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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 2000
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)
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DELAWARE 13-4098266
(STATE OR OTHER JURISDICTION (COMMISSION (I.R.S. EMPLOYER
OF INCORPORATION OR FILE NUMBER) IDENTIFICATION NUMBER)
ORGANIZATION)
</TABLE>
ONE NORTH END AVENUE, WORLD FINANCIAL CENTER, NEW YORK, NEW YORK 10282-1101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 299-2000
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 [ ] No [X]
As of June 26, 2000, no shares of the registrant's common stock were
outstanding. As described in this report, the registrant and its wholly-owned
subsidiary, New York Mercantile Exchange, Inc., will succeed to the business and
operations of the New York Mercantile Exchange upon consummation of a
demutualization of the New York Mercantile Exchange. Upon consummation of the
demutualization, the registrant will have 816 shares of common stock
outstanding, none of which will be listed for trading on any stock exchange or
included in any automated quotation system. The registrant's subsidiary, New
York Mercantile Exchange, Inc., will have 816 class A memberships, representing
trading privileges, and 1 class B membership, representing all of the economic
rights and substantially all of the voting power, in New York Mercantile
Exchange, Inc. outstanding upon completion of the demutualization. The common
stock of the registrant and the class A memberships will be held by the former
members of the New York Mercantile Exchange. The class B membership will be held
by the registrant.
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TABLE OF CONTENTS
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 3
Unaudited Condensed Consolidated Statements of Income and
Members' Equity for the Three Months Ended March 31, 2000
and March 31, 1999........................................ 3
Unaudited Condensed Consolidated Balance Sheets at March 31,
2000 and December 31, 1999................................ 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2000 and March 31,
1999...................................................... 5
Notes to Unaudited Condensed Consolidated Financial
Statements for the Three Months Ended March 31, 2000 and
March 31, 1999............................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 14
PART II: OTHER INFORMATION
Item 1. Legal Proceedings........................................... 16
Item 2. Changes in Securities....................................... 16
Item 3. Defaults Upon Senior Securities............................. 16
Item 4. Submission of Matters to a Vote of Security Holders......... 16
Item 5. Other information........................................... 16
Item 6. Exhibits and Reports on Form 8-K............................ 16
Signature............................................................. 17
</TABLE>
PRELIMINARY STATEMENT: A registration statement on Form S-4 with respect
to the registrant's common stock was declared effective on May 12, 2000. Until
consummation of the demutualization transaction described therein, the
registrant has no material operations or assets. The information contained in
this Form 10-Q is presented with respect to the New York Mercantile Exchange and
its subsidiaries (collectively, the "Exchange"), a New York not-for-profit
corporation. Upon consummation of the demutualization transaction, the
registrant and its subsidiaries will assume all of the assets, liabilities,
rights and obligations of the Exchange.
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEW YORK MERCANTILE EXCHANGE AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND MEMBERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT PER NYMEX MEMBERSHIP AMOUNTS)
<TABLE>
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MARCH 31, MARCH 31,
2000 1999
----------- -----------
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OPERATING REVENUES:
Clearing and transaction fees, net of member fee rebates
of $3,299 in 2000 and $3,017 in 1999................... $25,148 $25,133
Market data fees.......................................... 8,338 8,859
Other, net of rebates of $446 in 2000 and $531 in 1999.... 1,151 1,106
------- -------
Total operating revenues.......................... 34,637 35,098
------- -------
OPERATING EXPENSES:
Salaries and employee benefits............................ 11,609 11,223
Professional services..................................... 4,147 1,953
General and administrative................................ 3,965 3,327
Rent and facility......................................... 3,657 2,838
Telecommunications, equipment rentals and maintenance..... 3,428 3,832
Depreciation and amortization of property and equipment,
net of deferred credit amortization.................... 3,222 2,857
Amortization of goodwill.................................. 538 538
Marketing................................................. 495 475
Other..................................................... 979 1,017
------- -------
Total operating expenses.......................... 32,040 28,060
------- -------
INCOME FROM OPERATIONS...................................... 2,597 7,038
OTHER INCOME (EXPENSES):
Investment income, net.................................... 2,283 1,323
Interest expense.......................................... (1,928) (1,926)
------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES.................... 2,952 6,435
PROVISION FOR INCOME TAXES.................................. 1,417 3,089
------- -------
NET INCOME.................................................. 1,535 3,346
MEMBERS' EQUITY, BEGINNING OF YEAR.......................... 93,202 86,233
LESS NET TRANSFER TO MEMBERS' RETENTION PROGRAM:
NYMEX Division............................................ (490) (253)
COMEX Division............................................ (254) (110)
------- -------
MEMBERS' EQUITY, END OF PERIOD.............................. $93,993 $89,216
======= =======
Earnings per NYMEX membership (based on 816 NYMEX Division
memberships).............................................. $ 1,881 $ 4,100
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
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NEW YORK MERCANTILE EXCHANGE AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
AT MARCH 31, 2000 AND DECEMBER 31, 1999
(IN THOUSANDS)
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MARCH 31, DECEMBER 31,
2000 1999(1)
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ASSETS
Cash and cash equivalents................................... $ 33,461 $ 36,592
Marketable securities, at market (cost of $90,743 at March
31, 2000 and $80,905 at December 31, 1999)................ 92,144 76,992
Clearing and transaction fees receivable.................... 9,440 14,421
Market data fees receivable................................. 4,465 4,647
Prepaid taxes and other current assets...................... 8,073 8,857
-------- --------
Total current assets.............................. 147,583 141,509
Property and equipment, net................................. 227,003 228,613
Goodwill, net............................................... 20,097 20,635
Other assets................................................ 1,719 1,737
-------- --------
TOTAL ASSETS................................................ $396,402 $392,494
======== ========
LIABILITIES AND MEMBERS' EQUITY
LIABILITIES:
Accounts payable and accrued liabilities.................... $ 11,646 $ 12,053
Accrued interest payable.................................... 3,840 1,920
Accrued salaries and related liabilities.................... 2,814 2,848
Deferred credit -- grant for building construction.......... 2,145 2,145
Other current liabilities................................... 3,430 1,874
-------- --------
Total current liabilities......................... 23,875 20,840
Deferred income taxes....................................... 12,568 12,568
Postemployment and postretirement benefits.................. 6,931 6,770
Notes payable............................................... 100,000 100,000
Deferred credit -- grant for building construction.......... 120,643 121,179
Subordinated commitment -- members' retention program....... 38,392 37,935
-------- --------
Total liabilities................................. 302,409 299,292
COMMITMENTS AND CONTINGENCIES (See Note 6)
MEMBERS' EQUITY............................................. 93,993 93,202
-------- --------
TOTAL LIABILITIES AND MEMBERS' EQUITY....................... $396,402 $392,494
======== ========
</TABLE>
---------------
(1) The amounts as of December 31, 1999 have been derived from the audited
consolidated financial statements of the New York Mercantile Exchange and
its subsidiaries.
The accompanying notes are an integral part of these statements.
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NEW YORK MERCANTILE EXCHANGE AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31, 2000 AND 1999
(IN THOUSANDS)
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MARCH 31, MARCH 31,
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 1,535 $ 3,346
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization of property and
equipment, net of deferred credit amortization........ 3,222 2,857
Amortization of goodwill............................... 538 538
Net changes in operating assets and liabilities:
(Increase) decrease in marketable securities:
Corporate funds................................... (12,600) 1,420
Members' retention funds.......................... (2,552) 1,106
Decrease (increase) in clearing and transaction fees
receivable.......................................... 4,981 (3,745)
Decrease (increase) in market data fees receivable... 182 (451)
Decrease (increase) in prepaid taxes and other
current assets...................................... 784 (1,117)
(Decrease) increase in accounts payable and accrued
liabilities......................................... (407) 4,326
Increase in accrued interest payable................. 1,920 1,920
(Decrease) increase in accrued salaries and related
liabilities......................................... (34) 605
Increase in other current liabilities................ 1,556 1,539
Increase in postemployment and postretirement
benefits............................................ 161 169
-------- -------
Net cash (used in) provided by operating
activities.......................................... (714) 12,513
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (2,148) (3,098)
Decrease in other assets.................................. 18 84
-------- -------
Net cash used in investing activities................ (2,130) (3,014)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions under NYMEX Division members' retention
program................................................ (287) --
-------- -------
Cash used in financing activities.................... (287) --
-------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (3,131) 9,499
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 36,592 14,353
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 33,461 $23,852
-------- -------
SUPPLEMENTAL INFORMATION
Cash paid for:
Interest............................................... $ -- $ --
======== =======
Income taxes........................................... $ -- $ --
======== =======
Noncash members' equity transaction -- transfer to
subordinated commitment -- members' retention program:
NYMEX Division......................................... $ 490 $ 253
======== =======
COMEX Division......................................... $ 254 $ 110
======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
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NEW YORK MERCANTILE EXCHANGE AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2000 AND 1999
1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- The accompanying unaudited condensed consolidated
financial statements of the New York Mercantile Exchange and its subsidiaries
(collectively, the "Exchange") 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 Exchange's management, the accompanying unaudited
condensed consolidated financial statements reflect all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the Exchange's
financial position as of March 31, 2000 and its results of operations and cash
flows for the three month interim periods ended March 31, 2000 and 1999. 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, 1999 and
1998 and for each year in the three-year period ended December 31, 1999, 1998
and 1997.
Accounting principles generally accepted in the United States of America
require that management make estimates and assumptions that affect the amounts
reported in these statements and accompanying notes. These estimates and
assumptions are based on judgement and available information and, consequently,
actual results could be materially different from these estimates.
For a summary of significant accounting policies (which have not
significantly changed from
December 31, 1999 -- see note 2 to the unaudited condensed consolidated
financial statements) and additional information, see note 1 to the audited
December 31, 1999 financial statements.
2. NEW ACCOUNTING STANDARDS
The American Institute of Certified Public Accountants issued Statement of
Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, effective for fiscal years beginning after December
15, 1998. Generally, once the capitalization criteria of this SOP have been met,
external direct costs of materials and services used in development of
internal-use software, payroll and payroll-related costs for employees directly
involved in the development of internal-use software are to be capitalized.
Beginning in 1999, the Exchange capitalized certain development and
implementation costs. The Exchange capitalizes internally developed software
costs based on a project-by-project analysis of each project's significance to
the Exchange and its estimated useful life. The total amount of internally
developed software costs capitalized was $1.1 million for each of the three
months ended March 31, 2000 and 1999, respectively. All capitalized internally
developed software costs are amortized using the straight-line method over the
estimated useful lives, not exceeding five years. Prior to 1999, all costs
associated with internally developed software were expensed.
3. SEGREGATED FUNDS
The Exchange is required under the Commodity Exchange Act to segregate cash
and securities that are deposited by clearing members at banks approved by the
Exchange as margin for house and customer accounts; such assets belong to
members and thus are not included in the accompanying unaudited condensed
consolidated financial statements. At March 31, 2000 and 1999, $15,499 and
$1,200,592 of cash, $3,695,342,300 and $2,512,948,700 of U.S. Treasury
obligations, and $25,540,000 and $19,800,000 of U.S. Treasury bills purchased
under agreements to resell, respectively, were segregated pursuant to such
regulations by the NYMEX Division of the Exchange. In addition, at March 31,
2000 and 1999, the NYMEX Division held irrevocable letters of credit amounting
to $193,650,000 and $102,250,000, respectively, which are used by members to
meet their obligations to the Exchange for margin requirements on both open
futures and options positions, as well as delivery obligations in lieu of
depositing cash and/or securities. The Exchange invests cash
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deposits and earns interest thereon. All income earned on deposits of U.S.
government securities accrue to the member firms depositing such securities.
At March 31, 2000 and 1999, the segregated funds of the Exchange's COMEX
Division consisted of $2,786,455 and $325,238 in cash, $1,025,580,000 and
$552,362,750 in U.S. Treasury bills, and $8,435,000 and $5,200,000 of U.S.
Treasury bills purchased under agreements to resell, respectively. The COMEX
Division also holds irrevocable letters of credit aggregating $85,050,000 and
$44,250,000 as of March 31, 2000 and 1999, respectively.
4. GUARANTY FUND
Each clearing member 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'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
Exchange, are maintained for the NYMEX and COMEX Divisions. These funds may be
used by the Exchange for any loss sustained by the Exchange as a result of the
failure of a clearing member to discharge their obligations.
At March 31, 2000 and 1999, the total deposits maintained in the NYMEX
Division Guaranty Fund were $81,672,950 and $80,513,950, respectively. At March
31, 2000 and 1999, the total deposits for the COMEX Division Guaranty Fund were
$79,119,500 and $74,652,962, respectively.
5. SEGMENT REPORTING
The Exchange has two operating segments: the NYMEX Division providing
futures and options trading of energy product contracts and platinum group
metals contracts, and the COMEX Division, providing futures and options trading
of precious metals contracts, copper and aluminum contracts, and FTSE Eurotop
100(R) and FTSE Eurotop 300(R) stock index futures and options contracts. A
summary of operating revenues by business segment follows (in thousands):
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NYMEX COMEX TOTAL
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Three Months Ended March 31, 2000
OPERATING REVENUES:
Clearing and transaction fees
Regular trading hours (1)............................... $21,105 $ 5,565 $26,670
NYMEX ACCESS(R)(2)...................................... 1,530 247 1,777
Market data fees.......................................... 4,469 3,869 8,338
Other..................................................... 1,130.. 21 1,151
Member fee rebates........................................ (3,299) N/A (3,299)
------- ------- -------
Total operating revenues........................... $24,935 $ 9,702 $34,637
======= ======= =======
Three Months Ended March 31, 1999
OPERATING REVENUES:
Clearing and transaction fees
Regular trading hours (1)............................... $19,923 $ 6,286 $26,209
NYMEX ACCESS(R) (2)..................................... 1,734 207 1,941
Market data fees.......................................... 4,828 4,031 8,859
Other..................................................... 1,070 36 1,106
Member fee rebates........................................ (3,017) N/A (3,017)
------- ------- -------
Total operating revenues........................... $24,538 $10,560 $35,098
======= ======= =======
</TABLE>
(1) Clearing and transaction fees generated from trading on the open outcry
system during regular trading hours.
(2) Clearing and transaction fees generated from trading on the NYMEX
ACCESS(R) system.
6. COMMITMENTS AND CONTINGENCIES
From time to time, the Exchange is involved in legal proceedings and
litigation arising in the ordinary course of business. Set forth below are
descriptions of litigation and legal proceedings to which the Exchange is a
party as of March 31, 2000 that could have a material adverse effect on our
business, operating results or financial condition. While the ultimate result of
the proceedings against the Exchange cannot be predicted with certainty, it is
the opinion of management, after consultation with outside legal counsel, that
the resolution of these matters will not have a material adverse effect on its
consolidated financial position, results of operations or cash flows.
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The Exchange has been named as a defendant in the following legal actions:
- Ricky Barnes v. New York Mercantile Exchange, Commodity Exchange, Inc.,
A.J. Contracting Company, Inc., and Zwicker Electric Company, Inc.. This
action is pending in New York State Supreme Court (New York County). The
Exchange was served with the summons and complaint on or about March 4,
1998. This is a personal injury case that relates to the construction of
One North End. Plaintiff, an employee of Forest Datacom Services, Inc., a
subcontractor of A.J. Construction, alleges that he was injured on
December 17, 1996 while working at the One North End construction site.
Plaintiff seeks $10,000,000 in compensatory damages. The Exchange and the
Commodity Exchange, Inc. are represented by insurance counsel. The case
is currently in discovery.
- Electronic Trading Systems Corporation v. The Board of Trade of the City
of Chicago, New York Mercantile Exchange, Cantor Fitzgerald, L.P. and the
Chicago Mercantile Exchange. This action is pending in United States
District Court for the Northern District of Texas (Dallas Division). The
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 Letters Patent No. 4,903,201 entitled
"Automated Futures Trade Exchange" and that defendants are infringing
this patent through use of their respective electronic trading systems.
Plaintiff seeks an unspecified amount of royalties. The Exchange is
providing its own defense to this action. The Exchange has filed motion
to sever and transfer venue to the Southern District of New York. Cantor
Fitzgerald, L.P. has settled this lawsuit and is no longer a party to
this action. This case is in discovery.
- Phillip Petruzzi and Joann Petruzzi v. New York Mercantile
Exchange. This action is pending in New York State Supreme Court (New
York County). The Exchange was served with the summons and complaint on
or about October 13, 1998. This is a personal injury claim that relates
to plaintiff's trading activity when the Exchange was located at 4 World
Trade Center. Plaintiff, an Exchange member, alleges that he was injured
on July 23, 1993 while trading in the Natural Gas Ring. Plaintiff seeks
$10,750,000 in compensatory damages and $10,000,000 in punitive damages.
The Exchange is represented by insurance counsel on the compensatory
damages portion of the claims and has retained counsel to represent it on
the punitive damages claim. The case is still in discovery. The
Exchange's motion to dismiss punitive damages was served on March 17,
2000.
- 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). The 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 the 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
Exchange has retained counsel to defend it in this matter. The case is in
discovery.
- George Scivoletti and Maryanne Scivoletti v. New York Mercantile
Exchange, Commodities Exchange Center, Inc., Cushman & Wakefield, Inc.,
Paris Maintenance, Inc., A.J. Construction of New York, Inc. and
Space/Management Programs, Inc.. This action is pending in United States
District Court for the Southern District of New York. The summons and
complaint were filed on or about February 2, 1998. This is a personal
injury case that related to plaintiff's trading activity at the
Exchange's One North End trading facility. Plaintiff alleges that on July
10, 1997 he was injured while trading in the Natural Gas Ring. Plaintiffs
seek a total of $30,000,000 in compensatory damages against defendants.
The Exchange is represented by insurance counsel. This action was
discontinued without prejudice pursuant to a stipulation of
discontinuance on September 2, 1999. The parties have agreed to the
refiling of this action in the Supreme Court of the State of New York,
County of New York.
- Robert Teofrio and Susan Teofrio v. New York Mercantile Exchange, Turner
Construction and A.J. Construction of New York. This action is pending
in New York State Supreme Court (New York County). The Exchange was
served with the summons and complaint on or about July 20, 1998. This is
a personal injury case that relates to plaintiff's involvement in the
construction of One North End. Plaintiff is an ironworker employed by
Diamond Installations, a subcontractor of Turner Construction. Plaintiff
alleges that he was injured on September 11, 1996, while working at the
One North End
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construction site. Plaintiff seeks a total of $11,000,000 in compensatory
damages. The Exchange is represented by insurance counsel. This case is
in discovery.
- Western Capital Design, LLC On Its Own Behalf of those similarly situated
v. New York Mercantile Exchange and John Does "1-50." This action is
pending in New York District Court for the Southern District of New York.
The Exchange was served with the summons and complaint on or about
February 17, 1999. This action relates to alleged wrongful conduct by the
Exchange and Exchange members regarding the execution of heating oil and
natural gas options. Plaintiff alleges that the prices it was charged for
heating oil and natural gas options were improper and that these improper
transactions affected the market price at which plaintiff transacted its
trading. Plaintiff seeks compensatory damages and $75,000,000 in punitive
damages. The Exchange has retained counsel to represent it in this
matter. This action was commenced in State Court in Florida. It was
removed to Federal Court by notice of removal filed March 8, 1999. Venue
was transferred to the Southern District of New York by an order dated
May 11, 1999. The Exchange's motion to dismiss was filed on November 12,
1999 and granted on March 31, 2000. The Exchange was served with an
amended complaint on or about April 26, 2000. On May 12, 2000, the
Exchange served a motion to dismiss the amended complaint.
- John Donnellan v. New York Mercantile Exchange, Turner Construction
Company, LaStrada General Construction Corp. and the Faraday Company,
Ltd. This action is pending in New York State Supreme Court (New York
County). The complaint was filed on February 25, 1999. This is a personal
injury case that relates to the construction of the One North End Avenue
facility. Plaintiff alleges that he was injured on February 28, 1996
while working at the One North End construction site. LaStrada General
Construction Corp. is a subcontractor of Turner. Although the complaint
alleges that the Faraday Company, Ltd. is a subcontractor of LaStrada,
the Exchange has no record of Faraday's relationship to LaStrada.
Plaintiff seeks $25,000,000 in compensatory damages. The Exchange served
its answer to the complaint on June 5, 2000.
7. SUBSEQUENT EVENT
On June 20, 2000, the NYMEX Division members voted and approved the
Exchange's plan. In particular, the demutualization transaction will entail a
two-step merger process: first merging NYMEX into a newly formed Delaware
non-stock corporation ("NYMEX Exchange") and second, NYMEX Exchange will merge
with a subsidiary, named NYMEX Merger Sub, Inc., of a newly formed, stock
holding company also organized under Delaware law that will be named NYMEX
Holdings, Inc. ("NYMEX Holdings"). NYMEX Exchange will survive this merger and
become a wholly owned subsidiary of NYMEX Holdings. As a result, NYMEX Holdings
will own all of the equity of NYMEX Exchange and current NYMEX Division members
will receive all of the stock of NYMEX Holdings, while retaining their trading
privileges in NYMEX Exchange. In the first merger, each NYMEX member will
receive one Class A membership and one Class B membership in NYMEX Exchange for
each NYMEX Division membership that the member owns. The Class A membership
represents the trading privileges associated with a NYMEX Division membership.
The Class B membership represents an economic interest in NYMEX Exchange -- a
right to dividends and liquidation proceeds. In the second merger, each member's
Class B membership will be exchanged for one share of common stock in NYMEX
Holdings. NYMEX Holdings' interest in its subsidiary will be converted into the
sole outstanding Class B membership in NYMEX Exchange. The demutualization
transaction is subject to the Exchange's receipt of appropriate "contract
market" designations from the Commodity Futures Trading Commission and a
favorable ruling from the Internal Revenue Service regarding certain federal
income tax aspects of the transaction.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (IN THOUSANDS, EXCEPT PER NYMEX DIVISION MEMBERSHIP AND
STATISTICAL DATA)
INTRODUCTION
This discussion summarizes the significant factors affecting the results of
operations and financial condition of the Exchange during the first three months
ended March 31, 2000. This discussion is provided to increase understanding of,
and should be read in conjunction with, the unaudited condensed Consolidated
Financial Statements, accompanying notes and tables included in this quarterly
report.
OVERVIEW
Founded in 1872, the Exchange, based in New York City, New York, is the
largest commodity exchange for trading energy futures and options contracts,
including contracts for crude oil, natural gas, heating oil, unleaded gasoline,
propane and electricity, based upon data reported by the Futures Industry
Association. The Exchange is also the second largest commodity exchange for
trading platinum group metals contracts, including futures contracts for
platinum and palladium and options contracts for platinum. Through the
Exchange's subsidiary, Commodity Exchange, Inc., also known as COMEX, the
Exchange is the largest commodity exchange for trading precious metals futures
and options contracts, including contracts for gold and silver, based upon data
reported by the Futures Industry Association. COMEX also provides for trading
copper and aluminum futures and options contracts, FTSE Eurotop 100(R) stock
index futures and options and FTSE Eurotop 300(R) stock index futures. The FTSE
Eurotop(R) contracts are based on an index designed to measure the collective
performance of a sector of the European equities market.
DEMUTUALIZATION
On May 12, 2000, the Exchange's plan to demutualize and convert from a
non-stock New York corporation to a Delaware stock corporation was declared
effective by the Securities and Exchange Commission.
On June 20, 2000, the NYMEX Division members voted and approved the
Exchange's plan. In particular, the demutualization transaction will entail a
two-step merger process: first merging NYMEX into a newly formed Delaware
non-stock corporation ("NYMEX Exchange") and second, NYMEX Exchange will merge
with a subsidiary, named NYMEX Merger Sub, Inc., of a newly formed, stock
holding company also organized under Delaware law that will be named NYMEX
Holdings, Inc. ("NYMEX Holdings"). NYMEX Exchange will survive this merger and
become a wholly owned subsidiary of NYMEX Holdings. As a result NYMEX Holdings
will own all of the equity of NYMEX Exchange and current NYMEX Division members
will receive all of the stock of NYMEX Holdings, while retaining their trading
privileges in NYMEX Exchange. In the first merger, each NYMEX member will
receive one Class A membership and one Class B membership in NYMEX Exchange for
each NYMEX Division membership that the member owns. The Class A membership
represents the trading privileges associated with a NYMEX Division membership.
The Class B membership represents an economic interest in NYMEX Exchange -- a
right to dividends and liquidation proceeds. In the second merger, each member's
Class B membership will be exchanged for one share of common stock in NYMEX
Holdings. NYMEX Holdings' interest in its subsidiary will be converted into the
sole outstanding Class B membership in NYMEX Exchange. The demutualization
transaction is subject to the Exchange's receipt of appropriate "contract
market" designations from the Commodity Futures Trading Commission and a
favorable ruling from the Internal Revenue Service regarding certain federal
income tax aspects of the transaction.
RESULTS OF OPERATIONS
The Exchange reported net income of $1,535, (which was $1,881 per NYMEX
Division membership,) down $1,811 or a 54% decrease as compared to the same
quarter in 1999. The increase in professional fees incurred in connection with
the demutualization and the upgrading of the Exchange's electronic trading
system were the primary components of the decrease in net income for the first
quarter 2000. The following components of net income make up the major changes
occurring in the first quarter of 2000 versus the comparable quarter in 1999:
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Revenues
Total operating revenues were $34,637 in the first quarter of 2000, down
$461 from the same period in 1999.
Clearing and transaction fees represent the core business of the Exchange
and fluctuate with volume. Changes in volume are effected by external factors
such as:
- fluctuation in supply and price levels of the underlying commodities
- market perception of stability in the commodities and financial markets
- the level and volatility of interest rates
- national and international economic and political conditions
In the first quarter of 2000, clearing and transaction fees were $25,148
compared to $25,133 in the comparable 1999 quarter. This slight increase
primarily reflected higher trading volume, particularly in the unleaded gasoline
contracts. This increase in trading activity was offset by a reduction in the
average fee rate per contract due to more trades being executed at the lower
member fee rates.
The NYMEX Division clearing and transaction fee revenues were $19,336 in
the first quarter of 2000, up 4% from the 1999 comparable period. Trading volume
in the unleaded gasoline contracts increased by 21.1%, and trading in crude oil
contracts increased by 11.5%, both of which reflect the underlying volatility in
these commodities and the recent cuts in oil production by OPEC. Natural gas,
the NYMEX Division's second largest traded contract, experienced a moderate
increase of 5% in the first quarter. Management expects this trading volume to
increase in the second quarter, as energy consumption traditionally increases
during the summer months.
In general, any contract which experiences a significant trading increase
also experiences a change in the ratio of member trades versus non-member
trades. During the first quarter of 2000, changes in the ratio previously
described resulted in a lower average price per contract as member trades were
billed at reduced rates.
The COMEX Division clearing and transaction fee revenues were $5,812 in the
first quarter of 2000, down 10% from the 1999 period. Silver, COMEX's second
largest traded contract, experienced a significant decrease in trading volume of
21.7%. This decrease was the result of low volatility in the silver commodity
market during the first quarter 2000. Activity in the gold contract remained
stable with only a slight increase of 1.3% over the prior year's period.
Market data fees experienced a 6% decline to $8,338 in the first quarter of
2000, compared with $8,859 in the first quarter of 1999. Overall terminal usage
decreased by 7% for the NYMEX Division and 4% for the COMEX Division due to
consolidation in the subscriber base for market data services.
Operating Expenses
Total operating expenses were $32,040 in the first quarter of 2000, up
14.2% from the comparable period in 1999. A significant portion of the $3,980
increase versus that of the first quarter of 1999 reflected the Exchange's
considerable investments in its electronic trading system, as well as the costs
associated with demutualization.
Salaries and employee benefits in the first quarter of 2000 were $11,609,
up 4% from the comparable period in 1999. Overtime charges incurred during the
first weeks of 2000 for Y2K issues, as well as a slight increase in the total
number of Exchange employees, were the main reasons for this $386 increase.
General and administrative expenses were up $638, a 19% increase versus
that of the first quarter of 1999. Filing fees paid to the Securities and
Exchange Commission for filings related to the Exchange's demutualization plan,
as well as significant increases in new agreements for software licensing
expenses, which were up 30%, were the primary reasons for the increase.
Professional services expenses were $4,147 during the first quarter of
2000, a 112% increase over the first quarter of 1999. Legal fees, representing
the major portion of the increase, were up by $1,100, primarily as a result of
the Exchange's demutualization effort. Consulting fees also added to the
professional services
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expense increase by $600. This increase was primarily for the costs incurred
during the post-implementation phase of the new electronic trading system.
Expenses for professional services are expected to increase significantly during
the year 2000 as the Exchange concentrates its efforts on an e-commerce business
development plan.
Rent and facility expenses increased by 29% to $3,657 during the first
quarter of 2000 compared to the same quarter ended in 1999. A new cleaning
contract which began in the third quarter of 1999 for the One North End facility
increased custodial and janitorial costs by 32%. This, together with increased
repairs and maintenance costs associated with Y2K readiness, make up the
significant portions of the rent and facility expense increase.
Telecommunications, equipment rentals and maintenance decreased by 11% to
$3,428 during the first quarter of 2000 compared to the comparable 1999 quarter.
The primary reason for this decrease was due to terminal charges for the new
NYMEX ACCESS(R) system, which were less than for the old NYMEX ACCESS(R) system
used during the first quarter of 1999. This trend should continue throughout the
2000 fiscal year.
Depreciation and amortization of property and equipment, net of deferred
credit amortization, increased by 13% to $3,222 in the first quarter of 2000
when compared to the comparable 1999 quarter. This increase, which is expected
to continue throughout the 2000 fiscal year, is primarily the result of
amortization expense on internally developed software costs. These costs were
incurred on software development projects that were put into service during the
fourth quarter of 1999. There was no amortization expense on these projects
during the first quarter of 1999.
Other Income
Investment income, net of advisory fees, increased by 73% during the first
quarter of 2000 when compared to the comparable quarter in 1999. Interest income
accounted for $594, more than 60% of the increase, which was caused by higher
interest rates during the first quarter of 2000. Unrealized gains on new equity
holdings during the first quarter accounted for a large part of the remaining
increase. The Exchange changed its investment strategy and began investing in
equities towards the end of 1999.
FINANCIAL CONDITION AND CASH FLOWS
Liquidity and Capital Resources
The Exchange has made, and expects, to make significant investments to fund
its future growth and increase membership value. A total of $2,148 was spent on
capital expenditures during the first quarter of 2000 as the Exchange continues
to update its technology on the trading floor. Of these capital expenditures,
$1,100 was used for development of internally used software. The Exchange had
$125,605 in cash, cash equivalents and marketable securities at March 31, 2000.
Cash Flows
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
Net cash (used in) provided by:
Operating activities...................................... $ (714) $12,513
Investing activities...................................... (2,130) (3,014)
Financing activities...................................... (287) 0
------- -------
Net change in cash and cash equivalents..................... $(3,131) $ 9,499
======= =======
</TABLE>
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Working Capital
(in thousands)
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
2000 1999
------------ ---------------
<S> <C> <C>
Current assets............................................ $147,583 $141,509
Current liabilities....................................... 23,875 20,840
-------- --------
Working capital......................................... $123,708 $120,669
======== ========
Current ratio............................................. 6.18:1 6.79:1
</TABLE>
Current assets increased by $6,074 from year-end 1999, which was primarily
attributable to net income before depreciation and amortization offset by
capital expenditures. The primary changes in current assets consisted of an
increase of $15,152 in marketable securities, offset by declines of $4,981 in
clearing and transaction fees receivable, and $3,131 in cash and cash
equivalents. The decline in receivables was attributable to collection of higher
year-end balances. The decrease in cash and cash equivalents was due to maturing
year-end repurchase agreements. These proceeds were reinvested in marketable
securities.
Current liabilities increased by $3,035 with increases in other current
liabilities of $1,556 and $1,920 in accrued interest payable offset by a decline
in accounts payable and accrued liabilities of $407. The increase in other
current liabilities was primarily attributable to liabilities for unearned
revenue for trading floor fees such as booth license fees, clerk fees, etc.
Accrued interest payable, which represents interest due on the private placement
bonds, increased by an additional three months of interest, since interest is
paid semi-annually, in April and October. Interest payments on the private
placement bonds are paid from cash flows from operations.
Future Cash Requirements
As of March 31, 2000, the Exchange had long-term debt of $100 million. This
debt consisted of the following:
- $31 million of 7.48% notes with an eleven-year principal payout beginning
in 2001.
- $54 million of 7.75% notes with an eleven-year principal payout beginning
in 2011.
- $15 million of 7.84% notes with a five-year principal payout beginning in
2022.
The Exchange would incur a redemption premium should it choose to pay off
any series issue prior to its maturity. These notes contain limitations on the
Exchange's ability to incur additional indebtedness.
The Exchange expects to meet short-term liquidity requirements, such as
operating expenses, from its net cash flows from operations. The Exchange
expects to meet long-term liquidity requirements, such as scheduled debt
maturities, investments in facilities and technologies, and new strategic
initiatives from available working capital, issuances of short-term or long-term
debt and, if the common stock of NYMEX Holdings, Inc. and membership interests
of New York Mercantile Exchange, Inc. are unstapled, additional equity issuances
by NYMEX Holdings.
RECENT DEVELOPMENTS
In May 2000, the Exchange approved a plan to develop an e-commerce business
plan. The Exchange will seek to develop this endeavor, known as eNYMEX, into the
premier, global exchange for over-the-counter forward trading and clearing of a
wide range of standardized physical commodity products.
The Exchange plans to use its proven clearing infrastructure to introduce
complete counter-party risk management for over-the-counter trading, and create
net margining with Exchange futures markets by calculating a consolidated
clearing position. It is currently intended that eNYMEX will provide a single,
internet-based interface to both the over-the-counter market and the Exchange
futures market by routing futures orders to the trading floor or to the NYMEX
ACCESS(R) electronic trading system, depending on the time of the trading
session.
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The Exchange's vision also includes pursuing strategic partnerships through
which eNYMEX would provide clearing services to external organizations and
create a credit structure that will permit floor members to participate in
over-the counter markets. It is anticipated that funding during the next two
business quarters for this venture will come from cash flows from operations, as
well as existing funds.
FORWARD LOOKING AND CAUTIONARY STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE
RESULTS
The Securities and Exchange Commission 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 Exchange has tried,
wherever possible, to identify such statements by using words such as
"anticipate," "believes", "expects", and words and terms of similar substance in
connection with any discussion of future operating or financial performance.
These statements involve a number of risks, uncertainties and other factors that
could cause actual results to differ materially, including the Exchange's
failure to continue to develop and market a new electronic trading system,
competitive pressures, failure to obtain or protect intellectual property
rights, the Exchange's ability to attract and retain key personnel, legal,
political and economic changes and other risks, uncertainties and factors
discussed in the Exchange's other filings with the Securities and Exchange
Commission, and in materials incorporated therein by reference.
RESPONSIBILITY FOR FINANCIAL REPORTING
Management is responsible for the preparation, integrity and objectivity of
the condensed consolidated financial statements 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 considered by management to present fairly the
Exchange's financial position, results of operations and cash flows. These
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 Exchange's marketable
securities, excluding equity securities, including expected principal cash flows
for the years 2000 through 2005 and thereafter (in thousands).
PRINCIPAL AMOUNTS BY EXPECTED MATURITY
AT MARCH 31, 2000
<TABLE>
<CAPTION>
TOTAL FAIR MARKET
PRINCIPAL VALUE AS OF
CASH MARCH 31,
2000 2001 2002 2003 2004 THEREAFTER FLOWS 2000
-------- -------- -------- -------- -------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Government Bonds, Federal Agency
Issues.......................... $ -- $ -- $ -- $ -- $ 992 $ 1,975 $ 2,967 $ 2,960
Weighted average interest rate.... -- -- -- -- 6.50% 4.63%
U.S. Treasury issues.............. -- 10,200 -- -- 5,916 974 17,090 17,474
Weighted average interest rate.... -- 5.88% -- -- 5.88% 6.00%
Municipal Bonds................... 4,368 2,286 3,626 2,393 10,273 42,903 65,849 66,609
Weighted average interest rate.... 4.99% 6.66% 5.89% 4.65% 5.74% 5.03%
------ ------- ------ ------ ------- --------- ------- -------
Total Portfolio, excluding equity
securities...................... $4,368 $12,486 $3,626 $2,393 $17,181 $ 45,852 $85,906 $87,043
====== ======= ====== ====== ======= ========= ======= =======
</TABLE>
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PRINCIPAL AMOUNTS BY EXPECTED MATURITY
AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
FAIR MARKET
VALUE AS OF
TOTAL PRINCIPAL DECEMBER 31,
2000 2001 2002 2003 2004 THEREAFTER CASH FLOWS 1999
-------- -------- -------- -------- -------- ---------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Government Bonds, Federal
Agency Issues.............. $ 2,157 $ -- $2,351 $ -- $ 992 $ -- $ 5,500 $ 5,518
Weighted average interest
rate....................... 2.50% -- 5.50% -- 6.50% -- -- --
U.S. Treasury issues......... 10,199 -- -- -- 3,948 974 15,121 15,092
Weighted average interest
rate....................... 4.45% -- -- -- 5.88% 6.00% -- --
Municipal Bonds.............. 2,959 95 3,946 898 7,352 43,012 58,262 54,319
Weighted average interest
rate....................... 4.37% 3.57% 5.53% 4.50% 5.88% 4.80% -- --
------- ----- ------ ---- ------- --------- ------- -------
Total Portfolio, excluding
equity securities.......... $15,315 $ 95 $6,297 $898 $12,292 $ 43,986 $78,883 $74,929
======= ===== ====== ==== ======= ========= ======= =======
</TABLE>
INTEREST RATE RISK
Current Assets. In the normal course of business, the Exchange invests
primarily in fixed income securities. Marketable securities bought by the
Exchange 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 periods ended March 31, 2000 and December 31, 1999, the
Exchange had net investment income of $2.3 million and $3.9 million,
respectively. Accordingly, a substantial portion of the Exchange's income
depends upon its ability to continue to invest monies in these instruments,
prevailing interest rates and market prices. The fair value of these securities
at March 31, 2000 and December 31, 1999 was $92 million and $77 million. The
change in fair value, using a hypothetical 10% decline in prices, is estimated
to be a $9.2 million and $7.7 million loss for March 31, 2000 and December 31,
1999, respectively. The Exchange also invests in U.S. government securities and
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
consolidated financial statements.
Debt. The interest rate on the Exchange's long-term indebtedness is a
weighted average fixed rate of 7.68%. The Exchange'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 Exchange paying a redemption
premium if it should choose to refinance this debt. Management has not deemed it
necessary to employ any market or interest risk management strategies, such as
interest rate swap agreements. In the future, as the Exchange 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 Exchange's future sensitivity to interest rate
fluctuations and materially affect, in a negative manner, the Exchange's future
financial position and results of operations. There have been no material
changes in the Exchange's outstanding debt since December 31, 1999.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
N/A
ITEM 2. CHANGES IN SECURITIES
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
N/A
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 26th day of June, 2000.
NYMEX HOLDINGS, INC.
By: /s/ PATRICK F. CONROY
------------------------------------
Name: Patrick F. Conroy
Title: Duly Authorized Officer and
Principal Financial Officer
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