronic Brokerage Services include, but are not limited to, the provision and
operation of network distribution systems, transaction processing systems and customer interface systems, in each case that are related to the effecting of transactions in, and purchases and sales of, a Product on an Electronic Marketplace. Electronic Brokerage Services do not include Voice Assisted Brokerage Services, Clearance, Settlement and Fulfillment Services, Information Services or Related Services.
"Electronic Marketplace" means a Marketplace on which transactions in, and purchases and sales of, Products may be effected in whole or in part electronically, but does not include a Marketplace that is merely electronically assisted, such as screen assisted open outcry.
"Electronic Trading System" means, as to any Electronic Marketplace, the hardware, software, network infrastructure and other similar assets that are used to effect purchases and sales in that Electronic Marketplace.
"eSpeed Marketplace" means a Marketplace (i) in which an eSpeed Party renders Electronic Brokerage Services and (ii) that is not a Collaborative Marketplace.
"Financial Product" means any financial asset or financial instrument, any intangible commodity or any tangible fungible commodity, including, but not limited to, any security, futures contract, foreign exchange transaction, swap transaction, credit derivative, repurchase or reverse repurchase obligation, currency or swap (as currently defined in the Federal Bankruptcy Code of 1978) or any option or derivative on any of the foregoing.
"Information" means information relating to bids, offers or trades, or any other information, that is input into, created by or otherwise resides on an Electronic Trading System.
"Information Services" means the provision of Information to a Person with respect to a Marketplace as a separate service not in connection with transactions by such Person on such Marketplace. Information Services shall not include the provision of Information to purchasers and sellers of a Product incident to the provision of Electronic Brokerage Services and/or Voice Assisted Brokerage Services to such customers.
"Marketplace" means a marketplace operated or to be operated by the Cantor Parties and/or the eSpeed Parties in and through which buyers and sellers of a Product may effect transactions in the Product.
"New Market Notice" means, with respect to a Marketplace, a written notice describing with reasonable specificity the anticipated nature, general level of volume and trading needs of that Marketplace.
"Person" means any corporation, general or limited partnership, limited liability company, joint venture, estate, trust, association, organization or other entity or governmental or regulatory authority or agency.
"Product" means any tangible or intangible asset or good.
"Product or Pricing Decisions" means, as to an Electronic Marketplace for a particular Product, (i) the definition of the Product, (ii) the hours of operation of the Marketplace, (iii) the rules relating to trading priority, incentives and other trading related issues and (iv) the rates and schedules of commissions and other Transaction Revenues for the Marketplace, including any variation thereof for particular customers or classes of customers.
"Related Services" includes (i) credit and risk management services,
(ii) services related to sales positioning of Products, (iii) oversight of
customer suitability and regulatory compliance and (iv) such other services
customary to brokerage operations as are agreed to by CFLP and eSpeed.
"Transaction Revenues" means the standard fees, commissions, spreads, markups or other similar standard amounts received from a customer in connection with effecting transactions in a Marketplace.
"Unrelated Dealer Businesses" means (i) the equity businesses of the Cantor Parties as they may exist from time to time, (ii) the money market instruments and securities lending divisions of the Cantor Parties as they may exist from time to time, (iii) any business or portion thereof or activity in which a Cantor Party acts as a dealer or otherwise takes market risk or positions, including in the process of executing matched principal transactions, providing the services of a specialist or market maker or providing trading or arbitrage operations, (iv) activities wherever located that would, if conducted in the United Kingdom, be subject to the United Kingdom Gaming Act of 1963 or activities wherever located currently or in the future involving betting, gambling, odds making, lotteries, gaming, wagering, staking, drawing or casting lots and similar or related activities (each a "Gaming Business") and (v) any business not involving operating a Marketplace.
"Voice Assisted Brokerage Services" means the effecting of transactions in, and purchases and sales of, a Product on an Electronic Marketplace in and through a broker or other human intermediary, in each case who is an employee of, or providing services to, a Cantor Party. Voice Assisted Brokerage Services include the entry of an order by a broker or other human intermediary into the Electronic Trading System.
2. Term. The term of this Agreement shall commence as of the Closing and shall be in effect perpetually, unless sooner ended by the mutual agreement, in writing, of CFLP and eSpeed (the "Term").
3. Joint Services in Collaborative Marketplaces.
(a) Subject to the terms and conditions stated herein, the Cantor
Parties and the eSpeed Parties intend to collaborate in providing brokerage
services to customers in and through Electronic Marketplaces. In any case in
which the Cantor Parties and the eSpeed Parties do so collaborate, the
Marketplace shall be a Collaborative Marketplace and the respective authority,
responsibilities and obligations of the parties shall be governed by this
Section 3.
(b) The parties agree that the Electronic Marketplaces that are managed
by the Cantor Parties prior to the date hereof, all of which are listed by
Product on Annex A hereto, shall be Collaborative Marketplaces governed by this
Section 3. The determination as to whether a
Marketplace that is created after the date hereof is to be a Collaborative Marketplace governed by this Section 3 shall be made in accordance with Section 7 of this Agreement.
(c) In the case of each Collaborative Marketplace, any Product or Pricing Decision shall be made jointly by the Cantor Parties and the eSpeed Parties. If the parties are unable to agree on a particular Product or Pricing Decision after good faith efforts to do so, then the final Product or Pricing Decision shall be made by (i) a Cantor Party, in the case of a Marketplace or the portion thereof in which or for which a Cantor Party provides any Voice Assisted Brokerage Services, and (ii) an eSpeed Party, in the case of a fully electronic Marketplace (that is, a Marketplace in which no Cantor Party provides Voice Assisted Brokerage Services) or the portion of a Marketplace that is fully electronic; provided, however, that no Product and Pricing Decision made by an eSpeed Party with respect to a fully electronic Marketplace shall result in the Cantor Party's share of Transaction Revenues for the transactions effected in the Marketplace being less than the amount necessary to cover the Cantor Party's actual costs of providing Cantor Services in connection with such Marketplace.
(d) In the case of each Collaborative Marketplace, the applicable
eSpeed Party (i) shall own and operate the Electronic Trading System associated
with the Electronic Marketplace, (ii) shall be responsible, as between the
parties, for the provision of Electronic Brokerage Services to customers and
(iii) except as provided above with respect to Product or Pricing Decisions,
shall have reasonable discretion as to the manner and means of operating the
Electronic Trading System and providing Electronic Brokerage Services to
customers and Cantor brokers in connection therewith.
(e) In the case of each Collaborative Marketplace, the applicable Cantor Party (i) shall be responsible, as between the parties, for the provision of Cantor Services to customers and (ii) except as provided above with respect to Product or Pricing Decisions, shall have reasonable discretion as to the manner and means of providing the Cantor Services. The applicable Cantor Party shall be responsible for maintenance of books and records and compliance with applicable securities laws, rules and regulations, as determined by the applicable Cantor Party. CFP and CF & Co shall be responsible for compliance with the reporting requirements under Regulation ATS and related provisions of the Securities Exchange Act of 1934, as amended. In that regard, CFP and CF & Co each will be the broker for all transactions in the respective matching systems, and each will determine the various non-discretionary parameters under which transactions match in their respective systems. eSpeed Securities and eSpeed GS shall cooperate with CFP and CF & Co in all regulatory compliance matters and, if applicable, in complying with Regulation ATS.
(f) Without limiting the authority of the parties in their respective areas of responsibility pursuant to paragraphs (d) and (e), the parties recognize the importance of providing an integrated and seamless service to customers. Accordingly, the parties shall consult diligently and in good faith, as and as often as necessary, to ensure that their respective services are properly integrated.
(g) All information and data, other than Information, created, developed, used in connection with or relating to the operation of and effecting of transactions in any Marketplace ("Data") shall constitute the sole property of the Cantor Parties or the eSpeed Parties, as applicable, on the following basis: (i) if the Data relate to Financial Products, the Data shall belong solely to the Cantor Parties, (ii) if the Data relate to a Collaborative Marketplace in which only Products that are
not Financial Products are traded, the ownership of the Data shall be determined by the Cantor Parties and the eSpeed Parties on a case-by-case basis based on good faith negotiations, (iii) if the Data relate to an eSpeed Marketplace in which only Products that are not Financial Products are traded, the Data shall belong solely to the eSpeed Parties and (iv) if the Data relate to a non-Collaborative Marketplace that is not an eSpeed Marketplace and in which Financial Products are traded, the Data shall belong solely to the Cantor Parties. All Information relating to Financial Products transmitted and disseminated on or through the Electronic Marketplace shall be the sole property of the Cantor Parties and, as between the parties, the Cantor Parties shall have the sole and exclusive right to use, publish and be compensated for Information Services in connection with or relating to such Information; provided, however, in the case of each Collaborative Marketplace, that the eSpeed Parties shall have the right (without any obligation to pay the Cantor Parties therefor) to use such Information in connection with the execution of transactions in the applicable Collaborative Marketplace.
(h) To such extent as is consistent with the Cantor Parties' own businesses of providing Electronic Brokerage Services in Marketplaces that are not Collaborative Marketplaces, the Cantor Parties shall promote and market eSpeed Marketplaces for effecting transactions in Financial Products, and shall refer customers and prospective customers to the applicable eSpeed Parties in an effort to cause such customers to effect transactions in Financial Products in eSpeed Marketplaces.
4. Sharing of Transaction Revenues. The Cantor Parties and the eSpeed Parties agree to share Transaction Revenues with regard to transactions effected through Marketplaces in the following manner:
(a) If (i) the Electronic Marketplace is a Collaborative Marketplace,
(ii) the transaction relates to a Financial Product (other than a Financial
Product that is traded on the Cantor Exchange) and (iii) no Cantor Party
provides Voice Assisted Brokerage Services in connection with the transaction to
which the Transaction Revenues relate (that is, the transaction is fully
electronic), then the applicable eSpeed Party will receive the aggregate
Transaction Revenues and will pay to the applicable Cantor Party a service fee
equal to 35% of the Transaction Revenues.
(b) If (i) the Electronic Marketplace is a Collaborative Marketplace,
(ii) the transaction relates to a Financial Product (other than a Financial
Product that is traded on the Cantor Exchange) and (iii) a Cantor Party provides
Voice Assisted Brokerage Services in connection with the transaction to which
the Transaction Revenues relate, then the applicable Cantor Party will receive
the aggregate Transaction Revenues and will pay to the applicable eSpeed Party a
service fee equal to 7% of the Transaction Revenues.
(c) If (i) the Electronic Marketplace is a Collaborative Marketplace,
(ii) the transaction relates to a Product that is traded on the Cantor Exchange
and (iii) no Cantor Party provides Voice Assisted Brokerage Services in
connection with the transaction to which the Transaction Revenues relate (that
is, the transaction is fully electronic), then the applicable eSpeed Party will
receive the aggregate Transaction Revenues and will pay to the applicable Cantor
Party a service fee equal to 20% of the Transaction Revenues.
(d) If (i) the Electronic Marketplace is a Collaborative Marketplace,
(ii) the transaction relates to a Product that is traded on the Cantor Exchange
and (iii) a Cantor Party provides Voice Assisted Brokerage Services in
connection with the transaction to which the Transaction Revenues relate, then
the applicable eSpeed Party will receive the aggregate Transaction Revenues and
will pay to the applicable Cantor Party a service fee equal to 55% of the
Transaction Revenues.
(e) If (i) the Electronic Marketplace is a Collaborative Marketplace and (ii) the transaction relates to a Product that (x) is not a Financial Product and (y) is not traded on the Cantor Exchange, then the applicable Cantor Party and the applicable eSpeed Party will share Transaction Revenues in such manner as they shall agree.
(f) If (i) the Electronic Marketplace is an eSpeed Marketplace and (ii) the transaction relates to a Financial Product, then the applicable eSpeed Party will receive the aggregate Transaction Revenues and will pay to CFLP a service fee equal to 20% of the Transaction Revenues.
(g) If (i) the Electronic Marketplace is an eSpeed Marketplace and (ii) the transaction relates to a Product other than a Financial Product, then the applicable eSpeed Party will receive and retain all of the Transaction Revenues.
(h) If (i) a transaction is effected in an Electronic Marketplace that is not a Collaborative Marketplace and is not an eSpeed Marketplace, but that is a Marketplace in which Cantor provides Electronic Brokerage Services, and (ii) the transaction relates to a Financial Product, then the applicable Cantor Party will receive the aggregate Transaction Revenues and pay to eSpeed a service fee equal to 30% of the amount eSpeed would have received pursuant to Section 4 (a) or 4 (b) of this Agreement if the Marketplace had been a Collaborative Marketplace. For purposes of this paragraph (h), the Transaction Revenues shall be reduced by the costs incurred or paid by a Cantor Party to a third party to provide or arrange for the provision of Electronic Brokerage Services.
(i) If a transaction (i) is not effected through an Electronic Marketplace, but (ii) is electronically assisted (by way of example, but not limited to, a screen-assisted open outcry transaction), then the applicable Cantor Party will receive the aggregate Transaction Revenues and will pay to the applicable eSpeed Party 2.5% of the Transaction Revenues.
(j) Notwithstanding the foregoing, in the event that a Cantor Party's direct costs payable to third parties (other than the Cantor Parties and their affiliates) for providing Clearance, Settlement and Fulfillment Services with respect to transactions in a Collaborative Marketplace with respect to any Financial Product for any month exceed the direct costs incurred by the Cantor Parties to clear and settle cash transactions in United States Treasury securities for such month, the cost of such excess shall be borne pro rata by the applicable Cantor Party and the applicable eSpeed Party in the same proportion as the Transaction Revenues and service fees for such transactions are to be shared.
(k) For any month, for any Product for which sales and purchases during such month are effected both through fully electronic transactions and through voice-brokered transactions, Transaction Revenues earned with respect to such Product shall be allocated between fully electronic transactions and voice-brokered transactions as follows: the amount of Transaction Revenues
attributable to fully electronic transactions or voice-brokered transactions, as the case may be, for such Product during such month in a Marketplace shall be equal to (x) total Transaction Revenues for such Product for such month in such Marketplace multiplied by (y) a fraction, the numerator of which is the notional volume (by currency) of all transactions in such specific Product type for such month in such Marketplace effected by fully electronic transactions or voice-brokered transactions, as the case may be, and the denominator of which is the notional volume (by currency) of all transactions in such specific Product type for such month in such Marketplace.
(l) In the event that a customer does not pay, or pays only a portion
of, the Transaction Revenues relating to a transaction described in paragraphs
(a) through (i) above (a "Loss Event"), then the relevant Cantor Party and the
relevant eSpeed Party each shall bear its respective share of the loss arising
from the Loss Event in the same proportion as the Transaction Revenues and
service fees for such transaction are to be shared.
(m) All amounts due and payable to a Cantor Party or an eSpeed Party by
the other pursuant to this Section 4 shall be paid in the manner specified in
Section 12 of this Agreement.
(n) In the event that any tax is imposed on Transaction Revenues with respect to a transaction (other than a Tax on net income), the cost of such tax will be borne by the applicable eSpeed Party and the applicable Cantor Party in the same proportion as the Transaction Revenues and service fees for such transaction are to be shared.
5. Ancillary IT Services.
(a) During the Term, the eSpeed Parties shall provide Ancillary IT Services to the Cantor Parties.
(b) CFLP shall pay to eSpeed in consideration for the Ancillary IT Services an amount equal to the direct and indirect costs, including overhead, that the eSpeed Parties incur in performing those services.
6. Representations and Warranties.
(a) Organization and Good Standing.
(i) Each Executing Cantor Party is duly organized, validly existing and in good standing under the laws of the state of its incorporation or organization, as the case may be. Each Executing Cantor Party has the requisite power and authority to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby.
(ii) Each Executing eSpeed Party is duly organized, validly existing and in good standing under the laws of the state or other jurisdiction of its incorporation or organization, as the case may be. Each Executing eSpeed Party has the requisite power and authority to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby.
(b) Authority; Binding Effect; No Conflicts.
(i) Each Executing Cantor Party has taken all necessary actions to authorize the execution and delivery of this Agreement and to perform all of its obligations under, and to consummate the transactions contemplated by, this Agreement. This Agreement has been duly and validly executed by each of the Executing Cantor Parties. This Agreement constitutes the valid and binding obligation of each of the Executing Cantor Parties enforceable against each of the Executing Cantor Parties in accordance with its terms, subject to the effect of reorganization, bankruptcy, insolvency, moratorium, fraudulent conveyance and other similar laws relating to or affecting creditors' rights generally and court decisions with respect thereto, and subject to the application of equitable principles and the discretion of the court (regardless of whether the enforceability is considered in a proceeding in equity or at law). The execution, delivery and performance by each of the Executing Cantor Parties of this Agreement shall not, with or without the giving of notice or the lapse of time or both, (x) violate any provision of any federal, state, local or foreign law, statute, rule or regulation to which any of the Executing Cantor Parties is subject, (y) violate any injunction, order, judgment, ruling, decree or settlement applicable to any of the Executing Cantor Parties or (z) conflict with, or result in a breach or violation of, any provision of the certificate of incorporation, by-laws, partnership agreement or similar governing document of any of the Executing Cantor Parties or any lease, contract, agreement, instrument, undertaking or covenant by which any of the Executing Cantor Parties is bound.
(ii) Each of the Executing eSpeed Parties has taken all necessary corporate actions to authorize, execute and deliver this Agreement and to perform all of its obligations under, and to consummate the transactions contemplated by, this Agreement. This Agreement has been duly and validly executed by each of the Executing eSpeed Parties. This Agreement constitutes the valid and binding obligation of each of the Executing eSpeed Parties enforceable against each of the Executing eSpeed Parties in accordance with its terms, subject to the effect of reorganization, bankruptcy, insolvency, moratorium, reorganization, fraudulent conveyance and other similar laws relating to or affecting creditors' rights generally and court decisions with respect thereto, and subject to the application of equitable principles and the discretion of the court (regardless of whether the enforceability is considered in a proceeding in equity or at law). The execution, delivery and performance by each of the Executing eSpeed Parties of this Agreement and the consummation by each of the Executing eSpeed Parties of the transactions contemplated hereby will not, with or without the giving of notice or the lapse of time or both, (x) violate any provision of any federal, state or local law, statute, rule or regulation to which any of the Executing eSpeed Parties is subject, (y) violate any injunction, order, judgment, ruling, decree or settlement applicable to any of the Executing eSpeed Parties, or (z) conflict with, or result in a breach or violation of, any provision of the certificate of incorporation or by-laws of any of the Executing eSpeed Parties or any lease, contract, agreement, instrument, undertaking or covenant by which any of the Executing eSpeed Parties is bound.
(c) Litigation; No Undisclosed Liabilities. Except as disclosed in the Prospectus relating to eSpeed's initial public offering, there is no litigation pending or, to CFLP's knowledge,
threatened, which questions the validity or enforceability of this Agreement or seeks to enjoin the consummation of any of the transactions contemplated hereby.
7. New Marketplaces; Non-competition; Strategic Alliances.
(a) If a Cantor Party wishes to create a new Marketplace for a
Financial Product, then such Cantor Party may, by providing a New Market Notice
to eSpeed, require eSpeed to provide, or cause another eSpeed Party to provide,
Electronic Brokerage Services with respect to that Marketplace. In such a case,
eSpeed shall use commercially reasonable efforts to develop an Electronic
Trading System for, and to render Electronic Brokerage Services with respect to,
that Marketplace under the terms of this Agreement. If eSpeed is able to develop
and put into operation an Electronic Trading System for the Marketplace within
180 days, then the Marketplace shall be a Collaborative Marketplace and the
operation thereof shall be subject to the provisions of Section 3 of this
Agreement. If, after diligent effort, eSpeed is unable to develop and put into
operation an Electronic Trading System for the Marketplace within 180 days, then
(i) eSpeed shall have no liability to any Cantor Party for its failure to
provide an Electronic Trading System, (ii) the Cantor Party may create and
operate the Marketplace in any manner that the Cantor Party deems to be
acceptable and (iii) the Marketplace shall not be a Collaborative Marketplace.
CFLP agrees that its proposal to create a new Marketplace and the requirements
relating thereto will be commercially reasonable in scope and that CFLP or
another Cantor Party will diligently pursue the development of such Marketplace
in a meaningful way and that failure to do so within two years of the provision
of the New Market Notice will cause any rights of the eSpeed Parties and the
Cantor Parties in this Section 7 and Section 8 of this Agreement to revert to
their original status.
(b) If a Cantor Party wishes to create a new Marketplace for a
Financial Product that will involve the provision of Electronic Brokerage
Services and the Cantor Party does not require eSpeed to operate an Electronic
Trading System and to provide Electronic Brokerage Services for that Marketplace
pursuant to paragraph (a) of this Section 7, then the Cantor Party shall provide
to eSpeed a New Market Notice relating thereto and eSpeed shall have a right of
first refusal to provide Electronic Brokerage Services with respect to that
Marketplace under the terms of this Agreement. If eSpeed notifies the Cantor
Party that it wishes to provide Electronic Brokerage Services with respect to
the new Marketplace, then eSpeed shall use commercially reasonable efforts to
develop and put into operation an Electronic Trading System for the Marketplace
within 180 days. If eSpeed is able to develop and put into operation an
Electronic Trading System for the Marketplace within 180 days, then the
Marketplace shall be a Collaborative Marketplace and the operation thereof shall
be subject to Section 3 of this Agreement. If, after diligent effort, eSpeed is
unable to develop and put into operation an Electronic Trading System for the
Marketplace within 180 days, or eSpeed notifies the Cantor Party that it does
not wish to provide Electronic Brokerage Services with respect to the new
Marketplace, then (i) the applicable Cantor Party may provide or obtain from a
third party Electronic Brokerage Services for that Marketplace in any manner
that the Cantor Party deems to be acceptable and (ii) the Marketplace shall not
be a Collaborative Marketplace. CFLP agrees that its proposal to create a new
Marketplace and the requirements relating thereto will be commercially
reasonable in scope and that CFLP or another Cantor Party will diligently pursue
the development of such Marketplace in a meaningful way and that failure to do
so within two years of the provision of the New Market Notice will cause any
rights of the eSpeed Parties and the Cantor Parties in this Section 7 and
Section 8 of this Agreement to revert to their original status.
(c) If a Cantor Party wishes to create a new Electronic
Marketplace for a Product that is not a Financial Product, then the Cantor Party
shall provide to eSpeed a New Market Notice relating thereto. eSpeed or another
eSpeed Party shall have the opportunity to offer to provide Electronic Brokerage
Services with respect to the new Marketplace, which offer the Cantor Party shall
review and negotiate in good faith, but may accept or reject in its reasonable
discretion. If the Cantor Party accepts the eSpeed Party's negotiated terms of
proposed offer to provide Electronic Brokerage Services, then the Marketplace
shall be a Collaborative Marketplace and the operation thereof shall be subject
to Section 3 of this Agreement on such terms as the applicable Cantor Party and
the applicable eSpeed Party shall agree. If the Cantor Party rejects the eSpeed
Party's negotiated terms of proposed offer to provide Electronic Brokerage
Services, then (i) the Marketplace shall not be a Collaborative Marketplace and
(ii) the Cantor Party may create and operate the Marketplace in any manner that
the Cantor Party deems to be acceptable.
(d) If an eSpeed Party wishes to create a new Electronic Marketplace for a Financial Product, then the eSpeed Party shall provide to CFLP a New Market Notice relating thereto and CFLP or another Cantor Party shall have a right of first refusal to provide the applicable Cantor Services with respect to that Marketplace under the terms of this Agreement. If, within 30 days of receiving the New Market Notice, CFLP or another Cantor Party notifies the eSpeed Party that it wishes to provide such Cantor Services with respect to the new Marketplace, then the Marketplace shall be a Collaborative Marketplace and the operation thereof shall be subject to Section 3 of this Agreement. If (i) CFLP notifies the eSpeed Party that it does not wish to provide such Cantor Services or (ii) CFLP fails to notify the eSpeed Party within the 30-day time period that it wishes to provide such Cantor Services with respect to the new Marketplace, then the eSpeed Party may provide or obtain from a third party those services for that Marketplace in any manner that the eSpeed Party deems to be acceptable, and the Marketplace shall be an eSpeed Marketplace for purposes of this Agreement.
(e) If an eSpeed Party wishes to create a new Electronic Marketplace for a Product that is not a Financial Product, then the eSpeed Party shall provide to CFLP a New Market Notice relating thereto. CFLP or another Cantor Party shall have the opportunity to offer to provide Cantor Services with respect to the new Marketplace if, within 30 days of receiving the New Market Notice, CFLP or another Cantor Party notifies the eSpeed Party that it wishes to provide such Cantor Services with respect to the new Marketplace. The eSpeed Party shall review and negotiate the offer of CFLP or the other CFLP Party in good faith, but may accept or reject that offer in its reasonable discretion. If the eSpeed Party accepts a Cantor Party's negotiated terms of proposed offer to provide Cantor Services, then the Marketplace shall be a Collaborative Marketplace and the operation thereof shall be subject to Section 3 of this Agreement on such terms as the applicable Cantor Party and the applicable eSpeed Party shall agree. If the eSpeed Party rejects the Cantor Party's negotiated terms of proposed offer to provide Cantor Services, then (i) the Marketplace shall not be a Collaborative Marketplace and (ii) the eSpeed Party may create and operate the Marketplace in any manner that the eSpeed Party deems to be acceptable.
(f) No eSpeed Party shall, directly, indirectly or in connection with a third Person, engage in any activities competitive with a business activity now or hereafter conducted by a Cantor Party or provide or assist any other Person in providing any Cantor Service, other than (i) in
collaboration with a Cantor Party pursuant to Section 3 of this Agreement, (ii)
with respect to a new Marketplace involving a Financial Product, after CFLP (x)
has indicated that it is unable or unwilling to provide such Cantor Service or
(y) fails to indicate to the eSpeed Party within the prescribed 30-day period
that it does wish to provide such Cantor Service with respect to that
Marketplace in accordance with paragraph (d) of this Section 7, (iii) with
respect to a new Marketplace involving a Product that is not a Financial Product
in accordance with paragraph (c) or paragraph (e) of this Section 7 or (iv) with
respect to an Unrelated Dealer Business in which an eSpeed Party develops and
operates a fully electronic Marketplace.
(g) No Cantor Party shall, directly, indirectly or in connection with a third Person, provide or assist any other Person in providing Electronic Brokerage Services, other than (i) in collaboration with eSpeed pursuant to Section 3 of this Agreement, (ii) with respect to a new Marketplace, after eSpeed (x) has indicated that it is unable to develop and put into operation an Electronic Trading System with respect to that new Marketplace in accordance with paragraph (a) of this Section 7 or (y) has declined to exercise its right of first refusal or is unable to develop and put into operation an Electronic Trading System with respect to that new Marketplace in accordance with paragraph (b) of this Section 7, including, without limitation, the time period specified therein, or (iii) with respect to an Unrelated Dealer Business.
(h) Notwithstanding the foregoing and anything to the contrary in this Section 7, the Unrelated Dealer Businesses are expressly excluded from eSpeed's rights of first refusal under paragraph (b) and the conduct by any Cantor Party either directly, or indirectly with or through another Person, of any of the Unrelated Dealer Businesses shall not be deemed to be a violation of this Section 7.
(i) The Cantor Parties and the eSpeed Parties shall be
entitled to and may enter into strategic alliances, joint ventures, partnerships
or similar arrangements with Persons and consummate Business Combinations with
Persons (all of the foregoing, collectively, "Alliance Opportunities") on the
following basis only. If an Alliance Opportunity (i) relates to a Person that
directly or indirectly provides Cantor Services and engages in business
operations that do not involve Electronic Brokerage Services, then any Cantor
Party shall be entitled to consummate a transaction with respect to such an
Alliance Opportunity, (ii) relates to a Person that directly or indirectly
provides Electronic Brokerage Services and engages in business operation that do
not involve any Cantor Service, then any eSpeed Party shall be entitled to
consummate a transaction with respect to such an Alliance Opportunity and (iii)
is an Alliance Opportunity with respect to a Person other than those described
in clauses (i) and (ii) above, then the Cantor Parties and the eSpeed Parties
shall cooperate to jointly pursue and consummate a transaction with respect to
such Alliance Opportunity on mutually agreeable terms. For purposes of this
paragraph, a "Business Combination" shall mean, with respect to any Person, a
transaction initiated by and/or in which a Cantor Party or an eSpeed Party is
the acquiror involving (i) a merger, consolidation, amalgamation or combination,
(ii) any sale, dividend, split or other disposition of any capital stock or
other equity interests (or securities convertible into or exchangeable for or
options or warrants to purchase any capital stock or other equity equivalents)
of the Person, (iii) any tender offer (including without limitation a
self-tender), exchange offer, recapitalization, liquidation, dissolution or
similar transaction, (iv) any sale, dividend or other disposition of a
significant portion of the assets and properties of the Person (even if less
than
all or substantially all of such assets or properties), and (v) entering into of any agreement or understanding, or the granting of any rights or options, with respect to any of the foregoing.
8. Exclusive Patent Licenses.
(a) Subject to the second following sentence, CFLP and CFPH hereby grant to eSpeed an exclusive, perpetual, irrevocable, worldwide, royalty-free right and license, with the right to sublicense to its subsidiaries and affiliates, under all patents and patent applications of CFLP and CFPH related to Electronic Marketplaces, now known and existing, including all provisionals, divisionals, continuations, continuations-in-part, reissues and extensions derived therefrom, as well as all foreign patents and patent applications now known or pending and other counterparts thereof (the "Patent Rights"). The Cantor Parties agree to take all commercially reasonable actions requested by the eSpeed Parties, at the sole expense of the eSpeed Parties, to cause the Patent Rights to remain in full force and effect to the extent permitted by law. In the event that eSpeed (x) has indicated that it is unable to develop and put into operation an Electronic Trading System with respect to a new Marketplace in accordance with paragraph (a) of Section 7 or (y) has declined to exercise its right of first refusal with respect to a new Marketplace in accordance with paragraph (b) of Section 7, then the Cantor Parties shall have a limited right to use the Patent Rights solely in connection with the operation of that new Marketplace. The Cantor Parties shall cooperate with eSpeed, at eSpeed's sole expense, in any attempt by eSpeed to prevent or otherwise seek remedies or damages which, in any case, shall inure to eSpeed for any third party infringement of the Patent Rights that are the subject of the license granted to eSpeed pursuant to this Section 8 or to defend against any third party claim relating to the Patent Rights.
(b) CFS hereby grants to eSpeed a non-exclusive, perpetual, irrevocable, worldwide, royalty-free right and license, with the right to sublicense to its subsidiaries and affiliates, to use the trademarks "Cantor Exchange," "Interactive Matching," and "CX" (collectively, the "Trademark Rights"), in all media now known or hereinafter developed, in connection with Electronic Marketplaces. The Cantor Parties agree to take all commercially reasonable actions requested by the eSpeed Parties, at the sole expense of the eSpeed Parties, to cause the Trademark Rights to remain in full force and effect to the extent permitted by law. The eSpeed Parties acknowledge that CFS owns the Trademark Rights, including all goodwill now or hereafter associated therewith, and that all goodwill and improved reputation generated by the eSpeed Parties' use of the Trademark Rights shall inure to the benefit of CFS. In order to preserve the inherent value of the Trademark Rights, the eSpeed Parties agree to use reasonable efforts to ensure that the products and services in connection with which the eSpeed Parties use the Trademark Rights shall be at least equal to the standard prevailing in the operation of the Electronic Marketplaces immediately prior to the date of the Agreement.
9. Indemnification.
(a) CFLP's Indemnification Obligations. Subject to the terms and conditions of this Section 9, CFLP agrees to defend, indemnify and hold eSpeed, the other eSpeed Parties and their respective officers, directors, affiliates, agents, attorneys, employees and representatives harmless from and against any and all liabilities, losses, costs, damages, expenses, penalties, fines and taxes, including,
without limitation, reasonable legal and other expenses (collectively, "Damages"), directly or indirectly arising out of, resulting from or relating to:
(i) any breach of any covenant, agreement or obligation of any Cantor Party contained in this Agreement; and
(ii) any liability resulting from CFLP broker errors and errors arising in connection with the provision by any Cantor Party of Clearance, Settlement and Fulfillment Services.
(b) eSpeed's Indemnification Obligations. Subject to the terms and conditions of this Section 9, eSpeed agrees to defend, indemnify and hold CFLP, the other Cantor Parties and their respective officers, directors, affiliates, agents, attorneys, employees and representatives harmless from and against any and all Damages directly or indirectly arising out of, resulting from or relating to:
(i) any breach of any covenant, agreement or obligation of any eSpeed Party contained in this Agreement;
(ii) any liability resulting from failures of eSpeed's technology and errors caused by the technology of the Electronic Marketplaces; and
(iii) any liability resulting from any claims asserted against Cantor with respect to an eSpeed Party's exercise of its Patent Rights.
(c) Claims for Indemnification; Defense of Indemnified Claims. For purposes of this Section, the party entitled to indemnification shall be referred to as the "Indemnified Party" and the party required to indemnify shall be referred to as the "Indemnifying Party." In the event that the Indemnifying Party shall be obligated to the Indemnified Party pursuant to this Section 9 or in the event that a suit, action, investigation, claim or proceeding is begun, made or instituted as a result of which the Indemnifying Party may become obligated to the Indemnified Party hereunder, the Indemnified Party shall give prompt written notice to the Indemnifying Party of the occurrence of such event, specifying the basis for such claim or demand, and the amount or estimated amount thereof to the extent then determinable (which estimate shall not be conclusive of the final amount of such claim or demand); provided, however, that the failure to give such notice shall not constitute a waiver of the right to indemnification hereunder unless the Indemnifying Party is actually prejudiced in a material respect thereby. The Indemnifying Party agrees to defend, contest or otherwise protect the Indemnified Party against any such suit, action, investigation, claim or proceeding at the Indemnifying Party's own cost and expense with counsel of its own choice, who shall be, however, reasonably acceptable to the Indemnified Party. The Indemnifying Party may not make any compromise or settlement without the prior written consent of the Indemnified Party (which will not be unreasonably withheld or delayed) and the Indemnified Party shall receive a full and unconditional release reasonably satisfactory to it pursuant to such compromise or settlement. The Indemnified Party shall have the right but not the obligation to participate at its own expense in the defense thereof by counsel of its own choice. If requested by the Indemnifying Party, the Indemnified Party shall (at the Indemnifying Party's expense) (i) cooperate with the Indemnifying Party and its counsel in contesting any claim or demand which the Indemnifying Party defends, (ii) provide the Indemnifying
Party with reasonable access during normal business hours to its books and records to the extent they relate to the condition or operation of a Marketplace and are requested by the Indemnifying Party to perform its indemnification obligations hereunder, and to make copies of such books and records, and (iii) make personnel available to assist in locating any books and records relating to a Marketplace or whose assistance, participation or testimony is reasonably required in anticipation of, preparation for or the prosecution and defense of, any claim subject to this Section 9. In the event that the Indemnifying Party fails timely to defend, contest or otherwise protect the Indemnified Party against any such suit, action, investigation, claim or proceeding, the Indemnified Party shall have the right to defend, contest or otherwise protect the Indemnified Party against the same and may make any compromise or settlement thereof and recover the entire cost thereof from the Indemnifying Party, including, without limitation, reasonable attorneys' fees, disbursements and all amounts paid as a result of such suit, action, investigation, claim or proceeding or compromise or settlement thereof.
(d) Payments; Non-Exclusivity. Any amounts due an Indemnified Party under this Section 9 shall be due and payable by the Indemnifying Party within fifteen (15) business days after (x) in the case of a claim which does not involve any third party, receipt of written demand therefor and (y) in the case of a claim which involves a third party, the final disposition of such claim or demand, provided that reasonable legal and other out-of-pocket costs and expenses are reimbursed currently within 15 business days after demand therefor. The remedies conferred in this Section 9 are intended to be without prejudice to any other rights or remedies available at law or equity to the Indemnified Parties, now or hereafter.
10. Relationship of the Parties. The relationship of the Cantor Parties on the one hand and the eSpeed Parties on the other hand is that of independent contractors. Pursuant to this Agreement, the Cantor Parties and the eSpeed Parties intend to render separate but related services to customers and to divide certain of the revenues arising from those services, but the parties do not intend to share profits or losses or to enter into or create any partnership, and no partnership or other like arrangement shall be deemed to be created hereby. None of the Cantor Parties or eSpeed Parties shall have any claim against the others or right of contribution with respect to any uninsured loss incurred by any of them nor shall any of them have a claim or right against the others with respect to any loss that is deemed to be included within the deductible, retention or self-insured portion of any insured risk.
11. Audit. eSpeed may request a review, by those certified public accountants who examine CFLP's books and records, of CFLP's allocation of Transaction Revenues to eSpeed to determine whether such allocation was based upon the procedures set forth herein. Such a review is to be conducted at eSpeed's expense. CFLP may request a review, by those certified public accountants who examine eSpeed's books and records, of eSpeed's allocation of Transaction Revenues to CFLP to determine whether such allocation was based upon the procedures set forth herein. Such a review is to be conducted at CFLP's expense.
12. Invoicing and Billing; Payment of Service Fees. Each of eSpeed and CFLP shall pay to the other, within 30 days of the end of each calendar month, the amounts due and received to the Cantor Parties or the eSpeed Parties, as the case may be (determined in the manner provided in Section 4 of this Agreement), during that calendar month. eSpeed shall invoice CFLP for charges for Ancillary IT Services provided pursuant hereto on a monthly basis as incurred, such invoices to be
delivered to CFLP by eSpeed within 15 days after the end of each calendar month. CFLP shall pay to eSpeed the aggregate charge for Ancillary IT Services provided under this Agreement in arrears within 30 days after the end of each calendar month. Amounts due by one party to another under this Agreement shall be settled against amounts due by the second party to the first under this or any other agreement. All payments to be made pursuant to this Agreement shall be exclusive of United Kingdom Value Added Tax which, if applicable to any payments hereunder, shall be added to the amount of, and be paid in addition to, such payments.
13. Documentation. All Transaction Revenues, service fees, fees for Ancillary IT services and other benefits hereunder shall be substantiated by and payments thereof shall be preceded or accompanied by, as applicable, appropriate schedules, invoices or other documentation.
14. Force Majeure. Any failure or omission by a party in the performance of any obligation under this Agreement shall not be deemed a breach of this Agreement or create any liability if the same arises from any cause or causes beyond the control of such party, including, but not limited to, the following, which, for purposes of this Agreement shall be regarded as beyond the control of each of the parties hereto: acts of God, fire, storm, flood, earthquake, governmental regulation or direction, acts of the public enemy, war, rebellion, insurrection, riot, invasion, strike or lockout; provided, however, that such party shall resume the performance whenever such causes are removed.
15. Post-Termination Payments. Notwithstanding any provision herein to the contrary, all payment obligations hereof shall survive the happening of any termination of this Agreement until all amounts due hereunder have been paid.
16. Confidentiality.
(a) CFLP and its affiliates agree to treat as confidential and not to disclose to any person (other than to CFLP employees who have a need to know the same for purposes of CFLP's performing its obligations hereunder) or use the same for its own benefit or for any purpose other than performing its obligations hereunder, all confidential or proprietary information, trade secrets, information related to, and all subject matter covered by, any pending patent applications, data, plans, strategies, projections, budgets, reports, research, financial information, files, reports, software, agreements and other materials and information (individually and collectively, "Confidential Information") it receives, obtains or learns about eSpeed and its affiliates, an Electronic Marketplace or any other program, service, software or system eSpeed and/or CFLP develops in connection with this Agreement. CFLP shall notify those of its employees who perform services for eSpeed and its affiliates of this covenant and shall, to the extent practical, secure their agreement to abide by its terms.
(b) eSpeed and its affiliates agree, during the term of this Agreement, to treat as confidential and not to disclose to any person (other than to eSpeed employees who have a need to know the same for purposes of eSpeed's performing its obligations hereunder) or use the same for its own benefit or for any purpose other than performing its obligations hereunder, all Confidential Information it receives, obtains or learns about CFLP and its affiliates or any other program, service, software or system CFLP and/or eSpeed develops in connection with this Agreement. eSpeed shall notify those of its employees who perform services under this Agreement of this covenant and shall, to the extent practical, secure their agreement to abide by its terms.
(c) Notwithstanding the foregoing, neither party shall be obligated with respect to confidential or proprietary information that it can document: (i) is or has become readily publicly available through no fault of its own or that of its affiliates, employees or agents; or (ii) is received from a third party lawfully in possession of such information and lawfully empowered to freely disclose such information to it; or (iii) was lawfully in its possession, without restriction, after the date hereof.
17. Miscellaneous.
(a) This Agreement and all the covenants herein contained shall be binding upon the parties hereto, their respective heirs, successors, legal representatives and assigns. No party shall have the right to assign all or any portion of its rights, obligations or interests in this Agreement or any monies which may be due pursuant hereto without the prior written consent of the other affected parties and which consent may not be unreasonably withheld.
(b) No waiver by any party hereto of any of its rights under this Agreement shall be effective unless in writing and signed by an officer of the party waiving such right. No waiver of any breach of this Agreement shall constitute a waiver of any subsequent breach, whether or not of the same nature. This Agreement may not be modified except by a writing signed by officers of each of the parties hereto; provided, however, that each amendment, modification and/or waiver hereof or hereunder must be approved by a majority of the outside directors of eSpeed or the applicable eSpeed Party. For purposes of this Agreement, an outside director shall mean a director who is not an employee, partner or affiliate (other than solely by reason of being an eSpeed director) of eSpeed, CFLP or any of their respective affiliates.
(c) This Agreement constitutes the entire Agreement of the parties with respect to the services and benefits described herein, and cancels and supersedes any and all prior written or oral contracts or negotiations between the parties with respect to the subject matter hereof.
(d) This Agreement shall be strictly construed as independent from any other agreement or relationship between the parties.
(e) This Agreement is made pursuant to and shall be governed and construed in accordance with the laws of the State of New York, without regard to the principles of conflict of laws thereof.
(f) The descriptive headings of the several sections hereof are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof.
(g) Any notice, request or other communication required or permitted in this Agreement shall be in writing and shall be sufficiently given if personally delivered or if sent by registered or certified mail, postage prepaid, addressed as follows:
(i) If to a Cantor Party:
One World Trade Center, 105th Floor New York, NY 10048 Attention: General Counsel Facsimile: (212) 938-3620
(ii) If to an eSpeed Party:
One World Trade Center, 103rd Floor New York, NY 10048 Attention: General Counsel Facsimile: (212) 938-3620
The address of any party hereto may be changed on notice to the other parties hereto duly served in accordance with the foregoing provisions.
[Signature Pages to Follow]
IN WITNESS WHEREOF, the parties hereto have executed or caused this Joint Services Agreement to be executed in their respective names by their respective officers thereunto duly authorized, as of the date first written above.
CANTOR FITZGERALD, L.P.
By: CF Group Management, Inc.,
its Managing General Partner
By:________________________
Name:
Title:
CANTOR FITZGERALD SECURITIES
By: Cantor Fitzgerald, L.P.
its Managing General Partner
By: CF Group Management, Inc.
its Managing General Partner
By:________________________
Name:
Title:
CANTOR FITZGERALD & CO.
By: Cantor Fitzgerald Securities
its Managing General Partner
By: Cantor Fitzgerald, L.P.
its Managing General Partner
By: CF Group Management, Inc.
its Managing General Partner
By:________________________
Name:
Title:
CFPH, L.L.C.
By:________________________
Name:
Title:
CANTOR FITZGERALD PARTNERS
By: Cantor Fitzgerald Securities
its Managing General Partner
By: Cantor Fitzgerald, L.P.
its Managing General Partner
By: CF Group Management, Inc.
its Managing General Partner
By:________________________
Name:
Title:
CANTOR FITZGERALD INTERNATIONAL
By:________________________
Name:
Title:
CANTOR FITZGERALD GILTS
By:________________________
Name:
Title:
eSPEED, INC.
By:________________________
Name:
Title:
eSPEED SECURITIES, INC.
By:________________________
Name:
Title:
eSPEED GOVERNMENT SECURITIES, INC.
By:________________________
Name:
Title:
eSPEED MARKETS, INC.
By:________________________
Name:
Title:
eSPEED INTERNATIONAL, LIMITED
By:________________________
Name:
Title:
ANNEX A
o U.S. Government Securities
o United Kingdom and European Government Bonds
o Eurobonds
o Corporate Bonds
o U.S. Agency Securities
o Emerging Market Government Bonds and Emerging Market Eurobonds
o Global Repurchase Agreements and Reverse Repurchase Agreements (U.S., Europe and Emerging Market Countries)
o U.S. Municipal Bonds
o U.S. Treasury Futures
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of eSpeed, Inc. on Form S-1 of our report dated December 7, 1999, appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to use under the heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP New York, New York December 7, 1999 |
CONSENT TO BE NAMED AS DIRECTOR
OF
eSPEED, INC.
The undersigned hereby consents to be named as a director of eSpeed, Inc. (the "Company") in the Registration Statement on Form S-1 (Registration No. 333-87475) and all amendments thereto, filed by the Company with the Securities and Exchange Commission.
/s/ Joseph P. Shea
------------------------
Joseph P. Shea
|