UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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RULE 14A-6(E)(2))
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[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to (S)240.14a-11(c) or (S) 240.14a-12
eSpeed, Inc.
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(Name of Registrant as Specified In Its Charter)
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1-NY/1452892.9
09/25/02
eSpeed, Inc. logo
September 27, 2002
Dear Stockholder:
You are cordially invited to attend our 2002 Annual Meeting of
Stockholders, which will be held at the Rihga Royal Hotel, 151 West 54th Street,
New York, New York, on Wednesday, October 23, 2002, commencing at 10:00 a.m.
(local time). We look forward to greeting as many of our stockholders as are
able to be with us.
At the meeting, you will be asked to consider and vote upon (i) the
election of nine (9) directors; and (ii) such other business as may properly
come before the meeting and any adjournment thereof.
We hope you will find it convenient to attend the meeting in person.
WHETHER OR NOT YOU EXPECT TO ATTEND, TO ASSURE YOUR REPRESENTATION AT THE
MEETING AND THE PRESENCE OF A QUORUM, PLEASE COMPLETE, DATE, SIGN AND MAIL
PROMPTLY THE ENCLOSED PROXY, for which a return envelope is provided. No postage
need be affixed to the Proxy if it is mailed in the United States.
Our Annual Report for the fiscal year ended December 31, 2001 is being
mailed to you together with the enclosed proxy materials.
Sincerely,
/s/ Howard W. Lutnick
Howard W. Lutnick
Chairman of the Board of Directors
ESPEED, INC.
135 EAST 57TH STREET
NEW YORK, NY 10022
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
NOTICE IS HEREBY GIVEN that our Annual Meeting of Stockholders (the Annual
Meeting) will be held at the Rihga Royal Hotel, 151 West 54th Street, New York,
New York, on Wednesday, October 23, 2002, commencing at 10:00 a.m. (local time),
for the following purposes:
(1) To elect nine (9) directors to hold office until the next annual
meeting and until their successors are duly elected and qualified;
and
(2) To transact such other business as may properly come before the
Annual Meeting and any adjournment thereof.
Only holders of record of our Class A common stock or our Class B common stock
at the close of business on September 19, 2002 are entitled to notice of and to
vote at the Annual Meeting and any adjournment thereof.
By Order of the Board of Directors,
/s/ Stephen M. Merkel
STEPHEN M. MERKEL
Secretary
September 27, 2002
YOUR VOTE IS IMPORTANT.
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED
PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE.
ESPEED, INC.
135 EAST 57TH STREET
NEW YORK, NY 10022
PROXY STATEMENT
This Proxy Statement is being furnished in connection with the
solicitation of Proxies by and on behalf of our board of directors to be used at
our Annual Meeting of Stockholders to be held on Wednesday, October 23, 2002,
and at any adjournment thereof (the Annual Meeting), for the purposes set forth
in the accompanying Notice of Annual Meeting. Our Annual Report for the fiscal
year ended December 31, 2001 accompanies this Proxy Statement. This Proxy
Statement and accompanying materials are expected to be first sent or given to
our stockholders on or about September 30, 2002.
The close of business on September 19, 2002 has been fixed as the
record date (the Record Date) for the determination of the stockholders entitled
to notice of and to vote at the Annual Meeting. Only holders of record as of
that date of shares of our Class A common stock, $.01 par value per share, or of
our Class B common stock, $.01 par value per share, are entitled to notice of
and to vote at the Annual Meeting. Our Class A common stock and our Class B
common stock are sometimes collectively referred to herein as our "Common
Equity."
Each share of our Class A common stock entitles the holder thereof to
one vote per share on each matter presented to stockholders for approval at the
Annual Meeting. Each share of our Class B common stock entitles the holder
thereof to 10 votes per share on each matter presented to stockholders for
approval at the Annual Meeting. On the Record Date, there were 28,291,403 shares
of our Class A common stock and 26,688,814 shares of our Class B common stock,
for a total of 54,980,217 shares of our Common Equity, outstanding and entitled
to vote.
Execution of a Proxy by a stockholder will not affect such
stockholder's right to attend the Annual Meeting and to vote in person. Any
stockholder who executes a Proxy has a right to revoke it at any time before it
is voted by advising Stephen M. Merkel, our Secretary, in writing of such
revocation, by executing a later-dated Proxy which is presented to us at or
prior to the Annual Meeting, or by appearing at the Annual Meeting and voting in
person. Attendance at the Annual Meeting will not in and of itself constitute
revocation of a Proxy.
The required quorum for the transaction of business at the Annual
Meeting is a majority of the collective voting power represented by the shares
of our Common Equity issued and outstanding on the Record Date (the Total Voting
Power), which shares must be present in person or represented by Proxy at the
Annual Meeting. Assuming a quorum, the nominees receiving a plurality of the
Total Voting Power present in person or by Proxy at the Annual Meeting and
entitled to vote on the election of directors will be elected as directors.
With regard to the election of directors, votes may be cast in favor or
withheld; votes that are withheld will be counted for purposes of determining
the presence or absence of a quorum but will have no other effect. Broker
non-votes, if any, will be counted for purposes of determining the presence or
absence of a quorum, but will have no effect on the election of directors.
Pursuant to the trust agreement governing our Deferral Plan, the trustee of our
Deferral Plan will not, except as otherwise required by law, vote shares of our
Class A common stock held in the trust as to which the trustee has not received
voting instructions from plan participants.
UNLESS SPECIFIED OTHERWISE, THE PROXIES WILL BE VOTED FOR THE ELECTION
OF ALL THE NOMINEES TO SERVE AS OUR DIRECTORS UNTIL THE NEXT ANNUAL MEETING AND
UNTIL THEIR SUCCESSORS ARE DULY ELECTED AND QUALIFIED. IN THE DISCRETION OF THE
PROXY HOLDERS, THE PROXIES WILL ALSO BE VOTED FOR OR AGAINST SUCH OTHER MATTERS
AS MAY PROPERLY COME BEFORE THE ANNUAL MEETING. MANAGEMENT IS NOT AWARE OF ANY
OTHER MATTERS TO BE PRESENTED FOR ACTION AT THE ANNUAL MEETING.
Our principal executive offices are located at 135 East 57th Street, New
York, NY 10022 and our telephone number there is (212) 938-5000.
PROPOSAL 1 -- ELECTION OF DIRECTORS
Our board of directors is currently comprised of eight members. Mr.
Richard C. Breeden, a director since 1999, will not be running for re-election
as a director. Our board has nominated the seven other current directors listed
below, as well as Senator Frank R. Lautenberg and Albert M. Weis, for election
as directors at the Annual Meeting. The information with respect to the nine
nominees for election as directors is set forth below. All of the nominees are
to be elected at the Annual Meeting and to serve until their successors are duly
elected and qualified. All of the nominees listed below are expected to serve as
directors if they are elected. If any nominee should decline or be unable to
accept such nomination or to serve as a director (an event which our board of
directors does not now expect), our board of directors reserves the right to
nominate another person or to vote to reduce the size of our board of directors.
In the event another person is nominated, the Proxy holders intend to vote the
shares to which the Proxy relates for the election of the person nominated by
our board of directors. There is no cumulative voting for directors.
DIRECTOR PRINCIPAL OCCUPATIONS DURING THE LAST
NAME AGE SINCE FIVE YEARS; OTHER DIRECTORSHIPS
---- --- ----- -------------------------------
Howard W. Lutnick 41 1999 Mr. Lutnick has been our Chairman of the Board of Directors and Chief
Executive Officer since June 1999 and has been our President since September
2001. Mr. Lutnick joined Cantor Fitzgerald, L.P. in 1983 and has served as
President and Chief Executive Officer of Cantor since 1991. Mr. Lutnick's
company, CF Group Management, Inc., is the managing general partner of
Cantor. In addition to his executive responsibilities at Cantor Fitzgerald
and eSpeed, Mr. Lutnick is a member of Haverford College's Board of Managers,
a member of the Board of the Zachary and Elizabeth M. Fisher Center for
Alzheimer's Disease Research at Rockefeller University, a member of the
Executive Committee of the Intrepid Museum Foundation's Board of Trustees and
a member of the Board of Directors of the Solomon Guggenheim Museum Foundation.
Lee M. Amaitis 52 2001 Mr. Amaitis has been our Global Chief Operating Officer and director since
September 2001. Mr. Amaitis has been Executive Managing Director of eSpeed
International Limited from December 1999. Mr. Amaitis has also been President
and Chief Executive Officer of Cantor Fitzgerald International and Cantor
Fitzgerald Europe since March 1995. Prior to joining Cantor, Mr. Amaitis was
Managing Partner and Senior Managing Director of Cowen Government Brokers from
April 1991 to February 1995 and was Manager MBS and Limited Partner of Cowen &
Co. from February 1989 to April 1991.
Joseph C. Noviello 37 2001 Mr. Noviello has been our Executive Vice President, Chief Information Officer
and director since September 2001. Mr. Noviello served as our Senior Vice
President and Chief Technology Officer from December 1999 to September 2001.
From December 1995 to December 1999, Mr. Noviello served as Managing Director
of Technology for Cantor Fitzgerald, L.P.
2
DIRECTOR
NAME AGE SINCE PRINCIPAL OCCUPATIONS DURING THE LAST FIVE YEARS; OTHER DIRECTORSHIPS
---- --- ----- ---------------------------------------------------------------------
Stephen M. Merkel 44 2001 Mr. Merkel has been our director since September 2001. Mr. Merkel has been
our Executive Vice President, General Counsel and Secretary since December
2001. From June 1999 to December 2001, he was our Senior Vice President,
General Counsel and Secretary. Mr. Merkel has also been Executive Managing
Director, General Counsel and Secretary of Cantor since December 2000 and was
Senior Vice President, General Counsel and Secretary of Cantor from 1993 to
December 2000. Mr. Merkel is also responsible for Cantor's legal, compliance,
tax, risk, credit and human resources departments. 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. Mr. Merkel is on the Board of Directors of Freedom International
Brokerage Company and is on the Management Committee of TradeSpark, L.P.
Larry R. Carter 59 1999 Mr. Carter has been our director since December 1999. Mr. Carter joined Cisco
Systems, Inc., a computer technology company, in January 1995 as Vice
President, Finance and Administration and as Chief Financial Officer and
Secretary. In July 1997, he was promoted to Senior Vice President, Finance and
Administration, Chief Financial Officer and Secretary and has served as a
director of Cisco Systems since July 2000. From 1992 to January 1995, Mr.
Carter was Vice President and Corporate Controller at Advanced Micro Devices.
His career also includes four years with V.L.S.I. Technology Inc. as Vice
President, Finance and Chief Financial Officer and two years at S.G.S. Thompson
Microelectronics Inc. as Vice President, Finance, Administration and Chief
Financial Officer. He also spent 19 years at Motorola, Inc., where he held a
variety of financial positions, the last being Vice President and Controller,
M.O.S. Group. Mr. Carter is a member of the Board of Trustees at Loyola
Marymount University. Mr. Carter is also on the Board of Directors of Transmeta
Corp. and QLogic Corporation.
John H. Dalton 60 2002 Mr. Dalton has been our director since February 2002. Mr. Dalton has been
President of IPG Photonics Corp., a company that designs, develops and
manufactures a range of advanced amplifiers and lasers for the telecom and
industrial markets, since September 2000. From May 1999 to June 2000,
Mr. Dalton was Chairman and Chief Executive Officer of EPCAD Systems, a company
that researches and develops electroplasma technology for the metals industry.
Mr. Dalton served as Secretary of the Navy from July 1993 to November 1998.
Mr. Dalton serves on the Board of Directors of TransTechnology Corp. and Fresh
Del Monte Produce Inc.
3
DIRECTOR
NAME AGE SINCE PRINCIPAL OCCUPATIONS DURING THE LAST FIVE YEARS; OTHER DIRECTORSHIPS
---- --- ----- ---------------------------------------------------------------------
Frank R. Lautenberg 78 2002 From 1982 until 2001, Mr. Lautenberg was a United States Senator for New
Jersey. Mr. Lautenberg was the Chairman of the Transportation Sub-Committee and
a member of the Budget Committee, the Environmental Committee and the
Appropriations Committee, as well as other committees and sub-committees of the
United States Senate. From 1978 to 1982, Mr. Lautenberg was a Commissioner and
a member of the Audit Committee of the Port Authority of New York and New
Jersey. Mr. Lautenberg was a co-founder of Automatic Data Processing, Inc., a
company listed on the New York Stock Exchange, and Chairman and Chief Executive
Officer of Automatic Data Processing from 1975 until 1983. Since 1967,
Mr. Lautenberg has been the President of the Association of Data Processing
Services Organizations. Mr. Lautenberg is an honorary director of Automatic
Data Processing, Inc. and serves on the Boards of NorCrown Bank, IDT
Corporation, Columbia University, Cardozo School of Law at Yeshiva University,
The Holocaust Museum in Washington, D.C. and other not-for-profit
organizations.
William J. Moran 61 1999 Mr. Moran has been our director since December 1999. Mr. Moran joined the Chase
Manhattan Corporation and the Chase Manhattan Bank in 1975 as Internal Control
Executive. After several promotions, Mr. Moran was named General Auditor in
1992, Executive Vice President in 1997 and a member of the Management Committee
in 1999. Before joining Chase, now J.P. Morgan Chase & Co., Mr. Moran was with
the accounting firm of Peat, Marwick, Mitchell & Co. for nine years.
Albert M. Weis 75 2002 Mr. Weis has been President of A.M. Weis & Co., Inc., a money management
company, since 1976. Mr. Weis was Chairman of the New York Cotton Exchange from
1997 to 1998, 1981 to 1983 and 1977 to 1978. From 1998 to 2000, Mr. Weis was
Chairman of the New York Board of Trade. From 1996 to 1999, Mr. Weis was a
director and chairman of the audit committee of Synetic, Inc. and, from 1999
to 2001, he was a director and chairman of the audit committee of Medical
Manager Corporation (successor to Synetic, Inc.).
VOTE REQUIRED FOR APPROVAL
The nine nominees receiving a plurality of the Total Voting Power
present in person or by Proxy at the Annual Meeting and entitled to vote on the
election of directors will be elected as directors.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
OUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE NINE
NOMINEES.
COMPENSATION OF DIRECTORS
Directors who are also our employees do not receive additional
compensation for serving as directors. On October 19, 2001, we granted each of
our three non-employee directors at the time options to purchase 30,000 shares
of our Class A common stock at an exercise price per share equal to $5.10.
4
These options vest in three equal installments beginning on the first of three
semi-anniversaries of the date of grant. Effective February 11, 2002, Mr. Dalton
was granted an option to purchase 30,000 shares of our Class A common stock at
an exercise price per share of $8.95 in connection with his election to our
board. Under our current policy, each of our non-employee directors is granted
an option to purchase 30,000 shares of our Class A common stock in connection
with his initial election to our board and an option to purchase 10,000 shares
of our Class A common stock each year he serves as a director thereafter. In
addition, non-employee directors receive annual compensation of $25,000. They
also receive cash compensation of $2,000 for each meeting of our board of
directors and $1,000 for each meeting of a committee of our board of directors
actually attended, whether in person, by telephone or otherwise. However, none
of our non-employee directors will be paid more than $3,000 in the aggregate for
attendance at meetings held on the same date. Non-employee directors also are
reimbursed for all out-of-pocket expenses incurred in attending meetings of our
board of directors or committees of our board of directors.
MEETINGS AND COMMITTEES OF OUR BOARD OF DIRECTORS
Our board of directors held eight meetings during the year ended
December 31, 2001. In addition to meetings, our board of directors and its
committees reviewed and acted upon matters by unanimous written consent.
Our board of directors has an Audit Committee and a Compensation
Committee. The members of our Compensation Committee are presently Messrs.
Breeden (1), Carter and Moran, all of whom are non-employee directors. The
Compensation Committee is responsible for reviewing and approving all
compensation arrangements for our executive officers and for administering our
stock option and stock purchase plan. The Compensation Committee held six
meetings during the year ended December 31, 2001. The members of our Audit
Committee are presently Messrs. Breeden (1), Carter and Moran, all of whom are
independent directors (as defined in the applicable rules of the Nasdaq National
Market). Our Audit Committee selects our independent auditors, consults with our
auditors and with management with regard to the adequacy of our internal
accounting controls and considers any non-audit functions to be performed by our
independent auditors. The Audit Committee held six meetings during the year
ended December 31, 2001. Our board of directors has adopted a written charter
for the Audit Committee.
EXECUTIVE OFFICERS
Our executive officers are appointed annually by our board of directors
and serve at the discretion of our board of directors. Except with respect to
our Chief Financial Officer, Jeffrey M. Chertoff, our executive officers, their
respective ages and positions and certain other information with respect to each
of them are set forth herein under the section entitled "Election of Directors."
Information with respect to Mr. Chertoff is as follows:
Mr. Chertoff, age 48, was hired as our Senior Vice President and Chief
Financial Officer on May 6, 2002. As Chief Financial Officer, Mr. Chertoff is
responsible for managing our global financial and accounting operations. Mr.
Chertoff served as Executive Vice President and Chief Financial Officer for
Daiwa Securities America from August 1998 to May 2002. From May 1995 to August
1998, Mr. Chertoff was Controller, Director and Senior Operating Officer for
Salomon Brothers, Inc. Mr. Chertoff also served as Assistant Controller and
Managing Director at Bear Stearns, where he was employed from 1981 to 1995. He
began his career with Coopers & Lybrand, now PricewaterhouseCoopers, LLP.
--------
1 During calendar years 2001 and 2002, Mr. Breeden served as a member of the
Compensation and Audit Committees. Mr. Breeden has elected not to run for
re-election as a director, and hence will not serve on the Compensation
Committee or Audit Committee or otherwise be involved in board activities
after the date of the Annual Meeting.
5
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning all
compensation earned for the year ended December 31, 2001, the year ended
December 31, 2000 and the period from March 10, 1999 through December 31, 1999
by our Chief Executive Officer and each of our other executive officers required
to be included in the table (collectively, the Named Executive Officers).
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Awards
--------------------
Securities
Salary Bonus Underlying
Name and Principal Position Year ($) ($) Options (#)
---------------------------- ---- --- --- -----------
Howard W. Lutnick.................................. 2001 400,000 600,000 1,500,000
Chairman, Chief Executive Officer 2000 350,000 650,000 625,000
and President 1999 280,000 -- 2,500,000
Frederick T. Varacchi*............................. 2001 354,167 500,000 --
2000 500,000 500,000 200,000
1999 400,000 -- 800,000
Douglas B. Gardner*................................ 2001 177,083 350,000 --
2000 250,000 350,000 75,000
1999 200,000 -- 375,000
Lee M. Amaitis..................................... 2001 107,418 300,000 375,000
Global Chief Operating Officer 2000 107,418 333,333 50,000
1999 -- -- 325,000
Joseph C. Noviello................................. 2001 275,000 1,000,000(1) 200,000
Chief Information Officer and 2000 250,000 350,500 65,000
Executive Vice President 1999 175,000 250,000 85,000
Stephen M. Merkel.................................. 2001 150,000 400,000 200,000
General Counsel, Executive Vice President and 2000 150,000 300,000 100,000
Secretary 1999 120,000 -- 100,000
----------------------
*Messrs. Varacchi and Gardner were lost as a result of the terrorist attacks on
September 11, 2001.
(1) The after-tax portion of $600,000 of such bonus was used to purchase units
in Cantor Fitzgerald, L.P.
See "Certain Relationships and Related Transactions."
6
The following table sets forth the options granted during 2001 to, and the value
of the options held on December 31, 2001 by, our Named Executive Officers.
Messrs. Varacchi and Gardner were not granted any options during 2001.
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
Percent of Total
Number of Shares Options Granted
Underlying Options to Employees Exercise or Base Grant Date
Name Granted in 2001 Price ($/Share) Expiration Date Present Value ($)
---- ------- ------- --------------- --------------- -----------------
Howard W. Lutnick................. 1,500,000(1) 42.2 5.10 10/19/11 4,068,150(2)
Lee M. Amaitis.................... 375,000(1) 10.5 5.10 10/19/11 1,017,038(2)
Joseph C. Noviello................ 200,000(1) 5.6 5.10 10/19/11 542,420(2)
Stephen M. Merkel................. 200,000(1) 5.6 5.10 10/19/11 542,420(2)
----------------------
(1) The options vest quarterly over a four year period from the date of
grant, October 19, 2001.
(2) The fair value of the options was estimated using a modified
Black-Scholes option pricing model and the following assumptions:
risk-free interest rate of 3.25%, no expected dividends, expected stock
price volatility of 80% and assumed to be exercised at 80% of their
original life.
The following table provides information, with respect to the Named Executive
Officers, concerning options and SARs held as of December 31, 2001.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
Shares Number of Securities Underlying Value of Unexercised
Acquired on Value Unexercised Options/SARS at In-The-Money Options/SARs at
Exercise Realized on Fiscal Year End (#) Fiscal Year End($)(1)
(#) Exercise --------------------------------- -------------------------------
Name ($) Exercisable Unexercisable Exercisable Unexercisable
------------------------------------------------------------------------------------------------------------------------------------
Howard W. Lutnick............ 0 0 1,425,000 3,200,000 0 4,770,000
Frederick T. Varacchi*....... 0 0 1,000,000 0 0 0
Douglas B. Gardner*.......... 0 0 450,000 0 0 0
Lee M. Amaitis............... 0 0 140,000 610,000 0 1,192,500
Joseph C. Noviello........... 0 0 58,750 291,250 0 636,000
Stephen M. Merkel............ 0 0 60,000 340,000 0 636,000
----------------------
(1) Based on the last reported price of $8.28 for our Class A common stock
on December 31, 2001.
* Messrs. Varacchi and Gardner were lost as a result of the terrorist
attacks on September 11, 2001.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of our board of directors consists of
Messrs. Breeden, Carter and Moran. All of the members of the Compensation
Committee are non-employee directors and are not former officers. During 2001,
none of our executive officers served as a member of the board of directors or
on the compensation committee of a corporation where any of its executive
officers served on our Compensation Committee or on our board of directors.
7
REPORT OF THE COMPENSATION COMMITTEE OF OUR
BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
The Compensation Committee reviews and recommends to our board of
directors for its approval the salaries and bonuses of our executive officers.
In addition, the Compensation Committee grants awards under our Long-Term
Incentive Plan and administers our Long-Term Incentive Plan and our Employee
Stock Purchase Plan, which has been suspended as a result of the events of
September 11, 2001.
Compensation Philosophy
Our executive compensation program is designed to integrate
compensation with the achievement of our short and long-term business objectives
and to assist us in attracting, motivating and retaining the highest quality
executives.
Executive compensation is comprised of three components: (i) a base
salary, which is designed to attract talented employees and contribute to
motivating and rewarding individual performance; (ii) an incentive bonus of
cash, stock and/or options, which is intended to tie financial reward with the
achievement of our short-term performance objectives; and (iii) a long-term
incentive program, which is designed to promote the achievement of long-term
performance goals and to align the long-term interests of our executive officers
with those of our stockholders.
The Compensation Committee generally intends that compensation paid to
our Chief Executive Officer and the other Named Executive Officers not be
subject to the limitation on tax deductibility under Section 162(m) of the
Internal Revenue Code, as amended (the Code), so long as this can be achieved in
a manner consistent with the Committee's other objectives. Section 162(m)
generally eliminates a corporation's tax deduction in a given year for payments
to certain Named Executive Officers in excess of $1 million, unless the payments
result from "qualified performance-based compensation."
Base Salary Compensation
The Compensation Committee believes that the retention of executives
who have developed the skills and expertise required to lead our organization is
vital to our competitive strength. The Compensation Committee further believes
that attracting other key employees who can supplement the efforts of our
existing executives is absolutely critical. To this end, it is the Compensation
Committee's policy to establish base pay at competitive levels.
Incentive Bonus Compensation
The Compensation Committee believes that compensation should vary with
corporate performance and that a significant portion of compensation should
continue to be linked to the achievement of business goals.
Grants of Stock Options
It is the policy of the Compensation Committee to award stock options
to our executive officers and other key employees in order to align their
interests with those of our long-term investors and to help attract and retain
these persons. The options, therefore, provide value to the recipients only if
and when the market price of our Class A common stock increases above the option
grant price. To that end, there is ongoing review by the Compensation Committee
of the market price of our Class A common stock and the grant price of options.
It is the Compensation Committee's goal to preserve this incentive as an
effective tool in motivating and retaining executives.
In 2001, options to purchase 2,275,000 shares of our Class A common
stock were granted by our Compensation Committee to the Named Executive
Officers.
Compensation of Our Chief Executive Officer
In 2001, Mr. Lutnick was paid a salary of $400,000 and a bonus of
$600,000. Mr. Lutnick was granted options to purchase 1,500,000 shares of our
Class A common stock in 2001, which vest and become exercisable quarterly over a
four year period from the date of grant, October 19, 2001. The Compensation
8
Committee considered several factors in establishing our Chief Executive
Officer's compensation package, including market pay practices, performance
level, contributions toward achievement of strategic goals and our overall
financial and operating success.
THE COMPENSATION COMMITTEE
Richard C. Breeden
Larry R. Carter
William J. Moran
9
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
BY MANAGEMENT. The following table sets forth certain information, as of
September 9, 2002, with respect to the beneficial ownership of our common equity
by: (i) each director and nominee for director; (ii) each of the Named Executive
Officers; and (iii) all executive officers and directors as a group. Each person
listed below can be reached at our headquarters located at 135 East 57th Street,
New York, NY 10022. Shares of Class B common stock are convertible into shares
of Class A common stock at any time in the discretion of the holder on a
one-for-one basis. Accordingly, a holder of Class B common stock is deemed to be
the beneficial owner of an equal number of shares of Class A common stock for
purposes of this table.
Beneficial Ownership(1)
---------------------------------------------------------------
Class A common Class B common
stock stock
------------------------------ -------------------------------
Name Shares % Shares %
----------------- ---------------- ------------- ---------------- -------------
Howard W. Lutnick................................ 30,312,930(2) 53.1% (3) 26,688,814(4) 100%
Lee M. Amaitis................................... 370,074 1.3% (5) -- --
Joseph C. Noviello............................... 126,468 * -- --
Stephen M. Merkel................................ 166,897(6) * -- --
Jeffrey Chertoff................................. 6,250 * -- --
Richard C. Breeden............................... 75,500 * -- --
Larry R. Carter.................................. 95,500(7) * -- --
John H. Dalton................................... 10,000 * -- --
Frank R. Lautenberg.............................. -- -- -- --
William J. Moran................................. 53,000 * -- --
Albert M. Weis................................... 14,000(8) * -- --
All executive officers, directors and director
nominees as a group (11 persons) ................ 31,230,619 54.1% (9) 26,688,814 100%
-------------
* Less than 1%
(1) Based upon information supplied by officers, directors and director
nominees, and filings under Sections 13 and 16 of the Securities
Exchange Act of 1934, as amended (the Exchange Act).
(2) Consists of (1) 2,100,000 shares of Class A common stock subject to
options currently exercisable or exercisable within 60 days of
September 9, 2002, (2) 2,667,475 shares of Class B common stock held by
Cantor Fitzgerald, L.P., which shares are immediately convertible into
shares of Class A common stock, (3) 24,021,339 shares of Class B common
stock held by Cantor Fitzgerald Securities, which shares are
immediately convertible into Class A common stock, (4) 387,469 shares
of Class A common stock held by CF Group Management, Inc., (5) 961,058
shares of Class A common stock held directly by Mr. Lutnick and (6)
175,589 shares held by a trust for the benefit of the descendants of
Mr. Lutnick, of which Mr. Lutnick is one of two trustees. Cantor
Fitzgerald, L.P. is the managing partner of Cantor Fitzgerald
Securities. CF Group Management, Inc. is the managing general partner
of Cantor Fitzgerald, L.P. and Mr. Lutnick is the President and sole
stockholder of CF Group Management, Inc.
(3) Percentage based on (1) 28,291,403 shares of Class A common stock
outstanding on September 9, 2002, (2) 26,688,814 shares of Class B
common stock immediately convertible into Class A common stock and (3)
2,100,000 shares of Class A common stock subject to options currently
exercisable or exercisable within 60 days of September 9, 2002.
(4) Consists of (1) 2,667,475 shares of Class B common stock held by Cantor
Fitzgerald, L.P., which shares are immediately convertible into shares
of Class A common stock, and (2) 24,021,339 shares of Class B common
stock held by Cantor Fitzgerald Securities, which shares are
immediately convertible into Class A common stock. Cantor Fitzgerald,
L.P. is the managing partner of Cantor Fitzgerald Securities. CF Group
Management, Inc. is the managing general partner of Cantor Fitzgerald,
L.P., and Mr. Lutnick is the President and sole stockholder of CF Group
Management, Inc.
10
(5) Percentage based on (1) 28,291,403 shares of Class A common stock
outstanding on September 9, 2002 and (2) 266,562 shares of Class A
common stock subject to options currently exercisable or exercisable
within 60 days of September 9, 2002.
(6) Includes 2,250 shares of Class A common stock beneficially owned by Mr.
Merkel's spouse.
(7) Includes 45,500 shares of Class A common stock owned by Cavallino
Ventures LLC, of which Mr. Carter is the President.
(8) Includes 1,000 shares of Class A common stock beneficially owned by Mr.
Weis' spouse, 4,000 shares of Class A common stock held in trust for
Mr. Weis' children and 2,000 shares of Class A common stock
beneficially owned by Mr. Weis' children.
(9) Percentage based on (1) 28,291,403 shares of Class A common stock
outstanding on September 9, 2002, (2) 26,688,814 shares of Class B
common stock immediately convertible into Class A common stock and (3)
2,790,686 shares of Class A common stock subject to options currently
exercisable or exercisable within 60 days of September 9, 2002.
BY OTHERS. The following table sets forth certain information, as of September
9, 2002, with respect to the beneficial ownership of our Common Equity by each
person or entity known to us to beneficially own more than 5% of our Class A
common stock and Class B common stock, other than our officers and directors.
Unless indicated otherwise, the address of each entity listed is 135 East 57th
Street, New York, NY 10022, and each entity listed has sole voting and
investment power over the shares beneficially owned. Shares of Class B common
stock are convertible into shares of Class A common stock at any time in the
discretion of the holder on a one-for-one basis. Accordingly, a holder of Class
B common stock is deemed to be the beneficial owner of an equal number of shares
of Class A common stock for purposes of this table.
Beneficial Ownership(1)
---------------------------------------------------------------
Class A common Class B common
stock stock
------------------------------ -------------------------------
Name Shares % Shares %(2)
----------------- ---------------- ------------- ---------------- -------------
Cantor Fitzgerald Securities.......................... 24,021,339(3) 45.9%(4) 24,021,339 90.0%
Cantor Fitzgerald, L.P................................ 26,688,814(5) 48.5%(6) 26,688,814 (7) 100.0%
CF Group Management, Inc.............................. 27,076,283(8) 49.2%(6) 26,688,814 (7) 100.0%
J.P. Morgan Chase & Co. (9)........................... 1,637,364 5.8%(10) -- --
------------
(1) Based upon filings under Sections 13 and 16 of the Exchange Act and/or
information supplied by the stockholders.
(2) Based on 26,688,614 shares of Class B common stock outstanding on
September 9, 2002.
(3) Consists of shares of Class B common stock.
(4) Percentage based on 28,291,403 shares of Class A common stock
outstanding on September 9, 2002 and 24,021,339 shares of Class B
common stock immediately convertible into Class A common stock.
(5) Consists of (1) 2,667,475 shares of Class B common stock owned by
Cantor Fitzgerald, L.P. and (2) 24,021,339 shares of Class B common
stock owned by Cantor Fitzgerald Securities, which shares are
immediately convertible into Class A common stock. Cantor Fitzgerald,
L.P. is the managing partner of Cantor Fitzgerald Securities.
(6) Percentage based on 28,291,403 shares of Class A common stock
outstanding on September 9, 2002 and 26,688,614 shares of Class B
common stock immediately convertible into Class A common stock.
(7) Consists of 2,667,475 shares of Class B common stock owned by Cantor
Fitzgerald, L.P. and 24,021,339 shares of Class B common stock owned by
Cantor Fitzgerald Securities. Cantor Fitzgerald, L.P. is the managing
partner of Cantor Fitzgerald Securities. CF Group Management, Inc. is
the managing general partner of Cantor Fitzgerald, L.P.
(8) Consists of (1) 387,469 shares of Class A common stock held by CF Group
Management, Inc., (2) 24,021,339 shares of Class B common stock held by
Cantor Fitzgerald Securities, which shares are
11
immediately convertible into Class A common stock, and (3) 2,667,475
shares of Class B common stock held by Cantor Fitzgerald, L.P., which
shares are immediately convertible into Class A common stock. CF Group
Management, Inc. is the managing general partner of Cantor Fitzgerald,
L.P.
(9) The address of J.P. Morgan Chase & Co. is 270 Park Avenue, New York, NY
10017. J.P. Morgan Chase & Co. has sole voting power with respect to
1,302,897 shares, sole dispositive power with respect to 1,632,784
shares and shared dispositive power with respect to 4,580 shares of
Class A common stock.
(10) Percentage based on 28,291,403 shares of Class A common stock
outstanding on September 9, 2002.
PERFORMANCE GRAPHS
The first performance graph below shows a comparison of the cumulative
total return, on a dividend reinvestment basis, measured on December 10, 1999
(the date of our initial public offering), December 31, 1999, December 31, 2000
and December 31, 2001 assuming $100 was invested on December 10, 1999 in our
Class A common stock, our former selected peer group, our new selected peer
group and the S&P 500. The second performance graph below shows a comparison of
the cumulative total return, on a dividend reinvestment basis, measured on
October 5, 2001 (the date of resumption of trading of our Class A common stock
after September 11, 2001) and September 20, 2002 assuming $100 was invested on
October 5, 2001 in our Class A common stock, our former selected peer group, our
new selected peer group and the S&P 500. Our former peer group consisted of
Ariba, Commerce One, FreeMarkets and VerticalNet, which also operate
business-to-business electronic marketplaces. Our new peer group includes Ariba
and FreeMarkets, but we have replaced Commerce One and VerticalNet with Instinet
and ITG because we believe that Instinet and ITG better represent our current
business line and are more commercially viable than the companies we replaced.
The returns of each peer group company have been weighted according to its stock
market capitalization for purposes of arriving at a peer group average.
CUMULATIVE TOTAL RETURN FROM DECEMBER 10, 1999 THROUGH DECEMBER 31, 2001
AMONG ESPEED, INC., S&P 500 AND PEER GROUPS
12/10/99 12/31/99 12/31/00 12/31/01
-------- -------- -------- --------
eSpeed, Inc. $100 $161.65 $71.31 $37.64
S&P 500 $100 $105.89 $96.25 $84.81
Old Peer Group $100 $172.18 $52.89 $ 8.83
Only
New Peer Group $100 $163.99 $67.05 $22.43
Only
12
CUMULATIVE TOTAL RETURN FROM OCTOBER 5, 2001 THROUGH SEPTEMBER 20, 2002
AMONG ESPEED, INC., S&P 500 AND PEER GROUPS
10/5/2001 9/20/2002
--------- ----------
eSpeed, Inc. $100.00 $158.54
S&P 500 $100.00 $79.92
Old Peer Group $100.00 $66.32
Only
New Peer Group $100.00 $57.86
Only
13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE FORMATION TRANSACTIONS
Concurrently with our initial public offering, Cantor contributed to us
certain of our assets. These assets primarily consist of the proprietary
software, network distribution systems, technologies and related contractual
rights that comprise our eSpeed(R) system. In exchange for these assets, we
issued to Cantor 43,999,900 shares of our Class B common stock, representing
approximately 98% of the voting power of our capital stock outstanding at the
time. Cantor converted 3,350,000 of these shares into the shares of our Class A
common stock which it sold in our initial public offering in December 1999.
We entered into the agreements described below in connection with the
formation transactions and to help define the terms of our relationship with
Cantor in the future. In an effort to mitigate conflicts of interest between us
and Cantor, we and Cantor have agreed that none of these agreements may be
amended without the approval of a majority of our disinterested directors.
JOINT SERVICES AGREEMENT
Under our Amended and Restated Joint Services Agreement, as amended,
with Cantor and services agreements with TradeSpark, Freedom and Municipal
Partners, LLC, we own and operate the electronic trading systems and are
responsible for providing electronic brokerage services, and Cantor, TradeSpark,
Freedom and Municipal Partners, LLC provide voice-assisted brokerage services,
clearance, settlement and other fulfillment 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. Our agreement with Cantor provides for a perpetual term.
REVENUE SHARING ARRANGEMENTS
Under our Amended and Restated Joint Services Agreement, as amended,
with Cantor and services agreements with TradeSpark, Freedom and Municipal
Partners, LLC, we own and operate the electronic trading system and are
responsible for providing electronic brokerage services, and Cantor, TradeSpark,
Freedom or Municipal Partners, LLC provides voice-assisted brokerage services,
fulfillment services, such as clearance and settlement, and related services,
such as credit risk management services, oversight of client suitability and
regulatory compliance, sales positioning of products and other services
customary to marketplace intermediary operations. In general, for fully
electronic transactions, we receive 65% of the transaction revenues and Cantor,
TradeSpark or Freedom receives 35% of the transaction revenues. We and Municipal
Partners, LLC each receive 50% of the fully electronic revenues related to
municipal bonds. In general, for voice-assisted brokerage transactions, we
receive 7% of the transaction revenues, in the case of Cantor transactions, and
35% of the transaction revenues, in the case of TradeSpark or Freedom
transactions. In addition, we receive 25% of the net revenues from Cantor's
gaming businesses.
SOFTWARE SOLUTION SERVICES
We also provide to Cantor, Tradespark, Freedom and Municipal Partners,
LLC software solution services, including (1) systems administration; (2)
internal network support; (3) support and procurement for desktops of end-user
equipment; (4) operations and disaster recovery services; (5) voice and data
communications; (6) support and development of systems for clearance, settlement
and other fulfillment services; (7) systems support for brokers; (8) electronic
applications systems and network support and development; and (9) provision
and/or implementation of existing electronic applications systems, including
improvements and upgrades thereto, and use of the related intellectual property
rights. In general, we charge Cantor, Tradespark and Freedom the actual direct
and indirect costs, including overhead, that we incur in performing these
services. We charge Municipal Partners, LLC an amount based on the actual direct
and indirect costs, including overhead, of providing such services. In exchange
for a 25% share of the net revenues from Cantor's gaming businesses, we are
obligated to spend and do not get reimbursed for the first $750,000 each quarter
of costs of providing support and development services for such gaming
businesses.
14
INTELLECTUAL PROPERTY
Cantor has granted to us a license covering Cantor's patents and patent
applications that relate to our eSpeed(R) system. The license is perpetual,
irrevocable, worldwide and royalty free and is exclusive, except in the event
that (1) we are unwilling to provide to Cantor any requested services covered by
the patents with respect to a marketplace and Cantor elects not to require us to
do so, or we are unable to provide such services; or (2) we do not exercise our
right of first refusal to provide to Cantor electronic brokerage services with
respect to a marketplace, in which events Cantor will have a limited right to
use the patents and patent applications solely in connection with the operation
of that marketplace. Cantor will cooperate with us, at our expense, in any
attempt by us to prevent any third party infringement of our patent rights under
the license. Cantor has also granted to us a non- exclusive, perpetual,
irrevocable worldwide, royalty-free right and license to use the servicemarks
"Cantor Exchange(SM)," "Interactive Matching(SM)," "MOLE(SM)" and "CX(SM)".
NON-COMPETITION AND MARKET OPPORTUNITY PROVISIONS
The Joint Services Agreement imposes performance obligations on us and
restricts our ability to compete with Cantor and Cantor's ability to compete
with us in markets that we and Cantor traditionally operate. We and Cantor have
agreed to exclude the TradeSpark and Freedom marketplaces from the provisions of
the Joint Services Agreement in order to enable us to enter into separate
agreements in connection with these marketplaces.
ADMINISTRATIVE SERVICES AGREEMENT
Under our Administrative Services Agreement with Cantor, Cantor
provides certain administrative and management services to us. Cantor makes
available to us some of its administrative and other staff, including its
internal audit, treasury, legal, tax, insurance, human resources, facilities,
corporate development and accounting staffs. Members of these staffs arrange for
our insurance coverage and provide a wide array of services, including
administration of our personnel and payroll operations, benefits administration,
internal audits, facilities management, promotional sales and marketing, legal,
risk management, accounting and tax preparation and other services. We reimburse
Cantor for the actual costs incurred by Cantor, plus other reasonable costs,
including reasonably allocated overhead and any applicable taxes. We have also
entered into arrangements with Cantor under which we have the right to use
certain assets, principally computer equipment, from Cantor. These assets are
subject to operating leases with third party leasing companies. Under the
Administrative Services Agreement, we provide sales, marketing and public
relations services to Cantor. Cantor reimburses us for the actual costs incurred
by us, plus other reasonable costs, including reasonably allocated overhead. The
Administrative Services Agreement has a three-year term which will renew
automatically for successive one-year terms unless canceled by either us or
Cantor upon six months' prior notice; provided, however, that our right to use
our 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.
Pursuant to the Administrative Services Agreement, Cantor is required
to obtain for us, among other things, property and casualty insurance of not
less than $40 million and business interruption insurance of $25 million. Cantor
has procured insurance coverage for us in these respective amounts; however, we
are listed on this insurance policy as one of several insured parties, together
with Cantor and several of its affiliates. This insurance policy is for
aggregate amounts in excess of the amounts set forth above. The Administrative
Services Agreement does not provide for the allocation of the proceeds among the
named insureds.
Insurance proceeds paid to date have been paid to Cantor on behalf of
all parties named on the policy, and Cantor has allocated these proceeds among
the insured parties. Pursuant to this allocation, we received approximately
$20.5 million of property insurance proceeds in 2001 with respect to fixed
assets of ours that were destroyed as a result of the September 11 Events. In
addition, Cantor received $40 million of business interruption insurance
proceeds in 2002, of which approximately $12.8 million was paid to us in August
2002 to compensate us for lost revenues and increased expenses as a result of
the September 11 Events.
15
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Registration Rights Agreement entered into by Cantor
and us, Cantor has received piggyback and demand registration rights.
The piggyback registration rights allow Cantor to register the shares
of our Class A common stock issued or issuable to it in connection with the
conversion of its shares of our Class B common stock whenever we propose to
register any shares of our Class A common stock for our own or another's account
under the Securities Act for a public offering, other than any shelf
registration of shares of our Class A common stock to be used as consideration
for acquisitions of additional businesses and registrations relating to employee
benefit plans.
Cantor also has the right, on three occasions, to require that we
register under the Securities Act any or all of the shares of our Class A common
stock issued or issuable to it in connection with the conversion of its shares
of our Class B common stock. The demand and piggyback registration rights apply
to Cantor and to any transferee of shares held by Cantor who agrees to be bound
by the terms of the Registration Rights Agreement.
We have agreed to pay all costs of one demand and all piggyback
registrations, other than underwriting discounts and commissions. We have also
agreed to indemnify Cantor and any transferee for certain liabilities they may
incur in connection with the exercise of their registration rights. All of these
registration rights are subject to conditions and limitations, including (1) the
right of underwriters of an offering to limit the number of shares included in
that registration; (2) our right not to effect any demand registration within
six months of a public offering of our securities; and (3) that Cantor agrees to
refrain from selling its shares during the period from 15 days prior to and 90
days after the effective date of any registration statement for the offering of
our securities.
POTENTIAL CONFLICTS OF INTEREST AND COMPETITION WITH CANTOR
Various conflicts of interest between us and Cantor may arise in the
future in a number of areas relating to our past and ongoing relationships,
including potential acquisitions of businesses or properties, the election of
new directors, payment of dividends, incurrence of indebtedness, tax matters,
financial commitments, marketing functions, indemnity arrangements, service
arrangements, issuances of our capital stock, sales or distributions by Cantor
of its shares of our common stock and the exercise by Cantor of control over our
management and affairs. Four of our directors and a majority of our officers
also serve as directors and/or officers of Cantor. Simultaneous service as an
eSpeed director or officer and service as a director or officer, or status as a
partner, of Cantor could create or appear to create potential conflicts of
interest when such directors, officers and/or partners are faced with decisions
that could have different implications for us and for Cantor. Mr. Lutnick, our
Chairman, President and Chief Executive Officer, is the sole stockholder of the
managing general partner of Cantor. As a result, Mr. Lutnick controls Cantor.
Cantor owns shares of our Class A common stock and Class B common stock
representing approximately 90.9% of the Total Voting Power of our capital stock.
Mr. Lutnick's simultaneous service as our Chairman, President 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, transactions between us and Cantor
and/or its other affiliates are subject to the approval of a majority of our
independent directors. In addition, Cantor can compete with us under certain
circumstances.
WILLIAMS AND DYNEGY
On June 5, 2000, each of Williams Energy Marketing & Trading and Dynegy
purchased a unit consisting of (a) 789,071 shares of our Class A common stock
and (b) warrants exercisable for the
16
purchase of up to 666,666 shares of our Class A common stock, for an aggregate
purchase price for the unit of $25.0 million. The warrants have a per share
exercise price of $35.20, a 10-year term and are exercisable commencing on
December 5, 2005, subject to acceleration under certain prescribed
circumstances. Acceleration results from the investment by Williams and/or
Dynegy, along with at least two additional participants, in four new electronic
and telephonic verticals to be formed by us and Cantor, which we refer to as
Qualified Verticals, by an agreed upon date. The initial agreed upon date of
June 2001 has been extended by the parties for a period not to exceed two years.
We refer to such period as the Presentment Period. The Presentment Period
operates in three month increments, and is subject to the right of Dynegy and
Williams to refuse to grant an additional three month extension on not less than
30 days' prior notice to us. In connection with the four Qualified Verticals,
Williams and, subject to certain limitations, Dynegy, will be entitled to invest
$25.0 million in shares of our Class A common stock at a 10% discount to the
trading price of our Class A common stock determined at the time of the
investment in the Qualified Vertical. If we present Qualified Vertical
opportunities in accordance with the terms of the agreements, and either
Williams or Dynegy does not invest in at least four Qualified Verticals, the
non-investing entity will be required to make a $2,500,000 payment to us for
each investment not made, up to a maximum of $10 million. Williams and Dynegy
have already invested in the first Qualified Vertical presented to it,
Tradespark.
At such time as Williams and Dynegy (or their permitted affiliate
assignees) have made an aggregate equity investment in us of an amount equal to
at least $100.0 million, valued on a cost basis (and for so long as such parties
maintain ownership of equity securities having such cost basis), Cantor will use
its best efforts to cause one designee jointly selected by Williams and Dynegy
to be nominated to our board of directors and to vote its shares of common
equity in favor of such designee.
In connection with the Williams and Dynegy transactions, we purchased
from Cantor 789,071 shares of our Class A common stock, representing half of the
number of shares of our Class A common stock sold by us to Williams and Dynegy,
for a purchase price of $25.0 million. In addition, Cantor has agreed to sell
half of the number of shares to be purchased by Williams and Dynegy, in the
aggregate, each time an additional investment right is exercised in connection
with a new Qualified Vertical for the same purchase price per share as is paid
by Williams and Dynegy at the time.
TRADESPARK
On September 22, 2000, we made a cash investment in TradeSpark of $2.0
million in exchange for a 5% interest in TradeSpark, and Cantor made a cash
investment of $4.25 million in TradeSpark and agreed to contribute to TradeSpark
certain assets relating to its voice brokerage business in certain energy
products in exchange for a 28.33% interest in TradeSpark. We and Cantor also
executed an amendment to the Joint Services Agreement in order to enable each of
us to engage in this business transaction. The remaining 66.67% interest in
TradeSpark was purchased by energy industry market participants (EIPs). In
connection with such investment, we entered into a perpetual technology services
agreement with TradeSpark pursuant to which we provide the technology
infrastructure for the transactional and technology related elements of the
TradeSpark marketplace as well as certain other services to TradeSpark in
exchange for specified percentages of transaction revenues from the marketplace.
If a transaction is fully electronic, we receive 65% of the aggregate
transaction revenues and TradeSpark receives 35% of the transaction revenues. In
general, if TradeSpark provides voice-assisted brokerage services with respect
to a transaction, then we receive 35% of the revenues and TradeSpark receives
65% of the revenues. Cantor also entered into an administrative services
agreement with TradeSpark pursuant to which it provides administrative services
to TradeSpark at cost. We and Cantor each received representation rights on the
management committee of TradeSpark in proportion to our ownership interests in
TradeSpark.
In order to provide incentives to the EIPs to trade on the TradeSpark
electronic marketplace, which result in commissions to us under the TradeSpark
technology services agreement, we issued 5,500,000 shares of our Series A
preferred stock and 2,500,000 shares of our Series B preferred stock to a
limited liability company newly-formed by the EIPs to hold their investments in
TradeSpark and the Series A and B preferred stock.
17
MUNICIPAL PARTNERS
In January 2002, Cantor sold the assets of the business known as
Municipal Partners, Inc., a municipal bond broker, to a newly formed limited
liability company, Municipal Partners, LLC, formed by Brian Kelly, a former
employee of Cantor, in exchange for a 25% special interest in Municipal
Partners, LLC. Cantor had purchased substantially all of the assets of Municipal
Partners, Inc. in July 2000. Cantor also loaned $1,000,000 to Municipal
Partners, LLC and is entitled to distributions equal to 5% of the gross revenues
of the business less the amount of our revenue share for electronic
transactions. Pending receipt of applicable licenses by Municipal Partners, LLC,
Cantor provided Municipal Partners, LLC with interim services. In connection
with the sale, we (1) granted Municipal Partners, LLC a non-exclusive license to
use our software and technology to operate a municipal bond brokerage business;
(2) will maintain our municipal bond trading platform and provide the software
capabilities that were in place in Cantor's municipal bond business (we are to
be compensated for upgrading the trading platform at cost plus a reasonable
profit or at prevailing rates, at our election); (3) will provide web-hosting,
technical and customer support at cost plus a reasonable fee to Municipal
Partners, LLC; (4) will receive 50% of gross revenues of Municipal Partners, LLC
with respect to electronic transactions; and (5) terminated existing
arrangements with former brokers in the business (some of whom are deceased)
pursuant to which we had given them shares of our Class A common stock valued at
$1,250,000 in exchange for promissory notes in the same amount, with the result
that the notes were terminated and the shares were cancelled. We are currently
reviewing Municipal Partners, LLC's compliance with its agreements.
FREEDOM INTERNATIONAL BROKERAGE
On January 29, 2001, we and Cantor formed a limited partnership to
acquire 66.7% of Freedom International Brokerage. On April 4, 2001, we
contributed 310,770 shares of our Class A common stock to the limited
partnership, which entitles us to 75% of the limited partnership's interest in
Freedom. We share in 15% of the limited partnership's cumulative profits but not
in its cumulative losses. Cantor contributed 103,589 shares of our Class A
common stock as the general partner. Cantor will be allocated all of the limited
partnership's cumulative losses and 85% of the cumulative profits. The limited
partnership exchanged the 414,359 shares for its 66.7% interest in Freedom. In
addition, we issued warrants to purchase 400,000 shares of our Class A common
stock to provide incentives to the Freedom owner-participants other than us and
Cantor to migrate to our fully electronic platform. To the extent necessary to
protect us from any allocation of losses, Cantor is required to provide future
capital contributions to the limited partnership up to an amount that would make
Cantor's total contribution equal to our investment in the limited partnership.
Upon the closing of the transaction, we entered into a services
agreement with Freedom to provide for electronic trading technology and services
and infrastructure/back-offices services. Under this agreement, we are entitled
to 65% of the electronic transaction services revenues and Freedom is entitled
to 35% of the revenues. We also receive 35% of revenues derived from all
voice-assisted transactions, other miscellaneous transactions and the sale of
market data or other information that is not incidental to the above services.
UBS
On August 21, 2002, we entered into a Global Fixed Income Transaction
Fee Agreement (the Agreement) with UBS AG and certain named affiliates
(collectively, UBS) and Cantor, for UBS to provide an electronic price feed to
execute trades electronically on our eSpeed(R) system in U.S. Securities, Agency
Securities, European Government Bonds, UK Gilts, Japanese Government Bonds and
swaps of these various securities instruments. The Agreement has an initial term
of two years and seven months commencing as of January 1, 2002. In addition to
quarterly participation fees to be paid to Cantor, UBS will pay transaction fees
to Cantor for each executed transaction. These fees will then be shared with us
in accordance with our Joint Services Agreement with Cantor.
In connection with the Agreement, we issued to UBS a warrant to
purchase 300,000 shares of our Class A common stock. The warrant has a term of
10 years and has an exercise price equal to $8.75, the
18
market value of the underlying Class A common stock on the date of issuance. The
warrant is fully vested and nonforfeitable, and is exercisable nine years and
six months after issuance, subject to acceleration upon the satisfaction by UBS
of its yearly commitment conditions as set forth in the Agreement. We will be
incurring a non-cash charge equal to the fair value of the warrant on the date
of issuance, which will be amortized over the term of the Agreement. We have
also agreed to issue an additional warrant to purchase 200,000 shares of our
Class A common stock at an exercise price equal to the market value of the
underlying Class A common stock on the date of issuance if the Agreement is
renewed for another two and one-half year term.
In addition, we have provided UBS with piggyback registration rights
for the Class A common stock underlying the warrants.
OUR EMPLOYEES' PURCHASE OF CANTOR FITZGERALD, L.P. PARTNERSHIP UNITS
We paid a cash bonus to six of our employees totaling $2.3 million in
early 2001. These employees used the after-tax amount of the bonus to purchase
units in Cantor Fitzgerald, L.P. Three of these persons, one of whom is Mr.
Noviello, our Executive Vice President and Chief Information Officer, are still
employees of ours. With respect to these persons, when an employee is no longer
a partner of Cantor (typically if he ceases to be employed by us), and if the
employee has been employed by us for a period of more than four years and does
not go to work for a competitor, then the employee will receive his capital in
Cantor in four equal annual installments, with interest at an applicable federal
rate. Amounts not paid to an employee who leaves before the fourth anniversary,
or who leaves and competes with us, Cantor or any of its affiliates, will be
paid to us.
INDEMNIFICATION BY CANTOR
Although we do not expect to incur any losses with respect to pending
lawsuits or supplemental allegations relating to Cantor and Cantor's limited
partnership agreement, Cantor has agreed to indemnify us with respect to any
liabilities we incur as a result of such lawsuits or allegations.
REVERSE REPURCHASE AGREEMENTS
We enter into overnight reverse repurchase agreements with Cantor. At
June 30, 2002, the reverse repurchase agreements totaled $164.1 million,
including accrued interest. The securities collateralizing the reverse
repurchase agreements are held under a custodial arrangement with a third party
bank.
REPORT OF THE AUDIT COMMITTEE OF OUR BOARD OF DIRECTORS
In discharging its oversight responsibility, the Audit Committee,
consistent with Independence Standards Board No. 1, "Independence Discussions
with the Audit Committees," obtained from our independent auditors a formal
written statement describing all relationships between our independent auditors
and us that might bear on the auditors' independence. The Audit Committee has
met and held discussions with management and our independent auditors.
Management represented to the Audit Committee that our consolidated financial
statements were prepared in accordance with generally accepted accounting
principles, and the Audit Committee has reviewed and discussed the consolidated
financial statements with management and our independent auditors. The Audit
Committee has discussed with our independent auditors matters required to be
discussed by the Statement on Auditing Standards No. 61.
The Audit Committee has reviewed with our independent auditors their
overall audit scope, audit plans and assessed the coordination of the audit
effort to ensure completeness of coverage. The Audit Committee has met with our
independent auditors and management to identify financial risk exposures. The
Audit Committee has met with our independent auditors, with and without
management present, to discuss the results of their examinations, the adequacy
of our internal controls and the integrity of our financial reporting processes.
The Audit Committee has reviewed an analysis prepared by management and our
independent auditors of significant financial reporting issues and judgments
made in connection with the preparation of our financial statements.
19
Based on the above mentioned reviews and discussions with management
and our independent auditors, the Audit Committee recommended to our board of
directors that our audited financial statements be included in our Annual Report
on Form 10-K for the year ended December 31, 2001. The Audit Committee also
recommended the reappointment of our independent auditors and our board of
directors concurred with such recommendations.
THE AUDIT COMMITTEE
Richard C. Breeden
Larry R. Carter
William J. Moran
INDEPENDENT AUDITORS' FEES
In addition to retaining Deloitte & Touche LLP to audit our
consolidated financial statements for 2001, we retained Deloitte & Touche LLP to
provide consulting services and to audit our Deferral Plan. The aggregate fees
for professional services by Deloitte & Touche LLP in 2001 for these various
services were:
AUDIT FEES: We were billed $356,075 for services rendered relating to
the annual audit of our consolidated financial statements for 2001. We were
billed $56,370 for the quarterly reviews performed during 2001.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES: No fees
for financial information systems design and implementation were billed or paid
during 2001.
ALL OTHER FEES: The aggregate Deloitte & Touche LLP fees billed for
2001 for services other than as set forth above were $321,000 for consulting
services and auditing our Deferral Plan. To date, fees billed for the services
of Deloitte & Touche LLP in connection with the events of September 11, 2001
amount to $1,442,187. The Audit Committee considered that the provision of these
services was compatible with maintaining Deloitte & Touche LLP's independence.
INDEPENDENT AUDITORS
Upon the recommendation of the Audit Committee, our board of directors
selected Deloitte & Touche LLP as our independent auditors for our fiscal year
ending December 31, 2002. One or more representatives of Deloitte & Touche LLP
are expected to attend our Annual Meeting to respond to appropriate questions.
They will have an opportunity to make a statement if they so desire. Material
non-audit services will be approved by the Audit Committee prior to the
rendering of such services after due consideration of the effect of the
performance thereof on the independence of our auditors.
EXPENSES OF SOLICITATION
The total cost of the Proxy solicitation will be borne by us. In
addition to the mails, Proxies may be solicited by our directors and officers by
personal interviews, telephone and telegraph. It is anticipated that banks,
brokerage houses and other custodians, nominees and fiduciaries will forward
soliciting material to the beneficial owners of shares of Common Equity entitled
to vote at our Annual Meeting and that such persons will be reimbursed for their
out-of-pocket expenses incurred in this connection.
STOCKHOLDER PROPOSALS
We intend to hold our 2003 Annual Meeting of Stockholders in or around
October 2003. Stockholders are hereby notified that, if they intend to submit
proposals for inclusion in our Proxy Statement and Proxy for our 2003 Annual
Meeting of Stockholders, such proposals must be received by us no later than May
30, 2003 and must otherwise be in compliance with applicable Securities and
Exchange Commission regulations.
20
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our officers, directors and
persons who beneficially own more than 10% of our Class A common stock to file
reports of ownership of such securities with the Securities and Exchange
Commission. Such officers, directors and 10% stockholders are also required by
Securities and Exchange Commission regulations to furnish us with copies of all
Section 16(a) forms they file.
Based solely on a review of the copies of the forms furnished to us, we
believe that for our fiscal year ended December 31, 2001 our officers, directors
and 10% stockholders filed all required Section 16(a) forms on a timely basis.
MISCELLANEOUS
Our board of directors knows of no other business to be presented at
our Annual Meeting. If, however, other matters properly do come before our
Annual Meeting, it is intended that the Proxies in the accompanying form will be
voted thereon in accordance with the judgment of the person or persons holding
such Proxies.
STOCKHOLDERS ARE URGED TO COMPLETE, DATE, SIGN AND MAIL PROMPTLY THE ENCLOSED
PROXY IN THE ENVELOPE PROVIDED. PROMPT RESPONSE WILL GREATLY FACILITATE
ARRANGEMENTS FOR THE ANNUAL MEETING, AND YOUR COOPERATION WILL BE APPRECIATED.
By Order of the Board of Directors,
/s/ Stephen M. Merkel
STEPHEN M. MERKEL
Secretary
New York, New York
September 27, 2002
21
ESPEED, INC.
ANNUAL MEETING OF STOCKHOLDERS -OCTOBER 23, 2002
The undersigned hereby appoints Howard W. Lutnick and Stephen M. Merkel, and
each of them, proxies, with full power of substitution, to appear on behalf of
the undersigned and to vote all shares of Class A common stock (par value $.01)
and Class B common stock (par value $.01) of eSpeed, Inc. (the Company) that the
undersigned is entitled to vote at the Annual Meeting of Stockholders of the
Company to be held at the Rihga Royal Hotel, 151 West 54th Street, New York, New
York, on Wednesday, October 23, 2002, commencing at 10:00 a.m. (local time), and
at any adjournment thereof.
WHEN PROPERLY EXECUTED, THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO
INSTRUCTIONS ARE SPECIFIED, THIS PROXY WILL BE VOTED FOR THE ELECTION OF THE
LISTED NOMINEES AS DIRECTORS.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
Please mark box [X] in blue or black ink.
1. Election of FOR all nominees listed below [ ]
Directors:
Nominees: HOWARD W. LUTNICK, LEE M. AMAITIS, JOSEPH C. NOVIELLO,
STEPHEN M. MERKEL, LARRY R. CARTER, JOHN H. DALTON, FRANK R. LAUTENBERG,
WILLIAM J. MORAN AND ALBERT M. WEIS.
WITHHOLD AUTHORITY to vote [ ]
for the nominees listed below
(Instructions: To withhold authority to vote for any one or more nominees, mark
the "WITHHOLD AUTHORITY" box and write the name of the nominee or nominees in
the space provided below.)
(Continued and to be signed on reverse side)
In their discretion, the proxies are authorized to vote upon such other business
as may properly come before the Annual Meeting and any adjournment thereof.
Please sign exactly as your name appears
on the left. When signing as an
attorney, executor, administrator,
trustee or guardian, please give your
full title. If shares are held jointly,
each holder should sign.
PLEASE CHECK HERE IF YOU PLAN TO ATTEND
THE ANNUAL MEETING [ ]
Dated: __________________________, 2002
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Signature
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Signature
Please sign, date and return the proxy card using the enclosed envelope.