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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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NYMEX HOLDINGS, INC.
DELAWARE 333-30332 13-4098266
(STATE OF INCORPORATION) (COMMISSION FILE NUMBER) (I.R.S. ID.)
ONE NORTH END AVENUE
WORLD FINANCIAL CENTER
NEW YORK, NEW YORK 10282-1101
(212) 299-2000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes [X] No [ ]
The number of shares of NYMEX Holdings, Inc. Capital Stock outstanding as
of February 24, 2003 was 816. The aggregate market value of NYMEX Holdings, Inc.
Capital Stock held by stockholders of NYMEX Holdings, Inc., as of February 24,
2003 was $1,040,400,000 based upon the average of the bid and ask price for a
NYMEX Holdings, Inc. share as of February 24, 2003.
DOCUMENTS OF WHICH PORTIONS PARTS OF FORM 10-K INTO WHICH PORTION
ARE INCORPORATED BY REFERENCE OF DOCUMENTS ARE INCORPORATED
----------------------------- -------------------------------------
Proxy Statement for NYMEX Holdings' March 18, 2003 III
Annual Meeting of Stockholders
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TABLE OF CONTENTS
PART I
ITEM 1. Business.................................................... 2
ITEM 2. Properties.................................................. 13
ITEM 3. Legal Proceedings........................................... 14
ITEM 4. Submission of Matters to a Vote............................. 15
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 16
ITEM 6. Selected Financial Data..................................... 16
ITEM 7. Management's Discussion and Analysis of Consolidated Results
of Operations and Financial Condition....................... 18
ITEM 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 32
ITEM 8. Financial Statements and Supplementary Data................. 34
ITEM 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 34
PART III
ITEM 10. Directors and Executive Officers of the Registrant and the
Exchange.................................................... 35
ITEM 11. Executive Officer Compensation.............................. 38
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 38
ITEM 13. Certain Business Relationships and Related Transactions..... 38
ITEM 14. Controls and Procedures..................................... 39
PART IV
ITEM 15. Exhibits, Financial Statement Schedule and Reports on Form
8-K......................................................... 40
Signatures.................................................. 42
Index to Financial Information.............................. F-2
Management's Responsibility for Financial Statements........ F-3
Independent Auditors' Reports............................... F-4
PART I
ITEM 1. BUSINESS.
Forward-Looking Information -- Safe Harbor Statement
Certain information in this report (other than historical data and
information) constitutes forward-looking statements regarding events and trends
that may affect the Company's future operating results and financial position.
The words "estimate," "expect," "intend" and "project," as well as other words
or expressions of similar meaning, are intended to identify forward-looking
statements. Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date of this annual report on Form 10-K.
These statements are based on current expectations. Assumptions are inherently
uncertain and are subject to risks that should be viewed with caution. Actual
results and experience may differ materially from forward-looking statements as
a result of many factors, including: changes in general economic and industry
conditions in various markets in which the Company's contracts are traded,
increased competitive activity, fluctuations in prices of the underlying
commodities as well as for trading floor administrative expenses related to
trading and clearing contracts, the ability to control costs and expenses,
changes to legislation or regulations, protection and validity of our
intellectual property rights and rights licensed from others, and other
unanticipated events and conditions. It is not possible to foresee or identify
all such factors. The Company assumes no obligation to update publicly any
forward-looking statements.
Overview
Throughout this document NYMEX Holdings, Inc., will be referred to as
"NYMEX Holdings" and, together with its subsidiaries, as the "Company." The two
principal operating subsidiaries of NYMEX Holdings are New York Mercantile
Exchange, Inc., ("NYMEX Exchange" or "NYMEX Division"), and Commodity Exchange
Inc. ("COMEX" or "COMEX Division"), which is a wholly-owned subsidiary of NYMEX
Exchange. Where appropriate, each division will be discussed separately and
collectively will be discussed as the "Exchange."
Since its founding 131 years ago, the Exchange has evolved into a major
provider of financial services to the energy and metals industries. A core
component of the business is the revenue derived from the Exchange's trading
facilities and from providing clearing and settlement services through its
clearinghouse to a wide range of participants in these industries. A significant
amount of revenue is also derived from the selling of market data. Based upon
our 2002 trading volume of approximately 133 million contracts, the Exchange is
the largest physical commodity based futures exchange in the world and the third
largest futures exchange in the United States. NYMEX Exchange is the largest
exchange in the world for the trading of energy futures and options contracts,
including contracts for crude oil, unleaded gasoline, heating oil and natural
gas and is the largest exchange in North America for the trading of platinum
group metals contracts. COMEX is the largest marketplace for gold and silver
futures and options contracts, and is the largest exchange in North America for
futures and options contracts for copper and aluminum. Participants in the
Exchange's markets include a wide variety of customers involved in the
production, consumption and trading of energy and metals products. Market
participants use the Exchange for both hedging and speculative purposes.
The Exchange exists principally to provide facilities for buying and
selling commodities for future delivery under rules intended to protect the
interests of all market participants. The Exchange itself does not own any
commodities, trade futures and options contracts for its own account or
otherwise engage in market activities. The Exchange provides the physical
facilities necessary to conduct an open-outcry auction market and electronic
trading systems and systems for the matching and clearing of all trades executed
on the Exchange. Futures and options markets, such as the Exchange, facilitate
price discovery and provide financial risk management instruments to a broad
array of market participants including commercial entities that produce,
consume, trade or have other interests in, underlying commodities. The Exchange
believes that market participants choose to trade on centralized markets such as
the Exchange because of the liquidity those markets help to provide and because
those markets perform an important price discovery function by providing the
prices at which each trade occurs. The liquidity that the Exchange and other
centralized markets
2
offer is achieved in large part because the traded contracts have standardized
terms and the exchanges' clearinghouses help mitigate counterparty performance
risk.
History
NYMEX Exchange's predecessor, the New York Mercantile Exchange, was
established in 1872 as the Butter and Cheese Exchange of New York to provide an
organized forum for the trading of dairy products. Within a few years, the egg
trade became an important part of the business and the name of the Exchange was
changed to the Butter, Cheese and Egg Exchange of the City of New York. In order
to attract traders of groceries, dried fruits, canned goods and poultry, the
name was changed to New York Mercantile Exchange in 1882.
Energy futures trading was first established with the introduction of the
heating oil contract in 1978, the world's first successful energy futures
contract. Between 1981 and 1996, contracts followed for gasoline, crude oil,
natural gas, propane, and electricity. The platinum futures contract is the
world's longest continuously traded precious metals futures contract and was the
first industrial commodity traded on the NYMEX Division. It is considered one of
the world's most valuable industrial metals. Palladium futures, the only
domestically exchange-traded instrument for that metal, were launched in 1968.
COMEX was founded in 1933 from the combination of four futures markets; the
National Metal Exchange, the Rubber Exchange of New York, the National Raw Silk
Exchange, and the New York Hide Exchange. It initially traded six commodities:
copper, hides, rubber, silk, silver and tin. In August 1994, with the
acquisition of COMEX, the Exchange enhanced its status as the world's largest
physical commodity futures exchange.
On November 17, 2000, the New York Mercantile Exchange converted from a New
York not-for-profit membership association into a Delaware for-profit stock
corporation and became a subsidiary of NYMEX Holdings, Inc., a Delaware
corporation, as a result of a merger. In the transaction, each NYMEX Division
membership was converted into one Class A membership in NYMEX Exchange and one
share of common stock of NYMEX Holdings. NYMEX Holdings holds the sole
outstanding Class B membership in NYMEX Exchange.
The Company's principal offices are located at One North End Avenue, World
Financial Center, New York, NY 10282. Its telephone number is (212) 299-2000.
Strategy
In general, the more liquidity a commodities market offers, the more
attractive it is to market users. Conversely, if liquidity declines, a market
becomes less attractive. Market participants generally view liquidity as having
two elements -- trading volume and open interest. The Company believes that its
continued and future success will be based upon its ability to strengthen its
existing assets, including the Company's product line and clearinghouse, and to
provide a technological infrastructure that offers efficient technology for
market participants which can accommodate future growth of the Company. In doing
so, the Company believes that it will position itself to ensure its ability to
offer trading volume and open interest and thereby ensure continued liquidity to
market participants. During the past year, the Company has continued these
efforts and has undertaken several initiatives that it believes make significant
strides in attempting to achieve these goals.
Product Line: The Company has had continued success in maintaining its
position as a premier marketplace for the trading of energy and metals futures
and options contracts. The marketplace, however, particularly in the energy
world, has undergone fundamental changes after the collapse of Enron and the
existing financial weakness in the merchant energy sector.
In order to respond to these fundamental shifts, the Company has had to
continue to take the initiative to develop new products that provide an array of
relevant products and risk management tools to the energy industry. During the
second quarter of 2002, the Company launched an initiative that was originally
called the over-the-counter ("OTC") clearing initiative, which is now provided
as one of the services entitled NYMEX ClearPort Clearing(SM). This initiative,
among other things, was intended to alleviate some of the credit issues in
3
the marketplace by use of the clearinghouse and to offer market participants the
advantages of reduced costs by offsetting positions. This initiative permits
market participants to negotiate bilateral deals in the OTC market that are
posted to the Exchange as futures contracts for clearing. The Company originally
listed 25 commonly traded OTC energy instruments for trading. During the fourth
quarter of 2002, the Company continued to pursue this strategy by listing an
additional 32 energy futures contracts, including electricity, natural gas basis
and crude oil swaps futures, which are based on commonly traded OTC instruments.
The Company also believes that there are strategic benefits to be gained by
providing ancillary services to energy and metals industry participants in order
to provide a full complement of services to these industries. For instance, in
2002 the Company commenced a service now called NYMEX ClearPort(SM)
Confirmations, which provides a confirmation service designed to be used by OTC
market participants. The Company is currently reviewing other possible ancillary
services that may be provided to the energy and metals industries and
anticipates developing and providing additional services.
Product Distribution: As part of its ongoing strategy, the Company also
undertook several measures that are intended to expand the customer base of the
marketplace by broadening access to the markets. The Company believes that
certain ways in which the product base can be enriched is to provide for a
broader distribution network for products as well as providing products which
attract an expanded class of investors other than those who have traditionally
used the Company's markets.
The Company has also looked towards use of its electronic trading systems
to expand customer access to its markets. The Company continued to expand
customer access to its NYMEX ACCESS(R) electronic trading system in accordance
with the Company's decision to eliminate previous restrictions on users of the
system. During the year 2002, the number of users on the system increased to
approximately 1,500. In addition, as further discussed below, the Company is in
the process of utilizing a new trade matching system that is designed to
facilitate ease of access into the markets by permitting customer proprietary or
third-party software to be connected to the Company's systems by means of an
application programming interface ("API").
The Company has also attempted to implement this strategy by means of
certain domestic and international alliances. For example, in 2002, the Company
commenced an alliance with the Chicago Mercantile Exchange ("CME"). In June,
2002, the Company began offering newly created smaller sized versions of NYMEX
Exchange crude oil and natural gas futures contracts ("e-miNY(SM)") for trading
on the CME's GLOBEX(R) electronic trading platform and clearing through the
Company's clearing house. This product is intended to provide not only another
risk management tool to energy participants, but it is hoped that such a product
will attract more public non-commercial customers to the Company's marketplace
while leveraging the GLOBEX system's distribution system.
The Company also attempts to internationalize its customer base, in large
part by undertaking a large-scale marketing effort to introduce risk management
analysis and techniques to potential customers abroad. Toward achieving that
end, the Company originally placed NYMEX ACCESS(R) terminals (now replaced by
internet-based NYMEX ACCESS(R)) in various physical commodity trading centers,
including the United Kingdom and in Australia (through a linkage with the Sydney
Futures Exchange). The Company continues to implement this strategy by ensuring
that its new initiatives, including NYMEX ClearPort(SM), have similar
international distribution. Similar alliance efforts are underway in Japan and
in China.
Technology: The Company has both enhanced and improved its technological
infrastructure to facilitate increased efficiency and to enhance its competitive
posture. During 2002, the Exchange launched a major infrastructure project known
as Enterprise-wide Messaging Architecture ("EMA"), which the Exchange believes
will enhance technological and strategic benefits internally and to its
customers. EMA allows for open communications between the Company's internal
systems such as clearing and trade management systems. EMA also provides a set
of APIs that will allow third party systems or exchanges to connect directly to
the Company's systems using a standard messaging protocol known as Financial
Information Exchange ("FIX").
The Company has also sought trade-matching technology that it believes can
provide the flexibility required to support these expanded business needs. In
the fourth quarter of 2002, the Company entered into a
4
software licensing agreement with TradinGear.com, a software provider, to
provide the company with trade matching software and support. This software has
become the basis of the NYMEX ClearPort(SM) Trading system, which was launched
in the first quarter of 2003. Currently, thirty-two of the futures products
based upon commonly traded OTC products that were originally listed on NYMEX
ACCESS(R) as well as two futures contracts previously cleared as part of the OTC
clearing initiative are traded on this system. At this point, assuming that the
system continues to provide the anticipated reliability, flexibility and
scalability, it is anticipated that NYMEX ClearPort(SM) Trading will over time
become the mechanism through which all electronic trading on the Exchange will
be conducted. Thus, the Company hopes to combine its expertise and leadership as
an exchange with state-of-the-art technology in order to provide users with a
comprehensive system in commodity risk management.
Principal Products
NYMEX Division
NYMEX Exchange is the leading commodity exchange for trading energy futures
and options contracts, including contracts for crude oil, heating oil, unleaded
gasoline, propane, and natural gas and is a leading exchange for trading
platinum group metals futures and options, including contracts for platinum and
palladium.
The aggregate trading volume in crude oil contributed approximately 32%,
32%, and 30% of the Company's total consolidated revenues for the years ended
December 31, 2002, 2001, and 2000, respectively. The aggregate trading volume in
natural gas contributed approximately 20%, 16%, and 16% of the Company's total
consolidated revenues for the years ended December 31, 2002, 2001, and 2000,
respectively.
COMEX Division
The COMEX Division provides futures and options trading of precious metals
including gold and silver, as well as base metals including copper and aluminum
contracts. The Company's gold and silver futures and options contracts are the
world's principal exchange-traded instruments for these commodities. FTSE
Eurotop 100(R) stock index futures and options contracts, and FTSE Eurotop
300(R) stock index futures contracts were de-listed in 2002.
The following is a list of the contracts traded and open interest for
contracts traded on both the NYMEX Division and COMEX Division for the last five
years expressed in "round turn" trades (i.e., a matched buy and sell trade):
NYMEX DIVISION CONTRACTS TRADED
1998 1999 2000 2001
----------------------- ----------------------- ----------------------- -----------------------
FUTURES OPTIONS FUTURES OPTIONS FUTURES OPTIONS FUTURES OPTIONS
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Light Sweet Crude
Oil................ 30,495,647 7,448,095 37,860,064 8,161,976 36,882,692 7,460,052 37,530,568 7,726,076
Henry Hub Natural
Gas................ 15,978,286 3,115,765 19,165,096 3,849,454 17,875,013 5,335,800 16,468,355 5,974,240
N.Y. Heating Oil.... 8,863,764 669,725 9,200,703 695,558 9,631,376 1,385,968 9,264,472 704,972
N.Y. Harbor Unleaded
Gasoline........... 7,992,269 730,421 8,701,216 600,009 8,645,182 1,012,460 9,223,510 1,040,030
Palladium........... 131,250 N/A 75,394 N/A 50,766 N/A 25,925 N/A
Platinum............ 528,269 14,183 567,268 11,146 320,924 7,065 205,969 1,813
Other............... 403,093 112,228 199,577 102,467 55,320 58,711 62,526 28,747
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total............... 64,392,578 12,090,417 75,769,318 13,420,610 73,461,273 15,260,056 72,781,325 15,475,878
========== ========== ========== ========== ========== ========== ========== ==========
2002
-----------------------
FUTURES OPTIONS
---------- ----------
Light Sweet Crude
Oil................ 45,679,468 11,460,857
Henry Hub Natural
Gas................ 24,357,792 10,966,023
N.Y. Heating Oil.... 10,695,202 602,170
N.Y. Harbor Unleaded
Gasoline........... 10,979,736 721,932
Palladium........... 41,053 N/A
Platinum............ 219,771 456
Other............... 296,675 116,568
---------- ----------
Total............... 92,269,697 23,868,006
========== ==========
"N/A" means contract was either not in existence at the time or was
declared dormant and therefore not available for trading.
5
NYMEX DIVISION OPEN INTEREST*
DECEMBER 31, 1998 DECEMBER 31, 1999 DECEMBER 31, 2000 DECEMBER 31, 2001
------------------- ------------------- ------------------- ---------------------
FUTURES OPTIONS FUTURES OPTIONS FUTURES OPTIONS FUTURES OPTIONS
--------- ------- ------- --------- ------- --------- --------- ---------
Light Sweet Crude
Oil................ 483,327 420,962 501,819 557,221 407,646 532,965 419,109 691,692
Henry Hub Natural
Gas................ 222,576 242,379 246,629 369,520 353,093 513,901 404,027 766,544
N.Y. Heating Oil.... 176,361 66,632 135,259 58,593 124,664 147,976 150,063 66,188
New York Harbor
Unleaded
Gasoline........... 100,465 26,859 89,804 45,854 90,242 38,791 120,738 35,132
Platinum............ 11,543 413 11,953 326 8,429 305 6,363 3
Palladium........... 2,861 N/A 2,869 N/A 1,848 N/A 1,273 N/A
Other............... 12,746 7,640 6,741 6,647 1,005 6,113 1,741 1,723
--------- ------- ------- --------- ------- --------- --------- ---------
Total............ 1,009,879 764,885 995,074 1,038,161 986,927 1,240,051 1,103,314 1,561,282
========= ======= ======= ========= ======= ========= ========= =========
DECEMBER 31, 2002
---------------------
FUTURES OPTIONS
--------- ---------
Light Sweet Crude
Oil................ 580,793 1,167,016
Henry Hub Natural
Gas................ 379,548 986,600
N.Y. Heating Oil.... 166,412 70,894
New York Harbor
Unleaded
Gasoline........... 115,123 47,984
Platinum............ 8,255 15
Palladium........... 1,941 N/A
Other............... 1,395 16,620
--------- ---------
Total............ 1,253,467 2,289,129
========= =========
"N/A" means contract was either not in existence at the time or was
declared dormant and therefore not available for trading.
* Open Interest as recorded on the last business day of the years 1998 to
2002.
COMEX DIVISION CONTRACTS TRADED
1998 1999 2000 2001
---------------------- ---------------------- ---------------------- ----------------------
FUTURES OPTIONS FUTURES OPTIONS FUTURES OPTIONS FUTURES OPTIONS
---------- --------- ---------- --------- ---------- --------- ---------- ---------
Gold................ 8,990,094 1,945,366 9,575,788 2,815,831 6,643,464 2,083,414 6,785,340 1,975,019
Silver.............. 4,094,616 818,053 4,157,500 725,885 3,117,017 579,085 2,569,198 483,386
High Grade Copper... 2,483,610 153,332 2,852,962 160,857 2,778,124 65,043 2,856,641 50,826
Other.............. 50,619 0 59,438 642 87,762 0 47,480 0
---------- --------- ---------- --------- ---------- --------- ---------- ---------
Total............ 15,618,939 2,916,751 16,645,688 3,703,215 12,626,367 2,727,542 12,258,659 2,509,231
========== ========= ========== ========= ========== ========= ========== =========
2002
----------------------
FUTURES OPTIONS
---------- ---------
Gold................ 9,018,183 1,948,564
Silver.............. 3,135,564 535,224
High Grade Copper... 2,807,286 32,922
Other.............. 74,000 0
---------- ---------
Total............ 15,035,033 2,516,710
========== =========
"0" means contract was available for trading but no trades were executed.
COMEX DIVISION OPEN INTEREST*
DECEMBER 31, 1998 DECEMBER 31, 1999 DECEMBER 31, 2000 DECEMBER 31, 2001 DECEMBER 31, 2002
----------------- ----------------- ----------------- ----------------- -----------------
FUTURES OPTIONS FUTURES OPTIONS FUTURES OPTIONS FUTURES OPTIONS FUTURES OPTIONS
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gold................ 162,912 432,256 155,914 629,296 111,307 302,517 114,963 201,976 206,914 212,847
Silver.............. 75,353 60,858 76,387 64,209 72,121 62,417 63,101 69,149 80,920 48,027
High Grade Copper... 71,975 19,960 71,753 12,142 69,752 5,190 73,420 11,174 80,174 3,387
Other............... 1,811 0 1,510 0 3,021 0 3,259 0 9,345 0
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total........ 312,051 513,074 305,564 705,647 256,201 370,124 254,743 282,299 377,353 264,261
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
"0" means contract was available for trading but no trades were executed.
* Open Interest as recorded on the last business day of the years 1998 to
2002.
The Company is constantly seeking ways to provide additional products and
innovative risk management tools to the marketplace and to expand its franchise
in the energy and metals marketplace.
Product Distribution
The Company provides the physical facilities necessary to conduct an open
outcry auction market, electronic trading systems and systems for the matching
and clearing of all trades executed on the Exchange.
Open Outcry Trading
Open outcry trading takes place at the Company's state-of-the-art facility
located at One North End Avenue. Trading is conducted on two 25,000 square foot
trading floors, one for each division of the Exchange. Approximately 96% of
trades that were executed on the Exchange in 2002 were conducted via open
outcry.
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Electronic Trading
The Company provides innovative, state-of-the-art trading systems and
facilities to enable it to serve efficiently its customers. To support its
expanding international business and product base, the Company has made sizable
investments to create and to maintain a global electronic trading platform.
NYMEX ACCESS(R)
The Exchange launched its NYMEX ACCESS(R) electronic trading system in June
1993. NYMEX ACCESS(R) permits the trading of futures contracts on crude oil,
heating oil, unleaded gasoline, natural gas, platinum, gold, silver, copper,
aluminum, propane and palladium. The system was originally active solely when
NYMEX Exchange's trading floor was closed; however, the Exchange expanded the
use of the system to enable both day and nighttime trading of certain products.
As of December 31, 2002, approximately 1,500 users were enabled to trade over
the system.
Trading on NYMEX ACCESS(R) achieved a record volume level during 2002 of
approximately 4.9 million contracts, which accounted for 4% of the Exchange's
total trading volume. Volume on NYMEX ACCESS(R) has rapidly grown, increasing
88% in 2002, and 25% in 2001. A new upgraded version of NYMEX ACCESS(R), using a
browser-based interface, was launched in September 2001. The new system retains
the transaction matching speed of its predecessor while expanding capacity, and
is less costly to operate than the previous version of the system as it is
delivered through the internet and no longer requires dedicated
telecommunications equipment. Due to the lessening of these constraints, the new
version of the system has enabled easier access by a broader customer base.
Electronic Trading and Trade Clearing -- NYMEX ClearPort(SM)
In 2002, the Company developed the NYMEX ClearPort(SM) initiative, which is
designed to provide an array of services beyond those provided by open outcry
trading. There are two major components of this initiative at this time. NYMEX
ClearPort(SM) Trading provides a trade execution system for certain energy
futures products which are based on commonly-traded OTC instruments. The system
was launched in January 2003. The Company anticipates that, assuming the system
provides the anticipated reliability, flexibility and scalability, NYMEX
ClearPort(SM) Trading will become the mechanism through which all electronic
trading on the Exchange will be conducted. NYMEX ClearPort(SM) Clearing is the
mechanism by which individually negotiated off-exchange trades are submitted to
the Exchange for clearing for specified products. This includes clearing for the
products that are part of the OTC clearing initiative launched in May 2002 as
well as the interface used to submit Exchange of Futures for Physical ("EFP")
and Exchange of Futures for Swaps ("EFS") transactions for energy futures traded
as part of NYMEX ClearPort(SM) Trading and a limited number of NYMEX ACCESS(R)
products.
Since the introduction of the OTC clearing initiative and the subsequent
introduction of NYMEX ClearPort(SM) Clearing, the estimated notional value of
transactions cleared as of February 24, 2003 was approximately $13.9 billion.
NYMEX ClearPort(SM) is also intended to be the mechanism through which
ancillary services to the marketplace may be provided. For instance, NYMEX
ClearPort(SM) Confirmations is a service developed in 2002 to provide
confirmation services to OTC market participants. The Company anticipates
developing and providing additional services in the future.
Alliances
Chicago Mercantile Exchange: In May 2002, The Company executed an agreement
with the CME to offer newly created smaller sized versions of crude oil and
natural gas futures contracts ("e-miNY(SM)") for trading on the CME's GLOBEX(R)
electronic trading platform and clearing through the Company's clearing house.
The agreement also provides for the possibility of development of additional
metals and energy-based products. These products are intended to provide not
only additional risk management tools to market participants with the
anticipation that such products will attract more public non-commercial
customers to the
7
Company's marketplace while leveraging the GLOBEX(R) system's distribution
system. In addition, the Company and CME offer a cross-margining program based
upon the Company's energy products and the CME's Goldman Sachs Commodity Index
futures product.
Sydney Futures Exchange Limited: In 1995, the Company entered into an
agreement with the Sydney Futures Exchange Limited ("SFE") whereby SFE members
were provided with a link to NYMEX Division products on NYMEX ACCESS(R) through
the SFE's SYCOM(R) after hours electronic trading system (now replaced by
internet-based NYMEX ACCESS(R). This linkage was expanded to include certain
COMEX Division products in 1996.
Singapore Exchange Derivatives Trading Limited: In 1999, the Company
entered into an agreement with the Singapore Exchange Derivatives Trading
Limited for the placement of NYMEX ACCESS(R) terminals in Singapore, one of
Asia's primary oil trading centers. This linkage received regulatory approval in
2000. The Company is currently seeking to modify its arrangement in Singapore to
include the internet-based NYMEX ACCESS(R).
Clearinghouse Function
The Exchange serves a clearinghouse function, standing as a financial
intermediary on every open futures and option transaction cleared. Specifically,
through its clearinghouses, the Exchange guarantees performance of obligations
owed to buyers and sellers. As such, in the case of a customer or clearing
member financial default, to the extent that funds are not otherwise available
to the Exchange to satisfy the obligations under the applicable contract, the
Exchange may be required to perform the financial obligations.
NYMEX Division contracts are currently cleared through NYMEX Exchange.
COMEX Division contracts are currently cleared through a wholly-owned subsidiary
of COMEX, the COMEX Clearing Association, Inc. ("CCA"). The Exchange is in the
process of merging CCA into NYMEX Exchange and anticipates this merger to take
place in the second quarter of 2003. NYMEX Exchange and the CCA provide the
operational infrastructure to allow position matching, reporting and margining
for each of NYMEX Division's and COMEX Division's contracts. This structure
permits parties to trade with one another without individual credit
determinations or counterparty credit risk, allows for the daily flow of
marked-to-market variation margin payments and allows the Exchange to look to
the financial strength of its clearing members.
As a safeguard to ensure proper settlement of contracts, 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 $2.0 million, depending upon such
clearing member's capital, in a fund known as a guaranty fund for each of NYMEX
and CCA, as applicable. The NYMEX guaranty fund contained approximately $79.8
million in cash and U.S. treasury securities as of December 31, 2002. The CCA
guaranty fund contained approximately $75.4 million in cash and U.S. treasury
securities as of December 31, 2002. The guaranty funds are controlled by NYMEX
or CCA, as applicable, and may be used to cover the financial defaults of a
clearing member; these amounts on deposit in the guaranty funds, however, are
not the property of NYMEX and are not available to pay debt service.
The Exchange, as a self-regulatory organization, has instituted detailed
risk-management policies and procedures to guard against default risk with
respect to contracts traded on the Exchange. In order to guard against default
risk with respect to contracts traded on the Exchange, each of NYMEX Exchange
and COMEX has instituted detailed risk management policies and procedures. In
order to manage the risk of financial non-performance, the Exchange (1) has
established minimum capital requirements for clearing members; (2) limits the
number of net open contracts that can be held by any clearing member, based upon
that clearing member's capital; (3) requires clearing members to post original
margin collateral for all open positions, and to collect original margin from
their customers; (4) pays and collects variation margin on a marked-to-market
basis at least twice daily; (5) requires clearing members to collect variation
margin from their customers; (6) requires deposits to the applicable guaranty
fund from NYMEX Division clearing members or COMEX Division clearing members, as
the case may be, which would be available to cover financial non-performance;
and (7) has broad assessment authority to recoup financial losses. The Exchange
also has extensive surveillance and compliance operations and procedures to
monitor and enforce
8
compliance with rules pertaining to the trading, position sizes, delivery
obligations and financial condition of members.
As part of the Exchange's powers and procedures designed to backstop
contract obligations in the event of a default, the Exchange may levy
assessments on any of its clearing members if there are insufficient funds
available to cover a deficit. The maximum assessment on each NYMEX Division
clearing member is the lesser of $15 million and 40% of such NYMEX Division
clearing member's capital. The Board of Directors of COMEX Clearing Association,
which serves as the Clearinghouse for COMEX, has substantially similar authority
in the case of a default by a COMEX Division clearing member.
Despite the Exchange's authority to levy assessments or impose fees, there
can be no assurance that the relevant members will have the financial resources
available to pay, or will not choose to be expelled from membership rather than
pay, any dues, fees or assessments. The Exchange believes that assessment
liabilities of a member arising prior to expulsion are contractual in nature
and, accordingly, survive expulsion. In addition, the Exchange would have
recourse to such member and the proceeds from the Exchange's sale of such
member's seat to apply towards any outstanding obligations to the Exchange of
such member.
Moreover, despite the risk mitigation techniques adopted by, and the other
powers and procedures implemented by the Exchange, which are designed to, among
other things, minimize the potential risks associated with the occurrence of
contract defaults on the Exchange, there can be no assurance that these powers
and procedures will prevent contract defaults or will otherwise function to
preserve the liquidity of the Exchange.
The Exchange conducts clearing through its Clearing 21(R) system. This
system, a highly flexible clearing system, developed jointly with the Chicago
Mercantile Exchange, was rolled out in 1999 and is expected to support any
anticipated growth in volume or business expansion for the next five to ten
years. The Clearing 21(R) system was upgraded in the fall of 2001 to permit
clearing member access via the internet. as well as to accommodate an enhanced
product base, including the clearing of OTC contracts. The system enables the
Exchange to perform functions relating to: banking, settlement, asset
management, delivery management, position management and margins.
The Exchange has an excellent risk management track record. No significant
clearing member default has occurred since 1985. The 1985 default was at the CCA
prior to the COMEX acquisition, and was promptly resolved. NYMEX Exchange's
clearing function enables the Company to guarantee the financial performance of
all contracts traded on NYMEX Exchange.
Market Data
The Company sells proprietary real-time and delayed market data relating to
prices of contracts traded on the Exchange to third parties. The data is
distributed to customers through information vendors. Fees from customers are
collected by these vendors and remitted to the Exchange. These information
vendors include Reuters, Thompson and DTN, who distribute the data to
sub-vendors and subscribers that receive real-time and delayed data. Market data
fees contributed 18%, 24% and 26% of the Company's total consolidated revenues
for the years ended December 31, 2002, 2001 and 2000, respectively.
Competitive Environment
According to information provided by the Futures Industry Association
("FIA") for the year 2002, the Exchange is the largest physical commodity based
futures exchange in the world and the third largest futures exchange in the
United States. The marketplace for the Exchange's contracts exists both in the
physical format of open-outcry ring trading on the trading floor facilities, and
electronically through NYMEX ACCESS(R) and the NYMEX ClearPort(SM) Trading
system, which was introduced in January 2003.
NYMEX encounters competition in all aspects of its business and competes
directly with other exchanges, both domestic and foreign, and OTC entities, some
having substantially greater capital and resources and offering a wider range of
products and services than does NYMEX. NYMEX believes that the
9
principal factors affecting competition involve the integrity of the marketplace
provided by NYMEX, the relative prices of services and products it offers, its
substantial liquidity base, its worldwide brand recognition and the quality of
its clearing and execution services.
Exchanges designated as "contract markets" or "derivatives transaction
execution facilities" can compete with the Exchange in offering market trading
of futures and options contracts in both of these formats. In addition, OTC
trading of contracts similar to those traded and/or cleared on the Exchange,
such as swaps, forward contracts and NYMEX "look alike" contracts, in which
parties directly negotiate the terms of their contracts, represents a
significant source of potential competition for the Exchange and could be a
significant factor affecting the Exchange's trading volumes and operating
revenues if market participants perceive OTC products and exchange-traded
futures and options as competing alternatives as opposed to complementary risk
management tools.
The Company also faces the threat of competition from the activities of
foreign and emerging exchanges or unregulated exchange-equivalents in the United
States. The Commodity Futures Modernization Act ("CFMA"), enacted in 2000,
increased the ability of competitors to offer unregulated competing products
that are financially-equivalent to futures contracts. For instance, the
IntercontinentalExchange, an electronic trading system for various OTC energy
products, was created by several large merchant energy and energy companies and
currently operates as an "exempt commercial market" under the CFMA. This company
is engaged in the trading of several energy instruments which are financially
equivalent to those traded on the Exchange.
The CFMA also expanded the ability of companies to engage in the business
of clearing OTC instruments which previously was not expressly permitted by
statute. One of the advantages of a regulated cleared futures instrument versus
an OTC instrument is that the existence of a clearinghouse mitigates potential
counterparty credit risk in the OTC markets. As such, to the extent that
companies are able to enter the business of the clearing of OTC instruments,
this may represent a source of competition to the Exchange and could be a
significant factor affecting the Exchange's trading volumes and operating
revenues. The NYMEX ClearPort(SM) Clearing initiative is the Exchange's effort
to enter into this type of business. There are other companies, such as the
Guaranty Clearing Corporation, a subsidiary of the Board of Trade Clearing
Corporation, and EnergyClear, which have also commenced operations. The
IntercontinentalExchange also has established a clearing arrangement in both the
U.S. and the U.K. with the London Clearing House.
Volume on foreign futures and options exchanges is growing as the benefits
of risk management through futures and options trading become more appreciated
throughout the world and risk management techniques are adopted to meet the
needs of local economies. This growing global awareness has not only aided the
growth of foreign exchanges but has, to a certain extent, also benefited NYMEX
as non-U.S. enterprises become NYMEX members and customers of other NYMEX
members. Under present competitive conditions, NYMEX believes that increasingly
liquid foreign markets generally have not taken material volume away from NYMEX
since volumes on NYMEX continue to grow. At present, the most active and fastest
growing futures and options products listed on foreign exchanges (e.g., Korean
and European stock indices; Euro-based fixed income products) have not competed
with the most active and fastest growing NYMEX products (e.g., natural gas).
Nevertheless, such foreign futures and options exchanges may in fact have taken
some volume, and may in the future take volume, away from NYMEX.
The Exchange, like other commodity and financial exchanges, is directly
affected by such factors as national and international economic and political
conditions, broad trends in business and finance, legislation and regulations
affecting the national and international financial and business communities
(including taxes), currency values, the level and volatility of interest rates,
fluctuation in the volume and price levels in the commodities markets and the
perception of stability in the commodities and financial markets. These and
other factors can affect the Exchange's volume of trading and the stability and
liquidity of the commodities markets. A reduced volume of commodity transactions
and reduced market liquidity would result in lower revenues for the Company from
transaction and clearing fees. In periods of reduced transactions, the Company's
profitability would also likely be adversely affected because certain of its
expenses are relatively fixed.
10
Intellectual Property
The Company reviews on an ongoing basis the proprietary elements of its
business to determine what intellectual property protections are available for
these elements. The Company seeks to protect proprietary elements by relying
upon the protections afforded by trademark, service mark, copyright, patent and
other legal rights and remedies on both a domestic and an international scale.
In addition, some of our products are dependent upon licensing of these rights
from third parties. For instance, with respect to certain of the products traded
and/or cleared on the NYMEX ClearPort(SM) system, we have entered into license
agreements with Platts and Intelligence Press.
Business Continuity Planning
As with all other financial institutions, the Company continues to
strengthen and upgrade its disaster recovery facilities and capabilities. Some
of the steps taken by the Company to achieve this goal are as follows:
Regulatory
There currently is limited or no regulatory oversight or regulations
imposed upon exchanges with respect to business continuity planning or disaster
recovery in the commodities and futures industry. However, the Company looks to
other regulatory bodies in the equities and bond markets, and has evaluated the
various proposals and white papers submitted by industry and government
agencies, as well as our own industry for direction and best practices trends.
The Company continually looks to improve its system of business continuity
planning by making sure our partners, members and vendors have considered and
implemented business continuity planning as well. This will enable the Company
to maximize its ability to continue operations in the face of adverse
conditions. The Company intends to be a leader in developing industry best
practices for business continuity.
Systems and Facilities
The Company's business continuity and disaster recovery planning currently
utilizes four facilities for potential use during an emergency in addition to
the One North End Avenue facility. Two facilities provide command and control
functionality and three provide data services. The newest facility serves as a
back-up trading floor and is fully equipped for trading. By the end of April
2003, the Company intends to be fully migrated into a new back-up trading
facility located on a separate power, water, and telecommunications grid. This
new back-up trading floor and data center is located outside of the primary
facility's transportation infrastructure. This migration will consolidate
back-up data systems into a single facility and reduce the number of facilities
in possible use during an emergency. Linking the data centers will be high
capacity fiber connectivity, allowing fully synchronous communications between
main and back-up systems. Additionally, one facility provides archiving
services. This facility is currently on a separate infrastructure grid from the
above-mentioned facilities.
Planning
The Company's current plan provides enterprise-wide business continuity
planning that includes all business units, Exchange staff, and member staff. The
Company has purchased a complex planning and incident management system and
hired a Business Continuity professional to manage the Program. This planning
has moved forward enabling the Exchange to progress quickly towards building a
comprehensive Business Continuity Plan. This planning includes conducting a full
Risk Analysis and Business Impact Analysis in order to identify areas of
opportunity for preventative measures as well as identify important business
functions and prioritize them accordingly. Additionally, the Company is
establishing relationships with local business community, law enforcement, and
local and regional government emergency agencies to help plan appropriately as
well as to provide information sources during a potential crisis.
11
Recent Developments
In January 2003, the Company, through a wholly-owned subsidiary Tradingear
Acquisition LLC, entered into an Asset Purchase Agreement with TradinGear.com
("TG") and its parent company, TGFIN Holdings, Inc. to purchase certain of the
assets of TG. The primary asset to be purchased is the trade-matching engine,
which is currently being licensed from TG. As part of this transaction, certain
of TG's existing employees will become employees of the Company. The Company
anticipates that the closing of this transaction will occur on or before March
31, 2003. The Company believes that ownership of its own proprietary trade
matching software will provide it with strategic flexibility to pursue its own
electronic trading strategy.
NYMEX Exchange and the Board of Trade of the City of New York, Inc.
("NYBOT") entered into a lease that became effective on November 20, 2002. This
lease provides that NYBOT will lease 13,170 square feet on the COMEX Division
Trading Floor and 45,006 square feet of office space for a ten-year term. The
rent commencement date for the trading floor space is the earlier of occupancy
or July 1, 2003. The rent commencement date for the office space is the earlier
of occupancy or May 20, 2003.
Financial Information about Segments
Financial information relating to NYMEX Holdings' business segments for
each of the three years for the period ended December 31, 2002 appears in Note
13 captioned "Segment Reporting" of the Notes to the Consolidated Financial
Statements set forth in Item 8 of the Annual Report, at page F-24 and is
incorporated herein by specific reference.
Seasonal and Other Conditions
The Company believes that its business, in the aggregate, is not seasonal.
Certain contracts listed on the NYMEX Division, however, trade more heavily in
some seasons than in others. For example, heating oil futures and options trade
more heavily in the late fall and winter months, while higher trading in
unleaded gasoline futures and options usually occurs in the late spring and
summer months. Where possible, the Company manages its trading floor personnel
and expenses appropriately to address the seasonal variations in demand for
these contracts.
Working Capital Requirements
The Company believes its working capital of $93 million is adequate to meet
its current obligations. Although no assurances can be made, the Company
believes it has adequate cash flows from operations to fund future operations
and capital expenditure requirements for the next twelve months. In addition,
the Company has the ability, and may seek, to raise capital through the
issuances of stock in the private and public capital markets. For additional
information on working capital, reference is made to: "Management's Discussion
and Analysis of Consolidated Results of Operations and Financial
Condition -- Liquidity and Capital Resources" beginning on page 27 of this
document.
Research and Development
The Company expends significant amounts each year on research for the
development and improvement of existing commodity contracts, as well as on
trading and clearing systems.
During the years ended December 31, 2002, 2001 and 2000, the Company
expended, directly or indirectly, $9 million, $13 million, and $5 million
respectively, on research, development and certain software engineering
activities relating to the design, development, improvement and modification of
new and existing contracts, as well as the formulation and design of new
processes, systems and improvements to existing ones. The Company anticipates
that it will continue to have research and development expenditures to maintain
its competitive position during 2003.
12
Effects of Environmental Regulations
The Company's services are not subject to environmental regulations.
Number of Employees
At December 31, 2002, NYMEX Holdings had 489 full-time employees. No
employees are covered by labor unions.
Foreign Sales
The Company derives foreign revenues from market data services, the total
of which is considered immaterial.
Available Information
The public may obtain further information about the Company from its
Internet address (http://www.nymex.com). Additionally, the Company makes its SEC
filings available free of charge and through its Internet address as soon as
reasonably practicable after the Company electronically files such material
with, or furnishes such material to, the SEC.
ITEM 2. PROPERTIES.
The Company's state-of-the-art trading facilities and corporate
headquarters are located in a 16-story building in downtown Manhattan. This
building, which is on land leased from the Battery Park City Authority for a
term expiring on June 17, 2069, is one of five office buildings in a complex
known as the World Financial Center. Construction of NYMEX's 502,000 square foot
building was completed in 1997. There are two 25,000 square foot trading floors
in the facility. The facility also contains all of the Company's back office
support functions. As of December 31, 2002, the Company leases approximately
149,864 square feet at this facility to approximately 35 tenants who are member
firms and non-member retail and other tenants.
In addition, NYMEX Exchange and the Board of Trade of the City of New York,
Inc. ("NYBOT") entered into a lease that became effective on November 20, 2002.
This lease provides that NYBOT will lease 13,170 square feet on the COMEX
Division Trading Floor and 45,006 square feet of office space for a ten-year
term The rent commencement date for the trading floor space is the earlier of
occupancy or July 1, 2003. The rent commencement date for the office space is
the earlier of occupancy or May 20, 2003.
The Company had previously leased 17,000 square feet of space at 22
Cortlandt Street in New York, New York. This space had been used as the backup
data center for the One North End Avenue facility prior to the events of
September 11, 2001. The Company has not utilized this facility due to the damage
it sustained as a result of the terrorist attack. As such, this facility is
unavailable for use as a backup data center. In addition, the Company also
occupies space at a New Jersey facility to house production equipment for its
internet version of the NYMEX ACCESS(R) trading platform as well as the backup
for other exchange systems. Since November 2002, the Company has leased a new
back-up facility that serves as a back-up trading floor and is fully equipped
for trading.
The Company also leases office space in Washington, D.C., at which it
conducts government relations activities, as well as office space in Houston,
Texas and London, England, at which it conducts marketing activities. These
offices are used to promote awareness of the Company's products.
The Company's management believes its properties are adequate and suitable
for its business as presently conducted and are adequately maintained for the
immediate future. The Company's facilities are effectively utilized for current
operations of all segments and suitable additional space is available to
accommodate expansion needs. For further information concerning leases, see Note
14 of the Consolidated Financial Statements.
13
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is involved in legal proceedings and
litigation arising in the ordinary course of business. Set forth below are
descriptions of legal proceedings and litigation to which the Company is a party
as of December 31, 2002. Although there can be no assurance as to the ultimate
outcome, the Company has denied, or believes it has a meritorious defense and
will deny liability, in all significant cases pending against it including the
matters described below, and intends to defend vigorously each such case. While
the ultimate result of the proceedings against the Company cannot be predicted
with certainty, it is the opinion of management, after consultation with outside
legal counsel, that the resolution of these matters, in excess of amounts
already recognized, will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
The Company has been named as a defendant in the following legal actions:
eSpeed, Inc. and Electronic Trading Systems Corporation. v. New York
Mercantile Exchange. This action was originally filed in the United States
District Court for the Northern District of Texas (Dallas Division) and is
now pending in United States District Court for the Southern District of
New York. NYMEX Exchange was served with a summons and complaint on or
about May 10, 1999. This is a patent infringement case, in which the
plaintiff alleges that it is the owner of United States Patent No.
4,903,201 entitled "Automated Futures Trade Exchange" and that NYMEX
Exchange is infringing this patent through use of its electronic trading
system. The plaintiff seeks an unspecified amount of royalties. On
September 15, 2000, the Court granted NYMEX Exchange's motion to sever and
transfer venue to the Southern District of New York. On August 1, 2001, the
Court granted Electronic Trading Systems Corporation's motion to add eSpeed
as a plaintiff. On August 10, 2001 the Exchange made a motion to bifurcate
the issues of willfulness of infringement and damages from all other issues
in the case and requested a stay of discovery on the issues of willfulness
and damages. The Markman hearing was held on April 18, 2002. On June 26,
2002, the Court issued a decision in which it construed more broadly the
meaning of certain elements of the patent claims than those constructions
proposed by the Exchange. This decision may limit the scope of the
arguments that the Exchange may have respecting non-infringement. The case
is ongoing.
Enrique Rivera and Edith Rivera v. New York Mercantile Exchange, Mark
Kessloff, Les Faison, Brian Bartichek and John Does "1-10." This action is
pending in New York State Supreme Court (Bronx County). NYMEX Exchange was
served with the summons and complaint on or about April 22, 1999. This is
an ethnic discrimination case, in which the plaintiff alleges that
throughout his employment with NYMEX Exchange he was subjected to a hostile
work environment and discrimination regarding his ethnic origin. Plaintiff
seeks an unspecified amount of compensatory and punitive damages. The
plaintiff filed a Note of Issue on or about September 27, 2002 and the
parties anticipate scheduling a pre-trial conference in the near future.
New York Mercantile Exchange v. GlobalView Software, Inc. On April 27,
2001, NYMEX Exchange filed a breach of contract suit in New York State
Supreme Court (New York County) against Global View Software, Inc.
("GlobalView") NYMEX Exchange seeks to recover direct and consequential
damages resulting from GlobalView's breach of its contract with NYMEX
Exchange regarding the front-end development for enymex(SM). On or about
June 18, 2001, GlobalView served its answer and counterclaims in which it
seeks to recover amounts in excess of $26,000,000 for alleged fees due and
owing under the contract, as well as consequential damages and other causes
of action. On June 28, 2001, NYMEX Exchange served an amended complaint on
GlobalView. On or about July 24, 2001, GlobalView filed a motion to dismiss
one cause of action in the amended complaint. The Second Amended Complaint
was served on or about November 26, 2001. GlobalView served its answer to
the Second Amended Complaint and Counterclaims on about February 14, 2002.
GlobalView asserted two additional counterclaims for tortious interference
each seeking an additional $9,000,000 in damages. On March 14, 2002, the
Exchange served its reply to the counterclaims. On January 13, 2003, the
parties participated in court-ordered mediation. The case is ongoing.
14
New York Mercantile Exchange v. IntercontinentalExchange, Inc. On November
20, 2002, NYMEX Exchange commenced an action in United States District
Court for the Southern District of New York against
IntercontinentalExchange, Inc. ("ICE"). The amended complaint alleges
claims for (a) copyright infringement by ICE arising out of ICE's uses of
certain NYMEX Exchange settlement prices; (b) service mark infringement by
reason of use by ICE of the service marks NYMEX and NEW YORK MERCANTILE
EXCHANGE, (c) violation of trademark anti-dilution statutes, and (d)
interference with contractual relationships. On January 6, 2003, ICE served
an Answer and Counterclaims, in which ICE alleges five counterclaims
against NYMEX Exchange as follows: (1) a claim for purported violation of
Section 2 of the Sherman Act, 15 U.S.C. sec. 2, for NYMEX Exchange's
allegedly trying to maintain a monopoly in the execution of the North
America energy futures and expand the alleged monopoly into the execution
and clearing of North American OTC energy contracts by attempting to deny
ICE access to NYMEX Exchange Settlement Prices; (2) a claim for purported
violation of Section 1 of the Sherman Act by conspiring with certain of its
members to restrain trade by attempting to deny ICE access to NYMEX
Exchange Settlement Prices; (3) a claim for alleged violation of Section 2
of the Sherman Act by NYMEX Exchange purportedly denying ICE access to
NYMEX Exchange's Settlement Prices which are allegedly an "essential
facility"; (4) a claim for purported violation of Section 1 of the Sherman
Act and Section 3 of the Clayton Act by NYMEX Exchange allegedly tying
execution services for North American energy futures and options to
clearing services; and (5) a claim for purported violation of the Lanham
Act through false advertising with respect to certain services offered by
NYMEX Exchange and services offered by ICE. The counterclaims request
damages and trebled damages in amounts not specified yet by ICE in addition
to injunctive and declaratory relief. NYMEX Exchange's response to the
counterclaims was served on February 26, 2003. NYMEX Exchange believes that
the counterclaims' allegations of violations of the antitrust laws, and the
allegations of false advertising under the Lanham Act have no merit, and
the Exchange will vigorously defend itself against the counterclaims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE.
No matter was submitted to a vote of security holders during the fourth
quarter of 2002.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Stock Trading Symbol -- Not applicable.
At present, there is no established trading market for the Company's common
stock. None of the Company's common stock is listed on any exchange or automated
quotation system. Each series of common stock is coupled with a Class A
membership interest in NYMEX Exchange and the two interests cannot be traded
separately. NYMEX Holdings' common stock, coupled with NYMEX Division
memberships are traded through a bid-ask system maintained by the Company's
membership department.
A proposed purchaser or transferee of common stock and trading rights must
meet certain financial requirements and have two member sponsors. All applicants
are subjected to a thorough review process in order to be approved. The Exchange
conducts a background investigation of each applicant focusing on the
applicant's credit standing, financial responsibility, character and integrity.
Due to the absence of an established public trading market and the limited
number and disparity of bids made for shares through year-end 2002, bid prices
for shares tend to be unrepresentative of the actual sales price of a share. The
high and low sales prices for a share of NYMEX Holdings Common Stock coupled
with NYMEX Division trading rights are reflected in the following seat sale
prices for each quarter of 2002 and 2001, and were as follows (in dollars):
2002 HIGH LOW
---- --------- ---------
First Quarter............................................... 900,000 825,000
Second Quarter.............................................. 1,050,000 920,000
Third Quarter............................................... 1,100,000 1,000,000
Fourth Quarter.............................................. 1,300,000 1,000,000
2001
----
First Quarter............................................... 735,000 710,000
Second Quarter.............................................. 735,000 685,000
Third Quarter............................................... 750,000 750,000
Fourth Quarter.............................................. 825,000 750,000
--------------------
Dividend Policy -- On November 7, 2002, the Board of Directors declared a
one-time dividend of $5,000,000 to be distributed to stockholders of record as
of January 2, 2003. This is the first time a dividend has been issued by the
Company.
Number of Holders of Common Stock -- There were 600 holders of record of
the Company's common stock as of February 24, 2003.
Changes in Securities and use of Proceeds -- Not applicable.
ITEM 6. SELECTED FINANCIAL DATA (UNAUDITED).
The following table sets forth selected consolidated financial and other
information for the Company. The balance sheet and operating data as of and for
each of the years in the five-year period ended December 31, 2002 have been
derived from the audited consolidated financial statements and notes thereto.
The information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Consolidated
16
Results of Operations and Financial Condition" beginning on page 18, the
consolidated financial statements and the notes thereto, and other financial
information, included in this report.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE/MEMBERSHIP DATA)
OPERATING DATA
Revenues
Clearing and transaction fees(1)... $ 140,763 $ 104,302 $ 92,500 $ 105,206 $ 90,764
Market data fees................... 33,459 34,313 33,622 34,689 34,858
Other(2)........................... 14,982 5,666 4,747 4,540 4,961
------------ ------------ ------------ ------------ -----------
Operating revenues................. 189,204 144,281 130,869 144,435 130,583
------------ ------------ ------------ ------------ -----------
Expenses
Salaries and employee benefits..... 48,021 48,811 48,547 45,802 44,552
General and administrative......... 18,837 14,480 15,063 14,012 14,983
Depreciation and amortization(3)... 20,926 16,024 13,862 10,966 9,901
Rent and facility.................. 18,590 17,073 15,736 12,877 12,760
Professional services.............. 17,954 12,753 15,625 8,424 7,486
Telecommunications, equipment
rentals.......................... 13,413 14,468 14,952 15,917 14,627
Impairment and disposition loss.... 12,583 5,114 857 1,298 2,814
Marketing.......................... 2,633 1,721 2,446 2,537 2,403
Amortization of goodwill(11)....... -- 2,153 2,153 2,153 2,153
Demutualization expense(4)......... -- -- 4,281 593 --
Other.............................. 9,445 7,203 4,905 4,984 5,344
------------ ------------ ------------ ------------ -----------
Operating expenses................. 162,402 139,800 138,427 119,563 117,023
------------ ------------ ------------ ------------ -----------
Operating income (loss)............ 26,802 4,481 (7,558) 24,872 13,560
Other income and expenses
Investment income, net............. 5,714 4,643 9,355 3,942 6,739
Interest expense................... (7,455) (7,662) (7,718) (7,721) (7,958)
------------ ------------ ------------ ------------ -----------
Income (loss) before income taxes.... 25,061 1,462 (5,921) 21,093 12,341
Income tax (benefit) expense......... 12,762 782 (3,140) 8,903 6,263
------------ ------------ ------------ ------------ -----------
Net income (loss).................... $ 12,299 $ 680 $ (2,781) $ 12,190 $ 6,078
============ ============ ============ ============ ===========
BALANCE SHEET DATA
Total assets......................... $ 462,755 $ 415,591 $ 500,131 $ 423,087 $ 384,012
Total liabilities.................... 361,220 321,715 415,471 329,901 299,069
Short-term borrowings................ 2,815 2,815 2,815 -- --
Long-term borrowings................. 91,551 94,368 97,185 100,000 100,000
Total equity......................... 101,535 94,236 84,659 93,202 86,233
OTHER DATA
Basic earnings (loss) per share/
membership(5)...................... $ 15,072 $ 833 $ (3,408) $ 14,939 $ 7,449
Book value per share/membership(5)... $ 124,430 $ 115,485 $ 103,749 $ 114,218 $ 105,678
Cash dividends declared per common
share(9)........................... $ 6,127 $ -- -- N/A N/A
Current ratio(6)..................... 1.8 2.0 1.4 3.3 6.0
Working capital...................... $ 93,011 $ 79,974 $ 74,913 $ 120,209 $ 114,547
Capital expenditures................. $ 31,049 $ 27,221 $ 12,797 $ 20,022 $ 18,175
Cash provided by operations.......... $ 63,554 $ 8,749 $ 10,188 $ 43,204 $ 25,139
Times interest earned(7)............. 4.4 1.2 0.2 3.7 2.6
Cash flow coverage of fixed
charges(10)........................ 11.2 2.2 1.9 7.7 4.9
Number of employees at end of
period............................. 489 478 544 609 594
Sales price per share/membership(8)
High............................... $ 1,300,000 $ 825,000 $ 725,000 $ 630,000 $ 705,000
Low................................ $ 825,000 $ 685,000 $ 550,000 $ 551,000 430,000
Total trading volume................. 133,689,446 103,025,093 104,075,238 109,538,831 95,018,685
Total open interest.................. 4,184,210 3,201,638 2,853,303 3,044,446 2,599,889
---------------
(1) Clearing and transaction fees are presented net of member fee rebates which
were $5,245, $6,693, $13,727, $13,065 and $11,272 for the years ended
December 31, 2002, 2001, 2000, 1999 and 1998, respectively.
17
(2) Beginning in 1998, NYMEX Division introduced various other rebate programs.
These costs reduced other revenue for the years ended December 31, 2002,
2001, 2000, 1999 and 1998 by $1,915, $2,090, $2,808, $2,377 and $1,364,
respectively.
(3) Depreciation and amortization expense is net of amortization of deferred
credit for building construction of $2,145, annually, except $1,930 for the
year ended December 31, 1998.
(4) On May 12, 2000, the Company's Form S-4 Registration Statement, with
respect to its plan to demutualize, was declared effective by the SEC.
Expenses incurred for the demutualization were accounting, investment
banking, legal, printing and SEC filing fees, and are shown as a separate
line item on the Consolidated Statements of Operations.
(5) NYMEX Holdings has 816 shares authorized, issued and outstanding for the
year ended December 31, 2002, 2001, and 2000, respectively. NYMEX Exchange
had 900 memberships authorized and 816 memberships outstanding for each of
the years ended December 31, 1999 and 1998, respectively. The per share
(membership) amounts in the table are based on the 816 shares (memberships)
issued and outstanding at the end of each of the periods shown. The 84
NYMEX memberships which were issued but not outstanding were cancelled upon
demutualization.
(6) Equals current assets divided by current liabilities. Current assets and
liabilities at December 31, 2000 include $33.2 million in NYMEX Division
member retention benefits that were paid out subsequent to year end. Had
this payment been made at December 31, 2000, the current ratio would have
been 4.3.
(7) Equals income before income taxes and interest expense divided by interest
expense.
(8) Shares are purchased from existing members at prevailing market prices.
These prices are established through a bid-and-ask system coordinated by
the Company.
(9) The board of directors declared a one-time dividend on November 7, 2002.
The total amount declared was $5 million for stockholders of record as of
January 2, 2003. Each shareholder received $6,127 per share on January 10,
2003. The Company did not pay dividends during 2002, 2001, and 2000. Prior
to that, due to its not-for-profit corporation status, the Company was
restricted by New York State law from paying dividends.
(10) Equals cash provided by operations plus income tax expense (or less income
tax benefit) plus interest expense divided by interest expense.
(11) Effective January 1, 2002, the Company is no longer required to amortize
goodwill pursuant to SFAS 142. Instead, the carrying value of goodwill is
annually measured for impairment. Such a test was performed in November of
2002 and no impairment was indicated.
(12) Certain reclassifications have been made to prior fiscal year balances in
order to conform to the current fiscal year presentation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (IN THOUSANDS, EXCEPT STATISTICAL
AND PER SHARE DATA).
Introduction
This discussion summarizes the significant factors affecting the results of
operations and financial condition of the Company during the years ended
December 31, 2002, 2001 and 2000. This discussion is provided to increase the
understanding of, and should be read in conjunction with, the audited
consolidated financial statements, accompanying notes and tables included in
this annual report.
Forward Looking and Cautionary Statements and Factors That May Affect Future
Results
Certain information in this report (other than historical data and
information) constitutes forward-looking statements regarding events and trends
that may affect the Company's future operating results and financial position.
The words "estimate," "expect," "intend" and "project," as well as other words
or expressions of similar meaning, are intended to identify forward-looking
statements. Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date of this annual report on Form 10-K.
These statements are based on current expectations. Assumptions are inherently
uncertain and
18
are subject to risks that should be viewed with caution. Actual results and
experience may differ materially from forward-looking statements as a result of
many factors, including: changes in general economic and industry conditions in
various markets in which the Company's contracts are traded, increased
competitive activity, fluctuations in prices of the underlying commodities as
well as for trading floor administrative expenses related to trading and
clearing contracts, the ability to control costs and expenses, changes to
legislation or regulations, protection and validity of our intellectual property
rights and rights licensed from others, and other unanticipated events and
conditions. It is not possible to foresee or identify all such factors. The
Company assumes no obligation to update publicly any forward-looking statements.
Business Overview
NYMEX Holdings, Inc. ("NYMEX Holdings") was incorporated in 2000 as a stock
corporation in Delaware, and is the successor to the New York Mercantile
Exchange that was established in 1872. The two principal operating subsidiaries
of NYMEX Holdings are the New York Mercantile Exchange, Inc. ("NYMEX Division")
and the Commodity Exchange, Inc. ("COMEX Division"), which is organized as a
wholly-owned subsidiary of NYMEX Division. Where appropriate, each NYMEX
Exchange operating division, NYMEX Division and COMEX Division, will be
discussed separately, and collectively will be referred to as the "Exchange."
When discussing NYMEX Holdings together with its subsidiaries, reference is
being made to the "Company."
The Company demutualized on November 17, 2000 at which time the book value
of the assets and liabilities of New York Mercantile Exchange carried over to
NYMEX Division. After the demutualization, all the assets and liabilities of
NYMEX Exchange were consolidated into the parent company, NYMEX Holdings. There
are no restrictions to pay dividends.
The Company facilitates the buying and selling of energy and metal
commodities for future delivery under rules intended to protect the interests of
market participants. The Company provides liquid marketplaces where physical
commodity market participants can manage future price risk and, through the
Company's clearing operations, mitigate counter-party credit risk. Through
real-time and delayed dissemination of its transaction prices, the Company
provides price discovery and transparency to market participants, further
enhancing liquidity in the energy and metals markets. To enhance its markets and
provide market participants additional mechanisms to manage risk, the Company
continuously offers new products, distribution services and clearing services.
The Company does not own commodities, trade for its own account, or otherwise
engage in market activities.
The Company's NYMEX Division provides a marketplace for trading energy
futures and options. Its COMEX Division provides a marketplace for trading
precious and base metals futures and options. The NYMEX Division's principal
markets include Crude Oil, Natural Gas, Heating Oil and Unleaded Gasoline. The
COMEX Division's principal markets include Gold, Silver and High Grade Copper.
Through its divisions, the Company provides the physical facilities for an open
outcry auction market. The open outcry market operates during regular business
hours, and trading activities in this market are, for purposes of this
management discussion, referred to as floor trading. Through its NYMEX ACCESS(R)
and NYMEX ClearPort Trading(SM) technology, the Company provides market
participants the ability to conduct after-hours and electronic trading for
floor-based products as well as 23 hours per trading day for additional
products.
During 2002, the Company launched a new trading program in conjunction with
the Chicago Mercantile Exchange ("CME"), where market participants can trade
certain of the NYMEX Division's futures contracts through the CME's GLOBEX(R)
electronic trading platform. The contracts traded through GLOBEX(R) are referred
to as e-miNYs(SM) and are 40% of the size of a normal NYMEX Division futures
contract. E-miNYs(SM) provide an additional risk management tool for energy
market participants and are designed to attract additional public non-commercial
customers to the Company's marketplace while leveraging GLOBEX(R)'s distribution
system.
The Company provides trade-clearing services for transactions executed
through its floor trading operations, transactions executed through its NYMEX
ACCESS(R) and NYMEX ClearPort(SM) Trading electronic trading platforms, and
e-miNY(SM) transactions executed through GLOBEX(R). In addition, during
19
the second quarter of 2002, the Company launched an over-the-counter ("OTC")
clearing initiative, which was intended, among other things, to alleviate some
of the credit issues in the marketplace by using the Company's clearing
operations to offer market participants the advantages of reducing costs by
permitting futures and OTC positions to be offset. This initiative permits
market participants to negotiate bilateral trades in the OTC market, which are
then transferred to the Company's exchange as futures contracts for clearing.
This endeavor was recently included as part of the Company's ClearPort
Clearing(SM) services.
To conduct floor-trading activities, market participants must own or lease
a membership on the NYMEX Division or COMEX Division exchange. Non-members may
also execute floor trades on the Company's exchanges, but must do so through a
member. In addition to floor trading privileges, each NYMEX Division and COMEX
Division member holds one right to trade on the Company's electronic trading
platforms. NYMEX Division members may purchase additional electronic trading
rights for a monthly fee established by the Company. In addition, non-members
may purchase NYMEX Division electronic trading rights for a fee. Each NYMEX
Division membership also has one share of NYMEX Holdings common stock. NYMEX
Division members own all of NYMEX Holdings common stock.
Certain NYMEX Division and COMEX Division members are clearing members.
Clearing members provide capital to support the Company's clearing activities.
All market participants trading through the Company's floor trading and
electronic trading venues must have a clearing relationship with a clearing
member who will clear their trades through the Company's clearinghouse. Market
participants must have similar clearing member relationships to use the
Company's ClearPort Clearing(SM) services.
The Company's principal sources of revenues are clearing and transaction
fees derived from trades executed on its exchanges. Clearing and transaction
fees are primarily dependent upon the volume of trading activity conducted on
the Company's exchanges and cleared by the Company's clearinghouse. These
volumes are impacted by several factors, including:
- National and international economic and political conditions;
- Volatility in price levels of the underlying commodities;
- Market perception of stability in commodities and financial markets;
- The level and volatility of interest rates and inflation;
- Credit quality of market participants; and
- Weather conditions affecting certain energy commodities.
The relative proportions of member and non-member trading activities, and
the trading venue on which market participants trade also impact the levels of
clearing and transaction fees. NYMEX Division and COMEX Division members are
afforded more favorable transaction pricing, and are eligible to participate in
certain transaction fee rebate and cost reduction programs.
Market data relating to proprietary prices of contracts executed on the
Company's exchanges is sold to vendors who redistribute this information to
market participants and others. The level of market data fees is dependent upon
the number of vendors and the number of end users receiving data through the
vendor redistribution process. The Company relies on its market data vendors to
supply accurate information regarding the number of subscribers that are
accessing the Company's market data.
The Company's expenses primarily consist of employee compensation and
benefits and the cost of facilities, equipment, software and communications to
support the Company's trading and clearing operations. The Company also incurs
marketing costs associated with the development and launch of new products and
services. During 2002, 2001 and 2000, the Company invested heavily in technology
and infrastructure to support market expansion, enhance its trading and clearing
technology, and develop new products and services. In 2001 and 2000, the Company
significantly reduced employee headcount to control compensation costs and
implemented certain other expense reduction measures. During 2001, the Company
incurred expenses associated with the recovery of its operations after the
September 11 terrorist attacks on the World Trade Center, which was located near
the building that houses the Company's headquarters and primary
20
trading floors. The terrorist attacks resulted in the closing of the Company's
trading and clearing operations for four business days, and rendered the
Company's back-up data and recovery center inoperable. To replace this site, the
Company leased temporary space in New Jersey while it developed a plan for a
permanent business recovery facility outside of New York City. In 2002, the
Company leased space for a suitable recovery site, where it invested in the
development of back up trading floors and a back-up data center. The data center
will be continuously connected to the Company's primary operations to ensure
immediate recovery in the event that the Company's headquarters or primary
trading floors become inaccessible. During 2002, the Company conducted
successful tests of the back-up trading floors. Certain costs related to the
September 11 recovery efforts and resulting loss of revenue were reimbursed by
insurance proceeds in 2002. During the fourth quarter of 2001 and the entire
year of 2002, the Company incurred additional lease and telecommunications
expenses associated with its temporary recovery site. The Company expects these
additional costs to continue until its new permanent recovery site becomes fully
operational.
During 2002, the Company adopted the provisions of a new accounting
standard for goodwill. The new standard generally provides that goodwill be
carried at the lower of book value on December 31, 2001 or a value determined by
regular impairment tests. During 2002, the Company ceased the amortization of
goodwill and performed the requisite impairment tests, which demonstrated no
impairment of the Company's goodwill. Accordingly, the Company's results of
operations for 2002 excluded expenses related to the amortization of goodwill,
which were recognized in prior periods. In 2000, the exchange demutualized.
Non-recurring expenses recognized in 2000 in connection with the demutualization
are reported separately on the Company's statement of operations.
MARKET CONDITIONS
In 2002, total futures and options trading volume on the Company's
exchanges increased 30% to a record 133.7 million contracts. Futures contract
volume increased 26% to 107.3 million contracts and options volume increased 47%
to 26.4 million contracts. In 2001, total futures and options volume decreased
1% to 103.0 million contracts. Futures contract volume decreased 1% to 85.0
million contracts and options volume was unchanged at 18.0 million contracts.
Energy Markets -- NYMEX Division
In 2002, total futures and options trading volume for the NYMEX Division
increased 32% to a record 116.1 million contracts. Futures contract volume
increased 27% to 92.3 million contracts and options volume increased 54% to 26.3
million contracts. In 2001, total futures and options volume decreased 1% to
88.3 million contracts. Futures contract volume decreased 1% to 72.8 million
contracts and options volume increased 1% to 15.5 million contracts. The
following table sets forth trading volumes for the Company's major energy
futures and options products.
2002 2001 2000
FUTURES OPTIONS TOTAL FUTURES OPTIONS TOTAL FUTURES OPTIONS
---------- ---------- ---------- ---------- --------- ---------- ---------- ---------
Light Sweet
Crude Oil.......... 45,679,468 11,460,857 57,140,325 37,530,568 7,726,076 45,256,644 36,882,692 7,460,052
Henry Hub
Natural Gas........ 24,357,792 10,966,023 35,323,815 16,468,355 5,974,240 22,442,595 17,875,013 5,335,800
Heating Oil.......... 10,695,202 602,170 11,297,372 9,264,472 704,972 9,969,444 9,631,376 1,385,968
New York
Harbor Unleaded
Gasoline........... 10,979,736 721,932 11,701,668 9,223,510 1,040,030 10,263,540 8,645,182 1,012,460
TOTAL
----------
Light Sweet
Crude Oil.......... 44,342,744
Henry Hub
Natural Gas........ 23,210,813
Heating Oil.......... 11,017,344
New York
Harbor Unleaded
Gasoline........... 9,657,642
Light Sweet Crude Oil
In 2002, futures contract volume increased 22% and options contract volume
increased 48%. Total futures and options contract volume increased 26% from
2001. Heightened volatility levels, uncertainty with regard to world production,
an oil workers strike in Venezuela, a surge in price levels, and global tensions
resulted in
21
hedging activity at near-record levels. Offsetting fundamental factors, such as
a sluggish economy, resulted in an increase in options volume relative to
futures volume. Continued credit concerns in the OTC market also contributed to
the increase.
In 2001, futures contract volume increased 2% and options contract volume
increased 4%. Total futures and options contract volume increased 2% from 2000.
Increased price volatility due to Middle East unrest and decreased compliance
with OPEC-sponsored production cuts supported historically high futures and
options volumes. Trading activity was limited by shortened trading hours
following the market disruption of September 11, 2001.
Henry Hub Natural Gas
In 2002, futures contract volume increased 48% and options volume increased
84%. Total futures and options contract volume increased 57% from 2001. These
increases were primarily due to a doubling in price levels, credit concerns in
the natural gas industry, and continued concerns over the weakening United
States economy. Most of the transaction volume increases occurred early in the
year. As the year progressed, corporate restructurings in the natural gas
industry suppressed trading activity somewhat. Certain initiatives by the
Company, including the Exchange of Futures for Swaps ("EFS") mechanism
introduced for natural gas contracts in November 2001, and the introduction of
OTC Clearing in May 2002, helped sustain trading in the latter part of the year.
In 2001, futures contracts volume decreased 8% while options contract
volume increased 12%. Total futures and options volume decreased 3% from 2000.
Higher commodity prices, increased capital requirements, and high volatility in
the first quarter accounted for most of the decline in futures trading. In the
fourth quarter of 2001, the Company set natural gas records in total options
traded at 2.2 million, and total futures and options transactions of 7.4 million
contracts. The Enron bankruptcy created uncertainty in the natural gas market
and highlighted the concerns of counter-party credit risk. Various Company
initiatives, including EFS, stable price levels and lower contract values
contributed to increased trading in natural gas futures and options contracts.
Heating Oil
In 2002, futures contact volume increased 15% while options contract volume
decreased 15%. Total futures and options volume increased 13% from 2001.
Heightened international tensions, unusually cold weather in the United States
during the fourth quarter, and the oil worker strike in Venezuela all
contributed to increases in hedging activity. Increasing price differentials
with crude oil also drove higher futures volume. Options volume decreased as
front month annualized volatility declined from 43% to 34%.
In 2001, futures contract volume decreased 4% and options volume decreased
49%. Total futures and options volume declined 10%.
New York Harbor Unleaded Gasoline
In 2002, futures contract volume increased 19% and options contract volume
decreased 31%. Total futures and options volume increased 14% from 2001.
Heightened international tensions and the oil worker strike in Venezuela
contributed to increased hedging activity. Temporary improvements in economic
conditions in the early part of the year contributed to increased demand for
refined products. The decline in options contract volume was driven, in part, by
declining differentials between unleaded gasoline and crude oil prices.
In 2001, futures contract volume increased 7% and options contract volume
increased 3%. Total futures and options contract volume increased 6% from 2000,
due to higher market volatility. Strong underlying demand for physical unleaded
gasoline in the first half of the year resulted in increased trading volume,
which was partially offset by declining volume in the second half of the year
when unleaded gasoline demand was curtailed by recession concerns and the
September 11 terrorist attacks.
22
Metals Markets -- COMEX Division
In 2002, total futures and options trading volume for the COMEX Division
increased 19% to 17.6 million contracts. Futures contract volume increased 23%
to 15.0 million contracts and options volume was unchanged at 2.5 million
contracts. In 2001, total futures and options volume decreased 4% to 14.8
million contracts. Futures contract volume decreased 3% to 12.3 million
contracts and options volume decreased 8% to 2.5 million contracts. The
following table sets forth trading volumes for the Company's major metals
futures and options products.
2002 2001 2000
---------------------------------- --------------------------------- ---------------------------------
FUTURES OPTIONS TOTAL FUTURES OPTIONS TOTAL FUTURES OPTIONS TOTAL
--------- --------- ---------- --------- --------- --------- --------- --------- ---------
Gold................. 9,018,183 1,948,564 10,966,747 6,785,340 1,975,019 8,760,359 6,643,464 2,083,414 8,726,878
Silver............... 3,135,564 535,224 3,670,788 2,569,198 483,386 3,052,584 3,117,017 579,085 3,696,102
High Grade Copper.... 2,807,286 32,922 2,840,208 2,856,641 50,826 2,907,467 2,778,124 65,043 2,843,167
Gold
In 2002, futures contract volume increased 33% and options contract volume
decreased 1%. Factors such as world tensions, a rebounding economy, and a
weakening U.S. currency contributed to the increased volume. Prices rose
significantly on the front-month contract from approximately $270 to about $380
per ounce. Gold options volume decreased as front month volatility ticked up
from 13% to 14% on an annualized basis. Total futures and options contract
volume increased 25%.
In 2001, futures contract volume increased 2% and options contract volume
decreased 5%. During the fourth quarter of 2001, gold prices began to stabilize
following the events of September 11. Physical gold consumption was generally
steady throughout 2001 and new supply was reduced. Sentiment also improved among
market participants in anticipation of an end to major central bank selling
combined with lingering concern over euro valuation. Options volume declined
during the year as gold traded over a narrow range.
Silver
In 2002, futures contract volume increased 22% and options contract volume
increased 11%. Total futures and options volume increased 20% from 2001.
Economic growth and a weak U.S. currency contributed to the increase. An
increased number of strike price intervals contributed to increased options
trading volumes.
In 2001, futures contract volume declined 18% and options contract volume
declined 17%. Total futures and options contract volume decreased 17%, as
economic activity slowed and prices trended downward through most of the year.
High Grade Copper
In 2002, futures contract volume decreased 2% and options contract volume
decreased 35%. Total futures and options volume decreased 2% from 2001. Volume
was relatively steady as price pressures from the increased demand for the
physical commodity were offset by greater production levels and competitive
pressures.
In 2001, futures contract volume increased 3% and options contract volume
decreased 22%. Total futures and options contract volume increased 2%.
Results of Operations
In 2002, the Company reported net income of $12,299, compared to net income
of $680 in 2001 and a net loss of $2,781 in 2000. Basic earnings per share were
$15,072 in 2002, $833 in 2001, and a loss of $3,408 in 2000.
23
Operating revenues increased 31% to $189,204 in 2002, due primarily to
record trading volumes in virtually all of the Company's principal products as
discussed in detail under "Market Conditions". Increases in trading volumes
resulted from increased market volatility, which was driven, in part, by
political and economic uncertainty related to the terrorists attacks of
September 11, 2001, a weakening United States economy, and energy market credit
concerns brought on by the financial weaknesses of certain major market
participants. Operating revenues increased 10% to $144,281 in 2001, due
primarily to a reduction in the level of fees refunded to members under member
fee rebate programs. Operating expenses increased 16% to $162,402 in 2002, due
primarily to higher software amortization expense and professional services
fees, and the write off of a significant component of capitalized software
costs. Operating expenses increased 1% to $139,800 in 2001. Increases in
software amortization expense, rent and facility expenses, and other expenses,
combined with the write off of certain capitalized software development costs,
were substantially offset by lower marketing and professional services expenses,
and the recognition of non-recurring demutualization expenses in 2000 that were
not present in 2001.
Revenues
The Company attributes its revenues to two business segments: Open Outcry,
which includes transactions executed and cleared through the Company's floor
trading operations, and Electronic Trading, which includes transactions executed
and cleared through NYMEX ACCESS, NYMEX ClearPort(SM) Trading and NYMEX
ClearPort(SM) Clearing.
The following table sets forth the Company's clearing and transaction fee
revenues by business segment, excluding for each segment the impact of member
fee rebate programs.
FISCAL YEAR ENDED
-----------------------------------------------
CLEARING FEE REVENUES: 2002 CHANGE 2001 CHANGE 2000
---------------------- -------- ------ -------- ------ -------
Open Outcry................................... $129,041 26.8% $101,750 2.5% $99,243
Electronic Trading and clearing............... 16,967 83.5% 9,245 32.4% 6,984
Member Fee Rebate............................. (5,245) (21.6)% (6,693) (51.2)% (13,727)
-------- ----- -------- ----- -------
Total......................................... $140,763 35.0% $104,302 12.8% $92,500
======== ===== ======== ===== =======
Clearing and transaction fees increased 35% in 2002, due primarily to a 30%
increase in the number of futures and options contracts traded and cleared.
Average clearing and transaction fee revenue per contract increased 4% to $1.05
due to growth in NYMEX ACCESS(R) trading volume, the introduction of NYMEX
ClearPort(SM) Clearing services, and a reduction in member fee rebates.
Per-contract fees for NYMEX ACCESS(R) and NYMEX ClearPort(SM) Clearing services
are higher than fees charged for floor trading. Clearing and transaction fees
increased 13% in 2001, due primarily to a reduction in the level of fees
refunded to members under member fee rebate programs. While total futures and
options contract volume decreased 1% in 2001, the reduction in member fee
rebates resulted in a 14% increase in average revenue per contract to $1.01.
For the first quarter of 2003, the Company increased clearing and
transaction fee rebates. The Company expects this increase to reduce clearing
and transaction revenue per contract during the first quarter of 2003.
Market Data
Market data revenues consist primarily of fees charged to market data
subscribers for the use of the Company's proprietary futures and options
contract price information. These fees are charged on a per-subscriber basis and
fluctuate as the number of subscribers changes. The Company also earns vendor
administration fees and audit recovery fees. Vendor administration fees are
fixed fees charged to each market data vendor for certain administrative
services. The Company relies on its market data vendors to supply accurate
information regarding the number of subscribers that are accessing the Company's
market data. The Company charges market data fees based on the number of
subscribers reported by its market data vendors.
24
The Company performs periodic audits to assess the accuracy of vendor reporting
and, if warranted by the audit findings, assesses additional fees. These
additional fees are referred to as audit recovery fees.
Market data revenues decreased 2% in 2002, due primarily to a decline in
subscriber fees, which was driven by the consolidation of energy trading desks
associated with contraction of the financial services sector of the commodities
markets. Market data revenues increased 2% in 2001, driven by a per-subscriber
fee price increase, which was partially offset by a reduction in revenue
resulting from a decline in the number of market data subscribers.
Other Revenues
Other revenues increased $9.3 million in 2002. During 2002, the Company
received an insurance settlement related to the reimbursement of expenses
associated with its business recovery efforts and revenue losses resulting from
the September 11, 2001 World Trade Center terrorist attacks. The portion of the
insurance recovery relating to expense reimbursement was credited to deferred
recovery expenses. The remainder of the insurance recovery was recorded in other
revenues, driving the increase in other revenues from 2001. Partially offsetting
the insurance recovery was a decline in lease revenue as the Company prepared
space for its new tenant, Board of Trade of the City of New York, Inc.
("NYBOT"). The Company and NYBOT signed a lease that became effective in 2002.
Under the terms of the lease, which expires in 2013, NYBOT will lease from the
Company certain office and trading floor space at the Company's headquarters and
data center. The Company expects the rental income from this lease to
substantially increase sub-lease revenues in 2003. Other revenues increased 19%
in 2001 due to lease revenue earned from additional tenants in the Company's
headquarters building.
Operating Expenses
Salaries and employee benefits decreased 2% in 2002. In 2001, salaries and
benefits reflected a significant charge for severance costs resulting from a
reduction in workforce in June 2001. The reduction in salaries and employee
benefits expenses from the absence of this charge in 2002 was partially offset
by higher employee bonuses related to the Company's record financial
performance. Salaries and employee benefits increased 1% in 2001. Severance
costs related to the June 2001 reduction in workforce were substantially offset
by the absence of certain compensation expenses recognized in 2000, including
salary and benefit costs for employees terminated as part of a reduction in
workforce in 2000 and a special compensation award accrued in 2000 for the heirs
of the Company's deceased former president.
General and administrative expenses increased 30% in 2002, due primarily to
an increase in litigation-related expenses and higher insurance costs related to
increases in property insurance premiums, which were driven by a weakened
insurance market subsequent to the September 11, 2001 terrorist attacks. General
and administrative expenses decreased 4% in 2001, due to cost control measures
that resulted in reduced travel, entertainment and office expenses. These
expense reductions were partially offset by a loss resulting from the write-off
of an uncollectible market data receivable from a bankrupt market data vendor.
Depreciation and amortization expense increased 31% in 2002, due primarily
to amortization of capitalized costs for internally developed computer software
that was placed in service near the end of 2001 and during 2002. Depreciation
and amortization increased 16% in 2001, due primarily to amortization of
capitalized costs for internally-developed computer software which was placed in
service during 2001, and additional software amortization expenses resulting
from a reduction, during the third quarter of 2000, in the estimated useful life
of certain capitalized software development costs. The change in estimated
useful life was based on management's belief that such software had a shorter
useful life than was originally expected due to rapidly changing technology.
Rent and facility expenses increased 9% in 2002. Rent expense increased as
the Company began leasing space in its permanent business recovery site and
incurred additional rental expenses at its temporary disaster recovery site.
Security expense increased due to heightened security measures subsequent to the
Septem-
25
ber 11, 2001 terrorist attacks. Rent and facility expenses increased 8% in 2001,
primarily due to higher security expenses subsequent to the terrorist attacks,
expenses related to disaster recovery activities and real estate taxes.
Professional services increased 41% in 2002, due primarily to expenses
relating to the Company's involvement in certain ongoing litigation, and
consulting fees related to the Company's insurance recovery and evaluation of
certain business processes. Professional services decreased 18% in 2001, due to
lower consulting costs, partially offset by increased expenses associated with
ongoing litigation. During 2000, the Company incurred significant consulting
costs related to the pre-development stage of a major software project.
Telecommunications, equipment rentals and maintenance decreased 7% in 2002,
due primarily to lower communications expenses to support the Company's NYMEX
ACCESS(R) electronic trading platform. NYMEX ACCESS(R) became internet-based
during the third quarter of 2001, eliminating expenses that supported direct
connectivity to its users. Savings from eliminating this expense were partially
offset by charges the Company incurred in 2002 to terminate the
telecommunications agreement for this connectivity and by higher equipment
leasing costs. Telecommunications, equipment rentals and maintenance decreased
3% in 2001, primarily due to declines in computer maintenance and communications
expenses, partially offset by an increase in the communications costs for NYMEX
ACCESS(R).
The Company recorded charges related to the impairment and disposition of
capitalized software and computer equipment of $12,583, $5,114 and $857 in 2002,
2001 and 2000, respectively. Impairment and disposition charges in 2002 resulted
primarily from the write off of capitalized computer software which management
deemed to have no meaningful remaining useful life due to a new strategy
relating to implementation of electronic trading and clearing systems. In the
fourth quarter of 2002, the Company entered into a software licensing agreement
with TradinGear.com to provide the Company with trade matching software and
support. This software became the basis for the NYMEX ClearPort(SM) Trading
system launched in the first quarter of 2003. The Company's assessment of the
impairment of capitalized software costs was based, in part, on its expectation
that NYMEX ClearPort(SM) Trading will become the mechanism through which all
electronic trading on the Company's exchanges is conducted. Impairment and
disposition charges in 2001 were primarily related to the Company's decision to
reposition its internet-based electronic trading strategy through NYMEX
ACCESS(R), abandoning the development of an alternative strategy. Software
development costs capitalized in conjunction with that alternative strategy were
written off when it was abandoned.
Marketing expenses increased 53% in 2002, due primarily to expenses
incurred with the introduction of e-miNY(SM) contracts and NYMEX ClearPort(SM)
Clearing services. Marketing expenses decreased significantly in 2001 in
conjunction with the Company's cost reduction initiatives and curtailed
marketing activities subsequent to the September 11 terrorist attacks.
Other expenses increased 31% in 2002, due primarily to higher member
benefit costs and higher earnings on COMEX member retention and retirement plan
assets. Member benefit costs increased due to higher premium rates and expanded
member medical benefits. Earnings for the COMEX retention and retirement plan
are included in investment income, net on the consolidated statements of
operations, with an equal and offsetting expense recorded in other expenses.
Other expenses increased 47% in 2001, primarily due to a special charitable
contribution to aid victims of the World Trade Center terrorist attacks and a
change in the presentation of funding costs and earnings for the COMEX members'
retention and retirement plan. Prior to the Company's demutualization in
November 2000, activity for this plan was presented as a transfer from members'
equity.
Other Income
Investment income, net of advisory fees, increased 23% in 2002, due
primarily to unrealized gains in the Company's fixed income portfolio, which
compared to unrealized losses in 2001. These gains were partially offset by
losses on the Company's equity portfolio. The Company's investment portfolio is
invested principally in municipal bonds, the market value of which was favorably
impacted by lower interest rates. Investment
26
income, net of advisory fees, decreased 50% in 2001 due to lower interest rates
earned on short-term investments and unrealized losses in the Company's equity
and fixed income investment portfolios. Realized gains from the Company's fixed
income portfolio partially offset these declines in investment income in 2001.
Provision for Income Taxes
The Company's effective tax rate was 50.9% in 2002, 53.5% in 2001 and 53.0%
in 2000. The effective tax rate declined in 2002 due primarily to the fact that
permanent differences had less of an effective tax rate impact on 2002 due to a
higher level of pre-tax book income. Additionally, in 2001 and 2000, goodwill
amortization was treated as a permanent difference for tax purposes. Under a new
accounting standard, goodwill is no longer amortized for financial reporting
purposes, thus eliminating this permanent difference in 2002. The provision
reflects changes in estimates, as well as uncertainties regarding utilization of
loss carry forwards. See Note 10 to the consolidated financial statements for a
complete discussion of income taxes.
FINANCIAL CONDITION AND CASH FLOWS
Liquidity and Capital Resources
The Company has made, and expects to continue to make, significant
investments in technology to fund its future growth and increase shareholder
value. The Company spent a total of $31,049 , $27,221 and $12,797 during 2002,
2001 and 2000 respectively primarily to develop its electronic trading system
and other initiatives. Future cash flows will benefit from the occupancy of a
major new tenant (see Item 2) in the Company's headquarters building in the
second quarter of 2003. The Company had $108,750 in cash, cash equivalents,
reverse repurchase agreements and marketable securities at December 31, 2002.
Cash Flow
YEAR ENDED DECEMBER 31,
-----------------------------
2002 2001 2000
-------- ------- --------
Net cash provided by (used in):
Operating activities............................. $ 63,554 $ 8,749 $ 10,188
Investing activities............................. (65,403) (3,124) (14,609)
Financing activities............................. (2,817) (2,815) --
-------- ------- --------
Net (decrease) increase in cash and cash
equivalents...................................... $ (4,666) $ 2,810 $ (4,421)
======== ======= ========
Net cash provided by operating activities was $63,554, driven by net income
of $45,808 before non-cash depreciation expense and impairment losses. The
Company received a $5 million cash grant in 2002 as a result of a government
program to aid those affected by the September 11 terrorist attack which will be
recognized in results of operations over 10 years as its recapture provisions
expire. In 2001, the Company liquidated the NYMEX Division members retention
plan, a program that set aside funds to provide retirement benefits for members.
The $33 million distribution utilized net cash for operating activities .
Investing activities reflected funds being used for capital expenditures of
$31,049. At December 31, 2002, the Company's investments in resale agreements
increased $34,260.
Annual principal payments of $2.8 million on the debt in each of the last
two years utilized cash resources in the area of financing activities.
27
Working Capital
AT DECEMBER 31, AT DECEMBER 31,
2002 2001
--------------- ---------------
Current assets........................................ $212,709 $161,394
Current liabilities................................... 119,698 81,420
-------- --------
Working capital.................................... $ 93,011 $ 79,974
======== ========
Current ratio......................................... 1.78:1 1.98:1
Current assets at December 31, 2002 increased $51,315 or 32%, from year-end
2001 primarily as a result of the strong financial performance in 2002 and an
increase in securities purchased under agreements to resell related to proceeds
from the Company's terrorist attack insurance recovery, an increase in
segregated and guarantee funds, and an increase in clearing and transaction fee
receivables. Segregated and guarantee funds represent the cash component of
clearing member deposits into the guaranty funds, which provide capital for the
Company's clearing business, and the cash component of customer margin deposits
held in custody by the Company. The Company may invest this cash, subject to
significant restrictions, for its own benefit and, therefore, reflects these
funds as current income-producing assets with equivalent offsetting liabilities
to the respective clearing members.
Current liabilities at December 31, 2002 increased $38,278, or 47%, from
year-end 2001, primarily as a result of the increase in segregated and guaranty
funds. The Company declared a dividend of $5,000 in November 2002, payable to
shareholders of record on January 2, 2003. This is the first dividend declared
since the Company's demutualization in 2000.
Future Cash Requirements
As of December 31, 2002, the Company had long-term debt of $91,551, and
short-term debt of $2,815. This debt consisted of the following:
- $25,366 of 7.48% notes with an eleven-year principal payout which began
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.
Since October 1, 2001, the Company has been making annual principal
payments of $2.8 million to its bond holders.
The Company would incur a redemption premium should it choose to pay off
any debt series prior to its maturity. Management believes that in the current
economic and interest rate environment, the economic benefit from refinancing at
a lower interest rate would be offset by the redemption penalty incurred. These
notes contain certain limitations on the Company's ability to incur additional
indebtedness.
In connection with its operating activities, the Company enters into
certain contractual obligations. The Company's material contractual cash
obligations include long-term debt, operating leases and other contracts.
28
A summary of the Company's future cash payments associated with its
contractual cash obligations outstanding as of December 31, 2002 as well as an
estimate of the timing in which these commitments are expected to expire are set
forth on the following table below (in thousands):
PAYMENTS DUE BY PERIOD
-------------------------------------------------------
LESS THAN AFTER
CONTRACTUAL OBLIGATIONS 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS TOTAL
----------------------- --------- --------- --------- -------- --------
Long-Term Debt Principal(1)........ $ 2,815 $ 5,630 $ 5,630 $ 80,291 $ 94,366
Debt Interest(2)................... 7,258 13,885 13,042 59,758 93,943
Operating Leases(3)................ 4,386 6,392 5,376 11,373 27,527
Other Long-Term Obligations(4)..... 715 1,781 2,299 6,958 11,753
------- ------- ------- -------- --------
Total.............................. $15,174 $27,688 $26,347 $158,380 $227,589
======= ======= ======= ======== ========
(1) See Note 5 to the consolidated financial statements.
(2) Interest on long-term debt. See Note 5 to the consolidated
financial statements.
(3) See Note 14 to the consolidated financial statements.
(4) Subordinated commitment -- COMEX Member's Retention Program. See
Note 6 to the consolidated financial statements.
The table above does not include the Company's financial guarantees under
the "Seat Financing Program", since the Company has the right to liquidate the
member's interest in case the member defaults on the loan. See Note 14 of the
consolidated financial statements for further details.
The Company and Board of Trade of the City of New York, Inc. ("NYBOT")
entered into a lease that became effective on November 20, 2002. This lease
provides that NYBOT will lease 13,170 square feet on the COMEX Division Trading
Floor and 45,006 square feet of office space for a ten-year term. The rent
commencement date for the trading floor space is the earlier of occupancy or
July 1, 2003. The rent commencement date for the office space is the earlier of
occupancy or May 20, 2003.
In January 2003, the Company, through a wholly-owned subsidiary Tradingear
Acquisition, LLC, entered into an Asset Purchase Agreement with TradinGear.com
("TG") and its parent company, TGFIN Holdings, Inc. to purchase certain of the
assets of TG. The primary asset to be purchased is the trade-matching engine,
which is currently being licensed from TG. As part of this transaction, certain
of TG's existing employees will become employees of the Company. The Company
anticipates that the closing of this transaction will occur on or before March
31, 2003. The Company believes that ownership of its own proprietary trade
matching software will provide it with strategic flexibility to pursue its own
electronic trading strategy.
The Company believes that its cash flows from operations and existing
working capital will be sufficient to meet its needs for the foreseeable future,
including capital and operating expenditures associated with the development of
its electronic trading strategy and other initiatives. In addition, the Company,
subject to the limitation discussed above, has the ability, and may seek, to
raise capital through the issuance of debt or equity in the private and public
capital markets.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION
Clearing and Transaction Revenues
The largest source of the Company's operating revenues are clearing and
transaction fees. These fees are recognized as revenue in the same period that
trades are effectuated on the Company's exchanges. Clearing and transaction fees
receivable are monies due the Company from clearing member firms. Exposure to
losses on receivables is principally dependent on each member firm's financial
condition. Members' equity interests collateralize fees owed to the Company. At
the end of December 31, 2002 and 2001, no clearing and
29
transaction fees receivable balance was greater than the member's equity
interests. Management does not believe that a concentration of credit risk
exists from these receivables. The Company retains the right to liquidate a
member's equity interests in order to satisfy its receivable.
Clearing and transaction fees receivable are carried net of allowances for
member credits, which are based upon expected billing adjustments. Allowances
for member credits of $500 and $600 were established and applied as a reduction
of clearing and transaction fees receivable at December 31, 2002 and 2001,
respectively. The Company believes the allowances are adequate to cover member
credits. The Company also believes the likelihood of incurring material losses
due to collectibility is remote and, therefore, no allowance for doubtful
accounts is necessary.
Market Data Revenue
The Company provides real time information to subscribers regarding
proprietary prices of futures and options contracts traded on the Exchange. As
is common business practice in the industry, fees are remitted to the Company by
market data vendors on behalf of subscribers. Revenues are accrued for the
current month based on the last month reported. The Company conducts periodic
audits of the information provided, and assesses, where appropriate based on
audit findings, additional fees.
Capitalization of Internally-Developed Software
The costs incurred for the development of computer software are evaluated
on a project-by-project basis and capitalized in accordance with Statement of
Position 98-1. Projects are amortized over two to five year periods.
Deferred Credits
In 1995, the Company secured a grant of $128.7 million from the New York
City Economic Development Corporation ("EDC") and the Empire State Development
Corporation ("ESDC", formerly known as the New York State Urban Development
Corporation) for construction of its corporate headquarters and trading
facility. The grant is being recognized in income on the same basis as, and is a
reduction to, the depreciation of the facility.
In 2002, the Company entered into an agreement and received a $5 million
grant from the Empire State Development Corp. This agreement requires the
company to maintain certain annual employment levels, and the grant is subject
to recapture amounts, on a declining scale, over time. The grant will be
recognized in income ratably in accordance with a recapture schedule.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, Goodwill and Other Intangible Assets, which supersedes Accounting
Principles Standards Board ("APB") Opinion No. 17, Intangible Assets. This
statement, effective for fiscal years beginning after December 15, 2001,
addresses, among other things, how goodwill and other intangible assets should
be accounted for after they have been initially recognized in the financial
statements. The provisions of SFAS No. 142 provide for an impairment test to be
performed at least annually rather than recording amortization. The adoption of
SFAS No. 142 had a material effect on operations. The adoption of this standard
increased annual pre-tax income by $2,153 or $2,638 per share, which was, prior
to 2002, the amount of annual amortization of goodwill. The Company tested for
an impairment during the fourth quarter of 2002 and no impairment was noted.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement, effective for fiscal years beginning after June 15,
2002, requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. When the liability
is initially recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value each period, and the capitalized cost is depreciated over the
30
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. The adoption of this statement is not expected to have an
impact on the Company's financial position or results of operation.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets which requires that long-lived assets to be
disposed of by sale be measured at the lower of the carrying amount or fair
value less cost to sell, whether reported in continuing operations or in
discontinued operations to include components of entity that have been or will
be disposed of rather than limiting such discontinuance to a segment of a
business. SFAS No. 144 excludes from the definition of long-lived assets
goodwill and other intangibles that are not amortized in accordance with SFAS
No. 142. SFAS No. 144 was effective for our 2002 fiscal year. The adoption of
SFAS No. 144 had a material impact on our consolidated results of operations, as
more fully described in Note 1 to the consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, which rescinds SFAS No. 4,
Reporting Gains and Losses from Extinguishment of Debt, SFAS No. 44, Accounting
for Intangible Assets of Motor carriers, and SFAS No. 64, Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirement ("SFAS 145"). SFAS No. 145 also
amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. As a result of the rescission of SFAS
No. 64, the criteria in APB Opinion No. 30 will be used to classify gains and
losses from debt extinguishment. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meaning, or describe their applicability under changed conditions. SFAS No. 145
is effective for the Company as of January 1, 2003. The adoption of SFAS No. 145
is not expected to have a material impact on the Company's consolidated results
of operations, financial position or cash flows.
In June 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which addresses financial
accounting and reporting for costs associated with exit or disposal activities,
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring) which previously
governed the accounting treatment for restructuring activities. SFAS No. 146
applies to costs associated with an exit activity that does not involve an
entity newly acquired in a business combination or with a disposal activity
covered by SFAS No. 144. Those costs include, but are not limited to, the
following: (1) termination benefits under the terms of a benefit arrangement
that, in substance, is not an ongoing benefit arrangement or an individual
deferred-compensation contract, (2) costs to terminate a contract that is not a
capital lease, and (3) costs to consolidate facilities to relocate employees.
SFAS No. 146 does not apply to costs associated with the retirement of
long-lived assets covered by SFAS No. 143. SFAS No. 146 will be applied
prospectively and is effective for exit or disposal activities initiated after
December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("Interpretation"). This Interpretation
elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees, and standby letters of credit. It also clarifies that
at the time a company issues a guarantee, the company must recognize an initial
liability for the fair market value of the obligations it assumes under that
guarantee and must disclose that information in its interim and annual financial
statements. The initial recognition and measurement provisions of the
Interpretation apply on a prospective basis to guarantees issued or modified
after December 31, 2002.
In October 2001, the Emerging Issues Task Force reached consensus on EITF
No. 01-10, Accounting for the Impact of the Terrorist Attacks of September 11,
2001. This statement, among other things, addresses how costs and insurance
recoveries for business affected by this event should be accounted for in the
financial statements. The provisions of EITF No. 01-10 provide guidelines for
the recording of a contingent insurance recovery. The Company adopted the
provisions of EITF No. 01-10 for the third quarter of 2001.
31
Recent Developments
For a discussion of the Company's recent business developments see Item 1.
Business. Recent Developments beginning on page 12.
Responsibility for Financial Reporting
Management is responsible for the preparation, integrity and objectivity of
the audited consolidated financial statements and related notes, and the other
financial information contained in this Form 10-K. Such financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America and are considered by management to present
fairly the Company's consolidated financial position, results of operations and
cash flows. These audited consolidated financial statements include some amounts
that are based on management's best estimates and judgements, giving due
consideration to materiality.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The table below provides information about the Company's marketable
securities, excluding equity securities, and long term debt including expected
principal cash flows for the years 2003 through 2008 and thereafter (in
thousands). The marketable securities are classified as trading.
PRINCIPAL AMOUNTS BY EXPECTED MATURITY
AT DECEMBER 31, 2002
WEIGHTED
AVERAGE
YEAR PRINCIPAL AMOUNT INTEREST RATE
---- ---------------- -------------
ASSETS
MUNICIPAL BONDS
2003........................................................ $ 3,003 4.33%
2004........................................................ 2,294 5.44%
2005........................................................ 4,899 4.25%
2006........................................................ 9,489 4.46%
2007........................................................ 14,138 4.58%
2008 and thereafter......................................... 27,099 4.33%
--------
Total....................................................... $ 60,922 N/A
Fair Value.................................................. $ 63,700 N/A
LIABILITIES
CORPORATE DEBT
2003........................................................ $ 9,361 7.69%
2004........................................................ 8,515 7.70%
2005........................................................ 7,741 7.71%
2006........................................................ 7,033 7.71%
2007........................................................ 6,387 7.72%
2008 and thereafter......................................... 55,365 7.73%
--------
Total....................................................... $ 94,402 N/A
Fair Value.................................................. $119,250 N/A
Interest Rate Risk
Current Assets. In the normal course of business, the Company invests
primarily in fixed income securities. Marketable securities bought by the
Company are typically held for the purpose of selling them in the near term and
are classified as trading securities. Unrealized gains and losses are included
in earnings. For the years ended December 31, 2002 and 2001, the Company had net
investment income of $5.7 million and
32
$4.6 million, respectively. Accordingly, a substantial portion of the Company's
income depends upon its ability to continue to invest monies in these
instruments at prevailing interest rates and market prices. The fair value of
these securities at December 31, 2002 and 2001 was $67 million and $65 million,
respectively. The change in fair value, using a hypothetical 10% decline in
prices, is estimated to be a $6.7 million and $6.5 million loss for December 31,
2002 and 2001 respectively. The Company also invests in U.S. government
securities and repurchase agreements and maintains interest-bearing balances in
its trading accounts with its investment managers.
Debt. The interest rate on the Company's long-term indebtedness is a
weighted average fixed rate of 7.69%. The Company's fixed rate debt is exposed
to the risk that the fair market value of its debt will increase in a declining
interest rate environment. This would result in the Company paying a redemption
premium if it should choose to refinance this debt. Management has not deemed it
necessary to employ any market or interest risk management strategies, such as
interest rate swap agreements. In the future, as the Company pursues its market
strategy, it may become subject to a higher degree of interest rate sensitivity
if it is required to borrow at higher or at variable rates. This could
significantly increase the Company's future sensitivity to interest rate
fluctuations and materially affect, in a negative manner, the Company's future
financial position and results of operations. There have been no material
changes in the Company's outstanding debt since December 31, 2002.
Credit Risk
NYMEX's bylaws authorize its Board of Directors to fix the annual dues of
NYMEX Members and to levy assessments as it determines to be necessary. Such
dues and assessments are payable at such time as NYMEX's Board of Directors may
determine. The Company's Board of Directors may waive the payment of dues by all
NYMEX Members or by individual Members as it determines. COMEX's By-Laws provide
its Board of Directors with similar powers relating to dues, assessments and
fees with respect to COMEX Members, provided that such dues and assessments (or
fee surcharges in lieu thereof) may not be imposed (other than in connection
with certain Merger-related events) without the consent of the COMEX Governors
Committee and that the ability of COMEX's Board of Directors to impose such fee
is subject to the limitations.
The Exchange, as a self-regulatory organization, has instituted detailed
risk-management policies and procedures to guard against default risk with
respect to contracts traded on the Exchange. The Exchange also has extensive
surveillance and compliance operations and procedures to monitor and to enforce
compliance with rules pertaining to the trading, position sizes and financial
condition of Members. As described herein, the Exchange has powers and
procedures designed to backstop contract obligations in the event that a
contract default occurs on the Exchange including authority to levy assessments
on any of the NYMEX Clearing Members if, after a default by another NYMEX
Clearing Member, there are insufficient funds available to cover a deficit. The
maximum assessment on each NYMEX Clearing Member is the lesser of $15 million
and 40% of such NYMEX Clearing Member's capital. The Board of Directors of COMEX
Clearing Association, which serves as the Clearinghouse for COMEX, has
substantially similar authority in the case of a default by a COMEX Clearing
Member.
Despite the Exchange's authority to levy assessments or impose fees, there
can be no assurance that the relevant Members will have the financial resources
available to pay, or will not choose to be expelled from membership rather than
pay, any dues, fees or assessments. The Exchange believes that assessment
liabilities of a Member arising prior to expulsion are contractual in nature
and, accordingly, survive expulsion. In addition, the Exchange would have
recourse to such Member and the proceeds from the Exchange's sale of such
Member's seat to apply towards any outstanding obligations to the Exchange of
such Member. Recourse to a Member's seat, however, may not be of material value
in the case of large defaults that result in assessments greater in value than
the seat, particularly when the seat value declines markedly in price as a
consequence of the default.
33
Moreover, despite the risk mitigation techniques adopted by, and the other
powers and procedures implemented by the Exchange, which are designed to, among
other things, minimize the potential risks associated with the occurrence of
contract defaults on the Exchange, there can be no assurance that these powers
and procedures will prevent contract defaults or will otherwise function to
preserve the liquidity of the Exchange.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Financial Information on page F-2.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The information required by this Item was previously reported by NYMEX
Holdings, Inc. in Current Reports on Form 8-K, dated October 24, 2002 and
November 7, 2002.
During the two most recent fiscal years and the subsequent interim period
through December 31, 2002, there have been no reportable events (as defined in
Regulation S-K Item 304(a)(1)(v)) of the Company.
34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND THE EXCHANGE.
Set forth below are: (1) the names and ages of all directors (including
directors who are also executive officers) of the Company at March 5, 2003, (2)
all positions with the Company presently held by each such person and (3) the
positions held by, and principal areas of responsibility of, each such person
during the last five years.
TERM
EXPIRATION
NAME OF DIRECTOR AND OFFICER DATE
---------------------------- ----------
Vincent Viola........................ 47 Chairman 2004
Mitchell Steinhause.................. 55 Vice Chairman 2005
Richard Schaeffer.................... 50 Director, Treasurer 2005
Gary Rizzi........................... 48 Director, Secretary 2004
Eric Bolling......................... 41 Director 2005
Madeline Boyd........................ 50 Director 2004
Joseph Cicchetti..................... 50 Director 2005
John Conheeney....................... 73 Public Director 2003
Joel Faber........................... 62 Director 2003
Melvyn Falis......................... 62 Public Director 2005
Stephen Forman....................... 47 Director 2005
Kenneth Garland...................... 54 Director 2004
Anthony George Gero.................. 66 Director 2005
David Greenberg...................... 38 Director 2003
E. Bulkeley Griswold................. 64 Public Director 2003
Jesse B. Harte....................... 44 Director 2003
Scott Hess........................... 45 Director 2003
Steven Karvellas..................... 43 Director 2005
Harley Lippman....................... 48 Public Director 2004
Michel Marks......................... 53 Director 2004
Kevin McDonnell...................... 43 Director 2005
John McNamara........................ 46 Director 2003
Gordon Rutledge...................... 49 Director 2004
Richard Saitta....................... 53 Director 2003
Robert Steele........................ 64 Public Director 2004
J. Robert Collins, Jr................ 37 President
Neal L. Wolkoff, Esq................. 47 Executive Vice President and Chief Operating
Officer
Christopher K. Bowen, Esq............ 42 General Counsel and Chief Administrative
Officer
Nachamah Jacobovits.................. 40 Senior Vice President -- Corporate
Communications
Thomas J. LaSala..................... 41 Senior Vice President -- Compliance and Risk
Management
Robert Levin......................... 47 Senior Vice President -- Planning and
Development
Lewis A. Raibley, III................ 41 Senior Vice President -- Finance and Chief
Financial Officer
Stuart A. Smith...................... 55 Senior Vice President -- Operations
The Board of Directors of the Company is comprised of 25 members.
35
MEMBERS OF THE BOARD OF NYMEX HOLDINGS, INC.
The information in the Proxy Statement, dated March 6, 2003 set forth under
the caption "Information Regarding the Current Board of Directors" is
incorporated herein by reference.
BOARD MEETINGS AND COMMITTEES
The information in the Proxy Statement, dated March 6, 2003 set forth under
the caption "Board Meetings and Committees" is incorporated herein by reference.
Set forth below are: (1) the names and ages of all executive officers
(including executive officers who are also directors) of the Company at March 5,
2003, (2) all positions with the Company presently held by each such person, and
(3) the positions held by, and principal areas of responsibility of, each such
person during the last five years. Information for the Company's Directors is
incorporated by reference to the Proxy Statement.
NAME POSITION(S) HELD AGE
---- ---------------- ---
VINCENT VIOLA CHAIRMAN 47
Mr. Viola was elected Chairman in 2001. In 1985, Mr. Viola founded Pioneer
Futures, Inc., a clearing member of NYMEX Exchange, COMEX and the New York Board
of Trade. In 1987, Mr. Viola formed the First Bank Group that operates community
banks in Dallas and the surrounding Texas area. From 1993 to 1996 he served as
Vice Chairman of the Board of NYMEX Exchange. During his tenure, Mr. Viola
served as chairman of the strategic planning committee and was instrumental in
developing the NYMEX ACCESS(R) electronic trading platform. In 1990, he formed a
proprietary futures and options trading group on NYMEX Exchange and the
International Petroleum Exchange.
MITCHELL STEINHAUSE VICE CHAIRMAN 55
Mr. Steinhause was elected Vice Chairman of the Board in March 2000. He is
presently a local trader. He has previously served as Corporate Secretary from
1996 to 1998 and has been a member of NYMEX Exchange since 1975 as both a floor
broker and a local trader.
RICHARD SCHAEFFER TREASURER 50
Mr. Schaeffer is presently a Senior Vice President and Director of Global
Energy Futures for ABN AMRO, Inc. He has been NYMEX Exchange's Treasurer since
March 1993. Prior to 1990, he was Senior Vice President/Director of the Chicago
Corp., which was a clearing member of both the NYMEX Exchange and the COMEX
Division until its buy-out by ABN AMRO, Inc. He is also a member of the Board of
Directors of the Juvenile Diabetes Foundation.
GARY RIZZI SECRETARY 48
Mr. Rizzi has been the Company's Secretary since 2001. He has been a
director since 1995. Mr. Rizzi has been a Vice President of AGE Commodity
Clearing Corp. since 2001 and was an Associate Vice President from 1985 to 2001.
Mr. Rizzi has served on the Executive Committee since 2000. He is also a member
of the COMEX Division and both divisions of the New York Board of Trade.
J. ROBERT COLLINS, JR. PRESIDENT 37
Mr. Collins was appointed President of NYMEX Exchange on July 23, 2001. Mr.
Collins was Senior Vice President of natural gas trading at El Paso Merchant
Energy-Gas, LP., a division of El Paso Energy Corp. Mr. Collins directed the
natural gas derivatives portfolio. Before joining El Paso in 1997, Mr. Collins
was a natural gas and crude oil options market maker with Pioneer Futures, Inc.
on the floor of NYMEX Exchange. Mr. Collins had been a director in 2001 and a
member of NYMEX Exchange since 1996.
36
NEAL L. WOLKOFF EXECUTIVE VICE PRESIDENT AND CHIEF 47
OPERATING OFFICER
Mr. Wolkoff served as Executive Vice President of NYMEX Holdings since 2000
and Executive Vice President of NYMEX Exchange since July 1993 and was Senior
Vice President - Operations and Regulatory Affairs from November 1989 to July
1993. Additionally, in 2002, Mr. Wolkoff was appointed Chief Operating Officer
of NYMEX Holdings, NYMEX Exchange and COMEX Division. Currently, he serves as a
director of the National Futures Association and the Demand Exchange, Inc. He
previously served as a director of Enersoft Inc. Early in his career, he served
as a trial attorney with the CFTC.
CHRISTOPHER K. BOWEN GENERAL COUNSEL AND CHIEF ADMINISTRATIVE 42
OFFICER
Mr. Bowen was appointed General Counsel and Chief Administrative Officer in
February 2002. Mr. Bowen has served as Senior Vice President and General Counsel
of NYMEX Holdings since 2000 and has been Senior Vice President and General
Counsel of the NYMEX Exchange since 1997. Mr. Bowen has held positions of
Associate General Counsel and Senior Associate General Counsel. He has also
served as Counsel/Manager of Futures Compliance at Morgan Stanley & Co., Inc.
and as an attorney at the CFTC. Mr. Bowen also serves as General Counsel and
Chief Administrative Officer of COMEX and CCA.
NACHAMAH JACOBOVITS SENIOR VICE PRESIDENT - CORPORATE 40
COMMUNICATIONS
Ms. Jacobovits is Senior Vice President of Corporate Communications for the
New York Mercantile Exchange, a position she has held since September 2002. Ms.
Jacobovits joined the Exchange in 1989 and has served as manager of media
relations as well as director and, most recently, vice president of corporate
communications. She is currently the secretary and board member of the New York
Mercantile Exchange Charitable Assistance Fund. She is also the staff liaison to
the Exchange's Charitable Foundation. Prior to joining the Exchange, Ms.
Jacobovits was manager of communications for UJA-Federation, following several
other public relations positions in the non-profit field. Ms. Jacobovits holds a
bachelor of arts degree in mass communications from Towson State University in
Maryland.
THOMAS J. LASALA SENIOR VICE PRESIDENT - COMPLIANCE AND 41
RISK MANAGEMENT
Mr. LaSala was appointed Senior Vice President - Compliance and Risk
Management in February 2002. Mr. LaSala previously served as Vice President -
Compliance of NYMEX Holdings since 2000 and NYMEX Exchange since 1994. Mr.
LaSala also serves as Senior Vice President -Compliance and Risk Management of
COMEX.
ROBERT LEVIN SENIOR VICE PRESIDENT - PLANNING AND 47
DEVELOPMENT
Mr. Levin serves as Senior Vice President - Planning and Development of
NYMEX Holdings and has been Senior Vice President - Planning and Development of
NYMEX Exchange since June 1993. Mr. Levin was Vice President - Product
Development of NYMEX Exchange from July 1991 until June 1993. Mr. Levin also
currently serves as Senior Vice President - Planning and Development of COMEX.
LEWIS A. RAIBLEY, III SENIOR VICE PRESIDENT - FINANCE CHIEF 41
FINANCIAL OFFICER
Mr. Raibley serves as Senior Vice President-Finance of NYMEX Holdings and
Chief Financial Officer, and Senior Vice President-Finance of NYMEX Exchange
since January 2003. Mr. Raibley also serves as Senior Vice President - Finance
of COMEX and CCA. Mr. Raibley has served as Senior Vice President and
37
Controller at Datek Online Holdings Corp. from 2000 to 2002 and served in
several senior financial roles at Morgan Stanley Dean Witter & Co., where he was
employed from 1986 to 2000.
STUART A. SMITH SENIOR VICE PRESIDENT - OPERATIONS 55
Mr. Smith serves as Senior Vice President-Operations of NYMEX Holdings and
has been Senior Vice President-Operations of the NYMEX Exchange since May 1992.
Mr. Smith currently serves as Senior Vice President - Operations of COMEX. Mr.
Smith previously served as Vice President of Trading Floor Operations from 1986
to 1996.
None of the directors, except for the Chairman, currently is or has ever
been an officer or employee of the Company or any of its subsidiaries, nor were
there any compensation committee interlocks or other relationships during 2002
requiring disclosure under item 402(j) of Regulation S-K of the SEC.
ITEM 11. EXECUTIVE OFFICER COMPENSATION.
The information in the Proxy Statement, dated March 6, 2003 set forth under
the captions "Executive Officer Compensation" and "Information Regarding the
Current Board of Directors" and "Compensation of Directors" is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Information Regarding
Beneficial Ownership of Principal Shareholders, Directors, and Management" of
the Proxy Statement, dated March 6, 2003 is incorporated herein by reference.
ITEM 13. CERTAIN BUSINESS RELATIONSHIPS AND RELATED TRANSACTIONS.
The inherent nature of the Company's business frequently gives rise to
related party transactions. The majority of the Company's shareholders,
including several members of the board of directors, frequently do business with
the Exchange. The Board establishes fees and usage charges and also determines
the extent of any member rebate program.
The following are descriptions of material transactions involving the
Company and its directors:
Several of the Company's directors serve as officers or directors of
clearing member firms. These clearing member firms pay substantial fees to the
Company's clearing house in connection with services the Company provides. The
Company believes that the services provided to these clearing firms are on terms
no more favorable to those firms than terms given to unaffiliated persons.
Pioneer Futures, Inc. ("Pioneer"), of which the Chairman of the Board of
the Company is the sole shareholder, is one of the largest clearing members with
whom the Company does business. For the year ended December 31, 2002, a total of
$10,164,506 in revenue was derived from Pioneer from clearing and transaction
fees, rental income, and various other floor fees. This amount represents 5% of
the Company's total consolidated revenue.
As of December 31, 2002, Pioneer leases from NYMEX Exchange approximately
17,693 square feet of space at the Company's headquarters. Pioneer currently has
five (5) leases, the aggregate amount of rent collected from Pioneer during 2002
was $1,457,744. As of August 1, 2002, Pioneer surrendered its rights to the
following lease: 18,893 square feet expiring on June 30, 2005.
Sterling Commodities Corp. ("Sterling"), of which David Greenberg, a
director of the Company, is the President, currently leases from NYMEX Exchange
approximately 6,253 square feet of space at the One North End Avenue facility.
The lease expires on November 30, 2007. The current annual rent for this space
is $237,614. The aggregate amount of rent collected from Sterling during 2002
was $237,291. The director's father is Chief Executive Officer and 100% owner of
Sterling. The clearing revenues earned from Sterling were $1,661,832.
38
The Company had invested $11.9 million and $10.4 million at December 31,
2002 and 2001, respectively, in fixed income securities with a major securities
firm, a senior investment officer of which is also a director of the Company.
Genesis 10, of which Harley Lippman, a Public director of the Company, is
the founder and Chief Executive Officer, is an information technology-consulting
firm. Mr. Lippman owns 90% of the equity interest of Genesis 10. The Company had
entered into a written contractual relationship with Genesis 10 pursuant to
which Genesis 10 provided the services of a Senior Developer/Architect who was
eventually hired by the Company in March 2002. A total of $173,396 was paid to
Genesis 10 for services rendered in 2002 which included a fee for placement.
The Company has provided financial guarantees and pledged collateral
relating to a membership seat financing program with one of its banks. Pursuant
to this program, the member remains primarily liable for the loan that is used
to purchase an interest in the Company. The Company's guarantee is limited to
the lesser of $500,000 or 50% of the purchase price of the membership interest,
and the Company has the right to liquidate the interest if the member defaults
on the loan. Under the program, the Company may issue guarantees totaling, in
the aggregate, up to $11.0 million. As of December 31, 2002, the following
director had a loan balance relating to this program greater than $60,000:
Steven Karvellas $133,000.
ITEM 14. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in Rules 13a-14(c)
and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) as of a date within 90 days prior to the filing date of this
Annual Report (the "Evaluation Date"). Based upon such evaluation, such officers
have concluded that, as of the Evaluation Date, our disclosure controls and
procedures are effective in alerting them on a timely basis to material
information relating to the Company that is required to be included in our
annual filing under such Exchange Act.
(b) Changes in Internal Controls. Since the Evaluation Date, there have
not been any significant changes in our internal controls or in other factors
that could significantly affect such controls.
39
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Report:
1. Consolidated Financial Statements
The consolidated financial statements required to be filed in
this Annual Report on Form 10-K are listed on page F-2 hereof and
incorporated herein by reference.
2. Financial Statement Schedules
Financial statement schedules have been omitted because the
information required to be set forth in those schedules is not
applicable or is shown in the consolidated financial statements or
notes thereto.
3. Exhibits
Certain of the following exhibits were previously filed as
exhibits to other reports or registration statements filed by NYMEX
Holdings and are incorporated herein by reference to such reports or
registration statements as indicated parenthetically below by the
appropriate report reference date or registration statement number.
EXHIBITS
2.2 Form of Agreement and Plan of Merger by and among New York
Mercantile Exchange, Inc., NYMEX Holdings, Inc. and NYMEX
Merger Sub, Inc. (incorporated herein by reference to
Exhibit 2.2 of Form S-4 (file no. 333-30332)).
3.1 Amended and Restated Certificate of Incorporation of NYMEX
Holdings, Inc. (incorporated herein by reference to Exhibit
3.1 of Form 10-K for the year 2000 (file no. 333-30332)).
3.2 By-laws of NYMEX Holdings, Inc. (incorporated herein by
reference to Exhibit 3.2 of Form S-4 (file no. 333-30332)).
4 Note Purchase Agreement among NYMEX and each of Purchasers
listed in Schedule A attached thereto dated October 15, 1996
(incorporated herein by reference to Exhibit 10.5 of Form
S-4 (file no. 333-30332)).
10.1 NYMEX Amended and Restated Members' Retention and Retirement
Plan effective December 31, 1998 (incorporated herein by
reference to Exhibit 10.1 of Form S-4 (file no. 333-30332)).
10.2 Trust under the NYMEX Members' Retention and Retirement Plan
dated December 31, 1998 (incorporated herein by reference to
Exhibit 10.2 of Form S-4 (file no. 333-30332)).
10.3 Ground Lease between Battery Park City Authority and NYMEX
dated May 18, 1995 (incorporated herein by reference to
Exhibit 10.3 of Form S-4 (file no. 333-30332)).
10.4 Funding Agreement among New York State Urban Development
Corporation, Battery Park City Authority and NYMEX dated May
18, 1995 (incorporated herein by reference to Exhibit 10.4
of Form S-4 (file no. 333-30332)).
10.5 NYMEX Holdings, Inc. Executive Income Deferral Program
(incorporated herein by reference to Exhibit 10.5 of Form
10-K for the year 2000 (file no. 333-30332)).
10.6 Network License Order Form between Oracle Corporation and
NYMEX, accompanying Payment Plan Agreement and Payment
Schedule between Oracle Credit Corporation and NYMEX
(incorporated herein by reference to Exhibit 10.6 of Form
S-4 (file no. 333-30332)).
40
10.7 Network License Order Form between Oracle Corporation and NYMEX, accompanying Payment Schedule between
Oracle Credit Corporation and NYMEX and Amendment 1 to the Network License Order Form (incorporated
herein by reference to Exhibit 10.7 of Form S-4 (file no. 333-30332)).
10.8 Network License Order Form between Oracle Corporation and NYMEX and accompanying Payment Schedule
between Oracle Credit Corporation and NYMEX (incorporated herein by reference to Exhibit 10.8 of Form
S-4 (file no. 333-30332)).
10.8.1 Software License and Services Agreement between Oracle Corporation and NYMEX effective January 6, 1995
(incorporated herein by reference to Exhibit 10.8.1 of Form S-4 (file no. 333-30332)).
10.9 Smartnet Agreement between Cisco Systems, Inc. and NYMEX dated May 21, 1996 (incorporated herein by
reference to Exhibit 10.9 of Form S-4 (file no. 333-30332)).
10.10 Network Supported Account Agreement between Cisco Systems, Inc. and NYMEX dated May 21, 1996
(incorporated herein by reference to Exhibit 10.10 of Form S-4 (file no. 333-30332)).
10.11 COMEX Members' Retention and Retirement Plan (incorporated herein by reference to Exhibit 10.11 of Form
10-K for the year 2000 (file no. 333-30332)).
10.12.1 Employment Agreement between NYMEX Holdings and Neal L. Wolkoff, Esq. (incorporated herein by reference
to Exhibit 10.12 of Form 10-K for the year 2000 (file no. 333-30332))
10.12.2 Employment Agreement between NYMEX Holdings, New York Mercantile Exchange, Inc. and J. Robert Collins,
Jr. (incorporated herein by reference to Exhibit 10.13 of Form 10-Q for the quarter ending March 31,
2002) (file no. 333-30332)).
21.1 Subsidiaries of NYMEX Holdings, Inc. (incorporated herein by reference to Exhibit 21.1 of Form S-4 (file
no. 333-30332)).
99 Published report regarding the demutualization vote by Security holders on June 20, 2000 (incorporated
herein by reference to Exhibit 99 of Form 10-K for the year 2000 (file no. 333-30332)).
(b) Reports on Form 8-K
NYMEX Holdings, Inc. filed a Current Report on Form 8-K, dated October
24, 2002, reporting the resignation of our auditors, Ernst & Young LLP.
NYMEX Holdings, Inc. filed a Current Report on Form 8-K, dated
November 7, 2002, reporting the appointment of KPMG LLP as our auditors.
NYMEX Holdings, Inc. filed a Current Report on Form 8-K, dated
November 14, 2002, reporting that our 3rd quarter 10-Q was accompanied by
certifications of our Company's Chairman and Chief Financial Officer, as
adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, NYMEX Holdings, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 5, 2003
NYMEX HOLDINGS, INC.
BY: /s/ VINCENT VIOLA
------------------------------------
VINCENT VIOLA
Chairman of the Board of Directors
(Principal Executive Officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF NYMEX HOLDINGS,
INC. AND IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ VINCENT VIOLA Chairman of the Board March 5, 2003
-----------------------------------------------------
VINCENT VIOLA
/s/ MITCHELL STEINHAUSE Vice Chairman March 5, 2003
-----------------------------------------------------
MITCHELL STEINHAUSE
/s/ RICHARD SCHAEFFER Treasurer March 5, 2003
-----------------------------------------------------
RICHARD SCHAEFFER
/s/ GARY RIZZI Secretary March 5, 2003
-----------------------------------------------------
GARY RIZZI
/s/ ERIC BOLLING Director March 5, 2003
-----------------------------------------------------
ERIC BOLLING
/s/ MADELINE BOYD Director March 5, 2003
-----------------------------------------------------
MADELINE BOYD
/s/ JOSEPH CICCHETTI Director March 5, 2003
-----------------------------------------------------
JOSEPH CICCHETTI
/s/ JOHN CONHEENEY Director March 5, 2003
-----------------------------------------------------
JOHN CONHEENEY
/s/ JOEL FABER Director March 5, 2003
-----------------------------------------------------
JOEL FABER
/s/ MELVYN FALIS Director March 5, 2003
-----------------------------------------------------
MELVYN FALIS
/s/ STEPHEN FORMAN Director March 5, 2003
-----------------------------------------------------
STEPHEN FORMAN
/s/ KENNETH GARLAND Director March 5, 2003
-----------------------------------------------------
KENNETH GARLAND
42
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ANTHONY GEORGE GERO Director March 5, 2003
-----------------------------------------------------
ANTHONY GEORGE GERO
/s/ DAVID GREENBERG Director March 5, 2003
-----------------------------------------------------
DAVID GREENBERG
/s/ E. BULKELEY GRISWOLD Director March 5, 2003
-----------------------------------------------------
E. BULKELEY GRISWOLD
/s/ JESSE B. HARTE Director March 5, 2003
-----------------------------------------------------
JESSE B. HARTE
/s/ SCOTT HESS Director March 5, 2003
-----------------------------------------------------
SCOTT HESS
/s/ STEVEN KARVELLAS Director March 5, 2003
-----------------------------------------------------
STEVEN KARVELLAS
/s/ HARLEY LIPPMAN Director March 5, 2003
-----------------------------------------------------
HARLEY LIPPMAN
/s/ MICHEL MARKS Director March 5, 2003
-----------------------------------------------------
MICHEL MARKS
/s/ KEVIN MCDONNELL Director March 5, 2003
-----------------------------------------------------
KEVIN MCDONNELL
/s/ JOHN MCNAMARA Director March 5, 2003
-----------------------------------------------------
JOHN MCNAMARA
/s/ GORDON RUTLEDGE Director March 5, 2003
-----------------------------------------------------
GORDON RUTLEDGE
/s/ RICHARD SAITTA Director March 5, 2003
-----------------------------------------------------
RICHARD SAITTA
/s/ ROBERT STEELE Director March 5, 2003
-----------------------------------------------------
ROBERT STEELE
/s/ J. ROBERT COLLINS, JR. President March 5, 2003
-----------------------------------------------------
J. ROBERT COLLINS, JR.
/s/ NEAL L. WOLKOFF Executive Vice March 5, 2003
----------------------------------------------------- President and Chief
NEAL L. WOLKOFF Operating Officer
/s/ LEWIS A. RAIBLEY, III Senior Vice President March 5, 2003
----------------------------------------------------- Finance and Chief
LEWIS A. RAIBLEY, III Financial Officer
/s/ JOSEPH FILKO Controller March 5, 2002
-----------------------------------------------------
JOSEPH FILKO
43
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
FINANCIAL INFORMATION
FOR INCLUSION IN ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 2002
F-1
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
ITEM 15(1)
ITEM 15(1) FINANCIAL STATEMENTS
Management's Responsibility for Financial Statements........ F-3
Report of Independent Auditors, KPMG LLP.................... F-4
Report of Independent Auditors, Ernst & Young LLP........... F-5
Report of Independent Auditors, Deloitte & Touche LLP....... F-6
Consolidated Balance Sheets at December 31, 2002 and 2001... F-7
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000.......................... F-8
Consolidated Statements of Stockholders'/Members' Equity for
the years ended December 31, 2002, 2001 and 2000.......... F-9
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000.......................... F-10
Notes to Consolidated Financial Statements.................. F-11
All other financial statements and schedules have been omitted since the
required information is not applicable or is included in Item
15(1) -- Consolidated Financial Statements.
F-2
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
To Our Stockholders:
Management is responsible for the reliability of the consolidated financial
statements and related notes. The financial statements were prepared in
conformity with accounting principles generally accepted in the United States of
America and include amounts based upon our estimates and assumptions, as
required. The consolidated financial statements for the year ended December 31,
2002 have been audited by our independent auditors, KPMG LLP, who were given
free access to all financial records and related data, including minutes of the
meetings of the Board of Directors and Committees of the Board. We believe that
our representations to the independent auditors are valid and appropriate.
Management maintains a system of internal accounting controls designed to
provide reasonable assurance as to the reliability of the financial statements,
as well as to safeguard assets from unauthorized use or disposition. The system
is supported by formal policies and procedures. Our internal audit function
monitors and reports on the adequacy of and compliance with the internal control
system, and appropriate actions are taken to address significant control
deficiencies and other opportunities for improving the system as they are
identified. The Audit Committee consists of the five Public Directors of the
Board. One of the Public Directors serves as chairman of the committee. The
Audit Committee meets several times each year with representatives of
management, including the Chief Financial Officer, the Vice President of
Internal Audit and the independent auditors to review the financial reporting
process and controls in place to safeguard assets. Both our independent auditors
and internal auditor have unrestricted access to the Audit Committee.
Although no cost-effective internal control system will preclude all errors
or fraud, we believe our controls as of December 31, 2002 provide reasonable
assurance that the consolidated financial statements are reliable and that our
assets are reasonably safeguarded.
/s/ VINCENT VIOLA
--------------------------------------
Chairman of the Board
/s/ J. ROBERT COLLINS, JR.
--------------------------------------
President
/s/ LEWIS A. RAIBLEY, III
--------------------------------------
Senior Vice President -- Finance
Chief Financial Officer
Date: March 5, 2003
-----------------------------------
F-3
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of NYMEX Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of NYMEX
Holdings, Inc. and subsidiaries (the "Company") as of December 31, 2002 and the
related consolidated statements of operations, stockholders'/members' equity and
cash flows for the year ended December 31, 2002. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The consolidated balance sheet of the Company as
of December 31, 2001 and the related consolidated statements of operations,
changes in stockholders'/members' equity and cash flows for each of the years in
the two-year period ended December 31, 2001, were audited by other auditors
whose reports dated March 3, 2002 and March 9, 2001, expressed unqualified
opinions on those financial statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audit provides a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NYMEX
Holdings, Inc. and subsidiaries at December 31, 2002 and the results of their
operations, and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for goodwill and other intangible
assets in 2002.
KPMG LLP
New York, New York
March 3, 2003
F-4
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of NYMEX Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of NYMEX
Holdings, Inc. and subsidiaries (the "Company") as of December 31, 2001, and the
related consolidated statements of operations, stockholders'/members' equity and
of cash flows for the year ended December 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of NYMEX Holdings,
Inc. and subsidiaries at December 31, 2001 and the consolidated results of its
operations, and its cash flows for the year ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America.
ERNST & YOUNG LLP
New York, New York
March 3, 2002
F-5
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of NYMEX Holdings, Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders'/members' equity and cash flows of NYMEX Holdings, Inc. and
subsidiaries (the "Company") for the year ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the results of operations and cash flows of NYMEX
Holdings, Inc. and subsidiaries for the year ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America.
DELOITTE & TOUCHE LLP
New York, New York
March 9, 2001
F-6
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2002 2001
-------- --------
ASSETS
Cash and cash equivalents................................... $ 1,014 $ 5,680
Securities purchased under agreements to resell............. 40,760 6,500
Marketable securities, at market (cost of $65,285 and
$65,339).................................................. 66,976 65,421
Clearing and transaction fees receivable, net............... 13,884 9,337
Prepaid taxes and expenses.................................. 3,595 12,985
Deferred tax assets......................................... 3,233 --
Segregated and guarantee funds.............................. 75,327 46,755
Other current assets........................................ 7,920 14,716
-------- --------
Total current assets................................. 212,709 161,394
Property and equipment, net................................. 223,878 228,483
Goodwill, net............................................... 16,329 16,329
Other assets................................................ 9,839 9,745
-------- --------
TOTAL ASSETS................................................ $462,755 $415,951
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued liabilities.................... $ 16,036 $ 20,907
Accrued salaries and related liabilities.................... 5,611 5,221
Deferred tax liabilities.................................... -- 139
Segregated and guarantee funds.............................. 75,327 46,755
Other current liabilities................................... 22,724 8,398
-------- --------
Total current liabilities.............................. 119,698 81,420
Deferred income taxes....................................... 9,622 9,924
Notes payable............................................... 91,551 94,368
Deferred credit -- grant for building construction.......... 114,745 116,890
Subordinated commitment -- members' retention program....... 11,037 9,779
Other non-current liabilities............................... 14,567 9,334
-------- --------
Total liabilities................................. 361,220 321,715
-------- --------
COMMITMENTS AND CONTINGENCIES (See Note 14)
STOCKHOLDERS' EQUITY:
Common stock, at $0.01 par value, 816 shares authorized,
issued and outstanding.................................... -- --
Additional paid-in capital.................................. 93,312 93,312
Retained earnings........................................... 8,223 924
-------- --------
Total stockholders' equity........................ 101,535 94,236
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $462,755 $415,951
======== ========
The accompanying notes are an integral part of these statements.
F-7
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2002 2001 2000
-------- -------- -------
OPERATING REVENUES:
Clearing and transaction fees, net of member fee rebates
of $5,245, $6,693 and $13,727 in 2002, 2001 and 2000... $140,763 $104,302 $92,500
Market data fees.......................................... 33,459 34,313 33,622
Other, net of rebates of $1,915, $2,090, and $2,808 in
2002, 2001 and 2000.................................... 14,982 5,666 4,747
-------- -------- -------
Total operating revenues.......................... 189,204 144,281 130,869
-------- -------- -------
OPERATING EXPENSES:
Salaries and employee benefits............................ 48,021 48,811 48,547
General and administrative................................ 18,837 14,480 15,063
Depreciation and amortization of property and equipment,
net of deferred credit amortization.................... 20,926 16,024 13,862
Rent and facility......................................... 18,590 17,073 15,736
Professional services..................................... 17,954 12,753 15,625
Telecommunications, equipment rentals and maintenance..... 13,413 14,468 14,952
Impairment and disposition loss on capitalized software
and computer equipment................................. 12,583 5,114 857
Marketing................................................. 2,633 1,721 2,446
Amortization of goodwill.................................. -- 2,153 2,153
Demutualization expenses.................................. -- -- 4,281
Other..................................................... 9,445 7,203 4,905
-------- -------- -------
Total operating expenses.......................... 162,402 139,800 138,427
-------- -------- -------
INCOME (LOSS) FROM OPERATIONS............................... 26,802 4,481 (7,558)
OTHER INCOME (EXPENSES):
Investment income, net.................................... 5,714 4,643 9,355
Interest expense.......................................... (7,455) (7,662) (7,718)
-------- -------- -------
INCOME BEFORE PROVISION (BENEFIT) FOR INCOME TAXES.......... 25,061 1,462 (5,921)
PROVISION (BENEFIT) FOR INCOME TAXES........................ 12,762 782 (3,140)
-------- -------- -------
NET INCOME (LOSS)........................................... $ 12,299 $ 680 $(2,781)
======== ======== =======
Basic earnings (loss) per share............................. $ 15,072 $ 833 $(3,408)
======== ======== =======
The accompanying notes are an integral part of these statements.
F-8
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'/MEMBERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS)
NO. OF MEMBERSHIPS/ TOTAL
-------------------- ADDITIONAL STOCKHOLDERS'/
SHARES MEMBER'S PAID-IN RETAINED MEMBERS'
OUTSTANDING AMOUNT EQUITY CAPITAL EARNINGS EQUITY
----------- ------ -------- ---------- -------- --------------
Balances at December 31, 1999...... 816 -- $93,202 N/A N/A $ 93,202
Net loss........................... (2,781) (2,781)
Net transfer to MRRP:
NYMEX............................ (4,959) (4,959)
COMEX............................ (803) (803)
Allocation of member's equity and
pre-demutualization loss......... -- (84,659) 84,415 244 --
--- ---- ------- ------- ------- --------
Balances at December 31, 2000...... 816 -- -- 84,415 244 84,659
Net income......................... 680 680
Tax benefit related to:
NYMEX MRRP....................... 5,728 5,728
COMEX MRRP....................... 3,169 3,169
--- ---- ------- ------- ------- --------
Balances at December 31, 2001...... 816 -- -- 93,312 924 94,236
Net income......................... 12,299 12,299
Dividends.......................... (5,000) (5,000)
--- ---- ------- ------- ------- --------
Balances at December 31, 2002...... 816 $ -- $ -- $93,312 $ 8,223 $101,535
=== ==== ======= ======= ======= ========
The accompanying notes are an integral part of these statements
F-9
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS)
2002 2001 2000
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 12,299 $ 680 $ (2,781)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment, net of deferred credit amortization....... 20,926 16,024 13,862
Amortization of goodwill............................... -- 2,153 2,153
Deferred income taxes.................................. (3,674) 3,546 (2,405)
Loss on disposition of property, equipment and
impairment of capitalized software and computer
equipment............................................ 12,583 5,114 857
Curtailment gain on postretirement plan................ -- (732) --
(Increase) decrease in operating assets:
Marketable securities................................ (1,555) 12,603 (10,838)
Clearing and transaction fees receivable............. (4,547) (1,762) 6,846
Prepaid taxes and expenses........................... 9,390 (2,789) (259)
Segregated and guarantee funds....................... (28,572) 67,961 (76,496)
Other current assets................................. 6,796 (5,074) 1,491
(Decrease) increase in operating liabilities:
Accounts payable and accrued liabilities............. (4,871) 9,622 (768)
Accrued salaries and related liabilities............. 390 1,352 1,021
Segregated and guarantee funds....................... 28,572 (67,961) 76,496
Other current liabilities............................ 9,326 498 (22)
Other non-current liabilities........................ 5,233 169 2,294
Distributions under NYMEX Division members' retention
program........................................... -- (33,221) (1,313)
Subordinated commitment - members' retention
program........................................... 1,258 566 50
-------- -------- --------
Net cash provided by operating activities............ 63,554 8,749 10,188
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in securities purchased under
agreements to resell................................... (34,260) 23,609 (808)
Capital expenditures...................................... (31,049) (27,221) (12,797)
(Increase) decrease in other assets....................... (94) 488 (1,004)
-------- -------- --------
Net cash used in investing activities................ (65,403) (3,124) (14,609)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term debt agreements........ (2,817) (2,815) --
-------- -------- --------
Cash used in financing activities.................... (2,817) (2,815) --
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (4,666) 2,810 (4,421)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 5,680 2,870 7,291
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 1,014 $ 5,680 $ 2,870
======== ======== ========
The accompanying notes are an integral part of these statements.
F-10
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS -- NYMEX Holdings, Inc. ("NYMEX Holdings") was
incorporated in 2000 as a stock corporation in Delaware, and is the successor to
the New York Mercantile Exchange that was established in 1872. The two principal
operating subsidiaries of NYMEX Holdings are the New York Mercantile Exchange,
Inc. ("NYMEX Division") and the Commodity Exchange, Inc. ("COMEX Division"),
which is organized as a wholly-owned subsidiary of NYMEX Division. Where
appropriate, each NYMEX Exchange operating division, NYMEX Division and COMEX
Division, will be discussed separately, and collectively will be referred to as
the "Exchange." When discussing NYMEX Holdings together with its subsidiaries,
reference is being made to the "Company."
The Company demutualized on November 17, 2000, at which time the book value
of the assets and liabilities of New York Mercantile Exchange carried over to
NYMEX Exchange. After the demutualization, all the assets and liabilities of
NYMEX Exchange were consolidated into the parent company, NYMEX Holdings. Upon
demutualization there have been no restrictions to pay dividends.
The Company exists principally to provide facilities for buying and selling
energy and precious and base metals commodities for future delivery under rules
intended to protect the interests of market participants. The Company itself
does not own commodities, trade for its own account, or otherwise engage in
market activities. The Company provides the physical facilities necessary to
conduct an open-outcry auction market, electronic trading systems, systems for
the matching and clearing of trades executed on the Exchange, and systems for
the clearing of certain bilateral trades executed in the over-the-counter
("OTC") market. These services facilitate price discovery, hedging, and
liquidity in the energy and metals markets. Transactions executed on the
Exchange mitigate the risk of counter-party default because the Exchange
clearinghouse acts as the counter-party to every trade. Trading on the Exchange
is regulated by the Commodity Futures Trading Commission. To manage the risk of
financial nonperformance, the Exchange requires members to post margin. (See
Note 12.)
BASIS OF PRESENTATION -- The accompanying consolidated financial statements
are presented on an accrual basis in conformity with accounting principles
generally accepted in the United States of America.
PRINCIPLES OF CONSOLIDATION -- The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiaries
NYMEX Division, COMEX Division, COMEX Clearing Association, Inc. ("CCA") , NYMEX
Technology Corp. (which became inactive in November 1996), and Tradingear
Acquisition LLC. Intercompany balances and transactions have been eliminated in
consolidation. COMEX Division and CCA were acquired by the Company in 1994.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of the fair value of financial instruments at the balance
sheet date. The carrying values of the Company's assets approximate their fair
values and, where applicable, are based on current market prices. The carrying
values of the Company's liabilities approximate their fair values except for the
fair value of the Company's notes payable, which are based upon their future
cash flows for principal and interest payments, discounted at prevailing
interest rates for securities of similar terms and maturities, and approximate
$119.3 million at December 31, 2002.
SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES -- The preparation of the accompanying consolidated
financial statements and related notes in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, the reported amounts of
revenues and expenses during the reporting period, and the disclosure of
contingent liabilities. Actual results could differ from those estimates.
F-11
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 2000, the Company changed its estimated useful life for an
internally developed software project from five years to three years. This
change in estimate was based on management's belief that this software had a
shorter useful life due to rapidly changing technology.
CASH AND CASH EQUIVALENTS -- Cash and cash equivalents consist of cash and
all highly-liquid investments with maturities of three months or less when
purchased. The fair value of cash and cash equivalents approximates their
carrying amounts.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL -- Securities purchased
under agreements to resell are carried at contract value, as specified in the
agreements. The market value of securities purchased under agreements to resell
is monitored by the Company and additional collateral is obtained as necessary
to protect against credit exposure. At December 31, 2002 and 2001, U.S.
government securities held in a segregated account by a U.S. money-center bank
collateralized the securities purchased under agreements to resell.
MARKETABLE SECURITIES -- The Company invests primarily in high-grade
tax-exempt municipal bonds and direct obligations of the U.S. government and its
agencies. The Company has classified all of its investments in debt and equities
as trading. Management determines the appropriate classification of debt and
equity securities at the time of purchase and re-evaluates such classification
at each balance sheet date.
Trading securities are bought and held principally for the purpose of
selling them in the near future and are carried at fair value based on quoted
market prices. The resulting realized and unrealized gains or losses are
recognized currently in Investment Income, net in the Consolidated Statements of
Operations. Realized gains or losses from the sales of marketable securities are
determined on a specific identification basis.
The Company has provided financial guarantees and pledged collateral with
one of its investment managers relating to a membership seat financing program
(see Note 15). The investment manager retains a collateral interest in the
underlying Company investments equal to 118% of the outstanding loan balance.
The Company has not set up allowances for loan losses as the Company retains the
exclusive right to assert its lien on and security interest in the membership
seat. At December 31, 2002 and 2001, the amounts of collateral in marketable
securities were $5,932,632 and $6,774,886, respectively.
SEGREGATED AND GUARANTEE FUNDS -- The Company holds, for clearing firms,
margin funds that may be in the form of cash or securities. Margin funds that
earn interest which the Exchange is entitled to keep are reflected in the
accompanying consolidated balance sheets. Cash received may be invested, and any
interest received accrues to the exchange. These investments are overnight
transactions in U.S. Government securities acquired through and held by a
broker-dealer of a subsidiary of a bank. Securities deposited by clearing firms
consist primarily of short-term U.S. Treasury securities and are not reflected
in the accompanying consolidated balance sheets. These securities are held in
safekeeping, although a portion of the clearing firms' proprietary segregated
deposits may be utilized in securities lending transactions. Interest and gain
or loss on securities deposited to satisfy clearing margin and security deposit
requirements accrues to the clearing firm.
REVENUE RECOGNITION -- The largest sources of the Company's operating
revenues are clearing and transaction fees. These fees are recognized as revenue
in the same period that trades are effectuated. Clearing and transaction fees
receivable are monies due from clearing member firms. Exposure to losses on
receivables is principally dependent on each member firm's financial condition.
Seats owned by NYMEX Division and COMEX Division members collateralize fees owed
to the Company. At the end of December 31, 2002 and 2001, no clearing and
transaction fees receivable balance was greater than the member's seat value.
Management does not believe that a concentration of credit risk exists from
these receivables. The Company retains the right to liquidate a member's seat in
order to satisfy its receivable.
Clearing and transaction fees receivable are carried net of allowances for
member credits, which are based upon expected billing adjustments. Allowances
for member credits were established and applied as reductions of clearing and
transaction fees receivable at December 31, 2002 and 2001, respectively. The
F-12
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company believes the allowances are adequate to cover member credits. The
Company also believes the likelihood of incurring material losses due to
collectibility is remote and, therefore, no allowance for doubtful accounts is
necessary.
The allowance for member credits was reduced by $100,000 in 2002 and had an
ending balance of $500,000 at December 31, 2002. This allowance was reduced by
$400,000 in 2001 to an ending balance of $600,000 at December 31, 2001 and
$500,000 in 2000 for an ending balance of $1,000,000 at December 31, 2000.
The Company maintains, on a discretionary basis, a fee reduction program
that is subject to periodic approval by the board of directors, pursuant to
which certain clearing fees of NYMEX Division members are substantially reduced.
The Company has various other discretionary rebate and cost reduction programs
to reduce operating costs of certain market participants.
The Company provides real time information to subscribers regarding prices
of futures and options contracts traded on the Exchange. As is common business
practice in the industry, fees are remitted to the Company by market data
vendors on behalf of subscribers. Revenues are accrued for the current month
based on the most recent month reported by the vendors. The Company conducts
periodic audits of the information provided. At December 31, 2002, four vendors
represented a receivable balance greater than 50% of the total balance.
Allowances for uncollectible receivables of $385,000 and $479,000 were applied
as a reduction to the December 31, 2002 and 2001 market data fees receivable
balances, respectively. These allowances are intended to cover potential
non-collectible vendor receivables from the market data vendors as well as
future adjustments by the market data vendor customers.
The allowance for market data receivables was reduced by $94,000 in 2002
and had an ending balance of $385,000 at December 31, 2002. This allowance was
reduced by $1,121,000 in 2001 to an ending balance of $479,000 at December 31,
2001.
During 2000, the allowance for market data receivables increased by
$1,100,000 to an ending balance of $1,600,000 at December 31, 2000.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost, less
allowances for depreciation and amortization. Depreciation and amortization are
provided utilizing the straight-line method over the estimated useful lives of
the assets or lease terms, whichever is shorter. (See Note 4.)
The following table summarizes the years over which significant assets are
generally depreciated or amortized:
Building and improvements................................... 20 to 60 years
Information system equipment................................ 4 to 7 years
Furniture, fixtures, office machinery and other............. 3 to 10 years
Internally developed software costs......................... 2 to 5 years
Leasehold improvements...................................... 15 to 40 years
Where different depreciation methods or lives are used for tax purposes,
deferred income taxes are recorded. The Company capitalizes purchases of
software and costs associated with internally developed software.
The carrying value of property and equipment is assessed periodically
and/or when factors indicating an impairment may be present. If an impairment is
present, the assets are reported at the lower of carrying value or fair value.
The loss on disposition of assets included in the Consolidated Statements of
Operations represents the net book value of property retired from service; in
2001, the loss resulted primarily from the September 11 disaster. Impairment of
capitalized software included in the Consolidated Statements of
F-13
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Operations represents the carrying amounts which, based on events or changes in
circumstances, management has determined are not recoverable. The impairment
loss recognized is equal to the amount by which the carrying amount exceeds the
fair value of the assets.
Expenditures for repairs and maintenance are charged to expense as
incurred. Expenditures for major renewals and betterments which significantly
extend the useful lives of existing property and equipment are capitalized and
depreciated.
GOODWILL -- Goodwill represents the excess of the purchase price over the
fair value of the net assets of the COMEX Division., As of December 31, 2002,
goodwill was $32,298,478. Prior to January 1, 2002, goodwill was being amortized
over a period of 15 years on a straight line basis. As of December 31, 2001, the
accumulated amortization relating to goodwill was $15,969,803. Effective January
1, 2002, goodwill is no longer being amortized. Instead, the value of goodwill
is measured using the impairment model. A test for impairment was made during
the fourth quarter of 2002 and no impairment was noted. The Company will perform
an impairment test during the 4th quarter every year. Prior to 2002, goodwill
was amortized on a straight-line basis over the period of expected benefit of 15
years. The measurement of possible impairment is based on the most recent sales
of COMEX Division membership interests. COMEX Division membership interests, or
"seats", are purchased from existing COMEX Division members at prevailing market
prices. These prices are established through a bid-and-ask system. There were no
impairments recognized during any of the periods presented. The following table
sets forth reported net income (loss) and earnings per share, as adjusted to
exclude goodwill amortization expense (in thousands, except per share data):
2001 2000
------ -------
Net income (loss) as reported............................... $ 680 $(2,781)
Net income (loss) as adjusted............................... 2,833 (628)
Basic earnings (loss) per share, as reported................ $ 833 $(3,408)
Basic earnings (loss) per share, as adjusted................ 3,472 (770)
INCOME TAXES -- The Company accounts for income taxes in accordance
Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting For
Income Taxes. SFAS No. 109 requires that deferred taxes be established based
upon the temporary differences between financial statement and income tax bases
of assets and liabilities using the enacted statutory rates. A valuation
allowance is recognized if it is anticipated that some or all of a deferred tax
asset may not be realized. (See Note 10.)
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS -- The Company provides certain
postretirement benefits to its employees, which are accounted for in accordance
with SFAS No. 106, Employers' Accounting for Postretirement Benefits Other than
Pensions "SFAS No. 106" requires the Company to accrue the estimated cost of
retiree benefit payments other than pensions during the employees' active
service lives. Such benefits consist principally of health care benefits. (See
Note 9.)
SEGMENT REPORTING -- Management considers operating results for two
business segments: Open Outcry and Electronic Trading and Clearing.
Open Outcry is the trading of NYMEX Division and COMEX Division futures and
options contracts on the trading floor of the Exchange. Electronic Trading and
Clearing includes transactions executed and cleared through NYMEX ACCESS(R),
NYMEX ClearPort(SM) Trading and NYMEX ClearPort(SM) Clearing. (See Note 13.)
DEFERRED CREDITS -- In 1995, the Company secured a grant of $128.7 million
from the New York City Economic Development Corporation ("EDC") and the Empire
State Development Corporation ("ESDC", formerly known as the New York State
Urban Development Corporation) for construction of corporate
F-14
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
headquarters and trading facility. The grant is being recognized in income on
the same basis as, and is a reduction to, the depreciation of the facility. (See
Note 14.)
In 2002, the Company entered into an agreement and received a $5 million
grant from the ESDC. This agreement requires the company to maintain certain
annual employment levels, and the grant is subject to recapture amounts on a
declining scale over time. The grant will be recognized in income ratably in
accordance with a recapture schedule.
MARKETING COSTS -- Marketing costs include costs incurred for producing and
communicating advertising and other marketing activities. These costs are
expensed when incurred.
EARNINGS PER SHARE -- The Company has only one type of earnings per share
calculation, basic earnings per share. In accordance with SFAS No. 128, Earnings
per Share, basic earnings per common share are based on the weighted-average
number of common shares outstanding in each year. There are no common stock
equivalents and, thus, no dilution of earnings per share.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following supplemental disclosures of cash flow information for the
years ended December 31, 2002, 2001, and 2000, respectively, are as follows:
2002 2001 2000
------ ------ ------
Dividends declared......................................... $5,000 $ -- $ --
====== ====== ======
Cash paid for:
Interest................................................. $7,477 $7,681 $7,680
====== ====== ======
Income taxes, net........................................ $1,232 $ -- $ 39
====== ====== ======
Noncash members' equity transactions -- transfer to
subordinated commitment -- members' retention program:
NYMEX Division........................................... $ -- $ -- $4,959
====== ====== ======
COMEX Division........................................... $ -- $ -- $ 803
====== ====== ======
Increase in prepaid taxes due to NYMEX MRRP tax
benefit............................................... $ -- $5,728 $ --
====== ====== ======
Increase in deferred tax asset due to COMEX MRRP tax
benefit............................................... $ -- $3,169 $ --
====== ====== ======
Transfer of short-term portion of security deposit to other
current assets........................................... $ -- $2,699 $ --
====== ====== ======
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, Goodwill and Other Intangible Assets, which supersedes Accounting
Principles Standards Board ("APB") Opinion No. 17, Intangible Assets. This
statement, effective for fiscal years beginning after December 15, 2001,
addresses, among other things, how goodwill and other intangible assets should
be accounted for after they have been initially recognized in the financial
statements. The provisions of SFAS No. 142 provide for an impairment test to be
performed at least annually rather than recording amortization. The adoption of
SFAS No. 142 had a material effect on operations. The adoption of this standard
increased annual pre-tax income by $2,153,000, or $2,638 per share, which was,
prior to 2002, the amount of annual amortization of goodwill. The Company tested
for an impairment during the fourth quarter of 2002 and no impairment was noted.
F-15
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement, effective for fiscal years beginning after June 15,
2002, requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. When the liability
is initially recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. The adoption of this statement is not expected to have an
impact on the Company's financial position or results of operation.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which requires that long-lived assets to be
disposed of by sale be measured at the lower of the carrying amount or fair
value less cost to sell, whether reported in continuing operations or in
discontinued operations to include components of entity that have been or will
be disposed of rather than limiting such discontinuance to a segment of a
business. SFAS No. 144 excludes from the definition of long-lived assets
goodwill and other intangibles that are not amortized in accordance with SFAS
No. 142. SFAS No. 144 was effective for the Company as of January 1, 2002. The
adoption of SFAS No. 144 had a material impact on our consolidated results of
operations.
In April 2002, the FASB issued SFAS No. 145, which rescinds SFAS No. 4,
Reporting Gains and Losses from Extinguishment of Debt, SFAS No. 44, Accounting
for Intangible Assets of Motor carriers, and SFAS No. 64, Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirement ("SFAS 145"). SFAS No. 145 also
amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. As a result of the rescission of SFAS
No. 64, the criteria in APB Opinion No. 30 will be used to classify gains and
losses from debt extinguishment. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meaning, or describe their applicability under changed conditions. SFAS No. 145
is effective for the Company as of January 1, 2003. The adoption of SFAS No. 145
is not expected to have a material impact on the Company's consolidated results
of operations, financial position or cash flows.
In June 2002, the FASB issued Statement No. 146, Accounting for Costs
associated with Exit or Disposal Activities, which addresses financial
accounting and reporting for costs associated with exit or disposal activities,
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring) which previously
governed the accounting treatment for restructuring activities. SFAS No. 146
applies to costs associated with an exit activity that does not involve an
entity newly acquired in a business combination or with a disposal activity
covered by SFAS No. 144. Those costs include, but are not limited to, the
following: (1) termination benefits under the terms of a benefit arrangement
that, in substance, is not an ongoing benefit arrangement or an individual
deferred-compensation contract, (2) costs to terminate a contract that is not a
capital lease, and (3) costs to consolidate facilities to relocate employees.
SFAS No. 146 does not apply to costs associated with the retirement of
long-lived assets covered by SFAS No. 143. SFAS No. 146 will be applied
prospectively and is effective for exit or disposal activities initiated after
December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("Interpretation"). This Interpretation
elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees, and standby letters of credit. It also clarifies that
at the time a company issues a guarantee, the company must recognize an initial
liability for the fair market value of the obligations it assumes under that
guarantee and must disclose that information in its interim and annual financial
statements. The initial
F-16
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recognition and measurement provisions of the Interpretation apply on a
prospective basis to guarantees issued or modified after December 31, 2002.
In October 2001, the Emerging Issues Task Force reached consensus on EITF
No. 01-10, Accounting for the Impact of the Terrorist Attacks of September 11,
2001. This statement, among other things, addresses how costs and insurance
recoveries for business affected by this event should be accounted for in the
financial statements. The provisions of EITF No. 01-10 provide guidelines for
the recording of a contingent insurance recovery. The Company adopted the
provisions of EITF No. 01-10 for the third quarter of 2001.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2001 and 2000 consolidated
financial statements to conform to the 2002 presentation.
2. COLLATERIZATION
In connection with reverse repurchase agreements, the Company receives
collateral that is held in custody by the Company's banks. At December 31, 2002
and 2001, the Company accepted collateral in the form of U.S. treasury bills
that it is permitted by contract or industry practice to sell or re-pledge,
although it is not the Company's policy to sell or re-pledge the collateral. The
fair value of such collateral at December 31, 2002 and 2001, was $40,760,000 and
$6,500,009, respectively.
3. DEMUTUALIZATION
On May 12, 2000, the Company's Form S-4 Registration Statement, with
respect to its plan to demutualize, was declared effective by the Securities and
Exchange Commission ("SEC"). The demutualization was completed on November 17,
2000. As a result, NYMEX Holdings owns all of the equity of the Exchange and
current NYMEX Division members received all of the stock of NYMEX Holdings,
while retaining their trading privileges in NYMEX Division. The previous
contract market designations of pre-demutualization New York Mercantile Exchange
were transferred to NYMEX Exchange. A favorable Internal Revenue Service letter
ruling was received on October 23, 2000 stating that there would be no adverse
tax consequences to the Company resulting from the demutualization transaction.
Expenses incurred for demutualization consisted of accounting, investment
banking, legal, printing and SEC filing fees, are shown as a separate line item
on the Consolidated Statements of Operations.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment are stated at cost, less related accumulated
depreciation and amortization of $77,855,000 at December 31, 2002 and
$62,534,000 at December 31, 2001.
PROPERTY AND EQUIPMENT (IN THOUSANDS)
DECEMBER 31, 2002 DECEMBER 31, 2001
------------------- -------------------
NET GROSS NET GROSS
-------- -------- -------- --------
Building and improvements.......................... $161,555 $179,942 $164,727 $179,770
Information system equipment....................... 26,137 58,222 25,981 55,065
Furniture, fixtures, office machinery and other.... 19,173 33,631 15,948 26,408
Internally developed software costs................ 7,542 19,583 21,471 28,672
Leasehold improvements............................. 9,471 10,355 356 1,102
-------- -------- -------- --------
$223,878 $301,733 $228,483 $291,017
======== ======== ======== ========
F-17
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Building and improvements depreciation expense is presented net of
amortization of the deferred credit related to the grant received for the
building of $2.1 million in each of 2002, 2001 and 2000.
In 2002, the Company recognized an impairment loss of $12.6 million in the
carrying value of capitalized software and computer equipment. In 2001, the
Company recognized an impairment loss of $4.3 million in the carrying value of
capitalized software and computer equipment. The Company also retired from
service capital assets with related accumulated amortization and depreciation
totaling $1.3 million and $500,000, respectively in 2001. The resulting loss of
$0.8 million was recognized in current earnings. In 2000, a similar loss of $0.8
million was recognized in earnings.
5. NOTES PAYABLE
The Company issued long-term debt totaling $100 million during 1996 and
1997 to provide completion financing for the Company's trading facility and
headquarters. This issue contained three series each with different maturities,
interest rates, and required repayment schedules. Series A notes require annual
principal repayments from 2001 to 2010, and a final payment of principal in
2011. Series B notes require annual principal repayments from 2011 to 2020, and
a final payment of principal in 2021. Series C notes require annual principal
repayments from 2022 to 2025, and a final payment of principal in 2026. The
notes represent senior unsecured obligations of the Company and are not secured
by the facility, the Company's interest therein, or any other collateral.
Notes payable consisted of the following at December 31:
2002 2001
------- -------
(IN THOUSANDS)
Private Placement Notes:
7.48%, Senior Notes, Series A, due 2011................... $25,366 $28,183
7.75%, Senior Notes, Series B, due 2021................... 54,000 54,000
7.84%, Senior Notes, Series C, due 2026................... 15,000 15,000
------- -------
94,366 97,183
Less current maturities................................... 2,815 2,815
------- -------
Long-term debt............................................ $91,551 $94,368
======= =======
Notes payable that become due during the next five years are as follows:
(IN THOUSANDS)
--------------
2003........................................................ $2,815
2004........................................................ 2,815
2005........................................................ 2,815
2006........................................................ 2,815
2007........................................................ 2,815
The Company would incur a redemption premium should it choose to pay off
any series issue prior to its maturity. The economic benefit from refinancing at
a lower interest rate would be offset by the redemption penalty incurred. These
notes contain certain limitations on the Company's ability to incur additional
indebtedness.
6. MEMBERS' RETENTION PROGRAMS
During 2000, the Company's Board of Directors voted to terminate the NYMEX
Division Members' Retention and Retirement Plan. The Company had maintained a
retention program which covered NYMEX
F-18
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Division members, based on long-term and continuous membership. The value of the
assets and related liability as of December 31, 2000 was $33.2 million. The
liability was classified as current on the Consolidated Balance Sheet at
December 31, 2001. Program commitments were recognized by a transfer from
members' equity to a subordinated commitment to the membership. For the year
ended December 31, 2000, a $3.6 million company contribution was made to this
program. This plan was terminated in October 2000 and fully liquidated in
January 2001.
The Company also maintains a retention program for members of the COMEX
Division. The annual benefit payments are $12,500 ($2,000 for options members)
for ten years for vested participants and no new participants were permitted
after the date of the merger. No payments were made prior to January 1, 2002. In
addition, under the terms of the COMEX merger agreement, the COMEX Division
program is funded at a minimum of $400,000 annually. In no event will the
Company's liability be greater than $800,000 a year. Such amounts may be reduced
if actuarial assumptions indicate that full funding can be achieved without
making the entire funding contributions indicated above. The Company funded the
COMEX program by $800,000 in 2002. Prior to the demutualization of the Company
on November 17, 2000, corporate contributions to the plan were recognized as
direct transfers from members' equity. After demutualization, corporate
contributions and related investment earnings are charged against current
operations.
All benefits to be paid under the COMEX Division program shall be based
upon reasonable actuarial assumptions which, in turn, are based upon the amounts
that are available and are expected to be available to pay benefits, except that
the benefits paid to any individual will not exceed the amounts stated above.
Quarterly distributions from the program began in the second quarter of 2002.
Subject to the foregoing, the Board of Directors of the Company reserves the
right to amend or terminate the program upon an affirmative vote of 60% of the
eligible COMEX Division plan participants.
7. DEFINED CONTRIBUTION PLAN
The Company sponsors a defined contribution plan (the "Plan") for all
eligible domestic employees. The Plan qualifies as a deferred salary arrangement
under Section 401(k) of the Internal Revenue Code. Under the Plan, participating
employees may defer up to 25% of their pre-tax earnings, subject to the annual
Internal Revenue Code contribution limit. The Company matches contributions up
to a maximum of 3% of salary. In addition, the Company makes annual
contributions ranging from 2% to 7% based upon tenure for each eligible Plan
member. Employees vest immediately in their contribution and vest in the
Company's contribution at a rate of 40% after two full years of service, and
then 20% per year until fully vested at 100% after five years of service. The
Company's total contributions to the Plan were $1.7 million, $1.7 million and
$1.8 million for the years ended December 31, 2002, 2001 and 2000, respectively.
8. DEFERRED COMPENSATION
The Company has a nonqualified deferred compensation plan (the "Deferred
Plan") for key employees to permit them to defer receipt of current compensation
in order to provide retirement benefits on behalf of such employees. The Company
may provide a matching and a regular year-end contribution to the Deferred Plan.
Matching and year-end contribution percentages follow the same guidelines as the
Company's defined contribution plan. The Deferred Plan is not intended to be a
qualified plan under the provisions of the Internal Revenue Code. It is intended
to be un-funded and, therefore, all compensation deferred under the Deferred
Plan is held by the Company and commingled with its general assets. The
participating employees are general creditors of the Company with respect to
these benefits. The Company has the right to amend, modify, or terminate the
Deferred Plan at any time.
F-19
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain health care and life insurance benefit plans
for qualifying retired employees. Substantially all of the Company's employees
may become eligible for these benefits if they reach specified age and years of
service criteria while working for the Company. The benefits are provided
through certain insurance companies. The Company expects to fund its share of
such benefit costs principally on a pay-as-you-go basis. Accrued postretirement
benefit costs are included in other non-current liabilities in the consolidated
balance sheets. The accrued postretirement obligations recorded in the balance
sheet at December 31, 2002 and 2001 exceed the amount of the accumulated
obligations, as indicated below.
The following table presents the funded status of such plans, reconciled
with amounts recognized in the Company's consolidated financial statements at
December 31 (in thousands):
2002 2001
---- ----
Change in accumulated postretirement benefit obligation:
Accumulated postretirement benefit obligation, beginning
of year.............................................. $ 5,183 $ 4,657
Service cost............................................ 428 445
Interest cost........................................... 355 352
Impact of special termination benefits.................. -- 148
Actuarial loss.......................................... 406 499
Impact of curtailment................................... -- (715)
Benefits paid........................................... (263) (203)
------- -------
Accumulated postretirement benefit obligation, end of
year................................................. $ 6,109 $ 5,183
======= =======
Funded status:
Accumulated postretirement benefit obligation, end of
year................................................. $ 6,109 $ 5,183
Unrecognized transition obligation...................... (993) (1,076)
Unrecognized prior service cost......................... 1,075 1,176
Unrecognized net gain................................... 278 703
------- -------
Accrued postretirement benefit cost, end of year........ $ 6,469 $ 5,986
======= =======
2002 2001 2000
---- ---- ----
Net periodic postretirement benefit cost consists of the
following components for the years ended December 31:
Service cost............................................ $ 428 $ 445 $ 339
Interest cost........................................... 355 352 311
Amortization of:
Transition obligation................................ 83 97 97
Prior service cost................................... (101) (119) (119)
Net gain............................................. (18) (40) (62)
------- ------- -----
Net periodic postretirement benefit cost................ 747 735 566
Special termination benefits cost....................... -- 148 --
Curtailment gain........................................ -- (732) --
------- ------- -----
Total net periodic postretirement benefit cost.......... $ 747 $ 151 $ 566
======= ======= =====
Impact of curtailment....................................... 2001
-----
Change in accumulated postretirement benefit obligation... $(715)
Recognized transition obligation.......................... 182
Recognized prior service cost............................. (199)
-----
Curtailment gain............................................ $(732)
=====
F-20
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted-average discount rates used in determining the accumulated
postretirement benefit obligation were 6.5% and 7.0% at December 31, 2002 and
2001, respectively.
The weighted-average annual assumed rates of increase in the per capita
cost to cover benefits (i.e., health care cost trend rate) is 9.0%, 9.5%, and
10.0% for 2002, 2001, and 2000, respectively, and is assumed to decrease
gradually to 5.5% by 2009 and remain level thereafter.
The following shows the impact, in thousands of dollars, of a 1% change in
the trend rate:
2002
----
1% 1%
INCREASE DECREASE
-------- --------
Effect on total of service and interest cost................ $ 2 $ (6)
Effect on accumulated postretirement benefit obligation..... $40 $(70)
POSTEMPLOYMENT BENEFITS -- The Company has certain post-employment benefit
plans covering its employees. The benefit plans provide severance, disability,
supplemental health care, life insurance or other welfare benefits. The Company
accrues the cost of certain benefits provided to former or inactive employees
during the employee's active years of service.
10. INCOME TAXES
The provision (benefit) for income taxes in the Consolidated Statements of
Operations for the years ended December 31, 2002, 2001 and 2000, respectively,
consisted of the following (in thousands):
2002 2001 2000
---- ---- ----
Current:
Federal................................................ $11,666 $(2,876) $(1,579)
State and local........................................ 4,770 112 844
------- ------- -------
16,436 (2,764) (735)
------- ------- -------
Deferred:
Federal................................................ (3,163) 3,160 (1,700)
State and local........................................ (511) 386 (705)
------- ------- -------
(3,674) 3,546 (2,405)
------- ------- -------
Total provision (benefit)...................... $12,762 $ 782 $(3,140)
======= ======= =======
Reconciliation of the statutory U.S. federal income tax rate to the
effective tax rate on income before tax is as follows:
2002 2001 2000
---- ---- ----
Statutory U.S. federal tax rate........................... 34.0% 34.0% 34.0%
State and local taxes, net of federal benefit............. 10.9% 16.9% (0.2%)
Change in estimate........................................ 6.0% 34.9% (16.2%)
Tax-exempt income......................................... (3.0%) (54.5%) 18.5%
Deferred credit amortization -- grant for building
construction............................................ (2.9%) (49.9%) 12.3%
Valuation allowance....................................... 2.3% 13.6% (2.0%)
Amortization of goodwill.................................. -- 50.1% (12.4%)
Rate change............................................... -- -- 12.4%
Member benefits........................................... -- -- 5.8%
Other, net................................................ 3.6% 8.4% 0.8%
----- ----- -----
Effective tax rate........................................ 50.9% 53.5% 53.0%
===== ===== =====
F-21
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, the components of net deferred tax assets (liabilities)
were as follows (in thousands):
2002 2001
---- ----
Current
Assets:
Accrued expenses....................................... $ 3,179 $ 1,271
Allowance for member credit adjustments................ 175 220
Unrealized loss on marketable securities............... -- 313
Other.................................................. 260 --
-------- --------
3,614 1,804
-------- --------
Liabilities:
Unrealized gains on marketable securities.............. 366 --
Insurance recovery..................................... -- 1,928
Other.................................................. 15 15
-------- --------
381 1,943
-------- --------
Total current net deferred tax assets (liabilities)......... $ 3,233 $ (139)
======== ========
Noncurrent
Assets:
Postretirement benefits................................ $ 3,374 $ 3,161
Deferred compensation.................................. 585 863
COMEX retention and retirement program................. 3,962 3,962
COMEX MRRP contribution and earnings................... 556 562
Demutualization costs.................................. 1,214 1,726
Federal net operating loss carryforwards............... 486 491
Charitable contributions carryfowards.................. 3,437 2,373
AMT credit carryforwards............................... 405 405
State and city net operating losses.................... 189 985
Other.................................................. 557 368
-------- --------
14,765 14,896
Less valuation allowance............................... (1,692) (1,110)
-------- --------
Total noncurrent deferred tax assets................... 13,073 13,786
-------- --------
Liabilities:
Capitalization of software............................. 5,194 6,016
Depreciation and amortization.......................... 17,501 17,694
-------- --------
Total noncurrent deferred tax liabilities.............. 22,695 23,710
-------- --------
Total net noncurrent deferred tax liabilities............... $ (9,622) $ (9,924)
======== ========
Management has determined that the realization of the recognized gross
deferred tax asset of $16,687,000 at December 31, 2002 is more likely than not,
based on taxable temporary differences and anticipated future taxable income.
However, if estimates of future taxable income are reduced, the amount of the
deferred tax asset considered realizable could also be reduced.
Valuation allowanceS of $1,692,000 and $1,110,000 were established in 2002
and 2001, respectively, in accordance with the provisions of SFAS No. 109. The
allowances were established due to the uncertainty of realizing certain tax
carryforwards.
F-22
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. REDUCTION-IN-WORKFORCE
In 2001, the Company implemented a reduction-in-workforce program which
eliminated 20% of the Company's staff. These employees were notified and
terminated by the end of the year. This program was adopted in an effort to
establish a more cost-efficient business structure in response to competition.
These staff reductions encompassed various professional and clerical positions
throughout the Company. Restructuring and related costs recorded in fiscal 2001
totaled $4.7 million, or $5,760 per share. The amounts paid through the end of
2002 were $4.7 million.
In 2000, the Company implemented a similar program which eliminated 10% of
the Company's staff. Restructuring and related costs recorded in fiscal year
2000 totaled $1.9 million or $2,328 per share. All benefits were paid by the end
of the year.
12. SEGREGATED AND GUARANTEE FUNDS
The Company is required under the Commodity Exchange Act to segregate cash
and securities that are deposited by clearing members at banks approved by the
Company as margin for house and customer accounts. The Company is entitled to
earn interest on certain cash balances. Only those cash balances which earn
interest that the Company is entitled to retain are included in the accompanying
consolidated financial statements.
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 and/or
COMEX). Separate and distinct Guaranty Funds, held by the Company, are
maintained for the NYMEX and COMEX Divisions. These funds may be used by the
respective divisions for any loss sustained by the Company as a result of the
failure of a clearing member to discharge their obligations. These deposits, are
used by members to meet their obligations to the Company for margin requirements
on both open futures and options positions, as well as delivery obligations in
lieu of depositing cash and/or securities. The Company invests cash deposits and
earns interest thereon. All income earned on deposits of U.S. government
securities accrue to the member firms depositing such securities.
F-23
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table below reflects segregated and guarantee fund balances
held by the Company on behalf of clearing members at December 31, 2002 and 2001,
respectively.
RESALE
CASH AGREEMENTS MONEY MARKET U.S. TREASURIES LETTERS OF CREDIT
(IN THOUSANDS) ------- ---------- ------------ --------------- -----------------
2002
-----------------------------------
NYMEX DIVISION:
Segregated....................... $ 340 $65,935 $1,434,975 $2,276,351 $247,580
Guaranty......................... -- 105 -- 79,721 --
COMEX DIVISION:
Segregated....................... -- 8,030 -- 937,310 61,150
Guaranty......................... -- 917 -- 74,437 --
------- ------- ---------- ---------- --------
Total.............................. $ 340 $74,987 $1,434,975 $3,367,819 $308,730
======= ======= ========== ========== ========
2001
-----------------------------------
NYMEX DIVISION:
Segregated....................... $17,111 25,000 $1,655,920 $1,876,773 $297,496
Guaranty......................... 105 -- -- 82,696 --
COMEX DIVISION:
Segregated....................... 865 715 -- 580,161 64,850
Guaranty......................... 2,063 896 -- 75,321 --
------- ------- ---------- ---------- --------
Total.............................. $20,144 $26,611 $1,655,920 $2,614,951 $362,346
======= ======= ========== ========== ========
13. SEGMENT REPORTING
The Company considers operating results for two business segments: Open
Outcry and Electronic Trading and Clearing.
Open Outcry is the trading and clearing of NYMEX Division and COMEX
Division futures and options contracts on the trading floor of the Exchange.
Electronic Trading and Clearing consists of NYMEX ACCESS(R), NYMEX Clearport(SM)
Trading and NYMEX Clearport(SM) Clearing.
Financial information relating to these business segments is set forth
below
ELECTRONIC
TRADING
AND
OPEN OUTCRY CLEARING TOTAL
(IN THOUSANDS) ----------- ---------- --------
Year Ended December 31, 2002:
Operating revenues........................................ $172,237 $16,967 $189,204
Operating expenses........................................ 139,931 22,471 162,402
Operating income (loss)................................... 32,306 (5,504) 26,802
Investment income......................................... 5,714 -- 5,714
Interest expense.......................................... 7,455 -- 7,455
Depreciation and amortization, net........................ 13,289 7,637 20,926
Income tax expense (benefit).............................. 15,563 (2,801) 12,762
Net income (loss)......................................... $ 15,002 $(2,703) $ 12,299
F-24
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ELECTRONIC
TRADING
AND
OPEN OUTCRY CLEARING TOTAL
(IN THOUSANDS) ----------- ---------- --------
Year Ended December 31, 2001:
Operating revenues........................................ $135,036 $ 9,245 $144,281
Operating expenses........................................ 112,402 27,398 139,800
Operating income (loss)................................... 22,634 (18,153) 4,481
Investment income......................................... 4,643 -- 4,643
Interest expense.......................................... 7,662 -- 7,662
Depreciation and amortization, net........................ 12,651 3,373 16,024
Income tax (benefit) expense.............................. 10,494 (9,712) 782
Net income (loss)......................................... $ 9,121 $(8,441) $ 680
Year Ended December 31 2000:
Operating revenues........................................ $123,953 $ 6,916 $130,869
Operating expenses........................................ 117,111 21,316 138,427
Operating income (loss)................................... 6,842 (14,400) (7,558)
Investment income......................................... 9,355 -- 9,355
Interest expense.......................................... 7,718 -- 7,718
Depreciation and amortization, net........................ 10,302 3,560 13,862
Income tax (benefit) expense.............................. 4,492 (7,632) (3,140)
Net income (loss)......................................... $ 3,987 $(6,768) $ (2,781)
14. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is involved in legal proceedings and
litigation arising in the ordinary course of business. Set forth below are
descriptions of legal proceedings and litigation to which the Company is a party
as of December 31, 2002. Although there can be no assurance as to the ultimate
outcome, the Company has denied, or believes it has a meritorious defense and
will deny liability, in all significant cases pending against it including the
matters described below, and intends to defend vigorously each such case. While
the ultimate result of the proceedings against the Company cannot be predicted
with certainty, it is the opinion of management, after consultation with outside
legal counsel, that the resolution of these matters, in excess of amounts
already recognized, will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
The Company has been named as a defendant in the following legal actions:
eSpeed, Inc. and Electronic Trading Systems Corporation. v. New York
Mercantile Exchange. This action was originally filed in the United States
District Court for the Northern District of Texas (Dallas Division) and is
now pending in United States District Court for the Southern District of
New York. NYMEX Exchange was served with a summons and complaint on or
about May 10, 1999. This is a patent infringement case, in which the
plaintiff alleges that it is the owner of United States Patent No.
4,903,201 entitled "Automated Futures Trade Exchange" and that NYMEX
Exchange is infringing this patent through use of its electronic trading
system. The plaintiff seeks an unspecified amount of royalties. On
September 15, 2000, the Court granted NYMEX Exchange's motion to sever and
transfer venue to the Southern District of New York. On August 1, 2001 the
Court granted Electronic Trading Systems Corporations motion to add eSpeed
as a plaintiff. On August 10, 2001 the Exchange made a motion to bifurcate
the issues of willfulness of infringement and damages from all other issues
in the case
F-25
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and requested a stay of discovery on the issues of willfulness and damages.
The Markman hearing was held on April 18, 2002. On June 26, 2002, the Court
issued a decision in which it construed more broadly the meaning of certain
elements of the patent claims than those constructions proposed by the
Exchange. This decision may limit the scope of the arguments that the
Exchange may have respecting non-infringement. The case is ongoing.
Enrique Rivera and Edith Rivera v. New York Mercantile Exchange, Mark
Kessloff, Les Faison, Brian Bartichek and John Does "1-10". This action is
pending in New York State Supreme Court (Bronx County). NYMEX Exchange was
served with the summons and complaint on or about April 22, 1999. This is
an ethnic discrimination case, in which the plaintiff alleges that
throughout his employment with NYMEX Exchange he was subjected to a hostile
work environment and discrimination regarding his ethnic origin. Plaintiff
seeks an unspecified amount of compensatory and punitive damages. The
plaintiff filed a Note of Issue on or about September 27, 2002 and the
parties anticipate scheduling a pre-trial conference in the near future.
New York Mercantile Exchange v. GlobalView Software, Inc. On April 27,
2001, NYMEX Exchange filed a breach of contract suit in New York State
Supreme Court (New York County) against Global View Software, Inc.
("GlobalView"). NYMEX Exchange seeks to recover direct and consequential
damages resulting from GlobalView's breach of its contract with NYMEX
Exchange regarding the front-end development for enymex(SM). On or about
June 18, 2001, GlobalView served its answer and counterclaims in which it
seeks to recover amounts in excess of $26,000,000 for alleged fees due and
owing under the contract, as well as consequential damages and other causes
of action. On June 28, 2001, NYMEX Exchange served an amended complaint on
GlobalView. On or about July 24, 2001, GlobalView filed a motion to dismiss
one cause of action in the amended complaint. The Second Amended Complaint
was served on or about November 26, 2001. GlobalView served its answer to
the Second Amended Complaint and Counterclaims on about February 14, 2002.
GlobalView asserted two additional counterclaims for tortious interference
each seeking an additional $9,000,000 in damages. On March 14, 2002, the
Exchange served its reply to the counterclaims. On January 13, 2003, the
parties participated in court-ordered mediation. The case is ongoing.
New York Mercantile Exchange v. IntercontinentalExchange, Inc. On November
20, 2002, NYMEX Exchange commenced an action in United States District
Court for the Southern District of New York against
IntercontinentalExchange, Inc. ("ICE"). The amended complaint alleges
claims for (a) copyright infringement by ICE arising out of ICE's uses of
certain NYMEX Exchange settlement prices; (b) service mark infringement by
reason of use by ICE of the service marks NYMEX and NEW YORK MERCANTILE
EXCHANGE, and (c) violation of trademark anti-dilution statutes, and (d)
interference with contractual relationships. On January 6, 2003, ICE served
an Answer and Counterclaims, in which ICE alleges five counterclaims
against NYMEX Exchange as follows: (1) a claim for purported violation of
Section 2 of the Sherman Act, 15 U.S.C. sec. 2, for NYMEX Exchange's
allegedly trying to maintain a monopoly in the execution of the North
America energy futures and expand the alleged monopoly into the execution
and clearing of North American OTC energy contracts by attempting to deny
ICE access to NYMEX Exchange Settlement Prices; (2) a claim for purported
violation of Section 1 of the Sherman Act by conspiring with certain of its
members to restrain trade by attempting to deny ICE access to NYMEX
Exchange Settlement Prices; (3) a claim for alleged violation of Section 2
of the Sherman Act by NYMEX Exchange purportedly denying ICE access to
NYMEX Exchange's Settlement Prices which are allegedly an "essential
facility"; (4) a claim for purported violation of Section 1 of the Sherman
Act and Section 3 of the Clayton Act by NYMEX Exchange allegedly tying
execution services for North American energy futures and options to
clearing services; and (5) a claim for purported violation of the Lanham
Act through false advertising with respect to certain services offered by
NYMEX Exchange and services offered by ICE. The counterclaims request
damages and trebled damages in amounts not specified yet by ICE in addition
to injunctive and
F-26
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
declaratory relief. NYMEX Exchange's response to the counterclaims was
served on February 26, 2003. NYMEX Exchange believes that the
counterclaims' allegations of violations of the antitrust laws, and the
allegations of false advertising under the Lanham Act have no merit, and
the Exchange will vigorously defend itself against the counterclaims.
The Company occupies premises under leases, including a land lease, with
various lessors which expire in 2003 through 2069. For the years ended December
31, 2002, 2001 and 2000, rental expense for the premises amounted to $3,777,242,
$2,021,245 and $2,019,950, respectively. At December 31, 2002, the Company was
obligated for future minimum rental payments for office and equipment leases
required under the non-cancelable terms of various leases as follows:
(IN THOUSANDS)
2003........................................................ $ 4,386
2004........................................................ 3,498
2005........................................................ 2,894
2006........................................................ 2,802
2007........................................................ 2,574
2008 and thereafter......................................... 11,373
-------
Total............................................. $27,527
=======
The Company leases space to tenants in its headquarters. Rents earned from
these leases were $3,966,614, $4,331,836 and $3,385,882 during 2002, 2001 and
2000, respectively.
The leases on the Company's corporate headquarters, as well as the back-up
data center, include scheduled base rent increases over the term of the lease.
The total amount of the base rent payments is being charged to expense on the
straight-line method over the term of the lease. The Company has recorded a
deferred credit to reflect the excess of rent expense over cash payments since
inception of the lease.
In 1994, the Company entered into a Letter of Intent with Battery Park City
Authority ("BPCA"), the New York City Economic Development Corporation ("EDC"),
and the Empire State Development Corporation ("ESDC," formerly called the New
York State Urban Development Corporation) to construct a new trading facility
and office building on a site in Battery Park City. By agreement dated May 18,
1995, EDC and ESDC agreed to provide funding of $128.7 million to construct the
facility. The Company is liable for liquidated damages on a declining scale,
with an initial maximum of up to $75 million, if it violates terms of the
occupancy agreement at any time prior to the 15 years from the date of
occupancy, July 7, 1997.
In May 1995, the Company signed a ground lease (expiring June 2069) with
BPCA for the site where it constructed its headquarters and trading facility.
The lease establishes payments in lieu of taxes ("PILOTs") due to New York City,
as follows: for the trading portion of the facility, PILOTs are entirely abated
for the first 20 years after occupancy; for the office portion of the facility,
PILOTs are entirely abated for one year after occupancy, at a percentage of
assessment (ranging from 25% to 92.5%) for the next 10 years and, thereafter, at
an amount equal to assessment. Sub-let space is not eligible for abatements.
In 2002, the Company entered into an agreement and received a $5 million
grant from Empire State Development Corp. This agreement requires the company to
maintain certain annual employment levels, and the grant is subject to recapture
amounts, on a declining scale, over time.
The Company and the Board of Trade of the City of New York, Inc. ("NYBOT")
entered into a lease that became effective on November 20, 2002. This lease
provides that NYBOT will lease 13,170 square feet on the COMEX Division Trading
Floor and 45,006 square feet of office space for a ten-year term. The rent
commencement date for the trading floor space is the earlier of occupancy or
July 1, 2003. The rent commencement date for the office space is the earlier of
occupancy or May 20, 2003.
F-27
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The inherent nature of the Company's business frequently gives rise to
related party transactions. The majority of the Company's shareholders,
including several members of the board of directors, frequently do business with
the Exchange. The board establishes fees and usage charges and also determines
the extent of any member rebate program.
The following are descriptions of material transactions involving the
Company and its directors:
Several of the Company's directors serve as officers or directors of
clearing member firms. These clearing member firms pay substantial fees to the
Company's clearing house in connection with services the Company provides. The
Company believes that the services provided to these clearing firms are on terms
no more favorable to those firms than terms given to unaffiliated persons.
Pioneer Futures, Inc. ("Pioneer"), of which the Chairman of the Board of
the Company is the sole shareholder, is one of the largest clearing members with
whom the Company does business. For the year ended December 31, 2002, a total of
$10,164,506 in revenue was derived from Pioneer from clearing and transaction
fees, rental income, and various other floor fees. This amount represents 5% of
the Company's total consolidated revenue.
As of December 31, 2002, Pioneer leases from NYMEX Exchange approximately
17,693 square feet of space at the Company's headquarters. Pioneer currently has
five (5) leases, the aggregate amount of rent collected from Pioneer during 2002
was $1,457,744. As of August 1, 2002, Pioneer surrendered its rights to the
following lease: 18,893 square feet expiring on June 30, 2005.
Sterling Commodities Corp. ("Sterling"), of which a director of the
Company, is the President, currently leases from NYMEX Exchange approximately
6,253 square feet of space at the One North End Avenue facility. The lease
expires on November 30, 2007. The current annual rent for this space is
$237,614. The aggregate amount of rent collected from Sterling during 2002 was
$237,291. The clearing revenues earned from Sterling were $1,661,832. The
director's father is Chief Executive Officer and 100% owner of Sterling.
Genesis 10, of which a public director of the Company is the founder and
Chief Executive Officer, is an information technology-consulting firm. This
director owns 90% of the equity interest of Genesis 10. The Company had a
written contractual relationship with Genesis 10 pursuant to which Genesis 10
provided the services of one technology development consultant, who was hired by
the Company in 2002. The Company paid approximately $173,396 to Genesis 10 for
services rendered in 2002, including a fee paid to hire this consultant.
Marketable Securities
The Company had invested $11.9 million and $10.4 million at December 31,
2002 and 2001, respectively, in fixed income securities with a major securities
firm, a senior investment officer of which is also a director of the Company.
Seat Financing Program
The Company has provided financial guarantees and pledged collateral
relating to a membership seat financing program with one of its banks. Pursuant
to this program, the member remains primarily liable for the loan that is used
to purchase an interest in NYMEX exchange. The Company's guarantee is limited to
the lesser of $500,000 or 50% of the purchase price of the membership interest,
and the Company has the right to liquidate the interest if the member defaults
on the loan. Under the program, the Company may issue guarantees totaling, in
the aggregate, up to $11 million. As of December 31, 2002, one director had a
loan balance relating to this program of $133,000.
F-28
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. DISASTER RECOVERY
On September 11, 2001, terrorists attacked the World Trade Center which
caused the closure of the Company's trading facility for four business days and
limited trading hours through the end of the year and into 2002. The Company
received an insurance recovery of $17.25 million for losses resulting from the
terrorist attacks, of which $8.6 million were reimbursements for additional
operating costs, and the remaining $8.65 million was for recovery of business
interruption insurance as a result of limited trading hours and was recorded in
other income in the consolidated statement of operations.
17. PARENT COMPANY ONLY INFORMATION
NYMEX Holdings, Inc., the registrant, has two assets, its investments in
its wholly owned subsidiaries, New York Mercantile Exchange, Inc, or NYMEX, and
Tradingear Acquisition LLC totalling $101.5 million at December 31, 2002. The
registrant has only one liability, dividends payable to shareholders in the
amount of $5 million. (See Note 1). Net income from these investments on the
equity basis of accounting amounted to $12.3 million for the year ended December
31, 2002. Other than the dividends payable to shareholders, the registrant has
no liabilities, material contingencies or guarantees. During 2002 the registrant
received no cash dividends from the New York Mercantile Exchange.
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
2002
-----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- ---------- ---------- ----------
Quarter Ended
------------------------------------------------
Trading Volumes
NYMEX Division.................................. 27,797 30,234 28,875 29,232
COMEX Division.................................. 4,063 4,773 4,318 4,398
Summarized financial data
Net revenues.................................... $ 42,689 $ 47,238 $ 45,338 $ 53,939
Income (loss) from operations................... 8,975 10,496 9,088 (1,757)
Provision (benefit) for income taxes............ 3,955 5,032 4,427 (652)
Net income (loss)............................... 3,955 5,626 4,829 (2,111)
Net income (loss) per common share.............. 4,847 6,895 5,918 (2,588)
Dividends paid per common share................. -- -- -- --
Common stock prices
High.......................................... $900,000 $1,050,000 $1,100,000 $1,300,000
Low........................................... $825,000 $ 920,000 $1,000,000 $1,000,000
F-29
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2001
-----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- ---------- ---------- ----------
Quarter Ended
---------------
Trading Volumes
NYMEX Division.................................. 20,549 23,717 20,967 23,024
COMEX Division.................................. 4,043 4,186 3,158 3,381
Summarized financial data
Net revenues.................................... $ 33,605 $ 35,806 $ 34,546 $ 40,324
(Loss) income from operations................... (1,082) (1,165) 2,638 4,090
(Benefit) provision for income taxes............ (456) (778) 985 1,031
Net (loss) income............................... (829) (1,132) 1,130 1,511
Net (loss) income per common share.............. (1,016) (1,387) 1,385 1,851
Dividends paid per common share................. -- -- -- --
Common stock prices
High.......................................... $735,000 $ 735,000 $ 750,000 $ 825,000
Low........................................... $710,000 $ 685,000 $ 750,000 $ 750,000
********
F-30
CERTIFICATIONS
I, Vincent Viola, certify that:
1. I have reviewed this annual report on Form 10-K of NYMEX Holdings,
Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Vincent Viola
Date: March 5, 2003 _________________________________
Name: Vincent Viola
Title: Chairman
I, Lewis A. Raibley, III, certify that:
1. I have reviewed this annual report on Form 10-K of NYMEX Holdings,
Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 5, 2003 /s/ Lewis A. Raibley, III
_________________________________
Name: Lewis A. Raibley, III
Title: Chief Financial Officer