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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 MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
NYMEX HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 333-30332 13-4098266
(STATE OR OTHER JURISDICTION OF (COMMISSION FILE NUMBER) (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
ONE NORTH END AVENUE,
WORLD FINANCIAL CENTER,
NEW YORK, NEW YORK 10282-1101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(212) 299-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
As of May 15, 2003, 816 shares of the registrant's common stock, par value
$0.01 per share, were outstanding.
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TABLE OF CONTENTS
PAGE
------
PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements........................................ 2
Unaudited Condensed Consolidated Statements of Income And
Retained Earnings for the Three Months Ended March 31,
2003 and March 31, 2002................................ 2
Unaudited Condensed Consolidated Balance Sheets at March
31, 2003 and December 31, 2002......................... 3
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2003 and March 31,
2002................................................... 4
Notes to Unaudited Condensed Consolidated Financial
Statements for the Three Months Ended March 31, 2003
and March 31, 2002..................................... 5
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 19
ITEM 4. Controls and Procedures..................................... 20
PART II: OTHER INFORMATION
ITEM 1. Legal Proceedings........................................... 22
ITEM 2. Changes in Securities and Use of Proceeds................... 22
ITEM 3. Defaults Upon Senior Securities............................. 22
ITEM 4. Submission of Matters to a Vote of Security Holders......... 22
ITEM 5. Other Information........................................... 22
ITEM 6. Exhibits and Reports on Form 8-K............................ 22
Signatures.................................................. 23
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND RETAINED EARNINGS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
2003 2002
-------- --------
OPERATING REVENUES:
Clearing and transaction fees, net of member fee
rebates................................................ $ 39,391 $ 32,931
Market data fees.......................................... 8,394 8,312
Other, net of rebates..................................... 1,840 1,446
-------- --------
Total operating revenues.......................... 49,625 42,689
-------- --------
OPERATING EXPENSES:
Salaries and employee benefits............................ 12,894 11,372
Occupancy and equipment................................... 7,038 5,847
Depreciation and amortization of property and equipment,
net of deferred credit amortization.................... 4,717 4,416
General and administrative................................ 4,048 3,302
Professional services..................................... 4,010 3,795
Telecommunications........................................ 1,332 2,486
Loss on disposition of property and equipment............. 940 677
Marketing and other....................................... 2,482 1,819
-------- --------
Total operating expenses.......................... 37,461 33,714
-------- --------
INCOME FROM OPERATIONS...................................... 12,164 8,975
OTHER INCOME (EXPENSES):
Investment income, net.................................... 686 809
Interest expense.......................................... (1,822) (1,874)
-------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES.................... 11,028 7,910
PROVISION FOR INCOME TAXES.................................. 5,273 3,955
-------- --------
NET INCOME.................................................. 5,755 3,955
Retained earnings, beginning of period...................... 8,223 924
-------- --------
Retained earnings, end of period............................ $ 13,978 $ 4,879
======== ========
Basic and diluted net income per share (based on 816
shares)................................................... $ 7,053 $ 4,847
======== ========
The accompanying notes are an integral part of these statements.
2
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND DECEMBER 31, 2002
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2003 2002
--------- ------------
ASSETS
Cash and cash equivalents................................... $ 2,988 $ 1,014
Securities purchased under agreements to resell............. 48,378 40,760
Marketable securities, at market (cost of $66,225 at March
31, 2003 and $65,285 at December 31, 2002)................ 67,503 66,976
Clearing and transaction fees receivable, net............... 15,864 13,884
Segregated and guaranty funds............................... 137,634 75,327
Other current assets........................................ 13,589 14,748
-------- --------
Total current assets................................. 285,956 212,709
Property and equipment, net................................. 219,290 223,878
Other assets................................................ 29,427 26,168
-------- --------
TOTAL ASSETS................................................ $534,673 $462,755
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued liabilities.................... $ 16,200 $ 16,036
Income taxes payable........................................ 13,740 4,335
Accrued interest payable.................................... 3,629 1,815
Segregated and guaranty funds............................... 137,634 75,327
Other current liabilities................................... 18,562 22,184
-------- --------
Total current liabilities.............................. 189,765 119,697
Notes payable............................................... 91,551 91,551
Deferred credit -- grant for building construction.......... 114,209 114,745
Deferred income taxes....................................... 5,833 9,622
Other non-current liabilities............................... 14,892 14,567
Subordinated commitment -- COMEX members' retention
program................................................... 11,133 11,038
-------- --------
Total liabilities................................. 427,383 361,220
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, at $0.01 par value, 816 shares authorized,
issued and outstanding.................................... -- --
Additional paid-in capital.................................. 93,312 93,312
Retained earnings........................................... 13,978 8,223
-------- --------
Total stockholders' equity........................ 107,290 101,535
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $534,673 $462,755
======== ========
The accompanying notes are an integral part of these statements.
3
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(IN THOUSANDS)
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 5,755 $ 3,955
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of property and
equipment, net of deferred credit amortization........ 4,717 4,416
Deferred income taxes.................................. (4,140) 1,852
Loss on disposition of property and equipment.......... 940 677
Increase in:
Segregated and guaranty fund assets.................. (62,307) (18,390)
Income taxes payable................................. 9,405 2,404
Segregated and guaranty fund liabilities............. 62,307 18,390
Increase in other current liabilities................ 1,378 1,169
Net changes in other operating assets and
liabilities........................................... 1,401 (10,198)
-------- --------
Net cash provided by operating activities............ 19,456 4,275
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in securities purchased under agreements to
resell................................................. (7,618) (4,000)
Capital expenditures...................................... (1,605) (2,053)
(Increase) decrease in other assets....................... (3,259) 87
-------- --------
Net cash used in investing activities................ (12,482) (5,966)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid............................................ (5,000) --
-------- --------
Cash used in financing activities.................... (5,000) --
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 1,974 (1,691)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 1,014 5,680
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 2,988 $ 3,989
======== ========
The accompanying notes are an integral part of these statements.
4
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND MARCH 31, 2002
1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Throughout this document NYMEX Holdings, Inc., will be referred to as NYMEX
Holdings and, together with its subsidiaries, as the "Company." The two
principal subsidiaries of NYMEX Holdings are New York Mercantile Exchange, Inc.,
("NYMEX Exchange" or "NYMEX Division"), and Commodity Exchange Inc. ("COMEX" or
"COMEX Division"), which is a wholly-owned subsidiary of NYMEX Exchange. Where
appropriate, each division will be discussed separately and collectively will be
discussed as the "Exchange."
NATURE OF BUSINESS -- The Company exists principally to provide facilities
for buying and selling energy and precious and base metals commodities for
future delivery under rules intended to protect the interests of market
participants. The Company itself does not own commodities, trade for its own
account, or otherwise engage in market activities. The Company provides the
physical facilities necessary to conduct an open-outcry auction market,
electronic trading systems, systems for the matching and clearing of trades
executed on the Exchange, and systems for the clearing of certain bilateral
trades executed in the over-the-counter ("OTC") market. These services
facilitate price discovery, hedging, and liquidity in the energy and metals
markets. Transactions executed on the Exchange mitigate the risk of
counter-party default because the Exchange clearinghouse acts as the
counter-party to every trade. Trading and clearing on the Exchange is regulated
by the Commodity Futures Trading Commission. To manage risk of financial
nonperformance, the Exchange requires members to post margin. (See Note 5.)
BASIS OF PRESENTATION -- The accompanying unaudited condensed consolidated
financial statements of NYMEX Holdings and subsidiaries have been prepared in
accordance with Accounting Principles Board Opinion No. 28 and Rule 10-01 of
Regulation S-X promulgated by the Securities and Exchange Commission (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, 2002 and 2001 and for each year in the three-year period
ended December 31, 2002.
The preparation of the accompanying unaudited condensed consolidated
financial statements and related notes in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, the reported amounts of
revenues and expenses during the reporting period, and the disclosure of
contingent liabilities. Actual results could differ from those estimates.
Certain reclassifications have been made to the prior year amounts to
conform to the current presentation. All inter-company balances and transactions
have been eliminated in consolidation.
For a summary of significant accounting policies and additional
information, see note 1 to the audited December 31, 2002 financial statements,
which were filed with the SEC in the Company's Form 10-K on March 6, 2003.
2. RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standard ("SFAS") No.
145, which recinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of
Debt, SFAS No. 44, Accounting for Intangible Assets of Motor Carriers, and SFAS
No. 64, Extinguishment of Debt Made to Satisfy Sinking-Fund Requirement ("SFAS
145"). SFAS No. 145 also amends SFAS No. 13, Accounting for Leases, to
5
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. As a
result of the rescission of SFAS No. 64, the criteria in Accounting Principles
Board ("APB") No. 30 will be used to classify gains and losses from debt
extinguishment. SFAS No. 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meaning, or
describe their applicability under changed conditions. SFAS No. 145 became
effective for the Company as of January 1, 2003. The adoption of SFAS No. 145
had no impact on the Company's consolidated results of operations, financial
position, or cash flows.
The Company adopted SFAS No. 146, Accounting for Costs Associated with Exit
or Disposal Activity, effective January 1, 2003. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities, and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring), which
previously governed the accounting treatment for restructuring activities. SFAS
No. 146 applies to costs associated with an exit activity covered by SFAS No.
144. Those costs include, but are not limited to, the following: (1) termination
benefits under the terms of a benefit arrangement that, in substance, is not an
ongoing benefit arrangement or an individual deferred-compensation contract, (2)
costs to terminate a contract that is not a capital lease, and (3) costs to
consolidate facilities to relocate employees. SFAS No. 146 does not apply to
costs associated with the retirement of long-lived assets covered by SFAS No.
143. The adoption of SFAS No. 146 had no impact on the Company's consolidated
results of operations, financial position or cash flows.
The Company adopted Financial Accounting Interpretation ("FIN") No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, effective January 1, 2003. FIN
No. 45 elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees, and standby letters of credit. It also clarifies that
at the time a company issues a guarantee, the company must recognize an initial
liability for the fair market value of the obligations it assumes under that
guarantee and must disclose that information in its interim and annual financial
statements. The initial recognition and measurement provisions of FIN No. 45
were applied prospectively to guarantees issued or modified after December 31,
2002. The adoption of FIN No. 45 had no impact on the Company's condensed
consolidated results of operations, financial position or cash flows. (See Note
7.)
3. COLLATERALIZATION
At March 31, 2003 and December 31, 2002, the Company accepted collateral in
the form of United States Treasury bills that it is permitted by contract or
industry practice to sell or repledge, although it is not the Company's policy
to do so. This collateral was received in connection with reverse repurchase
agreements with, and are held in custody by, the Company's banks. The fair value
of such collateral at March 31, 2003 and December 31, 2002 was approximately
$48.4 million and $40.8 million, respectively.
4. REVENUE REBATE AND FEE REDUCTION PROGRAM
The Company has a fee rebate program, which substantially reduces clearing
fees for the NYMEX Division members. Rebates under this program totaled $4.7
million and $1.0 million for the three months ended March 31, 2003 and March 31,
2002, respectively. Clearing and transaction fees are presented in the unaudited
condensed consolidated statements, net of these rebates.
The Company has several incentive programs for members for the purpose of
reducing various operating costs. These incentive programs totaled $443,558 and
$470,933 for the three months ended March 31, 2003
6
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and March 31, 2002, respectively. Other revenues are presented in the unaudited
condensed consolidated statements, net of fee reductions related to these
programs.
5. SEGREGATED AND GUARANTY FUNDS
The Company is required under the Commodity Exchange Act to segregate cash
and securities that are deposited as margin by clearing members at banks
approved by the Company for house and customer accounts. These deposits are used
by members to meet their obligations to the Company, for margin requirements, on
both open futures and options positions, as well as delivery obligations.
Each clearing member firm is required to maintain a security deposit, in
the form of cash or U.S. Treasury securities, ranging from $100,000 to $2.0
million, depending upon such clearing member firm's reported regulatory capital,
in a fund known as a "Guaranty Fund". 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 Company
as a result of the failure of a clearing member firm to discharge its
obligations.
The Company is entitled to earn interest on certain cash balances. Only
those balances, which earn interest that the Company is entitled to retain, are
included in the accompanying consolidated condensed financial statements. At
March 31, 2003 and December 31, 2002 a total of $8.1 billion and $5.2 billion
was held in segregated and guaranty funds, respectively. The following table
below reflects segregated and guaranty fund balances held by the Company on
behalf of clearing members at March 31, 2003 and December 31, 2002,
respectively.
MARCH 31, 2003
(IN THOUSANDS)
CASH AND MONEY MARKET FUNDS,
RESALE U.S. TREASURIES &
AGREEMENTS LETTERS OF CREDIT TOTAL
---------- ------------------- ----------
Segregated Funds:
NYMEX.................................... $125,118 $6,736,764 $6,861,882
COMEX.................................... 11,595 1,073,625 1,085,220
Guaranty Funds:
NYMEX.................................... 105 75,116 75,221
COMEX.................................... 816 71,010 71,826
-------- ---------- ----------
Total...................................... $137,634 $7,956,515 $8,094,149
======== ========== ==========
7
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2002
(IN THOUSANDS)
CASH AND MONEY MARKET FUNDS,
RESALE U.S. TREASURIES &
AGREEMENTS LETTERS OF CREDITS TOTAL
---------- ------------------- ----------
Segregated Funds:
NYMEX.................................... $66,275 $3,958,906 $4,025,181
COMEX.................................... 8,030 998,460 1,006,490
Guaranty Funds:
NYMEX.................................... 105 79,721 79,826
COMEX.................................... 917 74,437 75,354
------- ---------- ----------
Total...................................... $75,327 $5,111,524 $5,186,851
======= ========== ==========
6. SEGMENT REPORTING
The Company considers operating results for two business segments: Open
Outcry and Electronic Trading and Clearing.
Open Outcry is the trading and clearing of NYMEX Division and COMEX
Division futures and options contracts which are traded on the trading floor of
the Exchange. Electronic Trading and Clearing consists of trades which are
executed and/or cleared through the NYMEX ACCESS(R), NYMEX Clearport(SM) Trading
and NYMEX Clearport(SM) Clearing systems.
Financial information relating to these business segments is set forth
below:
ELECTRONIC TRADING
OPEN OUTCRY AND CLEARING TOTAL
($ IN THOUSANDS) ----------- ------------------ -------
Three Months Ended March 31, 2003:
Operating Revenues............................ $43,758 $5,867 $49,625
Operating expenses............................ 35,931 1,530 37,461
Operating income.............................. 7,827 4,337 12,164
Investment income, net........................ 686 -- 686
Interest expense.............................. 1,822 -- 1,822
Depreciation and amortization, net............ 4,189 528 4,717
Income tax expense............................ 3,209 2,064 5,273
Net income.................................... $ 3,482 $2,273 $ 5,755
Three Months ended March 31, 2002
Operating Revenues............................ $38,955 $3,734 $42,689
Operating expenses............................ 30,086 3,628 33,714
Operating income.............................. 8,869 106 8,975
Investment income, net........................ 809 -- 809
Interest expense.............................. 1,874 -- 1,874
Depreciation and amortization, net............ 2,994 1,422 4,416
Income tax expense............................ 3,902 53 3,955
Net income.................................... $ 3,902 $ 53 $ 3,955
8
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is involved in legal proceedings and
litigation arising in the ordinary course of business. Set forth below are
descriptions of legal proceedings and litigation to which the Company is a party
as of March 31, 2003. Although there can be no assurance as to the ultimate
outcome, the Company has denied, or believes it has a meritorious defense and
will deny, liability in all significant cases pending against it including the
matters described below, and intends to defend vigorously each such case. While
the ultimate result of the proceedings against the Company cannot be predicted
with certainty, it is the opinion of management, after consultation with outside
legal counsel, that the resolution of these matters, in excess of amounts
already recognized, will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
The Company has been named as a defendant in the following legal actions:
eSpeed, Inc. and Electronic Trading Systems Corporation. v. New York
Mercantile Exchange. This action was originally filed in the United States
District Court for the Northern District of Texas (Dallas Division) and is
now pending in United States District Court for the Southern District of
New York. NYMEX Exchange was served with a summons and complaint on or
about May 10, 1999. This is a patent infringement case, in which the
plaintiff alleges that it is the owner of United States Patent No.
4,903,201 entitled "Automated Futures Trade Exchange" and that NYMEX
Exchange is infringing this patent through use of its electronic trading
system. The plaintiff seeks an unspecified amount of royalties. The Markman
hearing was held on April 18, 2002. On June 26, 2002, the Court issued a
decision in which it construed more broadly the meaning of certain elements
of the patent claims than those constructions proposed by the Exchange.
This decision may limit the scope of the arguments that the Exchange may
have respecting non-infringement.
Enrique Rivera and Edith Rivera v. New York Mercantile Exchange, Mark
Kessloff, Les Faison, Brian Bartichek and John Does "1-10." This action is
pending in New York State Supreme Court (Bronx County). NYMEX Exchange was
served with the summons and complaint on or about April 22, 1999. This is
an ethnic discrimination case, in which the plaintiff alleges that
throughout his employment with NYMEX Exchange he was subjected to a hostile
work environment and discrimination regarding his ethnic origin. Plaintiff
seeks an unspecified amount of compensatory and punitive damages. The
plaintiff filed a Note of Issue on or about September 27, 2002.
New York Mercantile Exchange v. IntercontinentalExchange, Inc. On November
20, 2002, NYMEX Exchange commenced an action in United States District
Court for the Southern District of New York against
IntercontinentalExchange, Inc. ("ICE"). NYMEX Exchange alleges claims for
(a) copyright infringement by ICE arising out of ICE's uses of certain
NYMEX Exchange settlement prices; (b) service mark infringement by reason
of use by ICE of the service marks NYMEX and NEW YORK MERCANTILE EXCHANGE,
(c) violation of trademark anti-dilution statutes, and (d) interference
with contractual relationships. On January 6, 2003, ICE served an Answer
and Counterclaims, in which ICE makes five counterclaims against NYMEX
Exchange principally alleging violations of U.S. antitrust laws, including
those relating to monopolistic behavior based upon access to NYMEX Exchange
settlement prices, restraint of trade and tying of trade execution and
clearing services. The counterclaims request damages and trebled damages in
amounts not specified yet by ICE in addition to injunctive and declaratory
relief. NYMEX Exchange's response to the counterclaims was served on
February 26, 2003. On March 31, 2003, NYMEX's motion to dismiss the
counterclaims was submitted to the Court.
9
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial Guarantees
The Company adopted FIN 45, effective January 1, 2003. The Company has
certain guarantee arrangements in its clearing process as well as other
financial guarantees related to its seat-financing program as discussed below.
The Company serves a clearinghouse function, standing as a financial
intermediary on every open futures and option transaction cleared. Specifically,
through its clearinghouses, the Exchange maintains a system of guarantees for
performance of obligations owed to buyers and sellers. As such, in the case of a
customer or clearing member financial default, to the extent that funds are not
otherwise available to the Exchange to satisfy the obligations under the
applicable contract, the Exchange may perform the financial obligations. As of
March 31, 2003, there were no clearing members in default.
The Company has provided financial guarantees and pledged collateral with
one of its banks relating to a membership seat-financing program. Under this
program, members may borrow up to a specified percentage of the purchase price
of their seats. The Company guarantees all loans under this program and must
hold collateral, in the form of pledged securities, at the bank in an amount
equal to 118% of the outstanding loan balances. As of March 31, 2003 and
December 31, 2002 the amounts of outstanding guarantees under this program were
$4.3 million and $5.0 million, respectively.
There were no events of default during the first quarter of 2003 in either
arrangement in which a liability should be recognized in accordance with FIN 45.
As such, the adoption of this pronouncement had no impact on the Company's
condensed consolidated results of operations, financial position, or cash flows,
during the first quarter of 2003.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
Introduction
This discussion summarizes the significant factors affecting the results of
operations and financial condition of the Company during the three months ended
March 31, 2003. This discussion is provided to increase the understanding of,
and should be read in conjunction with, the unaudited condensed consolidated
financial statements, accompanying notes and tables included in this quarterly
report.
Forward Looking and Cautionary Statements and Factors That May Affect Future
Results
Certain information in this report (other than historical data and
information) constitutes forward-looking statements regarding events and trends
that may affect the Company's future operating results and financial position.
The words "estimate," "expect," "intend" and "project," as well as other words
or expressions of similar meaning, are intended to identify forward-looking
statements. Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date of this quarterly report on Form
10-Q. These statements are based on current expectations. Assumptions are
inherently uncertain and are subject to risks that should be viewed with
caution. Actual results and experience may differ materially from
forward-looking statements as a result of many factors, including: changes in
general economic, political and industry conditions in various markets in which
the Company's contracts are traded, increased competitive activity, fluctuations
in prices of the underlying commodities as well as for trading floor
administrative expenses related to trading and clearing contracts, the ability
to control costs and expenses, changes to legislation or regulations, protection
and validity of our intellectual property rights and rights licensed from
others, and other unanticipated events and conditions. It is not possible to
foresee or identify all such factors. The Company assumes no obligation to
update publicly any forward-looking statements.
Business Overview
NYMEX Holdings, Inc. ("NYMEX Holdings") was incorporated in 2000 as a stock
corporation in Delaware, and is the successor to the New York Mercantile
Exchange that was established in 1872. The two principal operating subsidiaries
of NYMEX Holdings are the New York Mercantile Exchange, Inc. ("NYMEX Exchange"
or "NYMEX Division") and the Commodity Exchange, Inc. ("COMEX" or "COMEX
Division"), which is organized as a wholly-owned subsidiary of NYMEX Division.
Where appropriate, each NYMEX Exchange operating division, NYMEX Division and
COMEX Division, will be discussed separately, and collectively will be referred
to as the "Exchange." When discussing NYMEX Holdings together with its
subsidiaries, reference is being made to the "Company."
The Company facilitates the buying and selling of energy and metal
commodities for future delivery under rules intended to protect the interests of
market participants. The Company provides liquid marketplaces where physical
commodity market participants can manage future price risk and, through the
Company's clearing operations, mitigate counter-party credit risk. Through
real-time and delayed dissemination of its transaction prices, the Company
provides price discovery and transparency to market participants, further
enhancing liquidity in the energy and metals markets. To enhance its markets and
provide market participants additional mechanisms to manage risk, the Company
continuously offers new products, distribution services and clearing services.
The Company does not own commodities, trade for its own account, or otherwise
engage in market activities.
The Company's NYMEX Division provides a marketplace for trading energy
futures and options. Its COMEX Division provides a marketplace for trading
precious and base metals futures and options. The NYMEX Division's principal
markets include crude oil, natural gas, heating oil and unleaded gasoline
products. The COMEX Division's principal markets include gold, silver and high
grade copper products. The Company provides the physical facilities for an
open-outcry auction market. The open outcry market operates during regular
business hours, and trading activities in this market are, for purposes of this
management discussion, referred to as floor trading. Through its NYMEX ACCESS(R)
and NYMEX ClearPort(SM) Trading technology, the Company provides market
participants the ability to conduct after-hours and electronic
11
trading for floor-based products as well as 23 hours per day trading for
additional products. The Company provides clearing services for all trades
executed through its floor trading and electronic trading venues. Additionally,
the Company's NYMEX ClearPort(SM) Clearing Services allows bilateral trades
negotiated in the over-the-counter markets to be transferred to the Company as
futures contracts for clearing.
Market data information relating to contracts on the Company's exchanges is
disseminated through to vendors then redistributed to market participants and
others. The level of market data fees correlates to the number of vendors and
end users receiving data. The Company relies on its market data vendors to
supply accurate information regarding the number of subscribers accessing the
Company's market data.
MARKET CONDITIONS
In the first quarter of 2003, total futures and options trading volume on
the Company's exchange increased 21% from the first quarter 2002. Futures
contract volume increased 19% and options volume increased 9%.
Energy Markets -- NYMEX Division
In the first quarter of 2003, total futures and options trading volume for
the NYMEX Division increased 12% to 31.3 million contracts as compared with the
first quarter 2002. The increases were primarily driven by uncertainties arising
out of political tensions in oil producing countries. Additional uncertainty was
caused by an unusually cold winter in the Northeast United States. The
contraction of available credit and market participants in the energy merchant
sector caused Natural Gas volume to significantly decline in the first quarter
of 2003. The following table sets forth trading volumes for the Company's major
energy futures and options products.
PERCENTAGE CHANGE
1Q03 1Q02 -------------------------
FUTURES OPTIONS TOTAL FUTURES OPTIONS TOTAL FUTURES OPTIONS TOTAL
---------- --------- ---------- ---------- --------- ---------- ------- ------- -----
Light Sweet Crude Oil..... 12,742,776 3,624,131 16,366,907 10,421,844 2,864,824 13,286,668 22% 27% 23%
Henry Hub Natural Gas..... 5,405,897 2,323,666 7,729,563 5,992,718 2,936,193 8,928,911 -10% -21% -13%
Heating Oil............... 3,465,016 207,397 3,672,413 2,694,809 140,240 2,835,049 29% 48% 30%
New York Unleaded
Gasoline................ 3,033,704 234,180 3,267,884 2,482,407 199,032 2,681,439 22% 18% 22%
Metals Markets -- COMEX Division
In the first quarter of 2003, total futures and options trading volume for
the COMEX Division increased 46%. COMEX volume increases were driven primarily
out of geopolitical uncertainty. Foremost among these was the Iraqi conflict. In
addition, weakness of the U.S. Dollar contributed to hedging activity.
The following table sets forth trading volumes for the Company's major
metals futures and options products.
PERCENTAGE CHANGE
1Q03 1Q02 -------------------------
FUTURES OPTIONS TOTAL FUTURES OPTIONS TOTAL FUTURES OPTIONS TOTAL
--------- ------- --------- --------- ------- --------- ------- ------- -----
Gold........................ 3,255,376 833,348 4,088,724 2,064,431 492,890 2,557,321 58% 69% 60%
Silver...................... 917,517 128,446 1,045,963 700,964 168,645 869,609 31% -24% 20%
High Grade Copper........... 752,033 7,161 759,194 616,049 7,250 623,299 22% -1% 22%
Results of Operations
In the first quarter of 2003, the Company reported net income of $5.8
million, compared to net income of $3.9 million the same period a year ago.
Basic and diluted earnings per share were $7,053 in the first quarter of 2003
and $4,847 in 2002.
12
Revenues
The Company's principal sources of revenues are clearing and transaction
fees derived from trades executed on its exchanges and market data fees from the
dissemination of the Company's futures and options contract price information.
Total operating revenues for the first quarter of 2003 of $49.6 million were 16%
higher than the first quarter of 2002 due primarily to higher clearing and
transaction fees.
Clearing and transaction fees are primarily dependent upon the volume of
trading activity conducted on the Company's exchanges and cleared by the
Company's clearinghouse. Clearing and transaction fees increased 20% in the
first quarter of 2003, due primarily to a 21% increase in the number of futures
and options contracts executed through the Company's floor trading and
electronic trading venues, and revenues from the over-the-counter transactions
cleared through NYMEX ClearPort(SM) Clearing Services. Average clearing and
transaction fee revenue per contract was $1.02 in the first quarter of 2003
compared to $1.03 in the first quarter of 2002. The Company charges higher fees
for electronic trading than for floor trading and provides liquidity incentives
to members by rebating a portion of member clearing transaction fees. During the
first quarter of 2003, the Company increased the level of member fee rebates.
This increase offset the growth in average revenue per contract that resulted
from higher levels of electronic trading.
Market Data
Market data revenues were $8.4 million in the first quarter of 2003
compared to $8.3 million in the first quarter of 2002. Market data revenues
consist primarily of fees charged to market data subscribers for the use of the
Company's futures and options contract information. These fees are charged on a
per-subscriber basis and fluctuate as the number of subscribers change. During
the first quarter of 2003, an increase in market data revenue related to audit
recovery was partially offset by a decline in subscriber fees related to a
decrease in the number of market data subscribers.
Other Revenues
Other revenues increased 27% in the first quarter of 2003 due primarily to
increased rental income. During the first quarter of 2003, the Company began
recording rental income from the New York Board of Trade ("NYBOT"). The Company
and NYBOT signed a lease that became effective in 2002. Under the terms of the
lease, which expires in 2013, NYBOT leases from the Company certain office and
trading floor space at the Company's headquarters and data center. As the full
terms of the lease become effective, the Company expects the rental income from
this lease to increase revenues in 2003.
Operating Expenses
Total operating expenses of $37.5 million for the first quarter of 2003
were 11% higher than the first quarter of 2002.
Salaries and employee benefits for the first quarter of 2003 increased by
13% from the first quarter of 2002. Increased employment levels and higher
health insurance premiums were partially offset by lower severance-related
costs.
Occupancy and equipment expenses increased 20% for the first quarter 2003
due primarily to higher rent expense for the Company's business recovery site.
Depreciation and amortization of property and equipment, net of deferred
credit amortization, increased by 7% in the first quarter of 2003, due primarily
to amortization of leasehold improvements at the Company's business recovery
site, which was partially offset by lower amortization of capitalized software
development costs. During 2002, in conjunction with the new electronic trading
strategy, the Company wrote off capitalized computer software that management
deemed to have no meaningful remaining useful life.
Professional services increased by 6% in the first quarter of 2003, due
primarily to the Company's involvement in certain ongoing litigation. Partially
offsetting this increase was a decline in consulting expenses.
13
The Company incurred significant consulting fees in the first quarter of 2002 to
support the continued development of a disaster recovery center.
General and administrative expenses increased by 23% in the first quarter
of 2003, due primarily to an increase in litigation-related expenses and higher
insurance costs related to increases in property insurance premiums, which were
driven by a weakened insurance market subsequent to the September 11, 2001,
terrorist attacks.
Telecommunications decreased 46% in the first quarter of 2003 due primarily
to charges recorded in the first quarter of 2002 related to the termination of
telecommunications services. These services supported direct customer
connectivity to the NYMEX ACCESS(R) platform, which became internet-based and no
longer required direct connectivity. An increase in data communications expense,
related to the Company's new business recovery site, partially offset the
reduction in telecommunication.
Marketing and other expenses increased by 36% in the first quarter of 2003
due primarily to expanded member benefits and higher member benefit premium
rates which became effective in the fourth quarter of 2002.
Other Income
Investment income, net of investment advisory fees, decreased 15%, in the
first quarter of 2003, due primarily to net unrealized losses in the Company's
fixed income portfolio. The Company's investment portfolio is invested
principally in municipal bonds, the market value of which was unfavorably
impacted by higher interest rates at the end of the quarter.
Provision for Income Taxes
The Company's effective tax rate was 47.8% and 50.0% in the first quarter
of 2003 and 2002, respectively. The effective tax rate declined in 2003 due to
the effect that permanent differences have on higher levels of pre-tax book
income, as well as 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 fund its future growth and increase shareholder
value. Capital expenditures were $1.6 million during the first quarter of 2003
primarily to develop and enhance its electronic trading system technology and
other initiatives. Future cash flows will benefit from the occupancy of a major
new tenant in the Company's headquarters building in the second quarter of this
year. The Company had $118.9 million in cash, cash equivalents, reverse
repurchase agreements and marketable securities at March 31, 2003. On April 14,
2003, the Exchange received a long-term AA+ and a short-term A-1+ counter-party
credit ratings from Standard & Poor's Rating Services ("S&P").
Cash Flow
AS OF AS OF
MARCH 31, MARCH 31,
2003 2002
($ IN THOUSANDS) --------- ---------
Net cash provided by (used in)
Operating activities...................................... $ 19,456 $ 4,275
Investing activities...................................... (12,482) (5,966)
Financing activities...................................... (5,000) --
-------- -------
Net increase (decrease) in cash and cash equivalents........ $ 1,974 $(1,691)
======== =======
14
Net cash provided by operating activities was $19.5 million, driven by net
income before non-cash depreciation expense, capital asset disposition losses
and the provision for income taxes.
Investing activities included the ongoing investment of operating cash
flows in the Company's investment portfolio and the acquisition of certain
assets of TradinGear.com ("TG"), a trading software development and licensing
company. The primary asset purchased was TG's trade-matching engine, which the
Company had been licensing from TG. The Company intends to use this software as
the foundation for its electronic trading strategy, NYMEX ClearPort(SM) Trading.
In January 2003, the Company distributed to its shareholders the $5 million
dividend it had declared in December 2002.
Working Capital
(IN THOUSANDS)
------------------------------
AT MARCH 31, AT DECEMBER 31,
2003 2002
------------ ---------------
Current assets............................................ $285,956 $212,709
Current liabilities....................................... 189,765 119,697
-------- --------
Working capital........................................... $ 96,191 $ 93,012
======== ========
Current ratio............................................. 1.51 1.78
Current assets at March 31, 2003 increased by 34%, from year-end 2002
primarily as a result of the increase in securities purchased under agreements
to resell, and increases in segregated and guaranty funds. Segregated and
guaranty funds represent the cash component of clearing member deposits into the
guarantee funds, which provide capital for the Company's clearing business, and
the cash component of customer margin deposits held in custody by clearing
members and posted with the Company's clearinghouse. The Company may invest this
cash, subject to significant restrictions, for its own benefit and, therefore,
reflects these funds as current income-producing assets with the equivalent
offsetting liabilities to the respective clearing members.
Current liabilities at March 31, 2003 increased by 59%, from year-end 2002,
primarily due to the increases in segregated and guaranty funds and income taxes
payable, partially offset by the $5 million dividend payment made in January.
Future Cash Requirements
As of March 31, 2003, the Company had long-term debt of $91.6 million and
short-term debt of $2.8 million. This debt consisted of the following:
- $25.4 million of 7.48% notes, of which $2.8 million is short term, with a
remaining ten-year principal payout,
- $54 million of 7.75% notes with an eleven-year principal payout beginning
in 2011, and
- $15 million of 7.84% notes with a five-year principal payout beginning in
2022.
The Company would incur a redemption premium should it choose to pay off
any debt series prior to its maturity. Management believes that in the current
economic and interest rate environment, the economic benefit from refinancing at
a lower rate would be offset by the redemption penalty incurred. These notes
contain certain limitations on the Company's ability to incur additional
indebtedness.
In connection with its operating activities, the Company enters into
certain contractual obligations. The Company's material contractual cash
obligations include long-term debt, operating leases and other contracts.
15
A summary of the Company's future cash payments associated with its
contractual cash obligations outstanding as of March 31, 2003 as well as an
estimate of the timing in which these commitments are expected to expire are set
forth on the following table below, which is presented in thousands:
PAYMENTS DUE BY PERIOD
-------------------------------------------------------
LESS THAN AFTER
CONTRACTUAL OBLIGATION 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS TOTAL
---------------------- --------- --------- --------- -------- --------
Long-term debt Principal........... $ 2,817 $ 5,634 $ 5,634 $ 80,281 $ 94,366
Debt interest...................... 7,258 13,885 13,042 59,768 93,953
Operating leases................... 4,333 5,859 5,312 10,729 26,233
Other long-term obligations(1)..... 732 1,853 2,401 6,879 11,865
------- ------- ------- -------- --------
Total.............................. $15,140 $27,231 $26,389 $157,657 $226,417
======= ======= ======= ======== ========
(1) Subordinated commitment -- COMEX Members' Retention Program.
The table above does not include the Company's financial guaranties under
the "Seat Financing Program" since the Company has the right to liquidate the
member's interests in case the member defaults on the loan.
The Company and NYBOT entered into a lease that became effective on
November 20, 2002. The rent commencement date for the trading floor space is the
earlier of occupancy or July 1, 2003. The rent commencement date for the office
space was March, 2003.
The Company believes that its cash flows from operations and existing
working capital will be sufficient to meet its needs for the foreseeable future,
including capital and operating expenditures associated with the development of
its electronic trading strategy and other initiatives. In addition, the Company
has the ability, and may seek, to raise capital through issuances of debt or
equity in the private and public capital markets.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION
Clearing and Transaction Revenues
The largest source of the Company's operating revenues are clearing and
transaction fees. These fees are recognized as revenue in the same period that
trades are effectuated on the Company's exchanges. Clearing and transaction fees
receivable are monies due the Company from clearing member firms. Exposure to
losses on receivables is principally dependent on each member firm's financial
condition. Members' equity interests collateralize fees owed to the Company. At
the end of March 31, 2003 and December 31, 2002, no clearing and transaction
fees receivable balance was greater than the member's equity interests.
Management does not believe that a concentration of credit risk exists from
these receivables. The Company retains the right to liquidate a member's equity
interests in order to satisfy its receivable.
Clearing and transaction fees receivable are carried net of allowances for
member credits, which are based upon expected billing adjustments. Allowances
for member credits of $500,000 were recorded as a reductions of clearing and
transaction fees receivable at March 31, 2003 and December 31, 2002,
respectively. The Company believes the allowances are adequate to cover member
credits. The Company also believes the likelihood of incurring material losses
due to collectibility is remote and, therefore, no allowance for doubtful
accounts is necessary.
Market Data Revenue
The Company provides real time information to subscribers regarding prices
of futures and options contracts traded on the Exchange. In accordance with
industry practice, fees are remitted to the Exchange by market data vendors on
behalf of subscribers. Revenues are accrued for the current month based on the
last month reported. The Company conducts periodic audits of the information
provided, and assesses, where appropriate based on audit findings, additional
fees.
16
Capitalization of Internally-Developed Software
The costs incurred for the development of computer software are evaluated
on a project-by-project basis and capitalized in accordance with Statement of
Position 98-1. Projects are amortized over two to five year periods.
Deferred Credits
In 1995, the Company secured a grant of $128.7 million from the New York
City Economic Development Corporation and the Empire State Development
Corporation formerly known as the New York State Urban Development Corporation)
for construction of its corporate headquarters and trading facility. The grant
is being recognized in income on the same basis as, and is a reduction to, the
depreciation of the facility.
In 2002, the Company entered into an agreement and received a $5 million
grant from the Empire State Development Corporation This agreement requires the
company to maintain certain annual employment levels, and the grant is subject
to recapture amounts, on a declining scale, over time. The grant will be
recognized in income ratably in accordance with a recapture schedule.
Recent Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standard ("SFAS") No.
145, which recinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of
Debt, SFAS No. 44, Accounting for Intangible Assets of Motor Carriers, and SFAS
No. 64, Extinguishment of Debt Made to Satisfy Sinking-Fund Requirement ("SFAS
145"). SFAS No. 145 also amends SFAS No. 13, Accounting for Leases, to eliminate
an inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. As a result of the
rescission of SFAS No. 64, the criteria in Accounting Principles Board ("APB")
No. 30 will be used to classify gains and losses from debt extinguishment. SFAS
No. 145 also amends other existing authoritative pronouncements to make various
technical corrections, clarify meaning, or describe their applicability under
changed conditions. SFAS No. 145 became effective for the Company as of January
1, 2003. The adoption of SFAS No. 145 had no impact on the Company's
consolidated results of operations, financial position, or cash flows.
The Company adopted SFAS No. 146, Accounting for Costs Associated with Exit
or Disposal Activity, effective January 1, 2003. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities, and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring), which
previously governed the accounting treatment for restructuring activities. SFAS
No. 146 applies to costs associated with an exit activity covered by SFAS No.
144. Those costs include, but are not limited to, the following: (1) termination
benefits under the terms of a benefit arrangement that, in substance, is not an
ongoing benefit arrangement or an individual deferred-compensation contract, (2)
costs to terminate a contract that is not a capital lease, and (3) costs to
consolidate facilities to relocate employees. SFAS No. 146 does not apply to
costs associated with the retirement of long-lived assets covered by SFAS No.
143. The adoption of SFAS No. 146 had no impact on the Company's consolidated
results of operations, financial position or cash flows.
The Company adopted Financial Accounting Interpretation ("FIN") No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, effective January 1, 2003. FIN
No. 45 elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees, and standby letters of credit. It also clarifies that
at the time a company issues a guarantee, the company must recognize an initial
liability for the fair market value of the obligations it assumes under that
guarantee and must disclose that information in its interim and annual financial
statements. The initial recognition and measurement provisions of FIN No. 45
were applied prospectively to guarantees issued or modified after December 31,
2002. The adoption of FIN No. 45 had no impact on the Company's consolidated
results of operations, financial position or cash flows.
17
BUSINESS HIGHLIGHTS
On April 14, 2003, the Exchange received a long-term AA+ and a short-term
A-1+ counter-party credit rating from Standard & Poor's Rating Services ("S&P").
S&P noted the Exchange's strong operating cash flow coverage, solid capital
base, highly liquid balance sheet, and the role it plays as the largest physical
commodity market in the world, based upon 133 million contracts traded in 2002.
On March 18, 2003, the stockholders of NYMEX Holdings, elected eight (8)
directors at the annual meeting. The following individuals were elected to the
Company's board of directors and won with the following number of affirmative
votes: Stephen Ardizzone (252), David Greenberg (321), John McNamara (440),
Jesse Harte (325), Scott Hess (455), Joel Faber (496), John Conheeney (456), and
E. Bulkeley Griswold (427). The following directors' terms of office continued
after the annual meeting: Vincent Viola, Mitchell Steinhause, Richard Schaeffer,
Gary Rizzi, Eric Bolling, Madeline Boyd, Joseph Cicchetti, Melvyn Falis, Stephen
Forman, Kenneth Garland, A. George Gero, Steven Karvellas, Harley Lippman,
Michel Marks, Kevin McDonnell, Gordon Rutledge and Robert Steele.
On April 29, 2003, a NYMEX Division seat sold for a record $1,350,000.
Ownership of a seat on the NYMEX Division also represents a share of common
stock in NYMEX Holdings, as well as a Class A membership on NYMEX Exchange.
Electronic Trading and Trade Clearing -- NYMEX ClearPort(SM)
In 2002, the Company developed the NYMEX ClearPort(SM) initiative, which is
designed to provide an array of services beyond those provided by open outcry
trading. There are two major components of this initiative at this time. NYMEX
ClearPort(SM) Trading provides a trade execution system for certain energy
futures products, which are based on commonly traded OTC instruments. The system
was launched in January 2003. The Company anticipates that, assuming the system
provides the anticipated reliability, flexibility and scalability, NYMEX
ClearPort(SM) Trading will become the mechanism through which all electronic
trading on the Exchange will be conducted. NYMEX ClearPort(SM) Clearing is the
mechanism by which individually negotiated off-exchange trades are submitted to
the Exchange for clearing for specified products. This includes clearing for the
products that are part of the OTC clearing initiative launched in May 2002 as
well as the interface used to submit Exchange of Futures for Physical ("EFP")
and Exchange of Futures for Swaps ("EFS") transactions for energy futures traded
as part of NYMEX ClearPort(SM) Trading and a limited number of NYMEX ACCESS(R)
products.
In January 2003, the Company through a wholly-owned subsidiary Tradingear
Acquisition LLC, entered into an Asset Purchase Agreement with TradinGear.com
("TG") and its parent company TGFIN Holdings, Inc. to purchase certain of the
assets of TG. The Company closed the transaction on March 31, 2003. The primary
asset purchased was a trade-matching engine, which was being licensed from TG
prior to the purchase. As part of this transaction, certain of TG's existing
employees became employees of the Company. The Company believes that ownership
of this proprietary trade matching software will provide it with strategic
flexibility to pursue its own electronic trading strategy.
RESPONSIBILITY FOR FINANCIAL REPORTING
Management is responsible for the preparation, integrity and objectivity of
the unaudited condensed consolidated financial statements and related notes, and
the other financial information contained in this quarterly report. Such
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America and are considered by
management to present fairly the Company's financial position, results of
operations and cash flows. These unaudited condensed consolidated financial
statements include some amounts that are based on management's best estimates
and judgments, giving due consideration to materiality.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about the Company's marketable
securities, excluding equity securities, and long term debt including expected
principal cash flows for the years 2003 through 2008 and thereafter (in
thousands).
PRINCIPAL AMOUNTS BY EXPECTED MATURITY
AT MARCH 31, 2003
WEIGHTED
AVERAGE
YEAR PRINCIPAL AMOUNT INTEREST RATE
- ---- ---------------- -------------
ASSETS
MUNICIPAL BONDS
2003........................................................ $ 1,847 3.89%
2004........................................................ 2,160 5.55%
2005........................................................ 3,902 4.99%
2006........................................................ 10,039 4.23%
2007........................................................ 9,699 4.52%
2008 and thereafter......................................... 34,289 4.62%
--------
Total....................................................... $ 61,936 N/A
Fair Value.................................................. $ 64,259 N/A
LIABILITIES
CORPORATE DEBT
2003........................................................ $ 2,817 7.69%
2004........................................................ 2,817 7.71%
2005........................................................ 2,817 7.71%
2006........................................................ 2,817 7.72%
2007........................................................ 2,817 7.73%
2008 and thereafter......................................... 80,281 7.74%
--------
Total....................................................... $ 94,366 N/A
Fair Value.................................................. $122,549 N/A
Interest Rate Risk
Current Assets. In the normal course of business, the Company invests
primarily in fixed income securities. Marketable securities bought by the
Company are typically held for the purpose of selling them in the near term and
are classified as trading securities. Unrealized gains and losses are included
in earnings. For the three months ended March 31, 2003 and the year ended
December 31, 2002, the Company had net investment income of $686,000 and $5.7
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 March 31, 2003 and December 31, 2002 were $67.5 million and
$67.0 million, respectively. The change in fair value, using a hypothetical 10%
decline in prices, is estimated to be $6.8 million for March 31, 2003 and $6.7
million for December 31, 2002, 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
19
should choose to refinance this debt. Management has not deemed it necessary to
employ any interest rate risk management strategies, such as interest rate swap
agreements. In the future, as the Company pursues its market strategy, it may
become subject to a higher degree of interest rate sensitivity if it is required
to borrow at higher or at variable rates. This could significantly increase the
Company's future sensitivity to interest rate fluctuations and materially
affect, in a negative manner, the Company's future financial position and
results of operations. There have been no material changes in the Company's
outstanding debt since December 31, 2002.
Credit Risk
NYMEX's by-laws authorize its Board of Directors to fix the annual dues of
NYMEX Members and to levy assessments as it determines to be necessary. Such
dues and assessments are payable at such time as NYMEX's Board of Directors may
determine. The Company's Board of Directors may waive the payment of dues by all
NYMEX Members or by individual Members as it determines. COMEX's By-Laws provide
its Board of Directors with similar powers relating to dues, assessments and
fees with respect to COMEX Members, provided that such dues and assessments (or
fee surcharges in lieu thereof) may not be imposed (other than in connection
with certain Merger-related events) without the consent of the COMEX Governors
Committee and that the ability of COMEX's Board of Directors to impose such fee
is subject to the limitations.
The Exchange, as a self-regulatory organization, has instituted detailed
risk-management policies and procedures to guard against default risk with
respect to contracts traded on the Exchange. The Exchange also has extensive
surveillance and compliance operations and procedures to monitor and to enforce
compliance with rules pertaining to the trading, position sizes and financial
condition of Members. As described herein, the Exchange has powers and
procedures designed to backstop contract obligations in the event that a
contract default occurs on the Exchange including authority to levy assessments
on each of the NYMEX Clearing Members if, after a default by another NYMEX
Clearing Member, there are insufficient funds available to cover a deficit. The
maximum assessment on each NYMEX Clearing Member is the lesser of $15 million or
40% of such NYMEX Clearing Member's capital. The Board of Directors of COMEX
Clearing Association, which serves as the Clearinghouse for COMEX, has
substantially similar authority in the case of a default by a COMEX Clearing
Member.
Despite the Exchange's authority to levy assessments or impose fees, there
can be no assurance that the relevant Members will have the financial resources
available to pay, or will not choose to be expelled from membership rather than
pay, any dues, fees or assessments. The Exchange believes that assessment
liabilities of a Member arising prior to expulsion are contractual in nature
and, accordingly, survive expulsion. In addition, the Exchange would have
recourse to such Member and the proceeds from the Exchange's sale of such
Member's seat to apply towards any outstanding obligations to the Exchange of
such Member. Recourse to a Member's seat, however, may not be of material value
in the case of large defaults that result in assessments greater in value than
the seat, particularly when the seat value declines markedly in price as a
consequence of the default.
Moreover, despite the risk mitigation techniques adopted by, and the other
powers and procedures implemented by the Exchange, which are designed to, among
other things, minimize the potential risks associated with the occurrence of
contract defaults on the Exchange, there can be no assurance that these powers
and procedures will prevent contract defaults or will otherwise function to
preserve the liquidity of the Exchange. In the case of a contract default, to
the extent that funds are not otherwise available to the Exchange or the
Clearinghouse to satisfy the obligations under such contract, as a result of the
clearinghouse's role as buyer to every seller and seller to every to buyer of
futures and options contracts traded on the Exchange, the clearinghouse would be
obligated to perform such obligations.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures (as such term is
20
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
On May 7, 2003, NYMEX Exchange and GlobalView Software, Inc., entered into
a complete settlement agreement in a previously disclosed litigation.
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
On March 18, 2003, the stockholders of NYMEX Holdings, elected eight (8)
directors at the annual meeting. The following individuals were elected to the
Company's board of directors and won with the following number of affirmative
votes: Stephen Ardizzone (252), David Greenberg (321), John McNamara (440),
Jesse Harte (325), Scott Hess (455), Joel Faber (496), John Conheeney (456), and
E. Bulkeley Griswold (427). The following directors' terms of office continued
after the annual meeting: Vincent Viola, Mitchell Steinhause, Richard Schaeffer,
Gary Rizzi, Eric Bolling, Madeline Boyd, Joseph Cicchetti, Melvyn Falis, Stephen
Forman, Kenneth Garland, A. George Gero, Steven Karvellas, Harley Lippman,
Michel Marks, Kevin McDonnell, Gordon Rutledge, and Robert Steele.
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
10.14 Employment Agreement between NYMEX Holdings, Inc., and Samuel H.
Gaer.
On March 6, 2003, NYMEX Holdings, Inc., filed a Form 8-K with the
Securities and Exchange Commission disclosing that the annual report on Form
10-K for the year ended December 31, 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.
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 15th day of May, 2003.
NYMEX HOLDINGS, INC.
BY: /s/ LEWIS A. RAIBLEY, III
------------------------------------
Name: Lewis A. Raibley, III
Title: Duly Authorized Officer and
Principal Financial Officer
(Chief 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 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
-----------------------------------
Name: Vincent Viola
Title: Chairman
Date: May 14, 2003
CERTIFICATIONS
I, Lewis A. Raibley, III, 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 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/ LEWIS A. RAIBLEY, III
-----------------------------------
Name: Lewis A. Raibley, III
Title: Chief Financial Officer
May 14, 2003