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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________.
NYMEX HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 333-30332 13-4098266
(STATE OR OTHER JURISDICTION (COMMISSION (I.R.S. EMPLOYER
OF INCORPORATION OR FILE NUMBER) IDENTIFICATION NUMBER)
ORGANIZATION)
ONE NORTH END AVENUE, WORLD FINANCIAL CENTER, NEW YORK, NEW YORK 10282-1101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(212) 299-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of November 14, 2001, 816 shares of the registrant's common stock, par
value $0.01 per share, were outstanding.
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TABLE OF CONTENTS
PAGE
----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 3
Unaudited Condensed Consolidated Statements of Operations
and Accumulated
Deficit/Members' Equity for the Three Months and Nine
Months Ended September 30, 2001 and September 30,
2000................................................... 3
Unaudited Condensed Consolidated Balance Sheets at
September 30, 2001 and December 31, 2000............... 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2001 and
September 30, 2000..................................... 5
Notes to Unaudited Condensed Consolidated Financial
Statements for the Three and Nine Months Ended
September 30, 2001 and September 30, 2000.............. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 20
PART II: OTHER INFORMATION
Item 1. Legal Proceedings........................................... 22
Item 2. Changes in Securities and Use of Proceeds................... 22
Item 3. Defaults Upon Senior Securities............................. 22
Item 4. Submission of Matters to a Vote of Security Holders......... 22
Item 5. Other Information........................................... 22
Item 6. Exhibits and Reports on Form 8-K............................ 22
Signatures........................................................... 23
2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND ACCUMULATED DEFICIT/MEMBERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS FOR 2001 AND
PER NYMEX DIVISION MEMBERSHIP AMOUNTS FOR 2000)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Operating Revenues:
Clearing and transaction fees, net of member fee
rebates.......................................... $24,199 $22,647 $ 74,417 $ 70,487
Market data fees.................................... 8,767 8,848 25,160 25,899
Other, net of rebates............................... 1,580 1,324 4,380 3,495
------- ------- -------- --------
Total operating revenues.................... 34,546 32,819 103,957 99,881
------- ------- -------- --------
Operating Expenses:
Salaries and employee benefits...................... 10,853 15,249 38,218 38,587
Rent and facility................................... 4,170 4,065 12,353 11,561
Depreciation and amortization of property and
equipment, net of deferred credit amortization... 3,939 3,682 11,641 10,286
Telecommunications, equipment rentals and
maintenance...................................... 3,795 4,446 11,130 11,156
General and administrative.......................... 3,201 3,479 10,844 11,242
Professional services............................... 2,714 3,181 9,262 11,452
Loss on disposition of property and equipment....... 490 434 515 730
Amortization of goodwill............................ 538 538 1,615 1,615
Impairment loss on capitalized software............. -- -- 1,605 --
Demutualization expense............................. -- 277 -- 3,992
Other............................................... 2,208 2,207 6,383 5,423
------- ------- -------- --------
Total operating expenses.................... 31,908 37,558 103,566 106,044
------- ------- -------- --------
Income (loss) from Operations......................... 2,638 (4,739) 391 (6,163)
Other Income (Expenses):
Investment income, net.............................. 1,405 2,718 4,314 7,046
Interest expense.................................... (1,928) (1,928) (5,785) (5,790)
------- ------- -------- --------
Net income (loss) before (provision) benefit for
income taxes........................................ 2,115 (3,949) (1,080) (4,907)
(Provision) benefit for income taxes.................. (985) 2,051 249 2,574
------- ------- -------- --------
Net income (loss)..................................... 1,130 (1,898) (831) (2,333)
Accumulated deficit/members' equity, beginning of
period.............................................. (1,717) 91,585 244 93,202
Less net transfer to members' retention program:
NYMEX Division...................................... -- (4,070) -- (4,895)
COMEX Division...................................... -- (272) -- (629)
------- ------- -------- --------
Accumulated deficit/members' equity, end of period.... $ (587) $85,345 $ (587) $ 85,345
======= ======= ======== ========
Net income (loss) per share/per NYMEX Division
membership (based on 816 shares/NYMEX Division
memberships)........................................ $ 1,385 $(2,326) $ (1,018) $ (2,859)
======= ======= ======== ========
The accompanying notes are an integral part of these statements.
3
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
AT SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
2001 2000(1)
------------- ------------
ASSETS
Cash and cash equivalents................................... $ 6,088 $ 2,870
Securities purchased under agreements to resell............. 14,101 30,109
Marketable securities, at market (cost of $57,422 at
September 30, 2001 and $75,637 at December 31, 2000)...... 59,793 77,628
Clearing and transaction fees receivable, net............... 14,543 7,575
Prepaid taxes and expenses.................................. 5,283 4,468
Other current assets, net................................... 10,126 8,516
-------- --------
Total current assets.............................. 109,934 131,166
Property and equipment, net................................. 224,422 224,547
Goodwill, net............................................... 16,867 18,482
Other assets................................................ 12,571 12,943
-------- --------
Total Assets...................................... $363,794 $387,138
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
NYMEX Division members' retention program................... $ -- $ 33,221
Accounts payable and accrued liabilities.................... 16,543 11,285
Accrued salaries and related liabilities.................... 7,474 3,869
Accrued interest payable.................................... 3,834 1,920
Notes payable............................................... 2,815 2,815
Deferred credit -- grant for building construction.......... 2,145 2,145
Other current liabilities................................... 2,334 1,019
-------- --------
Total current liabilities......................... 35,145 56,274
Notes payable............................................... 97,185 97,185
Deferred credit -- grant for building construction.......... 117,426 119,035
Other non-current liabilities............................... 20,483 20,772
Subordinated commitment -- members' retention program....... 9,727 9,213
-------- --------
Total liabilities................................. 279,966 302,479
COMMITMENTS AND CONTINGENCIES (See Note 8)
STOCKHOLDERS' EQUITY:
Common stock, at $0.01 par value, 816 shares authorized,
issued and outstanding.................................... -- --
Additional paid-in capital.................................. 84,415 84,415
(Accumulated deficit) Retained earnings..................... (587) 244
-------- --------
Total stockholders' equity........................ 83,828 84,659
-------- --------
Total Liabilities and Stockholders' Equity........ $363,794 $387,138
======== ========
---------------
(1) The amounts as of December 31, 2000 have been derived from the audited
consolidated financial statements of NYMEX Holdings, Inc. and subsidiaries.
The accompanying notes are an integral part of these statements.
4
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2001 2000
-------- --------
Cash Flows From Operating Activities:
Net loss.................................................. $ (831) $ (2,333)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization of property and
equipment, net of deferred credit amortization........ 11,641 10,286
Amortization of goodwill............................... 1,615 1,615
Deferred income taxes.................................. (523) (996)
Loss on disposition of property, equipment and
impairment of capitalized software.................... 2,120 730
Net changes in operating assets and liabilities:
(Increase) decrease in clearing and transaction fees
receivable............................................ (6,968) 5,416
Decrease (increase) marketable securities:
Corporate funds........................................ 2,944 (11,612)
Members' retention funds............................... 14,891 (10,294)
Increase in accounts payable and accrued liabilities... 5,258 1,654
Increase in accrued salaries and related liabilities... 3,605 3,788
Net changes in other operating assets and
liabilities........................................... 1,551 4,026
-------- --------
Net cash provided by operating activities......... 35,303 2,280
-------- --------
Cash Flows From Investing Activities:
Decrease in securities purchased under agreements to
resell................................................. 16,008 4,302
Capital expenditures...................................... (15,244) (7,479)
Decrease (increase) in other assets....................... 372 (21)
-------- --------
Net cash provided by (used in) investing
activities....................................... 1,136 (3,198)
-------- --------
Cash Flows From Financing Activities:
Distributions under NYMEX Division members' retention
program................................................ (33,221) (1,119)
-------- --------
Cash used in financing activities................. (33,221) (1,119)
-------- --------
Net Decrease in Cash and Cash Equivalents................... 3,218 (2,037)
Cash and Cash Equivalents, Beginning of Year................ 2,870 7,290
-------- --------
Cash and Cash Equivalents, End of Period.................... $ 6,088 $ 5,253
======== ========
Supplemental Information:
Cash paid for:
Interest............................................... $ 3,842 $ 3,846
======== ========
Income taxes........................................... $ -- $ --
======== ========
Non-cash members' equity transaction -- transfer to
subordinated commitment -- members' retention program:
NYMEX Division......................................... $ -- $ 4,895
======== ========
COMEX Division......................................... $ -- $ 629
======== ========
The accompanying notes are an integral part of these statements.
5
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business -- NYMEX Holdings, Inc. ("NYMEX Holdings") was
incorporated in 2000 as a Delaware for-profit corporation, and is the successor
to the New York Mercantile Exchange. The two principal operating subsidiaries of
NYMEX Holdings are New York Mercantile Exchange, Inc. ("NYMEX Exchange" or
"NYMEX Division") and Commodity Exchange, Inc. ("COMEX" or "COMEX Division"),
which is organized as a wholly-owned subsidiary of NYMEX Exchange. Where
appropriate, each operating division, NYMEX Division and COMEX Division, will be
discussed separately, and collectively will be referred to as the "Exchange."
When discussing NYMEX Holdings together with its subsidiaries, reference is
being made to the "Company."
Basis of Presentation -- The accompanying unaudited condensed consolidated
financial statements of NYMEX Holdings and its subsidiaries have been prepared
in accordance with Accounting Principles Board Opinion No. 28 and Rule 10-01 of
Regulation S-X promulgated by the Securities and Exchange Commission (the
"SEC"). These are unaudited condensed consolidated financial statements and do
not include all necessary disclosures required for complete financial
statements.
In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements reflect all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the Company's
financial position, results of operations and cash flows for the dates and
interim periods covered. Interim period operating results may not be indicative
of the operating results for a full year. This information should be read in
conjunction with the audited consolidated financial statements and notes thereto
as of December 31, 2000 and 1999 and for each year in the three-year period
ended December 31, 2000.
The preparation of the accompanying condensed consolidated financial
statements and related notes in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements, the reported amounts of revenues and
expenses during the reporting period, and the disclosure of contingent
liabilities. Actual results could differ from those estimates.
Certain reclassifications have been made to the prior year amounts to
conform to the current presentation. All intercompany balances and transactions
have been eliminated in consolidation.
Prior to its demutualization, the New York Mercantile Exchange accounted
for the contributions to the NYMEX and COMEX Divisions' members' retention
programs as transfers from members' equity to subordinated commitments. Since
demutualization, such contributions and related earnings are accounted for as
expenses; retroactive application has not been adopted.
During 2000, the Company changed the estimated useful life for an
internally developed software project from five years to three years. This
change in estimate was based on management's belief that this software had a
shorter useful life due to rapidly changing technology. Management believes this
change in estimate has a material effect on the nine month period ended
September 30, 2001. The effect of this change in estimate for the nine month
period presented was to increase the pre-tax loss by approximately $676,000 or
$828 per share.
6
The decrease in the Company's effective tax rate for the three and nine
month periods ended September 30, 2001, as compared to the corresponding periods
ended September 30, 2000, is primarily due to the Company's higher proportion of
tax-exempt earnings relative to pre-tax income for the three months ended and
pre-tax loss for the nine months ended September 30, 2001.
The Company is exploring the potential tax benefit, if any, of the
termination distribution of $33,221,000 from the NYMEX Division Members'
Retention and Retirement Plan, which has not been factored into the current
provision.
For a summary of significant accounting policies (that have not
significantly changed from December 31, 2000, -- see note 2 to the unaudited
condensed consolidated financial statements) and additional information, see
note 1 to the audited December 31, 2000, financial statements which were filed
with the SEC on the Company's Form 10-K, dated March 29, 2001.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, which was later amended by SFAS
No. 138. Among other provisions, it requires that entities recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. Gains and losses resulting from changes in the
fair values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting treatment. The
effective date of this standard was delayed via the issuance of SFAS No. 137.
The effective date of SFAS No. 133 is now for fiscal years beginning after June
15, 2000, though earlier adoption is encouraged and retroactive application is
prohibited. Effective January 1, 2001, the Company adopted this statement. Upon
adoption, SFAS No. 133 had no impact on the Company's financial position or
results of operations.
In September 2000, FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities -- a
Replacement of FASB Statement No. 125, which revises standards of accounting for
securitizations and other transfers of financial assets and collateral. The
provisions of SFAS No. 140 carry over most of the guidance outlined in SFAS No.
125 and further establish accounting and reporting standards with a
financial-components approach that focuses on control. Under this approach,
financial assets or liabilities are recognized when control is established and
derecognized when control has been surrendered or the liability has been
extinguished. In addition, specific implementation guidelines have been
established to further distinguish transfers of financial assets that are sales
from transfers that are secured borrowings. SFAS No. 140 is effective
prospectively for transfers occurring after March 31, 2001, and for disclosures
relating to securitization transactions and collateral for fiscal years ended
after December 15, 2000. The Company adopted the provisions of SFAS No. 140 that
relate to disclosures of securitization transactions and collateral in the
preparation of its condensed consolidated financial statements for the quarter
ended March 31, 2001. The Company adopted the remaining provisions of SFAS No.
140 as required, during the second quarter of 2001. The adoption of the
remaining provisions had no impact on the Company's financial position or
results of operations. The Company enters into reverse repurchase agreements and
falls under the guidelines of SFAS 140.
In June 2001, FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which supercedes APB Opinion No. 17, Intangible Assets. This statement,
effective for fiscal years beginning after December 15, 2001, addresses, among
other things, how goodwill and other intangible assets should be accounted for
after they have been initially recognized in the financial statements. The
provisions of SFAS No. 142 provide for an impairment test to be performed at
least annually rather than recording monthly amortization. The Company believes
that the adoption of SFAS No. 142 will have a material effect on operations. If
the Company had adopted this standard during the second quarter of 2001, the net
loss would have decreased by $538,000 and $1,077,000 for the three and nine
months ended September 30, 2001, or $659 and $1,319 per share, respectively. The
Company believes that the adoption of this standard may increase annual pre-tax
net income by $2,153,000 or $2,638 per share, which is the amount of annual
amortization of goodwill.
7
In August 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement, effective for fiscal years beginning after June 15,
2002, requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. When the liability
is initially recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value each period, and the capitalized cost is depreciated over the
useful live of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. The adoption of this statement is not expected to have an
impact on the Company's financial position or results of operation.
In October 2001, the Emerging Issues Task Force issued EITF No. 01-10,
Accounting for the Impact of the Terrorist Attacks of September 11, 2001. This
statement, among other things, addresses how costs and insurance recoveries for
businesses affected by this event should be accounted for in financial
statements. The provisions of EITF No. 01-10 provide guidelines for the
recording of a contingent insurance recovery. The Company has adopted the
provisions of EITF No. 01-10 in the third quarter of 2001.
3. COLLATERALIZATION
The Company receives collateral in connection with reverse repurchase
agreements which are held in custody by the Company's banks. At September 30,
2001 and December 31, 2000, the Company accepted collateral in the form of U.S.
treasury bills that it is permitted by contract or industry practice to sell or
repledge, although it is not the Company's policy to sell or repledge
collateral. The fair value of such collateral at September 30, 2001, and
December 31, 2000, was $14,100,940 and $30,108,800 respectively.
4. REVENUE REBATE AND FEE REDUCTION PROGRAM
Effective January 1, 1996, the Company adopted a fee rebate program, which
substantially reduces clearing and transaction fees for NYMEX Division members.
The Board of Directors approved a 50% reduction in the rebate rate, effective
January 1, 2001. Rebates under this program totaled $1,524,240 and $3,386,550
for the three months ended September 30, 2001 and September 30, 2000,
respectively, and $4,959,285 and $9,940,398 for the nine months ended September
30, 2001 and September 30, 2000, respectively. Clearing and transaction fees are
presented in the unaudited condensed consolidated statements of operations and
accumulated deficit/members' equity, net of these rebates.
The Company also adopted several incentive programs for members for the
purpose of reducing various operating costs. These incentive programs totaled
$445,334 and $661,475 for the three months ended September 30, 2001 and
September 30, 2000, respectively, and $1,459,088 and $1,953,574 for the nine
months ended September 30, 2001 and September 30, 2000, respectively. Other
revenues are presented in the unaudited condensed consolidated statements of
operations and accumulated deficit/members' equity net of fee reductions related
to these programs.
5. SEGREGATED FUNDS
The Company is required under the Commodity Exchange Act to segregate cash
and securities that are deposited by clearing members at banks approved by the
Company as margin for house and customer accounts. These assets belong to the
clearing member firms and are not included in the accompanying unaudited
condensed consolidated financial statements. At September 30, 2001 and September
30, 2000, $10,722,091 and $245,323 of cash, $3,392,866,000 and $4,233,617,050 of
U.S. treasury obligations, and $50,000,000 and $15,300,000 of U.S. treasury
obligations purchased under agreements to resell, respectively, were segregated
pursuant to such regulations by the NYMEX Division. In addition, $756,950,000
representing shares of certain money market mutual funds, were also held by the
NYMEX Division and segregated on behalf of the clearing members at September 30,
2001. In addition, at September 30, 2001 and September 30, 2000, the NYMEX
Division held irrevocable letters of credit amounting to $241,652,000 and
$154,652,000, respectively, which are used by clearing members to meet their
obligations to the Company for margin requirements on both open futures and
options positions, as well as to meet delivery obligations, in lieu of
8
depositing cash and/or securities. The Company invests cash deposits and earns
interest thereon. All interest earned on deposits of U.S. government securities
accrue to the clearing member firms depositing such securities.
At September 30, 2001 and September 30, 2000, the segregated funds of the
COMEX Division consisted of $444,759 and $77,803 in cash, $622,195,000 and
$632,845,000 in U.S. treasury obligations, and $0 and $1,120,000 of U.S.
treasury obligations purchased under agreements to resell, respectively. The
COMEX Division also held irrevocable letters of credit aggregating $52,200,000
and $37,800,000 as of September 30, 2001 and September 30, 2000, respectively.
6. GUARANTY FUND
Each clearing member firm is required to maintain a security deposit, in
the form of cash or U.S. Treasury securities, ranging from $100,000 to
$2,000,000, depending upon such clearing member firm's reported regulatory
capital, in a fund known as a "Guaranty Fund" for the respective clearing
division (NYMEX Division and/or COMEX Division). Separate and distinct Guaranty
Funds, held by the Company, are maintained for the NYMEX and COMEX Divisions.
These funds may be used by the Company for any loss sustained by the Company as
a result of the failure of a clearing member firm to discharge its obligations.
At September 30, 2001, and September 30, 2000, the total deposits
maintained in the NYMEX Division Guaranty Fund were $83,151,000 and $81,156,000,
respectively. At September 30, 2001, and September 30, 2000, the total deposits
managed by the COMEX Clearing Association for the COMEX Division Guaranty Fund
were $77,235,000 and $78,975,525, respectively.
7. SEGMENT REPORTING
During the second quarter of 2001, the Company changed its structure of
internal reporting which caused the composition of reportable segments to
change. The Company considers operating results for three business segments:
open-outcry, enymex(SM) and NYMEX ACCESS(R).
Open-outcry is the trading of NYMEX Division and COMEX Division futures and
options contracts on the trading floor of the Exchange. enymex(SM), while not
yet operational, will be an internet-based, global exchange for the trading and
clearing of contracts in a range of commodities with an initial focus on energy
and metals. NYMEX ACCESS(R) is an electronic trading system which currently
permits the trading of futures contracts on crude oil, heating oil, unleaded
gasoline, natural gas, electricity, platinum, gold, silver, copper, aluminum,
propane and palladium.
Prior year's financial information relating to these new business segments
is set forth below, as required by SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information.
NYMEX
OPEN-OUTCRY ENYMEX(SM) ACCESS(R) TOTAL
(In thousands) ----------------- ----------------- ----------------- ------------------
3 MOS. 9 MOS. 3 MOS. 9 MOS. 3 MOS. 9 MOS. 3 MOS. 9 MOS.
------- ------- ------- ------- ------- ------- ------- --------
Three and Nine Months Ended
September 30, 2001:
Operating revenues........ $32,150 $97,636 $ -- $ -- $ 2,396 $ 6,321 $34,546 $103,957
Operating expenses........ 26,138 83,442 2,432 9,646 3,338 10,478 31,908 103,566
Operating income (loss)... 6,012 14,194 (2,432) (9,646) (942) (4,157) 2,638 391
Investment income......... 1,405 4,314 -- -- -- -- 1,405 4,314
Interest expense.......... 1,928 5,785 -- -- -- -- 1,928 5,785
Depreciation and
amortization............ 3,343 10,141 100 210 1,034 2,905 4,477 13,256
Income tax expense
(benefit)............... 2,557 2,926 (1,133) (2,219) (439) (956) 985 (249)
Net income (loss)......... $ 2,932 $ 9,797 $(1,299) $(7,427) $ (503) $(3,201) $ 1,130 $ (831)
9
NYMEX
OPEN-OUTCRY ENYMEX(SM) ACCESS(R) TOTAL
(In thousands) ----------------- ----------------- ----------------- ------------------
3 MOS. 9 MOS. 3 MOS. 9 MOS. 3 MOS. 9 MOS. 3 MOS. 9 MOS.
------- ------- ------- ------- ------- ------- ------- --------
Three and Nine Months Ended
September 30, 2000:
Operating revenues........ $31,079 $95,139 $ -- $ -- $ 1,740 $ 4,742 $32,819 $ 99,881
Operating expenses........ 31,347 90,237 950 2,404 5,261 13,403 37,558 106,044
Operating (loss) income... (268) 4,902 (950) (2,404) (3,521) (8,661) (4,739) (6,163)
Investment income......... 2,718 7,046 -- -- -- -- 2,718 7,046
Interest expense.......... 1,928 5,790 -- -- -- -- 1,928 5,790
Depreciation and
amortization............ 3,240 9,020 2 7 978 2,874 4,220 11,901
Income tax (benefit)
expense................. 271 3,230 (493) (1,261) (1,829) (4,543) (2,051) (2,574)
Net (loss) income......... $ 251 $ 2,928 $ (457) $(1,143) $(1,692) $(4,118) $(1,898) $ (2,333)
8. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is involved in legal proceedings and
litigation arising in the ordinary course of business. Set forth below are the
descriptions of legal proceedings and litigation to which the Company is a party
as of September 30, 2001. Although there can be no assurance as to the ultimate
outcome, the Company believes that it has a meritorious defense to each
proceeding and will deny liability in all significant cases pending against it,
including the matters described below, and intends to defend vigorously each
such case. While the ultimate result of the proceedings cannot be predicted with
certainty, it is the opinion of the Company's management, after consultation
with outside counsel, that the resolution of these matters, in excess of amounts
already recognized, will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
The Company has been named as a defendant in the following legal actions:
- Electronic Trading Systems Corporation v. New York Mercantile
Exchange. This action is pending in the United States District Court for
the Southern District of New York. NYMEX Exchange was served with a
summons and complaint on or about May 10, 1999. This is a patent
infringement case alleging that NYMEX Exchange is infringing plaintiff's
patent through the use of its electronic trading system, NYMEX ACCESS(R).
Plaintiff seeks an unspecified amount of royalties. On September 15,
2000, the Court granted NYMEX Exchange's motion to sever and transfer
venue from the United States District Court for the Northern District of
Texas to the Southern District of New York. On August 10, 2001, NYMEX
Exchange made a motion to bifurcate the issues of willful infringement
and damages and requested a stay of discovery on these issues. The case
is in discovery.
- Enrique Rivera and Edith Rivera v. New York Mercantile Exchange, Mark
Kessloff, Les Faison, Brian Bartichek and John Does "1-10." This action
is pending in New York State Supreme Court (Bronx County). NYMEX Exchange
was served with the summons and complaint on or about April 22, 1999.
This is an ethnic discrimination case. Plaintiff alleges that throughout
his employment with NYMEX Exchange he was subjected to a hostile work
environment and discrimination regarding his ethnic origin. Plaintiff
seeks an unspecified amount of compensatory and punitive damages. The
case is in discovery. On March 28, 2001, NYMEX Exchange filed a motion to
strike the complaint. The motion is pending.
- Western Capital Design, LLC On Its Own Behalf and on behalf of those
similarly situated v. New York Mercantile Exchange and John Does
"1-50." This action is pending in United States District Court for the
Southern District of New York. NYMEX Exchange was served with the summons
and complaint on or about February 17, 1999. This action relates to
alleged wrongful conduct by NYMEX Exchange and certain members regarding
the execution of heating oil and natural gas options. Plaintiff seeks
compensatory damages and $75,000,000 in punitive damages. This action was
commenced in State Court in Florida. It was removed to Federal Court by
notice of removal filed March 8, 1999. Venue was then transferred to the
Southern District of New York by an order dated May 11, 1999.
10
NYMEX Exchange's motion to dismiss was filed on November 12, 1999 and
granted on March 31, 2000. NYMEX Exchange was served with an amended
complaint on or about April 26, 2000. NYMEX Exchange's motion to dismiss
the amended complaint was granted and the complaint was dismissed with
prejudice on February 16, 2001. On or about March 26, 2001, a Notice of
Appeal was served on NYMEX Exchange. Oral argument on the appeal has been
scheduled during the week of December 10, 2001.
- Luxembourg Henry and Jose Terrero v. NY Mercantile Exchange. On January
24, 2001, NYMEX Exchange was served with a summons and complaint filed by
two former employees who were terminated as part of the 10%
reduction-in-workforce that occurred in July 2000. Plaintiffs allege
harassment and discrimination because of race (Henry) and national origin
(Terrero). Henry seeks reinstatement, compensatory damages in the amount
of $9,320,000 for lost wages, fringe benefits and emotional distress and
costs and disbursements. Terrero seeks reinstatement, compensatory
damages in the amount of $4,500,000 for lost wages, fringe benefits and
emotional distress and costs and disbursements. On March 30, 2001, the
parties entered into a stipulation to discontinue the action and if the
action was re-commenced, it would be brought in New York State Supreme
Court (New York County). On June 14, 2001, the action was re-commenced in
New York County. The complaint asserted additional city, state and
federal claims. Additionally, the Plaintiffs alleges damages of
$5,000,000 for each of the eleven claims. NYMEX Exchange served and filed
its answer on June 29, 2001. Subsequently, the Exchange served and filed
an amended verified answer and counterclaim (against Henry) on July 18,
2001. The case is in discovery.
- New York Mercantile Exchange v. GlobalView Software, Inc. On April 27,
2001, NYMEX Exchange filed a breach of contract suit in New York State
Supreme Court (New York County). NYMEX Exchange seeks to recover direct
and consequential damages resulting from GlobalView's breach of its
contract with NYMEX Exchange regarding the front-end development for
enymex(SM). On or about June 18, 2001, GlobalView served its answer and
asserted counterclaims in which it seeks to recover amounts in excess of
$26,000,000 for alleged fees due and owing under the contract, as well as
consequential damages and other causes of action. On June 28, 2001, NYMEX
Exchange served an amended complaint on GlobalView. On about July 24,
2001, GlobalView filed a motion to dismiss one cause of action in the
amended complaint. Oral argument on the motion has been scheduled for
November 15, 2001.
9. DISASTER RECOVERY
On September 11, 2001, terrorists attacked the World Trade Center which
caused the closure of the Company's floor trading facility for four business
days. The Company incurred $1.6 million in expenses above and beyond the normal
course of business during the third quarter of 2001 to return the Company to
normal operations as quickly as possible after the event. Such expenses
included, but were not limited to, increased building security, transportation
costs, temporary command center costs, environmental cleaning costs and costs
related to the Company's back-up data center. A receivable for the insurance
recovery has been recorded in other current assets on the unaudited condensed
consolidated balance sheet at September 30, 2001 for these costs incurred during
the third quarter. The corresponding expenses have been reduced by a like amount
in the unaudited condensed consolidated statements of operations for the three
and nine months ended September 30, 2001.
The Company also suffered losses resulting from business interruption for a
four-day period immediately following this event. The Company has continued to
incur expenses and loss of revenues due to limited trading hours subsequent to
the end of the third quarter of 2001. The Company has substantial insurance
which it expects to cover losses resulting from business interruption and
expenses associated with property and casualty losses, the total of which is yet
to be fully determined.
*****
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND STATISTICAL
DATA)
INTRODUCTION
This discussion summarizes the significant factors affecting the results of
operations and financial condition of the Company during the three and nine
months ended September 30, 2001. This discussion is provided to increase the
understanding of, and should be read in conjunction with, the unaudited
condensed consolidated financial statements, accompanying notes and tables
included in this quarterly report.
FORWARD LOOKING AND CAUTIONARY STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE
RESULTS
The SEC encourages companies to disclose forward-looking information so
that investors can better understand a company's future prospects and make
informed investment decisions. Except for the historical information and
discussions contained herein, statements contained in this Form 10-Q may
constitute "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The Company has attempted, wherever
possible, to identify such statements by using words such as "anticipate,"
"believes," "expects" and words and terms of similar substance in connection
with any discussion of future operating or financial performance. These
statements may involve a number of risks, uncertainties and other factors that
may cause actual results to differ materially, including the Company's ability
to: continue to develop and market new innovative products and services; keep
pace with technological change; continue to develop and market a new electronic
trading system; obtain or protect intellectual property rights; respond to
competitive pressures; maintain financial condition or results of operations;
contend with quarterly fluctuations in revenues and volatility of commodity
prices; address changes in financial or business conditions; attract and retain
key personnel; successfully manage acquisitions and alliances; and respond to
legal, regulatory, and economic changes and other risks, uncertainties and
factors discussed elsewhere in this Form 10-Q, in the Company's other filings
with the SEC, or in materials incorporated therein by reference.
OVERVIEW
NYMEX Exchange's predecessor, the New York Mercantile Exchange, was
established in 1872. NYMEX Exchange exists principally to provide for the buying
and selling of commodities for future delivery under rules intended to protect
the interests of all market participants. NYMEX Exchange itself does not own any
commodities, trade futures and options contracts for its own account or
otherwise engage in market activities. NYMEX Exchange provides the physical
facilities necessary to conduct an open-outcry auction market and electronic
trading systems and systems for the matching and clearing of all trades executed
on NYMEX Exchange. Futures and options markets facilitate price discovery and
provide financial risk management instruments to a broad array of market
participants including commercial entities that produce, consume, trade or have
other interests in underlying commodities.
CORPORATE REORGANIZATION -- THE DEMUTUALIZATION
The New York Mercantile Exchange demutualized on November 17, 2000, at
which time the book value of the assets and liabilities of the New York
Mercantile Exchange carried over to NYMEX Exchange. Upon consummation of the
demutualization transaction, all the assets and liabilities of NYMEX Exchange
were consolidated into the parent company, NYMEX Holdings. NYMEX Holdings has
the right to pay dividends.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
RESULTS OF OPERATIONS
The Company reported net income of $1,130, which was $1,385 per share. The
net income was a $3,028 improvement over the same quarter of 2000. The increase
in net income was due to a Board-approved 50% reduction in the member fee rebate
rate and a decrease in salaries and benefits. These favorable events were offset
by lower investment income and reductions in various operating expenses.
12
The following components of net income make up the major changes occurring
during the third quarter of 2001.
Revenues
Total operating revenues were $34,546 in the third quarter of 2001, up
$1,727, or 5%, from the same period in 2000.
Clearing and transaction fees represent the core business of the Company
and are directly affected by volume. Changes in volume are affected by various
external factors such as:
- volatility in price levels of the underlying commodities;
- market perception of stability in the commodities and financial markets;
- the level and volatility of interest rates and inflation;
- national and international economic and political conditions; and
- weather conditions affecting certain energy commodities.
In the third quarter of 2001, clearing and transaction fees, net of member
fee rebates, were $24,199 compared to $22,647 earned during the same quarter
last year. This 7% increase was the result of the following two conditions: (1)
a 50% reduction in the NYMEX Division's member fee rebate rate totalling $1,862
and (2) a 38% increase in trading volume on NYMEX ACCESS(R) for the NYMEX
Division.
The NYMEX Division's clearing and transaction fee revenues, net of member
fee rebates, were $20,195 in the third quarter of 2001, up 8% from the
comparable period in 2000. The reduction in the membership clearing and
transaction fee rebate rate was the primary reason for this increase. The
overall volume on this division decreased by 7% principally due to lost business
trading days which resulted from the World Trade Center attack. The light sweet
crude oil futures and options contracts experienced an aggregate net decrease of
4% in trading volume compared with the third quarter of 2000. This decrease was
due in large part to lower price volatility in the contracts. Trading volume in
the unleaded gasoline contract increased 5% compared with the third quarter of
2000. Natural gas trading volume decreased by 7% during the third quarter of
2001 when compared with the same quarter a year ago. Trading volume in the
heating oil contract decreased by 27% compared with the same quarter a year ago,
also due in part to decreased price volatility.
Trading on NYMEX ACCESS(R), which is billed at a higher rate than
open-outcry trading, significantly increased on the NYMEX Division during the
third quarter of 2001, rising 38% when compared with the same quarter a year
ago. Improvements in system functionality helped to increase the utilization of
NYMEX ACCESS(R).
The COMEX Division's clearing and transaction fee revenues were $4,005 in
the third quarter of 2001, up 1.3% from the comparable period in 2000. However,
overall trading volume decreased by 3%. The primary reason for the increase in
revenue was higher realized rates per contract reflecting more non-member
trading. Trading volume in gold increased by 7% during the third quarter of 2001
when compared with the same period a year ago, primarily due to increased
investor interest as an inflation hedge as well as a spike in prices following
the September 11 terrorist attack. Volume for the silver contracts decreased by
17% due to low price volatility as well as a narrow price trading range. Copper
trading volume decreased by 8% as a result of the economic slow down in
industrialized countries.
Market data fees, which represent 25% of the Company's total operating
revenues for the third quarter of 2001, were virtually unchanged during the
third quarter of 2001 when compared with the same quarter a year ago. Total
subscriber units declined from the same period a year ago, principally due to
contraction in the financial services industry and the bankruptcy of a major
market data vendor. This decline was offset by a price increase at the beginning
of the third quarter of 2001.
13
Operating Expenses
Total operating expenses were $31,908 during the third quarter of 2001,
down 15% from the comparable period in 2000, primarily in the area of salaries
and employee benefits.
Salaries and employee benefits, which constitute 34% of total operating
expenses for the third quarter of 2001, decreased 29% from the similar period a
year ago. The non-recurrence of certain significant expenses, specifically
severance costs associated with the July 2000 reduction-in-workforce plan as
well as the special compensation award to the heirs of the Exchange's late
former president, were major contributors to this decrease. The total cost of
these items was $3,600 and constituted the majority of the decrease.
Rent and facility fees increased by $105, or 3%, during the third quarter
of 2001 compared to the same period in 2000. A 16% increase in real estate taxes
due to reduced abatements was the primary factor for this increase.
Depreciation and amortization of property and equipment, net of deferred
credit amortization, increased by $257, or 7% in the third quarter of 2001 when
compared to the same quarter in 2000. This increase is primarily the result of
depreciation expense related to capital expenditures on software development
incurred subsequent to the third quarter of 2000.
Telecommunications, equipment rentals and maintenance expenses decreased by
$651, or 15%, as a result of lower costs associated with the NYMEX ACCESS(R)
system, the company's electronic trading platform.
General and administrative expenses decreased by $278 during the third
quarter of 2001, an 8% decrease from the same period in 2000. Reductions in
spending, particularly in office supplies, which were implemented to improve
profitability, were the major factors contributing to this decrease during the
third quarter of 2001.
Professional services decreased by $467 or 15% during the third quarter of
2001, over the same quarter a year ago. Pre-development stage consulting fees
incurred for enymex(SM) during the comparable quarter a year ago were a
significant factor.
Other Income
Investment income, net of investment advisory fees, decreased by $1,313, or
48% during the third quarter of 2001 when compared to the same quarter in 2000.
The $33.2 million liquidation and distribution of funds from the NYMEX Division
members' retention and retirement plan during the end of January 2001 was the
primary reason for the decrease in investment income. A 170 basis point decline
in the average interest rates on reverse repurchase agreements also contributed
to this decrease. This trend is expected to continue in the fourth quarter as
interest rates are considerably lower this year as compared to last year.
Provision for Income Taxes
The decrease in the Company's effective tax rate for the three month period
ended September 30, 2001, as compared to the three month period ended September
30, 2000, is primarily due to the Company's higher proportion of tax-exempt
earnings relative to pre-tax income.
The Company is exploring the potential tax benefit, if any, of the
termination distribution of $33,221 from the NYMEX Division Members' Retention
and Retirement Plan, which has not been factored into the current provision.
14
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
RESULTS OF OPERATIONS
The Company reported a net loss of $831, which was a loss of $1,018 per
share. The net loss was $1,502 less than the similar period a year ago. The
primary reason for this reduced net loss was the non-recurrence of $3,992 in
demutualization expenses and reduced professional services fees related to the
pre-development stage of enymex(sm) in 2000. These favorable events were
partially offset by the reduction in investment income of $2,732 and the costs
associated with the loss on capitalized software.
The following components of net loss make up the major changes occurring
for the nine months ended September 30, 2001.
Revenues
Total operating revenues were $103,957 for the nine months ended September
30, 2001, up $4,076, or 4%, from the same period in 2000.
For the nine months ended September 30, 2001, clearing and transaction fees
net of member fee rebates were $74,417 compared to $70,487 in the same period
last year. This 6% increase was the result of the following two conditions: (1)
a reduction in the NYMEX Division's member fee rebate of $4,981 and (2) a 27%
increase in trading volume on NYMEX ACCESS(R) for the NYMEX Division.
The NYMEX Division's clearing and transaction fee revenues net of member
fee rebates were $59,782 in the first nine months of 2001, up 7% from the
comparable period in 2000. A significant part of this increase was the result of
the reduction in the membership clearing and transaction fee rebate rate. In
addition to the rebate rate reduction, NYMEX ACCESS(R) volume experienced a
substantial increase. Despite a 2% decrease in open-outcry volume during the
first nine months ended September 30, 2001, when compared with the same period a
year ago, several significant changes did occur in NYMEX Division contracts.
Trading volume in unleaded gasoline contracts rose 7%. Crude oil trading volume
also increased by 2% and natural gas trading volume decreased by 14% when
compared with the same period a year ago. Heating oil trading volume decreased
by 7% due in part to decreased price volatility.
Trading on NYMEX ACCESS(R), which is billed at a higher rate than
open-outcry trading, significantly increased on the NYMEX Division during the
first nine months of 2001 when compared with the same period a year ago.
Improvements in system functionality helped to increase the utilization of NYMEX
ACCESS(R).
The COMEX Division's clearing and transaction fee revenues were $14,635 in
the first nine months of 2001, representing a decrease of 1% from the comparable
period in 2000. Overall trading volume decreased by 6% principally due to a 25%
reduction in silver trading volume which was due in part to low price volatility
as well as a narrow price trading range.
Market data fees, which represent 24% of the Company's total operating
revenues for the first nine months of 2001, decreased by $739, or 3%, compared
to the same period last year. Total subscriber units declined from a year ago,
principally due to contraction in the financial services industry and the
bankruptcy filing of a major market data vendor. This decline was offset by a
price increase in the beginning of the third quarter.
Operating Expenses
Total operating expenses were $103,566 during the first nine months of
2001, down 2% from the comparable period in 2000. A significant portion of the
$2,478 decrease from the year-ago period was the sharp decline in professional
services due to substantial consultant fees related to the pre-developmental
stage of enymex(SM) last year, as well as fees associated last year with the
Company's demutualization plan. The decrease in costs from these events were
offset by costs associated with increased depreciation expense from a change in
estimate as well as capital additions and an impairment loss on capitalized
software.
15
Salaries and employee benefits, which constitute 37% of total year to date
2001 operating expenses, decreased by 1%. While the June 2001
reduction-in-workforce represented an increase of approximately $4.5 million in
salary and benefits, the 1% decrease resulted from the non-recurrence of certain
significant expenses, specifically the special compensation award to the heirs
of the late former president and the salary savings from the 2000
reduction-in-workforce. With regards to the severance costs associated with the
June 2001 reduction-in-workforce a total of $3,867 was paid by the end of the
third quarter of 2001. The remaining $663 unpaid balance was included in accrued
salaries and related liabilities on the balance sheet at September 30, 2001. The
program is expected to save $9,400 annually in salaries and benefits.
Rent and facility fees increased by $792, or 7% during the nine months
ended September 30, 2001, compared to the same period ended in 2000. A 21%
increase in real estate taxes due to reduced abatements was one of the primary
factors for this increase. This trend is expected to continue during the fourth
quarter of 2001, as tax abatements remain lower than last year's.
Depreciation and amortization of property and equipment, net of deferred
credit amortization, increased by $1,355, or 13%, in the first nine months of
2001 when compared to the same period during 2000. This increase is partially
the result of depreciation expense related to capital expenditures incurred
subsequent to the third quarter of 2000. Management's decision to reduce the
estimated useful life of an internally developed software project from five
years to three years during the third quarter of 2000 is also a reason for this
increase. This change in estimate is based on management's belief that this
software has a shorter useful life due to rapidly changing technology.
General and administrative expenses decreased by $398, or 4% during the
nine months ended September 30, 2001 compared with the same period a year ago.
The Company incurred bad debt expenses totaling $872 resulting from the
bankruptcy and liquidation of a major market data vendor. This increase was
largely offset by significant savings in office supplies and administrative
services.
Professional services decreased by $2,190, or 19% during the nine months
ended September 30, 2001, compared with the same period a year ago. The primary
reason for the decrease was due to substantial consultant fees incurred during
the pre-developmental stage of enymex(SM) last year.
An impairment loss of $1,605 occurred during the nine months ended
September 30, 2001 as a result of an alleged breach of contract by a vendor that
was producing the customer interface to the enymex(SM) system. This breach of
contract resulted in the abandonment of that application.
Demutualization expenses incurred during the nine months ended September
30, 2000 totaled $3,992, or 4% of the total operating expenses in 2000; such
expenses did not occur in 2001. These fees consisted of accounting, investment
banking, legal, printing and SEC filing fees.
Other expenses increased by $960, or 18% during the nine months ended
September 30, 2001, when compared with the same period a year ago. This increase
is primarily the result of the change in presentation for the funding of, and
earnings on, the COMEX division members' retention program. Prior to the
demutualization in November 2000, all earnings and contributions to this plan
were presented as a transfer from members' equity. This increase is expected to
continue during the fourth quarter of 2001.
Other Income
Investment income, net of advisory fees, decreased by $2,732, or 39%,
during the first nine months of 2001 when compared to the same period in 2000.
The liquidation and distribution of funds from the NYMEX
16
Division members' retention plan during January of this year is the primary
reason for the decrease in investment income. A 300 basis point decline in the
average interest rates on reverse repurchase agreements also contributed to this
decrease. This trend is expected to continue in the fourth quarter as interest
rates are considerably lower this year when compared with last year.
Benefit for Income Taxes
The decrease in the Company's effective tax rate for the nine month period
ended September 30, 2001, as compared to the nine month period ended September
30, 2000, is primarily due to the Company's higher proportion of tax-exempt
earnings relative to pre-tax loss.
The Company is exploring the potential tax benefit, if any, of the
termination distribution of $33,221 from the NYMEX Division Members' Retention
and Retirement Plan, which has not been factored into the current provision.
FINANCIAL CONDITION AND CASH FLOWS
Liquidity and Capital Resources
The Company has made, and expects to continue to make, significant
investments in technology to fund its future growth and increase shareholder
value. The Company spent a total of $3,491 during the third quarter of 2001
primarily to develop its enymex(SM) initiative. The Company had $79,982 in cash,
cash equivalents, reverse repurchase agreements and marketable securities at
September 30, 2001.
Cash Flow
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2001 2000
-------- -------
Net cash provided by (used in):
Operating activities.............................. $ 35,303 $ 2,280
Investing activities.............................. 1,136 (3,198)
Financing activities.............................. (33,221) (1,119)
-------- -------
Net decrease in cash and cash equivalents........... $ 3,218 $(2,037)
======== =======
Working Capital
(IN THOUSANDS)
AT SEPTEMBER 30, AT DECEMBER 31,
2001 2000
---------------- ---------------
Current assets................................. $109,934 $131,166
Current liabilities............................ 35,145 56,274
-------- --------
Working capital................................ $ 74,789 $ 74,892
======== ========
Current ratio.................................. 3.13:1 2.33:1
Current assets at September 30, 2001 decreased by $21,232, or 16%, from
year-end 2000 primarily as a result of the liquidation and distribution of the
NYMEX Division members' retention plan in January 2001. This liquidation caused
marketable securities to decrease by $15,500, with the remaining $17,721 coming
from cash balances. The other significant changes in current assets consisted of
an increase of $6,968 in clearing and transaction fees receivable in September
2001 when compared to the year-end 2000 receivable as a result of delays in
billing due to the September 11 World Trade Center terrorist attack. Prepaid
taxes also increased $815 as a result of tax benefits generated from this year's
nine-month pre-tax net loss. At September 30, 2001, a receivable of $1,600 was
recorded for insurance recovery relating to the expenses incurred in September
as a result of the September 11 World Trade Center terrorist attack. The Company
has substantial insurance
17
which it expects to cover losses, resulting from business interruption and
expenses associated with property and casualty losses the total of which is yet
to be fully determined.
Current liabilities at September 30, 2001 decreased by $21,129, or 38%,
from year-end 2000, primarily as a result of the January distribution of the
members' retention plan, which was $33,221. Accounts payable and accrued
liabilities increased by $5,258, or 47%. A significant increase in operating
expenses not paid by quarter's end due to the September 11 World Trade Center
Terrorist attack was a major factor in this increase. Increases in accrued
salaries and related benefits of $3,605, or 93%, was primarily the result of the
nine-month portion of anticipated year-end employee bonuses as well as the
unpaid severance balance at September 30, 2001. Interest payable also increased
by $1,914, or 99%, and represents three more months of interest on outstanding
debt. A $1,315, or 129% increase in other current liabilities was primarily
attributable to the short term portion of the COMEX members' retention plan
which will begin quarterly distributions beginning in January of 2002.
Future Cash Requirements
As of September 30, 2001, the Company had long-term debt of $97,185, and
short-term debt of $2,815. This debt consisted of the following:
- $31,000 of 7.48% notes with an eleven-year principal payout beginning in
2001;
- $54,000 of 7.75% notes with an eleven-year principal payout beginning in
2011; and
- $15,000 of 7.84% notes with a five-year principal payout beginning in
2022.
The Company would incur a "make whole" redemption premium should it choose
to pay off any series issue prior to its maturity. The economic benefit from
refinancing at a lower interest rate would be offset by the redemption penalty
incurred. These notes contain certain limitations on the Company's ability to
incur additional indebtedness.
The Company believes that its cash flows from operations will be sufficient
to meet its needs for the foreseeable future, including capital and operating
expenditures associated with the development and launch of enymex(SM). In
addition, the Company has the ability, and may seek, to raise capital through
the issuance of debt or equity in the private and public capital markets. On
October 1, 2001 the Company made its first $2,815 principal payment to its bond
holders.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which was later amended by SFAS No. 138.
Among other provisions, it requires that entities recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. Gains and losses resulting from changes in the fair values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting treatment. The effective date of
this standard was delayed via the issuance of SFAS No. 137. The effective date
of SFAS No. 133 is now for fiscal years beginning after June 15, 2000, though
earlier adoption is encouraged and retroactive application is prohibited.
Effective January 1, 2001, the Company adopted this statement. Upon adoption,
SFAS No. 133 had no impact on the Company's financial position or results of
operations.
In September 2000, FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities -- a
Replacement of FASB Statement No. 125, which revises the standards of accounting
for securitizations and other transfers of financial assets and collateral. The
provisions of SFAS No. 140 carry over most of the guidance outlined in SFAS No.
125 and further establish accounting and reporting standards with a
financial-components approach that focuses on control. Under this approach,
financial assets or liabilities are recognized when control is established and
derecognized when control has been surrendered or the liability has been
extinguished. In addition, specific implementation guidelines have been
established to further distinguish transfers of financial assets that are sales
from transfers that are secured borrowings. SFAS No. 140 is effective
prospectively for transfers occurring after March 31, 2001 and for
18
disclosures relating to securitization transactions and collateral for fiscal
years ended after December 15, 2000. The Company adopted the provisions of SFAS
No. 140 that relate to disclosures of securitization transactions and collateral
in the preparation of its condensed consolidated financial statements for the
quarter ended March 31, 2001. The Company adopted the remaining provisions of
SFAS No. 140 as required, during the second quarter of 2001. The adoption of the
remaining provisions had no impact on the Company's financial position or
results of operations. The Company enters into reverse repurchase agreements and
falls under the guidelines of SFAS 140.
In June 2001, FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which supercedes APB Opinion No. 17, Intangible Assets. This statement,
effective for fiscal years beginning after December 15, 2001, addresses, among
other things, how goodwill and other intangible assets should be accounted for
after they have been initially recognized in the financial statements. The
provisions of SFAS No. 142 provide for an impairment test to be performed at
least annually rather than monthly amortization. The Company believes that the
adoption of SFAS No. 142 will have a material effect on operations. If the
Company had adopted this standard during the second quarter of 2001, the net
loss would have decreased by $538,000 and $1,076,000 for the three and nine
months ended September 30, 2001, or $659 and $1,319 per share, respectively. The
Company believes that the adoption of this standard may increase annual pre-tax
net income by $2,152,000 or $2,637 per share, which is the amount of annual
amortization of goodwill.
In August 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement, effective for fiscal years beginning after June 15,
2002, requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. When the liability
is initially recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value each period, and the capitalized cost is depreciated over the
useful live of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. The adoption of this statement is not expected to have an
impact on the Company's financial position or results of operation.
In October 2001, the Emerging Issues Task Force issued EITF No. 01-10,
Accounting for the Impact of the Terrorist Attacks of September 11, 2001. This
statement, among other things, addresses how costs and insurance recoveries for
businesses affected by this event should be accounted for in financial
statements. The provisions of EITF No. 01-10 provide guidelines for the
recording of a contingent insurance recovery. The Company has adopted the
provisions of EITF No. 01-10 in the third quarter of 2001.
BUSINESS HIGHLIGHTS
On September 11, 2001, terrorists attacked the World Trade Center. This
attack also resulted in damage to the World Financial Center. As a result,
futures and options trading on NYMEX Exchange was disrupted for four business
days. Shortly after the incident, the Company established a command center in
midtown to coordinate the effort to resume trading. On Friday, September 14,
2001, the Company's newly developed internet-based NYMEX ACCESS(R) was
operational from 4:00 to 6:00 PM to enable NYMEX Exchange members to trade
electronically via the internet. On Monday, September 17, 2001, open-outcry
trading resumed at the Exchange on a reduced schedule.
On September 5, 2001, the Company launched a Brent crude oil futures
contract. The following day, the Company introduced a Brent crude oil options
contract. The Company announced that all clearing and exchange fees for the
first year of trading will be waived for Brent futures and options and that the
Company will offer rebates on offsetting light, sweet crude oil futures
contracts for a three-month period. The Brent futures contract is traded both
via open-outcry and after-hours on the NYMEX ACCESS(R) electronic trading
system.
On September 14, 2001, the Company launched a new internet-based version of
NYMEX ACCESS(R), the Company's existing electronic trading system which is used
primarily for after hours trading. The launch date was expedited in the wake of
the terrorist attacks on the World Trade Center that forced the Company to
utilize this new version until the Company resumed business at its facilities on
September 17, 2001. The Company is in the process of developing upgrades to this
internet-based system that will enable it to further
19
reduce the logistical constraints of operating a system that runs through a
dedicated line or dial-up basis. In addition, the Company is presently exploring
the possibility of using the internet-based version of NYMEX ACCESS(R) system to
expedite delivery of enymex(sm) product line to the marketplace. The purpose
behind the development of enymex(sm) is to introduce a product line which
provides products designed to mirror those instruments currently traded in the
OTC market. On October 30, 2001, the Company announced the future introduction
of a Henry Hub swaps contract, the first such enymex(sm) product to be traded;
however, the trade matching platform intended to deliver enymex(sm) products is
currently experiencing production delays. Consequently, given the successful
launch of the internet-based version of NYMEX ACCESS(R), its initial use to
expedite delivery of enymex(sm) products is being reviewed.
RESPONSIBILITY FOR FINANCIAL REPORTING
Management is responsible for the preparation, integrity and objectivity of
the unaudited condensed consolidated financial statements and related notes, and
the other financial information contained in this quarterly report. Such
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America and are considered by
management to present fairly the Company's financial position, results of
operations and cash flows. These unaudited condensed consolidated financial
statements include some amounts that are based on management's best estimates
and judgments, giving due consideration to materiality.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about the Company's marketable
securities, excluding equity securities, including expected principal cash flows
for the years 2001 through 2006 and thereafter (in thousands).
PRINCIPAL AMOUNTS BY EXPECTED MATURITY
AT SEPTEMBER 30, 2001
TOTAL FAIR MARKET
2006 PRINCIPAL VALUE AS OF
AND CASH SEPTEMBER 30,
2001 2002 2003 2004 2005 THEREAFTER FLOWS 2001
------ ------ ------ ------ ------ ---------- --------- -------------
Government Bonds, Federal Agency
Issues............................... $ -- $ -- $ -- $ -- $1,484 $ 7,791 $ 9,275 $ 9,606
Weighted average interest rate......... -- -- -- -- 6.96% 5.25%
U.S. Treasury issues................... -- -- -- -- -- -- -- --
Weighted average interest rate......... -- -- -- -- -- --
Municipal Bonds........................ 10 3,348 2,372 3,603 4,085 29,877 43,295 46,702
Weighted average interest rate......... 2.32% 6.28% 4.85% 5.07% 5.03% 4.69%
------ ------ ------ ------ ------ ------- ------- -------
Total Portfolio, excluding equity
securities........................... $ 10 $3,348 $2,372 $3,603 $5,569 $37,668 $52,570 $56,308
====== ====== ====== ====== ====== ======= ======= =======
PRINCIPAL AMOUNTS BY EXPECTED MATURITY
AT DECEMBER 31, 2000
TOTAL FAIR MARKET
2006 PRINCIPAL VALUE AS OF
AND CASH DECEMBER 31,
2001 2002 2003 2004 2005 THEREAFTER FLOWS 2000
------ ------ ------ ------ ------ ---------- --------- ------------
Government Bonds, Federal Agency
Issues............................... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Weighted average interest rate......... -- -- -- -- -- --
U.S. Treasury issues................... -- -- -- -- -- -- -- --
Weighted average interest rate......... -- -- -- -- -- --
Municipal Bonds........................ 2,633 3,777 1,133 3,397 9,785 49,914 70,639 73,037
Weighted average interest rate......... 6.19% 5.86% 4.62% 5.02% 5.07% 4.77%
------ ------ ------ ------ ------ ------- ------- -------
Total Portfolio, excluding equity
securities........................... $2,633 $3,777 $1,133 $3,397 $9,785 $49,914 $70,639 $73,037
====== ====== ====== ====== ====== ======= ======= =======
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INTEREST RATE RISK
Current Assets. In the normal course of business, the Company invests
primarily in fixed income securities. Marketable securities bought by the
Company are typically held for the purpose of selling them in the near term and
are classified as trading securities. Unrealized gains and losses are included
in earnings. For the nine months ended September 30, 2001 and the year ended
December 31, 2000, the Company had net investment income of $4.3 million and
$9.4 million, respectively. Accordingly, a substantial portion of the Company's
income depends upon its ability to continue to invest monies in these
instruments at prevailing interest rates and market prices. The fair value of
these fixed income securities at September 30, 2001 and December 31, 2000 was
$56 million and $73 million, respectively. The change in fair value, using a
hypothetical 10% decline in prices, is estimated to be a $5.6 million and $7.3
million loss for September 30, 2001 and December 31, 2000, respectively. The
Company also invests in U.S. government securities and repurchase agreements and
maintains interest-bearing balances in its trading accounts with its investment
managers. Financial instruments with maturities of three months or less when
purchased are classified as cash equivalents in the consolidated financial
statements.
Debt. The interest rate on the Company's long-term indebtedness is a
weighted average fixed rate of 7.68%. The Company's fixed rate debt is exposed
to the risk that the fair market value of its debt will increase in a declining
interest rate environment. This would result in the Company paying a redemption
premium if it should choose to refinance this debt. Management has not deemed it
necessary to employ any market or interest risk management strategies, such as
interest rate swap agreements. In the future, as the Company pursues its market
strategy, it may become subject to a higher degree of interest rate sensitivity
if it is required to borrow at higher or at variable rates. This could
significantly increase the Company's future sensitivity to interest rate
fluctuations and materially affect, in a negative manner, the Company's future
financial position and results of operations. There have been no material
changes in the Company's outstanding debt since December 31, 2000.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
N/A
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
N/A
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
N/A
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
N/A
ITEM 5. OTHER INFORMATION
N/A
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
On July 18, 2001, NYMEX Holdings filed a Form 8-K with the SEC disclosing
the change in auditors from Deloitte & Touche LLP to Ernst & Young LLP and the
appointment of J. Robert Collins, Jr. as President. The letter regarding the
change in certifying accountants is hereby incorporated by reference as Exhibit
16.1 of such Form 8-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 14th day of November, 2001.
NYMEX HOLDINGS, INC.
By: /s/ PATRICK F. CONROY
------------------------------------
Name: Patrick F. Conroy
Title: Duly Authorized Officer and
Principal Financial Officer
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