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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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO__________
NYMEX HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 333-30332 13-4098266
(STATE OR OTHER JURISDICTION (COMMISSION (I.R.S. EMPLOYER
OF INCORPORATION OR FILE NUMBER) IDENTIFICATION NUMBER)
ORGANIZATION)
ONE NORTH END AVENUE, WORLD FINANCIAL CENTER, NEW YORK, NEW YORK 10282-1101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(212) 299-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of August 14, 2002, 816 shares of the registrant's common stock, par
value $0.01 per share, were outstanding.
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TABLE OF CONTENTS
PAGE
----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 3
Unaudited Condensed Consolidated Statements of Operations
and Retained Earnings/(Accumulated Deficit) for the
Three Months and Six Months Ended June 30, 2002 and
June 30, 2001.......................................... 3
Unaudited Condensed Consolidated Balance Sheets at June
30, 2002 and December 31, 2001......................... 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2002 and June 30,
2001................................................... 5
Notes to Unaudited Condensed Consolidated Financial
Statements for the Three and Six Months Ended June 30,
2002 and June 30, 2001................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 20
PART II: OTHER INFORMATION
Item 1. Legal Proceedings........................................... 21
Item 2. Changes in Securities and Use of Proceeds................... 21
Item 3. Defaults Upon Senior Securities............................. 21
Item 4. Submission of Matters to a Vote of Security Holders......... 21
Item 5. Other Information........................................... 21
Item 6. Exhibits and Reports on Form 8-K............................ 21
Signatures............................................................ 22
2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS/(ACCUMULATED DEFICIT)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
2002 2001 2002 2001
-------- -------- ------- -------
Operating Revenues:
Clearing and transaction fees, net of member fee
rebates.............................................. $37,536 $26,478 $70,467 $50,218
Market data fees........................................ 8,132 8,130 16,444 16,393
Other, net of rebates................................... 1,570 1,198 3,016 2,800
------- ------- ------- -------
Total operating revenues........................ 47,238 35,806 89,927 69,411
------- ------- ------- -------
Operating Expenses:
Salaries and employee benefits.......................... 10,488 15,675 21,860 27,365
Depreciation and amortization of property and equipment,
net of deferred credit amortization.................. 5,475 3,881 9,891 7,702
Rent and facility....................................... 4,553 4,097 8,963 8,183
Telecommunications, equipment rentals and maintenance... 4,866 3,392 8,788 7,335
Professional services................................... 4,525 2,443 8,319 6,548
General and administrative.............................. 3,495 3,395 6,797 7,644
Loss on disposition of property and equipment, and
impairment of capitalized software................... 920 1,605 1,597 1,629
Amortization of goodwill................................ -- 539 -- 1,077
Other................................................... 2,420 1,944 4,240 4,175
------- ------- ------- -------
Total operating expenses........................ 36,742 36,971 70,455 71,658
------- ------- ------- -------
Income (loss) from operations............................. 10,496 (1,165) 19,472 (2,247)
Other Income (Expenses):
Investment income, net.................................. 2,037 1,184 2,846 2,909
Interest expense........................................ (1,875) (1,929) (3,750) (3,857)
------- ------- ------- -------
Income (loss) before (provision) benefit for income
taxes................................................... 10,658 (1,910) 18,568 (3,195)
(Provision) benefit for income taxes...................... (5,032) 778 (8,987) 1,234
------- ------- ------- -------
Net income (loss)......................................... 5,626 (1,132) 9,581 (1,961)
Retained earnings/(accumulated deficit), beginning of
period.................................................. 4,879 (585) 924 244
------- ------- ------- -------
Retained earnings/(accumulated deficit), end of period.... $10,505 $(1,717) $10,505 $(1,717)
======= ======= ======= =======
Net income (loss) per share (based on 816 shares)......... $ 6,895 $(1,387) $11,741 $(2,403)
======= ======= ======= =======
The accompanying notes are an integral part of these statements.
3
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
2002 2001(1)
-------- ------------
ASSETS
Cash and cash equivalents................................... $ 3,168 $ 5,680
Securities purchased under agreements to resell............. 28,600 6,500
Marketable securities, at market (cost of $60,275 at June
30, 2002 and $65,339 at December 31, 2001)................ 60,565 65,025
Clearing and transaction fees receivable, net............... 13,762 9,337
Prepaid taxes and expenses.................................. 7,658 12,985
Other current assets........................................ 14,071 15,101
-------- --------
Total current assets.............................. 127,824 114,628
Property and equipment, net................................. 224,148 228,483
Other assets................................................ 25,878 26,085
-------- --------
Total Assets...................................... $377,850 $369,196
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued liabilities.................... $ 14,408 $ 20,907
Deferred income taxes....................................... 1,317 359
Other current liabilities................................... 15,674 13,618
-------- --------
Total current liabilities......................... 31,399 34,884
Deferred income taxes....................................... 12,565 9,705
Notes payable............................................... 94,368 94,368
Deferred credit -- grant for building construction.......... 115,818 116,890
Other non-current liabilities............................... 19,883 19,113
-------- --------
Total liabilities................................. 274,033 274,960
-------- --------
COMMITMENTS AND CONTINGENCIES (See Note 8)
STOCKHOLDERS' EQUITY:
Common stock, at $0.01 par value, 816 shares authorized,
issued and outstanding.................................... -- --
Additional paid-in capital.................................. 93,312 93,312
Retained earnings........................................... 10,505 924
-------- --------
Total stockholders' equity........................ 103,817 94,236
-------- --------
Total Liabilities and Stockholders' Equity........ $377,850 $369,196
======== ========
- ---------------
(1) The amounts as of December 31, 2001 have been derived from the audited
consolidated financial statements of NYMEX Holdings, Inc. and subsidiaries.
The accompanying notes are an integral part of these statements.
4
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
-------------------
2002 2001
-------- --------
Cash Flows From Operating Activities:
Net income (loss)......................................... $ 9,581 $ (1,961)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and
equipment, net of deferred credit amortization........ 9,891 7,702
Amortization of goodwill............................... -- 1,077
Deferred income taxes.................................. 3,818 (735)
Loss on disposition of property and equipment, and
impairment of capitalized software.................... 1,597 1,629
Net changes in operating assets and liabilities........ 2,719 (11,649)
-------- --------
Net cash provided by (used in) operating
activities....................................... 27,606 (3,937)
-------- --------
Cash Flows From Investing Activities:
Capital expenditures...................................... (8,225) (11,753)
(Increase) decrease in securities purchased under
agreements to resell................................... (22,100) 16,808
Decrease in other assets.................................. 207 63
-------- --------
Net cash (used in) provided by investing
activities....................................... (30,118) 5,118
-------- --------
Net (decrease) increase in cash and cash equivalents........ (2,512) 1,181
Cash and cash equivalents, beginning of year................ 5,680 2,870
-------- --------
Cash and cash equivalents, end of period.................... $ 3,168 $ 4,051
======== ========
The accompanying notes are an integral part of these statements.
5
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2002 AND JUNE 30, 2001
1. 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."
Basis of Presentation -- The accompanying unaudited condensed consolidated
financial statements of NYMEX Holdings and subsidiaries have been prepared in
accordance with Accounting Principles Board ("APB") Opinion No. 28 and Rule
10-01 of Regulation S-X promulgated by the Securities and Exchange Commission
(the "SEC"). These are unaudited condensed consolidated financial statements and
do not include all necessary disclosures required for complete financial
statements.
In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements reflect all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the Company's
financial position, results of operations and cash flows for the dates and
interim periods covered. Interim period operating results may not be indicative
of the operating results for a full year. This information should be read in
conjunction with the audited consolidated financial statements and notes thereto
as of December 31, 2001 and 2000 and for each year in the three-year period
ended December 31, 2001.
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.
Certain reclassifications have been made to the prior year's amounts to
conform to the current presentation. All intercompany balances and transactions
have been eliminated in consolidation.
For a summary of significant accounting policies (which have not
significantly changed from December 31, 2001, see note 2 to the unaudited
condensed consolidated financial statements) and additional information, see
note 1 to the audited December 31, 2001 financial statements which were filed
with the SEC in the Company's Form 10-K on March 5, 2002.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets, which supercedes APB Opinion No. 17, Intangible Assets. This
statement, effective for fiscal years beginning after December 15, 2001,
addresses, among other things, how goodwill and other intangible assets should
be accounted for after they have been initially recognized in the financial
statements. The provisions of SFAS No. 142 provide for the performance of an
impairment test to be performed annually rather than recording monthly
amortization. The Company performed such a test during the first quarter of
2002. There were no impairments recognized during the periods presented. The
Company believes that the adoption of SFAS No. 142 has a material effect on
operations. The adoption of this standard has increased pre-tax income and net
income for the second quarter of 2002 by $539,000, or $660 per share, which is
the amount of quarterly amortization of goodwill, and $1,077,000, or $1,319 per
share for the six months ended June 30, 2002.
6
In October 2001, the Emerging Issues Task Force issued EITF No. 01-10,
Accounting for the Impact of the Terrorist Attacks of September 11, 2001. This
statement, among other things, addresses how costs and insurance recoveries for
businesses affected by this event should be accounted for in the financial
statements. The provisions of EITF No. 01-10 provide guidelines for the
recording of a contingent insurance recovery. The Company adopted the provisions
of EITF No. 01-10 during the third quarter of 2001.
In August 2001, SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets was adopted. This statement establishes a single model for the
impairment of long-lived assets and broadens the presentation of discontinued
operations to include disposal of an individual business. The Company adopted
this standard in 2002. As a result of adoption, no impairment charges resulted
from the required impairment evaluations.
3. COLLATERALIZATION
At June 30, 2002 and December 31, 2001, the Company had accepted collateral
in the form of United States Treasury bills that it is permitted by contract or
industry practice to sell or re-pledge, although it is not the Company's policy
to do so. This collateral was received in connection with reverse repurchase
agreements with, and are held in custody by, its banks. The fair value of such
collateral at June 30, 2002 and December 31, 2001 was approximately $28,600,000
and $6,500,009, respectively.
4. REVENUE REBATE AND FEE REDUCTION PROGRAM
The Company has a fee rebate program that reduces clearing fees for the
NYMEX Division members. Rebates under this program totaled $1.1 million and $1.9
million for the three months ended June 30, 2002 and June 30, 2001,
respectively, and $2.1 million and $3.4 million for the six months ended June
30, 2002 and June 30, 2001. Clearing and transaction fees are presented in the
unaudited condensed consolidated statements of operations and retained
earnings/(accumulated deficit), net of these rebates.
The Company also adopted several incentive programs for members for the
purpose of reducing various operating costs. These incentive programs totaled
$333,000 and $515,000 for the three months ended June 30, 2002 and June 30,
2001, respectively, and $804,000 and $1,014,000 for the six months ended June
30, 2002 and June 30, 2001. Other revenues are presented in the unaudited
condensed consolidated statements of operations and retained
earnings/(accumulated deficit), net of fee reductions related to these programs.
5. SEGREGATED FUNDS
The Company is required under the Commodity Exchange Act to segregate cash
and securities that are deposited by clearing members at banks approved by the
Company as margin for house and customer accounts. These assets belong to the
clearing member firms and are not included in the accompanying unaudited
condensed consolidated financial statements. At June 30, 2002 and 2001,
$17,237,837 and $3,263,643 of cash, $1,567,356,000 and $4,136,989,000 of U.S.
Treasury obligations and $82,000,000 and $18,000,000 of U.S. Treasury
obligations purchased under agreements to resell, respectively, were segregated
pursuant to such regulations by the NYMEX Division. In addition, at June 30,
2002 and 2001, the NYMEX Division held irrevocable letters of credit amounting
to $133,312,003 and $92,156,400, respectively, which are used by clearing
members to meet their obligations to the Company for margin requirements on both
open futures and options positions, as well as delivery obligations, in lieu of
depositing cash and/or securities. The Company invests cash deposits and earns
interest thereon. All income earned on deposits of U.S. Treasury obligations
accrue to the clearing member firms depositing such securities. In addition, at
June 30, 2002 and 2001, $1,658,625,000 and $524,500,000 representing shares of
certain money market mutual funds were held by the NYMEX Division on behalf of
clearing members, respectively.
At June 30, 2002 and 2001, the segregated funds of the Company's COMEX
Division consisted of $80,121 and $224 in cash, $913,520,000 and $560,270,000 in
U.S. Treasury obligations and $4,360,000 and $5,810,000 of U.S. Treasury
obligations purchased under agreements to resell, respectively. The COMEX
Division also held irrevocable letters of credit aggregating $48,850,000 and
$48,000,000 as of June 30, 2002 and 2001, respectively.
7
6. GUARANTY FUNDS
Each clearing member firm is required to maintain a security deposit, in
the form of cash or U.S. Treasury securities, ranging from $100,000 to
$2,000,000, depending upon such clearing member firm's reported regulatory
capital, in a fund known as a "Guaranty Fund" for the respective clearing
division (NYMEX Division and/or COMEX Division). Separate and distinct Guaranty
Funds, held by the Company, are maintained for the NYMEX and COMEX Divisions.
These funds may be used by the respective divisions for any loss sustained by
the Exchange as a result of the failure of a clearing member firm to discharge
its obligations.
At June 30, 2002 and 2001, the total deposits maintained in the NYMEX
Division Guaranty Fund were $80,371,000 and $79,486,000, respectively. At June
30, 2002 and 2001, the total deposits for the COMEX Division Guaranty Fund were
$77,425,000 and $77,930,000, respectively.
7. SEGMENT REPORTING
During the second quarter of 2001, the Company changed its structure of
internal reporting which caused the composition of reportable segments to
change. The Company reports operating results for two business segments:
open-outcry trading and electronic trading.
Open-outcry includes the trading of NYMEX Division and COMEX Division
futures and options contracts on the trading floor of the Exchange as well as
the Exchange's over-the-counter ("OTC") initiative. Electronic trading consists
of trading on NYMEX ACCESS(R), the Exchange's electronic trading platform, which
became web-based during the third quarter of 2001, as well as trading
"e-miNY(SM)" contracts on the Chicago Mercantile Exchange's ("CME") GLOBEX(R)
electronic trading platform. Both open-outcry and electronic trading currently
allow for the trading and clearing of futures contracts on crude oil, heating
oil, unleaded gasoline, natural gas, platinum, gold, silver, copper, aluminum,
propane and palladium.
Financial information relating to these business segments is set forth
below, as required by SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information.
OPEN-OUTCRY ELECTRONIC TRADING TOTAL
------------------- -------------------- --------------------
3 MOS. 6 MOS. 3 MOS. 6 MOS. 3 MOS. 6 MOS.
(In thousands) -------- -------- -------- --------- --------- --------
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.............. 3,191 6,185 2,284 3,706 5,475 9,891
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
8
OPEN-OUTCRY ELECTRONIC TRADING TOTAL
------------------- -------------------- --------------------
3 MOS. 6 MOS. 3 MOS. 6 MOS. 3 MOS. 6 MOS.
(In thousands) -------- -------- -------- --------- --------- --------
Three and Six Months
Ended June 30, 2001:
Operating
revenues......... $ 33,613 $ 65,486 $ 2,193 $ 3,925 $ 35,806 $ 69,411
Operating
expenses......... 30,376 57,304 6,595 14,354 36,971 71,658
Operating income
(loss)........... 3,237 8,182 (4,402) (10,429) (1,165) (2,247)
Investment income,
net.............. 1,184 2,909 -- -- 1,184 2,909
Interest expense.... 1,929 3,857 -- -- 1,929 3,857
Depreciation and
amortization,
net.............. 2,728 5,721 1,153 1,981 3,881 7,702
Income tax expense
(benefit)........ 1,014 2,792 (1,792) (4,026) (778) (1,234)
Net income (loss)... $ 1,478 $ 4,442 $ (2,610) $ (6,403) $ (1,132) $ (1,961)
8. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is involved in legal proceedings and
litigation arising in the ordinary course of business. Set forth below are
descriptions of legal proceedings and litigation to which the Company is a party
as of June 30, 2002. 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. 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. Plaintiff seeks an unspecified amount of royalties. On September
15, 2000, the Court granted NYMEX Exchange's motion to sever and transfer
venue to the Southern District of New York. On August 1, 2001, the Court
granted a motion to add eSpeed as a plaintiff. On August 10, 2001, the
Exchange made a motion to bifurcate the issues of willfulness of
infringement and damages from all other issues in the case and requested
a stay of discovery on the issues of willfulness and damages. On April
16, 2002, the Court denied the Exchange's motion and granted plaintiff's
cross-motion. 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. The
case remains in discovery.
- Enrique Rivera and Edith Rivera v. New York Mercantile Exchange, Mark
Kessloff, Les Faison, Brian Bartichek and John Does "1-10." This action
is pending in New York State Supreme Court (Bronx County). NYMEX Exchange
was served with the summons and complaint on or about April 22, 1999.
This is an ethnic discrimination case. Plaintiff alleges that throughout
his employment with NYMEX Exchange he was subjected to a hostile work
environment and discrimination regarding his ethnic origin. Plaintiff
seeks an unspecified amount of compensatory and punitive damages. On
December 17,
9
2001, the Court rendered a decision granting in part, the Exchange's
motion, for a further bill of particulars from plaintiffs. The case
remains in discovery.
- Luxembourg Henry and Jose Terrero v. NY Mercantile Exchange. This action
is pending in New York State Supreme Court (New York County). NYMEX
Exchange was served with a summons and complaint on January 24, 2001.
Plaintiffs are former employees who were terminated as part of the 10%
reduction-in-force that occurred in July 2000. Plaintiffs allege
harassment and discrimination because of race (Henry) and national origin
(Terrero) and that they were improperly terminated. Henry seeks
reinstatement to his former position; compensatory damages in the amount
of $9,320,000 for lost wages, fringe benefits and emotional distress; and
costs and disbursements. Terrero seeks reinstatement to his former
position; compensatory damages in the amount of $4,500,000 for lost
wages, fringe benefits and emotional distress; and costs and
disbursements. NYMEX Exchange served its answer on February 13, 2001. The
case remains in discovery.
- New York Mercantile Exchange v. GlobalView Software, Inc. On April 27,
2001, NYMEX Exchange filed a breach of contract suit in New York State
Supreme Court (New York County). NYMEX Exchange seeks to recover direct
and consequential damages resulting from GlobalView's breach of its
contract with NYMEX Exchange regarding the front-end development for
enymex(sm). On or about June 18, 2001, GlobalView served its answer and
counterclaims in which it seeks to recover amounts in excess of
$26,000,000 for alleged fees due and owing under the contract, as well as
consequential damages and other causes of action. On June 28, 2001, NYMEX
Exchange served an amended complaint on GlobalView. On or about July 24,
2001, GlobalView filed a motion to dismiss one cause of action in the
amended complaint. The Second Amended Complaint was served on or about
November 26, 2001. GlobalView served its answer to the Second Amended
Complaint and Counterclaims on or about February 14, 2002. GlobalView
asserted two additional counterclaims for tortious interference each
seeking an additional $9 million in damages. On March 14, 2002, the
Exchange served its reply to the counterclaims. The case is in discovery.
When the Company adapted its electronic trading strategy to an
internet-based platform, it terminated a contractual arrangement for its
proprietary network. The Company is currently negotiating a settlement of any
associated termination charges that the Company may be required to pay; an
estimate of which has been accrued and reflected in the unaudited condensed
consolidated financial statements.
9. DISASTER RECOVERY
As a result of the September 11, 2001 terrorist attack, the Company's
back-up data center, located near the World Trade Center, was rendered
non-operational. The Company is currently utilizing its web hosting facility as
a temporary backup data center. On May 13, 2002, the Company signed a lease for
a facility, located outside of New York City, to serve as a full service back-up
trading facility and data recovery center. The Company expects to complete the
necessary construction and technological installation before the end of the
year.
The Company has recorded a receivable of $7.3 million for the insurance
recovery including $1.8 million recorded during the second quarter of 2002. The
corresponding expenses have been reduced by this amount in the unaudited
condensed consolidated statements of operations. $3 million of the total
insurance receivable was collected during the first six months of 2002.
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, 2002. This discussion is provided to increase the
understanding of, and should be read in conjunction with, the unaudited
condensed consolidated financial statements, accompanying notes and tables
included in this quarterly report.
FORWARD LOOKING AND CAUTIONARY STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE
RESULTS
The SEC encourages companies to disclose forward-looking information so
that investors can better understand a company's future prospects and make
informed investment decisions. Except for the historical information and
discussions contained herein, statements contained in this Form 10-Q may
constitute "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The Company has tried, wherever
possible, to identify such statements by using words such as "anticipate,"
"assumes," "believes," "expects" and words and terms of similar substance in
connection with any discussion of future operating or financial performance.
These statements involve a number of risks, uncertainties and other factors that
may cause actual results to differ materially, including: the Company's ability
to continue to develop and market new innovative products and services and to
keep pace with technological change; failure to continue to develop and market a
new electronic trading system; failure to obtain or protect intellectual
property rights; competitive pressures; financial condition or results of
operations; quarterly fluctuations in revenues and volatility of commodity
prices; changes in financial or business conditions; ability to attract and
retain key personnel; ability to successfully manage acquisitions and alliances;
and legal and economic changes and other risks, uncertainties and factors
discussed elsewhere in this Form 10-Q, in the Company's other filings with the
SEC, or in materials incorporated therein by reference.
FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
RESULTS OF OPERATIONS
The Company reported net income of $5,626, or $6,895 per share, which
represented an increase of $6,758, compared to the net loss of $1,132 in the
second quarter of 2001. This increase was primarily the result of the following
factors:
- an increase in trading volume on the NYMEX Division, primarily due to
trading in natural gas and crude oil; and
- lower payroll expenses as compared with the second quarter of 2001
resulting from a reduction in severance payments.
The following discussion provides additional information about the
Company's operating results for the second quarter of 2002:
Revenues
Total operating revenues were $47,238 in the second quarter of 2002, up
$11,432 or 32%, from the same period in 2001.
Clearing and transaction fees, which represent the core business of the
Company, are directly related to volume. Changes in volume are affected by
various external factors such as:
- shifts in supply and demand of the underlying commodities;
- market perception of price volatility in the commodities and financial
markets;
- weather conditions affecting certain energy commodities; and
- national and international economic and political conditions.
11
Clearing and transaction fees, net of member fee rebates, were $37,536
compared to $26,478 earned during the same quarter last year, up 42%. The
increase in revenue was aided by a 50% reduction in NYMEX Division member fee
rebate rates. Member fee rebates, which apply only to NYMEX Division members,
amounted to $1,081 and $1,883 for the three months ended June 30, 2002 and 2001,
respectively.
The NYMEX Division's clearing and transaction fee revenues, net of member
fee rebates, were $31,481 up 50% from the comparable 2001 quarter, while overall
trading volume for the NYMEX Division increased 27% when compared with the same
period a year ago.
Open-outcry volume on the NYMEX Division increased by 25% compared with the
same quarter in 2001. Open-outcry clearing and transaction fees revenues were
$27,610, which increased 32% from the same quarter in 2001.
Total volume on NYMEX ACCESS(R), the Company's electronic trading system,
increased 113% when compared with the same period a year ago. Increased
accessibility to the system by users through the internet, and a wider
distribution of electronic trading rights due to the lifting of the limitation
on such rights, along with enhanced functionality of the system, contributed to
these strong results.
Natural Gas -- Overall volume in this contract for the second quarter
increased by 72% when compared with the same quarter a year ago. Natural Gas
options volume has risen 131% from the second quarter of 2001. Futures volume
increased by 53% over the same period. The primary catalysts for the increased
trading activity were credit concerns in the Natural Gas industry, highlighted
by the Enron bankruptcy as well as financial difficulties for other companies in
the energy industry, and a recovering economy that boosted trading activity in
options as compared to futures. Various NYMEX initiatives, including the
Exchange of Futures for Swaps ("EFS") mechanism introduced in Natural Gas in
November 2001, helped promote increased trading in Natural Gas futures and
options contracts.
Crude Oil -- Overall volume increased by 22% when compared with the same
quarter a year ago. Options volume remained at nearly record levels, up 57%
compared with the same quarter a year ago. Heightened volatility levels,
uncertainty with regard to world production, and a higher level of world
economic activity all served to maintain hedging activity at near record levels.
Middle East unrest and increased OPEC compliance with production cuts kept
uncertainty in the market at a historically high level. Continued credit
concerns in the OTC market also accounts for this increase.
Unleaded Gasoline -- Overall volume decreased by 9% when compared with the
same quarter a year ago. Lower volatility exhibited by this market was the
primary reason. Somewhat stronger economic performance boosted demand for
refined products, but this was offset by higher imports and production levels.
Unleaded Gasoline options volume fell 48%. Falling differentials between refined
products and crude oil played a major role in the decline.
The COMEX Division's clearing and transaction fees were $6,055 in the
second quarter of 2002, up 11% from the 2001 comparable period.
Gold -- Futures volume increased 28% compared with the second quarter of
2001. Factors such as a weakening U.S. currency, world tensions, and a
rebounding economy all contributed to the increase in volume for the second
quarter of 2002 when compared with the same period a year ago. Gold options
volume decreased by 20% as compared to the second quarter of 2001.
Silver -- Futures activity was up 30% in the second quarter. Continued
economic growth and a weak U.S. currency propelled the increase. Silver options
have experienced an increase in volume of 75% from the second quarter of 2001.
An increased number of strike price intervals helped boost volumes in these
options.
Copper -- Futures volume was adversely impacted by higher inventories and
production combined with stronger home building and car sales, leaving prices
little changed. During the second quarter of 2002, copper futures volume
decreased 14% from the second quarter of 2001. Options volume for the second
quarter of 2002 was down 18% from the second quarter of 2001.
12
Market data fee revenue, which represented 17% of the Company's total
operating revenues for the second quarter of 2002, remained virtually unchanged
compared with the same quarter a year ago. The benefits of a mid-year price
increase in 2001 were largely offset by declining subscriber units, particularly
for COMEX Division data. The decrease in units can be attributed to weaknesses
in the financial services industry.
Operating Expenses
Total operating expenses were $36,742 during the second quarter of 2002,
down $229 from the comparable period in 2001.
Salaries and employee benefits, which constitute 29% of total operating
expenses for the second quarter of 2002, decreased by $5,187, or 33%. This
decrease was due to a reduction in severance payments made during the second
quarter of 2002, compared with the second quarter of 2001 when a company wide
reduction-in-work force was implemented, as well as the salary savings realized
from this work force reduction.
Depreciation and amortization of property and equipment, net of deferred
credit amortization, increased by $1,594, or 41%, in the second quarter of 2002
when compared to the same quarter in 2001. This increase, which is expected to
continue throughout the remainder of the year, is the result of the start-up of
internet-based NYMEX ACCESS(R) trading. The launch, in September 2001, initiated
the amortization of project-related software development costs.
Rent and facility expenses increased by $456, or 11%, during the second
quarter of 2002 compared to the same period in 2001. Increased building security
services, as well as rent for a temporary back up data center, as a result of
the September 11th terrorist attacks, make up the majority of this increase.
This trend is expected to continue during the third quarter of 2002. This
increase was partially offset by a decrease in energy prices for light, heat and
power during the second quarter of 2002.
Telecommunications, equipment rentals and maintenance increased by $1,474,
or 43%, during the second quarter of 2002 compared to the same period in 2001.
The reason for this increase is that the Company implemented a policy, starting
in the third quarter of 2001, of leasing rather than purchasing EDP equipment.
This trend is expected to continue during the next quarter. The elimination of
NYMEX ACCESS(R) trading on a proprietary network is resulting in substantial
monthly savings that were largely offset in this quarter due to the accrual of
early termination charges for an underlying telecommunication contract.
Professional services increased by $2,082, or 85%, during the second
quarter of 2002 over the same quarter a year ago. Significant expenditures for
legal fees, which increased 155% in the second quarter of 2002 when compared
with the same quarter a year ago, was the primary reason for this increase.
These legal fees primarily result from the defense of a patent infringement suit
that is currently in the discovery phase.
A change in strategy related to the implementation of an internally
developed clearing system for the COMEX Division contributed to a $920
impairment loss on capitalized software for this quarter.
Goodwill is no longer being amortized in 2002. The provisions of SFAS No.
142 provide for an impairment test to be performed at least annually rather than
recording monthly amortization. The Company performed such a test during the
first quarter of 2002. There were no impairments recognized during the periods
presented. This has resulted in a decrease in operating expenses of $539 when
compared with the same quarter a year ago.
Other expenses increased by $476, or 24%, during the second quarter of 2002
compared to the same period in 2001 principally due to the cost of the COMEX
members' retention plan.
Other Income
Investment income, net of investment advisory fees, increased by $853, or
72%, during the second quarter of 2002 when compared to the same quarter in
2001. Unrealized gains on fixed income securities at the end of the second
quarter of 2002, as a result of lower interest rates, is the primary reason for
this increase.
13
Provision for Income Taxes
The Company's effective tax rate increased, from 41% to 47%, due to the
lower proportion of tax-exempt earnings relative to pre-tax income and changes
in estimates.
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
RESULTS OF OPERATIONS
The Company reported net income of $9,581, or $11,741 per share, which
represented an increase of $11,542, compared to the net loss of $1,961 in the
same period a year ago. This increase was primarily the result of the following
factors:
- an increase in volume on the NYMEX Division, primarily due to trading in
natural gas and crude oil;
- revenues resulting from the introduction of Exchange of Futures for Swaps
in natural gas; and
- lower payroll expenses as compared with the first half of 2001 resulting
from a reduction in severance payments.
The following discussion provides additional information about the
Company's operating results for the six months of 2002:
Revenues
Total operating revenues were $89,927 during the first six months of 2002,
up $20,516, or 30%, from the same period in 2001. Record trading volume in the
natural gas and crude oil contracts were the principal factors for this
increase.
Clearing and transaction fees, which represent the core business of the
Company, are directly related to volume. Changes in volume are affected by
various external factors such as:
- shifts in supply and demand of the underlying commodities;
- market perception of price volatility in the commodities and financial
markets;
- weather conditions affecting certain energy commodities; and
- national and international economic and political conditions.
In the first six months of 2002, clearing and transaction fees, net of
member fee rebates, were $70,467 compared to $50,218 earned during the same
period last year. This 40% increase was principally the result of greater
trading volume on the NYMEX Division as well as the impact of a board-approved
50% reduction in NYMEX Division member fee rebate rates. Member fee rebates,
which apply only to NYMEX Division members, amounted to $2,083 and $3,435 for
the six months ended June 30, 2002 and 2001, respectively.
The NYMEX Division's clearing and transaction fees, net of member fee
rebates, were $59,427 for the six months of 2002, up 50% from the 2001
comparable period. The overall trading volume for the NYMEX Division increased
31%.
Open-outcry volume on the NYMEX Division increased by 29% as compared with
the same period a year ago. Open-outcry clearing and transaction fee revenues
were $52,389, an increase of 33% from the same period a year ago.
Total volume on NYMEX ACCESS(R) also increased 115% compared with the same
period one year ago. The Exchange believes that this increase is principally due
to a significant expansion of electronic trading rights and enhanced
functionality of the system.
Natural Gas -- Futures volume has jumped 67% from the year ago six months
period. For the first half of 2002, options volume rose 161% from the comparable
period a year earlier. The primary catalysts for the increased trading activity
were credit concerns in the Natural Gas industry and a recovering economy that
boosted trading activity in options as compared to futures. Various NYMEX
initiatives, including the
14
Exchange of Futures for Swaps mechanism introduced in Natural Gas in November
2001, helped promote increased trading in the Natural Gas futures and options
contracts.
Crude Oil -- Futures volume rose 14% from the comparable year ago period.
Options volume remained close to record levels, up 58% in the first half of 2002
from the year ago period. Heightened volatility levels, uncertainty with regard
to world production, and a higher level of world economic activity all served to
keep hedging activity at near record levels. Middle East unrest and increased
OPEC compliance with production cuts kept uncertainty in the market at a
historically high level. Continued credit concerns in the OTC market also
accounted for the increase.
Heating Oil -- Futures volume rose 9% from the comparable year ago period.
Somewhat stronger economic performance boosted demand for refined products, but
this was offset by higher imports and production levels. Options volume in this
contract decreased. For the first six months of 2002 Heating Oil options fell
24% from the comparable 2001 period. Falling differentials between refined
products and crude oil played a major role in this decrease.
Unleaded Gasoline -- Futures volume rose 1% from the comparable period a
year ago. Somewhat stronger economic performance boosted demand for refined
products, but this was offset by higher imports and production levels. For the
first six months of 2002, Unleaded Gasoline options volume declined 40% from the
comparable 2001 period. Falling differentials between refined products and crude
oil played a major role in this decline.
The COMEX Division's clearing and transaction fees were $11,040 in the
first half of 2002, up 4% from the 2001 comparable period.
Gold -- Futures volume was 15% higher for the first half of 2002 compared
to 2001 levels. Factors such as world tensions, a rebounding economy, and a
weakening U.S. currency contributed to the increased volume. Gold options volume
was down 14% in the first half of 2002 from 2001 levels.
Silver -- Futures activity was up 21% during the first half from 2001
levels. Continued economic growth and a weak U.S. currency contributed to the
increase. Silver options have experienced a strong increase in activity thus far
in 2002, up 56% from comparable 2001 levels. An increased number of strike price
intervals helped boost volumes in these options.
Copper -- Futures volume was adversely impacted by higher inventories and
production combined with stronger home building and car sales, leaving prices
little changed. Overall copper futures volume fell 15% from the comparable 2001
period. Copper options volume decreased by 21% from the first six months of
2001.
Market data fee revenue, which represented 18% of the Company's total
operating revenues for the first six months of 2002, remained virtually
unchanged compared with the same period a year ago. The benefits of a mid-year
price increase in 2001 were largely offset by declining subscriber units,
particularly for COMEX Division data. The decrease in units can be attributed to
weakness in the financial services industry.
Operating Expenses
Total operating expenses were $70,455 during the first six months of 2002,
down $1,203 or 2% from the comparable period in 2001.
Salaries and employee benefits, which constituted 31% of total operating
expenses for the six months of 2002, decreased by $5,505, or 20%. This decrease
was due to a reduction in severance payments made during the second quarter of
2002, compared with the second quarter of 2001 when a company wide reduction-in-
work force was implemented, as well as the salary savings realized from the work
force reduction. These savings are expected to continue during the next quarter.
Depreciation and amortization of property and equipment, net of deferred
credit amortization, increased by $2,189, or 28%, in the first six months of
2002 when compared to the same period in 2001. This increase, which is expected
to continue throughout the remainder of the year, is the result of the start-up
of internet-
15
based NYMEX ACCESS(R) trading during the end of 2001. The launch, in September
2001, initiated the amortization of project-related software development costs.
Rent and facility expenses increased by $780, or 10%, during the first six
months of 2002 compared to the same period in 2001. Increased building security
services as a result of the September 11th terrorist attacks make up the
majority of this increase. This trend is expected to continue during the third
quarter of 2002. This increase was partially offset by a decrease in energy
prices for light, heat and power during the second quarter of 2002.
Telecommunications, equipment rentals and maintenance increased by $1,453,
or 20%, during the first six months of 2002 compared to the same period in 2001.
The primary reason for this increase is that the Company began to implement a
policy, starting in the third quarter of 2001, of leasing rather than purchasing
EDP equipment. This trend is expected to continue during the next quarter. The
elimination of NYMEX ACCESS(R) trading on a proprietary network has resulted in
substantial savings that were largely offset in the first half of the year due
to the accrual of the early termination of an underlying telecommunications
contract.
Professional services increased by $1,771, or 27%, during the first six
months of 2002 over the same period a year ago. Significant expenditures for
legal fees, which increased 178% in the first six months of 2002 when compared
with the same period a year ago, were the primary reason for this increase.
These legal fees primarily result from the defense of a patent infringement suit
that is currently in the discovery phase.
General and administrative expenses decreased by $847, or 11%, during the
first six months of 2002, from the comparable period in 2001. Bad debt expenses
of $813 had previously been recorded during the second quarter of 2001 resulting
from the bankruptcy filing of a large market data service provider.
Goodwill is no longer being amortized in 2002. The provisions of SFAS No.
142 provide for an impairment test to be performed at least annually rather than
recording monthly amortization. The Company performed such a test during the
first quarter of 2002. There were no impairments recognized during the periods
presented. This has resulted in a decrease in operating expenses for the first
six months of 2002 of $1,077 when compared with the same period a year ago.
Provision for Income Taxes
The Company's effective tax rate increased, from 39% to 48%, due to the
lower proportion of tax-exempt earnings relative to pre-tax income and changes
in estimates.
FINANCIAL CONDITION AND CASH FLOWS
Liquidity and Capital Resources
The Company has made, and expects to continue to make, significant
investments in technology to ensure its future growth and to increase
shareholder value. Capital expenditures were $6,172 during the second quarter of
2002. These capital expenditures were used to update and enhance computer
software applications. The Company has also developed a plan and anticipates
spending approximately $12-14 million to construct a full service back-up
trading facility and data recovery center, which the Company expects to complete
by the end of 2002. The Company had $92,333 in cash, reverse repurchase
agreements, and marketable securities at June 30, 2002.
16
Cash Flow
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
------------------------------
2002 2001
------------ ---------------
Net cash provided by (used in):
Operating activities............................ $ 27,606 $ (3,937)
Investing activities............................ (30,118) 5,118
-------- --------
Net (decrease) increase in cash and cash
equivalents..................................... $ (2,512) $ 1,181
======== ========
Working Capital
(IN THOUSANDS)
AT JUNE 30, AT DECEMBER 31,
2002 2001
------------ ---------------
Current assets.................................... $127,824 $114,628
Current liabilities............................... 31,399 34,884
-------- --------
Working capital................................... $ 96,425 $ 79,744
======== ========
Current ratio..................................... 4.07:1 3.29:1
Current assets at June 30, 2002 increased by $13,196, or 12%, from year-end
2001 primarily as a result of a stronger financial performance in 2002. The
primary changes in current assets consisted of an increase of $22,100 in
securities purchased under agreements to resell offset by a $5,457 decrease in
prepaid taxes; both changes are the result of strong financial performance for
the first six months of 2002. Interest payments on private placement notes of
$3,800 in April 2002, contributed to the decrease in marketable securities.
As of June 30, 2002, the Company has incurred costs of approximately $7.3
million related to the terrorist attacks of September 11th, which are expected
to be covered by insurance and, consequently, did not impact results. These
include the cost of duplicate facilities and equipment associated with the
Company's back-up data center, formerly located in lower Manhattan, and certain
other business recovery expenses. The Company also incurred costs associated
with the damage to the Company's offices and extra operating expenses, as well
as business interruption losses which continue to be evaluated. The Company
expects that a substantial portion of these losses will be covered by insurance.
The Exchange has applied for grant monies under the WTC Job Creation and
Retention Program, an incentive program administered by New York City and New
York State to foster the retention of business and employment in lower
Manhattan. The Exchange has received approval for the grant but must satisfy
certain conditions for receipt of the funds. The Exchange is currently in the
process of fulfilling these conditions and expects to receive the grant monies
in the third quarter of 2002.
Current liabilities at June 30, 2002 decreased by $3,485, or 10%, from
year-end 2001, primarily as a result of payments made during the second quarter
of 2002 for the capital expenditures incurred in the prior quarter for the
disaster recovery from the September 11th terrorist attack.
Future Cash Requirements
As of June 30, 2002, the Company had long-term debt of $94,368 and
short-term debt of $2,815. This debt consisted of the following:
- $28,183 of 7.48% notes, of which $2,815 is short term, with a remaining
ten-year principal payout,
- $54,000 of 7.75% notes with an eleven-year principal payout beginning in
2011, and
- $15,000 of 7.84% notes with a five-year principal payout beginning in
2022.
17
The Company would incur a redemption premium should it choose to pay off
any series issue prior to its maturity. These notes contain certain limitations
on the Company's ability to incur additional indebtedness.
The Company believes that its cash flows from operations will be sufficient
to meet its needs for the foreseeable future. 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 an ongoing basis, the Company
evaluates cost containment measures in an effort to ensure fiscal stability.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which supercedes APB Opinion No. 17, Intangible Assets. This statement,
effective for fiscal years beginning after December 15, 2001, addresses, among
other things, how goodwill and other intangible assets should be accounted for
after they have been initially recognized in the financial statements. The
provisions of SFAS No. 142 provide for an impairment test to be performed at
least annually rather than recording monthly amortization. The Company believes
that the adoption of SFAS No. 142 has a material effect on operations. The
adoption of this standard has increased pre-tax income and net income by $539
and $1,077 for the three months and six months ended June 30, 2002, or $660 and
$1,319 per share, respectively. The Company believes that the adoption of this
standard will increase annual pre-tax and net income by $2,153 or $2,638 per
share, which is the amount of annual amortization of goodwill.
In October 2001, the Emerging Issues Task Force issued EITF No. 01-10,
Accounting for the Impact of the Terrorist Attacks of September 11, 2001. This
statement, among other things, addresses how costs and insurance recoveries for
businesses affected by this event should be accounted for in the financial
statements. The provisions of EITF No. 01-10 provide guidelines for the
recording of a contingent insurance recovery. The Company adopted the provisions
of EITF No. 01-10 during the third quarter of 2001.
In August 2001, SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets was adopted. This statement establishes a single model for the
impairment of long-lived assets and broadens the presentation of discontinued
operations to include disposal of an individual business. The Company adopted
this standard in 2002. As a result of adoption, no impairment charges resulted
from the required impairment evaluations.
BUSINESS HIGHLIGHTS
On May 31, 2002, the Exchange launched its over-the-counter ("OTC")
clearing initiative. OTC clearing enables market participants to take advantage
of the financial depth and integrity of the Exchange's clearinghouse, while
conducting business with parties of their own choosing at prices they negotiate.
Parties may conduct a transaction and submit it through a web interface provided
by the Exchange or will be able to submit a trade through a portal provided
through the Exchange's confirmation services which is expected to be launched in
the third quarter of 2002. The transaction is submitted to the Exchange as an
EFP (exchange for physical) or an EFS (exchange for swap) transaction. These OTC
transactions are checked against credit limits established by the clearing
members and, when approved, the transactions will be matched and cleared by the
Exchange. The Exchange will also be able to provide third-party record-keeping
and confirmation services to parties transacting purely non-cleared bilateral
trades. By the end of June 2002, 91 companies had registered for the OTC
clearing service.
On June 7, 2002, the Exchange launched energy calendar spread options
contracts. Trading volume for June totaled 7,031 contracts and open interest
approached 5,500 contracts by the end of the month. A daily record was set on
July 2, 2002 when 2,425 crude oil calendar spread options contracts traded,
surpassing the previous record of 1,770 contracts traded on June 26, 2002.
On June 17, 2002, the Exchange began offering newly created "E-miNY(sm)"
versions of crude oil and natural gas futures contracts for trading on the
Chicago Mercantile Exchange's ("CME") GLOBEX(R) electronic trading platform and
clearing through the Exchange's clearinghouse. Since the launch, volume has
approximated 2,600 contracts per day.
18
On July 25, 2002, a seat on the NYMEX Division sold for $1,100,000, topping
the record of $1,050,000 set on June 6, 2002. Ownership of a seat on the NYMEX
Division represents a share of common stock in NYMEX Holdings, as well as a
Class A membership that reflects the trading privileges on NYMEX Exchange.
Electronic Trading Strategy
During the second quarter of 2002, the Company continued the repositioning
of its electronic trading strategy in an effort to expedite delivery of the
Company's products to the electronic marketplace and to expand the size and
scope of its customer base. The Company continues to upgrade and enhance NYMEX
ACCESS(R) to handle more users and improve the reliability and performance of
the system. Moreover, the Company continues to focus on transitioning its NYMEX
ACCESS(R) system to an internet-based trading platform that will accommodate
trading or clearing of products that are designed to replicate and complement
contracts traded in the OTC markets, but within the forum of an exchange. In
this way, the Company hopes to combine its expertise and leadership as an
exchange with state of the art technology in order to provide users with a
comprehensive system in commodity risk management.
The Board of Directors previously approved in December 2001 the expansion
of the number of users who can trade on NYMEX ACCESS(R) through the issuance of
electronic trading privileges. The newly issued trading privileges began in
February 2002, and the Company has continued to phase in the increased
privileges in the ensuing months. Previously, the number of electronic trading
privileges for the NYMEX Division products was limited to the number of NYMEX
Division memberships. The Company believes that the issuance of these additional
trading privileges will continue to expand the number of users of NYMEX
ACCESS(R).
Disaster Recovery
As a result of the September 11, 2001 terrorist attack, the Company's
back-up data center, located near the World Trade Center, was rendered
non-operational. The Company is currently utilizing its web hosting facility as
a temporary backup data center. As part of a long-term solution, on May 13,
2002, the Company signed a lease for a facility, located outside New York City,
to serve as a full service back-up trading facility and data recovery center.
The Company expects to complete the necessary construction and technological
installation before the end of the year.
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.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about the Company's marketable
securities, excluding equity securities, including expected principal cash flows
for the years 2002 through 2007 and thereafter (in thousands).
PRINCIPAL AMOUNTS BY EXPECTED MATURITY
AT JUNE 30, 2002
TOTAL FAIR MARKET
2007 PRINCIPAL VALUE AS OF
AND CASH JUNE 30,
2002 2003 2004 2005 2006 THEREAFTER FLOWS 2002
------ ------ ------ ------ ------ ---------- --------- -----------
Government Bonds, Federal Agency
Issues................................ $ -- $ -- $ -- $ -- $1,032 $ -- $ 1,032 $ 1,032
Weighted average interest rate.......... -- -- -- -- 5.50% --
U.S. Treasury Issues.................... -- -- -- -- -- 750 750 766
Weighted average interest rate.......... -- -- -- -- -- 6.25%
Municipal Bonds......................... 1,760 4,282 2,951 4,977 5,307 34,479 53,756 55,493
Weighted average interest rate.......... 5.51% 4.26% 5.31% 4.47% 5.01% 4.64%
------ ------ ------ ------ ------ ------- ------- -------
Total Portfolio, excluding equity
Securities............................ $1,760 $4,282 $2,951 $4,977 $6,339 $35,229 $55,538 $57,291
====== ====== ====== ====== ====== ======= ======= =======
PRINCIPAL AMOUNTS BY EXPECTED MATURITY
AT DECEMBER 31, 2001
TOTAL FAIR MARKET
2007 PRINCIPAL VALUE AS OF
AND CASH DECEMBER 31,
2002 2003 2004 2005 2006 THEREAFTER FLOWS 2001
------ ------ ------ ------ ------- ---------- --------- ------------
Municipal Bonds....................... $4,995 $3,892 $6,433 $3,073 $12,567 $29,594 $60,554 $61,154
Weighted average interest rate........ 5.70% 4.89% 4.67% 4.80% 5.02% 4.68%
------ ------ ------ ------ ------- ------- ------- -------
Total Portfolio, excluding equity
Securities.......................... $4,995 $3,892 $6,433 $3,073 $12,567 $29,594 $60,554 $61,154
====== ====== ====== ====== ======= ======= ======= =======
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, 2002 and the year ended December
31, 2001, the Company had net investment income of $2.8 million and $4.6
million, respectively. Accordingly, a substantial portion of the Company's
income depends upon its ability to continue to invest monies in these
instruments at prevailing interest rates and market prices. The fair value of
these securities at June 30, 2002 and December 31, 2001 were $61 million and $65
million, respectively. The change in fair value, using a hypothetical 10%
decline in prices, is estimated to be $6.1 million for June 30, 2002 and $6.5
million for December 31, 2001, respectively. 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
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, 2001.
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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
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 August, 2002.
NYMEX HOLDINGS, INC.
By: /s/ PATRICK F. CONROY
------------------------------------
Name: Patrick F. Conroy
Title: Duly Authorized Officer and
Principal Financial Officer
22