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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 JUNE 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 August 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 Six
Months Ended June 30, 2003 and June 30, 2002........... 2
Unaudited Condensed Consolidated Balance Sheets at June
30, 2003 and December 31, 2002......................... 3
Unaudited Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2003 and June 30,
2002................................................... 4
Notes to Unaudited Condensed Consolidated Financial
Statements for the Three and Six Months Ended June 30,
2003 and June 30, 2002................................. 5
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 19
ITEM 4. Controls and Procedures..................................... 21
PART II: OTHER INFORMATION
ITEM 1. Legal Proceedings........................................... 23
ITEM 2. Changes in Securities and Use of Proceeds................... 23
ITEM 3. Defaults Upon Senior Securities............................. 23
ITEM 4. Submission of Matters to a Vote of Security Holders......... 23
ITEM 5. Other Information........................................... 23
ITEM 6. Exhibits and Reports on Form 8-K............................ 23
Signatures.................................................. 24
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
2003 2002 2003 2002
-------- -------- ------- -------
OPERATING REVENUES:
Clearing and transaction fees, net of member fee
rebates........................................... $29,365 $37,536 $68,755 $70,467
Market data fees..................................... 7,926 8,132 16,320 16,444
Other, net of rebates................................ 3,302 1,570 5,143 3,016
------- ------- ------- -------
Total operating revenues..................... 40,593 47,238 90,218 89,927
------- ------- ------- -------
OPERATING EXPENSES:
Salaries and employee benefits....................... 12,700 10,488 25,595 21,860
Occupancy and equipment.............................. 6,864 6,086 13,901 11,932
General and administrative........................... 6,354 3,490 10,398 6,788
Professional services................................ 5,502 4,525 9,511 8,319
Depreciation and amortization of property and
equipment, net of deferred credit amortization.... 4,743 5,480 9,465 9,900
Telecommunications................................... 1,318 3,333 2,650 5,819
Loss on disposition of property and equipment, and
impairment of capitalized software................ 37 920 977 1,597
Marketing and other.................................. 3,242 2,420 5,724 4,240
------- ------- ------- -------
Total operating expenses..................... 40,760 36,742 78,221 70,455
------- ------- ------- -------
(LOSS) INCOME FROM OPERATIONS.......................... (167) 10,496 11,997 19,472
OTHER INCOME (EXPENSES):
Investment income, net............................... 2,064 2,037 2,750 2,846
Interest expense..................................... (1,823) (1,875) (3,645) (3,750)
------- ------- ------- -------
INCOME BEFORE (BENEFIT) PROVISION FOR INCOME TAXES..... 74 10,658 11,102 18,568
(BENEFIT) PROVISION FOR INCOME TAXES................... (103) 5,032 5,170 8,987
------- ------- ------- -------
NET INCOME............................................. 177 5,626 5,932 9,581
Retained earnings, beginning of period................. 13,978 4,879 8,223 924
------- ------- ------- -------
Retained earnings, end of period....................... $14,155 $10,505 $14,155 $10,505
======= ======= ======= =======
Net income per share (based on 816 shares)............. $ 217 $ 6,895 $ 7,270 $11,741
======= ======= ======= =======
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)
JUNE 30, DECEMBER 31,
2003 2002
-------- ------------
ASSETS
Cash and cash equivalents................................... $ 768 $ 1,014
Securities purchased under agreements to resell............. 44,683 40,760
Marketable securities, at market (cost of $65,794 at June
30, 2003 and $65,285 at December 31, 2002)................ 68,116 66,976
Clearing and transaction fees receivable, net............... 11,187 13,884
Clearing deposits and guaranty funds........................ 69,815 75,327
Other current assets........................................ 18,402 14,748
-------- --------
Total current assets................................. 212,971 212,709
Property and equipment, net................................. 218,881 223,878
Other assets................................................ 29,989 26,168
-------- --------
TOTAL ASSETS................................................ $461,841 $462,755
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued liabilities.................... $ 15,085 $ 16,036
Accrued salaries and related liabilities.................... 8,500 5,610
Income taxes payable........................................ 9,188 4,335
Clearing deposits and guaranty funds........................ 69,815 75,327
Other current liabilities................................... 14,814 18,389
-------- --------
Total current liabilities.............................. 117,402 119,697
Notes payable............................................... 91,551 91,551
Deferred credit -- grant for building construction.......... 113,673 114,745
Deferred income taxes....................................... 5,474 9,622
Subordinated commitment -- COMEX members' retention
program................................................... 11,440 11,038
Other non-current liabilities............................... 14,834 14,567
-------- --------
Total liabilities................................. 354,374 361,220
-------- --------
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........................................... 14,155 8,223
-------- --------
Total stockholders' equity........................ 107,467 101,535
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $461,841 $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)
SIX MONTHS ENDED
JUNE 30,
-------------------
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 5,932 $ 9,581
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of property and
equipment, net of deferred credit amortization........ 9,465 9,900
Deferred income taxes.................................. (4,341) 3,818
Loss on disposition of property and equipment, and
impairment of capitalized software.................... 977 1,597
(Increase) decrease in operating assets:
Marketable securities................................ (1,140) 4,506
Clearing and transaction fees receivable, net........ 2,697 (4,424)
Clearing deposits and guaranty funds................. 5,512 (58,169)
Other current assets................................. (3,677) 844
(Decrease) increase in operating liabilities:
Accounts payable and accrued liabilities............. (951) (6,499)
Accrued salaries and related liabilities............. 2,890 1,296
Income taxes payable................................. 4,853 5,457
Clearing deposits and guaranty funds................. (5,512) 58,169
Other current liabilities............................ 1,425 760
Subordinated commitment.............................. 402 664
Other non-current liabilities........................ 267 114
-------- --------
Net cash provided by operating activities............ 18,799 27,614
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (6,301) (8,225)
Increase in securities purchased under agreements to
resell................................................. (3,923) (22,100)
(Increase) decrease in other assets....................... (3,821) 199
-------- --------
Net cash used in investing activities................ (14,045) (30,126)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid............................................ (5,000) --
-------- --------
Cash used in financing activities.................... (5,000) --
-------- --------
Net decrease in cash and cash equivalents................... (246) (2,512)
Cash and cash equivalents, beginning of year................ 1,014 5,680
-------- --------
Cash and cash equivalents, end of period.................... $ 768 $ 3,168
======== ========
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 SIX MONTHS ENDED JUNE 30, 2003 AND JUNE 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.)
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.
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-
5
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 June 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 with, and is held in custody by, the Company's banks. The fair values
of such collateral at June 30, 2003 and December 31, 2002 were approximately
$44.7 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 $3.4 million and
$1.1 million for the three months ended June 30, 2003 and June 30, 2002, and
$8.1 million and $2.1 million for the six months ended June 30, 2003 and June
30, 2002. In the unaudited condensed consolidated statements of operations and
retained earnings, clearing and transaction fees are presented net of these fee
reductions.
6
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has several incentive programs that reduce certain member
operating costs. These incentive programs resulted in revenue reductions of
$385,000 and $333,000 for the three months ended June 30, 2003 and June 30,
2002, and $828,000 and $804,000 for the six months ended June 30, 2003 and June
30, 2002. In the unaudited condensed consolidated statements of operations and
retained earnings, other revenues are presented net of fee reductions related to
these programs.
The Company expanded its broker incentive program during the second quarter
of 2003. This program is designed to provide financial incentives to third party
intermediaries to place business with the Company using NYMEX ClearPort(sm)
clearing and execution facilities. Costs incurred under this program during the
second quarter of 2003 were $838,000.
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 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. Only those balances that earn interest
that the Company is entitled to retain are included in the accompanying
unaudited condensed consolidated financial statements. The following table below
reflects Clearing Deposits and Guaranty Fund balances held by the Company on
behalf of clearing members at June 30, 2003 and December 31, 2002.
7
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 2003
(IN THOUSANDS)
CASH AND MONEY MARKET FUNDS,
RESALE U.S. TREASURIES &
AGREEMENTS LETTERS TOTAL
---------- ------------------- ----------
Clearing Deposits.......................... $69,075 $5,961,723 $6,030,798
Guaranty Fund.............................. 740 148,806 149,546
------- ---------- ----------
Total...................................... $69,815 $6,110,529 $6,180,344
======= ========== ==========
DECEMBER 31, 2002
CASH AND MONEY MARKET FUNDS,
RESALE U.S. TREASURIES &
AGREEMENTS LETTERS OF CREDITS 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: Open Outcry and 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. 6 MOS. 3 MOS. 6 MOS. 3 MOS. 6 MOS.
(IN THOUSANDS) ------- ------- -------- -------- ------- -------
Three and Six Months Ended
June 30, 2003:
Operating revenues.......... $36,674 $80,432 $3,919 $9,786 $40,593 $90,218
Operating expenses.......... 39,794 75,725 966 2,496 40,760 78,221
Operating (loss) income..... (3,120) 4,707 2,953 7,290 (167) 11,997
Investment income, net...... 2,064 2,750 -- -- 2,064 2,750
Interest expense............ 1,823 3,645 -- -- 1,823 3,645
Depreciation and
amortization, net........ 4,269 8,463 474 1,002 4,743 9,465
Income tax (benefit)
expense.................. (1,476) 1,671 1,373 3,499 (103) 5170
Net (loss) income........... $(1,403) $ 2,141 $1,580 $3,791 $ 177 $ 5,932
Three and Six Months Ended
June 30, 2002:
Operating revenues.......... $42,651 $81,606 $4,587 $8,321 $47,238 $89,927
Operating expenses.......... 31,722 61,807 5,020 8,648 36,742 70,455
Operating income (loss)..... 10,929 19,799 (433) (327) 10,496 19,472
Investment income, net...... 2,037 2,846 -- -- 2,037 2,846
Interest expense............ 1,875 3,750 -- -- 1,875 3,750
Depreciation and
amortization, net........ 3,196 6,194 2,284 3,706 5,480 9,900
Income tax expense
(benefit)................ 5,236 9,145 (204) (158) 5,032 8,987
Net income (loss)........... $ 5,855 $ 9,750 $ (229) $ (169) $ 5,626 $ 9,581
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 June 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, 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:
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 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
9
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Financial Guarantees
The Company serves a clearinghouse function, standing as a financial
intermediary on every open futures and options transaction cleared. Through its
clearinghouses, 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 June 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 June 30, 2003 and December 31, 2002 the amounts of
outstanding guarantees under this program were $9.5 million and $5.0 million.
There were no events of default during the second 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 condensed consolidated results of operations, financial
position, or cash flows, during the second quarter of 2003.
8. SUBSEQUENT EVENTS
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.
10
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 six
months ended June 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. Its COMEX Division provides a marketplace for trading
precious and base metals futures and options. 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
11
trading for floor-based products as well as 23 hours per day trading for
additional products. 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 bi-annual basis. The audits include reviews of vendor entitlement processes,
technical infrastructure, billing systems and financial reconciliation
processes.
MARKET CONDITIONS
Total futures and options trading and clearing volumes decreased 11% in the
second quarter and increased 4% for the six months ended June 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 six months of 2003.
Energy Markets -- NYMEX Division
Total futures and options contracts executed on the NYMEX Division floor
and through NYMEX ACCESS(R) decreased 20% to 24.3 million contracts and 4% to
55.6 million contracts in the quarter and six month periods ended June 30, 2003
from the comparable periods of 2002. During the second quarter of 2003,
aggregate volumes for petroleum-related contracts declined due primarily to
lower volatility associated with the commencement of the war in Iraq. Volumes
for these contracts for the six months ended June 30, 2003 increased from the
comparable period of 2002 due to first quarter 2003 political tensions in oil
producing countries, and unusually cold Winter and Spring temperatures in the
Northeastern United States during 2003. The contraction of traditional market
participants in the energy merchant sector caused Natural Gas volume to
significantly decline in the quarter and six-month periods ended June 30, 2003
from the comparable periods of 2002. Natural Gas transactions cleared through
the Company's ClearPort(SM) Clearing Services substantially offset the declines
in Natural Gas trading volumes executed on the NYMEX Exchange floor and NYMEX
ACCESS(R) trading venues.
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
2Q03 2Q02 -------------------------
QUARTERLY COMPARISON FUTURES OPTIONS TOTAL FUTURES OPTIONS TOTAL FUTURES OPTIONS TOTAL
-------------------- ---------- --------- ---------- ---------- --------- ---------- ------- ------- -----
Light Sweet Crude......... 10,217,456 2,094,285 12,311,741 12,061,484 2,838,175 14,899,659 -15% -26% -17%
Henry Hub Natural Gas..... 4,427,801 1,893,775 6,321,576 6,614,797 3,070,666 9,685,463 -33% -38% -35%
Heating Oil............... 2,372,174 116,692 2,488,866 2,353,959 115,540 2,469,499 1% 1% 1%
New York Unleaded
Gasoline................ 2,786,821 159,331 2,946,152 2,838,973 238,558 3,077,531 -2% -33% -4%
PERCENTAGE CHANGE
2Q03 2Q02 -------------------------
YEAR-TO-DATE COMPARISON FUTURES OPTIONS TOTAL FUTURES OPTIONS TOTAL FUTURES OPTIONS TOTAL
----------------------- ---------- --------- ---------- ---------- --------- ---------- ------- ------- -----
Light Sweet Crude......... 22,960,232 5,718,416 28,678,648 22,483,328 5,702,999 28,186,327 2% 0% 2%
Henry Hub Natural Gas..... 9,833,698 4,217,441 14,051,139 12,607,520 6,006,859 18,614,379 -22% -30% -25%
Heating Oil............... 5,837,190 324,089 6,161,279 5,048,768 255,780 5,304,548 16% 27% 16%
New York Unleaded
Gasoline................ 5,820,525 393,511 6,214,036 5,321,380 437,590 5,758,970 9% -10% 8%
12
Metals Markets -- COMEX Division
Compared to the comparable periods in 2002, total futures and options
trading volume for COMEX Division increased 12% to 5.3 million contracts in the
second quarter of 2003, and increased 27% to 11.2 million for the six months
ended June 30, 2003. Increases in Gold and Silver contract volumes were driven
by weakness in the U.S. Dollar, which contributed to hedging activity. Increases
in Gold and Silver contract volumes for the six months ended June 30, 2003 were
also driven by political uncertainties in Iraq during the first quarter of 2003.
Increases in High Grade Copper contract volumes were driven, in part, by
residential construction in the United States.
The following table sets forth trading volumes for the Company's major
metals futures and options products.
PERCENTAGE CHANGE
2Q03 2Q02 -------------------------
FUTURES OPTIONS TOTAL FUTURES OPTIONS TOTAL FUTURES OPTIONS TOTAL
--------- ------- --------- --------- ------- --------- ------- ------- -----
Gold........................ 2,652,370 836,899 3,489,269 2,424,950 463,984 2,888,934 9% 80% 21%
Silver...................... 919,065 84,075 1,003,140 959,162 161,859 1,121,021 -4% -48% -11%
High Grade Copper........... 797,152 8,564 805,716 740,551 9,344 749,895 8% -8% 7%
PERCENTAGE CHANGE
2Q03 2Q02 -------------------------
FUTURES OPTIONS TOTAL FUTURES OPTIONS TOTAL FUTURES OPTIONS TOTAL
--------- --------- --------- --------- ------- --------- ------- ------- -----
Gold...................... 5,907,746 1,670,247 7,577,993 4,489,381 956,874 5,446,255 32% 75% 39%
Silver.................... 1,836,582 212,521 2,049,103 1,660,126 330,504 1,990,630 11% -36% 3%
High Grade Copper......... 1,549,185 15,725 1,564,910 1,355,600 16,594 1,372,194 14% -5% 14%
Results of Operations
For the second quarter and six-months ended June 30, 2003
Net income, as well as basic and diluted earnings per share, decreased 97%
and 38% in the three and six-month periods ended June 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 market data fees derived
from the dissemination of the Company's futures and options contract
information. Total operating revenues decreased 14% and remained virtually
unchanged in the three and six-month periods ended June 30, 2003 from 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 22% in
the second quarter and 2% in the six month period ended June 30, 2003 from the
comparable periods of 2002. The decrease in the second quarter was primarily due
to declines in the numbers of futures and options contracts executed through the
Company's floor trading and electronic trading venues and an increase in the
amount of fees refunded to members under the Company's proprietary fee reduction
program. Partially offsetting these declines were revenues from contracts
cleared through NYMEX Clearport(SM) Clearing Services. The decrease in the six
months ended June 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 volumes from all trading venues and
NYMEX ClearPort(SM) Clearing Services. Average clearing and transaction fee
revenue per contract was $0.92 and $1.07 in the second quarter of 2003 and
comparable period of 2002. For the six month periods ended June 30, 2003 and
2002, average revenue per contract was $0.97 and $1.05. The Company charges
higher fees for electronic trading than for floor trading. During 2003, the
Company increased the level of fees refunded to members
13
through its proprietary fee reduction program. This increase offset growth in
average revenue per contract that resulted from higher proportions of electronic
trading.
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 3% in the
second quarter of 2003 and remained relatively unchanged for the six month
period ended June 30, 2003, from the comparable periods of 2002.
Other Revenues
Other revenue increased 110% and 71% in the three and six-month periods
ended June 30, 2003 from the comparable periods of 2002. The increase was
primarily due to rental income from a lease agreement between the Company and
the New York Board of Trade ("NYBOT").
Operating Expenses
Total operating expenses increased 11% in the three and six-month periods
ended June 30, 2003 from the comparable periods of 2002.
Salaries and employee benefits increased 21% and 17% in the three and
six-month periods ended June 30, 2003 from the comparable periods in 2002. The
increases were due to an increase in employee bonus compensation, higher
staffing levels and lower levels of capitalized compensation expense related to
internal software development activities.
Occupancy and equipment expenses increased 13% and 17% in the three and
six-month periods ended June 30, 2003 from the comparable periods in 2002, due
primarily to rent expense for the Company's new disaster recovery site.
General and administrative expenses increased 82% and 53% in the three and
six-month periods ended June 30, 2003. The increases were primarily due to
litigation-related expenses and higher insurance costs related to increases in
property insurance premiums, which were driven by a weakened insurance market
subsequent to the September 11, 2001 terrorist attacks.
Professional services increased 22% and 14% in the three and six-month
periods ended June 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.
Depreciation and amortization of property and equipment, net of deferred
credit amortization, decreased by 13% and 4% in the three and six-month periods
ended June 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 decreased by 60% and 54% in the three and six-month
periods ended June 30, 2003 from the comparable periods in 2002. The decreases
were due to lower communications expenses to support the Company's NYMEX
ACCESS(R) electronic trading platform. NYMEX ACCESS(R)became internet-based
during the third quarter of 2001, eliminating expenses that supported direct
connectivity to its users. However, in 2002, the Company, incurred charges to
terminate the telecommunications agreement for this connectivity. An increase in
data communications expense related to the Company's new business recovery site,
partially offset the reduction in telecommunications costs.
Marketing and other expenses increased 34% and 35% in the three and
six-month periods ended June 30, 2003 from the comparable periods in 2002. The
increases were due primarily to an increase, in the fourth quarter of 2002, in
the Company's contribution toward member medical benefits.
14
Other Income
Investment income, net of investment advisory fees, increased 1% in the
quarter and decreased 3% in the six-month period ended June 30, 2003 compared to
the same periods in 2002. The Company's investment portfolio is invested
principally in municipal bonds. Portfolio market values were favorably impacted
by declining interest rates during all periods. Changes in investment income
levels are driven by the relative declines in interest rates during the
comparable periods of 2003 and 2002.
Provision for Income Taxes
The Company's effective tax rate was 46.6% and 48.4% for the six 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.
The Company's effective tax rate for the three-month period ended June 30,
2003 was negative due to the tax benefit related to tax-exempt income.
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. Capital expenditures were $4.7 million during the second quarter of 2003
and $6.3 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 $113.6 million in cash, cash equivalents, reverse
repurchase agreements and marketable securities at June 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").
Cash Flow
SIX MONTHS ENDED
JUNE 30,
---------------------
2003 2002
(IN THOUSANDS) --------- ---------
Net cash provided by (used in):
Operating activities...................................... $ 18,799 $27,614
Investing activities...................................... (14,045) (30,126)
Financing activities...................................... (5,000) --
-------- -------
Net decrease in cash and cash equivalents................... $ (246) $(2,512)
======== =======
Net cash provided by operating activities was $18.8 million, driven by net
income before non-cash depreciation expense, capital asset disposition losses
and the provision for income taxes.
Investment activities 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.
15
Working Capital
(IN THOUSANDS)
------------------------------
AT JUNE 30, AT DECEMBER 31,
2003 2002
------------ ---------------
Current assets............................................ $212,971 $212,709
Current liabilities....................................... 117,402 119,697
-------- --------
Working capital........................................... $ 95,569 $ 93,012
======== ========
Current ratio............................................. 1.81 1.78
Current assets at June 30, 2003 remained virtually unchanged from year-end
2002. Increases in securities purchased under agreements to resell were offset
by a decrease in clearing deposits and guaranty funds. 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 June 30, 2003 decreased by 2%, from year-end 2002,
primarily due to the $5 million dividend payment made in January, partially
offset by the increase in income taxes payable.
Future Cash Requirements
As of June 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.
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.
16
A summary of the Company's future cash payments associated with its
contractual cash obligations outstanding as of June 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 $ 80,281 $ 94,366
Debt interest...................... 3,629 13,885 13,042 59,768 90,324
Operating leases................... 4,353 6,001 5,249 10,086 25,689
Other long-term obligations(1)..... 749 1,919 2,480 7,041 12,189
------- ------- ------- -------- --------
Total.............................. $11,548 $27,439 $26,405 $157,176 $222,568
======= ======= ======= ======== ========
(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 June 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.
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 June 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.
17
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 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.
18
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
consolidated results of operations, financial position or cash flows.
BUSINESS HIGHLIGHTS
On May 16, 2003, the Company integrated the clearing operations for the
COMEX Division contracts into the NYMEX Exchange clearinghouse and strengthened
its system of financial guarantees by combining the previously separate guaranty
funds of its two divisions. In addition, the Company obtained a $100 million
default insurance policy.
On May 28, 2003, a NYMEX Division seat sold for a record $1,356,000.
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 June 5, 2003, the Company announced that the 3 millionth off-Exchange
contract was posted for clearing through the NYMEX Exchange
Clearport(sm)Clearing website, approximately one year after the system's launch.
Additionally, the slate of products available for trading on NYMEX Exchange
ClearPort(sm) Trading was expanded on June 29, 2003 to include the 16 remaining
natural gas basis, crude oil and refined product spread, and crude oil contracts
that were previously listed for clearing only. These contracts were among the 23
contracts originally listed on the system for clearing services on May 31, 2002.
The Tokyo Commodity Exchange (TOCOM) and NYMEX Exchange signed a memorandum
of understanding on June 9, 2003, for co-operation in the electronic trading of
energy and metals. The arrangement would, among other things, provide for the
electronic cross listing of products on the other exchange.
On July 9, 2003, and the Company declared a dividend of $2.5 million to be
distributed to stockholders of record as of July 15, 2003. Each stockholder
received $3,063.73 per share of the Company's common stock paid on August 4,
2003.
The Company expanded its broker incentive program during the second quarter
of 2003. This program is designed to provide financial incentives to third party
intermediaries to place business with the Company using NYMEX ClearPort(sm)
clearing and execution facilities.
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 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).
19
PRINCIPAL AMOUNTS BY EXPECTED MATURITY
AT JUNE 30, 2003
WEIGHTED
AVERAGE
YEAR PRINCIPAL AMOUNT INTEREST RATE
---- ---------------- -------------
ASSETS
MUNICIPAL BONDS
2003........................................................ $ 1,151 3.84%
2004........................................................ $ 1,896 5.52%
2005........................................................ $ 4,402 4.72%
2006........................................................ $ 8,100 4.75%
2007........................................................ $ 13,073 4.22%
2008 and thereafter......................................... $ 33,137 4.38%
--------
Total....................................................... $ 61,759 N/A
Fair Value.................................................. $ 64,453 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 six months ended June 30, 2003 and the year ended December
31, 2002, the Company had net investment income of $2.8 million and $5.7
million. 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 securities at June 30,
2003 and December 31, 2002 were $68.1 million and $67.0 million. The change in
fair value, using a hypothetical 10% decline in prices, is estimated to be $6.8
million for June 30, 2003 and $6.7 million for December 31, 2002. The 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 condensed consolidated
balance sheets.
Debt. The interest rate on the Company's long-term indebtedness 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
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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's by-laws 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 By-Laws 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
and 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 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-14(c) and 15d-14(c) 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.
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(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.
On May 15, 2003, NYMEX Holdings, Inc., filed a Form 8-K with the Securities
and Exchange Commission disclosing that the Quarterly Report on Form 10-Q for
the quarter ended March 31, 2003 was accompanied by certifications of the
Company's Chairman (i.e., its Principal Executive Officer) and its Chief
Financial Officer, as required by 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. The certifications were in the
form required by such Act.
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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 August, 2003.
NYMEX HOLDINGS, INC.
BY: /s/ LEWIS A. RAIBLEY, III
------------------------------------
Name: Lewis A. Raibley, III
Title: Duly Authorized Officer and
Principal Financial Officer
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