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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 JUNE 30, 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)
<TABLE>
<S> <C> <C>
DELAWARE 333-30332 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)
(212) 299-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of August 14, 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 outstanding,
representing trading privileges, and one class B membership outstanding,
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. Upon consummation of the demutualization transaction, all of
the common stock of the registrant and the class A memberships of New York
Mercantile Exchange, Inc. will be held by the former members of the New York
Mercantile Exchange. The sole class B membership in New York Mercantile
Exchange, Inc. 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 Operations
and Members' Equity for the Three Months and Six Months
Ended June 30, 2000 and June 30, 1999..................... 3
Unaudited Condensed Consolidated Balance Sheets at June 30,
2000 and December 31, 1999................................ 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2000 and June 30,
1999...................................................... 5
Notes to Unaudited Condensed Consolidated Financial
Statements for the Three and Six Months Ended June 30,
2000 and June 30, 1999.................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . 11
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 18
PART II: OTHER INFORMATION
Item 1. Legal Proceedings........................................... 20
Item 2. Changes in Securities and Use of Proceeds................... 20
Item 3. Defaults Upon Senior Securities............................. 20
Item 4. Submission of Matters to a Vote of Security Holders......... 20
Item 5. Other Information........................................... 20
Item 6. Exhibits and Reports on Form 8-K............................ 20
Signatures............................................................ 21
</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 OPERATIONS
AND MEMBERS' EQUITY
(IN THOUSANDS, EXCEPT PER NYMEX MEMBERSHIP AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
2000 1999 2000 1999
-------- -------- ------- -------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Clearing and transaction fees, net of member fee
rebates.............................................. $22,692 $25,923 $47,840 $51,056
Market data fees........................................ 8,713 8,740 17,051 17,599
Other, net of rebates................................... 1,020 1,038 2,171 2,144
------- ------- ------- -------
Total operating revenues........................ 32,425 35,701 67,062 70,799
------- ------- ------- -------
OPERATING EXPENSES:
Salaries and employee benefits.......................... 11,729 11,282 23,338 22,505
Professional services................................... 7,316 1,955 11,463 3,908
General and administrative.............................. 4,321 3,562 8,286 6,889
Rent and facility....................................... 3,839 2,988 7,496 5,826
Telecommunications, equipment rentals and maintenance... 3,282 3,937 6,710 7,769
Depreciation and amortization of property and equipment,
net of deferred credit amortization.................. 3,382 2,856 6,604 5,713
Marketing............................................... 740 697 1,235 1,172
Amortization of goodwill................................ 539 539 1,077 1,077
Loss on disposition of property and equipment........... 296 -- 296 --
Other................................................... 1,002 967 1,981 1,984
------- ------- ------- -------
Total operating expenses........................ 36,446 28,783 68,486 56,843
------- ------- ------- -------
(LOSS) INCOME FROM OPERATIONS............................. (4,021) 6,918 (1,424) 13,956
OTHER INCOME (EXPENSES):
Investment income, net.................................. 2,045 424 4,328 1,747
Interest expense........................................ (1,934) (1,926) (3,862) (3,852)
------- ------- ------- -------
(LOSS) INCOME BEFORE (BENEFIT) PROVISION FOR INCOME
TAXES................................................... (3,910) 5,416 (958) 11,851
(BENEFIT) PROVISION FOR INCOME TAXES...................... (1,940) 2,600 (523) 5,689
------- ------- ------- -------
NET (LOSS) INCOME......................................... (1,970) 2,816 (435) 6,162
MEMBERS' EQUITY, BEGINNING OF PERIOD...................... 93,993 89,216 93,202 86,233
LESS NET TRANSFER TO MEMBERS' RETENTION PROGRAM:
NYMEX Division.......................................... (335) 290 (825) 37
COMEX Division.......................................... (103) (97) (357) (207)
------- ------- ------- -------
MEMBERS' EQUITY, END OF PERIOD............................ $91,585 $92,225 $91,585 $92,225
======= ======= ======= =======
(Loss) earnings per NYMEX membership (based on 816 NYMEX
Division memberships)................................... $(2,414) $ 3,451 $ (533) $ 7,551
======= ======= ======= =======
</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 JUNE 30, 2000 AND DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999(1)
----------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 27,805 $ 36,592
Marketable securities, at market (cost of $92,840 at June
30, 2000 and $80,905 at December 31, 1999)................ 94,204 76,992
Clearing and transaction fees receivable.................... 10,130 14,421
Market data fees receivable................................. 5,709 4,647
Deferred income taxes....................................... 752 476
Prepaid taxes and other current assets...................... 10,282 8,381
-------- --------
Total current assets.............................. 148,882 141,509
Property and equipment, net................................. 226,420 228,613
Goodwill, net............................................... 19,558 20,635
Other assets................................................ 1,424 1,737
-------- --------
TOTAL ASSETS................................................ $396,284 $392,494
======== ========
LIABILITIES AND MEMBERS' EQUITY
LIABILITIES:
Accounts payable and accrued liabilities.................... $ 12,348 $ 12,053
Accrued salaries and related liabilities.................... 5,903 2,848
Deferred credit -- grant for building construction.......... 2,145 2,145
Accrued interest payable.................................... 1,920 1,920
Other current liabilities................................... 4,061 1,874
-------- --------
Total current liabilities......................... 26,377 20,840
Deferred income taxes....................................... 12,568 12,568
Postemployment and postretirement benefits.................. 7,087 6,770
Notes payable............................................... 100,000 100,000
Deferred credit -- grant for building construction.......... 120,106 121,179
Subordinated commitment -- members' retention program....... 38,561 37,935
-------- --------
Total liabilities................................. 304,699 299,292
COMMITMENTS AND CONTINGENCIES (See Note 7)
MEMBERS' EQUITY............................................. 91,585 93,202
-------- --------
TOTAL LIABILITIES AND MEMBERS' EQUITY....................... $396,284 $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 SIX MONTHS ENDED
JUNE 30, 2000 AND JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
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JUNE 30, JUNE 30,
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income......................................... $ (435) $ 6,162
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization of property and
equipment, net of deferred credit amortization........ 6,604 5,713
Amortization of goodwill............................... 1,077 1,077
Deferred income taxes.................................. (276) --
Loss on disposition of property and equipment.......... 296 --
Net changes in operating assets and liabilities:
(Increase) decrease in marketable securities:
Corporate funds................................... (9,607) 1,950
Members' retention funds.......................... (7,605) 941
Decrease (increase) in clearing and transaction fees
receivable.......................................... 4,291 (1,364)
Increase in market data fees receivable.............. (1,062) (1,098)
(Increase) decrease in prepaid taxes and other
current assets...................................... (1,901) 23
Increase in accounts payable and accrued
liabilities......................................... 295 6,522
Increase in accrued salaries and related
liabilities......................................... 3,055 2,177
Increase in other current liabilities................ 2,187 1,808
Increase in postemployment and postretirement
benefits............................................ 317 341
-------- -------
Net cash (used in) provided by operating
activities.......................................... (2,764) 24,252
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (5,780) (8,794)
Decrease in other assets.................................. 313 254
-------- -------
Net cash used in investing activities................ (5,467) (8,540)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions under NYMEX Division members' retention
program................................................ (556) (274)
-------- -------
Cash used in financing activities.................... (556) (274)
-------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (8,787) 15,438
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 36,592 14,353
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 27,805 $29,791
======== =======
SUPPLEMENTAL INFORMATION:
Cash paid for:
Interest............................................... $ 3,846 $ 3,840
======== =======
Income taxes........................................... $ -- $ --
======== =======
Noncash members' equity transaction -- transfer to
subordinated commitment -- members' retention program:
NYMEX Division......................................... $ 825 $ (37)
======== =======
COMEX Division......................................... $ 357 $ 207
======== =======
</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 AND SIX MONTHS ENDED
JUNE 30, 2000 AND JUNE 30, 1999
1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS -- The New York Mercantile Exchange is a membership
corporation organized under the New York State Not-for-Profit Corporation Law.
Under these laws, the Exchange is prohibited from paying dividends (subject to
only very limited exceptions).
As an exchange designated by the Commodity Futures Trading Commission (the
"CFTC") for trading futures contracts and options on futures contracts, the
Exchange has the primary objective of creating and maintaining an orderly market
for contracts that are traded on the Exchange. Through its in-house clearing
unit, the Exchange stands as buyer to every seller and seller to every buyer. To
manage the risk of financial non-performance, the Exchange requires clearing
members to post margin, in the form of cash, U.S. government securities or
irrevocable letters of credit. The Exchange also requires guaranty fund deposits
from clearing members which would be available to cover financial
non-performance, and there is a system of rules providing for assessments of
clearing members in the event of financial non-performance by any one of them.
The Exchange has extensive surveillance and compliance operations and procedures
to monitor and enforce the rules pertaining to trading, position limits and the
financial status of its members.
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, 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, 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.
Certain reclassifications have been made to the prior year amounts to
conform to the current presentation. All intercompany balances and transactions
have been eliminated in consolidation.
For a summary of significant accounting policies (which have not
significantly changed from
December 31, 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, which were filed with the SEC, on the
Exchange's Form S-4 Registration Statement no. 333-30332 on May 12th, 2000.
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 as well as payroll and payroll-related costs for employees
directly involved in the development of internal-use software
6
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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 $1.5 million and
$3.2 million for the six months ended June 30, 2000 and 1999, respectively and
are included in property and equipment, net on the condensed consolidated
balance sheet. 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 when incurred.
3. REVENUE REBATE AND FEE REDUCTION PROGRAMS
Effective January 1, 1996, the Exchange adopted a fee reduction program,
which substantially reduces clearing fees for NYMEX Division members. Rebates
under this program totaled $3.3 and $3.2 million for the three months ended June
30, 2000 and June 30, 1999, respectively, and $6.6 and $6.3 million for the six
months ended June 30, 2000 and June 30, 1999, respectively. Clearing and
transaction fees are presented in the statements of operations and members'
equity net of these rebates.
The Exchange also adopted several fee reduction programs as incentives to
members for the purpose of reducing various operating costs such as telephone,
rent and marketing expenses. These cost reduction programs totaled $500,000 and
$600,000 for the three months ended June 30, 2000 and June 30, 1999,
respectively, and $1.0 and $1.2 million for the six months ended June 30, 2000
and June 30, 1999, respectively. Other revenues are presented in the statements
of operations and members' equity net of these programs.
4. 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. These assets belong to the
clearing member firms and are not included in the accompanying unaudited
condensed consolidated financial statements. At June 30, 2000 and 1999, $30,656
and $1,068,991 of cash, $4,496,895,300 and $2,568,750,315 of U.S. Treasury
obligations, and $16,970,000 and $24,200,000 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 June 30, 2000
and 1999, the NYMEX Division held irrevocable letters of credit amounting to
$248,650,000 and $103,150,000, respectively, which are used by clearing 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 deposits and earns
interest thereon. All income earned on deposits of U.S. government securities
accrue to the clearing member firms depositing such securities.
At June 30, 2000 and 1999, the segregated funds of the Exchange's COMEX
Division consisted of $2,946,768 and $3,568,024 in cash, $682,640,500 and
$628,702,000 in U.S. Treasury bills, and $3,930,000 and $11,355,000 of U.S.
Treasury bills purchased under agreements to resell, respectively. The COMEX
Division also held irrevocable letters of credit aggregating $61,800,000 and
$48,050,000 as of June 30, 2000 and 1999, respectively.
5. GUARANTY FUND
Each clearing member firm is required to maintain a security deposit, in
the form of cash or U.S. Treasury securities, ranging from $100,000 to
$2,000,000, depending upon such clearing member firm's reported regulatory
capital, in a fund known as a "Guaranty Fund" for the respective clearing
division (NYMEX Division and/or COMEX Division). Separate and distinct Guaranty
funds, held by the 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 firm to discharge its
obligations.
At June 30, 2000 and 1999, the total deposits maintained in the NYMEX
Division Guaranty Fund were $81,601,000 and $85,796,000, respectively. At June
30, 2000 and 1999, the total deposits for the COMEX Division Guaranty Fund were
$76,080,900 and $75,704,900, respectively.
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6. 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, FTSE Eurotop 100(R)
stock index futures and options contracts, and FTSE Eurotop 300(R) stock index
futures contracts. A summary of operating revenues by business segment follows
(in thousands):
<TABLE>
<CAPTION>
NYMEX COMEX TOTAL
------------------ ------------------ -----------------
3 MOS. 6 MOS. 3 MOS. 6 MOS. 3 MOS. 6 MOS.
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Three and Six Months Ended June
30, 2000
OPERATING REVENUES:
Clearing and transaction fees
Regular trading hours
(1)..................... $19,802 $40,907 $ 4,867 $10,432 $24,669 $51,339
NYMEX ACCESS(R)(2)......... 1,149 2,679 129 376 1,278 3,055
Member fee rebates......... (3,255) (6,554) N/A N/A (3,255) (6,554)
Market data fees............. 4,731 9,200 3,982 7,851 8,713 17,051
Other, net of rebates........ 1,029.. 2,159 (9) 12 1,020 2,171
------- ------- ------- ------- ------- -------
Total operating
revenues............ $23,456 $48,391 $ 8,969 $18,671 $32,425 $67,062
======= ======= ======= ======= ======= =======
Three and Six Months Ended June
30, 1999
OPERATING REVENUES:
Clearing and transaction fees
Regular trading hours
(1)..................... $21,254 $41,177 $ 6,005 $12,291 $27,259 $53,468
NYMEX ACCESS(R) (2)........ 1,694 3,428 218 425 1,912 3,853
Member fee rebates......... (3,248) (6,265) N/A N/A (3,248) (6,265)
Market data fees............. 4,696 9,524 4,044 8,075 8,740 17,599
Other, net of rebates........ 986 2,056 52 88 1,038 2,144
------- ------- ------- ------- ------- -------
Total operating
revenues............ $25,382 $49,920 $10,319 $20,879 $35,701 $70,799
======= ======= ======= ======= ======= =======
</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.
7. 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 June 30, 2000 that could have, if resolved against the Exchange, a
material adverse effect on its 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 the Exchange's consolidated financial
position, results of operations or cash flows.
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 Avenue. 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 Avenue
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
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use of their respective electronic trading systems. Plaintiff seeks an
unspecified amount of royalties. The Exchange is providing its own
defense to this action. On August 1, 2000 the United States Magistrate
Judge recommended to the United States District Court Judge that the
Exchange's motion to sever and transfer venue to the Southern District of
New York be granted in its entirety. 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 submitted to the court
on June 29, 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 Avenue 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 New York State Court. On June 22, 2000, a
complaint was filed in the Supreme Court of the State of New York, County
of New York. The Exchange answered the complaint on July 11, 2000.
- 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 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 and on 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
9
<PAGE> 10
November 12, 1999 and granted on March 31, 2000. The Exchange was served
with an amended complaint on or about April 26, 2000. The Exchange's
motion to dismiss the amended complaint was submitted to the court on
July 28, 2000.
- 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 Avenue 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. The case is
in discovery.
The Exchange has provided an employee severance package pursuant to the
Board approved Corporate Restructuring plan. (See note 9.) The plan provides for
the continued payment of medical insurance premiums of the severed employees by
the Exchange based upon length of service or the extent permitted by applicable
law through the end of the fiscal year 2000 as well as specified severance
payments to be paid by the end of the third quarter of 2000. The Exchange
estimates the total cost to the Exchange under this plan to be approximately
$1.7 million.
8. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a description of a material transaction involving the
Exchange and its members:
On June 16, 2000, the Exchange issued a total of $1.6 million in short term
loans to 11 members. The loans were interest free for six months, and thereafter
bore an annual interest rate of 2%. The purpose of these loans was to relieve
financial difficulties facing these NYMEX Division members as a result of a
default by a NYMEX/COMEX Division clearing member firm on another exchange. The
loans were repaid in full on August 4, 2000.
9. SUBSEQUENT EVENT
On July 26, 2000, the Exchange received from the CFTC approval of the bylaw
and rule changes necessary to implement the demutualization plan and received
approval to transfer the Exchange's "contract market" designations from the
Exchange to New York Mercantile Exchange, Inc., upon implementation of the
demutualization plan.
On July 31, 2000, the Exchange implemented a Corporate Restructuring plan.
This plan, approved by the Board of Directors on July 12, 2000, called for the
elimination of approximately 10% of the Exchange's work force. In connection
with this plan, the Exchange estimates that $1.7 million will be paid in
severance and benefits through December 31, 2000, depending upon length of
service or the extent permitted by applicable law.
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<PAGE> 11
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 three and six
months ended June 30, 2000. 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.
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 Form S-4 Registration Statement, with
respect to its plan to demutualize, was declared effective by the SEC. 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
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, Inc. NYMEX Holdings, Inc.'s 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 a favorable ruling from the Internal Revenue Service regarding
certain federal income tax aspects of the transaction.
On July 26, 2000, the Exchange received approval from the CFTC to transfer
its "contract market" designations from the Exchange to New York Mercantile
Exchange, Inc., upon consummation of the demutualization transaction. On June
20, 2000, the NYMEX Division members voted and approved the Exchange's
demutualization plan.
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
RESULTS OF OPERATIONS
The Exchange reported a net loss of $1,970, which was a loss of $2,414 per
NYMEX Division membership, a decline of $4,786 compared to the second quarter of
1999. The primary reasons for this decrease were the substantial increase in
professional fees incurred in connection with the demutualization plan, the
development of an e-commerce business, and the decrease in realized rates on
cleared contracts.
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<PAGE> 12
The following components of net loss make up the major changes occurring
during the second quarter of 2000.
Revenues
Total operating revenues were $32,425 in the second quarter of 2000, down
$3,276, or 9%, from the same period in 1999.
Clearing and transaction fees represent the core business of the Exchange
and are directly affected by volume. Changes in volume are affected by various
external factors such as:
- shifts in supply and demand as well as volatility in 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 second quarter of 2000, clearing and transaction fees net of member
fee rebates, were $22,692 compared to $25,923 earned during the same quarter
last year. This 12% decrease was the result of the following two conditions: (1)
a lower average realized rate per contract on the NYMEX Division and (2) a
substantial decline in trading volume on the COMEX Division.
The NYMEX Division's clearing and transaction fee revenues net of member
fee rebates, were $17,696 in the second quarter of 2000, down 10% from the 1999
comparable period. While NYMEX overall trading volume experienced a slight
increase, volatility existed in several contracts which resulted in more trades
at the lower member rate. Trading volume in the unleaded gasoline contracts rose
20% compared with the second quarter of 1999 because of the shortage in supply
and high retail prices of gasoline during the second quarter of 2000. Natural
gas trading volume also increased by 20% during the second quarter of 2000 when
compared with the same quarter last year. This increase was due to the lower
than expected accumulation of United States stock piles of natural gas. Crude
oil trading volume declined by 11% during the second quarter of 2000 when
compared with the same quarter a year ago, caused by a decision to increase oil
production by the Organization of Petroleum Exporting Countries (OPEC).
In general, any contract which experiences a significant trading volume
increase also experiences an increase in the ratio of member trades versus
non-member trades. During the second quarter of 2000, changes in the ratio
previously described resulted in a lower average realized rate per contract as
member trades were billed at lower rates.
The COMEX Division's clearing and transaction fee revenues were $4,996 in
the second quarter of 2000, down 20% from the 1999 comparable period. Trading
volume significantly decreased in all three of COMEX's major contracts: options
and futures of gold, silver and copper. Low volatility and the narrow trading
price range affected silver and copper trading. Since the late fall of 1999, the
selling of gold reserves by the Bank of England and National Swiss Bank
unfavorably affected gold trading as supply outpaced demand.
Market data fees, which represent 27% of the Exchange's total operating
revenues for the second quarter of 2000, were virtually unchanged as compared
with the same quarter a year ago.
Operating Expenses
Total operating expenses were $36,446 during the second quarter of 2000, up
27% from the comparable period in 1999. A major portion of the $7,663 increase
from the same period in 1999 reflected the Exchange's significant investments in
corporate e-commerce initiatives, as well as the costs of professional services
associated with demutualization.
Salaries and employee benefits, which constitute 32% of total operating
expenses for the second quarter of 2000, rose 4% from the similar period a year
ago, primarily the result of employee merit increases.
Professional services increased by $5,361 or 274% during the second quarter
of 2000, over the same quarter a year ago. Financial advisory fees relating to
the Exchange's demutualization constitute the largest portion of this increase.
In connection with the Exchange's e-commerce initiatives, consulting fees
substan-
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<PAGE> 13
tially contributed to the increase during the second quarter as well. Increased
expenses for professional services are expected to continue during the third
quarter of 2000 as the Exchange concentrates its efforts on e-commerce business
development.
General and administrative expenses were up $759 during the second quarter
of 2000, a 21% increase from the same period in 1999. The reasons for the
increase included printing and delivery expenses related to the demutualization
plan, as well as a 30% increase in software licensing fees due to renewals of
software licensing agreements.
Rent and facility fees increased by $851, or 28% during the second quarter
of 2000 compared to the same period 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 30% during the second quarter of 2000 compared
to the same period in 1999.
Telecommunications, equipment rentals and maintenance decreased by $655, or
17% during the second quarter of 2000 compared to the same quarter last year. In
1999, significant costs were incurred due to the fact that prior to its November
1999 launch, the updated version of NYMEX ACCESS(R) was being tested at the same
time as the previous version was operational. After the launch, the previous
version of NYMEX ACCESS(R) was used in a backup capacity through to the end of
1999. This trend should continue throughout the remainder of 2000 fiscal year.
Depreciation and amortization of property and equipment, net of deferred
credit amortization, increased by $526, or 18% in the second quarter of 2000
when compared to the same quarter in 1999. This increase, which is expected to
continue throughout the remainder of 2000 year, is the result of amortization
expense on internally developed software costs. These costs were incurred on
software development projects that were placed into service during the fourth
quarter of 1999 and, as a result, there was no amortization expense on these
projects prior to the last quarter of 1999.
Other Income
Investment income, net of investment advisory fees, increased by $1,621, or
382% during the second quarter of 2000 when compared to the same quarter in
1999. Interest income accounted for $700, or 44%, of the increase, due to higher
interest rates earned during the second quarter of 2000 on the Exchange's
overnight investments. Unrealized gains on the Exchange's fixed income portfolio
contributed $900, or 56%, of the increase. A rally in the bond market toward the
end of the second quarter of 2000 was the primary reason for this increase.
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
RESULTS OF OPERATIONS
The Exchange reported a net loss of $435, which was a loss of $533 per
NYMEX Division membership, a decline of $6,597 compared to the similar period a
year ago. The primary reasons for this decrease were: the costs associated with
professional services rendered in connection with the demutualization plan, fees
related with the development of an e-commerce business, a lower average rate
earned per contract cleared on the NYMEX division and a decline in trading
volume on the COMEX Division.
The following components of net loss make up the major changes occurring
for the six months ended June 30, 2000.
Revenues
Total operating revenues were $67,062 for the six months ended June 30,
2000, down $3,737, or 5%, from the same period in 1999.
For the six months ended June 30, 2000, clearing and transaction fees net
of member fee rebates were $47,840 compared to $51,056 in the same period last
year. This decrease was the result of the following two conditions: a lower
average rate earned per contract cleared on the NYMEX Division and a substantial
decline in trading volume on the COMEX Division.
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<PAGE> 14
The NYMEX Division's clearing and transaction fee revenues net of member
fee rebates were $37,032 in the first half of 2000, down 3% from the 1999
comparable period. While the NYMEX Division's overall trading volume experienced
only a slight increase, volatility existed in several contracts. Trading volume
in the unleaded gasoline contracts rose 13% because of the shortage in supply
and high retail prices of gasoline during the first half of 2000. Natural gas
trading volume increased 21% during the first half of 2000 when compared with
the same period last year. This increase was due to the lower than expected
accumulation of United States stock piles of this commodity. Heating oil trading
volume declined by 5% during the first half of 2000 when compared with the same
period a year ago. This was caused by a decision by OPEC to increase oil
production.
The COMEX Division's clearing and transaction fee revenues were $10,808 in
the first half of 2000, a decrease of 15% from the comparable 1999 period.
Trading volume significantly decreased in all three of COMEX's major futures
contracts of gold, silver, and copper. Low volatility and a narrow trading price
range affected silver and copper trading. The selling of gold reserves by the
Bank of England and National Swiss Bank since the late fall of 1999 unfavorably
affected gold trading as supply outpaced demand during this period.
Market data fees, which represent 25% of the Exchange's total operating
revenues for the first six months of 2000, slightly decreased by $548, or 3%,
compared to the same period last year, due to consolidation in the subscriber
base for market data services.
Operating Expenses
Total operating expenses were $68,486 during the first half of 2000, up 20%
from the comparable period in 1999. A significant portion of the $11,643
increase from the year-ago period reflected the Exchange's considerable
investments into e-commerce initiatives, as well as the costs associated with
demutualization.
Salaries and employee benefits, which constitute 34% of total year to date
2000 operating expenses, rose 4% from the similar period a year ago, primarily
the result of employee merit increases.
Professional services increased by $7,555, or 193% during the six months
ended June 30, 2000, compared with the similar period a year ago. Financial
advisory fees as well as legal costs relating to the Exchange's demutualization
constitute a majority of this increase. Consulting fees in connection with the
Exchange's e-commerce initiatives, substantially contributed to this increase
during the first half of 2000 as well.
General and administrative expenses rose $1,397, a 20% increase from the
year-ago period. The primary reasons for the increase included printing,
delivery, and SEC filing fees related to the work on the demutualization plan,
as well as a 30% increase in licensing fees due to renewals of software
licensing agreements.
Rent and facility fees increased by $1,670, or 29% during the first half of
2000 compared to the same period 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 30%. Light, heat, and power costs also rose,
increasing by 34% during the first half of 2000 due to the rising rates charged
for electricity.
Telecommunications, equipment rentals and maintenance decreased by $1,059,
or 14%, during the six months ended June 30, 2000 compared to the year ago
period. In 1999, significant costs were incurred due to the fact that prior to
its November, 1999 launch, the updated version of NYMEX ACCESS(R) was being
tested at the same time as the previous version was operational. After its
launch, the previous version of NYMEX ACCESS(R) was used in a backup capacity
through to the end of 1999. This trend should continue throughout the remainder
of the 2000 fiscal year.
Depreciation and amortization of property and equipment, net of deferred
credit amortization increased by $891, or 16%, in the first half of 2000 when
compared to the same period during 1999. This increase, which is expected to
continue throughout the 2000 year, is the result of amortization expense on
internally developed software costs. These costs were incurred on software
development projects that were placed into service during the fourth quarter of
1999 and, therefore, there was no amortization expense on these projects prior
to the last quarter of 1999.
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<PAGE> 15
Other Income
Investment income net of advisory fees, increased by $2,581, or 148%,
during the first half of 2000 when compared to the same period in 1999. Interest
income from higher interest rates on the Exchange's overnight investments
accounted for 50% of the increase. Realized and unrealized gains on its fixed
income portfolio contributed the remaining portion of the increase. A rally in
the bond market towards the end of the second quarter of 2000 was the primary
reason for this increase.
FINANCIAL CONDITION AND CASH FLOWS
Liquidity and Capital Resources
The Exchange has made, and expects to continue to make, significant
investments in technology to fund its future growth and increase membership
value. A total of $3,632 was spent on capital expenditures during the second
quarter of 2000 as the Exchange continued to update its technology on the
trading floor. The Exchange had $122,009 in cash, cash equivalents and
marketable securities at June 30, 2000.
Cash Flow
<TABLE>
<CAPTION>
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
Net cash (used in) provided by:
Operating activities...................................... $(2,764) $24,252
Investing activities...................................... (5,467) (8,540)
Financing activities...................................... (556) (274)
------- -------
Net (decrease) increase in cash and cash equivalents........ $(8,787) $15,438
======= =======
</TABLE>
Working Capital
<TABLE>
<CAPTION>
(IN THOUSANDS)
AT JUNE 30, AT DECEMBER 31,
2000 1999
----------- ---------------
<S> <C> <C>
Current assets............................................. $148,882 $141,509
Current liabilities........................................ 26,377 20,840
-------- --------
Working capital.......................................... $122,505 $120,669
======== ========
Current ratio.............................................. 5.64:1 6.79:1
</TABLE>
Current assets at June 30, 2000 increased by $7,373, or 5%, from year-end
1999 primarily as a result of cash flows from net income before depreciation and
amortization offset by payments for capital expenditures. The primary changes in
current assets consisted of an increase of $17,212 in marketable securities,
offset by declines of $4,291 in clearing and transaction fees receivable, and
$8,787 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 at June 30, 2000 increased by $5,537, or 27% from year
end 1999, with increases of $2,187 in other current liabilities and $3,055 in
accrued salaries and related liabilities. The increase in other current
liabilities was primarily attributable to liabilities for unearned revenue from
trading floor fees such as booth license fees and clerk fees. These annual fees
are billed by the Exchange during the first quarter of every year and recognized
in income on a monthly basis. The increase in accrued salaries and related
liabilities represents the six month portion of anticipated year end employee
bonuses. These bonuses are traditionally paid during the last month of the year.
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<PAGE> 16
Future Cash Requirements
As of June 30, 2000, the Exchange had long-term debt of $100,000. This debt
consisted of the following:
- $31,000 of 7.48% notes with an eleven-year principal payout beginning in
2001,
- $54,000 of 7.75% notes with an eleven-year principal payout beginning in
2011, and
- $15,000 of 7.84% notes with a five-year principal payout beginning in
2022.
The Exchange would incur a redemption premium should it choose to pay off
any series issue prior to its maturity. These notes contain certain limitations
on the Exchange's ability to incur additional indebtedness.
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(SM), into
the premier global exchange for trading and clearing of a wide range of cash and
derivative instruments with an initial focus on energy 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(SM) will provide a
single, internet-based interface to both the over-the-counter ("OTC") market and
the Exchange futures market.
The Exchange's vision also includes pursuing strategic partnerships through
which enymex(SM) would provide clearing services to external organizations and
create a credit structure that will permit floor members to participate in the
OTC 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.
On Thursday, July 20, 2000, the President of the Exchange, R. Patrick
Thompson passed away. Mr. Thompson, who was associated with the Exchange as
either a member or an executive for 20 years, was appointed President in October
1989. Previously, Mr. Thompson served as Executive Vice President, Senior Vice
President of Compliance, and General Counsel of the Exchange.
During his tenure as President of the Exchange Mr. Thompson made his most
valuable contributions, helping to transform the Exchange into a recognized
global leader in developing confidence in the commodity markets. Mr. Thompson
was also instrumental in the successful launch of the natural gas futures
contract in 1990, one of the largest energy contracts presently traded. He was
instrumental in the acquisition of the Commodities Exchange, Inc. (COMEX) in
1994. The Exchange experienced a 110% growth in revenues during his presidency
and had become the sixth largest futures exchange in the world by the time of
his death.
Mr. Neal Wolkoff, Executive Vice President of NYMEX, has assumed the duties
and responsibilities of the President of NYMEX until a successor has been duly
elected and qualified. Mr. Wolkoff has been associated with the Exchange since
1989.
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
may cause actual results to differ materially, including the Exchange's: ability
to continue to develop and market new innovative products and services and to
keep pace with technological change; failure to continue to develop and market a
new electronic trading system; failure to obtain or protect intellectual
property rights; competitive pressures; financial condition or results of
operations; quarterly fluctuations in revenues and volatility of commodity
prices; change in financial or business
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<PAGE> 17
conditions; ability to attract and retain key personnel; ability to successfully
manage acquisitions and alliances; and legal and economic changes and other
risks, uncertainties and factors discussed elsewhere in this Form 10-Q, in the
Exchange's other filings with the SEC or in materials incorporated therein by
reference.
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 Exchange's financial position, results of
operations and cash flows. These unaudited condensed consolidated financial
statements include some amounts that are based on management's best estimates
and judgements, giving due consideration to materiality.
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<PAGE> 18
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 JUNE 30, 2000
<TABLE>
<CAPTION>
TOTAL FAIR MARKET
2005 PRINCIPAL VALUE AS OF
AND CASH JUNE 30,
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 $ 2,968
Weighted average interest rate... -- -- -- -- 6.50% 4.63%
U.S. Treasury issues............. -- 10,202 -- -- 1,932 -- 12,134 12,173
Weighted average interest rate... -- 5.88% -- -- 6.08% --
Municipal Bonds.................. 3,439 2,286 2,773 2,393 9,702 49,407 70,000 71,189
Weighted average interest rate... 4.85% 6.66% 6.28% 4.65% 6.02% 5.17%
------ ------- ------ ------ ------- --------- -------- -------
Total Portfolio, excluding equity
securities..................... $3,439 $12,488 $2,773 $2,393 $12,626 $ 51,382 $ 85,101 $86,330
====== ======= ====== ====== ======= ========= ======== =======
</TABLE>
PRINCIPAL AMOUNTS BY EXPECTED MATURITY
AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
TOTAL FAIR MARKET
2005 PRINCIPAL VALUE AS OF
AND CASH DECEMBER 31,
2000 2001 2002 2003 2004 THEREAFTER 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 six months ended June 30, 2000 and the year ended December
31, 1999, the Exchange had net investment income of $4.3 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 June 30, 2000 and December 31, 1999 was $94 million and $77
million. The change in fair value, using a hypothetical 10% decline in prices,
is estimated to be a $9.4 million and $7.7 million loss for June 30, 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
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<PAGE> 19
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 AND USE OF PROCEEDS
N/A
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
N/A
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 20, 2000, the NYMEX Division members, during a special meeting,
voted and approved the demutualization plan: 430, or 97.5% of the NYMEX Division
members voted in favor and 11, or 2.5% of the NYMEX Division members, voted
against. There were no abstentions. Details of the demutualization plan are
contained in the Form S-4 Registration Statement which was filed with the SEC on
May 12, 2000.
ITEM 5. OTHER INFORMATION
N/A
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
On August 1, 2000, NYMEX Holdings, Inc., filed a Form 8-K with the SEC. The
reportable event was the death of R. Patrick Thompson, President of NYMEX
Holdings, Inc. on July 20, 2000. The 8-K further disclosed that Neal L. Wolkoff,
Executive Vice President of NYMEX Holdings, Inc., assumed the duties and
responsibilities of the President of NYMEX Holdings, Inc., until a successor is
duly elected and qualified.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 14th day of August, 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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