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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, 2003
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 OF (COMMISSION FILE NUMBER) (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
As of November 14, 2003, 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........................................ 2
Unaudited Condensed Consolidated Statements of Operations
and Retained Earnings for the Three Months and Nine
Months Ended September 30, 2003 and September 30,
2002................................................... 2
Unaudited Condensed Consolidated Balance Sheets at
September 30, 2003 and December 31, 2002............... 3
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2003 and
September 30, 2002..................................... 4
Notes to Unaudited Condensed Consolidated Financial
Statements for the Three and Nine Months Ended
September 30, 2003 and September 30, 2002.............. 5
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 21
ITEM 4. Controls and Procedures..................................... 23
PART II: OTHER INFORMATION
ITEM 1. Legal Proceedings........................................... 24
ITEM 2. Changes in Securities and Use of Proceeds................... 24
ITEM 3. Defaults Upon Senior Securities............................. 24
ITEM 4. Submission of Matters to a Vote of Security Holders......... 24
ITEM 5. Other Information........................................... 24
ITEM 6. Exhibits and Reports on Form 8-K............................ 24
Signatures.................................................. 25
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
OPERATING REVENUES:
Clearing and transaction fees, net of member fee
rebates......................................... $33,337 $35,159 $102,093 $105,627
Market data fees................................... 7,632 8,246 23,952 24,690
Other, net of rebates.............................. 4,879 2,338 10,465 5,590
------- ------- -------- --------
Total operating revenues................... 45,848 45,743 136,510 135,907
------- ------- -------- --------
OPERATING EXPENSES:
Salaries and employee benefits..................... 13,854 11,332 39,448 33,192
Occupancy and equipment............................ 7,128 5,856 21,029 17,788
Professional services.............................. 4,508 4,024 14,020 12,344
General and administrative......................... 7,695 5,295 18,536 12,083
Depreciation and amortization of property and
equipment, net of deferred credit
amortization.................................... 4,895 5,330 14,360 15,231
Telecommunications................................. 1,722 591 4,372 6,646
Loss on disposition of property and equipment, and
impairment of capitalized software.............. -- 696 977 2,293
Marketing and other................................ 2,368 3,531 8,093 7,770
------- ------- -------- --------
Total operating expenses................... 42,170 36,655 120,835 107,347
------- ------- -------- --------
INCOME FROM OPERATIONS............................... 3,678 9,088 15,675 28,560
OTHER INCOME (EXPENSES):
Investment income, net............................. 643 2,043 3,393 4,889
Interest expense................................... (1,823) (1,875) (5,468) (5,625)
------- ------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES............. 2,498 9,256 13,600 27,824
PROVISION FOR INCOME TAXES........................... 960 4,427 6,130 13,414
------- ------- -------- --------
NET INCOME........................................... 1,538 4,829 7,470 14,410
------- ------- -------- --------
Net income per share (based on 816 shares)........... $ 1,885 $ 5,918 $ 9,154 $ 17,659
======= ======= ======== ========
Retained earnings, beginning of period............... 14,155 10,505 8,223 924
Net income........................................... 1,538 4,829 7,470 14,410
Less: dividends...................................... (2,500) -- (2,500) --
------- ------- -------- --------
Retained earnings, end of period..................... $13,193 $15,334 $ 13,193 $ 15,334
======= ======= ======== ========
The accompanying notes are an integral part of these statements.
2
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
ASSETS
Cash and cash equivalents................................... $ 3,050 $ 1,014
Securities purchased under agreements to resell............. 47,000 40,760
Marketable securities, at market (cost of $62,671 at
September 30, 2003 and $65,285 at December 31, 2002)...... 66,264 66,976
Clearing and transaction fees receivable, net............... 13,326 13,884
Clearing deposits and guaranty funds........................ 84,617 75,327
Other current assets........................................ 21,971 14,748
-------- --------
Total current assets................................. 236,228 212,709
Property and equipment, net................................. 216,966 223,878
Other assets................................................ 29,436 26,168
-------- --------
TOTAL ASSETS................................................ $482,630 $462,755
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued liabilities.................... $ 13,832 $ 16,036
Accrued salaries and related liabilities.................... 11,530 5,610
Income taxes payable........................................ 11,342 4,335
Clearing deposits and guaranty funds........................ 84,617 75,327
Other current liabilities................................... 18,443 18,389
-------- --------
Total current liabilities.............................. 139,764 119,697
Notes payable............................................... 91,551 91,551
Deferred credit -- grant for building construction.......... 113,136 114,745
Deferred income taxes....................................... 5,226 9,622
Subordinated commitment -- COMEX members' retention
program................................................... 11,528 11,038
Other non-current liabilities............................... 14,920 14,567
-------- --------
Total liabilities................................. 376,125 361,220
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, at $0.01 par value, 816 shares authorized,
issued and outstanding.................................... -- --
Additional paid-in capital.................................. 93,312 93,312
Retained earnings........................................... 13,193 8,223
-------- --------
Total stockholders' equity........................ 106,505 101,535
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $482,630 $462,755
======== ========
The accompanying notes are an integral part of these statements.
3
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
2003 2002
-------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 7,470 $14,410
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of property and
equipment, net of deferred credit amortization........ 14,360 15,231
Deferred income taxes.................................. (5,671) 7,376
Loss on disposition of property and equipment, and
impairment of capitalized software.................... 977 2,293
Decrease (increase) in operating assets:
Marketable securities................................ 712 (2,167)
Clearing and transaction fees receivable, net........ 558 (6,373)
Clearing deposits and guaranty funds................. (9,290) (56,130)
Other current assets................................. (5,949) 554
(Decrease) increase in operating liabilities:
Accounts payable and accrued liabilities............. (2,204) (6,148)
Accrued salaries and related liabilities............. 5,920 2,861
Income taxes payable................................. 7,007 4,817
Clearing deposits and guaranty funds................. 9,290 56,130
Other current liabilities............................ 5,054 6,952
Subordinated commitment.............................. 490 1,470
Other non-current liabilities........................ 353 24
-------- -------
Net cash provided by operating activities............ 29,077 41,300
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (10,033) (16,594)
Increase in securities purchased under agreements to
resell................................................. (6,240) (28,500)
(Increase) decrease in other assets....................... (3,268) 174
-------- -------
Net cash used in investing activities................ (19,541) (44,920)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid............................................ (7,500) --
-------- -------
Cash used in financing activities.................... (7,500) --
-------- -------
Net increase (decrease) in cash and cash equivalents........ 2,036 (3,620)
Cash and cash equivalents, beginning of year................ 1,014 5,680
-------- -------
Cash and cash equivalents, end of period.................... $ 3,050 $ 2,060
======== =======
The accompanying notes are an integral part of these statements.
4
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Throughout this document NYMEX Holdings, Inc., will be referred to as
"NYMEX Holdings" and, together with its subsidiaries, as the "Company." The two
principal 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 a wholly-owned subsidiary of NYMEX Exchange. Where
appropriate, each division will be discussed separately and collectively will be
discussed as the "Exchange."
NATURE OF BUSINESS -- The Company exists principally to provide facilities
for buying and selling energy and precious and base metals commodities for
future delivery under rules intended to protect the interests of market
participants. The Company itself does not own commodities, trade for its own
account, or otherwise engage in market activities. The Company provides the
physical facilities necessary to conduct an open-outcry auction market,
electronic trading systems, systems for the matching and clearing of trades
executed on the Exchange, and systems for the clearing of certain bilateral
trades executed in the off-exchange market. These services facilitate price
discovery, hedging, and liquidity in the energy and metals markets. Transactions
executed on the Exchange mitigate the risk of counter-party default because the
Exchange clearinghouse acts as the counter-party to every trade. The Exchange is
regulated by the Commodity Futures Trading Commission. To manage risk of
financial nonperformance, the Exchange requires members to post margin. (See
Note 5.)
The Company provides market data information for subscribers regarding
prices of futures and options contracts traded on the Exchange. As is common
business practice in the industry, fees are remitted to the Company by market
data vendors on behalf of subscribers. Revenues are accrued for the current
month based on the most recent month reported by the vendors. The Company
conducts periodic audits of the information provided.
BASIS OF PRESENTATION -- The accompanying unaudited condensed consolidated
financial statements of NYMEX Holdings and 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 ("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, 2002 and 2001 and for each year in the three-year period
ended December 31, 2002.
The preparation of the accompanying unaudited 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.
It is the Company's policy to reclassify amounts to conform to the current
presentation where appropriate. All inter-company balances and transactions have
been eliminated in consolidation.
For a summary of significant accounting policies and additional
information, see note 1 to the audited December 31, 2002 financial statements,
which were filed with the SEC in the Company's Form 10-K on March 6, 2003.
5
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
2. RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standard ("SFAS") No.
145, which rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment
of Debt, SFAS No. 44, Accounting for Intangible Assets of Motor Carriers, and
SFAS No. 64, Extinguishment of Debt Made to Satisfy Sinking-Fund Requirement
("SFAS 145"). SFAS No. 145 also amends SFAS No. 13, Accounting for Leases, to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. As a
result of the rescission of SFAS No. 64, the criteria in Accounting Principles
Board ("APB") No. 30 will be used to classify gains and losses from debt
extinguishment. SFAS No. 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meaning, or
describe their applicability under changed conditions. SFAS No. 145 became
effective for the Company as of January 1, 2003. The adoption of SFAS No. 145
had no impact on the Company's consolidated results of operations, financial
position, or cash flows.
The Company adopted SFAS No. 146, Accounting for Costs Associated with Exit
or Disposal Activity, effective January 1, 2003. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities, and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring), which
previously governed the accounting treatment for restructuring activities. SFAS
No. 146 applies to costs associated with an exit activity covered by SFAS No.
144. Those costs include, but are not limited to, the following: (1) termination
benefits under the terms of a benefit arrangement that, in substance, is not an
ongoing benefit arrangement or an individual deferred-compensation contract, (2)
costs to terminate a contract that is not a capital lease, and (3) costs to
consolidate facilities to relocate employees. SFAS No. 146 does not apply to
costs associated with the retirement of long-lived assets covered by SFAS No.
143. The adoption of SFAS No. 146 had no impact on the Company's consolidated
results of operations, financial position or cash flows.
The Company adopted SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity during the third
quarter of 2003. This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). The adoption of SFAS No. 150 had no impact on the Company's
condensed consolidated results of operations, financial position, or cash flows.
The Company adopted Financial Accounting Interpretation ("FIN") No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, effective January 1, 2003. FIN
No. 45 elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees, and standby letters of credit. It also clarifies that
at the time a company issues a guarantee, the company must recognize an initial
liability for the fair market value of the obligations it assumes under that
guarantee and must disclose that information in its interim and annual financial
statements. The initial recognition and measurement provisions of FIN No. 45
were applied prospectively to guarantees issued or modified after December 31,
2002. The adoption of FIN No. 45 did not have a material impact on the Company's
condensed consolidated results of operations, financial position or cash flows.
(See Note 7.)
3. COLLATERALIZATION
At September 30, 2003 and December 31, 2002, the Company accepted
collateral in the form of United States Treasury bills that it is permitted by
contract or industry practice to sell or repledge, although it is not the
Company's policy to do so. This collateral was received in connection with
reverse repurchase agreements
6
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
with, and is held in custody by, the Company's banks. The fair values of such
collateral at September 30, 2003 and December 31, 2002 were approximately $47.0
million and $40.8 million.
4. INCENTIVE PROGRAMS
The Company has proprietary fee reduction programs that reduce clearing
fees for Exchange members. Rebates under these programs totaled $3.7 million and
$1.0 million for the three months ended September 30, 2003 and September 30,
2002, and $11.8 million and $3.1 million for the nine-months ended September 30,
2003 and September 30, 2002. In the unaudited condensed consolidated statements
of operations and retained earnings, clearing and transaction fees are presented
net of these fee reductions. In September 2003, the Company announced that
effective October 1, 2003, the level of fees paid to NYMEX Division members
under its proprietary fee reduction program would be reduced by 50%, and that
the program in its current form would be eliminated on December 31, 2003.
The Company has several incentive programs that reduce certain member
operating costs. These incentive programs resulted in revenue reductions of
$200,000 and $461,000 for the three months ended September 30, 2003 and
September 30, 2002, and $1,028,000 and $1,265,000 for the nine-months ended
September 30, 2003 and September 30, 2002. Other revenues are presented net of
fee reductions related to these programs in the unaudited condensed consolidated
statements of operations and retained earnings. The Company also implemented
certain programs designed to provide incentives to third party intermediaries to
place business with the Company. Costs incurred under these programs during the
third quarter of 2003 were $1,364,000 and $2,646,000 for the nine-months ended
September 30, 2003. These costs are included in general and administrative
expenses on the unaudited condensed consolidated statement of operations.
5. CLEARING DEPOSITS AND GUARANTY FUNDS
The Company is required, under the Commodity Exchange Act, to maintain
separate accounts for cash and securities that are deposited by clearing members
at banks, approved by the Company, as margin for house and customer accounts.
These clearing deposits are used by members to meet their obligations to the
Company for margin requirements on open futures and options positions, as well
as delivery obligations.
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 $2.0
million, per division, depending upon such clearing member firm's reported
regulatory capital, in a fund known as a "Guaranty Fund." Historically, separate
and distinct Guaranty Funds were maintained for the NYMEX Division and the COMEX
Division. Effective May 16, 2003, the NYMEX Division assumed all of the clearing
functions of the COMEX Division. Accordingly, the deposits have been aggregated
and are now maintained in a single Guaranty Fund which may be used for any loss
sustained by the Company as a result of the failure of a clearing member to
discharge its obligations on either division. Although there is now one Guaranty
Fund for both divisions, separate contribution amounts are calculated for each
division.
The Company is entitled to earn interest on cash balances posted as
clearing deposits and guaranty funds. Such balances are included in the
accompanying unaudited condensed consolidated financial statements. The
following table sets forth Clearing Deposits and Guaranty Fund balances held by
the Company on behalf of clearing members at September 30, 2003 and December 31,
2002.
7
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2003
(IN THOUSANDS)
CASH AND MONEY MARKET FUNDS,
RESALE U.S. TREASURIES &
AGREEMENTS LETTERS OF CREDIT TOTAL
---------- ------------------- ----------
Clearing Deposits.......................... $81,857 $6,107,414 $6,189,271
Guaranty Fund.............................. 2,760 147,546 150,306
------- ---------- ----------
Total...................................... $84,617 $6,254,960 $6,339,577
======= ========== ==========
DECEMBER 31, 2002
CASH AND MONEY MARKET FUNDS,
RESALE U.S. TREASURIES &
AGREEMENTS LETTERS OF CREDIT TOTAL
---------- ------------------- ----------
Clearing Deposits.......................... $74,305 $4,957,366 $5,031,671
Guaranty Fund.............................. 1,022 154,158 155,180
------- ---------- ----------
Total...................................... $75,327 $5,111,524 $5,186,851
======= ========== ==========
6. SEGMENT REPORTING
The Company has two business segments: (1) Open Outcry and (2) Electronic
Trading and Clearing.
Open Outcry is the trading and clearing of NYMEX Division and COMEX
Division futures and options contracts which are traded on the trading floor of
the Exchange. Electronic Trading and Clearing consists of trades which are
executed and/or cleared through NYMEX ACCESS(R), NYMEX ClearPort(SM) Trading and
NYMEX ClearPort(SM) Clearing systems.
8
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
Financial information relating to these business segments is set forth
below:
ELECTRONIC TRADING
OPEN-OUTCRY AND CLEARING TOTAL
------------------ ------------------ ------------------
3 MOS. 9 MOS. 3 MOS. 9 MOS. 3 MOS. 9 MOS.
(IN THOUSANDS) ------- -------- ------- -------- ------- --------
Three and Nine Months Ended
September 30, 2003:
Operating revenues....... $39,852 $117,456 $5,996 $19,054 $45,848 $136,510
Operating expenses....... 40,522 116,691 1,648 4,144 42,170 120,835
Operating (loss)
income................ (670) 765 4,348 14,910 3,678 15,675
Investment income, net... 643 3,393 -- -- 643 3,393
Interest expense......... 1,823 5,468 -- -- 1,823 5,468
Depreciation and
amortization, net..... 4,421 12,884 474 1,476 4,895 14,360
Income tax (benefit)
expense............... (718) (580) 1,678 6,710 960 6,130
Net (loss) income........ $(1,132) $ (730) $2,670 $ 8,200 $ 1,538 $ 7,470
Three and Nine Months Ended
September 30, 2002:
Operating revenues....... $41,431 $123,049 $4,312 $12,858 $45,743 $135,907
Operating expenses....... 34,149 95,449 2,506 11,898 36,655 107,347
Operating income......... 7,282 27,600 1,806 960 9,088 28,560
Investment income, net... 2,043 4,889 -- -- 2,043 4,889
Interest expense......... 1,875 5,625 -- -- 1,875 5,625
Depreciation and
amortization, net..... 3,288 9,473 2,037 5,743 5,330 15,231
Income tax expense....... 3,564 12,951 863 463 4,427 13,414
Net income............... $ 3,886 $ 13,913 $ 943 $ 497 $ 4,829 $ 14,410
7. 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
descriptions of legal proceedings and litigation to which the Company is a party
as of September 30, 2003. Although there can be no assurance as to the ultimate
outcome, the Company has denied, or believes it has a meritorious defense 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 against the Company cannot be predicted
with certainty, it is the opinion of management that, after consultation with
outside legal counsel, the resolution of these matters, 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:
eSpeed, Inc. and Electronic Trading Systems Corporation. v. New York
Mercantile Exchange. This action was originally filed in the United States
District Court for the Northern District of Texas (Dallas Division) and is
now pending in 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, in which the
plaintiff alleges that it is the owner of United States Patent No.
4,903,201 entitled "Automated Futures Trade Exchange" and that NYMEX
Exchange is infringing
9
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
this patent through use of its electronic trading system. The plaintiff
seeks an unspecified amount of royalties. The Markman hearing was held on
April 18, 2002. On June 26, 2002, the Court issued a decision in which it
construed more broadly the meaning of certain elements of the patent claims
than those constructions proposed by the Exchange. This decision may limit
the scope of the arguments that the Exchange may have respecting
non-infringement.
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, in which the 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
plaintiff filed a Note of Issue on or about September 27, 2002.
New York Mercantile Exchange v. IntercontinentalExchange, Inc. On November
20, 2002, NYMEX Exchange commenced an action in United States District
Court for the Southern District of New York against
IntercontinentalExchange, Inc. ("ICE"). NYMEX Exchange alleges claims for
(a) copyright infringement by ICE arising out of ICE's uses of certain
NYMEX Exchange settlement prices; (b) service mark infringement by reason
of use by ICE of the service marks NYMEX and NEW YORK MERCANTILE EXCHANGE,
(c) violation of trademark anti-dilution statutes, and (d) interference
with contractual relationships. On January 6, 2003, ICE served an Answer
and Counterclaims, in which ICE makes five counterclaims against NYMEX
Exchange principally alleging violations of U.S. antitrust laws, including
those relating to monopolistic behavior based upon access to NYMEX Exchange
settlement prices, restraint of trade and tying of trade execution and
clearing services. The counterclaims request damages and trebled damages in
amounts not specified yet by ICE in addition to injunctive and declaratory
relief. NYMEX Exchange's response to the counterclaims was served on
February 26, 2003. On August 11, 2003, the Court issued an opinion
dismissing certain counterclaims and one affirmative defense, with leave to
replead. On about August 28, 2003 the NYMEX Exchange was served with ICE's
First Amended Counterclaims in which ICE makes four counterclaims against
NYMEX Exchange principally alleging violations of U.S. antitrust laws,
including claims regarding monopoly leveraging and sham litigation. On
about September 2, 2003 ICE moved to dismiss NYMEX Exchange's first cause
of action (copyright infringement). NYMEX Exchange's motion to dismiss the
counterclaims and its opposition to ICE's motion to dismiss the copyright
infringement claim was served on October 30, 2003.
Financial Guarantees
The Company serves a clearinghouse function, standing as a financial
intermediary on every open futures and options transaction cleared. Through its
clearinghouse, the Exchange maintains a system of guarantees for performance of
obligations owed to buyers and sellers. In the event of a customer or clearing
member default, the Exchange draws on Clearing deposits and the Guaranty funds,
to satisfy the obligations under the applicable contract. To the extent that
funds are not otherwise available from these sources to satisfy the obligations
under the applicable contract, the Exchange can assess its clearing members for
the balance of the financial obligations. As of September 30, 2003, there were
no clearing members in default.
The Company has provided financial guarantees and pledged collateral with
one of its banks relating to a membership seat financing program. Under this
program, members may borrow from the lending financial institution up to a
specified percentage of the purchase price of their seats. The Company
guarantees all loans under this program and must hold collateral, in the form of
pledged securities, at the bank in an amount equal to 118% of the outstanding
loan balances. As of September 30, 2003 and December 31, 2002 the amounts of
outstanding guarantees under this program were $9.6 million and $5.0 million.
10
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
There were no events of default during the third quarter of 2003 in either
arrangement discussed above in which a liability should be recognized in
accordance with FIN 45. As such, the adoption of this pronouncement had no
impact on the Company's unaudited condensed consolidated results of operations,
financial position, or cash flows, during the three and nine-months ended
September 30, 2003.
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 financial
condition and results of operations of the Company during the three and
nine-months ended September 30, 2003. 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
Certain information in this report (other than historical data and
information) constitutes forward-looking statements regarding events and trends
that may affect the Company's future operating results and financial position.
The words "estimate," "expect," "intend" and "project," as well as other words
or expressions of similar meaning, are intended to identify forward-looking
statements. Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date of this quarterly report on Form
10-Q. These statements are based on current expectations. Assumptions are
inherently uncertain and are subject to risks that should be viewed with
caution. Actual results and experience may differ materially from
forward-looking statements as a result of many factors, including: changes in
general economic, political and industry conditions in various markets in which
the Company's contracts are traded, increased competitive activity, fluctuations
in prices of the underlying commodities as well as for trading floor
administrative expenses related to trading and clearing contracts, the ability
to control costs and expenses, changes to legislation or regulations, protection
and validity of our intellectual property rights and rights licensed from
others, and other unanticipated events and conditions. It is not possible to
foresee or identify all such factors. The Company assumes no obligation to
update publicly any forward-looking statements.
Business Overview
NYMEX Holdings, Inc. ("NYMEX Holdings") was incorporated in 2000 as a stock
corporation in Delaware, and is the successor to the New York Mercantile
Exchange that was established in 1872. The two principal operating subsidiaries
of NYMEX Holdings are the New York Mercantile Exchange, Inc. ("NYMEX Exchange"
or "NYMEX Division") and the Commodity Exchange, Inc. ("COMEX" or "COMEX
Division"), which is organized as a wholly-owned subsidiary of NYMEX Division.
Where appropriate, each NYMEX Exchange 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."
The Company facilitates the buying and selling of energy and metal
commodities for future delivery under rules intended to protect the interests of
market participants. The Company provides liquid marketplaces where physical
commodity market participants can manage future price risk and, through the
Company's clearing operations, mitigate counter-party credit risk. Through
real-time and delayed dissemination of its transaction prices, the Company
provides price discovery and transparency to market participants, further
enhancing liquidity in the energy and metals markets. To enhance its markets and
provide market participants additional mechanisms to manage risk, the Company
continuously offers new products, distribution services and clearing services.
The Company does not own commodities, trade for its own account, or otherwise
engage in market activities.
The Company's NYMEX Division provides a marketplace for trading energy
futures and options contracts. Its COMEX Division provides a marketplace for
trading precious and base metals futures and options contracts. The NYMEX
Division's principal markets include crude oil, natural gas, heating oil and
unleaded gasoline products. The COMEX Division's principal markets include gold,
silver and high grade copper products. The Company provides the physical
facilities for an open-outcry auction market. The open outcry market operates
during regular business hours, and trading activities in this market are, for
purposes of this management discussion, referred to as floor trading. Through
its NYMEX ACCESS(R) and NYMEX ClearPort(SM) Trading technology, the Company
provides market participants the ability to conduct after-hours and electronic
trading for floor-based products as well as 23 hours per day trading for
additional
12
products. While the Company's primary electronic trading venue is NYMEX
ACCESS(R), the Company continues to expect that NYMEX ClearPort(SM) Trading will
become the mechanism through which all electronic trading on the Company's
exchanges is conducted. The Company provides clearing services for all trades
executed through its floor trading and electronic trading venues. Additionally,
the Company's NYMEX ClearPort(SM) Clearing Services allows bilateral trades
negotiated in the over-the-counter markets to be transferred to the Company as
futures contracts for clearing.
Market data information relating to contracts on the Company's exchanges is
disseminated to vendors and then redistributed to market participants and
others. The level of market data fees correlates to the number of vendors and
end users receiving data. The Company relies on its market data vendors to
supply accurate information regarding the number of subscribers accessing the
Company's market data information. The Company audits its market data vendors on
a periodic basis.
MARKET CONDITIONS
Total futures and options trading and clearing volumes increased 2.6% in
the third quarter and increased 3.1% for the nine-months ended September 30,
2003 from the comparable periods of 2002. Volumes for metals contracts traded on
the COMEX Division increased from the comparable periods in 2002. Declines in
floor-traded energy contracts on the NYMEX Exchange were partially offset by
energy contract volume cleared through NYMEX ClearPort(SM) Clearing Services.
NYMEX ClearPort(SM) Clearing Services was launched during the second quarter of
2002 and gained significant volume during the first nine-months of 2003.
Energy Markets -- NYMEX Division
Total futures and options contracts executed on the NYMEX Division floor
and through NYMEX ACCESS(R) decreased 11.0% to 25.7 million contracts and 7.3%
to 77.5 million contracts in the quarter and nine-month periods ended September
30, 2003 from the comparable periods of 2002. During the third quarter of 2003,
aggregate volumes for petroleum-related contracts declined primarily due to the
stabilization of the political situation in Iraq and subsiding uncertainty with
regard to world production associated with global tensions.
A relatively mild summer across the United States, anticipation for normal
winter temperatures, and the contraction of traditional market participants in
the energy sector caused Natural Gas volume to decline during the nine-month
period ended September 30, 2003 from the comparable period a year ago.
Higher refining margins for both Unleaded Gasoline and Heating Oil played a
significant role in explaining the nine-month increase in futures volume. A
general easing of world tensions and production uncertainty was offset by
slowing demand. Various NYMEX initiatives, including the Exchange of Futures for
Swaps ("EFS") and NYMEX ClearPort Clearing(SM) mechanisms introduced in Natural
Gas in November 2002 and May 2002 respectively, helped mitigate the downturn in
floor activity.
The following table sets forth transaction volumes for the Company's major
energy futures and options products traded on the NYMEX Exchange floor and
through NYMEX ACCESS(R).
PERCENTAGE CHANGE
3Q03 3Q02 -------------------------
QUARTERLY COMPARISON FUTURES OPTIONS TOTAL FUTURES OPTIONS TOTAL FUTURES OPTIONS TOTAL
-------------------- ---------- --------- ---------- ---------- --------- ---------- ------- ------- -----
Light Sweet Crude......... 10,959,153 2,015,453 12,979,606 11,287,069 2,735,166 14,022,235 -2.9% -26.3% -7.5%
Henry Hub Natural Gas..... 4,362,736 1,904,373 6,267,109 6,371,757 2,724,339 9,096,096 -31.5% -30.1% -31.1%
Heating Oil............... 2,859,805 144,519 3,004,324 2,459,220 156,983 2,616,203 16.3% -7.9% 14.8%
New York Unleaded
Gasoline................ 2,952,024 140,817 3,092,841 2,728,995 143,531 2,872,526 8.2% -1.9% 7.7%
13
PERCENTAGE CHANGE
3Q03 3Q02 -------------------------
YEAR-TO-DATE COMPARISON FUTURES OPTIONS TOTAL FUTURES OPTIONS TOTAL FUTURES OPTIONS TOTAL
----------------------- ---------- --------- ---------- ---------- --------- ---------- ------- ------- -----
Light Sweet Crude......... 33,919,385 7,733,869 41,653,254 33,770,182 8,438,165 42,208,347 .4% -8.3% -1.3%
Henry Hub Natural Gas..... 14,196,434 6,121,814 20,318,248 18,978,788 8,731,198 27,709,986 -25.2% -29.9% -26.7%
Heating Oil............... 8,696,995 468,608 9,165,603 7,507,988 412,763 7,920,751 15.8% 13.5% 15.7%
New York Unleaded
Gasoline................ 8,772,549 534,328 9,306,877 8,050,375 581,121 8,631,496 8.9% -8.1% 7.8%
Metals Markets -- COMEX Division
Compared to the comparable periods in 2002, total futures and options
trading volume for COMEX Division increased 57.0% to 6.8 million contracts in
the third quarter of 2003, and increased 35.7% to 17.4 million for the
nine-months ended September 30, 2003.
Gold trading activity soared year-to-date in 2003, with futures increasing
34.0% and options increasing 126.1% from the comparable period a year ago. The
increase in the Gold contract volume was driven in part, by world tensions, a
rebounding economy, and a weakening U.S. currency. Silver futures activity
increased 25.8% in the nine-months ended September 30, 2003 compared to the same
period a year ago. Accelerated economic growth and a weaker U.S. currency
propelled the increase for this metal which serves both as an industrial and
precious metal. Copper futures volume experienced strong growth year-to-date
2003. Futures volume rose nearly 10% over last year's third quarter. Increased
global industrial production, particularly in the Far East, was the primary
reason for this increase.
The following table sets forth trading volumes for the Company's major
metals futures and options products.
PERCENTAGE CHANGE
3Q03 3Q02 -------------------------
QUARTERLY COMPARISON FUTURES OPTIONS TOTAL FUTURES OPTIONS TOTAL FUTURES OPTIONS TOTAL
-------------------- --------- --------- --------- --------- ------- --------- ------- ------- -----
Gold...................... 3,063,106 1,544,413 4,607,519 2,206,536 465,064 2,671,600 38.8% 232.1% 72.5%
Silver.................... 1,186,201 175,327 1,361,528 742,330 116,871 859,201 59.8% 50.0% 58.8%
High Grade Copper......... 773,369 9,007 782,376 762,674 8,931 782,376 1.4% 0.9% 1.4%
PERCENTAGE CHANGE
3Q03 3Q02 -------------------------
YEAR-TO-DATE FUTURES OPTIONS TOTAL FUTURES OPTIONS TOTAL FUTURES OPTIONS TOTAL
------------ --------- --------- --------- --------- --------- --------- ------- ------- -----
Gold..................... 8,970,852 3,214,660 12,185,512 6,695,917 1,421,938 8,117,855 34.0% 126.1% 50.1%
Silver................... 3,022,618 387,848 3,410,466 2,402,456 447,375 2,849,831 25.8% -13.3% 19.7%
High Grade Copper........ 2,322,554 24,732 2,347,286 2,118,274 25,525 2,143,799 9.6% -3.1% 9.5%
Results of Operations
For the third quarter and nine-months ended September 30, 2003
Net income, as well as basic and diluted earnings per share, decreased 68%
and 48% in the three and nine-month periods ended September 30, 2003, from the
comparable periods in 2002.
Revenue
The Company's principal sources of revenues are clearing and transaction
fees derived from trades executed on its exchanges and cleared through its
clearinghouse, and market data fees derived from the dissemination of the
Company's futures and options contract information. Total operating revenues
were slightly higher in the three and nine-month periods ended September 30,
2003 than the comparable periods in 2002.
Clearing and Transaction Fees
The levels of clearing and transaction fees are primarily dependent upon
the volumes of trading activity conducted on the Company's exchanges and cleared
by the Company's clearinghouse. Clearing and transaction fees decreased 5% in
the third quarter and 3% in the nine-month period ended September 30, 2003
14
from the comparable periods of 2002. The decrease in the third quarter was
primarily due to an increase in the amount of fees refunded to members under the
Company's proprietary fee reduction program. Partially offsetting this decline
were revenues from contracts cleared through NYMEX ClearPort(SM) Clearing
Services. The decrease in the nine-months ended September 30, 2003 was driven by
an increase in the amount of fees refunded to members under the proprietary fee
reduction program, which was partially offset by revenues from increased trading
and clearing volumes. Average clearing and transaction fee revenue per contract
was $0.98 and $1.06 in the third quarter of 2003 and comparable period of 2002.
For the nine-month periods ended September 30, 2003 and 2002, average revenue
per contract was $1.03 and $1.10. The Company charges higher fees for electronic
trading than for floor trading and NYMEX ClearPort(SM) Clearing. During 2003,
the Company increased the level of fees refunded to members through its
proprietary fee reduction program. The effect of this increase offsets growth in
average revenue per contract that resulted from higher proportions of electronic
trading and clearing.
In September 2003, the Company announced that effective October 1, 2003,
the level of fees paid to NYMEX Division members under its proprietary fee
reduction program would be reduced by 50%, and that the program in its current
form would be eliminated on December 31, 2003. It is expected that the reduction
and elimination of this will result in increased levels of clearing and
transaction fees. Although the current program is being eliminated, the Company
may introduce similar programs in the future.
Market Data
Market data revenues consist primarily of fees charged to market data
subscribers for the use of the Company's futures and options contract
information. These fees are charged on a per-subscriber basis and fluctuate as
the number of subscribers change. Market data revenues decreased 7% in the third
quarter of 2003 and 3% for the nine-month period ended September 30, 2003, from
the comparable periods of 2002 as a result of a decline in the number of
subscriber units.
Other Revenue
Other revenue increased 109% and 87% in the three and nine-month periods
ended September 30, 2003 from the comparable periods of 2002. The increase was
primarily due to a large compliance fine levied on one of the Company's clearing
members during the third quarter 2003 and rental income from a lease agreement
between the Company and the New York Board of Trade ("NYBOT").
Operating Expenses
Total operating expenses increased 15% and 13% in the three and nine-month
periods ended September 30, 2003 from the comparable periods of 2002.
Salaries and employee benefits increased 22% and 19% in the three and
nine-month periods ended September 30, 2003 from the comparable periods in 2002.
The increases were due to an increase in employee bonus accruals, severance
incurred in the third quarter of 2003, higher staffing levels and lower levels
of capitalized compensation expense related to internal software development
activities.
Occupancy and equipment expenses increased 22% and 18% in the three and
nine-month periods ended September 30, 2003 from the comparable periods in 2002,
primarily due to rent expense for the Company's new disaster recovery site.
Professional services increased 12% and 14% in the three and nine-month
periods ended September 30, 2003 from the comparable periods in 2002. The
increases were primarily due to the Company's involvement in certain ongoing
litigation and additional expenses associated with the reconfiguration of the
COMEX Division trading floor to accommodate NYBOT's trading operation.
General and administrative expenses increased 45% and 53% in the three and
nine-month periods ended September 30, 2003. The increases were primarily due to
the implementation of the certain programs designed to provide incentives to
third parties to place business with the Company in 2003. These programs were
not in place in 2002. Also contributing to the increase were litigation-related
expenses and higher insurance costs
15
related to increases in property insurance premiums, which were driven by a
weakened insurance market subsequent to the September 11, 2001 terrorist
attacks.
Depreciation and amortization of property and equipment, net of deferred
credit amortization, decreased by 8% and 6% in the three and nine-month periods
ended September 30, 2003 from the comparable periods in 2002. The decreases were
primarily due to lower amortization of capitalized software development costs.
During 2002, the Company wrote off capitalized computer software that management
deemed to have no meaningful remaining useful life.
Telecommunications increased by 191% and decreased 34% in the three and
nine-month periods ended September 30, 2003 from the comparable periods in 2002.
The increase in the third quarter was due primarily to the recognition in the
third quarter of 2002 of a credit which was recorded when the Company realized a
more favorable charge than it had anticipated for the termination of certain
telecommunications services.
For the nine-months ended September 30, 2002, the Company recognized a net
charge related to the termination of these services. Telecommunication expenses
for the nine-month period ended September 30, 2003 declined due to the absence
of this termination charge. An increase in data communications expense related
to the Company's new business recovery site, partially offset this reduction in
telecommunications costs.
Marketing and other expenses decreased 33% in the three month period ended
September 30, 2003 from the comparable periods in 2002. The decrease was
primarily due to larger advertising expenditures in the third quarter of 2002
due to the launch of NYMEX ClearPort(SM) and e-miNY initiatives. These costs
increased by 4% during the nine-month period due primarily to an increase, in
the fourth quarter of 2002, in the Company's contribution toward member medical
benefits.
Other Income
Investment income, net of investment advisory fees, decreased 69% in the
quarter and 31% in the nine-month period ended September 30, 2003 from the
comparable periods in 2002. The Company's investment portfolio is invested
principally in municipal bonds. Portfolio market values were unfavorably
impacted during the third quarter of 2003 due to the large sell off of bonds.
Unrealized losses at September 30, 2003 were the primary reason for the quarter
and year to date declines.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 45.1% and 48.2% for the nine-months of
2003 and 2002. The effective tax rate declined in 2003 due to a higher
proportion of tax-exempt earnings to pre-tax income.
FINANCIAL CONDITION AND CASH FLOWS
Liquidity and Capital Resources
The Company has made, and expects to continue to make, significant
investments in technology. Capital expenditures were $3.7 million during the
third quarter of 2003 and $10.0 million year to date. Future cash flows will
benefit from the occupancy of NYBOT in the Company's headquarters building in
the third quarter of this year. The Company had $116.3 million in cash, cash
equivalents, reverse repurchase agreements and marketable securities at
September 30, 2003. On April 14, 2003, the Exchange received a long-term AA+ and
a short-term A-1+ counter-party credit rating from Standard & Poor's Rating
Services ("S&P").
16
Cash Flow
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2003 2002
(IN THOUSANDS) -------- --------
Net cash provided by (used in):
Operating activities...................................... $ 29,077 $ 41,300
Investing activities...................................... (19,541) (44,920)
Financing activities...................................... (7,500) --
-------- --------
Net increase (decrease) in cash and cash equivalents........ $ 2,036 $ (3,620)
======== ========
Net cash provided by operating activities was $29.1 million, driven by net
income before non-cash depreciation expense, capital asset disposition losses
and the provision for income taxes.
Investing activities in 2003 included the ongoing investment of operating
cash flows in the Company's investment portfolio and the acquisition of certain
assets of TradinGear.com ("TG"), a trading software development and licensing
company. The primary asset purchased was TG's trade-matching engine, which the
Company had been licensing from TG. The Company intends to use this software as
the foundation for its electronic trading strategy, NYMEX ClearPort(SM) Trading.
In January 2003, the Company distributed to its shareholders the $5 million
dividend it had declared in December 2002. On July 9, 2003, the Company declared
a $2.5 million dividend to shareholders of record as of July 15, 2003, which was
paid on August 4, 2003.
Working Capital
(IN THOUSANDS)
----------------------------------
AT SEPTEMBER 30, AT DECEMBER 31,
2003 2002
---------------- ---------------
Current assets......................................... $236,228 $212,709
Current liabilities.................................... 139,764 119,697
-------- --------
Working capital........................................ $ 96,464 $ 93,012
======== ========
Current ratio.......................................... 1.69 1.78
Current assets at September 30, 2003 increased 11% from year-end 2002 due
to increases in securities purchased under agreements to resell, clearing
deposits and guaranty funds, and other current assets. Clearing deposits and
guaranty funds represent the cash component of clearing member deposits into the
guaranty funds, which provide capital for the Company's clearing business, and
the cash component of house and customer margin deposits posted by clearing
members with the Company's clearinghouse. The Company may invest this cash,
subject to significant restrictions, for its own benefit and, therefore,
reflects these funds as current income-producing assets with the equivalent
offsetting liabilities to the respective clearing members.
Current liabilities at September 30, 2003 increased by 17%, from year-end
2002, primarily due to accrual of bonus compensation, which is paid in December,
severance costs incurred during 2003 as well as a rise in income taxes payable.
Future Cash Requirements
As of September 30, 2003, the Company had long-term debt of $91.6 million
and short-term debt of $2.8 million. This debt consisted of the following:
- $25.4 million of 7.48% notes, of which $2.8 million is short term, with a
remaining ten-year principal payout,
- $54 million of 7.75% notes with an eleven-year principal payout beginning
in 2011, and
- $15 million of 7.84% notes with a five-year principal payout beginning in
2022.
17
The Company would incur a redemption premium should it choose to pay off
any debt series prior to its maturity. Management believes that the economic
benefit from refinancing at a lower rate would be offset by the redemption
penalty incurred. These notes contain certain limitations on the Company's
ability to incur additional indebtedness.
In connection with its operating activities, the Company enters into
certain contractual obligations. The Company's material contractual cash
obligations include long-term debt, operating leases and other contracts.
A summary of the Company's future cash payments associated with its
contractual cash obligations outstanding as of September 30, 2003 as well as an
estimate of the timing in which these commitments are expected to expire, are
set forth on the following table below (in thousands):
PAYMENTS DUE BY PERIOD
-------------------------------------------------------
LESS THAN AFTER 5
CONTRACTUAL OBLIGATION 1 YEAR 1-3 YEARS 4-5 YEARS YEARS TOTAL
---------------------- --------- --------- --------- -------- --------
Long-term debt principal........... $ 2,817 $ 5,634 $ 5,634 $ 80,315 $ 94,400
Debt interest...................... 7,153 13,674 12,831 56,666 90,324
Operating leases................... 2,279 5,435 5,171 6,555 19,440
Other long-term obligations(1)..... 934 2,243 2,921 6,218 12,316
------- ------- ------- -------- --------
Total.............................. $13,183 $26,986 $26,557 $149,754 $216,480
======= ======= ======= ======== ========
---------------
(1) Subordinated commitment -- COMEX Members' Recognition and Retention Plan.
The table above does not include the Company's financial guarantees under
the "Seat Financing Program" since the Company has the right to liquidate the
member's interests in case the member defaults on the loan.
The Company and NYBOT entered into a lease that became effective on
November 20, 2002. The rent commencement date for the trading floor space was
July 1, 2003. The rent commencement date for the office space was March 2003.
The Company believes that its cash flows from operations and existing
working capital will be sufficient to meet its needs for the foreseeable future,
including capital and operating expenditures associated with the development of
its electronic trading strategy and other initiatives. In addition, the Company
has the ability, and may seek, to raise capital through issuances of debt or
equity in the private and public capital markets.
On May 16, 2003, the Company integrated its NYMEX Division and COMEX
Division clearing operations. In conjunction with this integration, the
individual NYMEX Division and COMEX Division guaranty funds were combined, and
the Company obtained a $100 million default insurance policy to further protect
the Exchange and its clearing members from a clearing member default.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION
Clearing and Transaction Revenues
The largest source of the Company's operating revenues are clearing and
transaction fees. These fees are recognized as revenue in the same period that
trades are effectuated on the Company's exchanges. Clearing and transaction fees
receivable are monies due the Company from clearing member firms. Exposure to
losses on receivables is principally dependent on each member firm's financial
condition. Members' equity interests collateralize fees owed to the Company. At
the end of September 30, 2003 and December 31, 2002, no clearing and transaction
fees receivable balance was greater than the member's equity interests.
Management does not believe that a concentration of credit risk exists from
these receivables. The Company retains the right to liquidate a member's equity
interest in order to satisfy its receivable.
18
Clearing and transaction fees receivable are carried net of allowances for
member credits, which are based upon expected billing adjustments. Allowances
for member credits of $500,000 were recorded as a reduction of clearing and
transaction fees receivable at September 30, 2003 and December 31, 2002. The
Company believes the allowances are adequate to cover member credits. The
Company also believes the likelihood of incurring material losses due to
collectibility is remote and, therefore, no allowance for doubtful accounts is
necessary.
Market Data Revenue
The Company provides information to subscribers regarding futures and
options contracts traded on the Exchange. As is common business practice in the
industry, fees are generally remitted to the Exchange by market data vendors on
behalf of subscribers. Revenues are accrued for the current month based on the
last month reported. The Company conducts periodic audits of the information
provided, and assesses, where appropriate based on audit findings, additional
fees.
Capitalization of Internally-Developed Software
The costs incurred for the development of computer software are evaluated
on a project-by-project basis and capitalized in accordance with Statement of
Position 98-1. Projects are amortized over two to five-year periods.
Deferred Credits
In 1995, the Company secured a grant of $128.7 million from the New York
City Economic Development Corporation and the Empire State Development
Corporation ("ESDC", formerly known as the New York State Urban Development
Corporation) for construction of its corporate headquarters and trading
facility. The grant is being recognized in income on the same basis as, and is a
reduction to, the depreciation of the facility.
In 2002, the Company entered into an agreement and received a $5 million
grant from the ESDC. This agreement requires the Company to maintain certain
annual employment levels, and the grant is subject to recapture amounts, on a
declining scale, over time. The grant is being recognized in income over the
term of the recapture schedule.
Recent Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standard ("SFAS") No.
145, which rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment
of Debt, SFAS No. 44, Accounting for Intangible Assets of Motor carriers, and
SFAS No. 64, Extinguishment of Debt Made to Satisfy Sinking-Fund Requirement
("SFAS 145"). SFAS No. 145 also amends SFAS No. 13, Accounting for Leases, to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. As a
result of the rescission of SFAS No. 64, the criteria in Accounting Principles
Board ("APB") No. 30 will be used to classify gains and losses from debt
extinguishment. SFAS No. 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meaning, or
describe their applicability under changed conditions. SFAS No. 145 became
effective for the Company as of January 1, 2003. The adoption of SFAS No. 145
had no impact on the Company's consolidated results of operations, financial
position, or cash flows.
The Company adopted SFAS No. 146, Accounting for Costs Associated with Exit
or Disposal Activity, effective January 1, 2003. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities, and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring), which
previously governed the accounting treatment for restructuring activities. SFAS
No. 146 applies to costs associated with an exit activity covered by SFAS No.
144. Those costs include, but are not limited to, the following: (1) termination
benefits under the terms of
19
a benefit arrangement that, in substance, is not an ongoing benefit arrangement
or an individual deferred-compensation contract, (2) costs to terminate a
contract that is not a capital lease, and (3) costs to consolidate facilities to
relocate employees. SFAS No. 146 does not apply to costs associated with the
retirement of long-lived assets covered by SFAS No. 143. The adoption of SFAS
No. 146 had no impact on the Company's consolidated results of operations,
financial position or cash flows.
The Company adopted SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity during the third
quarter of 2003. This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). The adoption of SFAS No. 150 had no impact on the Company's
condensed consolidated results of operations, financial position, or cash flows.
The Company adopted Financial Accounting Interpretation ("FIN") No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, effective January 1, 2003. FIN
No. 45 elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees, and standby letters of credit. It also clarifies that
at the time a company issues a guarantee, the company must recognize an initial
liability for the fair market value of the obligations it assumes under that
guarantee and must disclose that information in its interim and annual financial
statements. The initial recognition and measurement provisions of FIN No. 45
were applied prospectively to guarantees issued or modified after December 31,
2002. The adoption of FIN No. 45 did not have a material impact on the Company's
unaudited condensed consolidated results of operations, financial position or
cash flows.
BUSINESS HIGHLIGHTS
On July 21, 2003, the Company extended its agreement with Koch Supply &
Trading, LP, for Koch Metals to act as the specialist market maker for its
aluminum futures contract. Koch Metals, through its designated floor broker,
will maintain an orderly, two-sided market throughout the open outcry session
for aluminum futures.
On September 3, 2003, a NYMEX Division seat sold for a record $1,625,000,
topping the three seats that sold for $1,500,000 on August 20, 2003. Ownership
of a seat on the NYMEX Division also represents a share of common stock in NYMEX
Holdings, as well as a Class A membership on NYMEX Exchange.
On September 22, 2003, the Company announced that the 2 millionth Henry Hub
natural gas swap futures contract was posted for clearing through the NYMEX
Exchange ClearPort(SM) Clearing website. The Henry Hub natural gas swap is a
financially settled futures contract for natural gas transactions at the Henry
Hub, the principal pricing point for natural gas in North America. The contract
is one of 66 energy futures contracts that can be transacted off of the Exchange
and submitted to the Exchange clearinghouse.
On September 24, 2003, the Company announced a record 4,326 heating oil
futures contracts were traded on the NYMEX ACCESS(R) electronic trading system,
surpassing the previous record of 3,910 contracts traded in the February 27
overnight session.
On August 14 and 15, 2003, New York City experienced an electrical
blackout, which disrupted the Company's business. The blackout did not have a
material effect on the Company's unaudited condensed consolidated results of
operations, financial position or cash flows and the Company expects to be
reimbursed for these business losses incurred during this period from its
insurance carrier.
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
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financial statements include some amounts that are based on management's best
estimates and judgements, 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, and long term debt including expected
principal cash flows for the years 2003 through 2008 and thereafter (in
thousands).
PRINCIPAL AMOUNTS BY EXPECTED MATURITY
AT SEPTEMBER 30, 2003
WEIGHTED
AVERAGE
YEAR PRINCIPAL AMOUNT INTEREST RATE
---- ---------------- -------------
ASSETS
MUNICIPAL BONDS AND TREASURIES
2003........................................................ $ 355 3.43%
2004........................................................ $ 821 5.04%
2005........................................................ $ 2,998 4.49%
2006........................................................ $ 7,452 4.66%
2007........................................................ $ 10,886 4.64%
2008 and thereafter......................................... $ 35,637 4.40%
--------
Total....................................................... $ 58,149 N/A
Fair Value.................................................. $ 62,319 N/A
LIABILITIES
CORPORATE DEBT
2003........................................................ $ 2,817 7.69%
2004........................................................ $ 2,817 7.71%
2005........................................................ $ 2,817 7.71%
2006........................................................ $ 2,817 7.72%
2007........................................................ $ 2,817 7.73%
2008 and thereafter......................................... $ 80,281 7.74%
--------
Total....................................................... $ 94,366 N/A
Fair Value.................................................. $123,002 N/A
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, 2003 and the year ended
December 31, 2002, the Company had net investment income of $3.4 million and
$5.7 million. Accordingly, a substantial portion of the Company's investment
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 securities at September 30, 2003 and December 31, 2002 were $66.3 million
and $67.0 million. The change in fair value, using a hypothetical 10% decline in
prices, is estimated to be $6.6 million for September 30, 2003 and $6.7 million
for December 31, 2002. The
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Company also invests in U.S. government securities and reverse 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 unaudited
condensed consolidated balance sheets.
Debt. The interest rate on the Company's long-term debt is a weighted
average fixed rate of 7.69%. 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 interest rate 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, 2002.
Credit Risk
NYMEX Exchange's bylaws authorizes its Board of Directors to fix annual
dues of NYMEX Members and to levy assessments as it determines to be necessary.
Such dues and assessments are payable at such time as NYMEX's Board of Directors
may determine. The Company's Board of Directors may waive the payment of dues by
all NYMEX Members or by individual Members as it determines. COMEX's bylaws
provide its Board of Directors with similar powers relating to dues, assessments
and fees with respect to COMEX Members, provided that such dues and assessments
(or fee surcharges in lieu thereof) may not be imposed (other than in connection
with certain Merger-related events) without the consent of the COMEX Governors
Committee and that the ability of COMEX's Board of Directors to impose such fee
is subject to the limitations.
The Exchange, as a self-regulatory organization, has instituted detailed
risk-management policies and procedures to guard against default risk with
respect to contracts traded on the Exchange. The Exchange also has extensive
surveillance and compliance operations and procedures to monitor and to enforce
compliance with rules pertaining to the trading, position sizes and financial
condition of Members. As described herein, the Exchange has powers and
procedures designed to backstop contract obligations in the event that a
contract default occurs on the Exchange including authority to levy assessments
on any of the NYMEX Clearing Members if, after a default by another NYMEX
Clearing Member, there are insufficient funds available to cover a deficit. The
maximum assessment on each NYMEX Clearing Member is the lesser of $30 million or
40% of such NYMEX Clearing Member's capital. Prior to the integration of the
COMEX Division's clearing operations into the NYMEX Exchange clearinghouse, the
maximum assessment was the lesser of $15 million or 40% of the clearing member's
capital.
Despite the Exchange's authority to levy assessments or impose fees, there
can be no assurance that the relevant Members will have the financial resources
available to pay, or will not choose to be expelled from membership rather than
pay, any dues, fees or assessments. The Exchange believes that assessment
liabilities of a Member arising prior to expulsion are contractual in nature
and, accordingly, survive expulsion. In addition, the Exchange would have
recourse to such Member and the proceeds from the Exchange's sale of such
Member's seat to apply towards any outstanding obligations to the Exchange of
such Member. Recourse to a Member's seat, however, may not be of material value
in the case of large defaults that result in assessments greater in value than
the seat.
Moreover, despite the risk mitigation techniques adopted by, and the other
powers and procedures implemented by the Exchange, which are designed to, among
other things, minimize the potential risks associated with the occurrence of
contract defaults on the Exchange, there can be no assurance that these powers
and procedures will prevent contract defaults or will otherwise function to
preserve the liquidity of the Exchange. In the case of a contract default, to
the extent that funds are not otherwise available to the Exchange or the
Clearinghouse to satisfy the obligations under such contract, as a result of the
clearinghouse's
22
role as buyer to every seller and seller to every buyer of futures and options
contracts traded on the Exchange, the clearinghouse would be obligated to
perform such obligations.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of our disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) as of the end of the period covered by this quarterly
report (the "Evaluation Date"). Based upon such evaluation, such officers have
concluded that, as of the Evaluation Date, our disclosure controls and
procedures are effective in alerting them on a timely basis to material
information relating to the Company that is required to be included in our
periodic filings under such Exchange Act.
(b) Changes in Internal Controls. Since the Evaluation Date, there have
not been any significant changes in our internal controls that could
significantly affect such controls.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31 Certifications pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certifications pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
Not applicable
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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, 2003.
NYMEX HOLDINGS, INC.
By: /s/ LEWIS A. RAIBLEY, III
------------------------------------
Name: Lewis A. Raibley, III
Title: Duly Authorized Officer and
Principal Financial Officer
25