S-1/A
As filed with the Securities and Exchange Commission on
July 5, 2006
Registration
No. 333-135060
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 2 to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
IntercontinentalExchange,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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6200
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58 2555 670
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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2100 RiverEdge Parkway
Suite 500
Atlanta, GA 30328
(770) 857-4700
(Address, including zip code,
and telephone number,
including area code, of
registrants principal executive offices)
Johnathan H.
Short, Esq.
General Counsel
IntercontinentalExchange,
Inc.
2100 RiverEdge Parkway
Suite 500
Atlanta, GA 30328
(770) 857-4700
(Name, address, including zip
code, and telephone number,
including area code, of agent
for service)
Copies to:
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David B. Harms, Esq.
David J. Gilberg, Esq.
Catherine M. Clarkin, Esq.
Sullivan & Cromwell LLP
125 Broad Street
New York, NY 10004
(212) 558-4000
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William F. Gorin, Esq.
Cleary Gottlieb Steen & Hamilton LLP
One Liberty Plaza
New York, NY 10006
(212) 225-2000
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this registration statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 of the Securities Act of 1933, check the following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If the delivery of the prospectus is expected to be made
pursuant to Rule 434 under the Securities Act, check the
following box. o
CALCULATION OF REGISTRATION FEE
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Proposed Maximum
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Amount of
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Title of Each Class of
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Amount to be
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Proposed Maximum Offering
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Aggregate Offering
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Registration
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Securities to be
Registered
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Registered(1)
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Price per Share(2)
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Price(2)
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Fee(2)(3)
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Common Stock, par value
$0.01 per share
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9,200,000
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$46.36
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$426,512,000
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$45,637
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(1)
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Includes 1,200,000 shares of
common stock that may be purchased by the underwriters from the
selling shareholders upon the exercise of the underwriters
option to purchase additional shares.
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(2)
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Estimated solely for the purpose of
calculating the registration fee in accordance with
Rule 457(c) under the Securities Act of 1933, as amended.
Based on the average of the high and low sales prices reported
on the New York Stock Exchange Composite Tape on June 14,
2006.
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(3)
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Previously paid.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The information in
this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement
filed with the Securities and Exchange Commission is effective.
This prospectus is not an offer to sell nor does it seek an
offer to buy these securities in any jurisdiction where the
offer or sale is not permitted.
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SUBJECT
TO COMPLETION. DATED JULY 5, 2006.
8,000,000 Shares
Common Stock
This is a public offering of common stock of
IntercontinentalExchange, Inc.
The selling shareholders are offering 7,975,000 shares in
the offering and we are offering an additional
25,000 shares. We will not receive any proceeds from the
sale of the shares being sold by the selling shareholders.
Our common stock is listed on the New York Stock Exchange under
the symbol ICE. On June 30, 2006, the last
reported sale price of our common stock on the New York Stock
Exchange was $57.94 per share.
Investing in our common stock involves significant risks. See
Risk Factors beginning on page 12 to read about
factors you should consider before buying shares of our common
stock.
Neither the Securities and Exchange Commission nor any other
regulatory body has approved or disapproved of these securities
or passed upon the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
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Per Share
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Total
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Public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds, before expenses, to
IntercontinentalExchange, Inc.
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$
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$
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Proceeds, before expenses, to the
selling shareholders
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$
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$
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To the extent that the underwriters sell more than
8,000,000 shares of our common stock, the underwriters have
the option to purchase up to an additional 1,200,000 shares
from the selling shareholders at the public offering price less
the underwriting discount.
The underwriters expect to deliver the shares of common stock in
New York, New York
on ,
2006.
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Goldman,
Sachs & Co. |
Morgan
Stanley |
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UBS
Investment Bank |
William
Blair & Company |
Sandler
ONeill + Partners, L.P. |
Societe Generale
Prospectus
dated ,
2006
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this prospectus. Before making an investment decision, you
should read the entire prospectus carefully, including the
section entitled Risk Factors and our consolidated
financial statements and related notes included elsewhere in
this prospectus. Unless otherwise indicated, the terms
IntercontinentalExchange, we,
us, our, our company and
our business refer to IntercontinentalExchange, Inc.
or IntercontinentalExchange, LLC, as applicable, together with
our consolidated subsidiaries. Due to rounding, figures in
tables may not sum exactly.
BUSINESS
Overview
We operate the leading electronic global futures and
over-the-counter,
or OTC, marketplace for trading a broad array of energy
products. Currently, we are the only marketplace to offer an
integrated electronic platform for
side-by-side
trading of energy products in both futures and OTC markets.
Through our electronic trading platform, our marketplace brings
together buyers and sellers of derivative and physical energy
commodities contracts. Our electronic platform increases the
accessibility and transparency of the energy commodities markets
and enhances the speed and quality of trade execution. The open
architecture of our business model meaning our
ability to offer centralized access to trading in regulated
futures markets and in OTC contracts on a cleared or bilateral
basis through multiple interfaces allows our
participants to optimize their trading operations and
strategies. We conduct our OTC business directly, and our
futures business through our wholly-owned subsidiary, ICE
Futures. ICE Futures is the largest energy futures exchange
outside of North America, as measured by 2005 traded contract
volumes. We also offer a variety of market data services for
both futures and OTC markets through ICE Data, our market data
subsidiary.
For the three months ended March 31, 2006,
36.6 million contracts were traded in our combined futures
and OTC markets, up 86.9% from 19.6 million contracts
traded for the three months ended March 31, 2005. For the
year ended December 31, 2005, 104.1 million contracts
were traded in our combined futures and OTC markets, up 56.5%
from 66.5 million contracts traded for the year ended
December 31, 2004. Our revenues consist of transaction
fees, market data fees and other revenues. On a consolidated
basis, for the three months ended March 31, 2006, we
generated $50.3 million in revenues (representing a 58.0%
increase compared to $31.8 million for the three months
ended March 31, 2005) and $19.7 million in net
income (representing a 121.7% increase compared to
$8.9 million for the three months ended March 31,
2005). On a consolidated basis, we generated $155.9 million
in revenues for the year ended December 31, 2005
(representing a 43.8% increase compared to $108.4 million
for the year ended December 31, 2004) and
$40.4 million in net income for the year ended
December 31, 2005 (representing a 84.1% increase compared
to $21.9 million for the year ended December 31,
2004). The financial results for the year ended
December 31, 2005 include $4.8 million in expenses
incurred relating to the closure of our open-outcry trading
floor in London and a $15.0 million settlement expense
related to a payment made to EBS Dealing Resources, Inc., or
EBS, to settle litigation.
Our
History
Our company was formed in May 2000 with the goal of developing a
platform to provide a more transparent and efficient market
structure for OTC energy commodities trading. Our predecessor
company, Continental Power Exchange, Inc., which was wholly
owned by Jeffrey C. Sprecher, our chairman and chief executive
officer, contributed to us all of its assets in May 2000, which
consisted principally of electronic trading technology, and its
liabilities, in return for a minority equity interest in our
company. In June 2001, we expanded our business into futures
trading by acquiring ICE Futures Holdings Plc (formerly known as
IPE Holdings Plc), the owner of ICE Futures (formerly known as
the International Petroleum Exchange), which, at the time, was
operated predominantly as a floor-based, open-outcry exchange.
The International Petroleum Exchange had been seeking to expand
its electronic trading capabilities since the late 1990s
following the emergence of the industry trend toward electronic
trade execution. At the time, we were seeking to expand our
product offerings and to gain access to clearing and settlement
services. Based on the complementary nature of our businesses,
we acquired the International Petroleum Exchange to develop a
leading platform for energy commodities trading that would offer
liquidity in both the futures and OTC markets. The International
Petroleum Exchange, as a regulated futures exchange, had both
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established liquidity and an established brand in global energy
markets. Prior to our acquisition of the International Petroleum
Exchange, we offered trading only in OTC markets. The
International Petroleum Exchange was formed in 1980 by a group
of energy and futures companies. The Brent Crude futures
contract, its benchmark contract, was launched in 1988.
Our
Business
Our marketplace is globally accessible, promotes price
transparency and offers participants the opportunity to trade a
variety of energy products. Our key products include contracts
based on crude or refined oil, natural gas and power. Our
derivative and physical products provide participants with a
means for managing risks associated with changes in the prices
of these commodities, asset allocation, ensuring physical
delivery of select commodity products, speculation and
arbitrage. The majority of our trading volume is financially, or
cash, settled, meaning that settlement is made through cash
payments based on the value of the underlying commodity, rather
than through physical delivery of the commodity itself.
We operate our business in three distinct markets: futures
markets, OTC markets and market data markets. We operate our
futures markets through our regulated subsidiary, ICE Futures, a
Recognized Investment Exchange based in London, which gained
recognition from the Financial Services Authority, the
regulatory authority that governs, among other things,
commodities futures exchanges in the United Kingdom, in
accordance with the terms of the Financial Services and Markets
Act of 2000. Futures markets offer trading in standardized
derivative contracts and OTC markets offer trading in
over-the-counter,
or off-exchange, derivative contracts, including contracts that
provide for the physical delivery of an underlying commodity and
contracts that provide for financial settlement based on the
prices of underlying commodities. All futures and cleared OTC
contracts are cleared through a central clearinghouse. We offer
OTC contracts that can be traded on a bilateral basis and
certain OTC contracts that can be traded on a cleared basis.
Bilateral contracts are settled between counterparties, while
cleared contracts are novated to a clearinghouse, where they are
marked to market and margined daily before final settlement at
expiration. We do not take proprietary trading positions in
derivatives contracts on commodities and other financial
instruments in our markets. We also offer a variety of market
data services for both futures and OTC markets through ICE Data,
our market data subsidiary.
We operate our futures and OTC markets exclusively on our
electronic platform. We believe that electronic trading offers
substantial benefits to our market participants. In contrast to
alternate means of trade execution, such as telephones and
trading floors, market participants executing trades
electronically on our platform are able to achieve price
improvement and cost efficiencies through greater transparency
and firm posted prices, reduce trading errors and eliminate the
need for market intermediaries. In addition to trade execution,
our electronic platform offers a comprehensive suite of
trading-related services, including electronic trade
confirmation, access to clearing services and risk management
functionality. Our trading-related services are designed to
support the trading operations of our participants. Through our
electronic platform, we facilitate straight-through processing
of trades, with the goal of providing seamless integration of
front-, back- and mid-office trading activities.
Our
Competitive Strengths
We have established ourselves as the leading electronic
marketplace for combined global futures and OTC energy
commodities trading by leveraging a number of key strengths,
including:
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highly liquid global markets and benchmark contracts;
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leading electronic energy trading platform;
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integrated access to futures and OTC markets;
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highly scalable, proven technology infrastructure;
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transparency and independence; and
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strong value proposition.
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Highly
Liquid Global Markets and Benchmark Contracts
We offer liquid markets in a number of the most actively traded
global energy commodities products. We operate the leading
market for trading in Brent crude futures, as measured by the
volume of contracts traded in 2005.
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The ICE Brent Crude futures contract that is listed by ICE
Futures is a leading benchmark for pricing light, sweet crude
oil produced and consumed outside of the United States.
Similarly, the ICE Gas Oil futures contract is a leading
benchmark for the pricing of a range of refined oil products
outside the United States. We also operate the leading market
for trading in cleared OTC Henry Hub natural gas contracts, with
13.9 million contracts traded for the three months ended
March 31, 2006 and 42.8 million contracts traded for
the year ended December 31, 2005, compared to
3.6 million and 10.4 million cleared OTC Henry Hub
natural gas contracts traded by our nearest competitor during
the same periods. The Henry Hub natural gas market is the most
liquid natural gas market in North America. We believe that our
introduction of cleared OTC products has enabled us to attract
significant liquidity in the OTC markets we operate.
Leading
Electronic Energy Trading Platform
Our leading electronic trading platform provides centralized and
direct access to trade execution for a variety of energy
products. We operate our futures and OTC markets exclusively on
our electronic platform. Our electronic platform has enabled us
to attract significant liquidity from traditional market
participants as well as new market entrants seeking the
efficiencies and ease of execution offered by electronic
trading. We have developed a significant global presence with
thousands of active screens at over 1,000 OTC participant firms
and over 450 futures participant firms as of March 31,
2006.
Integrated
Access to Futures and OTC Markets
We attribute the growth in our business in part to our ability
to offer qualified market participants integrated access to
futures and OTC markets. Our integrated and electronic business
model allows us to respond rapidly to our participants
needs, changing market conditions and evolving trends in the
markets for energy commodities trading by introducing new
products, functionality and increased access for energy market
participants.
Highly
Scalable, Proven Technology Infrastructure
Our electronic trading platform provides rapid trade execution
and is, we believe, one of the worlds most flexible,
efficient and secure systems for commodities trading. We have
designed our platform to be highly
scalable meaning that we can expand capacity
and add new products and functionality efficiently at relatively
low cost and without disruption to our markets. Our platform can
also be adapted and leveraged for use in other markets, as
demonstrated by the decision of the Chicago Climate Exchange to
operate its emissions-trading market on our platform. We believe
that our commitment to investing in technology to enhance our
platform will continue to contribute to the growth and
development of our business.
Transparency
and Independence
We offer market participants price transparency, meaning a
complete view of the depth and liquidity of our markets and
transactional data, through our electronic platform. This is in
contrast to the lack of transparency of traditional open-outcry
exchanges and voice-brokered markets. All orders placed on our
platform are executed in the order in which they are received,
ensuring that all participants have equal execution priority. In
addition, our transparent electronic markets facilitate
regulation through increased market visibility, and our systems
generate and maintain complete and confidential records of all
transactions executed in our markets.
Our board of directors is structured to be independent from our
participants and trading activity on our electronic platform,
which allows our board to act impartially in making decisions
affecting trading activity. In contrast, many of our competitors
are governed by their members or other market participants. We
believe that our governance structure promotes shareholder value
and the operation of fair and efficient markets. We also believe
that it provides us with greater flexibility to introduce new
products and services, and to evaluate and pursue growth
opportunities while ensuring impartial treatment for our
participants. In addition, we do not participate as a principal
in any trading activities, which allows us to avoid potential
conflicts of interest that could arise from engaging in trading
activities while operating our marketplace.
Strong
Value Proposition
We believe that, by using our electronic platform, market
participants benefit from price transparency and can achieve
price improvement over alternate means of trading. Electronic
trade execution offers time and cost efficiencies by providing
firm posted prices and reducing trade-processing errors and back
office overhead, and
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allows us to accelerate the introduction of new products on our
platform. The combination of electronic trade execution and
integrated trading and market data services facilitates
automation by our participants of all phases of trade execution
and processing from front-office to back-office, and ranging
from trading and risk management to trade settlement. In
addition, in our futures business, eligible participants who
become members may trade directly in our markets by paying a
maximum annual membership fee of approximately $11,000 per
year. In contrast, on the New York Mercantile Exchange, or
NYMEX, which is our principal competitor, participants are
required to purchase a seat on the exchange before
they are eligible to trade directly on or gain membership in the
exchange, the cost of which is substantial (approximately
$1.2 million based on a June 6, 2006 NYMEX seat sale
price). While a seat conveys a right of ownership
and other benefits to its member, it poses a significant barrier
to gaining direct access to certain futures exchange markets
that are owned by members.
Selected
Risk Factors
We face risks in operating our business, including risks that
may prevent us from achieving our business objectives or that
may adversely affect our business, financial condition and
operating results. You should consider these risks before
investing in our company. Risks to our business include:
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Competition. We face intense competition from
exchanges, voice brokers and other electronic platforms, some of
which are larger than we are and have greater financial
resources, broader product offerings, more participants, less
regulation and longer operating histories. Competition in the
market for commodities trading could increase if new electronic
trading platforms or futures exchanges are established, or if
existing platforms or exchanges that currently do not trade
energy commodities products decide to do so. NYMEX announced in
April 2006 that it had entered into a definitive technology
services agreement with the Chicago Mercantile Exchange, or CME,
pursuant to which CME, through CME Globex, will become the
exclusive electronic trading services provider for NYMEXs
energy futures and options contracts. Our business depends on
our ability to compete successfully.
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Dependence on Trading Volumes, Market Liquidity and Price
Volatility. Our business is primarily
transaction-based, and declines in trading volumes and market
liquidity will adversely affect our profitability. Trading
volume is driven primarily by the degree of
volatility the magnitude and frequency of
fluctuations in prices of commodities. In
particular, our revenues depend heavily on trading volumes in
the markets for our ICE Brent Crude and ICE Gas Oil futures
contracts and our OTC North American natural gas and power
contracts, which represent a significant percentage of our
revenues.
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Dependence on LCH.Clearnet. We currently do
not own our own clearinghouse and must rely on LCH.Clearnet to
provide clearing services to trade futures and cleared OTC
contracts in our markets. We cannot continue to operate our
futures markets or offer cleared OTC contracts without clearing
services.
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Regulation. We operate our OTC markets in the
United States as an exempt commercial market under the Commodity
Exchange Act, and we operate our futures markets through a
regulated Recognized Investment Exchange subject to regulation
by the United Kingdoms Financial Services Authority, or
FSA. In the United States, our futures products are not
regulated by the Commodity Futures Trading Commission, or CFTC,
and are offered to customers pursuant to a series of CFTC
no-action letters. Recently, the CFTC announced that it intends
to re-examine its use of the no-action letter process and held a
public hearing on June 27, 2006 to consider what
constitutes a foreign board of trade that is not subject to CFTC
jurisdiction and regulation. Our ability to offer new futures
products under our existing no-action relief could be impacted
by the pendency of the CFTCs policy review and any actions
taken by the CFTC as a result of its policy review. We cannot
predict what level of additional regulation our futures business
and futures products may be subjected to as a result of this
CFTC policy review. If we are unable to offer additional
products, or if our offerings of products are subject to
additional regulatory constraints, our business could be
adversely affected. In addition, our failure to comply with
existing regulatory requirements, and possible future changes in
these requirements, could adversely affect our business.
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Litigation. We are subject, from time to time,
to claims that we are infringing on the intellectual property
rights of others, which can result in litigation. For example,
our principal competitor, NYMEX, filed suit against us alleging
we infringed its intellectual property rights. Our motion for
summary judgment was granted by the federal district court in
September 2005, and on October 13, 2005, NYMEX filed a
notice of
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appeal. If NYMEX is successful in its appeal and the matter is
determined adversely to us after a trial, our business would be
materially and adversely affected. Unfavorable outcomes of
litigation could adversely affect our business.
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For a discussion of the significant risks associated with
operating our business, our industry or investing in our common
stock, you should read the section entitled Risk
Factors beginning on page 12 of this prospectus.
Our
Growth Strategy
We seek to advance our leadership position by focusing our
efforts on the following key strategies for growth:
Attract
New Market Participants
In recent years, our participant base has expanded and
diversified due to the emergence of new participants in the
energy commodities markets. These new participants range from
producers and consumers of commodities to financial services
companies, such as investment banks, hedge funds, proprietary
trading firms and asset managers that are increasingly seeking
hedging, trading and risk management strategies within the
energy sector. Many of these participants have been attracted to
the energy markets in part due to the availability of electronic
trading. We intend to continue to expand our participant base by
targeting these and other new market participants and by
offering electronic trade execution and processing capabilities
that meet the risk management requirements of a broad range of
market participants.
Increase
Connectivity to Our Marketplace
Our participants may access our electronic platform for trading
in our futures markets through our own Internet-based front-end
or through the front-end systems developed by any of 12
independent software vendors. These represent a substantial
portion of the independent software vendors that serve the
commodities futures markets. Furthermore, participants in our
futures markets can access our platform directly through their
own proprietary interfaces or through a number of member
brokerage firms. Qualified participants may access our OTC
markets through our Internet-based front-end or, in the case of
some of our most liquid markets, through a recognized
independent software vendor. We intend to extend our initiatives
in this area by continuing to establish multiple points of
access with our existing and prospective market participants.
Expand
Our Market Data Business
We will continue to leverage the value of the market data
derived from our trade execution, clearing and confirmation
system by developing enhancements to our existing information
services and creating new market data products. We also publish
daily transaction-based indices for the North American spot
natural gas and power markets based on data collected from
trading activity on our platform. In addition, we sell real-time
and historical futures quotes and other futures market data
through over 40 data vendors that distribute this information,
directly and through various sub-vendors, to tens of thousands
of subscribers around the world. We believe that the database of
information generated by our platform serves as the single
largest repository of energy market data. As a result of the
breadth of our global data offerings, we believe that we are
well positioned to meet the growing demand for increased
availability of energy market data.
Develop
New Trading Products and Services
We continually develop and launch new products designed to meet
market demand and the needs of our participants. In February
2006, we successfully launched the ICE West Texas Intermediate,
or WTI, Crude futures contract. The addition of WTI crude
futures to ICE Futures suite of energy futures and options
contracts brings the worlds two most significant light,
sweet crude oil benchmarks together on our trading platform. WTI
is the leading benchmark for crude prices in the United States,
and Brent is the leading benchmark for pricing crude and refined
products produced and consumed outside of the United States. The
ICE WTI Crude futures contract has achieved significant volumes
since its launch in February 2006, reaching a record high of
157,009 contracts traded on May 9, 2006 out of a record
total of 451,308 futures contracts traded on our platform on
that date. In February 2006, we announced plans to introduce
more than 50 additional cleared contracts on our OTC markets in
2006. To date, we have launched over 40 of these planned cleared
contracts. We have also launched two new cash-settled futures
products, the ICE New York Harbor Unleaded Gasoline Blendstock,
or RBOB, futures contract and the ICE New York Harbor Heating
Oil futures contract.
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Pursue
Select Strategic Opportunities
We are actively exploring and evaluating strategic acquisitions
and alliances to strengthen our current business and grow our
company. We intend to pursue strategic transactions and may
acquire other businesses, products or technologies to expand our
products and services, advance our technology or take advantage
of new developments and potential changes in our industry.
Strategic transactions may involve acquiring or making a
strategic investment in an existing clearinghouse to provide
services directly to participants in our futures and OTC markets
or establishing our own clearinghouse, or acquiring or entering
into agreements with businesses complementary to our market data
business or businesses that offer risk management or other
complementary services. Any such transactions could happen at
any time, could be material to our business and could take any
number of forms. There are risks associated with such
transactions, including risks associated with the level of
required financing, the impact on our stock price and the
demands on our management.
Recent
Developments
Subject to final review and closing of our quarterly financials,
we expect to report the following revenues. For the three months
ended June 30, 2006, we expect to report consolidated
revenues of approximately $73.3 million, compared to
$37.5 million reported for the same period in 2005. In our
futures business segment, we expect to report approximately
$29.4 million in transaction fee revenues for this period
compared to $13.9 million reported for the same period in
2005. In our OTC business segment, we expect to report
approximately $34.1 million in transaction fee revenues for this
period compared to $19.2 million reported for the same
period in 2005. We expect to report approximately
$8.7 million in consolidated market data fee revenues for
this period compared to $3.5 million reported for the same
period in 2005. Our revenue growth is due principally to
increased volumes in our futures and OTC markets.
During April, May and June 2006 and 2005, we reported the
following volume and commission levels in our futures and OTC
markets, respectively:
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|
|
|
|
|
|
ICE Futures Average
|
|
|
ICE Futures Total Volume
|
|
|
ICE OTC Average Daily
|
|
|
|
Daily Volume
(Contracts)
|
|
|
(Contracts)
|
|
|
Commissions
|
|
|
June 2006
|
|
|
353,058
|
|
|
|
7,767,267
|
|
|
$
|
507,647
|
|
June 2005
|
|
|
172,665
|
|
|
|
3,798,639
|
|
|
$
|
339,446
|
|
Year-over-Year
Increase
|
|
|
104.5
|
%
|
|
|
104.5
|
%
|
|
|
49.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 2006
|
|
|
338,792
|
|
|
|
7,453,433
|
|
|
$
|
583,537
|
|
May 2005
|
|
|
159,242
|
|
|
|
3,184,846
|
|
|
$
|
262,538
|
|
Year-over-Year
Increase
|
|
|
112.8
|
%
|
|
|
134.0
|
%
|
|
|
122.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 2006
|
|
|
305,285
|
|
|
|
5,800,412
|
|
|
$
|
483,343
|
|
April 2005
|
|
|
136,897
|
|
|
|
2,874,836
|
|
|
$
|
275,649
|
|
Year-over-Year
Increase
|
|
|
123.0
|
%
|
|
|
101.8
|
%
|
|
|
75.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April to June 2006
|
|
|
333,668
|
|
|
|
21,021,112
|
|
|
$
|
526,824
|
|
April to June 2005
|
|
|
156,481
|
|
|
|
9,858,321
|
|
|
$
|
293,277
|
|
Year-over-Year
Increase
|
|
|
113.2
|
%
|
|
|
113.2
|
%
|
|
|
79.6
|
%
|
You may contact us at our principal executive offices, located
at 2100 RiverEdge Parkway, Suite 500, Atlanta, Georgia
30328, or by telephone at
(770) 857-4700.
You may find us on the Internet at www.theice.com. Information
contained on our website does not constitute a part of this
prospectus. We have included our website address only as an
inactive textual reference and do not intend it to be an active
link to our website.
6
The
Offering
|
|
|
Common stock offered by us
|
|
25,000 shares |
|
Common stock offered by the selling shareholders
|
|
7,975,000 shares(1) |
|
Total common stock offered |
|
8,000,000 shares(1) |
|
Common stock to be outstanding after the offering
|
|
55,588,696 shares(1)(2) |
|
|
|
Use of proceeds
|
|
We intend to use the net proceeds to pay our costs and expenses
associated with conducting this offering. We will not receive
any proceeds from the sale of common stock by the selling
shareholders. |
|
|
|
Voting rights |
|
The holders of our common stock are entitled to one vote per
share on all matters submitted to a vote of our common
shareholders. |
|
Dividends |
|
We do not anticipate paying any cash dividends in the
foreseeable future. |
|
New York Stock Exchange symbol |
|
ICE |
|
Risk Factors |
|
Please read Risk Factors and other information
included in this prospectus for a discussion of factors you
should carefully consider before deciding to invest in our
common stock. |
The number of shares of our common stock to be outstanding after
this offering, as set forth above and elsewhere in this
prospectus, unless otherwise specified, is based on
55,563,696 shares of our common stock outstanding as of
March 31, 2006. This number of shares of common stock to be
outstanding excludes:
|
|
|
|
|
4,594,392 shares of our common stock reserved for issuance
upon the exercise of options under our 2000 Stock Option
Plan, subject to outstanding options as of March 31, 2006,
at a weighted average exercise price of $9.53 per share,
and 402,424 shares of common stock available for future
issuance under such plan;
|
|
|
|
1,446,674 shares of our common stock reserved for issuance
under our 2004 Restricted Stock Plan, subject to outstanding
grants as of March 31, 2006, and 28,326 shares of
common stock available for future issuance under such plan;
|
|
|
|
150,184 shares of our common stock reserved for issuance
under our 2005 Equity Incentive Plan, subject to outstanding
grants as of March 31, 2006, and 1,974,816 shares of
common stock available for future issuance under such
plan; and
|
|
|
|
24,865 shares of our common stock reserved for issuance
under our 2003 Restricted Stock Deferral Plan for Outside
Directors, subject to outstanding grants as of March 31,
2006, and 225,135 shares of common stock available for
future issuance under such plan.
|
|
|
|
(1) |
|
Does not include 1,200,000 shares of common stock that may
be sold by the selling shareholders if the underwriters choose
to exercise in full their option to purchase additional shares.
See Underwriting. Unless otherwise indicated, the
information contained in this prospectus assumes that the
underwriters option to purchase additional shares is not
exercised. |
|
|
|
(2) |
|
Includes 55,585,485 shares of common stock, no shares
of Class A Common Stock, Series 1, or
Class A1 shares, and 3,211 shares of Class A
Common Stock, Series 2, or Class A2 shares. In
connection with our initial public offering, we effected a
recapitalization, pursuant to which we created a new class of
common stock and granted holders of our
Class A1 shares and Class A2 shares the
right to convert their Class A shares into an equal number
of shares of new common stock. All of the Class A1 shares have
been converted into shares of new common stock. In this
prospectus, common stock refers to shares of new
common stock, Class A common stock, or both, as the context
may require. See
Organization Recapitalization. |
7
Summary
Consolidated Financial Data
The following tables present our summary consolidated financial
data as of and for the dates and periods indicated. We derived
the summary consolidated financial data set forth below for the
three months ended March 31, 2006 and 2005 and as of
March 31, 2006 from our unaudited consolidated financial
statements that are included elsewhere in this prospectus. We
derived the summary consolidated financial data set forth below
for the years ended December 31, 2005, 2004 and 2003 and as
of December 31, 2005 and 2004 from our audited consolidated
financial statements, which have been audited by
Ernst & Young LLP, independent registered public
accounting firm, and are included elsewhere in this prospectus.
The summary consolidated financial data presented below is not
indicative of our results for any future period. In
managements opinion, the unaudited information has been
prepared on substantially the same basis as the consolidated
financial statements appearing elsewhere in this prospectus and
includes all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the unaudited
consolidated data. The summary consolidated financial data set
forth below should be read in conjunction with our consolidated
financial statements and related notes and
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except for share
and per share data)
|
|
|
Consolidated Statement of
Income/(Loss) Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction fees, net(2)
|
|
$
|
43,235
|
|
|
$
|
27,085
|
|
|
$
|
136,976
|
|
|
$
|
90,906
|
|
|
$
|
81,434
|
|
Market data fees
|
|
|
6,022
|
|
|
|
3,482
|
|
|
|
14,642
|
|
|
|
12,290
|
|
|
|
9,624
|
|
Other
|
|
|
1,025
|
|
|
|
1,261
|
|
|
|
4,247
|
|
|
|
5,218
|
|
|
|
2,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
50,282
|
|
|
|
31,828
|
|
|
|
155,865
|
|
|
|
108,414
|
|
|
|
93,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
10,617
|
|
|
|
7,886
|
|
|
|
35,753
|
|
|
|
30,074
|
|
|
|
26,236
|
|
Professional services
|
|
|
2,690
|
|
|
|
3,200
|
|
|
|
10,124
|
|
|
|
12,312
|
|
|
|
13,066
|
|
Selling, general and administrative
|
|
|
6,134
|
|
|
|
4,376
|
|
|
|
18,886
|
|
|
|
16,610
|
|
|
|
16,185
|
|
Floor closure costs(3)
|
|
|
|
|
|
|
|
|
|
|
4,814
|
|
|
|
|
|
|
|
|
|
Settlement expense(4)
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,188
|
|
|
|
3,958
|
|
|
|
15,083
|
|
|
|
17,024
|
|
|
|
19,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
22,629
|
|
|
|
19,420
|
|
|
|
99,660
|
|
|
|
76,020
|
|
|
|
74,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
27,653
|
|
|
|
12,408
|
|
|
|
56,205
|
|
|
|
32,394
|
|
|
|
18,918
|
|
Other income, net
|
|
|
1,108
|
|
|
|
992
|
|
|
|
3,790
|
|
|
|
1,328
|
|
|
|
948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
28,761
|
|
|
|
13,400
|
|
|
|
59,995
|
|
|
|
33,722
|
|
|
|
19,866
|
|
Income tax expense
|
|
|
9,097
|
|
|
|
4,530
|
|
|
|
19,585
|
|
|
|
11,773
|
|
|
|
6,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(5)
|
|
$
|
19,664
|
|
|
$
|
8,870
|
|
|
$
|
40,410
|
|
|
$
|
21,949
|
|
|
$
|
13,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption adjustments to
redeemable stock put(6)
|
|
|
|
|
|
|
|
|
|
|
(61,319
|
)
|
|
|
|
|
|
|
8,378
|
|
Deduction for accretion of
Class B redeemable common stock(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to
common shareholders
|
|
$
|
19,664
|
|
|
$
|
8,870
|
|
|
$
|
(20,909
|
)
|
|
$
|
21,949
|
|
|
$
|
19,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except for share
and per share data)
|
|
|
Earnings (loss) per common
share(8):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.35
|
|
|
$
|
0.17
|
|
|
$
|
(0.39
|
)
|
|
$
|
0.42
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.33
|
|
|
$
|
0.17
|
|
|
$
|
(0.39
|
)
|
|
$
|
0.41
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding(8):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
55,532,693
|
|
|
|
52,866,295
|
|
|
|
53,217,874
|
|
|
|
52,865,108
|
|
|
|
54,328,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
58,972,248
|
|
|
|
53,063,138
|
|
|
|
53,217,874
|
|
|
|
53,062,078
|
|
|
|
54,639,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes revenues from related parties generated in the ordinary
course of our business. For a presentation and discussion of our
revenues attributable to related parties for the three months
ended March 31, 2006 and 2005 and for the years ended
December 31, 2005, 2004 and 2003, see our consolidated
statements of income and note 13 to our consolidated
financial statements that are included elsewhere in this
prospectus. |
|
(2) |
|
Our transaction fees are presented net of rebates. For a
discussion of these rebates, see Managements
Discussion and Analysis of Financial Condition and Results of
Operations Sources of
Revenues Transaction Fees included
elsewhere in this prospectus. |
|
(3) |
|
In April 2005, we closed our open-outcry trading floor in London
to take advantage of increasing acceptance and adoption of
electronic trading, and to maintain and enhance our competitive
position. Costs associated with the floor closure were
$4.8 million and are classified as Floor closure
costs in the accompanying consolidated statement of income
for the year ended December 31, 2005. Floor closure costs
include lease terminations for the building where the floor was
located, payments made to 18 employees who were terminated as a
result of the closure, contract terminations, legal costs, asset
impairment and other associated costs. No floor closure costs
were incurred in prior periods and no additional closure costs
are expected to be incurred. See note 18 to our
consolidated financial statements that are included elsewhere in
this prospectus. |
|
(4) |
|
In September 2005, we settled the legal action brought by EBS
related to alleged patent infringement. Under the settlement
agreement, we made a payment to EBS of $15.0 million, and
were released from the legal claims brought against us without
admitting liability. The payment was recorded as
Settlement expense in the accompanying consolidated
statement of income for the year ended December 31, 2005.
See note 17 to our consolidated financial statements that
are included elsewhere in this prospectus. |
|
(5) |
|
The financial results for the year ended December 31, 2005
include $4.8 million in expenses incurred relating to the
closure of our open-outcry trading floor in London and a
$15.0 million settlement expense related to the payment
made to EBS to settle litigation. |
|
(6) |
|
In connection with our formation, we granted a put option to
Continental Power Exchange, Inc., an entity controlled by our
chairman and chief executive officer, Jeffrey C. Sprecher. The
put option would have required us under certain circumstances to
purchase Continental Power Exchange, Inc.s equity interest
in our business at a purchase price equal to the greater of the
fair market value of the equity interest or $5 million. We
initially recorded the redeemable stock put at the minimum
$5 million redemption threshold. We adjusted the redeemable
stock put to its redemption amount at each subsequent balance
sheet date. Adjustments to the redemption amount were recorded
to retained earnings or, in the absence of positive retained
earnings, additional paid-in capital. In October 2005, we
entered into an agreement with Continental Power Exchange, Inc.
to terminate the redeemable stock put upon the closing of our
initial public offering of common stock in November 2005. We
increased the redeemable stock put by $61.3 million during
the year ended December 31, 2005 to reflect an increase in
the estimated fair value of our common stock from $8.00 per
share as of December 31, 2004 to $35.90 per share as
of November 21, 2005, the closing date of our initial
public offering of common stock and the termination date of the
redeemable stock put. The balance of the redeemable stock put on
November 21, 2005 was $78.9 million and was
reclassified to additional paid-in capital upon its termination.
See note 10 to our consolidated financial statements that
are included elsewhere in this prospectus. In |
9
|
|
|
|
|
connection with the termination of the put option, we amended
certain registration rights previously granted to Continental
Power Exchange, Inc. pursuant to which we may be obligated to
pay the expenses of registration, including underwriting
discounts up to a maximum of $4.5 million. |
|
(7) |
|
We redeemed all of our Class B redeemable common stock on
November 23, 2004 at a price of $23.58 per share,
for aggregate consideration of $67.5 million. Upon its
issuance on June 18, 2001, we recorded our Class B
redeemable common stock at its discounted present value of
$60.2 million. We recorded charges to retained earnings for
the accretion of this amount up to the $67.5 million
redemption value of our Class B redeemable common stock
over a two-year period ending in June 2003, which was the
earliest potential redemption date. |
|
(8) |
|
The impact of outstanding stock options is considered to be
antidilutive in the calculation of diluted earnings per share
when a net loss available to common shareholders is reported.
Our outstanding stock options have not been included in the
computation of diluted loss per share for the year ended
December 31, 2005 due to the $20.9 million net loss
available to common shareholders as a result of the
$61.3 million charged to retained earnings related to the
redeemable stock put adjustments. Therefore, our diluted loss
per share is computed in the same manner as basic loss per share
for the year ended December 31, 2005. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
As of
December 31,
|
|
|
|
2006(1)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents(2)
|
|
$
|
8,602
|
|
|
$
|
8,198
|
|
|
$
|
20,002
|
|
|
$
|
61,199
|
|
Restricted cash
|
|
|
12,942
|
|
|
|
12,942
|
|
|
|
12,578
|
|
|
|
18,421
|
|
Short-term investments(2)
|
|
|
133,893
|
|
|
|
133,893
|
|
|
|
111,181
|
|
|
|
5,700
|
|
Total current assets
|
|
|
182,339
|
|
|
|
181,935
|
|
|
|
164,015
|
|
|
|
100,042
|
|
Long-term investments(3)
|
|
|
8,618
|
|
|
|
8,618
|
|
|
|
2,296
|
|
|
|
|
|
Total assets
|
|
|
292,100
|
|
|
|
291,696
|
|
|
|
265,770
|
|
|
|
207,518
|
|
Total current liabilities
|
|
|
28,249
|
|
|
|
28,249
|
|
|
|
26,394
|
|
|
|
34,440
|
|
Revolving credit facility(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
Redeemable stock put(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,582
|
|
Shareholders equity
|
|
|
257,065
|
|
|
|
256,661
|
|
|
|
232,623
|
|
|
|
132,149
|
|
|
|
|
(1) |
|
As adjusted to reflect the sale of shares of our common stock in
this offering at an assumed offering price of $57.94 per
share (the last reported sale price of our common stock on the
New York Stock Exchange on June 30, 2006), after deducting
the underwriting discount and our estimated expenses in this
offering. |
|
|
|
(2) |
|
We received net proceeds from our initial public offering of our
common stock in November 2005 of $60.8 million, after
deducting the underwriting discount. We used a portion of these
net proceeds to repay all outstanding borrowings under our
$25.0 million revolving credit facility. We also invested a
portion of our cash in excess of short-term operating needs in
investment-grade marketable debt securities and municipal bonds. |
|
(3) |
|
Represents
available-for-sale
investments that we intend to hold for more than one year
pursuant to our cash investment policy. See note 4 to our
consolidated financial statements that are included elsewhere in
this prospectus. |
|
(4) |
|
In October 2005, we entered into an agreement with Continental
Power Exchange, Inc. to cancel the redeemable stock put upon the
closing of the initial public offering of our common stock in
November 2005. See note 10 to our consolidated financial
statements that are included elsewhere in this prospectus. |
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our total average daily exchange
fee and commission fee revenues(1)
|
|
$
|
677
|
|
|
$
|
438
|
|
|
$
|
538
|
|
|
$
|
353
|
|
|
$
|
294
|
|
Our Trading Volume(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures volume
|
|
|
16,659
|
|
|
|
8,739
|
|
|
|
42,055
|
|
|
|
35,541
|
|
|
|
33,341
|
|
Futures average daily volume
|
|
|
260
|
|
|
|
143
|
|
|
|
166
|
|
|
|
140
|
|
|
|
132
|
|
OTC volume
|
|
|
19,970
|
|
|
|
10,859
|
|
|
|
61,999
|
|
|
|
30,961
|
|
|
|
24,260
|
|
OTC average daily volume
|
|
|
322
|
|
|
|
178
|
|
|
|
247
|
|
|
|
123
|
|
|
|
97
|
|
|
|
|
(1) |
|
Represents the total exchange fee and commission fee revenues
for the period divided by the number of trading days during the
period. |
|
(2) |
|
Volume is calculated based on the number of contracts traded in
our markets, which is the number of round turn trades. Each
round turn trade represents a matched buy and sell order of one
contract. Average daily volume represents the total volume, in
contracts, for the period divided by the number of trading days
during that period. |
11
RISK
FACTORS
The purchase of our common stock involves significant
investment risks. The risks described below comprise the
material risks of which we are aware. You should consider these
risks carefully before making a decision to invest in our common
stock. In addition, there may be risks of which we are currently
unaware, or that we currently regard as immaterial based on the
information available to us, that later prove to be material.
These risks may adversely affect our business, financial
condition and operating results. As a result, the trading price
of our common stock could decline, and you could lose some or
all of your investment.
Risks
Relating to Our Business
We
face intense competition from regulated exchanges, voice brokers
and other electronic platforms, which could adversely affect our
business. If we are not able to compete successfully, our
business will not survive.
The market for commodities trading facilities is highly
competitive and we expect competition to intensify in the
future. Our current and prospective competitors, both
domestically and internationally, are numerous.
Our principal competitor, the New York Mercantile Exchange,
Inc., or NYMEX, is a regulated, predominantly open-outcry
futures exchange that offers trading in futures products and
options on those futures in the crude oil, gas and metals
markets, among other commodities markets. NYMEX has also
established two electronic platforms: NYMEX Access and
ClearPort, although NYMEX recently entered into an agreement
with the Chicago Mercantile Exchange, or CME, under which CME
will exclusively list NYMEX energy contracts on its electronic
trading platform. NYMEX is larger than we are and has greater
financial resources, a broader participant base and a longer
operating history. NYMEX also operates its own clearinghouse,
which may give it greater flexibility in introducing new
products and clearing services than we are able to offer through
our relationship with LCH.Clearnet, formerly known as the London
Clearing House, a clearinghouse based in London. Unlike NYMEX,
we may be limited in the number of cleared OTC contracts that we
are able to offer, since we must first obtain approval from
LCH.Clearnet to offer such products. Our relationship with
LCH.Clearnet is also subject to termination by either party upon
one years notice. See We do not own our
own clearinghouse and must rely on LCH.Clearnet to provide
clearing services for the trading of futures and cleared OTC
contracts in our markets. We cannot continue to operate our
futures and cleared OTC businesses without clearing
services.
NYMEX has taken several actions in the past year to improve its
competitive position. In September 2005, NYMEXs board of
directors selected General Atlantic, a leading private equity
firm, as a minority investment partner to assist NYMEX in
evaluating its strategic options, which may include an initial
public offering of NYMEX common stock in late 2006. Pursuant to
a stock purchase agreement entered into in November 2005, and as
amended in February 2006, General Atlantic agreed to invest
$160 million for a 10% equity investment in NYMEX. The
transaction was approved by NYMEX stockholders in March 2006,
together with a plan to restructure the NYMEX board. The
initiatives set forth by General Atlantic and NYMEX include
augmenting NYMEXs open outcry trading model and developing
opportunities in market data, clearing and complementary
electronic trading, which will likely intensify competition
between us and NYMEX.
In addition to its alliance with General Atlantic as a strategic
partner, NYMEX also undertook initiatives to offer increased
access to electronic trading in its futures contracts. In
February 2006, NYMEX launched a mini version of the
Brent crude futures contract. In April, NYMEX announced that it
had entered into a definitive technology services agreement with
CME pursuant to which CME, through CME Globex, will become the
exclusive electronic trading services provider for NYMEXs
energy futures and options contracts. Under this agreement, the
CME will host trading in mini versions of NYMEXs contracts
and full size versions of the contracts. Initial trading of
NYMEXs energy products on CME Globex began in June 2006
with full roll-out expected by the third quarter of 2006. This
agreement is expected to increase access to trading in NYMEX
contracts and could increase the liquidity of NYMEXs
markets by offering customers electronic trading capabilities
that NYMEX previously did not offer its customers. Our business
could be materially and adversely affected if our trading
volumes decline and we lose liquidity in our markets due to
participants opting to trade competing NYMEX contracts. In these
circumstances, the markets with the highest trading volumes, and
therefore the most liquidity,
12
would likely have a growing competitive advantage over other
markets. This could put us at a greater disadvantage relative to
NYMEX, whose markets are larger and more established than ours.
We also have been involved in litigation with NYMEX, in which
NYMEX asserted against us claims of intellectual property
infringement related to our use of and reference to NYMEX
settlement prices in our cleared OTC swap contracts for Henry
Hub natural gas and West Texas Intermediate crude oil. The
federal district court granted our motion for summary judgment
in September 2005, dismissing the claims filed against us by
NYMEX. The case is presently on appeal before the Second Circuit
Court of Appeals. If NYMEX is successful in its appeal, and the
matter is determined adversely to us in any subsequent trial,
our business would be materially and adversely affected. See
also Any infringement by us on the
intellectual property rights of others could result in
litigation and adversely affect our ability to continue to
provide, or increase the cost of providing, our products and
services and Regulation and Legal
Proceedings Legal
Proceedings NYMEX Claim of Infringement.
In addition to NYMEX, we also currently compete with:
|
|
|
|
|
voice brokers active in the commodities markets, including
Amerex, ICAP, Prebon Yamane and Tradition (North America);
|
|
|
|
other electronic energy trading platforms, such as NGX (a
subsidiary of the Toronto Stock Exchange) and Houston Street;
|
|
|
|
energy futures exchanges, such as European Energy Derivatives
Exchange, or Endex (formerly known as Amsterdam Power Exchange),
Nord Pool, and Powernext; and
|
|
|
|
market data vendors, such as Bloomberg, Reuters, Argus and
Platts (a division of The McGraw-Hill Companies Inc.).
|
We may also face additional competition from new entrants to our
markets. Competition in the market for commodities trading could
increase if new electronic trading platforms or futures
exchanges are established, or if existing platforms or exchanges
that currently do not trade energy commodities products decide
to do so, as CME has done through its agreement with NYMEX to
trade NYMEX energy products on CME Globex. Additional
competition from new entrants to our markets could negatively
impact our trading volumes and profitability.
In addition, some of the exchanges, trading systems, dealers and
other companies with which we currently or in the future could
compete are or may be substantially larger than we are and have
or may have substantially greater financial, technical,
marketing and other resources and more diverse revenue streams
than we do. Some of these exchanges and other businesses have
long standing, well established and, in some cases, dominant
positions in their existing markets. They may offer a broader
range of products and services and may take better advantage of
business opportunities than we do. For example, our competitors
may:
|
|
|
|
|
respond more quickly to new or evolving opportunities,
technologies and participant requirements;
|
|
|
|
develop services and products similar to or that compete with
ours;
|
|
|
|
develop services and products that are preferred by our
participants or new market participants;
|
|
|
|
price their products and services more competitively or respond
more quickly to competitive pressures;
|
|
|
|
take advantage of efficiencies that result from owning their own
clearinghouses, including the ability to bring new cleared
products to market faster and offering cross-margining
opportunities across products that reduce the cost of capital
for participants;
|
|
|
|
develop and expand their network infrastructure and service
offerings more efficiently;
|
|
|
|
better utilize technology or develop more user-friendly and
reliable technology;
|
|
|
|
consolidate, make strategic acquisitions or form alliances,
which may create more liquidity in their markets, cost
reductions and better pricing than we offer;
|
|
|
|
more effectively market, promote and sell their products and
services; and
|
13
|
|
|
|
|
better leverage existing relationships with participants and
alliance partners or exploit better recognized brand names to
market and sell their services.
|
Our ability to continually maintain and enhance our
competitiveness and respond to threats from stronger current and
potential competitors will have a direct impact on our results
of operations. We cannot assure you that we will be able to
compete effectively. If our markets, products and services are
not competitive, our business, financial condition and operating
results will be materially affected. In addition, even if new
entrants or existing competitors do not significantly erode our
market share, we may be required to reduce significantly the
rates we charge for trade execution or market data to remain
competitive, which could have a material adverse effect on our
profitability.
Our
business is primarily transaction-based, and declines in trading
volumes and market liquidity would adversely affect our business
and profitability.
We earn transaction fees for transactions executed in our
markets and from the provision of electronic trade confirmation
services. Historically, we have also earned transaction fees
under order flow agreement shortfalls. We derived 86.0%, 87.9%,
83.9% and 86.9% of our consolidated revenues for the three
months ended March 31, 2006, and for the years ended
December 31, 2005, 2004 and 2003, respectively, from our
transaction-based business. Even if we are able to further
diversify our product and service offerings, our revenues and
profitability will continue to depend primarily on our
transaction-based business. A substantial portion of our
revenues are derived from transaction fees generated from trades
executed on our trading platform, which are based primarily on
the volume of contracts traded. Any decline in our trading
volumes in the short-term or long-term will negatively impact
our transaction fees and, therefore, our revenues. Accordingly,
the occurrence of any event that reduces the amount of
transaction fees we receive, whether as a result of declines in
trading volumes or market liquidity, adverse response to our all
electronic market, reductions in commission rates, regulatory
changes, competition or otherwise, will have a significant
impact on our operating results and profitability. See also
Our business depends in large part on
volatility in energy commodity prices and has benefited from
record-high oil prices in recent years.
Our
business depends in large part on volatility in energy commodity
prices and has benefited from record-high oil prices in recent
years.
Participants in the markets for energy commodities trading
pursue a range of trading strategies. While some participants
trade in order to satisfy physical consumption needs, others
seek to hedge contractual price risk or take speculative or
arbitrage positions, seeking returns from price movements in
different markets. Trading volume is driven primarily by the
degree of volatility the magnitude and
frequency of fluctuations in prices of
commodities. Higher volatility increases the need to hedge
contractual price risk and creates opportunities for speculative
or arbitrage trading. Energy commodities markets historically
have experienced significant price volatility and in recent
years reached record levels. We cannot predict whether this
pattern will continue, or for how long, or if this trend will
reverse itself. Were there to be a sustained period of stability
in the prices of energy commodities, we could experience lower
trading volumes, slower growth or even declines in revenues as
compared to recent periods.
In addition to price volatility, we believe that the increase in
global energy prices, particularly for crude oil, during the
past three years has had a positive impact on the trading volume
of global energy commodities, including trading volumes in our
markets. As oil prices have risen to record levels, we believe
that additional participants have entered the markets for energy
commodities trading to address their growing risk-management
needs or to take advantage of greater trading opportunities. If
global crude oil prices decrease or return to the lower levels
where they historically have been, it is possible that many
market participants, particularly the newer entrants, could
reduce their trading activity or leave the trading markets
altogether. Global energy prices are determined by many factors,
including those listed below, that are beyond our control and
are unpredictable. Consequently, we cannot predict whether
global energy prices will remain at their current levels, nor
can we predict the impact that these prices will have on our
future revenues or profitability.
14
Factors that are particularly likely to affect price volatility
and price levels, and thus trading volumes, include:
|
|
|
|
|
economic, political and market conditions in the United States,
Europe, the Middle East and elsewhere in the world;
|
|
|
|
weather conditions, including hurricanes and other significant
weather events that impact production, refining and distribution
facilities for oil and natural gas;
|
|
|
|
the volatility in production volume of the commodities
underlying our energy products and markets;
|
|
|
|
war and acts of terrorism;
|
|
|
|
legislative and regulatory changes;
|
|
|
|
credit quality of market participants;
|
|
|
|
the availability of capital;
|
|
|
|
broad trends in industry and finance;
|
|
|
|
the level and volatility of interest rates;
|
|
|
|
fluctuating exchange rates and currency values; and
|
|
|
|
concerns over inflation.
|
Any one or more of these factors may reduce price volatility or
price levels in the markets for energy commodities trading,
which in turn could reduce trading activity in those markets,
including in our markets. Moreover, any reduction in trading
activity could reduce liquidity the ability to
find ready buyers and sellers at current
prices which in turn could further discourage
existing and potential market participants and thus accelerate
any decline in the level of trading activity in these markets.
In these circumstances, the markets with the highest trading
volumes, and therefore the most liquidity, would likely have a
growing competitive advantage over other markets. This could put
us at a greater disadvantage relative to our principal
competitor, whose markets are larger and more established than
ours.
We are unable to predict whether or when these unfavorable
conditions may arise in the future or, if they occur, how long
or severely they will affect our trading volumes. A significant
decline in our trading volumes, due to reduced volatility, lower
prices or any other factor, could have a material adverse effect
on our revenues, since our transaction fees would decline, and
in particular on our profitability, since our revenues would
decline faster than our expenses, some of which are fixed.
Moreover, if these unfavorable conditions were to persist over a
lengthy period of time, and our trading volumes were to decline
substantially and for a long enough period, the liquidity of our
markets, and the critical mass of transaction volume necessary
to support viable markets, could be jeopardized.
Our
revenues depend heavily upon trading volumes in the markets for
ICE Brent Crude and ICE Gas Oil futures contracts and OTC North
American natural gas and power contracts. A decline in volumes
or in our market share in these contracts would jeopardize our
ability to remain profitable and grow.
Our revenues depend heavily on trading volumes in four principal
markets: the markets for ICE Brent Crude futures contracts, ICE
Gas Oil futures contracts, OTC North American natural gas
contracts and OTC North American power contracts. Trading
in these four contracts in the aggregate has represented over
80% of our consolidated revenues for the most recent interim and
annual periods. Trading in ICE Brent Crude futures contracts
accounted for 26.8%, 26.5%, 29.7% and 30.4% of our consolidated
revenues for the three months ended March 31, 2006, and for
the years ended December 31, 2005, 2004 and 2003,
respectively. Trading in ICE Gas Oil futures contracts accounted
for 10.2%, 9.5%, 11.3% and 10.6% of our consolidated revenues
for the three months ended March 31, 2006, and for the
years ended December 31, 2005, 2004 and 2003, respectively.
Trading in OTC North American natural gas contracts accounted
for 36.4%, 38.4%, 26.8% and 17.9% of our consolidated revenues
for the three months ended March 31, 2006, and for the
years ended December 31, 2005, 2004 and 2003, respectively.
Trading in OTC North American power contracts accounted for
9.6%, 10.6%, 8.7% and 6.1% of our consolidated revenues for the
three months ended March 31, 2006, and for the years ended
December 31, 2005,
15
2004 and 2003, respectively. Our trading volume or market share
in these markets may decline due to a number of factors,
including:
|
|
|
|
|
development of competing contracts, and competition generally;
|
|
|
|
reliance on technology to conduct trading;
|
|
|
|
the relative stability of commodity prices;
|
|
|
|
increased availability of electronic trading on competing
contracts;
|
|
|
|
possible regulatory changes; and
|
|
|
|
adverse publicity and government investigations.
|
A decline in trading volumes in one or more of these contracts
could adversely affect our business. In addition, we recently
launched trading in the ICE WTI Crude futures contract, which
has traded in substantial volumes since it began trading in
February 2006. While we only began to derive transaction fees
from this contract in the second quarter of 2006, we expect that
this contract could represent a significant percentage of our
consolidated revenues in future periods. Accordingly, a decline
in trading volumes in this contact could adversely affect our
future revenues. If our market share in any of these markets
declines, participants may decide to trade in other markets and
our revenues would decline, which could harm our ability to
remain profitable and to grow our business.
A
decline in the production of commodities traded in our markets
could reduce our liquidity and adversely affect our revenues and
profitability.
We derived 84.6%, 86.9%, 82.1% and 79.1% of our consolidated
revenues for the three months ended March 31, 2006, and for
the years ended December 31, 2005, 2004 and 2003,
respectively, from exchange fees and commission fees generated
from trading in commodity products in our futures and OTC
markets. The volume of contracts traded in the futures and OTC
markets for any specific commodity tends to be a multiple of the
physical production of that commodity. If the physical supply or
production of any commodity declines, market participants could
become less willing to trade in contracts based on that
commodity. For example, the ICE Brent Crude futures contract has
been subject to this risk as production of Brent crude oil
peaked in 1984 and began steadily falling in subsequent years.
We, in consultation with market participants, altered the
mechanism for settlement of the ICE Brent Crude futures contract
to a mechanism based on the Brent/Forties/Oseberg North Sea oil
fields, known as the BFO Index, to ensure that the commodity
prices on which its settlement price is based reflect a large
enough pool of traders and trading activity so as to be less
susceptible to manipulation. Market participants that trade in
the ICE Brent Crude futures contract may determine in the
future, however, that additional underlying commodity products
need to be considered in the settlement of that contract or that
the settlement mechanism is not credible. Exchange fees earned
from trading in the ICE Brent Crude futures contract accounted
for 69.2%, 68.8%, 65.3% and 66.6% of our total revenues from our
futures business, net of intersegment fees, for the three months
ended March 31, 2006, and for the years ended
December 31, 2005, 2004 and 2003, respectively, or 26.8%,
26.5%, 29.7% and 30.4% of our consolidated revenues for the
three months ended March 31, 2006, and for the years ended
December 31, 2005, 2004 and 2003, respectively. Any
uncertainty concerning the settlement of the ICE Brent Crude
futures contract, or a decline in the physical supply or
production of any other commodity on which are trading products
are based, could result in a decline in trading volumes in our
markets, adversely affecting our revenues and profitability.
We may
acquire other businesses, products or technologies. If we do, we
may be unable to integrate them with our business, or we may
impair our financial performance.
We are actively exploring and evaluating strategic acquisitions
and alliances to strengthen our current business and grow our
company. We intend to pursue strategic transactions and may
acquire other businesses, products or technologies to expand our
products and services, advance our technology or take advantage
of new developments and potential changes in our industry.
Strategic transactions may involve acquiring or making a
strategic investment in an existing clearinghouse to provide
services directly to participants in our futures and OTC markets
or establishing our own clearinghouse, acquiring or entering
into an agreement with another exchange or clearinghouse to
broaden our product offering, or acquiring or entering into an
agreement with a business complementary to
16
our market data business or a business that offers risk
management or other complementary services. In addition, we may
be acquired by another company. Any such transaction could
happen at any time, could be material to our business and could
take any number of forms. We cannot assure you that we will be
able to identify strategic opportunities or negotiate or finance
any future acquisition successfully. Even if we do succeed in
acquiring a business, product or technology, we have limited
experience, other than with respect to ICE Futures, in
integrating a significant acquisition into our business. The
process of integration may produce unforeseen regulatory and
operating difficulties and expenditures and may divert the
attention of our management from the ongoing operation of our
business. If we make future acquisitions, we may issue shares of
our stock that dilute shareholders, expend cash, incur debt,
assume contingent liabilities or create additional expenses
related to amortizing intangible assets with estimable useful
lives, any of which could harm our business, financial condition
or results of operations and negatively impact our stock price.
We do
not own our own clearinghouse and must rely on LCH.Clearnet to
provide clearing services for the trading of futures and cleared
OTC contracts in our markets. We cannot continue to operate our
futures and cleared OTC businesses without clearing
services.
We have contracted with LCH.Clearnet to provide clearing
services to us for all futures contracts traded in our markets
pursuant to a contract for an indefinite term that is terminable
by either party upon one years prior written notice, if
not otherwise terminated in accordance with its terms.
LCH.Clearnet also provides clearing services to participants in
our OTC business that trade designated contracts eligible for
clearing. These services are provided pursuant to a separate
contract we have entered into with LCH.Clearnet, which continues
in force unless either party gives one years prior written
notice.
The interruption or cessation of these clearing services and our
inability to make alternate arrangements in a timely manner
would have a material adverse effect on our business, financial
condition and results of operations. In particular, if our
agreement with LCH.Clearnet with respect to our futures business
were terminated, and we could not obtain clearing services from
another source, we may be unable to operate our futures markets
and would likely be required to cease operations in that segment
of our business. For the three months ended March 31, 2006,
and for the years ended December 31, 2005, 2004 and 2003,
transaction fees generated by our futures business, which are
also referred to as exchange fees, accounted for 37.7%, 36.7%,
42.0% and 42.6%, respectively, of our consolidated revenues.
If our agreement with LCH.Clearnet relating to our OTC business
were terminated, we may be unable to offer clearing services in
connection with trading OTC contracts in our markets for a
considerable period of time. While we would still be able to
offer OTC trading in bilateral contracts, our inability to offer
trading in cleared contracts, assuming that no other clearing
alternatives were available, would significantly impair our
ability to compete, particularly in light of the launch of a
competing
swaps-to-futures
clearing facility by one of our competitors and the ease with
which other competitors can introduce new cleared OTC and
futures products. For the three months ended March 31,
2006, and for the years ended December 31, 2005, 2004 and
2003, transaction fees derived from trading in cleared OTC
contracts accounted for 36.2%, 37.5%, 21.7% and 6.4%,
respectively, of our consolidated revenues. Our cleared OTC
contracts have become a significant component of our business,
and accounted for 68.5%, 69.3%, 47.6% and 13.9% of the total
revenues, net of the intersegment fees, generated by our OTC
business for the three months ended March 31, 2006, and for
the years ended December 31, 2005, 2004 and 2003,
respectively.
Our principal competitor owns its own clearing facility and thus
does not face the risk of losing the ability to provide clearing
services to participants that we do. Moreover, because it owns
its own facility, it may be able to provide clearing services
more cost-effectively and can extend clearing services to new
products faster than we can. For example, our ability to
introduce new cleared OTC products is subject to review by and
approval of LCH.Clearnet. In addition, all clearing fees are
determined by LCH.Clearnet and may be set at prices higher than
those set by our competitors or at levels prohibitive to trading.
LCH.Clearnet could elect for strategic reasons to discontinue
providing clearing services to us for our futures and OTC
businesses at any time with appropriate notice. For example,
LCH.Clearnet could decide to enter into a strategic alliance
with a competing exchange or other trading facility. In
addition, according to the terms of our contract with
LCH.Clearnet with respect to our OTC business, our relationship
may be terminated upon a change in
17
control of either party. The commodity markets have experienced
increased consolidation in recent years and may continue to do
so, and strategic alliances and changes in control involving
various market participants are possible. LCH.Clearnet is owned
by its members, which include banks and other financial
institutions whose commercial interests are broader than the
clearing services business. We cannot assure you that our
futures or OTC businesses would be able to obtain clearing
services from an alternate provider on acceptable terms or in
sufficient time to avoid or mitigate the material adverse
effects described above.
If we
establish our own clearinghouse, or acquire a clearinghouse or
an interest in a clearinghouse, we will be exposed to risks
related to the cost of establishing or operating a clearinghouse
and the risk of defaults by our participants.
In order to address the competitive disadvantages of not owning
our own clearinghouse, we may decide to establish a
clearinghouse that would clear transactions executed in our
markets. Alternatively, we may decide to purchase or acquire, or
make a strategic investment in, an existing clearinghouse for
that purpose, although the number of clearing facilities not
owned by our competitors is limited. Establishing or acquiring a
clearinghouse, and subsequently operating the clearinghouse,
would require substantial ongoing expenditures and would consume
a significant portion of our managements time, potentially
limiting our ability to expand our business in other ways, such
as through acquisitions of other companies or the development of
new products and services. We cannot assure you that these
clearing arrangements would be satisfactory to our participants
or would not require substantial systems modifications to
accommodate them. The transition to new clearing facilities
could also be disruptive and costly to our participants. There
are substantial risks inherent in operating a clearinghouse.
In addition, our establishment or acquisition of a clearinghouse
may not be successful, and it is possible that the clearinghouse
would not generate sufficient revenues to cover the expenses
incurred, which would subject us to losses. Moreover, by owning
our own clearinghouse, we would be exposed to the credit risk of
our participants, to which we are not currently subject, and
defaults by our participants could subject us to substantial
losses. We would also be subject to additional regulation as a
result of owning a clearinghouse.
Some
of our largest shareholders are also our participants and their
interests may differ from those of other
shareholders.
Some of our largest shareholders are both our principal
shareholders and participants in our markets. As market
participants, these shareholders may have strategic interests
that are different from, or that could conflict with, your
interests. For example, in their capacity as participants, these
investors may favor lower fees for trade execution or other
concessions that would presumably reduce our revenues, and
therefore, the value of your ownership interest in us. Because
of their common interests as participants in our markets, these
investors may vote in the same way. If these investors vote
together on a given matter, they collectively may have the
ability to influence the decision, which could involve the
election of our directors, the appointment of new management and
the potential outcome of any matter submitted to a vote of our
shareholders, including mergers, the sale of substantially all
of our assets and other extraordinary events. In addition, our
largest shareholders, The Goldman Sachs Group, Inc. and
Morgan Stanley Capital Group Inc., are affiliated with Goldman,
Sachs & Co. and Morgan Stanley & Co.
Incorporated, respectively, each an underwriter for this
offering.
We are
currently subject to regulation in certain of our markets.
Failure to comply with existing regulatory requirements, and
possible future changes in these requirements or in the current
interpretation of these requirements, could adversely affect our
business.
We operate our OTC markets as an exempt commercial
market under the Commodity Exchange Act. As such, we are
subject to access, reporting and record-keeping requirements of
the Commodity Futures Trading Commission, or the CFTC. However,
unlike a futures exchange, our OTC business is not generally
regulated by the CFTC. Members of Congress have, at various
times over the last several years, introduced legislation
seeking to restrict OTC derivatives trading of energy generally
and to bring electronic trading of OTC energy derivatives within
the direct scope of CFTC regulation. Separate pieces of
legislation have recently been introduced in Congress that would
(i) provide the CFTC with the authority to require exempt
commercial markets to comply with additional regulatory
requirements, including the imposition of position limits, and
to require some participants on
18
exempt commercial markets to file reports on their positions,
and (ii) place price controls on natural gas derivatives
and make those derivatives tradable only on a designated
contract market, which is a regulatory status we do not
presently hold. If adopted, this legislation could require us
and our participants to operate under heightened regulatory
burdens and incur additional costs in order to comply with the
additional regulations, and could deter some participants from
trading on our OTC platform.
In contrast to our OTC business, ICE Futures, through which we
conduct our futures business, operates as a Recognized
Investment Exchange in the United Kingdom. As a Recognized
Investment Exchange, ICE Futures has regulatory responsibility
in its own right and is subject to supervision by the Financial
Services Authority pursuant to the Financial Services and
Markets Act 2000, or FSMA. ICE Futures is required under the
FSMA to maintain sufficient financial resources, adequate
systems and controls and effective arrangements for monitoring
and disciplining its members. ICE Futures ability to
comply with all applicable laws and rules is largely dependent
on its maintenance of compliance, audit and reporting systems.
We cannot assure you that these systems and procedures are fully
effective.
Electronic trading in futures contracts on ICE Futures is
permitted in many jurisdictions, including in the United States,
through no-action relief from the local
jurisdictions regulatory requirements. In the United
States, direct electronic access to trading in ICE Futures
products is offered to U.S. persons based on a series of
no-action letters from the CFTC. In connection with
the launch of our ICE WTI Crude futures contract in February
2006, the CFTC stated that it will be evaluating the future use
of its no-action process. The CFTC held a public hearing on
June 27, 2006 to consider the issue of what constitutes a
board of trade, exchange, or market located outside the
United States for the purposes of exemption from CFTC
jurisdiction and regulation. Our ability to offer new futures
products under our existing no-action relief could be impacted
by the pendency of the CFTCs policy review and any actions
taken by the CFTC as a result of its policy review. We cannot
predict what level of additional regulation our futures business
and future products may be subjected to as a result of this CFTC
policy review. If we are unable to offer additional products, or
if our offerings of products are subject to additional
regulatory constraints, our business could be adversely
affected. If the CFTC revokes or makes substantial revisions to
the no-action process or to the no-action decisions upon which
we currently rely, ICE Futures may be required to comply with
additional regulation in the United States, including the
possibility of being required to register as a regulated futures
exchange in the United States, known as a designated
contract market. Requiring ICE Futures to comply with
regulation in addition to that presently required by its primary
regulator, the FSA, would be costly and time consuming. Failure
to comply with our current regulatory requirements and
regulatory requirements that may be imposed on us in the future
could subject us to significant penalties, including termination
of our ability to conduct our regulated businesses.
Additional legislative and regulatory initiatives, either in the
United States, the United Kingdom or elsewhere, could affect one
or more of the following aspects of our business or impose one
or more of the following requirements:
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the manner in which we communicate and contract with our
participants;
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the demand for and pricing of our products and services;
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the tax treatment of trading in our products;
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a requirement that we maintain minimum regulatory capital on
hand;
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a requirement that we exercise regulatory oversight of our OTC
participants, and assume responsibility for their conduct;
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our financial and regulatory reporting practices;
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our record-keeping and record-retention procedures;
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the licensing of our employees; and
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the conduct of our directors, officers, employees and affiliates.
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The implementation of new regulations, or changes in or
unfavorable interpretations of existing regulations by courts or
regulatory bodies could require us to incur significant
compliance costs and impede our ability to operate, expand and
enhance our electronic platform as necessary to remain
competitive and expand our business. Regulatory changes inside
or outside the United States or the United Kingdom could
materially and adversely affect our business, financial
condition and results of operations.
The
energy commodities trading industry in North America has been
subject to increased regulatory scrutiny in the recent past, and
we face the risk of changes to our regulatory environment in the
future, which may diminish trading volumes on our electronic
platform.
Our OTC business is currently subject to limited regulatory
oversight due to the types of market participants eligible to
trade in our OTC markets. As an exempt commercial market, we are
not subject to registration as an exchange nor to the type of
ongoing comprehensive oversight to which exchanges are subject.
Instead, we are required to comply with access, reporting and
record-keeping requirements of the CFTC. In addition, our
futures business is subject to primary regulation by the FSA,
and offers its products for trading in the United States
pursuant to a series of no-action letters, which effectively
exempts it from CFTC jurisdiction and regulation.
In past years, and again recently, the market for OTC energy
commodities trading has been the subject of increased scrutiny
by regulatory and enforcement authorities due to a number of
highly publicized problems involving energy commodities trading
companies. This increased scrutiny has included investigations
by the Department of Justice, the Federal Energy Regulatory
Commission and the Federal Trade Commission of alleged
manipulative trading practices, misstatements of financial
results, and other matters.
Furthermore, in response to the rise in energy commodity prices
in recent years and allegations that manipulative trading
practices by certain market participants may have contributed to
the rise in prices, legislative and regulatory authorities at
both the federal and state levels, as well as political and
consumer groups, have called for increased regulation and
monitoring of the OTC energy commodities markets and a review of
the no-action process pursuant to which our futures products are
presently offered to market participants in the United States.
For example, regulators in some states have publicly questioned
whether some form of regulation, including price controls,
should be re-imposed in OTC commodities markets, particularly in
states where power markets were deregulated in recent years. In
addition, members of Congress have, at various times in the last
several years, introduced legislation seeking to restrict OTC
derivatives trading of energy contracts generally, to bring
electronic trading of OTC energy derivatives within the direct
scope of CFTC regulation, to impose position limits on trading
in energy commodities, and to provide for expanded CFTC
surveillance of both OTC and futures markets and the people and
entities that trade in those markets. If any of these measures
are implemented, they could reduce demand for our products,
which will adversely affect our business.
Also, on January 19, 2006, the Federal Energy Regulatory
Commission issued final rules under the Energy Policy Act of
2005 clarifying the agencys authority over market
manipulation by all electricity and natural gas sellers,
transmission owners and pipe lines, regardless of whether they
are regulated by the Federal Energy Regulatory Commission. In
addition, the Energy Policy Act of 2005 granted the Federal
Energy Regulatory Commission the power to prescribe rules
related to the collection and government dissemination of
information regarding the availability and price of natural gas
and wholesale electric energy. These rules and possible future
exercises of the Federal Energy Regulatory Commissions
rulemaking powers could adversely affect the trading of certain
of our products and adversely impact demand for our data
products in the United States or have other material adverse
impacts on our business.
It is possible that future unanticipated events in the markets
for energy commodities trading will lead to additional
regulatory scrutiny and changes in the level of regulation to
which our business is subject. Increased regulation of our
participants or our markets could materially adversely affect
our business. The imposition of stabilizing measures such as
price controls in energy commodities markets could substantially
reduce or potentially even eliminate trading activity in
affected markets. New laws and rules applicable to our business
could significantly increase our regulatory compliance costs,
delay or prevent us from introducing new products and services
as planned and discourage some market participants from using
our electronic platform. New allegations of manipulative trading
by market participants could subject us to regulatory scrutiny
and possibly fines or restrictions
20
on our business, as well as adverse publicity. All of this could
lead to lower trading volumes and transaction fees, higher
operating costs and lower profitability or losses.
If we
are unable to keep up with rapid changes in technology and
participant preferences, we may not be able to compete
effectively.
To remain competitive, we must continue to enhance and improve
the responsiveness, functionality, accessibility and reliability
of our electronic platform and our proprietary technology. The
financial services industry is characterized by rapid
technological change, change in use patterns, change in client
preferences, frequent product and service introductions and the
emergence of new industry standards and practices. These changes
could render our existing proprietary technology uncompetitive
or obsolete. Our ability to pursue our strategic objectives,
including increasing trading volumes on our platform following
our transition to an all-electronic marketplace, as well as our
ability to continue to grow our business, will depend, in part,
on our ability to:
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enhance our existing services and maintain and improve the
functionality and reliability of our electronic platform, in
particular, reducing network downtime;
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develop or license new technologies that address the
increasingly sophisticated and varied needs of our participants;
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anticipate and respond to technological advances and emerging
industry practices on a cost-effective and timely basis; and
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continue to attract and retain highly skilled technology staff
to maintain and develop our existing technology and to adapt to
and manage emerging technologies.
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We cannot assure you that we will successfully implement new
technologies or adapt our proprietary technology to our
participants requirements or emerging industry standards
in a timely and cost-effective manner. Any failure on our part
to remain abreast of industry standards in technology and to be
responsive to participant preferences could cause our market
share to decline and negatively impact our profitability.
Our
operating results are subject to significant fluctuations due to
a number of factors. As a result, you will not be able to rely
on our operating results in any particular period as an
indication of our future performance.
A number of factors beyond our control may contribute to
substantial fluctuations in our operating results, particularly
in our quarterly results. As a result of the factors described
in the preceding risk factors, you will not be able to rely on
our operating results in any particular period as an indication
of our future performance. The energy commodities trading
industry has historically been subject to variability in trading
volumes due primarily to five key factors. These factors include
geopolitical events, weather, real and perceived supply and
demand imbalances in the underlying energy commodities, the
number of trading days in a quarter and seasonality. As a result
of one or more of these factors, trading volumes in our markets
could decline, possibly significantly, which would adversely
affect our revenues derived from transaction fees. If we fail to
meet securities analysts expectations regarding our
operating performance, the price of our common stock could
decline substantially. See also Risks
Relating to our Common Stock The market price
of our common stock may fluctuate significantly, and it may
trade at prices below the offering price.
Our
cost structure is largely fixed. If our revenues decline and we
are unable to reduce our costs, our profitability will be
adversely affected.
Our cost structure is largely fixed. We base our expectations of
our cost structure on historical and expected levels of demand
for our products and services as well as our fixed operating
infrastructure, such as computer hardware and software, hosting
facilities and security and staffing levels. If demand for our
products and services declines and, as a result, our revenues
decline, we may not be able to adjust our cost structure on a
timely basis. In that event, our profitability will be adversely
affected.
21
Fluctuations
in currency exchange rates may adversely affect our operating
results.
We have historically generated a significant portion of our
revenues and net income and corresponding accounts receivable
and cash through sales denominated in pounds sterling, which is
the functional currency of our foreign subsidiaries. Of our
consolidated revenues, 38.6%, 38.3%, 46.1% and 47.1% were
denominated in pounds sterling for the three months ended
March 31, 2006, and for the years ended December 31,
2005, 2004 and 2003, respectively. We have foreign currency
translation risk equal to our net investment in these
subsidiaries. As of March 31, 2006 and December 31,
2005, $44.1 million and $35.9 million, respectively,
of our cash and cash equivalents, short-term and long-term
investments and restricted cash, $7.0 million and
$5.1 million, respectively, of our accounts receivable,
$76.4 million and $75.8 million, respectively, of our
goodwill and other intangible assets and $124.0 million and
$113.1 million, respectively, of our net assets were
denominated in pounds sterling. On April 1, 2006, we began
to charge exchange fees in U.S. dollars rather than in
pounds sterling in our key futures contracts, including crude
oil and heating oil contracts.
We also have foreign currency transaction risk related to the
settlement of foreign receivables or payables incurred with
respect to trades executed on our electronic platform, including
for our OTC European gas and power markets, which are paid in
pounds sterling, and for cash accounts of our U.K. subsidiaries
held in U.S. dollars. While we currently enter into hedging
transactions to help mitigate our foreign exchange risk
exposure, primarily with respect to our net investment in our
U.K. subsidiaries, these hedging arrangements may not always be
effective, particularly in the event of imprecise forecasts of
the levels of our
non-U.S. denominated
assets and liabilities. Accordingly, if there is an adverse
movement in exchange rates, we may suffer significant losses,
which would adversely affect our operating results and financial
condition. Events over time could cause us to change the
functional currency of our foreign subsidiaries.
The
nature of our business is highly competitive, which may result
in litigation with competitors or competitors affiliated
entities.
Our business is highly competitive. We have been sued in the
past by NYMEX and we are presently being sued by MBF Clearing
Corp, an entity closely affiliated with NYMEX, over actions we
have taken in connection with conducting our business. In the
latter action, MBF Clearing, a market maker for certain NYMEX
electronic contracts, filed a complaint against us that claims
that we have a monopoly over the electronic trading of Brent
Crude Oil futures and certain other energy contracts and that
certain actions we have taken in denying MBF Clearing access to
our markets are in violation of antitrust laws, are in breach of
contract and constitute tortious activity. MBF Clearing claims
that its business has been harmed as a result, and while MBF
Clearing has not specified an amount of damages in its suit, it
claims that it should be awarded treble damages under antitrust
laws and punitive damages under state law. We filed a motion to
dismiss all of MBF Clearings claims in June 2006, but
briefing is still ongoing in connection with our motion.
Separately, the CFTC has requested information in connection
with this matter. While we intend to defend these claims
vigorously, litigation may be expensive, lengthy and disruptive
to our normal business operations. Moreover, the results of the
above-referenced litigation, or possible future litigation, are
inherently uncertain and may result in adverse rulings or
decisions that may, individually or in the aggregate, impact our
business in a material and adverse manner. For more information
regarding the NYMEX and MBF Clearing litigation, see
Regulation and Legal Proceedings Legal
Proceedings. See also Any infringement
by us of intellectual property rights of others could result in
litigation and adversely affect our ability to continue to
provide, or increase the costs of providing, our products and
services.
Any
infringement by us of intellectual property rights of others
could result in litigation and adversely affect our ability to
continue to provide, or increase the cost of providing, our
products and services.
Patents and other intellectual property rights of third parties
may have an important bearing on our ability to offer certain of
our products and services. Our competitors, as well as other
companies and individuals, may have obtained, and may be
expected to obtain in the future, patent rights related to the
types of products and services we offer or plan to offer. We
cannot assure you that we are or will be aware of all patents
that may pose a risk of infringement by our products and
services. In addition, some patent applications in the United
States are confidential until a patent is issued, and therefore
we cannot evaluate the extent to which our products and services
may be covered or asserted to be covered in pending patent
applications. Thus, we cannot be sure that our
22
products and services do not infringe on the rights of others or
that others will not make claims of infringement against us.
In addition, our competitors may claim other intellectual
property rights over information that is used by us in our
product offerings. For example, in November 2002, NYMEX filed
claims against us in the U.S. District Court for the
Southern District of New York asserting that, among other
things, we infringed copyrights NYMEX claims exist in its
publicly available settlement prices that we use in connection
with the clearing of certain of our OTC derivative contracts.
While the court granted a motion for summary judgment in our
favor in September 2005 dismissing all claims brought against us
by NYMEX, NYMEX is appealing the ruling of the District Court to
the Second Circuit Court of Appeals, and no decision has yet
been made by the Court of Appeals. If NYMEX successfully appeals
the courts judgment and we are subsequently found to have
infringed NYMEXs intellectual property rights after a
trial, we may incur substantial monetary damages and we may be
enjoined from using or referring to one or more types of NYMEX
settlement prices. If we are enjoined from using or referring to
NYMEX settlement prices, we could lose all or a substantial
portion of our cleared trading volume in Henry Hub natural gas
and West Texas Intermediate crude oil contracts and the related
commission revenues. For more information regarding the NYMEX
litigation, see Regulation and Legal
Proceedings Legal
Proceedings NYMEX Claim of Infringement.
With respect to our intellectual property, if one or more of our
products or services is found to infringe patents held by
others, we may be required to stop developing or marketing the
products or services, obtain licenses to develop and market the
products or services from the holders of the patents or redesign
the products or services in such a way as to avoid infringing
the patents. We also could be required to pay damages if we were
found to infringe patents held by others, which could materially
adversely affect our business, financial condition and operating
results. We cannot assess the extent to which we may be required
in the future to obtain licenses with respect to patents held by
others, whether such licenses would be available or, if
available, whether we would be able to obtain such licenses on
commercially reasonable terms. If we were unable to obtain such
licenses, we may not be able to redesign our products or
services at a reasonable cost to avoid infringement, which could
materially adversely affect our business, financial condition
and operating results.
Some
of the proprietary technology we employ may be vulnerable to
infringement by others.
Our business is dependent on proprietary technology and other
intellectual property that we own or license from third parties.
Despite precautions we have taken or may take to protect our
intellectual property rights, third parties could copy or
otherwise obtain and use our proprietary technology without
authorization. It may be difficult for us to monitor
unauthorized use of our intellectual property. We cannot assure
you that the steps that we have taken will prevent
misappropriation of our proprietary technology or intellectual
property.
We have filed U.S. patent applications for our electronic
trade confirmation service, our method to allow a participant to
engage in program trading while protecting its data (referred to
as ICEMaker), our method for displaying both cleared and
bilateral OTC contracts in single price stream, our method for
locking prices on electronic trading screens, and our method for
exchanging OTC contracts and futures contracts in similar base
commodities on an electronic trading platform. In addition, we
have been issued a joint U.S. patent with NYMEX covering an
implied market trading system. We have also filed patent
applications in the European Patent Office and Canada for our
electronic trade confirmation service and our method for
displaying cleared and bilateral OTC contracts in a single price
stream, as well as having made a filing under the Patent
Cooperation Treaty with respect to ICEMaker. On May 5,
2006, we filed two new patent applications with the
U.S. patent office and three corresponding patent
applications under the Patent Cooperation Treaty, all of which
related to systems and features for trading commodities
contracts. We cannot assure you that we will obtain any final
patents covering these services, nor can we predict the scope of
any patents issued. In addition, we cannot assure you that any
patent issued will be effective to protect this intellectual
property against misappropriation. Third parties in Europe or
elsewhere could acquire patents covering this or other
intellectual property for which we obtain patents in the United
States, or equivalent intellectual property, as a result of
differences in local laws affecting patentability and patent
validity. Third parties in other jurisdictions might also
misappropriate our intellectual property rights with impunity if
intellectual property protection laws are not actively enforced
in those jurisdictions. Patent infringement
and/or the
grant of parallel patents would erode the value of our
intellectual property.
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We have secured trademark registrations for
IntercontinentalExchange and ICE from
the United States Patent and Trademark Office and from relevant
agencies in Europe as appropriate, as well as registrations for
other trademarks we use in our business. We also have several
U.S. and foreign applications pending for other trademarks we
use in our business. We cannot assure you that any of these
marks for which applications are pending will be registered.
We may have to resort to litigation to enforce our intellectual
property rights, protect our trade secrets, and determine the
validity and scope of the intellectual property rights of others
or defend ourselves from claims of infringement. We may not
receive an adequate remedy for any infringement of our
intellectual property rights, and we may incur substantial costs
and diversion of resources and the attention of management as a
result of litigation, even if we prevail. As a result, we may
choose not to enforce our infringed intellectual property
rights, depending on our strategic evaluation and judgment
regarding the best use of our resources, the relative strength
of our intellectual property portfolio and the recourse
available to us.
We
face significant challenges in implementing our strategic goals
of expanding product and service offerings and attracting new
market participants to our markets. If we do not meet these
challenges, we may not be able to increase our revenues or
remain profitable.
We seek to expand the range of commodity products that can be
traded in our markets and to ensure that trading in those new
products becomes liquid within a sufficiently short period of
time to support viable trading markets. We also seek to expand
the number of contracts traded in our futures markets following
the closure of our open-outcry trading floor. In meeting these
strategic goals, however, we face a number of significant
challenges, including the following:
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To introduce new cleared contracts, we must first obtain the
approval of LCH.Clearnet, our provider of clearing services. The
timing and terms of LCH.Clearnets approval may prevent us
from bringing new cleared contracts to market as quickly and
competitively as our competitors. The approval of LCH.Clearnet
and the timing of its receipt will depend upon the type of
product proposed, the type and extent of system modification
required to establish clearing functionality for the relevant
product and the integration of the new contract with our
electronic platform and other challenges posed. This could
result in a substantial delay between development of a cleared
contract and its offering on our electronic platform.
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Prior to launching a new contract, we must satisfy certain
regulatory obligations, which if not satisfied could delay the
launch of the new contract.
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To expand the use of our electronic platform to additional
participants and contracts, we must continue to expand capacity
without disrupting functionality to satisfy evolving customer
requirements.
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To introduce new trading-related services, we must develop
additional systems technology that will interface successfully
with the wide variety of unique internal systems used by our
participants. These challenges may involve unforeseen costs and
delays.
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We must continue to build significant brand recognition among
commodities market participants in order to attract new
participants to our markets. This will require us to increase
our marketing expenditures. The cost of our marketing efforts
may be greater than we expect, and we cannot assure you that
these efforts will be successful.
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Even if we resolve these issues and are able to introduce new
products and services, there is no assurance that they will be
accepted by our participants, attract new market participants,
or be competitive with those offered by other companies. If we
do not succeed in these efforts on a consistent, sustained
basis, we will be unable to implement our strategic objectives.
This would seriously jeopardize our ability to increase and
diversify our revenues, remain profitable and continue as a
viable competitor in our markets.
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Reductions
in our commission rates resulting from competitive pressures
could lower our revenues and profitability.
We expect to experience pressure on our commission rates as a
result of competition we face in our futures and OTC markets.
Some of our competitors offer a broader range of products and
services to a larger participant base, and enjoy higher trading
volumes, than we do. Consequently, our competitors may be able
and willing to offer commodity trading services at lower
commission rates than we currently offer or may be able to
offer. As a result of this pricing competition, we could lose
both market share and revenues. We believe that any downward
pressure on commission rates would likely continue and intensify
as we continue to develop our business and gain recognition in
our markets. A decline in commission rates could lower our
revenues, which would adversely affect our profitability. In
addition, our competitors may offer other financial incentives
such as rebates or payments in order to induce trading in their
markets, rather than ours.
Our
business may be harmed by computer and communications systems
failures and delays.
We support and maintain many of the systems that comprise our
electronic platform. Our failure to monitor or maintain these
systems, or to find replacements for defective components within
a system in a timely and cost-effective manner when necessary,
could have a material adverse effect on our ability to conduct
our business. Our systems are located primarily in Atlanta,
Georgia and our backup facilities fully replicate our primary
data center. Our redundant systems or disaster recovery plans
may prove to be inadequate.
Our systems, or those of our third party providers, may fail or,
due to capacity constraints, may operate slowly, causing one or
more of the following:
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unanticipated disruption in service to our participants;
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slower response time and delays in our participants trade
execution and processing;
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failed settlement by participants to whom we provide trade
confirmation or clearing services;
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incomplete or inaccurate accounting, recording or processing of
trades;
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our distribution of inaccurate or untimely market data to
participants who rely on this data in their trading
activity; and
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financial loss.
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We could experience system failures due to power or
telecommunications failures, human error on our part or on the
part of our vendors or participants, natural disasters, fire,
sabotage, hardware or software malfunctions or defects, computer
viruses, intentional acts of vandalism or terrorism and similar
events. In these instances, our disaster recovery plan may prove
ineffective. If any one or more of these situations were to
arise, they could result in damage to our business reputation,
participant dissatisfaction with our electronic platform,
prompting participants to trade elsewhere, or exposure to
litigation or regulatory sanctions. As a consequence, our
business, financial condition and results of operations could
suffer materially.
Our
systems and those of our third party service providers may be
vulnerable to security risks, which could result in wrongful use
of our information, or which could make our participants
reluctant to use our electronic platform.
We regard the secure transmission of confidential information on
our electronic platform as a critical element of our operations.
Our networks and those of our participants and our third party
service providers, including LCH.Clearnet, may, however, be
vulnerable to unauthorized access, computer viruses, firewall or
encryption failures and other security problems. We may be
required to expend significant resources to protect ourselves
and our participants against the threat of security breaches or
to alleviate problems caused by security breaches. Although we
intend to continue to implement industry standard security
measures, we cannot assure you that those measures will be
sufficient to protect our business against losses or any reduced
trading volume incurred in our markets as a result of any
significant security breaches on our platform.
25
We
rely on specialized management and employees.
Our future success depends, in part, upon the continued
contributions of our executive officers and key employees who we
rely on for executing our business strategy and identifying new
strategic initiatives. Some of these individuals have
significant experience in the energy commodities trading
industry and financial services markets generally, and possess
extensive technology skills. We rely in particular on Jeffrey C.
Sprecher, our chief executive officer, Charles A. Vice, our
president and chief operating officer, Richard V. Spencer, our
chief financial officer, David S. Goone, our chief strategic
officer, and Edwin D. Marcial, our chief technology officer, as
well as certain other employees responsible for product
development and technological development within our company.
Although we have entered into employment agreements with each of
these executive officers, it is possible that one or more of
these persons could voluntarily terminate their employment
agreements with us. Furthermore, we have not entered into
employment agreements with non-executive personnel, who may
terminate their employment with us at any time. Several of these
employees have been with our company since inception and have
fully vested stock options. Any loss or interruption of the
services of our executive officers or other key personnel could
result in our inability to manage our operations effectively or
to execute our business strategy. We cannot assure you that we
would be able to find appropriate replacements for these key
personnel if the need arose. We may have to incur significant
costs to replace key employees who leave, and our ability to
execute our business strategy could be impaired if we cannot
replace departing employees in a timely manner. Competition in
our industry for persons with trading industry and technology
expertise is intense.
We
rely on third party providers and other suppliers for a number
of services that are important to our business. An interruption
or cessation of an important service or supply by any third
party could have a material adverse effect on our
business.
In addition to our dependence on LCH.Clearnet as a clearing
service provider, we depend on a number of suppliers, such as
online service providers, hosting service and software
providers, data processors, software and hardware vendors,
banks, and telephone companies, for elements of our trading,
clearing and other systems. For example, we rely on Atos
Euronext Market Solutions Limited for the provision of a trade
registration system that routes trades executed in our markets
to LCH.Clearnet for clearing. Atos Euronext Market Solutions
Limited and other companies within the Euronext, N.V. group of
companies, are potential competitors to both our futures
business and our OTC business, which may affect the continued
provision of these services in the future. Moreover, the
proposed merger between NYSE Group, Inc. and Euronext, N.V., as
well as the general trend toward industry consolidation, may
increase the risk that these services may not be available to us
in the future. We also rely on a large international
telecommunications company for the provision of hosting
services. If this company were to discontinue providing these
services to us, we would likely experience significant
disruption to our business until we were able to establish
connectivity with another provider.
We cannot assure you that any of these providers will be able to
continue to provide these services in an efficient,
cost-effective manner or that they will be able to adequately
expand their services to meet our needs. We also cannot assure
you that any of these providers will not terminate its business
relationship with us for competitive reasons or otherwise. An
interruption in or the cessation of an important service or
supply by any third party and our inability to make alternative
arrangements in a timely manner, or at all, would result in lost
revenues and higher costs.
In addition, our participants may access our electronic platform
through 12 independent software vendors, which represent a
substantial portion of the independent software vendors that
serve the commodities markets. The loss of a significant number
of independent software vendors providing access could make our
platform less attractive to participants who prefer this form of
access.
As an
electronic futures and OTC marketplace, we are subject to
significant litigation and liability risks.
Many aspects of our business, and the businesses of our
participants, involve substantial risks of liability. These
risks include, among others, potential liability from disputes
over terms of a trade, the claim that a system failure or delay
caused monetary loss to a participant or that an unauthorized
trade occurred. For example, dissatisfied participants that have
traded on our electronic platform, or those on whose behalf our
participants have traded, may
26
make claims regarding the quality of trade execution, or alleged
improperly confirmed or settled trades, abusive trading
practices, security and confidentiality breaches, mismanagement
or even fraud against us or our participants. In addition,
because of the ease and speed with which sizable trades can be
executed on our electronic platform, participants can lose
substantial amounts by inadvertently entering trade orders or by
entering them inaccurately. A large number of significant error
trades could result in participant dissatisfaction.
As a result, we could incur significant legal expenses defending
claims against us, even those without merit. The adverse
resolution of any lawsuits or claims against us could result in
our obligation to pay substantial damages, and cause us
reputational harm. Our participants may face similar legal
challenges, and these challenges could affect their ability or
willingness to trade on our electronic platform. The initiation
of lawsuits or other claims against us, or against our
participants with regard to their trading activities, could
adversely affect our business, financial condition and results
of operations, whether or not these lawsuits or other claims are
resolved in our favor. If we violate the terms and provisions of
the Commodity Exchange Act under which we operate our OTC
business, or if the CFTC concludes or believes we have violated
other provisions of the Commodity Exchange Act, we could also be
exposed to substantial liability. See also We
are currently subject to regulation in certain of our markets.
Failure to comply with existing regulatory requirements, and
possible future changes in these requirements, could adversely
affect our business.
If we
are compelled to monitor our OTC participants compliance
with applicable standards, our operating expenses and exposure
to private litigation could increase.
While we have self-regulatory status in our futures business, we
currently do not assume responsibility for enforcing compliance
with applicable commercial and legal standards by our
participants when they trade OTC contracts in our markets. If we
determined that it was necessary to undertake such a role in
respect of OTC products for example, to deter
unfavorable regulatory actions, to respond to regulatory actions
or simply to maintain our participants confidence in the
integrity of our OTC markets we would have to
invest heavily in developing new compliance and surveillance
systems, and our operating expenses could increase
significantly. Our assumption of such a role could also increase
our exposure to lawsuits from dissatisfied participants and
other parties claiming that we failed to deter inappropriate or
illegal conduct.
Our
compliance and risk management methods might not be effective
and may result in outcomes that could adversely affect our
financial condition and operating results.
Our ability to comply with applicable laws and rules is largely
dependent on our establishment and maintenance of compliance,
audit and reporting systems, as well as our ability to attract
and retain qualified compliance and other risk management
personnel. Our policies and procedures to identify, monitor and
manage our risks may not be fully effective. Management of
operational, legal and regulatory risk requires, among other
things, policies and procedures to record properly and verify a
large number of transactions and events. We cannot assure you
that our policies and procedures will always be effective or
that we will always be successful in monitoring or evaluating
the risks to which we are or may be exposed.
Risks
Relating to Our Common Stock
The
market price of our common stock may fluctuate significantly,
and it may trade at prices below the offering
price.
The market price of our common stock has, and may continue, to
fluctuate significantly from time to time as a result of many
factors, including:
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investors perceptions of our prospects;
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investors perceptions of the prospects of the commodities
markets and more broadly, the energy markets;
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differences between our actual financial and operating results
and those expected by investors and analysts;
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changes in analysts recommendations or projections;
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fluctuations in quarterly operating results;
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27
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announcements by us or our competitors of significant business
initiatives, acquisitions, strategic partnerships or
divestitures;
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changes or trends in our industry, including trading volumes,
competitive or regulatory changes or changes in the commodities
markets;
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changes in valuations for exchanges and other trading facilities
in general;
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adverse resolution of new or pending litigation against us;
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additions or departures of key personnel;
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the impact, or perceived impact, of additional shares of common
stock becoming freely tradeable;
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changes in general economic conditions; and
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broad market fluctuations.
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In particular, announcements of potentially adverse
developments, such as proposed regulatory changes, new
government investigations or the commencement or threat of
litigation against us or our major participants, as well as
announced changes in our business plans or those of our
competitors, could adversely affect the trading price of our
stock, regardless of the likely outcome of those developments.
Broad market and industry factors may adversely affect the
market price of our common stock, regardless of our actual
operating performance.
Future
sales of our shares could adversely affect the market price of
our common stock.
If our existing shareholders sell substantial amounts of our
common stock in the public market or if we issue a large number
of shares of our common stock in connection with future
acquisitions, the market price of our common stock could decline
significantly. Also, the perception that such sales of a large
number of shares of our common stock could occur may cause our
stock price to decline. Sales by our existing shareholders might
also make it more difficult for us to raise equity capital by
selling common stock at a time and price that we deem
appropriate.
Based on shares outstanding as of March 31, 2006, we have
approximately 55.6 million shares of common stock
outstanding. Of these outstanding shares, approximately
35.0 million shares are restricted securities as defined in
Rule 144 under the Securities Act of 1933 and may be sold
by the holders into the public market from time to time in
accordance with Rule 144. Substantially all of these
restricted shares are eligible for sale under Rule 144(k)
and will be eligible for sale under Rule 144 following
expiration of the lockup agreements to the extent applicable, as
discussed below.
We and the holders of approximately 42.2% of our shares
outstanding following the completion of this
offering including our directors and
officers have agreed to a
90-day
lockup, meaning that, for a period of 90 days following the
date of this prospectus, we and they will not sell shares of our
common stock. However, this lockup is subject to several
exceptions, and the lead underwriters in their sole discretion
may release any of the securities subject to the lockup, at any
time without notice. For a discussion of shares eligible for
future sale and the terms of the lockup agreements, see
Shares Eligible for Future Sale.
We have granted Continental Power Exchange, Inc. and other
designated shareholders, including Goldman, Sachs & Co.
and Morgan Stanley & Co. Incorporated, the right to
require us to register their shares of our common stock that
they received upon conversion of their
Class A2 shares, which represents approximately
17.1 million shares of common stock. Accordingly, the
number of shares subject to registration rights is substantial
and the sale of these shares may have a negative impact on the
market price for our common stock.
Delaware
law and some provisions of our organizational documents and
employment agreements make a takeover of our company more
difficult.
Provisions of our charter and bylaws may have the effect of
delaying, deferring or preventing a change in control of our
company. A change of control could be proposed in the form of a
tender offer or takeover proposal that might result in a premium
over the market price for our common stock. In addition, these
provisions could make
28
it more difficult to bring about a change in the composition of
our board of directors, which could result in entrenchment of
current management. For example, our charter and bylaws:
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require that the number of directors be determined, and any
vacancy or new board seat be filled, only by the board;
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not permit shareholders to act by written consent, other than
for certain class votes by holders of the Class A common
stock;
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not permit shareholders to call a special meeting unless at
least a majority of the shareholders join in the request to call
such a meeting;
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allow a meeting of shareholders to be adjourned or postponed
without the vote of shareholders;
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permit the bylaws to be amended by a majority of the board
without shareholder approval, and require that a bylaw amendment
proposed by shareholders be approved by
662/3%
of all outstanding shares;
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require that notice of shareholder proposals be submitted
between 90 and 120 days prior to the scheduled
meeting; and
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authorize the issuance of undesignated preferred stock, or
blank check preferred stock, by our board of
directors without shareholder approval.
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In addition, Section 203 of the Delaware General
Corporation Law imposes restrictions on mergers and other
business combinations between us and any holder of 15% or more
of our common stock. Delaware law prohibits a publicly held
corporation from engaging in a business combination
with an interested shareholder for three years after
the shareholder becomes an interested shareholder, unless the
corporations board of directors and shareholders approve
the business combination in a prescribed manner or the
interested shareholder has acquired a designated percentage of
our voting stock at the time it becomes an interested
shareholder.
Our employment agreements with our executive officers also
contain change in control provisions. Under the terms of these
employment agreements, all of the stock options granted to these
officers after entering into the agreement will fully vest and
become immediately exercisable if such officers employment
is terminated following, or as a result of, a change in control
of our company. In addition, the executive officer is entitled
to receive a significant cash payment.
These and other provisions of our organizational documents,
employment agreements and Delaware law may have the effect of
delaying, deferring or preventing changes of control or changes
in management of our company, even if such transactions or
changes would have significant benefits for our shareholders. As
a result, these provisions could limit the price some investors
might be willing to pay in the future for shares of our common
stock.
We do
not expect to pay any dividends for the foreseeable
future.
We do not anticipate paying any dividends to our shareholders
for the foreseeable future. Accordingly, investors must be
prepared to rely on sales of their common stock after price
appreciation to earn an investment return, which may never
occur. Investors seeking cash dividends should not purchase our
common stock. Any determination to pay dividends in the future
will be made at the discretion of our board of directors and
will depend upon our results of operations, financial
conditions, contractual restrictions, restrictions imposed by
applicable law or the Securities and Exchange Commission and
other factors our board deems relevant.
29
FORWARD-LOOKING
STATEMENTS
This prospectus, including the sections entitled
Prospectus Summary, Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and
Business contains forward-looking statements that
are based on our present beliefs and assumptions and on
information currently available to us. You can identify
forward-looking statements by terminology such as
may, will, should,
could, would, targets,
goal, expect, intend,
plan, anticipate, believe,
estimate, predict,
potential, continue, or the negative of
these terms or other comparable terminology. These statements
relate to future events or our future financial performance and
involve known and unknown risks, uncertainties and other factors
that may cause our actual results, levels of activity,
performance or achievements to differ materially from those
expressed or implied by these forward-looking statements. These
risks and other factors include those listed under Risk
Factors and elsewhere in this prospectus and other filings
with the SEC. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance
or achievements. We caution you not to place undue reliance on
these forward-looking statements. Forward-looking statements and
other factors that may affect our performance include, but are
not limited to:
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our expectations regarding our revenues for the three months
ended June 30, 2006;
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our expectations regarding the business environment in which we
operate and trends in our industry, including increasing
competition, including possible new entrants into our markets;
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our ability to keep pace with rapid technological developments;
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our plans not to adjust commission rates and our belief that we
will attract trading without entering into order flow agreements;
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the accuracy of our expectations of various costs;
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the benefits that we anticipate will result from the closure of
our open-outcry trading floor;
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our belief that cash flows will be sufficient to fund our
working capital needs and capital expenditures, at least through
the end of 2007;
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our ability to, on a timely and cost-effective basis, increase
the connectivity to our marketplace, expand our market data
business, develop new products and services, and pursue select
strategic acquisitions and alliances, all on timely,
cost-effective basis;
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our ability to maintain existing market participants and attract
new ones;
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our ability to protect our intellectual property rights,
including the costs associated with such protection, and our
ability to operate our business without violating the
intellectual property rights of others;
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our expectation that our selling, general and administrative
expenses will increase in future periods;
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the impact of any changes in domestic and foreign regulations or
government policy, including any changes or reviews of
previously issued regulations and policies;
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potential adverse litigation results;
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our belief that our electronic trade confirmation service could
attract new market participants; and
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our belief in our electronic platform and disaster recovery
system technologies, as well as our ability to gain access on a
timely basis to comparable products and services if our key
technology contracts were terminated.
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Any forward-looking statement speaks only as of the date on
which such statement is made, and we undertake no obligation to
update any forward-looking statement or statements to reflect
events or circumstances after the date on which such statement
is made or to reflect the occurrence of an unanticipated event.
New factors emerge from time to time, and it is not possible for
management to predict all factors that may affect our business
and prospects. Further, management cannot assess the impact of
each factor on our business or the extent to which any factor,
or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking
statements.
30
USE OF
PROCEEDS
We will not receive any of the proceeds from the sale of shares
of our common stock by the selling shareholders, including any
proceeds from the selling shareholders sale of additional
shares upon exercise of the underwriters option to
purchase additional shares.
Based upon our sale of 25,000 shares of common stock at an
assumed offering price of $57.94 (the last reported sale price
of our common stock on the New York Stock Exchange on
June 30, 2006), we expect to receive net proceeds from our
sale of shares in this offering of $404,181 after deducting the
estimated underwriting discount and offering expenses, which are
payable by us. The proceeds we receive in this offering from our
sale of shares of common stock will be used to pay our costs and
expenses of $990,000 associated with this offering.
DIVIDEND
POLICY
We have never declared or paid cash dividends on our capital
stock. We do not anticipate paying any cash dividends in the
foreseeable future. We currently intend to retain all available
funds and any future earnings to fund the development and growth
of our business.
PRICE
RANGE OF OUR COMMON STOCK
Our common stock has been traded on the New York Stock Exchange
under the symbol ICE since November 16, 2005.
Prior to that time there was no public market for our common
stock. As of June 30, 2006, there were 90 record holders of
our common stock, four holders of record of our Class A
common stock, Series 2 and no holders of record of our
Class A common stock, Series 1. No dividends have ever
been paid on our common stock. See Dividend Policy.
On June 30, 2006, our common stock traded at a high of
$57.94 and a low of $53.70. The following table sets forth, for
the periods indicated, the high and low sales prices for our
common stock, as reported on the New York Stock Exchange.
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Price
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High
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Low
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2005
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Fourth Quarter(1)
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$
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44.21
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$
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31.27
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2006
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First Quarter
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73.59
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36.00
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Second Quarter
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82.40
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45.27
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(1) |
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Fourth quarter figures are given for the period from
November 16, 2005 (the date on which our common stock
commenced trading on the New York Stock Exchange) to
December 31, 2005. |
31
CAPITALIZATION
The following table sets forth our cash and cash equivalents,
restricted cash, short-term investments and capitalization as of
March 31, 2006 on an actual basis based upon our present
capitalization and on a pro forma as adjusted basis to reflect
the sale of 25,000 shares of our common stock offered by us
in this offering at an assumed offering price of $57.94 per
share (the last reported sale price of our common stock on the
New York Stock Exchange on June 30, 2006), after deducting
the estimated underwriting discounts and commissions and our
estimated offering expenses payable by us.
The outstanding share information excludes:
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4,594,392 shares of our common stock issuable upon the
exercise of stock options outstanding under our 2000 Stock
Option Plan, 1,446,674 shares issuable pursuant to
outstanding awards under our 2004 Restricted Stock Plan,
150,184 shares issuable pursuant to outstanding awards
under our 2005 Equity Incentive Plan and 24,865 shares
issuable pursuant to outstanding awards under our 2003
Restricted Stock Deferral Plan for Outside Directors, in all
cases, as of March 31, 2006; and
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402,424 shares of our common stock available for future
issuance under our 2000 Stock Option Plan, 1,974,816 shares
available for future issuance under our 2005 Equity Incentive
Plan, 225,135 shares available for future issuance under
our 2003 Restricted Stock Deferral Plan for Outside Directors
and 28,326 shares available for future issuance under our
2004 Restricted Stock Plan, in all cases, as of March 31,
2006.
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This table should be read in conjunction with Selected
Consolidated Financial Data, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and
related notes included elsewhere in this prospectus.
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As of March 31,
2006
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As Adjusted
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for This
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Actual
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Offering
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(In thousands)
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Cash and cash equivalents
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$
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8,198
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$
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8,602
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Restricted cash(1)
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$
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12,942
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$
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12,942
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Short-term investments(2)
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$
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133,893
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$
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133,893
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Shareholders equity:
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Preferred Stock, $0.01 par
value per share, 25,000,000 shares authorized and no shares
issued or outstanding, actual and as adjusted for this offering
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$
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$
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Common Stock, $0.01 par value
per share, 194,275,000 shares authorized;
20,566,678 shares issued and outstanding, actual;
28,566,678 shares issued and outstanding, as adjusted for
this offering(3)
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206
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286
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Class A common stock,
Series 1, $0.01 par value per share, 5,725,000 shares
authorized; 695,895 shares issued and outstanding, actual
and as adjusted for this offering(3)
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7
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7
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Class A common stock,
Series 2, $0.01 par value per share, 75,000,000 shares
authorized; 35,860,290 shares issued and
34,301,123 shares outstanding, actual;
27,885,290 shares issued and 26,326,123 shares
outstanding, as adjusted for this offering(3)
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359
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279
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Treasury stock, at cost
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(7,312
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)
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(7,312
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)
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Additional paid-in capital
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175,623
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176,027
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Retained earnings
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67,575
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67,575
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Accumulated other comprehensive
income
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20,203
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20,203
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Total shareholders equity
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|
|
256,661
|
|
|
|
257,065
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
256,661
|
|
|
$
|
257,065
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
(1) |
|
We classify all cash and cash equivalents that are not available
for general use either due to Financial Services Authority
requirements or through restrictions in specific agreements as
restricted cash. See note 3 to our consolidated financial
statements that are included elsewhere in this prospectus. |
|
(2) |
|
An additional $8.6 million is classified as long-term
investments. See note 4 to our consolidated financial
statements that are included elsewhere in this prospectus. |
|
|
|
(3) |
|
Pursuant to our charter and resolutions adopted by our board of
directors, our Class A1 shares became convertible into
shares of new common stock on February 19, 2006 (with
certain exceptions) and shares of our Class A2 shares
became convertible into shares of new common stock on
May 20, 2006. After giving effect to the conversion of all
shares of Class A common stock for which conversion has
been elected by our holders, 55,585,485 shares of common
stock, no Class A1 shares and 3,211
Class A2 shares are issued and outstanding, as
adjusted for this offering. |
33
SELECTED
CONSOLIDATED FINANCIAL DATA
The following tables present our selected consolidated financial
data as of and for the dates and periods indicated. We derived
the selected consolidated financial data set forth below for the
three months ended March 31, 2006 and 2005 and as of
March 31, 2006 from our unaudited consolidated financial
statements that are included elsewhere in this prospectus. We
derived the selected consolidated financial data set forth below
for the years ended December 31, 2005, 2004 and 2003 and as
of December 31, 2005 and 2004 from our consolidated
financial statements, which have been audited by
Ernst & Young LLP, independent registered public
accounting firm, and are included elsewhere in this prospectus.
We derived the selected consolidated financial data set forth
below for the years ended December 31, 2002 and 2001 and as
of December 31, 2003, 2002 and 2001 from our audited
consolidated financial statements, which have been audited by
Ernst & Young LLP, and are not included in this
prospectus. We converted from a limited liability company to a
corporation on June 15, 2001.
The selected consolidated financial data presented below is not
indicative of our future results for any period. In
managements opinion, the unaudited information has been
prepared on substantially the same basis as the consolidated
financial statements appearing elsewhere in this prospectus and
includes all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the unaudited
consolidated data. The selected consolidated financial data set
forth below should be read in conjunction with our consolidated
financial statements and related notes and
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(In thousands, except for share
and per share data)
|
|
|
Consolidated Statement of
Income/(Loss) Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction fees, net(2)
|
|
$
|
43,235
|
|
|
$
|
27,085
|
|
|
$
|
136,976
|
|
|
$
|
90,906
|
|
|
$
|
81,434
|
|
|
$
|
118,794
|
|
|
$
|
63,526
|
|
Market data fees
|
|
|
6,022
|
|
|
|
3,482
|
|
|
|
14,642
|
|
|
|
12,290
|
|
|
|
9,624
|
|
|
|
5,237
|
|
|
|
2,589
|
|
Other
|
|
|
1,025
|
|
|
|
1,261
|
|
|
|
4,247
|
|
|
|
5,218
|
|
|
|
2,688
|
|
|
|
1,459
|
|
|
|
748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
50,282
|
|
|
|
31,828
|
|
|
|
155,865
|
|
|
|
108,414
|
|
|
|
93,746
|
|
|
|
125,490
|
|
|
|
66,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
10,617
|
|
|
|
7,886
|
|
|
|
35,753
|
|
|
|
30,074
|
|
|
|
26,236
|
|
|
|
27,906
|
|
|
|
15,970
|
|
Professional services
|
|
|
2,690
|
|
|
|
3,200
|
|
|
|
10,124
|
|
|
|
12,312
|
|
|
|
13,066
|
|
|
|
14,344
|
|
|
|
7,340
|
|
Selling, general and administrative
|
|
|
6,134
|
|
|
|
4,376
|
|
|
|
18,886
|
|
|
|
16,610
|
|
|
|
16,185
|
|
|
|
17,919
|
|
|
|
9,571
|
|
Floor closure costs(3)
|
|
|
|
|
|
|
|
|
|
|
4,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement expense(4)
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,188
|
|
|
|
3,958
|
|
|
|
15,083
|
|
|
|
17,024
|
|
|
|
19,341
|
|
|
|
14,368
|
|
|
|
7,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
22,629
|
|
|
|
19,420
|
|
|
|
99,660
|
|
|
|
76,020
|
|
|
|
74,828
|
|
|
|
74,537
|
|
|
|
39,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
27,653
|
|
|
|
12,408
|
|
|
|
56,205
|
|
|
|
32,394
|
|
|
|
18,918
|
|
|
|
50,953
|
|
|
|
26,930
|
|
Other income (expense), net
|
|
|
1,108
|
|
|
|
992
|
|
|
|
3,790
|
|
|
|
1,328
|
|
|
|
948
|
|
|
|
1,492
|
|
|
|
(385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
28,761
|
|
|
|
13,400
|
|
|
|
59,995
|
|
|
|
33,722
|
|
|
|
19,866
|
|
|
|
52,445
|
|
|
|
26,545
|
|
Income tax expense
|
|
|
9,097
|
|
|
|
4,530
|
|
|
|
19,585
|
|
|
|
11,773
|
|
|
|
6,489
|
|
|
|
17,739
|
|
|
|
10,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(5)
|
|
$
|
19,664
|
|
|
$
|
8,870
|
|
|
$
|
40,410
|
|
|
$
|
21,949
|
|
|
$
|
13,377
|
|
|
$
|
34,706
|
|
|
$
|
15,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(In thousands, except for share
and per share data)
|
|
|
Redemption adjustments to
redeemable stock put(6)
|
|
|
|
|
|
|
|
|
|
|
(61,319
|
)
|
|
|
|
|
|
|
8,378
|
|
|
|
(10,730
|
)
|
|
|
(6,144
|
)
|
Deduction for accretion of
Class B redeemable common stock(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,768
|
)
|
|
|
(3,656
|
)
|
|
|
(1,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to
common shareholders
|
|
$
|
19,664
|
|
|
$
|
8,870
|
|
|
$
|
(20,909
|
)
|
|
$
|
21,949
|
|
|
$
|
19,987
|
|
|
$
|
20,320
|
|
|
$
|
7,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share(8):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.35
|
|
|
$
|
0.17
|
|
|
$
|
(0.39
|
)
|
|
$
|
0.42
|
|
|
$
|
0.37
|
|
|
$
|
0.37
|
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.33
|
|
|
$
|
0.17
|
|
|
$
|
(0.39
|
)
|
|
$
|
0.41
|
|
|
$
|
0.37
|
|
|
$
|
0.37
|
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding(8):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
55,532,693
|
|
|
|
52,866,295
|
|
|
|
53,217,874
|
|
|
|
52,865,108
|
|
|
|
54,328,966
|
|
|
|
54,392,602
|
|
|
|
29,778,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
58,972,248
|
|
|
|
53,063,138
|
|
|
|
53,217,874
|
|
|
|
53,062,078
|
|
|
|
54,639,708
|
|
|
|
54,850,095
|
|
|
|
29,873,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes revenues from related parties generated in the ordinary
course of our business. For a presentation and discussion of our
revenues attributable to related parties for the three months
ended March 31, 2006 and 2005 and for the years ended
December 31, 2005, 2004 and 2003, see our consolidated
statements of income and note 13 to our consolidated
financial statements that are included elsewhere in this
prospectus. |
|
(2) |
|
Our transaction fees are presented net of rebates. For a
discussion of these rebates, see Managements
Discussion and Analysis of Financial Condition and Results of
Operations Sources of
Revenues Transaction Fees. |
|
(3) |
|
In April 2005, we closed our open-outcry trading floor in London
to take advantage of increasing acceptance and adoption of
electronic trading, and to maintain and enhance our competitive
position. Costs associated with the floor closure were
$4.8 million and are classified as Floor closure
costs in the accompanying consolidated statement of income
for the year ended December 31, 2005. Floor closure costs
include lease terminations for the building where the floor was
located, payments made to 18 employees who were terminated as a
result of the closure, contract terminations, legal costs, asset
impairment and other associated costs. No floor closure costs
were incurred in prior periods and no additional closure costs
are expected to be incurred. See note 18 to our
consolidated financial statements that are included elsewhere in
this prospectus. |
|
(4) |
|
In September 2005, we settled the legal action brought by EBS
related to alleged patent infringement. Under the settlement
agreement, we made a payment to EBS of $15.0 million, and
were released from the legal claims brought against us without
admitting liability. The payment was recorded as
Settlement expense in the accompanying consolidated
statement of income for the year ended December 31, 2005.
See note 17 to our consolidated financial statements that
are included elsewhere in this prospectus. |
|
(5) |
|
The financial results for the year ended December 31, 2005
include $4.8 million in expenses incurred relating to the
closure of our open-outcry trading floor in London and a
$15.0 million settlement expense related to the payment
made to EBS to settle litigation. Excluding these charges, net
of taxes, our consolidated net income for the year ended
December 31, 2005 would have been $53.1 million. See
Managements Discussion and Analysis of Financial
Condition and Results of
Operations Non-GAAP Financial
Measures. |
|
(6) |
|
In connection with our formation, we granted a put option to
Continental Power Exchange, Inc., an entity controlled by our
chairman and chief executive officer, Jeffrey C. Sprecher. The
put option would have required us under certain circumstances to
purchase Continental Power Exchange, Inc.s equity interest
in our business at a purchase price equal to the greater of the
fair market value of the equity interest or $5 million. We
initially recorded the redeemable stock put at the minimum
$5 million redemption threshold. We adjusted the redeemable
stock put to its redemption amount at each subsequent balance
sheet date. Adjustments to the redemption amount were recorded
to retained earnings or, in the absence of positive retained
earnings, |
35
|
|
|
|
|
additional paid-in capital. In October 2005, we entered into an
agreement with Continental Power Exchange, Inc. to terminate the
redeemable stock put upon the closing of our initial public
offering of common stock in November 2005. We increased the
redeemable stock put by $61.3 million during the year ended
December 31, 2005 to reflect an increase in the estimated
fair value of our common stock from $8.00 per share as of
December 31, 2004 to $35.90 per share as of
November 21, 2005, the closing date of our initial public
offering of common stock and the termination date of the
redeemable stock put. The balance of the redeemable stock put on
November 21, 2005 was $78.9 million and was
reclassified to additional paid-in capital upon its termination.
See note 10 to our consolidated financial statements that
are included elsewhere in this prospectus. In connection with
the termination of the put option, we amended certain
registration rights previously granted to Continental Power
Exchange, Inc. pursuant to which we may be obligated to pay the
expenses of registration, including underwriting discounts up to
a maximum of $4.5 million. |
|
(7) |
|
We redeemed all of our Class B redeemable common stock on
November 23, 2004 at a price of $23.58 per share, for
aggregate consideration of $67.5 million. Upon its issuance
on June 18, 2001, we recorded our Class B redeemable
common stock at its discounted present value of
$60.2 million. We recorded charges to retained earnings for
the accretion of this amount up to the $67.5 million
redemption value of our Class B redeemable common stock
over a two-year period ending in June 2003, which was the
earliest potential redemption date. |
|
(8) |
|
The impact of outstanding stock options is considered to be
antidilutive in the calculation of diluted earnings per share
when a net loss available to common shareholders is reported.
Our outstanding stock options have not been included in the
computation of diluted loss per share for the year ended
December 31, 2005 due to the $20.9 million net loss
available to common shareholders as a result of the
$61.3 million charged to retained earnings related to the
redeemable stock put adjustments. Therefore, our diluted loss
per share is computed in the same manner as basic loss per share
for the year ended December 31, 2005. If the redemption
adjustments to the redeemable stock put are excluded from the
calculation of earnings per share, the resulting adjusted basic
earnings per share would have been $0.76 based on the
$40.4 million in consolidated net income for the year ended
December 31, 2005 and adjusted diluted earnings per share
would have been $0.74. The adjusted diluted earnings per share
would have been based on 54.4 million in adjusted diluted
weighted average common shares outstanding, which includes
1.2 million stock options and restricted stock having a
dilutive effect for the year ended December 31, 2005. The
adjusted basic and diluted earnings per share for the year ended
December 31, 2005, excluding the redeemable stock put
adjustments, the $4.8 million floor closure costs and the
$15.0 million settlement expenses, would have been $1.00
and $0.98, respectively. See Managements Discussion
and Analysis of Financial Condition and Results of
Operations Non-GAAP Financial Measures. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
As of
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents(1)(2)
|
|
$
|
8,198
|
|
|
$
|
20,002
|
|
|
$
|
61,199
|
|
|
$
|
44,913
|
|
|
$
|
33,627
|
|
|
$
|
25,610
|
|
Restricted cash and restricted
short-term investments(1)(3)
|
|
|
12,942
|
|
|
|
12,578
|
|
|
|
18,421
|
|
|
|
36,797
|
|
|
|
8,876
|
|
|
|
8,157
|
|
Short-term investments(2)
|
|
|
133,893
|
|
|
|
111,181
|
|
|
|
5,700
|
|
|
|
12,000
|
|
|
|
4,000
|
|
|
|
|
|
Total current assets
|
|
|
181,935
|
|
|
|
164,015
|
|
|
|
100,042
|
|
|
|
105,893
|
|
|
|
60,841
|
|
|
|
46,814
|
|
Property and equipment, net
|
|
|
21,556
|
|
|
|
20,348
|
|
|
|
19,364
|
|
|
|
25,625
|
|
|
|
32,843
|
|
|
|
18,567
|
|
Long-term investments(4)
|
|
|
8,618
|
|
|
|
2,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangible
assets, net
|
|
|
76,654
|
|
|
|
76,054
|
|
|
|
86,075
|
|
|
|
81,448
|
|
|
|
73,950
|
|
|
|
67,727
|
|
Total assets
|
|
|
291,696
|
|
|
|
265,770
|
|
|
|
207,518
|
|
|
|
214,879
|
|
|
|
170,053
|
|
|
|
134,957
|
|
Total current liabilities
|
|
|
28,249
|
|
|
|
26,394
|
|
|
|
34,440
|
|
|
|
17,917
|
|
|
|
17,603
|
|
|
|
30,023
|
|
Revolving credit
facility current and long-term(1)(2)
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related-party notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,201
|
|
Obligations under capital
leases current and long-term
|
|
|
|
|
|
|
|
|
|
|
482
|
|
|
|
2,130
|
|
|
|
2,656
|
|
|
|
1,306
|
|
Class B redeemable common
stock(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,500
|
|
|
|
65,732
|
|
|
|
62,076
|
|
Redeemable stock put(5)
|
|
|
|
|
|
|
|
|
|
|
17,582
|
|
|
|
17,582
|
|
|
|
25,960
|
|
|
|
15,230
|
|
Shareholders equity(3)(5)
|
|
|
256,661
|
|
|
|
232,623
|
|
|
|
132,149
|
|
|
|
101,194
|
|
|
|
50,021
|
|
|
|
19,540
|
|
36
|
|
|
(1) |
|
The redemption of the Class B redeemable common stock
occurred in November 2004 and resulted in an $18.5 million
reduction in cash and cash equivalents, a $24.0 million
reduction in restricted short-term investments, a
$25.0 million increase in current and long-term debt and a
corresponding $67.5 million reduction in Class B
redeemable common stock. |
|
(2) |
|
We received net proceeds from our initial public offering of our
common stock in November 2005 of $60.8 million, after
deducting the underwriting discount. We used a portion of these
net proceeds to repay all outstanding borrowings under our
$25.0 million revolving credit facility. We also invested a
portion of our cash in excess of short-term operating needs in
investment-grade marketable debt securities and municipal bonds. |
|
(3) |
|
We adopted FASB Interpretation No. 46, Consolidation
of Variable Interest Entities, during 2003, which resulted
in the consolidation of a variable interest entity and an
increase in restricted short-term investments and a
corresponding increase in additional paid-in capital of
$24.0 million. See note 9 to our consolidated
financial statements that are included elsewhere in this
prospectus. |
|
(4) |
|
Represents
available-for-sale
investments that we intend to hold for more than one year
pursuant to our cash investment policy. See note 4 to our
consolidated financial statements that are included elsewhere in
this prospectus. |
|
(5) |
|
In October 2005, we entered into an agreement with Continental
Power Exchange, Inc. to cancel the redeemable stock put upon the
closing of the initial public offering of our common stock in
November 2005. See note 10 to our consolidated financial
statements that are included elsewhere in this prospectus. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001(1)
|
|
|
|
(In thousands, except for
percentages)
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Market Share of Selected Key
Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total crude oil futures contracts
traded globally(2)
|
|
|
29,514
|
|
|
|
20,384
|
|
|
|
91,049
|
|
|
|
78,477
|
|
|
|
69,450
|
|
|
|
67,173
|
|
|
|
55,926
|
|
Our ICE Brent Crude oil futures
contracts traded
|
|
|
10,174
|
|
|
|
6,162
|
|
|
|
30,412
|
|
|
|
25,458
|
|
|
|
24,013
|
|
|
|
21,493
|
|
|
|
18,395
|
|
Our ICE WTI Crude oil futures
contracts traded
|
|
|
2,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our crude oil futures market
share(2)
|
|
|
42.3
|
%
|
|
|
30.2
|
%
|
|
|
33.4
|
%
|
|
|
32.4
|
%
|
|
|
34.6
|
%
|
|
|
32.0
|
%
|
|
|
32.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cleared OTC Henry Hub
natural gas contracts traded on us and NYMEX-ClearPort
|
|
|
17,434
|
|
|
|
8,847
|
|
|
|
53,166
|
|
|
|
21,241
|
|
|
|
6,869
|
|
|
|
1,170
|
|
|
|
|
|
Our cleared OTC Henry Hub natural
gas contracts traded
|
|
|
13,851
|
|
|
|
6,832
|
|
|
|
42,760
|
|
|
|
15,887
|
|
|
|
4,512
|
|
|
|
792
|
|
|
|
|
|
Our market
share cleared OTC Henry Hub natural gas vs.
NYMEX-ClearPort(3)
|
|
|
79.4
|
%
|
|
|
77.2
|
%
|
|
|
80.4
|
%
|
|
|
74.8
|
%
|
|
|
65.7
|
%
|
|
|
67.7
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cleared OTC PJM financial
power contracts traded on us and NYMEX-ClearPort
|
|
|
522
|
|
|
|
352
|
|
|
|
1,886
|
|
|
|
748
|
|
|
|
149
|
|
|
|
|
|
|
|
|
|
Our cleared OTC PJM financial
power contracts traded
|
|
|
444
|
|
|
|
240
|
|
|
|
1,234
|
|
|
|
513
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
Our market
share cleared OTC PJM financial power vs.
NYMEX-ClearPort(4)
|
|
|
85.1
|
%
|
|
|
68.1
|
%
|
|
|
65.4
|
%
|
|
|
68.7
|
%
|
|
|
4.0
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001(1)
|
|
|
|
(In thousands, except for
percentages)
|
|
|
Our Average Daily Trading Fee
Revenues(5):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our futures business average daily
exchange fee revenues
|
|
$
|
296
|
|
|
$
|
198
|
|
|
$
|
226
|
|
|
$
|
179
|
|
|
$
|
158
|
|
|
$
|
125
|
|
|
$
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our bilateral OTC business average
daily commission fee revenues
|
|
|
87
|
|
|
|
78
|
|
|
|
79
|
|
|
|
80
|
|
|
|
112
|
|
|
|
330
|
|
|
|
194
|
|
Our cleared OTC business average
daily commission fee revenues
|
|
|
294
|
|
|
|
162
|
|
|
|
233
|
|
|
|
94
|
|
|
|
24
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our OTC business average daily
commission fee revenues
|
|
|
381
|
|
|
|
240
|
|
|
|
312
|
|
|
|
174
|
|
|
|
136
|
|
|
|
335
|
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our total average daily exchange
fee and commission fee revenues
|
|
$
|
677
|
|
|
$
|
438
|
|
|
$
|
538
|
|
|
$
|
353
|
|
|
$
|
294
|
|
|
$
|
460
|
|
|
$
|
286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Trading Volume(6):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures volume
|
|
|
16,659
|
|
|
|
8,739
|
|
|
|
42,055
|
|
|
|
35,541
|
|
|
|
33,341
|
|
|
|
30,441
|
|
|
|
26,423
|
|
Futures average daily volume
|
|
|
260
|
|
|
|
143
|
|
|
|
166
|
|
|
|
140
|
|
|
|
132
|
|
|
|
121
|
|
|
|
104
|
|
OTC volume
|
|
|
19,970
|
|
|
|
10,859
|
|
|
|
61,999
|
|
|
|
30,961
|
|
|
|
24,260
|
|
|
|
43,982
|
|
|
|
24,875
|
|
OTC average daily volume
|
|
|
322
|
|
|
|
178
|
|
|
|
247
|
|
|
|
123
|
|
|
|
97
|
|
|
|
175
|
|
|
|
99
|
|
|
|
|
(1) |
|
Information for 2001 for our futures business reflects trading
activity for the entire year, including trading activity that
occurred prior to our acquisition in June 2001 of ICE Futures
(formerly known as the International Petroleum Exchange). |
|
(2) |
|
Total crude oil futures contracts traded globally and our
resulting crude oil futures market share is calculated based on
the number of ICE Brent Crude futures contracts traded and ICE
WTI Crude futures contracts traded as compared to the total
number of ICE Brent Crude futures contracts, ICE WTI Crude
futures contracts traded and NYMEX Light Sweet Crude and London
Brent Crude futures contracts traded. |
|
(3) |
|
Our cleared OTC Henry Hub market share versus NYMEX-ClearPort is
calculated based on the number of ICE cleared Henry Hub natural
gas contracts traded as a percentage of the total ICE cleared
Henry Hub natural gas contracts and NYMEX-ClearPort Henry Hub
natural gas futures contracts traded. |
|
(4) |
|
Our cleared OTC PJM financial power market share versus
NYMEX-ClearPort is calculated based on the number of ICE cleared
PJM financial power contracts traded as a percentage of the
total ICE cleared PJM financial power contracts and
NYMEX-ClearPort cleared PJM financial power contracts traded.
PJM refers to the Pennsylvania, New Jersey and Maryland power
trading hub. The NYMEX-ClearPort cleared PJM financial power
contract was launched in April 2003 and our PJM financial power
contract was launched in November 2003. Data regarding the
volumes of NYMEX-ClearPort cleared PJM financial power contracts
traded is derived from the Futures Industry Association. |
|
(5) |
|
Represents the total commission fee and exchange fee revenues
for the period divided by the number of trading days during the
period. |
|
(6) |
|
Volume is calculated based on the number of contracts traded in
our markets, which is the number of round turn trades. Each
round turn trade represents a matched buy and sell order of one
contract. Average daily volume represents the total volume, in
contracts, for the period divided by the number of trading days
during that period. |
38
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements
that involve risks and uncertainties. Our actual results could
differ materially from those anticipated in these
forward-looking statements for many reasons, including those set
forth under the heading Risk Factors and elsewhere
in this prospectus. The following discussion is qualified in its
entirety by, and should be read in conjunction with, the more
detailed information contained in our Selected
Consolidated Financial Data and our consolidated financial
statements and related notes included elsewhere in this
prospectus.
Overview
We operate the leading electronic global futures and
over-the-counter,
or OTC, marketplace for trade execution in a broad array of
energy products. Currently, we are the only marketplace to offer
an integrated electronic platform for trading energy products in
both futures and OTC markets. Through our widely-distributed
electronic trading platform, our marketplace brings together
buyers and sellers of derivative and physical energy commodities
contracts. We operate our business in, and report our financial
results based on, three distinct markets: futures markets, OTC
markets and market data markets. Futures markets offer trading
in standardized derivative contracts on a regulated exchange and
OTC markets offer trading in over-the-counter, or off-exchange,
derivative contracts, including contracts that provide for the
physical delivery of an underlying commodity or for financial
settlement based on the price of an underlying commodity.
Through our market data segment, we offer a variety of market
data services and products for both futures and OTC market
participants and observers. During the three months ended
March 31, 2006, 16.7 million contracts were traded in
our futures markets and 20.0 million contracts were traded
in our OTC markets, up 90.6% from 8.7 million futures
contracts traded during the three months ended March 31,
2005 and up 83.9% from 10.9 million OTC contracts traded
during the three months ended March 31, 2005. During the
year ended December 31, 2005, 42.1 million contracts
were traded in our futures markets and 62.0 million
contracts were traded in our OTC markets, up 18.3% from
35.5 million futures contracts traded during the year ended
December 31, 2004 and up 100.2% from 31.0 million OTC
contracts traded during the year ended December 31, 2004.
Our futures business segment consists primarily of trade
execution in futures contracts and options on futures contracts,
which we conduct through our subsidiary, ICE Futures.
Historically, we offered futures trading both on our electronic
platform and on our open-outcry trading floor. We closed our
open-outcry trading floor in London on April 7, 2005 and
all of our futures trading is now conducted exclusively in our
electronic markets. This decision allowed us to maintain and
enhance our competitive position in our futures markets, and to
take advantage of the increasing demand for electronically
traded markets. Our OTC business segment consists of trade
execution in OTC energy contracts conducted exclusively on our
electronic platform and the provision of trading-related
services, including OTC electronic trade confirmation and OTC
risk management functionality. Our market data business segment,
which we conduct through our subsidiary, ICE Data, consists of
the distribution of electronically generated, verifiable energy
market data primarily derived from actual trades executed in our
marketplace.
On a consolidated basis, we generated $50.3 million in
revenues for the three months ended March 31, 2006, a 58.0%
increase compared to $31.8 million for the three months
ended March 31, 2005. On a consolidated basis, we generated
$19.7 million in net income for the three months ended
March 31, 2006, a 121.7% increase compared to
$8.9 million during the three months ended March 31,
2005. On a consolidated basis, we generated $155.9 million
in revenues for the year ended December 31, 2005, a 43.8%
increase compared to $108.4 million for the year ended
December 31, 2004. On a consolidated basis, we generated
$40.4 million in net income for the year ended
December 31, 2005, a 84.1% increase compared to
$21.9 million for the year ended December 31, 2004.
The financial results for the year ended December 31, 2005
include $4.8 million in expenses incurred relating to the
closure of our open-outcry trading floor in London and a
$15.0 million settlement expense related to the payment to
EBS to settle litigation.
39
Our
Business Environment
Trading activity in global derivatives markets has risen in the
past decade as the number of available trading products and
venues has increased. This, in turn, has enabled a growing
number and range of market participants to access these markets.
As energy markets began to deregulate in the early 1990s,
new derivative products were developed to satisfy the increasing
demand for energy risk management tools and investment
strategies. The range of derivative energy products has expanded
to include instruments such as futures, forwards, swaps,
differentials, spreads and options. Volume growth in both our
futures markets and our OTC markets has been driven by steadily
increasing demand for these contracts and our ability to provide
liquidity in the markets for these products.
Our business is primarily transaction-based, and our revenues
and profitability relate directly to the level of trading
activity in our markets. Trading volumes are driven by a number
of factors, including the degree of volatility in commodities
prices. Higher price volatility increases the need to hedge
contractual price risk and creates opportunities for arbitrage
or speculative trading. While higher energy prices do not have a
direct correlation to our trading volumes, changes in the
absolute price level of energy commodities, such as those
experienced in recent years in crude oil, can have a significant
impact on our trading volumes. Changes in our futures trading
volumes and OTC average daily commissions have also been driven
by varying levels of liquidity both in our markets and in the
broader markets for energy commodities trading, which influence
trading volumes across all of the markets we operate. For
example, the use of clearing in the OTC markets has served to
increase participation in the OTC markets by non-traditional
participants. This in turn has increased liquidity in formerly
illiquid contracts and resulted in increased trading activity,
particularly in North American natural gas and power markets.
Our trading volumes in our futures business segment were also
favorably impacted by our transition to electronic trading in
April 2005 when the distribution of our futures markets was
significantly expanded through increased use of screen-based
trading.
Commodity futures markets are highly regulated and offer trading
of standardized contracts. The futures markets are more
structured and mature than the institutional markets for OTC
energy trading. In our futures business segment, rising demand
for, among other things, increased price discovery and risk
management tools in the energy sector has driven annual record
trading volumes for eight consecutive years at ICE Futures and
its predecessor company.
Unlike the futures markets, the OTC markets generally involve
limited regulation and offer customization of contract terms by
counterparties. While the OTC markets have matured considerably
in recent years, contracts traded in the OTC markets are
generally less standardized than the futures markets. These
markets have been characterized by less transparency and
fragmentation of liquidity. However, we have introduced a number
of structural changes to our OTC markets to increase both
transparency and liquidity, including the availability of
electronic trading, the introduction of cleared OTC contracts
and the use of transaction-based indices.
We introduced the industrys first cleared OTC energy
contracts in North America in March 2002 in the natural gas
market. The use of OTC clearing serves to reduce the credit risk
associated with bilateral OTC trading by interposing an
independent clearinghouse as a counterparty to trades in these
contracts. The use of a central clearinghouse rather than the
reliance on bilateral trading agreements resulted in more
participants becoming active in the OTC markets. Clearing
through a central clearinghouse typically offers market
participants the ability to reduce the amount of capital
required to trade as well as the ability to cross-margin
positions in various commodities. Cross-margining means that a
participant is able to have offsetting positions taken into
account in determining its margin requirements, which could
reduce the amount of margin the participant must deposit with
the futures commission merchant through which it clears. As a
result of the introduction of OTC clearing, the addition of new
participants and an improved credit environment in the markets
for energy commodities trading, our OTC markets have experienced
steady growth, increase price transparency and increased
institutionalization.
We believe that the move toward electronic trade execution,
together with the improved accessibility for new market
participants and the increased adoption of energy commodities as
a tradable, investable asset class, will support continued
secular growth in the global energy markets. As participation
continues to increase and as participants continue to employ
more sophisticated financial instruments and risk management
strategies to manage their energy price exposure, we believe
there remains considerable opportunity for further growth in
energy derivatives trading on a global basis.
40
Variability
in Quarterly Comparisons
In addition to general conditions in the financial markets and
in the energy markets in particular, energy trading has
historically been subject to variability in trading volumes due
primarily to five key factors. These factors include:
|
|
|
|
|
Geopolitical Events: Geopolitical events tend
to impact global oil prices and may impact global oil supply.
Because crude oil prices often move in conjunction with changes
in the perception of geopolitical risk, these events in the past
have impacted trading activities in our markets due to the
increased need for risk management in times of uncertainty.
|
|
|
|
Weather: Weather events have been an important
factor in energy price volatility and the supply and demand of
energy commodities and, therefore, the trading activities of
market participants. Unexpected or extreme weather conditions,
such as low temperatures or hurricanes, and other events that
cause demand increases, supply disruptions or unexpected
volatility tend to result in business disruptions and expanded
hedging and trading activity in our markets.
|
|
|
|
Real and Perceived Supply and Demand
Imbalances: Government agencies, such as the
Energy Information Administration, regularly track energy supply
data. Reporting on supply or production may impact trading
volumes due to real or perceived supply and demand imbalances.
|
|
|
|
Number of Trading days: The variability in the
number of business days in each quarter affects our revenues,
and will affect
quarter-to-quarter
revenue comparisons, since trading generally only takes place on
business days.
|
|
|
|
Seasonality: Participants engaged in oil,
natural gas and power businesses tend to experience moderate
seasonal fluctuations in demand, although such seasonal impacts
have been negated in periods of high volume trading.
|
These and other factors could cause our revenues to fluctuate
from quarter to quarter. These fluctuations may affect the
reliability of quarter to quarter comparisons of our revenues
and operating results when, for example, these comparisons are
between quarters in different seasons. Inter-seasonal
comparisons will not necessarily be indicative of our results
for future periods.
Products
We offer products and services to serve the front-, middle- and
back-offices of our participants and are well positioned in the
energy trading market and risk management operations. For
traders, we offer a range of commodity contracts in both our
futures and OTC marketplace on a common electronic platform. We
offer an electronic trade confirmation system for back-office
professionals as well as a range of market data services.
In our futures markets, we offer trading in the ICE Brent Crude
and ICE West Texas Intermediate, or WTI, Crude futures
contracts. Brent crude is a light, sweet grade of crude oil that
serves as the price benchmark to approximately two-thirds of the
worlds traded oil products. WTI crude is also a light
sweet crude that serves as a global crude oil benchmark. We
introduced our WTI contracts in February 2006. We continually
develop and launch new products designed to meet market demand
and the needs of our participants. The addition of WTI Crude
futures to our suite of energy futures and options brings the
worlds two most significant crude oil benchmarks together
on our trading platform. Also through our futures segment, we
list the leading heating oil contract, known as ICE Gas Oil
futures. In April 2006, we introduced two new cash-settled
futures contracts, the ICE New York Harbor Unleaded Gasoline
Blendstock (RBOB) futures contract and the ICE New York Harbor
Heating Oil futures contract.
In our OTC markets, we offer trading in hundreds of natural gas,
power and refined oil products on a bilateral basis. At the end
of the first quarter of 2006, we also offered over 50 cleared
OTC contracts, which account for the majority of our commission
revenue. In March 2006, we began the introduction of more than
50 planned additional cleared OTC contracts. To date, we have
launched over 40 of these planned cleared contracts.
41
On April 6, 2006, the New York Mercantile Exchange, Inc.,
or NYMEX, and the Chicago Mercantile Exchange Inc., or CME,
entered into a definitive technology services agreement.
Pursuant to the agreement, NYMEX will list certain energy
futures and options contracts on the CME Globex electronic
trading platform. The agreement between NYMEX and CME may
enhance NYMEXs ability to compete with the energy
contracts traded on our electronic platform. In addition, this
agreement may impact our ability to continue to increase our
market share. However, we believe we are well positioned to
compete with NYMEX on a number of fronts. Responding to customer
demand, we introduced our successful ICE WTI Crude futures
contract in February 2006, achieving record open interest and
trading volumes on a weekly basis. More importantly, we enjoy
liquidity in a diverse range of energy contracts across both
futures and
over-the-counter
markets that we believe is not offered by other markets.
Technology
Our innovative Internet-accessible trading platform was designed
for energy trading and risk management. Deployed on the desktops
of thousands of energy market participants around the world, our
electronic platform is an integral tool for energy market
participants. In addition to our own front-end, participants may
select from 12 independent software vendors that are linked
to our trading platform. There is also a rapidly growing base of
proprietary front-end development around our electronic platform
to connect various dealer and prime brokerage systems as well as
algorithmic trading systems. Most of our largest customers
back-offices are connected to our platform for back-office
purposes to realize the efficiencies of straight-through
processing for both futures and OTC trades. From a connectivity
perspective, customers can access our redundant data centers in
the U.S. and U.K. using the Internet or any one of several
private line alternatives, including routing through our
recently opened telecommunications hubs in London, Chicago,
Singapore, and starting in June, in New York.
We are continuously enhancing our technology to improve our
speed and reliability. Since our futures business moved to the
screen last April, we have experienced a ten-fold increase in
message volume. In order to sustain the scalability of our
platform, we have completed a number of hardware and software
upgrades that have allowed us to reduce round-trip time and
increase throughput. From a reliability standpoint, we also made
system improvements to minimize downtime, particularly as we
repeatedly expanded our platform hours to cover 23 hours
per day.
We believe that our electronic platform offers the most
comprehensive set of energy markets and functionality available
in the industry today. The platform provides a rich set of
features for trading futures and options as well as OTC swaps
and physical spot and forwards on one screen. OTC trades can be
executed and settled bilaterally between counterparties or
cleared anonymously. Implied spreading in both futures and OTC
markets improves execution, while spreadsheet capabilities
embedded into the WebICE front-end allow traders to easily build
and deploy simple market-making algorithms.
We believe our continued focus on distribution, performance, and
functionality will enable us to maintain and enhance our
technological edge in the energy marketplace.
Segment
Reporting
For financial reporting purposes, our business is divided into
three segments: our futures business segment, our OTC business
segment and our market data business segment. For a discussion
of these segments and related financial disclosure, refer to
note 19 to our consolidated financial statements and
related notes included elsewhere in this prospectus.
42
Our
Futures Business Segment
The following table presents, for the periods indicated,
selected statement of income data in dollars and as a percentage
of revenues for our futures business segment:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2006
|
|
|
%
|
|
|
2005
|
|
|
%
|
|
|
2005
|
|
|
%
|
|
|
2004
|
|
|
%
|
|
|
2003
|
|
|
%
|
|
|
|
(Dollar amounts in
thousands)
|
|
|
Revenues(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction fees, net(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ICE Brent Crude futures
|
|
$
|
13,476
|
|
|
|
61.4
|
%
|
|
$
|
8,498
|
|
|
|
60.1
|
%
|
|
$
|
41,334
|
|
|
|
63.4
|
%
|
|
$
|
32,176
|
|
|
|
60.7
|
%
|
|
$
|
28,497
|
|
|
|
62.0
|
%
|
Other futures products and options
|
|
|
5,483
|
|
|
|
25.0
|
|
|
|
3,560
|
|
|
|
25.2
|
|
|
|
15,856
|
|
|
|
24.3
|
|
|
|
13,324
|
|
|
|
25.2
|
|
|
|
11,463
|
|
|
|
24.9
|
|
Intersegment fees
|
|
|
2,471
|
|
|
|
11.3
|
|
|
|
1,036
|
|
|
|
7.3
|
|
|
|
5,108
|
|
|
|
7.8
|
|
|
|
3,679
|
|
|
|
6.9
|
|
|
|
3,198
|
|
|
|
6.9
|
|
Market data fees
|
|
|
37
|
|
|
|
0.2
|
|
|
|
181
|
|
|
|
1.3
|
|
|
|
389
|
|
|
|
0.6
|
|
|
|
341
|
|
|
|
0.6
|
|
|
|
183
|
|
|
|
0.4
|
|
Other
|
|
|
467
|
|
|
|
2.1
|
|
|
|
861
|
|
|
|
6.1
|
|
|
|
2,503
|
|
|
|
3.8
|
|
|
|
3,460
|
|
|
|
6.5
|
|
|
|
2,659
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
21,934
|
|
|
|
100.0
|
|
|
|
14,136
|
|
|
|
100.0
|
|
|
|
65,190
|
|
|
|
100.0
|
|
|
|
52,980
|
|
|
|
100.0
|
|
|
|
46,000
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
expenses(3)
|
|
|
5,772
|
|
|
|
26.3
|
|
|
|
6,320
|
|
|
|
44.7
|
|
|
|
22,865
|
|
|
|
35.1
|
|
|
|
23,823
|
|
|
|
45.0
|
|
|
|
22,600
|
|
|
|
49.1
|
|
Intersegment expenses(4)
|
|
|
4,735
|
|
|
|
21.6
|
|
|
|
1,973
|
|
|
|
14.0
|
|
|
|
10,289
|
|
|
|
15.8
|
|
|
|
7,532
|
|
|
|
14.1
|
|
|
|
4,737
|
|
|
|
10.3
|
|
Floor closure costs(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,814
|
|
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
525
|
|
|
|
2.4
|
|
|
|
629
|
|
|
|
4.4
|
|
|
|
2,464
|
|
|
|
3.8
|
|
|
|
2,415
|
|
|
|
4.6
|
|
|
|
2,117
|
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
11,032
|
|
|
|
50.3
|
|
|
|
8,922
|
|
|
|
63.1
|
|
|
|
40,432
|
|
|
|
62.0
|
|
|
|
33,770
|
|
|
|
63.7
|
|
|
|
29,454
|
|
|
|
64.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
10,902
|
|
|
|
49.7
|
|
|
|
5,214
|
|
|
|
36.9
|
|
|
|
24,758
|
|
|
|
38.0
|
|
|
|
19,210
|
|
|
|
36.3
|
|
|
|
16,546
|
|
|
|
36.0
|
|
Other income, net
|
|
|
507
|
|
|
|
2.3
|
|
|
|
640
|
|
|
|
4.5
|
|
|
|
2,686
|
|
|
|
4.1
|
|
|
|
1,925
|
|
|
|
3.6
|
|
|
|
1,135
|
|
|
|
2.5
|
|
Income tax expense
|
|
|
3,993
|
|
|
|
18.2
|
|
|
|
2,049
|
|
|
|
14.5
|
|
|
|
9,606
|
|
|
|
14.7
|
|
|
|
7,397
|
|
|
|
14.0
|
|
|
|
5,616
|
|
|
|
12.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(5)
|
|
$
|
7,416
|
|
|
|
33.8
|
%
|
|
$
|
3,805
|
|
|
|
26.9
|
%
|
|
$
|
17,838
|
|
|
|
27.4
|
%
|
|
$
|
13,738
|
|
|
|
25.9
|
%
|
|
$
|
12,065
|
|
|
|
26.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We generate revenues from related parties in the ordinary course
of our business. Revenues attributable to related parties were
$4.0 million and $1.9 million for the three months
ended March 31, 2006 and 2005, respectively, and
$11.4 million, $6.7 million and $5.5 million for
the years ended December 31, 2005, 2004 and 2003,
respectively. For a discussion of our related parties, see
note 13 to our consolidated financial statements, which are
included elsewhere in this prospectus. |
|
(2) |
|
Our transaction fees are presented net of rebates. For a
discussion of these rebates, see Sources of
Revenues Transactions Fees. |
|
(3) |
|
Includes compensation and benefits expenses and professional
services expenses. |
|
(4) |
|
Intersegment expenses represent fees paid by our futures
business segment for support provided by the OTC business
segment to operate the electronic trading platform used in our
futures business. |
|
(5) |
|
The financial results for the year ended December 31, 2005
include $4.8 million in expenses incurred relating to the
closure of the open-outcry trading floor in London. Excluding
these floor closure charges, net of taxes, our futures business
net income for the year ended December 31, 2005 would have
been $21.0 million. See
Non-GAAP Financial Measures. |
During the period following the closure of our open-outcry
trading floor, aggregate trading volumes in our futures markets
have increased substantially as compared to the comparable
periods in the prior year. The trading volumes initially
declined in April 2005 due in part to the displacement of
floor-based traders following the floor closure on April 7,
2005. Many of these traders later began trading electronically
along with new participants on our platform. Aggregate futures
trading volumes were 16.7 million contracts for the three
months ended March 31,
43
2006, a 90.6% increase compared to 8.7 million contracts
for the three months ended March 31, 2005. Aggregate
futures trading volumes since the April 2005 electronic
transition increased 25.6% compared to the same April through
December period in 2004.
We achieved cost savings of approximately $1.2 million in
2005 and expect to achieve cost savings ranging from
approximately $3.8 million to $4.4 million annually in
2006 and 2007 in connection with our decision to close our
open-outcry trading floor. These cost savings primarily relate
to reduced compensation and benefits expenses, rent and
occupancy expenses and selling, general and administrative
expenses. However, in 2005, any cost savings were offset by a
charge of $4.8 million that we recorded in the quarter
ended June 30, 2005 in connection with expenses we incurred
as part of the closure of our open-outcry trading floor and full
migration of futures trading to our electronic platform. These
expenses primarily include lease termination costs, employee
termination costs and property and equipment disposals relating
to our open-outcry trading floor. Furthermore, because our
electronic platform can accommodate substantially greater
trading volumes, and the cost of operating our platform is
largely fixed, we expect to benefit from increased operating
leverage in our futures business.
Our ICE Brent Crude futures contract is a benchmark contract
relied upon by a broad range of market participants, including
certain large oil producing nations, to price their crude oil.
During the three months ended March 31, 2006, the average
daily quantity of Brent crude oil traded in our markets was
159 million barrels, with an average notional daily value
of over $10.1 billion. We believe that market participants
are increasingly relying on this contract for their risk
management activities, as evidenced by steady increases in
traded volumes over the past several years.
In our futures business segment, we earn fees from both
counterparties to each futures contract or option on futures
contract that is traded. In our futures business, we refer to
these fees as exchange fees. We derived exchange fees of
$19.0 million and $12.1 million for the three months
ended March 31, 2006 and 2005, respectively, representing
37.7% and 37.9%, respectively, of our consolidated revenues, and
$57.2 million, $45.5 million and $40.0 million
for the years ended December 31, 2005, 2004 and 2003,
respectively, representing 36.7%, 42.0% and 42.6%, respectively,
of our consolidated revenues. A contract is a standardized
quantity of the physical commodity underlying each futures
contract.
The following table presents the underlying commodity size per
futures and options contract traded in our futures markets as
well as the relevant standard of measure for each contract:
|
|
|
|
|
|
|
Futures Contract
|
|
Size
|
|
|
Measure
|
|
ICE Brent Crude
|
|
|
1,000
|
|
|
Barrels
|
ICE WTI Crude
|
|
|
1,000
|
|
|
Barrels
|
ICE Gas Oil
|
|
|
1,000
|
|
|
Metric Tonnes
|
ICE Heating Oil
|
|
|
42,000
|
|
|
Gallons
|
ICE Natural Gas
|
|
|
1,000
|
|
|
Therms per day
|
ICE Electricity
|
|
|
1
|
|
|
Megawatt Hours
|
ICE Unleaded Gasoline Blendstock
(RBOB)
|
|
|
42,000
|
|
|
Gallons
|
|
|
|
|
|
|
|
Options Contract
|
|
Size
|
|
|
Measure
|
|
ICE Brent Crude options
|
|
|
1
|
|
|
ICE Brent Crude futures contracts
|
ICE Gas Oil options
|
|
|
1
|
|
|
ICE Gas Oil futures contracts
|
44
The following table presents, for the periods indicated, trading
activity in our futures markets for commodity type based on the
total number of contracts traded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Number of futures contracts traded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ICE Brent Crude futures
|
|
|
10,174
|
|
|
|
6,162
|
|
|
|
30,412
|
|
|
|
25,458
|
|
|
|
24,013
|
|
ICE Gas Oil futures
|
|
|
3,937
|
|
|
|
2,427
|
|
|
|
10,972
|
|
|
|
9,356
|
|
|
|
8,430
|
|
ICE WTI Crude futures(1)
|
|
|
2,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other(2)
|
|
|
232
|
|
|
|
150
|
|
|
|
671
|
|
|
|
727
|
|
|
|
898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
16,659
|
|
|
|
8,739
|
|
|
|
42,055
|
|
|
|
35,541
|
|
|
|
33,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
A fee waiver applied to trade execution for ICE WTI Crude
futures contracts from the launch date of February 3, 2006
through March 31, 2006. |
|
(2) |
|
Consists primarily of ICE Natural Gas futures, ICE Electricity
futures, ICE Brent Crude options, ICE Gas Oil options and ICE
ECX CFI futures contracts. The ICE ECX CFI Futures contract is
the result of a cooperative relationship between ICE Futures and
the Chicago Climate Exchange, Inc. and its subsidiary, the
European Climate Exchange. ICE Futures shares in the revenue
derived from the ICE ECX CFI futures contract. |
The following chart presents the futures exchange fee revenues
by contract traded in our markets for the periods presented:
Futures
Transaction Fee Revenues by Commodity
|
|
|
(1) |
|
Presented net of $2.3 million of exchange fee rebates. For
a discussion of these rebates, see Sources of
Revenues Transaction Fees. |
45
The following table presents our average daily open interest for
our futures contracts. Open interest is the number of contracts
(long or short) that a member holds either for its own account
or on behalf of its clients. Open interest refers to the total
number of contracts that are currently open in
other words, contracts that have been traded but not yet
liquidated by either an offsetting trade, exercise, expiration
or assignment. The level of open interest in a contract is often
considered a measure of an exchanges liquidity in that
contract. In general, the higher the level of open interest, the
greater the extent it is being used as a hedging and risk
management tool. Open interest is also a measure of the health
of a market both in terms of the number of contracts which
members and their clients continue to hold in the particular
contract and by the number of contracts held for each contract
month listed by our exchange.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Open
Interest Futures (in contracts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ICE Brent Crude futures
|
|
|
398
|
|
|
|
340
|
|
|
|
351
|
|
|
|
336
|
|
|
|
299
|
|
ICE Gas Oil futures
|
|
|
225
|
|
|
|
161
|
|
|
|
200
|
|
|
|
164
|
|
|
|
148
|
|
ICE WTI Crude futures
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other(1)
|
|
|
57
|
|
|
|
34
|
|
|
|
42
|
|
|
|
35
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
760
|
|
|
|
535
|
|
|
|
593
|
|
|
|
535
|
|
|
|
490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists primarily of ICE Natural Gas futures, ICE Electricity
futures, ICE Brent Crude options, ICE Gas Oil options and ICE
ECX CFI futures contracts. |
We charge exchange fees to ICE Futures 41 clearing members
for contracts traded for their own account and for contracts
traded on behalf of their customers or local traders. As ICE
Futures operations are currently centered in London, we
consider all revenues derived from exchange fees to be generated
in the U.K.
Historically, the revenues generated in our futures business
have been denominated in pounds sterling, which is the
functional currency of ICE Futures and related U.K.
subsidiaries. We translate these revenues and expenses into
U.S. dollars using the average exchange rates for the
reporting period. Gains and losses from foreign currency
transactions are included in other income (expense) in our
consolidated statements of income. We record any translation
adjustments in accumulated other comprehensive income, a
separate component of shareholders equity. Beginning on
April 1, 2006, we began to charge exchange fees in
U.S. dollars rather than pounds sterling in our key futures
contracts, including crude oil and heating oil contracts.
46
Our
OTC Business Segment
The following table presents, for the periods indicated,
selected statement of income (loss) data in dollars and as a
percentage of revenues for our OTC business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2006
|
|
|
%
|
|
|
2005
|
|
|
%
|
|
|
2005
|
|
|
%
|
|
|
2004
|
|
|
%
|
|
|
2003
|
|
|
%
|
|
|
|
(Dollar amounts in
thousands)
|
|
|
Revenues(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction fees, net(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American natural gas
|
|
$
|
18,323
|
|
|
|
57.9
|
%
|
|
$
|
10,871
|
|
|
|
59.4
|
%
|
|
$
|
59,911
|
|
|
|
62.9
|
%
|
|
$
|
29,046
|
|
|
|
49.6
|
%
|
|
$
|
16,814
|
|
|
|
34.3
|
%
|
North American power
|
|
|
4,833
|
|
|
|
15.3
|
|
|
|
3,246
|
|
|
|
17.7
|
|
|
|
16,444
|
|
|
|
17.3
|
|
|
|
9,462
|
|
|
|
16.2
|
|
|
|
5,739
|
|
|
|
11.7
|
|
Global oil
|
|
|
438
|
|
|
|
1.4
|
|
|
|
436
|
|
|
|
2.4
|
|
|
|
1,632
|
|
|
|
1.7
|
|
|
|
3,999
|
|
|
|
6.8
|
|
|
|
8,844
|
|
|
|
18.0
|
|
Other commodities markets
|
|
|
|
|
|
|
|
|
|
|
116
|
|
|
|
0.6
|
|
|
|
219
|
|
|
|
0.2
|
|
|
|
1,043
|
|
|
|
1.8
|
|
|
|
2,821
|
|
|
|
5.7
|
|
Electronic trade confirmation
|
|
|
682
|
|
|
|
2.1
|
|
|
|
358
|
|
|
|
2.0
|
|
|
|
1,580
|
|
|
|
1.7
|
|
|
|
789
|
|
|
|
1.3
|
|
|
|
165
|
|
|
|
0.3
|
|
Order flow agreements shortfall
payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,067
|
|
|
|
1.8
|
|
|
|
7,091
|
|
|
|
14.4
|
|
Intersegment fees
|
|
|
5,077
|
|
|
|
16.0
|
|
|
|
2,274
|
|
|
|
12.4
|
|
|
|
11,034
|
|
|
|
11.6
|
|
|
|
9,160
|
|
|
|
15.6
|
|
|
|
5,923
|
|
|
|
12.1
|
|
Market data fees
|
|
|
1,752
|
|
|
|
5.5
|
|
|
|
615
|
|
|
|
3.3
|
|
|
|
2,649
|
|
|
|
2.8
|
|
|
|
2,258
|
|
|
|
3.9
|
|
|
|
1,699
|
|
|
|
3.5
|
|
Other
|
|
|
558
|
|
|
|
1.8
|
|
|
|
400
|
|
|
|
2.2
|
|
|
|
1,744
|
|
|
|
1.8
|
|
|
|
1,758
|
|
|
|
3.0
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
31,663
|
|
|
|
100.0
|
|
|
|
18,316
|
|
|
|
100.0
|
|
|
|
95,213
|
|
|
|
100.0
|
|
|
|
58,582
|
|
|
|
100.0
|
|
|
|
49,125
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
expenses(3)
|
|
|
13,376
|
|
|
|
42.2
|
|
|
|
8,921
|
|
|
|
48.7
|
|
|
|
40,808
|
|
|
|
42.9
|
|
|
|
34,219
|
|
|
|
58.4
|
|
|
|
32,017
|
|
|
|
65.1
|
|
Intersegment expenses
|
|
|
1,248
|
|
|
|
3.9
|
|
|
|
456
|
|
|
|
2.5
|
|
|
|
1,352
|
|
|
|
1.4
|
|
|
|
1,923
|
|
|
|
3.3
|
|
|
|
1,406
|
|
|
|
2.9
|
|
Settlement expense(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
15.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,660
|
|
|
|
8.4
|
|
|
|
3,327
|
|
|
|
18.2
|
|
|
|
12,609
|
|
|
|
13.2
|
|
|
|
14,599
|
|
|
|
24.9
|
|
|
|
17,219
|
|
|
|
35.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
17,284
|
|
|
|
54.6
|
|
|
|
12,704
|
|
|
|
69.4
|
|
|
|
69,769
|
|
|
|
73.3
|
|
|
|
50,741
|
|
|
|
86.6
|
|
|
|
50,642
|
|
|
|
103.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
14,379
|
|
|
|
45.4
|
|
|
|
5,612
|
|
|
|
30.6
|
|
|
|
25,444
|
|
|
|
26.7
|
|
|
|
7,841
|
|
|
|
13.4
|
|
|
|
(1,517
|
)
|
|
|
(3.1
|
)
|
Other income (expense), net
|
|
|
602
|
|
|
|
1.9
|
|
|
|
334
|
|
|
|
1.8
|
|
|
|
589
|
|
|
|
0.6
|
|
|
|
(588
|
)
|
|
|
(1.0
|
)
|
|
|
(180
|
)
|
|
|
(0.4
|
)
|
Income tax expense
|
|
|
4,275
|
|
|
|
13.5
|
|
|
|
1,921
|
|
|
|
10.5
|
|
|
|
7,698
|
|
|
|
8.0
|
|
|
|
2,509
|
|
|
|
4.3
|
|
|
|
307
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)(4)
|
|
$
|
10,706
|
|
|
|
33.8
|
%
|
|
$
|
4,025
|
|
|
|
22.0
|
%
|
|
$
|
18,335
|
|
|
|
19.3
|
%
|
|
$
|
4,744
|
|
|
|
8.1
|
%
|
|
$
|
(2,004
|
)
|
|
|
(4.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We generate revenues from related parties in the ordinary course
of our business. Revenues attributable to related parties were
$1.7 million and $1.3 million for the three months
ended March 31, 2006 and 2005, respectively, and
$6.0 million, $6.3 million and $6.7 million for
the years ended December 31, 2005, 2004 and 2003,
respectively. For a discussion of our related parties, see
note 13 to our consolidated financial statements, which are
included elsewhere in this prospectus. |
|
(2) |
|
Our transaction fees are presented net of rebates. For a
discussion of these rebates, see Sources of
Revenues Transaction Fees. |
|
(3) |
|
Includes compensation and benefits expenses and professional
services expenses. |
|
(4) |
|
The financial results for the year ended December 31, 2005
include a $15.0 million settlement expense related to the
payment made to EBS to settle litigation. Excluding this charge,
net of taxes, our OTC business net income for the year ended
December 31, 2005 would have been $27.9 million. See
Non-GAAP Financial Measures. |
47
Revenues in our OTC business segment are generated primarily
through commission fees earned from trades executed in our
markets. We also receive fees from the provision of electronic
trade confirmation services, which primarily relates to
bilateral or off-exchange trades. While we charge a monthly data
access fee for access to our electronic platform, we derive a
substantial portion of our OTC revenues from commission fees
paid by participants for each trade that they execute.
Commission fees are payable by each counterparty to a trade. We
do not risk our own capital by engaging in any trading
activities or by extending credit to market participants. We
derived commission fees for OTC trades executed on our
electronic platform of $23.6 million and $14.7 million
for the three months ended March 31, 2006 and 2005,
respectively, or 46.9% and 46.1%, respectively, of our
consolidated revenues, and $78.2 million,
$43.5 million and $34.2 million for the years ended
December 31, 2005, 2004 and 2003, respectively, or 50.2%,
40.2% and 36.5%, respectively, of our consolidated revenues. Our
OTC commission rates vary by product and are based on the volume
of the commodity underlying the contract that is traded.
In addition to our commission fees, a participant that chooses
to clear a trade must pay a fee to LCH.Clearnet and another for
the services of the relevant member clearing firm, or futures
commission merchant. Consistent with our futures business, we
derive no direct revenues from the clearing process and
participants pay the clearing fees directly to LCH.Clearnet and
the futures commission merchants. However, we believe that the
introduction of cleared OTC contracts has attracted new
participants to our platform, which has led to increased
liquidity in our markets. We believe that the increase in
liquidity has led to increased trading volumes in the OTC
markets for North American natural gas and power. Transaction or
commission fees derived from our cleared OTC contracts represent
an increasing percentage of our total OTC revenues. For the
three months ended March 31, 2006 and for the years ended
December 31, 2005, 2004 and 2003, these cleared transaction
fees represented 68.5%, 69.3%, 47.6% and 13.9% of our total OTC
revenues, respectively, net of intersegment fees. We intend to
continue to support the introduction of these products in
response to the requirements of our participants.
The following tables present, for the periods indicated, the
total volume of the underlying commodity and number of contracts
traded in our OTC markets, measured in the units indicated in
the footnotes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Total Volume OTC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American natural gas(1)
|
|
|
44,906
|
|
|
|
23,838
|
|
|
|
138,809
|
|
|
|
63,935
|
|
|
|
34,257
|
|
North American power(2)
|
|
|
716
|
|
|
|
417
|
|
|
|
2,140
|
|
|
|
1,153
|
|
|
|
575
|
|
Global oil(3)
|
|
|
269
|
|
|
|
104
|
|
|
|
981
|
|
|
|
926
|
|
|
|
1,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Number of OTC contracts traded(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American natural gas
|
|
|
17,964
|
|
|
|
9,535
|
|
|
|
55,524
|
|
|
|
25,574
|
|
|
|
13,703
|
|
North American power
|
|
|
1,086
|
|
|
|
613
|
|
|
|
3,145
|
|
|
|
1,683
|
|
|
|
838
|
|
Global oil
|
|
|
920
|
|
|
|
704
|
|
|
|
3,320
|
|
|
|
3,580
|
|
|
|
6,636
|
|
Other(5)
|
|
|
|
|
|
|
7
|
|
|
|
10
|
|
|
|
124
|
|
|
|
3,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
19,970
|
|
|
|
10,859
|
|
|
|
61,999
|
|
|
|
30,961
|
|
|
|
24,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Measured in million British thermal units, or MMBtu. |
|
(2) |
|
Measured in megawatt hours. |
|
(3) |
|
Measured in equivalent barrels of oil. |
|
(4) |
|
These OTC market volumes are converted into contracts based on
the conversion ratios in the table below. |
48
|
|
|
(5) |
|
Consists of the North American weather, North American coal,
European power, European gas and global precious metals
commodities markets. |
The following table presents the underlying commodity size for
selected OTC contracts traded in our OTC markets as well as the
relevant standard of measure for such contracts:
|
|
|
|
|
|
|
OTC Contract
|
|
Size
|
|
|
Measure
|
|
Financial gas
|
|
|
2,500
|
|
|
MMBtu
|
Physical gas
|
|
|
2,500
|
|
|
MMBtu
|
European gas
|
|
|
25,000
|
|
|
Therms per day
|
East power
|
|
|
800
|
|
|
Megawatt Hours per day
|
West power
|
|
|
400
|
|
|
Megawatt Hours per day
|
Crude oil
|
|
|
1,000
|
|
|
Barrels
|
Refined oil
|
|
|
100
|
|
|
Barrels
|
Precious metals
|
|
|
1,000
|
|
|
Ounces
|
The following chart presents the OTC commission fee revenues by
commodity traded in our markets for the periods presented:
OTC
Transaction Fee Revenues by Commodity
The following table presents our average weekly open interest
for our cleared OTC contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Open
Interest Cleared OTC (in contracts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American gas
|
|
|
1,327
|
|
|
|
837
|
|
|
|
998
|
|
|
|
533
|
|
|
|
131
|
|
North American power
|
|
|
384
|
|
|
|
181
|
|
|
|
266
|
|
|
|
71
|
|
|
|
|
|
Global oil
|
|
|
26
|
|
|
|
39
|
|
|
|
40
|
|
|
|
28
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,737
|
|
|
|
1,057
|
|
|
|
1,304
|
|
|
|
632
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
Our
Market Data Business Segment
The following table presents, for the periods indicated,
selected statement of income data in dollars and as a percentage
of revenues for our market data business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2006
|
|
|
%
|
|
|
2005
|
|
|
%
|
|
|
2005
|
|
|
%
|
|
|
2004
|
|
|
%
|
|
|
2003
|
|
|
%
|
|
|
|
(Dollar amounts in
thousands)
|
|
|
Revenues(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market data fees
|
|
$
|
4,233
|
|
|
|
77.5
|
%
|
|
$
|
2,686
|
|
|
|
86.2
|
%
|
|
$
|
11,604
|
|
|
|
86.2
|
%
|
|
$
|
9,691
|
|
|
|
86.2
|
%
|
|
$
|
7,742
|
|
|
|
84.4
|
%
|
Intersegment fees
|
|
|
1,227
|
|
|
|
22.5
|
|
|
|
430
|
|
|
|
13.8
|
|
|
|
1,864
|
|
|
|
13.8
|
|
|
|
1,546
|
|
|
|
13.8
|
|
|
|
1,429
|
|
|
|
15.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
5,460
|
|
|
|
100.0
|
|
|
|
3,116
|
|
|
|
100.0
|
|
|
|
13,468
|
|
|
|
100.0
|
|
|
|
11,237
|
|
|
|
100.0
|
|
|
|
9,171
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
expenses(2)
|
|
|
293
|
|
|
|
5.4
|
|
|
|
221
|
|
|
|
7.1
|
|
|
|
1,090
|
|
|
|
8.0
|
|
|
|
954
|
|
|
|
8.5
|
|
|
|
870
|
|
|
|
9.5
|
|
Intersegment expenses
|
|
|
2,792
|
|
|
|
51.1
|
|
|
|
1,311
|
|
|
|
42.1
|
|
|
|
6,365
|
|
|
|
47.3
|
|
|
|
4,930
|
|
|
|
43.9
|
|
|
|
4,407
|
|
|
|
48.0
|
|
Depreciation and amortization
|
|
|
3
|
|
|
|
0.1
|
|
|
|
2
|
|
|
|
|
|
|
|
10
|
|
|
|
0.1
|
|
|
|
10
|
|
|
|
0.1
|
|
|
|
5
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,088
|
|
|
|
56.6
|
|
|
|
1,534
|
|
|
|
49.2
|
|
|
|
7,465
|
|
|
|
55.4
|
|
|
|
5,894
|
|
|
|
52.5
|
|
|
|
5,282
|
|
|
|
57.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
2,372
|
|
|
|
43.4
|
|
|
|
1,582
|
|
|
|
50.8
|
|
|
|
6,003
|
|
|
|
44.6
|
|
|
|
5,343
|
|
|
|
47.5
|
|
|
|
3,889
|
|
|
|
42.4
|
|
Other income (expense), net
|
|
|
(1
|
)
|
|
|
|
|
|
|
18
|
|
|
|
0.6
|
|
|
|
515
|
|
|
|
3.8
|
|
|
|
(9
|
)
|
|
|
(0.1
|
)
|
|
|
(7
|
)
|
|
|
(0.1
|
)
|
Income tax expense
|
|
|
829
|
|
|
|
15.2
|
|
|
|
560
|
|
|
|
18.0
|
|
|
|
2,281
|
|
|
|
16.9
|
|
|
|
1,867
|
|
|
|
16.5
|
|
|
|
566
|
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,542
|
|
|
|
28.2
|
%
|
|
$
|
1,040
|
|
|
|
33.4
|
%
|
|
$
|
4,237
|
|
|
|
31.5
|
%
|
|
$
|
3,467
|
|
|
|
30.9
|
%
|
|
$
|
3,316
|
|
|
|
36.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We generate revenues from related parties in the ordinary course
of our business. Revenues attributable to related parties were
$60,000 and $57,000 for the three months ended March 31,
2006 and 2005, respectively, and $198,000 and $178,000 for the
years ended December 31, 2005 and 2004, respectively. For a
discussion of our related parties, see note 13 to our
consolidated financial statements, which are included elsewhere
in this prospectus. |
|
(2) |
|
Includes compensation and benefits expenses and professional
services expenses. |
We earn terminal and license fee revenues that we receive from
data vendors through the distribution of real-time and
historical futures prices and other futures market data derived
from trading in our futures markets. We also earn subscription
fee revenues from OTC daily indices, view only access to the OTC
markets, data access fees to both the OTC and futures markets
and OTC and futures end of day reports. In addition, we manage
the market price validation curves whereby participant companies
subscribe to receive consensus market valuations for their
commodity positions.
Intersegment
Fees
Our OTC business segment provides and supports the platform for
electronic trading and market data in our futures and market
data business segments. Intersegment fees include charges for
developing, operating, managing and supporting the platform for
electronic trading in our futures and market data businesses.
Our futures business segment provides access to futures trading
volumes to our market data business segment. We determine the
intercompany or intersegment fees to be paid by the business
segments based on transfer pricing standards and independent
documentation. These intersegment fees have no impact on our
consolidated operating results. We expect the structure of these
intersegment fees to remain unchanged and expect that they will
continue to have no impact on our consolidated operating results.
Sources
of Revenues
Our revenues are comprised of transaction fees, market data fees
and other revenues.
50
Transaction
Fees
Transaction fees, including both futures exchange fees and OTC
commission fees, have accounted for, and are expected to
continue to account for, a substantial portion of our revenues.
Transaction fees consist of:
|
|
|
|
|
exchange fees earned on futures transactions;
|
|
|
|
commission fees earned on OTC transactions;
|
|
|
|
electronic confirmation fees; and
|
|
|
|
shortfall payments made under our order flow agreements, which
applied through the end of 2004.
|
Transaction fees were $43.2 million and $27.1 million
for the three months ended March 31, 2006 and 2005,
respectively, and accounted for 86.0% and 85.1% of our
consolidated revenues for the three months ended March 31,
2006 and 2005, respectively. Transaction fees were
$137.0 million, $90.9 million and $81.4 million
for the years ended December 31, 2005, 2004 and 2003,
respectively, and accounted for 87.9%, 83.9% and 86.9% of our
consolidated revenues for the years ended December 31,
2005, 2004 and 2003, respectively. Transaction fees, net of
intersegment fees, accounted for 97.4% and 92.0% of revenues
generated by our futures business segment for the three months
ended March 31, 2006 and 2005, respectively, and accounted
for 91.3% and 93.7% of revenues generated by our OTC business
segment for the three months ended March 31, 2006 and 2005,
respectively. Transaction fees, net of intersegment fees,
accounted for 95.2%, 92.3% and 93.4% of revenues generated by
our futures business segment for the years ended
December 31, 2005, 2004 and 2003, respectively, and
accounted for 94.8%, 91.9% and 96.0% of revenues generated by
our OTC business segment for the years ended December 31,
2005, 2004 and 2003, respectively. Transaction fees, except for
shortfall payments, are recognized as revenues as services are
provided.
In our futures business segment, we charge exchange fees to both
the buyer and the seller in each transaction. In this segment,
our exchange fees are calculated and collected by LCH.Clearnet
on our behalf. Exchange fees are based on the number of
contracts traded during each month multiplied by the commission
rate. A change to either our commission rate or to the volume of
contracts executed through our futures business directly affects
the revenues of our futures business. A change in the average
exchange rate of pounds sterling to the U.S. dollar also
directly affected the revenues and expenses of our futures
business.
We accept Exchange of Futures for Physical, or EFP, and Exchange
of Futures for Swaps, or EFS, transactions from members and
their customers. EFP and EFS are trades that occur off exchange
and are then reported for registration and clearing onto our
futures markets. We have also implemented block trading
facilities for members and their customers through which members
may bilaterally arrange large volume trades
and/or
certain complex strategies and then submit these transactions
for registration as exchange trades. For these transactions, we
charge both the clearing firms of the buyer and seller a premium
to the commission rate for trades executed directly on our
platform.
Transaction fees in our futures business segment are presented
net of rebates. We have historically granted trade rebates to
local floor members to generate market liquidity. Under this
arrangement, we rebated a percentage of the exchange fee for
contracts bought and sold on our open-outcry trading floor on
the same day for the same price. In addition, in November 2004,
we implemented a two month fee rebate program when we
transitioned the morning ICE Brent Crude futures session
exclusively to our electronic platform. Under this program, we
rebated to each member all exchange fees paid to execute trades
in ICE Brent Crude futures contracts on our electronic platform
during the morning session, as well as exchange fees paid to
execute these contracts by certain local floor members trading
on our open-outcry trading floor during our afternoon trading
session. This program terminated on December 31, 2004.
Trade rebates to local floor members amounted to $137,000,
$625,000 and $687,000 for the years ended December 31,
2005, 2004 and 2003, respectively. In connection with the
closure of our open-outcry trading floor on April 7, 2005,
we discontinued the trade rebate to local floor members. The
rebate fees under the 2004 rebate program amounted to
$2.3 million in the aggregate for the months of November
and December 2004. From time to time we may enter into market
maker agreements with certain participants to make markets in
certain contracts on our electronic platform.
51
In our OTC business segment, we charge commission fees to both
the buyer and the seller in each transaction executed on our
platform. The commission fees are based on the underlying
commodity volume of each product traded multiplied by the
commission rate for that product. We also accept transactions
that participants execute off-platform but wish to have
processed for clearing. For these transactions, we charge both
the buyer and seller, but at typically half the commission rate
for on-platform execution. We calculate and collect commission
fees from our customers directly, other than trades that are
cleared through LCH.Clearnet, for which LCH.Clearnet performs
the commission fee calculation and collection function. The
transaction fees in our OTC business segment also include fees
derived from our electronic trade confirmation service, in which
we charge a standard fee across all products for each trade
confirmation successfully submitted by a participant.
Changes in the volume of contracts traded on our electronic
platform and in our commission rates directly affect transaction
fees in our OTC segment. Since launching our electronic platform
in 2000, we have, in limited circumstances, adjusted our
commission rates or waived our commissions with respect to
certain products. We have, for example, waived commission fees
on our WTI oil bullet swap contracts (which have since been
transitioned to a futures contract) for the period from November
2004 through January 2006 and on our ICE WTI Crude futures
contracts for the months of February 2006 and March 2006. We
continue to evaluate our commission rates on a regular basis.
Transaction fees in our OTC business segment are presented net
of rebates. We rebate a portion of the commission fees paid by
certain market makers in the OTC market-maker program from time
to time. In this program, certain participants agree to make a
two-sided market (i.e., posting a simultaneous bid and
offer) with respect to a particular contract at a specified
price spread (the difference between the bid and offer). The OTC
fee rebates to market makers amounted to $20,000 and $77,000 for
the three months ended March 31, 2006 and 2005,
respectively, and $376,000, $436,000 and $283,000 for the years
ended December 31, 2005, 2004 and 2003, respectively. The
market-maker program also includes a monthly fee that we pay to
certain participants that participate in this program. See
Components of
Expenses Selling, General and
Administrative.
To build and maintain liquidity in the products traded on our
platform, we entered into order flow agreements with some of our
shareholders during 2000 pursuant to which they committed to
provide a minimum aggregate amount of order flow. The commission
rates under the order flow agreements were the same as the rates
for all other participants on our electronic platform. If the
volume traded in any period fell short of the agreed minimum,
these parties were required to pay us a shortfall payment based
on the additional commission revenues we would have earned had
the minimum volume been met. We also entered into order flow
commitments with seven companies during November 2001 to trade
OTC European gas products on our electronic platform. We
recognized order flow shortfall revenues of $1.1 million
and $7.1 million for the years ended December 31, 2004
and 2003, respectively. The order flow agreements with our
shareholders expired in 2002 and 2003, respectively, and the OTC
European gas order flow agreements expired in 2004. For a
discussion of our order flow agreements see note 14 to our
consolidated financial statements that are included elsewhere in
this prospectus.
We are currently not a party to any order flow agreements and do
not intend to enter into order flow agreements in the future. We
believe that the willingness of our previously committed order
flow providers to continue to trade at current levels will be
influenced by a variety of factors, including prevailing
conditions in the commodities markets. We experienced a decline
in our OTC global oil commission fee revenues following the
expiration of certain order flow agreements in October 2002.
While this may have been caused by a combination of factors
relating to order flow, sales and marketing activities, market
conditions and competition, we believe that we will be able to
continue to attract trading in these markets in the future
without order flow agreements.
52
The following table presents, for the periods indicated, the
commission fees that were required to be paid to us under the
order flow agreements and the expiration dates of these
agreements.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
Expiration Date
|
|
|
(In thousands)
|
|
|
|
|
North American natural gas and
power
|
|
$
|
|
|
|
$
|
6,000
|
|
|
June 2003
|
European gas
|
|
|
1,075
|
|
|
|
1,303
|
|
|
December 2004
|
|
|
|
|
|
|
|
|
|
|
|
Total commission fees
|
|
$
|
1,075
|
|
|
$
|
7,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
Data Fees
Consolidated market data fees were $6.0 million and
$3.5 million for the three months ended March 31, 2006
and 2005, respectively, and $14.6 million,
$12.3 million and $9.6 million for the years ended
December 31, 2005, 2004 and 2003, respectively. Market data
fees consist of terminal fees and license fees that we receive
from data vendors in exchange for the provision of real-time
price information generated from our futures markets through ICE
Data. We invoice these data vendors monthly for terminal fees
based on the number of terminals that carry our futures market
data. Each data vendor also pays an annual license fee to us.
Annual license fee revenues are deferred and amortized ratably
over the period for which services are provided.
Market data fees consist of data access fees that we have
historically charged to participants or customers that were not
active traders that were registered to trade or view OTC natural
gas and power products on our electronic platform. The data
access fees were based on their historical trading activity and
the number of users the participant firm has registered to trade
on our platform. We recognize the difference between the monthly
data access fee for a given participant and the actual amount of
commission fees generated by such participant for trading
activity in that month as data access revenues. Beginning in
March 2006, we changed the methodology for charging OTC data
access fees. The OTC data access fees are now charged based upon
the number of individual users having access to our platform
(both trading and view only access) instead of at the
participant or customer level for the less active participants.
We also began to charge data access fees in our futures business
segment beginning in February 2006, also at the individual user
level. The futures data access fees replaced the futures system
user fees that were previously charged to our futures exchange
members.
Market data fees also consist of subscription fees that we
receive from market participants that subscribe to our OTC
market data services through ICE Data. ICE Data has an exclusive
license to use our OTC market data and publishes the ICE Data
end of day report, ICE daily indices, as well as market price
validation curves, which are available to subscribers for a
monthly subscription fee. ICE Data also markets real-time view
only screen access to OTC markets and charges subscribers a fee
that varies depending on the number of users and the markets
accessed at each subscribing company. The revenues we receive
from market data fees are deferred and amortized ratably over
the period for which services are provided.
Other
Revenues
Other revenues include revenues generated from membership fees
charged to our futures exchange members, training seminars,
communication charges and equipment rentals, and fees charged to
the Chicago Climate Exchange, or CCX. We generated other
revenues of $1.0 million and $1.3 million for the
three months ended March 31, 2006 and 2005, respectively,
and $4.2 million, $5.2 million and $2.7 million
for the years ended December 31, 2005, 2004 and 2003,
respectively.
In our futures business, we generate revenues from, among other
things, annual membership and subscription fees charged to ICE
Futures members. We recorded fees related to futures exchange
membership and subscription fees of $298,000 and $273,000 for
the three months ended March 31, 2006 and 2005,
respectively, and $1.5 million, $1.2 million and
$762,000 for the years ended December 31, 2005, 2004 and
2003, respectively. We defer revenues derived from membership
and subscription fees and amortize them ratably over the period
for which services are provided.
53
We recognize revenues generated from training seminars and
communication charges and equipment rentals as services are
provided. Of the other revenues, $335,000, $1.3 million and
$901,000 for the years ended December 31, 2005, 2004 and
2003, respectively, relate to revenues generated from
communication charges and equipment rentals relating to the
futures business floor operations. We no longer charge our
futures participants for these costs subsequent to the closure
of the open-outcry trading floor on April 7, 2005.
Other revenues include fees charged to CCX, a self-regulated
exchange that administers a voluntary multi-sector greenhouse
gas reduction and trading program for North America. We, through
our OTC business segment, have been contracted to provide,
design and service CCXs electronic trading platform in the
United States. We charge licensing and service fees in advance
to CCX on a monthly basis and these fees are recognized as
services are provided. We also have an agreement, through our
futures business segment, with CCX and its wholly owned
subsidiary, the European Climate Exchange, or ECX, to list
certain European emissions contracts on our platform. Under this
agreement, we have charged ECX certain operating costs, which
represent 25% of the net European emissions membership fees and
25% of the net transaction fees earned from the European
emissions contracts traded on our platform. Pursuant to an
amendment to this agreement effective June 28, 2006, these
amounts charged to ECX have increased to 27.5% and 27.5%,
respectively. We also recognize technology development fees as
revenues from both CCX and ECX when the development work is
completed and accepted. Our arrangement with CCX began in July
2003, and we recognized revenues of $378,000 and $442,000 for
the three months ended March 31, 2006 and 2005,
respectively, and $1.8 million, $2.0 million and
$605,000 for the years ended December 31, 2005, 2004 and
2003, respectively, pursuant to our contractual relationships.
Components
of Expenses
Compensation
and Benefits
Compensation and benefits expenses primarily consist of
salaries, bonuses, non-cash compensation expenses, payroll
taxes, employer-provided medical and other benefit plan costs
and recruiting costs. Compensation and benefits expenses were
$10.6 million and $7.9 million for the three months
ended March 31, 2006 and 2005, respectively, and
$35.8 million, $30.1 million and $26.2 million
for the years ended December 31, 2005, 2004 and 2003,
respectively. Substantially all of our employees are full-time
employees. We capitalized and recorded as property and equipment
a portion of our compensation and benefits costs for technology
employees engaged in software development and the enhancement of
our electronic platform. We expect that our compensation and
benefits expenses will vary from quarter to quarter as a
percentage of total revenues due to additional employees
associated with the growth of our business, accrual of bonuses
and due to non-cash compensation expenses recognized in
accordance with the adoption of SFAS No. 123(R) on
January 1, 2006. Over the next year, we expect compensation
and benefits expenses to increase from current levels.
Professional
Services
Professional services expenses primarily consist of outside
legal, accounting and other professional and consulting services
expenses. Professional services expenses were $2.7 million
and $3.2 million for the three months ended March 31,
2006 and 2005, respectively, and $10.1 million,
$12.3 million and $13.1 million for the years ended
December 31, 2005, 2004 and 2003, respectively. We
capitalize and record as property and equipment a portion of the
costs associated with fees for technology consultants engaged in
software development and enhancements to our electronic
platform. We expensed the remaining portion of these fees in the
month in which they were incurred. We engaged a number of
consultants in our futures business segment to facilitate
ongoing technology development, maintenance and support work in
connection with the migration of trading of our futures
contracts to our electronic platform and the support of the
legacy systems used in the operation of the exchange floor. We
reduced the number of consultants in our futures business
segment during 2004 and 2005 following the substantial
completion of development relating to futures trading on our
electronic platform and due to the replacement of consultants
with permanent staff.
We incurred substantial accounting and legal fees in connection
with external and internal audit functions, the regulatory and
disciplinary functions of our futures markets, the negotiation
of new clearing agreements with LCH.Clearnet and legal fees
associated with the NYMEX copyright and trademark and EBS patent
infringement
54
litigation. As a public company, we are now subject to the
requirements of the Sarbanes-Oxley Act of 2002, which require us
to incur significant expenditures in the near term to document
internal controls and hire and train personnel to comply with
these requirements. In addition, as a public company, we incur
additional costs for external advisors such as legal, accounting
and auditing fees, as well as additional marketing and investor
relations expenses. Even with these additional public company
expenses, we anticipate that professional services expenses will
decrease in the current and future periods due to the reduction
in consultants at ICE Futures and the reduction in legal fees
due to our settlement of the EBS case and the courts grant
of summary judgment in our favor on all claims asserted against
us by NYMEX, notwithstanding NYMEXs current appeal of the
decision.
Selling,
General and Administrative
Selling, general and administrative expenses were
$6.1 million and $4.4 million for the three months
ended March 31, 2006 and 2005, respectively, and
$18.9 million, $16.6 million and $16.2 million
for the years ended December 31, 2005, 2004 and 2003,
respectively. Cost of hosting expenses, hardware and software
support expenses, rent and occupancy expenses, and marketing and
market-maker expenses are the major expense categories in
selling, general and administrative expenses during the periods
discussed herein.
Cost of Hosting Expenses. Cost of hosting
expenses primarily consists of hosting and participant network
expenses. Cost of hosting expenses were $509,000 and $283,000
for the three months ended March 31, 2006 and 2005,
respectively, and $1.4 million, $1.3 million and
$1.7 million for the years ended December 31, 2005,
2004 and 2003, respectively. Our hosting expenses include the
amounts we pay for the physical facilities, maintenance and
other variable costs associated with securely housing the
hardware used to operate our electronic platform, as well as our
redundant disaster recovery facility. Our participant network
expenses include the amounts we pay to provide participants with
direct connectivity to our platform. Because our Internet-based
electronic platform is highly scalable, we anticipate that the
cost of hosting will remain relatively constant in the near
term, even though we believe that we will continue to increase
the number of participants trading on our electronic platform.
Prior to 2003, we used a private network connection that did not
have the scalability and cost efficiency associated with our
current Internet-based platform. In addition, in early 2003, we
began to maintain and support our information security system
with internal resources. Prior to 2003, we outsourced our
information security to a nationally recognized encryption
technology company. By changing certain vendors and by
transitioning our participant base to our Internet browser for
access to our electronic platform, we have been able to reduce
our participant network expenses while improving system
performance, resulting in faster execution and increased system
availability.
Hardware and Software Support
Expenses. Hardware and software support expenses
were $1.0 million and $969,000 for the three months ended
March 31, 2006 and 2005, respectively, and
$3.8 million, $3.4 million and $3.3 million for
the years ended December 31, 2005, 2004 and 2003,
respectively. Hardware and software support expenses primarily
consist of external hardware and software maintenance and
support costs and trade registration system costs. The trade
registration system is owned and administered by a third party
and it handles our post trade administration such as giving up
trades to alternate parties, clearing and margining. We expect
our hardware and software support expenses to increase slightly
in absolute terms in future periods in connection with the
growth of our business. As a percentage of total revenues, our
hardware and software support expenses may decrease in future
periods due to anticipated higher revenue growth.
Rent and Occupancy Expenses. Rent and
occupancy expenses were $721,000 and $998,000 for the three
months ended March 31, 2006 and 2005, respectively, and
$3.2 million, $4.1 million and $3.8 million for
the years ended December 31, 2005, 2004 and 2003,
respectively. We currently lease office space in Atlanta, New
York, Houston, Chicago, London, Singapore and Calgary. Our rent
costs consist primarily of rent expense for these properties.
Our occupancy expenses primarily relate to the use of
electricity, telephone lines and other miscellaneous operating
costs. The decrease in rent and occupancy expenses in 2005
primarily related to the closure of our open-outcry trading
floor on April 7, 2005. As a percentage of total revenues,
our rent and occupancy expenses may decrease in future periods
due to anticipated higher revenue growth.
Marketing and Market-Maker Expenses. Marketing
and market-maker expenses were $339,000 and $629,000 for the
three months ended March 31, 2006 and 2005, respectively,
and $2.2 million, $1.6 million and $1.2 million
for the years ended December 31, 2005, 2004 and 2003,
respectively. Marketing expenses
55
primarily consist of advertising, public relations and product
promotion campaigns used to promote brand awareness, as well as
new and existing products and services. These expenses also
include our participation in seminars, trade shows, conferences
and other industry events. The level of marketing activity, and
thus the amount of related expenses, may vary from period to
period based upon managements discretion and available
opportunities.
Market-maker expenses include fees we incur under our
market-maker program. Under this program, we allow certain
participants to execute trades on our platform at no charge and,
beginning in 2004, paid them a monthly fee in exchange for their
commitment to make markets on our platform within a specified
price range for specific commodity markets. We recognized
$27,000 and $194,000 for the three months ended March 31,
2006 and 2005, respectively, and $530,000 and $778,000 in fees
under this program for the years ended December 31, 2005
and 2004, respectively. We began the market-maker program during
2004. Such amounts are treated as expenses as we receive no fees
from these market makers.
Other. Other costs include all selling,
general and administrative costs not included in separate
expense categories and primarily consist of insurance expense,
telephone and communications expense, corporate insurance
expense, travel expense, meals and entertainment expense,
royalty payments made to eSpeed, Inc. and dues, subscriptions
and registration expense.
We expect our selling, general and administrative expenses to
increase slightly in absolute terms in future periods in
connection with the growth of our business, partially offset by
lower selling, general and administrative costs associated with
closure of our open-outcry trading floor. As a percentage of
total revenues, our selling, general and administrative expenses
may decrease in future periods due to anticipated higher revenue
growth.
Floor
Closure Costs
Floor closure costs relate to the April 2005 closure of our
open-outcry floor in London. We closed our open-outcry floor to
take advantage of increasing acceptance and adoption of
electronic trading, and to maintain and enhance our competitive
position. Floor closure costs were $4.8 million for the
year ended December 31, 2005, and include lease
terminations for the building where the trading floor was
located, payments made to 18 employees who were terminated as a
result of the closure, contract terminations, and other
associated costs, including legal costs and asset impairment
charges. No floor closure costs were incurred in prior periods
or are expected to be incurred in future periods.
Settlement
Expense
Settlement expense relates to the September 2005 settlement of
the legal action brought by EBS related to alleged patent
infringement. Under the settlement agreement, we made a cash
payment of $15.0 million to EBS, and were released from the
legal claims brought against us without admitting liability.
Settlement expense was $15.0 million for the year ended
December 31, 2005. No settlement expenses were incurred in
prior periods.
Depreciation
and Amortization
Depreciation and amortization expenses were $3.2 million
and $4.0 million for the three months ended March 31,
2006 and 2005, respectively, and $15.1 million,
$17.0 million and $19.3 million for the years ended
December 31, 2005, 2004 and 2003, respectively. We
depreciate
and/or
amortize costs related to our property and equipment, including
computer and network equipment, software and internally
developed software, office furniture and equipment and leasehold
improvements. We compute depreciation expense using the
straight-line method based on estimated useful lives of the
assets, or in the case of leasehold improvements, the shorter of
the lease term or the estimated useful life of the assets, which
range from three to seven years. Gains on disposal of property
and equipment are included in other income, losses on disposals
of property and equipment are included in depreciation expense
and maintenance and repairs are expensed as incurred. We do not
amortize goodwill and intangible assets with indefinite lives.
We amortize intangible assets with contractual or finite useful
lives, in each case over the estimated useful life of five years.
56
We capitalize costs, both internal and external, direct and
incremental, related to software developed or obtained for
internal use in accordance with AICPA Statement of Position
98-1, Accounting for Costs of Computer Software Developed or
Obtained for Internal Use. Costs incurred in the application
development phase are capitalized and amortized over the useful
life of the software, for a period not to exceed three years.
We amortize the licensing fees we pay to eSpeed for a
non-exclusive license to use its patent related to an automated
futures trading system in the United States over the period to
which the license fees relate. We recognized amortization
expense of $500,000 for the three months ended March 31,
2006 and 2005, and $2.0 million for the years ended
December 31, 2005, 2004 and 2003. This patent expires in
February 2007.
We anticipate that depreciation and amortization expenses will
decrease in the current and future periods due to certain
property and equipment purchased in prior years becoming fully
depreciated, the expiration of the eSpeed patent in February
2007 and lower computer hardware costs in the future due to
declining costs of technology.
Other
Income (Expense)
We had net other income of $1.1 million and $992,000 for
the three months ended March 31, 2006 and 2005,
respectively, and $3.8 million, $1.3 million and
$948,000 for the years ended December 31, 2005, 2004 and
2003, respectively. Other income (expense) consists primarily of
interest income and expense, as well as gains and losses on
foreign currency transactions.
We generate interest income from the investment of our cash and
cash equivalents, short-term investments, long-term investments
and restricted cash. Interest expense consisted of interest from
capitalized leases, interest on the outstanding indebtedness and
the unused fee calculated under our revolving credit facility.
Other income (expense) also relates to gains and losses from
foreign currency transactions, such as those resulting from the
settlement of foreign receivables or payables or cash accounts
held in U.S. dollars by our U.K. subsidiaries. We seek to
manage our foreign exchange translation risk and exposure in
part through converting our U.K. subsidiaries cash to
investments denominated in U.S. dollars. However, because
the functional currency of our U.K. subsidiaries is pounds
sterling, we are subject to transaction gains and losses for the
re-measurement of the U.S. dollar cash investments held by
our U.K. subsidiaries due to foreign currency exchange rate
fluctuations between periods.
Provision
for Income Taxes
We incurred income tax expenses of $9.1 million and
$4.5 million for the three months ended March 31, 2006
and 2005, respectively, and $19.6 million,
$11.8 million and $6.5 million for the years ended
December 31, 2005, 2004 and 2003, respectively. Our
provision for income taxes consists of current and deferred tax
provisions relating to federal, state and local taxes, as well
as taxes related to foreign subsidiaries. We file a consolidated
United States federal income tax return and file state income
tax returns on a separate, combined or consolidated basis in
accordance with relevant state laws and regulations. Our foreign
subsidiaries are based in the United Kingdom and in Canada and
we file separate local country income tax returns and take
advantage of the United Kingdoms group relief provisions
when applicable. The difference between the statutory income tax
rate and our effective tax rate for a given fiscal period is
primarily a reflection of the tax effects of our foreign
operations, general business and tax credits, tax exempt income,
state income taxes and the non-deductibility of certain
expenses. We have made provisions for U.S. income taxes on
the majority of the undistributed earnings of our foreign
subsidiaries as such earnings are not expected to be permanently
reinvested.
On October 22, 2004, the American Jobs Creation Act of
2004, or the Jobs Act, introduced a special one-time dividends
received deduction on the repatriation of certain foreign
earnings in 2004 or 2005, provided certain criteria are met. The
deduction would result in an approximate 5.25% federal tax rate
on repatriated earnings. To qualify for the deduction, the
earnings must be reinvested in the United States pursuant to a
domestic reinvestment plan established by our chief executive
officer and approved by our board of directors. Certain other
criteria in the Jobs Act must be satisfied as well.
In 2005, we completed our evaluation of the repatriation
provision and made the determination to repatriate
$35.0 million of foreign earnings in accordance with the
requirements of the Jobs Act. As a result, we recognized a
57
tax benefit of $2.0 million, net of available foreign tax
credits, in 2005. This was offset by tax expense of
$2.0 million recorded in the third quarter of 2005 related
to an increase to the estimate of U.S. residual taxes due
on the remaining undistributed earnings of our foreign
subsidiaries.
Consolidated
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except for share
and per share data)
|
|
|
Consolidated Statement of
Income/(Loss) Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction fees, net(2)
|
|
$
|
43,235
|
|
|
$
|
27,085
|
|
|
$
|
136,976
|
|
|
$
|
90,906
|
|
|
$
|
81,434
|
|
Market data fees
|
|
|
6,022
|
|
|
|
3,482
|
|
|
|
14,642
|
|
|
|
12,290
|
|
|
|
9,624
|
|
Other
|
|
|
1,025
|
|
|
|
1,261
|
|
|
|
4,247
|
|
|
|
5,218
|
|
|
|
2,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
50,282
|
|
|
|
31,828
|
|
|
|
155,865
|
|
|
|
108,414
|
|
|
|
93,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
10,617
|
|
|
|
7,886
|
|
|
|
35,753
|
|
|
|
30,074
|
|
|
|
26,236
|
|
Professional services
|
|
|
2,690
|
|
|
|
3,200
|
|
|
|
10,124
|
|
|
|
12,312
|
|
|
|
13,066
|
|
Selling, general and administrative
|
|
|
6,134
|
|
|
|
4,376
|
|
|
|
18,886
|
|
|
|
16,610
|
|
|
|
16,185
|
|
Floor closure costs(3)
|
|
|
|
|
|
|
|
|
|
|
4,814
|
|
|
|
|
|
|
|
|
|
Settlement expense(4)
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,188
|
|
|
|
3,958
|
|
|
|
15,083
|
|
|
|
17,024
|
|
|
|
19,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
22,629
|
|
|
|
19,420
|
|
|
|
99,660
|
|
|
|
76,020
|
|
|
|
74,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
27,653
|
|
|
|
12,408
|
|
|
|
56,205
|
|
|
|
32,394
|
|
|
|
18,918
|
|
Other income, net
|
|
|
1,108
|
|
|
|
992
|
|
|
|
3,790
|
|
|
|
1,328
|
|
|
|
948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
28,761
|
|
|
|
13,400
|
|
|
|
59,995
|
|
|
|
33,722
|
|
|
|
19,866
|
|
Income tax expense
|
|
|
9,097
|
|
|
|
4,530
|
|
|
|
19,585
|
|
|
|
11,773
|
|
|
|
6,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(5)
|
|
$
|
19,664
|
|
|
$
|
8,870
|
|
|
$
|
40,410
|
|
|
$
|
21,949
|
|
|
$
|
13,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption adjustments to
redeemable stock put(6)
|
|
|
|
|
|
|
|
|
|
|
(61,319
|
)
|
|
|
|
|
|
|
8,378
|
|
Deduction for accretion of
Class B redeemable common stock(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to
common shareholders
|
|
$
|
19,664
|
|
|
$
|
8,870
|
|
|
$
|
(20,909
|
)
|
|
$
|
21,949
|
|
|
$
|
19,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common
share(8):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.35
|
|
|
$
|
0.17
|
|
|
$
|
(0.39
|
)
|
|
$
|
0.42
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.33
|
|
|
$
|
0.17
|
|
|
$
|
(0.39
|
)
|
|
$
|
0.41
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding(8):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
55,532,693
|
|
|
|
52,866,295
|
|
|
|
53,217,874
|
|
|
|
52,865,108
|
|
|
|
54,328,966
|
|
Diluted
|
|
|
58,972,248
|
|
|
|
53,063,138
|
|
|
|
53,217,874
|
|
|
|
53,062,078
|
|
|
|
54,639,708
|
|
|
|
|
(1) |
|
We generate revenues from related parties in the ordinary course
of our business. For a presentation and discussion of our
revenues attributable to related parties for the three months
ended March 31, 2006 and 2005 |
58
|
|
|
|
|
and for the years ended December 31, 2005, 2004 and 2003,
see our consolidated statements of income and note 13 to
our consolidated financial statements that are included
elsewhere in this prospectus. |
|
(2) |
|
Our transaction fees are presented net of rebates. For a
discussion of these rebates, see Sources of
Revenues Transaction Fees. |
|
(3) |
|
In April 2005, we closed our open-outcry trading floor in London
to take advantage of increasing acceptance and adoption of
electronic trading, and to maintain and enhance our competitive
position. Costs associated with the floor closure were
$4.8 million and are classified as Floor closure
costs in the accompanying consolidated statements of
income for the year ended December 31, 2005. Floor closure
costs include lease terminations for the building where the
floor was located, payments made to 18 employees who were
terminated as a result of the closure, contract terminations,
legal costs, asset impairment charges and other associated
costs. No floor closure costs were incurred in prior periods and
no additional closure costs are expected to be incurred. See
note 18 to our consolidated financial statements that are
included elsewhere in this prospectus. |
|
(4) |
|
In September 2005, we settled the legal action brought by EBS
related to alleged patent infringement. Under the settlement
agreement, we made a payment to EBS of $15.0 million, and
were released from the legal claims brought against us without
admitting liability. The payment was recorded as
Settlement expense in the accompanying consolidated
statements of income for the year ended December 31, 2005.
See note 17 to our consolidated financial statements that
are included elsewhere in this prospectus. |
|
(5) |
|
The financial results for the year ended December 31, 2005
include $4.8 million in expenses incurred relating to the
closure of our open-outcry trading floor in London and a
$15.0 million settlement expense related to the payment
made to EBS to settle litigation. Excluding these charges, net
of taxes, our consolidated net income for the year ended
December 31, 2005 would have been $53.1 million. See
Non-GAAP Financial Measures. |
|
(6) |
|
In connection with our formation, we granted a put option to
Continental Power Exchange, Inc., an entity controlled by our
chairman and chief executive officer, Jeffrey C. Sprecher. The
put option would have required us under certain circumstances to
purchase Continental Power Exchange, Inc.s equity interest
in our business at a purchase price equal to the greater of the
fair market value of the equity interest or $5 million. We
initially recorded the redeemable stock put at the minimum
$5.0 million redemption threshold. We adjusted the
redeemable stock put to its redemption amount at each subsequent
balance sheet date. Adjustments to the redemption amount were
recorded to retained earnings or, in the absence of positive
retained earnings, additional paid-in capital. In October 2005,
we entered into an agreement with Continental Power Exchange,
Inc. to terminate the redeemable stock put upon the closing of
our initial public offering of common stock in November 2005. We
increased the redeemable stock put by $61.3 million during
the year ended December 31, 2005 resulting from an increase
in the estimated fair value of our common stock from
$8.00 per share as of December 31, 2004 to
$35.90 per share as of November 21, 2005, the closing
date of our initial public offering of common stock and the
termination date of the redeemable stock put. The balance of the
redeemable stock put on November 21, 2005 was
$78.9 million and was reclassified to additional paid-in
capital upon its termination. See note 10 to our
consolidated financial statements that are included elsewhere in
this prospectus. In connection with the termination of the put
option, we amended certain registration rights previously
granted to Continental Power Exchange, Inc. pursuant to which we
may be obligated to pay the expenses of registration, including
underwriting discounts up to a maximum of $4.5 million. |
|
(7) |
|
We redeemed all of our Class B redeemable common stock on
November 23, 2004 at a price of $23.58 per share, for
aggregate consideration of $67.5 million. Upon its issuance
on June 18, 2001, we recorded our Class B redeemable
common stock at its discounted present value of
$60.2 million. We recorded charges to retained earnings for
the accretion of this amount up to the $67.5 million
redemption value of our Class B redeemable common stock
over a two-year period ending in June 2003, which was the
earliest potential redemption date. |
|
(8) |
|
The impact of outstanding stock options is considered to be
antidilutive in the calculation of diluted earnings per share
when a net loss available to common shareholders is reported.
Our outstanding stock options have not been included in the
computation of diluted earnings per share for the year ended
December 31, 2005 due to the $20.9 million net loss
available to common shareholders as a result of the
$61.3 million charged to retained earnings related to the
redeemable stock put adjustments. Therefore, our diluted
earnings per share are computed in the same manner as basic
earnings per share for the year ended December 31, 2005. If
the redemption adjustments to the redeemable stock put are
excluded from the calculation of earnings per share, the |
59
|
|
|
|
|
resulting adjusted basic earnings per share would have been
$0.76 based on the $40.4 million in consolidated net income
for the year ended December 31, 2005 and adjusted diluted
earnings per share would have been $0.74. The adjusted diluted
earnings per share would have been based on 54.4 million in
adjusted diluted weighted average common shares outstanding,
which includes 1.2 million stock options and restricted
stock having a dilutive effect for the year ended
December 31, 2005. The adjusted basic and diluted earnings
per share for the year ended December 31, 2005, excluding
the redeemable stock put adjustments, the $4.8 million
floor closure costs and the $15.0 million settlement
expenses, would have been $1.00 and $0.98, respectively. See
Non-GAAP Financial Measures. |
Key
Statistical Information
The following table presents key transaction volume information,
as well as other selected operating information, for the periods
presented. A description of how we calculate our market share,
our trading volumes and other operating measures is set forth
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except for
percentages)
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Market Share of Selected Key
Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total crude oil futures contracts
traded globally(1)
|
|
|
29,514
|
|
|
|
20,384
|
|
|
|
91,049
|
|
|
|
78,477
|
|
|
|
69,450
|
|
ICE Brent Crude oil futures
contracts traded
|
|
|
10,174
|
|
|
|
6,162
|
|
|
|
30,412
|
|
|
|
25,458
|
|
|
|
24,013
|
|
ICE WTI Crude oil futures
contracts traded
|
|
|
2,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our crude oil futures market
share(1)
|
|
|
42.3
|
%
|
|
|
30.2
|
%
|
|
|
33.4
|
%
|
|
|
32.4
|
%
|
|
|
34.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cleared OTC Henry Hub
natural gas contracts traded on us and NYMEX-ClearPort
|
|
|
17,434
|
|
|
|
8,847
|
|
|
|
53,166
|
|
|
|
21,241
|
|
|
|
6,869
|
|
Our cleared OTC Henry Hub natural
gas contracts traded
|
|
|
13,851
|
|
|
|
6,832
|
|
|
|
42,760
|
|
|
|
15,887
|
|
|
|
4,512
|
|
Our market
share cleared OTC Henry Hub natural gas vs.
NYMEX-ClearPort(2)
|
|
|
79.4
|
%
|
|
|
77.2
|
%
|
|
|
80.4
|
%
|
|
|
74.8
|
%
|
|
|
65.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cleared OTC PJM financial
power contracts traded on us and NYMEX- ClearPort
|
|
|
522
|
|
|
|
352
|
|
|
|
1,886
|
|
|
|
748
|
|
|
|
149
|
|
Our cleared OTC PJM financial
power contracts traded
|
|
|
444
|
|
|
|
240
|
|
|
|
1,234
|
|
|
|
513
|
|
|
|
6
|
|
Our market
share cleared OTC PJM financial power vs.
NYMEX-ClearPort(3)
|
|
|
85.1
|
%
|
|
|
68.1
|
%
|
|
|
65.4
|
%
|
|
|
68.7
|
%
|
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Average Daily Trading Fee
Revenues(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our futures business average daily
exchange fee revenues
|
|
$
|
296
|
|
|
$
|
198
|
|
|
$
|
226
|
|
|
$
|
179
|
|
|
$
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our bilateral OTC business average
daily commission fee revenues
|
|
|
87
|
|
|
|
78
|
|
|
|
79
|
|
|
|
80
|
|
|
|
112
|
|
Our cleared OTC business average
daily commission fee revenues
|
|
|
294
|
|
|
|
162
|
|
|
|
233
|
|
|
|
94
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our OTC business average daily
commission fee revenues
|
|
|
381
|
|
|
|
240
|
|
|
|
312
|
|
|
|
174
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our total average daily exchange
fee and commission fee revenues
|
|
$
|
677
|
|
|
$
|
438
|
|
|
$
|
538
|
|
|
$
|
353
|
|
|
$
|
294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except for
percentages)
|
|
|
Our Trading Volume(5):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures volume
|
|
|
16,659
|
|
|
|
8,739
|
|
|
|
42,055
|
|
|
|
35,541
|
|
|
|
33,341
|
|
Futures average daily volume
|
|
|
260
|
|
|
|
143
|
|
|
|
166
|
|
|
|
140
|
|
|
|
132
|
|
OTC volume
|
|
|
19,970
|
|
|
|
10,859
|
|
|
|
61,999
|
|
|
|
30,961
|
|
|
|
24,260
|
|
OTC average daily volume
|
|
|
322
|
|
|
|
178
|
|
|
|
247
|
|
|
|
123
|
|
|
|
97
|
|
OTC Participants Trading
Commission Percentages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial companies (including
merchant energy)
|
|
|
50.5
|
%
|
|
|
50.1
|
%
|
|
|
48.8
|
%
|
|
|
56.5
|
%
|
|
|
64.1
|
%
|
Banks and financial institutions
|
|
|
21.0
|
%
|
|
|
18.4
|
%
|
|
|
20.5
|
%
|
|
|
22.4
|
%
|
|
|
31.3
|
%
|
Hedge funds, locals and
proprietary trading shops
|
|
|
28.5
|
%
|
|
|
31.5
|
%
|
|
|
30.7
|
%
|
|
|
21.1
|
%
|
|
|
4.6
|
%
|
OTC Trading Commission fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of commission fees by
the top 20 customers
|
|
|
58.7
|
%
|
|
|
58.2
|
%
|
|
|
62.2
|
%
|
|
|
64.8
|
%
|
|
|
69.3
|
%
|
|
|
|
(1) |
|
Total crude oil futures contracts traded globally and our
resulting crude oil futures market share is calculated based on
the number of ICE Brent Crude futures contracts traded and ICE
WTI Crude futures contracts traded as compared to the total
number of ICE Brent Crude futures contracts, ICE WTI Crude
futures contracts traded and NYMEX Light Sweet Crude and London
Brent Crude futures contracts traded. |
|
(2) |
|
Our cleared OTC Henry Hub natural gas market share versus
NYMEX-ClearPort is calculated based on the number of ICE cleared
Henry Hub natural gas contracts traded as a percentage of the
total ICE cleared Henry Hub natural gas contracts and
NYMEX-ClearPort Henry Hub natural gas futures contracts traded. |
|
(3) |
|
Our cleared OTC PJM financial power market share versus
NYMEX-ClearPort is calculated based on the number of ICE cleared
PJM financial power contracts traded as a percentage of the
total ICE cleared PJM financial power contracts and
NYMEX-ClearPort cleared PJM financial power contracts traded.
PJM refers to the Pennsylvania, New Jersey and Maryland power
trading hub. The NYMEX-ClearPort cleared PJM financial power
contract was launched in April 2003 and our PJM financial power
contract was launched in November 2003. Data regarding the
volumes of NYMEX-ClearPort cleared PJM for annual contracts
traded is derived from the Futures Industry Association. |
|
(4) |
|
Represents the total commission fee and exchange fee revenues
for the period divided by the number of trading days during that
period. |
|
(5) |
|
Represents the total volume, in contracts, for the period
divided by the number of trading days during that period. |
For purposes of our operating data, we calculate our volumes
based on the number of contracts traded in our markets, or based
on the number of round turn trades. Each round turn
represents a matched buy and sell order of one contract. Each
side to a contract is matched and treated as one contract and
each side is not separately calculated. The volume of contracts
traded in a given market is a widely recognized indicator of the
liquidity in that market, including our markets.
Three
Months Ended March 31, 2006 Compared to Three Months Ended
March 31, 2005
Overview
Consolidated net income increased $10.8 million, or 121.7%,
to $19.7 million for the three months ended March 31,
2006 from $8.9 million for the comparable period in 2005.
Net income from our futures business segment increased
$3.6 million, or 94.9%, to $7.4 million for the three
months ended March 31, 2006 from $3.8 million for the
comparable period in 2005, primarily due to higher transaction
fees revenues. Net income from our OTC business segment
increased $6.7 million, or 166.1%, to $10.7 million
for the three months ended March 31, 2006 from
$4.0 million for the comparable period in 2005. Net income
in our OTC business segment increased primarily
61
due to significantly higher transaction fees revenues. Net
income from our market data business segment increased $502,000,
or 48.1%, to $1.5 million for the three months ended
March 31, 2006 from $1.0 million for the comparable
period in 2005. Net income in our market data business segment
increased primarily due to increased market data sales in our
futures business. Consolidated operating income, as a percentage
of consolidated revenues, increased to 55.0% for the three
months ended March 31, 2006 from 39.0% for the comparable
period in 2005. Consolidated net income, as a percentage of
consolidated revenues, increased to 39.1% for the three months
ended March 31, 2006 from 27.9% for the comparable period
in 2005.
Our consolidated revenues increased $18.5 million, or
58.0%, to $50.3 million for the three months ended
March 31, 2006 from $31.8 million for the comparable
period in 2005. This increase is primarily attributable to
increased trading volumes on our electronic platform and
increased market data fees. A significant factor driving our
revenues and volume growth during this period was the continued
growth in trading volumes of our futures and cleared OTC
contracts.
Consolidated operating expenses increased $3.2 million to
$22.6 million for the three months ended March 31,
2006 from $19.4 million for the comparable period in 2005,
representing an increase of 16.5%. This increase is primarily
attributable to higher compensation expenses during the three
months ended March 31, 2006 due to non-cash compensation
expenses recognized under SFAS No. 123(R) and an
increase in our discretionary bonus accrual. The increase in
consolidated operating expenses was also due to higher royalty
payments under the eSpeed licensing agreement.
Revenues
Transaction
Fees
Consolidated transaction fees increased $16.2 million, or
59.6%, to $43.2 million for the three months ended
March 31, 2006 from $27.1 million for the comparable
period in 2005. Transaction fees, as a percentage of
consolidated revenues, increased to 86.0% for the three months
ended March 31, 2006 from 85.1% for the comparable period
in 2005.
Transaction fees generated in our futures business segment
increased $6.9 million, or 57.2%, to $19.0 million for
the three months ended March 31, 2006 from
$12.1 million for the comparable period in 2005, while
declining as a percentage of consolidated revenues to 37.7% for
the three months ended March 31, 2006 from 37.9% for the
comparable period in 2005. The increase in transaction fees was
primarily due to an increase in our futures contract volumes.
Futures contract volumes increased primarily due to increased
liquidity brought by new market participants due to electronic
trading. Volumes in our futures business segment increased 90.6%
to 16.7 million contracts traded during the three months
ended March 31, 2006 from 8.7 million contracts traded
during the comparable period in 2005. The 16.7 million
contracts include 2.3 million ICE WTI Crude futures
contracts for which we did not charge any commissions during the
three months ended March 31, 2006. Average transaction fees
per trading day increased 49.9% to $296,000 per trading day
for the three months ended March 31, 2006 from
$198,000 per trading day for the comparable period in 2005.
Transaction fees generated in our OTC business segment increased
$9.2 million, or 61.6%, to $24.3 million for the three
months ended March 31, 2006 from $15.0 million for the
comparable period in 2005, primarily due to increased trading
volumes. Transaction fees in this segment, as a percentage of
consolidated revenues, increased to 48.3% for the three months
ended March 31, 2006 from 47.2% for the comparable period
in 2005. The number of transactions or trades executed in our
OTC business segment increased by 78.1% to 684,939 trades for
the three months ended March 31, 2006 from 384,623 trades
for the comparable period in 2005. Average transaction fees per
trading day increased 58.2% to $381,000 per trading day for
the three months ended March 31, 2006 from
$240,000 per trading day for the comparable period in 2005.
The increase in trades was partially offset by a 9.7% decrease
in the average revenues per transaction for the three months
ended March 31, 2006 as compared to the comparable period
in 2005. The decline in average revenues per transaction was due
in part to an increased number of lower volume transactions,
primarily as a result of newer market participants generally
trading in smaller transaction sizes, and a change in the mix of
contracts traded, with a larger number of contracts traded
relating to commodities with lower commission rates.
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Increased volumes in our OTC business segment were primarily due
to increased trading activity in North American natural gas and
power markets as a result of the availability of cleared OTC
contracts, as well as increased liquidity brought by new market
participants and weather-related volatility. Transaction fees
generated by trading in North American natural gas contracts
increased $7.5 million, or 68.6%, to $18.3 million for
the three months ended March 31, 2006 from
$10.9 million for the comparable period in 2005. In
addition, transaction fees generated by trading in North
American power contracts increased $1.6 million, or 48.9%,
to $4.8 million for the three months ended March 31,
2006 from $3.2 million for the comparable period in 2005.
The continued growth in trading volumes in OTC contracts can be
attributed in part to the use of cleared OTC contracts, which
eliminates the need for a counterparty to post capital against
each trade and also reduces requirements for entering into
multiple negotiated bilateral settlement agreements to enable
trading with other counterparties. We believe that the
introduction of OTC cleared contracts has facilitated trading by
market participants that otherwise would not have engaged in
trading in energy derivatives.
Revenues derived from electronic trade confirmation fees in our
OTC business segment increased $324,000, or 90.6%, to $682,000
for the three months ended March 31, 2006 from $358,000 for
the comparable period in 2005. During the three months ended
March 31, 2006, 123,142 trades were matched through our
electronic trade confirmation service, compared to 93,145 trades
during the comparable period in 2005. We implemented a fee
increase for our electronic trade confirmation service beginning
in February 2006. Consolidated electronic trade confirmation
fees, as a percentage of consolidated revenues, increased to
1.4% for the three months ended March 31, 2006 from 1.1%
for the comparable period in 2005.
Market
Data Fees
Consolidated market data fees increased $2.5 million, or
72.9%, to $6.0 million for the three months ended
March 31, 2006 from $3.5 million for the comparable
period in 2005. This increase was primarily due to increased
data access fees in our OTC and futures markets, increased
terminal fees and license fees that we receive from data vendors
in exchange for the provision of real-time price information
generated from our futures markets, increased market data fees
in our OTC markets from the market price validation service, and
increased fees from view only screen access and end of day
reports. During the three months ended March 31, 2006 and
2005, we recognized $2.0 million and $796,000,
respectively, in data access fees and terminal fees in our
futures and OTC business segments. The increase in the market
data fees received from data vendors were due to both an
increase in the average charge per terminal and an increase in
the number of terminals. During the three months ended
March 31, 2006 and 2005, we recognized $2.8 million
and $1.8 million, respectively, in terminal and license
fees from data vendors. We also continued to enroll new
individual monthly subscribers for our market price validation
service and our view only screen access service. Consolidated
market data fees, as a percentage of consolidated revenues,
increased to 12.0% for the three months ended March 31,
2006 from 10.9% for the comparable period in 2005.
Other
Revenues
Consolidated other revenues decreased $236,000, or 18.7%, to
$1.0 million for the three months ended March 31, 2006
from $1.3 million for the comparable period in 2005. This
decrease was primarily due to a $335,000 reduction in the
communication charges and equipment rentals to ICE Futures
members following the closure of our open-outcry trading floor.
Consolidated other revenues, as a percentage of consolidated
revenues, decreased to 2.0% for the three months ended
March 31, 2006 from 4.0% for the comparable period in 2005.
Expenses
Compensation
and Benefits
Consolidated compensation and benefits expenses increased
$2.7 million, or 34.6%, to $10.6 million for the three
months ended March 31, 2006 from $7.9 million for the
comparable period in 2005. This increase was primarily due to an
increase in the non-cash compensation expenses in accordance
with the adoption of SFAS No. 123(R) on
January 1, 2006 and an increase in our discretionary bonus
accrual for the three months ended March 31, 2006 as
compared to the three months ended March 31, 2005. The
non-cash compensation expenses recognized in our consolidated
financial statements for our stock options and restricted stock
were
63
$2.2 million for the three months ended March 31, 2006
as compared to $405,000 for the three months ended
March 31, 2005. Our discretionary bonus expense increased
due to improved operating results for the three months ended
March 31, 2006 as compared to the three months ended
March 31, 2005. Consolidated compensation and benefits
expenses, as a percentage of consolidated revenues, decreased to
21.1% for the three months ended March 31, 2006 from 24.8%
for the comparable period in 2005 primarily due to our increased
revenues.
Professional
Services
Consolidated professional services expenses decreased $510,000,
or 16.0%, to $2.7 million for the three months ended
March 31, 2006 from $3.2 million for the comparable
period in 2005. This decrease was due to an aggregate decrease
in legal fees related to litigation with NYMEX and EBS, the
former of which was dismissed by a ruling in our favor on a
motion for summary judgment in the third quarter of 2005, which
is currently on appeal by NYMEX, and the latter of which was
settled in the second quarter of 2005. Consolidated professional
services expenses, as a percentage of consolidated revenues,
decreased to 5.3% for the three months ended March 31, 2006
from 10.1% for the comparable period in 2005.
Selling,
General and Administrative
Consolidated selling, general and administrative expenses
increased $1.8 million, or 40.2%, to $6.1 million for
the three months ended March 31, 2006 from
$4.4 million for the comparable period in 2005. This
increase was primarily due to an increase in royalty payments
made to eSpeed and increased marketing efforts relating to our
transition to exclusive electronic trading in our futures
market. The royalty payments to eSpeed under the licensing
agreement increased to $1.0 million for the three months
ended March 31, 2006 from $27,000 for the three months
ended March 31, 2005 due to increased futures volumes
following the launch of exclusive electronic trading during 2005
and due to the launch of the ICE WTI Crude futures contract
during February 2006. Consolidated selling, general and
administrative expenses, as a percentage of consolidated
revenues, decreased to 12.2% for the three months ended
March 31, 2006 from 13.7% for the comparable period in 2005.
Depreciation
and Amortization
Consolidated depreciation and amortization expenses decreased
$770,000, or 19.4%, to $3.2 million for the three months
ended March 31, 2006 from $4.0 million for the
comparable period in 2005. This decrease was due to certain
property and equipment purchased in 2002 with estimated useful
lives of three years becoming fully depreciated over the course
of 2005. Consolidated depreciation and amortization expenses, as
a percentage of consolidated revenues, decreased to 6.3% for the
three months ended March 31, 2006 from 12.4% for the
comparable period in 2005.
Other
Income
Consolidated other income increased $116,000, or 11.7%, to
$1.1 million for the three months ended March 31, 2006
from $992,000 for the comparable period in 2005. This increase
primarily related to an increase in interest income and a
decrease in interest expense. Interest income increased $512,000
from the prior period primarily due to an increase in our cash
balances from the net proceeds received from our initial public
offering of common stock in November 2005. Interest expense
decreased $100,000 from the prior period primarily due to the
remaining $13.0 million outstanding balance under the
Wachovia revolving credit agreement being paid off with a
portion of the proceeds from our initial public offering of
common stock in November 2005. These increases in other income
were partially offset by foreign currency transaction gains
recognized during the three months ended March 31, 2005.
We recognized net foreign currency transaction gains of $1,000
for the three months ended March 31, 2006 as compared to
net foreign currency transaction gains of $539,000 for the three
months ended March 31, 2005. The foreign currency
transaction gains and losses primarily related to the
revaluation of the U.S. dollar cash balances held by our
foreign subsidiaries due to the increase or decrease in the
period-end foreign currency exchange rates between periods. The
functional currency of our foreign subsidiaries is pounds
sterling. The period-end foreign
64
currency exchange rate of pounds sterling to the
U.S. dollar decreased 7.9% to 1.7393 as of March 31,
2006 from 1.8888 as of March 31,2005.