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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 November 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 Nine Months Ended September 30, 2002
and September 30, 2001................................. 3
Unaudited Condensed Consolidated Balance Sheets at
September 30, 2002 and December 31, 2001............... 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2002 and
September 30, 2001..................................... 5
Notes to Unaudited Condensed Consolidated Financial
Statements for the Three and Nine Months Ended
September 30, 2002 and September 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
Item 4. Controls and Procedures..................................... 21
PART II: OTHER INFORMATION
Item 1. Legal Proceedings........................................... 22
Item 2. Changes in Securities and Use of Proceeds................... 22
Item 3. Defaults Upon Senior Securities............................. 22
Item 4. Submission of Matters to a Vote of Security Holders......... 22
Item 5. Other Information........................................... 22
Item 6. Exhibits and Reports on Form 8-K............................ 22
Signatures............................................................ 23
2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS/(ACCUMULATED DEFICIT)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Operating Revenues:
Clearing and transaction fees, net of member fee
rebates......................................... $35,159 $24,199 $105,626 $ 74,417
Market data fees................................... 8,246 8,767 24,690 25,160
Other, net of rebates.............................. 1,933 1,580 4,950 4,380
------- ------- -------- --------
Total operating revenues................... 45,338 34,546 135,266 103,957
------- ------- -------- --------
Operating Expenses:
Salaries and employee benefits..................... 11,331 10,853 33,191 38,218
Depreciation and amortization of property and
equipment, net of deferred credit
amortization.................................... 5,325 3,939 15,216 11,641
Rent and facility.................................. 4,555 4,170 13,519 12,353
Professional services.............................. 4,024 2,714 12,344 9,262
General and administrative......................... 5,300 3,201 12,097 10,844
Telecommunications, equipment rentals and
maintenance..................................... 1,488 3,795 10,276 11,130
Loss on disposition of property and equipment, and
impairment of capitalized software.............. 696 490 2,293 2,120
Marketing.......................................... 1,233 544 2,072 1,544
Amortization of goodwill........................... -- 538 -- 1,615
Other.............................................. 2,298 1,664 5,698 4,839
------- ------- -------- --------
Total operating expenses................... 36,250 31,908 106,706 103,566
------- ------- -------- --------
Income from operations............................... 9,088 2,638 28,560 391
Other Income (Expenses):
Investment income, net............................. 2,043 1,405 4,889 4,314
Interest expense................................... (1,875) (1,928) (5,625) (5,785)
------- ------- -------- --------
Income (loss) before (provision) benefit for income
taxes.............................................. 9,256 2,115 27,824 (1,080)
(Provision) benefit for income taxes................. (4,427) (985) (13,414) 249
------- ------- -------- --------
Net income (loss).................................... 4,829 1,130 14,410 (831)
Retained earnings/(accumulated deficit), beginning of
period............................................. 10,505 (1,717) 924 244
------- ------- -------- --------
Retained earnings/(accumulated deficit), end of
period............................................. $15,334 $ (587) $ 15,334 $ (587)
======= ======= ======== ========
Net income (loss) per share (based on 816 shares).... $ 5,918 $ 1,385 $ 17,659 $ (1,018)
======= ======= ======== ========
The accompanying notes are an integral part of these statements.
3
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
ASSETS
Cash and cash equivalents................................... $ 2,060 $ 5,680
Securities purchased under agreements to resell............. 35,000 6,500
Marketable securities, at market (cost of $65,056 at
September 30, 2002 and $65,339 at December 31, 2001)...... 67,266 65,025
Clearing and transaction fees receivable, net............... 15,710 9,337
Prepaid taxes and expenses.................................. 10,051 12,985
Cash performance margin..................................... 98,144 43,594
Other current assets........................................ 12,952 15,101
-------- --------
Total current assets.............................. 241,183 158,222
Property and equipment, net................................. 225,959 228,483
Other assets................................................ 25,911 26,085
-------- --------
Total assets...................................... $493,053 $412,790
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued liabilities.................... $ 14,759 $ 20,907
Accrued salaries and related liabilities.................... 8,082 5,221
Accrued interest payable.................................... 3,735 1,867
Cash performance margin..................................... 98,144 43,594
Other current liabilities................................... 11,615 6,889
-------- --------
Total current liabilities......................... 136,335 78,478
Deferred income taxes....................................... 17,817 9,705
Notes payable............................................... 94,368 94,368
Deferred credit -- grant for building construction.......... 115,281 116,890
Other non-current liabilities............................... 20,606 19,113
-------- --------
Total liabilities................................. 384,407 318,554
-------- --------
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........................................... 15,334 924
-------- --------
Total stockholders' equity........................ 108,646 94,236
-------- --------
Total liabilities and stockholders' equity........ $493,053 $412,790
======== ========
The accompanying notes are an integral part of these statements.
4
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2002 2001
-------- --------
Cash Flows From Operating Activities:
Net income (loss)......................................... $ 14,410 $ (831)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment, net of deferred credit amortization........ 15,216 11,641
Amortization of goodwill............................... -- 1,615
Deferred income taxes.................................. 7,376 (523)
Loss on disposition of property, equipment and
impairment of capitalized software.................... 2,293 2,120
Net changes in operating assets and liabilities........ 2,005 (11,940)
-------- --------
Net cash provided by operating activities......... 41,300 2,082
-------- --------
Cash Flows From Investing Activities:
Capital expenditures...................................... (16,594) (15,244)
(Increase) decrease in securities purchased under
agreements to resell................................... (28,500) 16,008
Decrease in other assets.................................. 174 372
-------- --------
Net cash (used in) provided by investing
activities....................................... (44,920) 1,136
-------- --------
Net (decrease) increase in cash and cash equivalents........ (3,620) 3,218
Cash and cash equivalents, beginning of year................ 5,680 2,870
-------- --------
Cash and cash equivalents, end of period.................... $ 2,060 $ 6,088
======== ========
The accompanying notes are an integral part of these statements.
5
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND SEPTEMBER 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, except for the treatment of cash
performance margin described below, 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.
Effective September 30, 2002, the Company changed its accounting policy
regarding the presentation of cash performance margin. The Company now presents
such amounts as current assets and offsetting current liabilities. Previously
such amounts were netted to reflect a zero balance. There is no impact on
results of operations as a result of this change in presentation.
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 third quarter of 2002 by $538,000, or $659 per share, which is
the amount of quarterly amortization of goodwill, and $1,615,000, or $1,979 per
share for the nine months ended September 30, 2002.
6
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.
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. (See note 9).
3. COLLATERALIZATION
At September 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 September 30, 2002 and December 31, 2001 was
approximately $35,000,000 and $6,500,009, respectively.
4. REVENUE REBATE AND FEE REDUCTION PROGRAM
The Company has a fee rebate program that reduces clearing fees for NYMEX
Division members. Rebates under this program totaled $1 million and $1.5 million
for the three months ended September 30, 2002 and September 30, 2001,
respectively, and $3.1 million and $5 million for the nine months ended
September 30, 2002 and September 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
$461,000 and $446,000 for the three months ended September 30, 2002 and
September 30, 2001, respectively, and $1,265,000 and $1,459,000 for the nine
months ended September 30, 2002 and September 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. At September 30, 2002 and
2001, $5.4 million and $10.7 million of cash, $2.2 billion and $4.2 billion of
U.S. Treasury obligations and $88.7 million and $50 million of U.S. Treasury
obligations purchased under agreements to resell, respectively, were segregated
pursuant to such regulations by the NYMEX Division. In addition, at September
30, 2002 and 2001, the NYMEX Division held irrevocable letters of credit
amounting to $130.6 million and $154.7 million, 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. Margin balances in
the form of cash deposits are included in the accompanying unaudited condensed
consolidated financial statements as cash performance margin. 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 September 30, 2002 and 2001, $1.4 billion and $757
million, representing shares of certain money market mutual funds, were held by
the NYMEX Division on behalf of clearing members, respectively.
At September 30, 2002 and 2001, the segregated funds of the Company's COMEX
Division consisted of $3.3 million and $.4 million in cash, and $801.5 million
and $622.2 million in U.S. Treasury obligations, respectively. The COMEX
Division also held irrevocable letters of credit aggregating $62.6 million and
$52.2 million as of September 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 to satisfy the obligations
of a defaulting member.
At September 30, 2002 and 2001, the total deposits maintained in the NYMEX
Division Guaranty Fund were $79.7 million and $83.2 million, respectively. At
September 30, 2002 and 2001, the total deposits for the COMEX Division Guaranty
Fund were $73 million and $77.2 million, 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 Company'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. 9 MOS. 3 MOS. 9 MOS. 3 MOS. 9 MOS.
(In thousands) ------- -------- ------- -------- ------- --------
Three and Nine Months Ended
September 30, 2002:
Operating revenues....... $41,431 $123,049 $ 3,907 $ 12,217 $45,338 $135,266
Operating expenses....... 34,149 95,449 2,101 11,257 36,250 106,706
Operating income......... 7,282 27,600 1,806 960 9,088 28,560
Investment income........ 2,043 4,889 -- -- 2,043 4,889
Interest expense......... 1,875 5,625 -- -- 1,875 5,625
Depreciation and
amortization.......... 3,288 9,473 2,037 5,743 5,325 15,216
Income tax expense....... 3,564 12,951 863 463 4,427 13,414
Net income............... $ 3,886 $ 13,913 $ 943 $ 497 $ 4,829 $ 14,410
8
OPEN-OUTCRY ELECTRONIC TRADING TOTAL
------------------ ------------------ ------------------
3 MOS. 9 MOS. 3 MOS. 9 MOS. 3 MOS. 9 MOS.
(In thousands) ------- -------- ------- -------- ------- --------
Three and Nine Months Ended
September 30, 2001:
Operating revenues....... $32,150 $ 97,636 $ 2,396 $ 6,321 $34,546 $103,957
Operating expenses....... 26,138 83,442 5,770 20,124 31,908 103,566
Operating income
(loss)................ 6,012 14,194 (3,374) (13,803) 2,638 391
Investment income........ 1,405 4,314 -- -- 1,405 4,314
Interest expense......... 1,928 5,785 -- -- 1,928 5,785
Depreciation and
amortization.......... 3,343 10,141 1,134 3,115 4,477 13,256
Income tax (benefit)
expense............... 2,557 2,926 (1,572) (3,175) 985 (249)
Net income (loss)........ $ 2,932 $ 9,797 $(1,802) $(10,628) $ 1,130 $ (831)
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 September 30, 2002, which may be deemed to be material under the
regulations of the Securities and Exchange Commission. 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. The Court set the date of December 13, 2002
for notification by the parties of their intention to file dispositive
motions in this action.
- 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
9
origin. Plaintiff seeks an unspecified amount of compensatory and
punitive damages. On December 17, 2001, the Court rendered a decision
granting in part, the Exchange's motion, for a further bill of
particulars from plaintiff. Plaintiff filed a Note of Issue on or about
September 27, 2002 and a pre-trial conference is scheduled for February
4, 2003.
- 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.
At a conference held on November 12, 2002, the Court ordered the parties
to mediation.
When the Company adapted its electronic trading strategy to an
internet-based platform, it terminated a contractual arrangement for its
proprietary network. The Company has negotiated, and subsequently paid in
October, a settlement of associated termination charges.
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 back-up 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 has completed the
necessary construction and technological installation of the back-up trading
facility and is conducting full tests of the facility.
The Company has recorded a receivable of $8.6 million for insurance
recovery related to the September 11th terrorist attack, including $1.3 million
recorded during the third quarter of 2002. The corresponding expenses have been
reduced by this amount in the unaudited condensed consolidated statements of
operations. The Company settled its claim with the insurance carrier in the
amount of $17.25 million in the fourth quarter and has been fully reimbursed for
costs incurred as a result of the disaster, as well as for certain business
interruption losses.
* * * * *
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 results of
operations and financial condition of the Company during the three and nine
months ended September 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 attempted, wherever
possible, to identify such statements by using words such as "anticipates,"
"believes," "expects" and words and terms of similar substance in connection
with any discussion of future operating or financial performance. These
statements may involve a number of risks, uncertainties and other factors that
may cause actual results to differ materially, including the Company's ability
to: continue to develop and market new innovative products and services; keep
pace with technological change; continue to develop and market its electronic
trading system; obtain or protect intellectual property rights; respond to
competitive pressures; contend with quarterly fluctuations in revenues and
volatility of commodity prices; address changes in financial or business
conditions; attract and retain key personnel; successfully manage acquisitions
and alliances; and respond to legal, regulatory, and economic changes and other
risks, uncertainties and factors discussed elsewhere in this Form 10-Q, in the
Company's other filings with the SEC, or in materials incorporated therein by
reference.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
RESULTS OF OPERATIONS
The Company reported net income of $4,829, or $5,918 per share, which
represented an increase of $3,699, compared to the net income of $1,130 in the
third 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;
- an increase in trading volume on the COMEX Division, primarily due to
trading in gold; and
- revenues resulting from the introduction of Exchange of Futures for Swaps
in natural gas.
The following discussion provides additional information about the
Company's operating results for the third quarter of 2002:
Revenues
Total operating revenues were $45,338 in the third quarter of 2002, up
$10,792 or 31%, 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 $35,159
compared to $24,199 earned during the same quarter last year, up 45%. 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 $1,034 and $1,524 for the three months ended September 30, 2002 and
2001, respectively. Effective October 1, 2002, the Board of Directors approved a
doubling of the fee rebate rate through year-end.
The NYMEX Division's clearing and transaction fee revenues, net of member
fee rebates, were $29,670, up 47% from the comparable 2001 quarter, while
overall trading volume for the NYMEX Division increased 38%.
Open-outcry volume on the NYMEX Division increased by 36% compared with the
same quarter in 2001. Open-outcry clearing and transaction fee revenues, before
member fee rebates, were $25,914, a 33% increase. Volume benefited from an
increase in the number of trading days over the prior year's period, which had
been curtailed due to the September 11th terrorist attack.
Total volume on NYMEX ACCESS(R), the Company's electronic trading system,
increased 66% 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.
THE FOLLOWING ARE THE SIGNIFICANT CHANGES IN TRADING VOLUME FOR THE NYMEX
DIVISION PRODUCTS:
Natural Gas -- Overall volume in Natural Gas futures and options for the
third quarter increased by 74%. Natural gas options volume rose 87% and futures
volume increased by 69%. 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 to a lesser extent, a mild economic recovery 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, also helped promote increased trading in Natural
Gas futures and options contracts.
Crude Oil -- Overall volume increased by 27%. Options volume remained at
near record levels, up 54%. 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 as to product supply at a historically high level. Continued credit
concerns in the OTC market also contributed to the increase in volume.
Unleaded Gasoline -- Overall volume increased by 26%. Somewhat stronger
economic performance boosted demand for refined products, but this was somewhat
offset by higher imports and production levels. Unleaded Gasoline options volume
fell 15%. Reduced differentials between the price of refined products and crude
oil played a major role in the decline.
THE FOLLOWING ARE THE SIGNIFICANT CHANGES IN TRADING VOLUME FOR THE COMEX
DIVISION PRODUCTS:
The COMEX Division's clearing and transaction fees were $5,489 in the third
quarter of 2002, up 37% from the 2001 comparable period.
Gold -- Overall volume increased 42%. Futures volume increased 50%. Factors
such as a weakening U.S. currency, world tensions, and a mild economic recovery,
all contributed to the increase in volume for the third quarter of 2002 when
compared with the same period a year ago.
Silver -- Overall volume increased 28%. Futures activity was up 37%.
Continued economic growth and a weak U.S. currency propelled the increase.
Options have experienced a decrease in volume of 9% associated with decreased
number of strike price intervals.
Copper -- Overall volume increased 28%. Futures volume, up 30%, was
positively impacted by lower inventories and production combined with stronger
home building and car sales, creating price volatility.
12
Market data fee revenue, which represented 18% of the Company's total
operating revenues for the third quarter of 2002, decreased by 6%. The 13%
decrease in units, attributed to contraction in financial services industry, was
the primary reason for this decline.
Operating Expenses
Total operating expenses were $36,250 during the third quarter of 2002, up
$4,342 or 14%.
Salaries and employee benefits, which constitute 31% of total operating
expenses for the quarter, increased by $478, or 4%. This increase is reflective
of the 4% increase in staffing during the third quarter of 2002, primarily for
OTC Clearing and e-miNY(SM) projects.
Depreciation and amortization of property and equipment, net of deferred
credit amortization, increased by $1,386, or 35%, in the third quarter of 2002.
This increase is the result of the start-up of internet-based NYMEX ACCESS(R)
trading. The launch, in the fourth quarter of 2001, initiated the amortization
of project-related software development costs.
Rent and facility expenses increased by $385, or 9%. Increased building
security services, as a result of the September 11th terrorist attacks, as well
as rent for a web-hosting center, make up the majority of this increase. This
increased rents are expected to continue during the fourth quarter of 2002. The
increase was partially offset by a decrease in energy prices for light, heat and
power during the third quarter of 2002.
Professional services increased by $1,310, or 48%. Significant expenditures
for legal fees, which increased 107%, 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.
General and administrative expenses increased by $2,099, or 66%, during the
third quarter of 2002. An addition to litigation reserves, as well as a
significant rise in insurance premiums as a result of the September 11th
terrorist attacks, were the primary reasons for this increase.
Telecommunications, equipment rentals and maintenance decreased by $2,307,
or 61%. The elimination of NYMEX ACCESS(R) trading on a proprietary network,
resulting in monthly savings, was the primary reason for this decline.
Loss on disposition of property and equipment and impairment of capitalized
software was $696 during the third quarter of 2002. A change in strategy related
to the implementation of an internally developed clearing system for the COMEX
Division contributed to this loss. As the Company continues to evaluate changes
to its electronic trading technology strategy, additional impairment charges may
result.
Marketing costs increased by $689, or 127%. The implementation of a
significant advertising campaign for the e-miNY(SM) contracts as well as the OTC
Clearing service, contributed to this increase. This trend is expected to
continue during the fourth 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 $538 when
compared with the same quarter a year ago.
Other expenses increased by $634, or 38%, principally due to the increased
investment earnings on the COMEX members' retention plan assets, which is also
reflected in other expenses.
Other Income
Investment income, net of investment advisory fees, increased by $638, or
45%, during the third quarter of 2002. Unrealized gains on fixed income
securities at the end of the third quarter of 2002, as a result of lower
interest rates, is the primary reason for this increase.
13
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
RESULTS OF OPERATIONS
The Company reported net income of $14,410, or $17,659 per share, which
represented an increase of $15,241 compared to the net loss of $831 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 compared with the same period in 2001 resulting
from a reduction in severance payments.
The following discussion provides additional information about the
Company's operating results for the nine months of 2002:
Revenues
Total operating revenues were $135,266 during the first nine months of
2002, up $31,309, or 30%. 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 nine months of 2002, clearing and transaction fees, net of
member fee rebates, were $105,626 compared to $74,417 earned during the same
period last year. This 42% 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 $3,118 and $4,959 for
the nine months ended September 30, 2002 and 2001, respectively. Effective
October 1, 2002, the Board of Directors approved a doubling of the fee rebate
rate through year-end.
The NYMEX Division's clearing and transaction fees, net of member fee
rebates, were $89,097 for the nine months of 2002, up 49%. The overall trading
volume for the NYMEX Division increased 33%.
Open-outcry volume on the NYMEX Division increased by 31%.
Total volume on NYMEX ACCESS(R), the Company's electronic trading system,
increased 96%. 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.
THE FOLLOWING ARE THE SIGNIFICANT CHANGES IN TRADING VOLUME FOR THE NYMEX
DIVISION PRODUCTS:
Natural Gas -- Overall volume in this contract for the nine months of 2002
increased by 84%. The overall increase resulted from a rise in Natural Gas
options volume, which rose 132%, while futures volume increased by 68%. The
primary catalysts for the increased trading activity were credit concerns in the
Natural Gas
14
industry, highlighted by the Enron bankruptcy as well as financial difficulties
of other companies in the energy industry. Various NYMEX initiatives, including
the Exchange Futures for Swaps ("EFS") and OTC Clearing mechanisms introduced in
Natural Gas in November 2001 and May 2002 respectively, helped promote increased
trading in Natural Gas futures and options contracts.
Crude Oil -- Overall volume in this contract for the nine months of 2002
increased by 23%. Futures volume rose 17% and options volume remained at record
levels, up 56%. Slow global economic activity tends to be correlated to low
crude oil prices. However, political tensions and uncertainty with respect to
OPEC production levels served to maintain hedging activity at near record
levels. Continued credit concerns in the OTC market also helped account for this
increase.
Unleaded Gasoline and Heating Oil -- Unleaded Gasoline volume increased by
4% and Heating Oil volume increased by 9% for the first nine months of 2002. As
with crude oil, world tensions and production uncertainty offset slowing demand
to keep speculative and hedging activities high. Both Unleaded Gasoline and
Heating Oil options volume fell by 35% and 20%, respectively. Continued narrow
differentials between refined products and crude oil played a major role in the
decline in options trading.
THE FOLLOWING ARE THE SIGNIFICANT CHANGES IN TRADING VOLUME FOR THE COMEX
DIVISION PRODUCTS:
The COMEX Division's clearing and transaction fees were $16,530 in the
first nine months of 2002, up 13%.
Gold -- Volume increased by 18%. Futures volume increased 25%. Factors such
as a weakening U.S. currency and world tensions all contributed to the increase
in volume.
Silver -- Volume increased by 27%. Futures activity was up 26% in the first
nine months of 2002. A mild economic recovery and geopolitical events propelled
the increase. Option volume also experienced an increase in volume, rising 32%.
Copper -- Overall volume declined by 3% over last year's nine month totals.
Record housing starts and higher inventories and production offset by slower car
production reduced hedging activity. Copper options volume decreased 27% from
the same period in 2001.
Market data fee revenue, which represented 18% of the Company's total
operating revenues for the nine months of 2002, remained virtually unchanged,
declining 2%. 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 $106,706 during the first nine months of
2002, up $3,140 or 3%.
Salaries and employee benefits, which constituted 31% of total operating
expenses for the nine months of 2002, decreased by $5,027, or 13%. This decrease
was due to a reduction in severance payments made during 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 $3,575, or 31%. 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 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 $1,166, or 9%. 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
fourth quarter of 2002. This increase was partially offset by a decrease in
energy prices for light, heat and power during the third quarter of 2002.
15
Professional services increased by $3,082, or 33%. Significant expenditures
for legal fees, which increased 151%, 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 increased by $1,253, or 12%. An
increase in litigation reserves was the primary reason.
Telecommunications, equipment rentals and maintenance decreased by $854, or
8%. The elimination of NYMEX ACCESS(R) trading on a proprietary network,
resulting in monthly savings, was the primary reason for this decline.
Marketing costs increased by $528, or 34%. The implementation of a
significant advertising campaign for the e-miNY(SM) contracts as well as the OTC
Clearing service contributed to this increase. This trend is expected to
continue during the fourth quarter.
Loss on disposition of property and equipment and impairment of capitalized
software was $2,293, as a result of a change in strategy related to the
implementation of an internally developed clearing system.
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 $1,615.
Other expenses increased by $859, or 18%, principally due to the increased
investment earnings on the COMEX members' retention plan assets, which is also
reflected in other expenses.
Other Income
Investment income, net of investment advisory fees, increased by $575, or
13%, during the first nine months of 2002. This increase was primarily due to
unrealized gains on fixed income securities at the end of the third quarter of
2002, as a result of lower interest rates.
Provision for Income Taxes
The Company's effective tax rate increased, from 23% to 48%, due to the
lower proportion of tax-exempt earnings relative to pre-tax income.
FINANCIAL CONDITION AND CASH FLOWS
Liquidity and Capital Resources
The Company has made, and expects to continue to make, significant
investments in technology to ensure its future growth and to increase
shareholder value. Capital expenditures were $8,369 during the third quarter of
2002. These capital expenditures were used to update and enhance computer
software applications as well as the development of a full service back-up
trading facility and data recovery center, which cost approximately $12 million.
The Company had $104,326 in cash, reverse repurchase agreements, and marketable
securities at September 30, 2002.
Cash Flow
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
2002 2001
-------- ------
Net cash provided by (used in):
Operating activities.................................... $ 41,300 $2,082
Investing activities.................................... (44,920) 1,136
-------- ------
Net (decrease) increase in cash and cash equivalents...... $ (3,620) $3,218
======== ======
16
Working Capital
(IN THOUSANDS)
AT SEPTEMBER 30, AT DECEMBER 31,
2002 2001
---------------- ---------------
Current assets................................. $241,183 $158,222
Current liabilities............................ 136,335 78,478
-------- --------
Working capital................................ $104,848 $ 79,744
======== ========
Current ratio.................................. 1.77:1 2.02:1
Current assets at September 30, 2002 increased by $82,961, or 52%, 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 $28,500 in
securities purchased under agreements to resell offset by a $2,934 decrease in
prepaid taxes; both changes are the result of strong financial performance for
the first nine months of 2002. The increase in clearing and transaction fees
receivable at September 30, 2002 is due primarily to an increase in volume. Cash
performance margins an increased by $54,550 or 125% and is the result of
significantly higher trading activity at the end of September.
As of September 30, 2002, the Company had incurred costs of approximately
$8,643 related to the terrorist attacks of September 11th, which were covered by
insurance and which, 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. The Company settled with its insurers for $17,250 for all
losses claimed under the insurance policy, $14,250 of which was received in
October.
The Company 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 Company 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
before the end of the year.
Current liabilities at September 30, 2002 increased by $57,857, or 74%,
from year-end 2001. Accounts payable and accrued liabilities decreased by
$6,148, or 29%, primarily the result of payments in 2002 for prior year
liabilities related to the disaster recovery work from the September 11th
terrorist attacks. Offsetting this decrease was an increase in accrued salaries
and related liabilities. This liability increased by $2,861, or 55%, and
represents the nine-month portion of anticipated year-end bonuses. Accrued
interest payable also increased, rising $1,868, or 100%. This increase
represents three more months of interest on outstanding debt. Cash performance
margins increased by $54,550 or 125% and is the result of significantly higher
trading activity at the end of September.
Future Cash Requirements
As of September 30, 2002, the Company had long-term debt in the principal
amount of $94,368 and short-term debt in the principal amount 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
nine-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.
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.
On November 7, 2002 the Board of Directors declared a one-time dividend of
$5 million to be distributed to stockholders of record as of January 2, 2003.
This is the first time a dividend has been issued by the Company.
17
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.
Long term deferred income tax liabilities (net of deferred income tax
assets) increased by $8,112 or 84% from year-end 2001. This increase is due to
significantly stronger financial performance during the nine months ended
September 30, 2002 which allowed the Company to utilize charitable contribution
and net operation loss carryforwards, thus reducing deferred income tax assets.
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 $538
and $1,615 for the three months and nine months ended September 30, 2002, or
$659 and $1,979 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.
Effective September 30, 2002, the Company changed its accounting policy
regarding the presentation of cash performance margin. The Company now presents
such amounts as current assets and offsetting current liabilities. Previously
such amounts were netted to reflect a zero balance. There is no impact on
results of operations as a result of this change in presentation.
BUSINESS HIGHLIGHTS
On May 31, 2002, the Company launched its over-the-counter ("OTC") clearing
initiative. OTC clearing enables market participants to take advantage of the
financial depth and integrity of the Company'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
Company or will be able to submit a trade through a portal provided through the
Company's confirmation services which was successfully deployed in October 2002.
The transaction is submitted to the Company 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 Company will
also be able to provide third-party record-keeping and confirmation services to
parties transacting purely non-cleared bilateral trades. By November 14, 2002,
92 companies had registered for the OTC clearing service.
On June 7, 2002, the Company launched energy calendar spread options
contracts. Trading volume through September 30, 2002, totaled 62,029 contracts
and open interest reached 15,332 contracts. 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 Company began offering newly created smaller sized
versions of crude oil and natural gas futures contracts ("e-miNY(SM)") for
trading on the Chicago Mercantile Exchange's ("CME")
18
GLOBEX(R) electronic trading platform and clearing through the Company's
clearinghouse. Since the launch, volume has approximated 2,264 contracts per
day. On October 1, 2002, a record was set when 4,836 contracts were traded,
topping the record of 3,761 contracts traded on July 9, 2002.
On September 25, 2002, a seat on the NYMEX Division sold for $1,110,000,
topping the record of $1,100,000 set on July 25, 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.
The Exchange recently launched a major infrastructure project known as
Enterprise-wide Messaging Architecture ("EMA"), which the Exchange believes will
enhance technological and strategic benefits internally and to its customers.
EMA allows for open communications between our internal systems such as clearing
and trade management systems. EMA also provides a set of Application Programming
Interfaces ("API") that will allow third party systems or exchanges to connect
directly to our clearing systems using a standard messaging protocol known as
Financial Information Exchange ("FIX"). This API will allow third parties to
send trade information directly from their electronic trading system or
back-office clearing systems in FIX format, where we will accept the trade,
convert it into our Universal Trade Message ("UTM") format and process it
through our systems.
On November 7, 2002 the Board of Directors declared a one-time dividend of
$5 million to be distributed to stockholders of record as of January 2, 2003.
This is the first time a dividend has been issued by the Company.
Electronic Trading Strategy
During the third 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. Moreover, the Company continues to focus on
transitioning its NYMEX ACCESS(R) system to 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.
In addition, the Company is continuing to evaluate electronic trading
platforms that could be used as a matching engine for OTC trading. This matching
engine will complement the Company's OTC Clearing initiative. The Company
expects to complete this evaluation by year-end.
On October 22, 2002, NYMEX Exchange announced that it had cleared more than
$1.1 billion worth of OTC deals in natural gas and electricity, equivalent to
294 trillion British thermal units of natural gas and 118,400 megawatt hours of
electricity.
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).
On September 17, 2002 a record volume of 46,255 futures contracts were
traded on the NYMEX ACCESS(R) electronic trading system. The previous record for
overnight trading was 42,131 contracts, set on June 5, 2002.
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
19
facility as a temporary back-up 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 has completed the necessary construction and technological
installation of the back-up trading facility and is conducting full tests of the
facility.
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, including expected principal cash flows
for the years 2002 through 2007 and thereafter (in thousands).
PRINCIPAL AMOUNTS BY EXPECTED MATURITY
AT SEPTEMBER 30, 2002
TOTAL FAIR MARKET
2007 PRINCIPAL VALUE AS OF
AND CASH SEPTEMBER 30,
2002 2003 2004 2005 2006 THEREAFTER FLOWS 2002
------ ------ ------ ------ ------ ---------- --------- -------------
Municipal Bonds........................ $1,023 $3,309 $2,850 $5,838 $5,309 $43,010 $61,339 $64,604
Weighted average interest rate......... 5.05% 4.40% 5.32% 4.55% 5.01% 4.49%
------ ------ ------ ------ ------ ------- ------- -------
Total Portfolio, excluding equity
Securities........................... $1,023 $3,309 $2,850 $5,838 $5,309 $43,010 $61,339 $64,604
====== ====== ====== ====== ====== ======= ======= =======
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 nine months ended September 30, 2002 and the year ended
December 31, 2001, the Company had net investment income of $4.9 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 September 30, 2002 and December 31, 2001 were $67 million
and $65 million, respectively. The change in fair value, using a hypothetical
10% decline in prices, is estimated to be $6.7 million for September 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.
20
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.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Our 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 a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"). Based upon such evaluation, such
officers have concluded that, as of the Evaluation Date, our disclosure controls
and procedures are effective in alerting them on a timely basis to material
information relating to the Company that is required to be included in our
periodic filings under such Exchange Act.
(b) Changes in Internal Controls. Since the Evaluation Date, there have
not been any significant changes in our internal controls or in other factors
that could significantly affect such controls.
21
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
N/A
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
N/A
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
N/A
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
N/A
ITEM 5. OTHER INFORMATION
N/A
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
On August 14, 2002, 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 June 30, 2002 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.
On October 24, 2002, NYMEX Holdings, Inc., filed a Form 8-K with the
Securities and Exchange Commission disclosing the resignation of Ernst & Young
LLP ("E&Y") as the Company's independent auditor.
On November 7, 2002, NYMEX Holdings, Inc., filed a Form 8-K with the
Securities and Exchange Commission disclosing the appointment of KPMG LLP as the
Company's independent auditor, effective immediately.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 14th day of November, 2002.
NYMEX HOLDINGS, INC.
By: /s/ PATRICK F. CONROY
------------------------------------
Name: Patrick F. Conroy
Title: Duly Authorized Officer and
Principal Financial Officer
23
CERTIFICATIONS
I, Vincent Viola, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NYMEX Holdings,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Vincent Viola
Date: November 14, 2002 _________________________________
Name: Vincent Viola
Title: Chairman
I, Patrick Conroy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NYMEX Holdings,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Patrick Conroy
_________________________________
Name: Patrick Conroy
Title: Chief Financial Officer